Alamo Group Inc (ALG) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Alamo Group Third Quarter 2017 Earnings Conference Call. (Operator Instructions) This conference is being recorded today, Wednesday, November 1, 2017.

I will now turn the conference over to Mr. Bob George, Vice President of Alamo Group. Please go ahead, Mr. George.

Thank you, and good morning. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at (212) 827-3773, and we will send you a release and make sure you are on the company's distribution list. There will be a replay of the call which will begin 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1 (888) 203-1112, with the passcode 3612612. Additionally, the call is being webcast on the company's website at www.alamo-group.com, and a replay will be available for 60 days.

On the line with me today are Ron Robinson, Chief Executive Officer and President; Dan Malone, Executive Vice President and Chief Financial Officer; Richard Wehrle, Vice President and Corporate Controller; and Ed Rizzuti, Vice President and General Counsel. Management will make some opening remarks, and then we'll open up the line for your questions.

During the call today, management may reference certain non-GAAP numbers in their remarks. Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release.

Before turning the call over to Ron, I'd like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risk and uncertainties, which may cause the company's actual results and future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following: market demand, competition, weather, seasonality, currency-related issues and other risk factors listed from time-to-time in company's SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date.

I would now like to introduce Ron. Ron, please go ahead.

Thank you, Bob, and we want to thank all of you for joining us here today. Dan Malone will begin our call with the review of our financial results for the third quarter of 2017, and then I'll provide a few more comments on the quarter's results. And following the formal remarks, we look forward to taking your questions. So Dan, please go ahead.

Thank you, Ron. Alamo Group's third quarter and 9-month 2017 operating results set company sales and earnings records for the third quarter and 9-month periods. In addition, Alamo's trailing 12-month EBITDA exceeded $100 million for the first time in the company's history. Third quarter 2017 sales of $240.4 million were up 10.9% over third quarter 2016 sales of $216.8 million.

Excluding sales attributable to acquisitions, third quarter 2017 sales grew 5.9% over the prior-year quarter. 9-month 2017 sales of $669.1 million were 4.7% higher than 9-month 2016 sales of $639.2 million. Excluding acquisitions, 9-month 2017 sales exceeded 9-month 2016 sales by 2.9%.

Our third quarter and 9-month 2017 sales compared favorably to the comparable prior-year periods across all divisions, both including and excluding the sales attributed to business acquisitions.

Industrial Division third quarter 2017 sales of $132.4 million represented a 9.2% increase over the prior-year third quarter, and 9-month 2017 sales of $375.5 million increased 3.8% over 9-month 2016 sales. Excluding sales contributed by business acquisitions, sales in this division increased 2.7% and 1.7% over the prior-year third quarter and 9-month periods, respectively.

For the third quarter, higher sales of vacuum trucks and excavators were partially offset by lower shipments of mowers, sweepers and snow removal equipment.

Agricultural Division third quarter 2017 sales were $64.9 million, up 15% compared to third quarter 2016 and 9-month 2017 sales of $170.9 million or 8.9% above the prior-year 9-month period. Excluding sales contributed by business acquisitions, sales in this division increased 10% and 6.5% over the prior-year third quarter and 9-month periods, respectively. This division continues to benefit from new product introductions and improved demand for our mowing products despite the continued general weakness of agricultural equipment markets.

European Division third quarter 2017 sales were $43.1 million or about 10.3% higher than the third quarter of 2016, and 9-month 2017 sales of $122.7 million or 1.7% above the prior-year 9-month period. This division benefited from growth in both vegetation maintenance equipment and vacuum trucks sales and for the first time in a while, the absence of a currency headwind.

Third quarter 2017 gross profit of $64.9 million grew by 18.7% over third quarter 2016 gross profit of $54.7 million. Our third quarter 2017 gross profit was 27% of net sales, which compares favorably to 25.2% of net sales for the prior-year quarter. 9-month 2017 gross profit of $173.8 million grew 10.6% over 9-month 2016 gross profit of $157.2 million. Our 9-month 2017 gross profit was 26% of net sales, which compares favorably to 24.6% of net sales in the prior-year 9-month period. These favorable comparisons continue to be helped by pricing actions, improved production efficiencies, new product introductions and purchasing initiatives.

