Alamo Group Inc (ALG) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Alamo Group Fourth Quarter 2018 Year-End Earnings Conference Call.

(Operator Instructions) This conference is being recorded today, Friday, March 1, 2019.

I will now turn the conference over to Mr. Ed Rizzuti, Vice President, General Counsel and Secretary of Alamo Group.

Please go ahead, Mr. Rizzuti.

Thank you.

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 8315612.

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, President and Chief Executive Officer; Dan Malone, Executive Vice President and Chief Financial Officer; and Richard Wehrle, Vice President, Treasurer and Corporate Controller.

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 attachment 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 risks and uncertainties, which may cause the company's actual results in 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, geopolitical issues and other risk factors listed from time to time in the 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.

All right, thank you, Ed.

And we want to thank all of you for joining us today.

Dan Malone, our CFO, will begin our call with a review of our financial results for the fourth quarter and year-end 2018.

I will then provide a few comments, and following our formal remarks, we look forward to taking any questions you may have.

So Dan, please go ahead.

Thank you, Ron.

Our fourth quarter and full year 2018 results, again, set records for Alamo Group.

Some of the major milestones we surpassed in 2018 included: annual sales exceeded -- exceeding $1 billion; annual operating income exceeding $100 million and 10% of sales; annual net income exceeding $70 million and $6 per share; annual EBITDA exceeding $120 million; and the year-end backlog of $240 million.

Fourth quarter 2018 sales of $256 million beat the prior-year fourth quarter by 5.3%.

For the full year, 2018 sales of $1 billion were up 10.6% over prior year, with organic sales growth of 6.4%, excluding the comparative results of the Old Dominion Brush, Santa Izabel and R.P.M.

Tech acquisitions.

Industrial fourth quarter 2018 sales of $160 million represented an 8.7% increase over the prior-year fourth quarter sales.

Full year net sales in this division were up 14.6% over prior year, with organic sales growth of 9.4%, excluding the Old Dominion Brush and R.P.M.

Tech acquisitions.

Agricultural Division fourth quarter 2018 sales were $55.9 million, down 1% from the prior-year fourth quarter.

For the full year, this division's sales were up 3.4% over prior year but down 1.1% without the Santa Izabel acquisition.

Weather, crop yields and U.S. trade disputes have delayed recovery of the general agricultural market.

European Division fourth quarter 2018 sales were $40.1 million, up 1.3% over the fourth quarter of 2017.

Without an unfavorable currency translation effect, this division's local currency sales were up 4.5% over the prior-year fourth quarter.

For the full year, this division's sales were up 7.7% and also grew 3.3% without the benefit of favorable currency translation.

Fourth quarter 2018 gross margin of $62.6 million grew 2.8% over the prior-year fourth quarter.

Our fourth quarter gross margin was 24.5% of net sales, which compares to 25% of net sales for the prior year quarter.

Full year 2018 gross margin was 25.4% of net sales compared to 25.7% for the prior year.

Our percentage margins were squeezed during the second half of 2018 by an unfavorable timing of input cost increases relative to the pricing actions taken to offset them.

Our gross margins were also constrained by an unfavorable mix of equipment aftermarket part sales but continue to benefit from purchasing initiatives and productivity improvements.

Fourth quarter 2018 operating income of $24.7 million was 18.3% higher than the fourth quarter -- than the prior fourth quarter, primarily due to Industrial Division organic sales growth, partially offset by the factors constraining gross margins already mentioned.

Full year 2018 operating income is up 13.9% over prior year and grew 8.5% without acquisitions.

Fourth quarter 2018 operating income was 9.6% of net sales compared to 8.6% of net sales for the prior-year quarter.

Full year 2018 operating income was 10% of net sales compared to 9.7% for the prior year.

Fourth quarter and full year 2018 net income and earnings per share were also helped by a lower effective income tax rate.

Excluding the one-time effects of the new U.S. tax legislation from both current and prior-year results, our effective tax rate was 26.4% for the fourth quarter 2018 compared to 35% for the prior-year quarter.

