Q2 2020 Kadant Inc Earnings Call
Ladies and gentlemen, thank you for steady by and welcome to the Q2 2020 cadence incorporated earnings Conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question you're in the Sachin you wanting to press star one well your telephone.
If you require any further assistance. Please press star Zero I would now like they had the conference over to your speaker today Mr. Michael The Kenny. Please go ahead.
Thank you Sean.
Good morning, everyone and welcome to cadence second quarter earnings call.
With me on the call today's John Paul, Our President and Chief Executive Officer.
Before we began let me read our safe Harbor statement.
Bearish remarks that we may make today about cadence future plans and expectations financial and operating results and prospects are forward looking statements for purposes of the safe Harbor provisions under the private Securities Litigation Reform Act of 1995.
These forward looking statements are subject to known and unknown risks and uncertainties that may cause our actual results could differ materially.
From these forward looking statements as a result, the various important factors.
He knows outlined at the beginning of a slide presentation and those discussed under the heading risk factors in our annual report on form 10-K for the fiscal year ended December 28, 2019, and subsequent filings with the Securities and Exchange Commission.
In addition, any forward looking statements we make during this webcast.
Present, our views announcements only as of today.
Well, we may elect to update forward looking statements at some point in the future. We specifically disclaim any obligation do so even if our views per estimate strange.
During this webcast will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.
A reconciliation on the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our second quarter earnings press release, and the slides presented on the webcast and discussed in the conference call, which are available in the Investor section ever website at Www Dot Kate Dot com.
Finally, I want to know that when we refer to GAAP earnings per share or E. P. S and adjusted EPS on this call we're referring to each of these measures as calculated on a diluted basis.
With that I will turn the call over to John Paul will give you an update on cadence business in future prospects falling Geoffs remarks, I'll give an overview of our financial results for the corridor and we will then have acuity Sasha.
Josh.
Thanks, Mike Hello, everyone.
Thank you for joining us this morning to review, our second quarter results and discuss our outlook for the second half of 2020.
Since our last earnings call. The World has continued to be impacted by the covert pandemic, which has led to an economic crisis in their nearly every region the world.
Most countries continue deltas pandemic and depressed economic activity.
I'll begin with a few comments about our operations and how the pandemic has continued to affect our business.
Like most other industrial companies, we have been affected in many ways by the pandemic.
The effective covert made the second quarter, whether more challenging quarters in the history of our company.
Our global workforce as adapted to new wave work and performed exceptionally well wonder extremely challenging circumstances, I'm very proud of our talented and dedicated employees around the world for the work they've done and continue to do to serve our customers and each other.
We are fully operational and all of our manufacturing facilities and continue to work under enhanced safety protocols designed to safeguard our workplaces and protect the health and safety of our employees.
These precautionary measures at served us well and allowed us to continue operating in every region of the world.
Well some regions around the world are starting to reopen it will take some time to see this increased economic activity reflected a new orders.
The early signs of the recovery are still fragile and could be up ended by new searches in the virus.
Having said that we believe we are well positioned to navigate through the pandemic and uncertainties as economic environment.
Our balance sheet remains healthy and our last quickie position is solid robust cash flows have always been the strength of cadence and we believe this will continue as economies began to reopen around the world.
Performance in the second quarter it was impacted by our customers request delay projects the phone service work and curtailed production.
Cash flow from operations and our free cash flow were both strong cash flow of 22 million was down 3% compared to Q2 of 29 team well free cash flow increased 2% to 21 billion.
Our parchment Cymabays revenue made up 64% of total revenue comparable to the period.
To the prior year period.
This relative stability in our parts consumable business is reflected in our strong cash flows and our focus on growing this area continues to be a key strategic initiative.
Overall, most of our customers are operating and adjusting to the new level demand and the current environment.
After the initial surge in packaging the tissue demand early in the second quarter. These markets have returned to levels more indicative of the general economic environment.
The one sector that seems to be performing better than expected is wood and specifically lumber I'll provide additional comments on that later in my remarks.
Also during the second quarter, we put into place various cost containment majors and implemented selective reductions in our workforce via early retirement offers furloughs and layoffs at certain divisions.
Well never something we look forward to these adjustments were necessary to ensure our staffing levels reflect the business environment.
We continue to assess the situation at each of our businesses and take actions where appropriate.
Before leaving the slide I wanted to comment and our recent acquisition Cogent industrial technologies announced yesterday.
This acquisition is an exciting addition to the Kate and family.
We believe this new platform greatly expands our ability to deliver automation and.
Plant wide technology solutions to process industries.
It also allows us to play a bigger role when our customers digital ecosystem by offering integration solutions across mobile processes products and systems for enhanced productivity and increased operational agility.
Next I'd like to review our performance in our three operating segments.
As shown on slide seven our flow control segment faced a challenging market environment with industrial production down across most sectors.
This was especially evident and non critical infrastructure industries, where manufacturers were forced to shut down operations and those that didn't continue to operate we're doing so at much lower operating rates.
