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Tennant Co (NYSE:TNC)
Q2 2020 Earnings Call
Jul 30, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, my name is Christine, and I will be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's 2020 Second Quarter Earnings Conference Call. [Operator Instructions]

Thank you for participating in Tennant Company's 2020 second quarter earnings conference call. Beginning today's meeting is Mr. William Prate, Senior Director of Global Financial Planning and Analysis and Investor Relations for Tennant Company. Mr. Prate, you may begin.

William Prate -- Director, Investor Relations

Thank you Christine. Good morning everyone and welcome to Tennant Company's second quarter 2020 earnings conference call. I am William Prate, Senior Director of Global Financial Planning and Analysis and Investor Relations. Joining me today are Chris Killingstad, Tennant's President and CEO; Dave Huml, Chief Operating Officer; and Andy Cebulla, our interim CFO. Today, we will update you regarding our second quarter performance and our broader business impact of the coronavirus pandemic.

Chris will brief you on our operations, Dave will discuss progress we're making on our enterprise strategy and Andy will cover the financials. After our remarks, we will open the call to questions.

Please note a slide presentation accompanies this conference call and is available on our Investor Relations website at investors.tennantco.com.

Before we begin, please be advised that our remarks this morning and our answers to questions may contain forward-looking statements regarding the Company's expectations of future performance.

Such statements are subject to risk and uncertainties, and our actual results may differ materially from those contained in the statements. These risks and uncertainties are described in today's news release and the documents we filed with the Securities and Exchange Commission.

We encourage you to review those documents, particularly our safe harbor statement for a description of the risks and uncertainties that may affect our results. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude certain items.

Our 2020 second quarter earnings release includes the comparable GAAP measures and a reconciliation of these non-GAAP measures to our GAAP results. Our earnings release was issued this morning via Business Wire and is also posted on our Investor Relations website at investors.tenneco.com.

Now I'll turn the call over to Chris.

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

Thank you, William and thank you everyone for joining us today. The global health crisis affects us all. And we hope you are staying safe and healthy. And it's a 150-year history, Tennant has demonstrated a deep commitment to customer service. We honor that commitment by providing the equipment, parts and service our customers' need to keep the facilities clean and safe during this pandemic.

Our top priority is the health and safety of our employees, customers and business partners. In discussing today's financial results, we will provide as much context as we can about what we're seeing and how we're responding to a continues to be a fluid and unpredictable situation.

While our second quarter revenue was down year-over-year, we are encouraged by the fact that the decline was significantly less in June than in April and in May. Furthermore, our July order patterns are consistent with what we saw in June.

As we outlined in our last call, we took certain actions to manage our costs and cash flow, while preserving our ability to ramp-up quickly when Global Markets eventually recover.

In the second quarter, we implemented a combination of reduced work schedules and furlough programs for employees globally, consistent with applicable laws and regulations. These actions also included pay reductions for our Senior Executives and Board of Directors.

At the same time, we limited travel to business critical trips only, implemented work-from-home processes where possible, reduced non-essential discretionary and project spending, adjusted our expected management incentives and participated in government programs where appropriate.

Because of these actions, our profitability measures for the second quarter reflect some sizable cost savings, most of which we do not expect will repeat in the second half of the year.

However, they are consistent with our commitment to successfully managing through this period of uncertainty. Furthermore, they reflect no small amount of personal sacrifice on the part of our employees during these trying times.

These actions have positioned us to navigate successfully through the second half of the year. And as a result, we do not anticipate the need for further broad-based cost reductions.

Tennant is a resilient company. That will emerge from this health crisis in a strong position. And I am proud of the way our team members have responded with determination, dedication and resourcefulness.

Operating in a COVID environment is certainly a challenge. But our dedicated response team led by our COO, Dave Huml continues to support our Tennant locations worldwide, in staying on top of any issues as they emerge.

As we outlined last quarter, we continue work closely with our customers, supply chain partners and carriers. And to-date, we have experienced no major disruptions.

Before we shift to our financials, we want to provide an update on our enterprise strategy, particularly as we work to navigate the current environment. For more on that, I will turn the call over to Dave Huml, in addition to heading-up our dedicated pandemic response team, which supports our locations around the world. Dave leads the key initiatives associated with our enterprise strategy of winning where we have competitive advantage, reducing complexity and building scalable processes and innovating for profitable growth.

As I mentioned last quarter, the pandemic has not derailed our efforts in these areas, because much of what we can accomplish is entirely within our control. The initiatives we have launched and continue to drive not only help us to manage through the pandemic, but will enable us to emerge with a stronger operating model as well.

Dave, please go ahead.

Dave Huml -- SVP and Chief Operating Officer

Thank you, Chris and hello everyone. As Chris noted, we continue to push forward with our enterprise strategy, because of the central to how we can ultimately grow the business as market start to recover.

Although we took significant expense reduction actions in the second quarter, we continue to fund and resource our strategic efforts. In fact, we are reaping the benefits in 2020 from actions we took last year and have made important progress with new actions in the first half of 2020 that I'd like to highlight for you.

