Alamo Group Inc. (ALG) Q2 2019 Earnings Report, Transcript and Summary

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. [Operator Instructions]. This conference is being recorded today, Thursday, August 1, 2019. I would now like to turn the conference over to Mr. Edward 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 1888-203-1112 with the passcode 9760087. Additionally, the call is being webcast on the company’s website at www.alamodashgroup.com and a replay will be available for 60 days. On the line with me today are Ron Robinson, President and Chief Executive Officer, Dan Malone, Executive Vice President and Chief Financial Officer and Richard Wehrle, Vice President, Treasurer, and Corporate Controller. Management will 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 all for joining us here today. Then 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 and 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 in the past three quarters. Net income for the second quarter of 2019 was almost $21 million or $1 and $0.75 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. Trailing 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 $400,000 of operating cash flow in the prior year second quarter. This improvement is due to earnings growth combined with reductions and receivables and inventories. While home goods demand in the Industrial Division still applies upward pressure on working capital needs, we have 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 are 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 are pleased to products in this group continue to exceed our expectations despite tariffs inflation and even Sanders from general economic softness, but we feel the strength and stability of our core markets has remain buoyant, and we’ve been helped by our solid level of backlog, which continues to be strong, which also makes the balance of our outlook for 2019 promising. Our other two divisions of each faced a little more adversity. But I believe they are both performing reasonably given the conditions that you’re dealing with. Certainly, our agricultural Division is being hampered by the overall weak market with farm in still 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 from strengthening in certain commodities and though it’s too early to tell at this trend will continue, at least is looking in a positive direction. Our European operations have also been affected some weak market conditions as the general European economies have been a little softer than in North America, and this was made even worst 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 and we still have a little of that left in our backlog, with most of that should be finished in the of the remainder that order in the third-quarter. So it will be behind us. But certainly, the soft European economic conditions and unfavorable currency exchange rate will continue to hamper our results for the rest of the 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 toward a fairly dramatic conclusion with unknown repercussions. But like I think we feel good about our position under any circumstances, but it’s the short-term implications that we are concerned about if there is the uncertainty that we’ll 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 one of our operations there a boost this year. 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 are pleased that the M&A activity for us actually remains quite buoyant and feel more opportunities we are 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 are seeing a lot less inflationary pressure, particularly in purchase components being much less of a factor than they were last year when we saw 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 is 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 fuel 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 or 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 operations 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 can continue to help our ongoing margin improvement efforts. I am very pleased and anxious with the process – 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 to 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 and 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. [Operator Instructions] Our first question will come from Joe Mondillo with Sidoti & Company.

Hi, good afternoon guys.

Hi, Joe.

I wanted to ask you on the backlog. It’s slowed quite a bit from a year ago but I also wanted to ask just theoretically how sort of 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% and it really didn’t translate certainly anywhere close to 50% revenue growth in the back half of the year of last year. So 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 provide you with a relatively positive outlook that you just provided?

Yes, 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, that I mean, we think that could have a negative implication on future sales, like if we’re not able to respond quickly or rapidly. And as I say this quarter, I mean during the quarter, as Dan pointed out, actually what we’re up - backlog is up from where it was this time last year it actually went down a little bit in the quarter but actually our bookings - I mean, 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 our highest profit sector of spare parts, spare and wear parts, don’t go through backlog. So I mean, they are since – the deliveries of those are usually in very short-term. I mean, almost one to two days. I mean from when 80% of our spare parts orders come in. So yes, as 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 and to support our operations. But yes, 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 as I said, we actually don’t want it to get too big.

Yes, 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 order flow at the moment, I mean if you look at – if you back out the acquisition, the backlog is still 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 maybe – not necessarily quantifying, but I’m just trying to get a sense of how much was volume related, price related, productivity improvement related. If there is any color that you can provide.

As you said, it wasn’t one thing. It was a number of things that were certainly volume, which was very beneficial. There was certainly – I mean, nothing – one thing you didn’t mention was variance, price variances. Last year, we had negative price – purchase price variances due to the higher inflation of input costs. This year it turned and it was a positive contribution to margin. So that was another major effect. I think those two were – as I said, volume and input cost were the two biggest contributors –

And the full effect of pricing.

