Q1 2022 Alamo Group Inc Earnings Call
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 2128 to 73746, and we will send you a release and make sure you're around the company's distribution list there will be a replay of the call which will begin one hour after.
For the call and run for one week. The replay can be accessed by dialing 18882031112 with the pass code 7515566.
The call is being webcast on the company's website at Www Dot Alamo Das group Dot Com and a replay will be available for 60 days.
On the line with me today are Jeff <unk>, President and Chief Executive Officer, Richard Oreilly, Executive Vice President Chief Financial Officer, and Treasurer, and Dan Malone, Executive Vice President and Chief Sustainability Officer.
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 attachments to our earnings release.
Before turning the call over to Jeff.
I can 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 COVID-19 impact, including operational and supply chain disruptions competition weather seasonality currency related issues.
Political 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 contained herein, which speaks only.
As of this date I would now like to introduce Jeff letter Jeff. Please go ahead. Thank.
Thank you Ed.
Thanks to all of you for joining US today, Richard we will begin our call with a review of our financial results for the first quarter of 2022 I will then provide more comments on the results. Following our formal remarks, we will look forward to taking your questions. So Richard Please go ahead.
Thanks, Jeff and good afternoon, everyone.
The Alamo group team started 2022, and a solid first quarter performance.
These record results for the quarter driven by continued strong demand for our products in a very challenging operating environment first.
First quarter consolidated net sales for 2022 came in at $362 million, an increase of 16% compared to $311 2 million in the first quarter of last year.
Gross margin dollars in the quarter improved compared to the first quarter of 2021.
Over $10 2 million. However, our gross margin percent was down about 60 basis points.
<unk> cost on an inbound on inbound inventory were up significantly as tariffs surcharges were included in already significantly higher freight cost and freight invoices.
Consolidated net income for the first quarter of 2022 was $18 5 million or.
$1 55 per diluted share an increase of five 8% versus net income of $17 5 million.
Our $1 47 per diluted share for the first quarter of 2021 company.
Kevin and completed an excise tax audit covering a five year period that resulted in a onetime $1 3 million dollar expense in the first quarter of 2022 excluding.
This charge adjusted net income for the quarter was $19 4 million or $1 63 per diluted share.
The vegetation management Division had a strong first quarter for 2022 as markets were solid as new orders were higher than the first quarter of 2021.
First quarter net sales were $221 million.
An increase of 20% compared to $183 9 million for the first quarter of 2021.
The division continues to see strong demand for agricultural forestry tree care and governmental mowing products in North America and Europe .
During the first quarter of 2022, we're down 145 basis points compared to the first quarter of 2021.
As higher material and labor costs compressed the division's margin by 106 by 106 basic basic basis points, while the remaining 39 basis points impact resulted from a combination of lower operating efficiencies and significantly higher inbound freight costs.
<unk> margin compression income from the operations for the first quarter 2022 was $18 3 million up 14% compared to $16 1 million for the same period in 2021.
Industrial equipment Division net sales in the first quarter 2000, $20 million to $141 million up 11% compared to 100.
$127 3 million for the first quarter of 2021 due to a strong performance in north North American excavator and vacuum truck operations.
Along with improved net sales and the division's other product lines.
First quarter margins in the division margin percent in the division improved by 40 basis points versus the first quarter last year due to primarily to favorable product mix and improved operational efficiencies.
Extended lead times for truck chassis and shortages and other component parts will continue to have a significant impact on this division's operations along with higher than expected inbound freight on inventory.
Income from operations in the first quarter of 2022.
$10 $8 million up 15% compared to $9 3 million for the first quarter of 2021 still a solid performance in the division. Despite the ongoing issues I covered above.
For the first for the fifth quarter in a row of strong order bookings continued during the first quarter 2022, resulting in a record backlog of just under 918 billion, an increase of 103% compared to the backlog at the end of the first quarter of 2021.
The backlog is also up compared to the end of 2021 by 15%.
We had record new order bookings in the first quarter, which is the primary reason for the increase in backlog. However, some of the increase in our backlog was due to the ongoing supply chain issues that delayed shipments of finished products.
