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Briggs & Stratton Corp  (NYSE:BGG)
Q1 2019 Earnings Conference Call
Oct. 26, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Dexter, and I'll be your conference operator for today. At this time, I would like to welcome everyone to the Analyst Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Mark Schwertfeger, you may begin your conference.

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Good morning and welcome to the Briggs & Stratton Fiscal 2019 First Quarter Earnings Conference Call. I'm 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 we operate in. 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 make reference to certain non-GAAP financial measures during today's call. Additional information regarding these financial measures, including reconciliations to comparable US GAAP amounts is available in our earnings release issued yesterday and in our SEC filings. 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 is Todd.

Todd Teske -- Chairman, President, Chief Executive Officer

Good morning, everyone, and thank you for joining us today.

Yesterday, we reported financial results reflecting lower year-over-year sales and profitability. However, our decreased first quarter results were largely influenced by several business timing items which we expect to reverse as we make our way through the remainder of fiscal 2019. In fact, our full year forecast which contemplates strong sales and profitable growth remains intact. Overall, we anticipated lower first quarter sales this year on our outlook, as our outlook contemplated no business related to hurricanes.

In addition, we have pulled forward sales of $20 million, as well as production into the fourth quarter of fiscal 2018 to support our ERP go-live in July. Ultimately, sales in the first quarter fell short of what we had anticipated due to unfavorable weather conditions in Australia and Europe, later-than-anticipated customer demand and lower business throughput following the go-live of our upgraded ERP. Approximately $15 million of generator sales to support people impacted by Hurricane Florence and higher than expected commercial sales exceeded our sales plan in the first quarter.

Business trends in our commercial markets have remained solid with particularly robust activity for expanding line of commercial job site products. For the first quarter, commercial sales advanced the solid 12%, while trailing 12 month sales are up more than 18%. On a full year basis, we expect that generator sales from Hurricanes Florence and Michael will offset lower than anticipated sales into Australia and Europe due to the difficult weather conditions experienced there. The first quarter also saw significant progress across multiple dimensions of our business to sustain long-term growth and improved returns, as we provide power to those who get work done.

First, we are well positioned to achieve $30 million to $35 million in cost savings from our business optimization initiatives over the next three years. I'd like to briefly cover key milestones we have achieved along this path. During the quarter, we went live with our ERP upgrade, and we remain pleased with the result. Manufacturing speed from the beginning exceeded our expectations and we were immediately able to effectively respond to heightened demand for generator shipments to support people impacted by Hurricane Florence. We recognize, however that we did not consistently operate at our usual shipping capacity around the globe in the first quarter, and our team is focused on returning shipments throughput to our industry-leading standards, particularly for service parts. We have made a lot of progress to-date and expect to complete this work during the second quarter, well, in time for the major shipping season.

I would like to thank our customers and suppliers for their patients and outstanding support as we've transitioned to our upgraded system. I would also like to thank our dedicated employees for all their hard work to deliver a successful go-live, and for all the great work we're currently doing to ramp up our business throughput. While it is difficult work, we are confident as ever that this upgraded system will provide us with the right platform to support our growth long into the future.

Second, for Vanguard commercial engines, domestic production is ramping up in our Auburn, Alabama plant as planned with our team meeting cost and quality targets. In the third fiscal quarter, we will bring Vanguard engine production online at our Statesboro, Georgia plant as planned.

Third, the transition of our new facility for Ferris commercial mower production is also proceeding on schedule with the remainder of the move to be completed early in the fiscal third quarter. Overall, we are very pleased with the progress on driving operational excellence throughout our production facilities, which is lowering cost, improving customer service and positioning production geographically closer to our main body of customers.

Our focus on innovation is expanding the range of products we offer to serve more of the professionals' needs and make work easier, safer and more productive. Earlier this month, we introduced several new products at the annual turf and landscaping trade show in Louisville, Kentucky, including several new stand-on commercial blowers and spreader sprayers to help fill-up the professional landscapers' trailer. As a result of two recent acquisitions, these innovative products now supported by our family of brands and industry leading distribution, I'll allow landscapers to expand the range of services they offer their customers.

In addition, we are pleased with the growing success of our Vanguard commercial engines. With wider exposure in distribution and a proven record of superior performance, we are winning new accounts and placements to power a broader range of equipment in construction and in other venues. Strong placement of our horizontal shaft engines which we introduced late last fiscal year are another important reason for our share gains.

At this year's show, we built on last year's introduction of our innovative web-based solution, InfoHub, to offer a broader range of tools to help commercial cutters and others work smarter. We have expanded the capabilities of the InfoHub for commercial turf to cover diesel powered equipment with the same tracking and maintenance capabilities it provides for the gas-powered equipment such as lawn mowers. Also in support of full fleet tracking, we've launched InfoHub OBD or on-board diagnostic for trucks.

We also launched a version of InfoHub specifically to meet the needs of outdoor power equipment dealers who want to track rental and demo equipment. This version includes geo-fencing technology which will alert dealers when a piece of equipment leaves the dealership or other defined areas.

Finally, let me comment on the residential lawn and garden environment. With generally favorable grass growing conditions in the US in the late summer and early fall, we estimate US retail inventories of mowers and other products remain at historic lows with the mass retail channel due to an effort this past season to reduce inventory to support a higher than usual brand transitions for the upcoming season. In addition, channel inventory is typically at a seasonal low at this point of the year when the US lawn and garden season is winding down. We believe, this will help mitigate the risk of significant market disruption caused by any inventory markdowns associated with Sears' recent bankruptcy filing.

We believe that our US dealer channel inventory is at normal levels to support the planned shipment for the upcoming season. European lawn and garden channel inventory however remains elevated after a season of unusually hot and dry weather across much of Northern and Central Europe.

