Prompt:
Human: We will be referring to that slide deck throughout today's call.
I'm Kelly Boyer, Vice President of Investor Relations.
Joining me on the call today are Chris Rossi, President and Chief Executive Officer and Damon Audia, Vice President and Chief Financial Officer.
These risk factors and uncertainties are detailed in Kennametal's SEC filings.
In addition, we will be discussing non-GAAP financial measures on the call today.
Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our Form 8-K on our website.
I'll start today's call with some general comments on the level of industrial activity we are currently seeing then briefly review the quarter, our strategic initiatives and expectations for Q2.
Damon will then go over the quarterly financial results in more detail.
Debt increasing sequentially by 6% of which 3% was due to FX.
General engineering and transportation end-markets are showing the highest levels of recovery.
As a reminder, those two end-markets total more than 60% of our sales.
On a year-over-year basis, organic sales declined by 21% on top of an 11% year-over-year decline in the prior year quarter.
However, through disciplined execution on several fronts, we were able to effectively maintain profitability.
Adjusted EBITDA margin improved by 40 basis points to 11.3% versus 10.9% in the prior year quarter.
And our operating leverage was strong as well, while[Phonetic] continued double-digit declines in volume and associated under-absorption.
Improved EBITDA margin was driven by lower raw material costs, increasing from simplification, modernization and effective cost control action.
Operating expense as a percentage of sales increased 23% due to lower sales.
However, in total dollar terms decreased 18% year-over-year.
Our target for operating expense remains at 20%.
Adjusted earnings per share was $0.03 compared to $0.17 in the prior year quarter, reflecting the factors I just named as well as a higher adjusted effective tax rate.
Looking ahead, of course, visibility in this environment is still limited due to COVID-19.
So it remains extremely difficult to forecast how our customers as well as our end-markets will be affected, especially with additional shutdowns being contemplated in some regions due to recent spikes and COVID-19 cases.
We will not be providing a full-year outlook for fiscal year '21, however, I would like to provide some color on what we might expect in the second quarter.
Based on the monthly sales results in Q1, early indications from our October sales, assuming that there is no additional second wave of COVID-19 lockdowns in the quarter, we expect Q2 to see low to mid-single digit growth sequentially, which would be above our normal sequential growth pattern of 1% to 2%.
While it feels like the economic recovery may be gaining momentum, as I said, it is still difficult to predict the pace and trajectory.
So we continue to focus on the things we can control such as executing our operational excellence and commercial excellence strategies, and share and improve operating results throughout the economic cycle.
On the operational excellence side, simplification, modernization initiatives are on track to deliver approximately $80 million in benefits this year, increase of 67% over last year.
That will bring the total cumulative savings from inception of the program to $180 million, which is within the original target we set in December 2017, despite much lower volumes than were envisioned at that time.
As a reminder, we expect to complete our original footprint rationalization activities with closure of the Johnson City, Tennessee plant, downsizing of the Essen, Germany plant by the end of this fiscal year.
Also, the capital spending associated with the simplification modernization program is substantially complete.
This will result in significantly lower capex levels going forward, including this fiscal year where total capex is expected to be reduced by approximately 50% to be $110 million and $130 million.
In addition to our focus on these transformational operational excellence initiatives, we are equally focused on driving commercial excellence.
Turning to Slide 3, as you recall, last quarter we announced the combination of our two metal cutting business segments, enabling us to direct our commercial resources, products and technical expertise more effectively toward capturing a larger share of wallet.
In addition, we discussed our new brand strategy to reposition the Widia brand and portfolio to the multi-billion dollar fit-for-purpose application space within metal cutting, which we previously have not focused on.
This strategy opens a 40% increase in served market opportunity while offering better service, and tooling options to our customers.
Progress on this initiative is tracking with our expectations and I'm pleased that we already have several wins with new customers and existing customers, including a recent win at a major machine tool builder to apply fit-for-purpose tooling as standard on new machines they sell.
Also, the reaction from our channel partners has been broadly positive, especially to be able to operate in the market with clear brand positioning, key to win share in the full-solution application space as well, with the share gain in a major machine tool builders manufacturing facility.
And we are successfully leveraging one of our proven tooling solutions, developed for a wind turbine manufacturer in China to capture share of similar projects in India.
And of course, we remain committed to product innovation to better serve customers and gain share.
For example, during the quarter, in the full-solution application space within general engineering, we introduced two best-in-class products, HPX Solid Carbide Drill which delivers 2 to 3 times more productivity than competing products, KCFM 45 face milling cutter, which offers greater flexibility and a cost-effective user friendly solution for a broad range of CNC machines.
Based on our continued ability to deliver products that are highly valued by customers and the positive reaction to our brand repositioning, we are even more confident in our ability to gain share and drive top line improvement.
In addition, as you know, we are also focused on improving the bottom line.
The last time, the company experienced a sales decline of this magnitude, it was during The Great Recession.
Trailing 12-month sales is shown on the left and corresponding adjusted operating margin is shown on the right.
The improvement in profitability compared to the earlier downturn, illustrating the benefits of simplification modernization, stronger cost control and remember of the present day numbers do not yet include the full run rate effect of the modernization activities we are currently undertaking.
By executing our commercial excellence and operational excellence strategies we are positioning the company for improved performance throughout the economic cycle.
We will begin on Slide 5 with the review of Q1 operating results, both on a reported and adjusted basis.
Chris mentioned, demand trends improved off low levels throughout the quarter and outpaced the 10% sequential seasonal decline we normally experienced in Q1.
For the quarter, sales declined 23% year-over-year.
On organic basis, sales were down 21% year-over-year.
Foreign currency in a business divestiture, each had a negative effect of 1% in the quarter.
However, sales did increase 6% on a sequential basis, with approximately 3% attributed to foreign currency.
Adjusted gross profit margin of 27% was down 50 basis points year-over-year.
Year-over-year performance was primarily due to the effect of lower volumes and associated under-absorption, partially offset by the positive effect of the raw materials, which contributed approximately 650 basis points, incremental simplification/modernization benefits and temporary cost control actions.
Adjusted operating expenses of $93 million were down $21 million or 18% year-over-year.
Adjusted EBITDA margin was 11.3%, up 40 basis points from the previous-year quarter.
Adjusted operating margin of 2.9% was down 180 basis points year-over-year.
Adjusted effective tax rate in the quarter of 33.4% was higher year-over-year due to the combined effects of geographical mix and the continued effect of GILTI on the low level of U.S. taxable income.
Although we expect our adjusted effective tax rate to remain elevated in the low to mid 30% range with these lower levels of earnings, we still expect our tax rate to be in the low to mid 20% range when we return to higher levels of profitability.
We reported a GAAP earnings per share loss of $0.26 versus earnings per share of $0.08 in the prior year period, reflecting the reduced volumes and higher tax rate, partially offset by raw materials, simplification/modernization benefits and temporary cost control actions.
On an adjusted basis, earnings per share was $0.03 per share versus $0.17 in the prior year.
The main drivers of our adjusted earnings per share performance are highlighted on the bridge on Slide 6.
Effective operations this quarter amounted to negative $0.28, this compares positively to both the negative $0.60 in the prior year period and the negative $0.68 in Q4 of fiscal year 2020.
The largest factors contributing to the $0.28 was the effect of significantly lower volumes and associated under-absorption, partially offset by positive raw materials of $0.30 in strong cost control actions.
Simplification/modernization benefits increased again this quarter totaling $0.20 on top of $0.07 in the prior year.
This brings the total benefit since inception from simplification modernization to a $123 million.
As Chris mentioned, our expectations continue to be that simplification/modernization benefits will be approximately $0.80 for fiscal year 2021, driven by actions already taken or announced and bringing the total expected cumulative savings to $180 million by the end of fiscal year 2021.
Incremental savings from our restructuring actions contributed to $17 million of the $22 million in simplification/modernization savings this quarter.
Remember, restructuring is a subset of our simplification/modernization program.
Slide 7 and 8 detailed the performance of our segments this quarter.
Metal cutting sales in the first quarter declined 23% organically on top of an 11% decline in the prior year period.
All regions posted year-over-year sales decreases, the largest decline in the Americas at negative 29% followed by EMEA at 24%, Asia Pacific posted the smallest year-over-year decline at 9%.
Performance in Asia Pacific reflects more positive economic activity in the region with approximately 10% growth in China year-over-year, partially offsetting weakness in other countries such as India.
From an end market perspective, although improving sequentially, we still experienced year-over-year declines in transportation of 21% and general engineering of 20%.
Sales and aerospace experienced more significant declines, year-over-year and was also down sequentially driven by the COVID-19 associative effects on demand and the supply chain.
Relatively speaking, energy was the best performing end market in metal cutting on a year-over-year basis with positive trends in wind and renewable energy.
However, it is worth noting that the oil and gas portion of the energy end markets continues to be significantly challenged.
Adjusted operating margin came in at 1% compared to 7.9% in the prior year quarter.
The decrease was primarily driven by a decline in volume and mix, partially offset by incremental simplification/modernization benefits, temporary cost control actions and raw materials that contributed 230 basis points.
Turning to Slide 8 for Infrastructure.
Organic sales declined 18% on top of a decline of 11% in the prior year period.
Other factors affecting infrastructure total sales were a divestiture of 4%, partially offset by a benefit from business days of 1%.
Regionally, again the largest decline was in the Americas at 27% then EMEA at 9%, but this time followed by a 1% growth in Asia Pacific.
By end market, the results were primarily driven by energy, which was down 31% year-over-year, reflecting the effect of the significant decline in the U.S. land only rig count.
General engineering was down 14%, earthworks was down 11%, reflecting a continued production decline in Appalachian coal.
Adjusted operating margin of 6.5% was up 700 basis points year-over-year.
