Alamo Group's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 8.13 | About: Alamo Group (ALG)

Alamo Group Inc. (NYSE:ALG)

Q3 2013 Earnings Conference Call

November 8, 2013 11:00 AM ET

Executives

Robert H. George – Vice President Secretary and Treasurer

Ronald A. Robinson – President and Chief Executive Officer

Dan E. Malone – Executive Vice President and Chief Financial Officer

Analysts

Robert A. Kosowsky – Sidoti & Co. LLC.

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Alamo Group Third Quarter Earning Conference Call. At this time all participants are on a listen-only mode. Following the presentation we will conduct the question-and-answer session with instructions provided (Operator Instructions) I will like to remind everyone that this conference call is being recorded.

I’ll now turn the presentation over to your Bob George, Vice President of Alamo Group. Please go ahead sir.

Robert H. George

Thank you. By now you should have received the copy of the press release. However if anyone is 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 1800-406-7325 with the passcode 4646067.

Additionally the call is being webcast on the company’s website at www.alamo-group.com and replay will be available for 60 days. On the line with me today are Ronald Robinson, Chief Executive Officer and President; Dan Malone, Executive Vice President,

Chief Financial Officer; and Richard Wehrle, Vice President and Corporate Controller. Management will make some opening remarks and we will open up the line for your questions.

Before turning the call over to Mark, I’d like to make a few comments about forward-looking statement. 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 risk and uncertainties, which may cause the Company’s actual results in future periods to differ materially from forecasted results, 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. Also the Company will be filling its third quarter 10-Q later today.

I would now like to introduce Ron. Ron, please go ahead.

Ronald A. Robinson

Okay. Thank you, Bob and thank you all for joining us on this call this morning. We appreciate you participating. I think it’s a good quarter to start conference calls. We had a very nice quarter, sort of continuing on how we did from the second quarter. And, to begin with I have Dan Malone, our CFO who will make a few comments about the results and then I’ll comment about the performance and where we think we are.

Dan E. Malone

Thank you, Ron. Alamo Group sales and net income for the third quarter and first nine months of 2013 were the highest achieved in its 44-year history. Sales for the third quarter were $174.7 million, an increase of 12% over the prior year third quarter. Net income for the quarter was $11.3 million or $0.93 per diluted share, a 32% increase over prior year.

For the first nine months of 2013, net sales increased to $511.2 million, which is 7% better than the comparable prior year period. Fully diluted EPS was $2.47 for the nine month period, an increase of 22% over prior year.

In our Industrial Division, third quarter sales of $71.9 million represent a 16% increase compared to the prior year third quarter. For the nine month period sales in this division are now 11% above the prior year results.

Agricultural Division sales were $61.2 million in the third quarter, an increase of 13% over prior year. For the first nine months of 2013, sales in this division were $168 million, an increase of 8% compared to the same period in 2012.

European Division third quarter sales were $41.7 million, an improvement of 4% over the prior year third quarter. However, for the nine month period net sales in this Division are down 2% from prior year.

Throughout 2013 total company gross margin has improved both in total dollars and as a percent of sales, as higher volume has contributed to significant productivity improvements in our manufacturing facilities. These improvements have more than offset an unfavorable sales mix comparison to the prior year as we recorded double-digit increases and lower margin tractor and chassis while sales of high margin replacement parts have decreased as a percentage of total sales.

In the third quarter of 2013 this unfavorable mix comparison was lessened somewhat as volume in all sales categories, including replacement parts, increased significantly over prior year levels.

In the third quarter SG&A expense increased over prior year levels, primarily due to commissions paid on higher sales, professional fees resulting from an information systems upgrade and legal matters, earnings based incentive compensation accruals and an increase in stock option expense due to the vesting of stock option awards to retirement eligible employees. Also contributing to higher SG&A expense were the filling of several senior management positions and restructuring cost in our French operations.

In the third quarter, interest expense continued to decline due to lower debt levels. Other income and expense continued to run favorable to prior year, mostly due to a $475,000 government grant we’ve received in the UK for R&D, training and employment. And our effective tax rate decreased as a result of favorable reserve adjustments.

Alamo Group finished the third quarter with net cash in excess of debt totaling $53 million of which $39.7 million was held by our foreign subsidiaries. Inventory turns continue to improve, inventories finished the third quarter at $121.6 million or about 2% higher than the third quarter of 2012, while we have seen double-digit increases in both sales and cost of goods sold over the past 12 months.

Capital expenditures for the first nine months of 2013 totaled $9.9 million compared to $3.5 million for the first nine months of 2012, the increase in 2013 is due to ongoing capacity expansions at the Bomford facility in the UK, and the [indiscernible] facility in Canada.

In summary record sales net income are only the headlines. Our third quarter results demonstrate continued improvement in operating efficiency, cash flow and asset returns as well.

