Alamo Group, Inc.

Good day, ladies and gentlemen. Welcome to the Alamo Group Incorporated second quarter 2019 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, press star followed by the one on your touchtone telephone. If you would like to withdraw your question, please press the star followed by the two And if you are using a speakerphone, please lift the handset before making your selection. This conference is being recorded today, Thursday, August 1st, 2019. I would now like to turn the conference over to Mr. Ed Rizzuti, Vice President, General Counsel, and Secretary of the Alamo Group. Please go ahead, Mr. Rizzuti.

Thank you. By now, you should have all received 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 976-0087. 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 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. It speaks only as of this date. I would now like to introduce Ron. Ron, please go ahead.

Thank you, Ed, and we want to thank all of you all for joining us here today. Dan Malone, our CFO, will begin our call with a review of our financial results for the second quarter, and then I will provide a few more comments on the results. Following our formal remarks, we look forward to taking your questions. So, Dan, please go ahead.

Thank you, Ron. Second quarter 2019 sales of $285 million beat the prior year second quarter by nearly 11%. Year-to-date sales of $547 million were up over 10% compared to the prior year first six months. Excluding the impact of the Dutch power acquisition, organic sales growth was over 5% for the quarter and just short of 7% year to date. Industrial Division second quarter 2019 sales of $168 million represented a nearly 12% increase over the prior year second quarter. First half sales of $326 million were up almost 16% over the prior year first half. All product groups except governmental mowing equipment contributed to this division's continued strong organic sales growth. Agricultural Division second quarter 2019 sales were $55 million, down more than 6% from the prior year second quarter. First half sales of $108 million were down 8% from the prior year first half. The prolonged downturn in the U.S. agricultural economy continues to negatively affect demand for new equipment. European Division second quarter 2019 sales were $62 million, up 29% from the second quarter of 2018, but essentially flat in U.S. dollars without the effect of the Dutch power acquisition. First half sales of $112 million were up almost 18% over the prior year first half, but down slightly in U.S. dollars without the acquisition. Excluding an unfavorable currency translation effect, this division's local currency organic sales growth was about 6% in both the second quarter and first half of 2019. Second quarter 2019 gross margin of $73 million grew 10% over the prior year second quarter. Our second quarter gross margin was 25.6% of net sales, which compares to 25.8% of net sales for the prior year quarter. In the second quarter of 2019, we saw a significant easing of the margin compression we experienced in the second half of 2018 and the first quarter of this year. We began to realize the full benefit of prior year pricing actions as well as lower steel cost, and we saw a better mix of high margin aftermarket part sales. Partially offsetting this improvement was the negative leveraging of lower volume in the agricultural division and the shipment of some thin margin backlog at one of our French businesses. Second quarter 2019 operating income exceeded $29 million and was about 10% higher than the prior year second quarter. primarily due to strong industrial division organic sales growth, as well as the factors affecting gross margin already discussed. Second quarter 2019 operating income was 10.3% of net sales compared to 10.4% of net sales for the prior year quarter. Again, a much better year-to-year comparison than what we've seen the past three quarters. Net income for the second quarter of 2019 was almost $21 million, or $1.75 per diluted share, which favorably compares to the prior year second quarter net income of nearly $19 million, or $1.60 per diluted share. Second quarter 2019 EBITDA was $36 million, up 12% over the prior year quarter. Frailing 12-month EBITDA now exceeds $130 million, and is up nearly 5% over the comparable prior year result. Second quarter 2019 net cash provided by operating activities was above $30 million, which compares favorably to only $400,000 of operating cash flow in the prior year second quarter. This improvement is due to earnings growth combined with reductions in receivables and inventories. Whole goods demand in the industrial division still applies upward pressure on working capital needs. We've managed to improve working capital turns while working to reduce a high order backlog. Second quarter 2019 investing cash flows were highlighted by $7 million of capital spending, which is now, year to date, tracking above prior year levels as planned. Due to the Dutch power acquisition, debt net of cash increased almost $43 million over the prior year second quarter. Excluding the acquisition, debt net of cash would have been about $10 million lower than prior year. Our order backlog remains at a very healthy level, ending the second quarter at $229 million, including the Dutch power acquisition, which is about 8% higher than the prior second quarter. Without the acquisition, backlog increased about 3% year-over-year. While the backlog decreased $30 million during the second quarter, this was mainly due to improved output as new orders excluding Dutch Power were up slightly year-over-year. In summary, our second quarter 2019 results were highlighted by record second quarter sales of $285 million, up almost 11%. Record second quarter net income of almost $21 million, up over 10%. Record second quarter EBITDA exceeding $36 million, up 10%. Near full recovery from last year's margin compression caused by rising input cost. Second quarter operating cash flow exceeding $30 million, up from just $400,000 in the prior year quarter. and a healthy quarter end backlog of $229 million. I would now like to turn the call back over to Ron.

