Image source: The Motley Fool.
Alamo Group Inc (ALG -2.84%)
Q3Â 2019 Earnings Call
Oct 31, 2019, 3:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day ladies and gentlemen. Thank you for standing by. Welcome to Alamo Group's third quarter earnings conference call. [Operator Instructions]
This conference is being recorded today October 31 2019. I would now like to turn the conference over to Mr. Ed Rizzuti Vice President General Counsel and Secretary of Alamo Group. Please go ahead sir.
Edward Rizzuti -- General Counsel and Secretary
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'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 one (888) 203-1112 with the passcode 3380097.
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 and Chief Financial Officer; and Richard Wehrle Vice President Treasurer and Corporate Controller. Management will be 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 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 acquisition-related issues weather seasonality currency-related issues geopolitical issues and other risk factors listed from time to time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein which speaks only as of this date. I would now like to introduce Ron. Ron please go ahead.
Ron Robinson -- President and Chief Executive Officer
Thank you Ed and we want to thank all of you for joining us today. Dan Malone our CFO will begin our call with a review of our financial results for the third quarter. I will then provide a few more comments on the results. And following our remarks we look forward to taking your questions. So Dan please go ahead.
Dan Malone -- Executive Vice President and Chief Financial Officer
Thank you Ron. Third quarter 2019 sales of $271.8 million exceeded the prior year third quarter by 5.5%. Year-to-date sales of $818.9 million were up 8.8% compared to the prior year 9-month results. Excluding the impact of the Dutch Power acquisition comparable sales were up 1.6% for the quarter and about 5.1% year-to-date. During the quarter year-to-year sales growth slowed significantly in our Industrial Division as both excavator and roadside mowing products were impacted by slower demand from state-level governmental customers while weaker demand in certain nongovernmental customer segments negatively affected specialty excavator sales mainly those machines used in steel mills as well as vacuum truck fleet vacuum truck rental fleet utilization.
Also in the quarter the sale of used vacuum trucks out of the rental fleet dropped sharply but this comp appears to be more due to timing the timing of these sales than rather than an unfavorable year-to-year trend. As a result this division sales of $158.5 million grew 1% over the prior year third quarter. Despite the third quarter weakness this division's year-to-date sales of $484.9 million are still up 10.5% over the prior year 9-month results. The prolonged downturn in the U.S. agricultural economy continues to affect sales in our Agricultural Division though the year-to-year decline narrowed some during the quarter.
This division's third quarter 2019 sales were $59.8 million down 2.7% from the prior year third quarter while year-to-date sales of $168.1 million were down 6.2% from the prior year 9-month period. In the third quarter our sales of higher-margin Flexwing mowers were particularly hard hit which also caused an unfavorable sales mix. Partially offsetting these unfavorable effects was a small sales contribution from the Dixie Chopper acquisition. European Division third quarter 2019 sales were $53.5 million up 36% from the third quarter of 2018 and up 10% without the effect of the Dutch Power acquisition.
Year-to-date sales of $165.9 million were up 23% over the prior year 9-month period and up almost 3% without the acquisition. Excluding an unfavorable currency translation effect this division's local currency organic sales was about 16% for the third organic sales growth was about 16% for the third quarter and about 9% year-to-date primarily due to improved results from our Rivard vacuum truck business. Third quarter 2019 net income was almost $17.4 million or $1.47 per diluted share. Excluding acquisition cost and the effect of the Dutch Power acquisition adjusted net income was $18.3 million or $1.54 per diluted share. Third quarter 2018 net income was $23.5 million or $2 per diluted share.
Excluding a onetime favorable tax provision adjustment relating to the new tax legislation third quarter 2018 adjusted net income was $20.5 million or $1.75 per diluted share. The remainder of my comments will address the differences between the current quarter and prior year quarter adjusted results. Third quarter 2019 gross margin of $68.7 million grew 3% over the prior year third quarter due to the Dutch Power acquisition. Excluding Dutch Power our gross margin was essentially flat. Our third quarter gross margin was 25.3% of net sales which compares to 25.9% of net sales for the prior year quarter.
In the third quarter of 2019 unfavorable product mix lower production levels higher import tariffs and lower rental fleet utilization negatively affected gross margin and more than offset the benefits of lower steel cost improved results from our Rivard vacuum truck business and a small gross margin contribution by Dixie Chopper. Third quarter 2019 adjusted operating income of $25.6 million was about 9% lower than the prior year third quarter primarily due to the factors affecting gross margin already mentioned as well as higher group medical claims and unfavorable timing of management incentive comp approvals and increased R&D spending.
Third quarter 2019 adjusted operating income was slightly under 10% of net sales compared to 11% of net sales for the prior year quarter. Excluding the prior year onetime tax adjustment the third quarter 2019 effective income tax rate was 25% compared to 23% in the prior year third quarter. This increase was primarily due to a shift in the pre-tax earnings mix toward higher-taxed non-U.S. jurisdictions. Third quarter 2019 EBITDA was $31.8 million down 6% from the prior year quarter. Trailing 12-month EBITDA of $127.8 million is up almost 3% over the comparable prior year results.
Third quarter 2019 net cash provided by operating activities was $43.3 million which is 38% better than $31.3 million of operating cash flow in the prior year third quarter. This improvement is due to the seasonal liquidation of nearly $24 million in receivables and inventories in the third quarter of 2019 compared to the prior year quarter when increased working capital requirements driven by high order backlog substantially offset the normal seasonal cash generation. Third quarter 2019 investing cash flows included about $6 million used to acquire Dixie Chopper and $7 million of capital spending which as expected continues to track slightly above prior year levels.
