Alamo Group, Inc.

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 open for questions. If you have a question, please press the star followed by the 1 on your touch-tone telephone. If you would like to withdraw your question, please press the star followed by the 2. And if you're using a speakerphone, please flip the handset before making your selection. This conference is being recorded today, Friday, March 1, 2019. I will now turn the conference over to Mr. Ed Rizzuti, Vice President, General Counsel, and Secretary of Alamo Group. Please go ahead, Mr. Rizzuti.

Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at 212-827-3773, and we will send you a release and make sure you are on the company's distribution list. There will be a replay of the call, which will begin one hour after the call and run for one week. The replay can be accessed by dialing 1-888-203-1112 with the passcode 831-5612. Additionally, the call is being webcast on the company's website at www.almo-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 Worley, 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 the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following. Market demand, competition, weather, seasonality, currency-related issues, geopolitical issues, and other risk factors listed from time to time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein which speaks only as of this date. I would now like to introduce Ron. Ron, please go ahead.

All right. Thank you, Ed. We want to thank all of you for joining us today. Dan Malone, our CFO, will begin our call with a review of our financial results for the fourth quarter and year-end 2018. I will then provide a few comments, and following our formal remarks, we look forward to taking any questions you may have. So, Dan, please go ahead.

Thank you, Ron. Our fourth quarter and full year 2018 results again set records for Alamo Group. Some of the major milestones we surpassed in 2018 included annual sales 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 a year-end backlog of $240 million. Fourth quarter 2018 sales of $256 million beat the prior year fourth quarter by 5.3%. For the full year, 2018 sales of $1 billion were up 10.6% over prior year, with organic sales growth of 6.4%, excluding the comparative results of the Old Dominion Brush, Santa Isabel, and RPM Tech acquisitions. Industrial fourth quarter 2018 sales of $160 million represented an 8.7% increase over the prior year fourth quarter sales. Full year net sales in this division were up 14.6% over prior year, with organic sales growth of 9.4% excluding the Old Dominion Brush and RPM Tech acquisitions. Agricultural Division fourth quarter 2018 sales were $55.9 million, down 1% from the prior year fourth quarter. For the full year, this division's sales were up 3.4% over prior year, but down 1.1% without the Santa Isabel acquisitions. Weather, crop yields, and U.S. trade disputes have delayed recovery of the general agricultural market. European Division fourth quarter 2018 sales were $40.1 million, up 1.3% over the fourth quarter of 2017. Without an unfavorable currency translation effect, this division's local currency sales were up 4.5% over the prior year fourth quarter. For the full year, this division's sales were up 7.7% and also grew 3.3% without the benefit of favorable currency translation. Fourth quarter 2018 gross margin of $62.6 million grew 2.8% over the prior year fourth quarter. Our fourth quarter gross margin was 24.5% of net sales, which compares to 25% of net sales for the prior year quarter. Full year 2018 gross margin was 25.4% of net sales compared to 25.7% for the prior year. Our percentage margins were squeezed during the second half of 2018 by an unfavorable timing of input cost increases relative to the pricing actions taken to offset them. Our gross margins were also constrained by an unfavorable mix of equipment to aftermarket parts sales but continued to benefit from purchasing initiatives and productivity improvements. Fourth quarter 2018 operating income of $24.7 million was 18.3% higher 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 quarter. Fourth quarter and full year 2018 net income and earnings per share were also helped by a lower effective income tax rate. Excluding the one-time effects of the new U.S. tax legislation from both current and prior year results, our effective tax rate was 26.4% for the fourth quarter 2018 compared to 35% for the prior year quarter. And our full year 2018 effective tax rate was 25.8% compared to 33.8% for the prior year. Net income for the fourth quarter was $16.6 million, or $1.41 per diluted share, compared to prior year net income of $3.2 million, or 27 cents per diluted share. Full year 2018 net income was $73.5 million per $6.25 per diluted share. compared to prior year net income of $44.3 million or $3.79 per diluted share. Excluding the one-time effects of the new tax legislation, full year net income was $70.2 million or $5.97 per diluted share compared to $54.6 million or $4.67 per diluted share in 2017. Adjusted net income and diluted earnings per share are both up more than 20% and 28% compared to the prior year fourth quarter and full year respectively. Full year 2018 EBITDA of $124.4 million was up 13.7% over the prior year. Net cash provided by operating activities in 2018 totaled $12.9 million, which compares to $70.8 million net cash provided in the prior year. The year-to-year difference of $58 million was due to the higher level of inventory needed to support the increased order backlog and mitigate longer supplier lead times. Also, growth in demand for 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 have also increased the level of capital investment to make targeted improvements in our product lines, production capacities, and operating efficiencies. Capital spending for the full year 2018 was $26.6 million, compared to $13.5 million for the prior year. Primarily due to these additional investments in working capital, rental fleet, and capital assets, we ended the fourth quarter with debt net of cash of $51.3 million, up $16.5 million from the prior year end. Our order backlog ended the fourth quarter at $240 million, about 10% higher than the prior year end. Backlog remains at a very healthy level, but declined $11 million during the fourth quarter, mainly due to the timing of orders in the Agricultural Division, which had surged in September ahead of an announced price increase. In summary, our fourth quarter and full year results were highlighted by annual sales over $1 billion, annual operating income over $100 million, full year operating margin exceeding 10%, record fourth quarter and full year sales and net income, and a record year-ending quarter backlog. I'd now like to turn the call back over to Ron.