Thank you, Dan. And again, thank you all for being with us on this call today. We're pleased to report that the current fiscal year is proceeding nicely and that we once again had record sales and earnings for both the second quarter and year to date. And as I noted in the press release, we feel particularly good with these results given the variety of challenges with which we had to continue to encounter during the quarter. Certainly, the strong performance by our industrial division was the key to our results, and we're pleased the products in this group continue to exceed our expectations despite tariffs, inflation, and even signs of some general economic softness. but we feel the strength and stability of our core markets has remained buoyant and been helped by our solid level of backlog, which continues to be strong, which also makes the balance of our outlook for 2019 look promising. Our other two divisions have each faced a little more adversity, but I believe they are both performing reasonably given the conditions they are dealing with. Certainly our agricultural division is being hampered by the overall weak market with farm income still challenged by soft commodity prices. And on top of that, I think adverse weather conditions have had a negative impact on the whole farming community in North America this year. While our sales in ag are down, we believe we have held up a little bit better actually than the market itself. And we're finally encouraged that there are some signs emerging of some market improvements and some strengthening in certain commodities. And though it's too early to tell if this trend will continue, it at least is looking in a positive direction. Our European operations have also been affected by some weak market conditions as the general European economies have been a little softer than North America. And this was made even worse with our results by unfavorable changes in currency exchange rates. So whereas we were up in Europe without the acquisition in local currency, we were slightly down in U.S. dollars. And as we reported, we even had a few internal problems as well as a result of some low margin backlog in one of our French operations. though we still have a little of that left in our backlog, but most of that should be finished in the remainder of that order in the third quarter, so it'll be behind us. But certainly, the soft European economic conditions and unfavorable currency exchange rates will continue to hamper our results for the rest of 2019. And who knows what the ramifications will be as a result of the latest rhetoric we're hearing on the Brexit negotiations. It certainly looks like that situation, after the last several years of uncertainty, could be headed towards a fairly dramatic conclusion with unknown repercussions. But I think we feel good about our position. under any circumstances, but it's the short-term implications that we're concerned about if there's the uncertainty that will create. Fortunately, our European operations have also been aided by the acquisition this year of Dutch Power. They are a very good fit with Alamo and feel they will prove to be a nice addition for us, not only this year, but for years to come, and I think certainly we'll give our operations there a boost this year. And it's also pleasing to note that acquisitions in general are one area where we feel some economic softness is actually a bit of a benefit since lofty valuations have hindered our efforts in this area during the last few years. We're pleased that M&A activity for us actually remains quite buoyant and feel more opportunities we're looking at should be within a valuation range we feel is actionable for Alamo Group. So the pluses and minuses of some softness. Similarly, due to some overall economic softening, we're seeing a lot less inflationary pressure, particularly in purchase components being much less of a factor than they were last year when we saw a fair bit of inflation. This is being led by actually real declines in areas such as steel, which prices for steel are well below what they were a year ago. And we are just now starting to realize, since there's usually a lag effect between how we actually price changes in steel when they go up or down, there's a bit of a lag effect in the way we buy steel before it really hits our results. So we feel the reductions in steel price should really benefit our results much more in the second half of the year than they did even in the first half of the year. And I think managing input costs are just one element of our ongoing operational improvement initiatives, which we have actually been accelerating in the last few years. Certainly we've announced things like the new plant we're building in Wisconsin for the consolidation of our super products operation is another major element of this ongoing operational improvement plan. And while we have some big ones like that, I think we have a number of smaller projects which we feel cumulatively should continue to help our ongoing margin improvement efforts. We're very pleased and anxious with the progress we're making in that area. We feel these ongoing initiatives to improve our efficiency are the real key that has allowed Alamo Group to produce record results despite a variety of ongoing challenges. And while we certainly do not know what challenges we're going to be facing tomorrow, whether it's more tariffs or Brexit or adverse weather conditions or economic softness, or whatever, we feel that with continued focus on our own internal operations and reacting quickly to any changing market conditions or any changing external conditions, the outlook for our company remains very positive. We feel good about where we are and feel good about the outlook for Alamo Group for the rest of this year and for next year as well. So we want to thank you for your support in this journey, and with that, I would like to entertain any questions you may have.

