Alamo Group Inc (ALG) 2019 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Alamo Group Inc.

Second Quarter 2019 Conference Call.

(Operator Instructions) This conference is being recorded today, Thursday, August 1, 2019.

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

Please go ahead, Mr. Rizzuti.

Thank you.

By now you should have all received the 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 9760087.

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 will 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.

Thank you, Ed, and we want to thank all of you all for joining us here today.

Dan Malone, our CFO, will begin our call with a review of our financial results for the second quarter.

And then I will provide a few more comments on the results.

Following our formal remarks, we look forward to taking your questions.

So Dan, please go ahead.

Thank you, Ron.

Second quarter 2019 sales of $285 million beat the prior year second quarter by nearly 11%.

Year-to-date sales of $547 million were up over 10% compared to the prior year first 6 months.

Excluding the impact of the Dutch Power acquisition, organic sales growth was over 5% for the quarter and just short of 7% year-to-date.

Industrial Division second quarter 2019 sales of $168 million represented a nearly 12% increase over the prior year second quarter.

First half sales of $326 million were up almost 16% over the prior year first half.

All product groups, except governmental mowing equipment, contributed to this division's continued strong organic sales growth.

Agricultural Division second quarter 2019 sales were $55 million, down more than 6% from the prior year second quarter.

First half sales of $108 million were down 8% from the prior year first half.

The prolonged downturn in the U.S. agricultural economy continues to negatively affect demand for new equipment.

European Division second quarter 2019 sales were $62 million, up 29% from the second quarter of 2018 but essentially, flat in U.S. dollars without the effect of the Dutch Power acquisition.

First half sales of $112 million were up almost 18% over the prior year first half, but down slightly in U.S. dollars without the acquisition.

Excluding an unfavorable currency translation effect, this division's local currency organic sales growth was about 6% in both the second quarter and first half of 2019.

Second quarter 2019 gross margin of $73 million grew 10% over the prior year second quarter.

Our second quarter gross margin was 25.6% of net sales, which compares to 25.8% of net sales for the prior year quarter.

In the second quarter of 2019, we saw significant easing of the margin compression we experienced in the second half of 2018 and the first quarter of this year.

We began to realize the full benefit of prior year pricing actions as well as lower steel cost, and we saw a better mix of high-margin aftermarket part sales.

Partially offsetting this improvement was the negative leveraging of lower volume in the Agricultural Division and the shipment of some thin margin backlog at one of our French businesses.

Second quarter 2019 operating income exceeded $29 million and was about 10% higher than the prior year second quarter, primarily due to strong Industrial Division organic sales growth as well as the factors affecting gross margin already discussed.

Second quarter 2019 operating income was 10.3% of net sales compared to 10.4% of net sales for the prior year quarter, again, a much better year-to-year comparison than what we've seen in the past 3 quarters.

Net income for the second quarter of 2019 was almost $21 million or $1.75 per diluted share, which favorably compares to the prior year second quarter net income of nearly $19 million or $1.60 per diluted share.

Second quarter 2019 EBITDA was $36 million, up 12% over the prior year quarter.

Trailing 12-month EBITDA now exceeds $130 million and is up nearly 5% over the comparable prior year results.

Second quarter 2019 net cash provided by operating activities was above $30 million, which compares favorably to only $400,000 of operating cash flow in the prior year second quarter.

This improvement is due to earnings growth, combined with reductions in receivables and inventories.

While whole goods demand in the Industrial Division still applies upward pressure on working capital needs, we've managed to improve working capital turns while working to reduce a high order backlog.

Second quarter 2019 investing cash flows were highlighted by $7 million of capital spending, which is now, year-to-date, tracking above prior year levels as planned.

Due to the Dutch Power acquisition, debt net of cash increased almost $43 million over the prior year second quarter.

Excluding the acquisition, debt net of cash would've been about $10 million lower than prior year.

Our order backlog remains at a very healthy level, ending the second quarter at $229 million including the Dutch Power acquisition, which is about 8% higher than the prior second quarter.

Without the acquisition, backlog increased about 3% year-over-year.

While the backlog decreased $30 million during the second quarter, this was mainly due to improved output as new orders, excluding Dutch Power, were up slightly year-over-year.