And our full year 2018 effective tax rate was 25.8% compared to 33.8% for the prior year.

Net income for the fourth quarter was $16.6 million or $1.41 per diluted share compared to prior-year net income of $3.2 million or 27% -- or $0.27 per diluted share.

Full year 2018 net income was $73.5 million or $6.25 per diluted share compared to prior-year net income of $44.3 million or $3.79 per diluted share.

Excluding the one-time effects of the new tax legislation, full year net income was $70.2 million or $5.97 per diluted share, compared to $54.6 million or $4.67 per diluted share in 2017.

Adjusted net income and diluted earnings per share are both up more than 20% and 28% compared to the prior-year fourth quarter and full year, respectively.

Full year 2018 EBITDA of $124.4 million was up 13.7% over the prior year.

Net cash provided by operating activities in 2018 totaled $12.9 million, which compares to $70.8 million net cash provided in the prior year.

The year-to-year difference of $58 million was due to a -- the higher level of inventory needed to support the increased order backlog and mitigate longer supplier lead times.

Also, growth in demand for backing trucks continued to support a large planned increase in our rental fleet investment, and the retroactive effects of the new U.S. tax legislation increased cash taxes year-over-year.

We have also increased the level of capital investment to make targeted improvements in our production -- in our product lines, production capacities and operating efficiencies.

Capital spending for the full year 2018 was $26.6 million compared to $13.5 million for the prior year.

Primarily due to these additional investments in working capital, rental fleet and capital assets, we ended the fourth quarter with debt net of cash of $51.3 million, up $16.5 million from the prior year-end.

Our order backlog ended the fourth quarter at $240 million, about 10% higher than the prior year-end.

Backlog remains at a very healthy level but declined $11 million during the fourth quarter, mainly due to the timing of orders in the Agricultural Division, which had surged in September ahead of an announced price increase.

In summary, our fourth quarter and full year results were highlighted by annual sales over $1 billion; annual operating income over $100 million; full year operating margin exceeding 10%; record fourth quarter and full year sales in net income; and a record year-ending quarter backlog.

I'd now like to turn the call back over to Ron.

All right.

Thank you, Dan.

Certainly, as the numbers Dan just presented indicate, Alamo Group had a very good 2018 fourth quarter to finish off a record year for the company.

We've commented during the year and in our fourth quarter press release about the various challenges we faced in 2018, but I think the important thing to focus on is not the challenges but the results.

There always seems to be some challenges somewhere in the global economy and certainly, there's no shortage of them today, but -- and this seems likely to continue.

But we believe we, once again, demonstrated that by staying focused on our business strategy and reacting quickly to changing conditions, we continue to move Alamo Group forward, and the results for 2018 certainly confirm this.

Once again, in the quarter, we were led by our Industrial Division, where sales for the year were up nearly 15%.

Certainly, we benefited by strong demand pretty well across the entire product range within that division, and we're further aided by new product introductions.

And we're really pleased, actually, in that division.

We have a lot of good initiatives going on in our Industrial group.

We [just had] some new products, the recent acquisitions of Old Dominion and R.P.M., we -- that Dan pointed out, we increased investment in -- our CapEx was up so as we increased investment in manufacturing technology.

And even the recently-announced construction of a new facility in Wisconsin, which will allow us to consolidate our backing -- Super Products backing truck operation into one location.

All of these actions should help maintain the positive momentum this group has built as we move into 2019.

And these are being further helped by the company's strong -- continuing strong backlog, the majority of which is in our Industrial Division.

And while I'm sure we will continue to have some challenges in 2019, I feel some areas that affected us in 2018, such as higher-than-usual increases in input costs, should be less of a challenge in 2019.

So we continue to feel good about the outlook for our Industrial Division.

Our Agricultural Division also, I thought, performed well in 2018, with sales up for the year over 3%, though market conditions were certainly more challenging than we experienced in our Industrial Market.

As farm incomes were down once again in 2018.

