Q3 2019 Earnings Call
Good day, ladies and gentlemen, thank you for standing by welcome to Alamos Alamo groups third quarter earnings Conference call. During today's presentation. All parties will be an English only med. Following the presentation conference will be open for questions. Do you have a question. Please press star followed by the number.
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This conference is being recorded today October 31st 2019, I would now like to turn the conference over to Mr., Edward Judy Vice President General Counsel and Secretary of Alamo Group. Please go ahead Sir.
Thank you.
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Additionally call todays webcast on the company website Www Dot Alamo group Dotcom site sales were 60 day.
On the line with me today are on Robinson, President and Chief Executive Officer, Dan Malone Executive Vice President Chief Financial Officer, Richard Worley, Vice President Treasurer, corporate [laughter] wont be we'll make some opening remark.
[laughter].
During the call today management may reference certain non-GAAP numbers their remarks reconciliations of these non-GAAP results to a couple GAAP number [noise].
All right.
Sure.
Before turning the call over to Ron I'd like to make a few comments about forward [laughter], we will be making forward looking statements today.
Pursuant to the Safe Harbor [laughter] Private Securities Litigation Reform Act 99.
Forward looking statements involve known and unknown risks.
Yes.
Make cost the company actual result.
Series.
Materially.
[laughter].
Among those factors, which could cause actual results could differ materially or.
Market demand competition acquisition related issues, whether seasonality currency related issues geopolitical issues and other risk [laughter].
The company does not undertake any obligation to update the information [laughter] speaks only 60.
I would now like to introduce Rob Rob. Please go ahead.
Thank you and we want to thank all of you for joining US today, Dan Malone, our CFO will begin our call with review of our financial results for the third quarter.
I will then provide a few more comments on the results and following our remarks, we look forward to taking your questions. So damn. Please go ahead. Thank you Ross.
Third quarter 2019 sales of $271.8 million [noise].
Ceded the prior year third quarter by 5.5%.
Year to date sales of $818.9 million were up 8.8%.
Prior to the prior year nine month result.
Excluding the impact of the Dutch power acquisition comparable sales were up 1.6% for the quarter.
And about 5.1% year to date.
During the quarter year to year sales gross slowed significantly in our industrial division as both excavator and Rightside mowing products.
Were impacted by slower demand from state level governmental customers, while weaker demand in certain non governmental customer segments negatively affected specialty excavator sales, mainly those machines usten steel.
Well its vacuum truck fleet.
Vacuum truck rental fleet utilization.
Also in the quarter the sale abuse vacuum trucks.
The rental fleet dropped sharply, but this comp appears to be more due to timing the timing of these sales than right rather than an unfavorable year to year trend.
As a result, this division sales of $158.5 million grew 1% over the prior year third quarter.
Despite the third quarter weakness this division's year to date sales of 484.9 million are still up 10% over the prior year nine month result.
The prolonged downturn in the U.S. agricultural economy continues to affect sales and our agricultural division.
The year to year decline narrowed some during the quarter. This division's third quarter 2019 sales were $59.8 million down 2.7% from the prior year third quarter, while year to date sales of $168.1 million.
Were down 6.2% from the prior year nine month period.
In the third quarter, our sales higher margin fluctuating mowers weren't particularly hard hit which also caused an unfavorable sales mix.
Partially offsetting these unfavorable FX was a small sales contribution from the Dixie Chopper acquisition.
European Division third quarter, 2019 sales were $53.5 million up 36% from the third quarter 2018, and up 10% without the effect of the Dutch power acquisition.
Year to date sales of $165.9 million were up 23% over the prior year nine month period.
And up almost 3% without the acquisition.
Excluding an unfavorable currency translation effect this division's local currency organic sales.
Is about 16% for the third or organic sales growth.
Was about 16% for the third quarter and about 9% year to date, primarily due to improved results from our regard vacuum truck business.
Third quarter 2019, net income was almost $17.4 million or $1.47 cents per diluted share excluding acquisition costs and the effect of the Dutch power acquisition, adjusted net income was $18.3 million or $1.54 cents per diluted.
Sure.
Third quarter 2018, net income was $23.5 million or $2 per diluted share. Excluding a one time favorable tax provision adjustment relating to new new tax legislation third quarter 2018, adjusted net income was $20.5 million or one.
In dollar and 75 cents per diluted share.
The remainder of my comments will address the differences between the current quarter and prior year quarter adjusted results.
Third quarter 2019, gross margin of $68.7 million grew 3% over the prior year third quarter due to the Dutch power acquisition, excluding Dot Dutch power, our gross margin was essentially flat.
Our third quarter gross margin was 25.3% of net sales, which compares to 25.9% of net sales for the prior year quarter.
In the third quarter of 2019 unfavorable product mix lower production levels higher import tariffs and lower rental fleet utilization negatively affected gross margin and more than offset the benefits of lower steel cost improved results from our revard vacuum truck business.
And a small gross margin contribution by Dixie Chopper.
Third quarter 2019, adjusted operating income of $25.6 million was about 9% lower than the prior year third quarter, primarily due to the factors affecting gross margin already mentioned as well as higher group medical claims an unfavorable timing of management incentive comp accruals.
And increased R&D spending.
Third quarter 2019, adjusted operating income was slightly under 10% of net sales compared to 11% of net sales for the prior year quarter.