In summary, our second quarter 2019 results were highlighted by record second quarter sales of $285 million, up almost 11%; record second quarter net income of almost $21 million, up over 10%; record second quarter EBITDA exceeding $36 million, up 10%; near full recovery from last year's margin compression caused by rising input cost; second quarter operating cash flow exceeding $30 million, up from just $400,000 in the prior year quarter; and a healthy quarter-end backlog of $229 million.

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

Thank you, Dan.

And again, thank you all for being with us on this call today.

We are pleased to report that the current fiscal year is proceeding nicely, and that we once again had record sales and earnings for both the second quarter and year-to-date.

And as I noted in the press release, we feel particularly good with these results, given the variety of challenges with which we had to continue to encounter during the quarter.

Certainly, the strong performance by our Industrial Division was the key to our results, and we are pleased the products in this group continue to exceed our expectations despite tariffs, inflation and even signs of some general economic softness.

But we feel the strength and stability of our core markets has remained buoyant and been helped by our solid level of backlog, which continued to be strong, which also makes the balance of our outlook for 2019 looks promising.

Our other 2 divisions have each faced a little more adversity, but I believe they are both performing reasonably, given the conditions they are dealing with.

Certainly, our Agricultural Division is being hampered by the overall weak market, with farm incomes still challenged by soft commodity prices.

And on top of that, I think adverse weather conditions have had a negative impact on the whole farming community in North America this year.

While our sales in Ag are down, we believe we have held up a little bit better actually than the market itself.

And we're finally encouraged that there are some signs emerging of some market improvements and some strengthening in certain commodities.

And though it's early to tell that this trend will continue, at least it's looking in a positive direction.

Our European operations have also been affected by some weak market conditions as the general European economies have been a little bit softer than North America.

And this was made even worse with our results by unfavorable changes in currency exchange rates.

So whereas we were up on -- in Europe without the acquisition, in local currency, we were slightly down in U.S. dollars.

And as we reported, there were -- we even had a few internal problems as well as a result of some low margin backlog in one of our French operations, though -- and we should have -- we still have a little of that left in our backlog.

But most of that should be finished in the remainder of that order in the third quarter, so it will be behind us.

But certainly, the soft European economic conditions and unfavorable currency exchange rates will continue to hamper our results for the rest of 2019.

And who knows what the ramifications will be as a result of the latest rhetoric we are hearing on the Brexit negotiations.

It certainly looks like that situation, after the last several years of uncertainty, could be headed towards a fairly dramatic conclusion with unknown repercussions.

But we don't like to -- I think we feel good about our position under any circumstances, but it's the short-term implications that we are concerned about that if there is -- the uncertainty that will create.

Fortunately, our European operations have also been aided in the -- by the acquisition this year of Dutch Power.

They are a very good fit with Alamo and feel they will prove to be a nice addition for us, not only this year but for years to come and, I think certainly, will give our operations there a boost this year.

And it's also pleasing to note that acquisitions in general are one area where we feel some economic softness is actually a bit of a benefit since lofty valuations have hindered our efforts in this area during the last few years.

We are pleased that the M&A activity for us actually remains quite buoyant and feel more opportunities we are looking at should be within a valuation range we feel is actionable for Alamo Group, so the pluses and minuses of some softness.

Similarly, due to some overall economic softening, we're seeing a lot less inflationary pressure, particularly in purchase components being much less of a factor than they were last year when we saw a fair bit of inflation.

This is being led by actually real declines in areas, such as steel, which are -- which prices for steel are well below what they were a year ago.

And we are just now starting to realize, since there's usually a lag effect between how we actually -- price changes in steel, when they go up or down, there's a bit of a lag effect in the way we buy steel before it really hits our results, so we feel that the reductions in steel price should really benefit our results much more in the second half of the year than they did even in the first half of the year.

And I think managing input costs are just one element of our ongoing operational improvement, initiatives, which we have actually been accelerating in the last few years.

Certainly, we've announced things like the new plant we're building in Wisconsin for the consolidation of our Super Products operation is another major element of this ongoing operational improvement plan.

And while that -- we have some big ones like that, I think we have a number of smaller projects, which we feel cumulatively, should continue to help our ongoing margin improvement efforts.

I am very pleased and anxious with the process -- with the progress we are making in that area.

We feel these ongoing initiatives to improve our efficiency are the real key that has allowed Alamo Group to produce record results despite a variety of ongoing challenges.