I mean, actually, entering the year, we thought there was a good chance farm incomes could be up in the year, but they ended up not only down versus last year, they're considerably below the highs of the Ag sector from 4 or 5 years ago.

Yet, despite a weak market and higher input cost increases, the division sales were up, and margins held steady.

So I thought they performed very well.

Market conditions are likely to remain soft as we move into 2019, but hopefully should start to improve somewhat in the second half of the year.

And we feel we should continue to benefited from the broad range of agricultural sectors we serve as well as from new product introductions and some other marketing initiatives which we have going on.

Our European operations also contributed nicely to Alamo's overall results, with record sales in 2018 for the division.

We're pleased with these results given the general softness in the overall European economy and the lingering uncertainties surrounding the Brexit negotiations.

Our U.K. operations performed particularly well and led by our McConnel unit, which has benefited from strong marketing initiatives and new products, which we think will continue to help them going forward.

We're particularly excited about the new -- all new range of robo cut -- remote control mowers that they are introducing, which have many unique features and options and is already being very well-received by the market.

So in total, while there will be ongoing challenges to be faced in 2019, we think the fundamentals of our business, which propelled our record results in 2018, should continue to benefit us in 2019.

We feel there should also be a little less inflationary pressure this year compared to last year, so most of the other market challenges are likely to linger.

Still, we feel good about the outlook, and to help drive these results, we will continue to invest in product development and are even increasing the number of major initiatives we are pushing, which we believe really support that our organic growth will continue to outpace the market growth in the sectors in which we operate.

And we're also spending a little more on capital projects to help us further consolidate our manufacturing footprint and upgrade our technical capabilities.

And I want to say, spending more in the line of what we spent in 2018 compared -- which was up significantly from the previous few years.

So we'll be at that level for the next couple of years.

Together, we feel these 2 initiatives, focused on our products and our manufacturing, will drive organic sales growth and ongoing margin improvements, both of which we feel are critical to our ongoing success.

All these results should be further enhanced by the recently-announced pending acquisition in Europe of Dutch Power.

Dutch Power is a very nice company that is very complementary to Alamo Group in both the products they offer and the markets they serve.

They also have some unique and interesting products that will add to our range such as equipment to maintain underwater vegetation and systems to operate equipment autonomously.

This is a good company with good people and good products, and we look forward to getting this deal completed prior to the end of the first quarter.

I think one indication of how good this company is a fit with us is, a few years ago, we bought Herder in Brazil, which was originally founded by Dutch Power at their Herder Group in Europe.

So there are already relationships between the company.

So we're pleased.

We're also pleased that acquisition activity, in general, remains very robust, with several interesting opportunities under evaluation.

So while we are pleased with the record results achieved in 2018, in many ways, we've already put that behind us and are focused on 2019 and beyond.

And we thank you for your support as we proceed in the -- to the future.

With that, I would now like to open the floor for any questions you might have.

(Operator Instructions) Our first question today will come from Joe Mondillo with Sidoti & Company.

So I wanted to ask you about the parts revenue.

In 2018, it was sort of weak as a percentage of the total sales.

It declined in the back half of the year.

I think it trended sort of the weakest.

It was -- it looked like it was down maybe 3% in the fourth quarter.

So just wondering what [you thought] what happened in 2018 and sort of how you're thinking about that going into 2019?

Yes.

The parts sales, you're right.

We're a little weak fourth quarter.

Even in a good fourth quarter, they tend to be a little on the soft side.

And we did see fourth quarter -- but I think they're actually -- there's also a few things, like the ag market being a little soft and everything.

I think people were -- farmers were watching their spending.

We noticed a little softness there.

It -- We haven't seen any major trends, though, that we think -- I mean, like I say, there's some market weakness, this type stuff.

And the one thing, I mean, it trended down a little bit as a percent of sales because whole goods sales were up, so it wasn't down as much -- it was off a little in dollars too but not quite as much.

So like I said, when whole goods sales grow, which they did nicely for the year, even in the end of the year, I think that was a contributing factor.

And we think it's okay.