All right. Thank you, Dan. Certainly, as the numbers Dan just presented indicate, Alamo Group had a very good 2018 fourth quarter to finish off a record year for the company. We've commented during the year and in our fourth quarter press release about the various challenges we faced in 2018, but I think the important thing to focus on is not the challenges, but the results. There always seems to be some challenges somewhere in the global economy, and certainly there's no shortage of them today, and this seems likely to continue. But we believe we once again demonstrated that by staying focused on our business strategy and reacting quickly to changing conditions, we continue to move Alamo Group forward, and the results for 2018 certainly confirm this. Once again in the quarter, we were led by our industrial division, where sales for the year were up nearly 15%. Certainly, we've benefited by strong demand pretty well across the entire product range within that division, and we're further aided by new product introductions. We're really pleased, actually, in that division. We have a lot of good initiatives going on in our industrial group. We've set some new products, the recent acquisitions of Old Dominion and RPM. Dan pointed out we increased investment. Our CapEx was up, so we increased investment in manufacturing technology. and even the recently announced construction of a new facility in Wisconsin, which will allow us to consolidate our vacuum super products vacuum truck operation into one location. All of these actions should help maintain the positive momentum this group has built as we move into 2019. And these are being further helped by the company's continuing strong backlog, the majority of which is in our industrial division. And while I'm sure we will continue to have some challenges in 2019, I feel some areas that affected us in 2018, such as higher than usual increases in input costs, should be less of a challenge in 2019. So we continue to feel good about the outlook for our industrial division. Our agricultural division also I thought performed well in 2018, with sales up for the year over 3%. The market conditions were certainly more challenging than we experienced in our industrial markets. You know, 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, you know, they're considerably below the highs of the ag sector from four and five years ago. Yet despite a weak market and higher input cost increases, the division sales were up and margins held steady. So I thought they performed very well. Market conditions are likely to remain soft as we move into 2019, but hopefully should start to improve somewhat in the second half of the year. And we feel we should continue to 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 Alamo's overall results with record sales in 2018 for the division. We're pleased with these 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 by our McConnell unit, which has benefited from strong marketing initiatives and new products, which we think will continue to help them going forward. We're particularly excited about the all-new range of RoboCut remote control mowers that they are introducing, which have many unique features and options, and is already being very well received by the market. So in total, while there will be ongoing challenges to be faced in 2019, We think the fundamentals of our business, which propelled our record results in 2018, should continue to benefit us in 2019. We feel there should also be a little less inflationary pressure this year compared to last year, though 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. We're also spending a little more on capital projects to help us further consolidate our manufacturing footprint and upgrade our technical capabilities. And I want to say spending more in the line of what we spent in 2018, 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 a very nice company that is very complementary to Alamo Group in both the products they offer and the markets they serve. They also have some unique and interesting products that will add to our range, such as equipment to maintain underwater vegetation and systems to operate equipment autonomously. This is a good company with good people and good products, and we look forward to getting this deal completed prior to the end of the first quarter. I think one indication of how good this company is a fit with us is a few years ago we bought Herder in Brazil, which was originally founded by Dutch Power and their Herder Group in Europe. So there's already relationships between the companies. We're also pleased that acquisition activity in general remains very robust with several interesting opportunities under evaluation. 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. 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.