Turning to a few additional financial items for the first quarter of 2022, our balance sheet continues to remain healthy receivables were almost $297 million up 22% from a year ago from solid sales volume receivables are also up 25% compared to the end of 2021.
Inventory is up almost $93 million compared to the Q1 of 2021 and is up 34 million compared to the end of 2020 to the end of the year 2021.
This is a reflection of higher work in process material cost inflation as well as our efforts to support the growing demand for our products by purchasing higher levels of key components in service parts for our customers. During this time of constraint supplies.
Finally, the company's trailing 12 months EBITDA is $165 7 million, that's up 2% compared to the full year of 2021.
For the balance of this year, we will be disciplined in controlling costs and expenses to mitigate the effects of ongoing inflationary pressures on our margins and operating performance. We will also continue to raise prices to meet the rising material and transportation costs in order to maintain target margin levels as a percent of sales.
Our biggest challenge remains meet meeting the heightened demand for our products throughout the company given the current supply chain restraints.
As we did in the first quarter of this year. The company approved a quarterly dividend of <unk> 18 per share for the second quarter of 2022 of 29% increase over the second quarter of 2021.
One of them final items to go over with you during the second quarter of this year. The company will publically release, the 2021 quarterly historical financial information for the two new divisions that we announced.
And at the start of the fourth quarter last year for vegetation management and industrial equipment.
With that I'd like to turn the call back over to Jeff.
Thank you Richard first I'd like to again, thank everyone, who has joined the call. This afternoon. The past several months have certainly been challenging for us, but I am very pleased with the results. Our teams were able to achieve in the phase of a number of formidable supply related headwinds, including resurgent COVID-19 illness related to the omicron variance persistent supply.
Chain disruptions shortages cost inflation and finally, the terrible war in Ukraine.
Repeating the pattern over the past few quarters the level of activity in our markets remained very strong across all of our business segments and served market areas first quarter order bookings of $469 million were up 22% compared to the first quarter last year and the Companys order backlog increased nearly a 103% to 918 million.
Our vegetation management division saw its order bookings increased by more than 28% and backlog rose, 97% compared to the first quarter of 2021 prices for most agricultural commodities remained elevated in the quarter as post pandemic economic recovery market disruptions due to the war in Ukraine.
Associated international economic sanctions and lower crop yields in several countries led prices higher this was a mixed blessing for farmers because costs associated with fertilizers and other agrochemicals and fuel will also increased.
Rental agencies continued to enjoy healthy revenues, thanks, largely to lingering benefits of federal government stimulus spending rising property taxes derived from housing market strength and rising income from user fees.
Continue to invest in maintenance equipment and fleet upgrades as a result activity in our governmental mowing businesses remained strong in both North America, and Europe U S lumber prices dipped in the quarter after beginning the quarter modestly higher however demand for our wood recycling <unk> and land clearing equipment remained excellent our backlog.
And this area continues to rise at a brisk pace.
Demand for the company's industrial equipment from contractors and governmental agencies also remained very strong the industrial equipment divisions first quarter order bookings increased almost 15% and backlog rose, 116% compared to the first quarter of 2021, the division's vacuum trucks and associated rental equipment continue.
To experience very strong demand demand for its suite burst debris collectors and snow removal equipment also increased but at a more modest pace.
From an operations perspective, our first quarter got off to a slow start the omron variant of COVID-19 impacted our north American workforce or in the early weeks of January as workers return from the year end holiday break.
With many employee sales productivity software in January sales did not meet our expectations.
In February COVID-19, similarly impacted our European teams again, constraining our capacity and result of sales.
Fortunately in March most of our employees were able to return to work and we were able to add shifts and moderate over time to regain our stride is to have a solid finish to the quarter as.
As much as it would be nice to talk about something else on this call the disruption and increased demand on the supply chain continues to be the most significant factor affecting the company performance as in recent quarters chassis availability and it's constraining impact on sales growth in our industrial equipment Division continues to be the most persistent supply chain.
<unk> confronting us, although new problems seem to arise almost daily while heavy and medium duty truck chassis deliveries were initially delayed in 2021 by shortages of semiconductors in the first quarter shortages of items, such as wiring harnesses axles and transmissions exacerbated the problem and delays of <unk>.
