Alamo Group Inc (ALG) 2014 Q4 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Alamo Group fourth-quarter and year-end 2014 earnings results conference call. During today's presentation, all parties 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, March 5, 2015. I will now turn the conference over to Mr. Bob George, Vice President of Alamo Group. Please go ahead, Mr. George.

Thank you. And 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 to 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 1-888-203-1112, with a pass code, 5181685 and the pound sign. 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, the 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 up the line for 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 risk 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 the information contained herein, which speaks only as of today.

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

Thank you, Bob. And we want to thank all of you for joining us today. Dan Malone, our CFO, will begin our call with a review of financial results for the fourth quarter and fiscal year 2014. And then I will then provide some comments on the performance of our operations. And following the formal remarks, we look forward to taking your questions. So Dan, please go ahead.

Thank you, Ron. As I'm sure you've read by now, Alamo Group's fourth-quarter and 2014 net sales and net income were both Company records. Before we get into some of the details of these record results, I would like to remind you, just as I've done in our prior calls, that our 2014 results were impacted by the operating results of recently acquired companies as well as certain non-routine expenses such as acquisition-related transaction costs and age-based accelerations of stock-option vesting, both of which we noted for the first time in our second-quarter 2014 results. As well as non-cash charges related to our sales of the acquired specialized inventories, which were subject to a step up to fairer value in the initial purchase price allocation.

I believe that it is also worth noting that in the fourth quarter, we supported a follow-on offering which facilitated the orderly exit of a major shareholder. As a result of this effort, Alamo Group has seen both increased research coverage and market float. Also, a related stock repurchase from the same major shareholder completed on September 25, 2014 added about $0.07 to our fourth-quarter earnings per share.

Fourth-quarter 2014 net sales of $223.9 million represents a 34% increase over the fourth quarter of 2013. Excluding acquisitions, fourth-quarter 2014 net sales were $173.5 million, an increase of 4% over the prior-year quarter. Net income for the fourth quarter was a record $11.4 million, or $1 per diluted share, compared to $6 million, or $0.49 per diluted share, in the fourth quarter of 2013. Excluding the non-routine expenses previously mentioned, net income for the quarter would have been $12.4 million, or $1.09 per diluted share.

Full-year 2014 net sales of $839.1 million represent a 23% increase over prior year. Excluding acquisitions, full-year 2014 net sales were $718.5 million, an increase of 5% over 2013. Full-year net income for 2014 was $41.2 million, or $3.42 per diluted share, compared to $36.1 million, or $2.96 per diluted share, for 2013. Excluding the effect of the previously mentioned non-routine expenses, full-year 2014 net income would've been $44.8 million, or $3.72 per diluted share.

The operating results of our recent acquisitions, net of related interest expense and income taxes, contributed $2.7 million to fourth-quarter 2014 net income, or $.24 per diluted share. The total contribution of 2014 acquisitions to 2014 net income was $4.3 million, or $0.36 per diluted share.

In Alamo's industrial division, fourth quarter sales of $126.5 million represent a 62% increase compared to the prior-year fourth quarter, and full-year sales of $436 million represent a 46% increase over 2013. Excluding acquisitions, fourth-quarter industrial division sales were $80.2 million, an increase of 3% over the fourth quarter of 2013, and full-year sales of $328.6 million -- 10% higher than the prior year.

Agricultural division 2014 sales were $51 million in the fourth quarter, an increase of 6% over the prior-year quarter, while full-year 2014 sales for this division were $203 million, down 4% from 2013. Excluding acquisitions, 2014 fourth-quarter sales in this division were $49.4 million, an increase of 4% over the prior-year quarter, while full-year 2014 sales for this division were $209.4 million, down 4% from the prior year.

European division fourth-quarter sales were $46.4 million, an improvement of 14% over the prior-year fourth quarter. And our full-year sales of $188.7 million also represents a 14% increase over the 2013 results. Excluding acquisitions, fourth-quarter sales in this division were $44 million, an increase of 8% over the fourth quarter of 2013. And their full-year sales were $180.5 million, a 9% increase over prior year.

