Q2 2020 Altra Industrial Motion Corp Earnings Call
Despite the today's conference is being recorded.
Require any brothers. Please press star zero I'd now like to hit the comps over to your speaker today, David Calusdian, Some Sharon Merrill Sharon Merrill.
Please go ahead.
Thank you good morning, everyone and welcome to the call.
Let me follow management discussion on this call I'll be referring to slide that are posted on the ultra motion Dot com website under events and presentations in the Investor Relations section.
Please turn to slide three.
During the call management will be making forward looking statements as defined in the private Securities Litigation Reform Act of 1995 forward looking statements are inherently uncertain and investors must recognize that events could differ significantly from management's expectations. Please refer to the risks uncertainties and other factors described.
The company's quarterly reports on form 10-Q, an annual report on form 10-K, and then the company's other filings with the U.S. Securities and Exchange Commission.
That's required by applicable law alter industrial motion Uncork does not intend to update or alter its forward looking statements, whether as a result, new information future events or otherwise.
On today's call management will refer to non-GAAP diluted earnings per share non-GAAP income from operations.
GAAP net income non-GAAP adjusted EBITDA non-GAAP operating income margin.
Adjusted EBITDA margin non-GAAP organic sales non-GAAP gross margin non-GAAP operating working capital.
Net debt net debt.
Cash flow and non-GAAP adjusted free cash flow.
Metrics exclude certain items discussed in our slide presentation.
Press release under the heading discussion non-GAAP financial measures and any other items that management believes should be excluded when reviewing continuing operations. The reconciliations of Altrus non-GAAP measures that comparable GAAP measures are available in the financial tables. The Q2 2020 financial results press release Ultras website.
Please turn to slide four.
With me today, our Chief Executive Officer, Carl Christenson, and Chief Financial Officer, Christian Storch, I'll now turn the call over to call.
Thank you David Thank you all for joining us today.
Please turn to slide five.
Ultra second quarter execution was outstanding as we exceeded our expectations for revenue profitability and cash generation.
Emmons trading the resilience of our business model and our ability to perform well in a downturn.
Although the headwinds and uncertainty caused by the cold that 19 pandemic continue to persist we've been encouraged by a few key factors that are playing out.
First similar to 2009 or cash generative business model is proving to be resilient in the face of adversity.
Second we have benefited from abroad and Mark.
Which is further enhanced as a result of the ANS merger.
The merger expanded our exposure to several end markets that we believed to be less cyclical and have better secular trends in some of our legacy P.T. PTT businesses.
Third several of the end markets that we serve are seeing stronger than expected demand.
And finally offers value proposition continues to resonate deeply with our customer base as we are outperforming the competition in several key verticals, including factory automation.
As we navigate through the near term challenges presented by the pandemic and focus on continuously delivering on our customers' needs. We remain steadfast on advancing our strategic priorities to deliver sustainable value over the long term.
These include leveraging the strength of ultra as a premier industrial company focusing on margin enhancement.
Delevering, our balance sheet and positioning ultra to drive topline growth.
Please turn to slide six.
[noise] Christian will cover the results for the quarter in more detail in a few moments, but I would like to start by making three key point as it relates to our second quarter financial performance.
First we exceeded our expectations on the top line with sales of $400.8 million compared with $466.5 million a year ago.
This strong performance was due largely to our ability to capitalize on outperformance in certain markets.
Notably the class eight truck and wind energy markets in China, as well as a somewhat better than anticipated overall demand during a tough macroeconomic environment.
Second our aggressive actions to reduce cost led to excellent bottom line performance.
This included net income of $21.7 million for 34 cents per diluted share and non-GAAP earnings per share of 60 cents.
Notably despite the year over year decline in sales adjusted EBITDA margin was up 170 basis points to 22.2%.
And third we had tremendous cash flow generation, which allowed us to repay 100% of the revolver that we drew down in Q1 as well as an additional $24 million of the term loan debt in the second quarter.
Paying down debt remains a top priority for ultra.