I mean, actually, they started off pretty good.

I mean, this winter, first of all, there's a lot of snow.

And we've seen, the first of this year, especially with some of the winter products like snow removal, they're off to a pretty good start the first quarter.

But though, I think -- I know in the first quarter too, ag's probably soft a little, but I think in total, it's okay.

We've got a few initiatives aimed at parts, but we don't think we've been losing market share.

We think it's been more of like some soft market conditions where, like I said, in ag -- and but we're trying to do more in that area, but -- yes, I don't know.

Ron, I would think in a soft market...

Yes, Joe, just to kind of put it in perspective, I mean, you look at -- if you kind of look at the 3 years in total, and quarter-to-quarter, you can have a lot of variation just due to weather and some micro sort of packers.

But if you look, overall, for the year, we went from $167 million in parts in 2016 to $182 million in 2017, and we're actually up a little bit over -- we're up to nearly $187 million in '18.

What -- the mix impact is more due to the fact that we went from 663 to 714 to 802 on whole goods.

And a good part of that whole goods is also tractors and chassis, which are non-marked up as much as what we manufactured.

Okay.

Okay.

The backlog, up 10%.

Last year, going into 2018, it was up 40%.

And not surprisingly, end markets have slowed.

I'm just wondering sort of your thoughts on growth in 2019.

I mean, you were clear that the ag market seemed like they're going to continue to remain a little soft, at least in the first half of the year.

Just sort of, overall, what kind of growth expectations, I guess, that maybe the Industrial segment or just, overall, that you're thinking about for 2019?

Well, of course, I mean, we don't give out or look -- I mean, what we say -- think sales would be.

I think, organically, the Industrial Division ought to -- do a little bit better than the markets.

I think ag, first half of the year, would be fairly flat.

We think the second half of the year has some chance for -- to be up.

I think Europe -- again, I think I have a little bit better feel in another -- as Brexit's supposed to come to a head at the end of March, I don't know if it will come to a head, or they'll just delay it.

But I think Europe's economies are softening a little bit right now.

I think, what, several countries in Western Europe are already in recession.

So I think -- like I say, there's probably a little bit of softness there.

I think -- but with some new product introductions that we've been doing, and I think organic growth will be reasonable for us for next year, probably a little bit ahead of the market.

I think, certainly, the acquisition of Dutch Power will add.

So I mean, we definitely think we'll be up this year, in 2019.

But yes, like I said, we don't really give guidance as to how much we think we're going to be up, and it's still a little early in the year to actually predict that much.

Great.

Okay.

The industrial margins in 4Q were pretty strong, stronger than I was expecting.

In the last couple of years, you've seen a fall off in margin in the fourth quarter.

I'm not sure if that's a mix issue that hits in the fourth quarter or what.

I'm just wondering what sort of drove those margins in 4Q to the industrial segment?

Yes.

I think a couple of things.

First of all, you're right.

I mean, fourth quarter margins usually trail off a little bit because we -- I mean, like our spare parts, which are our highest-margin products, tend to be higher in the second and third quarters when our vegetation maintenance equipment is being utilized the most, and spare parts are being [considered].

So it's usually a little -- there is a product mix difference in the fourth quarter where, usually, spare parts are off a little.

This year, like I say, Industrial Division, I think spare parts held up probably a little bit better in the fourth quarter.

Also, we had taken some price -- a little more pricing actions in 2018, earlier in the year, as a result of cost increases.

And I think, in the fourth quarter, you saw that those price increases were starting to take effect.

Like I say, once we put them in, they don't take effect immediately.

It takes -- you have to then -- the soft new equipment that were -- been selling.

So the price increases were taking effect.

And there -- I'm going to say, the -- there was a little softening in steel prices, probably in the fourth quarter, most input cost, it softened.

But I think we -- like I said, we got the benefit of price increases, and that offset a little bit of a mix decline -- I mean, decline in the margins due to mix.

So yes, I was going to ask this a little later, but I'll touch on it now, the price cost situation.