As we commented in August, we are confident of our residential engine placement for the Spring season, and are ready to respond engine orders from our customers as we move closer to the selling season.

Now, I'll turn it back over to Mark to walk through our financial results for the first quarter fiscal 2019.

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Thanks, Todd. The first quarter consolidated adjusted net loss was $21 million compared with an adjusted net loss of $11.3 million in the prior year. The wider loss reflects a significant reduction in hurricane-related sales of generators this year, as well as lower sales mainly due to timing. As a reminder, we typically reported net loss in our first fiscal quarter due to the seasonal nature of our engine business and the related lawn and garden portion of our product segment.

This year's adjusted results exclude pre-tax charges of $19.9 million related to our business optimization program, of which $700,000 were non-cash in nature. The engine and product segment incurred $14.4 million and $5.5 million of pre-tax charges respectively. Results also exclude within the product segment, a pre-tax litigation settlement charge of $2 million, a pre-tax bad debt charge for the receivable owed by Sears of $4.1 million, and $100,000 of acquisition integration costs.

Engine segment sales for the first quarter were $119 million, a decline of 27%. Engine unit shipments decreased by 25% or approximately 260,000 engines from the first quarter of fiscal 2018. The decline was substantially related to the timing of shipments. Sales of approximately $15 (ph) million had been accelerated into the fourth quarter of fiscal 2018 to support customers during the go-live of our ERP upgrade.

In addition, sales were approximately $10 million lower this year in the first quarter due to lower business throughput following the go-live of our ERP upgrade. Further, certain of our US customers required fewer engines this quarter due to higher than usual plant shutdown days for maintenance and weather disruption from Hurricane Florence.

Sales in the Europe and Australia were also lower due to unseasonably dry weather conditions, which will begin to improve subsequent to the end of the first quarter. Engine segment sales were approximately $25 million short of our expectations in the first quarter. We believe, the majority of the shortfall will be made up over the remainder of fiscal 2019.

Engine segment adjusted gross profit margin was 13.8%, a decrease from 19.4% last year. The decrease was largely due to unfavorable sales mix, including a lower proportion of service part sales and manufacturing volumes that were lower compared to last year by over 15% due to the cut over to our upgraded ERP system.

Production volume was approximately 1.3 million units this year compared with 1.5 million units for the first quarter of fiscal 2018. Total engine inventories at the end of the quarter were approximately 2.3 million units, which is an increase of approximately 300,000 units from the end of the first quarter of fiscal 2018. Engine production was slightly higher than planned in the first quarter due to the production ramp up following our ERP go-live. The higher-than-planned production combined with lower-than-planned sales had our engine inventory slightly elevated as of the end of the first quarter. Engine segment adjusted ESG&A expenses declined in the first quarter of 2019 by $2 million due to lower employee compensation costs.

Products segment's net sales for the first quarter decreased by $14 million substantially as a result of a decline in demand for portable generators related to the last year's significant hurricane activity. Last year, Hurricanes Harvey, Irma and Maria caused significantly more power outages than Hurricane Florence during this year. While Hurricane Florence created demand for approximately $15 million in generator sales this year in the first quarter, the demand was about half the demand of the $30 million for last year's first quarter storms.

Lawn mower sales in Australia were lower due to dry weather conditions at the outset of their upcoming lawn and garden season. Similar to the engine segment, business throughput was somewhat lower in the first quarter compared to a year ago for portions of the business, primarily service parts due to the ramp up following our ERP go-live. Partially offsetting the decrease in sales were higher sales of job site equipment, unfavorable market conditions and higher sales of Ferris commercial mowers. Sales also benefited modestly from the asset acquisitions of Ground Logic and Hurricane.

The product segment adjusted gross profit margin was 17.6% versus 19.5% a year ago, largely due to the decline in contribution margin from less generator sales, as well as unfavorable sales mix from lower service part sales. Product segment adjusted ESG&A expenses decreased by $1.4 million due to lower employee compensation expense.

Turning to the balance sheet. Net debt at the end of the first fiscal quarter was approximately $373 million, up from $230 million last year. At the end of the quarter, we had approximately $201 million drawn on our revolving credit facility, an increase from $65 million. The cash was primarily used for higher working capital balances that resulted from the transition of our ERP system in the first quarter as well as to fund our asset acquisition of Hurricane, Inc. At the end of the quarter, last 12 month average funded debt was $362 million and the last 12 month EBITDA was $176 million. Both is defined by our credit agreement, resulting our leverage ratio of 2.06 times, which is well within our debt covenants.

Our first quarter adjusted tax rate included a non-recurring benefit of approximately $3 million from a federal research and development credit. Because of this benefit which had not been contemplated in our previous guidance, we now anticipate our fiscal 2019 adjusted tax rate to be in a range of 21% to 23% compared to our previous estimate of 24% to 26%.

Before I turn the call back over to Todd for his closing remarks, let me spend a moment on the updated outlook for fiscal 2019. As we reported yesterday, we are increasing our estimate for full year net sales to be in a range of $1.95 billion to $2.01 billion, which is approximately $20 million higher than our previous guidance. The increase is primarily due to higher pricing to offset the anticipated cost of new US section 301 tariffs that were implemented in September. We expect the majority of this pricing increase to impact the second half of our fiscal year when the tariff rate is set to increase from 10% to 25%. In addition, we expect that $18 million of generator sales from Hurricane Florence and Michael will be offset by lower first quarter sales of residential engines and products in Australia and Europe.

