Good day and welcome to the Alamo Group Inc Second Quarter 2020 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Ed Rizzuti, VP, General Counsel and Secretary. Please go ahead.

Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at 212-827-3746 and we will send you a release and make sure you are on the company’s distribution list. There will be a replay of the call which will begin 1 hour after the call and run for 1 week. The replay can be accessed by dialing one 1888-203-1112 with the pass code 227086. Additionally, the call is being webcast on the company’s website at www.alamo-group.com and a replay will be available for 60 days. On the line with me today are Ron Robinson, President and Chief Executive Officer; Dan Malone, Executive Vice President, Chief Financial Officer; and Richard Wehrle, Vice President, Treasurer and Corporate Controller. Management will make some opening remarks, and then we will open up the line for your questions. During the call today, management may reference certain non-GAAP numbers in their remarks. Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release. Before turning the call over to Ron, I’d like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the company’s actual results in future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following: market demand, COVID-19 impacts, competition, weather, seasonality, currency-related issues, geopolitical issues and other risk factors listed from time to time in the company’s SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date. I would now like to introduce Ron. Ron, please go ahead.

Thank you, Ed, and we want to thank all of you for joining us here today. Dan Malone, our CFO, will begin our call with a review of our financial results for the second quarter. I will then provide a few comments. And following our formal remarks, we look forward to taking your questions. So Dan, please go ahead.

Thank you, Ron. The key takeaways from our second quarter and first half 2020 results are: second quarter net sales were down 5.8% compared to prior year as the effect of acquisitions did not fully offset a 22.3% organic sales decline. Record first half net sales were up 6.6% with acquisitions, but down 13.4% organically. Second quarter adjusted EBITDA was down 4.9% from prior year, but higher than prior year as a percent of sales. First half adjusted EBITDA increased 9.7% over prior year, and adjusted EBITDA margin was also up as a percent of sales for the same period. Net income and earnings per share were down due to COVID-19, but acquisitions were again accretive to net earnings, even with the full burden of incremental interest, amortization and inventory step-up expenses. Second quarter operating cash flow was $53.1 million, up almost 60% over prior year. Outstanding debt was reduced by $51.5 million during the quarter. Quarter end cash on hand plus loan availability remained above $200 million, and quarter end backlog was $217 million, down 6.9% since the end of March. Second quarter 2020 net sales of $268.6 million were 5.8% lower than the prior year second quarter. Without acquisition, organic sales were down 22.3%. Without the unfavorable effects of currency translation, organic sales were down 21.2%. The organic sales decline was primarily due to COVID-19 impact. First half 2020 net sales of $583.1 million were a company record and 6.6% higher than prior year with the contribution of acquisitions. Without acquisitions, organic sales were down 13.4%. Without the unfavorable effects of currency translation, organic sales were down three 12.3%. The organic sales decline was less than the quarterly comparison because of stronger pre COVID results in the first quarter. Industrial division second quarter 2020 net sales of $182.3…

Thank you, Dan. Alamo Group’s second quarter results were certainly soft, as Dan just reported, as our press release reported. But given the dramatic effects COVID is having on the economy and our business in general, I feel our results held up reasonably well. Sales were off about in line with the expectations we indicated last quarter, but earnings were better than we thought they would be. And cash flow, which we felt would be strong, came in even better than we hoped, which allowed us to pay down over $50 million against our debt. Given the circumstances, I am very pleased with our performance and proud of our staff, in general, because it was certainly no easy accomplishment. The second quarter was quite a roller coaster ride with plant closures, stay-at-home directives, travel restrictions and all the challenges we’ve all faced and are still contending with. And I know we were not alone in this endeavor as nearly everyone’s had to adjust their way of living and working to deal with the crisis. But while some businesses could adapt to working remotely better than others, let me assure you, we’re not an industry that can work from home. We cannot build our equipment virtually. We have to have people show up. And our people really made the extra effort to ensure we continue to function effectively and never lost focus during the last quarter on doing so economically and efficiently. I am glad to say that as of now, all of our plants are open and operating and we are continuing to make deliveries in a timely fashion. And while our new bookings are running at a lower level than last year, they are still coming in at a consistent pace. And fortunately, our customers in both our agricultural…

[Operator Instructions] We have a question from Chris Moore, CJS Securities.

