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Tower International Inc  (NYSE:TOWR)
Q1 2019 Earnings Call
May. 02, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to Tower International First Quarter 2019 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.

I would now like to turn the call over to Derek Fiebig, Head of Investor Relations. Sir, you may begin.

Derek Fiebig -- Executive Director, Investor & External Relations

Thanks, Ian and good afternoon, everyone. I'd like to welcome you to the Tower International first call -- first quarter 2019 earnings call. Materials for today's presentation were posted to our website earlier this morning. Throughout today's presentation we will reference the non-GAAP financial measures, adjusted earnings per share, adjusted EBITDA, adjusted EBITDA margin, free cash flow, net debt and net leverage. Reconciliation to these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP are included in the appendix of this presentation.

As a reminder, today's presentation contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, included, but not limited to statements relating to revenue, revenue growth, adjusted earnings per share, adjusted EBITDA, cash flows, leverage, trends in our operation, dividend and expected future contracts.

Forward looking statements are made as of today's presentation and are based upon management's current expectations and beliefs concerning future development and their potential effects on us. Such forward-looking statements are not guarantees of future performance, we do not assume any obligation to update or revise the forward-looking statement. Additional information on risk factors are available in today's material and in our regular filings with the SEC. Presenting on today's call are Jim Gouin, our Chief Executive Officer; and Jeff Kersten, Executive Vice President and CFO. Following our formal remarks, we'll open up the phone lines for questions-and-answers.

Now, I'll turn the call over to Jim.

James C. Gouin -- Chief Executive Officer

Thanks, Derek and good afternoon, everyone. Slide three provides select highlights for the first quarter 2019. In March, we closed the sale of Tower Europe and received $250 million in net proceeds. We used a portion of those proceeds to pay down $50 million on the term loan which by the way brings total repayments on the loan to nearly $200 million since 2014.

From an operation standpoint, we had a massive undertaking at our Chicago facility, where we successfully demolished and removed the old Ford Explorer lines and installed the new lines. Our first quarter results were in line with the previous outlook provided in February and for the full year 2019, we are updating our outlook to reflect more moderated customer ramp up schedules for major vehicle launches and lower production on certain Tower contented vehicles. Based on the cadence of these changes, the assumptions in our plan, we do not expect these revisions to impact our previous volume assumptions and our outlook for 2020 remains unchanged.

Slide four discusses the divestiture of Tower Europe. As you recall, Towers' revenue and earnings in Europe had been very flat for the past several years. In the fragmented European market, Tower was unable to profitably grow the business and from a resource and capital allocation standpoint, it made more sense to continue to invest in the more profitable North American market. Therefore, in December, Tower entered into an agreement to sell all of its European operations to Financiere SNOP Dunois, a privately owned French auto supplier. The sale price represents an enterprise value of EUR255 million or an EV to adjusted EBITDA multiple of 5.4 times 2018 full year earnings. Substantially higher than Tower's current trading multiple.

I know it goes without saying, but I can't resist. We sold the business representing about one-third of our revenue with limited to no prospect for growth, suboptimal margins and a continual need for cash at 5.4 times earnings as compared to our current trading multiple of just over 4 times. We kept the Company with above industry revenue growth, significant anticipated free cash flow generation and a strong balance sheet and our share price is lower, not higher.

Perhaps someone can call my office to explain why that makes sense, because it doesn't make sense to me. However, transaction closed on March the 1st of this year. We received $250 million in net proceeds after fees and the settlement of the fixed rate term loan swaps. We subsequently paid down $50 million on the term loan and the remaining $200 million of cash proceeds are reflected in our March 31st cash balance.

Slide five, you have seen many times before. The Tower's priorities remain unchanged. We remain focused on excellent program execution, which of course, starts with safety and quality. Launch performance is a big focus this year, as I have and will discuss, we have a number of major programs launching. And of course, we maintain our focus on cost performance and efficiencies.

From a capital deployment standpoint, we continue to focus on profitable growth above the industry growth rate. This rate of growth will continue once our launches and program change over downtime are behind us. Regarding leverage we continue to reduce our term loan and are on track to be at our long-term target of 1 time net leverage by the end of this year. And finally, we continue to return capital to shareholders through our growing and sustainable dividend.