Third quarter 2017 operating income of $27.6 million was about 31.4% higher than the prior-year third quarter. 9-month 2017 operating income of $67.9 million was about 22.6% higher than the prior-year 9-month period. Third quarter 2017 operating income was 11.5% of net sales, which compares favorably to 9.7% of net sales for the prior-year third quarter. 9-month 2017 operating income was 10.1% of net sales, which compares favorably to 8.7% of net sales than the prior-year 9-month period.

Net income for the third quarter was 6 -- third quarter 2017 was $16.7 million or $1.42 per diluted share, an increase of over 25% over net income of $13.2 million or $1.14 per diluted share for the third quarter of 2016. Net income for the 9-month period 2017 was $41.1 million or $3.52 per diluted share, an increase in excess of 26% over 9-month 2016 net income of $32.5 million or $2.81 per diluted share. For the 9-month period in 2017, net income and earnings per share comparisons to prior year were helped by a lower effective income tax rate. This favorable comparison was due in part to prior-year foreign subsidiary losses for which we did not report a corresponding tax benefit as well as excess tax benefits related to share-based payments in 2017.

Our trailing 12-month EBITDA performance surpassed $100 million for the first time, both on an adjusted and unadjusted basis. 9-month 2017 EBITDA of $83.4 million exceeded the 2016 9-month result by 17%, while unadjusted trailing 12-month EBITDA of $100.7 million is about 13.6% higher than the full year 2016 EBITDA of $88.6 million.

Excluding a fourth quarter 2016 noncash charge related to a pension termination, adjusted trailing 12-month EBITDA of $103.6 million is trending about 13.2% ahead of full year 2016 adjusted EBITDA of $91.5 million. Our operating cash flow remains very strong, however, it's growth has flattened as meaningful sales growth is now driving higher working capital levels and high utilization rates have caused us to add to our vacuum truck rental fleet during the past 2 quarters. These strong cash flows have allowed us to improve our debt net of cash position by $21.7 million over the past 12 months even after paying about $40 million for acquisitions on top of outlays for capital investments, interest, and dividends.

Our order backlog ended the third quarter 2017 at $181 million, which is 31.7% higher than the third quarter 2016 backlog of $137.4 million. This backlog build is primarily due to increased new order levels. Excluding recent business acquisitions, our third quarter 2017 backlog has increased 21.6% since the third quarter of 2016.

In summary, our third quarter 2017 results were highlighted by net sales and earnings records for the third quarter and 9-month periods, sales and earnings growth across all company divisions, record trailing 12-month EBITDA exceeding $100 million, continued strong operating cash flow and significantly higher new orders and backlog.

I would now like to turn the call back over to Ron.

All right. Thank you, Dan. Alamo Group obviously had a very good third quarter, as both the press release and the comments just made by Dan attest to. Throughout the current year, and as a result of our ongoing focus on our operations, we have been able to show steady improvement in margins. But for the first half of the year, the top line growth was very modest, very limited. And finally, this was -- in the third quarter, we were able to achieve over 10% improvement in sales which, together with the margin improvement, resulted in record sales and earnings for our company that even exceeded our expectations for the quarter. We're particularly pleased with this improvement in sales for several reasons. As you are no doubt aware, we have been facing a number of market headwinds that have limited our top line growth for all of 2016 and the first half of 2017. These headwinds have included a weak global agricultural market; softness in sales of snow removal equipment due to successive mild winter conditions in North America; declines in sales of nongovernmental end users of certain of our Industrial Division products, mainly vacuum trucks; soft market conditions in some of our European markets and particularly which got softer following last year's Brexit vote in the U.K.; and the negative effect of the translation of our international sales and earnings into U.S. dollars due to the strong U.S. dollar.

We noted in our comments on our second quarter results that we were finally starting to see some improvement in several of these areas of concern. And while sales were still soft, bookings and backlog in the second quarter showed definite strengthening. This improvement in bookings we experienced in the second quarter led to the growth in sales we achieved in the third quarter. And our growing backlog should also support continued growth in the fourth quarter compared to last year's fourth quarter as well as provide a good base for starting off 2018.

We're also pleased that this sales improvement was spread across all 3 of our operating divisions, it was good to see all of them show improvement in sales in the third quarter. And further, that areas such as the currency translation effects went from being a headwind to actually being a slight tailwind as the U.S. dollar, though still stronger than several years ago, is actually below where it was during last year's third quarter when compared especially to some of the major international currencies in which Alamo conducts business, mainly the euro, the British pound and the Canadian dollar.