In analyzing our product portfolio globally, we've made significant progress with strategic pricing changes in addition to exits from margin diluting products we announced last year. That we expect will lead to further improved gross margins as volumes return to normal.

We've established standard product configurations for our most popular products and are keeping them in stock for ease of ordering and fast delivery. This will allow us to simplify how we sell, manufacture and service our machines. All of which improves our relationship with our customers and our ability to deliver improved business and operational results.

Specifically, in our North American business, we're using 80-20 methodology to segment our strategic account customer base and distribution channel partners. This helps us in focusing on our best customers, while reducing unwarranted discounting in order to improve efficiency and profitability.

At the same time as part of a geographic portfolio optimization initiative, we have restructured our Japan organization into a wholly indirect go-to-market channel. This will enable us to better leverage the strength of local channel partners in serving local customers. It also will allow us to align our cost structure to the profitability potential of that local market.

In China, we've begun the consolidation of the manufacturing footprint of Tennant China and our new Gaomei business, which we acquired in early 2019. This new infrastructure will provide singular focus on how to best leverage the combined products, brands and channels to maximize market share in this important and very competitive market.

Additionally, the consolidated footprint on operations will deliver cost synergies and supply chain leverage to improve the profitability of our China business.

In terms of new products, we launched the IPC branded CT 5 and the Tennant branded CS 5 earlier this year. This marks the first time we've leveraged an IPC platform design to launch products under both the IPC and the Tennant brands. Both of these products are small space floor scrubbers, that enable efficient cleaning of spaces like restrooms, restaurants and coffee shops.

At a competitive and entry level price, these products offer a professional result and an attractive alternative to mop and bucket cleaning, which our small space customers tell us they are looking for in a COVID-19 world.

Also, we recently launched our new S-16 ride-on sweepers, which features lithium-ion battery technology and is well-suited for industrial floor sweeping applications in vertical markets like food and beverage and warehousing. These markets have fared relatively well despite the pandemic, and we're excited by the positive response from customers for this new product.

Lastly, we're building on the North American success of the T7AMR. We've begun introducing our autonomous mobile robot cleaners to customers in EMEA and APAC markets. While pandemic related restrictions have hampered our plans to aggressively show, demonstrate and pilot the AMR, customer interest remains very high and we are working hard to expand our AMR offering.

Overall, our strategic efforts toward simplifying our business and improving our operating model remain on track, despite the pandemic and I want to thank our Tennant team members around the world for their hard work in that regard.

I will now turn the call over to Andy who will discuss our financials.

Andy Cebulla -- VICE PRESIDENT, FINANCE AND CORPORATE CONTROLLER, AND INTERIM CFO

Thank you, Dave, and hello everyone. Please note that in my comments today any references to earnings per share both GAAP and non-GAAP are on a fully diluted basis. As Chris noted, Tennant's second quarter results reflect a negative impact of the coronavirus pandemic. In the second quarter of 2020, Tennant reported net sales of $214 million, down approximately 29% percent year-over-year. Organic sales, which exclude the impact of currency effects declined 27.2%. The decline in sales during the second quarter of 2020 was greater in the first two months of the quarter than in the last month of the quarter. Organic sales declined 31.6% and 30.5% in April and May respectively with a decline in sales dropping to 12.4% in June.

The decline in revenue for the quarter was a result of continued slowdowns in some end markets amid widespread disruption to our customers' operations. In addition, we are currently seeing a decline in July order rates that are consistent with the level we saw in June. While we are encouraged by the reduction in the rate of sales declines that we experienced in the quarter, we cannot say whether these month-to-month trends will continue in the second half of the year given the unpredictability of the pandemic.

Turning to the bottom line for the second quarter. We reported net earnings of $14.3 million or $0.77 per share, down from $14.8 million or $0.81 per share in the year-ago period. Adjusted EPS, which excludes certain non-operational items and amortization expense totaled $0.96 compared with $1.35 in the prior year.

Let's take a closer look at our second quarter sales results by geography. As a reminder, we grouped sales into three geographies, The Americas, which includes all of North America and Latin America, EMEA, which covers Europe, the Middle East, and Africa and Asia Pacific, which includes China, Japan, Australia and other Asian markets. Sales in the Americas declined 28.1% or down 27% organically with overall declines across both North America and Latin America.

While we continued to experience strong demand for Tennant's autonomous cleaning machines in North America, this was more than offset by the negative effects from the pandemic. Sales in the Europe, Middle East and Africa region were down 32.3% or 30.2% organically, primarily due to the broad economic impact of the pandemic across the entire region. Shutdowns of customer facilities were widespread in the second quarter and Tennant's manufacturing facilities in Italy were closed for approximately eight days in early April in accordance with local government directives.

Sales in the Asia Pacific region decreased 21.8% or 20.1% organically, primarily as a result of significant decreases in sales in China due to slower recovery and export-dependent businesses along with clients in Japan and Southeast Asia due to the pandemic.