As we've discussed, our Chicago facility is going through a major transformation this year as we remove equipment support in the previous model and install the equipment required for the production of the all new Ford Explorer. We have a video on our website under the Presentation section. The video does a much better job of demonstrating what has transpired, but for those of you who are unable to view it at this point, Slide six and Slide seven will give you a feel for the before demolition, that during demolition and the after installment of the new lines.

Tower Chicago is a 400,00 square foot facility in the supplier park supporting Ford Chicago assembly plant. It has supported production of the Ford Taurus and Explorer since before our IPO. With the introduction of the all new Ford Explorer this year, we needed to remove our existing production lines and install the new production lines.

The new lines were first assembled at Kuka, our systems integrator here in Livonia. Starting in mid-February, the lines were disassembled at the integrator and shipped using more than 300 trucks to drive the 250 miles to Tower Chicago. The Chicago demolition was taking place concurrently and we've removed the old equipment in more than 200 truckloads.

The new lines were reassembled on the floor at Chicago and all power was turned on before the end of March. All of this in about 40 days. Our lines are already producing parts at a low rate and will ramp up as Ford increases production on the new vehicle during the second quarter. This program was and is a tremendous undertaking, and I'm proud of how well the tower team has performed thus far.

Slide eight displays Tower's major assemblies on the old version of the Explorer which was, code U502 and the new mode -- model, code U625. We produced the front apron and the rear floor assembly on the new version as we did on the old. This slide depicts the change in both assemblies and the use of multiple materials and joining technologies.

Previous models did not use hot stamped, aluminum, aluminum castings, aluminum extruded parts, high strength steel or hydroforming and you can see the number of new joining technology is being used primarily on the front apron. 10 different joining technologies and all, while we did not produce all of these parts as some sourcing is directed by our customer we must integrate them all into our assembly.

The value Tower brings to our customer is in our ability to join these items and provide a complete assembly almost directly into Ford's assembly facility. As the industry continues to focus on light weighting of vehicles, there will be continued usage of lightweight materials and having the expertise and the capability to bring them together is a great example of how Tower has been able to increase our value add to our customers.

Slide nine shows Tower's major programs that are launching during 2019. As we discussed on our call in February, we are launching a total of more than $700 million of annual run rate business this year. This includes both renewal and net new business. Depicted on this slide are the approximate start dates of production for the customer launches for which Tower has meaningful content.

As you can see, there is a lot going on in addition to the Explorer launch. The pace at which customers ramp up production also has an impact on the timing of our revenue. As mentioned, we are reducing our -- outlook for 2019 in part, because of a more moderated launch of some vehicles. We expect that these changes will not go forward into 2020 total revenue and results. It will just likely be a shift in timing, having more net new business next year.

With that, I'll call -- I'll turn the call over to Jeff to discuss the financials for the quarter.

Jeffrey L. Kersten -- Executive Vice President and Chief Financial Officer

Thanks, Jim and good afternoon, everyone. Slide 10 shows summary financial results for the first quarter. The first quarter was adversely impacted by the changeover and launch of the Explorer. Revenue of $379 million for the quarter compared with 470 -- $407 million a year ago and outlook of $375 million.

Adjusted EBITDA of $30.4 million and margin were both in line with outlook and lower than 2018. The Explorer launch impact was greater than $10 million for the quarter. Adjusted EPS of $0.23 per share was above outlook of $0.18 per share. This was lower than 2018 reflecting lower EBITDA and less of a tax benefit from R&D credits. As you can see, results were in line with our outlook.

Free cash flow as shown on Slide 11. Free cash flow was negative $55 million for the first quarter. As normally occurs, working capital was negative in the quarter as the benefits of the year end shutdowns that are favorable to our fourth quarter cash flow, reverse at the start of the year. CapEx was $40 million for the quarter which represents a significant portion of $110 million expected for the full year. We anticipate that CapEx will remain elevated in the second quarter as well as we move toward completing the investment in the programs we have been discussing representing our net new and renewal business.

