Alamo Group, Inc.

Good day and welcome to the Alamo Group, Inc. fourth quarter and year-end 2019 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ed Rizzuti, Vice President, General Counsel, and Secretary of Alamo Group. Sir, please go ahead.

Thank you. By now, you should have all received a copy of the press release. However, if anyone's missing a copy and would like to receive one, please contact us at 827-3746, and we will send you a release and make sure you're on the company's distribution list. There will be a replay of the call, which will begin one hour after the call and run for one week. The replay can be accessed by dialing 1-888-203-1112 with the passcode 3971238. 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, which speaks only as of this date. I would now like to introduce Ron. Ron, please go ahead.

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

And so ahead. Thank you, Ron. Before getting into the results, I will start with a few comments regarding the fourth quarter impact of the Moorbark acquisition. I will then focus on orders, backlog, and sales before addressing margins and earnings. Finally, before closing my comments, I will also discuss our coronavirus exposure as we know it today. On October 24th, we completed the Morbark acquisition, the largest in the company's history. We immediately shut down their operations for about a week to get a clean cutoff to conduct wall-to-wall physical inventory counts and provide employee orientations. This shutdown, along with normal holiday closures, limited their number of operating days right out of the gate. Still, Morbark accounted for most of Alamo Group's 2019 adjusted EBITDA growth. Including the pre-acquisition period, Morbark also achieved the 2019 adjusted EBITDA estimate we previously provided. Our fourth quarter 2019 GAAP earnings results were negatively affected by large non-cash expenses caused by Morbark opening balance sheet adjustments to step up acquired inventory values from historical costs to fair value, as well as the allocation of a significant portion of the purchase price to amortizable intangible assets as opposed to goodwill. The inventory step-up totaled $8.1 million, of which we expensed $3.3 million during the fourth quarter. We will expense nearly all the rest of it during the first half of 2020. The incremental amortization expense resulting from the Moor Bark and Dutch Power acquisitions was $1.7 million for the quarter and $2.2 million year-to-date, or for the full year. Before discussing new orders and backlog, I should note that while we did not carve out Dixie Chopper sales and earnings during 2019 due to their immateriality, their fourth quarter new orders and backlog were significant and merit discussion or merit inclusion as part of the effect of acquisitions on those specific measures. Fourth quarter agricultural orders exceeded the prior year by 46% with the benefit of acquisitions and by about 34% without. You may recall from last quarter's comments, our third quarter to prior year quarter comparison of agricultural division new order bookings was affected by an approximate $24 million pull forward of new orders from the fourth quarter into the third quarter of 2018. This occurred because our dealers accelerated orders to avoid an announced price increase. While this timing issue unfavorably affected our third quarter comps, it had an opposite favorable effect on our fourth quarter comps. For total Alamo group, excluding this timing effect and the orders booked by all three of our 2019 acquisitions, fourth quarter new orders were up slightly compared to the prior year quarter. This was truly a mixed result as we saw a strong rebound in the industrial division mower and excavator orders, continued strength in vacuum truck demand, and about 5% higher North American bookings in the agricultural divisions. This slightly more than offset weaker new order rates in sweepers and snow removal, as well as lower international bookings in the agricultural division. Year-end 2019 backlog of $261 million is up about 9% over the prior year-end. The Dutch Power, Dixie Chopper, and Moorbark acquisitions added about $40 million to year-end backlogs. Without the contributions from acquisitions, our year-end backlog without Borbark and Dutch Power was down about 9% from a very high year-end 2018 level. Agricultural division backlog without Dixie Chopper was down about 4% year-to-year, which is considerably better than the 16% unfavorable comp we saw as of the end of the third quarter. Fourth quarter 2019 net sales of $300 million is a company record and exceeded the prior year fourth quarter by about 17%. Full year sales of $1.1 billion were up about 11% over prior year. Excluding the impact of the Moorbark and Dutch Power acquisitions, comparable sales were up less than 1% for the quarter and about 4% for the full year. During the quarter, industrial division net sales of $222 million exceeded prior year quarter sales of $172 million. Excluding the effect of acquisitions, industrial division net sales were about $179 million, up 4% over the prior year quarter. High vacuum truck and sweeper shipments offset slower sales of industrial mowers, excavators, and snow removal equipment. For the full