Capital project activity at most industrial companies was particularly impacted.
During the quarter.
While demand for aftermarket parts was solid and made up 72% of total revenue in the quarter customer delays and capital project execution postpone service work and the ability of our employees to engage face to face with customers and prospects due to the pandemic negatively affected both our bookings and revenue performance.
Looking ahead to third quarter, we expect Q3 to show some improvement while we expect capital project orders remain subdued.
[noise], our industrial processes segment was also impacted by the global locked down in Q2. However, we are seeing encouraging signs and some of our market sectors and particularly in wood products.
Revenue in this segment declined 14% to 66 million year over year.
It was up slightly compared to Q1 of this year.
This decline was largely due to a significant slowdown and capital projects falling to exceptional years of capital project activity.
Parts and consumables revenue on the other hand was solid and made up 62% total revenue in the second quarter.
Encouragingly U.S. housing starts in June were up 17% sequentially to 1.2 million, which followed a boost in may housing starts up 14% compared to April.
The increase in housing construction, coupled with homeowners forced to remain at home during the widespread shutdowns in April and May.
Led to strong demand for lumber and other wood products.
As a result lumber prices for July delivery increased 8% above pre pandemic high end demand is providing support for higher price levels.
This in turn has benefited our customers producing wood products.
We are experiencing an increase in capital project activity and expect capital bookings to strengthen as the second half of 2020 unfolds.
Turning now to our material handling segment, we had solid results in second quarter due in part to healthy backlog.
This operating segment experienced depressed levels of bookings due to most customers being unable to receive visitors and others being shut down due to government mandated closures associated with the pandemic.
Demand for a fiber based products was a bright spot in second quarter as homeowners used more lawn and garden products.
Adjusted EBITDA increased 8% to $6 million, our adjusted EBITDA margin was nearly 18% in second quarter, as we sort of solid execution and product mix.
As an or other segments, we're seen increasing capital project activity.
Looking beyond 2020, we continue to believe this segment has upside potential in its aggregates in market. If there is increased infrastructure spending.
Well the last several months have proved to be challenging with many unknowns, we remain confident in our ability to manage through these unprecedented times.
As we look ahead to the second half of 2020, the uncertainty in evolving environment limit our visibility to accurately forecast the timing of orders in the speed of economic recovery.
Therefore, we will not be provided guidance at this time.
We expect Q3 to be the weakest quarterly year and are looking for some improvement in Q4 as we navigate through what we hope is the bottom of this pandemic induce recession.
I'd like to pass cover to Mike now for a review of our Q2 financial performance Mike.
Thank you Jeff.
I'll start with some key financial metrics from our second quarter.
Slide 12, a summary of some of the key financial metrics that I'll comment on over the next few slides.
Our GAAP diluted EPS was a dollar in the second quarter down 30% compared to $1.42 in the second quarter 2019.
Our GAAP diluted EPS in the second quarter includes three cents, a restructuring costs and three cents of acquisition costs associated with our acquisition of Koetje, which was completed in June.
In addition, our second quarter results included pretax income of 2.1 million or 14 cents net of tax attributable to government sponsored employee retention programs related to the pandemic.
These programs were received by many of our subsidiaries around the world and enabled us to retain employees as we work our way back towards normal operating conditions.
Solid gross margins were 43.5% in the second quarter 2020.
Up 150 basis points compared to 42% and the second quarter 2019.
Approximately 80 basis points of the increase was due to the receipt of government sponsored employee retention.
Programs related to the pandemic and the remainder was due to the negative effect from the amortization of acquired profit and inventory that was included in the results for the second quarter of 2019.
Parts and consumables revenue as a percentage of revenue remained fairly consistent with the prior year at 64% and the second quarter 2020, compared to 63% last year.
SGN, a expenses were 45.1 million or 29.5% of revenue in the second quarter 2020, compared to 48.5 million or 27.4% of revenue in the second quarter of 2019.
The 3.4 million decrease and asking in a expense included a 1.1 million decrease from a favorable foreign currency translation effect and a point 8 million benefit from government sponsored employee retention programs.
The remainder of the decrease was essentially due to reduced travel related cost.
Adjusted EBITDA decreased to 26.6 million were 17.4% of revenue compared to 32.7 million or 18.5% of revenue in the second quarter 2019, due to declines in profitability hitter flow control segment and to a lesser.
That our industrial processing segment.
Operating cash flows were 22 million in the second quarter 2020, which included a modest positive impact to point 3 million from working capital compared to operating cash flows at 22.6 million in the second quarter of 2019.
We had several notable non operating uses of cash in the second quarter 2020.
We paid down debt by 13.8 million.
Page 6.89 for the acquisition of Cogen.
Paid 2.8 paid to 2.89 dividend on our common stock and paid point 9 million for capital expenditures.
Free cash flow increased significantly on a sequential basis to 21.1 million compared to 3.5 million. The first quarter 2020, as our first quarter typically used the weakest of the year.