And while we certainly do not know what challenges we're going to be facing tomorrow, whether it's more tariffs or Brexit or adverse weather conditions or economic softness or whatever, we feel that with continued focus on our own internal operations and reacting quickly to any changing market conditions or any changing external conditions, the outlook for our company remains very positive.

And we feel good about where we are and feel good about the outlook for Alamo Group for the rest of this year and for next year as well.

So we want to thank you for your support in this journey.

And with that, I would like to entertain any questions you may have.

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

Wanted to ask you on the backlog.

It has slowed quite a bit from a year ago, but I also wanted to ask just theoretically how sort of important can you see that as an indicator for your business?

If you go back to the first half of last year, your backlog was up 50%.

And it really didn't translate, certainly anywhere as close to 50% revenue growth in the back half of the year of last year.

So is that -- how much weight should we put behind that metric?

And if it's not that quite important, what are you looking at that, I guess, provides you with relatively positive outlook that you just provided?

Yes.

Certainly, backlog -- I mean, it's important that we have a reasonable level of backlog to help in our production planning.

But as I've said a few times, I mean, I don't like it to be too high because that usually means that our lead times are lengthening, and we don't want to get our lead times too far ahead that, I mean, we think that could have a negative implication on future sales, like if we're not able to respond quickly or rapidly.

So -- and like I say, this quarter, I mean, during the quarter, as Dan pointed out, actually while we're up -- backlog is up from where it was this time last year, it actually went down a little bit in the quarter.

But actually, our booking -- I mean, our sales were quite strong so the bookings were actually stronger than the -- bookings were stronger than our sales, which is a good -- I mean, that is something.

The other thing you got to remember, things like our highest-profit sector, spare parts, spare and wear parts, don't go through backlog.

So I mean they are -- since the deliveries of those are usually in very short term, I mean almost 1 to 2 days, I mean from when the 80% of our spare parts orders come in.

So like I said, it's important for planning.

But like I said, I don't like it to get too big.

We think it's at a healthy level and to support our operations.

But yes -- but as you said, it's not like we say, okay, well it went up a bunch, so our sales are not going to up a bunch tomorrow, but it provides a good, stable base.

But like I said, we actually don't want it to get too big.

Yes.

I mean backlogs on the industrial side, that's kind of our vision forward for the next few months.

And certainly, they are very healthy on the industrial side.

There is a normal seasonality in the Ag side to backlog because of the preseason programs and that sort of thing.

So just last year, you probably didn't see it as much just because the industrial groups were a bit more -- booking such big orders during that time.

But it feels more of a normalized order flow at the moment.

I mean if you look at -- if you back out the acquisition, the backlog is still up a bit.

The new orders are up a bit compared to last year, and last year was very strong.

Okay.

And you saw really good margin expansion at the industrial segment.

That segment specifically, is there any sort of maybe not necessarily quantifying, but just trying to get a sense of how much was volume-related, price-related, productivity improvement-related?

If there's any color that you can provide on that.

Well, as you said, it wasn't one thing, it was a number of things.

There was certainly volume, which was very beneficial.

There was certainly -- I mean another thing you didn't mention was the price variances.

Last year, we had negative purchase price variances due to the like higher inflation of input cost.

This year, it turned and it was a positive contribution to margins.

So -- and that was another major effect.

I think those 2 were, like I say, volume and input costs were probably the 2 biggest contributors.

Right.

Well, and the full effect of pricing.

Yes.

Well, last year, yes, we were -- as a result of the higher input cost, we were raising our prices more last year.

Some of that, we felt last year more than we actually have felt this year.

Yes.

So the major difference between Ag and industrial is that industrial was getting favorable volume effects and the Ag, while they were getting the favorable effects of pricing and lower steel, they have -- they had a negative volume effect.

So that's why you saw industrial expand much more (inaudible).

We just -- we've seen such a volatile last 4, 5 quarters with pricing.

Just trying to get a sense of how much pricing and how much volume really.

So like of the 12% revenue growth at industrial, is it half pricing, half volume?

Or how can we think about sort of -- I'm just trying to think of what organic volume is these days.

We don't really break it down quite like that.

We think it was more volume than price on the industrial side.

I mean it was the -- that sort of growth we didn't get...

Volume would be first, costing would be second, pricing would be third.

Okay.

Okay.

And then on the Ag side, I mean same type of thing.

What is sort of the volume like relative to pricing?

I mean is volume -- I assume you got a little bit of price on the top line.

So is volume down high single digits?

Or how can we think about the volume there?

