Hello, and welcome to today's webinar. Our speakers today are Mike Rivitch and Ross Golarity. Before I turn it over to Brian McGuire, President and CEO of AAD, who is also on the call with us, I'd like to let those of you who are live with us know that you may submit questions during the webinar via the chat box in the lower left side of your screen. The slide deck and related documents from today's presentation are available as PDFs in the handouts tab of the webinar homepage. This webinar will also be recorded so that you may watch or re-watch on demand at your convenience. And with that, I will turn it over to Brian. Thank you, Liz. Good morning, everyone. I want to welcome you to our last in our three-part series that AAD put together at the onset of this crisis to kind of give folks some inside information on the markets and what was going on as things were certainly affected by the pandemic. And we want to thank our friends at Merrill Lynch and Bank of America for partnering with us on this. And I think that this third part is probably the installment we've all been waiting for, and that's to hear about the effects on the industrial machinery and heavy equipment part of the economy. And I'm sure that they will cover a lot of details and answer a lot of our questions. And with that, I'm going to turn it over to Mike Ribbage, and thank you once again to both Michael and Ross for joining us today. Great. Thank you, Liz. Thank you, Brian. And good morning, everybody. Good morning, everybody. And again, glad to be here and glad for the opportunity to be part of this again, as mentioned in the last two parts. We will get through this. We think that there's a great opportunity now. I was just listening to someone last week, one of the top money managers, senior portfolio managers in the industry, kind of been around in investing and managing money for 50-plus years, and he summed up that this is probably, in his lifetime, one of the top five buying opportunities from an investment standpoint. We actually just put out, which I will forward to Liz and Brian to post up on this as well, a research report that we just came out with this morning that kind of shows five signs of a bottoming process and how we're starting to see the bottoming process in place. And I think four of the five are already there, and the fifth one is just making sure that we see things stabilized from a health side, right? And so that was a great summary, great read. But the last two, we've talked about the economy and the markets in general. And this time, we're focusing more specifically to all of your businesses and your industry and your sector. And I'm honored and proud to have Ross Colarty from our U.S. Equity Research Team as the Managing Director in our U.S. Equity Research Team covering machinery. Ross joined our firm just a little over 21 years ago and has actually been covering this sector for about eight years now, the machinery sector. And more importantly, he is a top-ranked analyst, institutional investor, has been currently ranked second in the machinery category on their most recent U.S. Institutional Investor All-America Research Poll, and he's been in the top five in that category every year since 2014. So, again, with that, I'm going to turn it over to Ross Colarty, who's going to go through, you know, again, the timely report he actually just published two days ago or three days ago, which is, you know, a report that he puts out, you know, on a yearly basis or maybe a couple times a year in the construction dealer survey. So it wasn't planned when we set this all up that that was getting released right at this call, but since it is, we thought we'd go through that, and I think you'll all find some great insights from that report. For those that registered prior to the last half hour, Liz did send that report out. For those that just registered in the last half hour, I think it's available on the website and it'll be available on the website after this as well for you to download and read. It's a, you know, 30-plus page report, but Ross is going to cover here just, you know, briefly in the next 20 minutes or so, half hour, kind of, you know, what I like to call the cliff notes of at the high level, and then again, he and I are both here for you for Q&A. So with that, I will turn it over to Ross. Thanks, Mike. Good morning, everybody. This is Ross Gilardi from, as Mike said, the Equity Research Department at Bank of America Merrill Lynch. I'm really happy to be here with all of you today. I am, you know, the Senior Machinery Analyst in your general neck of the woods. I cover Caterpillar, Deere, Case New Holland, Cummins, Packard, Terex, Oshkosh, United Rentals, Herc, amongst a list of about 30 companies that my team follows. As Mike said, I joined Merrill in 1999 out of business school. I really cut my teeth covering this base, covering the chemical and paper and packaging sectors. I worked in Europe for four years through the financial crisis, picked up the machinery stocks in 2012, right as Caterpillar was going into year one of, you know, a pretty brutal four-year downturn triggered by, you know, a depression in the mining sector. But all in all, I've been covering cyclical stocks for over 20 years, really my whole career. I was in the building across from the World Trade Center on 9-11, which is where we used to be located. So I've been with the firm for a long