In addition, the second quarter 2020 free cash flow was point 5 million higher than the second quarter of 29 team.
Let me turn next to our EPS results for the quarter.
In the second quarter 2020, GAAP diluted EPS was a dollar and are just a duty EPS was a dollar sex. The six different was due to three cents of acquisition expenses and three cents a restructuring costs.
In comparison to second quarter of 2019, both our GAAP and adjusted duly diluted EPS was $1.42.
We had 10 cents of acquisition related expenses, which were fully offset by discrete tax benefit.
As shown on the chart the decrease of 36 cents, an adjusted diluted EPS in the second quarter 2020, compared to the second quarter 2019 consist of the filing.
71 cents due to lower revenue and eight cents due to a higher effective tax rate.
These decreases were partially offset by 24 cents due to lower operating costs 11 cents due to lower interest expense and eight cents due to higher gross margin percentages.
Collectively included in other categories I, just mentioned was an unfavorable foreign currency translation effect of five cents and the second quarter 2020, compared to the second quarter last year due to the strengthening of the U.S. dollar.
Looking at our liquidity metrics on slide 15, our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days and accounts payable.
Was 128 at the end of the second quarter 2020, compared to 117 at the end of the second quarter 2019.
This increase was driven by higher number days in inventory.
Working capital as a percentage of revenue was 14.8% in the second quarter 2020, compared to 14.2% in the first quarter 2020, and 15.4% and the second quarter 2019.
Our net debt that is debt less cash decreased 11.1 million or 5% to 222 million at the ended the second quarter 2020, compared to 233 million at the ended the first quarter 2020.
We repaid 13.8 million adapt and the second quarter and have repaid 16.4 million debt in the first six months of 2020.
After quarter end, we repaid our real estate loan.
Which had a remaining principal balance of 18.9 million by borrowing from our revolving credit facility.
This effective we swapped at with an annual interest rate of 4.4 or 5% under the real estate loan.
Our revolver debt currently 1.68%, which at current interest rates would reduced interest expense by over $500000 on an annual basis.
Our leverage ratio calculated in accordance with our credit facility decreased to 2.01 at the ended the second quarter 2020 compared to 2.03 at the end of 2019.
After repaying the real estate loan in July we currently have over 130 million a borrowing capacity available under our revolving credit facility, which matures in December 2023.
And have access to an additional 150 million uncommitted borrowing capacity under this agreement.
We also have access to $115 million I'm committed borrowing capacity through the issuance of senior promissory notes under our note purchase agreement.
We do not have any mandatory principal payments on debt facilities until 2023.
We believe that our cash on hand, operating cash flows and access to available credit provide us with sufficient liquidity to meet our capital requirements and continue to navigate through this challenging environment.
Regarding guidance the current environment has certainly made forecasting quite difficult.
Well, we have noticed an increase in inquiries related to capital projects. We have also experienced and continue to experience delays than anticipated bookings due to a reduction in capital expenditures and project delays by our customers.
In addition, we expect.
Continued customer requested do delays related to certain capital projects in our backlog.
Given the current uncertainty, we will not be providing guidance for the third quarter or the full year 2020.
We will reevaluate providing guidance next quarter.
While we're not providing guidance I would like to provide a few directional comments on our outlook for the year.
We anticipate the third quarter will likely be our weakest quarter the year and as a result sequential revenue could decrease approximately 5% to 9%.
Our revenue for the year could decrease roughly 11% to 14% compared to 2019.
Few other directional notes, we anticipate that we will remain eligible for some government sponsored employee retention programs in various locations. However, as the year progress as we expect these programs will diminish as our businesses returned to more traditional operating levels.
During the second quarter, we recognize point 5 million in restructuring costs related the reduction of employees across our businesses.
We expect these restructuring activities will reduce our cost structure by approximately 3.7 million annually.
We may incur additional restructuring costs in future periods is we continue to monitor the impact of the pandemic and the resulting global economic downturn on our businesses.
On a positive note. We now expect net interest expense for 2020 to be under 8 million compared to our last earnings call estimate of nine to 9.5 million.
Given the lack of visibility into what the future holds across our end markets and geographies, it's difficult to provide for guidance at the moment.
However, we've given these directional comments pellet provide insight into our current business environment as well as our belief that are healthy balance sheet strong cash flows and recurring revenue streams will help our business navigate through the current business cycle.
That concludes my review the financials and I'll now turn the call back over to the operator for acuity section.
Operator.
Hey, Thank you as a reminder, if we have a question. Please press star one on your telephone keypad.
Your first question comes in a line of John Franzreb send dodi incorporate in.
Good morning, guys, sorry zone.
Hi, John John.
I'd like to talk about the book is profile you mentioned that would was better than you expected, but when you look at the the segments that you participate in what kind of surprised you on the downside, it's been a relative to a quarter ago.
I think.
We certainly expected our.
Our capital.
Now, let's be impacted the most than it was.
I think the non critical infrastructure.
Industries that we shut down completely that was.