We have been witnessing steel prices sort of come down, and I imagine the price increases that you put in place are still sort of maybe flowing through the backlog, so that should continue to see a benefit, at least in the early part of 2019.

Do you see a beneficial spread happening at some point in time?

I don't know if it's in 1Q or where it is, but how do you see sort of that price cost situation compared to where we were in 2018?

Where is that, and how does that, I guess, flow into 2019?

Well -- and I think you're right because I think we're just starting to see some of the benefits of the price increases.

And that's why I was saying earlier.

I don't think we're going to see anywhere near the pricing pressure.

Yes, steel's probably going to -- right now, is flat to a little down.

Other input costs are -- I mean, I think we're going to see more modest increases in cost in 2019.

And so I think we believe we'll see a positive, I mean, marginal effect on -- like I say, it's not going to be a huge effect, but I think we'll see some positive momentum in our margins from that -- the price cost spread.

And so like I said, I think we're -- as you said, we actually saw some of it in the fourth quarter.

We think we'll see some of it in the first -- actually, throughout this year but at a modest level.

Okay.

At the ag segment, despite organic revenues being off as much as they were, I was surprised to see the margin, that, that segment hold up in the fourth quarter reasonably well.

What caused that?

And maybe that's part due to the better part mix.

Are there any other reasons that caused that?

And...

Well, as I think we said, we had several above-average price increases in our ag sector in all our divisions in 2018.

And I think in the fourth quarter, we started to see some of the benefit of the pricing initiatives we've taken earlier in the year.

So a little of that started to flow into the fourth quarter.

And like I said, at a time when things like steel softened a little, and actually, steel as a percent of cost of goods sold is probably even a little higher in our ag division than they are even in our Industrial Division.

Okay.

Okay.

And at the European segment, in 4Q of 2017, parts were -- I remember, going back to my notes, you stating that parts were a little weaker than normal, and some severance costs related to certain things weighed on margins in the fourth quarter of 2017.

So you should have had a pretty good comp going into this fourth quarter.

As well, you also saw organic revenue growth, yet your profits declined year-over-year.

So what's going on with the European segment there?

In the -- it was more in our -- some of our French operations.

I think, in the third quarter, we announced -- we said that -- we have had a few things that one of our French units were -- I mean, we kind of had some supplier delays and some -- we probably weren't staffed totally for the work we were trying to do.

And then there were some -- like I say, some customer delays -- they wanted to delay deliveries of some of their equipment.

So -- and I think a little bit of that tailed into the fourth quarter.

I mean, I think we did much better on it than the third quarter, but a little of that sort of affected us in the fourth quarter as well.

And it will probably even drag on a little bit in the fourth quarter, but -- I mean, the first quarter, but we are, like I said, improving the situation.

And like I say, it's not as bad as it was in the third quarter.

But I think that's still been a little bit of a drag on our operation because -- but our U.K. units, actually, did quite well.

I think that, like I stated earlier on the call, specific had a really strong fourth quarter, really strong year, and they were really helped by some new product introductions, and there's new robo cuts being very well-received.

And so it's -- like I said, it was more tied -- the decline in profits is more tied just to some few challenges, internal challenges, in one of our French units.

Okay.

How do you think about sort of profitability in the European segment for 2019?

I guess you sort of answered it there.

But more so, I was also wondering how the acquisition of Dutch Power affects things largely related to sort of purchase accounting.

Due to sort of the amortization that comes with that, do you anticipate margins probably would be down in 2019, in the European segment?

Yes.

No, I understand.

Again, we -- of course, we don't usually give guidance or much forward.

I think Dutch Power is a nice-performing unit.

I think their margins are sort of in line with our margins.

You're right, there is a little -- there will be some goodwill on this and some goodwill amortization.

But I don't see that.

I think we'll do a little bit better in our French operations in '19 than we did in '18.

I -- Like I say, I think our U.K. units will continue to hold up nicely.

Like I say, depending on what happens with Brexit -- actually, we think we can deal fine with whatever happens with Brexit.

