Alamo Group Inc (ALG) 2019 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to Alamo's -- Alamo Group's third quarter earnings conference call.

(Operator Instructions) This conference is being recorded today, October 31, 2019.

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

Please go ahead, sir.

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're 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 3380097.

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 be -- 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 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, acquisition-related issues, 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 for joining us today.

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

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

And following our remarks, we look forward to taking your questions.

So Dan, please go ahead.

Thank you, Ron.

Third quarter 2019 sales of $271.8 million exceeded the prior year third quarter by 5.5%.

Year-to-date sales of $818.9 million were up 8.8% compared to the prior year 9-month results.

Excluding the impact of the Dutch Power acquisition, comparable sales were up 1.6% for the quarter and about 5.1% year-to-date.

During the quarter, year-to-year sales growth slowed significantly in our Industrial Division, as both excavator and roadside mowing products were impacted by slower demand from state-level governmental customers, while weaker demand in certain nongovernmental customer segments negatively affected specialty excavator sales, mainly those machines used in steel mills as well as vacuum truck fleet -- vacuum truck rental fleet utilization.

Also in the quarter, the sale of used vacuum trucks out of the rental fleet dropped sharply, but this comp appears to be more due to timing -- the timing of these sales than -- rather than an unfavorable year-to-year trend.

As a result, this division sales of $158.5 million grew 1% over the prior year third quarter.

Despite the third quarter weakness, this division's year-to-date sales of $484.9 million are still up 10.5% over the prior year 9-month results.

The prolonged downturn in the U.S. agricultural economy continues to affect sales in our Agricultural Division, though the year-to-year decline narrowed some during the quarter.

This division's third quarter 2019 sales were $59.8 million, down 2.7% from the prior year third quarter, while year-to-date sales of $168.1 million were down 6.2% from the prior year 9-month period.

In the third quarter, our sales of higher-margin Flexwing mowers were particularly hard hit, which also caused an unfavorable sales mix.

Partially offsetting these unfavorable effects was a small sales contribution from the Dixie Chopper acquisition.

European Division third quarter 2019 sales were $53.5 million, up 36% from the third quarter of 2018, and up 10% without the effect of the Dutch Power acquisition.

Year-to-date sales of $165.9 million were up 23% over the prior year 9-month period and up almost 3% without the acquisition.

Excluding an unfavorable currency translation effect, this division's local currency organic sales was about 16% for the third -- organic sales growth was about 16% for the third quarter and about 9% year-to-date, primarily due to improved results from our Rivard vacuum truck business.

Third quarter 2019 net income was almost $17.4 million or $1.47 per diluted share.

Excluding acquisition cost and the effect of the Dutch Power acquisition, adjusted net income was $18.3 million or $1.54 per diluted share.

Third quarter 2018 net income was $23.5 million or $2 per diluted share.

Excluding a onetime favorable tax provision adjustment relating to new tax legislation, third quarter 2018 adjusted net income was $20.5 million or $1.75 per diluted share.

The remainder of my comments will address the differences between the current quarter and prior year quarter adjusted results.

Third quarter 2019 gross margin of $68.7 million grew 3% over the prior year third quarter due to the Dutch Power acquisition.

Excluding Dutch Power, our gross margin was essentially flat.

Our third quarter gross margin was 25.3% of net sales, which compares to 25.9% of net sales for the prior year quarter.

In the third quarter of 2019, unfavorable product mix, lower production levels, higher import tariffs and lower rental fleet utilization negatively affected gross margin and more than offset the benefits of lower steel cost, improved results from our Rivard vacuum truck business and a small gross margin contribution by Dixie Chopper.

Third quarter 2019 adjusted operating income of $25.6 million was about 9% lower than the prior year third quarter, primarily due to the factors affecting gross margin already mentioned as well as higher group medical claims, an unfavorable timing of management incentive comp approvals and increased R&D spending.

Third quarter 2019 adjusted operating income was slightly under 10% of net sales compared to 11% of net sales for the prior year quarter.

Excluding the prior year onetime tax adjustment, the third quarter 2019 effective income tax rate was 25% compared to 23% in the prior year third quarter.

This increase was primarily due to a shift in the pretax earnings mix toward higher-taxed, non-U.

S. jurisdictions.

Third quarter 2019 EBITDA was $31.8 million, down 6% from the prior year quarter.

Trailing 12-month EBITDA of $127.8 million is up almost 3% over the comparable prior year results.

Third quarter 2019 net cash provided by operating activities was $43.3 million, which is 38% better than $31.3 million of operating cash flow in the prior year third quarter.

This improvement is due to the seasonal liquidation of nearly $24 million in receivables and inventories in the third quarter of 2019, compared to the prior year quarter when increased working capital requirements, driven by high order backlog substantially offset the normal seasonal cash generation.

Third quarter 2019 investing cash flows included about $6 million used to acquire Dixie Chopper and $7 million of capital spending, which, as expected, continues to track slightly above prior year levels.

Due to acquisitions, debt net of cash increased $37.7 million over the prior year quarter.

