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Alamo Group Inc. (ALG) CEO Ron Robinson on Q4 2018 Results – Earnings Call Transcript – Seeking Alpha


Alamo Group Inc. (NYSE:ALG) Q4 2018 Earnings Conference Call March 1, 2019 11:00 AM ET

Company Participants

Edward Rizzuti – VP, General Counsel & Secretary

Ron Robinson – President & CEO

Dan Malone – EVP & CFO

Richard Wehrle – VP, Treasurer & Corporate Controller

Conference Call Participants

Joe Mondello – Sidoti and Company

Operator

Good day, ladies and gentlemen. And welcome to the Alamo Group Fourth Quarter 2018 Year End Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for question. [Operator Instructions] This conference is being recorded today, Friday, March 1, 2019

I would now turn conference over to Mr. Edward Rizzuti, Vice President, General Counsel & Secretary of Alamo Group. Please go ahead, Mr. Rizzuti.

Edward Rizzuti

Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at (212) 827-3773, and we will send you a release and make sure you are on the company’s distribution list. There will be a replay of the call, which will begin one hour after the call and run for one week. The replay can be accessed by dialing 1 (888) 203-1112, with the passcode 8315612. Additionally, the call is being webcast on the company’s website at www.alamo-group.com, and a replay will be available for 60 days.

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

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

Ron Robinson

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

Dan Malone, our CFO, will begin our call with a review of our financial results for the fourth quarter and year end 2018. I will then provide a few more comments and following our formal remarks, we look forward to taking any questions you may have. So Dan, please go ahead.

Dan Malone

Thank you, Ron.

Our fourth quarter and full year 2018 results again set records for Alamo Group. Some of the major milestones we surpassed in 2018 included, annual sales exceeded – exceeding $1 billion, annual operating income exceeding $100 million and 10% of sales, annual net income exceeding $70 million and $6 per share, annual EBITDA exceeding $120 million and the yearend backlog of $240 million.

Fourth quarter 2018 sales of $256 million beat the prior year fourth quarter by 5.3%. For the full year 2018 sales of $1 billion were up 10.6% over prior year, with organic sales growth of 6.4% excluding the comparative results of the Old Dominion Brush, Santa Izabel and R.P.M. Tech b acquisitions.

Industrial fourth quarter 2018 sales of $160 million represented an 8.7% increase over the prior year fourth quarter sales. Full year net sales in this division were up 14.6% over prior year with organic sales growth of 9.4% excluding the Old Dominion Brush and our R.P.M. Tech acquisitions.

Agricultural division fourth quarter 2018 sales were $55.9 million, down 1% from the prior year fourth quarter. For the full year this division sales were up 3.4% over prior year, but down 1.1% without the Santa Izabel acquisition.

Weather, crop yields and U.S. trade disputes have delayed recovery of the general agricultural market. European division fourth quarter 2018 sales were $40.1 million, up 1.3% over the fourth quarter of 2017. Without an unfavorable currency translation effect this division’s local currency sales were up 4.5% over the prior year fourth quarter. For the full year, this division sales were up 7.7% and also grew 3.3% without the benefit of favorable currency translation.

Fourth quarter 2018 gross margin of $62.6 million grew 2.8% over the prior year fourth quarter. Our fourth quarter gross margin was 24.5% of net sales, which compares to 25% of net sales for the prior year quarter.

Full year 2018 gross margin was 25.4% of net sales compared to 25.7% for the prior year. Our percentage margins were squeezed during the second half of 2018 by an unfavorable timing of input cost increases relative to the pricing actions taken to offset them.

Our gross margins were also constrained by an unfavorable mix of equipment aftermarket parts sales that continued to benefit from purchasing initiatives and productivity improvements. Fourth quarter 2018 operating income of $24.7 million was 18.3% higher than the fourth quarter – than the prior fourth quarter, primarily due to industrial division organic sales growth, partially offset by the factors constraining gross margins already mentioned.

