Briggs & Stratton (NYSE: BGG) Q3 2019 Earnings CallApril 26, 2019 10:00 a.m. ET

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Prepared RemarksQuestions and AnswersCall ParticipantsPrepared Remarks:

Operator

Good morning. My name is May, and I will be your conference operator today. At this time, I would like to welcome everyone to the analyst earnings call. [Operator instructions] Thank you.

I would like to turn the call over to Mr. Mark Schwertfeger. You may begin your conference.

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Good morning, and welcome to the Briggs & Stratton fiscal 2019 third-quarter earnings conference call. I am Mark Schwertfeger, chief financial officer; and joining me today is Todd Teske, our chairman, president, and chief executive officer. Today's presentation and our answers to your questions include forward-looking statements. These statements are based on our current assessment of the markets in which we operate.

Actual results could differ materially from any stated or implied projections due to changes in one or more of the factors described in the safe harbor section of yesterday's earnings release, as well as our filings with the SEC. We also refer to certain non-GAAP financial measures during today's call. Additional information regarding these financial measures, including reconciliations to comparable U.S. GAAP amounts is available in our earnings release and in our SEC filings.

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This conference call will be made available on our website or by phone replay approximately two hours after the end of this call. Now here's Todd.

Todd Teske — Chairman, President, and Chief Executive Officer

Good morning, everyone, and thank you for joining us today. Yesterday, we reported fiscal 2019 third-quarter results, which reflected Sears-related weakness in North America as expected, prolonged drought-related softness in Europe and Australia and inefficiencies mainly related to the ramp-up of our new commercial manufacturing operations. While we were disappointed with the results, the quarter held some meaningful bright spots, mainly continued strong, sustainable share gains in commercial engines and products. The conversion of all remaining Ferris mower production to our new plant and improved order fill rates on our service and parts business.

We were disappointed in the overall financial performance. Also, as a result, we announced a revision to our guidance for the 2019 fiscal year. Despite the near-term headwinds, we remain encouraged about the foundation of our business and remain confident in achieving our long-term financial goals. Sales for the fiscal 2019 third quarter were down $24 million or 4% to $580 million.

Product sales were strong, up $26 million or approximately 10%. Engine sales declined $48 million or 13% with more than half of the sales declined due to the — due to a reduction in international shipments of residential engines. In Europe, retailers and dealers have been cautious in their buying patterns and have significantly slowed their seasonal ordering to work through current inventories following last season's drought. Ground moisture has significantly improved after the historic drought last season, while spring temperatures have been somewhat cooler than normal.

However, we, along with several of our OEM partners have — had underestimated the level of channel inventory that remained at the end of last season. The elevated inventories coupled with a lack of early spring season has caused retailers to be very cautious in their early season ordering patterns. In Australia, historically severe drought conditions continue to the majority of the lawn and garden season which significantly hampered sales. We had expected some late season rebound in order activity in the third quarter, but the rebound failed to materialize given the continued dry conditions.

In North America, the market for engines has played out much as expected, as previewed last quarter, we expected the Sears bankruptcy to cause near-term disruption in the market, primarily in the third quarter as consumers migrate their shopping patterns and adjust to this change in the retail landscape. We estimated the impact of the exit at approximately $25 million of sales in the third quarter, which is predominantly comprised the sales of engines and service parts. At the same time, engine placement for other North America retailers were strong. Shipments to fill stores following brand transitions were particularly robust with early indications that consumers are responding positively to the brand changes.

The spring season here in the U.S. got off to a cooler than normal start in March, which somewhat constrained our commercial mover growth and led to lower residential riding mower sales in the third quarter within our Products segment. Temperatures improved in April and we've seen more robust sell-through to date, which is encouraging. We continued to achieve strong pressure washer sales growth in the third quarter due to our launch of Craftsman branded units at Lowe's this spring, as well as elevated pollen levels in the Southern U.S.

The real strength in our business continued to be the commercial categories. On a trailing 12-month basis, sales of commercial products and engines grew 18% and accounted for 30% of total sales. The strength was broad-based, including growth in job site, Ferris commercial mowers and Hurricane stand-on blowers, which we acquired last year. This success is a direct result of offering our customers demonstrably better, more innovative products that make the end user more productive and deliver a lower total cost of ownership.

The growth in commercial demonstrates that we are truly winning in the marketplace and making significant sustainable share gains. Across all lines, we have expanded distribution with increases in the number of dealerships, distributors and rental houses for job site and commercial turf products. Over the past two fiscal years for example, we have secured more than 60 new OEM placements and wins for our commercial engines and turf products. The quality of our products has led to substantial growth with multiple established OEMs as well.

Third-quarter results also include the impact of lower engine sales in production volumes, unfavorable sales mix and inefficiencies, which contributed to reduce profitability. Mark will provide more specifics on each, but I would like to cover the inefficiencies. During the quarter, our results included approximately $8 million of inefficiencies, primarily related to the start-up of our business optimization initiatives. Operational excellence is a cornerstone of how we run the business.

Consequently, we are disappointed in our performance this past quarter and have worked diligently to implement solutions to restore operational excellence going forward. The inefficiency breakdown in three areas: freight costs, incremental labor and production speed. I would like to briefly comment on each. First, elevated freight spending accounted for approximately 40% of the $8 million in inefficiencies.

A large portion of freight spending was driven by unusual market conditions in which the rate to ship containers from China to the U.S. nearly doubled for a period of time during the quarter. This spike in shipping rates was driven by a surge in global demand on the China to U.S. shipping routes.

The container rates dropped back in line by the end of the quarter. The remainder of the elevated freight spend we incurred related to the start-up of our projects to bring production of Vanguard engines onshore and support our commercial mower growth. We incurred elevated freight charges caused by supply chain issues in Asia resulting in the need to air freight components to allow us to meet customer demand. We also experienced increased costs for outbound freight to ship mowers to dealers and distributors, driven by a shift in orders during the quarter to our newest models for which we had not been able to build the necessary inventory.

Accordingly, we were not able to fully consolidate shipments which increased cost. Despite the higher outbound shipping costs, we met our commitments to our dealers by maximizing order fill rates at a crucial time in the selling season for commercial mowers and other products. We have already taken actions to remediate these start up issues and anticipate reduced freight inefficiencies in the fourth quarter. We do not expect the vast majority of freight inefficiencies to repeat in fiscal 2020.

Second, incremental labor in the form of overtime and temporary workers accounted for another 40% of the total inefficiencies. As we approach the peak season, we opted to increase the temporary manpower in certain of our locations, particularly within our North America Service Distribution Center to ensure that we could meet peak season demand. We have implemented plans to reduce the heightened labor in the fourth quarter as we gain more familiarity and rhythm with the new process following the upgrade of our ERP system. Based on this, we do not expect the vast majority of labor inefficiencies to repeat in fiscal 2020.

