Alamo Group, Inc.

Good day, and welcome to the Alamo Group Inc. Third Quarter 2020 Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Ed Rizzutti, Vice President, General Counsel, and Secretary. Please go ahead, sir.

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 212-422-4222. 8273746 and we will send you a release and make sure you're on the company's distribution list. There will be a replay of the call which will begin one hour after the call and run for one week. The replay can be accessed by dialing 1-888-203-1112 with passcode 1987728. Additionally, the call is being webcast on the company's website at www.alamo-group.com, and a replay will be available for 60 days. On the line with me today are Ron Robinson, President and Chief Executive Officer, Dan Malone, Executive Vice President, Chief Financial Officer, and Richard Worley, Vice President, Treasurer, and Corporate Controller. Management will make some opening remarks, and then we'll open up the line for your questions. During the call today, management may reference certain non-GAAP numbers in their remarks. Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release. Before turning the call over to Ron, I'd like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following. Market demand, COVID-19 impact, competition, weather, seasonality, currency-related issues, geopolitical issues, and other risk factors include listed from time to time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date. I would now like to introduce Ron. Ron, please go ahead.

Thank you, Ed, and we want to thank all of you for joining us here today. Dan Malone, our CFO, will begin our call with a review of our financial results for the third quarter, and then I will provide a few more forward to taking your calls, so any questions you may have. So, Dan, please go ahead.

