Alamo Group Inc

NYSE:ALG

Earnings Call Transcript 2019-Q4

[Operator]

Good day, and welcome to the Alamo Group, Inc. Fourth Quarter and Year-End 2019 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ed Rizzuti, Vice President, General Counsel and Secretary of Alamo Group. Sir, please go ahead.

[Ed Rizzuti, VP, General Counsel & Secretary]

Thank you. By now, you should have all received a copy of the press release. However, if anyone's missing a copy and would like to receive one, please contact us at 212-827-3746 and we will send you a release and make sure you're on the Company's distribution list. There will be a replay of the call which will begin one hour after the call and run for one week. The replay can be accessed by dialing 18882031112 with the passcode 3971238. Additionally, the call is being webcast on the Company's website at www.alamo-group.com and a replay will be available for 60 days.

On the line with me today are Ron Robinson, President and Chief Executive Officer; Dan Malone, Executive Vice President 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.

[Ron Robinson, President & CEO]

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

Dan, please go ahead.

[Dan Malone, EVP & CFO]

Yes. Thank you, Ron. Before getting into the results, I will start with a few comments regarding the fourth quarter impact of the Morbark acquisition. I will then focus on orders, backlog and sales before addressing margins and earnings. Finally, before closing my comments, I will also discuss our coronavirus exposure as we know it today.

On October 24, we completed the Morbark acquisition, the largest in the Company's history. We immediately shut down their operations for about a week to get a clean cut off, to conduct wall-to-wall physical inventory counts and provide employee orientations. This shutdown, along with normal holiday closures, limited their number of operating days right out of the gate. Still, Morbark accounted for most of Alamo Group's 2019 adjusted EBITDA growth. Including the pre-acquisition period, Morbark also achieved the 2019 adjusted EBITDA estimate we previously provided. Our fourth quarter 2019 GAAP earnings results were negatively affected by large non-cash expenses caused by Morbark opening balance sheet adjustments to step up acquired inventory values from historical cost to fair value, as well as the allocation of a significant portion of the purchase price to amortizable intangible assets as opposed to goodwill.

The inventory step up totaled $8.1 million, of which, we expensed $3.3 million during the fourth quarter. We will expense nearly all the rest of it during the first half of 2020. The incremental amortization expense resulting from the Morbark and Dutch Power acquisitions was $1.7 million for the quarter and $2.2 million year-to-date or for the full year.

Before discussing new orders and backlog, I should note that while we did not carve out Dixie Chopper sales and earnings during 2019 due to their immateriality, their fourth quarter new orders and backlog were significant and merit discussion or merit inclusion as part of the effect of acquisitions on those specific measures.

Fourth quarter agricultural orders exceeded the prior year by 46% with the benefit of acquisitions and by about 34% without. You may recall from last quarter's comments, our third quarter to prior-year quarter comparison of Agricultural division new order bookings was affected by an approximate $24 million pull forward of new orders from the fourth quarter into the third quarter of 2018. This occurred because our dealers accelerated orders to avoid an announced price increase. While this timing issue unfavorably affected our third quarter comps, it had an opposite-favorable effect on our fourth quarter comps.

For total Alamo Group, excluding this timing effect and the orders booked by all three of our 2019 acquisitions, fourth quarter new orders were up slightly compared to the prior-year quarter. This was truly a mixed result as we saw a strong rebound in the Industrial Division mower and excavator orders, continued strength in vacuum truck demand and about 5% higher North American bookings in the agricultural Division. This slightly more than offset weaker new order rates in sweepers and snow removal, as well as snow blower international bookings in the Agricultural Division.

Year-end 2019 backlog of $261 million is up about 9% over the prior year-end. The Dutch Power, Dixie Chopper and Morbark acquisitions added about $40 million to year-end backlog. Without the contributions from acquisitions, our year-end [Technical Difficulty] backlog without Morbark and Dutch Power was down about 9% from a very high year-end 2018 level. Agricultural Division backlog without Dixie chopper was down about 4% year-to-year, which is considerably better than the 16% unfavorable comp we saw as of the end of the third quarter.

