Kennametal Inc.

Good morning. I would like to welcome everyone to Kenna Metal's second quarter fiscal 2020 earnings conference call. All lines have been placed on you to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. Please note that this event is being recorded. I would now like to turn the conference over to Kelly Boyer. Vice President of Investor Relations. Ms. Boyer, please go ahead.

Thank you, Operator. Welcome, everyone, and thank you for joining us to review CannaMetal's second quarter fiscal 2020 results. Yesterday evening, we issued our earnings press release and posted our presentation slides on our website. We will be referring to that slide deck throughout today's call, and a recording of the call will be available for replay through March the 5th. I'm Kelly Boyer, Vice President of Investor Relations. Joining me on the call today are Chris Rossi, President and Chief Executive Officer, Damon Audia, Vice President and Chief Financial Officer, Patrick Watson, Vice President Finance and Corporate Controller, Alexander Brose, President Video Business Segment, Pete Dragich, President Industrial Business Segment, and Ron Port, President Infrastructure Business Segment. After Chris and Damon's prepared remarks, we will open the lineup for questions. At this time, I would like to direct your attention to our forward-looking disclosure statement. Today's discussion contains comments that constitute forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of assumptions, risks, and uncertainties that could cause the company's actual results performance, or achievements to differ materially from those expressed in or implied by such forward-looking statements. These risk factors and uncertainties are detailed in Kenna Metal's SEC filings. In addition, we will be discussing non-GAAP financial measures on the call today. Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our form 8K on our website. And with that, I'll now turn the call over to Chris.

Thank you, Kelly. Good morning, everyone, and thank you for joining the call today. Let me begin by making some general comments before reviewing the quarter. Though we are currently experiencing the downturn across all our end markets, we remain focused on the things that we can control. We are seeing results from the simplification and modernization actions completed to date, and these actions as well as those still to be completed, will drive improved profitability and leverage when our end markets begin to strengthen. Starting on slide two in the presentation deck, organic sales declined by 12% in the quarter versus 4% growth in the second quarter last year. This is the second consecutive quarter of double-digit organic decline and highlights the weakened state of our end markets. While we had expected end markets in the second quarter to decline sequentially, a few countries, specifically the U.S., Germany, and India, declined more significantly than we had anticipated. Furthermore, the challenges in the aerospace end market related to the 737 MAX and trickle-down effect in the supply chain exacerbated the already weak market conditions. Adjusted EBITDA margin decreased 740 basis points to 11.4%, but improved 50 basis points sequentially, despite lower sales this quarter. Adjusted EPS decreased to 17 cents versus 71 cents in the prior year quarter. The decreases in margin and EPS were the result of three main factors. First, the decline in volume was a significant contributor as all our end markets declined year over year. Second, the negative volume effect and the associated underabsorption were magnified by manufacturing inefficiencies related to the recent plant closures from our simplification modernization efforts. That said, the disruptive effect of plant closures is expected to decrease in the second half of this fiscal year. Third, as we discussed on our last earnings call, raw material headwinds continue to temporarily depress our margins in the quarter. Although as expected, the magnitude of the effect improved sequentially from the first quarter, it still represented 130 basis points of the year-over-year decline in our margins, or 7 cents of EPS. This situation will reverse in the second half since the higher cost raw material inventory worked through the P&L in the first half of fiscal year 20. And our expectation is that the full year effect will be roughly neutral. These negative factors were partially offset by the progress we are making on simplification modernization, which contributed an incremental 10 cents of EPS year over year. This quarter, we achieved an incremental $11 million in savings from simplification modernization and $19 million year-to-date, bringing the total since inception of the program to $69 million. As a reminder, we still expect our full year savings this fiscal year to be modestly higher than the $40 million achieved last year, reflecting increased savings in the second half from footprint rationalization and manufacturing modernization. We closed two manufacturing facilities in the second quarter. The savings from these closures are part of the fiscal year 20 restructuring actions. which are expected to deliver $35 to $40 million in run rate annualized savings by the end of fiscal year 20. We also remain on track with our fiscal year 21 restructuring actions that are expected to contribute an additional $25 to $30 million of annualized run rate savings by the end of fiscal year 21. And we now expect to achieve these savings at a lower cost. We've decided to downsize the ESSEN operation rather than closing it after reaching a compelling agreement with local employee representatives to improve profitability given by increased required work hours per week and lower operating costs. We're also evaluating the acceleration of other facility closures as part of our ongoing restructuring activities. As you've heard me say before, In an unpredictable market environment such as this one, it's important to stay focused on the things that we can control, such as discipline, cost management. Our adjusted operating expense of 21.3% represents a decrease of 6% year-over-year in dollar terms. And we will continue to look for opportunities to reduce costs, especially in the current market environment. Looking ahead, the lower end market demand we experienced in Q2 as well as our current expectations for further weakness through the remainder of the fiscal year, have necessitated a reduction in our total year outlook. Let's turn to slide three to discuss some of the changes since our last earnings call that have lowered our expectations. As you can see on this slide, many macroeconomic indicators for our key end markets have changed significantly over this last quarter versus what was forecasted at the end of the first quarter. U.S. manufacturing production was positive in the first quarter and unexpectedly turned negative in the second quarter. Similarly, India was indicating signs of recovery with September industrial production forecasted to be positive 4%. However, actual performance was negative 4% and consistent with the further deterioration that we saw in Q2. The transportation end market continued to weaken further than expected in the quarter, with a decrease in German industrial production of negative 5% versus the forecast of negative 3% at the start of the quarter. The developments with the 737 MAX affected our second quarter and full-year outlook as well. At the time of our last call, Boeing's actual monthly production levels were 42, and they were forecasting an increase to 52 by fiscal year end. And, of course, the subsequent production halt also affected the associated supply chain. Finally, the energy end market was significantly lower as seen in the drop in U.S. land-only rig count, which was forecasted to stabilize around 850 at the time of our last call and is now around 800 and expected to stay at approximately these levels for the balance of the fiscal year. Despite these challenges across our end markets, we continue to improve our long-term profitability as seen on slide four. Part of simplification modernization is reduction in our manufacturing footprint to reduce structural costs, as well as leveraging our modernized manufacturing processes for improved productivity. Since the start of this journey, we've reduced the footprint by five and require considerably less employees to operate the business. Note that the reduction in footprint does not include the significantly downsized Essin operation or other facility closures currently under evaluation. These actions today are reflected in the improvement in our cash flow from operations as shown in the chart, comparing the first half of this year to a similar revenue period. As you can see, there's a significant improvement in our cash flow as we focused on simplification modernization, including Simplifying and value-based pricing our product portfolio and services, improving productivity through automation and modernized manufacturing processes, and removing structural costs through footprint rationalization. Overall, we are making good progress. Today, we've reduced our footprint by five versus the December 2017 investor day projection of five to seven. and expect to spend approximately 90% of the incremental $300 million in modernization capex by the end of this fiscal year. This will complete the $300 million of incremental capital spend required for our simplification modernization program, except for approximately 10%, which we expect will be needed to add capacity once markets recover. It's important to note that much of the productivity improvements from the modernization capital are still to come, As we've discussed, the plant closures would happen toward the end of our simplification modernization program, and we are on track with that. The productivity of the modernized processes that enable consolidation of entire plants into a smaller footprint are significant. And these benefits of modernization are still ahead of us as we bring the new processes online and complete the transfer of products throughout fiscal year 20 and 21. So in summary, I remain confident that we will deliver the savings needed to achieve our adjusted EBITDA target of 24 to 26% once our sales are within the $2.5 to $2.6 billion range. Before I turn the call over to Damon, I'd like to discuss the executive changes announced last week. Ron Port, who is currently leading our infrastructure business segment, has moved into the newly created role of Chief Commercial Officer for our metal cutting businesses. In this new role, Ron will drive best practices across our metal cutting segments to improve sales and marketing effectiveness and accelerate growth with target customers by leveraging the company's full metal cutting portfolio. Franklin Cardenas is joining our team as of February 10th and will lead the infrastructure business segment. He comes to us from Donaldson Company, where he held various business and general management positions with responsibility for commercial and operations. He was most recently VP of Asia Pacific. Welcome, Franklin, to the Continental team. And with that, I'll turn it over to Damon.