Overall, all of our business categories were down year-over-year. Our service and parts and consumables businesses were comparatively less impacted. Our equipment sales were down approximately 33% year-over-year. Service revenue was down 17% and revenue from parts and consumables was down 22% over the same period. This reflects Tennant's efforts in helping our customers meet their cleaning and equipment maintenance needs during the pandemic.

Now on to margins. Adjusted gross margin during the second quarters of 2020 and 2019 were 42.3% and 41.4% respectively. The year-over-year increase primarily reflects actions related to the Tennant's enterprise strategy, including pricing and cost-out initiatives, as well as cost actions related to our response to the pandemic. These included employee furloughs, reduced work hours and benefits from government programs.

Turning to expenses. During the second quarter, our adjusted S&A expenses were 28.6% of net sales compared with 29% in the year-ago period, mainly as a result of cost containment efforts, benefits from government programs and adjustments to management incentives. As Chris noted, careful S&A management is an important part of our response to the pandemic.

Combining these results, our adjusted EBITDA in the second quarter of 2020 was $35.3 million or 16.5% of sales compared with $41.8 million or 13.9% of sales in the second quarter of 2019. The increase as a percent of sales was attributed to cost savings actions that we already discussed, including employee furloughs and reduced work schedules, benefits from government programs, adjustments to management incentives and other discretionary spending reductions that we implemented in the quarter. We estimate approximately $15 million of the savings will not repeat in future quarters.

As for our tax rates. In the second quarter, the company had an adjusted effective tax rate of 20.4% compared with 11.7% in the year-ago period. In the year-ago period, we realized a discrete tax benefit due to a partial release of our valuation allowance on deferred tax assets. In the second quarter of 2020 as mentioned, our adjusted EPS, which excludes certain non-operational items and amortization expense was $0.96 compared with $1.35 in the second quarter of 2019.

Turning now to cash flow, capital allocation and balance sheet items. In the second quarter of 2020 Tennant generated $39.8 million in cash flow from operations, primarily driven by business performance. Also in the second quarter, the company repaid the $125 million we had previously drawn as a precautionary measure from our $200 million revolvers. As of June 30th, we had $99.3 million in cash and cash equivalents and approximately $157 million of undrawn funds on our revolver.

Lastly, turning to guidance. As previously announced, we withdrew the full-year guidance we had provided on February 20, 2020, due to the uncertain nature of the ongoing pandemic. At this time we still cannot predict the total impact on our businesses and financial results for the remainder of fiscal 2020. Nevertheless, we will do what is necessary to maintain sufficient liquidity and to preserve our ability to ramp up quickly, as markets recover.

With that, we will now open the call to questions. Operator, please go ahead.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Michael Shlisky from Colliers Securities. Your line is open.

Michael Shlisky -- Colliers Securities -- Analyst

Thank you and good morning, everybody.

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

Good morning.

Dave Huml -- SVP and Chief Operating Officer

Good morning.

Michael Shlisky -- Colliers Securities -- Analyst

So I wanted to start on your comments Andy about you the investment on 14 -- $15 million of the savings will not repeat in future quarters, that part you bilt there. I guess maybe first is that $15 million on an annualized basis or a quarterly basis, just to make sure I got that right. And then maybe secondly will it just all come back one big lump here in the third quarter or will the expense reductions and other cost actions kind of gradually come back as the sales come back?

Andy Cebulla -- VICE PRESIDENT, FINANCE AND CORPORATE CONTROLLER, AND INTERIM CFO

So thanks for the question, Mike. So, first up the $15 million is the savings we had in the quarter in the second quarter that we experienced, that helped boost our EBITDA results. And so that's the first part of your question. The second part, you think of things like government savings programs that we were able to take advantage of, that was about $5 million of that savings in the quarter, that we're not expecting to repeat in future quarters. And another example is the employee action some of the furloughs or work reductions we took in the quarter to reduce our expenses. As Chris mentioned, we're not planning any broad-based actions at the current time. So we wouldn't expect to see those kind of savings in future quarters. It's just a couple of examples, that makes sense?

Michael Shlisky -- Colliers Securities -- Analyst

Okay. Okay. I would suppose then obviously orders you have a little bit better in this quarter, you have better sales but at least offset some of those costs coming back, so I guess maybe you won't be just lumpy $15 million less once you get the top line together. Okay, that's fine. You also mentioned, I think it was Dave, you mentioned in some of your comments, using this 80/20 methodology to kind of get some additional efficiencies out of the business. I'm kind of curious, are you -- if nothing that as very wide scale company wide basis, could be an outside firm or some kind of broad strategy or are you just kind of using some basic principles that are kind of well-known today to get that kind of benefit going?

Dave Huml -- SVP and Chief Operating Officer

Yeah, thanks for your question Mike. We educated ourselves on 80/20 methodology, but it is just one of many tools we have in the tool set, as we analyze our business for improvement going forward. So, we're using, I would say we're using the most appropriate tool that's available to us in each instance to drive our strategy.