It's just the uncertainty that seems to -- I mean, our people in Europe, like I say, are -- they're buying stuff regularly from us, but they're not placing the big orders in advance because they don't -- they want to know what the tariffs and all are going to be when the equipment gets delivered.

So there's this uncertainty of what's going to happen, and we would like -- we think -- like I say, whatever happens, we feel that we can deal positively with it.

Just -- it's the uncertainty that we're concerned about.

But so all in all, I mean, like I say, I think Europe will do like much better in 2019.

It's certainly helped a lot by Dutch Power, which will definitely be nicely accretive to our results.

Even with some, like I say, some goodwill amortization, I think they'll be a very nice addition to us.

And so that, all in all, Europe should have a very -- should have more than another record year.

Okay.

I'm -- Europe, I mean, I guess I'm a little surprised to hear such positive outlook, just given the fact that those economies over there have floated all so much.

That doesn't overly concern you at this very point, though?

Oh, sure, it concerns me.

It does, I mean, [I'm concerned] that the U.S. seems to be trying to talk its way into a recession.

But I think the markets we serve generally do better -- I mean, do okay in weak economic conditions because the type of products we sell gets utilized.

I think -- I mean, [you have to] are necessary, whether like -- you have to maintain the infrastructure, whether -- no matter what the economies are.

I think that the ag sector in Europe is -- like it's a big sector for us over there.

And I think that's likely to continue to, like I say, similar to the U.S., I mean, we feel it's -- even if it's weak, it should hold pretty steady.

We feel that -- so the type of markets we serve and the products we serve, we think we'll benefit by some pricing actions.

We're going to benefit by some new product introductions.

And yes, sure, we're concerned.

We could do a lot better if the economies were a little bit more buoyant.

But we think, as we've shown a lot of this, like, weak market, Brexit overhang, all this, and yet, we still did -- had a nice year in 2018.

Okay.

Last question for me.

I'm just wondering what your sort of outlook on CapEx is as well as anything to highlight in terms of working capital needs or uses that you're thinking about for 2019?

Okay.

Well, as we said and I said, Dan said, I mean, CapEx was up significantly in 2018, went from $13 million to $26 million.

And as I said, I think we'll stay in about that same range for 2019.

I mean, we're building a $15 million plant, and so that will certainly be the biggest chunk of it.

But not all that money will hit in 2019, some of that will probably tail over into 2020.

But I think, yes, that's sort of the range we'll be in.

It's about the number for 2019, it's where the range we were in for 2018.

And as far as working capital goals, I think that -- I mean, obviously, there will be the addition of Dutch Power and this [would work] but right now, we ended the year with probably -- with a little too much inventory, I thought.

I think receivables were fine and in line.

I mean, no major changes there.

Maybe a little -- it should trend a little bit higher with the sales trend.

But I think the inventory, we believe, excluding the effects of Dutch Power, that our inventory, even with some modest growth, ought to come down.

In 2018, I think our inventory -- certainly, sales were growing, and so the inventory grew.

And due to some longer lead times on some items, we probably -- our inventory got a little ahead of us.

And I think that we need to do a better job in 2019 of inventory management.

And so like I say, you can list some organic growth, but I think inventory needs to come down, like I say, before the adjustment for the addition of the Dutch Power.

So working capital should be similar to a little bit less than what it is today.

And our next question today will come from (inaudible) with [Waltz, Holsen and Company].

Can you give us a little bit more background on the Dutch Power deal?

How did that come about?

It sounds like you knew about them previously when you did the transaction in Brazil.

Yes, we've known about this contract.

I mean, they're a little -- like almost a smaller version of Alamo, that they've got about 4, 5 companies in there, a group, all sort of in the same areas we're in.

Like -- So they've got some fairly unique stuff on some underwater cutting for underwater vegetation maintenance.

But yes, we've known them for a long time.

I think a couple of the units they own, we've tried to buy over the years.

And they -- so I think we've been -- as with several opportunities, I mean, we've been in touch with them for the last several years.