Hey, good afternoon guys. Thanks for taking a couple of questions.

Yes, good afternoon.

Yes, good afternoon. Maybe just start with backlog. So I understand a little bit better. So just trying to get a sense as to whether products are cycling through more quickly now, more slowly, kind of maybe the average number of days in backlog currently versus where it might have been this time last year. And is that influenced by mix or just trying to get a better sense of what’s happening there?

Actually, so far, it has not changed appreciably. I mean, our lead times are about the same. Deliveries are running. We have got a few there’s a few sporadic issues on some maybe some purchase components. But by and large, the supply chain is supporting us in a fairly normal fashion. And our lead times are fairly normal. And so the backlog is as a number of days of sales has held up fairly consistently with pre COVID conditions.

Is the mix in there much different? You had talked in Q1 where you some of the big-ticket items were the ones that kind of warrant selling through at this point in time. Is that still the case?

That has is changing slightly. I think the big ticket I mean like some of the big things like great oil excavators and Morbark’s, big industrial machines. Saw a little bit softness, more softness early on, and they have actually both those kind of areas have improved. So, big ticket items have actually improved slightly. I mean all sales are still a little soft. Like I said, industrial has been a little softer than ag. Ag is up. In fact, yes, their backlog even since the end of the quarter, have continued to climb. So yes, in fact, today, our backlog is higher than it was at the end of the quarter. And but big-ticket items have shown a little come back a little stronger than they were a couple of months ago, but all in all, fairly consistent. Like I said, probably spare parts have held up better than whole goods. So spare parts as a percent of sales would be up a little bit, which would be a more favorable mix. And certainly, spare parts, they really have very little bit to do with backlog because they go in and out of backlog so quickly. But that would be a little bit of a different on the mix, which is favorable because, like I said, it’s a higher-margin thing, and it tends to be flow through much quicker. But other than that the trends have been more subtle.

Got it. That’s helpful. Thanks, Ron. I will jump back in line.

Sure. Thank you, Chris.

Our next question comes from Mike Shlisky, Collier Securities.

Yes. Hey, guys. Good afternoon.

Hey, Mike.

A bunch of a companies that we have heard from today have kind of given us some information about intra-quarter movements in other sales or orders. Can you give us perhaps quantify for us how sales or orders progressed sequentially from May over April, June over May and July or June, beyond what you have already said about just being up. Any kind of numbers we kind of put what behind that progression would be appreciated?

Yes. Well, as I said, April, there were a lot of operational issues. I mean I think we were all kind of dealing with sort of this new paradigm that we have been faced with. So I think there were more operational issues, and that limited I mean, orders as people were, I would say, only doing what they had to and looking ahead was a little there was more issues with that. So those started to get better in May, and they have even continued to get better in June. While there are still certainly some operational issues, like they have fairly limited, we figured out ways to work and to make our keep our plants open and yet conduct business in a safer way and everything. So now what we are seeing I mean, as I said, on the governmental side, I think budget constraints were already starting to see where they are being a little cautious and because I don’t think they know exactly how much money they are going to have to spend, and they are trying to deal with that, and that’s a very dynamic situation. So that’s changed. But even within that, like I said, the ag has held up fairly steady. And as we moved into the from like I say, a little bit of more uncertainty is on functionality, it all started improving. May was better than April. June has been much better than May. And so I mean, each month-over-month, on really both sides of the business, we have seen consistent improvement as people figure out how to work with it and try to get back to conducting business in a little bit more normal fashion. Like I said, it’s interesting, our equipment on both sides of the business is actually…

Okay, got it. And if I can follow-up with you on that on some of your ad comments there, I am curious, if you look at all the profit plan this year, not just corn beans, but both in barley and everything else out there, it looks like we have got about 10 million extra acres this year versus the prior year. All that land has to be cleared it has to be work tended to, etcetera. Do you get a sense that there will be elevated replacement coming next year, assuming COVID is more or less gone by then?