Thank you. Again, at this time, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question will come from Joe Mandela with Sidoti and Company.

Hi, good afternoon, guys. Hey, Joe. Hey, Joe. Joe. I wanted to ask you on the backlog. It has slowed quite a bit from a year ago, but I also wanted to ask just theoretically, how important do you see that as an indicator for your business? If you go back to the first half of last year, your backlog was up 50%. It really didn't translate certainly anywhere as close to 50% revenue growth in the back half of the year of last year. Is that, how much weight should we put behind that metric? And if it's not that quite important, what are you looking at that, I guess, provides you with a relatively positive outlook that you just provided?

Yeah, certainly backlog. I mean, it's important that we have a reasonable level of backlog to help in our production planning. But as I've said a few times, I mean, I don't like it to be too high because that usually means that our lead times are lengthening, and we don't want to get our lead times too far ahead. I mean, we think that could have a negative implication on future sales if we're not able to respond quickly or rapidly. And like I say, this quarter, I mean, during the quarter, as Dan pointed out, actually while we're up, backlogs up from where it was this time last year. It actually went down a little bit in the quarter. But, you know, but actually our booking, I mean, you know, our sales were quite strong. So the bookings were actually stronger than the bookings were stronger than our sales, which is a good, I mean, that is something. The other thing you got to remember, things like, you know, our highest profit sector spare parts, spare and wear parts, don't go through backlog. The deliveries of those are usually in very short term, almost one to two days from when 80% of our spare parts orders come in. Like I said, it's important for planning, but like I said, I don't like it to get too big. We think it's at a healthy level to support our operations. As you said, it's not like we say, okay, well, it went up a bunch, so now sales are not going to go up a bunch tomorrow. But it provides a good stable base. But like I said, we actually don't want it to get too big.

Yeah, I mean, backlogs on the industrial side, that's kind of our vision forward for the next few months. And certainly they are very healthy on the industrial side. There is a normal seasonality in the ag side. to backlog because of the preseason programs and that sort of thing. So just last year, you probably didn't see it as much just because the industrial groups were booking such big orders during that time. But it feels more of a normalized, you know, order flow at the moment. I mean, if you look at if you back out the acquisition, the backlog, you know, is still, you know, up a bit, the new orders are up a bit, compared to last year, and last year was very strong.

Okay, and you saw a really good margin expansion at the industrial segment. That segment specifically, is there any sort of, you know, maybe not necessarily quantifying, but just trying to get a sense of, you know, how much was volume-related, price-related, productivity improvement-related, if there's any color that you can provide. Yeah.

As you said, it wasn't one thing. It was a number of things. There was certainly volume, which was very beneficial. There was certainly, I mean, another thing you didn't mention was the price variances. Last year, we had negative purchase price variances due to the higher inflation of input costs. This year, it turned and it was a positive. you know, contribution to margins. And, you know, that was another major effect. You know, I think those two were, you know, like I say, volume and input costs were probably the two biggest contributors.

And the full effect of pricing.

Yeah. Well, last year, yeah, we were, as a result of the higher input costs, we were raising our prices more last year. Some of that we felt last year, more of that we actually have felt this year. Yeah.

The major difference between ag and industrial is that industrial was getting favorable volume effects and the ag, while they were getting the favorable effects of pricing and lower steel, they had a negative volume effect. That's why you saw industrial expand.

We've seen such a volatile last four or five quarters with pricing. just trying to get a sense of how much, you know, pricing and how much volume really. So like the 12% revenue growth at industrial, you know, is it half pricing, half volume? Or how can we think about sort of, I'm just trying to think of what, you know, organic volume is these days.

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

We think it was a little more volume than price on the industrial side. I mean, it was, yeah, that sort of growth we didn't get.

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

And then on the ag side, I mean, same type of thing. What is sort of the volume like relative to pricing? I mean, is volume, I assume you got a little bit of price on the top line, so is volume down high single digits, or how can we think about the volume there?

Yeah, and the volume's down mid-single digits even, yeah. But we got some pricing, I mean, so.