year, industrial division net sales of $768 million increased 20% over prior year. Excluding acquisitions, the industrial division full year sales grew 9%. If we also exclude the impact of currency translations, net sales in this division grew 10% in local currencies. For the full year, all businesses contributed to this division's organic growth except for industrial mowers. Fourth quarter agricultural division net sales of $78 million were down about 7% from the prior year quarter. Full year agricultural division net sales of $351 million were down about 5% from prior year. Excluding the impact of currency translation, net sales in this division were down about 3% in local currencies. While we saw an uptick in North American agricultural equipment orders during the quarter, the impact of weather, trade disputes, and other geopolitical events continue to constrain global agricultural economies. Fourth quarter gross margin of $68 million grew 9% over the prior year fourth quarter, primarily due to the Moorbark and Dutch Power acquisitions. Excluding the $3.3 million of inventory step-up expense, adjusted gross margin grew 14%. Fourth quarter adjusted gross margin, excluding inventory step-up expense, was 23.8 percent of net sales, which compares to 24.5 percent of net sales for the prior year quarter. Unfavorable product mix, lower production levels, higher import tariffs, and lower rental fleet utilization continue to negatively affect gross margin sales. and more than offset the benefits of lower steel costs. Full year 2019 adjusted EBITDA, excluding the inventory step-up expense, was $128 million and 3% above prior year. If we also exclude nearly $2 million of non-recurring transaction costs related to the 2019 acquisitions, this full year result would top $130 million. Adjusted EBITDA growth in 2019 was primarily due to the partial quarter of Moor Bark results and organic growth in the industrial division. Excluding the inventory step-up charge and the incremental amortization expense, the Moor Bark and Dixie Chopper acquisitions contributed $2.2 million and $3.8 million, respectively, to fourth quarter and full year adjusted operating income. Fourth quarter 2019 adjusted operating income of $22 million was about 12% lower than the prior year fourth quarter, primarily due to the factors affecting gross margin already discussed, but also due to an increase in R&D spending and Dixie Chopper startup expenses. Our effective income tax rate was 25.4% compared to 25.7% in 2018 after excluding the prior year one-time tax adjustment related to new tax legislation. Excluding acquisition costs and the effect of the Moorbark and Dutch Power acquisitions, adjusted net income was $15.5 million, or $1.32 per diluted share. Excluding one-time favorable tax adjustments, fourth quarter 2018 adjusted net income was $16.3 million, or $1.38 per diluted share. Fourth quarter 2019 net cash provided by operating activities was $47 million, which is over 400% above prior year quarter operating cash flow of $9 million. This was mostly due to fourth quarter liquidation of nearly $32 million of receivables and inventories compared to only $3 million in the prior year quarter when industrial division organic growth drove higher working capital requirements. Full year 2019 operating cash flow of $91 million is a company record and over 600% better than prior years. Fourth quarter 2019 investing cash flows were highlighted by about $350 million cash used to acquire Morbark and $11.5 million of capital spending, which as expected, continued to track above prior years. Full-year capital spending was $31 million compared to $27 million in 2018. Due to acquisitions, debt net of cash increased about $350 million over the prior year quarter. Excluding acquisitions, debt net of cash would have been about $53 million lower than prior year. Now, regarding our coronavirus exposure, we estimate that between $40 and $50 million of the components we buy are manufactured in China. Most of these can be sourced from non-Chinese suppliers, but the supply chain for some power transmission components used on mechanical mowers could be temporarily disrupted. Most of our agricultural division sales would be exposed to such a disruption, but as of today, our major suppliers are back up and running, though not necessarily at full staff. Currently, we're looking at two- to four-week inbound delays, and we have boots on the ground in China closely monitoring the situation at each of these suppliers. In the meantime, we are actively pursuing sourcing contingencies to mitigate the risk that the situation worsens. To date, we have seen no coronavirus impact on demand for our products. In summary, our fourth quarter and full year 2019 results included completion of the Morabark acquisition, the largest in the company's history, record fourth quarter and full year sales of $300 million and $1.1 billion, respectively, continued margin pressure from lower production volume, unfavorable product mix, and lower rental fleet utilization, which more than offset the benefit of lower steel costs, and strong fourth quarter and record full year operating cash flow over 400% and 600%, respectively, above the prior year. I'd now like to turn the call back over to Ron.