The third and remaining 20% of inefficiencies in the quarter pertain to the ramp-up of Vanguard engine production at our U.S. facilities, which fell short of our goals. Throughout the third quarter, however, we improved throughput and are now positioned to substantially achieve our original planned build rate for the fourth quarter. We have also had the benefit of continued manufacturing volume from our Japanese joint venture so as to ensure that we have plenty of Vanguard engines to keep pace with the fast-growing customer demand through the onshore in transition.

You can be assured that addressing the inefficiencies and restoring operational excellence has our full attention. You can also be assured that we are going to do the right things to meet customer commitments. The work our team has put in to improve the operations today has already driven up service parts fulfillment rates and we've been able to keep up with the fast-growing customer demand for our commercial engines and mowers. This significant progress gives us great confidence we will drive improvements in closing out fiscal 2019 and we will drive substantial profitability improvements going into fiscal 2020.

I would like to add that despite these near-term headwinds, we remain very encouraged about our long-term prospects. We have laid a solid foundation to accelerate growth, improve profitability and drive higher capital returns. We are already demonstrating the success for our strategy to diversify our business into higher margin commercial products. And we remain confident that our business optimization program would deliver upwards of $40 million in pre-tax cost savings by fiscal 2021.

Now here is Mark to walk through our financial results for fiscal 2019 third quarter and provide details on the revised earnings outlook.

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Thanks, Todd. I'll begin by touching on some highlights from the financial results. Third-quarter GAAP consolidated net income of $8 million included business optimization costs and acquisition-related charges of $6.6 million. Excluding these costs, third-quarter adjusted net income was $14.6 million or $0.34 per diluted share, down from $0.84 for last year's adjusted EPS.

The engines and product segments recognized $5.2 million and $4.7 million of pre-tax charges, respectively. Engines segment sales for the third quarter were $336 million, a decrease of approximately $48 million from the prior year. Engine unit sales were approximately $2.1 million, a decrease of 18% or approximately 456,000 engines. Engine sales decreased, primarily for the reasons Todd mentioned earlier, namely the decline in shipments for Sears and drought-related softness in Europe and Australia.

In addition, at our fiscal second quarter, we had commented that $20 million of sales had accelerated from the third quarter for sequentially earlier production this season, largely in support of brand transitions. Service parts sales were down slightly in the third quarter, partly offsetting the reduction in sales, Vanguard commercial engine sales grew by nearly 10% in the third quarter. In addition, higher pricing was in place to offset higher material costs and tariffs. The Engines segment adjusted gross profit margin of 21.8% was down from 25.4% a year ago, reflecting unfavorable sales mix, lower production volumes and an increase in manufacturing inefficiencies.

Unfavorable sales mix led to a decline in margins of approximately 160 basis points. The mix change was due to proportionately less sales of engines to customers outside the U.S., which typically contained higher margins and lower service parts sales. Quarterly engine production volume was 1.7 million units, down 14% from last year's third-quarter production of 2 million units. The lower production had an unfavorable impact on margins of approximately 130 basis points, which is roughly in line with what we had anticipated.

Total engine inventories at the end of the fiscal 2019 third quarter were approximately 1.7 million units, which is consistent with a year ago. Inventory dollars are higher year over year due to proportionately more large engines and inventory and higher components on hand to support the onshoring of Vanguard engines. We expect the higher inventory levels of commercial engines to decrease before the end of the fiscal year and into early fiscal 2020 as we complete the onshoring program. Inefficiencies drove 100 basis points of the margin decline.

As Todd detailed earlier, the elevated freight costs, higher labor costs and our Vanguard production ramp-up following behind the planned rate, primarily drove to the inefficiencies, and we are making good progress on actively abating the issues. Engines segment adjusted ESG&A declined by $3 million, primarily from lower employee-related expenses. Engines segment adjusted income of $28 million was down from $15.6 million a year ago. Product segment net sales for the third quarter increased by $26 million or 11%.

The increase was primarily due to 16% growth of commercial sales resulting from higher sales of Ferris mowers and growth from the Hurricane acquisition. Residential sales grew slightly on higher volumes of standby generators and pressure washers, partially offset by lower sales of portable generators and riding mowers following cool spring temperatures in the U.S. Outside the U.S., we achieved higher sales in Brazil. Sales also benefited from higher prices to offset cost inflation.

Adjusted gross profit margin in the product segment of 10.2% for the quarter was down from 13.8% for the same quarter last year, largely due to inefficiencies and unfavorable sales mix. Inefficiencies were responsible for approximately 180 basis points for the margin decline were caused by the items Todd detailed earlier, including elevated freight costs and higher labor costs. In addition to the inflated overseas container costs Todd mentioned, we incurred higher domestic outbound freight costs as we refined our processes to optimize loads from our plants to dealers and distributors. The task of optimizing freight and manufacturing labor for our commercial lawn and garden products was complicated in the third quarter by the rapid growth in customer demand and the plant transition.

All remaining production of our Ferris mowers transitioned to the new plant early in the third quarter and we are pleased with the build rate and product quality. Similar to the Engines segment, the Product segment incurred higher labor costs to improve the throughput of service parts to support the peak season. As Todd mentioned earlier, we have a clear line of sight to the causes of the inefficiencies and are actively working to abate the issues. Unfavorable sales mix drove approximately 170 basis points of margin decline in the third quarter for the Products segment.

The mix change was driven by robust sales growth of pressure washers due to elevated pollen levels of the Spring, and brand transitions at retail. Lower sales of products with comparatively higher margins included lower sales of portable generators from fewer springtime storms and lower replenishment following a less active storm season this past fall. In addition, as Todd mentioned earlier, sales of residential riding mowers through our dealer channel were lower year over year due to the cool March weather. Higher sales of commercial mowers partially offset the unfavorable margin mix.

Increases in material and tariff costs were largely offset by pricing. Product segment adjusted ESG&A expenses were down $1.9 million, primarily from a reduction in employee compensation expenses. The segment's adjusted loss for the quarter was $1 million, compared with the adjusted income of $3.7 million for the third quarter of 2018. On the balance sheet, net debt was $383 million at the end of the fiscal third quarter, up from $279 million a year ago, but down $93 million from the end of the second quarter.

In addition to funding internal projects to support our business optimization program, our primarily — primary goal for cash is to continue to pay down debt to strengthen the balance sheet further. We expect to reduce inventory by over $100 million from current levels by the end of the fiscal year. Last 12-month cash provided by operating activities was $7 million and last 12-month free cash flow was negative $65 million. Depreciation and amortization for the quarter of $15 million was lower than capital expenditures of $12 million, largely due to the winding down of investments in our business optimization program.