Movement in chassis chassis availability the tragic war in Ukraine. The broke out during the quarter has further impacted truck manufacturers is that country is a significant supplier of truck components. During the fourth quarter first quarter. The war began to cause more serious chassis delays in Europe and this led at this held back sales of our vacuum truck.
<unk> in the European market <unk>.
Unsurprisingly truck manufacturers have continued to pass through cost increases in surcharges that we had also to pass along to our customers.
During the first quarter, some new problems in our supply chain emerged in these began to affect our vegetation management division as well. This division is somewhat more dependent on mechanical components manufactured in China and the recent COVID-19, Lockdowns there have had a delayed have delayed anticipated.
For many other manufacturers compounding this china's major ports or backlog with numerous vessels waiting to burden. So it is taking somewhat longer to get goods loaded aboard a vessel, causing further extensions lead times inbound freight and created additional costs and logistics challenges for us in the quarter, we experienced sharply.
Our truck transportation costs and related surcharges as a result of higher labor and fuel costs.
Bound trucks shipped shipping presented its own set of headaches, securing trucks and drivers to LOE products for delivery to our customers, where and when needed continues to be problematic of this quarter. Although we did experience some improvement in the final weeks of the quarter, our vegetation management division experienced sharp cost increases during the quarter for both.
Inbound logistics surcharges in tariffs, while outbound freight costs have also risen we were able to pass these through to our customers, notably in early March the trucking industry began to report a surprising and unexpected decline in per mile rates and we expect this will provide some much needed shipping cost relief in the second quarter.
In spite of these compounded headwinds our production teams delivered the highest ever single quarter net sales in company history.
<unk> net sales were 16% higher than the first quarter of 2021 with sales and the vegetation management division up 20% and industrial equipment Division sales up 11%, while certainly a portion of the increase is attributable to higher prices more than half represents real growth and given the significant supply chain disruptions.
We experienced I am pleased that our teams accomplished this nice topline growth during the quarter.
Moving on to the operating performance of our divisions vegetation management experienced a 145 basis point erosion of margin compared to the first quarter of 2021 material and labor cost inflation combined with higher freight costs compressed the division's margin.
Expenses related to inbound freight, we're 100%, 101% higher relative to the first quarter of 2021 with tariffs surcharges, representing 40% of the increase the divisions <unk> SG&A expenses declined as a percentage of sale in this somewhat moderated the impact of the lower margin in spite of the higher cost.
Operating income in vegetation management benefited from the higher sales volume and rose nearly 13% compared to the first quarter of 2021, although income as a percentage of sales declined modestly as a result of the margin compression.
The industrial equipment divisions first quarter margin improved relative to the prior year first quarter. The improvement was the result of a combination of favorable product mix better capacity utilization and improved operational efficiencies. This division's ESG and <unk> expenses as a percentage of sales were unchanged relative to the first quarter of 2010.
One although the industrial equipment divisions net sales growth was more modest the topline leverage combined with a higher margin resulted in a nearly 23% improvement in operating income and.
In light of the persistent chassis shortage that has continued that continues to slow this division sales growth I'm very pleased with the division's performance during the quarter.
Turning now to our expectations for the second quarter. The company is operating environment continues to be extremely dynamic. We don't currently see signals from our markets that would indicate significant changes in near term demand for our products and dealer inventories remain historically low and arent yet rising.
We therefore expect order bookings will remain at a healthy level in the second quarter. Our backlog also remains solid we haven't experienced significant order cancellations to date and we don't anticipate changes in customer sentiment in the remaining weeks of the quarter. So our expectation is that the pattern over the past several quarters will continue in the second quarter we.
Expected sales will continue to show solid growth, although perhaps at a slightly more modest pace than we saw in the first quarter given what's happening in the supply chain.
Margins will remain under pressure, but I am confident that our recent pricing actions will largely keep us abreast of the inflation. We're experiencing our teams continue to become more adept at working with the increasingly frequent supply disruptions and I'm proud of the record they've continued to set under difficult circumstances.