Excluding the prior year onetime tax adjustment the third quarter 2019 effective income tax rate was 25% compared to 23% and the prior year third quarter. This increase was primarily due to a shift in the pretax earnings mix toward higher taxed non U.S. jurisdictions.
Third quarter, 2019, EBITDA was $31.8 million down 6% from the prior year quarter.
Trailing 12 month, even though a $127.8 million is up almost 3% over the comparable prior year results.
[noise] third quarter 2019, net cash provided by operating activities was $43.3 million, which is 38% better.
Then $31.3 million of operating cash flow in the prior year third quarter.
This improvement is due to the seasonal liquidation of nearly $24 million in receivables and inventories in the third quarter of 2019.
Compared to the prior year quarter, when increased working capital requirements, driven by high order backlog substantially offset the normal seasonal cash generation.
Third quarter 2019, investing cash flows included about $6 million used to acquire Dixie chopper and $7 million of capital spending, which as expected continues to track slightly above prior year levels.
Due to acquisitions debt net of cash increased $37.7 million over the prior year quarter, excluding acquisitions debt net of cash would've been about $20.8 million lower than prior year.
Regarding our order backlog I remind you that last year, or Activision announced or supplemental price increase near the beginning of the preseason ordering period.
Dealers accelerated their orders ahead of the effective date of the inquiries and this division took about $48 million more in orders in the third quarter of 2018, then they booked in the following fourth quarter by comparison. This division's 2017 third and fourth quarter, New order bookings were flat.
Adjusting for this approximate $24 million.
24 million dollar timing effect, our third quarter 2019, ending backlog of $215.3 million.
It was down about 5%.
From what it would have otherwise been this time last year.
Without the timing effect and Dutch power acquisition backlog as he has decreased about 8.5% year to year.
Third quarter 2019 orders of 247 million were 4% lower than the timing adjusted prior year quarter as higher European orders, partially offset lower AG in industrial division bookings.
In summary, the main takeaways from our third quarter 2019 results, our record third quarter sales of $271.8 million.
Slower new order bookings and lower order backlog in North America.
Turning to unfavorably impacted by product mix production cuts and lower rental fleet utilization, which more than offset the benefit of lower steel cost and improved reserve revard results.
However, slowing growth and production cuts push third quarter operating cash flow over $43 million and 38% above the prior year results.
I'd now like to turn the call back over to Ross.
[laughter]. Thank you Dan and again, thank you for joining us here today.
As you all saw our third quarter results were soft and below our expectations, but as as we pointed out in our press release last year's third quarter results at a large one time gain related to U.S. federal tax reform, which on a comparative basis made our results look even weaker than they actually were.
In fact of that or third quarter results for this year, if they didn't last year it would've been a record.
A record last year.
But certainly we have been facing a number of challenges for the last few years, including the ongoing week agricultural market or the various repercussions from the continuing trade disputes between the U.S. in China, some adverse weather conditions and those still unresolved Brexit situation.
Addition, the manufacturing sector globally seems to be slowing down.
And the despite all these headwinds, which we would have been going on for several quarters. We've managed to grow steadily and produce record quarterly results for several years running and even in the third quarter 2019, we had record sales, but obviously not record earnings as the various challenges seemed all come together to them.
Our bottom line results.
While sales was up we're up our mix was unfavorable.
As some of our higher margin products, such as excavators and industrial Division Boeing equipment were slightly all and even in our agricultural sector, which remains weak in general our product mix in the third quarter was also and favorable as the market for our higher margin products like flood.
Swing mowers was a little softer than lower margin products like single spindle mowers.
And we had hoped to get off to a little bit better start performance from our acquisitions earlier in this year, but unfortunately, Dutch power is off to a little bit slower start and we didnt hold.
And Dixie Chopper closed later in the year than we would anticipate are certainly later in the quarter. So in fact for the short period of time, they were with US in the third quarter, we were ER literally consolidating them into our nearby Gibson City, Illinois operation. So.
They were in literally be integrated during the for the for the couple of months, we had them during the quarter, but we continue to believe both of these will contribute well as we move into the next year.
In addition to the above we seem to have had a few more internal challenges than usual, we had some delayed shipments or the end of the quarters.
Health care costs were higher in the quarter than they've been running historically.
Legal expenses were a little bit above average. So there were submitted the inventory adjustments that were a little bit above average and and a few other things I mean, none of these in themselves were unusual or really of concern, but in the third quarter. There does seem to be more of them in total the new go which in fact that what was already a bit.
Have a week quarter.
And as we pointed out there was more expense related to acquisitions in both the third quarter and year to date than is typical.
Which is certainly MPL impacted our quarterly third quarter results, but but we also feel this is sort of parse the good news due for a in the quarter. We completed the previously announced acquisition of more bar just Oh, just last week and this is a very exciting development for Alamo group and.
But for those of you who've been following Alamo for a number of years now no. We have wanted to get into the tree chipper market for quite awhile and more bark is a main player in this segment.
They offer a very a wide range of products that are very complimentary to alamo and expand our footprint in our existing and adjacent markets plus they are of a scale that will provide a meaningful addition to alamos results going forward and in addition, we Bruce I believe they will bring a variety of positive synergies.
At our joint operations and everything from market coverage manufacturing purchasing and other areas.
And although we feel more work will contribute meaningfully to alamos results moving forward.