During the fourth quarter, the Company's gross margin of $48.4 million exceeded prior-year gross margin of $36.4 million, primarily due to the contributions of recently acquired companies. Gross margin as a percentage of net sales was 21.6% in the fourth quarter of 2014 compared to 21.8% in the prior-year fourth quarter. Excluding the previously mentioned non-cash charges related to the step up and acquired inventory values, gross margin as a percent of net sales was 22.4% in the fourth quarter of 2014.

Improved performance in our European division and the higher gross margin percentages of the recently acquired companies are more than offsetting an unfavorable whole goods product mix in the agricultural division as well as an unfavorable overall product mix effect caused by whole goods sales growth that was significantly outpacing the growth of higher margins spare and wear part sales.

In the fourth quarter, operating expenses increased approximately $4.4 million over the prior-year quarter due to the operating expenses incurred by the recently acquired companies. Fourth-quarter 2014 operating expenses as a percent of net sales decreased to 14.6% from 16.9% in the prior-year quarter. On average -- our average fourth-quarter 2014 effective income tax rate of 25.6% compares favorably to the 27.8% effective tax rate for the fourth quarter of 2013 primarily due to the cumulative current-year adjustment to reflect late congressional approval of a bill that extended the availability of research and development tax credits through the end of 2014.

The Company continues to generate strong cash flow. Full-year 2014 free cash flow -- which we define as net cash generated by operating activities less the net cash used for property, plant, and equipment additions, and provided by retirements -- was $21.8 million, an increase of 18% compared to 2013. After adjusting for the after-tax effect of previously mentioned non-routine transaction expenses, our adjusted 2014 free cash flow totaled $23.6 million, an increase of 20% over prior year.

Before I close, I would like to make a couple of comments about the effect of foreign exchange rate changes, particularly in light of recent evaluations of European currencies vis-a-vis the US dollar. The effect of average 2014 currency exchange rate changes on our full-year net income was not material, so we saw large translation adjustments to shareholders equity in the year-ending balance sheet.

Because the cost of our business units are predominantly in the same currency as their revenue stream, our exposure to recent shifts in foreign exchange rates resides primarily in the translation of our local currency results into US dollars. We began to feel some headwind there in the fourth quarter of 2014, and the strong US dollar is expected to continue to impact our results well into 2015.

In closing, our record 2014 sales and earnings results reflected highly accretive sales and earnings contributions from our most recent acquisitions and higher EPS due to the stock repurchase, as well as significantly improved results from our European division and continued organic growth in our industrial division, both of which more than offset the negative impact of weak market conditions on our agricultural division results.

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

Thank you, Dan. As Dan pointed out, I think it was a good quarter and a good year for Alamo Group in 2014. I think in particular, from our point of view, the third and the fourth quarters I think showed the positive effects of the acquisitions for the year, especially the specialized units. The second quarter, when that was completed, was a partial quarter and had the expenses in it. But I think the third and fourth quarter showed more of the ongoing benefits of that acquisition.

And because that was in our industrial division -- and our North American industrial division continues to lead the way for Alamo -- not only did it benefit from the acquisition of the specialized units, it also showed good internal growth as it has for the last several years. And we think this division will continue to show progress in 2015; plus, it will benefit from a full-year effect of the specialized acquisition, and particularly as we get -- specialized -- more integrated into Alamo as we move ahead.

Our North American agricultural division is certainly still feeling the effects of the slowdown in the overall agricultural sector. But we believe we are holding up just a little bit better than many other manufacturing companies in this area because of the wide range of uses for our implements, particularly in areas that are not as challenged by lower crop prices, such as cattle ranchers and hobby farmers. Plus, we feel our dealer inventories in the ag sector are in reasonable shape without a big overhang that could affect -- have a negative effect on our sales in the coming year, though we certainly still expect ag to stay soft in 2015.