We continue to estimate that we will spend $65 million on capital spending this year, a decrease of nearly $40 million from last year. At the end of the quarter, last 12-month average funded debt was $402 million and last 12-month EBITDA was $131 million, both was defined by our credit agreement, resulting in a leverage ratio of 3.06 times, which is within our debt covenant. Although leverage is elevated from where we have been historically, we project that improved earnings and lower spending due to the completion of a business optimization program will result in decreasing leverage in future quarters. Before I turn the call back over to Todd for his closing remarks, let me spend a moment on the fiscal 2019 full-year and fourth-quarter outlook.

For the full year, we expect sales in the range of $1.86 billion to $1.91 billion, a decrease of approximately $40 million from our previous outlook. Approximately $30 million of the downward revision is due to weather-related market conditions in Australia and Europe. We incurred the majority of this revision in the third quarter, with approximately $10 million of the outlook reduction expected to impact the fourth quarter. Given normal weather conditions this season, we would expect elevated channel inventories in Europe to normalize through the course of this season, which would support a rebound in engine sales next year.

Given the prolonged and severe nature of the drought in Australia, we believe that channel inventories are elevated and will not support a significant rebound in our sales next year there. The Australian market is substantially smaller, however, than the U.S. and Europe markets. In the U.S., we now estimate that service part sales will be lower than previously expected, by approximately $10 million.

Although, we have substantially improved the throughput of our service distribution center and have improved fill rates, we do not believe we'll fully restore our safety stock levels prior to the end of fiscal year. We expect to normalize channel inventory early in the summer following the peak shipping season. We also anticipate less favorable sales mix compared to our prior outlook. Following the cool start to spring in the third quarter, we expect the growth of lawn and garden equipment to be slightly less than what was contemplated on our previous outlook.

Offsetting this from a top-line perspective, we expect higher pressure washer sales, given the amount of pollen growth in the Southern U.S. and the success of the Craftsman brand launch at Lowe's. These factors are expected to be neutral on sales and unfavorable to margins. In response to the anticipated lower engine sales due to market conditions in Australia and Europe, we plan to decrease engine production in the fourth quarter by 350,000 units compared to what we previously plan to produce.

We use production as expected to lower pre-tax income by approximately $4 million to $5 million. Total engine production for fiscal 2019 is now expected to be 5.9 million units, or about 1 million less than what was produced a year ago. We had anticipated producing nearly 6.8 million units at the outset of fiscal 2019, but have since lowered production in response to transitory market conditions, including the Sears exit from the market, combined with weather-related softness in Australia and Europe. Because we have lowered production this year, we expect to end fiscal 2019 with fewer engines than last year.

This reduction will help us manage working capital and should create the need for some rebound in production levels during fiscal 2020. Taken together, the impact of lower sales, unfavorable sales mix and reduced production net of offsetting spending reductions is expected to be a reduction of $22 million pre-tax or $0.40 per diluted share to our fiscal 2019 outlook. In addition, we expect start-up inefficiencies associated with our business optimization initiatives, net of spending [Inaudible] to reduce our full-year diluted earnings per share by approximately $30 million pre-tax or $0.25 per diluted share. Although we believe we have addressed the majority of the causes driving inefficiencies, we expect fourth-quarter earnings will be impacted by inefficiency costs of $4 million to $5 million.

A portion of these costs were actually incurred prior to the fourth quarter, but will only be recognized in the fourth quarter upon sale of the inventory. As a result, the inefficiency costs incurred in the fourth quarter are expected to be down substantially from what was recognized in the third quarter. As indicated in last evening's earnings release, we expect fiscal 2019 equity and earnings of unconsolidated affiliates to be $11.5 million and we expect interest expense to be $28.5 million. The consolidated tax rate expected to be 10% to 12% due to the change in expected pre-tax earnings.

For the full year, we expect adjusted diluted earnings per share to be in the range of $0.45 to $0.65 per share. Lastly, regarding the fourth quarter, the midpoint of our sales guidance projects an increase of 4% compared to last year's fourth quarter. As a reminder, sales in last year's fourth quarter were negatively impacted by poor springtime weather in the U.S., as well as channel inventory reductions. These factors were partially mitigated by the benefit we received last year due to shipping approximately $20 million of sales to build customer safety stock in advance of our ERP upgrade go-live, which will not repeat.

For the current year, despite a slow start in March, we are optimistic regarding the U.S. lawn and garden season and are encouraged by April retail activity to date. Somewhat temporary fourth-quarter sales growth, our anticipated headwinds associated with the Europe market conditions and their exit of Sears here — and the exit of Sears here in the U.S. Accordingly, we expect engine sales in the fourth quarter to be relatively flat to last year.

We expect the fourth-quarter consolidated gross margin rate to be lower than last year's fourth-quarter margin rate by a little over 100 basis points. The decrease is due to our anticipation of producing approximately 400,000 fewer engines in the fourth quarter than a year ago. As mentioned previously, we also expect $4 million to $5 million of inefficiency charges will impact fourth-quarter earnings. Together, lower production and inefficiencies are expected to pressure fourth-quarter margins by approximately 170 basis points.

We expect to achieve offsets to these margin pressures from a favorable sales mix, which will include higher commercial sales, as well as higher service part sales and savings of approximately $2 million from our business optimization program. We expect fourth-quarter adjusted ESG&A spending to be slightly lower than the fourth quarter last year. Now let me turn the call back over to Todd for some closing remarks.

Todd Teske — Chairman, President, and Chief Executive Officer

Third-quarter results had several encouraging developments supporting the fundamental soundness of our long-term strategy. We continue to make significant progress in the diversification of our business into higher-growth commercial products and engines. Customers are clearly responding to the innovation we are bringing to the market, with products that deliver greater up time and make the professional more productive. The same attention to user-driven innovation is driving greater adoption of our engines.

While we have clearly faced some near-term challenges, we are making progress on several fronts, which strengthens our optimism and confidence about our future and our ability to create value for our shareholders. On our business optimization program, we have made significant progress on adapting business processes to our ERP upgrade, particularly in our service parts area, which we expect to be substantially back to normal operations this summer. In commercial engines, demand remained strong as volumes increased at our Auburn, Alabama plant from the onshoring of production from our joint venture and product quality remains high. Our Statesboro, Georgia facility continues to be in ramp up mode and is expected to be in full production by this summer.

Similarly, our new commercial mower plant in upstate New York is performing well as professional landscapers are increasingly choosing Ferris and other Briggs commercial products as their equipment of choice. By the end of fiscal 2019, the implementation of our business optimization program will be nearly complete. This important milestone lessens implementation risk as we end fiscal 2019 and enter fiscal 2020. It will also enable us to turn our full focus on operational excellence.