Due to acquisitions debt net of cash increased $37.7 million over the prior year quarter. Excluding acquisitions debt net of cash would have been about $20.8 million lower than prior year. Regarding our order backlog I'll remind you that last year our Ag Division announced a supplemental price increase near the beginning of the preseason ordering period. Dealers accelerated their orders ahead of the effective date of the increase and this division took about $48 million more in orders in the third quarter of 2018 than they booked in the following fourth quarter.
By comparison this division's 2017 third and fourth quarter new order bookings were flat. Adjusting for this approximate $24 million timing effect our third quarter 2019 ending backlog of $215.3 million is down about 5% from what it would have otherwise been this time last year. Without the timing effect and Dutch Power acquisition backlog has decreased about 8.5% year-to-year. Third quarter 2019 orders of $247 million were 4% lower than the timing adjusted prior year quarter as higher European orders partially offset lower Ag and Industrial Division bookings. In summary the main takeaways from our third quarter 2019 results are: record third quarter sales of $271.8 million; slower new order bookings and lower order backlog in North America; earnings unfavorably impacted by product mix production cuts and lower rental fleet utilization which more than offset the benefit of lower steel cost and improved reward results.
However slowing growth and production cuts pushed third quarter operating cash flow over $43 million and 38% above the prior year results. I'd now like to turn the call back over to Ron.
Ron Robinson -- President and Chief Executive Officer
Thank you Dan. And again thank you for joining us here today. As you all saw our third quarter results were soft and below our expectations but as we pointed out in our press release last year's third quarter results had a large onetime gain related to U.S. federal tax reform which on a comparative basis made our results look even weaker than they actually were. In fact that our third quarter results for this year if they did in last year which has been a record last year.
But certainly we have been facing a number of challenges for the last few years including the ongoing weak agricultural market. The various repercussions from the continuing trade disputes between the U.S. and China some adverse weather conditions and still unresolved Brexit situation. In addition the manufacturing sector globally seems to be slowing down. And despite all these headwinds which have been going on for several quarters we have managed to grow steadily and produce record quarterly results for several years running.
And even in the third quarter of 2019 we had record sales but obviously not record earnings as the various challenges seemed to all come together to impact our bottom line results. While our sales was up were up our mix was unfavorable as some of our higher-margin products such as excavators and Industrial Division mowing equipment were slightly off. And even in our agricultural sector which remains weak in general our product mix in the third quarter was also unfavorable as the market for our higher-margin products like Flexwing mowers was a little softer than lower-margin products like single-spindle mowers.
And we had hoped to get off to a little bit better start performance from our acquisitions earlier in this year but unfortunately Dutch Power is off to a little bit slower start than we had hoped and Dixie Chopper closed later in the year than we had anticipated or certainly later in the quarter. So in fact for the short period of time they were with us in the third quarter.
We were literally consolidating them into our nearby Gibson City Illinois operations. So they weren't literally being integrated during for the couple of months we had them during the quarter. But we continue to believe both of these will contribute well as we move into the next year. In addition to the above we seemed to have had a few more internal challenges than usual. We had some delayed shipments at the end of the quarter. Health care costs were higher in the quarter than they've been running historically.
Legal expenses were a little bit above average. There were some inventory adjustments that were a little bit above average and a few other things. I mean none of these in themselves were unusual or really of concern. But in the third quarter there just seemed to be more of them in total than usual which impacted what was already a bit of a weak quarter. And as we pointed out there was more expense related to acquisitions in both the third quarter and year-to-date than is typical which certainly impacted our quarterly third quarter results but we also feel this is sort of the part of the good news too or in the quarter we completed the previously announced acquisition of Morbark just last week. And this is a very exciting development for Alamo Group.
And in fact for those of you who have been following Alamo for a number of years now know we have wanted to get into the tree chipper market for quite a while and Morbark is a main player in this segment. They offer a very a wide range of products that are very complementary to Alamo and expand our footprint in our existing and adjacent markets. Plus they already have a scale that will provide a meaningful addition to Alamo's results going forward. And in addition we believe they will bring a variety of positive synergies to our joint operations and everything from market coverage manufacturing purchasing and other areas.
And although we feel Morbark will contribute meaningfully to Alamo's results moving forward being part of Alamo Group for not even a full quarter with combined with integration costs and just starting to work on synergies we believe they will not have very much of an impact for the balance of 2019 but should impact 2020 meaningfully. And as we look to the balance of 2019 we remain concerned about some of the ongoing challenges we've been facing. Certainly agricultural market conditions are expected to remain weak for the balance of this year. And overall economic conditions seem to be softening with I think several quite a few countries in Western Europe already in technically in recession.
And other parts of the world South America Asia seem to be softened. And even in the U.S. there are signs especially with the manufacturing of some slowdown. Certainly the trade disputes with China and the U.S. the Brexit the tariff situation all these seem to be unlikely to be resolved in the short term. But in spite of this we actually feel reasonably good about Alamo Group's prospects. We believe the actions we have taken in response to these conditions will benefit our results. And we also feel we will have a lot fewer issues with our cost that we're out of line a little bit in the during the third quarter that won't be out of line in the fourth quarter.
We're also seeing like improving last year at this time we were talking about some of the concerns at our French reward operation vacuum trucks there with some low-margin backlog and I and we saw that they rebounded nicely this quarter and the low-margin backlog is behind us. So there's certainly some positive things going on. And while our backlog is down a little bit we actually still feel that there is it is at a very healthy level and will allow our operations to perform efficiently. And we're also encouraged that our inquiry level for new businesses are maintaining a reasonable pace.
