Alamo Group Inc (ALG) 2020 Q2 法說會逐字稿

Good day, and welcome to the Alamo Group Inc.

Second Quarter 2020 Conference Call.

Today's conference is being recorded.

At this time, I would like to turn the call over to Ed Rizzuti, VP, General Counsel and Secretary.

Thank you.

By now, you should have all received a copy of the press release.

However, if anyone is missing a copy and would like to receive one, please contact us at (212) 827-3746 and we will send you a release and make sure you're on the company's distribution list.

There will be a replay of the call which will begin 1 hour after the call and run for 1 week.

The replay can be accessed by dialing 1 (888) 203-1112 with the passcode 227086.

Additionally, the call is being webcast on the company's website at www.alamo-group.com, and a replay will be available for 60 days.

On the line with me today are Ron Robinson, President and Chief Executive Officer; Dan Malone, Executive Vice President, Chief Financial Officer; and Richard Wehrle, Vice President, Treasurer and Corporate Controller.

Management will make some opening remarks, and then we'll open up the line for your questions.

During the call today, management may reference certain non-GAAP numbers in their remarks.

Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release.

Before turning the call over to Ron, I'd like to make a few comments about forward-looking statements.

We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results.

Among those factors which could cause actual results to differ materially are the following: market demand, COVID-19 impacts, competition, weather, seasonality, currency-related issues, geopolitical issues and other risk factors listed from time to time in the company's SEC reports.

The company does not undertake any obligation to update the information contained herein, which speaks only as of this date.

I would now like to introduce Ron.

Ron, please go ahead.

Thank you, Ed, and we want to thank all of you for joining us here today.

Dan Malone, our CFO, will begin our call with a review of our financial results for the second quarter.

I will then provide a few comments.

And following our formal remarks, we look forward to taking your questions.

So Dan, please go ahead.

Thank you, Ron.

The key takeaways from our second quarter and first half 2020 results are: second quarter net sales were down 5.8% compared to prior year as the effect of acquisitions did not fully offset a 22.3% organic sales decline.

Record first half net sales were up 6.6% with acquisitions, but down 13.4% organically.

Second quarter adjusted EBITDA was down 4.9% from prior year, but higher than prior year as a percent of sales.

First half adjusted EBITDA increased 9.7% over prior year, and adjusted EBITDA margin was also up as a percent of sales for the same period.

Net income and earnings per share were down due to COVID-19, but acquisitions were again accretive to net earnings, even with the full burden of incremental interest, amortization and inventory step-up expenses.

Second quarter operating cash flow was $53.1 million, up almost 60% over prior year.

Outstanding debt was reduced by $51.5 million during the quarter.

Quarter-end cash on hand plus loan availability remained above $200 million, and quarter end backlog was $217 million, down 6.9% since the end of March.

Second quarter 2020 net sales of $268.6 million were 5.8% lower than the prior year second quarter.

Without acquisition, organic sales were down 22.3%.

Without the unfavorable effects of currency translation, organic sales were down 21.2%.

The organic sales decline was primarily due to COVID-19 impact.

First half 2020 net sales of $583.1 million were a company record and 6.6% higher than prior year with the contribution of acquisitions.

Without acquisitions, organic sales were down 13.4%.

Without the unfavorable effects of currency translation, organic sales were down 3 -- 12.3%.

The organic sales decline was less than the quarterly comparison because of stronger pre COVID results in the first quarter.

Industrial division second quarter 2020 net sales of $182.3 million represented a 6.2% decrease from the prior year second quarter.

Without the impact of acquisitions, this division's organic sales were down 31% due to COVID-19 disruptions to operations and customer demand.

Agricultural division second quarter 2020 sales were $86.4 million, down 5% from the prior year second quarter in U.S. dollars and down 2.4% without the effect of unfavorable currency translation.

In the second quarter, we continued to see modest organic sales growth in our North American operations, plus some incremental Dixie Chopper sales, but this was offset by the COVID-19 impact on our operations and customer demand overseas.

Net income for the second quarter 2020 was $13 million or $1.10 per diluted share compared to prior year second quarter net income of $20.7 million or $1.75 per diluted share.

Second quarter GAAP net income from acquisitions, bearing the full cost of incremental interest, amortization and inventory step-up expense was accretive by $0.12 per diluted share.

Net income for the first half 2020 was $28.5 million or $2.41 per diluted share compared to prior year first half net income of $35.9 million or $3.05 per diluted share.

First half GAAP net income from acquisitions was accretive by $0.16 per diluted share, including the full burden of incremental interest, amortization and inventory step-up expenses.