Thank you. And again, ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off while you signal to reach our equipment. Again, press star 1 to ask a question. Our first question today will come from Joe Mondolo with Sidoti & Company.

Hi. Good morning, guys. Good morning, Joe. So I wanted to ask you about the parts revenue. In 2018, it was sort of weak as a percent of the total sales. It declined. And back half of the year, I think it trended sort of the weakest. It looked 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.

Yeah, Bart Sales, you're right. We're a little weak. Fourth quarter, even in a good fourth quarter, they tend to be a little on the soft side, and we didn't see fourth quarter. But I think there's also a few things like the ag market being a little soft and everything. I think farmers were watching their spending. We noticed a little softness there. uh it's you know we haven't seen any major trends though that we think i mean you know like i say there's some market weakness this type stuff uh 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 you know it wasn't down as much it was off a little in dollars too but not not quite as much so i you know like like i said when whole good sales grow which they did nicely in the for the year, even at the end of the year. I think that was a contributing factor. We think it's okay. Actually, it started off pretty good. This winter, first of all, there's a lot of snow. We've seen the first of this year, especially with some of the winter products like snow removal, they're off to a pretty good start in the first quarter. Though I think I know in the first quarter, too, ag is probably soft a little, but I think in total it's okay. We've got a few initiatives aimed at parts, but, you know, we don't think we've been losing market share. We think it's been more, you know, like some soft market conditions for, like I said, in ag. But, you know, we're trying to do more in that area, but, you know,

I don't know. Ron, I would think in a soft market.

Yeah, yeah, go ahead. Yeah, Joe, you know, just to kind of put it in perspective, I mean, you look at, if you kind of look at the three years, you know, 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, you know, we went from $167 million in parts in 2016 to 182 in 2017. And we're actually up a little bit. We're up to nearly 187 million in 18. The mixed impact is more due to the fact that we went from 663 to 714 to 802 on whole goods. And a good part of that whole goods is also tractors and chassis, which are not marked up as much as what we manufacture.

Okay. 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 were 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 Overall, what kind of growth expectations, I guess that may be the industrial segment or just overall that you're thinking about for 2019?

Well, of course, we don't give out what we think sales would be. I think organically, the industrial division ought to do a little bit better than the markets. I think ag, first half of the year, would be fairly flat. We think the second half of the year has some chance to be up. I think Europe, you know, kind of, I think it'll have a little bit better feel in another, you know, is Brexit supposed to come to a head at the end of March? I don't know if it will come to a head or if they'll just delay it. But, you know, I think Europe's economies are softening a little bit right now. Several countries in Western Europe are already in recessions. So I think, you know, like I say, probably a little bit of softness there. I think with some new product introductions that we've been doing, and I think organic growth will be reasonable for us for next year, probably a little bit ahead of the market. I think, you know, certainly the acquisition of Dutch Power will add. So, I mean, you know, we definitely think we'll be up this year in 2019. But, yeah, like I said, we don't really give guidance as to how much we think we're going to be up, and it's still a little early in the year to actually predict how much.

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

Yeah, I think a couple things. First of all, you're right. I mean, fourth quarter margins usually trail off a little bit because we have, I mean, you know, 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 consumed. So it's usually 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 said, industrial division, I think spare parts held up probably a little bit better in the fourth quarter. Also, we had taken some price, a little more pricing actions in 2018, earlier in the year as a result of cost increases And I think in the fourth quarter, you saw that those price increases were starting to take effect. You know, like I say, once we put them in, they don't take effect immediately. It takes, you know, it's on new equipment that we're 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. didn't 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, the decline of margins due to mix. So, yeah, I was going to ask this a little later, but I'll touch on it now. The price-cost situation, we have been witnessing steel prices sort of come down, and I imagine the price increases that you put in place are still sort of may be flowing through the backlog, so that should continue to see a benefit, at least in the early part of 2019. Do you see a beneficial spread happening at some point in time? I don't know if it's in 1Q or where it is, but how do you see sort of that price-cost situation compared to where we were in you know, 2018? Where is that? How does that, I guess, flow in the 2019?