Net income is now expected to be in a range of $60 million to $68 million compared to our previous estimate of $58 million to $66 million. Diluted earnings per share are now expected to be $1.40 to $1.60 per diluted share. Both the net income and diluted earnings per share estimate are prior to cost related to our business optimization program, bad debt charge, litigation settlement charge, acquisition costs and the benefit of share repurchases. The increase in the outlook is due to our expectation of achieving a lower tax rate to the tax benefit achieved in the first quarter, partially offset by slightly higher interest expense costs. We remain on track to achieve our expected operating margin percentage, including the benefits from our business optimization program of $6 million to $8 million.

Our fiscal 2019 outlook excludes the potential impact of up to $30 million in net sales loss and approximately $0.15 per diluted share depending on the outcome of the Sears bankruptcy proceeding. We believe, this reduction would be the upper end of the impact to our outlook if Sears exited the market for the upcoming Spring season. As Todd commented earlier, we believe Sears outdoor power equipment channel inventory is at a seasonal low point this time of year. However, we would expect some unfavorable impact to the market this upcoming season due to inventory liquidation. This expectation also incorporates the transition period that would temporarily impact the market should there be a sudden reduction in retail outlet settling outdoor power equipment from liquidation.

We believe, the impact of this transition would diminish significantly over the course of time, particularly as consumers are able to purchase Craftsman branded outdoor power equipment from retailers other than Sears. We will closely monitor the Sears proceedings and we'll provide an update on our outlook regarding this matter in January.

Finally, I'd like to comment briefly on a couple items to keep in mind regarding the second quarter of fiscal 2019. First, we estimated some, but not all of the timing related shipments that were delayed in the first quarter will shift into the second quarter. Based on this, we expect $15 million to $20 million of net sales we had anticipated to incur in the first quarter to shift into the second quarter.

We expect that sales into Europe will be sequentially later this year due to the elevated channel inventories resulting from the unusual dry, hot summer. In addition, we expect there could be some disruption to sales in the second fiscal quarter due to Sears' recent bankruptcy filing and announcement of additional store closures. Although difficult to estimate at this time, we expect the second quarter impact could be approximately $5 million in net sales.

Second, last year's second quarter included $10 million in elevated generator demand following the active hurricane season last year. This year, we anticipate generator sales associated with Hurricane Michael, which occurred in October to be substantially less than last year's elevated generator sales. Hurricane Michael was a destructive storm, however it formed unusually quickly and did not allow for the usual preparation time for channel partners or homeowners. In addition, the path of Hurricane Michael overlapped a fair amount with the area impacted by Hurricane Florence. Accordingly, we believe, a large portion of the generator demand for Hurricane Michael was met by channel inventory already in place as of the end of our first quarter.

Third, we expect modest lower production volumes in the second quarter this year compared to a year ago in order to prepare for the transition of Ferris mowers to the new plant and to right size our engine inventory, which is elevated due to our succeeding production speed upon go-live of the upgraded ERP system. All in, we expect the lower production to have a pre-tax impact of $2 million to $3 million in the second quarter. Despite lower production in the second quarter, we believe we will be well positioned to meet market demand for the upcoming lawn and garden season.

Lastly, while ESG&A spending was lower year-over-year in the first quarter, the decrease was mainly related to variable compensation expense that was lower this year due to lower generator sales in support of storms. We expect higher year-over-year ESG&A spending in the second quarter in support of our initiatives to grow commercial offerings and enabling technologies.

Now, let me turn the call back over to Todd for some closing remarks.

Todd Teske -- Chairman, President, Chief Executive Officer

We enter fiscal 2019 with our outlook intact. While first quarter results were affected largely by the timing of shipments, business activity has remained firm. As important, we are confident that our strategy of diversification and extending our leadership as a provider of power is setting the course for long-term success. Our main areas of focus remain unchanged, namely, grow the profitability of our resident business, drive growth in commercial, invest and build in enabling technologies and drive operational excellence.

To achieve these goals, our priorities for fiscal 2019 are simple; focus on extending our leadership as a provider of power, pursue acquisitions in business partnerships to accelerate growth in commercial enabling and in enabling technologies, maintain our high level of execution on business optimization to achieve $30 million to $35 million in cost savings and work closely with our channel partners to ensure there's smooth brand transitions for the upcoming grass growing season.

Unquestionably, we are known as a power application company. This deep domain expertise gives us the know-how and ability to apply power in ways that deliver the best user experience most efficiently to get the job done. The continued high growth of commercial demonstrates our success in achieving this goal with innovative new products such as our horizontal shaft engine platform where we are extending our reach to serve new applications with established new customers.

At the same time, we're moving Vanguard (ph) engines, with electrification, fuel injection technology and InfoHub to support further growth and deliver a broader range of products, services and technologies that drive greater value and make the user more productive. You will be hearing more about the developments in these areas and other areas as we proceed through this year.

Over the past year, we completed two asset acquisitions which have extended our product line, brought us new technology and extended our capabilities to build relationships with new customers. Both the Hurricane brand of stand-on blowers and Ground Logic Spreader sprayers will benefit from our industry-leading distribution and efficient manufacturing to accelerate sales growth and deliver value to our dealers and end users.

Dealer and end-user response to these innovative products was overwhelmingly positive at the Lawn & Garden Trade Show in Louisville earlier this year -- earlier this month.

In fiscal 2019, we'll be pursuing additional business combinations to further strengthen our presence in commercial, as well as support our growth in enabling technologies. For the past couple of years, we've devoted a large amount of organizational bandwidth to our ERP upgrade project. Having completed the go-live this past quarter, we are in a better position to accelerate action on our pipeline of corporate development opportunities. Our pursuit of acquisitions and other business arrangements will not diminish our discipline on capital allocation. We continue to focus on investing in those areas that deliver the highest risk-adjusted returns.