This increase was mainly driven by favorable raw materials, which contributed 1,330 basis points, simplification/modernization benefits and temporary cost control actions partially offset by lower volumes and associated under-absorption.
Now turning to Slide 9 to review our balance sheet and free operating cash flow.
We need to remain conservative to ensure the company has ample liquidity to weather the current environment as well as continue to execute our strategy.
Our current debt maturity profile is made up of two $300 million notes maturing in February of 2022 and June of 2028 as well as a U.S. $700 million revolver that matures in June of 2023.
At quarter end, we had combined cash and revolver availability of approximately $760 million and largely repaid the $500 million revolver draw from last quarter.
During the quarter we also amended our credit agreement to improve our flexibility given the continued uncertainty in the economic recovery.
At quarter end we were well within these financial covenants.
Primary working capital decreased year-over-year to $623 million, but was up sequentially as the decrease in inventory was more than offset by an increase in accounts receivable and accounts payable.
On a percentage of sales basis primary working capital increased to 36.4%, a reflection of the continued decline in sales.
Capital expenditures were $39 million, a decrease of approximately $33 million from prior year as expected.
We continue to expect fiscal year '21 capital expenditures will be between $110 million to $130 million with the majority in the first half.
Our first quarter free operating cash flow was negative $29 million that represents a year-over-year improvement of $15 million, largely reflecting the decline in capital expenditures.
In addition, we paid the dividend of $17 million in the quarter.
The full balance sheet can be found on Slide 14 in the appendix.
As a reminder, this slide details how we expect key factors affecting earnings per share and free operating cash flow to play out during each half of fiscal year '21 on a year-over-year basis and our expectations have not significantly changed since last quarter.
I've already mentioned our expectations for increasing benefits from simplification/modernization this year, resulting in a year-over-year tailwind in both the first and second half of the year.
Temporary cost actions will continue to be a year-over-year tailwind in the second quarter, although less of a benefit than in the first quarter as we are increasing our customer visits and rolling back certain temporary cost control actions.
Sequentially, the increase in cost in the second quarter will be in the range of $5 million to $10 million.
This continuation of these actions will result in a second half year-over-year headwind as we discussed last quarter.
The tungsten prices remaining in the $210[Phonetic] to $230[Phonetic] range, raw materials are expected to continue to be a tailwind in the second quarter, although at a reduced rate in neutral, for the second half on a year-over-year basis.
Although, depreciation, amortization was flat year-over-year in the first quarter, we still expect it to be $10 million to $20 million higher for the full year, starting in the second quarter, as our new equipment comes online.
In terms of cash flow, as Chris and I already mentioned, capital spending will be significantly down this year, a tailwind in both the first and second half.
Year-over-year cash restructuring will be higher in both halves as we execute the restructuring programs.
In terms of working capital, we'll be dependent upon the timing of the market recovery with both accounts receivable and accounts payable likely use up cash in the year, offsetting planned inventory reductions.
As a reminder, our target for working capital remains 30%.
Finally, as it relates to Q2, as Chris mentioned, we expect sales to be up, low to mid-single digit sequentially, despite fewer working days in Q2[Phonetic] versus Q1.
Turning to Slide 11, let me take a few minutes to summarize.
I'm pleased that we have continued to make significant progress on our initiatives.
We are advancing commercial excellence, including a focus on fit-for-purpose customer applications, drive growth and market share gain.
We expect to be at target savings of $180 million for the program by the end of this fiscal year, despite much lower volumes.
Timing of the completion of our simplification/modernization program as well as the renewed focus on commercial excellence will serve us well in a recovery.
Strength[Phonetic] of our balance sheet and cash position will allow us to optimize capital allocation, while improving customer service and profitability even further, throughout the economic cycle.
So I'm fully confident we will achieve our adjusted EBITDA profitability target of 24% to 26%, when markets recover such that sales reach the target sales range of 2.5 to [Technical Issues].
With that, operator, please open the line for question.
 Assistant:

Chosen response:
q1 loss per share $0.26.
qtrly adjusted earnings per share $0.03.


Prompt:
Human: We will be referring to that slide deck throughout today's call.
I'm Kelly Boyer, Vice President of Investor Relations.
Joining me on the call today are Chris Rossi, President and Chief Executive Officer; and Damon Audia, Vice President and Chief Financial Officer.
These risk factors and uncertainties are detailed in Kennametal's SEC filings.
In addition, we will be discussing non-GAAP financial measures today.
Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our Form 8-K on our website.
For today's call, I'll start with some general comments on the year followed by an overview of the fourth quarter.
From there, Damon will review the quarterly financial results and our outlook in more detail.
Now turning to Slide 2.
In fiscal year '21, despite the obvious COVID-19 challenges, we continue to operate safely to serve customers and invest in our commercial and operational excellence initiatives, including simplification/modernization.
We ended the year on a particularly strong note, with positive momentum heading into fiscal year '22, enabled by continued market recovery and advancement of our strategic initiatives that are transforming the company.
The additional simplification/modernization savings in fiscal year '21 bought the total savings achieved from the program to $186 million, in line with the target range we announced in our December 2017 Investor Day, despite lower volumes than we envisioned at that time.
This is a notable achievement.
And while fiscal year '21 may have marked the end of investment in our simplification/modernization program, we will continue to drive benefits from this investment.
In fact, the structural cost savings for the program are already contributing to strong underlying operating leverage as volumes recover, which we saw in Q3 and Q4 of fiscal year '21 and expect to continue in fiscal year '22 and beyond.
In addition, our investment in modernized processes will drive future growth and share gain.
These investments enable higher levels of customer service and new product innovations, some recent examples of which include the HARVI I TE endmill, which was a 2021 Golden Edge Award winner for Best Product Innovation at the China International Machine Tool Trade Show and is helping us gain share in aerospace and general engineering.
And our new indexable milling platform, Mill 4-15, designed to improve customer productivity to gain share, especially in general engineering.
We also saw a major win in the electric vehicle space with our RIQ Reamer, which was selected over top competitors by a major electric vehicle manufacturer for motor casings.
We would not have been able to make this tool without our investments in additive manufacturing as part of modernization.
And finally, our fit-for-purpose products, which as a result, of modernization can now be produced at a price point and availability to win in a multibillion-dollar application space of metal cutting that we previously had not focused on.
We are making excellent progress in this space with growth of our fit-for-purpose product portfolio outpacing the broader general engineering and market growth.
We're also seeing success in renewable energy applications, such as the machining of components for wind turbines and our infrastructure business segment is successfully leveraging their simplification/modernization investments to improve global reach and expand into mining adjacencies.
So looking forward, we are excited and confident to deliver additional returns on our simplification/modernization investment as we leverage it for growth, share gain and improved profitability throughout the economic cycle.
Now let's review a summary of Q4 on Slide 3.
We saw underlying momentum picking up across all our end markets, and in the fourth quarter we posted 29% organic growth versus a decline of 33% in the prior year quarter.
On a year-over-year basis, all regions and end markets posted positive growth, except aerospace.
It's worth noting, however, that on a sequential growth basis, Aerospace was one of the leading end markets.
Our adjusted EBITDA margin increased to 19.2%, driven mainly by increasing volume and associated absorption, incremental simplification/modernization benefits, partially offset by the reversal of temporary cost control actions taken in the prior year.
Free operating cash flow was $66 million for the quarter and $113 million for the full year.
Adjusted earnings per share was $0.53 for the quarter.
Graph on the left shows the sales level on a rolling 4-quarter basis through the downturn relative to our sales during the Great Recession while the graph on the right shows the corresponding adjusted operating margin.
The margins at the trough were 600 basis points higher through this downturn, illustrating our substantially improved cost structure.
Also note that the current trend lines are showing an upswing in both revenue and margin.
And we believe that these trends will continue in fiscal year '22, supported by the strong operating leverage from our simplification/modernization investments as demonstrated on Slide 5.
You can see from the slide that on a sequential basis we increased operating income by 57% on a 6% increase in sales.
This strong operating leverage is also evident on a year-over-year basis and even more impressive when you consider the roughly $45 million of temporary cost actions we took in the prior year quarter.
I will begin on Slide 6 with a review of our Q4 operating results on both a reported and adjusted basis.
As Chris mentioned, demand trends improved significantly year-over-year and our results highlight the strong operating leverage we are now demonstrating from our continued focus on commercial and operational excellence.
For the quarter, sales of $516 million improved 36% year-over-year and 29% on an organic basis from the low of $379 million in the fourth quarter last year.
Foreign currency had a positive effect of 6% on sales and business days contributed another 1%.
Adjusted gross profit margin of 34.5% was up 680 basis points year-over-year.
Adjusted operating expenses increased year-over-year to $108 million, reflecting the reversal of temporary cost actions taken last year.
Nevertheless, we were able to hold our operating expenses at 20.9% of sales, close to our target of 20% this quarter.
Adjusted EBITDA margin increased to 19.2%, up 150 basis points from the prior year quarter and adjusted operating margin of 12.8% was up 400 basis points year-over-year.
The 19.2% adjusted EBITDA margin is another validation point related to the successful execution of commercial and operational excellence.
The last time adjusted EBITDA margins were over 19% was in the third and fourth quarters of fiscal year 2019, and that was based on quarterly sales of approximately $600 million or 15% higher than this quarter.
This is yet another data point of the structural cost improvements we have made in confirming our ability to achieve the 24% to 26% adjusted EBITDA margin target as sales reached the $2.5 billion to $2.6 billion level.
The improved year-over-year performance was related to higher volumes and associated absorption, benefits from simplification/modernization and a slight positive from price and raw materials, partially offset by roughly $45 million of temporary cost actions taken last year and a modest mix headwind.