So while we are pleased with the improvement in bookings and backlog, we still remain concerned about the lingering effects of the issues that have constrained our markets during the last few years. For example, the overall agricultural market, while we had nice improvement in the third quarter, the market itself remains weak. And though there are signs of it bottoming out, it is still uncertain when farm incomes will start to rebound. We have done well in Ag but could do even better when the market starts showing improvement.

And with regards to our margins, while we have been pleased with the continued improvement we have achieved, we also know it is unrealistic to think the pace of improvement can continue at the levels we have achieved thus far in 2017. I mean, for example, sales for the first 9 months of 2017 are up about 5%, yet net income is up over 25%. So while this is very gratifying and we feel earnings growth will continue to outpace sales growth, but we do not feel that it will -- this kind of spread between the 2 growth rates is sustainable.

Lastly, we're pleased that the 3 acquisitions we completed this summer all seem to be off to a good start. And while they were small in total, they have been accretive to our results from the start, and this should continue to grow. So as a result, as we have said for a while now, we continue to like where Alamo is positioned today. We feel we are structured to perform well in challenging economic conditions and do even better as our markets start to improve as they are doing right now. We have a strengthening backlog, improving operational efficiencies, a strong and growing level of cash flow and all of this has led to the record results we experienced in the third quarter 2017. And while the rate of improvement we exhibited in the third quarter will moderate some as we go forward, we still feel the outlook for Alamo Group remains positive.

So we thank you for your support, and we would now like to open the floor for any questions you may have.

(Operator Instructions) And we'll take our first question today from Mike Shlisky with Seaport Global.

It's Jordan Bender on for Mike this morning. You guys touched on backlogs and the strength that's coming from it. I was wondering if you can point to any individual categories that's driving the growth and maybe categories that might be lagging that growth.

Generally, we were pleased that it was fairly broad based. I mean, certain products, I know Europe did well both in industrial products as well as in agricultural products. In North America, we saw nice pick up in things like vacuum trucks, things like excavators, Bush Hog, I mean, some of our mowers, agricultural mowers did well. So it -- we're -- certainly, some did better than others, but it was fairly broad based and we -- I'd say even things like snow removal products showed some positive momentum, even more in the anticipation of the coming winter rather than as a result of the mild conditions the last 2 winters. So we're pleased that it was fairly broad based.

Okay. And then were there any quantifiable impacts from the hurricanes during the quarter? I know that Alamo Industrial isn't located in Houston itself, but maybe were there any like disruptions on the highways that led to higher cost in the quarter?

Certainly, in the short term, no. I mean, we believe in the next few years, we will see some modest effect, everything from products like vacuum trucks and excavators and this type stuff. So I mean, we believe we will see some modest improved effects from those in the next couple of years. But I can tell you in the short term, really no effect to our results.

Okay, and I'm going to ask you one more in here. With all the demand out there, are there any components in short supply right now?

Not really. I think we're seeing a little more pricing pressure maybe, but I think we've been able to contain that pretty well. I think as our backlogs grow, I mean our lead times are lengthening a little and it's -- we'd like to have good backlog, but we don't want it to get too far ahead of itself just because we don't want our lead times to lengthen. But so far, our lead times are very well in control and there are no particular impediments and/or lack of input materials that are causing us any concern at this time.

(Operator Instructions) We'll go next to Joe Mondillo with Sidoti & Company.

I wanted to ask a question on the backlog, and I just want to ask in a different way. If you were to give us the growth rate of all 3 segments of the backlog briefs of the segment, which you don't have to do, but would it be all around 25% growth, right around there, for each of the 3 segments? Or is there higher growth in any of the other segments versus others?

Yes. No, like I said, there was growth in all of them. Certainly, I think, Europe has probably our strongest growth just because I think they had the lowest backlog going into this period. Probably industrial has the least growth just because they -- I mean, they had a fairly healthy backlog even before for the last couple of quarters. So they would have been the least and Europe would have been the most. But actually, even industrial, of course, they had a fair bit from the -- 2 of the 3 acquisitions that we did were in the industrial sector, so that added to them as well. But I like to say Europe was the strongest but that is because they came from the lowest level. But all 3 had improvements, and it was good. Like I said, that's why I was saying our sales growth and the growth in bookings and backlog was well distributed.