Thank you, Chris, and good morning, everyone. I will begin on slide five with a review of our operating results on both a reported and adjusted basis. As Chris mentioned, demand trends deteriorated more significantly than previously expected across our end markets. These trends were magnified by recent headwinds in the aerospace and market following changes to 737 mass production. This resulted in sales declining 14% year-over-year or negative 12% on an organic basis to $505 million. Foreign currency had a negative effect of 1%, as well as a divestiture that contributed another negative 1%. Adjusted gross profit margin of 26.8%, was down 710 basis points year over year. The year over year performance was largely a result of the effect of lower volumes and higher priced inventories still working its way through the P&L. The negative effect of raw materials this quarter was roughly 130 basis points, down from 360 basis points in the first quarter. The effect of higher priced inventory will reverse in the second half of the year and be roughly neutral for the full year. Adjusted operating expenses were down 6% year over year and represented 21.3% of sales, an improvement of 70 basis points sequentially. Taken together, adjusted operating margin was 4.8%, down 900 basis points year over year against tough margin comparisons. Reported loss per share was $0.07 versus positive EPS of $0.66 in the prior year period. There are some one-time items in the reported loss per share this quarter that I'd like to highlight. First, discrete tax benefits accounted for 18 cents due primarily to transition provisions of Swiss tax reform. Despite this change, we do not expect a material change on our long-term adjusted tax rate. Second, we recorded pre-tax non-cash video intangible asset impairment charges of $15 million this quarter. as the result of deteriorating market conditions, primarily in general engineering and transportation applications in India and China, in addition to overall global weakness in the manufacturing sector. The after-tax effect on EPS was negligible. This action does not change our view of Vidya, but is simply reflective of the current weak macro environment. Third, we completed the divestiture of a non-core specialty alloy business and infrastructure for $24 million in cash proceeds as part of simplification modernization, which amounted to $0.03 per share. On an adjusted basis, EPS was $0.17 per share versus $0.71 per share in the previous year. The main drivers for our adjusted EPS performance are highlighted on slide 6. The effect of operations this quarter amounted to negative 62 cents. The largest factor contributing to the 62 cents was the effect of significantly lower volumes. Also reflected within the operations category is the temporary effects of higher raw material costs of approximately seven cents. This is down from negative 19 cents last quarter and expected to reverse in the second half such that it will be roughly neutral for the full year. Another factor was the temporary manufacturing inefficiencies related to our plant closures. Although improving, these headwinds continued as expected this quarter. We expect this to diminish as we proceed through the year. Simplification modernization contributed $0.10 in the quarter, up from $0.07 last quarter, $0.03 of which is from restructuring actions. As Chris mentioned, we expect these benefits to increase as we progress through the second half of the fiscal year. Slide seven through nine provide detail on the performance of our segments this quarter. Industrial sales in Q2 declined 11% organically on top of 3% growth in Q2 of the prior year. From a regional standpoint, the largest decline was anemia at negative 14% followed by the Americas and Asia Pacific down 10% and 4% respectively. From an end market perspective, the weakness in demand remains broad-based, with the biggest challenges in transportation and general engineering down 13% and 10% respectively. This was primarily driven by decelerating global manufacturing and auto production activity, as well as extended holiday plant shutdowns by customers. Sales in the aerospace and market fell short of expectations, affected by the ongoing developments surrounding the 737 MAX and the corresponding effects to the supply chain. Adjusted operating margins came in at 10.7% compared to 18.6% in the prior year. The decrease was primarily driven by the decline in volume. The effects of higher raw material costs represented approximately 70 basis points of the year-over-year decline. However, on a sequential basis, the adjusted operating margin increased approximately 90 basis points on roughly flat sales. Turning to slide eight for video. Sales declined 8% organically against a positive 4% in the prior year period. Vidya faced similar macro challenges as the industrial segment during the quarter. Regionally, both EMEA and the Americas were down 6% year over year, but the largest decline this quarter was in Asia-Pacific, down 17%. It should be noted that the decline in Asia-Pacific was due primarily to the significant slowdown in India, specifically in the transportation sector. That slowdown is also affecting the general engineering and market as well. Adjusted operating margin for the quarter was a loss of 2.4%. Similar to the other business segments, higher raw material costs affected Vidya's operating margin by approximately 230 basis points this quarter, down from 430 basis points last quarter, and those headwinds will reverse in the second half. During the infrastructure on slide 9, Organic sales declined 14% against the positive 4% in the prior year period. Regionally, sales were up 2% in EMEA, while Asia-Pacific and the Americas were down 5% and 22% respectively. By end market, these results were primarily driven by energy, which was down 33% year-over-year, reflecting significant declines in the U.S. land-only rig count. General Engineering and Earthworks were down 6% and 3% respectively. Infrastructure recorded an operating margin loss of 1.8% this quarter compared to a profit of 9.6% in the prior year period. Remember, infrastructure is significantly more sensitive to changes in raw material costs in two ways. First, raw materials are a larger percentage of infrastructure's cost of goods sold. Second, certain customer prices adjust based on spot market prices of materials and create a temporary timing difference, further affecting operating margins. Those higher raw material costs affected margins by approximately 180 basis points year-over-year. Again, this was down sequentially from 660 basis points last quarter and will reverse such that we expect to see an improvement in infrastructure's profitability in the second half. Furthermore, as part of the simplification modernization initiative, we expect to see additional benefits in infrastructure margins following the recent closure of our Irwin, Pennsylvania facility, as well as the divestiture of our Newcastle business. Now, turning to slide 10 to review our balance sheet and cash flow. Primary working capital decreased both sequentially and year-over-year to $660 million. On a percentage of sales basis, our primary working capital was 32.7%. This slight increase year over year is the result of more modest inventory reductions compared to the sales decline in the quarter. Net capital expenditures increased to 75 million compared to 43 million in the prior year period. As Chris mentioned, our simplification modernization spending and results are on track. Our second quarter free operating cash flow was negative 15 million consistent with normal seasonal patterns. This represents a year over year decline of 24 million on increased net capital expenditures of $32 million and increased cash restructuring costs. In the context of our updated outlook, we expect our free operating cash flow to improve in the second half, resulting in roughly break-even free cash flow for the full year. Our cash balance remains strong, ending the quarter at $105 million, and we remain well-positioned with our debt and overfunded U.S. pension plans. We had no borrowings on our $700 million revolver at quarter end and have no significant debt maturities until February 2022. Dividends were approximately flat year over year at $17 million, and we remain committed to our dividend program. Overall, I'm confident in the strength of our balance sheet. Our cash position and unutilized revolver, coupled with our cash flow generation, allows us to drive forward with our simplification modernization initiatives, which will improve our financial performance and cash flows throughout the economic cycle. The full balance sheet can be found on slide 15 in the appendix. Turn to slide 11 for our fiscal year 20 outlook. Our updated outlook reflects the change in several factors since our last call, many of which Chris mentioned. First, we are now assuming further end-market deterioration in the second half. Secondly, our outlook encompasses the recent developments of the 737 MAX and the related effect on the supply chain. Also, the U.S. land-only rig count has declined more rapidly than expected, and the projections have been reduced, affecting the results across all business segments. Together, these headwinds are expected to steer our second half revenues off the course of normal seasonality, which is what we had assumed in our prior outlook. Our revised organic outlook is now in the range of negative 12 to negative 9%, down from negative 9 to negative 5%. Our adjusted effective tax rate is expected to increase to be in the range of 25 to 28%. Increase in our adjusted effective tax rate is a result of lower taxable earnings and geographic mix. There are two additional points related to this that I'd like to highlight. First, the current outlook is reflective of lower taxable earnings and we would expect a more normalized adjusted effective tax rate in the low 20s as profitability improves. Second, the change in this rate is not expected to have a material effect on the amount of cash taxes paid in fiscal year 20. In fiscal year 19, we paid approximately 50 million in cash taxes and expect to pay a modestly lower amount in fiscal year 20. Given these changes, we are updating the adjusted EPS outlook to $1.20 to $1.50. Moving on to pre-operating cash flow. As Chris mentioned, we are proceeding with our simplification modernization plans and maintaining our prior capital spending forecast of $240 to $260 million. Our updated outlook assumes pre-operating cash flow to be roughly break-even for the year, reflective of our lower earnings expectations. Remember, this reflects current weak demand environment, but it's also inclusive of CapEx that is $120 to $140 million higher than historical levels and significant cash restructuring charges. Our expectation is that cash flow conversion will be 100% once we are through the simplification and modernization initiatives. And with that, I'll turn the call back over to Chris.