Thank you, Dan. Well, as you certainly heard in Dan's presentation, our fourth quarter results had a lot of noise in it. Everything from acquisitions, inventory write-ups, amortization, some market challenges, and coronavirus and other issues. But all in all, actually, we're pleased with the achievements we made in the fourth quarter and with our 2019 results in total, which while certainly were off a little and below our expectations, were still the second highest in the company's history, and sales were at record levels. First of all, as I said, we acknowledge our earnings were somewhat short of our expectations, but as we reported starting in our third quarter, our results were impacted by weak agricultural market conditions, and some unfavorable mix even in our industrial sector. And some of these same conditions affected our fourth quarter results, but not quite to the effect they did in our third quarter, which we think is a very positive development. And it is also good to note sales for the year were, as I said, even before the contribution from acquisitions at record levels. even with the decrease in agricultural sales, our overall sales for the year, excluding acquisitions, were up 4%, and even more so in local currencies. In fact, with regard to currencies, as you noted, our industrial and agricultural division are probably going to have a little bit more currency effect in their results going forward now that we no longer report our European operations separately. But I also think this change in reporting, which just started with our fourth quarter results, will actually make our reporting more consistent since we now have all similar products reporting together. And while our organic profits were below the previous year due to, as we said, weaker sales in agricultural, and our margins even in our industrial division were still affected by some unfavorable sales mix, Still, we had fewer of the internal challenges that affected our results that we reported on in the third quarter, which, again, like I said, definitely see some improvements in the fourth quarter. And we were also pleased that bookings for the quarter were up. This was particularly welcomed in our ag sector, which had been impacted by declining backlogs during most of 2019. again showing some signs of stabilization in that market. But of course for us, the major development has been the acquisitions we completed in 2019, capped in October with our largest ever, Morbar. We believe this is a significant achievement for Alamo's future, though it certainly clouded our fourth quarter results. We completed this deal in late October, and as Dan said earlier, They were down over a week just to close the books, count the inventory, get everybody trained before being fully operational. Of course, then that was quickly followed by Thanksgiving holidays and their normal Christmas shutdown. Our results were obviously limited, but we were really pleased that we were still able to generate over $35 million in sales just in that short time. And again, as Dan pointed out, our costs were further impacted by this. I mean, in addition, there was transaction-related expenses, higher amortization costs, and the required step-up in inventory valuations, which alone added $3.3 million to cost of goods sold in the fourth quarter. So while obviously the higher level of amortization expense will continue as we move ahead, Certainly the transaction expenses will go away in 2020, and the step-up in inventory valuation should be all flushed out through the system, practically all by the end of the first half of the current year. We'll still have a little bit of integration expenses, but we believe more bark should be a very major contributor to our results in 2020. A good indication of this can actually be seen in our 2019 results, where despite softer organic results and acquisition-related expenses, our unadjusted EBITDA for 2019 was at record levels for Alamo Group, and we believe it will get significantly better in 2020. In addition, we are pleased by a number of our other internal initiatives, which we feel will help our organic sales growth to drive further operational improvements I mean, these initiatives include a variety of new product introductions that have been made recently. We've also made, as you noted, our CapEx spending has been up as we have been spending more on our plants to improve our manufacturing efficiencies and invest in technology. And, of course, the big driver of the increase in our CapEx for the year was our new a new greenfield plant we built in Wisconsin, which is part of our plan to have really four or five plant consolidations completed within about a two-year period now. So most of these we've previously discussed, and all of these are well underway and very pleased with the direction that's taking us. And certainly there's still a variety of challenges that we continue to face. The agricultural market is still soft. So showing some signs of stabilizing a little bit more in the U.S. However, in Europe, this sector is a little weaker and actually made worse by some unfavorable weather conditions in the last year. Our industrial products seem to be holding up steadier, and we're pleased to see some areas like our mowing products, as Dan commented, which were a little soft, major profit contributors for us, but they were a little soft in 2019. but are starting 2020 with certainly improved bookings and the outlook for them is back to normal. And, of course, there's a variety of external issues that we have been commenting on. I mean, certainly in the U.S., the presidential election in Europe, the Brexit situation is still not totally, you know, we don't know what's coming. We just don't know what the terms are. Trade disputes with China, sort of the same thing. There's some agreements made, but it's still not clear how all that's going to affect us because we're still paying certain tariffs and all. And, of course, at the top of the list, as Dan pointed out, is the coronavirus situation, which is a major concern for everyone. We're pleased that our major component suppliers in China are open, though not at full-off staffing levels. And at this time, we do not feel this situation will have any impact on our first quarter results. We have everything we need from there to meet all of our commitments in the first quarter. But we could face some disruptions in the second quarter if components do not start flowing at some level from China within the next month or so. And this would be mainly at the end. in our agricultural operations, much more so than in our industrial. But as a result, we're monitoring the situation daily, taking what actions we can to protect our deliveries and mitigate any adverse situation. But I don't think anyone knows the full effect this issue will have on us or our suppliers or our customers or the global economy, for that matter, at this point. So while there are definitely some areas of concern, we actually feel good about the outlook for Alamo Group. There was certainly a lot of noise in our 2019 fourth quarter results, but we actually feel the results are better than they first appear, and we think this will begin to become more evident as we move through 2020. With our various internal initiatives combined with the contributions from acquisitions, We feel the outlook for 2020 is very positive, and we can absolutely assure you that in this current year, I mean, we will have a much stronger internal focus, you know, working on the integration of the acquisitions and our other various internal initiatives, and our total focus will be on delivering the results we know we're capable of producing. So with that, thank you for your support, and we would now like to open the line to any questions you might have.