It was nice to see that our European division showed some improvement in 2014, even though we still lagged the results we achieved prior to this downturn. But it was good to see us moving in a positive direction, particularly since the European overall economy is still in a bit of the doldrums. And we think we will show further progress in 2015, but we are a little concerned in how that will translate into US dollars. We're going to have to see what the full effect of the strong US dollar is going to have on all of our international earnings throughout the year, because it will affect -- we deal in the pound, the euro, the Canadian dollar, the Australian dollar. And so I think it's going to be a little bit of a wait-and-see and see how that's going to affect us throughout 2015.

As I said, it was a good year, but it was also a very busy year. In addition to the nice internal growth we achieved, of course, there was the -- we did our biggest acquisition ever in May of the year. We also did a stock buyback in September of the year, which we bought 7% and retired 7% of our outstanding shares. And then in November of the year, we completed a major share offering on behalf of a major shareholder. And while the Company certainly didn't get to keep any of the proceeds from the offering, we do believe this has helped raise the profile of Alamo and increase both research coverage in our stock and float.

So as a result of the accomplishments in 2014, we feel good about our prospects for the current year, though we are concerned about some of the headwinds which I mentioned earlier -- certainly the soft ag market, the weak European economy, and the strong dollar among other things. And we have particularly noted that we've seen some softness in the start to 2015. We actually also saw weakness in the start to 2014 as well.

And while that rebounded nicely -- but like I said, 2015 has shown some softness in the start. I think it's been further affected by the severe winter weather conditions that have certainly affected large areas of the country in both Northeast, Southeast, and in other parts of the country. Of course for us, too much snow was not necessarily a bad thing since we have a big position in some snow removal products. But I think overall, as I have said, we've seen a little bit of softness in the start to the first quarter.

So in total, I think we have some concerns. We always have some concerns, but we feel we're in good position have another good year in 2015.

With that, I would like to finish the formal comments and open it up to questions if there are any. Operator, would you please go ahead and see if there any questions?

(Operator Instructions) Robert Kosowsky, Sidoti.

I was wondering -- first on Europe, I was wondering if you -- the 8% organic growth rate. How much of that do you think was pent-up demand for some of your products versus you creating some more of your own opportunities? You mentioned some export orders as well in the release.

There's certainly no way of breaking it out. I think certainly some pent-up demand did have an effect on the market because our sales have been down for the last several years in Europe. And we've not been replacing -- and we think the fleet of our type of equipment in operations is aging a little bit. So I feel for sure that helped us, but there's really no way of breaking that out.

UK was really up -- when it was up the most for us is France still remained flat and more challenged. I think UK in general was outperforming the rest of the euro zone markets for us. And -- yes, like I said, I think they were helped by that.

But it's really hard to break it down between the two. I think pent-up demand -- I think just even our kind of equipment tends to wear out. And so even in some other countries, there is getting to be some increased need for the type of equipment. And when they can find the funds to do it, they are replacing it.

All right, that's helpful. Then another question on Europe, just on margin profile. I know you've done a lot of restructuring of the past few years. So I was wondering if you could comment about the -- what margin level we are at right now. And I understand it hasn't been disclosed, but still waiting for the 10-K to come out. But wondering kind of where the margin trajectory is right now versus the next few years because it used to be a very high margin business, and then it kind of hit a downturn over the past few years.

That's right. And certainly with the downturn, as we have said before, Europe is a little harder to restructure -- cost in a downturn, so our margins have certainly been off in Europe. And I think we're in better shape and showing some positive direction in that, but we are still below where we were and where we need to be. And I think we will continue to show a little progress in that this year as volumes pick up some and as we get our cost in better shape there.

Okay. And then one last question. Federal Signal had about a 10% increase in its backlog for the environmental segment. I understand you said there is a little bit of weakness in the beginning of the year. But would you share at least qualitatively that kind of positive outlook going into 2015 from the governmental side?

