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Altra Industrial Motion Corp (NASDAQ:AIMC)
Q2 2020 Earnings Call
Jul 24, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to Altra Industrial Motion's Second Quarter 2020 Earnings Call. [Operator Instructions]
I would now like to hand the conference over to your speaker today, David Calusdian from Sharon Merrill. Please go ahead.
David C. Calusdian -- President
Thank you. Good morning, everyone, and welcome to the call. To help you follow management discussion on this call, they'll be referring to slides that are posted on the altramotion.com website under Events & Presentations in the Investor Relations section.
Please turn to Slide 3. During the call, management will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain and investors must recognize that events could differ significantly from management's expectations. Please refer to the risks, uncertainties and other factors described in the Company's quarterly reports on Form 10-Q and Annual Report on Form 10-K, and in the Company's other filings with the US Securities and Exchange Commission. Except as required by applicable law, Altra Industrial Motion Corp. does not intend to update or alter its forward-looking statements whether as a result of new information, future events or otherwise.
On today's call, management will refer to non-GAAP diluted earnings per share, non-GAAP income from operations, non-GAAP net income, non-GAAP adjusted EBITDA, non-GAAP operating income margin, non-GAAP adjusted EBITDA margin, non-GAAP organic sales, non-GAAP gross margin, non-GAAP operating working capital, non-GAAP net debt, net debt, non-GAAP free cash flow, and non-GAAP to GAAP adjusted free cash flow. These metrics exclude certain items discussed in our slide presentation and in our press release under the heading Discussion of Non-GAAP Financial Measures and any other items that management believes should be excluded when reviewing continuing operations. The reconciliations of Altra's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q2 2020 financial results press release on Altra's website.
Please turn to Slide 4. With me today are Chief Executive Officer, Carl Christenson; and Chief Financial Officer, Christian Storch.
I'll now turn the call over to Carl.
Carl R. Christenson -- Chairman and Chief Executive Officer
Thank you, David; and thank you all for joining us today. And please turn to Slide 5. Altra's second quarter execution was outstanding as we exceeded our expectations for revenue, profitability and cash generation, demonstrating the resilience of our business model and our ability to perform well in a downturn.
Although the headwinds and uncertainty caused by the COVID-19 pandemic continue to persist, we have been encouraged by a few key factors that are playing out. First, similar to 2009, our cash-generative business model is proving to be resilient in the face of adversity. Second, we have benefited from our broad end-market, which was further enhanced as a result of the A&S merger. The merger expanded our exposure to several end markets that we believe to be less cyclical and have better secular trends in some of our legacy PTT businesses. Third, several of the end markets that we serve are seeing stronger than expected demand. And finally, Altra's value proposition continues to resonate deeply with our customer base, as we are outperforming the competition in several key verticals including factory automation.
As we navigate through the near-term challenges presented by the pandemic and focus on continuously delivering on our customers' needs, we remain steadfast on advancing our strategic priorities to deliver sustainable value over the long-term. These include leveraging the strength of Altra as a premier industrial company, focusing on margin enhancement, delevering our balance sheet and positioning Altra to drive top line growth.
Now please turn to Slide 6. Christian will cover the results for the quarter in more detail in a few moments, but I would like to start by making three key points as it relates to our second quarter financial performance. First, we exceeded our expectations on the top line with sales of $400.8 million compared with $466.5 million a year ago. This strong performance was due largely to our ability to capitalize on outperformance in certain markets, notably, the Class 8 truck and wind energy markets in China, as well as a somewhat better than anticipated overall demand during a tough macroeconomic environment. Second, our aggressive actions to reduce cost led to excellent bottom line performance. This included net income of $21.7 million or $0.34 per diluted share, and non-GAAP earnings per share of $0.60. Notably, despite the year-over-year decline in sales, adjusted EBITDA margin was up 170 basis points to 22.2%. And third, we had tremendous cash flow generation, which allowed us to repay 100% of the revolver that we drew down in Q1, as well as an additional $24 million of term loan debt in the second quarter. Paying down debt remains a top priority for Altra.