Please turn to slide seven.
Ultra continues to manage through the current realities presented by the coal Cobot 19 pandemic would be guiding principle of safeguarding our employees customers and shareholders.
I'm very proud of our team's relentless focus on keeping fellow employees healthy, but vigilantly maintaining safety protocols well at the same time sustaining business continuity remaining diligent and delivering cost savings and positioning ultra for success in the post pandemic world.
I would like to take a closer look at progress we made in the quarter across these four areas.
Starting with our efforts to safeguard or employees.
At the onset of the pandemic, we quickly put practices in place to ensure the safety of our employees.
To protect onsite personnel, we have continued to fall social distancing protocols and other safety best practices, including providing pp conducting temperature checks limiting visitors and implementing frequent deep cleanings and sanitization.
A substantial portion of our global associates, who are able to work remotely continued to do so.
And the level of productivity from our teams as remain extraordinarily high.
We also continue to restrict nonessential company travel and expect to continue to do so for the foreseeable future.
Moving on to actions, we've taken to ensure business continuity as we move through the second quarter in many markets and businesses begin to reopen the ultra team did an incredible job of implementing systematic processes to ensure we were minimizing disruptions in optimizing opportunities.
Our supply chain teams have continued to take proactive measures to maintain a supply materials and components with minimal interruptions to meet customer demand across all industries, including the many essential businesses we serve.
We've also successfully brought nearly all of our manufacturing facilities that were shut down in Q1 back online.
Our teams have adapted to the new social distance set ups and the vast majority of ultra is 53 global manufacturing facilities are operating at a level required to meet customer demand.
Operations teams are doing a tremendous job ramping up in areas, where demand has been unexpectedly strong such as end and engine braking systems in China and components for respirators and ventilators.
They've also done an incredible job managing costs were end market demand dropped precipitously, such as component for oil and gas equipment and turf and garden equipment.
Now moving on to focus on managing costs.
The entire organization continues to take aggressive actions to reduce costs in order to protect our balance sheet and strengthen our financial flexibility in the current environment.
We implemented furloughs suspended merit increases rollback executive wage increases reduced discretionary spending and service provider expenses suspended all non essential travel and implemented a weekly check Brook approach for all expenses.
Some of these actions were started in Q2 and have continued were started in Q1 and have continued through Q2 and into Q3.
The checkbook approach, which is focused on managing each businesses cash inflows and outflows on a weekly basis has proved very effective in managing cash flow at the business unit level, but making sure people at every level of the organization by only what is absolutely necessary.
Additionally, as Christian will expand upon we benefited from significantly lower U.S. healthcare expenses in Q2 as elective surgeries in non emergency medical care came to a near hall.
As a result of the cost actions, we've taken and the additional actions we identified that we can act upon if necessary.
We remain confident that we will be able to maintain strong liquidity and cash flow.
Moving onto the four theme playing offense to position ultra to be a stronger company as we emerge in the post coded 19 world.
Here, we have focused on optimizing our own operations to be as efficient and reserved resilient as possible for the inevitable long term changes in the workplace.
Weve redesigned work cells to adhere to proper social distancing converted cells to produce components required for coal bid related treatment equipment and are working on additional automation and some of our operations.
Most importantly, we're focused on flexibility so we can adapt as necessary given the ongoing fluidity or the situation.
We're also investing in the talent and capabilities to ensure that we positioned altra to capitalize on new market opportunities and emerging trends such as the growing reliance on factory automation robotics, the increased demand for medical equipment, both related to near term cobot needs.
And post coded once elective surgeries come back.
The heightened focus on food processing packaging and safety.
Potential equipment demands that could emerge from the move towards reassuring, but.
The possibility of increased infrastructure in defense spending as a component of government stimulus and the possibility of increased demand for equipment related to growing online purchasing and the related logistics.
Now please turn to slide eight to review end market demand.
Well, we remain cautious given overall limited market visibility in the possibility of a strong resurgence of the virus in the fall or winter.
