Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Kadant Incorporated Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Michael McKenney. Please go ahead.

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

Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our second quarter results and discuss our outlook for the second half of 2020. Since our last earnings call, the world has continued to be impacted by the COVID pandemic, which has led to an economic crisis in nearly every region of the world. Most countries continue to deal with this pandemic and depressed economic activity. I'll begin with a few comments about our operations and how the pandemic has continued to affect our business. Like most other industrial companies, we have been affected in many ways by the pandemic. The effect of COVID made the second quarter one of the more challenging quarters in the history of our company. Our global workforce has adapted to a new way of work and performed exceptionally well under extremely challenging circumstances. I'm very proud of our talented and dedicated employees around the world for the work they've done and continue to do to serve our customers and each other. We are fully operational at all of our manufacturing facilities and continue to work under enhanced safety protocols designed to safeguard our workplaces and protect the health and safety of our employees. These precautionary measures have served us well and allowed us to continue operating in every region of the world. While some regions around the world are starting to reopen, it will take some time to see this increased economic activity reflected in new orders. The early signs of the recovery are still fragile and could be upended by new surges in the virus. Having said that, we believe we are well positioned to navigate through the pandemic and uncertainties in the economic environment. Our balance sheet remains healthy, and our liquidity position is solid. Robust cash flows have…

Thank you, Jeff. I'll start with some key financial metrics from our second quarter. Slide 12 is a summary of some of the key financial metrics that I'll comment on over the next few slides. Our GAAP diluted EPS was $1 in the second quarter, down 30% compared to $1.42 in the second quarter of 2019. Our GAAP diluted EPS in the second quarter includes $0.03 of restructuring costs and $0.03 of acquisition costs associated with our acquisition of Cogent, which was completed in June. In addition, our second quarter results include pretax income of $2.1 million or $0.14 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. Consolidated gross margins were 43.5% in the second quarter of 2020, up 150 basis points compared to 42% in the second quarter of 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 in inventory that was included in the results for the second quarter of 2019. Parts & Consumables revenue as a percentage of revenue remained fairly consistent with the prior year at 64% in December of 2020 compared to 63% last year. SG&A expenses were $45.1 million or 29.5% of revenue in the second quarter of 2020 compared to $48.5 million or 27.4% of revenue in the second quarter of 2019. The $3.4 million decrease in SG&A expense included a $1.1 million decrease from a favorable foreign currency translation effect and a $0.8 million benefit from government-sponsored employee retention programs. The…

Thank you. [Operator Instructions] Your first question comes from the line of John Franzreb from Sidoti Incorporated.

Good morning guys. How are you doing?

Good. Hi, John.

Hi, John.

Actually, I'd just like to talk about the bookings profile. You mentioned that wood was better than you expected. But when you look at the segments that you participate in, what kind of surprised you on the downside relative to a quarter ago?

I think we certainly expected our capital equipment to be impacted the most than it was. I think the noncritical infrastructure, industries that were shut down completely, that was a challenge for us. The paper side, of course, because it was a critical infrastructure, continued to operate, and we did reasonably well there. But the noncritical, all the other industrials out there, many of them were shut down around the world for a couple of months. And obviously, that had a big impact on our bookings. So as we look at our reduction in bookings, it 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 an economic environment where whole industries were shut down around the globe for an extended period of time.

Are your thoughts that some industries are clearly indicating a troughing effect and you expect them to have a more V-shaped recovery? Or are you hearing from your customers a more cautious outlook in the near term?

That's a big debate, a big discussion. As you know, that's occurring nationally as well globally as how quickly will the recovery 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 in an environment where we're going to have to manage social distancing and the other safeguards that we've taken, then I think it's going to be a more slow recovery. If, in fact, there's a vaccine available early in the year, and I think we could see – to have a rebound or a snapback and industries might actually return at a quicker pace. But it's really, I think, going to depend on how quickly we can get control of this virus.

Okay. And just switching to the paper market for a second. You kind of touched on how packaging and tissue has been kind of pulled forward. What are your thoughts about maybe more the institutional environment, like the back-to-school season is coming, and usually, there's advanced buying in that market. There's a lot of uncertainty going on, what that climate is going to look like. The office supply market with so much remote working, what's your thoughts there on that side of the paper business?