Okay. And I wanted to ask on the margin industrial because obviously, The Street has been off. I think this is probably where The Street has been off, at least in my model it is. Could you break down the biggest sort of buckets that are driving -- I mean, you saw I think organic growth of 2% this quarter and pretty modest in the last couple of quarters, but you're seeing -- I mean, operating margins last year were -- in the third quarter were 7.7% and now they're 11.2%. So you're seeing huge amount of operating leverage. We didn't even see this in the -- coming out of the 2009 recession. Coming out of that, we didn't even see that. So could you sort of maybe try to break down the buckets of drivers that are driving this operating leverage?

Yes. Again, the -- [good news], you want that industrial is fairly broad-based. You got to remember, like in the [story] in the third and fourth quarter of 2016, our vacuum truck business, particularly in industrial, was well off compared to the highs we had achieved like even in 2014, 2015. And so -- and that's the one area where we actually have some rental business, where we actually do our own rental activities. And so utilization stayed good but we actually lowered the rental fleet to keep the utilization good. And so -- and then like I said, sales were soft, particularly to the nongovernmental end users because that's where we saw we had some pretty good business going. The majority of our sales of vacuum trucks is to governmental but we had, had a nice growing in things like oil field construction, petrochem. And all of those, the nongovernmental was off, the rental activity in total was off, and those were high-margin products. And so that's what hurt our margins in industrial last year, but -- and that's what has helped our margin in industrial in the third quarter this year. I think we also saw some decent -- a little bit margin improvement in things like some mowers. Gradall excavators had a good quarter. Snow products were still, for the quarter, were actually down just because, like I said -- while I said, bookings and backlog just picked up a little there, sales there has still -- were still soft in the third quarter, so their margins were down a little. But I think, like I say, vacuum trucks, mowers, excavators was where industrial had -- saw the biggest pick up in the third quarter.

And then I think in the prior-year period, vacuum trucks were actually still decelerating. Now we're kind of accelerating so that just kind of magnifies the differences in the margins.

And fourth quarter, you still have a pretty easy comp. I assume that there's nothing sort of onetime in nature in this third quarter, and you should have another sort of good fourth quarter, just given the comp. And then in 2018, obviously the rate of margin expansion I would think would slow because the comps do get a little more difficult. Is that fair to say regarding the fourth quarter?

Yes. That's fair to say. I mean, the fourth quarter for us is always a little softer and -- but as you said, even last year's fourth quarter was pretty soft. So we ought to do definitely better than last year's fourth quarter. There was no really onetime events in the third quarter this year. But like I said, I think it was good and it was a quarter where quite a few things went right and not much went wrong. But whereas -- and I think that in the fourth quarter of this year, yes, we've got a decent backlog going into it so the comps are easy compared to last year's fourth quarter. And we feel it will -- yes, that we should have a nice improvement in the fourth quarter. And exactly what you said about 2018, that's what I was saying earlier. Certainly, I think it's good to go in -- that we should enter 2018 with a nice backlog and -- but yes, but the comps will be harder. And the margin, while I still feel we can -- our bottom line growth can be at a higher pace than top line growth, but it will certainly be at much less levels than we're achieving this year. I mean -- yes, you can't keep going 25% improvement in earnings.

Okay. And then at Ag, you saw organic revenue up 10%, but margins were down. Is that just a lingering sort of product mix issue where it's just smaller customers with smaller tractors that are buying smaller products, mix is the main issue?

A little bit of that, but I mean, Ag is one where we had really strong -- I mean, Ag had very good margins. They had very good margins last year, this is what I like to say. So with the sales growth, they were maybe -- the average, it was a little bit of product mix, but it was still a very good result level. But yes, just slightly, like I say, good margins but slightly below last year's, which were even better margins.

Okay. And then in terms of cash flow, just wondering if you can comment on your thoughts on the cash flow? I mean, I think in the first 9 months of the year, you saw about negative $0.50 a share of free cash flow. Just wondering your thoughts on that and going forward and maybe if you could provide sort of your [CapEx] for the year?