Thank you, Damon. Turning to slide 12, let me take a few minutes to summarize the quarter. and the fiscal year 20 outlook. As we discussed already, the slowdown across our end markets and recent developments in aerospace have affected our quarterly results and were not anticipated in our prior outlook. Nevertheless, we continue to focus on what we can control and expect profitability to improve in the second half, driven by the progress we're making in simplification modernization and the improvement in raw material costs. With continuing focus on strong execution combined with our emphasis on improving customer service, I remain confident in achieving our adjusted EBITDA target when sales reach the range of $2.5 to $2.6 billion. And with that, operator, let's open it up for questions.

Thank you. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. The first question today comes from Steven Volkman with Jefferies. Please go ahead.

Hey, good morning, guys.

Good morning, Steven.

Maybe, Chris, can I go back to something you said, I think, in your opening comments about how your incremental margins would be sort of well-positioned when things started to get better? And I guess I've been surprised at how large the decrementals have been, even adding back the raw materials. So, I don't know if there's a way for you to maybe put some brackets around what you would expect for incremental margins. When things actually turn up, that would be helpful.

Yeah, let me just say on the decremental margins, as we sort of do the math and we back out the effects of the material costs, and all the segments, we're not surprised, and they basically are falling in line with what we've talked about. Now, they are a little bit elevated as we've talked about because we have these sort of manufacturing efficiencies associated with the plant closures and those type of things. But when you peel that stuff away, which I think is your question, sort of longer term when those things go away, we think the decremental margins are sort of in line with our expectations. I think the other thing to look forward to is, you know, where are we really at with simplification and modernization? And as I said earlier, We feel good that we're on track to hit those targets once the volume recovers. You know, we've made good progress. We've got about $69 million of savings to date. We've talked about the restructuring actions in FY20 and FY21, which are a subset of modernization. And the way modernization was done, Steve, as you know, is a lot of the heavy lifting was associated with plant closures, which are now starting to happen. And we're transferring product from the closed facilities to the lower-cost facilities, and that process is ongoing right now. So this notion of a ramp-up starting in the second half of FY20 for simplification monetization benefits and then also more benefits to come in 21, so that all equals that we feel like we're on track, just waiting for the volume to come back.

