Q3 2020 Alamo Group Inc Earnings Call

Teams here in which speaks only as of this date.

I would now like to introduce Ron Ron. Please go ahead.

Thank you Ed and we want to thank all of you for joining US here today, Dan Malone, our CFO will begin our call with the review of our financial results for the third quarter and then I'll provide a few more comments on the results following which we look forward to taking your calls so any questions you may have so.

So Dan. Please go ahead, thank you Rob.

The key takeaways from our third quarter and nine months 2020 results are.

Record third quarter sales up 7.3% with acquisitions, but down 8.5% organically.

Record nine month sales up 6.8% with acquisitions, but down 11.8% organic.

Third quarter 2020, adjusted EBITDA up over 35% from the prior year quarter.

And at 14.8% of net sales compared to 11.7% prior year.

Nine month 2020, adjusted EBITDA up 17.8% from the prior year period, and at 13.1% of net sales compared to 11.8% prior year.

Third quarter net income and earnings per share both up 15% from the prior year quarter and included accretive acquisition results.

Third quarter operating cash flow over $77 million up 78% over the prior year quarter.

Outstanding debt was reduced by nearly $65 million during the quarter.

Quarter end cash on hand, plus loan availability increased to almost $280 million up nearly 25% since the end of June.

And third quarter, ending backlog of $254.5 million.

Up 17.5% since the end of the second quarter.

Third quarter 2020, net sales of $291.8 million.

It was a company record and 7.3% higher than the prior year third quarter without acquisitions organic sales were down 8.5% without the favorable effect of currency translation organic sales were down 8.8%.

The organic sales decline was primarily due to the COVID-19 impact.

Nine month 2020, net sales of $874.8 million for the company record and 6.8% higher than the prior year with the contribution of AG acquisitions without acquisitions organic sales were down 11.8% without the unfavorable effects of currency translation organic sales.

Were down 11.6%.

Industrial Division third quarter 2020, net sales of $196.2 million represented a 10.1% increase from the prior year third quarter.

Without the impact of acquisitions. This division's organic sales were down 14.4%.

Due to COVID-19 disruptions to operations and customer demand.

Agricultural Division third quarter 2020 sales.

Were $95.5 million up 2% from the prior year third quarter in us dollars and up 2.1% without the effect of unfavorable currency translation.

In the third quarter, we continued to see organic sales growth in our North American operations, plus some incremental Dixie chopper sales, partially offset by weaker results in Europe.

Net income for the third quarter, 2020 was $20 million or $1.69 cents per diluted share compared to prior year third quarter net income of $17.4 million or $1.47 cents per diluted share.

Third quarter GAAP net income from acquisitions bearing the full cost of incremental interest amortization and inventory step up expense was accretive by two cents per diluted share.

Excluding the inventory step up expense third quarter accretion from acquisitions would be about seven cents and as we'd be about $1.74 cents per diluted share.

Net income for nine month 20 for the nine months. The first nine months of 2020 was $48.6 million or $4.10 per diluted share compared to net income of $53.3 million or $4.52 per diluted share for the same prior year period.

Nine month GAAP net income from acquisitions was accretive by nine cents per diluted share, including the full burden of incremental interest amortization and inventory step up expenses, excluding the inventory step up expenses nine month accretion from acquisitions would be about 30 cents.

And EPS would be at about four $4.40 per diluted share.

Third quarter 2020, adjusted EBITDA, which excludes the more bark inventory step up charges.

It was $42.8 million up $11 million or about 35% over the prior year third quarter, our adjusted EBITDA as a percentage of net sales was 14.3% in the third quarter compared to 11.7% of net sales in the prior year.

Higher work margins favorable product mix the benefits realized from facility from facility consolidations and other cost containment measures more than offset the impact of COVID-19 for the quarter.

Nine month 2020, adjusted EBITDA was $114.6 million, which was 17.8% higher than the prior year nine month result, the nine month adjusted EBITDA margin was 13.1% of net sales compared to 11.8% for the prior year period.

During the third quarter of 2020, we generated $77.3 million of operating cash flow compared to $43.3 million in the prior year third quarter, an increase of 78.4%.

Strong operating cash flows continued during the quarter due to managements emphasis on asset efficiencies and controlling expenses.

At quarter end, we had $93.5 million of cash on hand, and $186.3 million of availability under the existing credit facility maintain.

Maintaining liquidity of almost $280 million during the quarter, we reduced outstanding debt by $64.8 million and significantly reduced our debt to EBITDA leverage ratio.

We ended the third quarter with $254.5 million order backlog, an increase of 17.5% since the end of the second quarter and 18.2% higher than the prior year third quarter.

Excluding acquisitions backlog was only down 1.9% from the prior year quarter.

During the quarter, we saw modest organic growth in new order bookings, primarily due to higher north American demand for agricultural products.