Being part of Alamo group, we're not even a bulk water with a combined with the integration costs than just starting to work on synergies. We believe they will not have very much of an impact for the balance of 2019, but should should the impact 2020 meaningfully.
And as we look to the balance of 29 team. We we remain concerned about some of the ongoing challenges we've been facing certainly agricultural market conditions are expected to remain weak for the balance of this year and the overall economic conditions seem to be softening was I think you know several quite a few countries.
In Western Europe already in technically in recession, and other parts of the World South America Asia.
He just seem to be so those are soft.
And even in the U.S. are signs, especially with the manufacturing of some slowdown certainly the trade disputes with the China on the U.S. the Brexit the no. The tariffs situation all these seem to be unlikely to be resolved in the short term.
But in spite of this we actually feel reasonably good about Alamo groups prospects. We believe the actions we have taken in response to these conditions will benefit our results and we also feel we will have a lot fewer issues with our costs that were out of line a little bit than the during the third quarter that that won't be out.
Outlined in the fourth quarter. We're also seeing your like improving PLM last year. This time, we were talking about some of the concerns.
Our French.
Revard operation vacuum trucks, there on some low margin backlog in <unk> and we saw that they rebounded nicely this quarter and the low margin backlog behind just so there's certainly some positive things going on and and while our backlog is down a little bit we actually still feel it as of <unk> as a.
It is that a very healthy level and will allow our operations to perform efficiently.
And were also encouraged that our inquiry level for new businesses or maintaining a reasonable pace in fact bookings going in already in the fourth you on October have been a have been white.
Favorable.
And although we had some issues was product mix, we feel the stability of our core products will continue to bode well for our results as our overall market shares our remaining steady to improving.
And you know certainly while it is hard to overcome market weakness Alamo has demonstrated its ability over the years to provide growth through a variety of economic conditions and by reacting quickly to market changes and steady and with a steady focused on our operations in our operating efficiencies actually we feel good about ARPU.
Prospects for the balance of the year.
And with the combination of the Alamo and more bar, we think the prospects for 2020 and beyond are very promising. So yeah. You know like say, we still remain a feeling good about where we are as a company today and and with a combination with more bar.
It's the future looks exciting.
So with that I would like.
Two.
Oh, you know certainly thank you all for joining us in it we would now like to open though floor to entertain any questions you might have today.
If he would like to ask the questions. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure your mute function. It's turned off to allow your signal to reach our recruitment.
Again press Star one to ask a question.
My first question comes from Joe Munda, you with Sidoti and company.
Hi, guys good afternoon.
Joe I don't I'm. So I first wanted to attachment to the industrial segments. I think people are a little concerned with number one sort of the potential of slowing growth and then the margins I'm, we're pretty low early in the year, you were able to sort of reaching record high.
Origin segments, and then I think we saw the second lowest quarter in terms of margin in three years here in the third quarter. So just trying to understand number one.
What are the you listen to various different factors that weighed on the segment overall, but I'm wondering if you could sort of wheat or give us a better idea what was the bigger factors that weighed on the margin in the quarter and then higher level, how you're thinking about some of these factors going forward and how that affects them.
George and going forward into the fourth quarter and as we move into 2020.
Yeah. This is we said costs were little higher than having el Morro overhead costs were little bit higher product mix really had a it was probably the things that really affected us. Most is like said sales you know sales were a little softer than we thought they were actually up even in the industrial division, but but only about while I think 1% organically.
In the quarter. So I mean, you know the so there was little softer than we want it and that and so you know we would you know and actually I can tell you. The during the quarter. It was a it was September I mean I can July was a little saw the August was actually nice, but then it was September there's you know that seem to.
<unk>.
Effect is the most but it really was a mix I mean yelling excavators or one of our higher margin products industrial motors for governmental or among our highest margin products and both of the holes were actually all.
So that you know who was made up for by something like say, some lower margin products. Some of the slow snow for us and and things like that so it really was product mix and some of that was was timing and I'd like to say.
In some trends and actually both excavators and and mowers I've had very nice bookings since since the ended the quarter.
Yes, I mean, what the especially excavators and lowers their kinda heavy state DLP sort of products and that demand has been very lumpy.
With the excavators, we just didnt have you know a robust backlog going into September and so they shut down actually for a for an inventory and normally we would then kind of work extra to try to make up for a shutdown like that first of all the shutdown does not match up to the same month of last year. When we took the inventory there.
And then we really did you know we didn't kill ourselves to try to make up for the shutdown days, so that that created a negative absorption or kind of a compression of margins and excavators alone. So no. We don't feel when when like so we don't feel we lost any market share. There is there like say, we do feel the markets were a little softer we're seeing some real.
Like some strain I mean, our industrial division has shown a pretty good you know lot of stability and like this mix thing it wasn't like saying that say well were down. It was just the mix was off a little bit than we think that that'll some of that will self correct I mean, there likes.
Yeah.
So actually we feel pretty good about it going into the next quarter, but but I mean, you know there's there's like say manufacturing and then the world is low you know a little softer right now so I don't we don't know how strong it will rebound, but but I like said, we feel good but it's the there's certainly some soft spots out there.
Okay and [laughter] do you have the feel of how much that too.
Dealership de stocking versus end user demand.
Industrial it's not I mean, because these are in industrial we tend to build to order the dealers do not stock much. The only place we have much dealer stocking is in the agricultural.
Sector and a you know we don't think there was a lot of destocking.