Okay, that's helpful. And then maybe switching just a little bit, is it possible to put, maybe, Damon, in question, any numbers around the max? I mean, how much is your exposure to the max? And, you know, how much do you think that was actually, you know, a factor in the guide down in the second half?

Yes. I guess we're not going to go into specifics on any given customer. I will tell you, though, that we did sort of – it was an impact on the overall change in our outlook, given what we expected to be on the overall supply chain in the second half of the year.

Peter, if I could just add to that. It was – as Damon said, there was an impact on the full year and also the second quarter. But, you know, part of our strategy has been to grow in aerospace. And, you know, it's a big market, including all the sub-tier suppliers beyond the 737 MAXs. And I think we've been very successful since the start of FY18 to redirect our engineering resources that have been, you know, really servicing the transportation industry quite well. We redirected a lot of those resources to Aero, and we feel like given the number of new customers we've added and across the board, across the supply chain, whether it be Tier 1, Tier 2, and actually with the direct OEMs, that we are gaining market share in this space and feel pretty good about being able to grow in Aero. So I just wanted to add that.

Okay, thanks. I'll pass it on.

The next question comes from Annie Goonan with J.P. Morgan. Please go ahead. Oh, my God.

This is Ann Duggan. I have no idea what name that was. Let me just ask you along those lines. You talked about gaining share in aerospace, but... Have you been losing market share anywhere regionally or by segment as you go through all of this simplification and, you know, just the disruption that it's having to your businesses?

We don't believe so. You know, where you're at in terms of market share at any given point is a challenge to measure. But when we look at, for example, our competitors where we have publicly available data, sort of like with Sandvik, if we look at their performance Their drop in revenue over the last two years, it's very consistent with where we are. And then the only area I would say that we actually have lost share would be in transportation, but as we talked about, Ann, that was by design. There's a lot of that business that wasn't very profitable for us, and we wanted to shift those resources to more profitable segments. So when we look at the data and peel back the onion, we don't believe we're losing share at all. our volumes have come down commensurate with our competitors, and also where we are actually keeping track of new customers we're adding in the segments that we're targeting, sort of general engineering and aero, just based on the fact we're adding new customers and not losing business with the existing ones, that gives us confidence that we're gaining share.

Yeah, I would suggest that maybe going forward, Sandvik is not the only competitor. There may be new competitors out there, but I can take that offline. My follow-up question is really, I may have asked this before, but on infrastructure, how did you end up in a situation whereby you are repricing based on spot prices? I mean, generally, even in automotive, you may be repricing to spot, but with a lag, given that everybody understands you have inventory. So I'm just curious how your business ended up in a situation where you're giving up pricing, coincident with raw material changes.

Yeah, I think, Anne, you're honing in on one part of our business in infrastructure. I think we have our traditional business, which we price for the value of the products that we're selling. and wear components and other parts. We do have an index-based pricing for some of our oil and gas customers, and that does lag. It depends on the individual customers. I think the specific point you are referencing is our powder business. We do sell powders into the marketplace, and, again, that piece is adjusted based on current market prices, and so we do deal with our inventory cost versus with a spot price, but it's only a subset of our overall infrastructure business.

Okay. Thank you. I appreciate the color. I'll get back in line.

The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Thanks. Good morning, everyone.

Good morning, Joe.

Just a few clarifying questions. I think the first one on just the max, are you guys assuming a, you know, zero in revenue in your fiscal second half?

Our assumption in the second half is that the production is not going to come back online. I guess that's the simplest way to say it.

Okay. All right. So production not coming back online and, you know, having a full impact on your revenue base, or is there still some potential incremental revenue coming from the max in the second half?

Yeah, I think that, you know, given all the uncertainties and the pluses and minuses in this current macro environment, I think that any potential upside that there might be for the Mac starting up, which, by the way, it's difficult to sort of figure out when does that start to translate in people starting to cut more chips and ultimately buying consumable tools from us. So that's a difficult thing to predict. But I would be cautious about looking for sort of positives in one area given all the uncertainties. So we've tried to do the best we can in terms of our outlook for the second half of factoring all these variables in. And so, you know, that would be my guidance to you is if you find, if you cherry pick some positive potentials, in this environment there could easily be some offsets. So we've tried to take a balanced view on our current outlook.

Okay. No, that's fair, Chris. And I guess as I kind of think about the puts and takes of, like, the midpoint of your second half guide versus what, you know, transpired in the first half, clearly you guys have called out the raw material headwinds abating. So that's roughly, you know, 26 cents. You've got incremental simplification modernization benefits, which I have kind of in that, like, you know, call it five to seven cent type range, I guess. Given that the backdrop is still expected to be pretty muted in the second half, I guess how am I bridging then to the, call it, 70-plus cents that is necessary to get to better second-half profitability versus the first half?

Yeah, let me kind of walk you through the way I'm thinking about it. If you look at our EPS guidance range, it implies 86 cents incremental improvement to $1.16. increment improvement in the second half. So if you start with the $0.34 that we've got so far for the first half, you're correct on the raw material. That's a $0.26 subject. I would say that the increased simplification and modernization benefits, we said they were going to be modestly greater than last year, which was $40 million. So I would say to you that's more like an $0.11 to $0.15 EPS subject. And then we also have the higher volumes, and our volume range applies. It's either flat to up maybe 28 cents that could be driven by volume. And then we've got a number of initiatives that I would call in the category of cost control. For example, we were taking salary furloughs in the U.S. and doing something similar in Europe where we can. That's driving additional benefits. Also recognize that some of those manufacturing efficiencies associated with plant closures, those are abating or decreasing in the second half. And then there's, you know, a bunch of pluses and minuses that will help offset potentially higher taxes and those type of things. But those cost control actions, sort of net benefit, that could be, you know, a 15-cent subject. So that's basically how we get there.

Got it. Very helpful. Thank you.

The next question comes from Julian Mitchell with Barclays. Please go ahead.

Thanks. Good morning. Morning, Julian. Morning. Maybe a first question around sort of inventory levels. I guess, you know, in terms of how you assess inventories at your channel partners and customers right now, what sort of destocking, if any, you're assuming happens in the second fiscal half? And also at your own inventories, I think they move down sequentially a fair amount. Do you see any need for underproduction in the second half in your own plant to get inventories out, or you think those are at a reasonable level?

