Alamo Group Inc (ALG) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Alamo Group's fourth-quarter 2013 earnings and 2013 fiscal year and conference call. During today's presentation all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today Friday, March 7, 2014. I would now like to turn the conference over to Mr. Bob George, Vice President of Alamo Group. Please go ahead.

Thank you. By now, you should have all received a copy of the press release. However if anyone is missing a copy and would like to receive one, please contact us at 212-827-3746 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 1-800-406-7325 with the passcode 4671283. 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 Ronald Robinson, Chief Executive Officer and President, Dan Malone, Executive Vice President, Chief Financial Officer and Richard [Wirley], Vice President and Corporate Controller.

Management will make some opening remarks and we'll open up the line for questions. 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 and 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 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 (technical difficulty) to Ron. Ron, please go ahead.

Thank you, Bob. we want to thank everyone for joining us today. We're going to start the call with Dan Malone doing a review of our financial results for the fourth quarter and the year ending 2013, and then I'll provide a little more detail in the quarter on the performance and outlook of our Company and following the remarks, will open it up to some questions.

So Dan, please go ahead.

Thank you, Ron. Alamo Group's 2013 sales and net income were records for the Company. Sales for the fourth quarter were $165.6 million, an increase of 11% over the prior-year fourth quarter. Net income for the quarter was $6 million or $0.49 per diluted share. That's an increase over the fourth quarter of 2012 of 43%. Excluding a prior-year goodwill impairment charge from this comparison, fourth-quarter 2013 EPS is still 23% better than the adjusted prior year result.

For the full-year 2013, sales increased to $676.8 million, which is 8% better than 2012 sales of $628.4 million. Fully diluted 2013 EPS was $2.96, an increase of 23% over prior year. In Alamo's industrial division, fourth-quarter sales of $77.8 million represent a 17% increase compared to prior year. For the full-year sales in this division, were 13% above the prior-year results.

Agricultural division sales were $47.3 million in the fourth quarter, an increase of 5% over prior year. For the full-year sales in this division were $215.3 million, an increase of 7% compared to 2012.

European division fourth-quarter sales were $40.6 million, an improvement of 7% over prior year. For the full year, sales in this division were up slightly over the 2012 results.

During the fourth quarter and throughout 2013 the Company's gross margin has improved both in total dollars and as a percent of sales as higher whole goods volume has contributed to significant productivity improvements in our manufacturing facilities. These improvements have occurred despite an unfavorable sales mix compared to prior year as we recorded double-digit increases in lower margin tractor and chassis sales while sales of high-margin replacement parts decreased as a percentage of total sales.

In the fourth quarter, SG&A expense increased over prior-year levels primarily due to legal fees incurred related to the successful defense of a patent infringement lawsuit. For the full year, SG&A increased over prior-year levels due to the legal expenses mentioned before as well as higher acquisition expenses, commissions paid on higher sales, earnings-based incentive compensation accruals, an increase in stock option expense due to the vesting of stock-option awards to retirement eligible employees and the filling of several senior management positions and restructuring costs in our French operations.

Also on the fourth quarter other income and expense continued to run favorable to prior-year mostly due to additional recognition of government grants we received in the UK for R&D, training and employment.

Alamo Group finished 2013 with cash net of debt totaling $63.5 million of which $44.9 million was held by its foreign subsidiaries. The Company saw further improvement in inventory turnover in 2013 as inventories finished the year at about the same level is 2012, despite double-digit increases in both sales and cost of goods sold in 2013. Capital expenditures for 2013 totaled $13.6 million compared to $4.7 million for 2012. The increase in 2013 was primarily due to capacity expansion at the [Bomford] facility in the UK and the Schulte facility in Canada.

In summary, it was another strong quarterly result for Alamo Group demonstrating the Company's continued success in achieving continuous operational improvement, one of the cornerstones of Alamo's integrated strategy for growth.

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

Thank you, Dan. I'll just make a few brief comments. I think Dan covered most of the points I think is significance for the quarter. It was a good quarter. It was a good year and we are pleased with the progress we made in the year to have organic -- no acquisitions in the year.