Yes. Well, last year, yes. 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.

So the major gap between and ag and industrials is that industrials 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. So what you saw was industrial expand much…

Yes, we just – we’ve seen such a volatile last four or five quarters with pricing. I’m just trying to get a sense of how much pricing and how much volume really. So like the 12% revenue growth in industrial – is it half pricing, half volume or how can we think about – I’m just trying to think about how organic volume is these days.

Yes. We don’t really break it down quite like that.

We think it was more volume than price on the industrial side. I mean, it was that sort of growth. We didn’t get…

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

Okay. Okay, thanks. And then on the ag side, I mean, same type of thing. How – 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 as volume down high single digits or how can we think about the volume there?

Yes, and the volumes down mid-single digits, it’s even – we’ve got some pricing, I mean.

Yes, it’s between 5% and 10%. It’s, I would say high single digits the volume would be. And we got to offset some of that with price and then we got a little help on the margin line with the lower steel cost.

And in terms of that I wanted to ask because I think steel is 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 the tailwind of price-cost 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. We’re going to get more - now, especially if you’re doing quarter-to-quarter prior – 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, last year. So number one, the comparison gets a lot easier there and then number two is come down quite a bit from that high second half steel cost. So second half of the year and the year-to-year comparisons are going to be a lot better on steel cost.

Yes, that’s right, because we have about a 60-day delay. Some units it’s as little as 30 and others it is up to 90 but on average about a 60 or a little more than that day delay from when the steel prices go down when we feel the effect; the same thing on the upside. So that’s why we’re going to feel a lot 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.

Yes, because there is – because of the delaying mechanism and then plus when they went up last year; so it’s going to be better.

And then, I mean, I imagine the volume probably gets better for – I mean, theoretically or just thinking, potentially how it plays out, the volume starts to improve probably in the third quarter and accelerates, especially if we get the ag here that we’re thinking in 2020 and also with the – you’re going to have a 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?

Yes. Well, I mean, when we say second half – I mean that the volumes get better – I mean, the third quarter particularly usually is one of the most profitable, especially in the Ag sector because it’s much because the spare parts sales are the highest level there. So that’s not as much volume as it is mix since that’s our highest mix. But the 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, like says the comparables from last year’s second half are going to be easier this year. So I mean, we feel that the third quarter is – should again in the Ag sector be one of our strongest for the year but fourth quarter is always a little tail off because it is a seasonal – the seasonality effect.

Will the part – do you think the parts are weaker than normal in the third quarter, so you don’t get …

They’re actually strong in the third quarter. And I think, yes – we think there’ll be somewhat in line with last year.

I think 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 the prior year. So maybe you don’t get as much, I don’t know...

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

And Joe, going into the third quarter and fourth quarter, we get Ag does their preseason program. So they take orders and then they’re stronger for units. And so as we enter Q4 and Q1, which are seasonally – because it’s colder there, the parts are lower, then you shift [indiscernible] higher there; so margins are down a little bit in those two quarters and that’s pretty much the way it’s always been.

But year-to-year, I don’t – we’re not feeling like there is a continuing negative trend. 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 Sakai 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 why did they do so well this quarter and do you see them doing well in next quarter and for the year?

Some of our best products in the second in quarter industrial were like excavators, and it 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 – their core markets were stable and strong. I mean, I think we’ve been helped a little bit by some new product introductions. But I think we executed well in those areas. Actually, snow was up but it was still sort of weak because the second, third quarters are sort of weak for our snow businesses even through like say it was up, but it’s weak but surprisingly I mean backlog there is actually nicely well above and I think as going into next season, they benefited by some strong snow in last season. Our mower groups, which are certainly one of our top performers held very steady, they did see a little softness. I think I mean sales were on plan and everything. But I think bookings there were a little softer and you we’re not – it’s sort of too early to tell why. We think sometimes due to the heavy winter some of the municipalities and government 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 will wait and see how that continues to develop, but across the board we did very reasonably, but as I said the sweeper products and backhaul, our vacuum units, [great haul] [ph], our Schwarze sweepers, all did quite well and the vacuum trucks, really not only benefited by I think good governmental business but strong non-governmental. I mean we seeing some nice continuing growing in some of the non-governmental applications for vacuum trucks, everything from vacuum excavation opportunities and other just on construction and mining, utility, other kind of end users that have held up well. So 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? I’m I right there?