Excluding acquisitions, debt net of cash would have been about $20.8 million lower than prior year.

Regarding our order backlog.

I'll remind you that last year, our Ag Division announced a supplemental price increase near the beginning of the preseason ordering period.

Dealers accelerated their orders ahead of the effective date of the increase, and this division took about $48 million more in orders in the third quarter of 2018 than they booked in the following fourth quarter.

By comparison, this division's 2017 third and fourth quarter new order bookings were flat.

Adjusting for this approximate $24 million timing effect, our third quarter 2019 ending backlog of $215.3 million is down about 5% from what it would have otherwise been this time last year.

Without the timing effect and Dutch Power acquisition, backlog has decreased about 8.5% year-to-year.

Third quarter 2019 orders of $247 million were 4% lower than the timing adjusted prior year quarter as higher European orders partially offset lower Ag and Industrial Division bookings.

In summary, the main takeaways from our third quarter 2019 results are: record third quarter sales of $271.8 million; slower new order bookings and lower order backlog in North America; earnings unfavorably impacted by product mix, production cuts and lower rental fleet utilization, which more than offset the benefit of lower steel cost and improved Rivard results.

However, slowing growth and production cuts pushed third quarter operating cash flow over $43 million and 38% above the prior year results.

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

Thank you, Dan.

And again, thank you for joining us here today.

As you all saw, our third quarter results were soft and below our expectations, but as we pointed out in our press release, last year's third quarter results had a large onetime gain related to U.S. federal tax reform, which on a comparative basis made our results look even weaker than they actually were.

In fact, that our third quarter results for this year if they'd been last year, would have been a record last year.

But certainly, we have been facing a number of challenges for the last few years, including the ongoing weak agricultural market.

The various repercussions from the continuing trade disputes between the U.S. and China, some adverse weather conditions and still unresolved Brexit situation.

In addition, the manufacturing sector globally seems to be slowing down.

And despite all these headwinds, which have been going on for several quarters, we have managed to grow steadily and produce record quarterly results for several years running.

And even in the third quarter of 2019, we had record sales, but obviously, not record earnings as the various challenges seem to all come together to impact our bottom line results.

While our sales was up -- were up, our mix was unfavorable as some of our higher-margin products, such as excavators and Industrial Division mowing equipment were slightly off.

And even in our agricultural sector, which remains weak in general, our product mix in the third quarter was also unfavorable as the market for our higher-margin products like Flexwing mowers was a little softer than lower-margin products like single-spindle mowers.

And we had hoped to get off to a little bit better start performance from our acquisitions earlier in this year, but unfortunately, Dutch Power is off to a little bit slower start than we had hoped and Dixie Chopper closed later in the year than we had anticipated or certainly later in the quarter.

So in fact, for the short period of time, they were with us in the third quarter.

We were literally consolidating them into our nearby Gibson City, Illinois operations.

So they [were] literally being integrated during -- for the couple of months we had them during the quarter.

But we continue to believe both of these will contribute well as we move into the next year.

In addition to the above, we seemed to have had a few more internal challenges than usual.

We had some delayed shipments at the end of the quarter.

Health care costs were higher in the quarter than they've been running historically.

Legal expenses were a little bit above average.

There were some inventory adjustments that were a little bit above average and a few other things.

I mean none of these in themselves were unusual or really of concern.

But in the third quarter, there just seemed to be more of them in total than usual, which impacted what was already a bit of a weak quarter.

And as we pointed out, there was more expense related to acquisitions in both the third quarter and year-to-date than is typical, which certainly impacted our quarterly -- third quarter results, but we also feel this is sort of the part of the good news too, or in the quarter, we completed the previously announced acquisition of Morbark just last week.

And this is a very exciting development for Alamo Group.

And in fact, for those of you who have been following Alamo for a number of years now know we have wanted to get into the tree chipper market for quite a while, and Morbark is a main player in this segment.

They offer a very -- a wide range of products that are very complementary to Alamo and expand our footprint in our existing and adjacent markets.

Plus, they are of a scale that will provide a meaningful addition to Alamo's results going forward.

And in addition, we believe they will bring a variety of positive synergies to our joint operations in everything from market coverage, manufacturing, purchasing and other areas.

And although, we feel Morbark will contribute meaningfully to Alamo's results moving forward, being part of Alamo Group for not even a full quarter with -- combined with integration costs and just starting to work on synergies, we believe they will not have very much of an impact for the balance of 2019 but should impact 2020 meaningfully.

And as we look to the balance of 2019, we remain concerned about some of the ongoing challenges we've been facing.

Certainly, agricultural market conditions are expected to remain weak for the balance of this year.

And overall, economic conditions seem to be softening, with, I think, several -- quite a few countries in Western Europe already in -- technically in recession.

And other parts of the world, South America, Asia seem to be soft.

And even in the U.S., there are signs, especially with the manufacturing, of some slowdown.

Certainly, the trade disputes with China and the U.S., the Brexit, the tariff situation, all these seem to be unlikely to be resolved in the short term.

But in spite of this, we actually feel reasonably good about Alamo Group's prospects.