Let me start with sort of the external view. You know, we saw additional desocking from our customers in Q2, and frankly, Julian, we expect our customers are going to remain vigilant, even though there's some positive indicators in the U.S. recently where maybe things are picking up. But I My sense in talking to customers is they're going to remain vigilant, and that's going to continue through the balance of the year. And I would also say that, you know, basically the customer behavior is pretty consistent with what we've seen in previous downturns. In terms of our internal inventory, we did see a nice decline from the first quarter to the second quarter. I'll let Damon sort of comment on how we're loading the plants from that point forward.

Yeah, Julian, I think as you allude to, we did make improvement in the first quarter to the second quarter. I think as we look at the back half of the year, we tried to right-size the production based on the outlook. But as we've said in the past, we're going to be very fluid or flexible based on market demands here. We don't want to compromise customer service. I think as we look at the balance of the year, I think what you'll see is a more modest reduction in inventory in the back half of the year versus what you saw here in the first half.

Thank you very much. And then my second question, just around the manufacturing inefficiencies aspect. Realized that they shrink in the second half versus the first half, but wondered if there was any way to frame at all their magnitude in the first half. For example, how much smaller were they relative to that raw material cost headwind, for example? Is there any help you could give us sizing the inefficiency?

Yeah, we really haven't sort of given that detailed information out, and I just assume not do that, Julian. I understand it would be helpful for you, but I think that's a little too much detail than I'd like to present in this format.

Fair enough. I guess I'm trying to think about, you know, once your sales return to growth, do you get some kind of, catch-up impact against those inefficiencies? Or do you think that you run the risk that, you know, once sales recover, there's some inefficiencies because you're juggling recovering volumes with modernization?

I'm glad you asked the follow-up question. Now I understand where you're sort of heading. Look, I think the way to think about the inefficiencies is they are temporary and it's very operational when you're shutting plants down and moving equipment. And A lot of the plant closures that we that we just did in the in the in the second quarter, I think a lot of that disruption will be sort of will sort of be done and behind us by the time we start FY21. However, there is, you know, the the estin operation is significantly downsized and, and there is product is moving to low cost countries and that will that will be sort of part of the FY21 restructuring and that's going to continue through through next year. So they are going to significantly come down, but there'll still be some in FY21. I think the way to think about it is as volume increases, you know, I don't think it's going to be that much more disruptive, although I guess potentially it could be. But I largely think that the bulk of them will be gone by the end of FY20, and some will still be there sort of through the first half of FY21. Even if volume comes back, I don't think that pattern is going to change too much.

That's great. Thank you for the color.

The next question comes from Adam Ullman with Cleveland Research. Please go ahead.

Hi, guys. Good morning. Good morning, Adam. At the beginning of the call, you mentioned again, and it's been asked a little bit around this, but about the need and the desire to add back capacity as demand comes back and And I guess I'm just wondering how we should be thinking about the magnitude of those costs as revenues come back to your targeted range. Is this a relatively modest and minor amount of costs, or is this something we should be thinking is more significant?

Yeah, the comments around adding capacity were relative to the capex. So if you go all the way back to our investor day, incremental CapEx spending for modernization and simplification was $300 million. We will have spent 90% of that by the end of FY20. And what's the balance is just adding more capacity to modernized processes. So, for example, if in some plants we went from 16 presses with 16 operators down to four presses with one operator, at some point, the volume is such that you're going to need to add a fifth press, for example, or a sixth press. So I wouldn't look at these as higher costs or expenses as volume comes up. We were just simply commenting on the CapEx that we may need to add a few more presses. They'd be modernized presses with a better productivity associated with modernization.

Gotcha. Okay, that's helpful. Thanks. And then can we review the cash flow outlook again for the second half, the key drivers to working capital coming back. And I think you mentioned that, you know, we'll get back to 100% conversion of net income. That's a next year long-term comment, right?

That's right. Yeah, so I think, I mean, Damian, you can add some color here, but the big positives from the first half to the second half, because we're forecasting to break even for the year, is we are going to see a significant increase uh, advantage from the EBIT improvement in the second half. CapEx is, uh, also coming down first half to second half substantially. And then, uh, you know, the way the normal cash outlays go for the company in terms of when we pay bonuses and those things, that was, that was front end loaded. So those three things are, um, are going to drive an improvement. However, we also have higher restructuring charges and, um, working capital will be a bit of a tailwind for us in terms of the incremental improve we saw in the first half. So, you know, all those things equal, we get back to sort of this break-even cash point. Damon, would you like to add anything to that?

So I think, Adam, the only comment I would make is, as Chris alluded to, the positives on EBIT and capital. The working capital, which I think for the first half was calling around, I think, positive $60 million, we wouldn't expect that full amount to repeat. I think I said modest inventory reduction. So, you know, sequentially you'll see a little bit of a tailwind there, you know, and then coupled with the other positives Chris alluded to are what's driving sort of the net positive $60 for the back half.

Okay, gotcha. Thank you very much.

The next question comes from Joel Tiss with BMO Capital Markets.

Hey, guys. How's it going?

Good, Joel. How are you?

All right. Just a little more color on some of the end markets. Can you just run through a couple where you feel like the worst is behind you and a couple other ones just to highlight where you feel like, you know, maybe there's not going to be any improvement for the next – you know, a couple of months or quarters?

Yeah, I'd say, let me kind of talk about metal cutting first. You know, we're expecting to see continued softness in the second half. But, you know, all the regions are sort of forecasting year-over-year sales declines is certainly a possibility. And all the end markets, we're taking sort of a pessimistic look at this thing, and they're expected to be down. We talked about the aero softness for the 737 MAXX. But there are some regions, for example, on the Aero side in EMEA and Mexico where, you know, based on the things I talked about earlier, we're actually going to grow those spaces. China, I would have said, was – China had sort of appeared to be stable with maybe some signs of recovery until we got the coronavirus. So, you know, Joe, your guess as good as mine is how long – how that's going to play out. But that would have been one area, if it had not been for the coronavirus, that I would have thought we would start to see some encouraging signs. On the infrastructure side, sort of general engineering and energy, we did see a more significant decline than we thought from 2.2 to 2.3. And we're sort of looking, we're sort of taking the view that it's probably not going to get too much worse than that going through the rest of the year. And then our earthworks, we feel like that's pretty stable, and that will actually probably follow its normal seasonal trend.