The adjusted effective tax rate in the quarter was 24.3%, a more normalized level than the previous year due to higher pre-tax income as well as a reduced effect of GILTI on the effective tax rate this quarter.
The adjusted effective tax rate for the full year was approximately 23.6% as expected.
We reported GAAP earnings per share of $0.41 versus a loss per share of $0.
11 in the prior year period.
On an adjusted basis, earnings per share was $0.53 per share versus $0.15 in the prior year quarter.
The main drivers of our adjusted earnings per share performance are highlighted on the bridge on Slide 7.
The effect of operations this quarter amounted to positive $0.02 compared to negative $0.68 in the prior year quarter and negative $0.33 in the third quarter of this fiscal year.
The operations bucket turned positive for the first time since Q3 of fiscal year '19, reflecting improving volumes offset by approximately $0.26 related to the reversal of temporary cost actions in effect last year.
Simplification/modernization contributed an incremental $0.13 in the quarter, bringing the total FY '21 simplification/modernization savings to $0.68 or $85 million and $186 million for the total program.
The detailed full year results can be found in the appendix.
Slides 8 and 9 detail the favorable performance and continuing progress we have achieved on our initiatives in our segments this quarter.
Metal cutting sales increased 30% organically versus a 35% decline in the prior year period.
All regions posted year-over-year sales increases with the largest increase in EMEA at 37%, followed by the Americas at 30% and Asia Pacific at 23%.
The slightly lower sales growth in Asia Pacific reflects the earlier timing of the recovery in China last year as well as the ongoing challenges in India this quarter due to a surge in COVID-19 cases.
From an end market perspective, on a year-over-year basis, the increasing strength in demand is broad-based.
Transportation was the strongest end market with 50% growth, followed by general engineering, up 35%.
Energy was up 4% year-over-year despite slowing demand in China due to the reduced wind subsidies.
Although aerospace declined 7% year-over-year, it showed the strongest sequential improvement, up 10%.
In addition to aerospace, on a sequential basis, General Engineering also showed strong signs of improvement and energy was slightly positive.
Transportation declined 11% sequentially due to the temporary supply chain challenges, which force transportation customers to slow their metal cutting factories like engine plants to better align with their overall production.
Based on comments from our customers, we expect these challenges to persist into our fiscal first quarter and to start to improve sequentially thereafter.
However, the situation continues to be fluid and different customer by customer.
Adjusted operating margin improved 540 basis points to 11.7% compared to 6.3% in the prior year quarter.
The increase was primarily driven by volume and associated absorption, simplification/modernization benefits and price and raw material benefits, partially offset by temporary cost actions taken last year and a modest mix headwind.
Turning to Infrastructure on Slide 9.
Organic sales increased 28% year-over-year versus a 29% decline in the prior year period.
FX and business days contributed positively to sales in the amount of 5% and 1%, respectively.
Regionally, the largest increase year-over-year was in the Americas at 35%, then EMEA at 29% and Asia at 14%.
By end market, the results were primarily driven by general engineering and energy, up 42% and 41%, respectively.
Earthworks was up 12%.
The bright spots in Earthworks this quarter were in the Americas in agriculture and forestry and in EMEA construction.
Adjusted operating margin increased to 14.5% from 12.7% in the prior year quarter.
The improvement was driven by higher volumes and associated absorption, simplification/modernization benefits, a slight positive effect from price and raw materials, partially offset by temporary cost actions taken last year in mix.
Now turning to Slide 10 to review our balance sheet and free operating cash flow.
We continue to maintain a very strong liquidity position, healthy balance sheet and debt maturity profile.
At fiscal year-end, we had combined cash and revolver availability of approximately $850 million.
Primary working capital of $602 million was relatively flat year-over-year and down approximately $13 million sequentially.
On a percentage of sales basis, it decreased to 33.4% as our focus on working capital during the year continued to strengthen our free operating cash flow even as sales have increased.
Our primary working capital target remains 30%, which we expect to approach by the end of this fiscal year.
Our fourth quarter free operating cash flow was $66 million, a significant year-over-year increase, reflecting higher income due to volume and strong operating leverage.
This is similar on a full year basis with free operating cash flow of $113 million compared to negative $18 million last year.
Net capital expenditures for the quarter were $30 million, a decrease of approximately $8 million from the prior year, bringing the total net capital spend for the year to $123 million, in line with our expectations.
We also paid the dividend of $17 million in the quarter.
The full balance sheet can be found on Slide 18 in the appendix.
Starting with the first quarter, we expect sales to be in the range of $470 million to $490 million.
At the midpoint, this implies year-over-year growth of approximately 20% and approximately 7% sequential decline, which is stronger than our normal Q4 to Q1 pattern.
At the midpoint of the sales outlook, we have assumed there will be no significant sequential change in the supply chain challenges in transportation.
We expect these challenges to persist into our fiscal first quarter and to start to improve sequentially thereafter.
However, the situation continues to be fluid.
Also, we do not expect to see demand adversely affected from additional lockdowns associated with the COVID-19 Delta variant.
Lastly, we are planning for the typical EMEA first quarter extended vacation and summer shutdowns for our customers.
Assuming our current outlook, we expect adjusted operating income to be a minimum of $45 million and to improve by at least 300% year-over-year despite the $15 million in Q1 year-over-year headwinds related to temporary cost actions taken last year.
Also, we expect the adjusted effective tax rate to be in the range of 25% to 28%, and depreciation and amortization will increase $3 million to $4 million year-over-year.
Lastly, we expect free operating cash flow to be slightly negative, which is typical in the first quarter.
Regarding the full year, visibility remains limited in the current environment.
But at this time, we would expect to exceed normal sequential growth patterns throughout the year.
Furthermore, we are confident that we will continue to achieve strong annual operating leverage in any growth scenario.
Keep in mind, this annual operating leverage is excluding approximately $25 million of year-over-year headwinds from temporary cost actions taken last year, of which approximately $15 million will return in Q1 and the remaining $10 million in Q2.
Also, it's important to note that leverage may vary quarter-to-quarter.
For example, in the first quarter, after adjusting for temporary cost actions, the operating leverage is expected to be higher than our normal annualized level as Q1 has the greatest combined effect of raw materials and pricing compared to the remainder of the year.
Moving on to other variables for the full year.
We expect an adjusted effective tax rate of 25% to 28%.
Depreciation and amortization is expected to increase $15 million to $20 million year-over-year to a range of $140 million to $145 million.
Capital expenditures will be consistent with this year and in the range of $110 million to $130 million.
As I mentioned earlier, we expect primary working capital to trend toward our 30% goal by the end of the fiscal year.
Together, this will translate to free operating cash flow generation and approximately 100% of adjusted net income, in line with our long-term target, which further demonstrates our progress in transforming the company by continued execution of our operational and commercial excellence initiatives.
Looking ahead in fiscal year '22, we are excited to build off Q4's momentum by leveraging our modernized footprint and strong operating leverage to drive growth and higher profitability as well as cash flow at approximately 100% of net income.
We expect the end market recovery to continue.
And though visibility remains limited right now, we expect growth to outpace our normal quarterly sequential trends throughout the year.
This sales performance will be driven both by market growth and our commercial excellence initiatives, aimed at gaining share in targeted end markets, including growth of our fit-for-purpose offering.
In summary, I believe fiscal year '22 will be a year where we further demonstrate the ability to achieve our adjusted EBITDA target when sales reached $2.5 billion to $2.6 billion by continuing to execute on our strategic operational and commercial excellence initiatives.
And I look forward to further outlining the details of these strategic initiatives at our next Investor Day, which is tentatively planned for early next calendar year.
We'll provide more details on that as we get closer to the date.
 Assistant:

Chosen response:
q4 adjusted earnings per share $0.53.
q4 earnings per share $0.41.
q4 sales $516 million versus refinitiv ibes estimate of $514.2 million.
sees q1 sales up 17 to 22 percent.
sees fy 2022 capital spending is expected to be $110 million - $130 million.
sees fy 2022 primary working capital trending toward 30 percent of sales by year-end.
sees fy 2022 adjusted etr expected to be 25% - 28%.


Prompt:
Human: I'm here today with Bill Nash, our president and CEO; Tom Reedy, our executive vice president of finance; Enrique Mayor-Mora, our senior vice president and CFO; and Jon Daniels, our senior vice president, CAF operations.
Celeste has been an integral part of our IR program for almost 20 years, and I'm sure you will all agree, she'll be deeply missed.
Celeste, we wish you all the joy and happiness retirement can bring.
Net earnings up 27% to $297 million and earnings per share up 27.9% to $1.79.
This performance was the result of strength across all aspects of our business: retail, wholesale and CAF.
We are proud to be the nation's largest and most profitable retailer of used car.
I'm also proud to say that this quarter, we completed the rollout of our omnichannel offerings.
This has been years in the making and has required a remarkable level of focus and change across our entire organization.
During this time, we have evolved nearly every aspect of our business.
From how we support and interact with our customers to how we structure our staffing to how we buy, sell and deliver cars.
Our omnichannel experience is built to provide a personalized multichannel experience that empowers customers to buy a car on their terms.
It is designed as a world-class in-store experience, a world-class online experience and a seamless integration of the two, giving us the largest addressable market within the used car industry.
No other used car retailer is in the position to deliver this iconic customer experience the way we can.
Now turning to our results.
For the second quarter, we achieved a 3.9% increase in total used units sold and the used unit comp growth of 1.2%.
In June, we experienced a high single-digit negative used unit comp which was more than offset by positive comps in both July and August.
The improvement in sales was the result of a variety of factors, including solid execution in operations, finance and marketing in addition to a strengthening used car sales environment.
In the quarter, we saw solid growth in web traffic, averaging approximately 29 million visits per month to carmax.com.
