Q2 2021 Alamo Group Inc Earnings Call
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Good day, everyone welcome to the Alamo Group, Inc. Second quarter 2021conference call. Today's conference is being recorded at this time I would like to turn the conference over to Edward Rizzuti, Vice President General Counsel and Secretary. Please go ahead Sir.
Thank you for.
By now you should have all received a copy of the press release.
However, if anyone at risk from a copy and would like to receive on please contact us if you want to.
2.7.
Thank you for ever.
Release, it makes for easier on the company's distribution list there.
There will be a replay for call, which will begin 1 hour after the call and run for 1 week.
Replay can be accessed by dialing 1882031112 with the task or box size to 3668.
Additionally, the call is being webcast on the company's website at www.
For you Debbie you got from them or dashed group Dot com and a replay will be available for 60 days.
On the line with me today are Jeff Leonard President and Chief Executive Officer, Richard Worthy Executive Vice President and Chief Financial Officer, Treasurer, and Dan Miller Executive Vice President Chief Sustainability Officer, and head of Investor Relations.
Management will make some opening remarks, and then we'll open up the line for your questions.
During the call today management may reference certain non-GAAP numbers in their remarks reconciliations of these non-GAAP results to applicable GAAP numbers are included in the tax rate attachments to our earnings release.
Before turning the call over to Jack 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 <unk> 5 for.
Forward looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods.
For materially from forecasted results.
Among those factors, which could cause actual results to differ materially are the following.
Market demand Covid, 19 impacts, including operational logistics that slot supply chain disruptions competition weather seasonality currency related issues geopolitical issues and other risk factors listed from time to time in the company's SEC reports.
Company does not undertake any obligation to update the information flow here at which speaks only as of this day.
I would now like to introduce Jeff letter Jeff.
Jeff. Please go ahead.
Thank you Ed we want to thank all of you for joining US today, Dan will begin our call with a review of our financial results for the second quarter 2021, I will then provide more comments on the results. Following our formal remarks, we look forward to taking your questions. So Dan go ahead. Please.
Thank you Jeff.
The key takeaways from our second quarter 2021 results, our second quarter sales and earnings are up significantly over the COVID-19 impacted prior year second quarter total company net sales of $348 million were up 29%.
Industrial Division net sales of $231 million were up 27% Agricultural division net sales of $116 million were up 35% net income of $26 million or $2.19 per diluted share was up 100%.
Adjusted net income of $23.4 million or $1.97 per diluted share was up 73% and EBITDA of $44.9 million was up 30% over the prior year's second quarter adjusted result.
Also our trailing 12 month, adjusted EBITDA was $155.3 million up 7% from full year 2020.
Total debt outstanding was reduced by $38.7 million during the second quarter and it was and was down 28% from the prior year second quarter.
And our backlog increased 10% during the current second quarter to $503.6 million, which was up which was up 132% over the prior year quarter.
Second quarter 2021, net sales of $348 million were 29% higher than the prior year second quarter during the during the quarter. Our top line benefited from a continued rise in order rates and backlog as well as the effect of recent pricing actions, but inbound supply.
Jane and labor capacity issues are still constraining our growth across all lines of business Industrial Division second quarter 2021, net sales of $231 million represented a 27% increase from the prior year second quarter, we stopped we saw strong customer demand and backlog.
Growth in all of this division's product lines.
Agricultural Division second quarter, 2021 sales were $116 million up 35% from the prior year second quarter during.
During the quarter strong agricultural market conditions, low dealer inventories and pricing actions continued to drive organic sales growth in this division.
Gross margin for the second quarter of 2021 was $88.1 million.
Or 25, 4% of net sales compared to $67.8 million or 25, 2% of net sales in the prior year second quarter.
Excluding zero point $7 million of more box inventory step up expenses. The prior year second quarter gross margin was $68.5 million.
Or 25, 5% of net sales.
In the second quarter, the favorable leveraging effect from significant sales volume improvement over the cobalt COVID-19 impacted prior year quarter as well as aggressive pricing actions helped us maintain percentage gross margins. Despite a dramatic rise in material cost production inefficiencies, resulting.