And so the total growth was our organic growth and to have, I think, 8% organic growth in a kind of a challenging market, especially with the European side being very weak in the first half of the year. They did start to show some improvement in the second half of the year. But then, even more pleasing to take a 8% growth in sales and turn it into 20 some percent growth in earnings.

So I think that very much as we have focused on our margins, focused on operating efficiencies, focused on asset management, I think all of these helped us.

Probably the one thing during the year especially in the fourth quarter was legal fees were quite high and I think much higher than we anticipated them being, especially in the fourth quarter. But a lot of -- we were working on major acquisitions and even though the Bandit one did not -- was called off during the quarter, we're very pleased that we had already been working on the specialized one which was recently announced and very pleased that that one is proceeding nicely.

The main thing we are waiting on now is -- in fact, the only thing we're waiting on now is Hart Scott Rodino and our trust review, which that has been filed and that's the main thing -- the only thing we're waiting for to get that opportunity closed.

And then, we mentioned that there was a patent infringement lawsuit that -- actually it had been going on against several parties for like five years. But we only got joined into it literally in the first part of 2013 and so had to play catch-up, and then the trial was actually in the fourth quarter, which was -- those cases can be very expensive. But we are pleased that it was a very strong verdict in our favor and not only was there no infringement, I mean, but probably the patent was no good to begin with.

So like I say, that aside, which was very expensive and I think the quarter could've even been much stronger excluding that. But we feel that, all in all, that was a pretty good year and we were really glad to see Europe starting to show some improvement and moving into the first quarter, I am a little concerned.

Certainly weather has been terrible in the first quarter, winter has been very severe. There's been a lot of -- this has caused delays with our customers, it's also caused some delays with us because we've actually lost workdays at several of our plants due to shutdowns due to ice storms and snowstorms and weather when we were not able to open some of our plants for a couple days.

So I think the first -- that's off to a slow start. We are also concerned, a lot of our customers are spending a lot of money on snow removal, which is helping us a little bit but we hope it doesn't take away from their mowing budgets later on during the year and other -- and sweeping budgets and the other kind of products which we provide for infrastructure maintenance for governmental. So, I think we are -- like I say the first quarter is off to a little bit slower start but we're pleased that Europe is still showing some progress even in -- it looks like -- going ahead and ag is a little bit of a -- we believe ag income will probably be down a little bit this year but down from record levels and commodity prices are down, farm incomes will probably be down but I think they'll still be at healthy levels.

So we think we will do okay, but it'll be nice when the winter stops and the farmers can start getting into the field. And then we'll see more exactly how the year will start to unfold.

So, we feel very good about where Alamo is today, very good about our product mix, glad to see -- like I said, glad to see Europe is improving. We're very excited about the specialized additions to us and that we think the two main things they have are the snow removal and vacuum trucks, both of which are very complementary to our existing offerings in those same areas.

So I think various synergistic opportunity with specialized. We're anxious to get it closed and start bringing it into ours. We think that will be certainly accretive to Alamo and what we're doing going forward.

So we like that and like I say we would like to see that -- curious how the year will start to shape up especially after the first quarter. But I think we feel very good about where we are in our products and that we can build on the progress we made last year.

So that's really my only formal comments at this point. But we would be glad to open it up to questions and, Operator, you can please go ahead and see if there are any.

(Operator Instructions) Robert Kosowsky, Sidoti.

Just wondering on the -- trying to get a better sense of the sustainability of the growth we saw in industrial. Obviously it was up 13% which is a good number in 2013. And absent weather conditions, which I understand that has a negative factor, just trying to understand the quality of growth you saw whether there's some large orders that came in. Is it one particular line versus another and kind of how you see the growth outlook for this municipal side of the market over the next couple of years?

We don't usually give a lot of detail but the one thing, I think a couple of things I can say is that there were a couple of large orders but it seems like every year other than maybe in like 2009 or 2010 we always seem to have one or two large orders.

