Alamo Group Inc (ALG) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alamo Group's first-quarter 2014 earnings conference call. (Operator Instructions). This conference is recorded today, Wednesday, May 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 are 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 a pass code 4680405. 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 and Chief Financial Officer; and Richard Wehrle, Vice President and Corporate Controller. Management will make some opening remarks and then we will open the line up to your questions.

Before turning the call over to Ron, I would 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 and other risk factors listed from time to time in the Company's SEC reports. The Company does not undertake any obligation to update information contained herein which speaks only as of this date.

I would now like to introduce Ron and turn it over to Ron.

Thank you, Bob, and we want to thank all of you all for joining us today. Dan Malone, our CFO, will begin our call with a review of our financial results for the first quarter of 2014 and I will then provide a little more detail on the performance and outlook of our operations. Then following the formal remarks, we will look forward to taking on your questions. Dan, please go ahead.

Thank you, Ron. Alamo Group's first-quarter 2014 sales and net income were again records for the Company. Sales for the first quarter were $171.2 million, an increase of 8% over the prior year. Operating earnings of $10.6 million were up 9% over the first quarter of 2013. Net income for the quarter was $7.2 million or $0.59 per diluted share, a 4% increase over the prior-year first quarter. In Alamo's industrial division, first-quarter sales of $77.3 million represented a 12% increase compared to the prior-year first quarter.

Agricultural division sales were $49.8 million in the first quarter. This is up slightly over prior-year first-quarter sales of $49.6 million. European division first-quarter sales were $44.1 million, an improvement of 12% over the prior year.

During the first quarter, the Company's gross margin exceeded prior year both in total dollars and as a percentage of sales as higher whole good volume continues to drive productivity improvements in our manufacturing facilities. These productivity improvements more than offset an unfavorable sales mix comparison to prior year as higher equipment sales are also driving double-digit growth in lower margin tractor and chassis sales while sales of high margin replacement parts decreased as a percentage of total sales.

SG&A increased $2.3 million over prior-year first quarter for a variety of reasons. Some of the more significant differences included acquisition-related costs and tradeshow expenses.

Also in the first quarter, Alamo's effective tax rate increased to nearly 34% compared to 29% for the prior-year quarter. This increase was primarily due to first-quarter 2013 recognition of research and development tax credits resulting from the delayed enactment of the American Taxpayer Relief Act of 2012 as well as an increase in the current year tax provision to reflect the fact that research and development tax credits have yet to be approved by the US Federal Government for 2014.

Alamo Group finished 2013 -- finished the first quarter of 2014 with cash net of debt totaling $42.3 million of which $20.9 million was held by foreign subsidiaries. As expected cash was used during the quarter to fund seasonal working capital needs.

In summary, Alamo Group overcame a very slow start to the year as well as weather-related disruptions to its operations to finish the first quarter strong.

We continue to see productivity improvements in the Company's margins as strong growth in industrial and European division sales drove another solid increase in operating earnings.

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

Thank you, Dan. I will just make a few comments. I think the first quarter was a pretty decent one for us, obviously always when you have records it is even though as I remember when I commented on our fourth-quarter results, it said that the first-quarter was starting off pretty slow and it certainly did. January was particularly weak, February a little bit better but fortunately March really finished very strongly for us which I think not only helped for the month but for the quarter as a whole.

I think the year started off slowly mainly the weather-related issues that were affecting North America really played havoc with some of our customers. I think farmers were having trouble getting into their fields, even some normal functions, everything from street sweeping to mowing certainly were affected by weather and our customers were tied up with dealing with snow than they were ordering new equipment for the spring.

We are pleased though as I said the quarter did end better. Even our own operations, I mean I think we lost something like six days at various plants of production due to the fact that we were even shut down because of these weather-related issues which further impacted our results.

But as I said, I think the quarter ended very nicely and we are pleased that it bodes well I think, not only the businesses started picking up as weather started improving, people are getting back to normal levels of operation and so we are pleased that not only sales started improving but even backlogs were up compared to this time last year. And I think probably the slowest part of our business though still was ag. It was certainly affected by the weather in the first quarter and I think we are also seeing I think there is just some general indications that the ag market for equipment purchases is a little softer than it was this time last year, even though like I said, marginally we were above last year.