From supply chain and labor capacity constraints, and a less favorable mix of service parts sales.
Operating income for the second quarter of 2021 was $33.6 million or 9.7% of net sales, which is up 48% over the prior year quarter and up 45%. When prior year results are adjusted to exclude the more bark inventory step up expense.
Higher sales volume and the gross margin effects already mentioned more than offset a more normal level of operating expenses as compared to the reduced spending levels of the pandemic affected prior year period.
While we're pleased to see this improvement we would normally expect a double digit operating margin percentage in our second quarter. Our recent pricing actions have been aggressive but the effective impact of these actions has been lagging a continued steep rise in cost. This is likely to continue until the rate of cost.
Creases moderates.
Net income for the second quarter 2021 of $26 million or $2.19 per diluted share was double the prior year second quarter result, <unk>.
Excluding a $2.6 million after tax gain on a real estate sale from the current year quarter and the more bark inventory step up expense from the prior year quarter second quarter, adjusted net income of $23.4 million was up 73% over the adjusted prior year result.
This increase in adjusted net income was primarily due to the 48% improvement in operating income, but it was also helped by lower interest expense and a favorable effective income tax rate.
Second quarter 2021, EBITDA was $44.9 million up 30% over the prior year second quarter adjusted EBITDA trailing 12 months EBITDA of $155.3 million is up $10.1 million or 7% above adjusted 2020 EBITDA.
Second quarter 2021, EBITDA was 12, 9% of net sales, which was flat to the prior year second quarter adjusted result.
During the second quarter 2021, we saw an $18 million net provision of cash from operating activities.
Despite steep volume and inflation driven increases in both accounts receivable and inventories.
This combined with the repatriation of cash from foreign subsidiaries resulted in a $38.7 million dollar reduction in outstanding debt during the second quarter.
Improved turnover of both receivables and inventory accounted for this better than expected performance.
We ended the second quarter of 2021 with an all time high order backlog of $503.6 million, which is an increase of 132% over the prior year's second quarter and 10% higher than the end of the current year first quarter during the quarter. We saw continued strong customer demand.
Across the entire range of our industrial and agricultural products to.
To recap our second quarter 2021 results second quarter sales and earnings were up significantly over the Covid impacted prior year second quarter total company net sales up 29% Industrial division net sales up 27%.
Agricultural Division net sales up 35% net income up 100% adjusted net income up 73% and EBITDA up 30% over the prior year second quarter adjusted result.
Trailing 12 month adjusted EBITDA was up 7% from full year 2020, total outstanding debt was reduced by $38.7 million during the second quarter and our backlog increased 10% during the second quarter to $503.6 million I'd now like to turn the call back over to Jeff.
Thank you Dan first I'd again like to thank everybody Who's joined the call today, My first quarterly earnings call as President and CEO of Alamo Group, It's an honor to succeed Ron Robinson has had an exemplary 'twenty 2 year period as our CEO I would like to take this opportunity to thank Ron for his highly successful stewardship of the company.
So many years. This is certainly an interesting time to step in as CEO with the many positive and challenging trends that are influencing business at the moment over the past few months and certainly throughout the second quarter Corona virus vaccination rates steadily improved across many countries economies reopened and people became more confident about.
Returning to more normal daily routines, while recovery from the pandemic is not yet evident in all of our markets North America, and Europe have rebounded strongly and we experienced a further resurgence of activity in our markets in the second quarter.
Customer ordering activity remains at a healthy level and our backlog increased to another new record at the end of the quarter.
Unfortunately, many raw material suppliers and industrial component manufacturers have not been able to add capacity fast enough to meet the higher demand certain critical components, such as computer logic chips remain in severe shortage and logistics networks for strained manufacturers such as Alamo group rely on a stable supply chain and efficient logistics.
Work to allow us to meet our customers' needs on a timely manner a shortage of skilled workers has further limited the ability of manufacturers to add capacity, most notably in North America.