Second quarter 2020 adjusted EBITDA, which excludes the Morbark inventory step-up charges, was $34.5 million, down $1.8 million or 4.9% from the prior year second quarter.

Our adjusted EBITDA as a percentage of net sales was 12.8% in the second quarter compared to 12.7% of net sales in the prior year quarter.

Higher Morbark margins, a higher mix of replacement part sales and a favorable mix of whole good equipment sales more than offset the unfavorable margin impact of COVID-19.

First half 2020 adjusted EBITDA was $71.5 million, which was $6.2 million or 9.7% higher than the prior year first half.

The first half adjusted EBITDA margin was 12.3% of net sales compared to 11.9% for the prior year period.

The first half comparison is better than the second quarter comparison due to the strong results realized during the pre COVID portion of the current year first quarter.

During the second quarter of 2020, we generated $51.3 million of operating cash flow compared to $33.3 million in the prior year second quarter, an increase of almost 60%.

Strong operating cash flow is expected to continue throughout 2020 due to management emphasis on asset efficiencies and controlling expenses.

At quarter end, we had $82 million of cash on hand and $122 million of availability under the existing credit facility, maintaining liquidity above $200 million.

During the quarter, we reduced outstanding debt by $51.5 million and improved our leverage ratio of total debt to EBITDA.

While we currently have more than adequate liquidity, we cannot forecast the duration and full impact of the COVID-19 pandemic.

However, we still do not anticipate any near-term liquidity issues.

We ended the second quarter with $217 million of order backlog, a decline of 6.9% since the end of the first quarter and 5.3% lower than the prior year second quarter.

Excluding acquisitions, backlog was down 19% from the prior year quarter.

To recap our second quarter and first half 2020 results, second quarter net sales declined 5.8% with acquisitions and are down 22.3% organically.

Record first half net sales were up 6.6% with acquisitions, but down 13.4% organically.

Second quarter adjusted EBITDA declined 4.9% from the prior year quarter, but increased as a percent of sales in the quarter-to-quarter comparison.

First half adjusted EBITDA increased 9.7% over prior year, and adjusted EBITDA margin was also up as a percent of sales for the same period.

Net income and earnings per share were down due to the COVID 19 impact.

Acquisitions were again accretive to net earnings, even including the full burden of incremental interest, amortization and inventory step-up expenses.

Second quarter operating cash flow was $53.1 million, up almost 60% over prior year.

Outstanding debt was reduced by $51.5 million during the quarter.

Quarter-end cash on hand plus loan availability remained above $ 200 million.

Quarter-end backlog of $217 million, down 6.9% since the end of March.

I would now like to turn the call back over to Ron.

Thank you, Dan.

Alamo Group's second quarter results were certainly soft, as Dan just reported and as our press release reported.

But given the dramatic effects COVID is having on the economy and our business in general, I feel our results held up reasonably well.

Sales were off about in line with the expectations we indicated last quarter, but earnings were better than we thought they would be.

And cash flow, which we felt would be strong, came in even better than we hoped, which allowed us to pay down over $50 million against our debt.

Given the circumstances, I am very pleased with our performance and proud of our staff, in general, because it was certainly no easy accomplishment.

The second quarter was quite a roller coaster ride with plant closures, stay-at-home directives, travel restrictions and all the challenges we've all faced and are still contending with.

And I know we were not alone in this endeavor as nearly everyone's had to adjust their way of living and working to deal with the crisis.

But while some businesses could adapt to working remotely better than others, let me assure you, we're not an industry that can work from home.

We cannot build our equipment virtually.

We have to have people show up.

And our people really made the extra effort to ensure we continued to function effectively and never lost focus during the last quarter on doing so economically and efficiently.

I'm glad to say that as of now, all of our plants are open and operating, and we're continuing to make deliveries in a timely fashion.

And while our new bookings are running at a lower level than last year, they are still coming in at a consistent pace.

And fortunately, our customers in both our agricultural and industrial sectors are continuing to function, so our equipment is being used on a regular basis and needing to be maintained and replaced at a similar, if lower, level today.

Alamo's industrial division products, which most of you know are heavily oriented towards governmental entities for infrastructure maintenance, had experienced some soft market conditions in 2 ways.

The initial challenges in -- especially late in the first quarter and early in the second quarter was just related to the ability to function with all the COVID-related issues.

I mean we had a lot of -- we were having to have more people work from home.

The markets were, and a lot of our governmental customers were not -- are not as well equipped to work from home.

So there were a lot of operational issues just in communicating and dealing with the customers and to -- and for them to conduct business in a normal way.