Fourth quarter 2019 net sales of $300 million is a company record and exceeded the prior year fourth quarter by about 17%. Full year sales of $1.1 billion were up about 11% over prior year. Excluding the impact of the Morbark and Dutch Power acquisitions, comparable sales were up less than 1% for the quarter and about 4% for the full year.

During the quarter, Industrial Division net sales of $222 million exceeded prior year quarter sales of $172 million. Excluding the effect of acquisitions, Industrial Division net sales were about $179 million, up 4% over the prior year quarter. High vacuum truck and sweeper shipments offset slower sales of industrial mowers, excavators and snow removal equipment. For the full year, Industrial Division net sales of $768 million increased 20% over prior year. Excluding acquisitions, the Industrial Division full year sales grew 9%. If we also exclude the impact of currency translations, net sales in this division grew 10% in local currencies. For the full year, all businesses contributed to this division's organic growth except for industrial mowers.

Fourth quarter Agricultural Division net sales of $78 million were down about 7% from the prior year quarter. Full year Agricultural Division net sales of $351 million were down about 5% from prior year. Excluding the impact of currency translation, net sales in this division were down about 3% in local currencies. While we saw an uptick in North American agricultural equipment orders during the quarter, the impact of weather, trade disputes and other geopolitical events continue to constrain global economies.

Fourth quarter gross margin of $68 million grew 9% over the prior year fourth quarter, primarily due to the Morbark and Dutch Power acquisitions. Excluding the $3.3 million of inventory step-up expense, adjusted gross margin grew 14%. Fourth quarter adjusted gross margin excluding inventory step-up expense was $23.8 million -- 23.8% of net sales, which compares to 24.5% of net sales for the prior year quarter.

Unfavorable product mix, lower production levels, higher import tariffs and lower rental fleet utilization continue to negatively affect gross margin and more than offset the benefits of lower steel cost. Full year 2019 adjusted EBITDA, excluding the inventory step-up expense was $128 million and 3% above prior year. If we also exclude nearly $2 million of non-recurring transaction cost related to the 2019 acquisitions, this full year result would top a $130 million. Adjusted EBITDA growth in 2019 was primarily due to the partial quarter of Morbark results and organic growth in the Industrial Division. Excluding the inventory step-up charge and the incremental amortization expense, the Morbark and Dixie Chopper acquisitions contributed $2.2 million and $3.8 million, respectively to fourth quarter and full year adjusted operating income.

Fourth quarter 2019 adjusted operating income of $22 million was about 12% lower than the prior year fourth quarter, primarily due to the factors affecting gross margin already discussed, but also due to an increase in R&D spending and Dixie Chopper start-up expenses.

Our effective income tax rate was 25.4% compared to 25.7% in 2018, after excluding the prior year one-time tax adjustment related to new tax legislation. Excluding acquisition costs, and the effect of the Morbark and Dutch Power acquisitions, adjusted net income was $15.5 million or $1.32 per diluted share. Excluding the one-time favorable tax adjustments, fourth quarter 2018 adjusted net income was $16.3 million or $1.38 per diluted share.

Fourth quarter 2019 net cash provided by operating activities was $47 million, which is over 400% above prior year quarter operating cash flow of $9 million. This was mostly due to fourth quarter liquidation of nearly $32 million of receivables and inventories compared to only $3 million in the prior year quarter when Industrial Division organic growth drove higher working capital requirements.

Full year 2019 operating cash flow of $91 million is a Company record and over 600% better than prior year. Fourth quarter 2019 investing cash flows were highlighted by about $350 million cash used to acquire Morbark and $11.5 million of capital spending, which as expected continued to track above prior year. Full year capital spending was $31 million compared to $27 million in 2018.

Due to acquisitions, debt net of cash increased about $350 million over the prior year quarter. Excluding acquisitions, debt net of cash would have been about $53 million lower than prior year.