time. I've seen a lot of ups and downs, and that's been very helpful to me in seeing sort of the anatomy of a downturn and seeing how things eventually turn up. I studied economics in college. I was a pretty good student. I wasn't a great student. I was a solid B-plus student at Boston College. And I tend to see the world through a lens of supply and demand. I go to all the conferences. You know, I know my companies and my management teams very, very well. I'm more of a stock guy than an industry guru. I pride myself more on trying to get the stocks right than anything else. It's been really hard lately. But I love talking to dealers, rental companies, anybody tied to the industry. So really pleased to be here with you all today. So as Mike mentioned, on Tuesday we had our quarterly construction equipment dealer survey out. It's actually a quarterly product. And Mike and I figured it would probably be best and you'd be most interested in that since it's a fresh piece of research that discusses sort of real-time feedback from the dealer channel and probably many of your peers. As a firm, we've been conducting this survey, I want to say for at least 15 years. I inherited it from my predecessor who covered this space for a long time who inherited it from his predecessor. So I say 15 years. Don't quote me on that. But we've had it for a while. I've been doing it for eight years. And what it does is it gives me a good flavor for how the companies are going to sound in the earnings every quarter. And it's not meant to be a tool to precisely pin down what demand is up or down and put a number on it. It's more of a directional indicator and it gives us a way of really reading all of you folks and the sentiment out in the dealer channel and whether or not it resonates with what we're seeing. Right now, I'd say there's a little bit of a dislocation. And I'll talk about that in a minute. We usually send it to over 5,000 dealer contacts around the world. We hear back from like 60 to 80, so it's like a 1% hit rate. So if anybody in the audience would like to participate, we're always happy to share it afterwards. We could really appreciate it because it's a lot of work to get those 60 to 80 responses. Everybody gets hit with so many surveys these days, ours included. But 60 to 80 is kind of the sweet spot. It sounds like a very small sample size, but we found it to be about the right number to give us a good feel for the market. This quarter, it was really interesting because we started reaching out to folks in early March and we didn't finish it until the end of March. That's a longer time period than normal, but because of the way the market was unfolding and what was going on, we had to stretch it out a little bit more. And obviously, the world changed quite a bit during that timeframe. So going into the quarter, and I'd say in the first week of the survey, the responses were a lot more positive. I mean, basically what had been, and we were a lot more positive, and basically the industry had been cutting production for six months. We had a ceasefire with China on trade. And because of those production cuts, and because it felt like a lot of you folks had been kind of holding back on orders, dealer inventories were starting to come down, and you could see that in Cat's results. And for Caterpillar, a lot of the call is figuring out when dealer inventories are kind of depleted to the max so that the market comes back, you all start ordering again, they ramp up production, and their margins go up very, very sharply. I mean, that's kind of like what you're looking for in covering a stock like Cat and many of the names in the sector that I mentioned before. So before COVID-19, I really felt like you had the makings of a potential spring recovery for the sector, and we had been saying that for a while. And heck, on January 3rd, the first day back after the holidays, Cat hit $150, and it looked like we were off to the races. Of course, all that's changed now. The stock started to break down well before COVID-19, and now it's had a pretty feverish rally off the lows. I guess what concerns me most with the survey and the responses that we got, like I said, I think there's a bit of a dislocation here, is that it didn't get worse until very late in March. And I feel like it should have gotten worse a lot earlier than that. Three weeks earlier, there were 130,000 people at ConExpo, and many of you might have been there. So this was an industry that generally wasn't, when you look at that attendance, it wasn't really an industry that was all too worried about COVID-19 and the threat of work stoppages in the general economy, because the construction economy was booming. I mean, Caterpillar was there. They had their CEO there for, I think, four or five days meeting with folks. And I think what that's going to mean, and what I'm a bit worried about, is that the industry overordered into the spring. And I'm guessing the Caterpillars of the world are going to spend the rest of the year, they were already curtailing production and trying to get dealer inventories down, but it's going to be certainly more aggressive now to right-size the amount of inventory in the field. And of course, Caterpillar, and most of the names I mentioned before, have suspended their earnings outlook altogether, really more tied to the outbreak than market conditions. It all kind of goes together at the end of