To recap our third quarter and nine month, 2020 result record third quarter sales and up 7.3% with acquisitions, but down 8.5% organic record nine month sales up 6.8% with acquisitions, but down 11.8% organically.

Third quarter 2020, adjusted EBITDA up over 35% from the prior year quarter, and 14.8% of net sales compared to 11.7% prior year.

Nine month 2020, adjusted EBITDA up 17.8% from the prior year period, and at 13.1% of net sales compared to 11.8% prior year third.

Third quarter net income and earnings per share both up 15% from the prior year quarter and included accretive acquisition results third.

Third quarter operating cash flow over $77 million up 70, 878% over the prior year quarter outstanding debt was reduced by nearly $65 million during the quarter.

Quarter end cash on hand, plus loan avail availability increased almost $290 million up nearly 25% since the end of June.

And third quarter, ending backlog of $254.5 million up 17.5% since the end of the second quarter.

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

Hi, Thank you Dan.

General is number of fruit afforded by Dan look do we are very pleased with Alamo groups 2023rd quarter.

Results given the certainly the particularly given the many ongoing challenges we are facing our sales continue to improve from the soft conditions, we experienced in the second quarter and we finished the third quarter record levels of sales certainly helped by the acquisitions, we completed last year.

Our earnings also rebounded nicely, where again, we benefited about both improving sales along with the accretive contributions from our recent acquisitions.

But there was so much lower in the quarter than just.

The sales and earnings our cash flow was very strong we paid down nearly $65 million in debt in the quarter and all in and.

Nearly doubled that year did in the last two quarters.

While still in yet we still ended the quarter with the strong level of cash of over $90 million.

Our balance sheet also continues to be very healthy and was further strengthened in the third quarter. So despite.

Despite despite the calm the impacts of the cobot situation on our markets and the economy in general our company showed strong and improving results in almost every measure of financial performance.

Also pleased that most of the operational issues, we faced in the second quarter showed improvement continued improvement in the third quarter and allows us to return to near normal operating conditions all of our manufacturing plants are open and operating and we've called back nearly all of the employees we head on.

Furlough or temporary layoff and in fact, the view of our operations already experiencing some.

Shortages as skilled workers are getting to be in a little short supply once again, probably good for the economy.

And while some of our markets continued to be constrained by the current adverse economic conditions, we saw our bookings and backlog improved throughout the third quarter. We were particularly pleased that our agricultural division has actually read in third quarter running ahead of last year's pace as the agricultural sector in general.

As shown.

Broad based improvement and is operating at near pre coated with levels.

While farm incomes are still soft due to weak commodity prices. They are certainly benefiting from higher government support and which has made the overall farm incomes be up this year versus the previous year and and and other signs of disarray in the back to Mike.

Acreage under cultivation remains at a very high level and I think it bodes well for the overall agricultural.

Outflow.

And certainly the agricultural sector is that a lot fewer operational challenges from covidien in many other industries.

Our industrial Division also showed the improving performance in the third quarter, though they are still below the previous year on an organic basis.

And the products in this division will have not improved on a uniform basis, it's been a little more lumpy. Some some better than others. For instance are more bark forestry products have been well ahead of the curve rode improving very nicely, whereas some other products like our vacuum truck lines of certainly low.

Hi behind in their recovery.

Also our markets in this sector have experienced a little bit more operational challenges and experienced a few more economic difficulties as well since a large part of our industrial sales are to governmental entities or infrastructure maintenance and certainly governmental budgets continue to be.

Acted by revenue shortfalls and spending constraints.

We believe this situation will continue to be negatively to negatively impact these markets for the remainder of 2020.

And well into 2021 now.

Now for our business should hold up a little bit better during these adverse times as they have in prior economic challenges.

Since our equipment continues to be used and employed and maintenance operations on a fairly regular basis, even during economic downturns and are being worn out and need we need repairing and replacing at a somewhat more steady rate.

Our Companys Industrial Division has also been helped throughout the current year by the acquisitions. We made in 2019 of Dutch power and more volatile. These two have consistently provided positive contributions to our sales and earnings and have proven to be good additions to alamos overall operations.

Although some of our initiatives to fully integrate them into our company have been hindered by operational challenges related to cope with these efforts are still underway and we remain confident we will achieve our intended synergies, though it may take a little bit more time than originally envisioned.

While we are pleased with Alamo groups performance in the third quarter of 2020, we believe our first our fourth quarter will be a little bit more challenged since it is a seasonally weak quarter for us is in general.

As the equipment is little bit less utilized in the fourth quarter and we also remain concerned about ongoing issues related to coal, but in particularly.

In Europe in places, where they are actually having almost a resurgence of covance issues and are re instituting some broad restrictions on the economies. So I mean, it's which is disk.