Full year 2018 operating income is up 13.9% over prior year and grew 8.5% without acquisitions. Fourth quarter 2018 operating income was 9.6% of net sales compared to 8.6% of net sales for the prior year quarter.

Full year 2018 operating income was 10% of net sales compared to 9.7% for the prior year. Fourth quarter and full year 2018 net income and earnings per share were also helped by a more effective income tax rate, excluding the onetime effects of the new U.S. tax legislation from both current and prior year results, our effective tax rate was 26.4% for the fourth quarter 2018 compared to 35% for the prior year quarter and our full year 2018 effective tax rate was 25.8% compared to 33.8% for the prior year.

Net income for the fourth quarter was $16.6 million or $1.41 per deluded share compared to prior year net income of $3.2 million or 275 – or $0.27 per diluted share. Full year 2018 net income with $73.5 million or $6.25 per deluded share compared to prior year net income of $44.3 million or $3.79 per diluted share.

Excluding the onetime effects of the new tax legislation, full year net income was $70.2 million or $5.97 per deluded chair compared to $54.6 million or $4.67 per deluded share in 2017.

Adjusted net income and diluted earnings per share are both up more than 20% and 28% compared to the prior year fourth quarter and full year respectively. Full year 2018 EBITDA of $124.4 million was up 13.7% over the prior year.

Net cash provided by operating activities in 2018 totaled $12.9 million, which compares to $70.8 million net cash provided in the prior year. The year to year difference of $58 million was due to the higher level of inventory needed to support the increased order backlog and mitigate longer supply lead times. Also growth in demand from vacuum trucks continued to support a large planned increase in our rental fleet investment and the retroactive effects of the new U.S. tax legislation increased cash taxes year-over-year.

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

Capital spending for the full year 2018 was $26.6 million compared to $13.5 million for the prior year, primarily due to these additional investments and working capital rental fleet and capital assets, we entered the fourth quarter with debt net of cash of $51.3 million, up $16.5 million from the prior year end.

Our order backlog ended the fourth quarter at $240 million, about 10% higher than the prior year end. Backlog remains at a very healthy level, but declined $11 million during the fourth quarter mainly due to the timing of orders in the agricultural division which surged in September ahead of an announced price increase.

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

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

Ron Robinson

Thank you, Dan. Certainly as the numbers Dan just presented indicate Alamo Group had a very good 2018 fourth quarter to finish off a record year for the company. We’ve commented during the year and in our fourth quarter press release about the various challenges we faced in 2018. But I think the important thing to focus on is not the challenges but the results. There always seems to be some challenges somewhere in the global economy and certainly there’s no shortage of them today. But this is likely to continue.

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

Once again in the quarter we were led by our industrial division where sales for the year were up nearly 15%. Certainly we’ve benefited by strong demand pretty well across the entire product range within that division and we’re further aided by new product introductions.

And we’re really pleased actually in that division, we have a lot of good initiatives going on in our industrial group, the sets of new products, the recent acquisitions of Old Dominion and R.P.M. Dan pointed out we increased investment and our CapEx was up, so as we increased investment and manufacturing technology and even the recently announced construction of a new facility in Wisconsin which will allow us to consolidate our vacuum super products back in truck operation into one location.

All of these actions should help maintain the positive momentum this group has built as we move into 2019 and these are being further helped by the company strong – continuing strong backlog, the majority of which is in our industrial division.

And while I’m sure we will continue to have some challenges in 2019, I feel some areas that affected us in 2018 such as higher than usual increases in input costs should be less of a challenge in 2019. So we continue to feel good about the outlook for our Industrial division.

Our Agricultural division also outperformed well in 2018 with sales up for the year over 3%, though market conditions were certainly more challenging than we experienced in our industrial markets. As farm incomes were down once again in 2018, I mean actually entering the year we thought there was a good chance farm incomes could be up in the year, but they ended up not only down versus last year, but considerably below the highs of the ag sector for four or five years ago.