All of this positions us for significant improvements in cash generation, improved earnings power as we move into the next fiscal year. The increase in demand for our commercial products is due at least in part to our success in expanding global distribution. We are building strong — stronger relationships with OEMs who increasingly recognize the value of partnering with a global leader in power. We are also forging stronger ties with rail houses, including, Bose, the leading company of its kind in Europe, which are specifying Vanguard engines in the products they provide to their customers in construction and infrastructure.

These investments in market development, which are ongoing will continue to pay dividends well into the future. Also, in response to increasing demand, we are expanding production capacity at our jobsite manufacturing facility to be better able to satisfy the volume requirement of rental houses. By the end of this calendar year, we will have installed new painting capacity and welding stations, which will improve efficiency as well — as improve responsiveness to customer demands. We are also investing in product upgrades for our standby generator business, which has experienced strong growth as a result of stronger dealer network and our success in making it easy to do business with Briggs & Stratton.

Our investments are also consistent with our goal of remaining responsible stewards of capital. In addition to continuing to invest in organic growth, including maintaining a robust culture of user-driven problem-solving, our near-term priority is to reduce debt. So that when opportunities arise, we are well-positioned to supplement internal growth with acquisitions that expand our portfolio of commercial products where we see opportunities to leverage our manufacturing footprint and global scale to create value. Our recent acquisitions of Ground Logics, Spreader Sprayers and Hurricane ride-on blowers are good examples of our product — our focus on products that fill out the commercial landscapers' trailer.

Both acquisitions are performing well. Fiscal 2019 has proven to be a year filled with some unusual market activity combined with some start-up inefficiencies associated with our business optimization program. Accordingly, we thought it would be useful to provide our preliminary estimates regarding an — our expected results beyond this fiscal year. We have recently completed the annual update of our long-range plan and we are very optimistic about the future.

Our preliminary estimates for fiscal 2020 contemplate meaningful sales and earnings improvement. We project net sales for fiscal 2020 to be in the range of $1.98 billion to $2.03 billion, which contemplates an increase of over 6% from the fiscal 2019 sales outlook range. We expect continued robust growth in commercial sales and a rebound of residential sales in Europe as market conditions normalize, along with a return-to-normal service parts throughput in North America. We also expect that the residential lawn and garden market in the U.S.

will benefit next season for former Sears consumers migrating to new retail outlets. I should add that our net sales estimates for 2020 assume normal growing conditions for the remainder of 2019 season and the 2020 season globally. Our 2020 estimates for diluted earnings per share are in a range of $1.20 to $1.40 per share, which is a substantial improvement from expected results in fiscal 2019. In addition to the margins on the expected sales growth, as well as a higher anticipated manufacturing volumes, we also expect fiscal 2020 earnings to benefit from a recovery of the vast majority of inefficiencies that we experienced in 2019, as well as approximately $15 million of incremental benefits from business optimization program savings.

Partially offsetting the expected earnings improvements, is our expectation that production levels will be tempered in fiscal 2022 to lower working capital levels and improved cash flow. We also expect approximately $0.07 of headwind associated with our frozen pension plan in fiscal 2020 based on current estimates. As you can see from our preliminary estimates for fiscal 2020, we are optimistic about our future. We will update these estimates when we provide our fiscal 2020 outlook in August, after the completion of the fiscal — after the completion of fiscal 2019 when we'll have better visibility on the progress of the current season.

We worked hard this year, laying the foundation to make Briggs & Stratton a better company with more diverse revenue streams in higher-growth, higher-margin areas. The business optimization program has been a big undertaking that is instrumental in helping build the foundation for a long-term sustainable growth. While we are disappointed by our near-term profitability, we are not discouraged about our future. The strategy is right.

We are seeing our way through the difficult near-term market headwinds from weather-related issues in Australia and Europe and from the Sears bankruptcy in the U.S. We are now coming to the late innings of implementing our business optimization initiatives and we have a path to improve operational excellence and generate an attractive return on the investment. We'll now open it up for questions.

Questions and Answers:

Operator

All right. [Operator instructions] All right. Your first question comes from the line of Tom Hayes. Your line is now open.

Tom Hayes — Northcoast Research — Analyst

Hi. Good morning, gentlemen.

Todd Teske — Chairman, President, and Chief Executive Officer

Good morning, Tom.

Tom Hayes — Northcoast Research — Analyst

Hey, Todd, I was wondering if maybe you could give us a little bit more color on the European market. It sounds like, continued headwinds you called out the channel inventory maybe higher than you'd originally expected. But kind of given your comments on the 2020 outlook, you're expecting some modicum of recovery in the market, just wanted to get a little bit more color on that.

Todd Teske — Chairman, President, and Chief Executive Officer

Yeah, Tom. So what happened last year is, just to take you back, I mean, there was a pretty severe drought in Europe. In fact, what's interesting is, we've experienced droughts before, but we've really never seen droughts on two continents between Europe and Australia, which we're managing our way through, but it just creates for some interesting market dynamics. But in Europe, when you look at what happened last year was very hot, very dry.

The grass wasn't growing, and we knew coming out of the season that inventories were elevated. The issue is, we didn't — the market in Europe is very fragmented, and you have a fairly robust dealer channel and you have a whole bunch of retailers that are out there. And so, when we talk to the OEMs and we talk to retailers, we had an idea of where the inventories might be but as the — we entered the season this year. The OEMs kind of discovered that they — the inventories were elevated in the channel, and when the season got to be — got off to a pretty slow start because it was very cold in Europe through March into early April, the OEMs really — they started pulling orders.

And ultimately, we've got one significant OEM over in Europe that's going to take two weeks off in the middle of the season to give you an idea that this took them by surprise. So now you get into, well, a couple of things. First off, we look at, I look a lot at things like ground-moistured maps and everything else. So when you're looking at ground moisture, where the season ended last year and where it is now, it's improved dramatically, which tells me that as it warmed up now here over the last couple of weeks over in Europe, we're anticipating that the season is moving, it's improving.

But with the elevated inventory levels that have been out there, we think that there's going to an impact for the season. Now when you get into the next year, unless something dramatic happens like another drought in Europe during the season, which we're not anticipating. The inventory levels will certainly normalize and in fact, could get to be a little bit too low because remember, the European production is done here in the U.S. for us, for engine, so it takes time on the water to get it to Europe, if it's going to a European OEM or engines go to China because there's Chinese OEMs that are now also shipping into Europe.