We believe the actions we have taken in response to these conditions will benefit our results.

And we also feel we will have a lot fewer issues with our cost that were out of line a little bit in the -- during the third quarter that won't be out of line in the fourth quarter.

We're also seeing like improving -- last year at this time we were talking about some of the concerns at our French Rivard operation, vacuum trucks there with some low-margin backlog, and I -- and we saw that they rebounded nicely this quarter and the low-margin backlog is behind us.

So there's certainly some positive things going on.

And while our backlog is down a little bit, we actually still feel that it is -- it is at a very healthy level and will allow our operations to perform efficiently.

And we're also encouraged that our inquiry level for new businesses are maintaining a reasonable pace.

In fact, bookings going in already in the fourth -- in October have been quite favorable.

And although we had some issues with product mix, we feel the stability of our core products will continue to bode well for our results as our overall market shares are remaining steady to improving.

And certainly, while it is hard to overcome market weakness, Alamo has demonstrated its ability over the years to provide growth through a variety of economic conditions and by reacting quickly to market changes and steady -- and with a steady focus on our operations and our operating efficiencies.

Actually, we feel good about our prospects for the balance of the year.

And with the combination of Alamo and Morbark, we think the prospects for 2020 and beyond are very promising.

So like I say, we still -- remain feeling good about where we are as a company today and with the combination with Morbark it's -- the future looks exciting.

So with that, I would like to certainly thank you all for joining us and we would now like to open the floor to entertain any questions you might have today.

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

So I first wanted to hatch in to the Industrial Segment.

I think people are a little concerned with, number one, sort of the potential of slowing growth, and then the margins were pretty low.

Early in the year, you were able to sort of reach, I think, record-high margins at the segment, and then I think we saw the second lowest quarter in terms of margin in 3 years here in the third quarter.

So just trying to understand, number one, what are the -- you listed various different factors that weighed on the segment overall, but I'm wondering if you could sort of weight or give us a better idea of what was the bigger factors that weighed on the margin in the quarter.

And then higher level, how are you thinking about some of these factors going forward?

And how that affects the margins going forward into the fourth quarter and as we move into 2020?

Yes.

As we said, costs were a little higher.

I mean more -- overhead costs were a little bit higher.

Product mix really had -- was probably the thing that really affected us most because like I said sales, sales were a little softer than we thought.

They were actually up even in the Industrial Division, but only about, I think, 1% organically in the quarter.

So I mean -- so it was a little softer than we wanted and that -- and so we -- and actually, I can tell you that during the quarter, it was September -- I mean actually July was a little soft, August was actually nice, but then it was September that seemed to affect us the most, but it really was a mix.

I mean like excavators are one of our higher-margin products and industrial mowers for governmentals are among our highest-margin products, and both of those were actually off so that it was made up for by something like, say, some lower-margin products, some of the snow -- snow for us and things like that.

So it really was product mix, and some of that was timing.

And like I say -- and some trends and actually both excavators and mowers have had very nice bookings since the end of the quarter.

With the especially excavators and mowers, they're kind of heavy state DOT sort of products, and that demand has been very lumpy.

With the excavators, we just didn't have a robust backlog going into September.

And so they shut down, actually, for inventory.

And normally, we would then kind of work extra to try to make up for a shutdown like that.

First of all, the shutdown does not match up to the same month of last year when we took the inventory there.

And then we really didn't -- we didn't kill ourselves to try to make up for the shutdown days.

So that created a negative absorption or kind of a compression of margins in excavators alone.

So yes, we don't feel -- like I say, we don't feel we lost any market share.

There is -- like I say, we do feel the markets were a little bit softer.

We're seeing some -- like some strength.

I mean our Industrial Division has shown a pretty good -- a lot of stability.

And like this mix thing, it wasn't like to say that sales in total were down, it was just the mix was off a little bit, and we think that will -- some of that will self-correct.

I mean like I said -- so like I said, we feel pretty good about it going into the next quarter.

But I mean there's -- like I say, manufacturing in the world is a little softer right now.

So we don't know how strong it will rebound.

But like I say, we feel good, but it's -- there's certainly some soft spots out there.

Okay.

And do you have a feel of how much this is dealership destocking versus end-user demand?

In Industrial, it's none.

I mean because in Industrial, we tend to build to order.

The dealers do not stock much.

The only place we have much dealer stocking is in the agricultural sector.

And we don't think there was a lot of destocking at the ag dealer level because they've been doing it for the last 2 years.

So I mean they -- like I say, they haven't -- they've kind of reduced -- they've been reducing their stocks over the last couple of years.

So we don't feel that was much.

They're probably not (inaudible).

They're not restocking for next season yet at like probably the same level they were.

But yes, like I say, in Industrial, there was no issues with destocking at dealer levels.

Okay.

And then just going back to my sort of original question.

You would say mix is what, like 2/3 of the lower margin in terms of a weighted factor?

Just trying to understand all -- you mentioned all these [different] like costs that were sort of unusual that they all hit in one quarter.

How much did that make up?

I'm just trying to understand how much did mix play a role versus these unusual costs versus the other factors that you mentioned?