Thank you, Ron. The key takeaways from our third quarter and nine-month 2020 results are record third quarter sales up 7.3% with acquisitions, but down 8.5% organically. Record nine-month sales up 6.8% with acquisitions, but down 11.8% organically. Third quarter 2020 adjusted EBITDA up over 35% from the prior year quarter and at 14.8% of net sales compared to 11.7% prior year. Nine month 2020 adjusted EBITDA up 17.8% from the prior year period and at 13.1% of net sales compared to 11.8% prior year. Third quarter net income and earnings per share both up 15% from the prior year quarter and included accretive acquisition results. Third quarter operating cash flow over $77 million, up 78% over the prior year quarter. Outstanding debt was reduced by nearly $65 million during the quarter. Quarter end cash on hand plus loan availability increased to almost $280 million up nearly 25% since the end of June, and third quarter ending backlog of $254.5 million, up 17.5% since the end of the second quarter. Third quarter 2020 net sales of $291.8 million was a company record and 7.3% higher than the prior year third quarter. Without acquisitions, organic sales were down 8.5%, Without the favorable effect of currency translation, organic sales were down 8.8%. The organic sales decline was primarily due to the COVID-19 impact. Nine-month 2020 net sales of $874.8 million was a company record and 6.8% higher than the prior year with the contribution of acquisitions. Without acquisitions, organic sales were down 11.8%. Without the unfavorable effects, of currency translation organic sales were down 11.6%. Industrial Division third quarter 2020 net sales of $196.2 million represented a 10.1% increase from the prior year third quarter. Without the impact of acquisitions, this division's organic sales were down 14.4% due to COVID-19 disruptions to operations and customer demand. Agricultural Division third quarter 2020 sales were $95.5 million, up 2% from the prior year third quarter in U.S. dollars, and up 2.1% without the effect of unfavorable currency translation. In the third quarter, we continued to see organic sales growth in our North American operations, plus some incremental Dixie chopper sales, partially offset by weaker results in Europe. Net income for the third quarter 2020 was $20 million, or $1.69 per diluted share, compared to prior year third quarter net income of $17.4 million, or $1.47 per diluted share. Third quarter gap net income from acquisitions, varying the full cost of incremental interest, amortization, and inventory step-up expense, was accreted by $0.02 per diluted share. Excluding the inventory step-up expense, third quarter accretion from acquisitions would be about 7 cents, and EPS would be about $1.74 per diluted share. Net income for the first nine months of 2020 was $48.6 million, or $4.10 per diluted share, compared to net income of $53.3 million, or $4.52 cents, per diluted share for the same prior year period. Nine-month gap net income from acquisitions was accreted by $0.09 per diluted share, including the full burden of incremental interest, amortization, and inventory step-up expenses. Excluding the inventory step-up expense, nine-month accretion from acquisitions would be about $0.30, and EPS would be at about $4.40 per diluted share. Third quarter 2020 adjusted EBITDA, which excludes the more of our inventory step-up charges, was $42.8 million, up $11 million, or about 35% over the prior year third quarter. Our adjusted EBITDA as a percentage of net sales was 14.3% in the third quarter, compared to 11.7% of net sales in the prior year quarter. Higher board mark margins, favorable product mix, The benefits realized from facility consolidations and other cost containment measures more than offset the impact of COVID-19 for the core. Nine-month 2020 adjusted EBITDA was $114.6 million, which was 17.8% higher than the prior year nine-month result. The nine-month adjusted EBITDA margin was 13.1% of net sales compared to 11.8%, for the prior year period. During the third quarter of 2020, we generated $77.3 million of operating cash flow compared to $43.3 million in the prior year third quarter, an increase of 78.4%. Strong operating cash flows continued during the quarter due to management's emphasis on asset efficiencies and controlling expenses. At quarter end, we had $93.5 million of cash on hand and $186.3 million of availability under the existing credit facility, maintaining liquidity of almost $280 million. During the quarter, we reduced outstanding debt by $64.8 million and significantly reduced our debt to EBITDA leverage ratio. We ended the third quarter with $254.5 million of order backlog, an increase of 17.5% since the end of the second quarter, and 18.2% higher than the prior year third quarter. Excluding acquisitions, backlog was only down 1.9% from the prior year quarter. During the quarter, we saw modest organic growth in new order bookings, primarily due to higher North American demand for our agricultural products. To recap our third quarter and nine-month 2020 results, Record third quarter sales, up 7.3% with acquisitions, but down 8.5% organically. Record nine month sales, up 6.8% with acquisitions, but down 11.8% organically. Third quarter 2020 adjusted EBITDA, up over 35% from the prior year quarter, and at 14.8% of net sales compared to 11.7% prior year. Nine-month 2020 adjusted EBITDA up 17.8% from the prior year period and at 13.1% of net sales compared to 11.8% prior year. Third quarter net income and earnings per share both up 15% from the prior year quarter and included accretive acquisition results. Third quarter operating cash flow over $77 million, up 78% over the prior year quarter. Outstanding debt was reduced by nearly $65 million during the quarter. Quarter-end cash on hand plus loan availability increased to almost $280 million, up nearly 25% since the end of June. And third quarter ending backlog of $254.5 million, up 17.5% since the end of the second quarter. I would now like to turn the call back over to Ron.