Please turn to Slide 7. Altra continues to manage through the current realities presented by the COVID-19 pandemic, with a guiding principle of safeguarding our employees, customers and shareholders. I'm very proud of our team's relentless focus on keeping fellow employees healthy by vigilantly maintaining safety protocols, while at the same time, sustaining business continuity, remaining diligent and delivering cost savings and positioning Altra for success in the post-pandemic world.
I would like to take a closer look at progress we made in the quarter across these four areas, starting with our efforts to safeguard our employees. At the onset of the pandemic, we quickly put practices in place to ensure the safety of our employees. To protect onsite personnel, we have continued to follow social distancing protocols and other safety best practices, including providing PPE, conducting temperature checks, limiting visitors and implementing frequent deep cleanings and sanitizations. A substantial portion of our global associates, who are able to work remotely, continue to do so. And the level of productivity from our teams has remained extraordinarily high. We also continue to restrict non-essential company travel and expect to continue to do so for the foreseeable future.
Moving on to actions we have taken to ensure business continuity. As we moved through the second quarter, and many markets and businesses began to reopen, the Altra team did an incredible job of implementing systematic processes to ensure we were minimizing disruptions and optimizing opportunities. Our supply chain teams have continued to take proactive measures to maintain the supply of materials and components with minimal interruptions to meet customer demand across all industries, including the many essential businesses we serve. We have also successfully brought nearly all of our manufacturing facilities that were shutdown in Q1 back online.
Our teams have adapted to the new social distance setups, and the vast majority of Altra's 53 global manufacturing facilities are operating at a level required to meet customer demand. The operations teams are doing a tremendous job ramping up in areas where demand has been unexpectedly strong, such as engine braking systems in China and components for respirators and ventilators. They've also done an incredible job managing cost, where end market demand dropped precipitously, such as component for oil and gas equipment, and turf and garden equipment.
Now moving on to focus on managing costs. The entire organization continues to take aggressive actions to reduce costs in order to protect our balance sheet and strengthen our financial flexibility in the current environment. We implemented furloughs, suspended merit increases, rollback executive wage increases, reduced discretionary spending and service provider expenses, suspended all non-essential travel and implemented a weekly checkbook approach for all expenses. Some of these actions were started in Q2 and have continued through -- were started in Q1 and have continued through Q2 and into Q3.
The checkbook approach, which is focused on managing each business's cash inflows and outflows on a weekly basis, has proved very effective in managing cash flow at the business unit level by making sure people at every level of the organization buy only what is absolutely necessary. Additionally, as Christian will expand upon, we benefited from significantly lower US healthcare expenses in Q2, as elective surgeries and non-emergency medical care came to a near-halt. As a result of the cost actions we've taken and the additional actions we identified that we can act upon, if necessary, we remain confident that we will be able to maintain strong liquidity and cash flow.
Moving on to the fourth theme, playing offense to position Altra to be a stronger company as we emerge in the post COVID-19 world. Here we have focused on optimizing our own operations to be as efficient and resilient as possible for the inevitable long-term changes in the workplace. We have redesigned work cells to adhere to proper social distancing, converted cells to produce components required for COVID-related treatment equipment and are working on additional automation in some of our operations. Most importantly, we are focused on flexibility, so we can adapt as necessary given the ongoing fluidity of the situation.
We are also investing in the talent and capabilities to ensure that we position Altra to capitalize on new market opportunities and emerging trends such as the growing reliance on factory automation and robotics, the increased demand for medical equipment both related to near-term COVID needs and post-COVID once elective surgeries come back; the heightened focus on food processing, packaging and safety; the potential equipment demands that could emerge from the move toward reshoring; the possibility of increased infrastructure and defense spending as a component of government stimulus; and the possibility of increased demand for equipment related to growing online purchasing and the related logistics.