I think that it's interesting. The mower set part of that had been in like 2011 and 2012 had been -- shown nice growth. This year -- it was very nice growth and led the way. This year -- or 2013 it was nice to see that while their growth wasn't quite as strong coming off some -- like I say, it was steady growth but not as strong as maybe it had been in the last couple of years. It was good to see that some of the other products did show some good improvement so you -- actually some of the bigger ticket items that had sort of lagged a little bit.

So I think the growth this year was in that division, particularly, was broader among all of our products not just simply mower products. I thought that was a good sign. I think -- so I think it is sustainable but that's not to say it can't be affected by weather, can't be affected by changing economic conditions.

So I feel good about where they are and feel good that we can continue to make some progress there but we still have to deal with whatever market conditions that do arise.

Okay and then do you still think there's -- or do you believe there is pent-up demand on the street sweeper and vacuum truck side just because these are bigger ticket items that may not come as fast as mowers?

Yes, I definitely do. I still think government like -- we know sales in those divisions are not back to where they were in units back in sort of the 2007, 2008 time period. So our unit sales have been down from then and are still down from then. So I think that there is some pent-up demand and there is some potential for some continued growth in those sectors.

Okay and then transitioning on the cost structure, you had very good operating leverage at the gross margin line this year. Was there anything that really was a tailwind for that or is this just kind of 30% incremental margin which is what you have done in the past couple of years. Is that a good way to think about the business going forward?

Yes, there was no one thing special. In fact, there was like I said we had two major expansions going on during the year and, usually, you take a step backwards on margins during plant expansions just because of the disruption of doing it but I thought that we handle those situations well. And I think we'll benefit from the results of those expansions in 2014 in the next couple of years. I think that I feel relatively good about the margin improvement we had.

And even probably one little concern, I mean spare parts were probably not as strong last year as we had hoped and so, I think that's in a time when [cold] goods sales are going up like they were I mean spare part sales typically lagged a little bit as a percent of sales and so like I say that was another headwind, it was actually our mix was slightly unfavorable to the previous year. So even when a couple of things like that happen, I think we feel we've really made some solid progress on our operating efficiencies.

Cool and then are those two capacity expansions, are they done and do you have anything on the docket for 2013 or 2014 outside of the acquisitions?

Nothing -- the buildings are done. We're still reorganizing internally. Once the expansion is done then you can move stuff into it, and then redo where you just moved out of and then move something into that but we're kind of in that shuffle phase. But the buildings are done and so I think CapEx will be a little bit higher this year than it was, say, two or three years ago but should be back to more like normal levels sort of just below depreciation. But it will probably be the second half of the year before we fully experience the efficiencies of the new expansions.

Okay and then, finally, what tax rate assumption should we be using for next year? Will (multiple speakers) on that Dan --

32% to 34% will.

Okay, thank you very much.

It will vary a little on where the income comes from but --

All right, thank you very much.

Brent Rystrom, Feltl.

Just a couple of quick questions. What products were represented by the plant expansions? What areas were you expanding?

In the UK, which was the biggest part of that, it's -- it was our Bomford and Spearhead and [Twose] products. Those in the last 10 years we've that started out as a Bomford plant and then through two acquisitions that we merged into that plant it was -- that's why we sort of overloaded the plant, but it's mainly ag products. It's heavily mowers but also some harrows and a few other pieces of equipment. But like I said, it's UK related, even though they export a fair bit from there. But it was mainly ag products.

And then in Canada, the expansion at Schulte was our Schulte products, which again are heavily mower products, some other few implements like rock pickers, some ag-related snow throwers, this type of stuff. But it was our Schulte products and that operation has continuously grown for us. It's heavily ag. I mean, some governmental on the mower side, some of the bigger mowers were governmentals, but like I'd say, heavily ag. But all -- everything there is sold under the Schulte brand.

All right and from a simplistic perspective, the snow product for farm or ag up there. Is that primarily like a PTO driven snow blower?