I think just the timing got right.

Their ownership structure, they have some private equity in there that, I'd [like to] say, that was -- sort of fit their timing, that we were finally able to get together on a valuation.

The fact that they were now willing to talk, and we were able to get together on a valuation, this deal was more of a -- a little bit more of a negotiated than an auction-type deal, which we tend to do better, like staying with the companies that we've identified, stayed close to and try to negotiate, like I say, where you can actually really discuss the synergies and get closer to them.

But it's -- they're in our space, though.

It's not -- and there's -- they've been on our radar, we've been in touch.

It's just that the timing started working out when we started discussions in the second half of last year.

Okay.

That's helpful from our understanding.

You guys break out the investment in the rental fleet as a important capital item.

About $22 million in 2018.

And it sounds like there's been some pretty good demand there.

How should we think about investment in the rental fleet in 2019?

It should continue to grow.

You -- We have -- that's the one area of our business we actually have our own rental operations and everything.

And that's been a nice -- if you go back over the last decade, that's been a nice growing business.

It's only been part of us since 2014 when we bought the Super Products -- or that's part of the specialized acquisition.

They -- in 2016, that business, we did see a slowdown because a lot of this rental activity is in nongovernmental.

It's one of the few parts of our industrial business that's sort of focused on nongovernmental.

It's more the contractors for various -- whether it's oilfield, mining, construction industries so that we're leasing vacuum trucks.

And when all those slowed down in 2016 and all, we actually reduced the fleet and kept our utilization nicely.

But then sort of starting last year, we started improving at the end of '17, and we started having to rebuild the fleet, and we actually had a little -- actually, I would have liked to have more investment in that, but we had the -- in 2018, probably had -- like I say, with demand for the products growing in general, we couldn't meet end user customer demand and build our rental fleet as fast as we would like to.

In 2018, we opened 2 new branches, which was further added to the need for more equipment, which is why, like I said, I actually liked to have done more.

We're -- we probably only have the 2 new branches up and running fully by this year, but it probably -- open at least one -- at least another one, if not more, so we're going to continue to invest in there.

So like I say, it was growing the fleet to make up for where we had kind of cut it back during the softness plus adding new branches.

And like I said, we're still not where we need to be and will be -- so the fleet will continue to grow into 2019.

Should we expect $20 million of investment there?

I mean, not at the same level we grew it in 2018.

I don't think -- I mean, if we end up doing more on the branches, that it could.

But like I say, it will grow probably not at the rate it did in 2018.

Okay.

That's helpful.

You spent some time discussing the Wisconsin project with the Super Products, the $15 million capital project.

Can you help us understand what we're trying to accomplish there and what the economics from a return perspective are of that project?

This -- I mean, we've actually said -- stated that, literally, since we bought Super Products in 2014, that they were operating out of 3 separate locations in the greater Milwaukee area.

We've said we wanted to bring that into one from day one, and we've been looking at options.

Kind of at this point, it took us so long to get to this point, but we were hoping we could expand one plant, 1 of the 3. The one we opened, there was not enough land.

We've looked at trying to buy an existing facility and never really could find one.

We kind of -- we wanted to stay in that area just because of the talent we have and the skills we have, that we have good -- like good people and good talent.

We wanted to build on that.

But we -- like I say, we're not able to find a facility that met our needs, so I mean, finally, we settled on a greenfield prospect about 10 miles further west from where most of the others are located.

And so the -- this facility that we're building will give us the capability of bringing in all of our production there together.

And even right now, like I say, there's a very good payback on this because by operating out of 3 facilities, I mean, we're building in -- stuff in one and then transporting it and have to assemble somewhere else.

We're -- We don't really have a good paint system and are outsourcing all the painting.

And we're doing painting after assembly instead of before assembly.

And so -- which, in our business, is not the way to do it.

So we're going to have a now more efficient system.

So we're actually -- we feel, even though this is a major capital investment, the project, the return is actually quite good.

And there will be margin enhancements.