And so that's why when we think about the headwinds for the remainder of the season, we don't think there's going to be much of a benefit to us if it does bounce back, simply because of timing. But when you look at now into '20, as inventories are expected to normalize, maybe you get to be a little bit low, we would then expect a comeback into '20, which is really contemplated in this preliminary guidance that we've given you, folks.

Tom Hayes — Northcoast Research — Analyst

OK. Great. And then maybe secondly, on — your thoughts on the Craftsman's mower rollouts at Lowe's into your participation and kind of the outlook for 2020?

Todd Teske — Chairman, President, and Chief Executive Officer

Yeah. It's well — the rollout's been very encouraging. It's not just on mowers, but on pressure washers too, and you're seeing that come through the results. The changes that have been made at Lowe's with inventory stocking level, remember, last year, they took inventories way down for a whole host of reasons, including the brand transition.

So what's playing out on the craftsman situation is exactly what we thought was going to happen. And in fact, maybe to even a little bit stronger than what we had anticipated. So as we look into '20, I mean, you're going to have the channel flow that you saw this year because of the fact that they were stocking up on this, but when you look at the amount of advertising that's going on by Lowe's and by others, it's very encouraging in the U.S. this season.

So that's — as we look into fiscal 2020, we would expect that craftsman situation will continue to play very strongly.

Tom Hayes — Northcoast Research — Analyst

Great. And maybe two quick ones for you Mark. One, you kind of faded out a little bit there on your comment on the inventory reduction, the timing and the amount. And then could you provide any color on the amount of business optimization expenses we should think about for the fourth quarter?

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Yeah. The inventory reduction from the third quarter to the year end, we're estimating to be about $100 million. That said, overall working capital change decline should be pretty similar sequentially year over year from Q3 into Q4, all in. And then, secondly, on business optimization, our outlook was just somewhere around $2 million to $6 million of optimization costs in Q4.

Tom Hayes — Northcoast Research — Analyst

Great. Thanks for your time.

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Thanks, Tom.

Operator

Your next question comes from the line of Sam Darkatsh. Your line is now open.

Unknown speaker

Good morning, Todd and Mark. This is Josh filling in for Sam. Thanks for taking my questions.

Todd Teske — Chairman, President, and Chief Executive Officer

Good morning, Josh.

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Good morning, Josh.

Unknown speaker

Long-term question first. In the past, you had given a margin goal of 8%. Given some of the external headwinds you've been facing, can you give us an update on what year you might be able to reach that level and what sorts of things might need to happen in order to get there?

Todd Teske — Chairman, President, and Chief Executive Officer

Yeah. We're — Josh, we're still — the target's still 8%. And we never put a date on it, we just said that was our long-term goal, and we, ultimately, don't believe that a lot of the external things that are happening today ultimately have an impact on the long-term goal that we have of 8%. So what needs to happen is, we just need to finish up on the business optimization program, continue to put out really great products on the commercial side, continue to put out really great products on the residential side.

And we will see the growth happen, and we will see the margins improve. Get back to operational efficiency, and we'll be back on track driving to that 8%. So really, nothing has changed, and nothing this year. All the stuff we view as being generally transitory and with a few things as we pointed out in the next year's preliminary guidance, starts to work its way through.

And so, the 8% is still a target and the time frame is still consistent with where we've been.

Unknown speaker

Thanks. And then regarding the fourth-quarter guidance, can you give us a sense, Mark, of what is baked into the high and low end in terms of how the season unfolds?

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Yeah. We roughly assume pretty normal weather and as we commented looking pretty good now in the fourth quarter so far for the U.S. and Europe. The thing that is a little bit more of a wildcard this year is just a bit of dynamics in the landscape from a standpoint of Sears not playing the same presence it used to, and so it's one less retailer in place compared to the past.

And there's also a little bit less — we anticipate less OEM walk-more production in the fourth quarter as well, compared to where they would be the past due to some transitions going on there. So those are the things that could potentially, call it, suppress a little bit of the fourth quarter even given good lawn and garden conditions. And then, on the high end, it really comes down to a lot of the commercial growth. And we've seen some very nice growth to date there and anticipate some nice volumes in the fourth quarter as well.

We also anticipate some catch up on our service parts business, which is helpful to the bottom line as well. And we continue as Todd mentioned, the pressure washers have been going very well with the craftsman launch too, and we see some continued strength there.

Unknown speaker

Thank you. And then you said your priority for cash uses debt reduction, could you talk about how you might think about addressing the refinancing the upcoming maturity?

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Yeah. With our bonds, our senior notes of $195 million come due about a year from this December. And so we've begun the process to think through what options we could have in order to give ourselves financial capacity and financial flexibility roughly by the end of this calendar year, so that we'd be in a position to then retire the senior notes at a time of our choosing prior to their due date. So that's something that we started working on.

And we'll keep you updated as we go forward.

Unknown speaker

And then the last one from me. I saw you continued with the $0.14 dividend. Any commentary you want to give on your current thoughts on the dividend?

Todd Teske — Chairman, President, and Chief Executive Officer

The dividend's $0.14, and we expect the dividend to remain at $0.14, and over time, we'll go higher.

Unknown speaker

Thanks. Good luck with the next quarter.

Todd Teske — Chairman, President, and Chief Executive Officer

Thank you.

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Thank you.

Operator

Your next question comes from the line of Tim Wojs. Your line is now open.

Tim Wojs — Baird — Analyst

Hey, everybody. Good morning.

Todd Teske — Chairman, President, and Chief Executive Officer

Good morning.

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Hi, Tim.

Tim Wojs — Baird — Analyst

I have a few questions. I guess, maybe just starting with North America. What do you — what does the plan include for the residential engine business to grow in fiscal '19 and preliminarily in fiscal '20? And if you want to take out craftsman for fiscal '19, that's fine.

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Well, the primary goal for our residential engine business is really to hold the good share we have in improved margins and that's something that we're going to certainly continue to work on as we go forward. The other thing that is significant there is new product development. And we have targeted innovation that we've launched over the years, and we anticipate having continued pieces of innovation that help us improve our share in the market around the globe. Because when we have very high share in the traditional channels and North America and Europe and Australia, there's other growing areas as well in those market so that channels like online and other things like that where we believe we can pick up market share as those things grow.

So those would be some of the primary areas on residential growth. As well as the fact that the market remains pretty historically depressed and the housing market has been awfully choppy of late. But the fundamental still seems to exist that there isn't enough supply for the demand at the entry-level housing. And the entry-level housing is particularly where you're going to buy a walk-behind mower, which could inure well into our benefit as that balance were to shake out.

When that happens, don't know, but we would project more normalization there into the future.