the day. So when I say that I'm worried about this location, just to explain where we're coming from, I mean, our economists are calling for a 30 percent decline in U.S. GDP in the second quarter. I mean, I don't even know how to conceptualize a number like that. I haven't been doing this for a while, but I haven't really experienced anything like that before. And this is a very different type of downturn. They're forecasting a very sharp, brutal recession, but we're hoping it's quick and then we get a snapback in the second half of the year. But overall, the firm is expecting a fairly sluggish recovery in 2021. You know, on top of that, with this space that I cover, you got the oil price, which adds another layer of complexity. Natural gas is not a lot better. You know, these OPEC meetings are going on right now and I guess the Saudis and the Russians are, you know, we'll see how much they cut production if they do it all. And I think there might be some news on the tape in the last half hour or so. And I don't know what role, if the U.S. is going to play ball on that or not. I don't I personally don't really understand how the president is going to force the private sector in the U.S. to cut oil production. But it's not really clear if the U.S. has got to play ball here to get anybody to adhere to these production cuts. But, you know, we think there's going to be a lot of equipment going to auction in the second half of the year, particularly in the oil fields. I mean, I think that's that's already happening. The equipment rental companies, which I follow really closely, you know, face some short term, real short term challenges. We've written about that. We all we think that the big ones will get through it. I mean, most of these companies, you know, United Rentals, Asset Herd, they've turned out their debt. They don't have big maturities coming in the next couple of years, which is which is good. They have a lot of liquidity generally. At the bottom of the rental cycle, you know, the companies are auctioning off equipment and they're cutting back on capex very, very hard. The equipment rental companies tend to get windfall free cash flow in, you know, year one of the downturn. And then as you come out of it, all that capex that they've deferred, they've then got to catch up because they're aging their fleet essentially. And so you could see capex spike, you know, in a year or two. But but for now, for the equipment rental guys, you've got a period where significant fleet comes or has already come off rent, I think, just in the last couple of weeks. As long as it's quick and everybody goes back to work in a month or two, the industry we think can handle it, albeit the second quarter is going to be really, really difficult. If it gets much longer than that, my worry is that the pricing environment begins to crack and you start to see rental companies liquidating fleet more aggressively. We're not hearing that is happening now. We're actually hearing everybody sitting tight, but it's still, you know, really early. So if we go to the survey here, a couple of the findings that I thought were kind of notable. Forty four percent say demand is shrinking versus twenty one percent last quarter. Only twenty six percent see growing demand versus forty six or six percent last quarter. Again, that's over the course of the entire month of March. I think if you did the survey now that there'd be you'd probably see here almost one hundred percent say demand is shrinking, but we'll have to wait till the next survey to see if that's right. Only thirty seven percent complained of having too much used equipment, which is pretty much the same as the fourth quarter. And honestly, I mean, that's that's what worries me a bit. I mean, only twenty six percent of the respondents see higher than average inventory at face value. If that's right, that's great. But I think the real number has got to be much higher than that. Only forty one percent of dealers saw new inventory levels above average, which was an improvement from the fifty two percent in the prior quarter, which, again, at face value is good. I mean, I think what it tells you is like the industry was like on the right path going into covid-19 inventories were really starting to come down. If we look at ordering patterns, fifty five percent expect to purchase less equipment over the next six months, that's 50 percent of dealers versus only 19 percent in the prior quarter. So fifty five percent purchased less versus 19 percent last quarter. Seventy eight percent responding in late March expect to purchase less equipment over the next six months. And of those people, over half of them by more than 10 percent of the decline. So overall view from the survey, if you take it purely at face value, it actually reads OK. But again, it got a lot worse as the month dragged on. And when I saw that only 26 percent think they have too much used inventory, only forty one percent think they have too much new inventory. I'm a little worried that the harsh reality hasn't completely settled in yet. That was actually the title of this quarter survey. And this is my interpretation of things like I again, we have to see what this thing says next quarter in terms of the companies that I follow. Like I said, they've all suspended their outlook, which speaks to how much uncertainty there is right now out there. I've never seen companies just