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Yet despite a weak market and higher input cost increases the division sales were up and margins held steady, so we felt – thought they performed very well. Market conditions are likely to remain soft as we move into 2019, but hopefully should start to improve somewhat in the second half of the year and we feel we should continue to benefit from the broad range of agricultural sectors we serve, as well as from new product introductions and some other marketing initiatives which we have going on.

Our European operations also contributed nicely to Alamos overall results with record sales in 2018 with the division. Now we’re pleased with the results given the general softness of the overall European economy and the lingering uncertainty surrounding the Brexit negotiations.

Our UK operations performed particularly well and led Barro McConnell [ph] union which has benefited from strong marketing initiatives and new products which we think will continue to help them going forward. We’re particularly excited about the new – all new range of remote control mowers that they are introducing which have many unique features and options and is already being very well-received by the market.

So in total, while there will be ongoing challenges to be faced in 2019, we think the fundamentals of our business which propelled our record results in 2008 thing should continue to benefit us in 2019.

We feel there should also be a little less inflationary pressure this year compared to last year though some most of the other market challenges are likely to linger. Still we feel good about the outlook and to help drive these results we will continue to invest in product development and are even increasing the number of major initiatives we are pushing which we believe will really support that our organic growth will continue to outpace the market growth in the sectors in which we operate.

And we’re also spending a little more on capital projects to help us further consolidate our manufacturing footprint and upgrade our technical capabilities. And we’ll see spending more – more in the line of what we spent in 2018 comparing which was up significantly from the previous few years. So we’ll be at that level for the next couple of years.

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

All these results should be further enhanced by the recently announced pending acquisition in Europe of Dutch Power. Dutch Power is very nice company, that is very complementary to Alamo Group in both the products they offer and the markets they serve.

They also have some unique and interesting products that will add to our range, such as equipment to maintain underwater vegetation and systems to operate equipment autonomously. This is a good company with good people and good products. We look forward to getting this deal completed prior to the end the first quarter.

I think one indication of how good this company is a fit with us is few years ago we bought herder in Brazil which was originally founded by Dutch Power and their herder group in Europe, so there are already relationships between the company.

So we’re pleased – we’re also pleased that acquisition activity in general remains very robust with several interesting opportunities under evaluation. So while we’re pleased with the record results achieved in 2018 in many ways we’ve already put that behind us and are focused on 2019 and beyond. And we thank you for your support. As we proceed to the future.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question today will come from Joe Mondello with Sidoti and Company.

Joe Mondello

Hi. Good morning, guys.

Ron Robinson

Morning, Joe.

Joe Mondello

So wanted to ask you about the parts revenue in 2018 it was sort of weak as a percent of the total sales that declined, and back half of the year I think it trended sort of the weakest, it looks like it was down maybe 3% in the fourth quarter. So just wondering what your thoughts happened in 2018 and sort of how you’re thinking about that going into 2019?

Ron Robinson

Yeah. Part sales you’re right, we’re a little weak fourth quarter, you know, even had a good fourth quarter they tend to be a little on the soft sides and we didn’t see fourth quarter. But you know. I think they’re actually – there’s also a few things like you know the ag market being a little soft and everything. I think people were you know, farmers were watching their spending, we noticed a little softness there.

It’s a – we haven’t seen any major trends though that we think. I mean, like I say there’s some market weakness this type stuff. And the one thing I mean, you know, it trended down a little bit as a percent of sales because whole good sales were up. So it wasn’t down as much. It was off a little in dollars too, but not quite as much. So you know, like I said one whole goods sales grow which they did nicely for the year. And even in the end of the year I think that was a contributing factor.

And we think it’s okay. I mean, actually they started off pretty good. I mean, this winter, first of all there’s a lot of snow. We’ve seen you know, the first of this year especially with the – some of the winter products, like snow removal, they’re off to a pretty good start in the first quarter. But though I think you know, in the first quarter to ags probably, softer a little, but I think in total it’s okay.