Slide 12 provides quarter and net leverage and liquidity as of March 31st. Net debt was $212 million which is down from $231 million as of December 31st. During the quarter, we received $250 million from the sale of Europe, paid down $50 million on the term loan and with the adoption of ASC 842, we have $163 million of certain financial lease obligations are now classified as debt. This led to an increase in gross debt leverage which is now at 2.5 times. Net debt leverage remained constant at 1.3 times.

Slide 13 provides our outlook for the second quarter 2019. Second quarter revenue is expected to be $365 million, adjusted EBITDA is expected to be $36 million and adjusted EPS is expected to be $0.40 per share. Revenue and earnings continued to be impacted by the launch of the new Explorer. With the elevated CapEx and the payment of annual incentive for 2018 during the second quarter, we expect the continued use of free cash flow.

Slide 14 provides our outlook for full year 2019. For the full year, our current outlook reflects moderated customer ramp up schedules from major vehicle launches and lower production on certain Tower contented vehicles. We expect revenue to be between $1.575 billion and $1.6 billion and adjusted EBITDA between $165 million and $170 million. EBITDA margin is expected to be unchanged at 10.6%. Adjusted EPS of $2.10 to $2.30 per share is expected. We expect to deliver positive free cash flow and have net leverage below 1 times at the end of the year.

Now, I will turn the call back over to Jim for some concluding remarks.

James C. Gouin -- Chief Executive Officer

Thanks, Jeff. Slide 15 shows our outlook for 2019 and 2020. And we said 2019 will be a transition year and this slide helps add some context. With the completion of significant launch activity, the second half 2019 results will lead to higher run rate revenue, EBITDA and free cash flow. Second half margin is expected to be 12% and we expect to generate more than $100 million in free cash flow.

Looking ahead to 2020, we expect this financial performance to continue and we are reaffirming our outlook with solid revenue and earnings growth, 12% margins and more than $60 million the expected full year free cash flow. So I will reiterate. 2019 transitions Tower for very robust financial performance in 2020 with continued growth in revenue, growth in earnings, significant free cash flow and a very solid balance sheet.

Wrapping things up with Tower's investment thesis on Slide 16. Again, the improved financial performance in the second half of the year will transition us to very strong full year 2020 results and represents a step change in our margins and cash flow generation. We are well positioned to grow revenue in excess of production volume changes, as we benefit from outsourcing lightweighting and our existing book of net new business.

With net leverage of 1 time insight, our balance sheet is in great shape providing ample liquidity to fund profitable growth and protection in the event of an industry downturn. We continue to have very limited geopolitical risk and finally, we remain disciplined in our approach to balancing new growth opportunities, with generating free cash flow and returning capital to our shareholders.

That concludes today's presentation. Derek, let's open up the lines for questions.

Derek Fiebig -- Executive Director, Investor & External Relations

Ian, if you could please remind participants how to get in the queue for questions-and-answers, please.

Questions and Answers:

Operator

Certainly. (Operator Instructions) Our first question is from the line of Matt Koranda from ROTH Capital Partners.

Matt Koranda -- ROTH Capital Partners -- Analyst

Hey guys. Good afternoon.

James C. Gouin -- Chief Executive Officer

Hey, Matt.

Matt Koranda -- ROTH Capital Partners -- Analyst

I'm going to start out with the 2019 outlook. So when you say, moderated, customer ramp-up schedules for new to vehicle launches, I just want to clarify does that mean you have customers pushing launches to the right or are you just assuming sort of lower volume as they ramp-up production then -- than earlier?

James C. Gouin -- Chief Executive Officer

Yeah, the customers are basically if you want to say, slowing the ramp rate on the vehicles as they come up. And that's not atypical, especially when you're talking about the size of the launches that we're talking about here. Obviously, the Ford Explorer is one of those, the Escape probably another. And so they're shifting a bit to the right. But again, that volume will not be lost forever, so it's going to have an impact to us in '19 on a marginal basis and you'll see it all come back to us and really increase net new business, if you will, in 2020.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay, that's helpful. And then on Slide eight, with the Explorer example that you guys provide in terms of content per vehicle. I mean, is it fair to extrapolate that as an example to the rest of your backlog, your net new business backlog that you've talked about or is that just an exception in terms of the content per vehicle delta that's there is that relatively sort of normal?