Yes. That would help a little. Like I said earlier, acreage under cultivation is remaining steady. Like you said, I mean, there’s a little bit more. And of course, it seems to be shifting a little bit between commodities based on prices. So but I see ag remaining steady, but they sort of and that helps. I mean, if you have so many acres under cultivation, you have to have equipment to manage those. But it would help if they were getting a little bit better commodity prices, for those commodities. I think, like say, farms are operating at a fairly steady level, but it’s a fairly low level, like it’s been the last couple of years, more so due to farm incomes being soft the acreage under cultivation. So I think that provides a baseline and keeps things steady, but it would be nice to see a little bit better, higher level of farm incomes for that sector to really rebound nicely.

Mike, this is Richard. Also on top of that, too, if you recall, last year, in March and April, there was some heavy flooding in the Midwest that caused that cultivation acreage to be down versus this year.

Right, correct. Exactly. Okay, yes.

Right. Okay.

And then I wanted to just switch over to a quick margin question as well, it’s pretty admirable given over the prior year, you had some consistent EBITDA margin, more or less, and certainly a change between which segment brought to those markets, that’s always good to see as well. I am kind of curious, in the second quarter, were there any temporary cost reductions that will be coming back immediately in the third quarter and you too hand log anything second forth?

Yes. No, Mike, that margin improvement is really just a straight up, continuing. It’s a function of the Morbark margins being higher. There are some lower commodity costs, but those are trending down. We had a favorable mix of parts. So you know the impact that that can have. And then even in the whole goods, we were we had a favorable mix. You think about some of the things that were down were like the big ticket, truck-mounted type of equipment, and we don’t have a big margin on the resale of the chassis. So whole goods, and even on the ag side, we had a favorable mix of whole goods. So it’s whole its mix, it’s parts mix. It’s higher Morbark margins. That’s the main story.

So then it does sound like, especially given this the first third quarter of having more about in new business, if do you have any kind of even a small amount of scale back on your top line in the third quarter, you should be able to keep ramping up the margins as well?

Mix, as we think is a small piece of that change. We think EBITDA margins are going to be a good story all year long.

Got it. It sounds like you kind of answered my next question, but maybe I can just kind of go on to the chassis availability situation. As I recall, you had a good inventory of chassis during a time when other folks may not have had some Class A chassis to attach things, too. Is that still the case today? And how do you feel about obtaining and passing through all those [indiscernible]?

Yes. So far, chassis availability has been has held up fairly steady. I mean, I know early in the like the COVID thing, several auto and truck plants were shut down. I think most of them are back opening and all. And but yes, right now, between our own inventory and the market availability, as I said, we have had no major supplier issues. I mean we have had one-off issues where one special chassis and that one was hard to get, but other than that, I mean, in general, we have had decent availability of truck chassis, and that seems to be holding fairly consistent even today.

Got it. That’s great color. I will hop back in queue. Thank you.

Thank you.

Our next question comes from Joe Mondillo, Sidoti & Company.

Hi, Ron, Dan. Good afternoon.

Hey, Joe.

Hey, Joe.

So I wanted to ask about the government business and what you are hearing there. So compared to when we last talked at the end of April, it sound – it almost sounds like things have gotten worse, but is it is that the case or is it a case in point where we have just gotten a little further down the line and you are just talking with your customers more and things have gotten further along in terms of budgets, and that’s really what the case is. And then just to follow-on to that, are you expecting because some of your wording, it’s a little unclear. Are you expecting the back half of the year related to the government business to be worse than, say, the volumes that you saw in the second quarter?