Now, please turn to Slide 8 to review end market demand. While we remain cautious given overall limited market visibility and the possibility of a strong resurgence of the virus in the fall or winter, we were encouraged by improving demand in June, when compared with a very weak May. This includes strong customer developmental activity as evidenced by the significant increase in technical webinar participation and a high degree of engineering activity as our customers continue to drive product development. While this increased activity hasn't yet translated into an order rate increase, we see this as an encouraging sign that we could see meaningful improvement once the markets begin to stabilize and we emerge from the pandemic.
Now, turning to a review of the markets, starting with those that performed well in the quarter. Renewable energy was up low-single digits in Q2 and up double-digit sequentially, as we continue to see strength in wind. We expect to see a slowing in the growth rate for wind in the balance of the year due to tougher comps and some possible industry supply chain issues unrelated to Altra that began to emerge in Q2, that may constrain our customer build rate.
Factory automation and specialty machinery was up high-single digits. We were encouraged to once again see strong growth for the quarter. We expect to see continued positive momentum in factory automation as the COVID-19 situation accelerates the need for automation, and expanding 5G has a positive impact in the semiconductor, tech and electronic market segments.
The Ag market was up mid-single digits for the quarter with the upside spread across several of our operating businesses, primarily due to favorable comps, which should trend into the second half of 2020. The remaining markets we serve faced headwinds in Q2. Aerospace and defense was down mid-single digits in Q2. We continue to see strong performance with many of our defense customers, which has been offset by a soft commercial aerospace market.
Transportation was off low-double digits due to a decline in automotive and heavy-duty trucks, where the strong demand in China was more than offset by weakness in North America and Europe. We are encouraged by emerging signs of improving Class 8 truck demand in the North American and European markets, but expect that this maybe offset by a return to more normal levels in China.
Distribution was down low-double digits for the quarter and sequentially as well. We expect distribution markets to track in line with the general industrial economy, which we believe will suffer a decline for the next couple of quarters. Metals was down double-digits, driven primarily by weakness across the oil and gas, automotive, and construction industries. We continue to expect the metal markets to be soft for the balance of the year.
In mining, demand was down low-double digits for the quarter, impacted by commodity prices. We expect this pressure to continue with both new equipment OEMs, as well as the aftermarket as we move through the year. Turf and garden was down double-digits also due in large part to a decline in discretionary spending. We expect this market to remain weak through the balance of 2020.
Oil and gas was down double-digits, reflecting reduced demand due to COVID-19, as well as lingering global industry trade tensions. With the price of oil and rig counts down meaningfully versus last year, we expect oil and gas will remain under pressure through the duration of the year.
Medical equipment was down low-double digits for the quarter, but up sequentially. It once again was a tale of two cities, where strength and demand for components for ventilators, respirators and other medical equipment related to the fight against COVID-19 was partially offset by the decreased rate of elective surgeries and reduced capital spending at hospitals. We expect shipments into this market to improve as we move through the year.
And with that, I'll turn the call to Christian -- turn the call over to Christian.
Christian Storch -- Executive Vice President, Chief Financial Officer
Thank you, Carl; and good morning, everyone. Please turn to Slide 9. Let's start with a review of our top line performance. Excluding FX effects, sales declined 12.5% compared with the prior-year period. Foreign exchange rates had a negative effect of 160 basis points, while price had a strong positive impact of 70 basis points. Excluding the effects of foreign exchange, net sales for the PTT segment were down 14.9%, while net sales for the A&S segment decreased 10.3%, compared with the same quarter last year.
Taking a look at our performance by geography. Asia and the rest of the world was very strong performer with revenues up 34.9%. This performance was primarily driven by strong JVS sales and sales into the wind energy market were up over 100%, while our brake and clutch business also saw year-over-year growth in China. In Europe, we saw a decline in demand with sales down 22.2%, 19.6% excluding the effect of FX. In North America, revenues declined 23.9%. This decline in North America was partially driven by temporary plant shutdowns and high absenteeism rates.