So I think if you look at the – I know I think PCA announced earlier today. If you look at what our customers are experiencing, of course, the packaging side continues to be reasonably strong. Certainly, home delivery packaging market is doing quite well. The tissue market is doing well. But the office supply side it's really been impacted by this and will continue to be impacted, I think, as they work from home. So I think that, that's really a tale of 2 stories. The home delivery is doing quite well. Office-related and commercial-related is struggling a little bit.

And 1 last question, if I could sneak it in. Cogent. It's an integrator. Can you talk a little bit about the strategic decision of purchasing it? Do you have any market concentration that is particularly appealing to you and where you expect to take that business going forward?

Yes. So we've known Cogent for quite a while. They're quite strong in the wood processing side. So they've worked with our wood processing businesses for many, many years. And they have a very, very, we think, attractive platform offering for process industries. And so we think that what they're doing and have primarily done on the wood processing side can be applied to our Material Handling segments as well as 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, is to take that capability that they 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 customers' digital transformation as well as ours where as you know, we've been working for some time in connecting our products, 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 – to a lot of our customers around the world.

Great. Thanks for taking my questions guys.

Your next question comes from the line of Chris Howe from Barrington Research.

Good morning everyone.

Good morning.

Hi, 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. Perhaps you can speak to this level of accretion. And how you felt about the multiple you paid for the business?

Yes. Chris, yes. It will be accretive. Their EBITDA margins are north of 20%. But this business itself is small. So – but it will be accretive.

Okay. And then my next question, Jeff had mentioned the product mix that benefited margin in the Material Handling segment this quarter. Has that product mix continued into July? And do you expect a similar product mix to have a similar benefit to margin in this segment 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. Chris, well, at the very beginning of the year, we had originally – in January, we originally guided to margins of 42.5% to 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 can still be in that range and to the higher side of it. And I'm optimistic that we'll see that specifically also in the third quarter with the product mix.

Okay. That's helpful. And – but the going back to the beginning part, the product mix in Material Handling has moved forward into July? Or has it changed at all?

We haven't had a – there hasn't been a lot of movement on the Material Handling side.

I would the one, it's one of our smaller groups but our group that supplies the home & garden and agriculture markets, this quarter tends to be one of the slower quarters for them, but they're fairly small. So 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 environment. So although Q3 is the weakest from a top line perspective, from a free cash flow perspective, what are your thoughts there as we look through the year?

No. I think you're right, Chris. I expect that our free cash flows will remain healthy for the remainder of the year. We've curtailed CapEx, and we've curtailed discretionary spending. And I'm also anticipating that we'll get a little pickup in the second half off of our working capital.

Okay, great. That's all I have for right now. Thank you.

Okay. Your next question comes from Kurt Yinger from 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 may be diverged 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 certainly are anticipating a sequential improvement in bookings to the third quarter and into the fourth quarter. And yes, we are seeing some green shoots in Flow Control. And certainly, as Jeff mentioned, in Industrial Processing in the – for the wood 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 seem to bottom in May and maybe some of those customers that were shut 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 that the end markets 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?

Well, I think overall, we actually believe things will improve in all the segments going forward.

I mean, if you look at the way our products are delivered, it takes – many of our products, it takes months to build and deliver those. So in some sense, we might be lagging. So if the bookings improved in Q3, we won't necessarily see all that translate to the bottom line because it takes several weeks, in some cases months to build and deliver that product. So I think that bookings that we see in Q3, we'll see a lot of that show up in Q4 when it comes to revenue or [indiscernible] of 2021. So a little bit of is our product lifecycle. As you might imagine, our parts and consumables, of course, 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 our capital equipment, of course, is a big equipment and last a long time when you place a new order, it takes a number of, as I said, weeks and sometimes many months for us to actually build that and get that shipped to them. So it's a little bit of a timing issue I think with us – the bookings versus the revenue side.

Okay. That makes a lot of sense. And I guess, sticking with parts and consumables. It's fared 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 and production levels versus customers maybe destocking 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 pent-up demand as we get into the fourth quarter and 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 the combination of trying to conserve cash and not been able to forecast their – the demand for their product leads to a quite bit of caution. Now there clearly was – there was a reduction in certain of our customers' products there. There is production curtailments. And so there is no question that some of our spare bookings decline was a result of production curtailments. I would say that a lot of it was conserving of 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 is that the parts are one of the first things they started to restock. When production starts to ramp back up again, they want to make sure they have parts and they obviously consume more of our parts. So normally that snaps back, obviously at a faster pace than the capital equipment. And we would expect that to normally be the case here that as production ramps back up, we'll see parts start to ramp up with that. But the only qualifier being that this is unlike any other economic environment we have experienced. And so it's – we're kind of using past experiences and not exactly the same as what we're dealing with here. But we would normally see our parts tend to go as operating rates go. So as operating rates increase, our parts will have to increase to support that effort.