Thank you, sir. 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 to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We'll pause for just a moment to allow everyone the opportunity to signal for questions. Our first question will come from Chris Moore with CJS Securities.

Hey, good morning, guys. Good morning, Chris. Good morning. Just trying to understand a little bit better the, you know, kind of the ultimate impact that more bark will have on the industrial margins, a couple of things. Is there much seasonality in more bark? Is Q4 normally a slower time of the year? Is there any impact on seasonality there? There's a little impact.

You know, vegetation-related activities are usually a little slower at the end of the year and first of the year in the winter months. I mean, when it's snow, they're not cleaning up brush and debris quite as much. So it's almost not as much on the equipment itself as in the spare parts, which, you know, in the spare parts are certainly... you know, a little bit higher margin. So, you know, not significant, but some seasonality. Morbark, though, is, you know, like I said, I mean, you know, when we announced the acquisition, we gave some prems for, you know, what we, you know, their sales levels and everything, and we believe that, you know, certainly they're still in line with the indications we made then. And as we pointed out then, their margins are actually higher a little bit better than our margins. So, I mean, we think that they should have a somewhat positive effect. Again, you've got to take out the noise of the inventory step-up in the short term and amortization and things like that. But, no, we actually think they'll be a very nice contributor with a little bit higher margins than we have in general.

Got it. Yeah, no, it sounded like just from a, a revenue-to-expense matching in Q4 beyond the one-times items, there was a little more expense there than revenue you had shut down that one week. So I'm just trying to understand kind of that balance.

And the thing is, is like that one week we're shut down, it's not like everybody went home. They were out counting. And, you know, we had interest accruing that week and everything else. Yeah. It just was a little bit of a slow start, mainly because we wanted to make sure we had a clean start.

Got it. If I look at the industrial margins in Q4 versus Q4-18, it was 5.5% versus 10.2%. I think if you add back the one times, you know, the incremental amortization, the step-up, et cetera, it gets you to about 8%. So then you had kind of talked about it was a combination of mix and rental fee utilization and volume. Is mix the big driver there in terms of getting back towards that double-digit level?