In fact bookings going in already in the fourth in October have been quite favorable. And although we had some issues with product mix we feel the stability of our core products will continue to bode well for our results as our overall market shares are remaining steady to improving. And certainly while it is hard to overcome market weakness Alamo has demonstrated its ability over the years to provide growth through a variety of economic conditions and by reacting quickly to market changes and steady and with a steady focus on our operations and our operating efficiencies.
Actually we feel good about our prospects for the balance of the year. And with the combination of Alamo and Morbark we think the prospects for 2020 and beyond are very promising. So like I say we still we remain feeling good about where we are as a company today and with the combination with Morbark it's the future looks exciting. So with that I would like to certainly thank you all for joining us and we would now like to open the floor to entertain any questions you might have today.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Joe Mondillo with Sidoti & Company.
Joseph Logan Mondillo -- Mondillo Sidoti & Company -- Analyst
Guys, good afternoon, Joe. So I first wanted to hatch in to the Industrial Segment. I think people are a little concerned with number one sort of the potential of slowing growth and then the margins were pretty low. Early in the year you were able to sort of reach I think record-high margins at the segment and then I think we saw the second lowest quarter in terms of margin in three years here in the third quarter.
So just trying to understand number one what are the you listed various different factors that weighed on the segment overall but I'm wondering if you could sort of weight or give us a better idea of what was the bigger factors that weighed on the margin in the quarter. And then higher level how are you thinking about some of these factors going forward? And how that affects the margins going forward into the fourth quarter and as we move into 2020?
Ron Robinson -- President and Chief Executive Officer
Yes. As we said costs were a little higher. I mean more overhead costs were a little bit higher. Product mix really had was probably the thing that really affected us most because like I said sales sales were a little softer than we thought. They were actually up even in the Industrial Division but only about I think 1% organically in the quarter. So I mean so it was a little softer than we wanted and that and so we and actually I can tell you that during the quarter it was September I mean actually July was a little soft August was actually nice but then it was September that seemed to affect us the most but it really was a mix.
I mean like excavators are one of our higher-margin products and industrial mowers for governmentals are among our highest-margin products and both of those were actually off so that it was made up for by something like say some lower-margin products some of the slow snow for us and things like that. So it really was product mix and some of that was timing. And like I say in some trends and actually both excavators and mowers have had very nice bookings since the end of the quarter.
Dan Malone -- Executive Vice President and Chief Financial Officer
With the especially excavators and mowers that are kind of heavy state DOT sort of products and that demand has been very lumpy. With the excavators we just didn't have a robust backlog going into September. And so they shut down actually for an inventory. And normally we would then kind of work extra to try to make up for a shutdown like that.
First of all the shutdown does not match up to the same month of last year when we took the inventory there. And then we really didn't we didn't kill ourselves to try to make up for the shutdown days. So that created a negative absorption or kind of a compression of margins in excavators alone.
Ron Robinson -- President and Chief Executive Officer
So yes we don't feel like I say we don't feel we lost any market share. There is like I say we do feel the markets were a little bit softer. We're seeing some like some strength. I mean our Industrial Division has shown a pretty good a lot of stability. And like this mix thing it wasn't like to say that sales in total were down it was just the mix was off a little bit and we think that will some of that will self-correct. I mean like I said so like I said we feel pretty good about it going into the next quarter.
But I mean there's like I say manufacturing in the world is a little softer right now. So we don't know how strong it will rebound. But like I say we feel good but it's there's certainly some soft spots out there.
Joseph Logan Mondillo -- Mondillo Sidoti & Company -- Analyst
Okay. And do you have a feel of how much this is dealership destocking versus end-user demand?
Ron Robinson -- President and Chief Executive Officer
In Industrial it's none. I mean because in Industrial we tend to build to order. The dealers do not stock much. The only place we have much dealer stocking is in the agricultural sector. And we don't think there was a lot of destocking at the ag dealer level because they've been doing it for the last two years.
So I mean they like I say they haven't they've kind of reduced they've been reducing their stocks over the last couple of years. So we don't feel that was much. They're probably not They're not restocking for next season yet at like probably the same level they were. But yes like I say in Industrial there was no issues with destocking at dealer levels.
Joseph Logan Mondillo -- Mondillo Sidoti & Company -- Analyst
Okay. And then just going back to my sort of original question. You would say mix is what like 2/3 of the lower margin in terms of a weighted factor? Just trying to understand all you mentioned all these different like costs that were sort of unusual that they all hit in one quarter. How much did that make up? I'm just trying to understand how much did mix play a role versus these unusual costs versus the other factors that you mentioned?
Ron Robinson -- President and Chief Executive Officer
Mix was the single biggest factor. We don't I mean I don't we don't like I say there was a lot of pluses and minuses but mix was the single biggest factor.
Joseph Logan Mondillo -- Mondillo Sidoti & Company -- Analyst
Okay. And then in terms of the rental fleet could you talk about utilization rates not necessarily quantifying them but maybe directionally talking about them? And what are you doing with the fleet size?
Dan Malone -- Executive Vice President and Chief Financial Officer
So as you can see we've built the fleet quite a bit. We opened some new locations. Our actual because our fleet is larger and we have more locations our actual rentals were up a little bit. But however the rental fleet has expanded quite a bit. So our utilizations were down a bit were down in the third quarter. And that also kind of caused not a mix impact but a margin compression because you're depreciating those trucks you've got the cost of those stores that so those additional costs and not a comparable increase in the rental income. So that was also an impact on margin. I'm not right now utilizations are lower than they had been running but it's not necessarily a consistent downward sort of pattern.
Ron Robinson -- President and Chief Executive Officer
Joe just to add that to that too is the mix of the products that we have in our rental fleet right now is really good. It's exactly where we wanted to be. We had a couple of that a couple of years ago we had an issue with that but it's actually good. And there was a little bit of seasonality in the third quarter because there's some slowing in the oil and gas usually but that happens at this time of the year anyway.