Mix was the single biggest factor for (inaudible).

We don't -- I mean I don't -- we don't -- like I say, there was a lot of pluses and minuses but mix was the single biggest factor.

Okay.

And then in terms of the rental fleet, could you talk about utilization rates, not necessarily quantifying them but maybe directionally talking about them?

And what are you doing with the fleet size?

So as you can see, we've built the fleet quite a bit.

We opened some new locations.

Our actual -- because our fleet is larger, and we have more locations, our actual rentals were up a little bit.

But however, the rental fleet has expanded quite a bit.

So our utilizations were down a bit -- were down in the third quarter.

And that also kind of caused not a mix impact, but a margin compression because you're depreciating those trucks, you've got the cost of those stores, that -- so those additional costs and not a comparable increase in the rental income.

So that was also an impact on margin.

I'm not -- right now, utilizations are lower than they had been running, but it's not necessarily a consistent downward sort of pattern.

Joe, just to add that -- to that too, is the mix of the products that we have in our rental fleet right now is really good.

It's exactly where we want it to be.

We had a couple of that -- a couple of years ago, we had an issue with that, but it's actually good.

And there was a little bit of seasonality in the third quarter because there's some slowing in the oil and gas usually, but that happens at this time of the year anyway.

Okay.

And your -- how are you managing the fleet?

Are you sort of maintaining size at this point going forward?

(inaudible).

The other thing is we just kind of have a kind of a timing issue with the sales of used units out of the fleet.

So we missed a couple of million dollars' worth of sales, just the fact that compared to last year, we didn't sell as many units out of the fleet.

We're not adding to the fleet.

We're going to continue to manage the trucks that are there and move them to where they're needed.

And we're going to go -- we're going to continue to not really -- we're not going to...

We're not expanding the fleet right now but we're not (inaudible) it either.

And actually, sales of new equipment in -- like Super Products was up.

Right.

The vacuum trucks look great except for -- we didn't sell as many used trucks out of the fleet and the utilization rates dropped a bit, which was more of a margin compression than it was a year-to-year sales impact.

Okay.

And then last question for now from me, and I'll jump back in queue.

Just in terms of the growth at Industrial, you called out excavators -- nongovernmental excavators, I guess, and then also industrial mowers.

What is your sense going forward from the levels that you saw in the third quarter?

How do you think about the overall business from here going into the fourth quarter?

Are we -- how has October started?

Do you feel like things are slowly getting worse?

Or do you think from the 3Q levels that -- do we see a rebound from 3Q?

Or how do you -- how are you thinking about some of these product categories that didn't fare too well, I guess, compared to earlier in the year in 3Q?

Well, like I said, both excavators and industrial mowers, the bookings are actually up nicely already in October.

And -- I mean most of that stuff won't ship this year.

I mean that's bookings that are going to start shipping sort of right after the first of the year.

But there were some very nice orders there.

And so all in all, I mean -- like I said, I mean it seems to be more of a blip than a trend at this point.

Like I said, the state DOT business is kind of lumpy.

And so you might be kind of lean one quarter and make it up the next.

But one thing is there -- some units we built at Gradall that didn't -- that were ready to go but didn't ship out before the end of the quarter.

So we should get some benefit there on the excavator side in the fourth quarter.

It's interesting.

Actually, the city and county business was held up even better than the state business.

The city and county tends to be lots of 1s and 2s units, whereas the state business tends to be lots of 10s and 20s.

And the city and county stuff held up -- has held up city all year.

It was the state business that -- where we saw some -- like a few -- a little bit of softening.

And -- but like I said, that seems to be improving already.

Our next question comes from Mike Shlisky with Dougherty & Company.

So I wanted to get maybe your early impression now that you officially own the Morbark business.

What's the culture like?

What's the footprint and the [fashion] looking like in making changes or even grow that there.

Just some kind of thoughts kind of early in the game here about -- about [how that looks]?

Like I said, we're excited.

The deal looks good.

They're heavily North America.

I mean they don't do much outside North America.

In fact, we're starting to look at some opportunities.

We know some of their competitors are doing well in some markets like Australia or Brazil or -- and we're going to try to use our capabilities to get them into some of those markets.

They -- culture-wise, they're actually very close to us.

I mean I think they, like I say, kind of focus on the fundamentals and are a good fit culturally.

We -- like I said, they're heavily North America, but we think that there's even opportunities that jointly we can help them in a few of their weak spots and they can help us in a few of our weak spots and that we can learn from -- like I say, do some joint efforts.

We've -- like I said, there's some good synergies on the operations side of things, some purchasing things where we think they can take [advantage].

We've already got our purchasing people in.

I mean you got to remember, this deal closed a week ago.

We've already got our people in there visiting with them and starting to talk about some of these things.

But yes, they're -- like I say -- culturally, they're a good fit with Alamo.

I think we just think alike of how we go to market.

And they're good guys.

They're good guys.

Great.

As far as the deal itself, I'm not going to push you on telling us about maybe some of the changes that we need to make in amortization at this point.

I know it's probably very early.