Now regarding our coronavirus exposure; we estimate that between $40 million and $50 million of the components we buy are manufactured in China. Most of these can be sourced from non-Chinese suppliers but the supply chain for some power transmission components used on mechanical mowers could be temporarily disrupted. Most of our Agricultural division sales would be exposed through such a disruption. But as of today, our major suppliers are back up and running, they're not necessarily at full staff. Currently we're looking at two to four week inbound delays and we have boots on the ground in China closely monitoring the situation at each of these suppliers. In the meantime, we are actively pursuing sourcing contingencies to mitigate the risk that the situation worsens. To date, we have seen no coronavirus impact on demand for our products.

In summary, our fourth quarter and full year 2019 results included completion of the Morbark acquisition, the largest in the Company's history, record fourth quarter and full-year sales of $300 million and $1.1 billion respectively, continued margin pressure from lower production volume, unfavorable product mix and lower rental fleet utilization, which more than offset the benefit of lower steel cost and strong fourth quarter and record full-year operating cash flow over 400% and 600% respectively above the prior year.

I'd now like to turn the call back over to Ron.

[Ron Robinson, President & CEO]

Thank you, Dan. Well, as you certainly heard in Dan's presentation, our fourth quarter results had a lot of noise in it, everything from acquisitions, inventory write-ups, and amortization, some market challenges and coronavirus and other issues. But all in all, actually we're pleased with the achievements we made in the fourth quarter. And with our 2019 results in total, which while certainly were off a little and below our expectations, were still the second highest in the Company's history, and sales were at record levels.

First of all, I think as I said, we acknowledge our earnings, we're somewhat short of our expectations, but as we reported starting in our third quarter our results were impacted by weak agricultural market conditions and some unfavorable mix in our industrial sector, and some of these same conditions affected our fourth quarter results, but not quite to the effect they did in our third quarter, which we think is a very positive development.

And it is also good to note, sales for the year were as I said even before the contribution from acquisitions at record levels. Even with the decrease in agricultural sales our overall sales for the year excluding acquisitions were up 4% and even more so in local currencies. In fact, with regard to currencies as you noted, our Industrial and Agricultural Division are probably going to have a little bit more currency effect in their results going forward now that we no longer report our European operations separately, but I also think this change in reporting, which just started with our fourth quarter results will actually make our reporting more consistent since we now have all similar products reporting together.

And while our organic profits were below the previous year, due to as we said weaker sales in agricultural and our margins even in our Industrial Division were still affected by some unfavorable sales mix, still we had fewer of the internal challenges that affected our results that we reported on the third quarter, which again definitely seen some improvements in the fourth quarter. And we were also pleased that bookings for the quarter were up. This was particularly welcomed in our Ag sector, which had been impacted by declining backlogs during most of 2019. So, again showing some sign of stabilization in that market. But of course for us the major development has been the acquisitions we completed in 2019 capped in October with our largest ever Morbark, we believe, this is a significant achievement for Alamos' future. So it's certainly clouded our fourth quarter results. We completed this deal in late October.

And as Dan said, they were down over a week just to close the books, count the inventory, get everybody trained and before being fully operational and that was quickly followed by Thanksgiving holidays then their normal Christmas shutdown. So our results were obviously limited, but we were really pleased that we were still able to generate over $35 million in sales in just in that short time and again as Dan pointed out, our costs were further impacted by this, I mean in addition there was transaction related expenses, higher amortization cost and the required step up in inventory valuations, which alone added the $3.3 million to cost of goods sold in the fourth quarter. So while obviously the higher level of amortization expense will continue as we move ahead, certainly the transaction expenses will go away in 2020 and the step up in inventory valuation should be all flushed out through the system, practically all by the end of the first half of the current year.

We'll still have some -- a little bit of integration expense, but we believe Morbark should be a very major contributor to our results in 2020, good indication of this can actually be seen in our 2019 results where despite softer organic results and acquisition related expenses, our unadjusted EBITDA for 2019 was at record levels for Alamo Group and we believe it will get significantly better in 2020. In addition, we are pleased by a number of our other internal initiatives, which we feel will help our organic sales growth to drive further operational improvements.