We were encouraged by improving demand in June when compared with a very weak may. This includes strong customer developmental activity as evidenced by the significant increase in technical Webinars participation and a high degree of engineering activity as our customers continue to drive product development.
Well this increased activity hasn't yet translated into an order rate increase we see this as an encouraging sign that we could see meaningful improvement wants to markets begin to stabilize and we emerge from the pandemic.
Now turning to review of the markets starting with those have performed well in the quarter.
Renewable energy was up low single digits in Q2 and up double digits sequentially as we continue to see strength in wind.
We expect to see a slowing and the growth rate for wind in the balance of the year due to tougher comps and some possible industry supply chain issues.
Unrelated to ultra that began to emerge in Q2 that may constrain our customer build rate.
Factory automation specialty machinery was up high single digits.
We were encouraged to once again see strong growth for the quarter. We expect to see can continued positive momentum and factory automation as the co bid 19 situation accelerates the need for automation and expanding Fiveg has a positive impact in the semiconductor tech and electronic market.
Segments.
The AG market was up mid single digits for the quarter with the upside spread across several of our operating businesses, primarily due to favorable comps, which should trend into the second half of 2020.
The remaining markets, we serve faced headwinds in Q2.
Aerospace and defense was down mid single digits. In Q2, we continue to see strong performance with many of our defense customers, which has been offset by a soft commercial aerospace market.
Transportation was off low double digits to due to a decline in automotive and heavy duty trucks, where the strong demand in China was more than offset by weakness in North America in Europe.
We are encouraged by emerging signs of improving class a truck demand in the north American and European markets, but expect that this may be offset by a return to more normal levels in China.
Distribution was down low double digits for the quarter and sequentially as well, we expect distribution markets to track inline with the general industrial economy, which we believe will suffer decline for the next couple of quarters.
Metals was down double digits, driven primarily by weakness across the oil and gas automotive and construction industries.
We continue to expect the metal markets to be saw for the balance of the year.
In mining demand was down low double digits for the quarter impacted by commodity prices.
We expect this pressure to continue with both new equipment Oems as well as the aftermarket as we move through the year.
Turf and garden was down double digits also due in large part to a decline in discretionary spending.
We expect this market to remain weak through the balance of 2020.
Oil and gas was down double digits, reflecting reduced demand due to coated 19 as well as lingering global in this industry trade tensions.
With the price of oil and rig counts down meaningfully versus last year, we expect oil and gas will remain under pressure through the duration of the year.
Medical equipment was down low double digits for the quarter, but up sequentially.
Once again was a tale of two cities, where strengthened demand for components for ventilators respirators and other medical equipment related to the fight against coated 19 was partially offset by the decreased rate of elective surgeries and reduced capital spending at hospitals.
We expect shipments into this market to improve as we moved through the year.
And with that ill turn the call to Chris can turn the call over to Christian.
Thank you call and good morning, everyone. Please turn to slide nine.
Let's start with a review of our topline performance, excluding FX effect sales declined 12% compared with the prior year period.
Foreign exchange rates had a negative effect over 160 basis points.
Prize had a strong positive impact of 70 basis points.
Excluding the effects of foreign exchange net sales for the PDP segment were down 14.9%, while net sales for the ANS segment decreased 10.3% compared with the same quarter last year.
Taking a look at outperformance by geography.
Asia and the rest of the World was very strong performer with revenues up 34.9%.
This performance was primarily driven by strong jvs sales.
Sales into the wind energy market were up over 100%, what I'll break and clutch business also saw year over year growth in China.
In Europe, we saw a decline in demand with sales down 22.2%, 19.6%, excluding the effect of FX.
In North America revenues declined 23.9%.
The decline in North America was partially driven by temporary plant shutdowns and high absenteeism rates.
Our teams continue to do a great job.
Actively managing cash.
In these uncertain times.
This included taking corrective measures to manage costs from the drone environment. As a result of these actions in the quarter, we were able to hold gross profit margins flat, we'd use SGN a expenses as a percentage of sales an increase operating income as a percentage of sales.