And at the deals that at the AG dealer level goes that they they've been doing it for the last two years. So I mean, you know they like say they haven't they've kind of reduced bins, reducing their stocks over the last couple of years. So.
We don't feel that though was much they're probably not released in I say, they're not Reese Rhys restocking for next season, yet at the Oh, I could probably the same level they work but.
Yeah like say isn't in industrial there was no no issues with you know de stocking a dealer levels.
Okay, and then just going back to my sort of original question you would say mix is one like two thirds of the lower margin in terms of weight exact there I'm just trying to understand all these you you mentioned all these costs that were sort of unusual that they will hit in one quarter.
How much does that make up I'm, just trying to understand how much did mix play a role versus you know these unusual costs versus doctors that you mentioned.
<unk> mix was the single biggest factor for Inflectra, we'd all I mean, I don't know we don't.
Like say there was a lot of pluses and minuses and I've never been but mix was the single biggest factor.
Okay, and then in terms of the rental fleet could you talk about utilization rates I'm not necessarily quantifying them, but maybe directionally talking about them and what are you doing with the fleet size.
Yeah.
So you know as you can see we've built the fleet quite a bit. We've you know we opened some new locations.
Our actual because our fleet is larger and we have more locations our actual.
Oh rentals were up a little bit, but however, the rental fleet is has expanded quite a bit. So our utilizations were down a bit or you know were down in the third quarter and that also kinda caused if not a mix impacts to our margin compression because your depreciating those trucks, you've got the cost of those stores.
That those schools additional cost and not a comparable increase and the rental income. So that was also an impact on margin I'm not right now utilizations are lower than they had been running but it's not necessarily if there is a consistent downward sort of [noise].
Yeah, Joe just to add that to that too is the mix of products that we have in our rental fleet right. Now is really good it's exactly where we wanted to be will add a couple that wasn't a couple of years ago. We had an issue with that but it's actually good and there was a little bit of seasonality in the third quarter, because theres some standpoint in the oil.
Gas, usually but that happens that's a seven year anyway right.
Okay and your how are you managing the fleet or you sort of maintaining size at this point.
Going forward.
Yeah.
The other thing is we just kind of had kind of a timing issue and the sales of used units out of the fleet. So we missed a couple of million dollars with the sales you know just the fact that <unk>.
<unk> compared to last year, we didn't sell as many units out of the fleet, we're not adding to the fleets were going to continue to manage the trucks that are there and move them to where they are needed.
And we're going to go.
Work, we're going to continue to you know to not really we're not going to China.
Handing the fleet right now until the utilization is tracking it either and actually sales of new equipment in the in like Super products was up right. So.
Vacuum trucks with great except for we didn't sell as many used trucks out of the fleet and the utilization rates dropped a bit which was more of a margin compression than it was a year to year sales impact.
Okay and then last question for now for me and I'll jump back in queue. Just in terms of the growth that industrial you called out excavators non governmental excavators I guess and then also industrial mowers. What is your sense going forward from the levels that you saw in the third call.
Order you know how do you think about the overall business from here going into the fourth quarter are we.
How is October started do you feel like things are slowly getting worse or do you think from the Threeq you levels.
How do we see a rebound from threeq or how do you. How are you thinking about some of these product categories that didnt, there too well I guess compared to earlier in the year in Threeq.
Well like like I said, both excavators and a and industrial motors. The bookings are actually up nicely you already in October and having it most of that stuff won't ship. This year I mean, that's that's bookings that are going to start shipping a you know sort of right. After the first as a year, but a it.
There were some very nice orders there and so all in all of I mean, you know that though yeah like I said I mean, it seems to be more or less than a trend at this point Oh I got to say you know the studio tea business was kind of lumpy. So.
So you might become a lean one quarter and yeah and they make it up to the next.
But one thing is there some units we built a great. All the did that we're ready to go but didnt ship out before the ended the quarter. So we should get some benefit there on the excavator side in the fourth quarter. It's one thing actually the city and county business was held up even better than the state business the city in county tends to.
Lots of ones and twos the units where is the state business tends to be you know a lots of you know tins and twentys and the the city counting stuff buildup of has held up city all year. It was the state business that we're where we saw some of the so you know like a few little bit of softening and but the likes it that's.
That seems to be improving already.
Okay, I guess I get a.
Got a bunch of more questions, but I'll, let someone else images at this point thanks.
Hey, Thanks show.
Thank you. Our next question comes from Mike Shlisky with Dougherty <unk> company.
Hey, guys good afternoon.
Hi, Mark.
So I want to get maybe your your early impressions nice you, especially on the more about business you know, what's the culture like.
What's the footprint and the faster.
Changes or even grow that they're just some kind of thoughts.
Early in the game here, how about how it looks.
[laughter].
Like so we're excited we feel it looks good there are heavily North America. I mean, you know they don't do much outside North America. In fact were off you know starting to look at some opportunities. We know some of their competitors are doing well in some markets like a those Australia or you know, Brazil, or ER and you know where.
Hi, I'm trying to use our capability used to get them into some of those markets. They a culture wise. They are actually very close to us I mean I. Thank you all that.
Yeah, like say I'm going to focus on the fundamentals and and you are good fit culturally. We like says is that are heavily North America, but.
You know, we think there's even opportunities the jointly weaken.
Help filmed in a few there are weak spots and they can help us in a few of our weak spots and and that weekend.