Joseph Logan Mondillo -- Mondillo Sidoti & Company -- Analyst
Okay. And your how are you managing the fleet? Are you sort of maintaining size at this point going forward?
Dan Malone -- Executive Vice President and Chief Financial Officer
The other thing is we just kind of have a kind of a timing issue with the sales of used units out of the fleet. So we missed a couple of million dollars worth of sales just the fact that compared to last year we didn't sell as many units out of the fleet. We're not adding to the fleet. We're going to continue to manage the trucks that are there and move them to where they're needed. And we're going to go we're going to continue to not really we're not going to...
Ron Robinson -- President and Chief Executive Officer
We're not expanding the fleet right now but it either. And actually sales of new equipment in like Super Products was up.
Dan Malone -- Executive Vice President and Chief Financial Officer
The vacuum trucks look great except for we didn't sell as many used trucks out of the fleet and the utilization rates dropped a bit which was more of a margin compression than it was a year-to-year sales impact.
Joseph Logan Mondillo -- Mondillo Sidoti & Company -- Analyst
Okay. And then last question for now from me and I'll jump back in queue. Just in terms of the growth at Industrial you called out excavators nongovernmental excavators I guess and then also industrial mowers. What is your sense going forward from the levels that you saw in the third quarter? How do you think about the overall business from here going into the fourth quarter?
Are we how is October started? Do you feel like things are slowly getting worse? Or do you think from the 3Q levels that do we see a rebound from 3Q? Or how do you how are you thinking about some of these product categories that didn't fare too well I guess compared to earlier in the year in 3Q?
Ron Robinson -- President and Chief Executive Officer
Well like I said both excavators and industrial mowers the bookings are actually up nicely already in October. And I mean most of that stuff won't ship this year. I mean that's bookings that are going to start shipping sort of right after the first of the year. But there were some very nice orders there. And so all in all I mean like I said I mean it seems to be more of a blip than a trend at this point.
Dan Malone -- Executive Vice President and Chief Financial Officer
Like I said the state DOT business is kind of lumpy. And so you might be kind of lean one quarter and make it up the next. But one thing is there some units we built at that didn't that were ready to go but didn't ship out before the end of the quarter. So we should get some benefit there on the excavator side in the fourth quarter.
Ron Robinson -- President and Chief Executive Officer
It's interesting. Actually the city and county business was held up even better than the state business. The city and county tends to be lots of 1s and 2s units whereas the state business tends to be lots of 10s and 20s. And the city and county stuff held up has held up steady all year. It was the state business that where we saw some like a few a little bit of softening. And but like I said that seems to be improving already.
Dan Malone -- Executive Vice President and Chief Financial Officer
I gotta I gotta get a bunch of more questions, but I'll let someone else have a chance at this point. Thanks.
Ron Robinson -- President and Chief Executive Officer
Thanks.
Operator
Our next question comes from Mike Shlisky with Dougherty & Company.
Michael Shlisky -- Dougherty & Company -- Analyst
Hey guys, good afternoon.
Ron Robinson -- President and Chief Executive Officer
Hi, Mike.
Michael Shlisky -- Dougherty & Company -- Analyst
So I wanted to get maybe your early impression now that you officially own the Morbark business. What's the culture like? What's the footprint and the faster looking life is making changes or even grow that there. Just some kind of thoughts kind of early in the game here about how about ?
Ron Robinson -- President and Chief Executive Officer
Like I said we're excited. The deal looks good. They're heavily North America. I mean they don't do much outside North America. In fact we're starting to look at some opportunities. We know some of their competitors are doing well in some markets like Australia or Brazil or and we're going to try to use our capabilities to get them into some of those markets. They culture-wise they're actually very close to us. I mean I think they like I say kind of to focus on the fundamentals and are a good fit culturally.
We like I said they're heavily North America but we think that there's even opportunities that jointly we can help them in a few of their weak spots and they can help us in a few of our weak spots and that we can learn from like I say do some joint efforts. We've like I said there's some good synergies on the operations side of things some purchasing things where we think they can take it there and we've already got our purchasing people in. I mean you got to remember this deal closed a week ago. We've already got our people in there visiting with them and start to talk about some of these things. But yes they're like I say culturally they're a good fit with Alamo. I think we just think alike of how we go to market. And they're good guys. They're good guys.
Michael Shlisky -- Dougherty & Company -- Analyst
Great. As far as the deal itself I'm not going to push you on telling us about maybe some of the changes that we need to make in amortization at this point. I know it's probably very early. But on the debt side can you give us a sense just the ballpark of the way you think the interest expenses might be going forward?
Ron Robinson -- President and Chief Executive Officer
I'm sorry. On the debt side what?
Michael Shlisky -- Dougherty & Company -- Analyst
I want to get a sense of maybe perhaps a ballpark for us where are you thinking the interest cost might be going forward?
Ron Robinson -- President and Chief Executive Officer
Oh interest cost? Interest cost of course our interest rates just got lowered this week. And but I mean I think interest our new credit agreement is very comparable to our old credit agreement as far as interest rates and everything. So I mean we don't really see like the initiative would be very comparable to what our old agreement was.
Dan Malone -- Executive Vice President and Chief Financial Officer
Yes. So we're just going to move up a little bit in the grid from around 1x levered to between 2.5 and 3. So that's basically it's just the incremental cost there which isn't measured.
Michael Shlisky -- Dougherty & Company -- Analyst
Okay. And just following up there then. Can you give us any kind of debt repayment cadence going forward? I know you did a great job obviously five years ago when you bought Super Products. That was a very large deal that you paid down over a 7-year period without much of an issue. Want to get my overall model correct here. Is there any kind way you can show us the kind of path to getting back down to maybe again?
