Kadant Inc

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Cated Incorporated Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Michael McKinney. Please go ahead.

Thank you, Shalon. Good morning, everyone, and welcome to Cadence's second quarter earnings call. With me on the call today is Jeff Powell, our president and chief executive officer. Before we begin, let me read our safe harbor statement. Various remarks that we may make today about Cadence's future plans and expectations, financial and operating results, and prospects are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended December 28, 2019, and subsequent filings with the Securities and Exchange Commission. In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views or estimates change. During this webcast, we'll refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our second quarter earnings press release and the slides presented on the webcast and discussed in the conference call, which are available in the investor section of our website at www.cadent.com. Finally, I want to note that when we refer to GAAP earnings per share or EPS and adjusted EPS on this call, We are referring to each of these measures as calculated on a diluted basis. With that, I'll turn the call over to Jeff Paul, who will give you an update on Cadence business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we will then have a Q&A session. Jeff? Thanks, Mike. Hello, everyone.

Thank you for joining us this morning to review our second quarter results and discuss our outlook for the second half of 2020. Since our last earnings call, the world has continued to be impacted by the COVID pandemic, which has led to an economic crisis in nearly every region of the world. Most countries continue to deal with this pandemic and depressed economic activity. I'll begin with a few comments about our operations and how the pandemic has continued to affect our business. Like most other industrial companies, we have been affected in many ways by the pandemic. The effect of COVID made the second quarter one of the more challenging quarters in the history of our company. Our global workforce has adapted to a new way of work and performed exceptionally well under extremely challenging circumstances. I'm very proud of our talented and dedicated employees around the world for the work they've done and continue to do to serve our customers and each other. We are fully operational at all of our manufacturing facilities and continue to work under enhanced safety protocols designed to safeguard our workplaces and protect the health and safety of our employees. These precautionary measures have served us well and allowed us to continue operating in every region of the world. While some regions around the world are starting to reopen, it will take some time to see this increased economic activity reflected in new orders. The early signs of the recovery are still fragile and could be upended by new surges in the virus. Having said that, we believe we are well positioned to navigate through the pandemic and uncertainties in the economic environment. Our balance sheet remains healthy, and our liquidity position is solid. Robust cash flows have always been a strength of Cadent, and we believe this will continue as economies begin to reopen around the world. Performance in the second quarter was impacted by our customers' requests to delay projects and propone service work and curtail production. Our cash flow from operations and our free cash flow were both strong. Cash flow of $22 million was down 3% compared to Q2 of 2019, while free cash flow increased 2% to $21 million. Our parts and consumables revenue made up 64% of total revenue comparable to the prior year period. This relative stability in our parts and consumable business is reflected in our strong cash flows and our focus on growing this area continues to be a key strategic initiative. Overall, most of our customers are operating and adjusting to the new level of demand in the current environment. After the initial surge in packaging and tissue demand early in the second quarter, these markets have returned to levels more indicative of the general economic environment. The one sector that seems to be performing better than expected is wood, and specifically lumber. I'll provide additional comments on that later in my remarks. Also during the second quarter, we put into place various cost-contingent measures and implemented selective reductions in our workforce via early retirement offers, furloughs, and layoffs at certain divisions. While never something we look forward to, these adjustments were necessary to ensure our staffing levels reflected the business environment. We continue to assess the situation at each of our businesses and take actions where appropriate. Before leaving this slide, I wanted to comment on our recent acquisition of Cogent Industrial Technologies announced yesterday. This acquisition is an exciting addition to the Kaden family. We believe this new platform greatly expands our ability to deliver automation and plant-wide technology solutions to process industries. It also allows us to play a bigger role in our customers' digital ecosystem by offering integration solutions across multiple processes, products, and systems for enhanced productivity and increased operational agility. Next, I'd like to review our performance in our three operating segments. As shown on slide seven, our flow control segment faced a challenging market environment with industrial production down across most sectors. This was especially evident in non-critical infrastructure industries, where manufacturers were forced to shut down operations and those that did continue to operate were doing so at much lower operating rates. Capital project activity at most industrial companies was particularly impacted during the quarter. While demand for our aftermarket parts was solid and made up 72% of total revenue in the quarter, customer delays in capital project execution, postponed service work, and the inability of our employees to engage face-to-face with customers and prospects due to the pandemic negatively affected both our bookings and revenue performance. Looking ahead to the third quarter, we expect Q3 to show some improvement while we expect capital project orders to remain subdued. Our industrial processing segment was also impacted by the global lockdown in Q2. However, we are seeing encouraging signs in some of our market sectors, and particularly in wood products. Revenue in this segment declined 14% to 66 million year-over-year, but was up slightly compared to Q1 of this year. This decline was largely due to a significant slowdown in capital projects following two exceptional years of capital project activity. Parts and consumables revenue, on the other hand, was solid and made up 62% of total revenue in the second quarter. Encouragingly, U.S. housing starts in June were up 17% sequentially to 1.2 million, which followed a boost in May housing starts, up 14% compared to April. The increase in housing construction coupled with homeowners forced to remain at home during the widespread shutdowns in April and May led to strong demand for lumber and other wood products. As a result, Lumber prices for July delivery increased 8 percent above pre-pandemic high, and demand is providing support for higher price levels. This, in turn, has benefited our customers producing wood products. We are experiencing an increase in capital project activity and expect capital bookings to strengthen as the second half of 2020 unfolds. Turning now to our material handling segment, we had solid results in the second quarter due in part to a healthy backlog. This operating segment experienced depressed levels of bookings due to most customers being unable to receive visitors and others being shut down due to government-mandated closures associated with the pandemic. Demand for our fiber-based products was a bright spot in the second quarter as homeowners used more lawn and garden products. Adjusted EBITDA increased 8% to $6 million, and our adjusted EBITDA margin was nearly 18% in the second quarter as a result of solid execution and product mix. As in our other segments, we are seeing increasing capital project activity. Looking beyond 2020, we continue to believe this segment has upside potential in its aggregates in market if there is increased infrastructure spending. While the last several months have proven to be challenging with many unknowns, we remain confident in our ability to manage through these unprecedented times. As we look ahead to the second half of 2020, the uncertainty and evolving environment limit our visibility to accurately forecast the timing of orders and the speed of economic recovery. Therefore, we will not be providing guidance at this time. We expect Q3 to be the weakest quarter of the year and are looking for some improvement in Q4 as we navigate through what we hope is the bottom of this pandemic-induced recession. I'd like to pass the call over to Mike now for a view of our Q2 financial performance.