As we look to support more sustainable growth in sales, we also recognize the opportunities to drive greater efficiencies with our business. For fiscal 2019, we will remain -- we will maintain our solid execution on our business optimization activities. With our ERP upgrade now up and running, we will be working to optimize operations around the system to drive operational efficiency and improve customer service. The move of commercial mower manufacturing to our new facility will be completed in time to take advantage of better operating leverage as we begin higher production to meet seasonal demands. For our Vanguard line, the transition to US based production of commercial engines will be substantially complete by the end of this fiscal year. As we move production closer to the end user and increase our ability to deliver high quality products faster.

Finally, we work closely with our channel partners to support our retail brands for the upcoming season to ensure high availability and a seamless buying experience. Our conversations with retailers and channel partners indicate that we will maintain our leading placement during fiscal 2019 as we deliver high value and better user experience to their homeowner.

That concludes our prepared comments, and now we'd like to open the call up for questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Sam Darkatsh.

Sam Darkatsh -- Raymond James -- Analyst

From Raymond James, yes. Hey, Todd, Mark. Good morning. How are you?

Todd Teske -- Chairman, President, Chief Executive Officer

Good morning.

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Good morning, Sam.

Sam Darkatsh -- Raymond James -- Analyst

Three questions, if I could. Mark, you gave us a whole bunch of moving parts for second quarter with the sale shifting with Sears, with the production volumes, with the ESG&A spending all that. If you could boil it down, sales and earnings per share on a year-on-year basis were up, down, flat. Generally speaking, directionally how should we think of all of the confluence of all those factors?

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Yeah. I think, if you think through a bunch of the pieces, hopefully that gives you have lot of ideas. Overall, we would expect higher sales similar to the outlook for the full year of higher sales. And I just wanted to make sure that you understood what portion of the timing from Q1 would likely be Q2 versus the remainder portion of the year. But as we commented on the remarks, we do think that there is solid end market demand across the business and would expect to see some higher performance in the second quarter.

And then earnings, similarly some benefit that would fallout from that, of course, with the couple of things to keep in mind there related to some lower production to mitigate a little bit of that sales growth benefits. And then just wanted to make clear that we wouldn't necessarily extrapolate the lower ESG&A in the first quarter on a full year basis. Overall, we're going to continue to control ESG&A. But if you think about as a percentage of sales seeing it being roughly consistent to slightly lower as we go throughout the remaining quarters of 2019 relative to '18, I think that would be a good way to look at it.

Sam Darkatsh -- Raymond James -- Analyst

So boiling it down, sales up year-on-year in the second quarter and earnings may be flat to down because of the cost pressures on production and ESG&A? Is that how to think of it?

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Yeah. And I don't know that I would say down necessarily, but just I would be careful not to extrapolate earnings the same way as sales growth would likely come about in the second quarter.

Sam Darkatsh -- Raymond James -- Analyst

Got you, OK. And then second question, as it relates to pricing around the tariffs, I think -- I guess it comes out to about $20 million, which I'm guessing is in the back half of the fiscal year, so that might be $30 million, $40 million on an annualized basis. What sorts of products is that pricing involved with or isolated to, what are the price increases for those particular products and how should we think about elasticity either historically or prospectively for products that would be requiring a price increase?

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Yeah, it's a little bit splits related to end-products by the bigger ones that impact us, our portable generators and some of our smaller portion of our pressure washer business, electric pressure washers that are sourced from China were those would see higher tariffs. And then the remainder of the impact which mainly impacts the Engine business and a little bit of our product segment are more indirect components that go into our supply chain manufacturing. So not the engines themselves, but more so the components and the like, we do source from China.

And so, I would say, overall, we are positioned very competitively relative to the marketplace from a standpoint relative to the tariffs when you contemplate the fact that 85% roughly of our production is here in the United States. And so, as it relates to our engines and a lot of our end-products, we are making them there, and so the impact is more on the component and input as opposed to the full product, which will impact others in the marketplace.

And then related to the categories I mentioned, the portable generators and pressure washers, that is where we would tend to see the full impact of the tariffs. Overall though, we do have avenues related to obtaining pricing and we are confident that we can achieve the pricing increase in order to offset the impact of the tariffs.

Todd Teske -- Chairman, President, Chief Executive Officer

Sam, let me add on to that as well. So if you think about big pieces of our business that are impacted by the tariffs, by the way, both positive and negative. So if you think about the -- sort of portable generators, just about every portable generator made today on the residential side is made in China. And so, everybody is kind of in the same position. I'm sure, we are all looking for ways to -- work our ways through the tariff situation, but it all becomes difficult is when do you change your supply chain, how long it becomes -- how long these things may or may not be out there. But it's a fairly level, it's a very level playing field as it relates to things like generators and then pressure washer pumps for example, and electric pressure washers, generally will come out of China as well. And so there, I think you have the opportunity because of the competitive nature of what's going on that people will just basically pass those along, that's, and we expect to do that.

On the other side -- on the flip side though what Mark was talking about especially as it relates to engines, as you know and others have pointed out in some of their analyst reports, a low-cost country competition, we've seen it for quite some time. And now, when you have engines that are coming out of China, they have 25% duties on them. Our engines are made here in the US, the components Mark talked about are substantially less in value, if you will than the entire engine coming out of China, which is why the impact of tariffs on us as it relates to a competitive engine situation as substantially less. And so that creates, perhaps, some elasticity in terms of pricing, the ability to go out and pass the tariffs on, and it also potentially creates some opportunities for additional business.

Now, we're not -- at this point, we are not contemplating anything in our guidance for additional business as it relates to the fact that we produce here versus China, but I would tell you that there isn't a substantially enhanced interest out there from others who ultimately are interested in avoiding those tariffs. And so, net-net, that's a long answer to your question, but I think it kind of fills out why we're confident that we can go out and get the pricing to offset the tariffs, as well as highlights some potential future advantages that we might be able to take advantage of, if you will, going forward.