Okay, that's great. And then, you know, can you just talk, like, take a step back? A lot of what you guys are talking about is a little bit defensive. And can you talk a little bit about some of the initiatives you have internally, like more offensive, you know, like you highlighted a little bit, switching transportation to more aerospace. Can you just talk a little bit about some of the offensive, you know, initiatives you guys have internally to drive forward, maybe longer term also?

Sure, I'd be happy to. You know, we continue, obviously, to invest in research and development. And in the last few calls, we've actually showed you some of the technology. And that technology is largely focused on aerospace, of course, but also the general engineering space. And Kenna Metal, as a company, has been very, I think they've been very focused on transportation. General engineering, which is an enormous business segment, they hadn't really even gone down and segmented the market in large detail. And we've now done that, and we feel we know exactly where we have the right product portfolio to penetrate that market, especially in the U.S. And we've set ourselves and organized ourselves to go and focus on that. You know, one of the things that we talked about in our announcement on the executive changes that I made with Ron Port taking over as the head of commercial for the metal cutting segments, is Ron is going to really be driving best practices across commercial operations. You know, as I said before, we see the investment in commercial operations as just that, an investment, not necessarily an expense, but we look at it just like it's a capital investment. And as such, we're really focused on improving its productivity and the efficacy of that whole sales process. And the fact of the matter is that there's common best practices and tools that we've talked about before, such as CRM, but there's a whole digital customer experience platform that we're investing in that we think can be leveraged across those segments and get us better connected to our customers. The other thing that we're doing as part of general engineering is now that we've segmented that market, We understand that there are customers that have sort of, I would say, high-end performance needs that are well-suited for the Kenna Metal portfolio of tooling, which is largely sold through the industrial segment. But there's also this performance value customer that they don't need something that's quite so top-end, but they're looking for a broader portfolio that's sort of well-suited for the broad spectrum of work they do, and that's the video portfolio. But, frankly, we've got Ron now – looking after commercial and trying to tie the commercial process together because there's customers that want to actually benefit from the kind of metal tooling portfolio as well as the video portfolio. And we want to make sure that we're getting out of our own way in terms of allowing them to leverage that full capability. So those kind of things give us encouragement that we're going to be able to drive growth in general engineering. It's a technology play, and it's also getting yourself organized to understand the different customer needs and setting yourself up to deliver that value. And on the aerospace side, it's all about focus. We've got the reputation as a tooling supplier to know that they have with the technology. We just never really focused it on in a disciplined way as a company. So we feel very good about those things. And I appreciate the question, Joel, and the opportunity to talk a little bit about the stuff that's fun. Thank you.

All right. Thank you.

The next question comes from Ross Gilardi with Bank of America.

Hey, good morning, guys. I just want to ask you about the dividend. I know you say you're committed to it and you seem to have plenty of liquidity with the revolver and whatnot, but You know, just to run through some of the numbers so I understand, I mean, you've got $105 million in cash on the balance sheet. The dividend is, I think, $65 to $70 million annual need. And I imagine you want to sustain that cash cushion on your balance sheet in the event that, you know, we actually did go into a deeper downturn or you need to do some additional restructuring. And you've got a sizable maturity coming up in two years. So, Honestly, why is sustaining the dividend even the right thing to do, given that your business might require additional investment for either automation or additional restructuring or any other number of things, and you're not generating free cash flow right now?

I guess, Ross, what I would tell you is we're spending $250 million on capital this year, which is the most this company has spent. to come down next year significantly. We're generating $60 million of cash in the back half of the year. We started with surplus cash on the balance sheet And when I look at the balance sheet, we are investment-grade rating by all three agencies, none of which have expressed any risk or any concern. I don't see any need to cut the dividend due to an economic downturn right now, which we expect will turn. When you look at prior recessions or prior downturns, these do turn. So I don't see any need to do anything like that. given where we sit. And again, to the extent this is prolonged, there's $700 million of a revolver undrawn that we have at our access at any given moment. So for us, as we said on the call, the balance sheet is strong. We're committed to the dividend. When we look at the restructuring that's baked into the pre-operating cash flow that we've already given you, we said that will be less than FY21. So there's no You know, that's not really a discussion internally with us right now to even consider that.

Just on that, though, Damon, and the CapEx, I mean, you know, you guys have been very clear that you expected to drop off significantly next year. I understand that. But your margins are still, I think, half of, you know, your competitors who seem to be running a lot more efficiently and not having the issues you're having right now. You know, how comfortable are you just going back to spending maintenance CapEx when your competitors seem to be, if anything, extending their competitive advantage are investing, you know, pretty robustly, spending more on R&D. You know, why is $300 million the be-all, end-all? I mean, you came up with that number three or four years ago, and why won't this business continue to require heavier levels of CapEx to restore margins really to where they should be and be more comparable to your global competitors?

Well, Ross, there's obviously a mix. And we've said from the beginning, the 25% long-term margins are to get us to what we think is competitive. When you look at us versus others, there's portfolio differences. There's economies of scale with how they run their factories or the size of the factories they have. The $300 million is what we believe we need to modernize our factories. We'll continue, as I said, from a capital allocation standpoint. Longer term, we'll continue to look at further investment, but those investments have got to have their own standalone returns. So as we think about more smarter factories or further automation, those are going to have to have returns that are incremental or justifiable on a standalone basis as we think about that future capital. But as we sit today, again, looking at what we're able to achieve, and you've seen some of the examples of what we've been able to achieve in areas like Rogers, what we're doing with some of our other industrial factories, we feel very good about where we're heading.

Is your footprint rationalization? I realize you're moving stuff into your lower production, your lower cost facilities, but Is it done at this point? I mean, do you need to close additional factories? You have the chart on where you were and where you are now, but, you know, is there a chance you've got to do additional factory closures and spend more on cash restructuring than you anticipate right now? I mean, you guys had to cut the outlook twice pretty hard in the last, you know, four months. You don't have a lot of visibility on when demand is going to turn, so I'm just a little bit confused on what gives you the confidence that the cash restructuring charges to turn this business around are really kind of all accounted for at this point.