I would now like to turn the call back over to Ron.

Ronald A. Robinson

Thank you, Dan. As Dan said record quarter, I mean we’ve thought going in, it was going to be a decent quarter, but probably it even exceeded our expectations, all divisions showed improvement, and we were glad to see that the European sales were even up for the first time in couple of years. As we’re starting some life in that market, our Ag Group also were felt good to see them have a good quarter given that there is some signs out there that the Ag equipment market is slowing down just a little bit and then we continue to be or led by our industrial division which had certainly a very good quarter, and shows that the demand for infrastructure maintenance equipment continues to be holding strong and to be rebounding for the last several years.

As also we were pleased that it was we were able to take a reasonable sales increase with tonnage into a much better earnings increase and I think we’ve done this in number of quarters in the last several years that with operating efficiencies and better utilization and tight cost control that we can take a reasonable sales increase turning it into a better earnings increase and we think we have the ability to continue doing that at whatever levels we are.

And this was a key, certainly there is still some headwinds out there, Europe is still weak, this year we had light winter conditions which means that the year sort of start had a slow start and yet and as Dan said there is even a slight bit unfavorable product mixes we had more sales of lower margin chassis and tractors and as a percent less sales of spare parts even those spare parts were up and did well, but as a percentage we’re down a little bit.

So as I said we have good result even with some of those headwinds, also pleased that we had very good cash flow during the quarter, of course this is in the third quarter from, we have our best cash flow with most of our out of season Ag programs where all the payments come due in sort of the September, October period. So it’s generally a good cash month.

So it’s generally a big tax quarter for us, but I mean even at that we were sort of cash, net of debt double of what it was last year at this time, up to $53 million in cash, and so I think our balance sheet continues to be strong, but improved, and this was even in spite of the fact that CapEx year-to-date is about double what it was last year, as we have said, we’re doing a couple of expansions, and one in England and one in Canada, but that has driven our CapEx up this year compared to – especially compared to what it’s being fairly modest for the last several years.

Looking ahead, there is certainly while there’s continued uncertainty, as I said, I think Europe is slightly showing some sounds of light, but it’s still a little early to – to really know, and I think even I’d like to say there’s some signs of a little bit slowing in equipment sales, even though I think wheels continue to do reasonably well, because going into this period, our backlogs are certainly up, ahead of last year at this time, and that gives us some confidence moving into knowing the fourth quarter, but certainly even into next year as well.

I think we’re also being helped in especially in ag, by some – overall divisions by some new product introductions, and that we’ve got net products that have come out recently that we think are being well received in the marketplace.

So that – we believe we can still have some growing sales even in uncertain market, and that with the – whatever sales increase we can get, we feel little bit depending on the mix of it, but we ought to be a bit – continue to grow the bottom line even better, but I would not say that the way we did this quarter with a 12% sales growth resulting in a 32% operating profit growth is – that’s not the norm. And in fact with that quarter, it was helped a little bit by last year’s third quarter was one of our weaker one. So the comparison was a little bit easier, but so the trend is right, but maybe not quite at that level.

And we got to remember too that the fourth quarter is generally one our weaker quarters anyway, but still I think all-in-all we like where we are today. We offer product mix, we like our manufacturing efficiencies and operational execution for financial strength, and so we actually feel we are in very good shape right now.

And with that, I’ll open it up for questions and see if [indiscernible] we can tell you about where we are today.

Question-and-Answer Session

Operator

(Operator Instructions) One moment please, for our first question. And your first question today will come from [indiscernible]. Please go ahead.

Unidentified Analyst

Good morning, guys.

Ronald A. Robinson

Good morning, Brandt.

Unidentified Analyst

A couple quick ones, can you give us a little more clarity on the U.S. bonds, that I’m just curious what in particular, what products are working best for you right now?

Ronald A. Robinson

What products are working best in the ag sector, North America probably moulding products. I mean they tend to have the longer season for us, some of our utilities products have shorter seasons. But I think that the lower dollar products are also doing very well, I mean I think maybe since we don’t make the big ticket items like combines tractors, but I think the more as we are doing well, but we’re really seeing some good pickup even in the smaller mowers as I think we’re seeing some like – not only, some good result in Ag, but maybe seeing the – even the hobby farmer come back a little bit more into that sector.

We’re a little more active, Houston been pretty quiet for the last few years. And so I think the low end of that and more modest ticket price items have done well. And I think that’s also I think we’re seeing the dealer inventories for us. I mean this time a year, when we thought even some of the outer season sales, and I think, our dealer inventories are in pretty good – pretty low enough that they are going to be having the repurchase items from us.

So we’re not stuck with the big overhang in the market. And I think that is helping us and as what I said even our backlogs are going up in Ag, which is a result of all of those factors.