Ron Robinson -- President and Chief Executive Officer
Well I mean on a combined basis our EBITDA would be in the $125 million $130 million range.
Dan Malone -- Executive Vice President and Chief Financial Officer
No no that's our plus there.
Ron Robinson -- President and Chief Executive Officer
I'm sorry. Yes closer to about $180 million combined EBITDA Mike. And of that I mean we should be...
Dan Malone -- Executive Vice President and Chief Financial Officer
60% 65%.
Ron Robinson -- President and Chief Executive Officer
Yes. 60% 65% of that should be sort of available. Now obviously that assumes no other acquisitions. That assumes and assumes that assumes not rapid growth. The rapid growth actually consumes more working capital than slow steady growth. But so but like in that you combine that and also it would actually be a very like I say it should be able to pay down a significant amount of debt over the next 3 four years in fact. Yes.
Michael Shlisky -- Dougherty & Company -- Analyst
Okay. Perfect. Just going on to the ag. It's been a very tough year for acreage and for trying to work the land given some of the weather issues and crop prices. But if you assume average weather next year I would imagine some of the lost acreage might come back if we keep things low as far as floods and drought snow. So there could be some return in demand that that would happen just because of the kind of heavier acreage. Given that there's been a bunch of quarters here where it's been tougher ag is there any kind of sense you've got that there's some pent-up demand in that overall market right now and that there could be some growth in that business in 2020?
Dan Malone -- Executive Vice President and Chief Financial Officer
It's got to be retail. Retail demand has needs to pick up. The inventories in that channel are kind of in normalish ranges so I wouldn't say there's pent-up demand at all. I just think it we just need to see retail the farmers need to show up and start buying trucks.
Ron Robinson -- President and Chief Executive Officer
Yes. And yes that's right. I mean it helped to get a little bit better pricing and it would certainly help to get this like the situation with China because I think while it's hurting us on tariffs it's hurting us on the demand from the farmers because I mean that's creating some uncertainty. The farmers are being impacted by the slowdown in export of goods and just the sentiment. I mean I think even if farmers are getting subsidies for some of this the distraction they're using it more to pay down debt than to buy equipment until they get a feeling that like I say it's farm sentiment that needs improving as much as farm incomes.
Richard J. Wehrle -- Alamo Group -- Analyst
Well Mike also take a look at our 10-Q. If you look at our third quarter despite all these issues we've had with the ag they still had 10.5% op income. So I think that's a pretty good indicator of what we're trying to do here to try to maintain control over both expenses and costs.
Michael Shlisky -- Dougherty & Company -- Analyst
Got it, guys. Perfect. Thanks so much. I'll pass it along. Thank you.
Operator
Our next question comes from Chris Sakai with Singular Research.
Joichi Sakai -- Singular Research -- Analyst
Hi, everyone. Just a question on Morbark. I wanted to see how it will affect your overall margins and what they are at Morbark right now.
Ron Robinson -- President and Chief Executive Officer
Well I think as you could see in our press release last week when we announced and we showed sort of their actually their EBITDA margins are higher than our EBITDA margins in total. So we believe they like I say the they're running a little bit higher than our overall average but and we think that with some synergies we can actually enhance that a little bit. So plus they already even have some initiatives going on themselves to enhance them a little too. So like I said they're starting out better than ours and we think we can even we can move them in a positive direction even from that.
Joichi Sakai -- Singular Research -- Analyst
Okay. Great. And then for the European division do you if you take out the revenues from Dutch Power how did the rest of the division do?
Ron Robinson -- President and Chief Executive Officer
The division was up 10% year-to-date. Yes was up 10%. Even without Dutch Power as we said sort of Rivard our French operations actually had more growth than our U.K. operations. But from what they started from a lower level. So but yes our European operations actually did reasonably well. Margins were up. I mean sales were up. Margins were up even without the acquisitions and...
Dan Malone -- Executive Vice President and Chief Financial Officer
And that's despite a currency headwind. I mean if you look at it just on a local currency basis the organic sales growth was 16% in the quarter and 9% year-to-date.
Ron Robinson -- President and Chief Executive Officer
Yes. Yes because currency had it was interesting. The pound was going into the quarter was about $1.28 $1.30. It dropped suddenly when all they were talking about of a hard Brexit to like about $1.19 $1.20. And so I mean we really took a currency hit there but then at the end of the quarter once they sort of delayed Brexit again it's back up to like $1.28. So we won't have so apparently the fourth quarter shouldn't have is impacted as much by currency as the third quarter. Just it was a bad currency. But so actually U.K. I mean Europe's doing well even without the certainly without acquisitions.
Joichi Sakai -- Singular Research -- Analyst
Okay. Great. And then lastly I guess on the whole China trade war which of the divisions is most affected by the trade war?
Ron Robinson -- President and Chief Executive Officer
Our ag division yes. Like I say like a lot of the gearboxes drivelines stuff we get from China are all now being hit with the tariffs. So I mean our like I said let alone what it's doing to farm sentiment and farm the farm market that it's not helping that but even directly in tariffs that like probably 2/3 of our tariffs that we're paying are related to our ag division.
Joichi Sakai -- Singular Research -- Analyst
Okay, great. Well, thanks. So look forward to seeing more mark.
Operator
Our next question comes from Chris Moore with CJS Securities.
Chris Moore -- CJS Securities -- Analyst
Hey, good afternoon.
Ron Robinson -- President and Chief Executive Officer
Good afternoon.
Chris Moore -- CJS Securities -- Analyst
Maybe we could just go back to the industrial mix just for a second. So I want to make sure they understand the so state DOT Dan you talked about the shutdown timing was different this year than last year. Can you maybe just walk me through that a little bit?