No. we are not expecting things to be necessarily worse. Like I said, communication with customers has improved, but their budget situation is still a big unknown. And I think, like I said, they don’t know. So I don’t know. But as I said, even in industrial, orders have been picking up month-over-month since they were very soft April, better in May, better in June. It looks like they are running better in July. And each month seems to be getting a little bit better. I think that bodes well. I don’t see anything that’s going to make it worse other than fact that, like I said, governmental budgets are a bit of a challenge. And as you know, federal government is talking about some kind of this next stimulus package is going to is supposed to have money to orient it toward the states. And I think it’s necessary. I think and I just hope that they do it sooner rather than later, whatever they do. But yes, I think like I say, I don’t have any particular concerns. I think, yes, business is going to stay soft, while budget there are budget constraints. But I think we will hold up fairly steady. Our order intake is coming in fairly steady throughout this, just at a lower level. And I think that level is picking up. And I see I don’t have anything in particular that says something is going to change or it’s going to get worse. But I mean, we have a pretty good I am glad we had a pretty good backlog going into this, and we still have a pretty good backlog. And as long that helps move out some of the rough spots and some governmental ordering, but – and that’s, of course, always for manufacturing company, new orders are the key. And yet there’s uncertainty when your customers’ budgets are in the shape governmentals are. So I am concerned, I am always concerned. But I have no reason to believe that there’s anything untoward that some problem working around the corner that I am not aware of.

Okay. And how much severance expenses did you see in the quarter?

Fairly minimal because we actually I mean, while we have had some permanent layoffs, I mean, the majority of the people, it’s been furloughs and temporary layoffs and work share programs and such so that you don’t have severance costs. They’re still on our books and that. We have had a few more layoffs, but I mean, like I said, the first levels are it’s been not a lot of tenured employees. So the dollars have been fairly negligible in our results. Yes. So far, severance expense has not been a particular issue.

Okay. And at what point I mean, things, I guess, have rebounded pretty strong from April to July. So maybe the furloughs just start to come off as your volumes start rising. I guess there’s maybe also an option where if things do look like they are maybe a little more slow and prolonged, then you take much more structural changes. Is that sort of how you are looking at?

Yes, I think that’s right. I mean at some point, we want to see how I mean, we have actually half the people on furlough we had 2 months ago. So I mean the number of people being furloughed has been cut down. And you are right, but we have done a few we see that some areas where we think it’s going to be soft for a while, we have done converted a few into permanent playoffs, too. So we sort of outlined that in the press release. And I think that’s, yes, I mean, we will probably we think in the next few months, we will have a few more cool off, furlough, maybe a few more to go on to into permanent layoffs. But we are still waiting to see sort of where we think some of the business levels are going to sort of settle in that, at least for the next couple of years. I mean, our view is, it’s not just getting to the end of this year, but look, if we – where we think how business is going to start shaping up next year. And the key to that, I mean, first of all, we got to get this COVID situation under control and some kind of a solution to that, that’s going to allow things to not be worried about the second wave, but it’s just like permanent changes to the way people do business. So we’re worried, we’re concerned. But I mean, like I said, that’s why I think we’re being cautious and we’re being taking steps necessary, but it’s not like, like I said, we think there’s something major coming down the road. One thing we have done in this is we are last each year we’ve done a little bit of plant consolidations. And last and we each time we do that, usually, there’s a few layoffs and some consolidations as we do that. And we’ve already that’s one of our goals over the long term, is to have fewer, bigger plants. And in COVID I mean we’re continuing with those initiatives already. So I mean, we’ll do another, we did a couple last year, we’re doing a couple this year and we’ll probably do another one next year. So I mean that kind of ties into that as well.

And I guess to follow up on that. Where are we with the Milwaukee consolidation? Is that pretty much all set in stone? I think it was supposed to be done by the end of the first quarter. And the consolidation that you’re doing this year, I wasn’t what you exactly are you doing? And is that going to be material? Or are these some pretty big utilizations or.

