Alamo Group, Inc.

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. Please go ahead.

Thank you. And 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 one hour after the call and run for one 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 Worley, 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 report. The company does not undertake any obligation to update the information contained herein and 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 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 effective 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 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 $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 Tapu sales, but this was offset by the COVID-19 impact on our operations and customer demand overseas. Net income for the second quarter of 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 gap net income from acquisitions bearing the full cost of incremental interest amortization and inventory step-up expense was accreted by 12 cents per diluted share. Net income for the first half of 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 gap net income from acquisitions was accreted 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 Moorbark 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 Moorbark margins, a higher mix of replacement parts 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. End of 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 four. 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 but acquisitions were again accreted 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 $27 million. Quarter-end backlog, $17 million, down 6.9% since the end of March. I would now like to turn the call back over to Robert.

Thank you, Dan. Alamo Group's second quarter results were certainly soft, as Dan just reported, 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 rollercoaster 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're 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, have experienced some soft market conditions in two ways. The initial challenges, 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, you know, we were having to have more people work from home. The markets were, and a lot of our governmental customers 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 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 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. 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 parts sales seem to be holding up much better than new equipment sales. 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, the smaller part of their revenues come from non-governmental related spending, and this was off even more than governmental spending, as in some areas such as oil field and construction, there were 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 with the lower levels of replacement for the last several years. 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 on restricting stay-at-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 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. 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, so 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 keys. And until they get back to the levels they need to be, I can assure you that our company will maintain its disciplined actions 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 more bark, 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, even on schedule or ahead of schedule. So all in all, we remain very pleased with the three acquisitions we completed last year, 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 rollercoaster ride, and while some of the challenges have settled down in the last few months, it is still going to be an uphill 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.

If you would like to ask a question, please signal by pressing star 1. on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We have a question from Chris Moore, CJS Securities. Hey, good afternoon, guys.

Thanks for taking a couple of questions. Chris. Yeah, good afternoon. Maybe just start with with backlog so I understand a little bit better. So just trying to get a sense as to whether, you know, products are cycling through more quickly now, more slowly, you know, kind of maybe the average number of days in backlog currently versus where it might have been, you know, this time last year. And is that influenced by mix or it's 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. 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 as a number of days of sales is held up fairly consistently with pre-COVID conditions.

Is the mix in there much different? You had talked in Q1 where some of the big ticket items were the ones that, you know, kind of weren't selling through at this point in time. Is that still the case?

That is changing slightly. I think the big ticket, I mean, you know, some of the big things like gray doll excavators and more barks, big industrial machines saw a little bit more softness early on, and they have actually, both of those kind of areas have improved. So big ticket items have actually improved slightly. I mean, you know, all sales are still a little soft, like I said, industrials. It's been a little softer than ag. Ag is up. In fact, yeah, their backlogs, even since the end of the quarter, have continued to climb. So, yeah, in fact, today our backlog is higher than it was at the end of the quarter. But big-ticket items have shown a little – come back a little stronger than they were a couple months ago. But, you know, 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 difference on the mix. which is favorable because, like I said, it's a higher margin thing and it tends to be, you know, flow through much quicker. But other than that, you know, other than that, the trends have been more subtle. Got it. It's helpful. Thanks, John. I'll jump back in line. Sure. Thank you, Chris.

Our next question comes from Mike Chalisky, Collier Securities.

Hey, guys. Good afternoon. Hey, Mike. So a bunch of companies that we've heard from today have been kind of given some information about intra-quarter movements in either sales or orders. Can you maybe perhaps quantify for us how sales or orders progress sequentially from May over April, June over May, and July over June, beyond what you've already said of just being up? Any kind of numbers you can kind of put behind that progression would be appreciated.