The volume is down mid-single digits even -- we got some pricing -- I mean so...

Yes.

I mean it's between 5% and 10%.

It's I would say high single digits, the volume would be.

And we got to offset some of that with price.

And then we got a little bit help on the margin line with the lower steel cost.

And in terms of that, I wanted to ask, because I think steel is -- especially at the agricultural segment, that's a big component compared to maybe some of the other products or business categories.

Have we just started to feel that tailwind of price cost with steel prices coming down?

Or have you been feeling that?

Do you get more of a benefit in the back half of the year?

We're going to get more of a benefit -- yes, we're going to get more now, especially if you're doing quarter-to-quarter, prior -- comparing current year quarter to prior year quarter, we did a great job of delaying the steel cost increases, particularly in the Ag division to the second half of the year.

So number one...

Last year.

Last year, last year.

So number one, the comparison gets a lot easier there.

And then number two, it's come down quite a bit from that high second half steel cost.

So second half of the year, the year-to-year comparisons are going to be a lot better on steel cost.

Yes.

That's right because we have about a 60-day delay.

For some units, it's as little as 30; others, it's up to 90.

But on average, about a 60 to little more than that day delay from when steel prices go down to when we feel the effect.

The same thing on the upside.

So I mean that's why we're going to feel a lot -- I like to say steel prices went down dramatically in the first half, but we're going to feel it even more dramatically in the second half.

In the second half, yes, because of the delaying mechanism.

And then plus when they went up last year so it's going to be better (inaudible)

And then I mean, I imagine the volume probably gets better for -- I mean, theoretically, you're just thinking potentially how it plays out.

That volume starts to improve probably in the third quarter and accelerates especially if we get the Ag year that we are thinking in 2020.

And also with the -- you're going to have pretty good comps, pretty easy comps in the first half of next year.

So do you see that as a likely scenario?

Is that what you're sort of thinking?

Yes, well, I mean when you say second half, I mean that the volumes get better.

I mean third quarter, particularly it usually is when we're most profitable, especially in the Ag sector, because there is much -- because the spare parts sales are the highest level there.

So that's not as much volume as it is mix since that's our highest mix.

But comparing it to last year, I mean last year Ag was okay.

The first half of the year, they really fell off the second half, so the second half, like I say, the comparables from last year's second half are going to be easier this year.

So I mean, yes, I mean we feel that the third quarter is -- should again in the ag sector, be one of our strongest for the year.

But the fourth quarter, there's always a little tail off because it is seasonal -- the seasonality effect.

Will the -- do you think the parts are weaker than normal in the third quarter so you don't get that as good of a mix just because...

No, no, no.

They are actually stronger in the third quarter.

And I think, yes, we think they will be somewhat in line with last year.

Would they compare to sort of a normal year, because farmers weren't out in the field as much early in the year, so there's not as much maybe equipment usage this year compared to prior year?

So maybe you don't get as much kind of (inaudible)

We certainly see that.

I mean, what acreage is under cultivation this year is supposed to be down about 10% because of weather.

That certainly will have an effect.

And -- but we are seeing and like I say, I mean we're actually seeing bookings sort in the second quarter this year in ag being ahead of the previous year.

And so I mean we're actually entering the third quarter with a little bit more Ag backlog than we had even last year.

And Joe, going into the third quarter and fourth quarter, when we get -- Ag does their preseason program, so they take orders and they're stronger per units.

And so as you enter Q4 and Q1, which are seasonally, because it's colder, the parts are lower, then you ship whole good tire there, so our margins are down a little bit on those 2 quarters.

And that's pretty much the way it's always been.

But year-to-year, I don't -- we're not feeling like there's a continuing negative trend.

No, because we kind of felt the fall off.

I think you can look and see what the pattern was this last year.

And we are seeing some signs that we are not at least seeing a continuing decline in the Ag demand.

Our next question will come from Chris Sakai with Singular Research.

Just a question on -- I got just a question on -- I get -- what were your best products for the industrial -- your industrial segment?

And why they do so well this quarter?

And do you see them doing well next quarter and for the year?

Some of our best products in the second quarter industrial were like excavators, had very good vacuum trucks and street sweepers.

Those were probably our 3 strongest and 3 of our biggest.

So I mean it was good that they all -- and I think they all just seems like -- because their core markets were stable and strong.

I mean I think we've been helped a little bit by some new product introductions.