All right. Thank you, Dan. As the numbers reported by Dan looked, we were very pleased with Alamo Group's 2020 third quarter results, particularly given the many ongoing challenges we are facing. Our sales continue to improve from the soft conditions we experienced in the second quarter, and we finished the third quarter at record levels of sales, certainly helped by the acquisitions we completed last year. Our earnings also rebounded nicely where, again, we benefited by both improving sales along with the accretive contributions from our recent acquisitions. But there was so much more in the quarter than just the sales and earnings. Our cash flow was very strong. We paid down nearly $65 million in debt in the quarter and nearly doubled that in the last two quarters. and yet we still ended the quarter with a strong level of cash of over $90 million. Our balance sheet also continues to be very healthy and was further strengthened in the third quarter. So despite the impacts of the COVID situation on our markets and the economy in general, our company showed strong and improving results in almost every measure of financial performance. Also pleased that most of the operational issues we faced in the second quarter showed improvement, continued improvement in the third quarter and allowed us to return to near normal operating conditions. All of our manufacturing plants are open and operating and we've called back nearly all of the employees we had on furlough or temporary layoff. And in fact, a few of our operations are experiencing some shortages as skilled workers are getting to be in a little short supply once again. It's probably good for the economy. And while some of our markets continue to be constrained by the current adverse economic conditions, we saw our bookings and backlog improve throughout the third quarter. We're particularly pleased that our agricultural division is actually in third quarter, running ahead of last year's pace. as the agricultural sector in general has shown broad-based improvement and is operating at near pre-COVID levels. While farm incomes are still soft due to weak commodity prices, they are certainly benefiting from higher government support, which has made the overall farm incomes be up this year versus the previous year. And other signs of this are in the fact that acreage under cultivation remains at a very high level, and I think it bodes well for the overall agricultural outlook. And certainly the agricultural sector has had a lot fewer operational challenges from COVID than many other industries. Our industrial division also showed improving performance in the third quarter. though they are still below the previous year on an organic basis. And the products in this division have not improved on a uniform basis. It's been a little more lumpy, some better than others. For instance, our Morbar forestry products have been well ahead of the curve, improving very nicely, whereas some other products like our vacuum truck lines have certainly lagged behind in their recovery. Also, our markets in this sector have experienced a little bit more operational challenges and experienced a few more economic difficulties as well, since a large part of our industrial sales are to governmental entities or infrastructure maintenance, and certainly governmental budgets continue to be affected by revenue shortfalls and spending constraints. We believe this situation will continue to negatively impact these markets for the remainder of 2020, and well into 2021. However, our business should hold up a little bit better during these adverse times as they have in prior economic challenges since our equipment continues to be used and employed in maintenance operations on a fairly regular basis, even during economic downturns, and are being worn out and need repair and replacing at a somewhat more steady rate. Our company's industrial division has also been helped throughout the current year by the acquisitions we made in 2019 of Dutch Power and Morbar. These two have consistently provided positive contributions to our sales and earnings and have proven to be good additions to Alamo's overall operations. Although some of our initiatives to fully integrate them into our company have been hindered by operational challenges related to COVID, These efforts are still underway, and we remain confident we will achieve our intended synergies, though it may take a little bit more time than originally envisioned. While we are pleased with Alamo Group's performance in the third quarter of 2020, we believe our fourth quarter will be a little bit more challenged, since it is a seasonally weak quarter for us in general, as the equipment is a little bit less utilized in the fourth quarter. And we also remain concerned about ongoing issues related to COVID, and particularly in Europe and places where they are actually having almost a resurgence of COVID issues and are reinstituting some broad restrictions on the economies. So, I mean, it's disconcerting to see, and I'm also concerned that there's areas in the U.S. where we're seeing are more issues with COVID than we would like to be seeing. So in this whole COVID situation, it's far from being resolved. Until there is a proven path to recovery, the pandemic will continue to foster an atmosphere of uncertainty in our markets as well as the economy in general. Still, we are optimistic about the outlook for our company. We've seen some positive momentum in our markets. We have a healthy backlog. We have very solid financial stability. We get the ongoing contributions from recent acquisitions. And we have a management team that has been very proactive in responding to challenges, changing market conditions, and other kind of operational issues. So with all this positive momentum, we believe we are well poised to prosper despite the uncertain environment in which we are operating. Certainly to be successful has required a team effort, and we're very grateful for the dedication and commitment we have had from not only our employees, but our customers, our vendors, and other stakeholders during these challenging financial times and are appreciative of this ongoing support. With that, I would now like to open the call to any questions you might have.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause just for a moment to allow everyone an opportunity to signal for questions. Our first question comes from Mike Shilsky, Collier Securities.

Hey, good afternoon, guys. Can I get a little bit more color about some of your comments on Agron? Can you give us a sense as to what might be some of the stronger products or stronger areas? Is it the large row crop farmer? Is it the rancher? Or is it the large acreage owner that's kind of driving most of the upside currently?