Finally, the combination of shortages in high demand has led to cost inflation in the raw materials and components that are needed to support our production requirements. For example, steel prices continue to rise sharply and were up by double digits again in the period like most manufacturers Alamo group is not immune to these issues on our teams have had to work.
<unk> and creatively to deliver another solid performance for the quarter continuing the trend of the last several quarters. Our agricultural division produced strong second quarter results. The AG market has consistently held up better during the pandemic largely due to the combined effects of several positive trends first after several years of soft conditions.
<unk> dealer inventories were low and demand began to accelerate and they remain low now as demand continues to outpace deliveries from Oems to dealers also crop prices have been steadily rising since August of 2020, giving professional farmers the confidence to invest in maintenance or replacement of their equipment. Similarly livestock.
Prices have been rising, giving the same increased confidence to ranchers Phi.
Finally, the pandemic has led to more people to seeking lifestyles, increasing investments in land and the essential equipment to maintain it as a result of these combined trends in the market in the second quarter, our agricultural division enjoyed steady growth in orders and sales not only in North America and Europe, but also in markets such as <unk>.
Brazil and Australia.
Timely and well planned price actions implemented by the divisions leadership teams margin compression was minimalize and the division achieved a very good level of profitability in spite of the cost and availability pressures in the supply chain on logistics network.
The industrial Division also reported solid improvements in both sales and earnings in the second quarter the impact of the pandemic on governmental budgets has not been as severe as previously expected and activity in this market continued to improve sequentially. During the period municipalities in the United States benefited from the very strong real estate market that is increase.
Property taxes that are a major source of their revenue.
Also stimulus actions taken by National governments in North America, and Europe helped agencies at the state and local level to offset lower revenue from income taxes and fees as employment fell as a result of the pandemic during the second quarter. The industrial division sales to governmental agencies continued to accelerate but they've not quite fully.
The levels achieved before the onset of the pandemic nongovernmental markets for the industrial divisions products also improved in sectors, such as forestry land clearing petrochemicals utilities and steel during the second quarter as most world economies took steps to re up steps to reopen this was evident in improved sales of that.
Visions large wood grinders vacuum trucks and excavators also by the end of the quarter utilization of our vacuum truck rental fleet was very close to pre pandemic levels. The industrial division was impacted by sharply higher steel costs shortages of important hydraulic components logistics delays in skilled worker shortages wild.
This division also took significant price actions to protect margins longer delivery cycles associated with the division's products means that it will take somewhat longer for the higher prices to be fully fully evident in its results.
Considering the many operational challenges we faced in the second quarter I am pleased with the results. We've achieved I'm also proud that our teams quickly reacted to these challenges to mitigate the impact on our results to the fullest extent possible. I'm also pleased that we further reduced our debt this quarter and continued to strengthen the company's balance sheet dispositions the company.
Well to take advantage of acquisition opportunities that may arise on what's proving to be inactive M&A season.
With Alamo group's record order backlog of nearly $504 million. The company's outlook continues to look promising although it doesn't appear that the cost pressures component shortages and tight labor market are likely to meaningfully improve during the remainder of 2021.
1 issue that remains a concern as the spread of the day strain of Covid that has emerged over the past few weeks. Although evidence suggests that vaccinations reduce both the frequency and seriousness of Covid infections. Another significant wave of Corona virus illness could adversely affect our performance on balance, though I remain confident that our teams will.
Continue to react appropriately as conditions in our operating environment involved and that Alamo group will continue to deliver solid results. This year.
This concludes our prepared remarks, we're now ready to take your questions. So operator. Please go ahead.
Thank you very much ladies and gentlemen, if you'd like to ask a question at this time. Please press star and then 1 on your Touchtone phone.
If you are using a speakerphone you might have to pick up on the handset or depressed for mute function for the signal can reach adequately.
Again that is star and then 1.
We will take our first question from Chris Moore from CJS Securities.
Hey, good afternoon, guys. Thanks for taking a few questions.
Good afternoon, So Inc.
<unk> sales up 27% hang up 35%.
Can you break out even roughly volume versus price on those.
Yeah.
Yeah.