Unidentified Analyst

What’s your guess maybe not that your counter was flowing on in Ag, but you’re more exposed to rainfall, because you’re focusing more or so, if we continue to get reason to get specification after several years of sub normal specification like [indiscernible] for a couple years cycle, we are seeing on the mower side?

Ronald A. Robinson

Rich, you’re breaking up a little bit.

Robert H. George

Yeah, I didn’t quite.

Dan E. Malone

You’re asking about rainfall weather patterns could be helping us on the milling product side, yeah, we certain feel that is helping us in some extent.

Ronald A. Robinson

Yeah. Certainly moisture is pretty good , we don’t know, we have the big drought in the upper Midwest in last year and I think even year before that we had a drought in the Southwest. So I think moisture in general is pretty good this year and has not like I say not quite the headwinds maybe it wasn’t the last couple of years. But yeah, I think the weather has helped, but I think it’s more of the other factors that have helped more.

Unidentified Analyst

Okay. And then the final question would be, it’s kind of a two-part question on Europe, again, what sort of products you are driving the better performance in Europe? And then if you get a little more color on which country you are performing best in Europe? Thanks, guys.

Ronald A. Robinson

Yes. For us I think Europe – it’s fairly broad, it certainly it is, Ag products are up. Governmental is little slower probably, so I think guidance are more than governmental. But even the governmental is up a little bit, I think it’s interesting throughout this downturn in Europe. Our UK operation has generally held up much better than our – than say our – some of our continental operations.

Though in this quarter, I mean, I’d say Europe was fairly flat with a good – they had a strong comparison last year, whereas France for us was up. Our operations in France were up more or so the ones in Europe, but they had a low comparison in the last year. They were weaker last year.

So I think England is still probably leading the way for us, even like I said, they really ones the one that was up this quarter, but I think we’re starting to see some inductions of OIP even in France. But I think the continent is going to be a little bit slower. I think central Europe is holding up, is going to do a little bit better, even though than Southern Europe and which is time for us, because I mean we don’t do that much in Southern Europe. I mean our strength is Central Europe and I think that’s what holding up better, but certainly England continues to lead the way for us.

Unidentified Analyst

Thank you.

Ronald A. Robinson

Sure.

Operator

Your next question will come from Robert Kosowsky with Sidoti. Please go ahead.

Robert A. Kosowsky – Sidoti & Co. LLC.

Good morning guys, how are you doing?

Ronald A. Robinson

Good morning, fine Rob.

Robert A. Kosowsky – Sidoti & Co. LLC.

I was hoping that you dive a little more to the strength we’ve seen on the industrial side whether or not it’s more on the vacuum truck side, for lower side and also a competitor of yours did say that they thought that [indiscernible] I mean this slow demand might be back to near peak levels. And I was wondering if you could agree with that and also what you think on the motor side?

Ronald A. Robinson

Okay. For us on the industrial side that we’re pleased pretty well most of the products showed nice improvement. And it was fairly broad-based, actually our motor products which for the last two years have been up real strong, they went up that much because they weren’t up so much the last two – the last couple of years in that sector. So more products have more modest growth, but against very strong comparisons. So vacuum truck were up, grader products were up, street sweepers were up it was little bit softer, but I mean they are sort of getting into their season now. So that was not totally unexpected.

But I was glad to see that that products – that are broad range of the products were up and that, yeah, I would necessarily say that municipal market is back to any kind of a record level. In fact I think adjusted for inflation they are still not buying quite as much as they were back in say 2007, 2008 kind of timeframe. So it’s certainly up and I think vacuum trucks has been further helped by industrial side of market of vacuum trucks is probably up. While I believe that’s a smaller sector of the market is probably up more than the municipal side. I mean you are seeing help from the oil field sectors and few other sectors for industrial applications of vacuum trucks and that’s up.

But in general I mean I think all of the sectors were up decently and showed some knowledge and strength with come continuing strength as our backlog in that sectors of those well. So yeah, we feel pretty good about that whole sector.

Robert A. Kosowsky – Sidoti & Co. LLC.

Okay, how do you look at the vacuum or the backlog strength between the industrial side and the governmental side within the sector?

Ronald A. Robinson

Well, I guess like I said maybe some of the industrial side and especially vacuum trucks is a little bit stronger right now than the governmental side, but in general I think there are – it’s fairly comparable I would say generally the lower items are doing better than higher items, but some of this is what’s driving, with them we are talking earlier about the lower – we are doing more sales of lower margin chassis and stuff, truck chassis that’s because this sector is improving. So I mean we are buying more truck chassis and buying more tractors to go along with these items. So I think one of the reasons that spare part is down slightly as a percentage of total sales is just at the pickup and whole goods has been pretty good. And I think that the spare parts will follow. So generally that’s – I’d ay both pretty well.

Robert A. Kosowsky – Sidoti & Co. LLC.