Finally, I expect that the additional top line strength will sustain moderate improvement in net income in the second quarter relative to the results achieved last year.
The outlook for the third quarter and the balance of 2022 is somewhat more on service. In addition to the inflation pressure and other headwinds we experienced in the first quarter accelerated interest rate hikes aggressive COVID-19, lockdowns in China and potential impacts of the war in Ukraine on markets in Europe imposed incremental risks.
Rising interest rates will increase the cost of equipment financing and could potentially damage dampened demand among farmers ranchers and contractors I am confident that our governmental businesses will hold up well, though and continue to show steady growth.
As always we will continue to take actions on price to defend margin and will not hesitate to adjust our internal costs should we see clear evidence of a change in customer sentiment in our markets given our strong order backlogs, improving labor ability, improving labor availability and untapped internal manufacturing capacity.
Even a modest improvement in the supply chain will allow the company to accelerate sales growth. So while the business environment continues to be quite dynamic I remain confident in the sustained positive development of the company for the foreseeable future. This concludes our prepared remarks, we're now ready to take your questions. Operator. Please go ahead.
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We'll pause for a quick moment to assemble the queue.
Alright, and our first question will come from Chris Moore with CJS Securities. Please go ahead.
Hey, good afternoon, guys. Thanks for taking a few questions.
Gross acres.
Hey.
I was hoping maybe you could talk a little bit more about the it sounds like revenue is going to be up in Q2, but the expected cadence I know from from where you sit today.
Revenue and margins for the balance 22, I mean for example is it is it likely that you know given the backlog that revenue.
Would grow sequentially each quarter in 'twenty two.
Yes, I think it will continue to grow sequentially, Chris I, just don't know what pace Im not really concerned I don't want to raise that its just theres more risks abounding and they have an impact of as yet materially but for example, I mentioned the war in Ukraine is one example.
Late in the quarter, we had a number of trucks that were delayed very unexpectedly their trucks that were being supplied to us by our customers are manufactured by MAA MAA and told US very late May we source a lot of components out of Ukraine, and we can't tell you when youre going to get those chassis and we frankly didn't see that one coming to be honest and then both Richard and I touched on those.
Higher shipping costs, which were certainly higher than we expected we've been tuning up our burden on inventory as we went along but the magnitude of the surcharges I mentioned that was about 40% of the total increase in shipping that also was a surprise to us during the quarter, but no I still think we're going to see decent sales growth in Q2, and even beyond the rest of the year.
Didn't want to signal any contraction in sales and I was pretty careful my wording with that but we had a nice pace of sales growth in the first quarter and I think as long as we don't have any more surprises, we'll see a nice pace again in the second quarter and beyond.
<unk> the visibility is getting a little bit murky with all that's happening out there in the market. So all I really wanted to signal what I think the risk profile in the market generally is increasing for everybody not just relevant group, but for all manufacturers Theres just a lot of things going on right now and of course, we've seen in the equity markets today in a rising interest rates are a real factor.
People are paying attention.
Absolutely I appreciate that that's helpful.
So vegetation grew 20% industrial 11% roughly how much of that was volume in each segment.
I think if you if you try to Peel that back and you look and vegetation management about one third of the total growth.
Came from pricing with the rest of it was incremental volume and I feel pretty comfortable with that number in the industrial division out of the 11% My own estimate is about 5% of that was price and even that came relatively late in the quarter. We had raised our prices late last year, knowing our cost were coming so I think this quarter, we actually saw some pretty decent.
Growth.
Use a different word this quarter that describe the chassis situation you may not have picked up on it Chris but I talked about it in terms of extended lead times rather than delays.
Because we are starting to get chassis slowing into our businesses reliably in other words, we get them when the manufacturers tell us we're going to get them, which is great, it's allowing us to plan our production better and improved our efficiencies as I made a remark about in my comments on the call. So as long as that continues there is no reason why our instance should suddenly jump again.
I can see so as I said I think Q2 is going to look a lot like Q1, I just wanted to raise the specter of the sort of the risk profile in the market generally is rising a bit.