James C. Gouin -- Chief Executive Officer

No. I mean what you've heard us, Matt talk about the ever changing revolution of use of materials in these different platforms and I think the front apron U625 picture that's there is a really good example of a lot of use of molten material -- multi materials with extrusion, aluminum extrusions and hot stamped parts and cast parts, et cetera. We're seeing that really that's a proliferation of that type of multi material use and joining technology going across the different platforms that we are launching.

Not everybody is in -- is using as many, but I can tell you that everybody is using something. So if you look for example, to the right of that slide and you see the U625 floor with the use of hot stamped parts. I mean, if we were to go down into our South Carolina factory and show you the floor that's down there for BMW, you'd see very similar aspects of that and you'd see the very similar use in terms of overall joining technologies with a lot of use of adhesives, a lot of use of these different types of self piercing rivets and flow drill screws, et cetera. So it is where the industry has moved and it will be where the industry will continue to move as we move forward.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay. And not asking you to disclose any sensitive customer information. But is there like a way of a multiplier that we can use in terms of like the new program versus the old in terms of the way you're thinking about it in an order of magnitude?

James C. Gouin -- Chief Executive Officer

No unfortunately not really, Matt, because each program is sort of unique in and of itself and it's also dependent upon the amount of content that we actually win, right.

Matt Koranda -- ROTH Capital Partners -- Analyst

Sure. Fair enough. That's fine. And then just another higher level capital allocation oriented question. So I mean by year end we're looking at net leverage potentially below 1 turn and with 2020 if that guidance holds an incremental $60 million in free cash flow, sort of outlook for 2020. So just wanted to get your latest thoughts on sort of dividend versus buyback as we get more cash on the balance sheet and does M&A start to look attractive in any way in North America. I mean, I know it's hard to make accretive given sort of the current state of things, but I want to get your thoughts on how to think about the rest there?

James C. Gouin -- Chief Executive Officer

Well as you know we have been paying a ever increasing dividend over the last three years and I certainly don't anticipate seen a stoppage in that. So that's sustainable growing dividend. I think it's part of our future. Yeah, the less than 1 time will be there and the cash in 2020 certainly solidifies that position.

You may recall on the last call, I talked about is still a fairly sizable amount of business that we're presently quoting on that will take us into the future. So assuming that we are successful in some of that -- some of the pieces of those potential awards are fairly sizable. So continuing to try and grow the business on a profitable basis assuming we win some of that, will suck up some of that -- they suck up some of that cash. And so I would rather be putting my money toward continually growing the business on a profitable basis as opposed to moving into a sizable buyback program at this -- at least in this foreseeable timeframe.

That's not to say that in the future if there is substantial cash and there's not a better use for it that I wouldn't look to use some of the capital in that fashion. But right now I'd rather put it -- continue to put it toward growth. M&A is always, always on our radar screen and to the extent that we find a nice bite-sized chunks to M&A that we can integrate easily into our business that we find at prices that are accretive to our business, we are always on that hunt.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay, very clear. I'll leave it there. Thanks guys.

James C. Gouin -- Chief Executive Officer

Thank you, Matt.

Operator

And our next question is from the line of Ryan Brinkman from JPMorgan.

Ryan Brinkman -- JPMorgan & Company -- Analyst

Great. Thanks for taking my question. Really more probing on capital allocation I think you're going to get the question a lot just given the balance sheet now. On Slide 12, you're not showing a material reduction in net debt because of the inclusion of these finance lease obligation. But I think from a managerial perspective, right you do consider that you've delivered quite materially and you do have access liquidity, right. This is also after the biggest seasonal outflow quarter two right.