Sam Darkatsh -- Raymond James -- Analyst

Comprehensive answer. Thank you for that Todd. My final question, Mark, as it relates to Sears, I'm guessing the $0.15 potential headwind is calculated just looking at a maybe a 25% contribution margin on the $30 million of sales if it's lost. Do you have a receivable out to them also? Was there a writedown to the receivable and what might be the other sorts of impacts should Sears ultimately to have a demise?

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Yeah. In the first quarter, we had a receivable outstanding of a little over $4 million which we reserved as of the end of the quarter, and so we would not anticipate additional charges related to that. And then as I think about any other things like inventory and the like, we think that that's pretty small related to what's out there. So really that -- the contribution margin you referred to and that $0.15 looks more at the perspective sales impact of there being fewer -- potentially fewer of lawn and garden retailers out there, and then also the one-time impact of potential channel inventory liquidation.

Sam Darkatsh -- Raymond James -- Analyst

So the $4 million reserve, was that booked as an expense in the first quarter or will it be booked in the second quarter?

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

It was booked in the first quarter.

Sam Darkatsh -- Raymond James -- Analyst

And it ran through the P&L?

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Correct.

Sam Darkatsh -- Raymond James -- Analyst

Okay. Thank you gentlemen. I appreciate it.

Todd Teske -- Chairman, President, Chief Executive Officer

Thank you, Sam.

Operator

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

Joe Mondillo -- Sidoti & Company -- Analyst

Hi. Good morning, guys.

Todd Teske -- Chairman, President, Chief Executive Officer

Good morning.

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Good morning.

Joe Mondillo -- Sidoti & Company -- Analyst

A follow-up on the -- one of the last questions there regarding the China engines. I'm just wondering, what percentage of the market is sourced from China in terms of actual engines?

Todd Teske -- Chairman, President, Chief Executive Officer

Yeah. We estimate that it's mainly related to walk mower engines that would go into residential walk mowers and approximately around 10% or so of the marketplace.

Joe Mondillo -- Sidoti & Company -- Analyst

Okay. And with the 25% -- I guess that would be included in the 10% which ramps up to 25% at the end of this year, accounting for 25% tariff on that, what is pricing of your engines look like relative to the China engines?

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

And actually, Joe, the most of the engines were covered by the annex of section 301 which went into effect on August 23, and that's around a 25% tariff rate as of then. The other piece beyond that 10% of residential walk mowers is, there also are some pressure washer engines in the marketplace too that would tend to be sourced from China right now but potentially we could service as well with our vertical shaft engines.

We work within the United States, sort of that we produced in the United States, and we're not going to get into specific pricing discussions on a SKU basis other than, we have a full value proposition associated with our engines that involve quality, real-time production availability with our US footprint, our outstanding service support network and the innovation we bring to market. Oftentimes, you will see in the Chinese engines, the key point that has highlighted in them is indeed the pricing advantage. And indeed, when you have a tariff of 25%, that reduces the pricing advantage quite a bit.

Joe Mondillo -- Sidoti & Company -- Analyst

Okay. All right. And then just in terms of the guidance. So generator, it sounds like the benefit from generators relative to your prior guidance, I'm talking about, obviously year-over-year comp, generators have been torqued down. But relative to your prior guidance, generators were a positive which essentially sort of offset what looks to be the weakness that you saw in Australia and Europe, and the tax rate benefit seems to be the added bonus to guidance.

My sort of curiosity is, it sounds like you're going to have a potential headwind of higher than average inventories in Europe, you have the potential headwind of Sears. And correct me if I'm wrong about pricing, it sounds like you are neutral on pricing, that your price increases will offset maybe there's a net positive -- maybe there's -- potentially a net negative. But in another words, it seems like there is a couple other sort of potential headwinds that are maybe even offsetting the tax benefits. So I'm wondering what your thoughts are on that and what made you decide to increase the guidance relative to all that?

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Yeah. Joe, essentially the guidance changes to net sales were approximately $20 million, which are to offset or we anticipate the tariff impact to be with the new tariffs implemented in September. And so, indeed from a bottom line perspective, we wanted to see a change there relative to our previous guidance. And then the tax -- the one-time tax project we were able to complete in the first quarter, we do see us having an impact on producing a fuller -- lower full year tax rate. And so that is what caused us to update our outlook to take that into account.

Related to the headwinds on the year upfront as well as potential Sears output. In Europe, we took that into account with our guidance, because indeed as you mentioned, that's being offset in our expectation by the higher than anticipate generator sales. And then secondly, related to the Sears situation, it's just so fluid with our recent -- the Chapter 11 filing was as well as the variability of outcomes related to that. It's just a little too difficult to predict. And so what we wanted to give there as a sense of the magnitude that could impact there. And then we just have to see how it plays out in to our best to manage the situation.

Joe Mondillo -- Sidoti & Company -- Analyst

Okay, that sounds just viable. Last question, then I'll hop back in queue. I know it's a little early in terms of -- and maybe -- actually I'm not sure if it's too early, it could be too early. In terms of placement at the big box, in terms of type and brand of mowers or models of mowers, just wondering if you have any early insight and how electrification will affect sort of the placement within the big box retailers this upcoming season at this point?

Todd Teske -- Chairman, President, Chief Executive Officer

Yes. Joe, we're not in a position to talk specifically about placement. We'll talk about placement as we come to January. But the one comment I would point out to you is that, we are reiterating that we are confident that our placement for the upcoming season is going to be quite robust. The -- as far as I think the nature of your question is, are we aware of any skews, gas skews being displaced by electric skews.