But on the debt side, can you give us a sense, just a ballpark of the way you think the interest expenses might be going forward?

I'm sorry.

On the debt side, what?

I want to get a sense of maybe perhaps a ballpark for us where are you thinking the interest cost might be going forward?

Oh, interest cost?

Interest cost -- of course, the interest rates just got lowered this week.

And -- but I mean -- I think interest -- our new credit agreement is very comparable to our old credit agreement as far as interest rates and everything.

So I mean we don't really see -- like the interest -- it would be very comparable to what our old agreement was.

Yes.

So we're just going to move up a little bit in the grid from around 1x levered to between 2.5 and 3. So that's basically -- it's just the incremental cost there, which isn't measured.

Okay.

And just following up there then.

Can you give us any kind of debt repayment cadence going forward?

I know you did a great job, obviously, 5 years ago when you bought Super Products.

That was a very large deal that you paid down over a 7-year period without much of an issue.

Want to get my overall model correct here.

Is there any kind way you can show us the kind of path to getting back down to maybe [1 lever] again?

Well, I mean on a combined basis, our EBITDA would be in the $125 million, $130 million range.

No, no, that's our (inaudible).

I'm sorry.

Yes, closer to [about $180 million] combined EBITDA, Mike.

And of that, I mean we should be...

60%, 65%.

Yes.

60%, 65% of that should be sort of available.

Now obviously that assumes no other acquisitions.

That assumes -- and essentially -- that assumes not rapid growth.

The rapid growth actually consumes more working capital than slow steady growth.

But -- so -- but like in that -- you combine that and also, it would actually be a very -- like I say, it should be able to pay down a significant amount of debt over the next 3, 4 years in fact.

Yes.

Okay.

Perfect.

Just going on to the ag.

It's been a very tough year for acreage and for trying to work the land given some of the weather issues and crop prices.

But if you assume average weather next year, I would imagine some of the lost acreage might come back if we keep things [normal] as far as floods and drought, go.

So there could be some return in demand if that were to happen just because of the kind of heavier acreage.

Given that there's been a bunch of quarters here where it's been tougher ag, is there any kind of sense you've got that there's some pent-up demand in that overall market right now and that there could be some growth in that business in 2020?

It's got to be retail.

Retail demand just needs to pick up.

The inventories in that channel are kind of in normalish ranges, so I wouldn't say there's pent-up demand at all.

I just think it -- we just need to see retail -- the farmers need to show up and start buying trucks.

Yes.

And yes, that's right.

I mean it helped to get a little bit better pricing, and it would certainly help to get this -- like the situation with China because I think while it's hurting us on tariffs, it's hurting us on the demand from the farmers because, I mean, that's creating some uncertainty.

The farmers are being impacted by the slowdown in export of goods and just the sentiment.

I mean I think even if farmers are getting subsidies for some of this, the distraction, they're using it more to pay down debt than to buy equipment until they get a feeling that -- like I say, it's farm sentiment that needs to improve as much as farm incomes.

Well, Mike, also take a look at our 10-Q.

If you look at our third quarter, despite all these issues we've had with the ag, they still had 10.5% op income.

So I think that's a pretty good indicator of what we're trying to do here to try to maintain control over both expenses and costs.

Our next question comes from Chris Sakai with Singular Research.

Just a question on Morbark.

I wanted to see how it will affect your overall margins and what they are at Morbark right now.

Well, I think as you could see in our press release last week when we announced and we showed sort of their -- actually, their EBITDA margins are higher than our EBITDA margins in total.

So we believe they -- like I say, the -- they're running a little bit higher than our overall average, but -- and we think that with some synergies, we can actually enhance that a little bit.

So -- plus, they already even have some initiatives going on themselves to enhance them a little, too.

So like I said, they're starting out better than ours, and we think we can even -- we can move them in a positive direction even from that.

Okay.

Great.

And then for the European division, do you -- if you take out the revenues from Dutch Power, how did the rest of the division do?

The division was up 10% year-to-date.

Yes, was up 10%.

Even without Dutch Power, as we said, sort of Rivard and our French operations, actually had more growth than our U.K. operations.

But from what -- they started from a lower level.

So -- but yes, our European operations actually did reasonably well.

Margins were up.

I mean sales were up.

Margins were up even without the acquisitions and...

And that's despite a currency headwind.

I mean if you look at it just on a local currency basis, the organic sales growth was 16% in the quarter and 9% year-to-date.

Yes.

Yes, because currency had -- it was interesting.

The pound was -- going into the quarter was about $1.28, $1.30.

It dropped suddenly when all they were talking about of a hard Brexit to like about $1.19, $1.20.

And so I mean we really took a currency hit there, but then, at the end of the quarter, once they sort of delayed Brexit again, it's back up to like $1.28.

So we won't have -- so apparently, the fourth quarter shouldn't be as impacted as much by currency as the third quarter.

Just it was a bad currency.

But -- so actually, U.K. -- I mean Europe's doing well even without the -- certainly without acquisitions.

Okay.

Great.

And then lastly, I guess on the whole China trade war, which of the divisions is most affected by the trade war?