I would say it's been fairly broad-based. Certainly the subsidies that farmers are receiving are to the big farmers. They don't go to hobby farmers. So we've seen that. But certainly the small horsepower tractor sales in the U.S. are up nicely, like double-digit increases in sales there, which I think means even in the hobby farmer sector there's been some But, you know, some of the ranching sectors, the row crop farm, it's been – you know, I think that's been sort of good that it's been fairly broad-based. And so, you know, like I say, no one sector – you know, certainly there was a little bump in probably the second quarter and early third quarter from, I think – like landowners who were at home more during COVID than they typically were, and there was a big bump in small horsepower tractors and some related type implements like our single spindle mowers. But as I said, acreage under cultivation is holding up good. The subsidy payments to farmers is at record levels, which has helped the big row crop farmers, the big ranchers, So it's been a pretty, that's been fairly, it's been very broad-based, which has been a welcome situation. Great.

Thanks. I wanted to turn to some weather impacts on the order patterns. In snow, you've always said that if you see a heavy snow season, oftentimes the next year is pretty good for snow plow orders. I guess first I'm curious whether that's happened this year for the snow wars. Have they met your expectations? And then secondly, you know, this has been a very active hurricane season. I think one hit the southeast U.S. just yesterday, and that was like the 11th of the year. Do you think hurricanes will have any effect on your vacuum trucks or your forestry equipment once the hurricane season is over? Could governments start to plan ahead for next year saying, We really should be more prepared for next year's storms with some more equipment.

Weather impacts on snow removal, first of all, snow is actually starting out quite good for us this quarter. We think we are seeing some benefits there. And, you know, certainly I think actually fires have had an impact on us as well. I mean, you know, certainly some of our forestry products that have been, you know, needed in the cleanup and remediation of those type areas. So, you know, snow products are off to a good start. Forestry products are off to a good start. Like I said, somewhat related to fires. Hurricanes, yeah, I mean, there seems to be a little bit more activity. I don't think you know, while it's been bad, none of them have been quite as severe as like the Katrina's or this kind of stuff. And we have not really seen, I mean, our vacuum truck business, as I stated earlier, has actually been one that has been softer. I think it's, you know, because a lot of, you know, especially where we rent vacuum trucks is to some of the non-governmental customers. And some of those areas, you know, have been soft. So, you know, like oil field and and some construction and mining, these type things. So they've been a little soft. So I have not seen a big influx from hurricanes that has offset that. So I'm not saying, you know, we haven't benefited a little. It's kind of a little early to benefit from the one yesterday. But, you know, so, yeah, they'll help us a little. But, like I say, vacuum trucks are soft and have remained soft throughout most of this period. I mean, it's great. but still that's been one of the softer sectors. Okay.

And then turning to the balance sheet, looking at your debt and your leverage ratio, it has gotten relatively low. You're probably around two times levered right now on that debt, if my calculations are correct. I guess first, Dan, is this area comfortable for you? And then kind of secondly, since you're in this range, is it now time to go out and look for your next good-sized M&A deal?

I think we'd like a little more certainty in the marketplace before we get really motivated. But the debt level is not an issue right now. It's been brought down. I mean, we'd like – if we were in a certain market, you know, we'd start feeling like that, you know, we got a lot of dry powders.

Yeah, no, I think, as Dan said, I mean, you know, balance sheet-wise, you're right. We're very comfortable. And, yeah, I mean, we would say, yeah, you know, that's not holding us back from acquisitions. There's a lot of other things holding us back on acquisitions. You know, there are some, you know, there hasn't been much activity. I think a lot of people have been on the sidelines for the last couple of quarters. And, yeah, people are starting to get more interested in looking at bringing some things to market. But I think, you know, as opposed to maybe high tech or as opposed to maybe health care, which I think has seen more M&A activity going on, I think sort of our industrial space is going to lag a little bit. You know, it's hard to – it's still hard to physically visit assets. It's still hard to, you know, while we all think – you know, valuations are a little hard because we don't, you know, we think it's got to be, you know, they'll recover from the COVID lows, but the timing is still very suspect. Until we have a clear path to recovery, I think it would be, it's a little harder to value industrial-type products, you know, the prospects of industrial, of acquisitions of industrial-type companies. So, but yeah, we're, you know, we're starting to, you know, open our eyes to things that are, you know, coming up there. And like I say, acquisitions are definitely still part of our strategy, and we're comfortable with our balance sheet. But I think it's still, you know, the right circumstances for us to move ahead at this time. But we're starting to look. But, yeah, it's a little bit more challenging environment to us.