Yeah, well, as I said, April, you know, there were a lot of operational issues. I mean, I think we were all kind of dealing with, you know, sort of this new paradigm that we've been faced with. So I think, you know, there were more operational issues, and that limited, I mean, you know, orders, people were, you know, I'd say only doing what they had to and looking ahead. There were more issues with that. 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. They're fairly limited. We've figured out ways to work and to 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 they're being a little cautious 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, the ag has held up fairly steady, and as we moved into the, you know, from – Like I say, the 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 being utilized regularly, being worked regularly, and needing to be maintained and replaced and all regularly. Now that they're functioning better, each month has gotten better. Like I said, July is already looking to be better than June. But there's still a lot of uncertainty out there. You know, we're certainly, we're concerned that there not be a second wave of COVID that really, you know, 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 and in their fields and they don't have to, you know, 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's working. Operational issues have gotten better. And like I say, sales are improving month over month. But the question with governmentals 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, issues with functioning for them than in North America. They've been a little slower, and softness there has been a little bit deeper than in North America, but they're all improving. Of course, we had more plants in Europe close during April. They all now have reopened. But, you know, in May and operationally, they're doing okay. But it's, you know, again, business is soft for some of the same reasons it's soft here. But, you know, they've been kind of a step behind us in the U.S.

Okay. Got it. If I can follow up with you on that, on some of your ad comments there, Ron. I'm curious, you look at all the process of planning 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. You know, all that's going to have to be cleared, have to be worked, tended to, et cetera. Do you get a sense that there could be elevated replacements coming next year, assuming COVID is, you know, more or less gone by then?

That would help a little. Like I said earlier, acreage under cultivation is remaining steady. Like you said, there's a little bit more. Of course, it seems to be shifting a little bit between commodities based on prices. I see ag remaining steady, and that helps. 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, you know, like I say, farms are operating at a fairly steady level, but it's a fairly, you know, low level like it's been the last couple of years, more so due to farm incomes being soft than, you know, acreage under cultivation. So I think that'll 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's pretty admirable, you know, even over the prior year, you had pretty consistent EBITDA margins, more or less, and certainly a change between which segments 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? And you've got a good handle on scaling things back and forth.

No, Mike, that margin improvement is really just a straight-up continuing. It's a function of the more bark 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 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 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 more bark margins. That's the main story.

So then it does sound like, especially given this is the first third quarter of having more bark in your business, if you have any kind of even a small amount of scale back in the top line in the third quarter, you should be able to keep wrapping up the margins as well. Mix may be a small 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 chassis to attach things to. Is that still the case today, and how do you feel about retaining and attaching through all those chassis-mounted products?

So far, chassis availability has held up fairly steady. I mean, I know early in the COVID thing, several auto and truck plants were shut down. I think most of them are back opening, Right now, between our own inventory and the market availability, as I said, we've had no major supplier issues. We've had one-off issues where you wanted a special chassis, and that one was hard to get. But other than that, in general, we've had decent availability of truck chassis, and that seems to be holding fairly consistent even today. Got it.

That's great color. I'll hop back in queue. Thank you.

Thank you. Our next question comes from Joe Mondillo, Sedonian Company.

Hi, Ron, Dan. Good afternoon.

Hey, Joe.

Hey, Joe. 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 almost sounds like things have gotten worse, but 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 is 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, you know, you know, 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 so 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 the fact that, like I say, governmental budgets are a bit of a challenge. You know, the federal government is talking about some kind of, you know, this next stimulus package is going to help. It's supposed to have money oriented towards the states. And, you know, I think, you know, I think it's necessary. I think and I just hope that they do it sooner rather than later, you know, whatever they do. But, yeah, I think, you know, like I say, I don't have any particular I think, yes, business is going to stay soft while 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 that level is picking up. I don't have anything in particular that says something is going to change or it's going to get worse, but I'm glad we had a pretty good backlog going into this, and we still have a pretty good backlog. That helps smooth out some of the rough spots and some governmental ordering. But that's why I say, of course, always for a manufacturing company, new orders are the key. And yet there's uncertainty when your customers' 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 some problem working 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, you know, the majority of the people, it's been furloughs and temporary layoffs and and work share programs and such so that, you know, you don't have severance costs. You know, they're still on our books and that. We've had a few more layoffs, but I mean, like I say, the first levels, it's been, you know, not a lot of tenured employees, so the dollars have been fairly negligible in our results. Yeah, 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 this?