Right, right. Okay. That makes a lot of sense. And then just lastly on Cogent. I mean, it sounds like that business – I don't know if it was kind of relationship or interacted with what you guys have with Carmona [ph]. Is that something that is actually integrated into Carmona products in any way or is it really part of a holistic offering to an OSB mill?

Yes. So it will continue to operate as a stand-alone because they crossover all industries, industries that we're in and they're actually in industries that we're not in. And so they will – although they've focused heavily on the wood side and are very strong there, they actually get contracts to act as the turnkey manager for entire new mills. The new OSB mill goes in. They actually might get the contract to manage that entire turnkey operation from an installation and start-up standpoint. So – but they'll continue because they cross and we'll crossover all our different business segments and markets. They'll continue to operate as a stand-alone. And they'll do two things. They'll continue to provide their services directly to the end customers. But they will also work with our divisions in helping to enhance and expand our capabilities. And so we saw it as a real win-win for us because 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. Yes, interesting capabilities for sure. All right. Well, I appreciate you guys taking the time, and I'll turn it over.

Thanks.

Your next question comes from the line of Walter Liptak from Seaport Global.

Hi, thanks. Good morning.

Good morning, Walt.

I want to ask about some of the project delays. And I guess, I'm interested in sort of the timing. Was the timing where it – those delays happened in April and May and we just need time for them to come back to the forefront over their delays that still crept in June in July so this is something that can continue on?

No, you're right, Walt. We saw them early on. So it was more of the April, May, and folks were notifying us early and I would say, some of them have already been rescheduled and they're – of the listing I have, they're shipping in the fourth quarter. And there are others that are still – we're still waiting for the customer to determine when they want to move forward with the project.

Okay. And those orders are still in the backlog, those have not come out of the backlog, is that right?

Correct. Yes. Those are – they're still in backlog. And of the orders that I have listed, I think there is really only one that maybe end up being a cancellation, but all the others – we're fairly certain, will proceed ahead.

Okay, great. And then you pointed out some of the strong fundamentals in paper and wood products and I'm curious about ordering for systems. Do you need to have sales engineers that go on to the field and visit the facilities before you can engineer and spec out an order or is it something that you can do remotely? How are your sales engineers working on this?

Yes. So we are starting – we started up several weeks ago going back and visiting customers and for the larger capital projects that are in discussion stages, you really, you really – it requires some face-to-face engagement, normally with a team of our people and we're doing that now. 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 have been a lot more cautious in opening back up and receiving visitors. But certainly in North America and in Asia and China, our people are back to 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 and that our customers want to continue proceeding with, it's requiring our teams to visit and we are doing it.

Okay, got it. And a couple of quick M&A ones. Is Cogent – do they have penetration yet in paper or 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. Their principal focus is on the processing side. And that's really spending the majority of their time and effort right now.

Okay, got it. And so, congratulations on getting that deal done in this environment, looks like a good one. What does the pipeline look like? Is there a potential for other deals even with this bad environment?

So we continued, as I think I mentioned on the last call, we continued at full speed in 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 us strategically that are available. And I would say that, certainly I think the pause button has hit back in the March-April timeframe with sellers not being able to visit, not receiving prospective buyers or have face-to-face meetings. And so I would think, things slowed down, discussions slowed down quite a bit. Also, I think everybody want to see, was the world going to fall apart or was there a bottom to this. And now that I think we have a sense of the bottom, I would say that companies that are – that were actively on the market for sale are starting to reengage in conversations, bankers are starting to call up again. So I think that we're slowly starting to see more activity in the latter part of the year as people get a handle on just how severe the crisis is going to be. And I would expect, after everybody returns – as you know, July and August in particular, it gets to be very slow, almost all of Europe is down, even in North America, a lot of people are on vacation. So I would expect after the return, after the August vacation, we'll start to hear more from bankers and about the opportunities that are out there. But we're still perceive – we're very much – we very much have run our business for the long term through this pandemic for the last several months. It really hasn't altered much of our planning in any way and acquisitions of course are a key part of that. And that's why we were pleased that we were able to do the acquisition in the middle of this. It was because I think of a relationship we had with the ownership team there, that we were able to do that, and they very much saw the benefits of being part of Kadant and we're excited about that as we saw the benefits of them being part of us. So we were able to get that finished even though we weren't allowed to travel to Canada. There was actually a 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-standing relationship with them, we were 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 from the line of Charan Sanghera from British Columbia.