Learn from like say just young to do some joint efforts.
We we.
Like the said, there's some good synergies on the on the operation side everything some purchasing things, where we think they can take advantage. We've already got our purchasing people. It's like you get a remember this deal closed a week ago [laughter], Yeah, we've already got our people in their visiting with Ellman starting to talk about some of these things, but but yeah there.
There are like say the cultural culturally they're a good fit with Alamo I think a you know we just think think alike of how we go up you know the market and ER and the they're good guys. They're good guys.
Great as far as the deal itself and that puts you on telling us about maybe so any changes that need to make it amortization at this point I know, it's probably very early.
But on the debt side can you give us a sense just a ballpark is the way the interest expenses might be going forward.
I'm sorry.
On the debt side what.
Well I guess, maybe perhaps a ballpark for us where you think.
Interest costs going forward, Oh, Oh interest Scott.
You know very good.
Course, the interest rates, just got lowered this week, and but but I mean youre think interest.
Our new <unk> credit agreement is very is very comparable to our old credit agreement as far as interest rates and and everything. So I mean, you know we don't really see.
Like that in should do would be very comparable to what our old agreement was yeah. So we're just going to move up a little bit in the grant you know from around one times Levered to you know between two and a half a three so that's a that's basically you know that just the incremental cost there which isn't major.
Okay, I'm, just telling up there then.
Can you give us any kind of.
Depending case going forward when he's a great job, obviously five years ago.
What's your thoughts that was a large deals you said you pay down over some of your period without much of an issue I get my overall mouth correct. Here is there any kind of wait a show us.
A path to getting back down to maybe.
But again.
Well I mean, you on combined basis, our EBITDA would be in the 125 30 million range no no. That's ours plus there yeah, I'm sorry, yeah closer to about 180 million combined EBITDA lying down and of that I mean, you know we should be the six.
Steve 65, yeah, 60% to 60% of that should be sort of you know available now obviously the you know that assumes no no other acquisitions that assumes and positioning of that assumes not rapid growth record growth actually consumes more work.
Capital than than than slow steady growth right, but ah, so, but but like a in that you know you combine that and also it would actually be a very you know like say it should be able to pay down a significant amount of debt over the next there you know three four years, but yeah.
Okay.
Perfect I'm, just going out with Citi.
Okay.
Very tough year for acreage and for trying to work and given the weather issues crop prices.
But do you assume average weather next year, I would imagine the lasik, which might come back.
We keep things little us.
So I floods and droughts go.
So there could be some it turned in diminish if that would have happened just because of though.
You know kind of have your acreage.
Given that there's been a bunch of course here, what's been tough rag isn't any kind of that you've got that there's some pent up demand in that and that's why you're right now.
And that there could be some growth in that business and a 20 actually.
It's got to be retail.
Retail demand s. needs to pick up the the inventories in that channel are kinda and normalization ranges. So I wouldn't say, there's pent up demand at all I just think it we just need to see retail the farmers need to show up and start buying <unk>.
Yeah, and yeah. That's right I mean, then it helped the get a little bit better pricing and it would certainly help to get this a you know like this situation with China goes I think you know about certain us on tariffs in certain to us on the on the demand as a further from the farmers because I mean, that's creating Oh you know some uncertainty the farmers are <unk> are being impacted.
But by a you know.
Just a slowdown in an export oh, good and just the sentiment I mean, you I think for even a farmers are getting you know subsidies for some of this the distraction you know the they're using it more to pay down destined to buy equipment until they get a feeling that that you know like say its its farm sentiment.
That needs to improving as much as farm incomes.
Hi, Mike also take a look at our 10-Q, if you look at our third quarter. Despite all these issues we've had with yag. They still at 10.5% op income. So I think that's a that's a pretty good indicator of what we're trying to do here to try to maintain control of our both expenses costs.
Got it guys perfect. Thanks, so much I'll pass it along.
Thank you.
Our next question comes from Chris <unk> with singular research.
Hi, how everyone or just a question on a more bar.
I wanted to see you know.
How how old affect your overall margins.
And what you know what they are at more bark right now.
Well I I think as you can see in our press release last week, when we announced so and we showed sort of they're actually their EBITDA margins are higher than our EBITDA margins in total. So we believe you all the you know like say the as you know they running a little bit higher than our overall average.
But and we think that with some synergies we can actually enhance that a little bit. So a plus yeah. They are even had some initiatives going on themselves to to enhance them a little too. So so like I said the there there are they they're starting out better than ours, and we think we can even we can move them a deal in a pause.
Out of direction even from that.
Okay.
Great and then.
For the the European Division do you.
If you take out the revenue from Dutch power you know how did the rest of the division due.
Oh, the dividend well, 10% year to date or you are yeah was up to.
Up 10% or even without Dutch power as we said the you know sort of revard and our French operations actually I had more growth in our UK operations, but from what they started from a lower level, so, but but yeah are you our European operations actually did reasonably well margins were up of I mean, you know sales were up.
Up margins were up even without the acquisitions and and that's despite currency headwind I mean, if you look at it just on a local currency basis, the organic sales growth was 16% in the quarter and 9% here today, yeah, yeah because.
You know currency had a it was interesting the pound <unk> going into the quarter was about $1.20 $8 30, it dropped a yellow suddenly when all the we're talking about a a hard breakfast hard Brexit to like about dollar $19 20, a and so I mean, you know, we really took a currency hit there, but but then that the ended the quarter once they are.