Dan Malone -- Executive Vice President and Chief Financial Officer
Yes. So we had our excavator plant down for a few days with people in there taking a wall-to-wall physical inventory. That happened in September of this year. It happened in July in the second quarter of last year. So we have a mismatch there. Now normally if you're full you're flushed with orders you have a few days of shutdown for inventory. Then you go hard after that to make it up because we had just kind of gotten our backlog down to a point that we really just didn't have the orders to build. We just didn't we didn't know and work extra to try to make that up. So the absorption the production of that plant was essentially or significantly lower than it was the quarter the prior quarter.
Ron Robinson -- President and Chief Executive Officer
Which would be great. I mean it was well above average.
Dan Malone -- Executive Vice President and Chief Financial Officer
And then you have to consider variables when they were highest operational leverage plans. I mean it has a high variable margin and high fixed cost. So when you drop production that great it's just a bigger bottom line impact than at most of our other facilities.
Chris Moore -- CJS Securities -- Analyst
Got it. And in terms of kind of customers' end markets so state DOTs is the key and you talked about city and county. Are there other customers' markets and what were you seeing there?
Ron Robinson -- President and Chief Executive Officer
No. I mean like I say I think that like some of the of course our rental on vacuum trucks a lot of that's nongovernmental related. But even in the governmental stuff like I said in general the city county business which is like a bunch of small orders held up a little bit steadier than the big the state business which is fewer number of orders but lumpier bigger.
Dan Malone -- Executive Vice President and Chief Financial Officer
Yes. I think last year we had a lot more steel mill units that we were doing last year because steel price that demand for those steel mill machines tends to ebb and flow with steel prices. So we were in a kind of an upswing in steel prices for the first half of last year. And this year of course ever since the middle of last year steel has been sliding.
Chris Moore -- CJS Securities -- Analyst
Got it. And the other high-margin product you called out was the industrial mowers. Again was that is that timing? Are you seeing a change in demand? Or what are you seeing there?
Ron Robinson -- President and Chief Executive Officer
No like I say we believe it's timing again because like I said the city county business actually was held up much more steady than the state business. And as I even said we've even got a couple of big state orders literally even since the end of the quarter.
Richard J. Wehrle -- Alamo Group -- Analyst
And also too in Q1 too Chris we also had some delayed orders kind of coming in because there was a late winter effect on snow which also caused a lot of the...
Ron Robinson -- President and Chief Executive Officer
Yes. They didn't start mowing as early this year as they did last year.
Richard J. Wehrle -- Alamo Group -- Analyst
It just pushes it out so...
Dan Malone -- Executive Vice President and Chief Financial Officer
It's just been a slow year in industrial mowing. But again if you just take the DOT business is lumpy. You have a weak quarter and then you book
Ron Robinson -- President and Chief Executive Officer
Product turnover's pretty steady. It's still pretty steady. I mean the mowers even with some of the softness in industrial mowing were still one of our highest-margin products and division units.
Chris Moore -- CJS Securities -- Analyst
Got it. Got no. And obviously it's difficult to look at all this stuff on a quarter-to-quarter basis especially the big-ticket stuff. I mean if you're looking at organic growth for 2020 I mean what's it going to take to do is 3% to 5% is that a reasonable level? I mean historically it seems like you certainly have talked to you've done been doing better than that lately but seemed like a level that was achievable. What would have to happen? And anything significant in order for you to get there in 2020?
Ron Robinson -- President and Chief Executive Officer
No. I mean that's certainly achievable. Like I said I mean we as long as the government I mean governmental buying tends to be very stable and steady. And so I mean we think it could be that. But like I said all it takes is one or two big orders or something to be get delayed and that could cause a little bit of lumpiness. But well like I said our backlogs actually are still quite healthy. I mean like I say maybe they're not as much as they were but they're still at a very I mean we don't want them to be too healthy.
We don't want them to get where it starts impacting delivery. So actually we feel that it's the backlog is healthy and the order pickup wasn't in order intake wasn't as good in the third quarter as we would have liked but the fourth quarter seems to be doing OK. And so yes. I mean yes we think that that's achievable. Like I said we're a little bit that there's the good news is steel's a lot cheaper. Steel's a lot cheaper because people are buying less of it though and so I mean there is some slowdown in manufacturing in the U.S. in general. And then and we can certainly use some help in the ag sector but like I said we feel good about next year.
Chris Moore -- CJS Securities -- Analyst
Got it. And from a industrial margin standpoint obviously the margins were low this quarter. Same type of question for 2020 in terms of kind of a more normal range. Is 10% to 11% range for next year? Does that require a lot of increase in volume? Is that something you can achieve even with kind of minimal growth?
Ron Robinson -- President and Chief Executive Officer
You got to remember. I mean Morbark alone is like 25% of our sales. So I mean this yes that's just so we're yes so no we ought to be doing a lot more than 10% or 11% better next year I mean just with the addition of Morbark. So yes we'll certainly exceed your 10% to 11%.
Dan Malone -- Executive Vice President and Chief Financial Officer
And we'll go out and do normal pricing actions too so that obviously helps.
Chris Moore -- CJS Securities -- Analyst
Got it. That was my next question. Okay. And then I'll just leave off with Morbark. So I mean what's a reasonable kind of expectation in terms of revenue growth there? Are they growing a little bit better than kind of your can they do that 3% to 5%? Can they do a little bit better? What are you seeing at this stage?