During the second quarter, our saleable inventory was below our targeted level as we saw a rapid increase in demand from the first quarter.
For the past three months, our teams have done a phenomenal job buying and producing vehicles at record levels, increasing salable inventory by more than 50% in the quarter.
Today, I'm pleased to report that we've successfully ramped inventory to targeted levels, providing customers with more than 55,000 vehicles nationwide, the largest of any used car retailer.
We offer a broad selection of inventory with a focus on zero to 10-year-old vehicles.
This quarter, we saw five to 10-year-old vehicles increased to 27% compared with 22% last year as a percentage of our sales mix, reflecting customer demand for older and less expensive vehicles.
Gross profit per used unit for the quarter was $2,214 up $31 per unit from a year ago.
For wholesale, performance was supported by strong appreciation in the market and excellent execution by our teams.
Volume was up 5.1%, driven by one more auction date in the quarter and a record buy rate.
We also achieved record gross profit per wholesale unit of $1,086 in the quarter, the result of strong appreciation and operational execution.
By the end of the quarter, we saw depreciation return to the marketplace.
As a reminder, all auctions continue to run virtually throughout the quarter.
As our results show, we have achieved a substantial recovery in our business.
Over the past several months, our talented workforce has demonstrated incredible agility and ability to drive change in one of the most challenging environments that we've ever faced.
We are proud to say that by the end of July, our team was back together again, and we no longer had associates on furlough.
We are now actively hiring across the country as we continue to grow our core business, enhance our omnichannel offerings and pursue new opportunities.
For the quarter, other gross profit increased $6.8 million or 5.8%.
EPP profits grew by $6.1 million or 5.4%, largely due to the increase in used units sold.
In the quarter, we also recognized $8.2 million in extended service plan profit sharing revenues compared with $6.5 million recognized a year ago.
In the second quarter, we maintained our ESP penetration above 60% compared with the prior-year quarter.
Service profits increased $4.5 million or 31%, which benefited primarily from the improved sales growth and the employee retention tax credit from the CARES Act.
The increase in EPP and service profits were partially offset by a $5 million increase in net third-party finance fees attributable to a shift in our sales mix by finance channel.
On the SG&A front, expenses increased 2% to approximately $9 million to $490 million.
SG&A per used unit was $2,256, a year-over-year leverage of $44 per unit on the quarter.
Excluding the impact of stock-based compensation, SG&A leverage was $97 a unit.
Notable SG&A expense drivers for the second quarter were: the opening of 14 stores since the beginning of the second quarter of last year, which represents a 7% growth in our store base; a $12 million or $53 per unit increase in share-based compensation expense; a 7.7% increase in advertising expense and continued spending to advance our technology platforms and support our core and omnichannel strategic initiatives.
Our ability to leverage SG&A in the quarter was supported by the decisive actions we took at the start of the pandemic to appropriately manage costs in a challenging environment.
We furloughed associates and froze hiring for a period of time, rightsized certain functions, aligned other overhead costs to the business and paused our store expansion strategy, thereby reducing preopening costs in the quarter.
We also experienced year-over-year favorability in the quarter due to lower self-insured loss and litigation-related expenses.
We remain committed to ensuring we are efficient in our spend, and we expect that targeted areas of focus will continue to deliver improvements over time.
Examples of these areas include improving the efficiencies of our customer experience centers or CECs, strategic sourcing and inventory production.
At the same time, we are very bullish about our future, given our unique customer offering.
We recognize that we have an opportunity to capitalize on our current position and grow market share.
Accordingly, we remain in a period of investment as we continue to evolve our omni experience in the areas of vehicle and customer acquisition.
We also planned in the back half of this year to increase our year-over-year spend in marketing, which Bill will address shortly.
From a capital allocation perspective, we remain focused on growing the business while managing with the appropriate amount of caution given the uncertainty that remains in the macro environment.
First, we are ready to resume store growth and are currently planning for eight to 10 new stores in FY '22.
And second, subsequent to the end of the quarter, we fully paid down the outstanding balance in our revolver.
Given the turnaround in our business, the strength of the credit markets and our solid balance sheet, we are confident that we have the appropriate liquidity and access to capital.
Finally, we ended the quarter modestly below our historical leverage target of 35% to 45% adjusted debt-to-capital when netting out cash.
Similar to our retail and wholesale business, CarMax Auto Finance and our partner lenders delivered with strong conversion in all credit tiers, and solid growth in cap income independent of the favorable loss experience.
As we previously discussed, CAF made some temporary underwriting adjustments early in the pandemic, with the goal of ensuring financeable Tier 1 portfolio.
While we remain cautious in our outlook, we are pleased with the trends we have experienced to date.
Payment extensions are down significantly, delinquencies are trending favorably, and our July ABS transaction was well received.
Consequently, in the back half of the quarter, we began originating our normal spectrum of Tier 1 business.
CAF also curtailed its in-house Tier 3 lending at the start of the pandemic.
And did not originate any loans through this channel in the second quarter.
Based on the trends I just mentioned, we have reengaged in the Tier 3 space in recent weeks.
Now I'll turn to performance in the quarter.
Net of three-day payoffs, they were significantly lower year over year.
Cash penetration was 42.6% compared with 42.2% a year ago.
Tier 2 accounted for 22.3% of used unit sales compared with 19.7% last year.
And Tier 3 was up to 11.1% compared with 9.6% a year ago.
Year over year, cash net loans originated grew by 1% to $1.8 billion as the increases in used cars sold and penetration rate were somewhat offset by a lower average amount finance.
For loans originated during the quarter, the weighted average contract rate charged to customers was 8.2%, down from 8.6% a year ago and 8.4% in the first quarter.
The lower rate reflects our focus on a higher-quality portfolio for much of the quarter.
Portfolio interest margin as a percent of average managed receivables increased to 6% versus 5.7% in Q2 last year.
Combined with our growth in receivables, this drove an increase in total interest margin of 7.4%, independent of any favorability in the provision for loan losses.
Total CAF income for the quarter was up 29% to $147.2 million.
This improvement primarily reflected a reduced loan loss provision, plus the increase in both interest margin and average managed receivables.
The provision for loan losses was $26 million in Q2, which results in an ending reserve balance of $433 million.
That's 3.2% of average managed receivables, which is moderately lower than at the end of Q1.
While its loss experienced in June, July and August was significantly favorable to the expectations we set at the end of Q1.
The loss reserve continues to reflect the unpredictability of the current environment in the highly uncertain consumer situation.
Our results in Q2 illustrate the importance of having a diverse group of lenders that can continually deliver high-quality finance offers to our broad range of customers in all economic environments.
In addition, having a fully functioning captive finance such as CAF offers numerous contributions to the business model that are difficult to replicate.
As I mentioned earlier, we have completed the rollout of our omnichannel offering.
The powerful integration of our online and in person experiences give us the largest addressable market within the used car industry.
Along with the ability to buy online, customers are also seeking experienced guidance along the way.
We are uniquely capable of providing this help whenever and wherever the customers want with our centralized CECs, experienced floor sales consultants and personalized e-commerce capabilities.
Buying a used car is still a highly considered and complex purchase.
Customers don't want to be forced to interact 100% in-store or 100% online.
Our competitive advantage is giving customers the option to seamlessly do as much or as little online and in-person as they want.
While omni is now rolled out nationwide, it is still early in its evolution, and we will continue to make enhancements to meet and exceed our customers' current and future needs.
One area of focus is our CECs.
And although a relatively new capability for us and still maturing, they are quickly becoming more effective than our previous model.
An example of how we are optimizing performance is by leveraging our data advantage and machine learning to ensure we get the right work to the right associate at the right time.
We capture our customers' online interactions, combine them with the information in our customers' data mark, and provide a truly personalized experience that is much more effective in meeting the customer needs and improving our conversion rates.
We believe that we have an unmatched opportunity to create a superior customer experience by leveraging our data and technology advantages, both online and in-store.
Digital merchandising is another area of continuous improvement.
By the end of this year, we will have rolled out approximately 95% of our photo studios, which provide a more immersive experience with high-quality photos, 360-degree interior and exterior views, feature scoring hotspots and reconditioning with new part call outs.
We also continue to upgrade content on our website to help customers fully research a vehicle without ever having to leave carmax.com.
All this provides our customers more confidence as they progress online.
The other omni area of focus that I will highlight is our customer hub, which provides customers a means to track the progress they have made, both online and in-person.
It is here that customers can manage certain aspects of their car-buying journey.
They can book mark and save vehicles they've selected online.
They can submit financing pre-approval and compare their financing options.
They can also get an estimate or an actual offer for their trade-in.
And finally, they can complete the checkout process in the hub for the car they selected online or in-store and choose if they want a home delivery or a curbside pickup.
Our omnichannel experience has been well received.
Approximately 70% of our customers interacted with our CECs this quarter.
Additionally, approximately 50% of our customers progressed their sale remotely, up from about 42% pre-COVID.
Most of these customers still chose to come to the store to complete their transaction, and approximately 30% of our customers still opted for an in-store experience only.
Again, the advantage of our business model is that customers have the choice as to how they progress their experience.
This is what gives us the largest addressable market.
We are focused on driving customer engagement strategies to ensure we continue to remain top of mind and the first choice for car buyers and sellers.
We launched a national marketing campaign last year, which has reinforced the strength of our brand and established a solid platform for future campaigns.
We've now introduced our omnichannel offering nationwide.
Accordingly, as we go forward, our messaging will focus on clearly differentiating our brand from digital-only and traditional dealer brands by demonstrating the benefits of our omnichannel offering.
Additionally, we will be increasing our year-over-year marketing spend in the back half of the year to expand our teams and investments in areas such as SEO, SEM, messaging, content and social.