And so that's why probably late March, most of April, there were a lot of just operational issues in just trying to function and communicate.

We are seeing now these types of issues have improved, and most of our customers in both our divisions are functioning reasonably well and being able to conduct business in a somewhat normal fashion.

But now we're seeing more issues related to -- on the governmental side, particularly, to revenue shortfalls and budget constraints, which I think -- which we believe will impact their spending for the rest of this year and into next year as well.

Since they are still utilizing our type of equipment on a regular basis, we feel we will hold up better than other types of industrial equipment, but we will not be immune to the governmental budgetary constraints.

So even when they delay new equipment purchases, they often have to spend more on repairs to their existing fleets, and we are already seeing evidence of this as our spare and wear part sales seem to be holding up much better than new equipment sales.

And this is consistent with patterns we have seen in previous downturns.

We also feel, as in the past, we will benefit somewhat by being part of their normal operating budgets and not reliant on special appropriations, things like new highway bills or special capital spending initiatives.

In the second quarter, our industrial revenues, some part of -- a smaller part of the revenues come from nongovernmental related spending.

And this was off even more than government spending as in some areas such as oilfield and construction, there was even greater impacts in the short term.

This was felt the most in areas such as our vacuum truck rental operations.

However, if it follows historical patterns, areas such as these should also rebound a little quicker as well.

And we're already starting to see some evidence of that in our current results.

Alamo's agricultural division sales have actually been more of a bright spot for us as they have held up even better than our industrial sales.

Farms and ranches, while not immune to the COVID-related issues, have generally continued to function throughout this crisis.

And if anything, I think we feel that we may have benefited from the softness in the agricultural market of the last several years, since the industry entered this COVID period with lower dealer inventories and a little pent-up demand due to lower levels of replacement for the last several years.

So the softness of the last several years has created a little bit more demand for us in the short-term as farmers and ranchers continuing to operate.

And interestingly, our North American agriculture equipment sales were actually up year-over-year in the second quarter, whereas overall sales were down, mainly due to weakness in Europe, which, in general, has had more COVID-related operational issues and probably came down even harder on restricting stay-a-home initiatives and restricting commerce, especially during April and into May.

But as I said, all of our plants in Europe are open and functioning now as well.

I think we also benefited in the U.S. from increased sales to the hobby farm sector, as with all the stay-at-home directives that the hobby farmers were home more and working in their fields and on their land and having to buy and replace equipment a little bit more steady.

I also feel agriculture should continue to hold up reasonably well moving ahead since acreage under cultivation seems to be holding reasonably steady.

And though farm incomes are still being constrained by soft commodity prices, so farm incomes are still a little constrained, but I think their operational activities are actually being conducted reasonably well, which we think we will benefit from.

Our company was also helped in the second quarter by our healthy level of backlog going into the quarter, which allowed us to maintain efficient levels of production throughout the quarter.

And although our backlogs came down slightly from the previous quarter, they are still at a solid level to support our third quarter operations.

But the key to Alamo's ongoing performance as long as this pandemic crisis continues will be new order bookings, and they are still running below historical levels.

Though I'm pleased that this is actually showing signs of improvement as well, particularly in June and the first weeks of July, as new orders have been -- we are seeing, have been picking up versus the previous several months.

And that's important because new orders are the key.

And until they get back to the levels they need to be, I can assure you that our company will maintain its disciplined action to manage our balance sheet, limit capital spending, control operating expenses and take other such actions necessary to maintain our financial stability.

And as we have said repeatedly, even if sales and earnings are soft, we feel our cash flow should remain strong, and we demonstrated this once again in our second quarter performance, where we were able to reduce our debt by over $50 million while still maintaining healthy cash balances of over $80 million.

This focus will remain a priority for Alamo for the foreseeable future.

I'm also pleased to report that despite the challenges of COVID, we continue to make reasonable progress on the integrations of the acquisitions we made last year, including Morbark, which was our largest ever.

While some initiatives such as international cross-selling have certainly been constrained with the lack of ability to travel, and these have been slower to get underway, other areas, such as improvements in technology in the plants and supply chain synergies are moving ahead.

And some are even on schedule or ahead of schedule.

So all in all, we remain very pleased with the 3 acquisitions we completed last year and feel -- and we definitely feel when business conditions return to more normal levels, each of these will contribute nicely to Alamo's overall development.

As I said earlier, the second quarter of 2020 was quite a roller coaster ride.

And while some of the challenges have settled down in the last few months, it is still going to be an up-go climb for us and many manufacturing companies.