No, it's just one of the several factors. You know, we did list it first, so it was a little bit larger impact there. But all three of those factors, you know, come into play in the industrial division. You know, remember we had a really weak industry quarter on mowing and excavators in the third quarter. And so, you know, while the bookings kind of surged there after quarter end on those two product lines, you know, that really isn't affecting the fourth quarter. That's kind of more of a delayed effect. It's going to benefit us in 2020. So, you know, production levels were still lower. We were absorbing less, you know, you saw the inventories come down. You know, we're absorbing less cost into inventory and So all of that has a little bit of an impact that compresses margins, but we don't see that as anything other than a temporary impact.

Last one from me. Just in terms of the expected Moorbark intangible amortization for fiscal 20, can you give us just a... On Moorbark, we booked a million and a half for two months.

So if you extrapolate that out... It's $9 million? Yeah.

Chris, that's just an estimate. Yeah. Yeah, understood, but I'm going to start somewhere. Okay.

There's your opening placeholder. All right. All right. I'll jump back in line. I appreciate it, guys. Thank you.

Thank you. Our next question will come from Joe Mondello with the Dodian Company.

Hi, guys. Good morning. Morning, Joe. So... the EBITDA margins that Morbach has historically seen, you know, excluding the purchase accounting amortization, that's still sort of intact?

Yes.

Okay. And then the interest, I'm just going over a few assumptions that I've made with this acquisition. The interest expense seemed a little higher than I anticipated.

I probably should have commented on interest. Interest was about $5.5 million in the quarter, but if you think about it, we were about $150 million for three weeks and then up around $500 million for almost the balance of the quarter. I think we did the pay down for debt pretty late in the quarter. I backed into about 4%, you know, using that kind of weighted average outstanding debt.

Joe, another way to look at it, too, is If you look at that attachment that we have, number two, where we net tax-effect the interest expense, which is like $3 million, if you back into the gross number, that's about $4 million of additional interest expense. And so normally we would have met about $1.5 million, so about only $4 million of that is related to the acquisitions. Okay.

But in total, that's about 4%. 4%. Okay, good. And then lastly, with the acquisitions, Can you talk about the synergies? I know you have a lot of opportunity. Not sure if you can quantify anything, but anything that you can provide and talk about what you're doing, how much it's going to benefit you, and what the timing is.

You know, they're in several buckets for sure. I mean, you know, one of the big ones is procurement, and we're pleased that, I mean, you know, like I said, we haven't put out any numbers, but, you know, that we're actively working on. On that, and we feel we're already achieving, have reached agreements to achieve about half the benefits already, but none of which will show up until the second half of the year because they've got to flow through their old inventory at their old purchasing rates. And so, I mean, you know, I think procurement's a big one. Certainly putting them on our operating systems and this kind of stuff, I mean, that's a function that will be going throughout this year we have already i mean you know literally we've started three uh capex is there uh already to on investing in the shop on some new uh robots and some and some new cutting uh capabilities which uh we believe will help their their cost so there's some operational ones and then you know a little bit longer term i mean you know more bark has been you know, good company, but very strong North American, you know, not as much international. And we've already got our European, our Brazilian, and our Australian groups have all been there lately. And, you know, we hope to, you know, by the end of this year, have some new international capabilities set up to market their products through our distribution network outside of North America. And so, I mean, you know, as I said, it's a, So there's a variety of issues, different buckets, and all of them are underway, but most of them are sort of second half of this year into next year before. We believe those will start being evident in the results.

Okay, and then last question regarding more bark. What is the incremental depreciation that comes with Morbark, and how does the acquisition affect the effective tax rate of the whole company?

You know, I think from the depreciation, please, we've not given you that information yet. As part of the valuation that we're going through right now, there's going to be some step up in some of the fixed assets, so we're not putting that information out just yet. As an effect of the tax rate, you know, most of their... Sales are in the United States, so if you look at a federal tax rate of 21%, they do have, obviously, a state tax there, but I would say that it's probably going to be roughly in the same range of where we're at now. You see a swing maybe, you know, a few tenths of a percent. Okay.

I had a couple questions about the industrial segment.

I'm sorry, go ahead. Yeah, no, just, you know, there was a tax benefit because we bought LLC interest. There was a tax benefit. which will affect cash taxes, but you don't necessarily see that in the GAAP tax provision number. So, you know, there's, you know, cash taxes should actually be better than what we put in the provision. We're going to put, you know, continue to put numbers into a deferred tax liability. Okay.