Our teams continue to do a great job of proactively managing cash in these uncertain times. This included taking proactive measures to manage cost in the current environment. As a result of these actions in the quarter, we were able to hold gross profit margins flat, reduce SG&A expenses as a percentage of sales and increase operating income as a percentage of sales.
Despite the $65.7 million revenue decline, non-GAAP income from operations only declined $7.5 million, reflecting the magnitude of the cost savings in the quarter. We were pleased with our ability to delever at approximately 11.5% in the second quarter. We are confident that we have a realistic path to delever at about 30% to 35% this year.
The provision for income tax in the second quarter of 2020, on a normalized basis, was 21.5% before discrete items. This rate includes the recently approved income tax rate reduction for one of our operations in China, due to a high technology designation. Non-GAAP adjusted EBITDA was $88.9 million for the first -- for the second quarter or 22.2% of net sales, up 170 basis points compared to last year.
Please turn to Slide 10 for a closer look at cost reductions, cash flow and liquidity. During the quarter, we reduced cost in all areas of the business. The quarter performance benefited from reduced US healthcare cost, as Carl mentioned, as a result of significant decline in preventative and non-emergency medical care for employees. Furloughs and rent abatements also contributed to the effort to reduce cost. We estimate approximately $7 million of these costs will come back in the third quarter, creating a sequential headwind.
We are extremely pleased with the strong non-GAAP adjusted free cash flow generation of $64.4 million that we delivered in the second quarter. This is 38% higher than last year's $46.7 million, despite a 14.1% [Phonetic] decline in revenues. Capital expenditures during the quarter totaled $9.1 million, down almost 10% from the prior year quarter. We plan to increase our capital expenditure levels in the second-half as we plan to invest in a number of growth initiatives.
We ended the quarter with $220.1 million of cash, which reflects our repayment of the $100 million that we drew down on our revolver in the first quarter and the $30 million of term loan debt that we paid down year-to-date; $24 million of which we paid down in the second quarter, bringing the total to $180 million since acquiring the A&S segment. We remain committed to deleveraging the balance sheet.
We remain very comfortable with the substantial room we have relative to compliance with financial maintenance covenants under our credit facility. Our covenant terms exclude the $400 million of senior unsecured notes we have outstanding. And we have no short-term debt maturities, as these are not due until October 2025 and October 2026. In terms of use of cash, our top priority in the current environment continues to be to reduce debt, manage leverage and preserve optionality for investing in future growth. As announced earlier this week, we are maintaining our quarterly dividend of $0.04 a share.
Please turn to Slide 11 for a review of our outlook for 2020. Today, we are increasing our guidance for the full year 2020 to reflect our best estimate and practical assessment of the potential impact of COVID-19 to our business at this time. We continue to closely monitor the situation and are prepared to implement further cost reduction measures, should top line demand decelerate. Our guidance assumes that we will experience a modest sequential revenue decline in the third quarter as we expect that the strong sales we saw in China in the second quarter will not repeat at the same level. We expect modest sequential growth again in the fourth quarter. The guidance also assumes that we will see SG&A expenses increase sequentially due to the before-mentioned factors.
With that as a background, we now expect annual sales in the range of $1,580 million to $1,640 million, the high end of our previously provided range. We are raising EPS guidance on a GAAP and non-GAAP basis as previously indicated. Following the A&S combination, we began to exclude acquisition-related amortization, net of tax from non-GAAP net income and non-GAAP EPS. We now expect GAAP diluted EPS in the range of a loss of $1.16 to a loss of $0.94, primarily driven by the impairment charge we took in the first quarter and non-GAAP diluted EPS in the range of $2.05 to $2.30.