That was a challenge for sale at the paper side of course, because it was a critical infrastructure continued to operate and we did really well there but the is the non critical yield the all the other industrial was out there are many hamburg or shutdown around the world.
For a couple of months and obviously that had a big impact on our bookings as we look at our the reduction in bookings that was principally in the industries outside of the paper industry.
And they're starting to recover and open back up now, but that was I don't know that we've ever in our life faced.
Let's say, an economic environment, where a whole industries were shut down around the globe for.
An extended period of time.
Our your thoughts that some industry is clearly, indicating troughing affecting you expect them to have more V shaped recovery or from your customers and more cautious out in the near term.
That's a that's a big debate a big discussion as you know that's occurring nationally as wells globally is how quickly will the recovery.
You know take place and I think it's from my perspective, I think we really think it's a function of how quickly we get a vaccine I think if we continue and a.
Environment, where we're going to have to manage social dispensing and the other safeguards that we've taken then I think it's going to be a more slow.
Slow recovery if in fact, there is a vaccine available early in the year.
I think we could see that have a rebound or step back and as you know industries might but actually we turn at at that at a quicker pace, but it's really I think going to depend on how quickly we can get control is fives.
And just switching to the paper market for second you kind of touched on you know how packaging and tissue has been kind of pulled forward.
What are your thoughts about.
Well the institutional environmentally the back to school.
Seasons, coming and usually this advanced buying in that market slot uncertainty going on what that climate is gonna look like.
The office supply market with so much remote.
Working you know what's the what's your thoughts there and that's that's paid the business.
I think if you look at the I know.
I think a PPA announced earlier today, if you look at what our customers their strategy and of course the.
Packaging side continues to be reasonably strong the certainly that home delivery packaging market is doing quite well the tissue markets doing well, but the office supply side is because it's really been impacted by this and we'll continue to be impacted I think as a.
As they.
You know work from home.
So so I think that.
That's really.
Tell two stories you know the home delivery is doing quite well.
Office related.
In commercial related is struggling a little bit.
Okay, and winless questioning I can sneak it in cogent.
I would say integrator can you talk a little bit about the strategic decision of purchasing it did have any market concentration that is particularly appealing to you and wage expect to take that business going forward.
Yes, so so we've known cogen for quite a while they are quite strong in wood processing sizes. They work with our wood processing businesses for many many years.
And they have a very very we think attractive.
Platform.
Offering.
For for for process industries, and so we think that what they're doing that primarily done on the wood processing side can be applied to our material handling segments as well as our.
As our our paper business they bring a lot of very innovative capabilities and platform offerings that we think are very applicable to the paper industry as well as the many of our material handling customers. So our goal is to take that that capability is a now.
Primarily provide in the wood processing side to our other markets and they're really going to I think enhance our acceleration of our yard or customers digital transformation as well as ours, whereas you know we've been working.
For some time and connecting our product making them smarter.
Allowing our customers to collect data from the systems and make operating decisions and these guys really specialize in that so we think that it will accelerate.
Our progress and will also allow us to offer.
Their platforms to our two a lot of our customers around the world.
Great. Thanks for taking my questions guys.
Your next question comes on line of Chris how from Barrington Research.
Good morning, everyone.
Good morning, Chris.
Good morning, just following up on some of those questions on cogent.
This is exciting.
I assume this acquisition fits.
From a margin perspective, and that it will be accretive to EBITDA margins moving forward or perhaps you can speak to this level of accretion.
And how you felt about the multiple you pay for the business.
Yes.
Chris.
Yes, it will be accretive their EBITDA margins are north of 20%, but this this business itself is small.
No.
But it will be accretive.
Okay.
Then my next question, Jeff had mentioned.
The product mix that benefited margins in material handling.
Segments. This quarter has that product mix continued into July.
We expect to similar product mix.
Similar benefits margin in this segments as we look to the upcoming quarter.
And following up on that with regard to Jeff's comments about the other segments in regard to capital projects and capital bookings.
For the industrial processing segments.
How should we think about.
Things shaking out for the remainder of the year in terms of margin I know you gave some directional comments that were very helpful. In regard to revenue and interest expense, but how should we think about the sustainability of margins in the second half.
Okay Creswell.
At the very beginning of the year we had.
Originally in January we originally guided to margins of 42 and a half 43.5%.
And I'm optimistic that we're going to finish off the year on the higher side of that.
So I think we I think we can still be in that range and ended the higher side of it and.
No I'm optimistic that we'll see that specifically also in the third quarter with the product mix.
Okay. That's that's helpful and put the products that going back to the beginning part.
Mechanics in material handling has moved forward into July or has it changed at all.
We haven't had.
There hasn't been a lot of.
Movement on the material handling side.
No I would say the one.
Our smaller groups, but our our group that supplies the home and garden in agriculture markets. This this.
Quarter tends to be one of the.
Slower quarters from them.
So, but there are fairly small so you don't you don't see a big impact on the overall business for that.