We’ve got a few initiatives aimed at parts, but we don’t think we’ve been losing market share. We think it’s been more like some soft market conditions were like I said in ag. But you know, we’re trying to do more in that area. But you know, I don’t…

Dan Malone

Ron, I would think in a soft market…

Richard Wehrle

Yeah, Joe. Just to kind of put it in perspective I mean, you look at – if you kind of look at the three years in total and you know quarter-to-quarter you can have a lot of variation just due to weather and some micro sort of factors.

But you know, if you look overall for the year, we went from one $167 million in parts in 2016 to $182 million in 2017 and we’re actually up a little bit over – we’re up to nearly $187 million in ’18. The mix impact is more due to the fact that we went from 663 to 714 to 802 on August and then part of that whole goods is also trackers and chassis which are not marked up as much as what we manufacture.

Joe Mondello

Okay. The backlog up 10%, last year going into 2018 it was up 40%. And you know, not surprisingly end markets have slowed. I’m just wondering sort of your thoughts on growth in 2019. I mean, you are clear that the Ag markets seem like they’re going to continue to remain a little soft at least in the first half of the year. Just sort of overall what kind of growth expectations I guess that maybe the industrial segment or just overall high that you’re thinking about for 2019?

Ron Robinson

Well of course, we don’t give out forward look – I mean you know, what we say, I think sales would be. I mean, I think you know organically the industrial division ought to – do a little bit better than the markets. I think ag, first half the year will be fairly flat. We think the second half the year has some chance for it to be up.

I think Europe, again I think have a little bit better feel in another – you know as Brexit supposed to come to a head and at the end of March, I don’t know that we’ll come to a head or they’ll just delay it. But you know, I think Europe’s economies are softening a little bit right now and what several countries in Western Europe are already in recession.

So I think like I say, probably a little bit of softness there. I think but with some new product introductions that we’ve been doing and I think organic growth will be reasonable for us for next year, probably a little bit ahead of market. I think you know, certainly the acquisition of Dutch Power will add. So I mean, you know we definitely think we’ll be up next – this year 2019. But yeah, like so we don’t really give guidance as to how much we think we’re going to be up and it’s still a little early in the year to actually predict how much.

Joe Mondello

Okay. The industrial margins in 4Q were pretty strong, stronger than I was expecting. The last couple of years you’ve seen a falloff in margin in the fourth quarter. I’m not sure if that’s a mix issue that hits in the fourth quarter or what. I’m just wondering what sort of grow those margins in 4Q for the industrial segment?

Ron Robinson

Yes. I think a couple of things. First of all you’re right, I mean, fourth quarter margin usually trail off a little bit because we – like our spare parts which are our highest margin products tend to be higher in the second and third quarters when our vegetation maintenance equipment is being utilized the most and spare parts are being considered [ph]. So it’s usually up.

A little bit there is a product mix difference in the fourth quarter where usually spare parts are off a little. This year like I say, industrial division I think spare parts will be held up probably a little bit better in the fourth quarter. Also you know, we had taken some price, but little more pricing actions in 2018 earlier in the year as a result of cost increases. And I think in the fourth quarter you saw that those price increases were starting to take effect.

You know, like I say, once we put them in they don’t take effect immediately it takes you know – then it’s on new equipment that we’re being selling. So the price increases were taking effect and there, I won’t say there was any – I mean you know there was a little softening in steel prices probably in the fourth quarter, most input costs did soften. But I think we – like I said, we got the benefit of price increases and that offset a little bit of a mix decline. I mean you know, decline of margin due to mix.

Joe Mondello

So – yeah, I was going to ask this all little later, but I’ll touch on it now. The price cost situation, we have been witnessing steel prices start to come down and I imagine the price increases that you put in place are still sort of maybe flowing through the backlog. So that should continue to see a benefit at least in the early part of 2019.