Like I say, we don't give forward-looking numbers, but we believe this will have a very nice return on investment and a good, quick payback and lead to margin enhancement for their products as well.

So we're excited about this.

It's overdue.

And that's, I mean, one of our stated goals, and if you look at our investor presentation, is to have fewer, bigger plants, and this is just another step in that.

We've consolidated at least 10 plants in the last decade.

And like I say, this will allow us to take 3 into 1 and really go in -- and we have got a few others that we need to pursue along this line as well.

And I'm still relatively new to the company.

How do you define a quick payback?

I think other people might define it as like 2 or 3 years.

Is that a good [player book]...

Yes, most CapEx is, I mean, 2 or 3 years.

A whole new plant's not.

But I mean, this one certainly less -- is more like in the 4- to 5-year range.

Okay.

Excellent.

And then you touched on it a little bit earlier in some of your comments, but we're addressing some of those issues in France.

Can you kind of just give us an update in terms of where we are?

I believe there was a discussion in the past about the new executive there helping the plant.

We had some product that was being outsourced, and we had some customers that had some inventory that we had built, but they had not yet taken it.

Can you just kind of update us on those 3 items and where we stand, and what further needs to be done?

Yes.

No.

I think that, yes, the outsourcing issues, I mean, we're excited, they seem to be -- have improved for now.

Though, like I say, that's something -- I think it was -- I blame ourselves more than -- as much of the outsource that we just want on top of it or not.

But I think that's the important thing, not that we didn't solve the problem now, but that we made sure that it doesn't happen again, that we're staying a little closer to these vendors and knowing what's going on.

We were actually -- we were in the middle of a bit of a plant expansion there.

Last year, we actually expanded one facility, put in a brand-new fiber laser, material handling and also a press brake and everything.

So I think that helped too, that we had some distractions going on with some internal expansion.

We have -- so I think that's okay.

I think we're a little bit better staffed right now.

I mean, in France, we're probably a little bit reluctant to hire staff just because like, in the U.S. or even in England, I mean, it's easier to -- the walls are such that it's easier to change your workforce in the short term, whereas in France, it's -- you're hesitant to hire people that you don't think is going to be long term because it takes longer and costs more to rightsize your workforce.

But anyway, I think we've -- our staffing is adequate, I think our outsourcing's better.

We -- like I say, that was sort of an anomaly that the customer said, "Hey, don't ship me that equipment this week.

I want it next week." Well, I mean, usually, that's not a problem, but it is when it's the last day of the quarter.

So like I say, I think we said, "Hey, we need to be a little bit more focused on --" but like I say, that was -- there were -- like I say, that would just added to the situation, which was normally shouldn't have added to the situation.

Other than that, I mean, right now, that unit actually has a good backlog.

Some of it's -- like it's -- they've got some big orders, which I think are a little bit less margins than we would ideally like because I mean, there's been inflations since the big orders are -- they're good, but they take time [to deliver].

I mean, if you got a backlog that's going out over a year, I mean, you worry about cost of -- the fact that -- if there's any inflation in that.

So that's -- like I say, some of our asset, when I said that this could -- continue to affect us a little into -- even in the -- into this year, it's because some of the backlog's a little bit lower margin then we would like.

But I think more of our operational issues are behind us.

And that's a good operation.

Like I said, it's a good thing.

They do have good -- they have a well-received product.

They're very nice products and very well-received.

But then that's why I've said, to be honest, most of the issues I think we had there were our own issues, not necessarily the market.

It's us.

And I think the good news is that I think we have the ability to do something about them, regardless of what the market does.

Thank you.

And at this time, we have no further questions in our queue.

I would like to turn the conference back over to Mr. Ron Robinson for any additional or closing remarks.

Okay.

No, again, thank you very much for joining us here today.

We appreciate -- if you -- anybody have any further questions, feel free to contact us.

And we look forward to speaking with you on our 2019 first quarter call in early May.

Thank you very much.

Have a good day.

Thank you.

And again, ladies and gentlemen, that does conclude our conference for today.

We thank you for your participation.