Again, we're not going to comment on placement, but as far as we know at this point, because we don't always see the full line ups. We're not aware of anything. We don't expect anything significant if at all to come out of that shift. And so when you look at what we're quoting on for example, we would expect the gas skews to remain very consistent when we ultimately talk about placement in January. But again we will talk about placement in January, I'll not comment on anything specific right now.

Joe Mondillo -- Sidoti & Company -- Analyst

Okay. Great, thanks a lot.

Operator

Your next question comes from the line of Tom Hayes. Your line is open.

Tom Hayes -- Northcoast Research -- Analyst

Great. Good morning, gentlemen.

Todd Teske -- Chairman, President, Chief Executive Officer

Hey, Tom.

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Good morning, Tom.

Tom Hayes -- Northcoast Research -- Analyst

Todd, maybe digging in a little bit on the commercial side, you said it was up 12% year-over-year for the quarter, maybe just talk about some of the drivers there because it's obviously been a good segment for you guys for the past couple of quarters?

Todd Teske -- Chairman, President, Chief Executive Officer

Yes, it's been a great segment for us Tom. And when you look at it, we've been able to drive. The primary driver has been some of our job site. And when you look at the expanded product offerings that we've had with towable gens and air compressors and then also some new offerings we've had on light towers. Things are -- things have been pretty robust. The thing I was really encouraged by with job site is heater sales, and we do very well with heater sales. And so ultimately the job site business has been strong as we continue to make headway with the rental companies that are out there. And we think, we're kind of in early cycle as it relates to oil and gas, because we've seen the oil prices tickup obviously, but some of the CapEx that they have for the shale oil fields here in the US and in Canada ultimately lag a bit. So we still think that we're earlier than peak as if you will on oil and gas.

When you look at Ferris, Ferris had -- Ferris continues to do extremely well. The type of activity we had at the show at Louisville last week was sensational. We had some new offerings that have come out and really when you look at the new offerings, there was a lot of excitement and we're very confident as we start to see the bookings come through that, that'll remain strong through the fiscal year.

On the Vanguard engines, they're going really well. Also yesterday we had our Annual Meeting and Board meeting in Auburn, Alabama, and I had a chance to tour the plant, and I'd tell you, the team down there is just doing a really good job as we ramp up production. We're seeing very, very strong demand along the way with regards to -- with regards to BIG BLOCK engines, 810s and as we go along.

And so when you look at Q1, the Vanguards we had a little bit of timing with some of the Vanguard. So it perhaps wasn't as robust as the others, but I tell you, as we look for the remainder of the fiscal year, it's going to be strong. And so you look at the trailing 12 months and it's up over 18%. It's been -- the CAGR on that business has been up double digit -- mid-teens for the last five years. And so the traction we're getting, we're very encouraged by and so we're making our way through the new offerings that are coming up.

Tom Hayes -- Northcoast Research -- Analyst

Great. I appreciate the color. Maybe just a couple other ones. Maybe staying on the Vanguard issue, did you say the new Statesboro facility will be up and running in Q3 or be fully running kind of in Q3 timeframe?

Todd Teske -- Chairman, President, Chief Executive Officer

So what's happening is, there are the two pieces right. The Statesboro, Georgia which will start production here as we get into to Q2, Q3. Really late Q2, really Q3 is when the bulk of it comes through, and then Auburn is already running. So we've got a couple engines -- engine lines in Auburn that are fully operational. And then Statesboro will be -- we'll do some of the transition here as we go through the remainder of this quarter, but then you'll start to see production come out in Q3.

Tom Hayes -- Northcoast Research -- Analyst

Great. And maybe just one more. As far as the, I think you called out, there were some issues with the shipment of parts. It seems like it was related, that's been cleaned up and fixed?

Todd Teske -- Chairman, President, Chief Executive Officer

So, yes. So, what's interesting is whenever you go through an ERP upgrade, you do as much testing as you possibly can. And then after you go-live, you kind of figure out where some of the rocks are. And so ultimately what happened is, we did a extensive amount of testing. Our service parts business, when you talk about SAP, the SAP is a very good system. But when you're talking about service parts and the number of service parts that we have and the way we pick the parts, not to get into all the gory details. But the process changed and so ultimately we did see some backlog, some back orders make their way through, which is why you saw margins in the quarter to be weaker than they otherwise would be because our service parts business margins are as you know, robust.

And so, ultimately we are still working our way through it. We've seen tremendous improvements here over the last five, six weeks. We -- and really the name of the game, Tom, will be to make sure that we've got the system fully functioning and up to the levels that we historically would be at as we get into the Spring selling season. So yes, we're working our way through that, but we are making progress every day, should have it fixed by the end of the quarter. So as we roll into Q3, we're running at full shipment rates.

Tom Hayes -- Northcoast Research -- Analyst

Great. I Appreciate the color, guys. Thanks.

Todd Teske -- Chairman, President, Chief Executive Officer

Thank you.

Operator

Next question comes from the line of Matthew Fields. Your line is open.

Matthew Fields -- -- Analyst

Hey, everyone. Just wanted to try to square some comments that you made. So you said that your pro forma EBITDA for the acquisitions over an LTM basis is $176 million?

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

I am Sorry, where are you -- where are you referring that from?

Matthew Fields -- -- Analyst

This was a comment at the -- toward the beginning of your prepared remarks.

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

I don't think we would have talked about our EBITDA from acquisitions.

While we were alluding to -- with the -- I think you're referring to our debt covenants where we talk about the end of the quarter LTM average funded debt was $362 million, LTM EBITDA was $176 million, both is defined by our credit agreement.