So just kind of looking at some of the numbers you've put out there. It looks like you might finish the year with like $270 million of cash. I think is that kind of what you're sort of hinting at? And then you see a big inflection in free cash flow next year which I know that includes the working capital and that includes the CapEx that you need to do to grow the business profitably, right. So, so much more cash than we've had before. When you were a smaller Company because you didn't have Europe and so arguably kind of needed last as a cushion. Anything more you can say why you want to hold on to this much, you paid down $50 million in term loan. Why not pay down more? Is there something -- some reason why you want to hold this over the near-term or how are you thinking about that?

James C. Gouin -- Chief Executive Officer

Now I think it's a fair question, Ryan and number one, I just got the cash. So it feels good to actually have that in the bank at this point in time, but that's neither here nor there. By next year I'll have the cash for a while. I think again to reiterate a bit of what I mentioned to Matt. There is a number of opportunities ahead of us and if we win some of those opportunities, we're going to have to use some of the cash to help continue to grow the business and that I think is critical for us to hold on to at least at this point in time.

After that I can clearly see the continuation of an increase in the overall dividend that we would have, to pay down the debt is always before us that we can certainly dip in and take more debt out and/or take out some of the leases, there's a pay down capability on that as well and there's a natural pay down on that piece over the course of time. I forget what the number is roughly $20 million to $25 million a year or so.

And so all of those things I think are on the table. There's nothing saying that I'm going to sit here and sit on cash and not use it for some level of good use. You look at the priority slide that I show, I've always talked about sort of our three tenants or three pillars of capital resource allocation and it's going to be growth, it's going to be delivering and it's going to be bringing money back to the shareholders.

Ryan Brinkman -- JPMorgan & Company -- Analyst

Okay. Thanks. And then just lastly things on Slide nine, it's really helpful. And speaking with Ford recently they emphasized to investors just how much of a guiding they're doing to Chicago really along the lines of what they did with Dearborn or Kentucky Truck when they went all aluminum. I know export is not all aluminum but just -- so I'm not surprised that you had to completely revamp your operations that supply that facility too. Is that the biggest execution risk this year? Is the Explorer launch I mean, execution because also it depends on how Ford executes, right. If they get the volumes ramped up and then your own execution. Is that the biggest -- what about these other major launches? How closely should we be monitoring them? Do they not represent the same sort of risk that the Explorer One does potentially?

James C. Gouin -- Chief Executive Officer

Yeah I think you hit it. That the Explorer is the biggest launch clearly of the year in fact, it's the biggest launch this Company has seen in, in substantially a long long time. The fact that we had to basically build up inventory of the old Explorer and then build the line here in Livonia with Kuka. We actually ran the line on the floor of Kuka to make sure that it operated properly. And then in that 40-day window, the demo, the Chicago facility install all the new lines and then begin production. To me that was the most significant risk as whether or not we would be able to get that done in that 40-day period of time. And thank goodness that the team pulled together on all fronts including our outside suppliers to actually get that done and get it in the production.

So is there a risk still ahead of us. Absolutely, there is. Is it as big a risk as what we've already gone through? I would say, no, not as much. And yes, we do -- Ford has to get their Chicago facility to run properly and up to speed and they've got to hit the volumes as well. And I don't -- can never say never in anticipating what might happen within a launch. But I was in Chicago a couple of weeks back went through a full launch review with the team there and came away very encouraged and very pleased at where we're at right now.

The following launches that -- and this program ramps-up through the second quarter and kind of peaks out into the third quarter. We got to get through that obviously but I don't -- I'm not -- it's not what keeps me awake at night, if you will. The next launch is the -- from a size standpoint is the Escape but it's a very slow ramp up on the Escape. So it's a sizable launch, but there's good and ample window to work out the issues that we might find in the launch process and to ramp-up. The other launches the Corolla, the Versa, the BMW, et cetera are lesser launches in terms of their overall risk profile. So I don't see a major concerns with them overall. The two major ones this year and then later in the year is the Nissan, Titan. But the two major ones this year are the Escape and the Explorer.

Ryan Brinkman -- JPMorgan & Company -- Analyst

Okay, very good. Thanks so much.

James C. Gouin -- Chief Executive Officer

Thank you.

Operator

And our next question is from the line of Chris Van Horn from B. Riley FBR.