Well, first of all, alright, the Milwaukee One is finished up and running. I mean some of the one thing you will notice, I have said we have cutback on CapEx, and we really have, but it looks like CapEx in the first half was a little higher than we sort of indicated, and that was because of some of the cost from the Milwaukee One was in sort of a working account instead of turned into capital into the put on to the capital account. And so it looks like we actually spent more, but all that was really a holdover from last year. So I mean, sort of like a delay in the timing from last year. So we really are have cut back. But that is done. It is up and operating. We plus, we consolidated into that. We owned one of them. That one’s not only been closed, it’s been sold and we’ve collected the money. So that one went well. It’s a good plant, and I’m glad we got it done before all of this hit. Just it makes it much easier. So we also had announced we did last year in Canada, we took our RPM plant, which was 20 minutes away from our Tenco plant and combined those two. In the last quarter, we also sold that plant, the Tenco the RPM one in Quebec and sold, closed that, got the money. When we bought Morbark, they had three locations, two in the U.S. and the smallest one was up in Canada. We had sort of our plans were to move that into take them from three to two locations. And we that is that’s the one that’s a fairly small one that but we have announced that is now under way and should be complete this year to close one of the Morbark ones and move it into another one of their plants, but moved closed one in Canada and move it into their one in Ohio. So that is under way. And yes, like I said, we are always looking at these opportunities to lessen our footprint. And we got a few others that, like I said, in the next couple of years that we plan on continuing on those on a regular basis.

Okay. And just last question sort of a follow-on to where you ended there with Morbark. It sounds like the COVID downturn didn’t set you back too much regarding integration and synergies and a lot of the things that you have planned on and probably still are planning on doing. Could you just update us on how the integration with Morbark is overall doing?

Yes. I think in general, it’s going well. Like I said, some of the international cross-selling we wanted to do has kind of been put on hold just because of logistical problems with traveling, especially internationally. The purchasing synergies, I think we feel good that we have identified and achieved a lot of procurement opportunities. With lower sales, obviously, we’re buying less. And so we’re not so the dollars haven’t come in quite the same at in total as much. But the pace is, like I say, we’ve achieved what we plan to and believe as the sales pick up, those savings will pick up as well. We had we knew, too, that we like the health I mean, some of the cutbacks in staffing at Morbark is related to COVID, lower business levels, but it’s also somewhat related to the fact that we’ve installed more technology in that plant. I mean, we literally, from the day we bought that in October of last year, started making some capital investments in some labor savings technology and putting in some robots there, which we funded early on in this. And those are actually now coming up and starting to operate, and we are very pleased with the technological developments that we’ve made there, which we believe have very good short-term paybacks. And so I mean, so operationally, those have proceeded ahead. Procurement ones have proceeded ahead and IT I mean so IT, we had a little bit of a delay because in the very beginning, when there was people being furloughed, we didn’t have all hands on deck, but we’ve restarted that IT integration, and we still plan to complete that this year as well. Yes. So by and large, it’s moving ahead. And like I said, the one plant integration is actually moving ahead of the sales. So we are moving ahead, actually better than I thought we would be able to, given the operational challenges of lack of being able to travel and everything else that we have all been faced with.

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

Thank you, Joe.

[Operator Instructions] The next question comes from Chris Sakai, Singular Research.

Hi, everyone. Just to add clarity, a question on Europe, the Europe operations. If you could shed some light there, why was Europe facing more operational and demand issues than North America?

First of all, like in France, I think the government came down much harder. They were like here. I mean, most of our businesses were all deemed essential. In Europe, they really wanted you to justify like it was harder to justify. They put more restrictions on travel. So early on, like I said, when we our plants in France and all were closed down more, we like I say, it was just I think the whole country was a little bit harder to function. I mean, moving around, transportation was harder, everything was harder. Some in respect to England, I mean, I think England was a little slower starting and really had more seem to have more incidences of the COVID situation. I think they were hit pretty hard for a while. And again, they responded. It’s interesting. England and France, our plants, especially during April, most of our plants were closed down for almost, like say, here, we go in the U.S. We have plant closed for a couple of days and then reopened there. It was two or three weeks before they would reopen. Though it’s interesting, our plant our three plants in the Netherlands never closed. They seem to be operational and functional throughout this. But like I said, I think the governments in England and France really have a lot more directives to keep things shut down and really limit travel. And you really almost if you were out on the road, you almost had to have some kind of a letter to say why you were out on the road. So just it was operationally a lot more challenging. And I think people didn’t function as much. Order intake was very low during those months, which has improved, now that they’re more back functioning and everything, but that created sort of a gap in the backlog while they were shutdown and so but so a little bit more operational challenges there. And so like I said, Europe just came down harder. You can if you can write even within the U.S. or like New York, New England came down harder. We had more operational issues in New York, New England kind of areas than we did in other parts of the country. And they got hit harder. And you go back and forth. The other parts of the country, should they have done more or should they be doing more now, but it’s we’ll all be second guessing, but I am just saying, England and France, we’re much more operational issue.