Yeah, I think that's right. I mean, at some point we want to see how well – I mean, we have actually half the people on furlough we had two months ago. So, I mean, the number of people being furloughed has been cut down. And, you know, and you're right, but we've done a few, you know, we see that some areas where we think it's going to be solved for a while, we have converted a few into permanent layoffs, too. So, you know, we sort of outlined that in the press release. And I think that's, yeah, I mean, you know, we'll probably, we think in the next few months, we'll have a few, you know, a few more come off furlough, maybe a few more go on to, you know, that are, you know, into permanent layoffs. But, you know, we're still waiting to see sort of where we think some of the business levels are going to sort of settle in at, at least for the next couple years. I mean, our view is, yeah, it's not just getting to the end of this year, but look, you know, where we think how business is going to start shaping up next year. And the key to that, I mean, first of all, we've got to get this COVID situation under control and some kind of a solution to that that's going to allow things to, you know, not only are we worried about a second wave, but, you know, it's just, you know, like permanent changes to the way people do business. So we're worried, we're concerned, but I mean, you know, like I said, that's why I think we're being cautious and we're being, taking steps necessary, but it's not like, like I said, we think there's something major coming down the road. One thing we have done in this is we, you know, we were, you know, last, Each year, we've done a little bit of plant consolidations. Each time we do that, usually there's a few layoffs and some consolidations as we do that. That's one of our goals over long term is to have fewer bigger plants. We're continuing with those initiatives. already. We did a couple last year, we're doing a couple this year, and we'll probably do another one next year. That kind of ties into that as well.

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, what exactly are you doing, and is that going to be material, or are these some pretty basic consolidations?

First of all, the Milwaukee one is finished, up and running. 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 indicated. That was because some of the cost from the Milwaukee one was in a working account instead of turned into a capital, put onto the capital account. It looks like we actually spent more, but all that was really a a holdover from last year. Sort of like the delay in the timing from last year, so we really are have cut back, but that is done. It is up and operating. Of the plants we consolidated into that, we own one of them. That one's not only been closed, it's been sold, and we've collected the money. That one went well. It's a good plant. I'm glad we got it done before all this hit, just because it makes it much easier. We also had announced what we did last year in Canada. We took our RPM plant, which was 20 minutes away from our Tenco plant, and combined those two. In the last quarter, we also sold that plant, the ORPM one in Quebec. and sold, closed that, got the money. When we bought Borbark, they had three locations, two in the US and the smallest one was up in Canada. Our plans were to take them from three to two locations, and that's a fairly small one. But we've announced that is now underway and should be complete this year to close one of the more bark ones and move it into another one of their plants, close one in Canada and move it into their one in Ohio. So that is underway. And like I said, we're always looking at these opportunities to lessen our footprint. And we got a few others that, you know, like I said, the next couple of years that we plan on continuing on those, you know, on a regular basis.

Okay. And just a last question, sort of a follow-on to where you ended there with Marbock. It sounds like the COVID downturn didn't set you back too much regarding integration and and a lot of 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?

Yeah, 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, you know, so the dollars haven't come in quite the same, you know, in total as much. But the pace is, you know, like I say, you know, we've achieved what we planned to and believe as the sales pick up, you know, those savings will pick up as well. We knew, too, that some of the cutbacks in staffing at Moorbark 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. 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 robots there, which we funded early on in this. Those are actually now coming up and starting to operate. We're very pleased with the technological developments that we've made there, which we believe have very good short-term paybacks. Operationally, those have proceeded ahead. Procurement ones have proceeded ahead.

IT, we had a little bit of a delay, because in the very beginning, when there were 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.

So yeah, by and large, it's moving ahead. And like I say, the one plant integration is actually moving ahead as well. No, we're moving ahead actually better than I thought we would, given the operational challenges of lack of being able to travel and everything else that we've all been faced with.

Okay, well, thanks a lot. Good luck with the rest of the year.