Yeah, I mean, it's between 5% and 10%. I would say high single digits, the volume would be.

Yeah.

And we got offset some of that with price. And then we got a little bit of help on the margin line with the lower steel cost.

In terms of that, I wanted to ask, because I think steel, especially at the agriculture segment, that's a big component compared to maybe some of the other products or business categories. Have we just started to feel that tailwind of price costs with steel prices coming down, or have you been feeling that? Do you get more of a benefit in the back half of the year?

We're going to get more of a benefit. Yeah, we're going to get more. Now, especially if you're doing quarter to quarter, you know, comparing current year quarter to prior year quarter, we did a great job of delaying the steel cost increases, particularly in the ag division, to the second half of the year. So, number one, last year. So, number one, you know, the comparison gets a lot easier there. And then number two, it's come down quite a bit from that high second half steel cost. So second half of the year, the year-to-year comparisons are going to be a lot better on steel costs.

Yeah, that's right. Because we have about a 60-day delay. For some units, it's as little as 30. Others, it's up to 90. But on average, about a 60 to a little more than that day delay from when steel prices go down to when we feel the effect. The same thing on the upside. Right. So, I mean, that's why we're going to feel a lot, you know, like say steel prices went down dramatically in the first half, but we're going to feel it even more dramatically in the second half.

In the second half, yeah, because of the delaying mechanism. And then plus when they went up last year. So, it's going to be a better picture.

And then, I mean, I imagine the volume probably gets better for, I mean, theoretically you're just thinking – potentially how it plays out, that volume starts to improve probably in the third quarter and accelerates, especially if we get the ag year that we're thinking in 2020 and also with the, you know, you're gonna have pretty good comps or easy comps in the first half of next year. So do you see that as a likely scenario? Is that what you're sort of thinking?

Yeah, well, I mean, we say second half, I mean, that the volumes get better. I mean, third quarter particularly, you know, usually is one of our most profitable, especially in the ag sector, because as much as the spare parts sales are the highest level there. So that's not as much volume as it is mixed, since that's our, you know, our highest mix. But comparing to last year, I mean, last year, ag was okay. The first half of the year, they really fell off the second half. So the second half You know, like say the comparables from last year's second half are going to be easier this year. So, I mean, yeah, I mean, we feel that the, you know, third quarter is, you know, should again in the ag sector be one of our, you know, our strongest for the year. But, you know, the fourth quarter, there's always a little tail off because it is a seasonal, the seasonality effect.

Do you think the parts are weaker than normal in the third quarter so you don't get that good of a mix?

No, no, no. They're actually stronger in the third quarter. And I think, yeah, we think they'll be somewhat in line with last year.

I'm saying compared to sort of a normal year because farmers weren't out in the field as much early in the year, so there's not as much maybe equipment usage this year compared to prior years, so maybe you don't get –

We certainly see that. I mean, you know, what acreage under cultivation this year is supposed to be down about 10% because of weather. You know, that certainly will have an effect. But we're seeing, I mean, like I say, I mean, we're actually seeing bookings sort of in the second quarter this year and ag being ahead of the previous year. And so, I mean, you know, actually entering the third quarter with a little bit more ag backlog than we had even last year.

Joe, going into the third quarter and fourth quarter, AG does their preseason program, so they take orders that are stronger for units. As you enter Q4 and Q1, which are seasonally, because it's colder, the parts are lower, then you ship whole goods higher there, so margins are down a little bit in those two quarters. That's pretty much the way it's always been.

But year to year, we're not feeling like there's a continuing negative trend there. No, we've kind of felt the follow-up. I think you can look and see what the pattern was this last year, and we're seeing some signs that we're not at least seeing a continued decline in the ag demand.

Okay. All right, I have a few more questions, but I'll jump back in queue.

Thank you. Our next question will come from Chris Zickey with Singular Research.

Hi, everyone. Just a question on, I've got just a question on, what were your best products for the industrial, your industrial segment? And, you know, why did they do so well this quarter? And, you know, do you see them doing well in next quarter and for the year?