Okay, and then lastly, I'm impressed with the free cash flow that you generated this past quarter.
In this pandemic environments, although Q3 is the weakest.
From a topline perspective from a free cash flow perspective, what are your thoughts there as we look through the year.
No I think.
You're right correct I expect that our free cash flows will remain healthy.
For the remainder of the year.
No we've curtailed capex and.
We've curtailed discretionary spending.
And.
Also anticipating that we'll get a little little pick up in the second here off of our working capital.
Okay, Great. That's all the upper right now thank you.
Okay. Your next question comes from Cart Geiger from date D.A. Davidson.
Yes, good morning, Jeff and Mike and I appreciate all the color.
I just wanted to start on bookings it sounded like going through the segments. There were some green shoots and I was just curious if you think that could maybe diverge from.
The revenue trend in Q3, and maybe see a little sequential improvement or is it maybe a little bit too early to tell.
Well, we we certainly are anticipating a sequential improvement.
In bookings to the third quarter and ended the fourth quarter.
And yes, we are seeing some green shoots and flow control.
And certainly as Jeff mentioned.
And industrial processing in the and the for the award markets.
Got it okay, and I mean I realize this is a business where things can shift around a bit but I mean, you talked about the strength in wood products. It seems like at least box demand seemed to bottom in may and maybe some of those customers that were shot down kind of coming back online here in the third quarter.
And so I guess could you maybe just talk about the disconnect between your expectations for Q3.
And maybe the outlook.
Our kids are getting a little bit better and where do you guys really see things getting worse versus Q2, whether it be by customer segment or geography.
Yes.
Well I think you know overall, we actually.
The things will improve and in all this the segments.
Going forward.
I mean, if you look at the way our products are delivered we it takes many of our products. It takes months to build and deliver though so we in some sense you know we might be lagging. So if the bookings improved in Q3, we won't necessarily see all that you know translate to the bottom line because it takes you know.
Several weeks in some cases bonds to to build and deliver that product. So I think that you know bookings that we see and Q3 will see a lot of that show up in Q4 comes to revenue and or core in Reeves County, and then the 20 to one of 2021, so a little bit of is our product lifecycle as you might imagine our.
Our parts and consumables of course, you know that we go through those.
Sometimes in hours and other times in weeks or months. So those get converted pretty quickly when we get new orders, but but our capital equipment of course is a big equipment last long time, when they place new order. It takes a number of as I said weeks or and sometimes many months for us to actually build that and get that shipped to them. So so it's a little bit.
The timing issue I think with us the bookings versus the revenue side.
Okay that makes a lot of side.
And I guess sticking with parts and consumables and it's fair better than capital equipment, but.
Still been under pressure.
Could you talk about how much of that you think is attributable to just lower operating rates in production levels versus customers, maybe de stocking a bit and I realize that's probably impossible to quantify but any color would be helpful. As we think about the shape of the recovery and the potential for some.
Demand as we get into the fourth quarter in early 2021.
Well I don't think there's any question that people were running down their store they were running down their inventories for two reasons, obviously to conserve cash but also I think it was very difficult for them in the middle of this to forecast exactly what the demand level is going to be for the product. They just didn't know and so you know the combination trying to conserve cash.
And not being able to forecast there there the demand for their product leads to.
Leads to quite a bit of caution now there are clearly was there was a reduction in certain of our customers products there.
You know there's production.
Curtailments and so there's no question that some of our spares spared bookings decline was the result of production curtailments boat I would say that lot of it was the conserving cash and being cautious so what we've seen in past recessions and of course. This one is unlike any we've ever seen before but in past what we've seen it is that the parts or one of the firm.
Things they start to restock when production starts to to ramp back up again, they want to make sure they have parts.
Obviously consume more of our parts. So normally that snaps back you know obviously at a faster pace than the than the capital equipment and we would expect that to normally be the case here that way as production ramps back up we will see parts start to ramp up with that but the only qualifier being that this is unlike any other economic environment, we are experience and so it's.
We're kind of using past.
Past experiences and they're not exactly the same as what we're dealing with here, but we would normally see our our parts to tend to go as operating rates go. So as operator operating rates increase our parts will will have to increase to support that.
That effort.
Right. Okay that makes a lot of sense and then just lastly, oncogene I mean, it sounds like that business.
I have a relationship for interacted with what you guys.
How would harmonic is that something that is actually integrated into carmona products in any way or is it really.
Part of a holistic offering to.
No SB now.
Yes, so it it will continue to operate as a standalone because they they crossover all industries and the fees that were in the direction industries that we're not in and so they will although they focused heavily on the Woodside in a very strong that they actually they actually get contracts to act as the turnkey.
Manager for entire new mills, the newest female goes in they actually might get the contract to manage that entire.
Turnkey.
Operation from an installation and startup standpoint.
So, but they'll they'll continue because they cross and we'll cross over all our different business segments.
And markets they'll continue to operate as as a standalone and they'll do two things. So continue to provide their services directly to the end customers, but there will also work with our divisions and helping to enhance and expand our capabilities and so you know we saw it as a real win win for us because they they have a very nice presence in the market.