Okay, and that’s helpful and then on the Ag side, I guess just of the preseason sales for the Ag pretty good and if that is the case how reliable of an indicator is that for next year and have you historically seen following the commodity prices you might get a little better preseason and then there might get a little better preseason and there might be a [indiscernible] because that’s doesn’t seem like that would make sense logically. But I’m just wondering how a lot of the indicator preseason sales are for rest of the season?

Ronald A. Robinson

Generally, it’s a pretty good. I mean, I’d say there can be things happening in mid season that can change things, but generally, it’s a decent one. It certainly reflects two things. I think we – I’d say there are huge percentages up, but as I think we say hey, with this consistent little percentage increases, we can do quite well with that. But I think that it bodes well on two things, it says number one, that the dealers are feeling more confident about, especially, our type products and two that their inventories are not out of control. I mean, they are modest and – so they finished last – this past season in reasonable shape. So that’s the two things that drive the dealers is what they think they are going to sell, but how much they got on their yards going in to it. And so I think in the increase so this is showing a little bit confidence in both those factors.

Robert A. Kosowsky – Sidoti & Co. LLC.

Okay. So you think that the fact the preseason is good that means that the weaker commodity prices might not be as bigger risk next year, but just kind of how weather plays out that might be kind of the thing that could impact 3Q kind of thing?

Ronald A. Robinson

Yeah, like I said, I mean, there is other factors and it’s not a total predictor of how the season is going to go. But – and you are right, commodity prices are softer, but the input costs are down too. I mean, fuel prices have gone down and farm incomes are actually still pretty strong. I mean, it’s still going to be one of the top three years ever. So I think that certainly farm incomes will be down this year, but it’s – I think farmers are still making pretty good money.

Robert A. Kosowsky – Sidoti & Co. LLC.

Okay, that’s helpful. And then, I guess, two last questions. One is on the SG&A, it seemed to be a lot of just stuff in there nature of the increase, I was wondering if, Dan, you might be able to quantify what some of the non-recurring professional fees you are feeling the senior management, some upfront fees might have been for the quarter to get a better comparison of what it was?

Dan E. Malone

Well, I mean, I think both have got the increase, obviously, there are some inflationary increases in SG&A, but most of the increase you’ve seen are attributed to those factors that we...

Ronald A. Robinson

Yes, as Dan said, I mean, certainly commissions were higher on higher sales. The accrual for incentive compensation were higher because the earnings performance having a good year. I think the one thing I mean some of it that’s not recurring that he mentioned like we did have some higher things on some information systems upgrades and some legal matters that we had a little bit more expense in that this quarter than we typically do. I won’t say all that’s non-recurring. I mean, we always have some of those kind of expenses, but probably a little heavier than usual in the last quarter. So I like to say some – it’s about half and half as to like recurring versus non-recurring, but actually I think that is now a focus for us in our forthcoming budget meetings, because I think our SG&A probably is a slight bit higher than it should be.

Robert A. Kosowsky – Sidoti & Co. LLC.

Okay. And then finally, on the productivity improvements, how far along are you on those two projects, one in UK and Canada, I mean, do you see anything in store for next year that might just be incremental project.

Ronald A. Robinson

Certainly nothing on the order of magnitude of those two, the one in the UK will be finished around year-end. I mean, I am sure some cost will still be dragging into the first quarter of next year, but it’s pretty well on time, on budget, both we finished this year. The Canadian one, again, on time, on budget, may certainly are working very hard to get that released before the snowfall. And that one we actually have a Phase 2 that will be little bit more next year, but that’s much smaller magnitude. I mean I think next year our CapEx will certainly be back below depreciation. And not on the order of magnitude it’s been in the previous couple of years where we are half of depreciation, but still be below depreciation for next year.

Robert A. Kosowsky – Sidoti & Co. LLC.

All right, thank you very much and good luck.

Ronald A. Robinson

Thank you.

Dan E. Malone

Thank you.

Operator

(Operator Instructions) And we see that there are no further questions at this time I will turn the call back over to management for any closing comments.

Robert H. George

All right well thank you very much for participating in the call. Like I said we feel there is certainly headwinds out there still, but we feel that we’re in pretty good shape and are looking forward to close out the year – and also I think we are glad, we haven’t talked about the good cash flow, but and also glad commented we are seeing a little more activity on acquisitions and hopefully we will not too distant future we will be able to do a little bit more on that front that which is as we have always said is a continuing part of our strategy as well.

So we appreciate your participation and any questions or comments don’t hesitate to give us a call and we look forward to talking to you next quarter.

Operator

Thank you. Ladies and gentlemen a replay of this presentation will be available after 1 pm Eastern Time today. You may access your replay system by dialing 1800-406-7325 or locally at 303-590-3030 and entering the access code 4646067. That does conclude our conference call for today, we thank you for your participation. You may now describe your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!