Do you see a beneficial spread happening at some point in time? I don’t know if this in 1Q or where it is, but how do you see sort of that price cost situation compared to where we were in 2018. Where is that? How does that I guess flow in the 2019?

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Ron Robinson

Well, yeah I think you’re right, because I think we’re just starting to see some of the benefits of pricing – you know the price increases and that’s why I was saying earlier I don’t think we’re going see anywhere near the pricing pressure. Yeah, steel is probably going to – you know right now is flat to a little down, other input cost or I mean, I think we’re going to see more modest increases in cost in 2019.

And so I think you know we believe we’ll see a positive, I mean, marginal effect on, like I say, it’s not going to be a huge effect, but I think we’ll see some positive momentum in our margins from that price cost spread. And so, you know like that, I think we’re – as you said we actually saw some of it in the fourth quarter. We think we’ll see some of it in the first and actually throughout this year, but at a modest level.

Joe Mondello

Okay. At the ag segment despite organic revenues being off as much as they were, I was surprised to see the margin that that segment hold up in the fourth quarter, reasonably well. What was that, and maybe that part due to the better part mix, are there any other reasons that caused that?

Ron Robinson

Well, as I think we said, you know, we had several above average price increases in our ag sector, all of our divisions in 2018. And I think in the fourth quarter we started to see some of the benefit of the pricing initiatives we’ve taken earlier in the year.

So you know, little that starts to flow into – into the fourth quarter and like I said at a time when things like steel softened a little and actually steel as a percent of cost of goods sold is probably even a little higher in our ag division than they are even our industrial division.

Joe Mondello

Okay. And then at the European segment in 4Q of 2017 parts were – I remember going back to my note, you stating that parks were a little weaker than normal. And some staggering costs related to certain things, weighed on margin in fourth quarter – sorry, ’17. So you should have had a pretty good comp going into this fourth quarter, as well you also saw organic revenue growth. Yet, your profits decline year-over-year. So what’s going on with the European segment there?

Ron Robinson

Again the – it was more in our – some of our French operations, I think in the third quarter we announced – you know we said that we had – to add a few things, one of our French units were – I mean, you know, we kind of had some supplier delays and some – probably weren’t staffed totally for the work we were trying to do. And then there were some, like I say, some customer delays on, who wanted to delayed deliveries of some of their equipment.

So – and I think a little bit of that tailed into the fourth quarter, I mean I think we did much better on it than the third quarter, but a little that sort of affected us in the fourth quarter as well and probably even though you know Greg on a little bit in the fourth quarter, but I mean the first quarter, but we are like I said, improving the situation.

And you know, like I say, it’s not as bad as it was in the third quarter. But I think that’s still been a little bit of a drag on our operations because our UK units actually did quite well. I think that you know, I guess, as I stated earlier McConnell [ph] unit and specific had a really strong fourth quarter, really strong year and they were really helped by some new product introductions and their robo cuts being very well-received. And so it’s – like I said, it was it was more tied. The decline in profits more tied just some few challenges, internal challenges with one of our French units.

Joe Mondello

Okay. How do you think about sort of profitability in the European segment for 2019? I guess you sort of answered it there, but more so I was also wondering how the acquisition of Dutch Power affects things largely related to sort of purchase accounting, due to sort of the amortization that comes with that. Do you anticipate margins probably would be down in 2019 in the European segment?

Ron Robinson

Yes, I understand. You know, again we don’t usually give guidance or much forward. I think you know, Dutch Power is a nice performing unit. I think their margins are sort of in line with our margins. You’re right, there is a little – there will be some goodwill on this and some goodwill amortization.

But I don’t see that. I think we’ll do a little bit better in our French operations in ’19 than we did in ’18. Like I say, I think our UK units will continue to hold up nicely, depending on what happens with Brexit. Actually we think we can deal fine with whatever happens with Brexit. It’s just the uncertainty that seems to – I mean, our deep people in Europe, like I say, they’re buying stuff regularly from us, but they’re not placing the big orders in advance because they don’t – you know, they want to know what the tariffs and all are going to be, when the equipment gets delivered.