I mean, yes, these initiatives include a variety of some new product introductions that have been made recently in some of our -- we've also made as you noted, our capital -- CapEx spending has been up, as we have been spending more on our plants to improve our manufacturing efficiencies and invest in technology and of course the big hit, I mean the big driver of the increase in our CapEx for the year was our, the new greenfield plant we built in Wisconsin, which is part of our plan to -- we have really four or five plant consolidations completed within about a two-year period now, so. And most of these we've previously discussed and all of these are well underway and very pleased with the direction that's taking. And certainly there is still no variety of challenges that we continue to face, the agricultural market is still slow, though showing some signs of stabilizing a little bit more in the US. However in Europe this sector is a little weaker and actually it may worse by some unfavorable weather conditions in the last -- further in the year.

Our industrial products seem to be holding up steadier and we are pleased to see some areas, like our mowing products as Dan commented, which were a little soft, major profit contributors for us and they were a little soft in 2019, but are starting 2020 with certainly improved bookings, and -- but the outlook for them is back to normal. And of course, there is a variety of external issues that we have been commenting on. I mean certainly US, the presidential election in Europe, the Brexit situation is still not totally -- we know it's been coming, we just don't know what the terms are. Trade dispute with China sort of the same thing, but there are some agreements made, but it's still not clear how all that's going to affect us because we're still paying sort of tariffs and all.

And of course at the top of the list as Dan pointed out is the coronavirus situation, which is a major concern for everyone. We're pleased that our major component suppliers in China are open, though not at full staffing levels. And at this time, we do not feel the situation will have any impact on our first quarter results [indiscernible] everything we need from there to meet all of our commitments in the first quarter. But we could pay some disruptions in the second quarter if components do not start flowing at some level from China within the next month or so. And this would be mainly as Dan indicated in our agricultural operations much more so in our industrial. But as a result, we're monitoring this situation daily, taking what actions we can to protect our deliveries and mitigate in adverse situation, but I don't think anyone knows the full effect this issue will have on us or our suppliers or our customers or the global economy for that matter at this point.

So while there are definitely some areas of concern, we actually feel good about the outlook for Alamo Group. There was certainly a lot of noise in our 2019 fourth quarter results, but we actually feel the results are better than they first appear, and we think this will begin to become more evident as we move through 2020. With our various internal initiatives combined with the contributions from acquisitions, we feel the outlook for 2020 is very positive. And we can absolutely assure you that in this current year, I mean we will have a much stronger internal focus, working on the integration of the acquisitions and our other various internal initiatives, and our total focus will be on delivering the results we know we're capable of producing.

So with that, thank you for your support and we would now like to open the line to any questions you might have.

[Operator]

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

[Chris Moore, CJS Securities]

Hey, good morning guys.

[Ron Robinson, President & CEO]

Good morning, Chris.

[Chris Moore, CJS Securities]

Good morning. Just trying to understand a little bit better the kind of the ultimate impact that Morbark will have on the industrial margins. A couple of things. Is there much seasonality in Morbark, is Q4 normally a slower time of the year or is there any impact on seasonality there?

[Ron Robinson, President & CEO]

There is a little impact, vegetation-related activities are usually a little slower in the -- at the end of the year and the first of the year in the winter months. I mean when it snows, they're not cleaning up brush debris quite as much. So it's almost not as much on the equipment itself as in the spare parts, which in the spare parts are certainly a little bit higher margin. So not significant, but some seasonality. Morbark though is like I said, I mean when we announced the acquisition we gave some parameter for what we -- their sales levels and everything, and we believe that certainly they are still in line with the indications we've made in. And as we pointed out then, their margins are actually a little bit better than our margins. So I mean, we think that they should have a somewhat positive effect. Again, you got to take out the noise of the inventory step-up in the short term and amortization and things like that. But now we actually think they will be a very nice contributor with a little bit higher margins than we have in general.