Michael Shlisky -- Colliers Securities -- Analyst

So it's not a large like widescale companywide consultant plan, just your own operational improvements. Is that the way to say it?

Dave Huml -- SVP and Chief Operating Officer

I think that's a fair characterization. The GPS strategy that we've articulated in the past is really the holistic broad enterprise framework for using and there are a number of tools within that framework.

Michael Shlisky -- Colliers Securities -- Analyst

Okay. I wanted to ask also about your new compact products. Especially in the U.S., I'm curious how penetrated are you in the restaurant and small coffee shop end market? I always thought that some of your stuff is really meant for largest portfolio, like an air cooler very large store or restaurant. Is there a real organic opportunity with the North America on the smaller compact space?

Dave Huml -- SVP and Chief Operating Officer

Yeah, great question. Historically, our share has been lower in some of these small space markets or smaller spaces within larger environments for our customers. We recognize this years back and started expanding both our portfolio to service those applications and also our channel's ability to reach those customers. And so really CT5 was the product I mentioned in the narrative, is just the next step in our advances into that important marketplace to improve our market share there.

Michael Shlisky -- Colliers Securities -- Analyst

Can I ask one last...

Andy Cebulla -- VICE PRESIDENT, FINANCE AND CORPORATE CONTROLLER, AND INTERIM CFO

I would say, historically it's been the part of the market where we've been most underrepresented. We've always been interested in figuring out a way to enter. It's a little more complicated than our historical vertical markets, but I think with these two new products that are getting our customers to become excited to move away from mop and bucket to mechanized cleaning, especially now when cleaning is becoming a higher order priority form and is actually gaining some interest because we find -- we have a product also I think as Dave said that the right entry-level price point and that was always the challenge.

So I think we have the right product that does a very professional job and it's at the right price point that is creating interest in a market segment in our fast-food restaurants, convenience stores, gas stations where we really have very little, if in many cases no presence today. So it's a potentially exciting opportunity down the road, you're not going to see this thing take off right away, but it's our first foray into it.

Michael Shlisky -- Colliers Securities -- Analyst

Got it. That is a lot of square footage. So it sounds very promising. And then perhaps. That would be like, my last question for me -- for Chris. This past quarter in the -- on the first quarter call I recall you said it was a kind of a theory that you know with millions of folks getting sick worldwide and a lot folks dying out there with this pandemic, there could be a tie into an increased focus on cleanliness in the works -- in the workplace and in public areas going forward. Do you recognize, there was a very cautious and very, very strange time in the market. But can you update us now, is that theory what you are hearing from customers kind of becoming a reality here, I mean all people out there are looking to clean things more and a lot more visibly today than in the past?

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

I think it remains a theory, we're not seeing it play out in the marketplace yet at least for our products. We do believe that in the medium to longer term that more robust cleaning protocols will be put in place and that people will adhere to a higher standard of clean, we should bode well for our product portfolio also bode well for products like AMR. But right now the majority of customers around the world are still very focused on high-touch cleaning, using sanitation chemicals and devices to hold the pandemic at bay.

And we think that floor cleaning has not yet returned to a priority part of their cleaning protocol. So as we showed that in June our sales were down less than they were in April and May, and that is mostly because we're seeing more of our customers open up. Right, so that's where we're starting to see the benefit. We're not yet seeing the benefit from a higher standard of clean. But the good news is that we have very strong and intimate relationships with our customers around the world and we're having this conversation with them and we will be the first to know, because we're trying to influence in this direction when that trend starts to turn.

Operator

Your next question comes from the line of Chris Moore from CJS Securities. Your line is open.

Stefanos Crist -- CJS Securities -- Analyst

Good morning. This a Stefanos Crist calling in for Chris.

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

Hey Stefanos.

Stefanos Crist -- CJS Securities -- Analyst

Good morning. You mentioned declines in June were less severe than the declines in April. Could you possibly quantify that for us, maybe April versus May and versus June?

Andy Cebulla -- VICE PRESIDENT, FINANCE AND CORPORATE CONTROLLER, AND INTERIM CFO

Yeah, as I said in the remarks, April was low 30% reductions in sales and May was kind of upper 30%, like 38%, and June was around 12.5% reductions in sales and as Chris, just kind of mentioned as well in July the trend we're seeing in our orders is consistent with the June level.

Stefanos Crist -- CJS Securities -- Analyst

Got it thank you. And besides any COVID related shutdowns, what are the biggest uncertainties facing Tennant in the second half of the year?

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

No, we said it is the fact that many of our customers have been closed down, some are cautiously openings, something are running at reduced capacity kind of standard floor cleaning does not remain a priority at this stage as they do the high touch disinfectant cleaning. So I think the biggest uncertainty going into the market is into the second half is that trend does not improve and of course, we anticipate it's going to be a pretty bumpy ride in the second half. And if there were to be a significant disruption another close down on a broad-based -- in a broad-based manner in the U.S. market or elsewhere that would obviously also have a significant impact on our business, but what we're doing is, we have done a lot of very detailed scenario planning for a whole host of things that could play out, and we know how we need to react in each of those cases to manage the business successfully through this uncertain time and are prepared to pull the necessary triggers quickly to stabilize the business.