Ross, as we said in our opening comments, there are additional plant closures that are under review. And our perspective on that right now is they're already captured inside the FY20 and FY21 restructurings, which we published. Now, beyond FY21, you know, As far as I'm concerned, and as long as I'm the CEO here, this company is never going to get itself in a situation where they don't look at – they don't keep their manufacturing operations modernized. And we're always going to be looking for opportunities to footprint rationalize if it makes sense. And as Damon said, if there's investments that need to be made, but that's in the mode of the ongoing business. You know, I looked at that. I looked at their maintenance capital before, kind of metal – You know, Candlemental was literally just that. They were just fixing things and not fundamentally improving it. So since we've now upgraded a lot of the equipment, we're not going to just be repairing it. These can be actually investments. We're going to keep it maintained, but the investments that we can make with this sort of maintenance capital, I feel, are actually going to have legitimate returns on investment, whereas before I think a lot of it was they were just keeping things sort of running, right? So there's opportunity inside that maintenance capital to continue to advance. But, look, I'm not projecting what's going to happen beyond the FY21 timeframe, but I can tell you in terms of our simplification modernization program, you know, we feel pretty good that the company is going to be positioned, like we said, when the volumes return. And as I said, in terms of restructuring charges next year, we feel like we've got the proper estimates there.

Okay, guys, thanks for taking my questions and addressing that. I appreciate it. Good luck. Thanks, Russ.

The next question comes from Walter Liptak with C4 Global.

Hi, thanks. Good morning, guys. I wanted to go back to, you know, you made a comment in the Q&A about how you're thinking about second half EPS versus first half. And, you know, just thinking about, you know, how you commented about the plant closure disruptions, you know, when you add up the buckets, it looks like, you know, we may be underestimating those plant closure disruptions. I wonder if you could just talk in a little bit more detail about, you know, the magnitude of those disruptions so that we understand. And then, too, it sounds like most of the closings that you had planned, especially out in Europe or in Germany, are done. And, you know, give us some assurance that, you know, those disruptions, you know, won't be there in your fiscal third quarter. Thanks.

Yeah, I think when I was doing the EPS bridge, I sort of had this category around 15 cents that are attributed to cost control actions, decreasing inefficiencies due to plant closures. So the inefficiencies from plant closures are certainly inside that 15-cent window. And I think just to give you direct guidance, I would say it's less than half of that potential improvement, just to give you some directional guidance. But the reality is once we get through the rest of this year, a good chunk of that disruption is going to go away, but especially from the FY20 restructuring actions, which was the closure of the plant in Germany that we announced and also the one in the U.S., But FY21, we have this S in facilities being downsized, and that's going to continue to, I think, have some disruptions at least through the first half of next year is kind of how I see it. And then I think also we've talked about additional plant closures, and by then we'll have some clarity around that. And while they're inside our current restructuring actions, that will be some other disruption that we haven't talked about. And for obvious reasons, we haven't. I'm not going to discuss those potential plant closures on a call like this, but just recognize that there are some additional things that we're working on along.

Okay, great. Okay, thank you.

The next question comes from Chris Stankert with Longbow Research.

Hey, morning, guys. I appreciate there's a lot of uncertainty around Asia and China specifically right now, but can you give us a little bit of a bracketing of what range of scenarios is kind of assumed in the revised guide as far as kind of how India and China could be down in the back half of the fiscal year here?

Yeah, in terms of India, we have, I think we've taken a view that things are not going to improve and potentially could get slightly worse. So if that's the case, then that gets us sort of towards the low end of our guidance. China, frankly, we had not, in our outlook, the potential effects of the coronavirus, we didn't factor that into our latest outlook. You know that that's a new situation, and it's certainly fluid. So we're working on trying to put brackets around that. But frankly, Chris, at this point, we don't have the number for ourselves yet. So that one is some uncertainty and is not contemplated in our current guidance.

Yeah, I think, Chris, one of the ways, one of the things we're challenged with right now is what's publicly available out in China, whether this is temporary and whether there is a snapback in the period of time that some of the cities are down, or is it going to be longer term, and what is the long-term ramifications, and that's what we're, as Chris said, it's a very fluid environment we're watching closely.

That's very helpful, guys. Thank you for the color there. And then, Jess, we focused a lot on headcount and footprint, but is there any additional skew rationalization or pricing for value changes left? Is there anything else that's beyond just process improvement?

Yeah, I want to talk a little bit about the simplification side. And as we've discussed in the past, a lot of that $69 million that we've got today is part of simplification where we've streamlined the portfolio and We're much more focused on value pricing, what we've got. So we're driving benefits from there. The other thing to recognize is, yeah, there's headcount reductions and there's footprint, which are sort of structural costs, but we're spending a lot of capex here to modernize processes, and not all those savings are mentioned inside these specific restructuring buckets. This is sort of the productivity you now get from the equipment that's installed as you drive higher volumes. So the headcount may not actually change all that much, but as you drive more capacity or more volume through the modernized processes, we're going to get a big boost in terms of leverage.

Yeah, thanks so much, guys.

The next question comes from Steve Barger with KeyBank. Please go ahead.

Hey, good morning, guys. Good morning. Chris, I want to go back to Joel's question. Kenna Metal's been talking about CRM and digital going back through multiple management teams. So can you just expand on what best practices means? And do you have to spend money on this, or is this just getting the sales force into a more disciplined process using what's already there?

Yeah, in terms of the CRM, there's not any additional investment there. It's just being more disciplined about it. And we've been working on it. And CRM is, you know, it's kind of like when I first got here, You know, CRM is – most companies have done this before. So Kenna Metal is a little bit behind in terms of driving best practices. We have made improvements. And so I think I just mentioned that as an example of a best practice that we want to make sure we're sharing and leveraging those learnings across the two segments. Because, you know, if you have two segments, it's not always natural that they're going to be leveraging those type of best practices. On the digital platform, you know, Kenna Metal – does have some excellent engineering tools, but I don't think that we've done, and in the past I don't think the company was focused on how do you really bring that to market and get paid for it and make sure that the customers are understanding it can derive value from it. And so that's one of the things that we are going to, that is going to require additional investment. We'll have to talk to you guys about that when it happens. And I think it's one of those things where, If the returns have to be justified, obviously, I don't see this as like the next modernization. It's not going to be that kind of a CapEx expenditure, but there will certainly be some investment that needs to happen there. And as Damon said, you know, once we get through this modernization process, we are generating a lot of cash, and these are the type of things that we want to invest in. You know, if I step back, Kenna Metal has been very much trying to fix the structural things And as we come out of simplification and modernization, we've got a lot of that fixed, and we can now devote our time to some of the things that are going to help us actually grow market share and grow this business. So we're shifting from fixing to now the growing mode. And I'm not afraid to make investments in, but as Damon said, we're happy to do that because they're going to drag through proper returns.