suspend their outlooks, just basically tear up the existing outlook and put their hands in the air and say, we don't know what's going to happen. That's basically what the whole industry has done. And when they finally come out with new earnings outlooks in the next few weeks, if they do that, I mean, maybe some of them won't even give an earnings outlook. We think the revisions are going to be very, very large. We faked in generally 40 to 50 percent earnings declines for most of our companies. We've got Caterpillar earning $5.75 this year of EPS versus a guidance figure that was provided in late January of $8.50 to $10. Our competitors are starting to catch up to our numbers. The consensus estimate for Caterpillar, when I looked this morning, was about $7. But the numbers are still too high and they're coming down, which is good. That's what needs to happen. If there have been a few silver linings out there recently, I saw, you know, we cover the industry globally. I've got a really good counterpart in China. She noted that China excavator sales bounced back very nicely in March. They were up like 11 percent year on year, which to me is miraculous. I don't understand what China is doing with all of these excavators. But, I mean, the market never really corrected. Even in the last year or two, you're pretty much at peak levels still. But on that 11 percent, she was noting you did have price cuts, big price cuts driving that. So we'll see what happens to margins. Before I kind of stop and, you know, and open it up to questions, I just figured I'd comment on infrastructure and the likelihood of a big federal infrastructure bill, which is very topical right now. You know, what I would say is kind of never say never, but like personally, I'm a skeptic. I mean, we've been skeptics for five years. Every time this subject comes up, I mean, there is no question this country needs it. I live outside of New York. I live in this area for a long time. I mean, our roads are the worst. Our transit system is terrible. It needs all sorts of updating. Penn Station is falling apart. You know, I don't need to tell you guys. We've got all the arguments in the world. We have very old infrastructure in this country that needs to be fixed. On the surface, you've obviously got bipartisan support for a federal infrastructure bill. I mean, everybody loves infrastructure. Personally, I just don't see the Democrats, and this is not like a political statement at all, giving Trump this big of a win six months before the election. And there are too many competing priorities out there to support small business, airlines, the unemployed, states and municipalities to fund a one to two trillion dollar program. But I don't know. I mean, the Fed is doing everything right now. So who knows? The issue has always been how do you pay for federal infrastructure stimulus? To me, I think that's an even much bigger issue now because you've got a big hole in tax receipts from a potential 30% collapse in GDP in the second quarter. The most straightforward way to pay for a federal infrastructure bill was always a gasoline tax. The tax hawks don't want that. And I think it's going to be pretty hard to sell a gasoline tax to the energy industry, which is already on its knees right now. That's the last thing they want. So in terms of infrastructure, I think it's going to continue to fall on the state's shoulders like it always has. The states have done a miraculous job picking up the slack for the federal government. Over the last five years, there have been a lot of big state infrastructure programs that have been good for the machinery industry, I'm sure helpful to many of your businesses. But clearly, states are going to have bigger deficits than they anticipated at the beginning of the year. So overall, I wish I had better news, but it's a tough picture, guys. I don't need to tell any of you that. Despite everything I've said, the stocks have rallied very, very sharply off the lows and catapulted up to 40% in three weeks. Generally speaking, from my perspective, I concur with Mike that this is probably a fantastic buying opportunity for the overall market for people with a long enough perspective. I think my space, I think the space is going to be tough. I think it's going to be very, very volatile. And the flow of funds can move around very, very sharply. The credit markets, the bond market have settled down in the last three weeks. That's really been the key to getting these large cap cyclical stocks and small cap stocks to rally very sharply. But I think there's going to be a lot of give and take here. So we'll see what happens. But I guess I'll stop there. And let me turn it back over to Mike. I'm happy to take questions or comments on anything I said. If anybody thinks I'm completely out to lunch in what we're saying or totally off base, welcome any feedback. But thanks for having me today. Mike, you still there? Yeah, Mike, those are my comments. I'll turn it back over to you guys for questions. Yep. I think you said something that's interesting. And I mentioned this on the first call is that stuff is moving very rapidly. And you mentioned the credit markets. And this morning, the Fed and the Treasury released additional stimulus packages or easing. And it was surrounding the credit markets. And right away, I was on an early call with my team this morning. We said, the high yield market's going