Dave Huml -- SVP and Chief Operating Officer

And just to build on that. I think to us kind of look at, it's really the pace of the recovery. I know you asked about actually coronavirus, it's just so dominant right now in our end markets, so how quickly that pace recovers, how our customers open and how quickly they are going to invest in some capital that's really kind of the risks that we're looking at.

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

And the other thing I would say is in the last quarter we said, if you looked at what customer segments were performing better on a relative basis, it was non-essential -- essential retail, warehousing, logistics, that remains the case, manufacturing remains very slow, building service contractors have shifted really to the high touch disinfecting cleaning that's impacting our business. Hospitality is also down and healthcare, which we had an initial bump in the first quarter that helped us that has not repeated in the second quarter. So healthcare remains down as a vertical market for us. So we haven't seen much shift. Our hope is that we are beginning to see some activities, some life and some of these other vertical markets.

Once that starts to happen, I think that our trajectory will be into improve.

Stefanos Crist -- CJS Securities -- Analyst

Got it. That make sense. Thank you.

Operator

Your next question comes from the line of Marco Rodriguez from Stonegate Capital Market. Your line is open.

Marco Rodriguez -- Stonegate -- Analyst

Good morning and thank you for taking my questions.

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

Good morning.

Dave Huml -- SVP and Chief Operating Officer

Good morning.

Marco Rodriguez -- Stonegate -- Analyst

I wanted to talk a little bit about the enterprise strategy, specifically on the reduction of your operational complexity. You highlighted a couple of things you did or you're working on right now in terms of obviously exiting some product lines and then establishing some standard configurations for manufacturing.

I was wondering if maybe you could just talk more as far as where you sort of are on that roadmap? Are you, are you still in the early innings or are we mid, mid-cycle or toward the end as far as about that specific area of your strategy.

Dave Huml -- SVP and Chief Operating Officer

Thanks, Marco. This is Dave. I'll respond to your question. First and foremost, we are very excited and committed to the GPS enterprise strategy. And it is the primary means we expect to deliver on our long-range financial targets. Where we're at in the journey? We really developed this over the years 2018, late 2018 through 2019 and 2020 represents the first full-year of activation of the strategy in the business.

And so, given that our strategic horizon is four years, I would say, we're really still in the early days of execution of the strategy. We're very encouraged by what's possible within our business and the entire company including leadership team is committed to execution, even in the midst of the challenges with operating within the pandemic.

What I highlighted for you in the narrative was some of the more recent developments. And we expect to have more details as we continue to roll forward with the strategy.

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

And just to build on that, if you look at standard configurations, which we believe is a really big deal, both from a customers' perspective and our ability to deliver with shorter lead times and overtime, it may also take some cost out of our products to compete more effectively on price. We've really just launched that. Our hope is that maybe by the end of September, that 90% of our Tennant machines have the standard configuration. That means they have it. That has, it doesn't mean that we've actually fully educated the sales force that's fully educated the customer base. So this is the part of our product portfolio, it starts flowing through.

So I -- on that piece, I don't think, we're seeing any benefit yet. And as Dave mentioned, the work we've done in Japan really hasn't shown any results yet, because that's still work in progress and definitely in China. The integration of the two businesses Tennant and Gaomei, that's work in progress right now. And I wouldn't anticipate really seeing a read-out of those benefits, maybe Dave until 2021 in any significant way.

Dave Huml -- SVP and Chief Operating Officer

I think that's right.

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

So, Dave's characterization of where we are in most of these things, it is early innings, I concur with that.

Marco Rodriguez -- Stonegate -- Analyst

Got it. Very helpful. Then, switching here to the $15 million benefits you recognized from the one-time cost cuts. Can you maybe discuss, what's the split between SG&A and cost of goods or was they're all primarily down in SG&A?

Andy Cebulla -- VICE PRESIDENT, FINANCE AND CORPORATE CONTROLLER, AND INTERIM CFO

It was. It was in both, that we -- we're going not going in the details of that, where we kind of focusing on EBITDA and I think that's kind of we've talked about this $15 million in EBITDA. But it was a little bit in both, you could think of it that way.

Marco Rodriguez -- Stonegate -- Analyst

Got it. And were there any other cost cuts that were realized in the quarter that are more permanent in nature? Like in other words, were there more than $15 millions of cost reduction is a benefit the quarter?

Andy Cebulla -- VICE PRESIDENT, FINANCE AND CORPORATE CONTROLLER, AND INTERIM CFO

No. We -- a lot of the actions that we talked about and we took, were more temporary nature given the pandemic. And again, keep in mind, one of our primary focus is we're trying to do is make sure when markets recover, and they will recover that we're ready hit, ready to ramp-up and meet our customers and customers' needs. So that's really one of our key principles.