Some of our best products in the second quarter industrial were like excavators, had very good vacuum trucks, and street sweepers. Those were probably our three strongest and three of our biggest. So, I mean, it was good that they all – and I think they all just seemed like their core markets were stable and strong. I mean, I think we've been helped a little bit by some new product introductions and I think we executed well in those areas. Actually, snow was up, but it was still sort of weak because the second and third quarters are sort of weak for our snow businesses, even though it was up, but it's weak. Surprisingly, their backlog there is actually nicely well above. I think as it's going into next season, they've benefited by some strong snow in last season. You know, our mower groups, you know, which are certainly one of our top performers, held very steady. They did see a little softness, I think. I mean, you know, sales were fine on plan and everything, but I think bookings there were a little softer. And, you know, we're not – it's sort of too early to tell why. I think we think sometimes – due to the heavy winter, then some of the municipalities and governments spent more on winter. And so two things, they were later getting into the fields to start mowing, and maybe they used up some of their budgets in the winter as well. So we'll wait and see how that continues to develop. But across the board, we did very reasonably, but as I said, super products and back all you know, our vacuum truck units, our great all units, our Schwartz sweepers all did all did quite well. And, you know, the vacuum trucks really not only benefited by I think good governmental business, but but strong non governmental and we've seen some nice continuing growing in some of the non governmental applications for vacuum trucks, everything from vacuum excavation opportunities and other, you know, just, you know, on construction, mining, utility, other kinds of end users that have held up well. But, you know, so, you know, it was pretty broad-based improvement in industrial.

Okay. Great. And then... One question I thought, the European division was going to be, I guess, consolidated into the two other divisions. Is that right? Am I right there?

Yeah, we announced that that would happen in the fourth quarter of this year. I mean, you know, when we announced that last quarter, we said it would happen, you know, beginning in the end of the fourth quarter. So up until then, we will still be reporting as we have historically. And when we do that, we will give a whole reconciliation of that change.

So we'll report the third quarter. Earnings release will be, Chris, in the three segments, year end when we do the fourth quarter and our 10K at the end of the year, we'll go to two segments.

Okay. Great. Thanks for that. Thanks. Good quarter. Thank you. Thanks, Chris.

Thank you. Our next question will come from DeForest Hinman with Walt Housen and Company.

Hi. Thank you for taking my question and congratulations on the good quarter. Thanks, DeForest. Looking at the balance Looking at the balance sheet, last couple quarters, the inventory has been growing a little bit more rapidly than sales. I know we have Dutch Power in there as well. Can you just have a discussion about the level of inventories, your comfort with them as it relates to your business outlook, and where should those be heading directionally as we head towards the end of the year? That's my first question.

Inventory levels are too high, I can tell you that. And, yeah, you're right. I mean, you know, there was Dutch power in there, which sort of, you know, had an effect. But we believe that they should go down for the rest of the year compared to, you know, previous levels because, yeah, as a percent of our sales or our assets, inventory is too high right now. And, yeah.

Yeah, and then we, you know, if you look at the cash flow statement in the 10Q, you can see that we've kind of turned that now. And in the quarter, we started to reduce the, you know, if you exclude the acquisition, we have begun the process of reducing inventories and even receivables. So, we generated in the quarter. If you looked at the first quarter cash flow statement, we were a negative $29 million cash used by operations. We're now positive nearly $900,000. So we generated over $30 million in cash during the quarter, and that was not only higher earnings, that was also a little bit of reduction in receivables and inventories.

And I expect by the end of the year, on a year-to-year basis, we will be reducing inventory for the next two quarters. Okay, that's very helpful.

In the 10-Q disclosure, We're showing a nice improvement in parts sales, parts actually growing at a higher rate than the total revenues. I'm sure there's a number of puts and takes there. Can you just help us better understand why were parts so good in the second quarter?

Partly because they were weak last year. I think they were a little weaker last year than they should have been. I think we put a little more effort. Certainly, the acquisition helped that too.

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

Okay. Some initiatives, but no real changes from us or from a competitive standpoint that would move parts drastically? No.

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

Yeah. And some of that's even because, like especially in Ag, whole goods sales were down more. In Ag, parts sales held up better than whole goods sales.

Right. Okay. That's helpful. One of the other things that I noticed in the 10Q disclosure is that you've further delineated your geographic sales. I'm going to guess that some of that's related to the Dutch power deal, but a couple things stood out to me. Your Chinese geographic sales have meaningfully increased, and you've also had a pretty nice increase in your Netherlands sales. I think I understand that very clearly with Dutch power. And your Germany sales have moved up significantly. sequentially as well. And that's been an area where there hasn't been a lot of growth, but it looks like it's a pretty big market. So at a very high level, can you just start to walk us through the opportunities in the Netherlands, in China, in Germany, as we've had Dutch power on our books now longer. What is the opportunity to either grow SKUs in those markets, grow distribution? And, you know, what's that opportunity? Can you just help us understand that?