Well, I think you're right, because I think we're just starting to see some of the benefits of the pricing, you know, the price increases. And that's why I was saying earlier, I don't think, you know, we're going to see anywhere near the pricing pressure. Yeah, steel's probably going to, you know, right now it's flat to a little down. Other input costs are, I mean, I think we're going to see more modest increases in cost in 2019. And so I think, you know, we believe we'll see a positive, I mean, you know, marginal effect on, you know, 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 the price-cost spread. And so, you know, like I said, I think, as you said, we actually saw some of it in the fourth quarter. We think we'll see some of it in the first, actually throughout this year, but at a modest level.

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

Well, as I think we said, 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 benefits of the pricing initiatives we had taken earlier in the year. So a little of that started to flow into the fourth quarter. And like I said, at a time when things like steel softened a little, and actually steel as a percent of cost of goods sold is probably even a little higher in our ag division than they are in even our industrial division.

Okay. And then at the European segment, in 4Q of 2017 parks were I remember going back to my notes you stating that parks were a little weaker than normal and some severing costs related to certain things weighed on margins in the fourth quarter of 2017 so you should have had a pretty good comp going into this fourth quarter as well you also saw organic revenue growth yet your profits decline year over year. So what's going on with the European segment there?

In the, it was more in our, some of our French operations, I think in the third quarter we announced, you know, we said that we had, you know, had a few things that one of our French units where, I mean, you know, we kind of had some supplier delays and some, you know, we were, Probably weren't staffed totally for the work we were trying to do. And then there were some, like I say, some customer delays who wanted to delay deliveries of some of their equipment. And I think a little bit of that tailed into the fourth quarter. I mean, I think we did much better on it than the third quarter, but a little of that. sort of affected us in the fourth quarter as well, and will probably even drag on a little bit in the first quarter. But we are, like I said, improving the situation. Like I said, 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. But our U.K. units actually did quite well. And I think that, you know, like I stated earlier, our McConnell unit in specific had a really strong fourth quarter, really strong year. They were really helped by some new product introductions and their new robo cuts being very well received. And so it's, you know, like I said, it was more tied, the decline in profits was more tied just to, you know, a few challenges, internal challenges at one of our French units.

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

Yes, no, I understand. Again, of course, we don't usually give guidance or much forward. I think Dutch Power is a nice performing unit. I think their margins are sort of in line with our margins. You're right, there will be some goodwill on this and some goodwill amortization. But I don't see that. I think we'll do a little bit better in our French operations in 19 than we did in 18. I 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 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, you know, like, of what's going to happen, and we would like, we think, you know, like I say, whatever happens, we feel that we can deal positively with it. It's the uncertainty that we're concerned about. But so, I mean, you know, like I say, I think Europe will do, you know, like, much better in in 2019 certainly helped a lot by Dutch Power which would definitely be nicely accretive to our results even with some goodwill amortization I think they'll be a very nice addition to us so that all in all Europe should have more than another record year

Okay. I guess I'm a little surprised to hear such positive outlook, just given the fact that those economies over there have floated all so much. That doesn't overly concern you at this very point, though?