Commodity prices have softened a little but I think the outlook for ag is still pretty reasonable. Farm incomes are even if they are off, they will be off from record levels so I think the farmers continue to have decent income and I think there is probably I think our type of implements more lower dollar tickets will hold up a little bit better than some of the high ticket items -- high dollar items such as combines and tractors.

So I think there will be a little softness in that sector but I think it will still be reasonable as we go ahead but it will be very interesting to see how the second quarter develops there when farm activity starts really picking up. Second and third quarters are of course the highest two months it seems like historically in our business in that sector and so they will be very key in how that business performs for us this year.

Certainly it was good to see our industrial division continued strong and as I said, backlogs there are up too and bodes well for the rest of the year. We are continuing to grow in that division and like I said, if anything that growth has probably even exceeded our expectations the way it finished the quarter on quite a strong note.

It was also good to see, finally start to see some improvement in our European operations. They certainly for the last several years have been down and weak and we saw that turn a little bit in the second half of last year but it was nice to see with double-digit growth in our business there in the first quarter of this year that it looks like that improvement return to market activity there has continued and again looks like is showing signs of further helping our business as we move throughout 2014.

So despite the slow start, we had good momentum finishing the quarter. As we go into the second quarter everywhere like I say maybe still a little softness in ag but hopefully when the farmers get into the field in earnest sort of here in May and all that we will start to see that improve. But as I said, I think even with that being a little soft, we feel that we are in pretty good shape to do well in that sector like I say in spite of what some of the market conditions may be.

Then as we also indicated, I think we are very positive about the rest of the year with the addition of the Specialized acquisition. We are very pleased as we indicated that we had been -- really that everything had been agreed to on that opportunity except we had been waiting for regulatory approval. As I indicated, regulatory approval has now been received literally just in the last couple of days and so we are online or on time to schedule that next week.

So that is a major acquisition for Alamo Group. It is a good company that is very well run with very good products that are very complementary to products that we are already in. Their two major areas are snow removal products and vacuum trucks which like I said are sectors we are already in so we know the products, we know those markets well. This will enhance our position in both those sectors. We will be major players in those sectors mainly in North America but there will also be some synergies and opportunities on the overhead and purchasing some of the other areas of consolidation as we move forward with the consolidations. But we believe this opportunity will be nicely accretive to Alamo's results from day one.

So that will help us like I say even starting in the second quarter and as we get for sure the second half of the year and for many years to come, so we are very optimistic and positive about getting this done and moving ahead with that. And I think that gives us good optimism about where Alamo is today.

We feel that we are in good shape. We like our product mix, and even though we are certainly leveraging up a little bit to buy Specialized, we feel our balance sheet is still in excellent position, probably still even underutilized and so we are continuing to look for other opportunities and pleased that we've seen a few -- see some more opportunities out there.

Also during the last quarter, we closed our -- subsequent to the end of the quarter, we closed on a little one in the UK, Kellands, which takes us into some agricultural spraying equipment so it broadens our presence into other agricultural implements. And we are looking for other areas where we can focus in on a few other new implements that would broaden our presence in the agricultural sector so we like that as well.

Like I said, I think we like where we are, we like our product mix, we think we are in good shape for this year and are continuing to be pleased that we are seeing activity to continue to look for acquisitions that will help enhance our growth as we move ahead.

Anyway, I think that is probably it for my comments in general but would at this point like to turn it open to see if there are any questions from anybody.

(Operator Instructions). Robert Kosowsky, Sidoti & Company.

Good afternoon, guys. One question on SG&A. I am just wondering how much was due to acquisition due diligence in there if you can parse that out?

It will be in the Q tomorrow. But it was about $500,000. And yes, I think SG&A is a little bit of itself right now. I think that is one area we are going to have to take a -- like certainly legal bills and acquisition costs have been something. First quarter was also high in like tradeshow expenses, a few other things that contributed to that. So I think we need to watch that a little bit better than we have, than we did this quarter.

Okay. So you think going forward absent kind of the impact of the Specialized deal that you should see better SG&A leverage from an organic basis?

Yes, that is correct.

Okay. Then just curious on the ag business. What impact has there been from the pullback in farm income and bad weather? Was there a negative impact on product mix? Also just curious if dealers were a little bit more cautious in stocking this year, this season?