to really pop. And sure enough, based on the additional buying that the Fed and Treasury are going to do, the government's going to do, you saw we're almost at a 6% increase today in high yield bonds. So again, one of the sectors of the fixed income of the credit markets that rallied a little bit but did not really rally fully, we're seeing that rally today. So again, another sign that we are starting to see stabilization. So again, I think long term, there's definitely a good opportunity out there. We did have a question come in. Ross, for you, it says, do you think there will ultimately be a shift to rental versus ownership of equipment? And then will COVID help or hurt this trend? Yeah, no, thanks for the question. I think it's a great question. Yeah, I mean, I think, you know, that the shift to rental has been going on for a very long time. And I don't see why that's going to change. I think particularly if you're in a world where everybody's a bit more constrained on cash flow and in a downturn for a little bit, I think that's one of the major facilitators of this shift to rental that's been going on for a very, very long time. So yeah, I think that'll continue. I think the industry has changed quite a bit. I mean, the equipment rental industry is not that old. United Rentals is a much bigger force than they ever used to be. And that's really just been since the financial crisis. They went through a major restructuring. They've rolled up, they've continued to roll up a lot of the industry. I mean, URI in, you know, pre-2009 still had, you know, a lot of issues. Company's a lot better run than it ever was in the past. I mean, they've become much more of a, you know, a service-oriented company. Sunbelt out of the UK is an excellent company. And, you know, these guys have got, URI's got over a thousand stores in the U.S. And, you know, they can serve large customers at multiple locations around the country. And that's, you know, that wasn't really the case 20 years ago. So, you know, they've just got a lot more reach than they ever have had. They have a much larger fleet, much broader diversification of fleet. They've gotten into this specialty rental business. So, yeah, I think you'll see rental penetration continue to go up. Great. We had a question come in that says, can you give any details on the $2.3 trillion the Fed announced this morning? Full disclosure, I'm, like, reading through a lot of the details, and a lot of the details are being released. On a high level, what I just read this morning, I think, you know, they're giving $500 billion, I think, of that is going to, you know, states and local governments, which, again, if you look at the municipal bond market, you know, that was one area as well that it was depressed because of a liquidity issue early on. And you saw prices of, you know, really highly rated municipal bonds, you know, down 6%, 7%, 8%, 9% this year, you know, through March or in March. And you started seeing some of that come back. I think today in the next two days, you're going to start, you know, you're going to see that rebounding more, because while there was no liquidity, you know, that was one of the concerns from a depreciation of municipal bond assets. The other reason that, you know, and just talking with clients and why they were like, I don't know if I want to own municipals right now, is that, you know, with, you know, everything going on on a local government standpoint, is there going to be funds to continue paying that? And while you look at historically the default rates of municipal bonds, it's, you know, of high quality municipal bonds, it's less than I think 1% out there. We, you know, I gave some examples of them in Detroit when I went bankrupt, right? Majority of the bondholders still got their payment so that, you know, that you're senior in line. But again, I think this funding is going to, you know, give reassurance to the typical investor and to the marketplace that, you know, hey, these states are going to be, the states and local governments are going to be backstopped as well. The other big portion of the funding was, again, in the corporate bond market and in the, you know, buying up more bonds on the short term. So, again, giving more stabilization, they're opening up the window, you know, for, you know, the government to buy more commercial papers, short-term corporate bonds, high-yield bonds, et cetera, which, again, gives stabilization to the marketplace. It just adds liquidity, right? I mentioned this on one of the earlier calls, right? It was historic in that the sell-off that we saw, you know, in mid-March was not just equities, right? We saw a record outflow in equities, but we also saw a record outflow in bonds, right? And so, you know, people heard that, oh, there's no liquidity, and the first thing they think of when they hear bonds is they go back to 2008 and they said, well, bonds, you know, the corporations and banks and so forth, excuse me, are not going to be able to make their payments on their bonds, and that wasn't the case this time. It was a liquidity issue of there was no buyers, right? Everybody was selling, and I explained this to a client the other day that really didn't understand it, and after I got done explaining it, it made sense. I'll just, again, give it, you know, right now, if you have a bond that's priced at par at $100, right, if you're going to sell it, right, you