Our ag division, yes.

Like I say, like a lot of the gearboxes, drivelines, stuff we get from China are all now being hit with the tariffs.

So I mean our -- like I said, let alone what it's doing to farm sentiment and farm -- the farm market that it's not helping that, but even directly in tariffs that like probably 2/3 of our tariffs that we're paying are related to our ag division.

Our next question comes from Chris Moore with CJS Securities.

Maybe we could just go back to the industrial mix just for a second.

So I want to make sure that I understand the -- so state DOT, Dan, you talked about the shutdown timing was different this year than last year.

Can you maybe just walk me through that a little bit?

Yes.

So we had our excavator plant down for a few days with people in there taking a wall-to-wall physical inventory.

That happened in September of this year.

It happened in July in the second quarter of last year.

So we have a mismatch there.

Now normally, if you're full -- you're flushed with orders, you have a few days of shutdown for inventory.

Then you go hard after that to make it up because we had just kind of gotten our backlog down to a point that we really just didn't have the orders to build.

We just didn't -- we didn't go -- and work extra to try to make that up.

So the absorption, the production of that plant was essentially or significantly lower than it was the quarter -- the prior quarter.

Which had been great.

I mean it was well above average.

And then you have to consider Gradall is one of highest operational leverage plants.

I mean it has a high variable margin and high fixed cost.

So when you drop production at Gradall, it's just a bigger bottom line impact than at most of our other facilities.

Got it.

And in terms of kind of customers' end markets, so state DOTs is the key, and you talked about city and county.

Are there other customers' markets and what we're seeing there?

No.

I mean like I say, I think that like some of the -- of course, our rental on vacuum trucks, a lot of that's nongovernmental related.

But even in the governmental stuff, like I said, in general, the city, county business, which is like a bunch of small orders, held up a little bit steadier than the big -- the state business, which is fewer number of orders but lumpier, bigger.

Yes.

I think last year we had a lot more steel mill units that we were doing last year because steel price -- that demand for those steel mill machines tends to ebb and flow with steel prices.

So we were in a -- kind of an upswing in steel prices for the first half of last year.

And this year, of course, ever since the middle of last year, steel has been sliding.

Got it.

And the other high-margin product you called out was the industrial mowers.

Again, was that -- is that timing?

Are you seeing a change in demand?

Or what are you seeing there?

No, like I say, we believe it's timing, again, because, like I said, the city, county business actually was held up much more steady than the state business.

And as I even said, we've even got a couple of big state orders literally even since the end of the quarter.

And also, too, in Q1, too, Chris, we also had some delayed orders kind of coming in because there was a late winter effect on snow, which also caused a lot of the...

Yes.

They didn't start mowing as early this year as they did last year.

It just pushes it out so...

It's just been a slow year in industrial modeling.

But again, if you just take the DOT business is lumpy.

You have a weak quarter and then you book (inaudible)

[Product turnover's] pretty steady.

It's still pretty steady.

I mean the mowers, even with some of the softness in industrial mowing, were still one of our highest-margin products and division units.

Got it.

Got -- no.

And obviously, it's difficult to look at all this stuff on a quarter-to-quarter basis, especially the big-ticket stuff.

I mean if you're looking at organic growth for 2020, I mean what's it going to take to do -- is 3% to 5%, is that a reasonable level?

I mean, historically, it seems like you certainly have talked to -- you've done -- been doing better than that lately but seemed like a level that was achievable.

What would have to happen?

And anything significant in order for you to get there in 2020?

No.

I mean that's certainly achievable.

Like I said, I mean we -- as long as the government -- I mean governmental buying tends to be very stable and steady.

And so I mean we think it could be that.

But like I said, all it takes is 1 or 2 big orders or something to be get delayed, and that could cause a little bit of lumpiness.

But well, like I said, our backlogs actually are still quite healthy.

I mean, like I say, maybe they're not as much (inaudible) as they were, but they're still at a very -- I mean we don't want them to be too healthy.

We don't want them to get where it starts impacting delivery.

So actually, we feel that it's -- the backlog is healthy and the order pickup wasn't in -- order intake wasn't as good in the third quarter as we would have liked, but the fourth quarter seems to be doing okay.

And so yes.

I mean, yes, we think that that's achievable.

Like I said, we're a little bit that there's -- the good news is steel's a lot cheaper.

Steel's a lot cheaper because people are buying less of it, though, and so I mean there is some slowdown in manufacturing in the U.S. in general.

And then -- and we can certainly use some help in the ag sector, but all in all, like I said, we feel good about next year.

Got it.

And from an industrial margin standpoint, obviously, the margins were low this quarter.

Same type of question for 2020 in terms of kind of a more normal range.

Is 10% to 11% range for next year?

Does that require a lot of increase in volume?

Is that something you can achieve even with kind of minimal growth?

You got to remember.

I mean Morbark alone is like 25% of our sales.

So I mean this -- yes, that's just -- so we're -- yes, so no, we ought to be doing a lot more than 10% or 11% better next year I mean just with the addition of Morbark.