Ron Robinson -- President and Chief Executive Officer
Yes. No I mean their growth the last couple of years has been organic growth has actually been a little bit higher than ours and so and we believe that I mean conditions are looking reasonable for them to continue that pace. And so yes we think their organic growth should be in lines of ours our pace. And they're coming they got some new products they're coming out with. Those were just introduced just a couple of weeks ago. They got on a dealer meeting they've got yes I mean they've got a lot of good initiatives. Plus we think and some of the synergies with us it's going to take a little longer to get all those to fruition. But no I think it looks good and...
Chris Moore -- CJS Securities -- Analyst
The synergies are both kind of supply chain and at some point in time potentially selling into Europe.
Ron Robinson -- President and Chief Executive Officer
No. Yes there are some marketing ones. There are some supply chain ones and back office ones. So yes like I say there are several avenues of synergies with between us and Morbark.
Chris Moore -- CJS Securities -- Analyst
Got it. Alright guys to jump back in line. I appreciate it.
Ron Robinson -- President and Chief Executive Officer
Thank you.
Operator
[Operator Instructions] Our next question comes from Joe Mondillo with Sidoti & Company.
Joseph Logan Mondillo -- Mondillo Sidoti & Company -- Analyst
Okay, thanks for taking my follow up questions, just a few more from me. I just in terms of the last question regarding the synergies at Morbark I wanted to ask about that. So you talked a little bit about it. I'm just wondering what kind of timing do you think to go through some of these synergies. Is it over 12 to 18 months? Or is it over two to three years?
Ron Robinson -- President and Chief Executive Officer
Both. I mean like there are some short-term ones. The purchasing this kind of stuff that could start playing out in like in sort of the 6-month time frame. There are some like I said the purchasing ones some of the back office ones I think can take place this year. Some of the like the marketing things are taking a little bit longer to develop. That's more in the like 1- to 2-year range as opposed to some in the less in the first year range. So it's really a mix of both.
Joseph Logan Mondillo -- Mondillo Sidoti & Company -- Analyst
Okay. And I'm wondering do you have any idea ballpark at least on what potentially the purchase accounting amortization expenses would be?
Dan Malone -- Executive Vice President and Chief Financial Officer
We haven't even no we haven't made that determination yet. I mean what I'd tell you though from because we're buying LLC interest we're going to get a tax benefit for the vast majority. 80% 90% of those intangibles we are going to get a tax write-off for that. So for free cash flow you can kind of factor that in but for GAAP earnings we just don't know yet what how that's going to allocate between goodwill and other intangibles.
Richard J. Wehrle -- Alamo Group -- Analyst
We're just setting up the opening balance sheet and then we'll actually start the valuation process itself. We'll try to have we'll have estimated numbers by the end of Q4 and then try to hopefully wrap it up early next year.
Joseph Logan Mondillo -- Mondillo Sidoti & Company -- Analyst
Okay. And in terms of Europe the growth that you saw in the third quarter well surpassed what I was looking for. Just wondering how you think about that. In your prepared remarks it almost made it seem like you're a little more cautious going into the fourth quarter and into early 2020. But this is really strong growth and I'm just wondering sort of how you think about growth rates in Europe in the next quarter or 2.
Ron Robinson -- President and Chief Executive Officer
Yes. And like I say sometimes we talk about growth compared to last quarter but and that's why I say some like we had there are some last quarter our backlog was sort of artificially high this time. At the same time this quarter and then Europe that's part of it. I mean like I said our French operations actually showed the most growth in the third quarter but they came from a low level. They were the ones that had been a little bit underperforming previous to that. So like I said it's all relative. So and our British operations I think will continue to show decent improvement.
I think though no I'm concerned that Europe itself is a little soft. The overall economies I love I didn't want a hard Brexit but I certainly didn't want them to kick the can down the road again. And I mean that's just three years they've been kicking the can down the road. And I mean like I say that's that creates an aura of uncertainty. So I wish they would some kind of minds get together and reach some kind of a resolution. Certainly in Europe we're not facing the tariff situation with China or the or I mean like the farmers are not being affected in Europe like they are here with that. So I mean I think that helps our European situation. But there is uncertainty there but like I said I mean in some respects from a low basis. In France we're showing better and we should continue to show a little show better.
Dan Malone -- Executive Vice President and Chief Financial Officer
And we've been talking about this low-margin backlog at Rivard that we've been working through. We finished that up early in the third quarter and now the business that's replacing that is a much better margin.
Richard J. Wehrle -- Alamo Group -- Analyst
One other point Joe in that too. If you recall we've announced earlier that we're moving from three segments to 2. That actually started here in October so we're getting some real good positive feedback from the guys working out well there.
Joseph Logan Mondillo -- Mondillo Sidoti & Company -- Analyst
Yes I'm glad you mentioned that because I wanted to ask about that. Is there any synergies outside of just reporting accounting the reporting the financial data? Is there any synergies in terms of the actual overall business the cost structure anything related to that?
Richard J. Wehrle -- Alamo Group -- Analyst
Yes. Rivard which does good support from the excavator vacuum truck group backhaul and those Super Products. So that's going to be really helpful to them. And also we're working the ag guys are working together with the U.S. ag guys over here on exchanging ideas on products and things of that nature.
Ron Robinson -- President and Chief Executive Officer
Yes. And I think in total the overhead structure will be have a couple less senior people in them yes and which so yes there will be a little bit of savings at the overhead level.
Dan Malone -- Executive Vice President and Chief Financial Officer
But the heads of the divisions will have both European and North American business units and that just that reorganization within the management structure is going to help drive more synergies between those businesses.
Joseph Logan Mondillo -- Mondillo Sidoti & Company -- Analyst
And where are we with making these changes? Did this just start here in the end of the third quarter? I know you've announced this a few quarters ago. But where are we?
Richard J. Wehrle -- Alamo Group -- Analyst
It happened in the fourth quarter. And so when you get the earnings release for the fourth quarter as well as the 10-K they'll show it into two segments and we'll take everyone through that. So you'll be able to...