Dan do you want to take a crack at that.
Yes, you know the price increases.
Have been double digits.
Because of just the variety of products that we sell it's really kind of hard and different units were taking different levels of price increases. It would it's a difficult analysis I can just tell you that.
The price increases were double digits in both.
In both the industrial and the AG side of the business.
Got it and I appreciate that.
And now.
Talked about dealer inventories remain very low.
Is there any way to quantify you know where those inventories are.
Today versus 6 months ago, or 12, or even 24 months ago, just trying to get.
More kind of quantitative sense in terms of.
The.
That's still a low level.
Chris I think they've improved since the end of last year, you know everybody pretty much reduced their inventory levels down during 2020, but they're actually picking up and they are improving so they're actually they seem to be very pleased to have obviously product on their lot, but it's continuing to move out to the end user as well so a nice steady flow.
And 1 of the reasons, we know Theyre down I mean, we get we get intelligence from the sales force.
For us in the AG side of the business, that's where dealer inventories are most common.
But the other way that we have we absolutely know that their way down as the receivables the receivables on the AG side are way down and as soon as they sell a unit we don't have to wait until the third quarter to get paid.
Got it that's helpful.
And just you know.
Looking at backlog record backlog.
No.
And in a normal year what percentage of.
That backlog would you typically shipped during the balance of the year on.
How would you compare that against.
What we're going through right now.
Yeah.
Okay.
Go ahead go ahead, Jeff.
Yes, Chris This is Jeff Leonard.
I mean, I think obviously lead times are a little bit longer than they are normally but in normal times.
$500 million backlog at the rate. We're currently shipping would carry us too.
Most to the end of the year. So I do believe most of that backlog if everything remains stable should turn.
We can't predict accurately yet is what the impact of the supply chain is likely to be going forward. While people have asked me a lot of questions about that I think the supply chain situation is stable, it's not getting worse.
But on the other hand, I haven't seen meaningful improvement yet so in normal circumstances, most of that backlog should turn before the end of the year, but we're certainly on a kind of a watch and wait and see mode with regard to the supply chain.
Got it I'll leave it there I appreciate your time guys.
Thank you and again, ladies and gentlemen, if you would like to ask a question at this time. Please press star and then 1.
We'll take a question from Greg Burns from Sidoti <unk> Company.
Good afternoon.
Is there any way you Hey, Greg did quantify hi.
Could you quantify on price cost gap.
In the quarter, how big that was.
From a dollar perspective and.
In terms of the price increases that you're you're passing along the timing of <unk>.
When we might see the benefit of those in closing that price cost gap.
You know where we're at.
We can see the price cost gap is the fact that.
Our volumes are way up.
And you know you would expect that we'd be well above 10% operating margin and a and well above the 25 point.
4%, where we were on the gross margin as well given the volume leveraging that we should've seen so I think it's affecting our margins by I think it's affecting our operating margin.
At least 100 basis points.
And you know and it's really this is again. This is it's really a difficult analysis, it's a moving target we're putting in pricing as quickly as we can get it in and then the costs are just coming in they're all coming on differently in different business units, Greg several times, we put price increases in the <unk>.
Next week at our Austin increases have gone up when with the price increase we just did was to cover the cost increase that we did have a couple of weeks ago. So everything that we're doing is probably a drag of 45 to 60 days.
<unk>.
So if the cost can stay steady for you or for a period of time for price increases we put into effect will definitely help us as we move out.
If we could get any moderation on the cost you know then the pricing, we're putting pricing for aggressive we're putting pricing in place as we see costs rise, but you know when the costs continue to rise there is a delaying impact I think it's at least 100 basis points on the operating margin.
Just the timing issue okay.
Okay and then.
Well when you look at the backlog on the lead times extending out do you see any risks.
Pricing continues to rise debt some of that backlog falls off.
Yes. This is Jeff I'll tackle that 1 Greg we've not had any customers cancel orders yet at least none that I'm aware of we don't see any evidence of unusual buying at the moment.