So there’s this uncertainty of – like what’s going to happen and we would like – we think, like I say, whatever happens we feel that we can deal positively with it, just the uncertainty that we’re concerned about.

But I mean, like I say, I think Europe will do like much better in 2019. It certainly helped a lot by Dutch Power, which will definitely be nicely accretive to our results, you know, even with some, like I say, some goodwill amortization, I think there’ll be a very nice addition to us. And so that, all in all, Europe should have a very – more than another record year.

Joe Mondello

Okay. Europe. I mean, I guess I’m a little surprised to hear such positive outlook. Just given the fact that those economies over there have slowed at all, but so much that doesn’t overly concern you at this very point though?

Ron Robinson

Oh sure, it concerns me. It does. I’m concerned that the US seems to be trying to talk its way into recession. But I think you know, the markets we serve generally do better. I mean, do okay in weak economic conditions because the type of products we sell gets utilized, I think I mean you know, you have to necessary, whether the – you know you have to maintain the infrastructure whether know no matter what the economies are, I think that the ag sector in Europe is you know, like that’s a big sector for us over there. And I think that’s likely to continue to like I say, similar to the U.S. I mean, we feel it’s even if it’s weak it’s should hold pretty steady.

We feel that – so the type of markets we serve and the products we serve, we think we will benefit by some pricing actions. We’re going to benefit by some new product introductions. And yeah, sure we’re concerned. You know, we could do a lot better if the economies were a little bit more buoyant.

But we think as we’ve shown you know, a lot of this – like weak markets, Brexit overhanging, all this and yet we still did nice year in 2018.

Joe Mondello

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

Ron Robinson

Okay. Well, as we said, actually Dan said, I mean, CapEx was up significantly in 2018 went from $13 million to $26 million. And as I’ve said I think you know, we’ll stay in about that same range for 2019. I mean, you know we’re building a $15 million dollar plant.

And so you know, that will certainly be the biggest chunk of it. But not all that money will hit 2019. Some of that will probably tail over into 2020. But I think yeah, that’s sort of the range we’ll be in is about the – for 20 19 as were the range we were in for 2018.

And as far as working capital goes, I think that obviously you know there’ll be the addition of Dutch Power and this would work. But right now we ended the year with probably with a little too much inventory I thought. I think you know receivables refine and then no major changes there, maybe a little – you know it should trend a little bit higher with the sales, as sales trend. But you know I think the inventory we believe you know excluding the effects of Dutch Power that we are – our inventory with some modest growth ought to come down.

Because in 2018 I think our inventory – certainly sales were growing. And so the inventory grew and due to some longer lead times on some items, you know we probably – our inventory got a little ahead of us. And I think that we need to do a better job in 2019 of inventory management.

And so like I say, even with some organic growth I think inventory needs to come down like say before the adjustment for the addition of the Dutch Power. So working capital should be similar to a little bit less than what it is today.

Joe Mondello

Okay. Perfect. Thanks. Thank you and thanks for taking my questions. And good luck.

Edward Rizzuti

Thank you, Joe.

Operator

Thank you. And our next question today will come from [indiscernible]

Unidentified Analyst

Hi. Thanks for taking my questions. Can you give us a little bit more background on Dutch Power deal. How did they comp out? Sounds like you knew about them previously when you did the transaction in Brazil?

Joe Mondello

Yes. Well, we’ve known about Dutch Power. In fact, I mean yes they’re a little – you know like almost a smaller version of Altamont that they’ve had – they’ve got about four or five companies in there, as a group, all sort in this thing. The same areas we’re in. Like say, they’ve got some fairly unique stuff on some underwater – cutting for underwater vegetation maintenance.

But yeah, we’ve known them for a long time. I think a couple of the units they own we’ve tried to buy over the years and you know they – so I think we’ve been as with several opportunities. I mean we’ve been in touch with them for the last several years and I think just the timing got right with their ownership structure have some private equity in there that it was like I say, that was sort of fit their timing that we were finally able to get together on valuation.