So yes, we'll certainly exceed your 10% to 11%.

And we'll go out and do normal pricing actions, too, so that obviously helps.

Got it.

That was my next question.

Okay.

And then I'll just leave off with Morbark.

So I mean what's a reasonable kind of expectation in terms of revenue growth there?

Are they growing a little bit better than kind of your -- can they do that 3% to 5%?

Can they do a little bit better?

What are you seeing at this stage?

Yes.

No, I mean their growth the last couple of years has been -- organic growth has actually been a little bit higher than ours and so -- and we believe that, I mean, conditions are looking reasonable for them to continue that pace.

And so yes, we think their organic growth should be in line to above ours, our pace.

And they're coming -- they got some new products they're coming out with.

Those were just introduced just a couple of weeks ago.

They got -- on a dealer meeting, they've got -- yes, I mean they've got a lot of good initiatives.

Plus we think -- and some of the synergies with us, it's going to take a little longer to get all those to fruition.

But no, I think it looks good and...

The synergies are both kind of supply chain and at some point in time, potentially selling into Europe.

No.

Yes, there are some marketing ones.

There are some supply chain ones and back office ones.

So yes, like I say, there are several avenues of synergies with -- between us and Morbark.

(Operator Instructions) Our next question comes from Joe Mondillo with Sidoti & Company.

Just a few more from me.

I just -- in terms of the last question regarding the synergies at Morbark, I wanted to ask about that.

So you talked a little bit about it.

I'm just wondering what kind of timing do you think to go through some of these synergies.

Is it over 12 to 18 months?

Or is it over 2 to 3 years?

Both.

I mean like there are some short-term ones.

The purchasing, this kind of stuff, that could start playing out in -- like in sort of the 6-month timeframe.

There are some -- like I said, the purchasing ones, some of the back office ones, I think, can take place this year.

Some of the -- like the marketing things are taking a little bit longer to develop.

That's more in the, like, 1- to 2-year range as opposed to some in the less -- in the first year range.

So it's really a mix of both.

Okay.

And I'm wondering, do you have any idea, ballpark at least on what potentially the purchase accounting amortization expenses would be?

We haven't even -- no, we haven't made that determination yet.

I mean what I can tell you, though, from -- because we're buying LLC interest, we're going to get a tax benefit for the vast majority.

80%, 90% of those intangibles, we are going to get a tax write-off for that.

So for free cash flow, you can kind of factor that in, but for GAAP earnings, we just don't know yet what -- how that's going to allocate between goodwill and other intangibles.

We're just setting up the opening balance sheet, and then we'll actually start the valuation process itself.

We'll try to have -- we'll have estimated numbers by the end of Q4 and then try to hopefully wrap it up early next year.

Okay.

And in terms of Europe, the growth that you saw in the third quarter well surpassed what I was looking for.

Just wondering how you think about that.

In your prepared remarks, it almost made it seem like you're a little more cautious going into the fourth quarter and into early 2020.

But this is really strong growth, and I'm just wondering sort of how you think about growth rates in Europe in the next quarter or 2.

Yes.

And like I say, sometimes, we talk about growth compared to last quarter, but -- and that's why I say some -- like we had -- there are some -- last quarter, our backlog was sort of artificially high at this time.

At the same time, this quarter -- and then Europe, that's part of it.

I mean, like I said, our French operations actually showed the most growth in the third quarter, but they came from a low level.

They were the ones that had been a little bit underperforming previous to that.

So like I said, it's all relative.

So -- and our French operations, I think, will continue to show decent improvement.

I think, though -- no, I'm concerned that Europe itself is a little soft.

The overall economies, I love -- I didn't want a hard Brexit, but I certainly didn't want them to kick the can down the road again.

And I mean that's just 3 years they've been kicking the can down the road.

And I mean, like I say, that's -- that creates an aura of uncertainty.

So I wish they would -- some kind of minds get together and reach some kind of a resolution.

Certainly in Europe, we're not facing the tariff situation with China or the -- or I mean like the farmers are not being affected in Europe like they are here with that.

So I mean I think that helps our European situation.

But there is uncertainty there but like I said, I mean, in some respects, from a low basis.

In France, we're showing better, and we should continue to show a little -- show better.

And we've been talking about this low-margin backlog at Rivard that we've been working through.

We finished that up early in the third quarter, and now the business that's replacing that is a much better margin.

One other point, Joe, in that, too.

If you recall, we've announced earlier that we're moving from 3 segments to 2. That actually started here in October, so we're getting some real good, positive feedback from the guys (inaudible) working out well there.

Yes, I'm glad you mentioned that because I wanted to ask about that.

Is there any synergies outside of just reporting -- accounting the -- reporting the financial data?

Is there any synergies in terms of the actual overall business, the cost structure, anything related to that?

Yes.

Rivard, which does vacuum trucks (inaudible) good support from the excavator vacuum truck group, backhaul and (inaudible) Super Products.

So that's going to be really helpful to them.

And also, we're working -- the ag guys are working together with the U.S. ag guys over here on exchanging ideas on products and things of that nature.

Yes.