[Chris Moore, CJS Securities]

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

[Dan Malone, EVP & CFO]

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

[Chris Moore, CJS Securities]

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

[Dan Malone, EVP & CFO]

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

[Chris Moore, CJS Securities]

Sure. Last one from me. Just in terms of the expected Morbark intangible amortization for fiscal '20, can you give us just a...

[Dan Malone, EVP & CFO]

So, we booked -- on Morbark, we booked a $1.5 million for two months. So, if you extrapolate that out, it's $9 million.

[Ron Robinson, President & CEO]

Yes. And Chris, that's just an estimate on quarter, so we are..

[Chris Moore, CJS Securities]

Yes. Understood.

[Ron Robinson, President & CEO]

There is your opening place over.

[Chris Moore, CJS Securities]

All right, I'll jump back in line. Appreciate it guys.

[Ron Robinson, President & CEO]

Thank you.

[Dan Malone, EVP & CFO]

Thank you.

[Operator]

Our next question will come from Joe Mondillo with the Sidoti & Company.

[Joe Mondillo, Sidoti & Company]

Hi guys, good morning. The EBITDA margins that Morbark has historically seen, excluding the purchase accounting amortization that's still sort of intact?

[Ron Robinson, President & CEO]

Yes.

[Joe Mondillo, Sidoti & Company]

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

[Dan Malone, EVP & CFO]

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

[Joe Mondillo, Sidoti & Company]

Okay.

[Ron Robinson, President & CEO]

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

[Joe Mondillo, Sidoti & Company]

Okay.

[Dan Malone, EVP & CFO]

But in total [indiscernible] about 4%.

[Joe Mondillo, Sidoti & Company]

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

[Ron Robinson, President & CEO]

They're in several buckets for sure. I mean, one of the big ones is procurement. And we're pleased that I mean -- like I said, we haven't put any numbers, but we're actively working on that, and we feel we're already achieving and have reached agreements to achieve about half the benefits already, but none of which will show up till the second half of the year because they got to flow through their old inventory, they are all purchasing rates until [indiscernible]. But procurement is a big one, certainly, putting them on our operating systems in this kind of stuff, I mean that's a function, that we'll be going throughout this year. We have already, I mean -- literally we started three, CapEx is there already to -- investing in the shop on some new robots and some new cutting capabilities, which we believe will help their cost, so there is some operational wins.

And then the little bit longer term, I mean Morbark has been good company, but very strong North American, not as much international. And we've already got our European, our Brazilian and our Australian Groups have all been there lately. And we hope to -- before the end of this year, have some new international capabilities set up to market their products through our distribution network outside of North America. And so, I mean as I said, it's a -- there is a variety of issues in the different buckets and all of them are underway. But most of them are sort of second half of this year, into next year before. We believe those will start being evident in the results.

[Joe Mondillo, Sidoti & Company]

Okay. And then, last question regarding Morbark; what is the incremental depreciation that comes with Morbark? And how does the acquisition affect the effective tax rate of the whole company?

[Ron Robinson, President & CEO]

I think from the depreciation piece, we've not added or given you that information yet. As part of the valuation that we're going through right now there's going to be some step up in some of the fixed assets. So we're not putting that information out just yet. As effect to the tax rate, most of their sales are in the United States. So if you look at the federal tax rate at 20%, they do have obviously a state tax there, but I wouldn't say that it's probably going to be roughly in the same range of where we're at now. You see a swing maybe few tenths of a percent.

[Joe Mondillo, Sidoti & Company]

Okay. I had a couple of questions about the Industrial segment. I'm sorry, go ahead.

[Dan Malone, EVP & CFO]

Just, there was a tax benefit, because we bought LLP interest. There was a tax benefit which will affect cash taxes, but you don't necessarily see that in the GAAP tax provision number. So, there is -- cash taxes should actually be better than what we put on provision. We're going to put, continue to put numbers into a deferred tax liability.