Oh, sure it concerns me. It does. I'm concerned that the U.S. seems to be trying to talk its way into a recession. But I think You know, the markets we serve generally do better, I mean, you know, do okay in weak economic conditions because the type of products we sell, you know, are utilized. I think, I mean, you know, are necessary whether, you know, like, you know, you have to maintain the infrastructure whether, you 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, you know, like I say, similar to the U.S. I mean, we feel it's, you know, even if it's weak, it should hold pretty steady. We feel that... So the type of markets we serve and the products we serve, we think we'll benefit by some pricing actions. We're going to benefit by some new product introductions. And, yeah, sure, we're concerned. We could do a lot better if the economies were a little bit more buoyant. But we think, as we've shown, a lot of this, like weak markets,

brexit overhang all this and yet we still did i thought you know had a nice year in 2018 okay uh last question for me i'm just wondering what your sort of outlook on capex is um as well as anything to highlight in terms of working capital needs or uses um that you're thinking about for 2019 okay

Well, as we said, as Dan said, CapEx was up significantly in 2018, went from $13 million to $26 million. And as I said, I think we'll stay in about that same range for 2019. I mean, we're building a $15 million plant, and so that will certainly be the biggest chunk of it. But not all that money will hit in 2019. tail over into 2020. But I think, yeah, that's sort of the range we'll be in. It's about the range, you know, for 2019 is where the range we were in for 2018. And as far as working capital goals, I think that, I mean, obviously, you know, there'll be the addition of Dutch power and this, which way, but right now we ended the year with probably with a little too much inventory. I thought, I think, you know, Receivables were fine and in line. No major changes there. It should trend a little bit higher with the sales trend. But I think the inventory, we believe, excluding the effects of Dutch Power, that our inventory, even with some modest growth, ought to come down. Because in 2018, I think our inventory, certainly sales were growing. So the inventory grew, and due to some longer lead times on some items, our inventory got a little ahead of us, and I think that we need to do a better job in 2019 of inventory management. So even with some organic growth, I think inventory needs to come down, like I say, before the adjustments for the addition of the Dutch power. So in total, working capital should be similar to a little bit less than what it is today.

Okay, perfect. Thank you, and thanks for taking my questions, and good luck. Thank you, Joe. Thanks, Joe.

Thank you. And our next question today will come from DeForest Hinman with Walt Halden and Company.

Hi, thanks for taking my questions. Can you give us a little bit more background on the Dutch Power deal? How did that come about? It sounds like you knew about them previously when you did the transaction in Brazil.

Yes, we've known about Dutch Power. In fact, they're a little like almost a smaller version of Alamo. They've got about four or five companies in there, a group all sort of in this thing. the same areas we're in. Like I 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. So I think we've been 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, having some private equity in there. I'd say that was sort of their timing that we were finally able to get together on evaluation. The fact that they were now willing to talk and we were able to get together on evaluation, this deal was more of a, a little bit more of a negotiated than an auction-type deal, which we tend to do better, like, say, in companies that we've identified, stayed close to, and tried to negotiate, you know, like, say, where you can actually really discuss the synergies and get closer to them. But it's, you know, they're in our space, so it's not, you know, and 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. second half of last year.

Okay. That's helpful for our understanding. You guys break out the investment in the rental fleet as a working 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?

It should continue to grow. That's the one area of our business where we actually have our own rental operations and everything. If you go back for 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 acquisitions. In 2016, you know, that business, we did see a slowdown because a lot of this rental activity is in non-governmental. It's one of the few parts of our industrial business that's, you know, sort of focused on non-governmental. It's more to contractors for various, whether it's, you know, oil field, mining, construction industry, so that we're, you know, leasing vacuum trucks. And when all those slowed down, you know, 2016 and all that you know we actually reduced the fleet and uh you know kept our utilization nicely uh but but then you know sort of starting you know last year uh you know started improving at the end of 17 and we started uh having to rebuild the the fleet and we actually had a little you know actually uh we should i would have liked to have had more infant more investment in that but but we had uh in 2018, but we had, you know, like I say, with demand for the products growing in general, we couldn't meet end-user customer demand and build our rental fleet as fast as we would like to. In 2018, we opened two new branches, which was further added to the need for more equipment, which is why, like I said, I'd actually like to have done more. We'll probably not have the two new branches up and running you know, fully by 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 know, like I say, it was growing the fleet, you know, to make up for where we had kind of cut it back during the softness, plus adding new branches. And like I said, we're still not where we need to be. And we'll be, so the fleet will continue to grow into 2019.

Should we expect $20 million of investment there?

Not at the same level we grew it in 2018. I don't think. If we end up doing more on the branches, it could, but like I say, it'll grow probably not at the rate it did in 2018.