Hi, there. It's Charan from British Columbia Investment Management. I Just had a question on the outlook for paper markets. Like 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 from some of the assets in North America. How do you think about that in terms of the impact to Kadant on the stock-prep side?

So I think you're exactly right that office – 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 this pandemic is gone? Are we going to see everybody return back to the office and things return back to 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 are hearing more and more of high-tech companies, in particular, talk about that. So to the extent that happens, that will further depress the demand for white paper and office paper and it will likely increase the demand for at-home products. If you are working from home, you tend to eat at home instead of going out and so there'll be more – you'll be buying more products that you consume in your home and the packaging tends to be higher for at-home products and delivery. So we would expect to see an increase in packaging and at-home product and a decrease. And luckily for us, of course, packaging is our biggest business. Y grade is a very small percentage of our business nowadays. So we will – we've – I think we will benefit from the – I mentioned in my comments, some of the social trends we're seeing and some of the consumer behavior we're seeing we thought 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 the real estate market is white hot, because people realize, if I'm going to work from home, I need a slightly different arrangement than I currently have and so they're – a lot of them are changing their living arrangements. People moving out of apartments, buying homes so the real estate market is kind of on fire and that's actually good for our business too, because we support the builders and the suppliers of that. So I think the shifts we're seeing, we think actually will – to the extent there'll be a change, it will likely be a positive for us.

Just maybe some more specifically on your customer base, like the IPs of the world, the Donckers and the Packaging Corp's, if they're thinking about converting white paper assets into containerboard, is this the trend that kind of RISI has been talking about? Like what kind of impact would that have on Kadant and when will we potentially see orders for capital equipment orders if that trend were to take place?

Yes. So we – as you probably know, we did – we had got – we've received the majority of the orders for conversions to the packaging from others. So, I mean obviously, to the extent that we continue to be successful in that, we would likely 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 is still trying to understand the data and where this thing likely will play out once the pandemic is gone. So I don't know that I know the timing of that. I will say those orders – those conversion orders tend to be bigger projects. They tend to be many, many months or even years in the planning and then they can take a year to get those things kind of built, installed and up and operating. So they are a longer term – they are longer-term projects for sure. But we do well in those, we've been very successful in those conversions and supporting our customers as they put those plans in place and we would expect to benefit from that going forward.

And just a quick question on Cogent. They seem to be very strong in OSB, like they've been involved in major projects with Norbord and Weyerhaeuser like kind of the major capital, like press conversions in Scotland and things like that. Is there a natural extension that you guys can move Cogent into other industries that you guys play in or is it more of Cogent helps kind of cross sell with your standard products?

No, I think, the thing about – the thing about controls and automation and kind of data management is it almost doesn't care where it's coming from. If you're looking at – whether you're looking at production rates where you're looking at temperatures, or you're looking at vibration or whatever, it takes the data and 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 the industries are that they're coming from. I mean, if you were to look at Cogent's portfolio of projects, I mean, they've done work for 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 that data. And so that's one of the things that we really liked about them was their platforms, their operating systems, their capabilities apply quite easily to our paper industry and frankly into our Material Handling, where we provide big systems. You think about the – in the aggregates market, if you're mining salt or sands or 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 kind of operational opportunities that come out of understanding what's going on. And so I think their technology easily applies to all of those industries. The challenge for us is it take in those industries and get them fully knowledgeable about the processes that we provide to those customers.

All right. Thank you for that. That's it from me. Have a good morning.

Okay, you have a follow-up question from John Franzreb.

Yes, I want to get – sneak two in if I can. Firstly, on the last topic, in the Material Handling side of the business, what does the booking profile look like? You kind of alluded to the fact that you expect the second half to be better than the first half. Is there any particular end market, be it, mining or food and packaging in Material Handling that's looking better than others?