Sort of delayed Brexit again, it's back up to like 128. So we won't you know so apparently is the fourth quarter shouldn't is impacted as much by currency is the third third quarter, just it was or bad currency, but it's all on so actually you kazemi Europe's doing well even without the certainly without acquisitions.
Okay, Great and then lastly, Ah I guess on that the whole time and trade War.
Which which are the divisions is most affected by by the trade War.
Divisions got like is it like a.
Lot of the you know gearboxes drive line stuff, we get from China are all now being get with that of the tariffs. So I mean, you know guar I and like I said, let alone what it's doing to farm sentiment and farm a you know the farm market, it's not helping that but but even directly and tariffs that the yellow.
Probably.
You know two thirds of our tariffs that were paying or relate to our AG division.
Okay.
Great well, thanks, I'll look forward to seeing a more bar the integration.
We do too.
Thanks, Chris.
Our next question comes from Chris Moore with CJS Securities.
Hey, good afternoon.
[laughter] you'd have to go back to the industrial mix just for a second so I want to make sure. They understand the state do you teach Dan you talked about the shutdown timing was what's different this year and last year can you can you maybe just walk me through that a little bit.
Yeah, So we had or or excavator plant down for a few days with people in their taking effect I know wall to wall physical inventory that happened in September of this year. It happened in July in the second quarter of last year. So we had a mismatch there now normally you know if your your follow your flush with orders you have a few days of shut down for inventory.
When you go hard after that to make it up because we had just kind of gotten our backlog down to a point that we really just didnt have the orders to build we just did you didn't go and work extra but try to make that up so the absorption you know the production that plant was essentially signet for a significantly lower than it was.
You know the quarter the prior calls.
She has been great. I mean, you always was well above average and then you have to consider grendel's whenever our highest offer unlevered plan. So I mean, it has a high variable margin and high fixed cost. So when you when you drop production a great. All it has a bigger bottom line impact and then it most of our other facilities.
Got it and in terms of you know kind of customers end markets. So stay tuned teas is the key that you talked about city County are there other customers markets and you know what we seeing there.
No I mean like say I think yeah like some of the of course, our rental on vacuum trucks, a lot of that's non governmental related but even in a governmental stuff like I said in general the city County business, which is you know like Oh, a bunch of small orders.
Held up a little bit.
Steadier than the big the state business, which is a fewer number of orders, but lumpier bigger yeah. I think last year, we had a lot more steel fill units yeah that we were doing last year, because steel price. They said that demand for those steel mill machine tends to ebb and flow with steel prices. So we're trying to kind of an up.
Switching and steel prices for the first half of last year and.
And this year of course, you know ever since the middle of last year tail steel supply.
Got it and then the other high margin part of you called that was the industrial mowers.
Again was that is that.
Timing are you seeing you know changing demand or what do you what are you seeing there.
Like I said, we believe it's timing of you know again, because like I said the city County business actually was was held up much more steady.
The state business and as I, even said Weve, even got a couple of big state orders literally even since the end of the quarter Oh. It also to Q1 two Chris. We also had some delayed orders come in because there was a late winter effect on the snow, which also caused a lot of the thought of it yeah. They didn't start rolling his early this year is right, yes, they did last years or just push.
Is it out so it's just been a slow your industrial modeling Oh, God, but again, it's like.
The state deal tea business is lumpy you know you have a week quarter and then you book or do you feel pretty steady it's still pretty steady.
I mean, you know the the mowers, even with some of the softness industrial more we're still one of our harvest margins right.
The products and individually units.
Got it got nine obviously, it's difficult to look at all this stuff on a quarter to quarter base, especially the big ticket stuff I mean, if if you.
Looking at organic growth for for 2020.
What's it going to take it to you know to do is 3% to 5% is that isn't a reasonable levels. I mean, you historically it seems like you you certainly have talked to two you've done been doing better than that lately, but seemed like a level that that was achievable what would have to happen and anything significant.
In order food feed to get there in 2020.
No I mean, you know that certainly achievable, yeah like said I mean, yeah. There's.
As long as the government I mean governmental buying tends to be very stable instead, aged and so I mean, you. We think it's you know it could be that but like I said all it takes is is one or two big orders or something to be gets delayed and that all a little bit it gets a little bit of flow of lumpiness, but.
Yeah, well likes our backlogs actually are still quite healthy I mean, you know like say, maybe they're not as much as.
They were bus, but theres still at a very every you know we don't want to do healthy you I won't go we don't want on the you know it where it starts impacting deliveries. So so actually we feel that is the backlogs healthy and the.
Order pickup from wasn't the order intake wasn't as good and the third quarter as we would have liked but stuff, but but as you know the fourth quarter seems to be doing okay, and so oh, yeah, I mean, yeah [laughter] that's achievable.
I I, you know like set worry a little bit the third you know the good news is steels lot cheaper steels lot cheaper because people are buying less of us, though and so I mean, you know that there is some slowdown and manufacturing.
A in the U.S. in general and then and Oh, we could certainly use some help in the AG sector.
But but all in all like said, yeah, we feel good about next year.
Got it and from a a industrial margin standpoint, obviously the margins were low this quarter.
Same type of question for for 2020 in terms of kind of made a more normal range.
Yeah.