Yes.
Despite the 65.7 million revenue decline non-GAAP income from operations only declined $7.5 million, reflecting the magnitude of the cost savings in the quarter.
We were pleased with our ability to de lever at approximately 11.5% in the second quarter.
We are confident that we have a realistic path through de lever at about 30% to 35% this year.
The provision for income tax on the second quarter of 2020 on a normalized basis was 21.5% before discrete items.
This rate includes the recently approved income tax rate reduction for one of our operations in China due to a high technology designation.
Non-GAAP adjusted EBITDA was 88.9 million for the first for the second quarter or 22.2% of net sales up 170 basis points.
Compared to last year.
Please turn to slide 10 will closer look at cost reductions cash flow and liquidity.
During the quarter, we reduce cost in all areas of the business.
Quarter performance benefited from a juice us healthcare cost as Carl mentioned as a result of significant decline that preventative and non emergency medical care for employees.
Ladies and rent Abatements also contributed to the effort to reduce cost.
We estimate approximately $7 million of these costs will come back in the third quarter, creating a sequential headwind.
We are extremely pleased with a strong non-GAAP adjusted free cash flow generation of 64.4 billion that we delivered in the second quarter. This is 38% higher than last year's 46.7 million. Despite a 40.1% decline in revenues.
Capital expenditures during the quarter totaled 9.1 billion down almost 10% from the prior year quarter.
We plan to increase all capital expenditure levels in the second half as we plan to invest in a number of growth initiatives.
We ended the quarter with 220.1 million of cash, which reflects all repayment of the $100 million that we drew down already below in the first quarter and the 30 million of term loan debt that we paid down year to date.
24 million of which we paid down in the second quarter.
Bringing the total to $180 million since acquiring the ANS segment.
We remain committed to de leveraging the balance sheet.
We remain very comfortable with the some substantial room, we have relative to compliance with financial maintenance covenants under our credit facility.
Our covenant times exclude the $400 million a senior unsecured notes.
We have outstanding and we have no short term debt maturities as these are not due until October 2025 in October 2026.
In terms of use of cash our top priority of the current environment continues to be read to reduce debt.
Manage leverage.
Preserve optionality for investing in future growth.
As announced earlier this week, we are maintaining our quarterly dividend or four cents a ship.
Please turn to slide 11.
I'll review of our outlook for 2020.
Today, we're increasing our guidance for the full year 2020 to reflect our best estimate and practical assessment of the potential impact of gold with 19 to all business at this time.
We continue to closely monitoring the situation and ill prepared to implement further cost reduction measures should topline dimont decelerate.
Our guidance assumes that we will experience a modest sequential revenue decline in the third quarter as we expect the strong sales we saw in China in the second quarter will not repeat at the same level.
We expect modest sequential growth again in the fourth quarter.
The guidance also assumes that we would see SGN a expenses increased sequentially due to the before mention factors.
With that as a background.
We expect annual sales in the range of 1.580 billion to 1.640 billion for high end of all previously provided at range.
We are raising EPS guidance on a GAAP and non-GAAP basis as previously indicated.
Following the ANS combination, we began to exclude acquisition related amortization net of tax from non-GAAP net income and non-GAAP EPS.
We now expect GAAP diluted EPS in the range of a loss of $1.16 to loss of 94 cents.
Revenue driven by the impairment charge, we took in the first quarter and non-GAAP diluted EPS in the range of $2.05 to do dollars 30 cents.
We are also raising our non-GAAP adjusted EBITDA guidance to the range of three or five to 330 million.
We expect to continue to pay down debt over the balance of 2020 and remain on track to de lever in the range of 30% to 35%.
We expect depreciation amortization in the range of 124 to 127 million and capital expenditures in the range of 40 million to 45 minutes.
We continue to expect a normalized tax rate for the full year to be in the range of 21% to 23% and we expect adjusted non-GAAP free cash flow in the range of $160 million to $200 million and with that I would turn the discussion back to call.