Thank you, Joe.

Just a reminder, to ask a question, please press star 1 now. Our next question comes from Chris Sakai, Singler Research.

Hi, everyone. Just had previously a question on Europe, the Europe operations. You know, if you could shed some light there, you know, why was Europe facing more operational and demand issues than North America?

First of all, in France, I think the government came down much harder. Like here, most of our businesses were all deemed essential. In Europe, they really wanted you to justify. It was harder to justify. They put more restrictions on travel. So early on, like I said, when our plants in France and all were closed down more, I think the whole country was a little bit harder to function. Moving around, transportation was harder, everything was harder. Some respect England. I think England was a little slower starting and really seemed to have more incidences of the COVID situation. I think they were hit pretty hard for a while, and again, they respond. It's interesting, England and France, our plants, especially during April, most of our plants were closed down for almost, like say, here in the U.S., we have a plant close for a couple days and then reopen. There, it was two or three weeks before they would reopen. Though it's interesting, our three plants in the Netherlands never closed. They seem to be operational and functional throughout this. Like I said, I think the governments in England and France really had a lot more directives to keep things shut down and really limit travel. 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. It was operationally a lot more challenging. 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. So a little bit more operational challenges there. So like I said, Europe just came down harder. And even within the U.S., sort of 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, you know, they got hit harder. And, you know, you go back and forth. Did other parts of the country, should they have done more or should they be doing more now? But... We'll all be second-guessing, but I'm just saying England and France were much more operational issues.

Right. Okay. Just another question on, I guess, you guys reduced debt by $50 million this past quarter. In the next quarter, if cash flow is just as good, are you going to plan on reducing debt again? What's the scene like for M&A opportunities?

Going into this year, since we did three 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, you know, sale processes were sort of delayed. and especially in industrial, you know, manufacturing industrial type companies, maybe high tech, maybe pharmaceuticals or medical or, you know, those kind of things went on but not industrial manufacturing. And I think that there are some property, you know, 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. You know, travel is still challenging right now, and people are, you know, 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, you know, everybody says, you know, you can't use EBITDA from today. You've got to look at pre-COVID, but, you know, how long is it going to be before we get back to pre-COVID? I mean, I think this could be, oh, you know, like say even if things start getting, you know, COVID gets, sorted out and things start getting better, I think it could be a little slower recovery. So I think that, you know, I think M&A, like I say, I think we're, you know, we're looking, you know, we believe acquisitions remain a part of our strategy and we want to pursue them. But, you know, 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 yeah, 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 slide. I'd just like to know, I mean, what do you guys see as the chance of your factories being shut down again?

Oh, your guess is as good as mine. I mean, yeah, I don't have any particular insights into that. Our plants, given that we support a lot of governmental and a lot of agricultural functions, our plants in the past have been deemed pretty well essential and have gotten ability to stay open. I think that it's probably a fairly low probability that they'd get shut down for any long periods of time. I mean, if there are very health issues or, you know, either within us or within an area. You know, I know like recently one of our plants in France, we had to go in and, you know, they said there's a big, big increase in this part of the France of COVID. So they were making everybody shut down for a day and test everybody. I mean, you know, we literally – had to test everybody in one of our plants, and then we could reopen. But unfortunately, number one, they could test everybody in one day and get the results in the next day. And that's another key, too, is just where we 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 some kind of a a drug that can solve this problem or what's that? There's a lot of what if scenarios, but I think we'll do better than most just because our deep plants are pretty well deemed essential. I think it helps that most of our plants are in basically more rural areas, smaller towns. We don't have big plants in big cities, not only in the US, but not in Europe either. We're in the smaller communities. which seem to be a little bit easier to control. I think in our plants, we are able to social distance even within our plants because it's not like we're running assembly lines where we have people shoulder to shoulder. People operate in cells within our plants, and they don't tend to accumulate in big groups. 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, my crystal ball of how COVID is going to develop is pretty cloudy these days.

Okay. Well, thanks for that.

Thank you. 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 it's a challenging situation. 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.

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