We talked about last quarter and we held in the second quarter, that we really want to be ready when this pandemic subsides.

Marco Rodriguez -- Stonegate -- Analyst

Got it. And then, just also some understanding the dynamics you're seeing from your customers with there obviously is a lot of places were shut-down in Q2, early parts of Q2.

But presumably, most places are kind of opening up or at least operating at some form of capacity, whether it's reduced capacity or whatnot. But I would assume that they would still be focused on cleaning.

But if I'm understanding you correctly and correct me if I'm wrong. It sounds like, perhaps some of these customers are shifting some of their spend at least temporarily from cleaning floors to more of a sanitation type aspects, is that fair?

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

Yes, that's fair. I mean, that has been the priority, so high-touch surface disinfecting cleaning to keep the pandemic at bay. And floor cleaning has not been a core part of that protocol, at least until now.

And you're right. Many of our customers were shut-down in parts of the second quarter. And I think, we think that the June improvement is completely due to more customers opening up and beginning to order again. And we've seen that trend carry over to July. And so, that's at least a promising early signal.

But I would say that as we look into the back half of the year, there is no definitive signal that we're going to see things improve dramatically. And of course, there could be another major disruption to the business, if things start to close down again.

So we're anticipating, it's going to be, it's going to be pretty bumpy. And if we could kind of maintain the June-July level and maybe improve on that a little bit as we go forward, that's kind of how we're modeling our business right now.

Dave Huml -- SVP and Chief Operating Officer

So two things I'd add to Chris's comments. One, keep in mind, for many of our customers, this is a capital expenditures and some of them are pausing in what they buy, they are not necessarily shifting that, in some cases they are, but they're not -- they're pausing and waiting for things be they're close, be they're open, they're pausing.

The second thing I'd add is that the comments we've talked about service and P&C and we certainly saw less of an impact, particularly in the second, last month of the quarter.

So as we move into that, the customers are shifting their or maintaining their -- actually they maintained their equipment maybe first. I mean the first, they're doing as opposing to this new capital investment. So that's kind of where we're seeing some of that it'd be a quicker recovery than on the capital side.

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

Yeah. And services usually a leading indicator of improvement. Historically, that's the way it works in the last recession.

Marco Rodriguez -- Stonegate -- Analyst

Got it. Very, very helpful. Then, I was wondering if maybe you can kind of talk a little bit about your thoughts on the revolver. You obviously took it down, you -- it expressed the idea that obviously was -- it was defensive in nature, just given the great uncertainty on the pandemic.

But you repay it back, it looks like pretty, pretty soon after you took it down. And it sounds like you're still expecting some choppiness, but some level of confidence in the second half of the year on terms of your overall business. And maybe if you could just kind of talk about your thoughts there on the revolver?

Andy Cebulla -- VICE PRESIDENT, FINANCE AND CORPORATE CONTROLLER, AND INTERIM CFO

Yeah. So like, we've talked about cash flow in the quarter was pretty strong and we feel pretty good about that. And customers, we've got good customer base. They're still paying and we feel pretty comfortable with that.

We've talked about publicly some opportunities we have to manage our inventory and that could be another potential source for us.

So given those new positive cash flow and the cash balance we still have at the end of the quarter, and the fact that we've got a great relationship with our banks and can always draw on the facility if need be, we didn't think it was necessary to have the cash just sitting in our cash, in our banks right now.

So, feel comfortable with the situation one that we're recovering a little bit. And two, just the cash that we have and the cash flow we saw in the quarter.

Marco Rodriguez -- Stonegate -- Analyst

Got it. And last quick question for me, just kind of wondering, just given all the volatility out there in the market, as it relates to the competitive dynamics and competitors in different regions. Are there -- aside from some of the new products that you're launching, are there any other sort of advantageous strategic initiatives that you might be looking at whether that's positioning in for acquisitions or other type of product launches in the near future?

Andy Cebulla -- VICE PRESIDENT, FINANCE AND CORPORATE CONTROLLER, AND INTERIM CFO

You know, one, we're continuing, we talked about AMR in the quarter. We've mentioned it, it was a -- continue to be a bright spot for us being in specific on the numbers, but continue to be a bright spot, we've continued to invest in expanding that offering. Now, we're not there yet. We haven't announced yet, but that's an area that we're continuing to invest and hope we will expand and Dave talked a bit about the small specs as well. So those are a couple of areas that I think we highlight the potential.

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

But our priority right now is successfully managing through the uncertainty of the pandemic, and continuing innovation agenda, and you're seeing we are rolling out new products and but most importantly, we've said this is, maintaining the integrity of our GPS strategy because all the initiatives within GPS are all about simplifying our business and improving our operating model that helps us now in the short-term, but more importantly, will allow us to get off to the fast start when markets recover that Andy talked about, that's where our focus is right now.