Yes, we announced that that would happen in the fourth quarter of this year. When we announced that last quarter we said it would happen beginning the end of the – in 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 third quarter earnings release will be, Chris in the three segments, year-end when we do the fourth quarter and our 10-K at the end of the year, we’ll [indiscernible] two segments.

Thank you. Our next question will come from the [indiscernible].

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

The inventory levels are too high. I can tell you that. And yes, you’re right, I mean there is Dutch Power in there with sort of had an effect. But we believe that they are – that they should be – they should go down for the rest of the year compared to previous levels because as a percent of our sales or our assets inventory is too high right now.

And yes, I mean, we – if you look at the cash flow statement in the 10-Q, you can see that we’ve kind of turned that now. And in the quarter, we started to reduce the – 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 were now a 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 we 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 part sales parts actually growing at a higher rate than the total revenues. I’m sure there is a number of puts and takes there. Can you just help us better understand why the part’s so good in the second quarter?

Because they were we last, I think they were a little weaker last year than they should have been. And I think we put a little more effort. Certainly the acquisition help that too but acquisition help most of it there, but our parts usually in that second quarter and third quarter two for us will be higher than the other two quarters.

Okay. So some initiatives, but no real changes that from us or from a competitive standpoint, I move parts drastically. But I mean you’re right that the mix was a little better comparing to the prior year.

And some of that’s even because like in, especially in a whole good sales were down more now, we’ve been in a part sales held up better than whole good sales.

Okay, that’s helpful. One of the other things that I noticed in the 10-Q disclosure is that you’ve further delineated your geographic sales and then I guess, but some of that’s related to the Dutch Power deal, but a couple of things stood out to me. Your Chinese geographic sales have meaningfully increased and you’ve also had a pretty nice increase in the Netherlands sales. I think you understand that very clearly the Dutch Power and your Germany sales of has moved up 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 Netherlands, in China in Germany, as we’ve had Dutch Power on our books now longer. What is the opportunity to either grow skews in those markets, grow distribution, 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 the Dutch powers – 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 certainly, the Benelux countries, the Germany and all our good markets for them. And we believe – I mean certainly obviously is – like that the second quarter – I mean, the first quarter had very little Dutch Power sales in it. Second quarter had a lot. So yes, we think that so that will – it will be more like at those levels going ahead and we think we can improve it a little bit more, because that’s one of the benefits of Dutch Power. Will they have better distribution in sort of that [indiscernible] and in Germany? Then we have for some products, and we will try to utilize them to 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. We had some big orders in China on snow removal mainly from some of our Canadian operations our Tenco and our sort of RPM acquisition which is – Just a couple of years old itself. I mean we only bought that in 2017. But RPM and Tenco both – and they typically you’ve had some very nice orders from China over the years. But the Chinese orders tend to come in lumps. I mean, so it tends to be big ones. And so we had some very nice wins already this year. And so, we’ll have good backlog actually of orders going to China. China is not like – so we don’t sell a lot of other stuff, I mean great all will sell some stuff there. And we felt some of adds that – sweepers there but on snow removal actually we’ve got it is like to say that the majority of that snow removal and we believe we still be some more of that and that China has been and will continue to be a relatively decent market for snow removal. But like I say it’s lumpy. I mean it comes in big chunks.

And so the one other thing, in the other category in that geographical location that other is there is no one country that’s greater than $1 million. Okay? So we will always listen nothing that’s greater than $1 million on our list.

Okay, that’s helpful. Maybe just a different way to ask the question on that one’s business $10.1 million. When I think about the France business. I think that has a lot of fact truck business. Are we selling fact trucks in the Netherlands right now and if we aren’t is that mean...