And I had a couple questions on the investor segment. Could you clarify? I missed one of your comments. You were talking about excavators and vacuum trucks. I think when you were talking about the order rates, was that positive rates with those products or negative in the fourth quarter?

Yeah, well, vacuum trucks continue to be strong. So we have strong, you know, while the rental fleet utilization has dropped some, and we really didn't see a big pickup in that in the fourth quarter. You know, the order rates for new trucks have continued strong. Excavators rebounded. Remember, we had a really kind of a weak sort of third quarter report on excavators as well as industrial mowing. And while the industrial mowing has been down all year, excavators was more of a drop-off, you know, around mid-year. We saw strong rebounds, and we even mentioned this, I think, in our call last quarter, that we saw strong rebounds in orders in excavators and industrial mowing in the fourth quarter.

Okay. And could you just talk overall how the order rates have been trending, you know, through the first two months of this year?

I think so far where we're at right now, Joe, it's trending, I wouldn't say 100%, you know, huge positive increase, but they are trending positive for us right now. We've got a few areas, obviously, that continue to need to get there and probably struggling, but overall I think we're fine so far. We're not seeing huge impacts yet.

Go ahead, Rob. No, I was going to say they're steady and up, which is, I mean, you've got to remember last year, I mean, sales were going down in ag and bookings were going down most of the year. And so, you know, it's good to see that our bookings are now coming back above our sales levels. And as I said, mowing equipment up nicely. I mean, some of the soft areas from last year, excavators, mowing equipment, You know, doing well. Excavator, I mean, vacuum trucks are continuing to be very strong. And, I mean, snow's off a little bit. Mowers, I mean, sweepers probably are, you know, off a little bit. But in total, they're strong, you know, and better. I think even the mix a little bit between Europe. Europe is not quite as strong. Europe is seeing a little bit, especially in ag. They've had some adverse weather, but actually the industrial products in Europe are very strong and steady, too. Still a little softness in European ag, but in total they're up a little bit.

All right. And last question for me, sticking with industrial, could you, I don't know if you can expand at all or, you know, if you can quantify anything, that would be great. But talk about the productivity initiatives that you have been focusing on, plant consolidation, automation, you know, how you're seeing that going and the benefits and the timings.

Yeah, we're pleased. We had two major consolidations we announced. I've been talking about last year. One was we expanded our TENCO facility in Canada to allow us to move our RPM facility, nearby RPM facility into that one, consolidate the manufacturing. But that has now been completed late last year. But that's done. The other major one was the new plant that – for our super products in Wisconsin, where we built a greenfield plant in McWanago. We started, you know, like that construction has been completed on, basically on time, on budget, and we started moving in, literally the office started moving in just before the first of the year, and now most of the production is gearing up, you know, we said we would, you know, that the year of production in the first quarter and that we are on track for that on track on budget and so that will allow us to to close uh you know you know consolidate several excuse me several plants and into one and in fact we haven't sold but we've already got a contract to sell one of the uh one of their plants that we did own you know the one we did own in milwaukee Uh, so all of that's on time. I mean, obviously none of this is starting to show up in the numbers yet, but we think it will. And, and we, uh, you know, most of our, as we said, we spent a little bit more on CapEx than a little bit more. And, and so, I mean, we, we are on target and believe most of that stuff will start contributing to our bottom line. Um, you know, at least in the second half of this year.

Okay. Anything else? Um, I don't know, significance. I know you are always doing a lot of random things, and you've talked about automation.

As I mentioned, we're already buying some new robots at Moorbark. We've got a new paint system coming online at Rovard. We've got, yeah, I mean, probably approved two other robots, just a new robot at Bushog. When we brought in the Dixie Chopper production into our Illinois manufacturing, Rhino manufacturing plant, we spent money on some new equipment there to be able to assemble that equipment more efficiently. Yes, you're right. We've got a number of these. Like I said, the last two years, our capex spending has been considerably above This year, I mean, like I say, the big year, we spent $31 million, almost $15 million with just the McGonagall plant. All of that wasn't in 2019. Some of that tailed over into 2020. So I think this year, 2020 CapEx spending will be off a little bit. I think by this year, we will start, second half of this year, we'll start seeing the benefits of not just the new plants, but a lot of this extra capex spending we've been doing.