But I feel confident in the ability of our people to maintain our focus and discipline for as long as it takes.

And I want to thank you and our investors for your support as we manage our way through this situation.

With that, I would now like to open the floor to any questions you might have.

(Operator Instructions) We have a question from Chris Moore, CJS Securities.

A couple of questions.

Maybe just start with backlog so I can understand a little bit better.

So just trying to get a sense as to whether products are cycling through more quickly now, more slowly, kind of maybe the average number of days in backlog currently versus where it might have been this time last year.

And is that influenced by mix, or -- just trying to get a better sense of what's happening there.

Actually, so far, it has not changed appreciably.

I mean our lead times are about the same.

Deliveries are running -- we've got a few -- there's a few sporadic issues on maybe some purchase components.

But by and large, the supply chain is supporting us in a fairly normal fashion.

And our lead times are fairly normal.

And so the backlog is, as a number of days of sales, has held up fairly consistently with pre COVID conditions.

Is the mix in there much different?

You had talked in Q1 where you -- some of the big-ticket items were the ones that kind of warrant selling through at this point in time.

Is that still the case?

That has -- is changing slightly.

I think the big ticket -- I mean like some of the big things like Gradall excavators and Morbarks, big industrial machines, saw a little bit softness, more softness early on.

And they have actually -- both those kind of areas have improved.

So big-ticket items have actually improved slightly.

I mean all sales are still a little soft.

Like I said, industrial has been a little softer than Ag.

Ag is up.

In fact, yes, their backlogs even since the end of the quarter have continued to climb.

So yes, in fact, today, our backlog is higher than it was at the end of the quarter.

And big-ticket items have shown a little -- come back a little stronger than they were a couple of months ago.

But all in all, fairly consistent.

Like I said, probably spare parts have held up better than whole goods.

So spare parts as a percent of sales would be up a little bit, which would be a more favorable mix.

And certainly, spare parts, they really have very little bit to do with backlog because they go in and out of backlog so quickly.

But that would be a little bit of a different on the mix, which is favorable because, like I said, it's a higher-margin thing, and it tends to be -- flow through much quicker.

But other than that, the trends have been more subtle.

Our next question comes from Mike Shlisky, Colliers Securities.

So a bunch of companies that we've heard from today have kind of given us some information about intra-quarter movements in either sales or orders.

Can you maybe just perhaps quantify for us how sales or orders progressed sequentially May over April, June over May and July over June, beyond what you've already said about just being up.

Any kind of numbers you could kind of put up behind that progression would be appreciated.

Yes.

Well, as I said, April, there were a lot of operational issues.

I mean I think we were all kind of dealing with sort of this new paradigm that we've been faced with.

So I think there were more operational issues, and that limited -- I mean orders as people were, like I say, only doing what they had to.

And looking ahead was a little -- there was more issues with that.

So those started to get better in May, and they've even continued to get better in June.

While there are still certainly some operational issues, like they're fairly limited, we figured out ways to work and to make our -- keep our plants open and yet conduct business in a safer way and everything.

So now what we're seeing, I mean, as I said, on the governmental side, I think budget constraints, we're already starting to see where they're being a little cautious and -- because I don't think they know exactly how much money they're going to have to spend.

And they're trying to deal with that, and that's a very dynamic situation.

So that's changed.

But even within that, like I said, Ag has held up fairly steady.

And as we moved into the -- from, like I say, a little bit more uncertainty is -- on functionality, it all started improving.

May was better than April.

June has been much better than May.

And so I mean, each -- month-over-month, on really both sides of the business, we have seen consistent improvement as people figure out how to work with it and try to get back to conducting business in a little bit more normal fashion.

Like I said, it's interesting, our equipment on both sides of the business is actually staying -- is being utilized regularly, being worked regularly and is needing to be maintained and replaced and all regularly.

And so now that they're functioning better, each month has gotten better.

Like I said, I can -- and July is already looking to be better than June.

But there's still a lot of uncertainty out there.

We're certainly -- we're concerned that there not be a second wave of COVID that really takes -- affects operational issues within us and our customers.

Like I said, we've got a little bit more of that on the governmental side than the Ag side.

I think the Ag side, farmers are -- they don't have to worry about social distancing in their fields.

And they don't have to -- and as long as they have crops in the field and animals on the farm, they have to be maintained to some level.

They can't just take a holiday from working their farms.

So I think we see a little bit more stability there and all.

But still, the equipment is working, operational issues have gotten better.

And like I say, sales are improving month-over-month.

But like the governmental -- the question with governmental is cash and when are they going to...