No, no. I wish we would. We are trying to looking at ways of getting a better distribution there. Netherlands since what like it’s half under water, I mean they are vacuum trucks are actually there is some local competition there that have our big players there. So we’ve actually not done very much from our [indiscernible] French vacuum truck business into the Netherlands what you were try and then that’s one thing. We hope, maybe with the Dutch Power distribution we can maybe help that a little bit, but like I said, it’s a decent market for vacuum trucks not sort of the small country, but there is also some pretty well-established competition in that market.

If you can kind of the same question for Germany on the vac trucks?

Yes, Germany is a little different. Again we don’t do much in Germany with vacuum trucks either. Again, I think there is a potential and we’d like to do but and Germany. I think there’s a couple of German competitors. But I think it’s a more open playing field in the then the Netherlands market is and so yes 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 yes. I mean, in fact we’ve got some initiatives to I think improve the export sales of net of the – in general that out of sort of the Southern Europe and there strong and France and a little more involved in Central in Northern Europe.

Thank you. [Operator Instructions]. Our next question will come from Chris Moore with CJS Securities.

Hey, good afternoon guys. Maybe just start with the lower margin backlog in Europe. Did any of this impact Q2?

Oh, 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. And like I said, it still hit us a little bit in the third quarter, but most of that will probably be pretty good because we had one big order that like it was a lot of our – really had our plan, took about half our plan on some orders that were in retrospect lower margin than we thought. And we made some safeguards to ensure that we don’t do that again.

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

And it should be finished in Q3.

Right, exactly. Okay. Got it. You took quite a bit about backlog before I want to bring it down, or are you experiencing increasing lead times with any products at this point in time?

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

Got it. So, 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 could be impacted or was just a kind of a general statement in terms of so?

No, I think it was kind of a general statement. I mean and like I said, some of that even good because we’re seeing like say freight and trucking availability has gotten better. I mean like it was hard to get trucks last year, that’s gotten better. So I think lead times as I said on even things like truck chassis some other input components have gotten a little bit better because that, like I say, they’re not being like say there. So our suppliers [indiscernible], they hold have softened a little bit. So, and it’s just – I mean, everything you read paper these days. I mean there just some slight indications of some softening in the general economy and even things like it’s interesting we always didn’t have, there is always seems to be a little slight dip in governmental in election years and we had an election year coming up next year. Just I think it’s because you it’s not it’s just the distraction almost – so it’s not almost at the federal level. But even at the state level where, like I say, if one party comes or goes there is a little bit of a delay in some orders. So anyway, this is a few little things. But like say we’re holding up well or backlogs are decent and I mean we feel good one responsible of your questions. I mean inquiry level for us is still quite buoyant, and we feel good that it’s not just what’s in backlog, but our quotation activity is remaining quite buoyant.

Thank you. Our next question will come from Joe Mondillo 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 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 by sometime in the first quarter 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, they’ll be a lot because like say with us, but it’s a lot of little things more than as I say, we’ve got a couple of big things but usually it’s a little bit from a lot of from a lot of things rather than a lot from a little few things. So I think it will be good. Like I said, we’re also being helped this year by purchase price variances in this kind of stuff. And so some of that will, that’s helping margins this year. I don’t know what’s going to happen with if our new – what is going to happen with those input costs or exchange rates or something like that. I mean some of the other things that can play into these kind of varying 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, I mean as I said, we’re spending more on CapEx, even on just normal improvements at other plants buying few more robust, few more lasers or few more the [CNC] equipments. So, I think it should be at least as good as and maybe a little bit better, but there are some other factors going into it.

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

Yes, that’s right probably as good or better as that been.

Thank you. [Operator Instructions]. I’m showing there are no further questions in the queue at this time.

Okay, well, thank you again for joining us today, we appreciate all interest and we look forward to speaking with you on our third quarter call at the end of October. Thank you very much. Have a good day.

Thank you, ladies and gentlemen, this concludes today’s teleconference you may now disconnect.