Our goal is to drive high ROI customers to our digital properties, while empowering us to create multichannel personalized campaigns.
We have a unique retail customer experience that we are continuing to evolve to exceed our customers' expectations.
At the same time, we are identifying and investing in new initiatives that we believe will also be solid contributors to our earnings growth.
All of this leads to a very exciting future, but none of this would be possible without our great associates.
I want to recognize all of them and the high-performance culture they maintain here at CarMax, a culture that values all individuals and perspectives.
Over the past several years, we have taken on the largest transformation in our company history, evolving nearly every aspect of our business.
We also accomplished all these great results in one of the most challenging environments we've ever faced.
And through it all, our associates have continued to live our values every day by putting people first and taking care of each other.
I am very proud of what we've accomplished, and I'm excited about the opportunities ahead.
 Assistant:

Chosen response:
q2 earnings per share $1.79.
qtrly total used units increased 3.9%; used unit sales in comparable stores rose 1.2%.
qtrly total wholesale units increased 5.1%; wholesale gross profit per unit up $158 or 17.0%, to $1,086.
resuming store openings, with 8 to 10 new stores planned in fiscal year 2022.
a strengthening used car selling environment also benefited the quarter.
returned to targeted inventory levels in september.
positive comparable used unit sales in both july and august more than offset the high single digit negative comps experienced in june.


Prompt:
Human: I'm Quynh McGuire, Vice President of Investor Relations.
You may access it via our website at www.
As indicated in our announcement, we've also posted materials to the Investor Relations page of our website that will be referenced in today's call.
References may also be made today to certain non-GAAP financial measures.
Joining me for our call today are Leroy Ball, President and CEO of Koppers; and Mike Zugay, Chief Financial Officer.
We'll start on Slide three where there's a save-the-date for our upcoming Investor Day scheduled to be in Pittsburgh on Monday, September 13, starting at 9:00 a.m. Eastern Time.
Now while there will be an option to join the meeting remotely, we hope that the current developments regarding COVID tamp down enough so that you feel comfortable enough joining us in person for this event.
Of course, we'll continue to closely monitor health and safety guidelines regarding the COVID-19 pandemic, and we'll have appropriate safety protocols in place.
Invitation with specific details of the event will be distributed in the coming weeks.
Now as mentioned, we're also providing remote option to attend.
Now let's move on to Slide five.
Koppers continues to serve in an essential role, such as keeping railroads safe so they can transport critical goods, helping to provide power and connectivity to homes and businesses and keeping our infrastructure strong and reliable, both home and away.
Our team members take this responsibility seriously, and we are incredibly proud to do our part to keep the global economy moving and growing.
Now let's take a look at our Zero Harm activities and results, as shown on Slide seven, which details the changes in guidance recently outlined by the Center for Disease Control due to the rise in COVID-19 cases from the Delta variant.
The Occupational Safety and Health Administration followed suit, directing all U.S. employers to adhere to the CDC's updated guidelines, and we've communicated these updates to our employees and have adopted them at each of our applicable locations.
The primary driver of mask requirements is now based on a county-by-county measurement of disease transmission rates.
A high rate, which is red or significant rate, which is orange, means masks must be worn by all individuals indoors, regardless of whether they've been vaccinated fully, partially or not at all, or whether they've already been infected by COVID-19.
Koppers has also updated our Zero Harm lifesaving role to reflect these new requirements as described on Slide eight.
In the counties with high or significant infection rates, vaccinated employees must wear a mask in public indoor environments and unvaccinated employees must mask and social distance from others.
These same guidelines are in effect for employees returning to the office.
However, vaccinated employees do not need to mask, if alone in their office.
Intentional violations of life-saving rules could lead to disciplinary actions up to and including termination of employment.
Unfortunately, COVID is not going away quietly and with vaccination rates at our locations ranging anywhere from 22% to 76%, we need to continue to practice good behaviors to keep our people safe.
Another Zero Harm news, as seen on Slide nine, following delays due to the pandemic, we've begun reaching frontline employees directly by rolling out a series of Zero Harm in-person training workshops.
One of the first examples came when our Zero Harm trainer spent time with our railroad structures frontline employees in the Chicago area, conducting workshops, both in a classroom setting and in the field.
Similar trainings have been conducted in Galesburg and Guthrie with more sessions scheduled for the third quarter and the remainder of 2021.
The idea, as always, is to illustrate and illuminate specific steps to prevent exposure to unsafe conditions and practices, but also to an instill an epithet mindset, where every employ actively and intuitively is always looking out for other team members and placing safety first.
We continue to strongly promote employee vaccinations, addressing misinformation with a special video produced in partnership with the Allegheny Health Network here in Pittsburgh.
two expert physicians, neither of whom are affiliated with Koppers in any way, are featured in the video speaking about how the vaccines were developed and their safety and effectiveness.
Our purpose in sharing this video is to help overcome any hesitation or concerns among our unvaccinated employee population.
In addition, our $250 vaccination incentive remains in place.
On another note, the wildfires on the West Coast of the U.S. and Canada have continued their devastation and recently came close to our Koppers Ashcroft facility, forcing employees to evacuate.
Our operation was down for a total of 11 days as Wildcat Fire Services arrive to fight the fires and keep our people and our facilities safe.
The men and women of Wildcat and other fire services like them are amazing, heroic and every other superlative adjective you want to apply to them.
On Slide 10 through 15, we have a number of notable happenings that have occurred in the past quarter.
And I won't go through them in any detail, you can do that on your personal time, if you'd like.
So in the meantime, I would like to turn the program over to Mike to discuss the second quarter results.
Let's start on Slide 17, that shows consolidated sales were $441 million, an increase of sales from $437 million in the prior year.
Sales for RUPS were $196 million, down from $210 million.
PC sales rose to $146 million, up from $137 million, and CM&C sales came in at $100 million, up from $90 million.
Moving on to Slide 18.
Adjusted EBITDA for the first quarter was $66 million or approximately 15%, up from $60 million or 14% in the prior year.
Compared to the prior year, adjusted EBITDA for RUPS was $12 million, down from $23 million.
PC EBITDA rose to $35 million, up from $29 million, and CM&C EBITDA improved to $19 million, up from $7 million.
On Slide 19, sales for RUPS were $196 million and declined from $210 million in the prior year.
This was primarily due to lower Class I crossties treating volumes and customers deferring purchases because of price increases associated with a temporary shortage of untreated crossties.
Some sawmills shifted their capacity to serve higher demand construction lumber.
These decreases were partially offset by an increase in the crosstie disposal business.
Moving on to Slide 20.
Adjusted EBITDA for RUPS was $12 million in the quarter compared with $23 million in the prior year.
This was driven by lower treating volumes, which resulted in reduced absorption of fixed cost.
We experienced lower volumes in our Utility business caused by transitioning the production from our former facility in Jasper, Texas to our Summerville, Texas plant.
Also higher raw material costs impacted profitability.
A bright spot was our Australian Utility pole business, which achieved higher margins in Q2.
On Slide 21, sales for PC were $146 million in the quarter compared to sales of $137 million in the prior year.
In Q2, we experienced strong -- continued strong international sales as well as price increases for copper-based preservatives in the Americas.
These positives were partially offset by lower treating levels in North America due to lumber treaters tightly managing their inventory as a result of high lumber prices.
On Slide 22, adjusted EBITDA for PC was $35 million compared with $29 million in the prior year.
The higher profitability can be attributed to higher sales volumes, lower raw material costs from our copper hedging programs and ongoing strong demand in the home repair and remodeling segments.
Slide 23 shows CM&C sales at $100 million for the quarter compared to sales of $90 million in the prior year.
The year-over-year increase was primarily due to higher pricing for carbon black feedstock in Europe and for phthalic anhydride in North America, partially offset by lower volumes of carbon pitch in North America, which was due to a temporary plant outage, lower pitch volumes in Europe and lower pitch pricing in Australia.
Moving on to Slide 24.
Adjusted EBITDA for CM&C was $19 million in the quarter compared to $7 million in the prior year.
This increased profitability was driven by higher product demand, favorable pricing in certain markets, strong operational efficiencies and the receipt of an insurance proceed.
As demand continues to recover, our efficient cost structure will continue to drive higher margins.
Now let's review our debt and liquidity.
As seen on Slide 26, at the end of June, we had $760 million of net debt with $330 million in available liquidity.
We continue to project $30 million of debt reduction for 2021 and expect to be at a 3.1 times to 3.2 times net leverage ratio by year-end.
We remain comfortably in compliance with all debt covenants and have no significant debt maturities until 2024.
Our net leverage ratio dropped to 3.2 times at June 30, down from 3.5 times at December 31, 2020, and it also showed a significant decline from 4.5 times in the prior year quarter.
Long term, our net leverage goal continues to be between two times and three times.
Now I'd like to give a little bit more color on each of our business segments, which includes some feedback from our customers and our suppliers.
So starting with Performance Chemicals on Slide 28.
The moment we knew was coming at some point in time, began actually occurring in the midpoint of Q2 as the U.S. lumber market finally peaked and then began a precipitous descent.
Lumber futures are currently trading at 1/3 of their peak from mid-May, and everyone is still a little skittish as to where things are going in the near term.
This has led to treaters and retailers trying to push their high-cost inventory through the system while working hand to mouth on replenishment, so a not to find themselves heavy on inventory on the wrong side of a dropping market.
And while you can never quite be entirely certain, according to our industry contacts, we're at or near the bottom of this curve.
And it's correct and the treaters are expected to gradually increase their buying and treating activity within the next month.
To provide some perspective, while our Q2 was a record sales and adjusted EBITDA quarter for PC, we did see a 17% drop in sales from May to June and even more pronounced drop in EBITDA for that period as business pulled back.