We are also raising our non-GAAP adjusted EBITDA guidance to the range of $305 million to $330 million. We expect to continue to pay down debt over the balance of 2020 and remain on track to delever in the range of 30% to 35%. We expect depreciation and amortization in the range of $124 million to $127 million and capital expenditures in the range of $40 million to $45 million. We continue to expect a normalized tax rate for the full year to be in the range of 21% to 23%, and we expect adjusted non-GAAP free cash flow in the range of $160 million to $200 million.
And with that, I will turn the discussion back to Carl.
Carl R. Christenson -- Chairman and Chief Executive Officer
Thanks, Christian. And please turn to Slide 12. Against a challenging backdrop, we have demonstrated the incredible resilience of our business model, and our team's ability to stay focused to drive top line performance, while taking swift actions to maintain good cash flow and debt reduction during a downturn. We are controlling what we can control in the short-term, while protecting the necessary resources to drive growth and thrive as a premier industrial company for the long-term when the global economy recovers.
I will leave you with four reasons we believe Altra is positioned to navigate through this challenging period, emerge as a stronger company and continue to deliver value to our shareholders. First, the strength of our diversified business model and our exposure to several early cycle end markets, key fundamental strengths that will continue to benefit Altra. Second, the COVID-19 crisis has put Altra's business system, culture and organization to the test and demonstrated the resilience of our business. Third, to bolster our financial flexibility, we continue to prudently manage our balance sheet and execute cost savings initiatives. Performance to-date and scenario plans support our expectations on strong liquidity and cash flow this year. Finally, we are putting strategic plans in place to position Altra to thrive in the future and serve our customers, our community, our employees and our shareholders in new high value ways.
I'm extremely proud of the Altra team's efforts to collaborate, maintain productivity, remain motivated and deliver value in these unprecedented times. We're grateful for the ongoing support of our customers, partners and shareholders. And look forward to keeping you updated on our progress, as we realize our vision for Altra as a premier industrial company.
And with that, we will now open up the call for questions.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from Jeff Hammond from KeyBanc Capital Markets. Your line is open.
Jeffrey D. Hammond -- KeyBanc Capital Markets Inc. -- Analyst
Hey. Good morning, guys.
Carl R. Christenson -- Chairman and Chief Executive Officer
Good morning, Jeff.
Jeffrey D. Hammond -- KeyBanc Capital Markets Inc. -- Analyst
Great performance during this tough environment. Just want to understand decremental margins here. I think, you said maybe just quantify first, the healthcare thing, maybe that's a $7 million coming back. But it looks like the businesses had decrementals in kind of the low-20s in the second quarter. And just wondering how sustainable then that. It looks like the guide is maybe for a little bit higher decremental margins.
Christian Storch -- Executive Vice President, Chief Financial Officer
Yeah. So the $7 million that sequentially will come back; $3.8 million to $4 million of that is healthcare cost. Healthcare costs in the second quarter were $3.8 million below last year's healthcare cost. That is a significant drop in healthcare cost, and we expect now that elective surgeries are possible again, people are visiting doctors, again that will not continue and will start to normalize.
We also got $1 million of rent concessions in the second quarter for the second quarter. That will not continue. And then, in addition to that, we'll see in the second-half, seasonally, you will see that revenues typically for us in the second-half are below first-half revenues. So there will be some seasonality in the business combined with the very strong outperformance in China, which will not repeat as we saw some pent-up demand in China that we covered in the second quarter.
I mentioned wind was up over 100% year-over-year, JVS in China was up over 100% year-over-year. That will not continue. So we'll see some headwinds in that regard as well. And then, we had significant amount of furloughs in the second quarter, about $3 million. So between furloughs of $3 million, the rent $1 million and healthcare about $4 million, that makes up that pool of $7 million that will come back in Q3 as well as in Q4 and provides that EPS headwind.
Jeffrey D. Hammond -- KeyBanc Capital Markets Inc. -- Analyst
So what are you looking for decrementals in the second-half within the guide?