Europe has been, as I also said, a little bit slower.

They came down harder on operational side, especially during April and May.

But they're really pushing to get things back open and all, but probably a little bit more -- a little bit even more functional issues with functioning for them than in North America.

But I think the -- even there, so they've been a little slower and softness there has been a little bit deeper than in North America.

But they're all improving.

And yes, we -- of course, we had more plants in Europe closed during April.

They're all now, have reopened, but -- in May.

And operationally, they're doing okay, but it's, again, business is soft for some of the same reasons it's soft here.

But they've been kind of a step behind us in the U.S.

Okay.

Got it.

And if I can follow-up with you on that on some of your Ag comments there, Ron.

I'm curious, if you look at all the crops that are planted this year, not just corn and beans, but oats and barley and everything else out there, it looks like we've got about 10 million extra acres this year versus the prior year.

All that land has to be cleared, it has to be worked, tended to, et cetera.

Do you get a sense that there'll be elevated replacement coming next year, assuming COVID is more or less gone by then?

Yes.

That would help a little.

Like I said earlier, acreage under cultivation is remaining steady.

Like you said, I mean, there's a little bit more.

And of course, it seems to be shifting a little bit between commodities, based on prices.

So -- but I see Ag remaining steady, but they sort of -- and that helps.

I mean if you have so many acres under cultivation, you have to have equipment to manage those.

But it would help if they were getting a little bit better commodity prices for those commodities.

I think, like I say, farms are operating at a fairly steady level, but it's a fairly low level, like it's been the last couple of years, more so due to farm incomes being soft than acreage under cultivation.

So I think that provides a baseline and keeps things steady, but it would be nice to see a little bit better, higher level of farm incomes for that sector to really rebound nicely.

Mike, this is Richard.

Also on top of that, too, if you recall, last year, in March and April, there was some heavy flooding in the Midwest.

So that caused that cultivation acreage to be down versus this year.

Right, correct.

Exactly.

Okay.

Yes.

Right, okay.

And then I wanted to just switch over to a quick margin question as well.

It was pretty admirable, given over the prior year, you had pretty consistent EBITDA margin, more or less, and certainly a change between which segment brought you those margins.

That's always good to see as well.

I'm kind of curious, in the second quarter, were there any temporary cost reductions that will be coming back immediately in the third quarter?

If you could I'd like to get a good handle on kind of anything, kind of [back and forth].

Yes.

No, Mike, that margin improvement is really just a straight up, continuing.

It's a function of the Morbark margins being higher.

There are some lower commodity costs, but those are trending down.

We had a favorable mix of parts.

So you know the impact that, that can have.

And then even in the whole goods, we were -- we had a favorable mix.

You think about some of the things that were down were like the big ticket, truck-mounted type of equipment, and we don't have a big margin on the resale of the chassis.

So whole goods, and even on the Ag side, we had a favorable mix of whole goods.

So it's whole goods mix.

It's parts mix.

It's higher Morbark margins.

That's the main story.

So then it does sound like, especially given this is the first third quarter of having Morbark in your business, if you have any kind of even a small amount of scale back on your top line in the third quarter, you should be able to keep ramping up the margins as well.

Mix may be a small piece of the change.

We think EBITDA margins are going to be a good story all year long.

Got it.

It sounds like you kind of answered my next question, but maybe I can just kind of go on to the chassis availability situation.

As I recall, you had a good inventory of chassis during a time when other folks may not have had some class A chassis to attach things too.

Is that still the case today?

And how do you feel about obtaining and passing through all those chassis-mounted products.

Yes.

So far, chassis availability has been -- has held up fairly steady.

I mean I know early in the -- like the COVID thing, several auto and truck plants were shut down.

I think most of them are back opening and all.

And -- but yes, right now, between our own inventory and the market availability, as I said, we've had no major supplier issues.

I mean we've had one-off issues where you wanted a special chassis, and that one was hard to get.

But other than that, I mean, in general, we've had decent availability of truck chassis, and that seems to be holding fairly consistent even today.

Our next question comes from Joe Mondillo, Sidoti & Company.

Ron, Dan.

So I wanted to ask about the government business and what you're hearing there.

So compared to when we last talked at the end of April, it sounds -- it almost sounds like things have gotten worse, but is it -- is that the case?

Or is it a case in point where we've just gotten a little further down the line and you're just talking with your customers more and things have gotten further along in terms of budgets, and that's really what the case is.

And then just to follow-on to that, are you expecting -- because some of your wording, it's a little unclear.