Marco Rodriguez -- Stonegate -- Analyst

Got it. Understood. Thank you much, very much. I really appreciate your time.

Operator

Your next question comes from the line of Joseph Munda from Sidoti & Company. Your line is open. Joseph if you're on mute, please unmute. Your line is open.

And our next question comes from the line of Brett Carney from Gabelli Funds. Your line is open.

Brett Carney -- Gabelli Funds -- Analyst

Hi guys, good morning. Thanks for taking my question.

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

Good morning.

Dave Huml -- SVP and Chief Operating Officer

Good morning.

Brett Carney -- Gabelli Funds -- Analyst

Great to hear AMR still progressing well and continued customer interest in those other regions, when that becomes feasible again. I was wondering the nature of conversations you're having with customers on that front. Would you say it's consistent the kind of where we were in before the pandemic or have kind of new elements factored into customers thinking in terms of every business has more considerations today human occupancy levels as well as cleaning considerations. And I'm just curious, any new dynamics have come into those ongoing conversations you have around the very autonomous offering you have for customers.

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

No, I'd say the same dynamics before the COVID play out, now the one thing that has changed, is that as companies are evaluating that cleaning protocols and they are realizing that they're going to have to be spending a lot more labor intensive time on this high touch disinfectant cleaning, they need to figure out the ways to keep the entire facility clean and do it in a very efficient manner. And so that they can shift the labor to these more higher-order cleaning priorities. And those customers understand that are becoming more interested in AMR as a way to help them, and not have to expand their labor pool, get all the cleaning jobs done but to get it more done more efficient. So that's the conversation we're having with more of our customers now because of the pandemic that we really didn't have prior.

Operator

[Operator Instructions] Your next question comes from the line of Mike Shlisky from Colliers Securities. Your line is open.

Michael Shlisky -- Colliers Securities -- Analyst

Hey guys, thanks for taking these follow-up questions from me here. And I want to follow up on some of the AMR questions and comments that were made. Is that market getting any more crowded these days as you get the occasional forward email -- hey check out this product, it's also automated, but they seem like they are from smaller start up type organisations or kind of someone's garage as opposed to a major company, but are there any other big companies any other four, five large players besides you going to that market with anything that's on the part of your AMR right now?

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

I would say you're correct in that many of the entrants are smaller entrepreneurial companies coming outside of our industry. And as we've said, in the beginning, the AMR equipment and ability to perform is important, but more important and this is what they can't match as you need to have a sales and service infrastructure in place to support this, to educate your customers, to help them change their cleaning processes, to be successful and to gain the benefits that they believe are inherent in the AMR technology.

And none of them have that. I mean the cost of building those infrastructures is huge. So I think that's a real barrier to entry for a lot of the small players. When you look at our players in our industry right now, there is really nobody who has commercialized an AMR product scale other than us. So we believe we have a significant lead and we like our position going forward.

Michael Shlisky -- Colliers Securities -- Analyst

Okay. Also wanted to touch on some of the 2020 fore goals that are in slides and comments as well. I just want to make sure I'm clear on what the base year is? nAre you counting this year as the base or you count 2019 or 2019 plus some normalized growth as your base for 2024?

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

Yeah, those are goals we obviously set before the coronavirus pandemic. So we're not -- haven't given guidance, it's probably not fair to say 2020 is the base year, because we got to think about it little bit differently for next year, we should have and coming out numbers for next year yet, but the base year would be prior to 2020 and in our goals that we set out. Do you think about it, we talked about it in February. And I think that thinking about prior years as a base is a better way to think about it.

Michael Shlisky -- Colliers Securities -- Analyst

So perhaps your guidance for 2020 that you gave in February that's not a fair base perhaps was that close you think?

Andy Cebulla -- VICE PRESIDENT, FINANCE AND CORPORATE CONTROLLER, AND INTERIM CFO

Yeah, I think that's probably a fair yeah, of course, as we think about the recovery from the pandemic, we got to really think about what that looks like, and how that will be and we will talk about these different rates of recovery we mentioned earlier that the pace of recovery might impact that, so I don't want to give you the impression that what we're seeing about 2021 at this point we haven't disclosed that yet. So -- but going forward, ex-pandemic yeah the 2020 guidance that we laid out in February is a fair way to think about the base.

Michael Shlisky -- Colliers Securities -- Analyst

Okay. Great. One last one for me, can you update us on the search for a permanent CFO as I recall there was an announcement, Keith is going to stay on to help out until 31st or tomorrow. So I want to know where you kind of stand there with that part of the organization.

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

Our first and foremost, Andy and -- CFO and his team have done a terrific job and we haven't missed a beat. So I think it's important for you and others to know that. But what I can tell you is that we have commenced a search process. We're not going to talk about when that will be concluded, but it has been kicked off.

Michael Shlisky -- Colliers Securities -- Analyst

Okay. Yes, thank you. And yes, I will also -- we've been here also I'm very impressed with Andy as well. So it just seems that like so far you have definitely not missed a beat. Thanks much for answering my questions.