Q3 thus far has been more of the same, but what we are being told is that as lumber pricing moderates, and people get back from their vacations, demand is expected to pick back up as DIYers and contractors push forward on their backlog of projects.
Also, we're generally seeing favorable demand in 2021 from our international markets, and they will exceed their pandemic effective 2020 results, which will help offset some of the reduced demand that we're seeing in North America currently.
In terms of gaining market share, we're seeing customer consolidations in 2021.
It should present new volume growth in the fourth quarter of this year and into 2022, supported by our continued investments in capacity expansion.
From an overall macro standpoint, we're seeing favorable trends that continue to benefit our PC business overall.
Existing home sales in June increased 1.4% from May, marking sales higher than prior year by 22.9%, with all four major U.S. regions experiencing double-digit year-over-year gains according to the National Association of Realtors.
The leading indicator of remodeling activity states that spending on home renovation repairs will reach 8.6% annual growth and surpass $380 billion by mid-2022.
And in July, the Consumer Confidence Index stands at 129.1, the highest level since February of 2020, with consumer spending expected to support robust economic growth in the second half of this year.
Looking at the international markets on Slide 29.
We're working to expand PC sales in overseas markets like Chile, Brazil and others, even as Europe continues to deal with regulatory and supply chain issues.
We do expect copper costs to be higher year-over-year for mid-2022 and beyond, but we remain relatively protected with current hedges in place.
Now if the price of copper does not decline to pre-pandemic levels over the next year, then significant pricing adjustments will need to be put into effect to account for the increase in cost.
Slide 30 highlights our UIP business, where there's a lot of transition happening.
We've been working hard to bring our Summerville, Texas treating plant up on pole production as we exited our operating agreement for the TEC Jasper, Texas plant.
We shipped our first poles out of Summerville during the second quarter and are beginning to build our business organically in the Texas market, which has a lot of upside.
We expect demand to remain strong in the U.S. and Australia throughout the balance of this year, but we will likely experience some limited sales decline due to our Texas transition.
The good news is the sales that are being displaced, were low-margin business.
So therefore, EBITDA should improve as we begin building a bigger book of business for Summerville.
We benefit from the fact that utilities need to maintain their infrastructure to avoid service interruptions, a need brought into sharper focus as more people choose to work remotely.
And as such, infrastructure is spending for improving broadband availability and the utility grid is projected to increase.
Demand is also expected to increase for poles among U.S. utilities for project work and upgrades that were delayed by the pandemic.
Piling business also is opening up with new construction in the Mid-Atlantic region, which will provide additional opportunities.
Wood supply remains strong and pricing steady even as transportation costs increased due to rising diesel fuel costs and lack of third-party trucking.
We're working to pass our inflationary cost increases on, but are currently behind the curve and look to catch up as the year progresses.
And with production of Penta ceasing by year-end, we're capturing market share among customers transitioning to new preservatives by converting our facilities from penta treating to CCA and other wood preservatives.
We're currently in the middle of a conversion at our Vidalia, Georgia plant, and should have it back online by the end of this quarter with the conversion of our advanced Alabama plant lined up next.
In Australia, wildfires have provided a solid demand for poles as utilities need to update an aging network and infrastructure, plus the lack of availability of hardwoods has opened opportunities up for us to market our pine pole alternatives.
There are a number of contributing factors to this year shaping up to be one of the better years our Australian pole business has ever experienced.
Moving on to our railroad products and services business on Slide 31.
I would say I'm generally more pessimistic about the year compared to where I was last quarter.
The pandemic has had an effect on every market it seems, and the effect for this portion of our business has moved from a positive in 2020 as more track work is getting done online with less traffic to a negative in 2021 as pandemic fuel demand for other products produced by sawmillers has pushed up the pricing to get adequate levels of untreated material for crossties to a point where it's affected their buying patterns.
We've experienced this phenomenon a couple of times over the past seven to 10 years, and we'll need to ride it out as supply demand either normalizes, crosstie pricing moves up or some combination of the 2.
Now on the plus side, this is temporary, and we believe will correct itself, but we'll probably not see that until we get out into 2022.
We're continuing to work on securing Class I contract renewals in 2021 with a focus on improving utilization at our facilities.
Feeding into those plants is the ongoing expansion at our North Little Rock, Arkansas plant, which is seeing some delays due to COVID, but we have still made tremendous progress and should be substantially complete in early 2022.
For now, the data from various industry experts are supporting various growth projections longer term.
The Railway Tie Association, for example, forecast 2021 demand for crossties at $18.9 million or four percent -- 4.7% growth and $19.5 million in 2022 or 3.2% growth, driven by the commercial market.
The American Association of Railroads reports total year-over-year U.S. carload traffic increased 9.4%.
Intermodal units increased 17.5% and combined carloads and intermodal units increased by 13.7%.
The AAR added that significant investments have made the industry more adaptable and better able to adjust operational and market conditions.
Koppers wood preservative technologies are central to those network improvements.
Slide 32 outlines our maintenance-of-way segment, where we've accumulated a 50% higher backlog than prior year projects and railroad structures in 2021.
This is expected to provide further improvement to profitability as our pipeline of opportunities remain strong.
This is another area where the labor shortage and turnover has hurt performance and efficiency.
We're working to address a lack of personnel and a relatively new workforce with more crew members anticipated in the second half of the year, but this continues to be a significant challenge.
We're continuing our efforts to expand our crosstie recovery business to additional Class I accounts, introduce other value-added services, lower costs and increased efficiency for our railroad customers.
With all these strategies in place, we expect EBITDA improvement in the second half of 2021 for the maintenance-of-way business this year.
Light vehicle production worldwide is expected to grow 50% in the second quarter according to IHS Markit, but supply issues around semiconductors have not been resolved.
Natural disasters and a factory fire in Japan, along with spread of COVID-19 and a lack of vaccine in certain world areas have combined to delay semiconductor capacity, catching up with demand until early 2022.
In North America, a strong steel market as tar production in line with pre-COVID levels.
However, due to an overall short call to our market and healthy end market demand, North America will continue importing tar from Europe to meet our customer demand.
Also pitch demand is strong and pricing is favorable.
Phthalic anhydride demand is recovering and expected to return to normal in 2021, while naphthalene and orthoxylene availability is relatively back to normal now.
These factors, combined with our streamlined global CM&C footprint support ongoing reinvestment in our Stickney facility to improve reliability and reduce costs.
Slide 34 describes conditions in our European markets where tar prices are up due to higher oil pricing as well as competition from the carbon black industry.
Pitch demand is down in Central and Southern Europe, while demand and prices for naphthalene and CBF are high.
In Australia, tar and pitch supplies and prices are relatively normal levels, and we are benefiting from higher export pricing for pitch from China and oil price increases, along with high demand and favorable pricing for naphthalene and CBF.
On Slide 36, our sales forecast for 2021 remains in the range of $1.7 billion to $1.8 billion compared with $1.67 billion in the prior year.
Due to improved end market dynamics, CM&C is expected to see a seven percent to 15% top line increase this year, while both RUPS and PC could be anywhere from two percent to three percent positive or negative.
On Slide 37, we're holding our EBITDA projections for 2021 to a range of $220 million to $230 million compared with $211 million in the prior year.
The biggest change from last quarter is a reduction in RUPS guidance due to lower untreated tie purchases and its impact on sales and absorption and a corresponding increase in CM&C due to strong macroeconomic drivers supporting healthy demand of our product portfolio over the remainder of the year.
On Slide 38, the EBITDA estimate to adjusted earnings per share guidance of $4.35 to $4.60 per share is unchanged from prior year's quarter -- from prior quarter's guidance and compares favorably to the prior year adjusted earnings per share of $4.12.
Finally, on Slide 39, our capital expenditures were $60.9 million year-to-date through June 30 or $55.8 million, net of the $5.1 million in cash proceeds.
We remain on-track to spend a net amount of $80 million to $90 million on capital expenditures, with half of that dedicated to growth and productivity projects that are expected to generate $8 million to $12 million of annualized benefits.
In summary, I continue to have confidence in our ability to deliver significantly better financial performance this year, now that we're through the first six months of 2021, but the effects of the pandemic continue to impact markets in ways that we're still trying to digest and make sense of for the longer term.
Beyond this year, I remain excited about the many opportunities we have to further build upon our integrated business model, focused on wooden infrastructure and looking forward to sharing the details of how we believe we can continue to take Koppers to over $300 million of EBITDA generation by the end of 2025 at our upcoming September 13 Investor Day.
 Assistant:

Chosen response:
q2 sales $441 million versus refinitiv ibes estimate of $461.7 million.
sees fy 2021 sales $1.7 billion to $1.8 billion.
sees fy 2021 adjusted earnings per share $4.35 to $4.60.


Prompt:
Human: We have slides for our conference call.
You can find them in the Investor Relations section of our website at www.
A great deal has changed over the past year with the COVID-19 pandemic.
For us, our top priority is and has been to protect the health and safety of our employees and our customers while ensuring our business continuity to meet our customers' requirements.
All of our plants around the world are operating, and we are continuing to meet our customer needs despite the increasingly challenging conditions caused by COVID as well as the current year global supply chain pressures that have impacted raw material availability.
I'm very proud of what the Quaker Houghton team has done to continue to service our customers as well as continue with our integration.
We are very pleased with our strong first quarter results.
Overall, our sales were sequentially up 11% compared to the fourth quarter, with all regions and segments showing revenue growth.
This was primarily driven by higher volumes as our business continues to come back from the negative impact that COVID-19 had on our end markets.
The sequential increase was broad-based, with all segments and regions growing between 9% and 12%.