Are you expecting the back half of the year related to the government business to be worse than, say, the volumes that you saw in the second quarter?

No.

We're not expecting things to be necessarily worse.

Like I said, communication with customers has improved, but their budget situation is still a big unknown.

And I think, like I said, they don't know.

So I don't know.

But as I said, even in industrial, orders have been picking up month-over-month since they were very soft April, better in May, better in June.

It looks like they're running better in July.

And each month seems to be getting a little bit better.

I think that bodes well.

I don't see anything that's going to make it worse other than fact that, like I said, governmental budgets are a bit of a challenge.

And as you know, federal government is talking about some kind of -- this next stimulus package is going to help -- is supposed to have money to orient it towards the states.

And I think that it's necessary.

I think -- and I just hope that they do it sooner rather than later, whatever they do.

But yes, I think, like I say, I don't have any particular concerns.

I think, yes, business is going to stay soft, while budget -- there are budget constraints.

But I think we'll hold up fairly steady.

Our order intake is coming in fairly steady throughout this, just at a lower level.

And I think -- and that level is picking up.

And I see -- I don't have anything in particular that says something is going to change or it's going to get worse.

But I mean, we have a pretty good -- I'm glad we had a pretty good backlog going into this, and we still have a pretty good backlog.

And as long -- that helps smooth out some of the rough spots in some governmental ordering, but -- and that's, of course, always for manufacturing company, new orders are the key.

And yet there's uncertainty when your customer's budgets are in the shape governmentals are.

So I'm concerned.

I'm always concerned.

But I have no reason to believe that there's anything untowards that -- some problem lurking around the corner that I'm not aware of.

Okay.

And how much severance expenses did you see in the quarter?

Fairly minimal because we actually -- I mean while we have had some permanent layoffs, I mean, the majority of the people, it's been furloughs and temporary layoffs and work share programs and such so that you don't have severance costs.

They're still on our books and that.

We've had a few more layoffs, but I mean, like I said, the first levels are -- it's been not a lot of tenured employees.

So the dollars have been fairly negligible in our results.

Yes.

So far, severance expense has not been a particular issue.

Okay.

And at what point -- I mean things, I guess, have rebounded pretty strong from April to July.

So maybe the furloughs just start to come off as your volumes start rising.

I guess there's maybe also an option where if things do look like they are maybe a little more slow and prolonged, then you take much more structural changes?

Is that sort of how you're looking at...?

Yes, I think that's right.

I mean at some point, we want to see how -- I mean we have actually half the people on furlough we had 2 months ago.

So I mean the number of people being furloughed has been cut down.

And you're right, but we've done a few -- we see that some areas where we think it's going to be soft for a while, we have done -- converted a few into permanent layoffs, too.

So we sort of outlined that in the press release.

And I think that's -- yes, I mean, we'll probably, we think in the next few months, we'll have a few more come off furlough, maybe a few more to go on to into permanent layoffs.

But we're still waiting to see sort of where we think some of the business levels are going to sort of settle in that, at least for the next couple of years.

I mean our view is, it's not just getting to the end of this year but look, if we -- where we think how business is going to start shaping up next year.

And the key to that, I mean, first of all, we got to get this COVID situation under control and some kind of a solution to that that's going to allow things to -- not only are we worried about the second wave, but it's just like permanent changes to the way people do business.

So we're worried.

We're concerned.

But I mean, like I said, that's why I think we're being cautious and we're taking steps necessary.

But it's not like, like I said, that we think there's something major coming down the road.

One thing we have done in this is we're, last -- or each year, we've done a little bit of plant consolidations.

And last -- and each time we do that, usually, there's a few layoffs and some consolidations as we do that.

And we've already -- that's one of our goals over the long term, is to have fewer, bigger plants.

And in COVID -- I mean we're continuing with those initiatives already.

So I mean, we'll do another.

We did a couple last year.

We're doing a couple this year, and we'll probably do another one next year.

So I mean, that kind of ties into that as well.

And I guess to follow-up on that.

Where are we with the Milwaukee consolidation?

Is that pretty much all set in stone?

I think it was supposed to be done by the end of the first quarter.

And the consolidation that you're doing this year, I wasn't -- what are you -- exactly are you doing?

And is that going to be material?

Or are these some pretty big consolidations, or...?

Well, first of all, all right, the Milwaukee one is finished, up and running.

I mean some of the -- one thing you'll notice, I've said we've cut back on CapEx, and we really have.

But it looks like CapEx in the first half was a little higher than we sort of indicated.

And that was because of some of the cost from the Milwaukee one was in sort of a working account instead it turned into a capital into the -- put on to the capital account.