But -- I think we executed well in those areas.

Certainly, snow -- actually, snow was up, but snow -- but it was still sort of weak because the second, third quarters are sort of weak for our snow businesses even though I like say it was up, but it was weak.

But surprisingly, I mean their backlog there is actually nicely -- well above.

And I think as going into next season, they benefited by some strong snow in last season.

Our mower groups was our certainly one of our top performers, held very steady.

They did see a little softness, I think -- I mean sales were fine on plan and everything, but I think bookings there were a little softer as -- and we're not -- it's sort of too early to tell why.

We think sometimes due to the heavy winter, then some of the -- I mean municipalities and government spent more on winter.

And so 2 things: they were later getting into the field to start mowing, and maybe they used up some of their budgets in the winter as well.

So we'll wait and see how that continues to develop.

But across the board, we were -- did very reasonably.

But as I said, the Super Products and VacAll, our vacuum truck units, our Gradall units, our Schwarze sweepers, all did quite well.

And the vacuum trucks really not only benefited by I think good governmental business, but strong nongovernmental.

And we've seen some nice -- continuing growing in some of the nongovernmental applications for vacuum trucks, everything from vacuum excavation opportunities and other just on construction, mining, utility, other kinds of end users that have held up well.

But -- so it was pretty broad-based improvement in industrial.

Okay.

Great.

And then one last -- one question.

I thought the European Division was going to be, I guess, consolidated into the 2 other divisions.

Is that, right?

Am I right there?

Or -- and when is that...

Yes, we announced that, that would happen in the fourth quarter this year.

I mean the -- when we announced that last quarter, we said it would happen beginning in -- at the end -- in the fourth quarter.

So up until then, we will still be reporting as we have historically, we'll -- and when we do that, we will give a whole reconciliation of that change.

So we'll report the third quarter.

Earnings release will be, Chris, in the 3 segments, year-end when we do the fourth quarter and our 10-K at the end of the year, we'll report the 2 segments.

Our next question will come from DeForest Hinman with Walthausen & Co.

Congratulation on the good quarter.

Looking at the balance sheet, last couple of quarters, the inventory even growing a little bit more rapidly than sales.

I know we have Dutch Power in there as well.

Can you just have a discussion about the level of inventories?

Are you comfortable with them as it relates to this outlook?

And where should those be heading directionally as we head towards the end of the year?

That's my first question.

Inventory levels are too high, I can tell you that.

And yes, you're right, I mean, there was Dutch Power in there with sort of -- had an effect.

But we believe that could -- that they should be -- they should go down for the rest of the year compared to previous levels because, yes, as a percent of our sales or our assets, inventory is too high right now.

And...

Yes, and we -- if you look at the cash flow statement in the 10-Q, you can see that we've kind of turned that now.

And we -- in the quarter, we started to reduce the -- if you exclude the acquisition, we have began -- begun the process of reducing inventories and even receivables.

So we generated in the quarter -- we were -- if you look at the first quarter cash flow statement, we were negative $29 million cash used by operations.

We are now positive nearly $900,000.

So we generated over $30 million in cash during the quarter, and that was not only higher earnings.

That was also a little bit of reduction in receivables and inventories.

So but -- and we -- I expect by the end of the year, on a year-to-year basis, we will be reducing inventory for the next 2 quarters.

Okay.

That's very helpful.

In the 10-Q disclosure we're showing a nice improvement in part sales, parts actually growing at a higher rate than the total revenues.

I'm sure there's a number of puts and takes there.

Can you just help us better understand why are parts so good in the second quarter?

Probably because they were weak last year.

I think they were a little weaker last year than they should have been.

But -- and yes so -- and I think we put a little more effort.

Certainly the acquisition helped that, too.

But...

Acquisition helped most of it there, but our parts usually in that second quarter and third quarter, DeForest, will be higher than the other 2 quarters.

Okay.

So some initiatives but not -- no real changes from us or from a competitive standpoint that would move parts drastically.

Yes.

But you're right, that the mix was a little better comparing to the prior year.

And some of that is even because, like especially in Ag whole goods sales were down more.

In Ag, part sales held up better than whole goods sales.

Right.

One other thing that I noticed in the 10-Q disclosure, is that you further delineated your geographic sales.

I'm going to guess that some of that's related to the Dutch Power deal.

But a couple of things stood out to me.

Your Chinese geographic sales have meaningfully increased, and you've also had a pretty nice increase in your Netherlands sales.