Okay, thanks. Thanks for taking my questions. Have a great day.

Thank you, Mike. Thank you, Joe. Thank you, Joe.

Thank you. Again, as a reminder, if you would like to ask a question, please press star 1 now. Our next question comes from Mike Shalaisky with Daughtry & Company.

Hey, guys. Good morning. Can you hear me okay? Yeah, Mike. Great. Can you maybe quantify the cost savings, if there are any, that we can expect from having two segments better than three? Are there any people costs that are going to be changing or still be costing any changing going forward?

You know, as far as, you know, overhead costs, I mean, you know, obviously we had three division managers. Now we've got two, and that was a very expensive position. But, you know, it's, like I say, it's not as much the overhead cost savings of that consolidation as much as it is the improved flow of information between like products. So I don't see, I mean, you know, I think that's where the opportunity is. And I mean, even though, like I said, yeah, there's a little bit of top-line cost saving, it's not significant.

Okay. I also want to ask about the debt outlook for 2020. I guess, Dan, is there any budget or plan you have in place, any actual dollars you can share with us about how much debt you want to pay down for the year?

Well, so we, you know, in kind of a normal growth or a slower growth period, you know, like we're seeing, I mean, you know, we're not seeing this super hot, double-digit whole good growth that we were seeing in the industrial division in particular over the last few years. You know, we generate a lot of cash. You know, the proof of that is, you know, just look at our cash flow statement the last two quarters. We've generated a lot of cash. We feel like at the new level of, you know, EBITDA and given our effective tax rate, you know, we've been saying that, you know, we should pay over $100 million down going forward, you can do the math on it, but we can make a significant debt reduction. And barring another deal, that's what you should see. I mean, the only thing that can change that is all of a sudden if we go the other direction and organic growth heats up, we might absorb a little more money back into working capital. Right now we're kind of in a liquidation mode.

Mike, to add to that, too, I think to add to that as well is that both Morbark and Dutch Power, their inventory levels at date of acquisition are probably higher than we want them to be. Their turns aren't as strong as we want them to be. So there's opportunity there. And one of the goals for both of them, for each one of them this year, is to reduce their inventory levels where they're at now. So that will be helpful.

Got it.

But as Dan has said in... Previously, you know, literally going forward, I mean, you know, borrowing, acquisitions, that kind of stuff, I mean, over 50% of our EBITDA should be, you know, available for, you know, free cash flow available for debt reduction.

Okay, perfect. I wanted to just, I got to look quickly here as well. I know there was some engine out in the order pattern in the quarter. Look, is there anything else about the tone you're hearing from my dealers for 2020? Actual commentary you're getting from farmers and dealers out there about what the business might look like this year?

I like the comment I heard that somebody said, the sentiment is good, but the numbers don't show it yet. And I think that, you know, We felt there was just the biggest ag show in North America, the big national farm machinery show in Louisville, which just took place a couple weeks ago. I think the sentiment was better. I think people felt that the farmers were there and showed a little bit more enthusiasm and feeling better in the outlook. But, you know, like I say, it certainly hasn't shown up in the numbers yet. I mean, you know, like I say, bookings are up a little bit. That's good. But it's still going to take some strengthening and some commodity prices, I think, before you're really going to see the farmers start buying again.

Got it. And then one last one for me, and I'm not going to let you go away without a good warbark question for me. I guess, how do you feel about that business's growth in 2020? Can you be able to at least match what you did in the 12 months from a top line and online perspective, or is that a high growth business this year?

You know, the last couple of years, they have been growing at a little bit higher rates than we have been growing. I think that most industrials in our space have been growing, and we think that's likely to continue. There will be a couple percent points of growth higher than we have. I just think that their products and all things being done to manage the forest out west and natural disasters would seem to be continuing at a fairly above average rates. So, no, we think that their growth rate should be a little bit above, you know, should be positive and a little bit above ours, but it's, you know, like I say, assuming there's no negative effects to the whole economy from coronavirus or anything else, but we still feel that they should have positive growth rates above ours.