Mike, our goal is to continue to be diligent to pay debt down as we move forward. So, as Ron said, that's correct. But, I mean, with the environment that we're at, it behooves us to continue to do what we're doing.

Okay. Got it. Well, guys, thanks again. I appreciate it, as always. Thank you. Thank you, Mike.

Just a reminder, to ask a question, please press star 1 now. Our next question comes from Chris Moore with CJS Securities. Hey, good afternoon, guys.

So, yeah, just trying to get a sense. It sounds like more bark is, you know, one of the bright spots on the industrial side. Organic growth was down, I think you said, 14.4%. You didn't own more bark in Q3 of last year. Roughly, in terms of from a revenue standpoint, was more bark revenue down meaningfully? year over year in a quarter, or just kind of any sense there it was doing better than the overall industrial segment?

Chris, they were a little slow this quarter, and it did pick up from, I should say, slow in Q2. It actually picked up here in Q3, but compared to last year, we've not given you that information out. But, yeah, we're seeing a nice pickup with them, both in sales as well as orders and backlogs.

Yeah, more of our, in the second quarter, I mean, you know, since they have some really big ticket items, they were off a little bit more early in the second quarter, probably more than the average. But like I said, by the, you know, midway, by the third quarter, they were actually above average in one of our stars. I think they're still running slightly behind last year's pace. But, you know, it picked up nicely in the third quarter, but they had a weak second quarter.

Got it. All right. Thank you. Dan, I might have missed it, but parts and services as a percentage of revenue and, you know, how big of an impact did that have on margins this quarter?

I mean, certainly it helped margins. The mix of parts was higher than last year, but it helped. It was one of our favorable product mix impacts.

Yeah, it is typical in downturns of parts hold up better than whole goods, and that has certainly been the case here.

Both second and third quarter, they're that way, Chris.

Right. And roughly what percentage of the revenue was that?

We don't provide that. Gotcha. It's a little over 20. A year today, we don't have that. Got it.

And just, you know, from the ag perspective, that's obviously doing pretty well. Ron, is that level, low single digits, you know, 1% to 2% organic growth, is that, from where you're sitting today, is that reasonable, you know, over the near term?

Yeah, I mean, I think so. You know, I think ag, you know, you saw the strengthening in our backlog. I can tell you the biggest strengthening was in ag. The biggest strengthening in the backlog was in our ag. Their backlog was well ahead of last year. So Europe is lagging a little bit. And as I just said, Europe is actually, you may have seen that France is reinstituting a lot of shutdown measures to deal with COVID. The word is England will follow suit by the weekend. I'm worried a little bit. That's a big part. We have good ag sales in England and France and in Europe. A little bit concerned there. Actually, the U.S. organically has even been up more than that couple percent. I think it should continue nicely. Like I say, there's always some uncertainty, but But the backlogs are good. The outlook's good. And, you know, commodity prices are still a little weak. And we would rather see farm incomes be improving more from – that their basic incomes are improving, not that their subsidies are improving. So, I mean, that's always subject to change.

Chris, we like where it's going. If you go back to the last couple of years – It's not rebounded to the levels we've seen before in the past. Commodity prices are still a little soft.

And the China situation, you know, all the commitments China made to buy agricultural commodities from the U.S. have certainly not been fulfilled the way they said they were going to. So, I mean, that's still a bit of a wild card there.

Got it. I appreciate it, guys. I'll jump back in line.

Thank you.

Okay, we have no further questions in the queue at this time. I would like to turn it all back over to management for closing remarks.

Okay, well, again, appreciate you all being on the call today, joining us. Like I said, we're pleased with, even though, like I said, there's still a lot of challenges out there, but pleased with the progress we are making and appreciate you all's ongoing support. So thank you for joining us today, and we look forward to speaking with you when we report our 2020 year-end results. Thank you much. Have a good day.