Thanks Christian please turn to slide 12.
Against a challenging backdrop, we have demonstrated the incredible resilience of our business model and our team's ability to stay focus to drive topline performance well, taking swift actions to maintain good cash flow and debt reduction during a downturn.
We're controlling what we can control in the short term, while protecting the necessary resources to drive growth and thrive as a premier industrial company for the long term when the global economy recovers.
I will leave you with four reasons, we believe ultra is positioned to navigate through this challenging period.
Emerge as a stronger company and continued to deliver value to our shareholders.
First the strength of our diversified business model and our exposure to several early cycle end markets are key fundamental strengths that we will continue to benefit ultra.
Second coated 19 crisis has put ultras business system culture and organization to the test and demonstrated the resilience of our business.
Third to bolster our financial flexibility, we continue to prudently manage our balance sheet and execute cost savings initiatives.
Performance to date and scenario plan support our expectations.
Strong liquidity and cash flow this year.
Finally, we are putting strategic plans in place to position ultra to thrive in the future and serve our customers our community our employees and our shareholders in new high value ways.
Im extremely proud of the ultra team's efforts to collaborate maintain productivity remain motivated and deliver value in these unprecedented times.
We are grateful for the ongoing support of our customers partners and shareholders and look forward to keeping you updated on our progress.
As we realize our vision for ultra as a premier industrial company and with that we will now open up the call for questions.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press the turnkey.
Your first question comes from Jeff Hammond from Keybanc capital markets. Your line is open.
Hey, good morning, guys.
Good morning, Jeff.
Great Great performance during a tough environment just wanted to understand decremental margins here.
Thank you said, maybe just quantify first the healthcare thing, maybe that's a 7 million coming back, but it looks like the businesses.
Hi, Decrementals and kind of a low twentys on the second quarter and.
Just wondering how sustainable than that it looks like the guide as maybe for a little bit higher decremental margins.
So the $7 million that sequentially will come back $3.8 million to $4 million. So that is healthcare cost healthcare cost in the second quarter with $3.8 million below last year's healthcare cost.
That is a significant drop in healthcare cost and we expect now that elective surgeries are possible again people visiting doctors.
Again.
That will not continue and we'll start to normalize.
We also got a million dollars of rent concessions in the second quarter for the second quarter that will not continue.
And then.
In addition to that.
We'll see in the second half seasonally you'll see that revenues typically for us in the second have below first half revenues. So there will be to see some seasonality in the business combined with the very strong outperformance in China, which will not repeat as we saw some pent up demand in China.
That.
We covered in the second quarter.
I mentioned when was up over 100% year over year Jvs in China was up over 100% year over year.
That would not continue so we'll see some headwinds.
In that regard as well and then we had significant amount of fellows in the second quarter.
About 3 million so between photos of 3 million the rent.
A million and health care about 4 million that makes up that pool of $7 million that will come back in Q3 as well as in Q4 and provides that EPS headwind.
So what are you looking for Decrementals in the second half within the guide.
So about 30%.
We think if we do extremely well, we can do slightly better than that.
And company in the height into the high Twentys.
But to say, 30% is what what the midpoint assumes.
Okay.
And Okay and then.
Can you just look at the kind of end market slide.
Can you just talk about what your order rates are telling you relative to some of these sales trends, where the order trends or maybe.
Getting worse or getting better sequentially as you kind of moved through the quarter.
You mentioned wind and China truck, but maybe just talk about somebody other areas.
Yes, I think in general what we saw from an order trend Jeff was the.
May was appears to be kind of the bottom so.
June we saw a nice recovery.
And then in July.
Mike.
Okay.
The bookings rate will will supports our guidance and I think we're seeing that that's probably the most.
Dick could have part of the trend is that the that the booking rates currently support what we've got out there for guidance.
By market.
I'd say.
Probably 10% to 15% or the end markets we serve were.
Up maybe 10% were neutral and ground 70, 580% we saw a decline in.