Well, I think the food side of this is, everybody loves food because it tends to be on of the more stable, and I think again, as I mentioned, when you shift food consumption from a percentage that are being allowed out of restaurants where they receive things in very large volume in bulk to smaller at-home packaging, of course, that increases the demand for our technology, because our technology supports the packaging of that product. So that's one that I think has some opportunity for us. The other thing, I think, the infrastructure spending has been – the market that support that have been down for several years and were starting to grow before this pandemic hit and of course everybody kind of hit the pause button especially on larger projects. But we think as this thing starts to clear and those industries starts to recover, we'd expect most of our markets in that business continue to grow. We had a very strong booking in the first quarter, I think record backlog. And that business over the last four or five years has grown kind of between 4% and 8% a year. So that business has experienced some pretty nice bookings growth over the last several years, interrupted by the pandemic, but once we work through that, we expect it to resume and that – there is – the industry is growing, but more importantly, we're picking up market share in that business. And so a lot of the growth is coming from us picking up market share from other suppliers out there around the globe.

Okay. And regarding furloughed employees, when do you expect to bring them back? And in your margin expectations for the second half of the year, how much is captured from the government-sponsored programs that's embedded in that number?

It's – John, it's a small amount – I would say it's going to be roughly, I mean, we're estimating because we're – we believe things will improve and these programs will be of less benefit to us. So I'd say about half of what we saw in the second quarter in the second half, in the margin.

And the timing of bringing your own guys back?

That very much will be dependent on the – on how fast things recover. One thing, as you know, that tends to happen when you're forced to have workforce reductions because of the decreased demand, when things come back, you're always very cautious of bringing people back. And so you tend – we tend to experience some productivity improvements when those things happen and so we don't – you don't bring everybody back right away. You learn that there's things you can do differently. And so I would say it's difficult to predict exactly when we will bring people back. We obviously hope that our business returns back very strongly and we're able to employ everybody but my – our experience has been that when we come out of these kind of recessions that 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.

Yes.

Okay, you have a follow up from Kurt Yinger.

Yes. Thanks for taking the follow-ups. Two quick ones. First in Flow Control, is there any way to think about what percentage of your customers might have experienced some sort of shutdown in the second quarter?

Yes, it was – I would say, it was almost everybody but the paper guys. And 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 is curtailed or stopped completely. And so – now, certainly paper is their – it's still their largest market, but they have a sizable portion that serves general industry and an awful lot of that was curtailed or shut down completely. I don't have exact numbers, but it was a significant piece.

Okay. No, that's helpful. And then just returning to the conversion conversation. I mean is it a fair characterization to say that the furnish of the board of one of these projects is really important in sizing the opportunity where, whether it's virgin or recycled? On the recycled side, it's really kind of a bigger opportunity for you guys for capital equipment?

Well, certainly our primary technology serves the recycle market. We do have a business that services and supplies into the pulp production market. But the majority of our business on that side is on the recycle side. I think 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 packaging that's resulted from this pandemic. I mean a lot of people that had not gone online and shopped online were forced to do so, and having set up accounts and gotten comfortable with doing it, I think it's reasonable to assume that a lot of them will continue doing that after this thing has 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 packaging that's produced in North America is the best packaging in the world. A large percentage of it is initially made from virgin fiber, it's very strong, it's very high quality. And so the recovery of that post consumer and the recycle of that I think will continue to grow because of the value of it, the strength of it. Now, as you know, the China waste import ban, which will go into effect at the end of this year completely has created some disruptions and dislocations in that business, but they're starting to sort themselves out and they will over the next year or two. I think they'll sort themselves out and will get back to an equilibrium. So I think it's a little too early 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.

Okay. I will now turn the call back over to Jeff for closing remarks.

Thank you, operator. Before wrapping up the call today, I just want to leave you with a few takeaways from the quarter. From the very beginning of the crisis, our health – the health and well-being of our employees has been and continues to be our top priority. I'm very proud of our employees' resilience and their hard work to serve our customers throughout these uncertain times. As many of you know, Kadant has a proven track record of strong cash flow generation. Our large installed base and demand for parts consumables continues to be a source of strong free cash flow. And as we look ahead to the recovery around the world, we are seeing changes in consumer behavior and social trends that we believe could improve the underlying strength of the markets we serve, particularly in the food, housing and the packaging businesses. And finally, I'm excited about the prospects we have with the addition of Cogent to the Kadant family and the potential opportunities around Industry 4.0 and the role Kadant 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 discussing at future calls. Thank you for joining the call today. We look forward to updating you next quarter and please stay safe.

This concludes today’s conference. You may now disconnect.