And I think in total, the overhead structure will be -- have a couple less senior people in them, yes, and which -- so yes, there will be a little bit of savings at the overhead level.

But the heads of the divisions will have both European and North American business units, and that -- just that reorganization within the management structure is going to help drive more synergies between those businesses.

And where are we with making these changes?

Did this just start here in the end of the third quarter?

I know you've announced this a few quarters ago.

But where are we?

It happened in fourth quarter.

And so when you get the earnings release for the fourth quarter as well as the 10-K, they'll show it into 2 segments, and we'll take everyone through that.

So you'll be able to...

Yes.

But it is going on right now.

Yes.

Okay.

And then I wanted to just -- well, I guess last question.

The CapEx projects that you have going on.

And you have a couple of major ones, one in Wisconsin where you're consolidating facilities, one in Canada.

Wondering what the timing of those 2 are.

And have any of them created any inefficiencies with the operations?

And when do we start to see the benefits from those?

Well, I mean both projects are on schedule time and -- both time and money wise.

We -- like I said, we said the one in Wisconsin will be taking -- or moving in and starting up running in the first quarter of next year.

Certainly, there will be a few inefficiencies during the start-up phase of that.

But we actually believe with our backlogs on vacuum trucks, we actually may have to keep producing in our old facility a little longer than we thought just because we're going to be -- literally have a lot -- need the capacity.

So all in all, at least that -- certainly, there will be some inefficiencies as we gear up, but I mean I think we're in pretty good shape.

The one in Canada is also going ahead as planned, and that one's a much smaller one, a smaller integration.

But yes, I mean -- and so I don't see -- it's interesting because the one we're integrating into there, the R.P.M.

into Tenco, R.P.M.

did a lot of outsourcing that we are now starting to in-source, so there'll be less disruption on that one than there will be on the one in Wisconsin.

You -- just one follow-up question, and then I'm done.

Do you think the benefit from a lot of these initiatives for 2020 will be one of the larger years in terms of internal productivity improvements for your margins?

Yes but only marginally.

I mean -- because I mean the good news and the bad news, we don't have a lot of our eggs in one -- in any one basket.

So it's not like -- I mean even when you have 26 plants that you -- you combine them even 3 into 2, it's certainly going to help, but it's not -- like I say, it's not going to be like a really big game changer just because, like I said, we don't have all of our eggs in any one basket that like if something good happens there, it's a big plus.

So yes, so it will be, but like I say, it's hard to say it's going to be materially -- affect the overall company just because we have so many operations.

Next question comes from Mike Shlisky with Dougherty & Company.

I just have a little follow-up question here.

I kind of want a little more clarity about the cadence of how things turned out in the quarter because things did seem awfully positive on the last conference call.

Just -- I want to kind of make sure I got some of the bigger changes here.

It sounds like you had a somewhat slightly soft July but a pretty strong August, then maybe a fall-off in September.

And I want to get a sense the DOT businesses with the various states, were the issue in September that they stopped ordering, they stopped with their demand or that the inventory shutdown pushed some stuff out into October?

No.

I mean it never shuts down.

I mean, yes, like I say, the city and county business, which is -- tends to be a little smaller sized orders was pretty steady.

But the DOT business is lumpier.

The big state business is a little lumpy.

It tends to be a little bit bigger dollars and a little bit lumpier.

There's fewer of the orders and like I said -- and I mean fewer bigger orders in that.

And in the third quarter -- or like actually, this -- like even the start, there just weren't as many.

Like I say, it's a couple of those lumps didn't happen.

And in fact, we've got a couple of them already in sort of October.

So I mean they sort of got delayed, but yes -- but there's just -- there are some of those lumps.

We even -- I mean we're a little concerned.

Occasionally we've seen in big election years that the governmental buyers get distracted and so -- I mean with elections and worry about change of administration.

Not -- we don't sell anything to the federal government to speak of much.

I mean most of our business is city, county, state.

But like I said, even that can get a little bit of a -- a little bit soft.

Like I say, a little bit -- they get a little bit distracted around election years.

But generally, it's pretty good.

It's just that, like I say, it's lumpy at the state -- at the DOT level, and there was a couple of lumps that got delayed.

But Mike, the inquiry levels were still there.

We mentioned in there.

Okay.

Yes.

Mike, we lost market share.

It's not like the -- like I say, the inquiries are -- have dried up.

I mean the inquiry level's still quite robust, and we believe our market shares are holding very, very strong.

And so the overall sentiment at the county, state and city level, it's all pretty similar.

It's just a matter of when the orders arrive and the actual size of those orders.

Is that the way...

That's what we're seeing for sure.

And like I said, if anything, those are a little jumpier in an election year than they are in a not a big election year.

I would now like to turn the conference back over to management for closing remarks.

All right.

Well, again, we appreciate you all being on the call today, and thank you for your interest.

And thank you for joining us, and we look forward to speaking with you on our 2019 fourth quarter call -- year-end call in February.

Thank you much.

Have a good day.

Thank you, ladies and gentlemen.

This concludes today's teleconference.

You may now disconnect.