Christopher Van Horn -- B. Riley FBR -- Analyst

Good afternoon. Thanks for taking my call.

James C. Gouin -- Chief Executive Officer

Hey, Chris.

Christopher Van Horn -- B. Riley FBR -- Analyst

The ramp-up changes that you're seeing just curious, Jim in your history is this similar to the cadence that you've seen before and other -- another launches do you think there's a macro component to this ramp up and any commentary that you're kind of hearing from a macro perspective would be interesting. Thanks.

James C. Gouin -- Chief Executive Officer

No I don't think there's any real macro component to it at all. I think that in the case of say, the Escape, Ford was able to balance out to old, new and they can work their magic within their own confines of their factories. This is just I think a pure changing in the assumption from Ford standpoint. They are not -- there's nothing that's happened that as -- that tell tales to us that they're having significant issues. They just ended up slowing the ramp up a little bit and then pushing it out a little bit. So nothing that I can tell you from an antidotal standpoint or macro standpoint that there are major concerns on the horizon nothing like that at all, Chris.

Christopher Van Horn -- B. Riley FBR -- Analyst

Okay, thanks. And then South America, could you maybe -- I know it's a very small part of the business but could you just maybe comment what was going on there during the quarter?

Jeffrey L. Kersten -- Executive Vice President and Chief Financial Officer

Yeah in...

James C. Gouin -- Chief Executive Officer

Go ahead, Jeff.

Jeffrey L. Kersten -- Executive Vice President and Chief Financial Officer

In South America, two things. One is, we're also at a little bit of a launch both down there, two at T-cross which is a BW platform down there. The second thing you probably knows that South America is, we had a one-time tax benefit from a legal settlement in Brazil which we put in through other income and then we excluded it from adjusted EBITDA and adjusted EPS. That's really the unusual thing that happened in Brazil this quarter.

Christopher Van Horn -- B. Riley FBR -- Analyst

Okay. Got it. And then when I look at some of the other programs like the Corolla Highlander, the Versa. Is it safe to assume that the content might be increasing a bit just given the complexity. Is there anything you want to call out in terms of just additional work that you'll be doing there that's interesting similar to what you're seeing in Explorer?

James C. Gouin -- Chief Executive Officer

No there's nothing truly different. I mean, BMW X is a continuation of launching basically the full set of series of that platform so I think that's a good thing for us and that's been an extremely good program for us overall. The others are really a replacement content and maybe a bit of content change here and there but nothing of any significance, Chris. Because remember, in the inside of that $700 million of net increase in revenue that's both the net new business plus the replacement business.

Christopher Van Horn -- B. Riley FBR -- Analyst

Okay. Got it. Sorry one last mechanical question for me. The termination of the hedges during the quarter. Are you exiting your hedging positions? Was that just a adjustment. What was going on there?

Jeffrey L. Kersten -- Executive Vice President and Chief Financial Officer

They were actually -- the hedges you were primarily cross currency swaps with the euro. And given the fact we saw at Europe those seem to make sense to get out of those. So we exited those positions and then during the quarter we did execute a plain vanilla hedge to lock in interest rates for $100 million on the terminal.

Christopher Van Horn -- B. Riley FBR -- Analyst

Okay, perfect. Thanks again for the time guys.

James C. Gouin -- Chief Executive Officer

Okay, Chris. Thank you.

Operator

And our next question is from the line of Michael Ward from Seaport Global.

Michael Ward -- Seaport Global Securities -- Analyst

Thanks. Good afternoon, everyone. Couple of things. Can you define a significant increase in content. Are we talking in 10% or are we taking 30%?

James C. Gouin -- Chief Executive Officer

Yeah, it's probably more like 40%.

Michael Ward -- Seaport Global Securities -- Analyst

Very nice.

James C. Gouin -- Chief Executive Officer

I wish I could show it to you pictorially.

Michael Ward -- Seaport Global Securities -- Analyst

No, that's fine.

James C. Gouin -- Chief Executive Officer

It's really...

Michael Ward -- Seaport Global Securities -- Analyst

That's right. I got it.

James C. Gouin -- Chief Executive Officer

Okay.