Tim Wojs — Baird — Analyst

OK. OK. And then, I guess, when you think about kind of fiscal 2020 guidance today, I mean how, I guess, could we just maybe talk about the thought process behind giving that? And I guess, I'm asking you from the perspective of — we're just kind of getting into the current season and, as you know, there's just a lot of things and moving parts, weather, inventories and things that can develop over the course of the next 15 months. So I guess, when you look out to fiscal 2020 today, I guess, what are the key pieces of visibility that you have to maybe give that guidance this morning?

Todd Teske — Chairman, President, and Chief Executive Officer

So Tim, let me first address your comment or maybe question on why did we do this. This is not normal that we would give next year's guidance in Q3, at the end of Q3. And we don't expect do it into the future, but given just the significant transitory items that occurred in '19, we felt it was important to give all of you folks and investors, and potential investors a glimpse into how we think about next year. And how we think about some of the items this year.

And the takeaway you should have for why we did it was, we wanted to communicate that these items are transitory, they're temporary, they're not structural. And ultimately, there's just a lot of moving pieces in fiscal '19. Fiscal '19 is really a transition year in a number of different ways that then happened to have a lot of market headwinds due to weather-related items. And so that's why we thought it was important to give you an idea of where we currently think fiscal 2020 may shake out.

You're absolutely, right. There are a number of different things that will happen with inventories and the season progressing and where Europe is and that sort of thing. And what we'll do is we'll update this guidance as we get into August. The thought process behind it is that ultimately we expect to see really strong commercial growth, again in '20.

We're seeing it here in '19. We've seen it for the last five years, we've had double-digit CAGR over the last five or six years in this category. And you should understand that we expect to continue to see that. We also expect to see a rebound in residential as it relates to things like the European market.

Again, Australia is — has been so severe that we think that there's going to be some inventory, higher levels of inventory coming out of this season. Because remember, their season is now finishing up, and so we have some visibility there. So ultimately, the other thing you need to understand is that we expect the inefficiencies will go away, and we expect that we will get business optimization benefits. And so, that was the purpose behind giving you fiscal 2020 preliminary guidance early.

I think, it's important for you to understand that we believe these things are transitory and they're just simply not going to repeat in '20. And we are on track as it relates to the execution of our strategy. And we are just encountering some things of this year that are unfortunate, are disappointing, but at the end of the day, we're managing our way through them.

Tim Wojs — Baird — Analyst

OK. OK, understood. And then, I guess, as we look at free cash flow for fiscal '19, is there a way to kind of think about what free cash flow should be into maybe this year? And as you kind of look into fiscal 2020, what the rough conversion might look like?

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Yeah. This year, we came into the capex, we expect to be around $65 million for the year, which was online with what we planned. We do think that free cash flow is going to, as we've talked about last quarter, going to be negative, slightly negative this year just given some of the headwinds of the operating results combined with the ongoing spending that we've done this last year to complete the — bring the business optimization program to completion. As we go forward, it's our long-term financial goal to be able to convert about 3% to 4% of net sales into free cash flow.

And we think that we can make a lot of progress in getting there in fiscal 2020 based upon our preliminary estimates for 2020, where we would certainly be positive and quite positive in order to turn around that free cash flow as a percent of sales. And that's going to come with the anticipated improved earnings, combined with our ability to manage working capital. And that's one of the benefits of the ERP upgrade that we did is, we do think that that's going to help in managing particularly inventory as we start going into '20.

Todd Teske — Chairman, President, and Chief Executive Officer

And Tim, let me just add — Tim, let me add onto that. When you look at preliminary 2020 guidance, it's lower than what consensus has. Now, this is the first time we've come out with our number and a lot of you've got a number that's out there. The thing you got to keep in mind is, we expect, in '20, we're going — we're not going to produce as much as we originally would expect.

Meaning, we're going to be producing, especially on the engine business, lower levels than what would be considered to be normal and that has a drag obviously on EPS. However, what's really important now is to get the working capital back in line with where it needs to be and continue to get that cash flow generation back to where we've historically had it, if not better. And so, as Mark pointed out, we've got targets on what we expect for free cash flow and things like that. We're still going to see a little bit of an impact of kind of rolling out business optimization, which I now think about it in terms of how do we flow the cash.

So that's having a drag on earnings for preliminary 2020, but the whole point is we use — as Mark pointed out, we use the system, we work through the system to ultimately have better asset velocity in the business. And so again, '18, '19 has been kind of more transition years and as we now get into '20, we start to really realize some of the benefits. We have the savings that we have baked — we told you about we're experiencing now, but then it also comes back to how do we better manage working capital in the balance sheet and flow cash. And so that why we're really, really optimistic about this new system.

It provides us with some new and different tools. We just got a — we've got it up, it's actually working quite well with the exception of what I would consider to be the service parts things we talked about in a little bit of Australia. But when you look at the rest of the business, the business is now being able to understand this new system, we're adapting our processes to the system, and we expect that — we're going to reap some real benefit out of this as we roll into '20 and '21.

Tim Wojs — Baird — Analyst

OK. OK. And then, the last piece I have is maybe just a little more bigger picture. So if you look at the engines business, maybe over just the last 10 years, the segments revenue's down maybe $400 million.

Gross profit is kind of also down but the margin is actually up since then, and really just SG&A has been kind of flat or so over that period of time. And I guess, my question is just given the lower revenue levels, what's the reasoning behind SG&A, I guess, still being at that same level it was 10 years ago? Because it — I guess, it implies that SG&A per unit is up fairly materially over the last 10 years. And I guess, business optimization probably will help with some of that. But if you could just talk a little bit about how we should think of SG&A over time just because that really hasn't moved over the last 10 years.

Thanks.

Todd Teske — Chairman, President, and Chief Executive Officer

Yeah. So Tim, what we've done is we've reallocated a lot of resources within ESG&A that you don't necessarily see how we've reallocated them because we don't report segments that way. Let me give you — Let me tell you what I mean. So if you think about our enabling technologies, the two big or three big ones, two of which are really big in the engine business, in the power business.

One is electronic fuel injection and the other is electrification. And so when you think about what we do and who we are, we're a power application company. So we don't think of ourselves any longer as being an engine company, we think of ourselves as a power company, a power application company. And so what we've done is we've reallocated resources from what would be 10 years ago, the traditional internal combustion engine — engineering if you will in some of the support functions, and now we've reallocated that to things like electronic fuel injection, some IoT and then on electrification.

And you're going to start see coming out this fall, we expect some of these offerings now on the electrification side. So you'll see us coming out with our own products that'll have — be battery-powered. And suffice to say in our long-range plan, we just took our Board through some of our product planning over the last two days. There is a tremendous amount of momentum with regards to battery-type applications.