So just thinking about that sales conversion, for the competitive deals that you're not winning right now, what are the common threads? Are they around product or pricing? What do you have to overcome here to get back on the plus side on sales and market share?

Yeah, I think it's actually focus and the ability to target the customers and understand what value proposition you want to bring to them. For example, we have a product portfolio that's well-suited from the very high-end customers who want to have very specific cutting needs for very specific metals in certain applications to broad-based tooling. And not all customers can be treated equally. And so part of what we're trying to do here is make sure we're not trying to treat them equally and make sure that organization, we don't get in the way of bringing that particular value proposition to the right customer. So that's a best practice in terms of understanding your customer and approaching them in a way that's going to have the greatest value instead of treating all customers as equal. So that's one example of improvement. And, frankly, to do that, you need to have something more than just the general engineering bucket that you're just kind of focusing on. You've actually segmented that down into the various industries, what the customers actually need. So this sort of basic market segmentation, sort of the blocking and tackling that you guys – would think that any best-in-class company at commercial excellence does, that's the next opportunity for countermetals improvement, which is one of the reasons why I'm putting an executive in charge who knows a lot about it based on his past experience, but also, you know, my belief is that if you put an executive focus on these things, you're going to drive performance improvement in a faster way, which is why we made the change.

Got it. And just one last quick one for me. I'll try the future state incremental margin question again, just hoping for a more numerical answer. If you think forward to when modernization is largely done, if you're putting up mid-single-digit revenue growth in a stable raw material environment, what is the incremental that you would expect out of the platform?

Okay. I guess, Chris, it's going to depend on where it comes from. Obviously, with industrial, we lever at north of our average of 40%. And I think if you start to look at where industrial is leveraging, deleveraging with the current environment, excluding the raw materials, I would say the range on the upside is going to be similar to that.

Which I think you had said is mid-50s. Is that right?

We didn't give a specific number. I guess you can do the math on the industrial. We gave you the raw material component. You can sort of figure out directionally what that is.

All right. Thanks.

The next question comes from Andy Casey with Wells Fargo. Please go ahead.

Thanks a lot, and good morning. I'm not sure you addressed these, but within the negative development in the U.S. and Germany, what did you see with respect to distributor inventories destocked during the quarter?

Andy, we saw destocking in both places. It wasn't just limited to the U.S. and Germany. And as I said before, our view is the customers are taking a – a very conservative view of this. And until the demand signals are firm, I think they're going to continue to be cautious about how much inventory they hold.

Okay, thanks, Chris. And did that accelerate during this last quarter relative to the prior quarter?

Yeah, we saw the de-stocking start in Q1. I don't know that it necessarily accelerated. It continued. And as... I think what people are anticipating, for example, on the 737 MAX, there's a lot of uncertainty there. Even though the production hadn't halted yet, my feeling is that the customer behavior was that they were a little nervous about where that thing was heading and may have started to slow down even before the actual announcement.

Okay, thanks. And then a couple more questions. Inside the changed revenue mix, I mean, Kenna Metal's kind of been a little bit of a moving target over time. What sort of lag do you expect in your revenue trends relative to, you know, take the U.S. exposure relative to the ISM manufacturing index? Is it something like six months?

It's a good question. You know, we just saw some improvements in the January numbers in the U.S., And I'll just go back to something I said before. I'd be a little cautious about cherry-picking bits and pieces of data until it becomes more of a trend. But I would say in a normal environment where there hasn't been so much uncertainty, you might get a reasonably quick reaction to things improving. In this environment, I think the customers are going to just kind of wait and see if it really happens. And when they start to get the orders, that's when they're going to start to buy the inventory. You know, I don't know what the exact number is, but it wouldn't surprise me if the signal could lag. Based on all the uncertainty and the noise in the system, it could lag up to six months. But I don't really know that.

Okay. I mean, the gist of the question is, you know, I'm just wondering what you're extrapolating in your guide. It seems like a sub-50 environment. You're not expecting any – okay. And then on the – I mean, the decremental gross margin performance in the quarter, it was still pretty high. I know some questions have been asked about it, but can you help us with the impact of what you think the operational inefficiencies contribution to that was?

Yeah, the decrementals, we're not going to be able to give you the specifics, but the manufacturing inefficiencies were certainly a part of that. And all I can say is that once you eliminate the raw materials and we take out those manufacturing inefficiencies, we actually are seeing decrementals that are certainly in line with our expectations. Is there anything we can add to that, Damon?

Okay, thanks. Lastly, the operational inefficiencies have popped up in demand-accelerating environments now and demand-decelerating environments. And what – I understand the demand accelerating environments where you're carrying inventory to make sure you're servicing your customers. Is that the same thing that's going on in the decelerating environment? And if not, what are these inefficiencies?

So the decelerating environment has been very specific to the fact that we – our closing plants. And that wasn't really a function of a desalinary environment. That was just part of our program. So the inefficiencies that we're talking about now are really associated with plant closure and consolidation of facilities while you're trying to modernize. And we've talked about how you're holding a project team on each side. You've got to hold on to production workers while you're closing a plant, while you're hiring them on the other side. So that's really not necessarily a demand reduction phenomenon. That's more self-imposed based on modernization. Now, the good news is about modernization is, you know, if you look at how the company behaved historically, they had to hang on to all those production workers because they were hugely dependent on them. It's not trivial to train these folks. And if they did mass layoffs, they would be caught flat-footed when volume came back. So once we've modernized, we're less dependent on labor, we should be in a better position to sort of react to that. and also preserve cash in the down cycle because we're not hanging down as many salary people. And so we feel good that the company is just going to operate better through the cycle. Now, if you remember the decremental or the inefficiencies we saw when volume came back after the company had done its Project W and began to downsize the whole company, at that point we hadn't modernized really anything. And when volume came back, we had to – we used a lot of temporary workers because, Andy, we didn't want to hire people when we knew that potentially they're going to have to be laid off again. So, again, the company, once you're modernized and volume comes back, we're less dependent on people, and we should be able to ramp up in a more efficient way.

Okay. Thank you very much.

Okay. Thanks, everyone, for –

This concludes our question and answer session. I would now like to turn the conference back to Chris Rossi for any closing remarks.

I'm glad I waited for the operator to tell me that. Thanks, everyone, for being on the call today. We certainly appreciate your interest. Thanks for the questions. If you have anything to follow up on, please contact Kelly. Thanks very much.

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