Yes, I mean, we -- if we were in a flat scenario, we would be [generating -- when we were] in the 90s in EBITDA, and we were in a flat, not a sales growth period, we felt like that translated to somewhere in the neighborhood of $50 million free cash flow. What's happening now, though, is we are accelerating in terms of sales growth. And so during this period of acceleration, we're going to put -- we're going to build some working capital. We've done pretty good on inventory. Inventories have built a little bit but we kept the turns up on inventories, but we will see more in receivables. So we should incrementally add to cash flows, but that ratio of EBITDA to cash flow will probably narrow some as we're building working capital. We also need to put some money into the rental fleet or to put some more trucks into the rental fleet. So that will be a bit of an offset to the cash flow. And then we had the big -- we had $40 million in acquisitions, obviously, that used up a lot of cash.

Sure. And CapEx sort of outlook? I mean, I know you've done sort of running below depreciation. Not sure what the fourth -- full year looks like or what you're looking at for 2018. Any sort of comments regarding that?

I think we'll finish the year running a little below depreciation. I think next year, we'll probably do a little bit above depreciation, like I say, because I think we're seeing a few -- as some of our markets are expanding and sales are growing, we're probably going to take on a couple more capital projects than we have this year. So I would see it a little bit -- and yes, but I'm talking small variations, plusses and minuses. But I think, like I said, this year, we'll be a little bit below depreciation and next year, we'll probably be a little bit above it.

(Operator Instructions) We'll go next to Tyler Etten from Piper Jaffray.

It's really great to see the operating margins break into double digits.

Yes, we've been talking about that for a while, and so we -- we're starting to get there.

Definitely got it. I guess, a lot of my questions have been answered already. You had a positive comment in the prepared remarks about the snow equipment business. Obviously, this has been a headwind for the last couple of years because of the mild winters. Just wondering what -- the commentary you're hearing from dealers and if this is a year where we might start to see a little bit more out of that business.

Yes, I think so. Like I said, I mean, we've seen some bookings and backlog increase in there, probably a little bit more than I even thought we would, given how mild the last 2 winters have been. I think there's some expectation this winter, I mean, is off to a decent start and could see a little bit more activity than last winter. But even though it was off, it was still a good business. And like I say, I think next year it could even be better because particularly, things like our wall saw, has come out with some new products that have been well received. So I think we're helping ourselves with some new product introductions. I think, like I say, we're optimistic that I think this winter's going to be a little more normal. I don't want to say it's going to be a big winter but I mean a little bit more normal than the last couple of winters. So -- but we'll see how that goes. But I think we've got some new products, we've got a little bit better coverage in that area. And so I think we'll see -- should have a -- like I say, it was off a little bit but not that much. And this year, we think it could be reasonably better because we're starting out with even better backlog.

Okay. And then in the Industrial segment, you said that mowers were a little bit weaker in the quarter. Is there any, I guess, explanation for that given that we have all the strength in mowers out of the Ag segment? Or is this just a different mix in the quarter without really any explanation?

No. I think some of that is actually a little more timing than anything. I don't -- like I say, we've done pretty well there. And so, I mean, we are a big market here, there. So it's hard to outperform the market when you are a big part of the market. But no, I think it's going well. But I would say there's a little bit of timing on a couple issues, but we think that will continue to be a very attractive part of our business.

That's primarily a build-to-order sort of business. So when you get big orders, sometimes it drives...

Yes, a bit lumpy. Yes, there are some of the big state contracts can be big orders at a time. And like -- as Dan said, those can be a bit lumpy. And so that's why I'm saying some of it is timing, too, is where when you get some of those or when you deliver them.

Got it. And then, Dan, could you just break out the European segment in terms of organic and growth with acquisitions, excluding any effects from FX?

Well, I mean, we put into our schedule the effect of FX on the top line. And since it's mainly translation, it's proportionate to the bottom line as well. We don't have any effects of acquisitions really in Europe because it's -- there's no -- in the comparable periods, there are no acquisitions.

Yes. I would say look at attachment 3 of our press release because -- and it shows the effects of currency. But yes. So it went from like, what? A 4% headwind to a 2% tailwind.

So you can take the segment earnings for Europe and effect -- and do the same effect.

Tyler, the 3 acquisitions, 2 of them were in industrial and 1 of them were in -- was in Ag.

And we'll take a follow-up question from Joe Mondillo with Sidoti.

I just have a few things. For acquisitions, that $715,000 of accretion to operating income related to acquisitions, how can we look at that for, say, going into the fourth quarter next year in a quarterly run rate because I know one of the deals I think was closed mid -- in the middle of the quarter. You also have the snow operation business that you bought, which I imagine would ramp up in the winter months. Do you think that $715,000 could sort of double on a quarterly run rate, at least on the fourth and first quarter or -- just trying to get an idea of accretion from acquisitions.