Disconcerting to see and I'm also concerned that there's areas in the us where we're seeing.

Negative.

Our more issues with Covance.

And then we would like to be seen so Intel there is sold.

So this is this whole cobot situations far from being resolved and.

Wow.

We really.

Until there is a proven path to recovery the pandemic will continue to foster an atmosphere of uncertainty in our markets as well as the economy in general still.

Still we are optimistic about the outlook for our company with those that we've seen some positive momentum in our markets. We have a healthy backlog, we have very solid financial stability.

The ongoing contributions from recent acquisitions and we have a management team that has been very proactive in responding to the challenges changing market conditions and another kind of operational issues.

So with all this positive momentum we believe we are well poised to prosper despite the uncertain.

Environment in which we are operating.

Certainly to be successful Rick has required a team effort and we're very grateful for the dedication and commitment we have had from our not only our employees, but our customers are vendors and other stakeholders. During these challenging financial times and are appreciative of this ongoing support with that I would now.

Now I'd like to open the call to any questions you may.

My head so.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question will.

We'll pause just for a moment to allow everyone an opportunity to signal for questions.

Our first question comes from Mike Shlisky Your Securities.

Hey, good afternoon guys.

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Can I get a little more color about some of your comments on AG Ron.

Can you give us a sense as to what might be some of the stronger products or stronger areas is it the is that the large row crop farmers at the ranch or or is it. The logic for June is kind of driving most of the upside current.

Hi, Alex.

Hey, it's been fairly broad base certainly the financial the subsidies that farmers are receiving artists of the big farmers not they don't go to hobby farmers. So I mean, but we so we've seen that but certainly the small horsepower tractor so.

Sales in the us or are up nicely.

Double digit increases in sales there was nothing so it means it's even in the hobby farmers sector. There has been some but some of the ranching sectors row crop farm, it's been I think thats been.

Sort of good that has been fairly broad based and so like.

Like say no one sector you know certain.

Certainly there was a little bump in probably the second quarter and early third quarter from I think of like landowners, who were at home for their end goal would than they typically were and we and Thats. When there was a big bump in small horsepower tractors and some related type implements like our single spend the most.

Yeah.

But.

But as I said acreage under cultivation says is holding up good.

The subsidy payments to farmers is at record levels, and so I mean, which which has helped the big row crop farmers the big ranchers. So but it's so it's been a pretty that's been fairly it's been very broad based which has been a welcome situation.

Great. Thanks very much.

Wanted to turn to some weather impacts on on the order patterns.

In snow, you've always said that if you see a heavy snow season oftentimes in next year is pretty good for snow plow orders.

I guess first I'm curious, whether that's happened this year for the for the flat for the for the Snow orders had they met your stations and then secondly, you know.

This has been a very active hurricane season, I think one hit at the southeast US just yesterday and it sounds like 11 to the event of the year do you think hurricanes will have any effect on your vacuum trucks or your forestry equipment. Once their kitchens overt could government starts to plan ahead for for next year, saying, we should be more.

Prepared for next year students with some more equipment.

Now.

Yeah weather impacts on snow removal first of all it's an order.

This is actually starting out quite good for us this quarter.

So how many also yeah, we think that we are seeing some benefits there.

Oh and yes, certainly.

I think actually fires have had an impact.

Packed on us as well I mean, yes.

Certainly some of our forestry products that have been needed in the in the cleanup and remediation of those type area. So you know so snow products are off to a good start.

For for your products are off to a good.

Good start like said somewhat related to buyers.

Hurricanes, yes, I mean, there there seems to be a little bit more activity out I don't think well it's been bad none of them have been quite a severe is likely katrina there or this kind of stuff. So and we have not really seen I mean, our vacuum truck business. As I stated earlier has actually been one that has been softer I think it's a you.

You know because a lot of especially where are we rent vacuum trucks is to some of the non governmental customers and some of those areas.

It had been have or have been soft so like oilfield and and some construction and mining. These type thing so they have been a little soft so.

I have not seen.

A big influx from Hurricanes that has offset that so I'm not saying we have benefited a little has got a little early to benefit from the one yesterday, but.

So yes, they will help us a little bit like I say vacuum trucks are soft and have remained soft throughout most of this this period that means gradually improving but.

But but still thats been one of the softer sectors.

Okay.

And then turning to the balance sheet.

Looking at your debt leverage ratio it has gotten relatively low you're probably around two times levered right now on net debt.

Patients are correct.

I guess first is this is this is this area comfortable for you.

And then kind of secondly, since you're in this range is it now time to go out and look for you next year.

Good sized M&A deal.

I think we'd like a little more certainty in the marketplace before got really motivated but the debt levels not an issue right now. It's it's been brought down I mean, we'd like if we were in a certain market.

No. It would mean, we'd start feeling like that and we got a lot of dry powder.