Well, of course, our backlogs in the governmental sector -- our industrial sector are up significantly, but that's because compared to this time last year, we had the big acquisition. So you would expect them to be up. But even internally, without the acquisition, they were up -- in that same range, give or take, that you said were Fed Sig. But, yes, like you say, our backlogs in total were up significantly just because of the acquisition on top of it. That still seems to be holding up very well.

I agree. Thank you very much, and good luck.

Brett Wong, Piper Jaffray.

I wanted to dig into that last comment a little bit more around backlogs and industrial, tying it into the comments you made around 2015 turning a little soft due to some of the severe weather likely prohibiting people from making purchases. But with all of the snow -- as you mentioned, that does help your snow removal -- where are we seeing that backlog in the industrial? In terms of product categories as we manage that segment? And if you think that you are going to see additional strength due to all of the issues that we've seen here?

The backlog improvement has been fairly broad-based in all of our units in the industrial unit. It's been in snow removal, it's been in mowers, it's been in our great all-excavator, our vacuum trucks, and even street sweepers. It's been fairly broad improvements throughout the unit.

And snow -- like I say, a big snow year doesn't necessarily help you right immediately because it's more -- it does help your spare parts business, which tends to go up during -- in bad winter conditions. But they don't tend to order -- it's almost too late to order new equipment to help them much this season, so they will wait until after the season and try to see where they are and try to replace it before the next season starts.

So like I said, the whole goods don't -- aren't helped much at this time of year. It's too late, but the spare parts you see which usually doesn't go into backlog -- that's sort of the in and out fairly quickly. So that has improved. But it's been fairly broad-based improvements in backlog, and so --.

The other thing -- like I said, one of the -- I think the contributing factors to a soft start is, yes, like I said, it's nice that it's -- from our point of view, nice that it's snowing because we believe that will help our snow removal business in the short term and in the longer term. But we do get affected because a lot of our customers are shut down sometimes. So we have even had plants that have missed operating days in the last -- in the first quarter of this year already just because -- due to weather conditions. Even we've had to shut down some of our manufacturing plants. Were they here or are they there?

So that's -- like I say -- and the customers of ours are being shut down some due to weather. So that's where I think the negative effect from the weather comes in for us in the short term.

Thank you. That's really helpful. Thanks a lot. Looking at ag, can you talk to impact maybe in the segment of a weakening dairy market(inaudible) pressure on the part industry? Obviously have different exposure then some of the other OEMs. Just wondering if you see some of the smaller horsepower and equipment markets softening a bit, how that impacts you guys.

It seems like the overall -- the smaller end of the range, like the hobby farm equipment, has held up reasonably well. I think the area under most challenge in the ag sector has been the big-ticket items for road crop farmers. So it would be your big horsepower tractors and your combines and these type that are more affected by corn and wheat and soybean prices. That's there. And plus, I think in those areas, you have seen a little bit of overhang in dealer inventories that are going to have to get worked out before the dealers start replacing product from the manufacturers. So I think -- like I said, the big-ticket items, road crop farmers, that's where probably the most challenge is.

Other sectors of the ag are holding up. Like I said, cattle prices are in reasonable shape, and ranchers are doing pretty good. And hobby farmers -- I think that sector is actually doing -- it was a growth sector last year, which helped offset some of the declines in some of the other sectors.

But still, overall farm incomes were down last year, and I think they will be down again further this year. So there is going to be some effect on the overall market with farm incomes being down. But like I said, we will be affected by that, but maybe not as much as people who have heavy exposure to some of the big growth-crop farmers.

Okay, great. It's just the last one for me. Obviously, you're still integrating specialized -- and some of the other acquisitions that have helped here in 2014. I'm just wondering if you can (technical difficulty) plan (technical difficulty) provide any color as to there's a pipeline (technical difficulty), that would be great.

No, we still feel our -- we are looking for acquisitions. We're specialized. We are a very well-run Company with good people and good systems. And so the integration there is not as big a distraction as it would be if it -- like I say, they want as well run. So I think -- and financially, our balance sheet is still improving, and we believe we have dry powder to take on further acquisitions.