Ron Robinson -- President and Chief Executive Officer
Yes. But it is going on right now. Yes.
Joseph Logan Mondillo -- Mondillo Sidoti & Company -- Analyst
Okay. And then I wanted to just well I guess last question. The capex projects that you have going on. And you have a couple of major ones one in Wisconsin where you're consolidating facilities one in Canada. Wondering what the timing of those two are. And have any of them created any inefficiencies with the operations? And when do we start to see the benefits from those?
Ron Robinson -- President and Chief Executive Officer
Well I mean both projects are on schedule time and both time and money wise. We like I said we said the one in Wisconsin will be taking or moving in and starting up running in the first quarter of next year. Certainly there will be a few inefficiencies during the start-up phase of that. But we actually believe with our backlogs on vacuum trucks we actually may have to keep producing in our old facility a little longer than we thought just because we're going to be literally have a lot need the capacity.
So all in all at least that certainly there will be some inefficiencies as we gear up but I mean I think we're pretty good shape. The one in Canada is also going ahead as planned and that one's a much smaller one a smaller integration. But yes I mean and so I don't see it's interesting because the one we're integrating into there the R.P.M. into Tenco R.P.M. did a lot of outsourcing that we are now starting to in-source so there'll be less disruption on that one than there will be on the one in Wisconsin.
Joseph Logan Mondillo -- Mondillo Sidoti & Company -- Analyst
You just one follow-up question and then I'm done. Do you think the benefit from a lot of these initiatives for 2020 will be one of the larger years in terms of internal productivity improvements for your margins?
Ron Robinson -- President and Chief Executive Officer
Yes but only marginally. I mean because I mean the good news and the bad news we don't have a lot of our eggs in one in any one basket. So it's not like I mean even when you have 26 plants that you combined even three into 2 it's certainly going to help but it's not like I say it's not going to be like a really big game changer just because like I said we don't have all of our eggs in any one basket that like if something good happens there it's a big plus. So yes so it will be but like I say it's hard to say it's going to be materially affect the overall company just because we have so many operations.
Joseph Logan Mondillo -- Mondillo Sidoti & Company -- Analyst
Great, thanks a lot. Appreciate it.
Operator
Next question comes from Mike Shlisky with Dougherty & Company.
Michael Shlisky -- Dougherty & Company -- Analyst
Hey, guys, thanks for this little follow up question here. I kind of want a little more clarity about the cadence and how things turned out in the quarter because things did seem awfully positive on the last conference call. Just I wanted to kind of make sure I got some of the bigger changes here. It sounds like you had a somewhat slightly soft July but a pretty strong August then maybe fall-off in September. And I want to get a sense the DOT businesses with the various states were the issue in September that they stopped ordering they stopped with their demand or that the inventory shutdown pushed some stuff out into October?
Ron Robinson -- President and Chief Executive Officer
No. I mean it never shuts down. I mean yes like I say the city and county business which is tends to be a little smaller sized orders was pretty steady. But the DOT business is lumpier. The big state business is a little lumpy. It tends to be a little bit bigger dollars and a little bit lumpier. There's fewer of the orders and like I said and I mean fewer bigger orders in that. And in the third quarter or like actually this like even the start there just weren't as many. Like I say it's a couple of those lumps didn't happen. And in fact we've got a couple of them already in sort of October.
So I mean they sort of got delayed but yes but there's just there are some of those lumps. We even I mean we're a little concerned. The case that we've seen in big election years that the governmental buyers get distracted and so I mean with elections and worry about change of administration. Not we don't see anything to the federal government to speak of much. I mean most of our business is city county state. But like I said even that can get a little bit of a a little bit soft. Like I say a little bit they get a little bit distracted around election years. But generally it's pretty good. It's just that like I say it's lumpy at the state at the DOT level and there was a couple of lumps that got delayed.
Dan Malone -- Executive Vice President and Chief Financial Officer
But Mike the inquiry levels were still there. We mentioned in there.
Michael Shlisky -- Dougherty & Company -- Analyst
Okay. Yes.
Ron Robinson -- President and Chief Executive Officer
Mike we lost market share. It's not like the like I say the inquiries are have dried up. I mean the inquiry level's still quite robust and we believe our market shares are holding very very strong.
Michael Shlisky -- Dougherty & Company -- Analyst
And so the overall sentiment at the county state and city level it's all pretty similar. It's just a matter of when the orders arrive and the actual size of those. Is that the way...
Ron Robinson -- President and Chief Executive Officer
That's what we're seeing for sure. And like I said if anything those are a little jumpier in an election year than they are in a not a big election year.
Michael Shlisky -- Dougherty & Company -- Analyst
Okay, OK, that that definitely helps. Thanks so much, guys.
Operator
I would now like to turn the conference back over to management for closing remarks.
Ron Robinson -- President and Chief Executive Officer
All right. Well again we appreciate you all being on the call today and thank you for your interest. And thank you for joining us and we look forward to speaking with you on our 2019 fourth quarter call year-end call in February. Thank you much. Have a good day.
Operator
[Operator Closing Remarks]
Duration: 64 minutes
Call participants:
Edward Rizzuti -- General Counsel and Secretary
Ron Robinson -- President and Chief Executive Officer
Dan Malone -- Executive Vice President and Chief Financial Officer
Joseph Logan Mondillo -- Mondillo Sidoti & Company -- Analyst
Michael Shlisky -- Dougherty & Company -- Analyst
Richard J. Wehrle -- Alamo Group -- Analyst
Joichi Sakai -- Singular Research -- Analyst
Chris Moore -- CJS Securities -- Analyst