Is it 10, 10% to 11% range for next year is that require a lot of increasing volume is that something you can achieve he even with you know kind of minimal growth.
But you got to remember I mean, more bark alone just like 25% of our sales.
So a a you know so I mean, you know that yeah.
Yeah. That's the you know so were oh, yeah, so not we ought to be doing a lot born generally more sense that are next year I. Just was just though with the addition or more bark. So oh, yeah. So so you know you know what we'll certainly exceed your 10% to 11%.
Well go out and do normal pricing actions to that always helps.
Got it does makes machine, Okay, and then I'll just leave off with with with more bark. So I mean, what see a reasonable kinex dictation turns of of revenue growth there or they growing a little bit better then you know kind of your.
You can they do that 3% to 5% can they do a little bit better where what are you seeing at this stage.
Yeah, No I mean, there girls. The last couple of years has been <unk> organic growth has actually been a little bit higher than ours.
And so and we believe that I mean, you know conditions are looking reasonable for them to continues at that pace and so yeah. We think there organic growth should be in line to above our our.
Our phase.
And they're they're coming they got some new products that are coming out with the we're just introduced just a couple weeks ago. They got the only other dealer meeting they've got a yeah them they've gotta go a lot of good initiatives plus we think you on some of the synergies with us is going to take a little longer to get all the old though to fruition, but but not like it looks.
Good.
And now but.
The the synergies are both kinda supply chain and and at some point in time potentially selling into Europe .
Oh, yeah, so to some marketing ones there are some supply chain ones and back office ones.
So yeah, there like say, there's there are several avenues of synergies with between us and more bar.
Got it alright, guys that jump back in line I appreciate it.
Hey, Thanks, Chris.
Thank you once again to ask a question. Please press star one.
Our next question comes from Joe Mandia with Sidoti and company.
Hi, guys. Thanks for taking my follow up questions. Just a few more for me I just in terms of the last question regarding the synergies at more bark I wanted to ask about that so you talked a little bit about it I'm just wondering what kind of timing do you think or to go through some these synergies is over.
12 to 18 months or is the over two to three years.
Yeah, both I mean, you know like there's some short term on some you know the purchasing or just kind of stuff that could start playing out and you know like in the in sort of the six month timeframe. There are some oh, yeah like said something else.
The purchasing one some of the back office ones I think can take place. This year. Some of the Oh, you know like the marketing things are taking a little bit longer to develop you know that yeah. That's more in the you know like a one to two year range as opposed to you know some in the in the less in the what first year range. So it's really a mix of both.
Okay.
And I'm wondering do you have any idea a ballpark at least what potentially the purchase accounting amortization expenses would be.
But we haven't even no we haven't made.
Made that determination yet I mean, what I can tell you, though from because we're buying LLC interests were going to get a tax benefit.
For the vast majority you know 80, 90% of those intangibles, we're gonna get attacks.
Write off for that so for free free cash flow you could you can kind of factored that in but for GAAP earnings. You know, we just don't know yet, but you know how how that's going to allocate between goodwill and other intangibles, Joe we're just starting out the opening balance sheet and then will actually start the.
Anyway process itself well try that we'll have estimated numbers by the into Q4, and then try to only wrap it up early next year.
Okay and in terms of Europe . The growth that you saw on sort of third quarter, you know well surpassed what I was looking for just wondering how you think about that in your prepared remarks, it almost need it seem like you're a little cost a little more cautious going into the fourth quarter and.
Early 2020, but you know this is really strong broken I'm, just wondering sort of how you think about growth rates in Europe in the next quarter or too.
Yeah, Yeah holiday, Unlike say and sometimes you know he we talk about young girls compared to last quarter, but and that's why I say some you know like we had there were some last quarter. Our backlog was sort of artificially high at this time, you know that same time, the this quarter low and in Europe . That's part of it I mean, you know like I said, our French operations actually showed the most grow.
So in.
Third quarter, but they came from a low level. They are they were the ones that had been a little bit underperforming previous to that so so yeah like said <unk>. It's all relative so in our French operations I think we'll continue to show a decent improvement I think though I'm concerned that Europe itself is.
As a little Saul a you know the overall economies I love.
You know I didn't want to hard Brexit, but I certainly didn't want them to kick the can down the road again and I mean, you know as you know that's just three years they've been kicking the can down the road and and I mean, you know like say that that's great that creates a our of uncertainty. So I wish. They would you know some new some kind of mines get together.
Okay. Good read some kind of a resolution you know certainly in Europe were not facing the the tariffs situation with China or the or Ah I mean, you know like the farmers are not being affected in Europe like they are here with that so so I mean, I think that that helps our European situation, but Ah, but there is there's there's.
Certainty there, but like I said, I mean, you know and in some respects from a low basis in France, where you know, we're showing better and we should continue to show little show better and here we've been talking about this low margin, but you know backlog and revard that we've been working through yeah. We finished that up early in the third quarter and now the business that's.
Replacing that is that much better margin.
Other point, Joe when that too if you recall, we've announced earlier that we're moving from three segments to that actually started here in October so, Oregon real good positive feedback the guy.
Really worked out well there.
Yeah, I'm glad you mentioned that because I wanted to ask about that is there any synergies outside of just reporting you know accounting. The you know reporting the financial data is there any synergies in terms of the actual overall business the cost structure.
Anything related to that.
Yeah with regard to which does vacuum trucks will be.