And as we go through each one of those markets, where we see.
Each one of them, we're tracking we see different trends occurring in those markets.
I think it says, but we do see that support right now.
For the guidance.
Okay.
The July bookings rates were are running better than June.
No no no no I think they're in line with June.
Okay.
In July typically isn't a real exciting one from a booking standpoint, because you've got people on vacations you got.
Plants being shut down for maintenance purposes. So so july's kind of can be an odd months, but I'd say, they're in line with what we're seeing in June.
Okay.
What the recovery in the June rates from May where what markets are you seeing that most dramatically.
So it's really across the board.
We had some some very good.
Defense orders that that helped to bookings.
The oil and gas businesses, so weak that.
That really isn't having an impact on it.
But it's pretty much across the board.
I think our turf and garden business was way down.
We think that there's the sell through through the Big box guys is probably better than what we're seeing and theyre chewing into some inventory. So that we saw a little bit of an uptick in turf and garden.
But it's it's generally across the board.
One of the really nice trends that we're seeing is the class eight truck business in North America and in Europe pick up nicely.
So that's.
Thats, probably the biggest change since.
April may timeframe as the.
Improvement in that market.
And Thats been substantial I think there was a report out last night to that.
That indicates the build rate for trucks is improving nicely here.
Okay, and then just if I could sneak in one final one the corporate expense line was positive it was that healthcare in the rent concession.
Going through there.
Yes, so we are located.
Corporate expenses to the Opcos for health care.
At a budget rate, therefore, providing them with a guaranteed cost program. So every under over performance in healthcare expenses.
End up with a corporate books in this case it was we allocated more than we actually spend when you combine that with all the cost actions that we took at corporate whether Thats professional services rent corporate office.
Furloughs at the corporate office.
You know you get that positive swing that would not.
Continue.
Okay. Thanks, guys I'll get in Q.
Alright, Thanks, Jeff.
As a reminder to ask a question. Please press star followed by the number one. Your next question comes from Mike Halloran from Baird. Your line is open.
Hi, good morning, guys.
Morning.
So so just some thoughts on channel inventory.
It looks today from your perspective, and then maybe weave that into how your inventories level work and how the working capital side is tracking for you as well.
Yes, so I think discussions with our channel partners.
The inventory they take it down a little bit, but again, the they didnt really buildup the inventories significantly from the big reduction we saw after the financial crisis.
So we don't I don't believe that Theres, a tremendous amount of inventory that needs to be consumed.
And in the in our partner channel.
We do look at some other areas and I think one place that we probably saw a little bit of inventory reduction was in the turf and garden space as I mentioned, one Jeff asked this question.
But other than that I think we're in pretty good shape like.
The inventory on the working capital side you know.
Compare.
Two last year.
Working capital operating working capital decreased by $36 million, it's about 10%.
On a revenue decline or.
14%.
That's really good.
Given the fact that we saw a very modest increase in diesel which is.
Much better than we had.
Thoughtful rate is going to get much worse right and then you combine that with.
The growth in China, requiring number one.
Additionally inventory.
If you double your business.
You will require additional working capital and in China payment terms, a very long 180 days in some cases. So overall, we're very pleased with.
With all working.
Super performance sequentially from the first quarter, but also year over year.
And the other thing like when the pandemic first hit.
We did.
Try to make sure the with the supply chain was getting longer than we saw disruptions of the some of our suppliers that we tried to build up a little bit of inventory. So I think we've got an opportunity over the next.
Six to 12 months to take some inventory so.
Thanks.
The next on the same can then free cash flow.
Generation solid good guide can you hear pay down some don't in the quarter, how should we think quite usage in the back half in years.
Our debt more and more debt Paydown new mines ahead.
In anything else that you might.
Capital on.
Yeah. So we're targeting additional debt pay down on the term loan in the second half was somewhere between 80 and $100 million.
And the second half is usually a better cash generating time period for us in the first half so.
So essentially every penny we generate.
Yeah.