I also think it is interesting to look at our revenue changes from the first quarter of 2020 which is just when COVID-19 was starting to impact us.
A year ago, we primarily saw the COVID impact in China, and you can see this impact in our current quarter, Asia Pacific sales growth of 31%.
EMEA and our global specialty businesses also showed strong growth and were up 14% and 12%, respectively, from a year ago.
The Americas were relatively flat in sales from a year ago if you exclude the two recent small acquisitions that we made.
Overall, we anticipate a sequential sales growth to play out in the first quarter.
But we were surprised by how strong our sales volumes ended up being as we simply just did not expect to see this level of growth so soon in 2021.
Some of this growth may be due to our customers replenishing their products in the supply chain and some pre-buying of our products, but it is really difficult to precisely say this was a major impact.
I also want to point out that our ability to gain new piece of business and take market share also contributed to our performance as our analysis shows that we had total organic sales growth due to net share gains of approximately 3% in the first quarter of this year versus the first quarter of '20.
So we continue to feel good about our ability to deliver on our historical performance of consistently growing 2% to 4% above the market due to share gains.
And looking forward, we continue to feel good about these levels and share gains, given the opportunities we have recently won or are actively working on.
While higher-than-expected sales were a positive for us in the quarter, a clear negative was the continued increase in our raw material costs.
While we knew raw materials were increasing the last time we talked, the increases have continued longer and at a higher level than we expected.
Overall, our cost of raw materials have increased over 20% since the end of last year.
There is tremendous stress on the supply chain of our raw materials and logistics.
Further, the availability of raw materials has impacted us at times.
But I'm proud to say that we've navigated through this so far and have ensured that all our customer businesses continued to operate.
The increase in raw material costs did put downward pressure on our gross margins in the first quarter, and this downward pressure will continue into the second quarter, just given the sheer magnitude and duration of additional increases and the lag effect we experienced between the time the raw material cost increase and the time we have to fully implement price increases to offset that.
So overall, we are pleased with the quarter, given the environment we're operating in and saw a strong sequential improvement in our sales and adjusted EBITDA from the fourth quarter.
Synergy achievement also was a factor in our results as we achieved $18 million in the current quarter compared to $10 million last year.
Relative to liquidity, we did increase our net debt in the quarter due to the small acquisition in the steel market and an increase in our working capital due to the strong sales growth.
However, our leverage ratio of net debt-to-adjusted EBITDA continued to improve from 3.2 times at the end of the year to 3.1 times to the end of the first quarter.
And we currently expect to be below three times at the end of the second quarter.
As we look forward to the second quarter, we expect short-term headwinds from higher raw material costs and some lower volume impacts due to some of the factors I mentioned earlier as well as the automotive market continuing to have semiconductor shortages.
I do see the second quarter as our lowest quarter of the year, both in terms of gross margin and profitability.
However, we do expect our margins to sequentially improve in the third and fourth quarters and return to where we expected them to be by the end of the year.
As I think about our full year, we are continuing with our previous guidance, which is really a floor or the low end of our expected EBITDA.
However, I am more optimistic on our year than I was a few months ago.
While we may end up the year in the same place, we're slightly better based on our strong first quarter, the shape of our year's expected profitability trends has changed.
Essentially, we're seeing higher demand for the year but greater margin pressures in the near term, which is expected to be largely offset by this higher demand.
However, the margin pressures are expected to be short term in nature, once our price increases are fully implemented.
So we currently expect to exit the year at better-than-expected demand for our products and our margins largely returning to our expected levels.
So even though we expect to largely end up in a similar or slightly better place as our previous expectations, I feel better about this scenario than the already positive one I had envisioned a few months ago.
We will have a step change in our profitability, essentially complete our integration, cost synergies, continue to grow above the market by taking share and reach our targeted net debt-to-adjusted EBITDA leverage of 2.5.
I am so proud of how our team has performed in servicing our customers, meeting their needs and successfully continuing with our integration execution, which is both critical and difficult for us given the current conditions we are facing this year.
People are everything in our business, by far, our most valuable asset, and ensuring their safety and well-being is and will continue to be a top priority for us.
So I can't help but to reemphasize my pride for our Quaker Houghton team and what we have and will be able to accomplish for our customers and investors, both now and going forward.
I'll now hand it over to Shane so that he can review some of the key financials for you for the quarter.
GAAP measures and non-GAAP measures provided in our call charts on Pages 10 to 21, for reference.
Looking at our strong start to the year.
The quarter really rounded out, as Mike previously summarized.
Our performance was driven by record quarterly net sales, partially offset by lower-than-expected gross margin due to higher raw material costs on significant supply chain pressures.
As I begin to discuss our quarterly performance, I'll point you to Slides six and seven in our call charts, which provide a further look into our financials.
Our record net sales of $429.8 million increased 14% from the prior year, which was primarily driven by higher volumes, including 3% from acquisitions and increases due to foreign exchange of approximately 3%.
This top line performance is truly a global effort, with each segment contributing nice growth year-over-year.
APAC's net sales increase of 31% was the largest increase than the prior year, but this was mainly due to the initial impacts of COVID hitting China in the first quarter of last year versus the rest of the segments being impacted in the second quarter of last year.
EMEA also showed strong net sales growth of 14% due to a solid bounce back from COVID-19.
Americas and GSB had net sales growth of 4% and 12%, largely due to higher volumes, including the Coral acquisition made in December of last year, which helped offset some of the market pressures we are facing, such as the semiconductor shortage.
Net sales were a positive story to the quarter.
But similar to all of our peers and most other manufacturing companies in the world right now, we are facing significant challenges with rising input costs due to the global supply chain disruption.
Gross margins were 36.3% for the quarter compared to 35.4% in the prior year.
But excluding onetime COGS increases related to acquisitions, these would have been 36.6% and 35.5%.
Notably, this 1% improvement year-over-year is really the benefit of strong execution of integration synergies, offsetting higher raw material costs that we incurred in the quarter.
SG&A was up $5.6 million compared to the prior year quarter, as we had additional costs associated with our recent acquisition of Coral and higher SG&A due to the impact of foreign exchange.
These were partially offset by additional savings from integration cost synergies as well as travel and other savings due to the COVID-19 situation.
So the net performance resulted in strong adjusted EBITDA growth in the first quarter.
As you can see in chart eight, our quarterly adjusted EBITDA of $77.1 million grew 28% from the prior year, which drove an 8% increase in our trailing 12-month adjusted EBITDA to $239 million.
These results were really driven by higher operating earnings in each of the company's segments year-over-year as the continued recovery of the company's global end markets, the benefit of recent acquisitions and higher integration cost synergies contributed to a record adjusted EBITDA performance.
From a tax perspective, we had an effective tax rate of 24.2% in the quarter compared to a benefit of 31.1% in the prior year.
Excluding various onetime items in each period, our tax rate would have been reasonably consistent at 25% for the current quarter compared to 22% last year.
To note, we do expect both our second quarter and full year ETRs will be in the range of 24.5% to 26.5%.
So net -- our net GAAP earnings per share of $2.11 grew 53% compared to the prior year as our strong operating earnings and adjusted EBITDA, coupled with $3 million of lower interest expense due to lower borrowing rates were partially offset by a slightly higher tax expense.
As we look to the company's liquidity, summarized on Chart nine, our net debt of $749.6 million increased $32 million in the quarter, which was primarily driven by a $25 million acquisition of a tin-plating business for the steel end market, $7.1 million of dividends paid and $12.6 million of operating cash outflow.
Related to the quarter's outflow of operating cash, the company's major cash requirement is working capital.
In periods such as this where our sales and volumes increase dramatically, there is an outflow of cash needed to sustain our day-to-day operating requirements, which will come back to us as our demand trends normalize.
Despite this increase in net debt, the company was able to improve its reported leverage ratio to 3.1 times as of the first quarter compared to 3.2 at the end of last year.
Overall, I want to emphasize we are committed to prudent allocation of our capital.
This includes prioritizing debt reduction while continuing to pay dividends and invest in acquisitions that provide growth opportunities, which make strategic sense, all while remaining committed to reducing our leverage below our targeted 2.5 times level by the end of this year.
So to summarize, Quaker Houghton had a strong quarter that was above our expectations due to continued end market recovery, a pickup in demand and good market share gains.
As we look to the second quarter and the remainder of the year, we expect our strong Q1 performance and improved volume demand will be a bit offset as raw material cost increases take full effect and we see more volume impacts from market variability, including the semiconductor shortage.
Though, as Mike mentioned, we still maintain our previous floor guidance that we will see a greater than 20% increase in adjusted EBITDA in 2021 as compared to the $222 million we achieved in the prior year.
That concludes my remarks.
 Assistant:

Chosen response: q1 sales rose 14 percent to $429.8 million.


Prompt:
Human: Joining me in virtually today as we are all currently working from home are Mary Hall, our CFO; Robert Traub, our General Counsel; and Shane Hostetter, our Head of Finance and Chief Accounting Officer.
We have slides for our conference call.
You can find them in the Investor Relations section of our website at www.
A great deal has changed in the world in 2020 with the COVID-19 pandemic.
For us, our top priority is to protect the health and safety of our employees and our customers, while ensuring our business continuity to meet our customers' requirements.
All of our 34 plants around the world are operating and we are satisfying all of our customer needs.
I am very proud of what the Quaker Houghton team has done to continue servicing our customers as well as continuing with our integration effort, which has not missed a beat.
The second quarter was consistent with our expectations.
Overall, our sales were down 27% from the second quarter last year on a pro forma basis and down 24% from the first quarter.
I think it is helpful to understand where the 24% decline in sales from the first quarter came from and I'll first do this on a geographic basis.
The Americas declined 35%, EMEA declined 23% and Asia-Pacific declined 4%.