Very profitable very very well regarded.
Selling to the end markets, but they also really enhance our internal capabilities and will accelerate our different companies.
Offerings, when it comes to kind of adding more and more digital capability to our products.
Got it makes sense yatin interesting capabilities for sure Alright, well I. Appreciate you guys, taking the time and I'll turn it over.
Thanks.
Hey, Your next question comes on line of Walter Liptak from Seaport Global.
Hi, Thanks, good morning.
Hi, well Cornwall had a one to ask about.
Some of the project delays and I guess I'm.
Interested in sort of the timing.
Was it was the timing word have those delays happened in April may and just we just need time for them to come back to the forefront or were there delays that you don't still crept in in June and July.
So this is something that can continue on.
No you're right well we saw early on so it was more the April may.
And you know folks were.
Notifying us early and I would say.
Some have already been rescheduled.
And there.
The listing I have their shipping in the fourth quarter and there are others that are still we're still waiting for the customer to determine when they when they want to move forward the project.
Okay and those orders are still in the backlog those having that come out of the backlog that right correct. Yes. Those are there still on backlog.
And we now.
Of the orders that I have listed I think there's really only one.
Matt.
That may be end up being a cancellation, but all the others were fairly certain will proceed ahead.
Okay, Great and then you pointed out some of them strong fundamentals and paper in wood products.
And I'm curious about Oh ordering for systems do you need to have sales engineers that go onto the field and because the facilities before you can you know engineer and spec out an order or is it something that you can do remotely.
Or your sales engineers working on this.
Yes. So we are starting we started up several weeks ago going back and visiting customers and no for the larger capital projects that are in discussion stages. You really you really requires some face to face engagement you know normally with up with a team of our people.
And we're doing that now.
You know so that is something that is slowly starting to in the North America and in Asia, and China, particularly Europe I would say has been a little slower to they had been a little more cautious and opening backup and receiving visitors, but certainly in North America and in Asia and China.
Our people were back to the going in and visiting.
Customers, it's not back to the level that we traditionally enjoy and it's going to take some time to get back completely but for the larger projects that are still.
On the drawing board that customers want to continue proceeding with.
It's required in our teams to visit and we're doing that.
Okay got it a couple of quick M&A ones coaching to their penetration yet in paper material handling.
They don't have any penetration in paper to speak of and they have.
A little bit in material handling, but nothing of any significance.
There there are principal focus was on the wood processing side, and that's that's where they spend spend the majority of their time and effort right now.
Okay got it and.
So congratulations on getting that yields and in this environment looks like a good one.
The pipeline look like or is there potential for other deals even with its bad environment.
So we continue as I as I think I mentioned, the last call Weve continued at full speed and evaluating and looking at companies out there at any given moment. We're looking at a couple of hundred companies and of course, they very quickly narrows down to just a handful that meet our criteria.
But we're still our team is still working.
At full speed on that looking for things that fit strategically that are available and I would say that.
You know certainly I think there with the pause button was hit back in in the March April timeframe with sellers, not being able to to visit not receiving prospective buyers or have face to face meetings and so I would think things slow down discussion slowed down quite a bit also I think everyone to see was was the world going to fall apart or was there bottom to this.
And now that I think we have a sense of the bottom I would say that companies that are that we're actively on the market for cell are starting to reengage in conversations bankers are starting to the call up again, so I think that were slowly starting to see more activity.
In the latter part of the year as as people get a handle one just tell severe though the crisis is going to be and I would expect after every returns.
As you know July and August in particular, it gets to be a very slow almost all of Europe is down in North America lot of people are under vacation. So I would expect after the return after the the August vacation.
That will start to hear more from from bankers and about on opportunities that are out there, but we're still receive we're very much we very much and run our business for long term through this through this pandemic. The last several months it really hasn't older much of our planning.
In any way and and acquisitions of course are a key part of that's why we were pleased that we're able to do the acquisition in the middle of this it was because I think of the relationship we had with but the ownership team. There that we were able to do that and they they very much saw the benefits of being part of cadence and we're excited about that.
As we saw the benefits of them being part of a so we were able to get that finished even though we weren't allowed to travel to Canada. There was actually travel ban at the time. So we were not able to travel to Canada, they weren't able to travel here, but because of our long long standing relationship with them, we're able to do the transaction kind of remotely.
Okay got it okay. Thank you very much congratulations on the good quarter.
Thanks, Thanks Walt.
Your next question comes the line of China, Thanks, Harold from British Columbia.
Hi, there so it's hard for British Columbia investment management, just had a question on the outlook for paper markets are white paper is definitely suffering from a kind of a work from home environment, but it's probably leading to potential for more containerboard conversions for some of the some of the assets in North America, How do you think.
Talk about that in terms of impact to educate intermediate stock prep side.