Got it and in terms of I know you raised pricing at the end of 'twenty. One have you raised pricing again, yet this year.
We have in fact, we were given another.
The surcharge on our truck chassis from our largest supplier and we've had to go back to customers now and open up contracts, even in our governmental side, which is not normally an easy thing to do.
But we've been very transparent about that with our customers. We've offered them the opportunity to cancel orders and not a single customer has taken us up on it.
So yes, we are continuing to tune price right along the way and the vegetation management group is adjusting prices constantly both in terms of raw price and also in terms of surcharges.
Got it last one for me parts, where I think 18, 8% of Q1 versus 24% a year.
Year over year.
Given the challenge in shipping some whole good day I would've thought that might have ticked up some is there any chance that part's skew meaningfully above 20% at some point in 2022.
Yes, they will in the second quarter in the third quarter, that's usually our highest two quarters, where we ship parts. This is Richard.
And Chris a big chunk of that is the incremental parts business that came with the more park acquisition and those customers around really hard in Q2, and Q3 and they're burning through where parks. So I second what Richard just said to you.
Fair enough I'll leave it there I appreciate it guys.
Okay. Thanks, Chris I appreciate it.
Okay.
Alright up next we will hear from Mike <unk> with D. A Davidson. Please go ahead.
Yes.
Hello, guys good afternoon.
Hey, Mike.
Can we start with you with follow up on some of your margin.
Comments.
Most of the years just given the seasonality Q2 is often.
Nicely higher margin quarter than Q1.
But given the.
Challenges of this year could actually Q2 margins this year will be down.
Orders in the quarter.
Mike This is Richard I don't believe that I mean, as I was just telling Chris our parks.
Sales increase in Q2, and Q3, so youre going to get a pickup from just that that situation right. There. The second thing is as I think as Jeff alluded to is both the vegetation management, which is a little bit easier for them are changing.
Additional <unk> are adding additional surcharges to a lot of their orders that they have in place and any new orders going forward. So we are trying to keep up pace with the additional cost and we're hoping at the end of the day that kind of helps wash itself out Q1 was extremely difficult a lot of the inbound freight invoices were getting almost every one of them had.
Surcharges in tariffs added to them that it's just and you ask the question.
Can you take that off and the answer is no and if you don't like would go somewhere else and so I mean, it's been very difficult to try to do this and when you try to look at what their trials what each of the do different the two divisions are doing they are adding prices as soon as they possibly can to help combat some of this extra cost.
Mike It's Jeff here I mean, there is another factor here that you shouldnt be missed in all of this I commented that our chassis delivery reliability was much better we're starting to get chassis. One we expect to now not as many as we'd like but the arrival as predictable then ended.
We're getting a lot of what we're told we're going to get reliable, that's allowing us to run the factories in a much smoother fashion thats what drove the operational efficiency higher in the industrial equipment division and that actually started to happen sort of in the mid to second half of the quarter. So I really think we're going to have a full quarter of nice running with that so I am expecting the operational efficiency will continue to.
Prove sequentially quarter over quarter at least through Q2, and probably into Q3 as well I think also too there Mike is as long as we don't have COVID-19 breakout we should have efficiencies just from full plant operation as well.
Got it thank you for that color guys.
A lot of trying to yet.
AG business your core real crop bag business.
So you're probably youre livestock as well.
Given that it's harder to find.
So raw materials prices are awfully high because you can get them into the firstly.
You guys said that dealers are willing to order equipment or <unk>.
Take any risk on the equipment at this point or are they saying I can't get the fertilizer.
Sure It had good equipment to get to the.
The best possible yields.
So I think our dealers on the AG outlook here.
Understand Mike It's Jeff here I think our dealers will take all of the equipment, we can get to.
Without any hesitation at all we have not seen any reluctance on the part of our dealer network and AG whatsoever, yes to.
Take equipment order to replenish orders.
Where are we in the AG cycle, what I, certainly think we're near the top of it I don't want to signal anything else.
And inventory levels in the AG side remain historically low and they have not kept up at all that's why I wanted to point that out in the call. So I mean, our dealers are retailing equipment as fast we delivered to them in the AG sector generally.