No, it is interesting I think in our kind of poll of dealers, they still feel fairly optimistic that the buying habits will be pretty good this year so they were still probably more optimistic than I thought they should be. But going into this, I mean inventories -- seasonally this is the high point for inventories, that is why it is the high point for us in working capital as inventory and receivables kind of grow. But inventories are sort of in line with expectations. It is not like there is an overhang of inventory at dealers, it is just seasonally higher now than it averages during the year. And I think like I said, I think smaller ticket items like some of our type implements will hold up a little bit better than big ticket items.

We are also seeing, it is interesting the hobby farmer has probably been a little more active in the first quarter and at the end of last year than they have been typically so it is good to see that is at the low end of a market but it is good to see them being a little more active.

So we don't see any particular trends or anything that is affecting anything other than like I said incomes are going to be down a little because of -- but I actually think some most of the delays in the first quarter were more related to weather than it was to incomes or other trends.

That is good to hear. Then also just on the Kellands deal, what is the opportunity here because it seems like it is a new product line and is there a chance to take some of these sprayers to US markets and or even further within Europe?

Yes, we do believe there is a chance to take them further into Europe but we would not be bringing them into the US at this time. We believe there is a chance to do a little more consolidation in that space even in Europe and to we think create -- this was just sort of our foothold in trying to broaden our presence there and we believe that we can actually through some consolidation take on a little bit more of the market share there particularly in the UK. And then through our distribution network, we can expand their presence more into the mainland Europe.

Okay, that is helpful. And then I guess finally just on the industrial market in general, do you see any pockets of pent-up demand either on mowers, vacuum trucks or street sweepers?

Yes, we still do. I think that the fleet going back to like 2006, 2007, 2008 time periods I think the fleet today even though our sales have grown nicely is still older than it was back then which I think bodes fairly well for the next few years as the equipment is wearing out and the replacement cycles are getting back to normal.

We also feel it is good to see the city and state budgets getting in a little bit better shape. Some of the latest indications are that most of what they are approving in budgets are actually spending these days as opposed to approving something and then not spending it because they are waiting for cash. But I think their cash receipts are more in line with their spending expectations and we think that will help us as well.

But yes, I think there is some fleet aging and some economics within the governmental entities that bode well for us for the rest of this year and next year. At some point they will catch up on the pent-up demand but I don't think it is going to be this year.

Okay. I assume fleets, you mean like vacuum trucks and street sweepers more so than mowers?

No, I think all of it. All of it.

Okay. And then one final question. So it seems like Specialized will close next week, is that what you are referring to?

Yes, that is what we anticipate.

All right, cool. Congratulations on that.

Yes, thank you. That is an exciting one and certainly when we do that we will try to give out a little bit more information about Specialized in general.

All right. Thank you very much. Good luck.

(Operator Instructions). Wayne Archambo, Monarch Partners.

I was just calling to follow-up on the accretion. You said it is nicely accretive. I was curious to know on the deal if you could quantify the word nicely?

Well, like I said, when we actually close the deal next week we will try to give out a little bit more information on the economics of it but at this point we can't really say much more than what I have indicated.

Is the market fertile for additional deals this year? Are you seeing a lot of activity out there? Is it a buyer's market? What is the general state of the market out there on the M&A front?

On the M&A front, I wouldn't say it is a buyer's market, I would say maybe it is more of a seller's market because I think pricing is still quite -- probably a little bit higher than maybe historically. I think certainly low interest rates have contributed to that as well plus I think you are also seeing a lot of buyers with -- there's a lot of cash available to do acquisitions these days. So like I say, there is usually a lot of buyers in the marketplace.

So as I said, I think it is probably still a little bit more of a seller's market but I am at least pleased that the level of volume of things we are seeing is still pretty good. Back in 2012, that was a hard time to find things to even look at. I think 2013 we looked at a lot more and 2014 seems to be continuing on that that there is a fair bit of things to look at. Like I said, pricing seems to be okay but a little on the high side I think like I say a bit more of a seller's market but there is good activity.

Thank you.

(Operator Instructions). I'm showing no further questions. I will turn the call back to management for closing comments.

As I said, we will put out some more information next week when we get closed on the Specialized acquisition and look forward to moving ahead with that and that is really all we have for right now. So we thank you for joining us today and we look forward to speaking with you next quarter on our second-quarter conference call.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.