Michael Ward -- Seaport Global Securities -- Analyst

The South America. Is it still actively for sale?

James C. Gouin -- Chief Executive Officer

Well it's not actively for sale that we certainly had it out there for sale for quite some time and over a year and of course, as you know under accounting rules once it's been out held for sale there's nothing actively going on in the sale process that it comes back onto the books. So it's on the books and we're running it as normal. I would say, Mike that if you look at our history, our history has been then -- that if we can monetize an asset it creates value for the shareholder, that we would monetize it. And I would just leave it at that.

Michael Ward -- Seaport Global Securities -- Analyst

Okay. Jeff, can you walk me through why the long-term lease is included in debt, where other companies are not including it in debt?

Jeffrey L. Kersten -- Executive Vice President and Chief Financial Officer

Well we have two types of leases. One is, we have real estate leases and those are not being included in debt, because they're just normal operating leases. These were financed leases so the assets on these financed leases is being included in PP&E and is being depreciated. So these are more akin to your capital leases that you used to see under the old standard. When we went to the new standard because the equipment was specialized in such they didn't meet the operating lease requirements under the new standard. So we put the debt on our balance sheet. We put the PP&E in our balance sheet and then we're obviously expensing the PP&E through depreciation and interest, whereas where everyone else then what you see in our real estate leases, those just came out and grossed up on the balance sheet and then the expense goes through COGS as normal.

James C. Gouin -- Chief Executive Officer

So Mike we've -- we tried to let the market know that this was going to happen. We've been pro forma in this for quite a bit of time now but now it's finally happened in -- on the books further.

Michael Ward -- Seaport Global Securities -- Analyst

No I think I don't think it surprised me as then. You're very clear about how it'd be treated. But when you saw other companies put it out and it was not included in debt, that's where the difference came in.

James C. Gouin -- Chief Executive Officer

Yeah, OK.

Michael Ward -- Seaport Global Securities -- Analyst

The -- So just in -- on Chicago. So the plant was down for 40 days for you to build inventory going up into that downtime and then the relaunch with the new product?

James C. Gouin -- Chief Executive Officer

We built the inventory prior to taking the factory down on the old U502 product and then we totally took the plant down to 40 days. That's why when you look at the year-over-year impact on revenue and EBITDA in the quarter, Mike it's more than $10 million worth of EBITDA impact in the quarter year-over-year associated with the downtime and change over that factors.

Jeffrey L. Kersten -- Executive Vice President and Chief Financial Officer

Included in the loss of revenue on Explorer, because obviously we didn't build enough at bank to cover everything. You're also going to see that impact in the second quarter because there are obviously not going to be at full run rate until the end of the second quarter.

Michael Ward -- Seaport Global Securities -- Analyst

Right. So it's -- they're just starting the process of ramping now, right. So it's...

Jeffrey L. Kersten -- Executive Vice President and Chief Financial Officer

Yeah.

Michael Ward -- Seaport Global Securities -- Analyst

Okay. Super. Thank you very much.

James C. Gouin -- Chief Executive Officer

Thank you, Mike.

Jeffrey L. Kersten -- Executive Vice President and Chief Financial Officer

Thank you, Mike.

Operator

And at this time, I'm showing that we have no further questions. I'll turn the presentation back over to the speakers.

Derek Fiebig -- Executive Director, Investor & External Relations

Well thanks, Ian. Thanks everyone for joining us on today's call. And I'll be around for any follow-ups you might have. Good afternoon.

Operator

Ladies and gentlemen, this does conclude today's conference call. We thank you greatly for your participation. You may now disconnect.

Duration: 39 minutes

Call participants:

Derek Fiebig -- Executive Director, Investor & External Relations

James C. Gouin -- Chief Executive Officer

Jeffrey L. Kersten -- Executive Vice President and Chief Financial Officer

Matt Koranda -- ROTH Capital Partners -- Analyst

Ryan Brinkman -- JPMorgan & Company -- Analyst

Christopher Van Horn -- B. Riley FBR -- Analyst

Michael Ward -- Seaport Global Securities -- Analyst

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