Now some of that — it's going to be some time before some of that adapts because internal combustion engines are still the most economical way to get power. However, when you look at the opportunities we have in electrification to expand, the scope of our business beyond what historically has been lawn and garden, there's other markets that we can play in. Now there's other markets we're playing in with Vanguard engines as well. My point to you is that ESG&A may have been relatively level but the way we spend the ESG&A is dramatically different, and we've been allocating to areas where we can get tremendous return, while still being that provider of power.

So, whether it's an internal combustion engine going forward, and internal combustion engines will be around for a long time. And we'll also have the opportunity to have batteries. So when you look at kind of where we're at that's why you're not seeing SG&A come down because of the investments that we're making in the enabling technologies.

Tim Wojs — Baird — Analyst

OK. OK. Thanks for the time, and good luck over the summer here.

Todd Teske — Chairman, President, and Chief Executive Officer

Thanks, Tim.

Operator

Your next question comes from the line of Joe Mondillo. Your line is now open.

Joe Mondillo — Sidoti and Company — Analyst

Just regarding the 18% growth at the commercial business, I was wondering if you could sort of not necessarily quantify what the sort of different buckets are generating but sort of obviously some bucket must be generating above 18% and probably below 18%. So I'm just wondering if you could sort of just hash through turf products, turf engine, industrial products, not turf, industrial engines are really making much of a movement at this point, but if you could sort of just talk about that that'd be great. Thanks.

Todd Teske — Chairman, President, and Chief Executive Officer

Yeah, Joe, if you think about over the last few years, we've seen double-digit CAGR growth. And early on, we were seeing jobsite growth pretty tremendous. And the reason we start seeing jobsite growth being pretty strong was, when we bought Allmand back in '15, it was really focused on oil and gas. And as the oil and gas market really didn't do very well, then shortly after '15, we pivoted into other things, meaning, light towers and for construction and jobsites and things like that and we also got into air — towable air, towable power.

So early on, when we started to see the momentum, that was stronger, but we saw momentum across the board. Over the last 12 months or so, jobsite is still strong, but not perhaps as strong as it was two years ago. And where we've seen just tremendous growth has been on the commercial mowers, and we've seen tremendous growth in commercial engines. And so, I would tell you it's pretty much across the board with more recently being skewed toward the engines business, as well as the commercial mowers where jobsite continues to grow, but perhaps not at the same pace as it had a few years ago.

Joe Mondillo — Sidoti and Company — Analyst

All right. And is that just on the engine side. I guess, it sounds like that's definitely a strength of the near term at least. Is that engine placement and just new customer wins? Could you just talk about the engine growth that you've seen?

Todd Teske — Chairman, President, and Chief Executive Officer

Well, I would tell you the growth is both on engines and commercial turf. We've seen our Ferris mowers have been tremendous over the last few years and that has to do with better placement out in the markets. We're signing up new dealers, new distributors. I would also tell you that we've got new models out over the last year and a half or two years.

It's been up almost 50% in terms of new models. On the engine side, it's a combination of things. One is, we now have a better value proposition, if you will. We always had a strong value prop coming out of Japan, but now being closer to the market, we're finding that people really are excited about the fact that we've shortened up lead times and they can do — they can — we're easier to business with that way.

We've also launched some new products over the last for years, and if you look at our Vanguard 200 single cylinder, you look at our Vanguard 400 that we've launched, we've got two other models that will be coming out. We continue to see — we see continued growth in this area simply because we've got a better value proposition as we move [Inaudible] onshore the engines and we've got a better product offering than what we've had in the past because we've launched these new products over the last few years. So it's not just one area, it's broad-based commercial growth.

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Weigh in on the commercial turf area you had in some of the bolt-on acquisitions that Todd commented on earlier like the Hurricane blowers and ground logic spreader/sprayer. It's gone really well, and helped us round up the trailer nicely for the professional mower.

Joe Mondillo — Sidoti and Company — Analyst

And just a follow-up, a last question regarding this. As you've rolled out all these new models and new products within commercial, and then probably more importantly, the tariffs and higher costs and everything related to that. Are the margins at commercial that's — this 18% growth at commercial, are the margins still, I mean, you've said in the past 500 to 600 basis points higher than residential, is it still that strong? And if so, I'm assuming that the product mix shift to commercial, I guess, it's just being offset tremendously by all these inefficiencies that you've talked about on your prepared remarks and the call itself?

Todd Teske — Chairman, President, and Chief Executive Officer

Yeah, Joe. So when you look at the margins, it's still as up to 500 basis points different that doesn't mean it's on every product. But I would tell you that when you look at the product mix shift, yes, it's benefited. The thing that I think people get confused by at times though is, when you look at the residential business — when we don't have throughput in the plants, obviously it has a drag on margins.

So yeah, we had some of the inefficiencies that we talked about that. But I think the other thing that's really important to understand is that the residential side of the business when you look at a year like we're having, with market headwinds in Europe and Australia, you ultimately don't have the throughput coming into the business. The other thing is margins in Europe and Australia are generally better than what we get here in the U.S. given the different market structures over there.

So I wouldn't hang it all on the inefficiencies. That's not it. It's partially it, but it's not the full picture. So I think it's important to kind of consider the market headwinds on the residential side that we don't expect will continue into next year.

That's why we're projecting the kind of bounce back that we're projecting.

Joe Mondillo — Sidoti and Company — Analyst

OK. And then, I guess, to follow on your sort of throughput comment. I totally understand that. With the ERP system and sort of how you're managing working capital and how you're managing the plants and production overall, could you talk about — and I'm guessing, some of this or a lot of it is actually baked in the benefits of business up.

But talk about sort of the benefits that you're — how the business overall changes. Because obviously, with all these weather events the last two years, inventory got way out of whack and now you're sort of trying to recover and try to sort of improve things going forward. But it sounds like going forward, the whole system and the process and working capital and everything is going to change, hopefully a huge amount for the better. Could you just sort of talk more about that?

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Joe, I think you hit on it because the other thing that certainly been the case in 2019, as we have a lot of things all going at once at the same time, initiative wise. And so that — onto themselves, they're all excellent things, but then from an execution standpoint that's where a little bit of the inefficiencies popped out. And that we just have a lot of people working pretty hard to execute these things. And the point with some the 2020 preliminary outlook is to show you just how confident we are that that bounces back and we got our arms around it.

So indeed from both a working-capital standpoint, particularly around inventory, inventory management, we've had to ramp a little bit when you think about going live with the ERP. We've now gotten better even in a short period of time with managing inventory. We have new tools within our warehouses to be much more precise with what's where, and we will be able to drive that to manage lower levels, from the working-capital standpoint. And then the benefit standpoint from the — Todd commented that we expect to get an incremental $15 million of benefits and business optimization in 2020 on top of the, I'll call it, $2 million to $3 million that I commented on that we're recognizing in '19, a little bit behind pacing wise where we thought we'd be, but still on track to get to the up to $40 million benefits by 2021 so that's pretty significant.