Matthew Fields -- -- Analyst

Right, for your leverage ratio. So $176 million is -- I'm just trying to square that to what you're sort of reported. I know, you don't like really reported adjusted EBITDA, but sort of -- I think most people calculate it kind of more toward the mid $130 million range, some I'm wondering what that maybe $40 million discrepancy is and I'm assuming that's the sort of credit that you get for the acquisitions you've made over the 12 month period for the time that you didn't own them, is that correct?

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

That's a portion of it. There's also a couple other charges that can either be one-time charges that are part of our business optimization that can either be included or excluded from a bank covenant standpoint relative to what you would see reported in our GAAP results.

Matthew Fields -- -- Analyst

Sure. The restructuring charges is what most people add back already. So I'm just trying to still square that, that $40 million benefit. All right. And then, I just sort of on that front, I mean you're, the midpoint of your guidance for full year sales is $1.98 billion, I guess that sort of up 5% in change. I'm wondering what percentage of that increase -- $100 million increase year-on-year in net sales is from the acquisitions versus the organic kind of legacy Briggs & Stratton assets?

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Yeah. We commented that at the outset of the year, approximately $10 million or so, a benefit from the acquisitions of -- the asset acquisition hurricane and then a full year of the ground logic, a acquisition we completed a year ago.

Matthew Fields -- -- Analyst

So that's -- are you saying, it's predominantly organic?

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Well, that $10 million as the inorganic piece that we anticipate in 2019 relative to 2018.

Matthew Fields -- -- Analyst

Okay. So there really shouldn't be a whole lot of add backs for LTM EBITDA of acquisitions that you didn't own.

Todd Teske -- Chairman, President, Chief Executive Officer

Well, assuming we don't do any more acquisitions during the year, yes. I mean, so the guidance contemplates, there's about $10 million of acquisition revenue that's coming into the number. Otherwise, the rest is all organic growth.

Matthew Fields -- -- Analyst

Okay. Maybe, we'll take this offline to discuss that further. Thanks very much.

Todd Teske -- Chairman, President, Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Josh Chan. Your line is open.

Josh Chan -- Private Investor -- Analyst

Hi. Good morning, Todd and Mark.

Todd Teske -- Chairman, President, Chief Executive Officer

Good morning.

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Good morning, Josh.

Josh Chan -- Private Investor -- Analyst

Good morning. Could you talk about to get to your guidance, what it contemplates in terms of the cadence of engine shipments over the course of the rest of the year? And do you expect it to be more loaded toward any particular quarter? And then I realize you also kind of trying to take down production to right size inventory, so maybe just run through like how the shipments and production could kind of cascade, maybe even qualitatively over the rest of the year, I guess?

Todd Teske -- Chairman, President, Chief Executive Officer

Yeah, there's a couple of variables at play. One of which we -- a couple of that we call that, one being channel inventories in the US at pretty low levels, which would tend to indicate that you'd have some pull forward of demand relative to historic periods. Or I would say, that's a little bit offset by the fact that you have channel partners who wish to manage their working capital pretty closely and what do all they can in order to try to ramp up that channel, stack up as efficiently as possible.

And so therefore, between those two things, we won't expect a dramatic pull forward sequentially from the fourth quarter, end of the third quarter of this year. However, we would anticipate there to be, perhaps a little bit of help in that regard sequentially. And then, another thing to keep in mind, we talked about was the Europe channel inventory is being a little bit elevated following last summer's very dry weather, such that, that would have the potential impact of pushing back revenue a little bit from the third quarter into the fourth. As you can see how the initial sell-through went depending on the Spring time weather. And then the restock that would follow subsequently to the extent that the spring time was more normal, you might, that would be the variability between Q3 and Q4.

So those were a couple of the biggest things that I'd call out, that could influence the timing of the back half of the year from an engine shipment standpoint.

Josh Chan -- Private Investor -- Analyst

Okay. Yeah, great. That's good color. And then how are you thinking about production as it relates to timing throughout the year?

Todd Teske -- Chairman, President, Chief Executive Officer

Yeah. A little bit lower in the second quarter as we commented, just to do a little better right-sizing mainly just because we came out of the gate in the year so fast and effective with the engine production. And then likely, we would need a ramp up in the third quarter and fourth quarter modestly in order to meet the anticipated higher market demand. That production, overall, though, keep in mind, our inventory was a little bit high coming out of last year with the unusual season.

And so, while we would anticipate production a little bit higher in the back half of the year, it will be mitigated a bit by the fact that we do have a fairly decent amount of inventory right now which is ready to go to support the channel.

Josh Chan -- Private Investor -- Analyst

Okay. That's good. And then on the $15 million to $20 million of revenue that you said, Mark, that would shift from Q1 to Q2, is that mainly the service -- catching up on the service parts and if that's the case, should we assume fairly healthy margins in Q2, I suppose?

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

And I would say, that's a portion of it. However, it would also relate to engines as well as some of our end products. From an engine perspective, we did comment that we had a higher than usual amount of OEM shutdown days in the first quarter, some of which were actually influenced by Hurricane Florence where some plants had to be shut down for a little bit longer in the first quarter. And so that we will also shift some of the, just the regular engine production out into the second quarter.

Josh Chan -- Private Investor -- Analyst

Okay. And then lastly for me, I think you mentioned that the tariffs on the engines from China were effective in August. And so, I guess, at this time, have you seen any impact or a discussion with potential OEMs regarding kind of buying your products, instead, or how are those early type of discussions going related to tariffs?

Todd Teske -- Chairman, President, Chief Executive Officer

So Josh, we are seeing enhanced inquiries, only put it that way, and we are having discussions with folks to potentially supply them. Again, it's very early on to be able to put anything into the guidance. So there is nothing in the guidance for that, but yes, it's, we want to help the folks that ultimately need the help and it could result in some additional business for us along the way.