I flagged a couple of things in the press release that I think everybody ought to be thinking about when that when they evaluate the AG markets, you've got sort of opposing forces going on in AG in a macro level at the moment.
On the one hand, the war in Ukraine, particularly as it starts to spread closer to the port of Odessa is going to really put a crimp in global supplies of wheat and other agreements I mean, we all know that that's coming so for U S farmers there'll be able to sell all of the crops. They can grow and my guess is theyre going to be in a rising price environment that that won't be in.
Issue, but at the same time, we've got rising interest rates, which makes it harder for them to finance equipment and so farmers are going to have to weigh how long and how far can they push the equipment. They have when they're really trying to get crop yields rising trying to get all the crops that Canada market. So I think it will be very interesting to see how that plays out over time, but on balance I think.
It's bullish.
I think it's out of out of the two factors I mean, I think overall, it's bullish for AG and I think it may sustain this high peak in the AG market longer than we would otherwise see in a normal cycle.
Got it.
Just to kind of follow up there just might not be your purview.
But.
I know you're seeing tight supply issues on some of the truck mounted equipment that you do are there any.
Issues with getting tractors or the other appropriate prime movers for your products.
In the AG.
No actually tractor deliveries, you're improving our lead times, we buy mostly John Deere, We also buy <unk>, but I think John Deere is the bigger of the two are John Deere tractor deliveries are improving and I think John Deere was actually fairly bullish and their outlook going forward, Mike from what I saw on the call and they signaled the same thing that they are starting to get their supply.
Chain challenges sorted out so I'm really not concerned about that side of our business at all and if you were behind our headquarters I know you have seen that trend scenario back there we've got more trackers outback than we've had for quite a while which is nice to see it makes me feel pretty good about that part of our business.
In terms of other prime movers, the situation still is kind of hit or Miss place to place.
What the whole of the industry is struggling with is components that are ultimately coming out of China in particular, hydraulics and to a lesser extent pneumatics and what I was concerned about and I remain concerned about to be Frank is what the impact of the Lockdowns in China are going to be over the next couple of quarters in terms of supplies for things like hydraulic cylinders.
And flow divide or as in all of those things that make machinery work and when you look at the log jam in the port of Shanghai, I mean, it's staggering to see how many ships are waiting in there to load at the moment now in terms of our own exports from China, which feed mainly into our AG business, we've been doing pretty well and we've got about at least a quarter close to two quarters worth of.
Supply already out of China on the water. So if there is a risk to our business there it might be a Q4 risk at the earliest and more likely if theres a risk into 2023 risk at this point from what I can see the suppliers that make those components for us our driveline components for our mowers and so on are still operating they are not locked down and shut down they're still operating.
So our challenge is more to get the goods out of China and part of the freight costs, which are referred to in some cases was air freight costs. We ended up flying some components out of China to make sure we can get products onto our customers.
That's great I appreciate that maybe just squeeze one more in maybe.
Maybe this is for Richard.
After the excise tax.
And this quarter.
We had to assume a higher tax rate in our models going forward or is it really.
One time.
Bill on the AG side, Yes, sorry, Mike on the excise tax that was in the other income and expense line I won't affect the actual tax rate itself, but one thing we have done from a tax rate standpoint is as we've kind of flatline the rate itself. So our tax rate is going to be roughly 25, and a half it may fluctuate a couple of.
Points here and there minor points.
For the whole entire year.
Usually have in the first quarter in the second quarter, we get a big credit as it relates to exercising of RSA options. So we were able to take that as Doug deduction on our on our tax rate so that will be.
By Flatlining this we pretty much take out any issues as it relates to any fluctuations.
Okay, Thanks for that and I'll pass it along.
Thanks, Michael.
As an additional reminder to the audience if you'd like to ask a question press star one on your telephone keypad again that is star one if you would like to ask a question.
And we have no further questions in the queue I'll turn the call back over to management for closing remarks.
Okay. Thank you for joining us today, we look forward to speaking with you on our second quarter call in August and we'll speak to you that thank you very much.
And once again this concludes today's call. We thank you again for your participation and you may now disconnect.
Yes.
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