Christian Storch -- Executive Vice President, Chief Financial Officer
So, about 30%. We think if we do extremely well, we can do slightly better than that into the high-20s, but, let's say, 30% is what the mid-point assumes.
Jeffrey D. Hammond -- KeyBanc Capital Markets Inc. -- Analyst
Okay. And -- OK. And then, if you just look at the kind of end market slide, can you just talk about what your order rates are telling you relative to some of these sales trends, where the order trends are maybe getting worse or getting better sequentially as you kind of move through the quarter? I think, you mentioned wind and China truck, but maybe just talk about some of the other areas?
Carl R. Christenson -- Chairman and Chief Executive Officer
Yeah. I think, in general what we saw from an order trend, Jeff, was that May was -- appears to be kind of the bottom. So June, we saw a nice recovery. And then in July, I think, the bookings rate will -- supports our guidance and I think we're seeing that, that's probably the most indicative part of the trend is that the booking rates currently support what we've got out there for guidance.
By market, I'd say probably 10% to 15% of the end markets we serve were up maybe 10% or neutral, and around 75%, 80% we saw a decline in. And as we go through each one of those markets where we see each one of them were tracking, we see different trends occurring in those markets. And I think it's just -- but we do see that support right now for the guidance. I hope we...
Jeffrey D. Hammond -- KeyBanc Capital Markets Inc. -- Analyst
Okay. The July bookings rates were -- are running better than June?
Carl R. Christenson -- Chairman and Chief Executive Officer
No. No, no, no. I think, they are in line with June. Maybe -- and July typically isn't a real exciting month from a booking standpoint, because you got people on vacations, you got plants being shutdown for maintenance purposes. So July is kind of a -- it can be an odd month, but I'd say they are in line with what we were seeing in June.
Jeffrey D. Hammond -- KeyBanc Capital Markets Inc. -- Analyst
Okay. But the recovery in the June rates from May, where -- what markets are you seeing that most dramatically?
Carl R. Christenson -- Chairman and Chief Executive Officer
So, it's really across the board. So we had some very good defense orders that helped the bookings, the oil and gas business so weak that -- but that really isn't having an impact on it. But it's pretty much across the board. I think our turf and garden business was way down, we think that there is the sell-through through the big box guys is probably better than what we're seeing and they're chewing into some inventory, so that we saw a little bit of an uptick in turf and garden, but it's generally across the board.
One of the really nice trends that we're seeing is the Class 8 truck business in North America and in Europe, pick-up nicely. So that's probably the biggest change since April, May time frame is the improvement in that market. And that's been substantial. I think there was a report out last night too that indicates the build rate for trucks is improving nicely here.
Jeffrey D. Hammond -- KeyBanc Capital Markets Inc. -- Analyst
Okay. And then just if I could sneak in one final one, the corporate expense line was positive. Was that the healthcare and the rent concession going through there?
Christian Storch -- Executive Vice President, Chief Financial Officer
Yeah. So we allocate corporate expenses through the OpCos for healthcare at a budget rate, therefore providing them with a guaranteed cost program. So every under or over performance in healthcare expenses, end up on the corporate books; in this case, it was reallocated more than we actually spent. When you combine that with all the cost actions that we took at corporate, whether that's professional services, rent of the corporate office, furloughs at the corporate office, you get that positive swing. That will not continue.
Jeffrey D. Hammond -- KeyBanc Capital Markets Inc. -- Analyst
Okay. Thanks, guys. I'll get back in queue.
Carl R. Christenson -- Chairman and Chief Executive Officer
All right. Thanks, Jeff.
Operator
[Operator Instructions] Your next question comes from Mike Halloran from Baird. Your line is open.
Michael Halloran -- Robert W. Baird Co. -- Analyst
Hey. Good morning, guys.
Carl R. Christenson -- Chairman and Chief Executive Officer
Good morning, Mike.