The declines in all three regions were primarily driven by the impact of COVID-19 on our customers' businesses.
And as you could see geographically, there was a large difference between these regions.
The Americas was the most impacted as many of our customers had shutdowns or significant slowdown that lasted well into May.
EMEA was the next largest in impact as the customer shutdowns and production slowdowns were less expensive and a shorter duration than in the Americas.
Asia-Pacific declined 4%, with most of declines in India and Southeast Asia.
China sales were actually higher in the second quarter versus the first quarter as the China industrial sector returned to more normal conditions relatively quickly.
I'd also like to give you a sense of how our sales played out timing-wise during the quarter.
April was the lowest month of the quarter and May was only a little better as we saw a 1% sequential monthly increase in net sales.
Again, this is due to the many of our customers have an extended shutdowns or significantly reduced production during this period of time.
In June, we did see a much more significant improvement as net sales increased 20% from May's levels.
And we expect this sequential improvement to continue over the next several months, which I'll talk about later.
Another way to indicate the sequential quarterly sales trend is to look at what happened with our three major customer industry groups.
Metalworking declined the most and decreased 30% sequentially from the first quarter, due primarily to automotive OEM and related suppliers having prolonged shutdowns or significantly reduced production in the quarter.
Our other customer industry groups of metals and global specialty businesses were less impacted and showed declines of 21% and 16%, respectively.
I hope these different cuts of our 24% sequential sales decline help provide insight into what was happening in the quarter.
I also want to point out that we did continue to take market share despite the continued or the current difficulties in our end markets.
As our analysis continues to show, we had total organic sales growth due to net share gains of 2% in the second quarter of '20 versus the second quarter of '19.
Turning to gross margins.
Our second quarter gross margin was down from the second quarter of 2019.
The decline is primarily due to lower volumes and its impact on the fixed portion of our manufacturing costs.
What may not be apparent is that our product margins actually increased approximately 2% from last year with our raw material synergies being the vast majority of the increase.
This pandemic and its impacts has been similar in many ways to what we went through in late 2008.
Just like then, we took fast action to save costs in numerous ways.
Essentially, all discretionary expenses have been eliminated.
We stopped new hires, executive pay cuts were implemented, some positions were furloughed, and our planned capital expenditures have been cut by over 30%.
And very importantly, we reviewed our integration synergy plans in light of this situation and took additional actions as well as accelerated other synergies where possible.
And as we announced last quarter, we increased our guidance on synergy achievement.
For 2020, our current estimate is $53 million of cost synergies achieved versus our earlier estimate of $35 million.
In this quarter, we achieved $12 million of synergies and we expect sequential improvement during our future quarters.
One question we have been asked is whether this pandemic impacted our integration and the answer is that it really hasn't negatively impacted the synergy capture part of our integration plan.
I give our people tremendous amount of credit for being able to do plant shutdowns, product manufacturing site transfers, ERP implementations and various other strategic changes during this challenging work environment.
Our two years of integration planning and are paying off and we are fortunate to have this integration execution ongoing during this period to help us offset some of the volume impact, we are experiencing.
Even with these additional cost synergies, we have not done anything that will impede our business execution or strategic initiatives, including our ability to service our customers well, continue to grow above the market in the future, and further develop and execute our strategic platform.
Overall, it was a tough second quarter by any measure, but one we exited in a better place.
Also, while our EBITDA was nearly cut in half from the first quarter, we still generated good cash flow and have less net debt now by $13 million.
The positive cash flow nature of our business during severe times is something we have discussed with investors in the past and we are now seeing the positive impacts again in these tough times.
Looking ahead, we do anticipate that throughout the second half of the year, we will see gradual sequential improvement.
For example, we saw June coming stronger than the April, May lows; July was better than June and we expect continued gradual improvement that should make our third quarter performance, better than the second quarter and the fourth quarter better than the third.
However, we do not expect our business to return to the levels we experienced pre-COVID-19 by the end of the year.
Last quarter, we said that we expect our full-year adjusted EBITDA to be more than $200 million.
Based on the multiple scenarios we have simulated in our forecasting, we continue to expect this to be the case.
So nothing has really changed from what I mentioned last quarter about the full year.
Also, we do not expect to have any liquidity or bank covenant issues.
Overall, our higher expected synergies, additional cost saving actions, improvement in our product margins and our cash flow management are expected to continue to help us during this period of time when our volumes are down versus pre-COVID levels.
And if we look forward to 2021 and 2022, I continue to be optimistic about our future and I still expect us to achieve significant increases in our adjusted EBITDA as we complete our integration cost synergies, continue to take share in the marketplace, and benefit from a projected gradual rebound in demand in our end markets over this period.
I am so proud of how our team has performed in servicing our customers, meeting their needs, and successfully continuing with our integration execution, which is both critical and difficult for us this year.
People are everything in our business and by far our most valuable asset and ensuring their safety and well-being is and will continue to be a top priority for us.
We just celebrated our one-year anniversary of our combination and I'm proud of and very happy with our Quaker Houghton team and what we have and will be able to accomplish for our customers and investors both now and going forward.
These are available on our website.
Please also note that we updated our risk factors in our Form 10-Q following our Q1 update to address the evolving COVID-19-related issues and these risk factors should be reviewed along with those in our 2019 Form 10-K.
Reconciliations are provided in the appendix of this investor deck.
We followed a similar review format for this deck as the one we used during our last couple of calls post combination where our comparison periods show actual and non-GAAP results as well as pro forma sales and pro forma adjusted EBITDA as if we had been combined with Houghton throughout the periods presented.
So please see slides 6 through 8 now while I review some highlights.
As Mike noted, the precipitous decline in volumes we began to see in the latter half of March continued into April.
We expected April to be the trough in volumes, and it was with slightly better performance in May, and in June, we saw more meaningful improvement in volumes and performance as Mike mentioned.
So, while our actual sales are up significantly to $286 million in Q2 compared to $206 million in the prior year, this is due to the inclusion of Houghton and Norman Hay.
On a pro forma basis, including Houghton in Q2 of last year, net sales declined about 27%.
Most of this decline was due to the COVID-19 impact on volumes.
But we also saw a negative foreign exchange impact on the top line of about 4%, due primarily to the significant weakening of the Brazilian real, the Mexican peso and the RMB versus the dollar.
These negative impacts were partially offset by the inclusion of Norman Hay.
Our gross margin of 34% for Q2 was down from 36.5% in the prior year quarter, which we attribute primarily to the steep decline in volumes and the related impact on fixed manufacturing costs.
As Mike mentioned, we realized meaningful procurement synergies in the quarter and our product margins were up approximately 2%, which was masked by the impact of fixed manufacturing costs on our significantly lower volumes.
As volumes pick up, we expect the benefits to our gross margin to be more visible and fall to the bottom line.
The drag from COVID is also evident in our non-GAAP operating income of $11.2 million compared to $25.5 million in Q2 of '19 and $36 million in Q1 of 2020.
Similarly, our non-GAAP earnings per share of $0.21 was down from $1.56 in Q2 of last year and $1.35 sequentially.
Our effective tax rate in the current quarter was 57.9% compared to 24.2% in Q2 of last year.
This quarter's elevated rate was primarily driven by an adjustment to tax reserves related to certain tax credits we acquired with Houghton and also to an adjustment relating to certain foreign tax audits.
Excluding all unusual items, we expect our effective tax rate for the full year 2020 will be in the range of 22% to 25%.
As Mike mentioned earlier, our Q2 adjusted EBITDA $32.1 million is in line with our guidance at roughly half of our Q1 adjusted EBITDA of $60.5 million.
And we continue to expect our full-year adjusted EBITDA will be more than $200 million.
With the decline in adjusted EBITDA, our net leverage has picked up about 0.2 times to 3.7 times on a reported basis and 3.1 times on a bank calculated basis, which is still comfortably below our bank covenant of 4.25 times.
We stress tested our projections for this year under multiple scenarios as Mike mentioned and expect no problem in remaining in compliance with our bank covenants.
And we have strong liquidity to support these uncertain times.
In addition, we're benefiting from the current low interest rate environment as the average interest rate on our debt is now about 1.9% as compared to 2.4% at March 31.
A bright spot in the quarter was our cash flow.
We're pleased to report that our operating cash flow doubled year-to-date to $44.7 million versus first half of last year of $22.4 million.
In addition, our Q2 operating cash flow of $24.5 million exceeded the prior quarter of $20.2 million.
This positive cash flow trend is primarily due to improved working capital.
As we've discussed in the past, the company has a very asset-light business model where the majority of capital deployed is in working capital and not in property, plant and equipment.
When general economic or industry crisis occur and stress sales, we generate cash through the release of working capital.
We saw this in the 2008-2009 crisis, and we are seeing it now.
In addition, our low capital intensity allows us flexibility in our capex spending and we're on pace to reduce capex by about 30% from our initial combined company estimates as we mentioned last quarter.
As Mike mentioned, it was a tough quarter.
But we're encouraged by some positive trends in business performance and the increase in cash flow I just mentioned, as well as the $12 million of cost synergies realized this quarter.
In addition, the increase in total synergies we expect to realize this year, which is up from $35 million to $53 million and the disciplined cost reduction actions we've taken will help mitigate the impact this difficult economic and business environment.
In summary, our track record of weathering tough economic environments through gaining share, cost reductions, and generating good cash flow during major downturn, all give us confidence in our ability to weather the storm.
More importantly, we've positioned our company need to leverage the future upswing in business activity when it occurs.
 Assistant:

Chosen response:
q2 sales $286 million versus refinitiv ibes estimate of $290.4 million.
q2 non-gaap earnings per share $0.21 excluding items.
affirms full year 2020 guidance of more than $200 million of adjusted ebitda.