That's helpful. You spent some time discussing the Wisconsin project with the super product, the $15 million capital project. Can you help us understand what we're trying to accomplish there and what the economics from a return perspective are of that project?

We've actually stated literally since we bought super products in 2014 that they were operating out of three separate locations in the greater milwaukee area we've uh we've said we wanted to bring that into one from day one and we've been looking at options you know 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 there was not enough land we've looked at trying to buy an existing facility and never really could find one we kind of wanted we wanted to stay in that area just because you know the talent we have and the skills we have that, you know, we have good, you know, like good people and good talent. We wanted to build on that. Uh, but, uh, we, we, uh, you know, like I say, we're not able to find a facility that met our needs. So, I mean, no, finally we, we negotiated, you know, settled on a Greenfield prospect of about the 10 miles further West from where most of the others are located. Um, we, and so the, you know, this facility that we're building will give us the capability of bringing all of our production there together. And even right now, like I said, there's a very good payback on this because by operating out three facilities, I mean, we're building stuff in one and then transporting it and having to assemble somewhere else. We don't really have a good paint system and are outsourcing all the painting and We're doing painting after assembly instead of before assembly, which in our business is, like I say, not the way to do it. So we're going to have a now more efficient system. So we're actually – we feel, even though this is a major capital investment, the project, the return is actually quite good, and there will be margin enhancement. Like I say, again, we don't do forward-looking numbers, but – We believe this will have a very nice return on investment and a good quick payback and lead to margin enhancement for their products as well. So we're excited about this. It's overdue. And that's, I mean, one of our stated goals, and if you look at our investor presentation, is to have fewer... uh bigger plants and this is uh you know like this is just another step in that we've closed we've consolidated at least 10 plants in the last decade and you know like say this will allow us to take three into one and really going and we've got a few others that we need to to pursue along this line as well

And I'm still relatively new to the company. How do you define a quick payback? I think other people might define it as like two or three years. Is that a good way of looking at it?

Yeah, most capexes, I mean, two or three years. A whole new plant's not. But, I mean, you know, this one's certainly less. It's more like in the four- to five-year range.

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

Yeah, no, I think that, yeah, the outsourcing issues, I mean, Like I say, they seem to have improved for now, though I'll blame ourselves more than as much the outsourcer. We just weren't on top of it enough, and I think that's the important thing. Not that we didn't 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 in the middle of a bit of a plant expansion. there last year we actually expanded one facility put in a brand new fiber laser you know material handling and also a new press break and everything so you know I think that didn't help too that we had some distractions going on with some internal expansion we have so I think that's okay I think we're a little bit better staffed right now I mean in France you know we're probably at a little bit reluctant to hire staff just because, you know, like in the U.S. or even in England, I mean, you know, it's easier to, laws are 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 it's, you know, it takes longer and costs more to right-size your workforce. But anyway, I think our staffing is adequate. I think our outsourcing is better. You know, like I said, that was sort of an anomaly that the customer said, hey, you know, don't ship me that equipment this week. I want it next week. Well, I mean, usually that's not a problem, but it is when it's the last day of the quarter. So, you know, like I said, I think we said, hey, we need to be a little bit more focused on, you know, like I say, that was, you know, there were about, Like I say, that was just added to the situation, which was normally shouldn't have added to the situation. Other than that, I mean, you know, right now, 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 ideally liked because, I mean, there's been inflations and, you know, the big orders, they're good, but, you know, they take time to deliver. I mean... If you've got a backlog that's going out over a year, I mean, you worry about the fact that if there's any inflation in that. So that's, you know, like I said when I said that this could continue to affect us a little even into this year, it's because some of the backlog is a little bit lower margin than we would like. But I think more of our operational issues are behind us. And, you know, that's a good operation. Like I said, the It's a good thing they do have good, you know, they have a well-received product. They're very nice products and very well-received. And that's why I've said, you know, 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, you know, the good news is that I think we have the ability to do something about them regardless of what the market does. Okay, thank you for taking my question. No problem. Thank you.

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

Okay. Now, again, thank you very much for joining us here today. We appreciate, you know, if anybody has 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. Have a good day.

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