Yes, I think there is as Dan said I mean, your balance sheet wise, you're right, we're very comfortable and yeah. I mean, it with let's say, yes, that's not holding us back from acquisitions, there's a lot of other things holding us back on acquisitions.

They are so you know there has been much activity I think a lot of people than on the sidelines and for the last couple of quarters and people are starting to get more interested in looking at bringing some things to market, but I think you know like it as opposed to maybe high tech are as opposed to maybe healthcare, which I think is.

The more OCC M&A activity going on I think it's fair to our industrial space is going a lagging a little bit you know, it's hard to it's still hard to.

To physically visit.

Visit assets, it's still hard to you know well, we all think.

Valuations are a little hard because we don't you know we we think it's got to be they'll report recovered from the Cove at Lowe's, but but the timing is still very suspect until we have a.

Clear path to recovery I think it would be it's a little harder to value industrial type products.

The prospects of industrial of acquisitions of industrial type company. So so, but yes, we're where we're starting to.

Open our eyes to things that are happening you know coming up there and like say acquisitions are definitely still part of our strategy and and we're comfortable with our balance sheet, but I think it's still.

The rights to take the right circumstances for us to move ahead at this time, but but we are starting to look but.

Yes, a little little bit more challenging environment.

Like our goal is to continue to be diligent to pay debt down as we move forward. So as Ron said Thats that's correct.

Firemen that were at the.

The moves us to continue to do.

Okay got it well guys. Thanks again I appreciate it as always.

Thank you Mike.

Just a reminder to ask a question. Please press star one now.

This question comes from Chris Moore with CJS Securities.

Hey, good afternoon guys.

So yeah, just trying to get a sense. It sounds like more bark is is one of the bright.

Bright spots on the industrial side.

Organic growth.

Growth was down like I think you said, 14.4% you didn't own more bark in Q3 last year.

Roughly in terms of from a revenue standpoint.

What was it was more about revenue.

Don't meaningfully year over year in the quarter or just kind of any sense, there would see doing better than the overall.

Industrial segment.

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

And second quarter I mean, since they have some really big ticket items, they were off a little bit more early in the second quarter of probably more than the average, but like I said by the buyout midways by the third quarter. They were actually one of above average in one of our stores I think they're still running slightly behind last year's pace.

But.

But but it picked up nicely in the third quarter that but they had a weak second quarter.

Got it all right. Thank you.

Dan I might have missed it but.

In services as a as a percentage of revenue and how big of an impact did that have on on margins this quarter.

Well I mean, it certainly helped margins the mix of parts was higher.

And then last year, but it.

As one of our favorable product mix impacts yes. It is typical in downturn of parts hold up better than that whole goods and that has certainly been the case here at both second and third quarter that way Chris.

Right and roughly what percentage of the revenue was that.

We don't provide that.

Right.

Yes 20.

Year to date.

Yeah.

And just you know from.

From a from an AG perspective that that would be doing pretty well is run is is that level low single digits wanted.

One or 2% organic growth is that from where you sit today is that reasonable.

Over the near term.

Yeah, Yeah, I mean, I think so yeah, I think I like.

So you saw the strength in our backlog I can tell you the biggest strengthening was in that.

Yes, the biggest strengthening as the backlog was in our AG. Their backlog is well ahead of last year. So a Europe is lagging a little bit and as you know as I just said Europe's actually.

I Miss the seen the Francis is reinstituting, a lot of shutdown measures to deal with go with word is England will follow suit by the weekend and so I mean, youre worried a little bit that's a big part you know we have good AG sales in England, France and in Europe, but so.

It's a little bit concerned there, but right now you know so actually the U.S. organically has even been up more than that couple of present and I think.

Yes, it should continue nicely, but but you know like say, there's always some uncertainty, but but but the backlogs are good the outlooks good and.

You know commodity prices are still a little weak and we would rather see farm incomes being improving more from.

From the basic incomes are improving not that theyre subsidies are improving so I mean that.

That's always subject to change, Chris we like where its going if you go back the last couple of years, it's been really a decline because the market the AG markets and really tough so we like where its going its not rebounded to the levels. We have seen before past commodity prices are still little salt and the China situation Bill.

All those are the commitments, China eight to abide agricultural commodities from the us.

We have certainly not been fulfilled.

But the way they said they were going to be so I mean, that's still a bit of a wildcard there.

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

Okay. Thank you.

We have no further questions in the queue. At this time I will then turn call back over to management for closing remarks.

Okay, well again.

Appreciate you all Vietnam.

The call today, joining us we're like I said, we're we're pleased with the even though I should say others.

Still a lot of challenges out there, but pleased with the progress we are making and appreciate your ongoing support. So thank you for joining us today and we look forward to speaking with you. When we report our pointing 20 year end results. Thank you much have a good day.

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.

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