Christian Storch -- Executive Vice President, Chief Financial Officer
Good morning.
Michael Halloran -- Robert W. Baird Co. -- Analyst
So, just some thoughts on channel inventory, how it looks today from your perspective? And then maybe read that into how your inventory level worked and how the working capital side is tracking for you as well?
Carl R. Christenson -- Chairman and Chief Executive Officer
Yeah. So I think discussions with our channel partners, the inventory they've taken them down a little bit. But again, they didn't really build up the inventory significantly from the big reduction we saw after the financial crisis. So we don't -- I don't believe that there is a tremendous amount of inventory that needs to be consumed in our partner channel. Now, we do look at some other areas, and I think, one place that we probably saw little bit of inventory reduction was in the turf and garden space, as I mentioned when Jeff asked his question. But other than that, I think we're in pretty good shape, Mike.
Christian Storch -- Executive Vice President, Chief Financial Officer
On the inventory -- on the working capital side, if you compare to last year, working capital -- operating working capital decreased by $36 million, that's about 10% on a revenue decline of 14%. That's pretty good given the fact that we saw a very modest increase in DSO, which is much better than we had thought of; we're afraid it's going to get much worse. And then you combine that with the growth in China, requiring number one, additional inventory. If you double your business, you will require additional working capital. And in China, payment terms are very long, 180 days, in some cases. So overall, we're very pleased with our working capital performance sequentially from the first quarter, but also year-over-year.
Carl R. Christenson -- Chairman and Chief Executive Officer
And the other thing, Mike, when the pandemic first hit, we did try to make sure that whether supply chain was getting longer and we saw disruptions with some of our suppliers that we tried to build up a little bit of inventory. So I think we've got an opportunity over the next six to 12 months to take some inventories out.
Michael Halloran -- Robert W. Baird Co. -- Analyst
That makes a lot of sense. And then free cash flow generation, solid, good guide for the year, paid down some debt in the quarter. How should we think about usage in the back half of the year? Is there debt more -- more debt pay down in your minds ahead? In anything else that you might start using that capital on?
Christian Storch -- Executive Vice President, Chief Financial Officer
Yeah. So we're targeting additional debt paydown on the term loan in the second-half somewhere between $80 million and $100 million.
Carl R. Christenson -- Chairman and Chief Executive Officer
Yeah. And the second-half is usually a better cash generating time period for us than the first-half. So essentially every penny we generate will be used to pay down debt. Gotten a little more comfortable with the cash flow situation from right when the pandemic hit. So we are going to probably spend a little money on some capital for growth opportunities and some projects that we put off. So we probably will loosen up the capital or expense it a little bit.
Christian Storch -- Executive Vice President, Chief Financial Officer
So in other words, we step really hard on the capex brakes. We are not changing guidance for capex, but we got ourselves some room to do a little bit more in the second-half; and as Carl said, to support some growth initiatives that several OpCos have.
Michael Halloran -- Robert W. Baird Co. -- Analyst
Appreciate it. Thank you, gentlemen.
Carl R. Christenson -- Chairman and Chief Executive Officer
Yeah. Thanks, Mike.
Operator
[Operator Instructions] Your next question comes from Bryan Blair from Oppenheimer. Your line is open.
Bryan F. Blair -- Oppenheimer Co. -- Analyst
Good morning, guys. Hope everyone's doing well.
Carl R. Christenson -- Chairman and Chief Executive Officer
Yeah. Good morning, Brain. We are. Hope you are too, Bryan.
Bryan F. Blair -- Oppenheimer Co. -- Analyst
Thank you. Of your end markets that remain in decline, are there any you would call out as nearing bottom at this point? And I guess in the same vein, anywhere you expect more prolonged period of compression, any kind of rank order would be helpful?