want to sell that as close as possible to $100, but if nobody's buying it, you have to kind of put that, you know, start offering that at a lower price. Well, it got to the point where high-quality, investment-grade bonds, you know, were getting offered at $0.91 on the dollar, right? It got to that low to where somebody said, okay, you know, yeah, I'll buy it now, because, you know, I think I'll probably still get my coupon, and you know what? I'm buying it at $0.90 on the dollar, and it'll mature at, you know, at $100, I'm going to make a premium, right? Earlier this week, we saw prices get back to, you know, $0.96, $0.97 on the dollar, so we saw an improvement, and I think today, you know, you're going to start seeing it a bit more, and as I mentioned, the high-yield market, you know, rallied is up, you know, 6% right now, right? So, the fact that, you know, your high-yield bonds, just in principle, are going up 6%. Now, they were depleted, you know, double digits, but again, it's definitely, you know, a movement in the right direction. So, again, I don't have all the details on it, but again, that's mainly what it, what the announcement was this morning, is continue buying of credit assets and giving money toward state, local municipalities. Any other questions out there? I think that was all we have that I can see. So, again, thank you for your time, Ross, and thank you, everybody, for participating in the call. One of the things I will say is that, as Ross mentioned, you know, this quarterly survey does come out on a quarterly basis. We can set you up to, you know, automatically receive that if you want to. All you need to do is email me. My email is on the screen, and Liz and Brian and the team at AEB also has my contact information, but we can set you up to receive that automatically on a quarterly basis when it comes out. I just put you on my distribution list for that. I know, you know, a lot of members of AEB are already receiving that. We actually did have one more question come in here. Ross, how do you rate the gold mining industry? Is that something you can touch on? Yeah, you guys, I don't follow the gold mining industry. I mean, I pay attention to it from a capital spending perspective with respect to CAT and a few of the other companies. I mean, companies have got a mining truck engine business. But, you know, gold for mining equipment, the types of mining equipment that CAT sells isn't as big of a needle mover as iron ore, copper, and coal, which we tend to watch a little bit more closely. So, unfortunately, no, I don't really have a strong view on the gold sector. If you're talking about the person is, you know, should you own gold? What's the outlook for gold? You know, gold is a piece of a portfolio, right, that we have as a small piece in a diversified portfolio, right? The reason we as advisors have gold or precious metals or commodities in a portfolio is for diversification purposes. It tends to be a non-correlated asset class, right, to hedge against inflation, right? And so if you're owning gold right now, you know, and I've had this conversation with clients is you have to look at is what do you do with it, right? Gold is up, you know, if I just say a click here, year to date, you know, year to date, gold is up just shy of 10%, right? And you look at the equity markets, you know, you have equity markets that through, you know, right now, you know, the equity markets are down 14 and a half percent. So from a non-correlated asset class, gold did exactly what you want it to do. You know, my feeling and our feeling, though, is you have to look at and say, what's your outlook for gold for the next 12 months, right? You know, gold did exactly what it's supposed to do in the portfolio right now. So we're actually for some clients portfolios is doing that rebalancing, selling off some of our gold that appreciate it, right? And actually buying and putting those assets back into their traditional equity classes, right? Because you have to look at is if you look at the next 12 months, what are you going to have greater upside in? Gold or an equity market that's down right now through right, you know, through today right now down 14 and a half percent. I personally think and we personally think that your upside is going to be greater in the equity market, right? So selling off some of the gold or gold mining stocks and reinvesting in traditional asset classes, because again, if you did own it, it did exactly what it's going to do. The other thing you have to ask yourself is why do you own gold? Well, historically, gold was a hedge against inflation. So you have to ask yourself is you really see inflation being a big concern over the next 12 months, given where interest rates are in the equity market, they don't see it being a huge concern. So again, from that standpoint, you know, that's our overall view on just owning gold as an asset class or as a holding in your portfolio. Well, it doesn't look like we have any more questions coming in. So again, thank you all for your time over the last three series. And today, thank you, Ross for Outlook. And if anybody has any additional questions or would like to discuss, you know, my contact information is on the screen. Thanks, everybody. Thank you. Thank you.

COVID-19 pandemic

demand downturn

equipment orders

used equipment

earnings declines

federal infrastructure bill

rental equipment