And so it looks like we actually spent more, but all that was really a holdover from last year.

So -- or I mean, sort of like a delay in the timing from last year.

So we really have cut back.

But that is done.

It is up and operating.

We -- plants we consolidated into that, we owned one of them.

That one's not only been closed, it's been sold and we've collected the money.

So that one went well.

It's a good plant, and I'm glad we got it done before all of this hit.

Just because it makes it much easier.

So we also had announced -- we did last year in Canada, we took our RPM plant, which was 20 minutes away from our Tenco plant and combined those 2.

In the last quarter we also sold that plant, the Tenco -- the old RPM one in Quebec and sold, closed that, got the money.

We've -- when we bought Morbark, they had 3 locations, 2 in the U.S. and the smallest one was up in Canada.

We had sort of -- our plans were to move that into -- take them from 3 to 2 locations.

And we, that is -- and that's the one, that's a fairly small one that -- but we've announced that is now underway and should be complete this year: to close one of the Morbark ones and move it into another one of their plants, moved the one -- close the one in Canada and move it into their one in Ohio.

So that is underway.

And yes, like I said, we're always looking at these opportunities to lessen our footprint.

And we got a few others that, like I said, in the next couple of years that we plan on continuing on those on a regular basis.

Okay.

And just last question, sort of a follow-on to where you ended there with Morbark.

It sounds like the COVID downturn didn't set you back too much regarding integration and synergies and a lot of the things that you've planned on and probably still are planning on doing.

Could you just update us on how the integration with Morbark is overall doing?

Yes.

I think in general, it's going well.

Like I said, some of the international cross-selling we wanted to do has kind of been put on hold just because of logistical problems with traveling, especially internationally.

The purchasing synergies, I think we feel good that we have identified and achieved a lot of procurement opportunities.

With lower sales, obviously, we're buying less.

And so we're not -- so the dollars haven't come in quite the same at -- in total as much.

But the pace is, like I say, we've achieved what we planned to and believe as the sales pick up, those savings will pick up as well.

We had -- we knew, too, that we, like the health -- I mean some of the cutbacks in staffing at Morbark is related to COVID, lower opportunity -- lower business levels.

But it's also somewhat related to the fact that we've installed more technology in that plant.

I mean we literally, from the day we bought that in October of last year, started making some capital investments in some labor savings technology and putting in some robots there, which we funded early on in this.

And those are actually now coming up and starting to operate, and we're very pleased with the technological developments that we've made there, which we believe have very good short-term paybacks.

And so I mean, so operationally, those have proceeded ahead.

Procurement ones have proceeded ahead and...

IT, I mean so in IT we had a little bit of a delay because in the very beginning, when there was people being furloughed, we didn't have all hands on deck.

But we've restarted that IT integration, and we still plan to complete that this year as well.

Yes.

So by and large, it's moving ahead.

And like I said, the one plant integration is actually moving ahead itself.

So we're moving ahead actually better than I thought we would be able to, given the operational challenges of lack of being able to travel and everything else that we've all been faced with.

(Operator Instructions) The next question comes from Chris Sakai, Singular Research.

Just to add clarity, a question on Europe, the Europe operations.

If you could shed some light there, why was Europe facing more operational and demand issues than North America?

First of all, like in France, I think the government came down much harder.

They were -- like here, I mean, most of our businesses were all deemed essential.

In Europe, they really wanted you to justify, like it was harder to justify.

They put more restrictions on travel.

So early on, like I said, when we -- our plants in France and all were closed down more.

We -- like I say, it was just -- I think the whole country was a little bit harder to, to function.

I mean moving around, transportation was harder, everything was harder.

Some, in respect to England, I mean, I think England was a little slower starting and really had more -- seemed to have more incidences of the COVID situation.

I think they were hit pretty hard for a while.

And again, they responded.

It's interesting.

England and France, our plants, especially during April, most of our plants were closed down for almost -- like say, here, we go in the U.S. we have plant closed for a couple of days and then reopened.

There it was 2 or 3 weeks before they would reopen.

Though it's interesting, our plant -- our 3 plants in the Netherlands never closed.

They seemed to be operational and functional throughout this.

But like I said, I think the governments in England and France really have a lot more directives to keep things shut down and really limit travel.

And you really almost -- if you were out on the road, you almost had to have some kind of a letter to say why you were out on the road.

So just it was operationally a lot more challenging.

And I think people didn't function as much.

Order intake was very low during those months, which has improved, now that they're more back functioning and everything.

But that created sort of a gap in the backlog while they were shut down.