I think I understand that very clearly with Dutch Power.

And your Germany sales have moved up sequentially as well.

And that's been an area where there hasn't been a lot of growth, but it looks like it's a pretty big market.

So at a very high level, can you just start to walk us through the opportunities in Netherlands, in China, in Germany as we've had Dutch Power on our books now longer?

What is the opportunity to either grow SKUs in those markets, grow distribution?

What's that opportunity?

Can you just help us understand that?

Sure.

As you said, the whole Netherlands and most of the German improvement was all Dutch Power because, I mean, Dutch Power is not -- of course, Netherlands is their home market, but Germany is one of their biggest markets, too.

I mean the majority of their sales are in Europe, but they are really sort of more in Central Europe.

And certainly, the Benelux countries, Germany, and all our good markets were down.

And we believe -- I mean certainly, obviously, is the we just -- like the second quarter was the first really -- I mean the first quarter we had very little Dutch Power sales in it.

Second quarter had a lot.

So yes, we think that the -- like, so that will -- it'll be more like at those level going ahead.

And we think we can improve it a little bit more because that's one of the benefits of Dutch Power.

They have better distribution in the sort of the Benelux and in Germany than we have for some products, and we will try to utilize down to really strengthen our position in those markets.

So we see those as -- continuing to be big markets for us.

The China thing was mainly actually snow removal.

We had some big orders in China on snow removal, mainly from some of our Canadian operations, our Tenco and our sort of R.P.M.

acquisition, which is just a couple years old itself when we bought that in 2017.

So -- but R.P.M.

and Tenco both had -- and they typically had some very nice orders from China over the years, but the Chinese orders tend to come in lumps.

I mean, so it tends to be big ones then -- so we had some very nice wins already this year and still have a good backlog actually of orders going to China.

So -- but it's -- China is not -- like I say, we don't sell a lot of other stuff.

I mean I know our Gradall, we'll sell some stuff there and we sell some odds, sweepers there.

But on snow removal, actually, we've got is -- like I say, that the majority of that snow removal and we believe we still -- there'll be some more of that.

And that China has been and will continue to be relatively decent market for snow removal.

But like I say, it's lumpy.

I mean it comes in big chunks, and so...

DeForest, one other thing.

In the other category in that geographical location, that other is there is no one country that's greater than $1 million, okay.

So we will always list something that's greater than $1 million on our list.

Okay.

That's helpful.

Maybe just a different way to ask that question.

On that Netherlands business, $10.1 million.

When I think about the France business, I think that has a lot of vac truck business.

Are we selling vac trucks in the Netherlands right now?

And if we are, is that a meaningful...

No.

I wish we would.

We are trying to -- looking at ways of getting better distribution there.

And Netherlands is -- like, it's half underwater.

I mean they are -- vacuum trucks are actually -- there's some local competition there that have -- are big players there.

So we've actually not done very much from our Rivard French vacuum truck business into the Netherlands.

We're trying -- and that's one thing we hope maybe with the Dutch Power or distribution, we can maybe help that a little bit.

But like I said, it's a decent market for vacuum trucks, even though it's sort of a small country.

But there is also some pretty well-established competition in that market.

And kind of the same question for Germany on vac trucks.

Germany is a little different.

We don't -- again, we don't do much in Germany with vacuum trucks either.

Again, I think there's a potential and we'd like to, but -- and Germany I think there's a couple of German competitors, but I think it's a more open playing field than the Netherlands market is.

And so yes, I mean I think there is some potential that we just really not had the right distribution, and we're hoping that we can get that a little bit better.

But yes, I mean -- and in fact, we've got some initiatives to, I think, improve the export sales of Rivard in general that they can out of sort of Southern Europe, they have in their stronghold in France and a little more involved in Central -- in Northern Europe.

(Operator Instructions) Our next question will come from Chris Moore with CJS Securities.

Maybe just to start with the lower-margin backlog in Europe, did any of this impact Q2?

Yes.

Yes.

Yes.

We've been impacted by that really for about the last 4 quarters, like the last half of last year and the first half of this year.

And like I say, still hit us a little bit in the third quarter but most of that will probably be pretty gone.

Because we had 1 big order that like it was a lot of our -- we really had our plant -- took up half our plant on some orders that were in retrospect, lower-margin than we thought.

And we've now made some safeguards to ensure that we don't do that again.