Operator

Your next question comes from the line of Joseph Munda from Sidoti & Company. Your line is open.

Joseph Munda -- Sidoti & Company -- Analyst

Hi, everyone. Good morning. Can you hear me?

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

Good morning.

Dave Huml -- SVP and Chief Operating Officer

Hi Joe.

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

Yeah, we can hear you.

Joseph Munda -- Sidoti & Company -- Analyst

Okay. I'm getting some statics. So I just wanted to make sure. So my first question, just regarding your sort of productivity improvement plan. However, you want to, however you guys refer to that related to go-to-market strategy, supply chain, value engineering everything that we've talked about for a little while. You have a pretty detailed roadmap and plan going ahead and I'm just wondering what sort of the timetable finishing a lot of that is a year from now, should we expect a lot of that to be done. I understand that some of this is just an ongoing multi-year just ongoing, but a lot of the heavy lifting, when do you think you'll be done with a good portion of that.

Dave Huml -- SVP and Chief Operating Officer

Hey, thanks for your question, Joseph. This is Dave. I'll address the question, really it's a that's a four year our strategy and we'll pace the execution of the initiatives within the strategy over that time period. And so, we'd expect the impact to read out over the four years, it's not a case of doing all the work upfront and then sort of harvesting the impact. We had to pace the individual initiatives based on a couple of factors. One is lead time to execute, some changes we contemplated making just have to get started earlier because it takes longer to realize the benefit. We also have to balance it against resource availability. And so, to make sure that we can execute well. Each of the initiatives we've got to have the bandwidth to do it to execute as we would, as we would like to. So it's really a four-year journey of execution across a broad range of initiatives within the business.

Joseph Munda -- Sidoti & Company -- Analyst

Okay. And then, could you give us your thoughts or provide an update on your competitive landscape, especially in this pretty challenging time, how your competition doing, what you're seeing?

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

Yeah. I mean, and we're not seeing anything new or different. I think we're all trying to manage through this period of uncertainty as well as we can. What I can say is that, I don't think we've seen any new material initiatives from any of our competitors in terms of winning new customers, launching new products.

I have said, we continue our lead and AMR. And we've not seen any major incursion by anybody on that front. So, but it's not unusual that in kind of a period that some competitors will resort to some pretty aggressive pricing.

So I think that is and it's more aggressive than we normally see. And that really maybe the most important dynamic that we're looking at and dealing with it right now.

Joseph Munda -- Sidoti & Company -- Analyst

Okay. And I may have missed this when you're talking about AMR. But is the -- you haven't introduced the new model outside of the T7 correct? And can we expect a new model being introduced with AMR capabilities at some point later this year?

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

Stay tuned. And just now, we are, this is not a one-off for us. Like, this is a long-term strategy and we fully anticipate overtime building a portfolio of capabilities in the AMR space.

So we're not prepared to tell you when the next one is coming, but stay tuned.

Joseph Munda -- Sidoti & Company -- Analyst

Okay. And then, just to follow-up with that. I know, it will be my last question. The R&D has come back on a percentage basis quite a bit in the second quarter and even in the first quarter a little bit when you look at the last three quarters of 2019.

Just wondering what to make out of that, especially with the cash flow that you driven in the, drove in the quarter, I thought we would continue the spending, especially thinking about AMR etc.

So I was just wondering about R&D and how that looks going forward and what happened in the first half?

Andy Cebulla -- VICE PRESIDENT, FINANCE AND CORPORATE CONTROLLER, AND INTERIM CFO

Well, I think in environments like this, we need to be cautious improvement across all our cost categories. And now, we've had to do that as well, within R&D. But what I can tell you is we have not in any way compromised on any of the important innovation initiatives and we certainly have not compromised our work on AMR.

Joseph Munda -- Sidoti & Company -- Analyst

Okay, great. Thanks for taking my questions. Have a good day.

Andy Cebulla -- VICE PRESIDENT, FINANCE AND CORPORATE CONTROLLER, AND INTERIM CFO

Thank you too.

Operator

Since there are no further questions at this time, I would like to turn the call over to management for closing remarks.

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

All right. Thank you, Christine. And again, thank you all for joining us today. Once again, we hope you all stay safe and healthy. So this concludes our second quarter earnings call. And you may now disconnect. Take care everybody.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

William Prate -- Director, Investor Relations

Chris Killingstad -- PRESIDENT AND CHIEF EXECUTIVE OFFICER

Dave Huml -- SVP and Chief Operating Officer

Andy Cebulla -- VICE PRESIDENT, FINANCE AND CORPORATE CONTROLLER, AND INTERIM CFO

Michael Shlisky -- Colliers Securities -- Analyst

Stefanos Crist -- CJS Securities -- Analyst

Marco Rodriguez -- Stonegate -- Analyst

Brett Carney -- Gabelli Funds -- Analyst

Joseph Munda -- Sidoti & Company -- Analyst

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