Josh Chan -- Private Investor -- Analyst

Okay, great. Thanks for your time.

Operator

We have a follow-up question from Joe Mondillo. Your line is open.

Joe Mondillo -- Sidoti & Company -- Analyst

Hi guys, just a couple follow-ups. So just going back to sort of a debt and the cash flow, was the ramp up of debt was primarily related to just your operating cash flow and to the fund that? Or why did we see such a big ramp up in debt and how should we sort of think about how that sort of plays out ex any sort of acquisitions that you do throughout the year?

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Yes, a couple of things where; one, we came out of the year with a little bit of higher debt than last year, simply because of how the last season played out between the really unusual weather patterns as well as the channel destock of inventory. The second is, we did complete the asset acquisition in the first quarter of hurricane which had some use of cash as well.

And then beyond that, if you think about the cadence of business related to the ERP go-live, we went live at the beginning of July, really good time of the year, it's a slower time of year of our business. However, that had the impact of shifting a fair amount of the Q1 sales volume toward the back end of the quarter as we started the catch-up following the ramp up. And then on top of that, we also add Hurricane Florence volume and Hurricane Florence impacted toward the middle of September. And so you had some receivables related to that business sitting out there as of the end of the quarter. So that's why you saw accounts receivable a little bit elevated relative to what we would see with the sales volume.

So lot related to the cadence of the quarter, which we would expect to see some catch-up on that as we get into the second quarter now and start to see some more normalization of the business.

Joe Mondillo -- Sidoti & Company -- Analyst

Okay. And then just more -- just to clarify the inventory situation. I mean, inventory, use of cash on inventory was up by over $40 million -- it looks like maybe $40 million to $50 million. What was the reasoning behind that again?

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Yeah. Really, two things. One was just the lower-than-planned sales that happened in the first quarter, a large portion of which we commented, we expect to reverse into the second quarter and beyond. And then the second piece was that, we just produced more efficiently than we thought, you have estimates when you go-live, when you do these upgrades with your ERP and we actually outperformed from a production basis right out of the gate. And so therefore we are a little bit elevated now and we'll take the opportunity to address that a bit in the second quarter.

Joe Mondillo -- Sidoti & Company -- Analyst

Okay. That makes sense. And so as we look toward getting into, as we go to the end of the year, what is your sort of thinking on sort of your net debt position relative to year ago? The reason why I'm sort of asking this is because, we're sort of -- we're nine years, 10 years into this full cycle. I would think, certainly the financial markets multiples have come down a lot. I think you're -- and correct me if I'm wrong, your strategy is that still try to diversify your business away from the biggest risk, which is the retail engine side of the business and you're trying to focus on commercial.

So as we see these multiples sort of pull back, I would think there's more opportunity with M&A. So I'm just trying to look at the balance sheet and sort of think of that in context to sort of what kind of opportunities we have, what kind of liquidity do you have to tap into M&A. And so, if you can address that as a whole, that's really where I'm getting at?

Todd Teske -- Chairman, President, Chief Executive Officer

Yeah. Joe, I don't mean to pick in your words, but let me just make one thing clear. We're not diversifying from residential, we want to diversify while keeping residential as part of our business. And so we are encouraged by the residential business going forward. As we commented, it's really grow that profitability. So, but it is, you're right, it is a diversification plan and you've seen us do that over the last five years, six years with the commercial business where our commercial business five years, six years ago was $250 million, now it's well over $500 million.

And so when we think about firepower, because that's really what you're talking about is firepower. We have a fair amount of firepower which you're seeing on the debt side right now is just a seasonal debt situation. We knew it was going to be somewhat elevated as the ERP system became live because of some of the things we have to do to make sure we're protecting our customers along the way as we did go live. And the good news is that, team did a great job with production. The bad news is we have elevated inventories, even that corrects itself as the year goes on. But I would tell you that, from a firepower standpoint, our firepower has been very consistent here as we talk to the Board about it over the last three years, four years. And so as multiples do come down, we will look for opportunities to accelerate the strategy.

Now, again, we're very EVA-based and we obviously look at it from the standpoint of returning the cost of capital and we look at cost of capital on a risk adjusted basis. So there is opportunities out there. And so as we said, as we kind of roll-out of the ERP, we've gone live and the focus has been on that ERP system in a very big way because of the -- just the magnitude of the impact that it had in the business and we'll have going forward.

We can now start to look at and get it more aggressive on working through that acquisition pipeline and that corporative is, they understand the role that they need to play in diversifying our business.

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

And now I think I would add, Joe, is, we're well on the track to achieving $65 million in capital spending for fiscal year '19, which is well lower than where we've been in the last couple of previous years as we get further down the path of our business optimization. So that should ultimately benefit our net debt position.

Joe Mondillo -- Sidoti & Company -- Analyst

Okay, great. I appreciate the color there. Thanks a lot and thanks for taking my question.

Todd Teske -- Chairman, President, Chief Executive Officer

Thanks, Joe.

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Thanks, Joe.

Operator

(Operator Instructions) There are no further questions at this time. Presenters, please continue.

Todd Teske -- Chairman, President, Chief Executive Officer

Well. Thank you for joining today's conference call. Our next quarterly call will be in January. Have a great day.

Operator

This concludes today's conference call. Thank you for all joining. You may now disconnect.

Duration: 63 minutes

Call participants:

Mark Schwertfeger -- Senior Vice President, Chief Financial Officer

Todd Teske -- Chairman, President, Chief Executive Officer

Sam Darkatsh -- Raymond James -- Analyst

Joe Mondillo -- Sidoti & Company -- Analyst

Tom Hayes -- Northcoast Research -- Analyst

Matthew Fields -- -- Analyst

Josh Chan -- Private Investor -- Analyst

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