So like I say, we're not standing by on the sidelines on acquisitions. We're actively looking for some. There is nothing imminent, I can tell you. And while we are certainly continuing to look -- we are seeing a fairly steady stream of reasonable opportunities that we think are -- would be nice bits and accretive to what we're doing. And so we were actively looking, but nothing imminent at this point.

Okay. And just on what you are seeing, is there any specific focus in terms of your segmentation that you have?

No, certainly the big acquisitions we've done lately seem to be in our industrial division. That's not necessarily by choice. We'd like all of our divisions to participate in acquisition growth. We did some little ones in Europe and little ones in our ag division. But we're looking across all three divisions. Like I said, it's just in the last year we've seen more in the industrial division. But we've got activity in all three, and our goal is to pursue all three division acquisitions in all three of our divisions.

Great. Thanks a lot again for taking my question.

Mike Shlisky, Global Hunter Securities.

I wanted to actually touch briefly here on the oil and gas roll-off in 2015. Do you have any impact expected a bit later on this year to products like your vacuum trucks and even on some brush clearing business, if we see escalation in production activity in the US decline as we go through 2015?

That's -- it's hard to identify what we have sold there, but I feel that's been miniscule. That's not -- while I think there could be some effects from slowness in the oil industry, I think they could affect state budget incomes -- state budget and incomes of governmental entities with lower taxes and this kind of stuff. But I don't think it's more the indirect effect that he would have on us than the direct effects of selling less to people who are clearing land. That's not a big area for us, so I don't expect any effect from that.

Got it, great. And secondly, I wanted to ask, looking at the margins here in this quarter -- the operating margin this quarter, but it's last year fourth quarter. It's been a pretty big jump year. Given that you've done all these deals over the last 12 months, has the seasonality of your margins were earnings changed at all given the somewhat new structure you got here?

You know, very nominally. Certainly, some of the products are a little bit less visitation maintenance. And so that helps, but still all of our equipment, even things like excavators in street sweepers and all things that you wouldn't think are not visitation oriented, they still have -- they tend to be more active in the summer -- the spring and summer months than they are in the winter months. And so -- and that usually results in more spare parts being consumed in the summer months, even for things that aren't vegetation oriented.

So, yes, the newer products and acquisitions we have done made us a little less reliant on vegetation maintenance products, but -- and a little less reliant -- a little less seasonal, but still we think that the second and third quarters will continue to be our major two quarters.

Okay. And then in ag, I wanted to touch on session 179. It got retroactively been offended at the very end of 2014 here. It didn't obviously affect some of the larger ag equipment products out there (inaudible) given that you really can't, given the lead times there. I was wondering if it affected some of your smaller-ticket items both to farmers and ranchers as well as to private customers in industrial. Was there any kind of last-minute affect there in your December results?

No. I think the fact that farm incomes are down would affect us more so than any kind of tax programs or anything, because our -- generally, the items we sell there are small enough ticket items that that is not one of the -- in overwhelming criteria for farmers so -- $15,000 mower is not as big an issue as it is for a $400,000 combine. So yes, but like I said, just the fact that farm incomes are down would have an effect, but the fact that the tax credits hasn't heard us -- we haven't seen anywhere near the effect that it would have on big-ticket items.

Great, very good. Let me get one last one here on operating expense side. Kind of flattened out here in the $33 million-a-quarter range. I guess, bluntly speaking, is that an appropriate rate pick-up going forward, or do you possibly have some ways you can cut out especially as you finish up the integration there?

Well, I think it's not as much the dollar amount as it is the percent of -- we think that probably we ought to be in the -- last year, we ran a little over 15% operating expenses. This quarter we were a little bit under 2015, and I think that sort of 15% to a little bit less than 15% is the range we ought to be in.

(inaudible) for your answer. Appreciate it.

(Operator Instructions) Mike Finegar, Bank of America Merrill Lynch.

Hey guys. Congratulations on the good quarter.

Thank you.