[Joe Mondillo, Sidoti & Company]

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

[Ron Robinson, President & CEO]

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

[Joe Mondillo, Sidoti & Company]

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

[Ron Robinson, President & CEO]

Yes, I think so far where we're at around right now, Joe, it's trending I wouldn't say 100% huge positive increase, but they are trending positive for us right now. We've got few areas obviously that continue to get they are probably struggling, but overall I think [indiscernible], we're not seeing huge impacts yet because I think -- go ahead Don.

[Dan Malone, EVP & CFO]

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

[Joe Mondillo, Sidoti & Company]

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

[Ron Robinson, President & CEO]

Yes, we're pleased. We had two major consolidations we announced the -- I mean talk about last year, one was the -- we expanded our Tenco facility in Canada to allow us to move our R.P.M facility, nearby R.P.M facility into that one, to mainly consolidate the manufacturing. So that has now been completed late last year, but that's done. The other major one was the new plant that -- for Super Products at Wisconsin, where we've built a greenfield plant in Mukwonago, though we started like that -- the construction has been completed on -- basically on time, on budget and we started moving in or literally the office started moving in, just before the first of the year and now most of the production is gearing up with we would -- that the Europe [ph] production in the first quarter and that we are on track for that -- on track, on budget and so that will allow us to close -- consolidate several -- excuse me several plants into one and in fact we haven't told, but we've already got contract to sell one of their plants that we see did own, one we did own in Milwaukee.

So, all of that is on time. I mean obviously none of this is starting to show up in the numbers yet, but we think it will, and we -- most of our as we said, we spent a little bit more on CapEx. It's been a little bit more and so, I mean we are on target and believe most of that stuff will start contributing to our bottom line, at least in the second half of this year.

[Joe Mondillo, Sidoti & Company]

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

[Dan Malone, EVP & CFO]

As I mentioned, we're already buying some new robots at Morbark, where we got a new paint system going online at Rivard, we've got, probably two other robots or additional new robot at Bush Hog. We made -- when we brought in the Dixie Chopper production into our Illinois manufacturing, Rhino manufacturing plant, we spent the -- money on some new equipment there to be able to make that assembly of that equipment more efficiently. So, yes, you're right, we've got a number of these. And then like the last two years, our CapEx spending has been considerably above. This year I mean I'd say the big year, we spent $31 million almost $15 million for just the [indiscernible] plant all of that went into 2019 some of that tail over into 2020. But so I think this year the 2020 CapEx spending could be off a little bit I think, but this year we will start -- second half of this year we'll start seeing the benefits of not just the plant, but a lot of this extra CapEx spending we've been doing.

[Joe Mondillo, Sidoti & Company]

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

[Dan Malone, EVP & CFO]

Thank you, Joe.

[Operator]

Thank you. [Operator Instructions] Our next question comes from Mike Shlisky with Daugherty & Company.

[Mike Shlisky, Dougherty & Company]

Hey guys, good morning. Can you hear me okay?

[Dan Malone, EVP & CFO]

Yes, Mike.

[Ron Robinson, President & CEO]

We can hear you, Mike.

[Mike Shlisky, Dougherty & Company]

Great. Can you maybe quantify the cost savings, if there are any that you expect from having two segments better than three? Are there any people costs that are going to be changing or still the cost that may be changing going forward?

[Dan Malone, EVP & CFO]

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

[Mike Shlisky, Dougherty & Company]

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

[Dan Malone, EVP & CFO]

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

[Ron Robinson, President & CEO]

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

[Mike Shlisky, Dougherty & Company]

Got it.

[Ron Robinson, President & CEO]

But as Dan had said previously, literally going forward, I mean barring acquisition and that kind of stuff, I mean over 50% of our EBITDA should be available for free cash flow available for debt reduction.

[Mike Shlisky, Dougherty & Company]

Okay, perfect. I wanted to just -- the Ag outlook figure as well. In other words, given the order pattern in the quarter, we're not even seeing --it's about the tone you're hearing from some for 2020, actual with your commentary you're getting some farmers, dealers out there about what the [indiscernible] might look like the year?