Yes, good support from from Excavator vacuum trucks group backhaul and both are Super products. So that's going to be really helpful to them and also are working the act guys are working together with the U.S. at guys over here on exchanging ideas on products and things of that nature, So yeah and as the the I think in total the overhead structure will be a have a couple.
Yes, the senior people wouldn't have yet and it would so yeah, there will be a little bit of savings that the at the overhead level, but the head to the divisions will have both European and North American business units and that just that reorganization within the management structure is going to help drive more synergies between those businesses.
And where are we with making these changes did this just start here in the third quarter I know I know you've announced this you know a few core guy, but where are we.
They happened in fourth quarter, and so when you get the earnings release for the fourth quarter as well as the 10-K they'll showed into two segments and we'll take every went through that so you won't be able to go but but it is it is going on right now yes.
Okay, and then I wanted to just I guess last question <unk> Capex projects that you're going on and you have a couple major ones one in Wisconsin, where you're consolidating facilities I'm wondering can and I'm wondering what the timing of those two or and.
Any of them.
You know created any inefficiencies with the operations and when do we start to see the benefits from those.
Well, yeah, I mean, the vote both projects are on launch schedule or timing, but that time and money wise a week in like said, we said, though the one in Wisconsin, we'll be taking you know moving in and starting up running in the first quarter of next year, certainly there will be a few interface.
And sees a during the during the you know startup phase of that but but we actually believe with our backlogs on vacuum trucks, we actually may have to produce keep producing in our old facility a little longer than we thought just because we're going to be you know literally.
A a lot of need the cup.
Need the capacity.
You know so so all in all police that certainly there'll be some inefficiencies as we as we gear up but I mean, I think were pretty good shape. The one in Canada is also on a going ahead.
Plan and that one's a much smaller one smaller integration, but but yeah, I mean, and so I don't see it's interesting because the one we're integrating into their RPM into attendant go RPM did a lot of outsourcing that we are now starting to in source. So there will be as well there will be less.
Disruption on that one then there will be on the one in Wisconsin.
You just one follow up question and then I'm Oh I'm done do you. When do you think the benefits from a lot of these initiatives for 2020 will be one of the larger years in terms of internal productivity improvements for your margins.
[laughter].
Yeah.
Yes, but but the only marginally I mean, because I mean, you know the young the good good news in the bad news won't have a lot of Rx and went in any one basket. So it's all I mean, you know even.
You know when you have 26 plants. The you know you combine even three into two it's certainly going to help but it's not like say is it's not going to be oh, yeah like a a really big game changer, just because like I said, we don't have all rigs in any one basket that you don't like is something good happens areas.
A big Big you know big plus so yeah. If you know so it will be but but like I say in the its hard to say, it's going to be materially.
Affect the overall company just because we have so many operations.
Okay, great. Thanks, a lot appreciate it.
Our next question comes from Mike Shlisky with Dougherty and company.
Oh, Hey, guys for this will follow up question here I kind of went a little more clarity about.
Okay is that how things turned out in the quarter because things that see all the positive on the last conference call.
HM I wanted to make sure I got some of that there.
Changes here.
Sounds like you had a so what's nice about July beneficial I guess, maybe a falloff in September .
And I want to get a sense.
The beauty businesses with the various state.
She was the caliber.
They stopped ordering they stopped there's a man.
The inventory shut down.
Push some stuff out into October .
No I mean, it never shuts down I mean, you know like yeah. The like say the city in County business, which is a little 10 tends to be little smaller look a sizable orders or is it was it was pretty steady the deal tea business is lumpier than you know the big state business is little lumpy it tends to be a little bit bigger dollar.
And a little bit Lumpier, theres fewer the orders and a and like I said and then it I mean, you know fewer bigger orders in that and in the third quarter or you know like actually you know this you know like even at the start up there just wasn't weren't as many of you know like say, it's a couple of those lumps coding or didnt happen and in fact.
Yeah, we've got a couple of them already in sort of October so I mean, your leases they sort of got delayed, but but yeah, but there's just there's some of those lumps you know, we even I mean were little concerned and occasionally we have seen in big election years or that you know <unk> governmental buyers get distracted.
[laughter], so a meal with the elections in worried about change of administration not them. Yeah, we don't see anything to the federal government. So to speak up much I mean, most of our business the city counting state, but but like I said, even back and get a little bit of a little bit Saul you know like I say little bit they get a little distracting.
Now the election years, but but generally it's pretty good. It's just as you know like say, it's lumpy at the state at the deal T. level and then there was a couple lumps that they've got delayed but Mike inquiry levels were still there.
You mentioned, yes.
We lost market share, it's not like the you know like say, the inquiries or or have dried up I mean inquiry level still quite robust and we believe our market shares are holding very very strong.
And so the the overall said to me I think kind of these days I see though I mean, it's all pretty similar if not or when the worst ride and Nashville sizable though.
Yes.
With that but that's what we're saying for sure and like I said, if anything goals are a little jump year in an election year than they are you know not not a big election here.
Okay. Okay that that's definitely helps thanks, so much guide.
Sure. Thank you Mark.
Thank you I would now like to turn the conference back over to management for closing remarks.
All right well again, we appreciate you all being on the call today and thank you for your interest and ER and though thank you for joining us and we look forward to speaking with you on our 2019 fourth quarter call a year in call in February .
Much of good day.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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