So I think you're exactly right that office you know any any paper associated with office work is severely depressed right now and the question I think really is when what is the new normal when we return when there's pandemic has gone are we going to see everybody be turned back to the office and things, we turn back to two pre pandemic levels or is there a new.
Paradigm shift where a percentage of people will continue to work from home either part time or full time, which I think is likely you're hearing more and more hi tech companies that particular talk about that so to the extent that happens that will you know that will further depress the demand for for white paper in an office paper and it will likely in.
Increase.
The demand for at home product you know if you're if you are working from home you tend to eat at home instead of going out and so there will be more bert you'll be buying more products that the to consume in your home and the packaging tends to be higher for Fred home products.
And delivery so we would expect.
To see an increase in packaging and at home product and a decrease in the Luckily for US of course packaging is our biggest business Y grade as a very small percentage of our of our business. Nowadays. So we will you know weve I think we will benefit from the I mentioned in my comments some of the social trends, we're seeing in some of the consumer behavior, we're seeing weve.
Might actually improve our markets. When this is over and done with and that's frankly part of it if you work from home you're going to consume more resources, there, which tend to be the markets we serve.
We support the housing industry people from working home are I mean, there isn't real estate market is white hot because people realize if I'm going to work for more money a slightly different arrangement. They currently have and so there are lot of them are changing the living arrangements.
People are moving out of apartments buying homes. So the real estate market is kind of on fire and that's actually good for our for our business too because we support the you know the builders in the suppliers of that so I think the shifts were seen we think actually.
Well, you know to extent there'll be a change it will likely be.
Positive for us.
I'm, just maybe a more specifically like on your customer base like the IP is at the world.
And the doctors in the production corp.'s it they're thinking about converting white paper assets into containerboard.
So the tried that kind of receded in talking about like we're going to impact would that have located there when we potentially see orders couple equipment orders if that credit where do you take place yeah. So we as you probably know we get we've had got we've received the majority of the orders for conversions to packaging for mothers. So I mean, obviously.
To the extent that we continue to be successful in that we would likely we expect to receive our fair share of the orders for that timing of which it's hard to say I mean this happened. So quickly that I think right now everybody still trying to understand the data and where the sing likely will play out once a pandemic as is gone. So I don't know that I know the timing of that.
Let's say those orders is conversion orders tend to be bigger projects. They tend to be many many months or even here in the planning and then it can take you know a year to get those things kind of built installed and up and operating so they are longer term.
They are longer term projects for sure, but we do well knows we we've been very successful in those conversions.
And supporting our customers as they as they put this plans in place than we would expect to benefit from that.
Going forward.
And just a quick question on cogent they seem to be very strong it always be like David enrolled in major projects with Norbord.
Weyerhaeuser like the.
You kind of major capital.
Like pressed conversions and it's called into things like that.
Is there a natural extension that you guys can move cogent need to other industries that you guys play in or is it more of their cogent helps to kind of cross sell with with your strider products.
No I think the thing about you know the thing about controlled in automation and you know kind of data management is it almost doesn't care, where it's coming from you know if you're looking at.
Whether you're looking at you know production rates. So you're looking at temperatures are you're looking at vibration or whatever it takes a data.
Kind of puts it in a form that helps the operator and they really don't care. If you think about the digital inputs. So to speak they really don't care what industries are that they are coming from I mean, if we if you're looking at cogent.
Portfolio of projects I mean, they've done work for four for its transit systems they've done work at.
Transportation operations like airports and things I mean, they really.
Their systems really can be applied almost anywhere where you're getting a digital signal and trying to make decisions based on data and so that's one of things that we really liked about them with their platforms are operating systems or capabilities.
Apply quite quite easily to to our our paper industry and frankly into our material handling we provide big system do you think about the in the aggregate market. If your mining you know sold or stands there.
Other things you have these miles and miles of conveying systems and control systems and power units all those require.
Constant data monitoring and.
Data management and there's a lot of you know kind of operational opportunities that come out of understanding what's going on and so I think the technology easily applies to all of those industries that the challenge for US is the taken those industries.
And.
When you get them fully knowledgeable about.
The processes that that we provide to those customers.
Alright. Thank you for that that's it from me have a good morning.
Okay, you have a follow up question from John Frenzy.
Yes, it's how are you seek to wonder if I can for firstly on the last topic and material handling side of the business.
What does the booking profile look like kind of alluded to the talk to his but there certainly has to be better. The first is.
Is there any particular end market the mining a food and packaging material handling that is looking better than others.
Well I think the food side of businesses.
Everybody loves food, because it tends to be whether more stable.
And I think.
Again as I mentioned when you when you shift.
Food consumption from from a percentage of it being out at restaurants, where they receive things and very large volume in fall to the smaller at home packaging of course that increases the demand for for our technology, because our technology supports the packaging of of that product. So that's one.
That I think it has had some opportunity for us.
The other thing I think they the infrastructure spending.
As has been and they see the markets that support that had been down for several years and we're starting to grow before this pandemic kit and of course, everybody can hit the pause button, especially on a larger projects, but we think as as this thing starts to clear and those industry start to recover we would expect most of our markets in that in that business continue to grow.