You know, the fact that they were now willing to talk and we were able to get together on a valuation. This deal was more of a little bit more of a negotiated than an auction type deal which we tend to do better like say in companies that we’ve identified, they close to try and negotiate. Yeah, like I say, we can actually really discuss the synergies and get closer to them.

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But it’s you know – they’re in our space, so it’s not – you know, they’ve been on our radar and we’ve been in touch and it’s just that the timing started working out when we started discussions in the second half of last year.

Unidentified Analyst

Okay. That’s helpful from our understanding. You guys break out the investment in the rental fleet as total capital item about $22 million in 2018. It sounds like there’s been some pretty good demand there. How should we think about investment in the rental fleet in 2019?

Joe Mondello

It should continue to grow. That’s the one area of our business where we actually have our own rental operations and everything and that’s been a nice. So you know if you go back all over the last decade that’s been a nice growing business. It’s only been part of us since 2014 when we bought the super products as part of the specialized acquisition.

In 2016 you know that that business we did see a slowdown because a lot of this rental activity is in nongovernmental it’s one of the few parts of our industrial business that you know sort of focused on non-governmental. It’s more to contractors for various – whether it’s you know or field mining construction industries so that we’re leasing vacuum trucks and when all those slowed down in 2016 and all that you know we actually reduced the fleet and kept our utilization nicely. But then you know sort of starting last year sort of improving at the end the ’17 and we started having to rebuild the fleet and we actually had a little you know actually I wish I would have liked to have more and more investment in that. But we had in 2018t we had you know, like say with demand for the products growing in general we couldn’t meet end user customer demand and build our rental fleet as fast as we would like to.

In 2018 we opened two new branches which was further added to the need for more equipment which is why I like said I’ve actually like to have done more where – will probably not have the two new branches up and running fully this year. But probably in the open at least one at least another one if not more, so we’re going to continue to invest in there so you say that it was growing the fleet to make up for where we kind of cut it back during the softness, plus adding new branches and Mike said we’re still not where we need to be and we’ll be. So the fleet will continue to grow in 2019.

Unidentified Analyst

Should we expect you know 20 million of investment there?

Joe Mondello

I mean not at the state level we grew it in 2018. I don’t think I mean if we end up doing more on the branches that they could but you know like I say, it will grow, probably not at the rate it did in 2018.

Unidentified Analyst

Okay. That’s helpful. So you spent some time discussing the Wisconsin Project with the super products the 15 million dollar capital project, can you help us understand what we’re trying to accomplish there and what the economics from a return perspective are of that project?

Joe Mondello

This – I mean you know we’ve actually said and stated that literally since we bought super product in 2014 that you know they were operating out of three separate locations in the greater Milwaukee area. We’ve said we wanted to bring that into one from day one and we’ve been looking at options. I’m kind of disappointed it took us so long to get to this point but you know we were hoping we could expand one plant. One of the three the one we own but that was not enough land.

We’ve looked at trying to buy an existing facility and never really could find one. We kind of wanted to we wanted to stay in that area just because of the talent we have and the skills we have that we have good you know like good people good talent we wanted to build on that, but we you know like say we’re not able to find a facility that met our needs. So I mean finally we negotiate you know settled on a greenfield prospect about the 10 miles further west from where most of the others are located.

And so that you know with this facility that we’re building will give us the capability of bringing in all of our production there together and do even right now. Like so what. But there’s a very good payback on this because by operating our three facilities I mean we’re building and stuff in one and then transporting it to assemble somewhere else. We have we don’t really have a good paint system and are outsourcing all the painting and we’re doing painting after assembly and sort of before assembly. And you know so which in our business is not the way to do it. So we’re going to have a now more efficient system.