Just a question, guys. We are seeing a slight pick-up in public construction spending. There's also some discussions going on about a potential highway bill. It does seem like that always gets pushed out, but people are getting a little more optimistic. What are you seeing from some state budgets? Should we see municipality budgets getting healthier and better in 2015 and willing to spend more in 2015 than they did in 2014?

I think certainly governmental budgets in general have been improving for the last couple of years, and I think we have benefited by that. We don't -- we are not directly tied to highway bill or construction spending because we are more in maintenance. Which, the good news is weren't hurt as much when those were weak the last few years. But the bad news is we're not helped as much when those get a lot better.

But in general, yes, I think we do believe we benefit a little bit from governmental budget situation improving, and we're certainly seeing and improve. But we've enjoyed the last few years a fairly steady rate of bid activity for governmental -- of our governmental sector business. And I think we believe that will continue and be helped by governmental budgets being in a little bit better shape, but not really affected much by highway bills or new construction spending.

Great. And you talked about the indirect impact from lower oil and gas. Are you hearing anything from your dealers, your customers in an area like Texas? Are you hearing anything about some concern in regions like that?

So far, we haven't. Like I said, I know there's been some fairly big announced layoffs of oil field workers in places like Texas right now, especially in the Eagle Ford shale and some of those kind of operations. So we have seen that, but we haven't seen any sort of residual effects on us at this point. Like I said, I'm concerned with what it does to things like state budgets. But I think, again, it's more of the indirect effects than the direct effects that I'm concerned about.

And lastly, we know you guys have a snow removal business. But does the harsh weather actually have maybe secondary impact on some of your other equipment as it damages storm drains and other infrastructure markets? Do you see other impacts and positive drivers for your other products outside of snow removal?

Yes, those -- yes, we see some impact, but they are mixed. Some are more positive, like you said. The more sand and grit and cinder they put down, the more they have to use street sweepers to pick it back up when the snow melts. So the street sweepers are really used. But there's also some negative effects because this (inaudible) when the cities are spending so much money removing snow, that it's actually affecting some of their budgets for cutting grass and everything later on in the year. So it's really a bit of a mixed bag.

All right. Thanks, guys.

(Operator Instructions) Paul Saran, Maestro Financial.

I want to ask (technical difficulty) for Dan. For the past I think two years by my math, your free cash flow conversion against net income has been in the 50% to 60% range. Do you have any view on how that will trend going forward?

Well, we -- a lot of our growth has been organic. So there has been some working capital growth that goes along with that. Our CapEx has been heavy the last couple of years because we had a couple of facility expansions that we (inaudible). We generally expect that our CapEx is going to trend probably a little bit lower than our depreciation and amortization. So I see continued improvement, but no major shift.

The conversion rate will be a little bit better because -- but I wouldn't say -- it'll be similar in scale, but a little bit better (technical difficulty).

Okay. And then I think we will get the EBITDA number with the 10-K, but can you share what that was for the full year, and then where that puts your leverage ratio and whether or not you have a specific leverage target?

We have not disclosed that yet. If I could ask you just wait a day or so, and we will put that all out in the 10-K.

And as far as specific leverage targets, we don't really have a -- this is the target, and it sort of fluctuates with the opportunities. I think, as we shown for a long time, we are a fairly conservative Company as far as financial structures. So we are never trying to see how much leverage we can get or trying to be over-levered. And we believe in a conservative leverage ratio. But we don't have a specific target; it varies with what the opportunities are, what's going on in the marketplace.

All right. Thank you.

And this does conclude our question-and-answer session. I will turn the conference back over to management for closing remarks.

All right. Well, thank you very much. We appreciate you joining us today. Certainly, as we've said, we will be filing the 10-K here shortly. And -- but we have -- and so if there are any other questions, certainly don't hesitate to contact us. And we thank you for joining us today, and we look forward to speaking with you in a couple months on our first-quarter conference call. Have good day. Thank you.

This does conclude today's conference. Thank you for your participation.