Okay, Ron, Guy, thanks for the call. I appreciate it. Thank you, Mike. Thanks, Mike.

Thank you. We have a follow-up from Joe Mandello with Fedoti.

Hi, guys. Just a couple follow-up questions. Regarding the ag segment, if your revenue is flat this year, given the dynamics that you faced in 2019, should your margins expand?

I think so. We've done a good job of adjusting costs down to, if you look at our largest business in that segment, they've done a great job of adjusting their cost structure to their current level of demand. So just on the year-to-year comps are going to be a lot easier in that segment. And I think our second largest business in that segment, also would have seen a similar performance, except for that we moved Dixie Chopper in, and so we had a lot of startup expenses relating to bringing that. But they're going to leverage that additional volume in that facility, utilizing available capacity in that facility. I would expect their numbers to improve as well.

Also, the product mix in 19 was off to, you know, a lot of our higher margin products that we sell were lower percent of lower margin units. So five and six footers sold a lot more than our 15 footers. We want more of those 15, 20 foot units going out because that really gives us the margin of improvement we're looking for.

Yeah, 15 footers are bread and butter for us. We need the professional farmers to be back, you know, buying equipment, and that would help. If I was to roll the dice and bet on it, I think there's probably a pretty good chance of that.

Okay, and then just another more question. You addressed the seasonality, and I believe you were probably talking about the revenue. Is there any difference between the seasonality of revenue versus the margins there?

That's what I was saying. The revenue probably doesn't fluctuate quite as much as the Margins, second and third quarters are certainly for vegetation maintenance equipment. That's when the equipment is utilized more. It consumes more spare parts. And so, yeah, like I said, even a little bit more so on margin seasonality than on revenue seasonality.

Okay. And regarding the margins that you saw in industrial segments, You addressed sort of the factors that sort of weighed on that. I'm wondering, given especially the orders that you saw with excavators and what your sort of outlook is and the trend that you're seeing with, you know, margins of industrial going into 2020, do you think those sort of rebound from the second half levels?

Yes. I mean, we do because, I mean, you know, we think the mix is going to be a little bit more back to more normal conditions and 2020, because it was, like I said, yeah, with the ag being off, but the mixed and industrial being a little bit unfavorable, and we think that that mix will kind of return to more normal conditions. Certainly, we still have, I mean, there's still going to be some noise in it. There's still going to be some step up in the inventory valuation that affects the more bark results and our overall results for the first half of the year. There'll be a little bit of integration cost, the But no, we believe that organically our market should rebound to the normal levels.

Okay. And just lastly, and this is probably sort of a nuanced type question, but regarding the reconciliation table at the end of the press release related to some of the one times and most of it related to Moormark, it looks like the net of the inventory step up and the earnings contribution from Moorbark, it's a negative number. And then if you look at the net income, that negative net number from the earnings contribution is actually bigger than the negative number in the operating income. Just wondering, is that a tax thing?

I think what you need to look at when you go up to the operating income level, the three split out, the earnings from acquisitions, that's just straight earnings. If you really need to look at the What will be a number going forward will be that plus the amortization. The step-up will always be highlighted out, and we'll back that out. When you go down to the net income, it's the combination of all three of those and then tax affecting that number.

We broke it out in the operating pre-tax number. We broke out the three pieces do net together to a negative number. But, you know, we burdened them with the additional, you know, with the step-up adjustment, and we burdened them with the additional amortization. That's what made it a negative number. Without that, they were, you know, were contributing operating earnings. So that's why that 2,154,000 was a contribution to operating earnings. And then we didn't do the same breakout after tax or for EPS. Okay.

Yeah, I was only netting names for a step-up. I wasn't netting the amortization at the operating income level, so I think that's awesome. All right, thanks, then. Thank you. All right, thanks.

Thank you. I'm currently showing no further questions in the queue. I would now like to turn it back over to management for closing remarks.

All right, well, again, thank you for joining us today. We look forward to speaking with you on our 2020 first quarter call. which will be in May. So have a good day, and thanks for your interest. Take care.

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