And if you look at our 2 divisions in the industrial Division, which is mostly governmental governmental agencies really can't buy on speculation. They don't have the power to do that and they don't behave that way in the AG side, the indicator would be when dealer inventories start to rise and dealers would then start to get cautious about waiting for orders that haven't been delivered yet.
Maybe some cancellations would occur but we've seen no evidence of that to date.
And we've already talked a little bit about dealer inventories kind of just kind of holding at a low level right. Now so we haven't seen much upward tick there yet so on the bigger AG stuff products that are being shipped are being retailed as fast as the dealers receive them at the moment. So in short we don't see any risk in the backlog at the moment.
Okay, and then in terms of the supply chain.
Chassis have been.
Particular.
Their area of constraints are you are you seeing anything there or in any other specific products.
Products for.
Components debt, maybe give you more concern as you look out into the balance of the year.
Yeah, I'll tackle that 1 again Greg.
On the chassis side, we've been very fortunate so far the chassis struggles have not really impacted us too heavily yet we have good relationships with our chassis suppliers, we do a pretty good job of forecasting for them in throughout this year, so far they've been able to meet our demands for the most part we've had to juggle a little bit here and there, but we've not had to shut.
Down any facilities and we've not had to turn down any delivery requests from customers.
Lose any orders over that.
Things that are making me more concerned or actually some of the smaller components at the moment.
Hydraulics of all types are in very short supply at the moment and if you place an order for 10 hydraulic motors you might if youre Lucky can 5 and the lead times are very long for hydraulic components typically out to about 6 months right now and then.
I mentioned that the computer logic chip shortage and people asked me a lot well how does that impact you will every chassis that we buy has 2 to 3.
Computer logic chips in it and.
And tractors the same because they all have an engine control module that requires on those computer logic chips, and even things like plc controllers to control the hydraulics and many of the products that we produce contained chips. So we're watching that very very closely but I would say at the moment hydraulics for the ones that are keeping me up the most at night.
But theres other things, even things like wiring harnesses getting wiring harnesses made for the equipment that we manufacture is the struggle there aren't a lot of suppliers out there for those and they tend to be a fairly complex and yet low dollar value items.
That can really put you into a bad spot if youre not able to get them. So.
It's just a variety of things.
The way I would describe it right now.
Alright, thank you.
And once again, ladies and gentlemen that is star and then 1 if you would like to ask a question at this time.
And it appears we have no further questions at this time I would like to turn the call back over to Dee.
I'm, sorry, I spoke too soon.
We have a follow up question from Greg Burns.
Hi, I guess no 1 else's is on on 1 or 2 more.
And in terms of.
What youre doing for capacity perspective.
On the.
Record backlog how are you.
Increasing capacity are you expanding your footprint what are you doing kind of prepare yourself.
Yeah.
The fulfill that backlog and maybe meet some of the demand you might see from an infrastructure Bill if it gets passed.
Yes.
A couple of things Greg I mean, if you if you look at some of the remarks I made in the press release.
We're investing heavily in robotics at the moment and welding because welders have been hard to come by these days and that's been a nice improvement for us, particularly in some of our larger units, we've been able to get a hold of and deploy robot a little bit faster than we were able to do previously so that's been a good health we.
We are not facility limited, we're not floor space limited or machine to limited or anything else at the moment, where our limitations are the supply chain and manpower more than anything else.
On manpower obviously, we are trying every trick in the book to hire as many people as we can but.
But we have to down onboard them and train them and get them indoctrinated to the things that we do on our plants. So that takes a bit of time.
And I think those are challenges that are going to be there for a while but we are making headway with it and the rate at which we've been able to generate revenue has been stepping up fairly consistently over the last few months and I think that's a trend that's likely to continue.
Okay, great. Thanks.
Yeah.
We have no further questions at this time I would like to turn the call back over to the management team for any concluding remarks.
Okay, well. Thank you again, everybody for joining US today, we look forward to speaking with you again on our 2021 third quarter call in November. So once again, thank you for joining us today.
And ladies and gentlemen that does conclude today's conference. We appreciate your participation today.
Okay.
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Okay.
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