Right. Okay. Just another added question on, I guess, you guys reduced debt by $50 million this past quarter. Say, I mean, in the future in the next quarter, this cash flow is just as good. I mean are you going to plan on reducing debt again or are you looking what’s does it seem like for M&A opportunity?

Well, going into this year, since we did three acquisitions last year and did our biggest ever and had more debt than we typically carry. I mean, we had already said we were going to slow down on M&A activity going into this year, even before COVID hit, and we are focused more on integrating acquisitions from last year and paying down debt. So the fact that sort of the whole industry decided to take an M&A holiday for COVID suited, that’s just fine because we were already taken one. So I think you are right. And I mean, a lot of sale processes were sort of delayed and especially in industrial, manufacturing, industrial companies, maybe high tech, maybe pharmaceuticals or medical or those kind of things went on, but not industrial manufacturing. And I think there are some property assets out there that people would like to probably sell. And I think they are already looking at trying to start up some of these sale processes again. But I still think it’s going to be a bit challenging. Travel is still challenging right now, and people are only doing absolutely necessary travel. And the other thing is I think industrial companies, valuations are going to be a little bit harder because I mean everybody says, you can’t use EBITDA from today. You got to look at pre COVID, but how long it’s going to be before we get back to pre COVID. I mean, I think this could be, oh, like I say, even if things start getting got sorted out and things start getting better, I think it could be a little slower recovery. So I think M&A, like I say, I think we are looking we believe acquisitions remain a part of our strategy, and we want to pursue them. And but we are fairly conservative on financial structure, and we want to make sure we have the wherewithal within our comfort limits of pursuing it. And we would probably do something smaller before we do bigger. But yes, we would we are still looking. We would still look. But like I say, our in the short term, our focus is much more internal.

Okay, great. Last, guys, I would just like to know, I mean, what do you guys see as a chance of your factories being shut down again? Well, your guess is as good as mine. I mean, yes, I don’t have any particular insights into that. I think most our plants are given that we support a lot of governmental and a lot of agricultural functions, our plants have in the past have been deemed pretty well essential and have gotten ability to stay open. So I mean I think that we are it’s probably a fairly low probability that they get shut down for any long period of time. I mean if they are very health issues or not either within us or within an area. I know like recently, one of our plants in France, we had to go by and they said there’s a big increase in this part of the France of COVID. So they were making everybody shut down for a day and test everybody. I mean we literally have to test everybody in one of our plants. And then we could reopen. But unfortunately, number one, they could test everybody in one day and get the results in the next day. So I think and that’s another key, too, is just where we go with this COVID situation. Is there going to be a second wave? Is it going to be as bad than the first? Are we going to have those some kind of a drug that can solve this problem? Or what’s that? I mean there’s a lot of what if scenarios. But I mean, I think we’ll do better than most, just because our need plants are pretty well deemed essential. I think it helps that most of our plants are in basically more rural areas, smaller towns. I mean we don’t have plants in big cities, not only in the U.S. but not in Europe either. I mean we are in the smaller community which seemed to be a little bit easier to control. I think in our plants, we are able to self social distance even within our plants because it’s not like we are running assembly lines where we have people shoulder to shoulder. I mean people operate in cells within our plants, and they don’t tend to accumulate in big groups and so we don’t have problems with that. So actually, I think we’ll continue to function. I don’t see major problems. But on the other hand, I am like I say my crystal ball of how cohort is going to develop is pretty cloudy these days.

Okay. Well, thanks, thanks for that.

Thank you.

There are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Okay. Well, again, thank you all for joining us today. We appreciate your interest and support of the company. And like I said, I think we it’s a challenging situation, but we feel good about where the company is and our ability to deal with the at least the issues as we see them currently. So anyway, thank you, and we look forward to speaking with you on our third quarter conference call in the end of October. Have a good day.

Thank you, ladies and gentlemen. This concludes today’s teleconference. You may now disconnect.