So we’re actually you know we feel – even though this is a major capital investment project that the return is actually quite good. And there will be margin enhancement like saying we with you or look at the numbers, but we believe this will have a very nice return on investment and a good quick payback. And it lead to margin enhancement for their products as well. So we’re excited about this. It’s overdue.

And that’s I mean you know one of our stated goals and you look at our investor presentation is to have you know fewer bigger plants and this is a you know like this is just another step in that we’ve closed – we’ve consolidated at least 10 plants in the last decade. You know, like say this allows us to take three into one. And really going and we’ve got a few others that we need to pursue along this line as well.

Unidentified Analyst

And I’m still relatively new to the company. How do you define a quick payback. I think other people want to find those two or three years is that a good.

Joe Mondello

Yeah most CapEx I mean two three years a holding plants not. But I mean you know this business and certainly less – it was more like in the four to five year range.

Unidentified Analyst

Okay. Excellent. And then you touched on it a little bit earlier in some of your comments but we’re addressing some of those issues in France. Can you kind of just give us an update in terms of where we are? Believe there was a discussion in the past about the new executive there helping the plant. We had some product that was being outsourced and we had some customers that had some inventory that we had built but they had not yet taken it. Just kind of update us on those three items and where we stand and what further needs to be done?

Joe Mondello

I think that the other the outsourcing issues I mean would say they seem to be improved for now though. Yeah – that’s something I think I think it was you know I blame ourselves more than much the outsourcing we just weren’t on top of it enough and I think that’s the important thing. Not that we solve the problem now but that we make sure that it doesn’t happen again that we’re staying a little closer to these vendors and knowing what’s going on.

We were actually we were in the middle of a little bit of a plant expansion there last year we actually expanded one facility put in a brand new fiber laser material handling and also a press break and everything.

So yeah I think that it helped to that we had some distractions going on with some internal expansion we have. So think that’s okay. I think we’re a little bit better staffed right now.

I mean in France it is you know we’re probably a little bit reluctant to hire staff just because you know like in the US or even in England I mean you know it’s easier to laws or such that it’s easier to change your workforce in the short term whereas in France it’s you know you’re hesitant to hire people that you don’t think it’s going to be long term because you know it takes longer and costs more to right size your workforce.

But anyway we think we’ve we are staffing is adequate. I think outsourcing is better. We – like say that that was more just sort of an anomaly that the customers that hey you know don’t I don’t give me that equipment this week I want it next week. Well I mean usually that’s not a problem but it is when it’s the last day of the quarter.

So yeah like I said I think we said hey we need to be a little bit more focused on that and like that was that there were like say that that was just added to that situation which was normally shouldn’t have added to the situation.

Other than that I mean you know right now that that unit actually has a good backlog some of it’s you know like they got some big orders which I think are a little bit less margins than we would have we would ideally like because I mean there’s been inflation since you know the big orders are they’re good that they take time. So I mean if you’ve got a backlog that’s going out over a year I mean you worry about cost the fact that if there’s any inflation in that.

So that’s you know like say somewhere I said when I said this could continue to affect us a little bit you know even in this year it’s because some of the backlogs a little bit lower margin than we would like but I think more of our operational issues are behind us. And the other is that’s a good operation like so the good thing they do have a well-received product.

They’re very nice products and very well received and that’s why I’ve said that I mean to be honest most of the issues I think we had there were our own issues not necessarily the market. You know it’s just us and I think the good news is that I think we have the ability to do something about it regardless of what the market does.

Unidentified Analyst

Okay, Thank you for taking the question.

Joe Mondello

No problem. Thank you.

Operator

Thank you and at this time we have no further questions and our queue. I would like to turn he the conference back over to Mr. Ron Robinson for any additional or closing remarks.

Ron Robinson

Okay. Now again thank you very much for joining us here today. We appreciate – if you have any questions feel free to contact us and we look forward to speaking with you on our 2019 first quarter call in early May. Thank you very much. Good day.

Operator

Thank you. And again ladies and gentlemen that does conclude our conference for today. Thank you for your participation.





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