So.
We had a very strong booking in the first quarter I think record record backlog and that business over the last four or five years, it's grown kind of between four and 8% a year. So you know is that business has experienced some pretty nice bookings growth over the last several years interrupted by the pandemic, but what we work through that we expect it to resume and.
Okay.
Theres, the industry's growing but more importantly, where we're picking up markets here.
And that business and so a lot of the growth is coming from us.
You know.
Picking up market share from from other suppliers out there around the globe.
Okay and recording Furloughed employees, when do you expect to bring them back and in your margin expectations for the second half the year. How much is captured from the government sponsored programs is embedded in that number.
It's John I'd say, it's a it's.
It's a it's a smaller amount I would say, it's going to be roughly I mean, we're estimating because were we believe things will improve in the these programs will be of less benefit to us I'd say about half of what we saw in the second quarter and the second half in the margin.
And the timing of bringing your own guys back.
And does that very much will be dependent on the.
Well, how fast things recover you know one things as you know that tends to happen when you're forced to.
To have workforce reduction because of the of the decreased demand when things come back you are always very cautious of bringing people back and so you 10, we tend to experience.
Activity improvements when those things happen and so we don't you don't bring every back right away you learned that Theres things you can do differently.
And so.
I would say its.
It's difficult to predict exactly when we're bringing people back we obviously hope that our business. We turn it back very strongly and were able to go to to simply everybody but.
Our experience has been that when we come out of these kind of recessions that youre you're.
Your employee base recovers more slowly because you're just more productive.
For a period of time.
Okay. Thanks, guys for taking my follow ups.
Can you have a follow up from Cat Jaeger.
Yeah. Thanks for taking the follow up to two quick ones first in flow control is there any way to think about what percentages your customers might have experience some sort of shutdown in the second quarter.
Yeah. It was it was almost I would say was almost everybody, but the paper guys [laughter]. That's it that's an overstatement of course, but it was a large percentage of the non paper. The non if you weren't designated as a critical infrastructure company. There is a good chance that your production was curtailed or stop completely.
And so now certainly paper is there is still the largest market.
But.
But they have a sizable portion that serves general industry and an awful lot of that was was curtailed or shut down completely I don't have exact numbers.
But it was it was a significant piece okay. No. That's helpful. And then just returning to the conversion conversation I mean is a fair characterization to say.
For Dash of the board of one of these projects is really important and sizing the opportunity where.
Whether its virgin or recycled.
Michael side, it's really.
A bigger opportunity for you guys for capital equipment.
Certainly our primary technology serves the recycle market, we do have a we do have a business that.
Services and supplies into into the pulp production market, but the majority of our of our business on that side is on the recycle side.
I think what what will be interesting and I'm sure that all of our customers are analyzing right. Now is what is the likely permanent shift.
In in packaging that resulted from this this pandemic I mean, a lot of people that had not going online and shopped online were forced to do so having set up accounts and gotten comfortable with doing that I think it's reasonable to assume that allow them. We'll continue doing that after this thing.
As is gone so and I'm sure that our customers are right now trying to determine okay. What kind of increased demand do we think is permanent and it's probably a little too early to know that but I think there will be clearly increased demand that comes out of this and.
To the extent.
The the packaging that's produced in the North America is the best packaging in rural.
A large percentage of it is initially made from Virgin fiber, it's very strong it's very high quality and so the.
The the recovery of that.
Post consumer and the recycle that I think we'll we'll continue to grow.
Because of the value of at the strength of it now as you know the China waste import ban, which will go into effect it into the sheer completely has has.
Created some disruptions dislocations in that business, but they are starting to sort themselves out and they will over the next year too I think the they'll sort themselves out and we'll get back to an equilibrium.
So I think.
It's literally to know exactly what the increased demand and therefore production capacity will be but I think there will be some.
Right. Okay. That's helpful. Thank you guys.
I'll now turn the call back over to Jeff for closing remarks.
Thank you operator before wrapping up the call today I just wanted to leave you with a few takeaways from the quarter.
From the very beginning of the crisis or health the health and wellbeing of our employees has been and continues to be our top priority I'm very proud of our employees resilience in the hard work to serve customers throughout these uncertain times.
As many of you know canyon is a proven track record.
Strong cash flow generation, our largest all base and demand for parts consumables continues to be a source of strong free cash flow.
As we look ahead to the to the recovery around the world, we're seeing changes in consumer behavior, social trends that we believe could improve the underlying strength of the markets. We serve particularly in the food housing in the packaging businesses.
And finally im excited about the prospects we have with addition of cogent indicate and family.
And the potential opportunities around industry 4.0, and the role cadence products and technologies can play in our customers digital transformation.
This is a strategic addition to the group of companies and one that I look forward to discuss in future calls.
Thank you for joining the call today, we look forward to updating next quarter and they stay safe.
This concludes today's conference you may now disconnect.
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