And then on top of that, you get the commercial sales mix that you guys are talking about as well. And you combine that with more normal utilization of the facilities and more normalized service part throughput, which comes at a nice margin relative to the portfolio. And you're absolutely right. It's a very different business from a top-line, bottom-line perspective.

Joe Mondillo — Sidoti and Company — Analyst

OK. Last question, I know the call is extended pretty long. I just wanted to make sure that I understand any anticipated headwinds for fiscal '20, and one being Australia that I can think of if there's anything else. Your comments regarding Australia seem to — I thought maybe it contradicted a little bit.

It sounded like initially in the prepared remarks, you sort of cited the elevated inventory is going to probably be a headwind as we go into fiscal '20, but then I thought — Todd, you may have said to sort of the opposite. So I'm wondering about that headwind. And are there any sort of other headwinds that you're sort of thinking about, I know there's several tailwinds that you've obviously covered on the call, but anything else that you think could be at risk going into fiscal '20?

Todd Teske — Chairman, President, and Chief Executive Officer

Yeah. Let me just clarify on the Australia situation. We don't expect that there's going to be a big rebound. We would expect and maybe I misspoke earlier, we expect that there will be inventory hangover, if you will, elevated inventories coming out of the season in Australia, and so, therefore, that will have an impact.

Where we won't see the kind of bounce back next year that we would expect to see in Europe because Europe, we expect to see a bounce back next year, but Australia, we don't. Let me just note a couple of other things to your question then Mark can fill it out. I would tell you the other things that you just need to remember are the fact that production levels, again, are going to be — are not going to be back to what we consider to be normalized levels. That will be a headwind because ultimately, we want to make sure we're taking down working capital, and we're cash flowing the business.

Other things, Mark?

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Yeah. The two other things really that we commented on were the pension expense. And we do expect about $0.07 per share of pension headwinds going into '20. And that's nothing other than our anticipation of a lower asset return compared to where we've been as we work down our glide path to derisk our pension volatility as one item.

And then the other thing is related to our early comments we made on the whole Sears market transition. You recall when we took out the $30 million of revenue in 2019, we said, we didn't anticipate all of it to come back right away. And so, indeed as we start to estimate out to 2020, it seems to be playing out roughly along the lines of what we had anticipated it would, but we still have some more time to go in the season, and we'll be able to better judge that in August. But we want to anticipate all the loss Sears volume coming back in 2020.

Some of it would hangover and come back later, likely '21.

Joe Mondillo — Sidoti and Company — Analyst

Right. And that would be a net tailwind still, but just not maybe the full tailwind that you saw in terms of headwind in fiscal '19, right?

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Yeah. Especially if you're comparing against how we started out at the beginning of this year with our estimates and the ramp rate then into '20 and '21 compared to '19. That's a change in circumstance, of course.

Joe Mondillo — Sidoti and Company — Analyst

Great. OK. All right. Thanks a lot.

Thanks for taking my questions.

Todd Teske — Chairman, President, and Chief Executive Officer

Thanks, Joe.

Operator

Your next question comes from the line of Matthew [Inaudible]. Your line is now open.

Unknown speaker

Hey, guys. I'm just trying to square some comments about your cash generation, and I'm having difficulty with. So If you take kind of the midpoint of your 2020 guidance for sales and then you take the midpoint of that 3% to 4% of sales for — as your cash flow goal that's like $70 million of cash flow potentially, but you said you sort of want to work up to that, which implies that 2020 actual cash flow generation is going to be less. But on the other hand, you're saying that maybe production is going to be low while you sort of work through some inventory, so maybe there's some working capital at least or cash flow is actually higher like, how do we square what potential for cash flow generation in 2020 is going to be?

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Yeah. There's obviously some variables that'll have to play out, but based on our estimates now, we think we can get very close to our goal of that 3% to 4% conversion likely, on the lower end of the range in 2021. And then, it really comes down to some of the working capital management and timing that we can drive. We think we have a good beat on things related to that.

We believe we have good control over capital spending. And although our goal is $65 million a year of capital spending going forward, we might even endeavor to try to do less than that if the opportunity arises. So those are a couple of the big things that we are really working on hard to manage with that priority toward improving some delevering.

Unknown speaker

So along that front, is the goal to use some of this cash flow generation over the next 15 quarters, I'm sorry, 15 months to chip away that maturity before you go to refinance it, with these continued open market purchases of the bonds?

Mark Schwertfeger — Vice President and President Job Site and Standby Group

No. I wouldn't necessarily say that specific. Our goal is more around our total net debt position. And right now, over the last 12 months or so, our revolving credit agreement borrowings have been a little bit higher than they've been in the past due to the operating performance and then just higher spending on initiatives.

And we've also reduced a little bit of the senior notes over the last 12 months as well. So we think about it more on the overall basis of the full debt, and we'd like to see the full debt relative to the earnings delever a bit with the use of the cash flow. And then as I commented from a refinancing standpoint, the whole thinking is that we just like to have good capacity and flexibility in place. Our goal would be by the end of the calendar year, so that we could then retire the senior notes at a time of our choosing.

Unknown speaker

Yeah. So about that timing. Obviously, if you let it go into calendar 2020, it becomes a current liability on your balance sheet, which auditors may or may not approve of. Are you comfortable letting this maturity go into 2020? Or do you intend to try to address it before calendar 2020?

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Really, need to address that as we go through our whole financing options as we work through that in the upcoming couple of quarters and the like in getting toward that December 2020. We have, I believe, we have good options available to us. And so, we'll see where all of that goes. But really, I think the important part, I'd say I want to have good capacity and flexibility to the extent I can demonstrate, I got capacity I think that eases the audit concerns and the like that you mentioned because it gives me the flexibility to take out the notes at a time of my choosing.

Unknown speaker

OK. All right. Thanks very much.

Todd Teske — Chairman, President, and Chief Executive Officer

Thank you.

Operator

[Operator instructions] There are no further questions at this time. Please continue.

Todd Teske — Chairman, President, and Chief Executive Officer

All right. Well, thank you very much for joining us today. We look forward to speaking with you again in August. Thanks.

Operator

[Operator signoff]

Duration: 74 minutes

Call Participants:

Mark Schwertfeger — Vice President and President Job Site and Standby Group

Todd Teske — Chairman, President, and Chief Executive Officer

Tom Hayes — Northcoast Research — Analyst

Unknown speaker

Tim Wojs — Baird — Analyst

Joe Mondillo — Sidoti and Company — Analyst

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