We anticipate on yet gotten a little more comfortable with the cash flow situation from from right. When the pandemic hit. So we are we are going to probably spend a little money on some capital for growth opportunities and.
Some projects that we put off so we probably will loosen up the capital per springs, and a little bit.
So in other words, we rate we step really hard on on the Capex breaks, we're not changing guidance for capex, but we got ourselves some room to do a little bit more in the second half and as Paul said to support some some growth initiatives that several opcos half.
Appreciate it thank you gentlemen.
Yes, Thanks, Mike.
Again, if you'd like to ask a question. Please press star followed by the number one.
Your next question comes from Brian Blair from Oppenheimer. Your line is open.
Good morning, guys suburban stand alone.
Yes, good morning, Brian, but our hope you are too Brian.
Thank you.
On the of your end markets that remain in decline or are there any you'd call out as nearing bottom at this point and I guess in the same Zane anywhere you expect more prolonged period of compression any kind of rank order would be helpful.
Yeah Okay.
Sure.
There are preface this I do this all the time, but I called the bottom in mining a few years ago nine times I think so oh.
Whatever I say, you get to take a little bit of the grain of salt.
But it feels like the turf and garden business is probably getting towards the bottom, we'll we'll see.
Typically the build in that industry.
Occurs in the starts to occur in the fall. So we hope to see an uptick in orders.
As we as we get into September October timeframe.
You know it feels like oil and gas might have hit a bottom that.
Can't get much lower than where it is today so the rig count seem to have stabilized at an incredibly low level.
So if we get some kind of agreement.
Between the different geographic regions that are battling out in the oil industry.
That may be we'll see something there start to improve and 612 months. So.
Not in the near term.
Medical equipment the.
The non covered related medical equipment, we're starting to see some.
Some movement, there elective surgery, certainly havent ramped up yet and hospitals, it's going to be awhile before they're going to be spending capex, but we're seeing some interest in our.
A little bit of of improved interest and some developmental activities from some of our traditional customers that are non coal that related equipment.
I.
I think the let's see the AG business was a little bit of a surprise to me that we had we had a pretty good quarter in AG.
And.
So whether food pharma and.
And the AG business.
He starts to come up a little bit that would be good good news.
I don't think we'll see much from the aerospace business for awhile.
And the I guess the one that's the biggest.
The biggest improvement we've seen has been in the class eight trucks, so transportation seems to be turning to them with a significant improvement in North America in Europe on class a trucks.
A miss anything Christian.
[music].
Okay helpful color.
And Christian I apologize if I Miss.
I missed this detail where there any material supply chain disruptions in the quarter you called out some other onetime ish.
Impacts there were no material supply chain disruptions in the quarter, we had some.
Particularly our.
Facilities in San kits and a move by.
Struggled with supply chain issues.
Did we are not material overall, we do anticipate that we're going to continue to have some of these supply chain issues here and there.
But not too material.
Hi effect.
Okay.
And last one for me given current visibility what should we think about as as your net leverage exiting 2020.
And assuming.
At that point, we have flat to positive demand how should we think about the rates you can de lever going forward.
So.
Given our current guidance.
Looking at the free cash flow guidance particular.
We believe that we would will and.
With the leverage ratio somewhere between 3.8 on 3.9 times essentially flat to where we have been now for 12.
18 months.
And then from a covenant perspective.
We think we're going to end the year at about 2.6, maybe 2.7 times with a covenant thats steps down to 4.75 at the end of the year.
So plenty of headroom from that perspective.
And then.
As we look at next year, that's a little but little bit too early given all the uncertainty I don't think we want to make any predictions for 2021 at this point.
Okay. That's fair Thanks again guys.
Thanks, Brian.
As a reminder, if he would like to ask the question. Please press star followed by the number one.
Okay.
We have no further questions I'd like to turn the call over to call Christensen for closing remarks.
Okay. Thank you Julien.
I want to thank everybody for joining us today, and we look forward to engaging with many of you over the next few weeks and months.
Thank you again for your time.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
[music].