Carl R. Christenson -- Chairman and Chief Executive Officer
Okay. Sure. And preface this, I do this all the time, but I call the bottom in mining a few years ago 9 times, I think. So whatever I say, you got to take a little bit of a grain of salt. It feels like the turf and garden business is probably getting toward to bottom. We'll see typically the build in that industry occurs in the -- starts to occur in the fall. So -- and we hope to see an uptick in orders as we get into September or October time frame.
It feels like oil and gas might have hit a bottom that -- I don't -- it can't get much lower than where it is today. So the rig count seem to have stabilized at an incredibly low level. So if we get some kind of agreement between the different geographic regions that are battling out in the oil industry, then maybe we'll see something there start to improve in six, 12 months out, but not in the near-term.
Medical equipment, the non-COVID related medical equipment, we're starting to see some movement there. The elective surgery certainly haven't ramped up yet and hospitals, it's going to be a while before they're going to be spending capex, but we're seeing some interest in our -- a little bit of improved interest in some developmental activities from some of our traditional customers that are non-COVID related equipment.
I think the -- let's see, the Ag business was a little bit of a surprise to me that we had a pretty good quarter in Ag. And so whether food, farming and the Ag business maybe starts to turn up a little bit, that would be good news. I don't think we'll see much from the aerospace business for a while. And the -- I guess the one that's the biggest improvement we've seen has been in the Class 8 trucks. So, transportation seems to be turning with a significant improvement in North America and Europe on Class 8 trucks.
I miss anything, Christian? No.
Bryan F. Blair -- Oppenheimer Co. -- Analyst
Okay. Helpful color. And Christian, I apologize if I missed this detail, but were there any material supply chain disruptions in the quarter? You called out some other one-time-ish in past.
Christian Storch -- Executive Vice President, Chief Financial Officer
There were no material supply chain disruptions in the quarter. We had some, particularly our facilities in St. Kitts and in Mumbai struggled with supply chain issues, but they were not material overall. We do anticipate that we're going to continue to have some of these supply chain issues here and there, but not too material effect.
Bryan F. Blair -- Oppenheimer Co. -- Analyst
Okay. And last one from me, given current visibility, what should we think about as your net leverage exiting 2020, and assuming at that point we have flat to positive demand, how should we think about the rates you can delever going forward?
Christian Storch -- Executive Vice President, Chief Financial Officer
Yeah. So given our current guidance and looking at the free cash flow guidance particular, we believe that we would -- will end with a leverage ratio of somewhere between 3.8 times and 3.9 times, essentially flat to where we have been now for 12, 18 months. And then from a covenant perspective, we think we're going to end the year at about 2.6 times, maybe 2.7 times with a covenant that steps down to 4.75 at the the end of the year. So plenty of headroom from that perspective. And then, as we look at next year, that's a little bit too early. Given all the uncertainty, I don't think we want to make any predictions for 2021 at this point.
Bryan F. Blair -- Oppenheimer Co. -- Analyst
Okay. That's fair. Thanks again, guys.
Carl R. Christenson -- Chairman and Chief Executive Officer
All right. Thanks, Bryan.
Operator
[Operator Instructions] We have no further questions. I'd like to turn the call over to Carl Christenson for closing remarks.
Carl R. Christenson -- Chairman and Chief Executive Officer
Okay. Thank you, Julian. I want to thank everybody for joining us today and we look forward to engaging with many of you over the next few weeks and months. And thank you again for your time.
Operator
[Operator Closing Remarks]
Duration: 42 minutes
Call participants:
David C. Calusdian -- President
Carl R. Christenson -- Chairman and Chief Executive Officer
Christian Storch -- Executive Vice President, Chief Financial Officer
Jeffrey D. Hammond -- KeyBanc Capital Markets Inc. -- Analyst
Michael Halloran -- Robert W. Baird Co. -- Analyst
Bryan F. Blair -- Oppenheimer Co. -- Analyst
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Altra Industrial Motion Corp (AIMC) Q2 2020 Earnings Call Transcript - Motley Fool
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