Yes. I mean, we don't give that kind of forward guidance or outlook. As -- though I just said in the comments, it was -- they were off to a decent start and that should grow. I mean, we should be better as we move ahead because like you said, I mean, we're still in a little bit of a re-org mode at some of those, putting in our operating systems and other types of -- making changes. So I was pleased to have it accretive from the start. As you said, the RPM, the last one, we didn't even have a full -- we don't have a month of that in there so it's fairly modest. Like I said, it's only a partial effect on that one. So yes, it should definitely be better and especially, as we get them running on our operating systems and our purchasing initiatives and our other structure that we can add to them. So yes, it should improve. But like I said, we don't give out that kind of detail.

Is there any noncash amortization or anything that's going to pull off starting in the fourth quarter or anything like that, or no?

No.

No.

Okay. And then I wanted to ask regarding -- over the last couple of years, you guys have done a really good job especially sort of in the slowdown years in 2015, '16. In terms of productivity improvement opportunities, just wondering how that bucket sort of plays a role in margin expansion when looking out to sort of 2018. Are the opportunities as big as they were? Smaller? Or sort of -- how are you looking at sort of that aspect of growth?

Yes. Certainly, there's more that we can do, and we're not -- like I say, we think we can still have improvements. As I said, it won't be at the pace we were able to achieve this year in margin improvements. It's going -- and you can do that pace on top of the pace we already did this year. As I did also say, I think we're seeing a little bit of pressure on input cost, raw materials, steel, things like that. I think we believe we can manage through that. Certainly won't have any margin deterioration but we believe we can probably still have a little bit of margin improvement going ahead, just not at the pace we have experienced. I mean, we have to wait and see exactly what's happening with cost, but we're seeing a little more pressure there than we certainly experienced this year so far. And I think that's the -- one of the one areas, I think. But we believe we got some good things going that can continue to improve our operating efficiencies. So as I said, I think we can still have bottom line growth exceeding top line growth, but just nowhere near at the pace we have achieved in the third quarter.

Right. So no big CapEx projects at any of your facilities that are going to at least play a role in 2018 significantly in terms of productivity?

Yes. No, not significant. The good news and the bad news is we don't have too many eggs in one basket. That means, like I say, no one project or anything usually has a material result -- effect on our results, up or down, just because we're so diversified in the range of products and in the manufacturing operations we have. So like I said, that's the good news and the bad news.

And then just -- I just had one last question regarding the backlog. So the backlog is generally less than a quarter's worth of revenue. So does that backlog extend to sort of year-end or does any of it extend into 2018? And then I was just wondering, I don't know if there's any clear mix, up or down, in terms of gross margins of what you have in the backlog. Is there anything to highlight in terms of mix to think about that?

No, not on the mix. I mean -- and certainly, some of the backlog does extend into the first quarter of next year. I mean, maybe a little bit even into the second quarter, but the majority of it should flow through in the fourth quarter and the first quarter of next year. You got to remember, like about a little over 20% of our sales is aftermarket spare and wear parts. That's also our most profitable piece of our segment of business, and that never goes through backlog. I mean, very seldom. I mean you have a little bit that does. But usually, that's an in and out business. And so that can have more of effect. And as I said, that's one of the reasons our fourth quarter is generally a little lighter than like the second and third quarters, just because equipment isn't being utilized in the field quite as much due to winter, due to holidays and other things like that. So that's -- the spare parts are usually a little softer in the fourth quarter, and that's what -- that affects our margins in the fourth -- fourth quarter margins are usually a little less than third quarter margins. So -- but like I say, that's just sort of a natural cyclical part of our business. Other than that, there is nothing in particular in the backlog that's going to hurt or help margins in any material way over and above our operating improvements that we continue to make. So I don't -- like I said, I think the spare parts are still -- like I say, that can come and go a little bit higher, a little bit lower than anticipated. But no, I think we're in a good shape on backlog, and that will help us going into the first quarter of next year.

And I'm showing we have no further questions at this time. I'll turn the call back to our presenters for any closing or further remarks today.

Okay. Well, thank you very much. We appreciate you joining us today and look forward to speaking with you all when -- on our year-end call, which should be around the first -- early March of next year. So appreciate your support, and have a good day. Thank you.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.