Yes, the Schulte ones are PTO-driven snow throwers usually sold to farmers, so like he can get to his feed lots and to his barns during heavy snows and winter conditions. So the products we sell under the Henke and Tenco brand name are in our industrial group and are for governmental and highway and airport applications, but the Schulte snow throwers are mainly for ag applications.

All right and then as a follow-up to the previous caller. CapEx for 2014, do you have a dollar amount that you would kind of like to target?

Well, like I said it should be a little bit below depreciation but higher than the levels; I mean, you know like for 2010, 2011 we were running less than half of depreciation. This year, we ran about -- depreciation was about $11 million then we're in about $14 million. Next year we ought to be back down below in the $9 million or $10 million range.

Okay, can you qualify for me how much of the OpEx was kind of noise. So the litigation-related expenses were X, other one-time or unusual expenses were this amount. Can you give me -- ?

Well, we did spell out in the press release what the litigation expenses were. I mean legal expenses on acquisitions were certainly higher than usual but not that much higher because we're always looking or working on acquisitions. So I wouldn't say this year it's going to be down because we're looking at the same thing -- at a lot this year as well.

So maybe you add $200,000 to the $1.8 million -- for legal expense. So another $200,000?

For the fourth quarter?

Yes.

Well, we when you say add, you know --

Well, I'm just saying in addition to the legal expenses, the other kind of unusual one-time major type expenses, were they another $200,000?

Well, I guess, like I said, we don't break that out and I won't say that's unreasonable, but we really don't separate that out because we think it's mostly more ordinary and like I say, it may have been a little higher than usual, but it's sort of in the ordinary range.

Okay, a couple of last questions then. Are you seeing in your forage business, so your mowers possibly your harrow products, are you seeing any improving sales cycle with these really high dairy prices?

I think it's been too early to tell at this point. And so we haven't seen anything. I think most -- a lot of our sales with this are sort of dealer pre-season orders and it's sort of restocking inventory more so than reacting to customer conditions at this point.

Okay and then as somebody relatively new to the cycle the last year to that Alamo Group story, how do you guys look at El Nino? Is the El Nino which looks to kind of be -- if you look at the Pacific oscillation right now, it looks to be starting to heat up. How has El Nino impacted your North American and your European business in the past?

Actually very little. You are right, I mean, in localized areas it can have big effects but when you kind of balance it over the whole country or overall North America, it seems that it has had a little bit less effect.

Okay and final question then. From a person living in the Midwest, it's been a long time since we've had a winter like this -- probably over 10 years since we've had the level of snow, ice, road issues, cold temperatures.

In past cycles, how did that impact the following years purchases of snow removal equipment and then, also, you had alluded to potential, maybe a little bit of risk this summer that maybe some budget might have snuck into the snow business that might have gone elsewhere. Can you walk me through in the past what a harsh winter has meant for Alamo Group?

Yes, I mean, certainly, and you know we have only been in snow removal for about five or six years. We haven't been through as many different cycles. But usually what we have seen, you're exactly right, it's the winter that it happens, you don't, it doesn't affect cold goods a lot but it's the next winter that I think there is a good start usually to the next winter because, then, people are having to replace more equipment but after the season starts, it's hard for them to get much equipment. If you order it in January and it comes in March -- you know what I am saying.

Well, I guess a different way of seeing that are you seeing an improving order book for (inaudible) --

Yes, well I think, it's too early -- like I say, I think people are just still dealing with the issues. They haven't started ordering for next winter yet, I think they are just, spare parts are obviously good in the season and I think that has helped. But, I think it's going to be sort of the second quarter before we really start to see the reordering for next winter.

I won't say it affects the people's budgets a lot, but I mean like you said, this is one of the more extreme winters, so I think it will have some effect.

The other thing is we tend to -- I think we have seen -- it doesn't necessarily hurt like the second or third quarters as much as you don't really catch up what you lost in the first quarter.

All right. Fair enough, I appreciate it. Very helpful.

(Operator Instructions) Wayne Archambo, Monarch Partners.

Yes, thank you. I missed the beginning of the call, I don't know if you addressed this but were you able to quantify the level of accretion from the specialized industry acquisition?

