Mike Roxland: Thank you, Tim and Kevin. Tim, I hope you are wearing mask appropriately. Just one quick question, Tim, for you. Can you mind talking about the competitive landscape and have you seen any increased pricing actions, maybe discounting, maybe from some of your larger private peers, particularly as their balance sheets have become increasingly stretched?
Tim Donahue: Well, I think, you are specifically talking about one competitor only, although, you could consider the other one a private company as well, even though they are public. I think the one company is used to operating with leverage. The other one, the more private one that you are alluding to is used to operating with far less leverage and they have communicated that they want to get their leverage down. So many — as we said to you in February — I believe we said to you in February, so many of the contracts — so much of the business is under contract for the next several years. We don’t see large pricing risk over the next couple of years, albeit the marginal business is, obviously, going to become more competitive as the market is a little bit slower than it was two years ago. So we will just see where that takes us.
Mike Roxland: Got you. And can you — any way to quantify, like, when you say the marginal business become more competitive. How much of your book roughly is that marginal business or just broadly up percent just to get a sense of so much, is 85%, 90% of the contract and 10% qualifies marginal that become — that could become more competitive?
Tim Donahue: Yeah. I think there — that’s not to — that’s — without getting too specific, that’s not too unreasonable.
Mike Roxland: Okay. Got you. Appreciate that. And just one quick follow-up on the bankruptcy issue in Brazil. Just can you provide some more color on that customer and what gives you the confidence that you should be able to recoup most of the receivables that you have outstanding with them?
Tim Donahue: So we have registered collateral in one of their large new breweries, land and building. So I don’t really want to talk about what the customer is going to do. They haven’t filed their plan yet. But a variety of things can happen when they file their plan. They can try to run the business as is going concern. They can sell one or two breweries. They can sell the whole company. There’s a variety of things they can do. We believe that large new brewery where we have collateral is a brewery that they or somebody else will be more than happy to run and make beer in. So our hope is that they remain an independent going concern and we have a broader customer base that we continue to supply in the market, we will see where it goes. But I think from a collateral standpoint, as I said, we have comfort where we sit right now.
Mike Roxland: Got it. Thanks very much and good luck for the balance of the year.
Tim Donahue: Thank you.
Operator: Thank you. The next question comes from the line of Angel Castillo from Morgan Stanley. Your line is now open.
Angel Castillo: Hi. Thanks for taking the question. I just wanted to follow up on the strength that you are seeing in Transit. In particular, you updated on what you are seeing now in Europe and how that — maybe has impacted your outlook for Transit, I think, you talked about mid- to single-digit improvement year-over-year in terms of earnings. Could you just update us on what that kind of looks like based on the strength that you are seeing for 2023?
Tim Donahue: You are talking about Transit in total or specific to Europe?
Angel Castillo: Transit in total, sorry.
Tim Donahue: Okay. I am sorry. The only thing I was going to say is Europe is a smaller part of the business. But I think, currently, what we are seeing is commodity volumes a little softer. I think we still expect commodity volumes to pick up off of easier comps when we get to Q3 and Q4. Equipment volumes currently pretty strong. The order book is still really healthy, more than 1 year sales in the backlog. The tools are a little soft right now, but we expect that to pick up. So that’s the volume picture. I think the more important thing is we are well ahead of plan, as I said earlier, on the cost out, and from a material margin standpoint, we are managing very well raw material inputs and pricing to the customer. And so, the business — Angel, I am glad you brought it up, because the business largely described by many as cyclical.
Some of the end markets it supplies are no doubt cyclical. This business is so diverse, it’s remarkably stable. And with the exception of the COVID year in 2020, if you adjust for currency, with almost no capital invested each year or this business have been remarkably stable since we acquired it, and this year, we will do quite well. My sense is that if you adjust for currency and the divestiture of the business that we had last year, that by the end of this year, we are up over what the income was two years ago. So it’s — that’s adjusted for currency. So, obviously, currency has an impact. But I think the business is stable and the cash flows that it generates are remarkable for the level of capital required to be invested. So it is a contributor to the company.
It’s a contributor to delevering, a contributor to return of cash to shareholders. So I think we are really positive on where the business sits today. We have got a new management team since last year in the third quarter, and a lot of changes, and I think, there’s even more improvement that we can make in the business.
Angel Castillo: Very helpful. Thank you. And then I just wanted to touch on capital allocation, given the amount of uncertainty and how much maybe edges on what happens in time half, I recognize there may be some limitations as to what you can say. But I think, in the past, you have talked about revenue and perhaps returning cash to shareholders once you get into that 3 turns to 3.5 turns kind of net leverage range. Given the uncertainty, would you want to be more solidly kind of at the lower end of that or once we reach the 3.5 turns, should we anticipate that free cash flow will start to flow through to buybacks and returning cash to shareholders? How are you kind of thinking about that from a risk standpoint?
Tim Donahue: Yeah. I think, it’s — I think given where the financing markets are generally and that means the rate of what it’s going to cost us to refinance, coupled with an incredible number of issuers that have to refinance over the next couple of years that we would be well served to be towards the lower end of that range that we previously discussed. So I think Kevin made it — said in his prepared remarks that we are going to apply cash generated this year with delevering and we will pick up next year and see where we go. We do have a bond that comes due in September of 2024. Having said that, we can meet that with internal cash flow, but when you think about the refinancing towers that we and others have over the next couple of years and it would be prudent to be at the lower end of that range.
Now that’s one answer. The other answer is that based on where interest rates are today, the accretion dilution analysis is much closer on paying down debt versus buying back stock than it has been in the past when rates were well below historical norms.
Angel Castillo: Very helpful. Thank you.
Tim Donahue: Thank you.