Sure. Well, as you said, the whole Netherlands and most of the German improvement was all Dutch power. Because, I mean, Dutch power is, you know, of course, Netherlands is their home market. But Germany is one of their biggest markets, too. I mean, the majority of their sales are in Europe, but they're really sort of in more central Europe. And, you know, certainly the Benelux countries, Germany and all are good markets for them. And we believe, I mean, you know, certainly obviously is, you know, we've just, you know, like that. The second quarter was the first really, I mean, the first quarter we had very little Dutch power sales in it. Second quarter had a lot. So, yeah, we think that, you know, like so that'll, it'll be more like at those levels going ahead. And we think we can improve it a little bit more because, you know, that's one of the benefits of Dutch Power. They have better distribution in sort of the Benelux and in Germany than we have for some products. And we will try to utilize them to, you know, really strengthen our position in those markets. So we see those as, you know, continuing to be big markets for us. The China thing was mainly actually snow removal. um you know we had some big orders uh in china on snow removal mainly from uh some of our our canadian operations our tenco and our sort of rpm uh acquisition which which which was just a couple years old itself i mean we only bought that in 2017 so so uh but rpm and and and uh tenco both had And they typically have had some very nice orders from China over the years, but the Chinese orders tend to come in lumps. I mean, you know, so it tends to be big ones. And, you know, so we had some very nice ones, you know, already this year. And still have a good backlog, actually, of orders going to China. So, but it's – you know, China's not – you know, like I said, we don't sell a lot of – Other stuff, I mean, Great All will sell some stuff there, and we sell some odd sweepers there. But on snow removal, actually, we've got, like I say, the majority of that is snow removal, and we believe there will be some more of that, and that China has been and will continue to be a relatively decent market for snow removal there. Uh, but, but it, it, but like I say, it, it, it's lumpy. I mean, it comes in big chunks and, and so.

One other thing in the other category in that, uh, geographical location, that other is there is no one country that's greater than a million dollars. Okay. So we will always list something that's greater than a million on our list.

Okay. That's helpful. Maybe just a different way to ask that question on that Netherlands business, uh, 10.1 million. When I think about the France business, I think that has a lot of vac truck business. Are we selling vac trucks in the Netherlands right now? And if we aren't, is that a meaningful?

No. I wish we would. We are trying to, you know, looking at ways of getting a better distribution there. In the Netherlands, you know, like it's half underwater. I mean, they are, you know, vacuum trucks are actually – There's some local competition there that are big players there. We've actually not done very much from our Rivard French vacuum truck business into the Netherlands. That's one thing we hope maybe with the Dutch power distribution, we can maybe help that a little bit. Like I said, it's a decent market for vacuum trucks, even though it's a small country. but there's also some pretty well-established competition in that market.

You can kind of ask the same question for Germany on the back trucks.

Germany is a little different. Again, we don't do much in Germany with vacuum trucks either. Again, I think there's a potential, and we'd like to. In Germany, I think there's a couple of German competitors, but I think it's a more open playing field than the than the Netherlands market is. And so, yeah, I mean, I think there is some potential, but we've just really not had the right distribution, and we're hoping that we can get that a little bit better. But, yeah, I mean, in fact, we've got some initiatives to, I think, improve the export sales of Rivard in general, to get them out of sort of the, you know, southern Europe, out of their stronghold in France. And a little more involved in central and northern Europe.

Okay, thank you for that help on the strategic side in Europe.

No problem.

Thank you. Again, as a reminder, if you would like to ask a question, you can do so by pressing star 1 now. Our next question will come from Chris Moore with CJS Securities.

Hey, good afternoon, guys. Hey, Chris. Hey, Chris. Hey. Maybe just start with the lower margin backlog in Europe. Did any of this impact you too?

Oh, yes. Yes. We've been impacted by that really for about the last four quarters. like the last half of last year and the first half of this year. Like I say, it still hits a little bit in the third quarter, but most of that will probably be pretty gone. We had one big order that was a lot of our really had our plant, took up half our plant on some orders that were in retrospect lower margin than we thought. We made some safeguards to ensure that we don't do that again.