No, we have not given out any numbers about that and we'll certainly give out more color when the deal gets closed but have not given out anything other than what's in the press release at this time.

Do you know when the deal will close?

Well, as I said, I mean, the main thing we are waiting for now is to hear from the Hart-Scott-Rodino antitrust review that -- we have filed the papers for that and we are waiting. That's the main legal impediment to the closing. Usually that takes about a month or so for the review and we'll see what they say at that time but the closing should take place soon after that is resolved.

Okay. Is it fair for us to assume an accretive deal, I assume it's not a dilutive deal? (technical difficulty) accretion.

Yes, we definitely think it is an accretive deal.

Okay and then, lastly, would you expect to do other deals in the next 12 months or will this keep you tied up for a while?

No, no. I mean, this is a -- specialized is a very good operation, very well run. We don't, I mean, there is always integration issues, but it's not like they're struggling or anything in any -- that's going to require a lot of focused management attention. Some of their margins are even better than ours in some of the key products.

So, I think that we believe it's well run and we are still actively looking and revaluating other opportunities, and we hope that there will be others. And that is not changing or delaying any of our outlook for acquisitions.

Great, very good. Thank you.

Robert Kosowsky, Sidoti.

Ron, I was wondering if you could tell us what part of Europe was doing better? Because I've seen some growth the past couple of quarters and I am wondering if it's more on the ag side or the governmental side?

A little of both. I mean, I think the financial markets are opening up a little bit more. I think the farmers are doing fairly well but -- and I think that the government spending on our type of equipment is continuing at a fairly stable level.

I would say Central to Northern Europe is probably holding up better than Southern Europe, especially for us. I mean, in particularly of our strong markets, England has actually done well but France is certainly lagging. And I think, that's just -- so if you read the papers France is lagging Europe in general right now. I think they've had a little bit more struggle with the -- seems like their President is always in the paper likely for the wrong -- for anything other than economic development. (laughter)

Fair enough. And then, finally on the Specialized acquisition. Where do you see the most value that you can add to these acquired assets? Is it in distribution; just getting the products to more dealers? Is it supply chain? Is it cost structure? Recognizing that these are pretty well-run companies like you said (multiple speakers).

Yes, like I said, they are pretty well-run companies and so there certainly is some tweaking in several of those areas. A little bit on the distribution side, a little bit on the procurement side, the supply chain side. Sometimes with these, we don't see any necessarily consolidation short opportunities in the short-term but I mean over the long term, I mean, we probably -- that's our -- we would hope that there would be a little bit more opportunities for consolidation.

But like I say, they are well-run and in the short-term, we just want them to keep sort of doing what they are doing, and then start tweaking little bit on the supply side, a little bit on the distribution side, some upgrading on manufacturing. But, some places, they are doing better margins than we are so I think we can even learn from some of the things they are doing.

Okay and then finally how much are you going to be borrowing to do the deal and what interest rate? I don't know if you've given that level of detail or if you will?

Well, as was indicated while we have a fair bit of cash, most of it's outside the US. And so, I mean, we're probably going to lead that mostly where it is to support acquisitions in those areas. So, we'll use some of our cash but not a lot of it in the deal. So, most of it will come from our new line of credit -- not our new line of credit, our expanded line of credit but the borrowing terms under that line of credit are fairly similar, the terms and conditions are fairly similar to it. It's just an amendment to our current deal and so there is a few tweaks to the matrix but not a lot.

Bob, do you want to comment on it?

Yes, I was, Rob. Rob, we're going to be filing an 8-K after we close our amendment with the credit agreement. So, you'll have all those details you're asking now in the very near term.

Okay, thank you very much and good luck.

Thank you, there appears to be no further questions. Are there any further points you wish to raise?

Yes, not from the Company side or view. But we certainly appreciate everyone joining us today and look forward to speaking with you when we have our first-quarter conference call.

Thank you, ladies and gentlemen. This concludes the Alamo Group fourth-quarter 2013 earnings and 2013 fiscal year-end conference call. Thank you for participating, you may now disconnect.