Got it.

So from a margin standpoint, it sounds like there will be less of this backlog flowing through on Q3 than Q2?

And it's going to be finished in Q3.

Right.

Exactly.

Got it.

You talked quite a bit about backlog before.

Want to bring it down or if -- are you experiencing increasing lead times with any products at this point in time?

No, not really.

And In fact, I mean part of our inventory issues were because last year, somehow -- on the input side, we had some long lead times from suppliers.

So but this year, our lead times for us, I mean I think we're holding lead times pretty steady.

There are a few exemptions.

But basically, our lead times are pretty steady and have not -- of us to our customers.

Even with some places where we got some strong backlog, it's not impacting our lead times very much at this point.

So we feel pretty good.

And it's good that they are on the purchasing side, the buying component side, I think lead times for those have improved a little or -- and certainly have not gotten worse.

So I mean, whereas last year, at this time, they were getting worse.

So -- but yes, on the input side, the lead times have come down a little then -- and our lead times have stayed the same or come down a little.

Got it.

That's helpful.

And in your prepared remarks, you talked about indications of market softening in the U.S. economy.

Anything specific that you were thinking about with respect to your core industrial products that could be impacted?

Or was just kind of a general statement in terms of overall...

No.

I think it's kind of a general statement.

I mean like I say, some of that's even good because we're seeing like, say, freight and trucking availability has gotten better.

I mean, like, it was hard to get trucks last year.

That's gotten better.

So I think lead times, as I said, on even things like truck (inaudible), some other input components have gotten a little bit better because they're -- like I say, they are not being -- like I say, their sales, our suppliers sales are -- have softened a little bit.

So -- this is, I mean, everything you read in the paper these days, I mean, there's just some slight indications of some softening in the general economy.

And even things like -- it's interesting, we always seem to have -- there always seems to be a slight dip in governmentals in election years.

And you got an election year coming up next year, just -- I think it's because -- it's not -- it's just a distraction almost and it's not almost at the federal level.

But even at the state level where, like I say, if one party comes or goes, there's a little bit of a delay in some orders.

So -- anyway, it's a few little things, but like I say, we're holding up well, our backlogs are decent and I mean we feel good.

One response to one of the earlier questions, I mean inquiry level for us is still quite buoyant.

And we feel good that it's not just what's in backlog, but our quotation activity is remaining quite buoyant.

Our next question will come from Joe Mondillo with Sidoti & Company.

Just one follow-up question.

Just wanted to ask regarding your CapEx projects and all the smaller productivity improvement initiatives that you sort of generally consistently focus on.

But it seems like you certainly have a lot on your plate, which is a positive thing right now.

So I'm curious, it seems like you're getting pretty good margin expansion aside from the volume, some productivity improvements this year.

But we have those 2 big CapEx projects that should be done by the -- some time in the first quarter, by the second quarter of next year, which should start to really benefit margins in the second half of the year.

So I'm just wondering if you think that the contribution from productivity improvement initiatives next year will be even greater than what you're seeing currently?

I think they'll be consistent, I'm not sure there'll be a lot because like I say, with us but it's in a lot of little things more than, like I say, we got a couple of big things.

But usually, it's a little bit from a lot of things rather than a lot from a little few things.

So I think it will be good.

Like I say, we're also being helped this year by purchase price variances and this kind of stuff, and so some of that will -- that's helping margins this year.

I don't know what's going to happen with -- if I knew what was going to happen with the input cost or exchange rates or something like that, I mean, some of the other things that can play into these kind of -- like variances on margins, I could -- but I think certainly, we ought to be at least in line, maybe a little bit better when these things come online next year and with some other initiatives we got.

I mean as we say, we're spending more on CapEx even on just normal improvements at other plants, buying more -- a few more robots, a few more lasers, a few more CNC equipment.

So yes, I think it should be at least as good as and maybe a little bit better.

But there's some other factors going into it.

Okay.

It sounds like the visibility, at the very least, for an 18-month time period, if you go back over the next last several years, your visibility right now is very good when it comes to sort of productivity improvements.

Yes, that's right.

Probably is good or better than it's ever been.

(Operator Instructions) I am showing there are no further questions on the queue at this time.

Okay.

Well, thank you again for joining us today.

We appreciate your all's interest, and we look forward to speaking with you on our third quarter call at the end of October.

Thank you much.

Have a good day.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

You may now disconnect.