Got it. So from a margin standpoint, it sounds like there'll be less of this backlog flowing through in Q3 than did in Q2?

And it could be finished in Q3. Right, exactly. Okay, got it.

You talked quite a bit about backlog before. I wanted to bring it down. Are you experiencing increasing lead times with any products at this point in time?

No, not really. And, in fact, I mean, you know, part of our inventory issues were because last year on the input side we had some long lead times from suppliers. So, but, you know, this year, I mean, our lead times for us, I mean, I think we're holding lead times pretty steady. You know, there's a few exceptions, but basically our lead times are pretty steady and have not, you know, of us to our customers. Even with some places where we got some strong backlog, it's not impacting our lead times very much at this point. We feel pretty good. It's good that on the purchasing side, the buying component side, I think lead times for those have improved a little and certainly have not gotten worse. Whereas last year at this time, they were getting worse. But on the input side, the lead times have come down a little bit, and our lead times have stayed the same or come down a little.

Got it. So cool. And in your prepared market, you talked about indications of market softening in the U.S. economy. Anything specific that you're thinking about with respect to your core industrial products that, you know, could be impacted or was just kind of a general statement in terms of the overall?

No, I think it was kind of a general statement. I mean, you know, and like I say, some of that's even good because we're seeing like, say, freight and trucking availability has gotten better. It was hard to get trucks last year. That's gotten better. I think lead times, as I said, on even things like truck chassis, some other input components have gotten a little bit better because, like I say, their sales or supplier sales have softened a little bit. Everything you read in the paper these days, there are just some slight indications of some softening in the general economy. and even things like it's interesting we always seem to have there's always seems to be a little slight dip in governmentals in election years and you know you got an election year coming up next year just I think it's because you know it's not it's just a distraction almost and you know it's not almost at the federal level but even at the state level where you know like to say if one party comes or goes, you know, there's a little bit of a delay in some orders. So anyway, it's a few little things. But like I say, we're holding up well. Our backlogs are decent. And, I mean, we feel good. You know, in response to one of your other questions, I mean, inquiry level for us is still quite buoyant. And, you know, we feel good that it's not just, you know, what's in backlog, but, you know, our quotation activity is remaining quite buoyant.

Got it. Helpful. I appreciate it, guys. No, thank you. Thanks, Chris.

Thank you. Our next question will come from Joe Mandello with Sidoti & Company.

Hi, guys. Just one follow-up question. Just wanted to ask regarding your CapEx projects and all the smaller productivity improvement initiatives that you sort of generally consistently focus on, but it seems like you certainly have a lot on your plate, which is a positive thing right now. So I'm curious, it seems like you're getting pretty good margin expansion, aside from the volume, from productivity improvements this year, but we have those two big CapEx projects that should be done sometime in the first quarter or by the second quarter of next year. which should start to really benefit margins in the second half of the year. So I'm just wondering if you think that the contribution from productivity improvement initiatives next year will be even greater than what you're seeing currently.

I think they'll be consistent. I'm not sure there'll be a lot, you know, because like I say, you know, with us, it's a lot of little things more than, you know, like I say, we've got a couple big things, but usually it's a little bit from a lot of things rather than a lot from a little few things. So I think, you know, it'll be good. You know, like I said, we're also being helped this year by purchase price variances and this kind of stuff. And so some of that will, you know, that's helping margins this year. I don't know what's going to happen with you know, if I knew what was going to happen with the input cost or exchange rates or something like that, I mean, you know, some of the other things that can play into these kind of, you know, like variances on margins. But I think Certainly, we ought to be at least in line, maybe a little bit better when these things come online next year, and with some other initiatives we got. As I said, we're spending more on CapEx, even on just normal improvements at other plants, buying a few more robots, a few more lasers, a few more you know, CNC equipment. So, yeah, I think it should be at least as good as, and maybe a little bit better, but there's some other factors going into it.

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

Yeah, that's right. Probably as good or better as it's ever been. Okay, great. Thanks a lot. Appreciate you taking my questions. No, thank you, Joe. Thanks, Joe.

Thank you. Again, at this time, if you'd like to ask a question, you can do so by pressing star 1 now. I am showing there are no further questions in the queue at this time.

Okay. Well, thank you again for joining us today. We appreciate your all's attention. and we look forward to speaking with you on our third quarter call at the end of October. Thank you much. Have a good day.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.