And so a little bit more operational challenges there.

And so like I said, Europe just came down harder.

You can -- and even within the U.S. or like New York, New England came down harder.

We had more operational issues in New York, New England kind of areas than we did in other parts of the country.

And they got hit harder.

And you go back and forth.

The other parts of the country, should they have done more?

Or should they be doing more now, but it's -- we'll all be second guessing, but I'm just saying, England and France were much more operational issues.

Right.

Okay.

Just another -- I had a question on, I guess, you guys reduced debt by $50 million this past quarter.

Say, I mean, in the future -- in the next quarter, if cash flow is just as good, I mean are you going to plan on reducing debt again?

Or are you looking -- what's the scene like for M&A opportunity?

Well, going into this year, since we did 3 acquisitions last year and did our biggest ever and had more debt than we typically carry.

I mean we had already said we were going to slow down on M&A activity going into this year, even before COVID hit, and we're focused more on integrating acquisitions from last year and paying down debt.

So the fact that sort of the whole industry decided to take an M&A holiday for COVID suited us just fine because we were already taking one.

So I think you're right.

And I mean, a lot of sale processes were sort of delayed and especially in industrial -- manufacturing, industrial type companies, maybe high tech, maybe pharmaceuticals or medical or those kind of things went on, but not industrial manufacturing.

And I think there are some property assets out there that people would like to probably sell.

And I think they're already looking at trying to start up some of these sale processes again.

But I still think it's going to be a bit challenging.

Travel is still challenging right now, and people are only doing absolutely necessary travel.

And the other thing is I think industrial companies, valuations are going to be a little bit harder because I mean everybody says, you can't use EBITDA from today.

You got to look at pre COVID, but how long it's going to be before we get back to pre COVID?

I mean I think this could be, like I say, even if things start getting -- COVID gets sorted out and things start getting better, I think it could be a little slower recovery.

So I think M&A, like I say, I think we're looking.

We believe acquisitions remain a part of our strategy, and we want to pursue them.

And -- but we're fairly conservative on financial structure, and we want to make sure we have the wherewithal within our comfort limits of pursuing it.

And we'd probably do something smaller before we do something bigger.

But yes, we would -- we're still looking.

We would still look.

But like I say, in the short term, our focus is much more internal.

Okay.

Great.

Last, I guess, I'd just like to know, I mean, what do you guys see as a -- the chance of your factories being shut down again?

Well, your guess is as good as mine.

I mean yes, I don't have any particular insights into that.

I think most -- our plants are, given that we support a lot of governmental and a lot of agricultural functions, our plants have in the past have been deemed pretty well essential and have gotten ability to stay open.

So I mean, I think that we're -- it's probably a fairly low probability that they'd get shut down for any long periods of time.

I mean if they are ever any health issues or -- either within us or within an area.

I know like recently, one of our plants in France, we had to go in and they said there's a big increase in this part of France of COVID.

So they were making everybody shut down for a day and test everybody.

I mean we literally had to test everybody in one of our plants.

And then we could reopen.

But fortunately, number one, they could test everybody in 1 day and get the results in the next day.

So I think -- and that's another key, too, is just where we do go with this COVID situation?

Is there going to be a second wave?

Is it going to be as bad than the first?

Are we going to have those -- some kind of a drug that can solve this problem?

Or what's that?

I mean there's a lot of what-if scenarios.

But I mean, I think we'll do better than most, just because our plants are pretty well deemed essential.

I think it helps that most of our plants are in basically more rural areas, smaller towns.

I mean we don't have plants in big cities, not only in the U.S. but not in Europe either.

I mean we're in the smaller community, which seem to be a little bit easier to control.

I think in our plants, we are able to self -- social distance even within our plants because it's not like we're running assembly lines where we have people shoulder to shoulder.

I mean people operate in cells within our plants, and they don't tend to accumulate in big groups and so we don't have problems with that.

So actually, I think we'll continue to function.

I don't see major problems.

But on the other hand, I'm -- like I say, my crystal ball of how COVID is going to develop is pretty cloudy these days.

There are no further questions at this time.

I would now like to turn the call back over to management for closing remarks.

Okay.

Well, again, thank you all for joining us today.

We appreciate your interest and support of the company.

And like I said, I think we -- it's a challenging situation, but we feel good about where the company is and our ability to deal with, at least, the issues as we see them currently.

So anyway, thank you, and we look forward to speaking with you on our third quarter conference call in the end of October.

Have a good day.

Thank you, ladies and gentlemen.

This concludes today's teleconference.

You may now disconnect.