[Ron Robinson, President & CEO]

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

[Mike Shlisky, Dougherty & Company]

Got it. And then, may be one last one from me. I guess how do you feel about Ag business' growth in 2020? Can you -- could you be able to -- what you did in the trailing twelve months, from a topline and bottom line perspective, or is that a high growth business this year?

[Ron Robinson, President & CEO]

The last couple -- last several years, they have been growing at a little bit higher rates than we have been growing or then -- I think the most industrials in our space have been growing and we think that's likely to continue. There will be a couple of percent growth the points of growth higher than we have, just think that their products and what, all things being done to manage, before south-west and natural disasters would seem to be continuing at a barely above average rates. So no we think that their growth rate should be a little bit -- should be positive and a little bit above ours but we are excited, given that negative effects to the whole economy from coronavirus or anything else but, but we still feel that there should be positive growth rates above average.

[Mike Shlisky, Dougherty & Company]

Okay. Ron, thanks for the color, I appreciate it.

[Ron Robinson, President & CEO]

Thank you, Mike.

[Dan Malone, EVP & CFO]

Thanks, Mike.

[Operator]

Thank you. We do have a follow-up from Joe Mondillo with Sidoti.

[Joe Mondillo, Sidoti & Company]

Hi guys, just a couple of follow up questions. Regarding the Ag segment if your revenue is flat this year given the dynamic that you face in 2019, should your margins expand?

[Dan Malone, EVP & CFO]

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

[Ron Robinson, President & CEO]

So also the product mix in '19 was off to a lot of our higher margin products that we sell was lower percentage of lower margin, five and six footers sold a lot more than 15 footers. We want more of those 15 foot, 20 foot units going out, because that really shows -- it gives us the margin improvement we are looking for.

[Dan Malone, EVP & CFO]

Yes, 15 footers has been bread and butter for us. We need the professional farmers to be back buying equipment that would help. And if I was to roll the dice and bet on it, I think there's probably a pretty good chance of that.

[Joe Mondillo, Sidoti & Company]

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

[Dan Malone, EVP & CFO]

That's what I was saying, the revenue probably doesn't fluctuate quite as much as the margins do. Second, third quarters are certainly for vegetation maintenance equipment, that's when the equipment is utilized more, it consumes more spare parts. And so, yes, so like that -- you've been a little bit more so on margin seasonality than on revenue seasonality.

[Joe Mondillo, Sidoti & Company]

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

[Dan Malone, EVP & CFO]

Yes. I mean we do because I mean, we think the mix is going to be a little bit more -- back to more normal conditions in 2020 because it was -- like I said, yes, with ag being off, but with the mixed in industrial being a little bit unfavorable, and we think that that mix would -- going to return to more normal condition certainly. We still have, I mean there was going to be some noise in it, they was going to be some step up in the inventory valuation that affects the Morbark results and then our overall results for the first half of the year, be a little bit integration cost too, but now we believe that organically our market should rebound to the normal levels.

[Joe Mondillo, Sidoti & Company]

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

[Ron Robinson, President & CEO]

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

[Dan Malone, EVP & CFO]

Yes. We just did -- we broke it out in the operating pre-tax number, we broke out, the three pieces do net together to a negative number, but we burdened them with the additional -- with the step-up adjustment and we burdened them with the additional amortization. That's what made it a negative number. Without that, they were operating earnings. So, that's why that $2.154 million [ph] was a contribution to operating earnings. So, and then we didn't do the same breakout after tax, more for EPS.

[Joe Mondillo, Sidoti & Company]

I see, okay. I was only netting names for step-up, I wasn't netting the amortization at the operating income level. So I think...

[Dan Malone, EVP & CFO]

Yes, right.

[Joe Mondillo, Sidoti & Company]

All right. Thanks, Dan.

[Dan Malone, EVP & CFO]

Yes. Thank you.

[Operator]

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

[Ed Rizzuti, VP, General Counsel & Secretary]

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

[Operator]

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