Q2 2022 Alamo Group Inc Earnings Call
Ladies and gentlemen, please stand by good day and welcome to the Alamo Group, Inc. Second quarter 2022 Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Edward Rizzuti.
Executive Vice President.
General Counsel and Secretary. Please go ahead.
Thank you.
By now you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one please contact us at 2128 to 73746, and we will send you a release and make sure you're 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 one eight at 82031112 with the pass code 48062 to six.
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 Worley, Executive Vice President Chief Financial Officer, and Treasurer, and Dan Malone, Executive Vice President and Chief Sustainability Officer.
Management will make some opening comments 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 rec.
Reconciliations of these non-GAAP results are applicable GAAP numbers are included in the attachments to our earnings release.
For turning the call over to Jeff I'd like to make a few comments about forward looking statements.
We will be making forward looking 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 impacts including.
Operational and 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.
The 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 Leonard Jeff. Please go ahead.
Thank you Ed we want to thank all of you for joining us today on the call Richard will begin our call with a review of our financial results for the second quarter of 2022, I will then provide more comments on the results. Following our formal remarks, we look forward to taking your questions. Richard. Please go ahead. Thanks, Jeff Good afternoon, everyone.
Alamo groups second quarter 2020 to close with an impressive performance with record results for the quarter driven by a strong demand for our products in a continued challenging operating environment.
Second quarter consolidated net sales for 2022 were $396 million, an increase of 14% compared to $348 million in the second quarter of last year.
Sales were negatively impacted almost two 5% due to currency translation.
S dollar strengthens against the currencies of international countries, where we operate.
Most margin dollars in the quarter improved compared to the second quarter of 2021 by just over $11 million with a gross margin percentage down by only 20 basis points, both margin dollars and percentage were negatively affected by freight cost freight costs on inbound freight inventory I explained about inventory is tariffs.
Surcharges continue to be added to already significantly higher freight invoices consol.
Consolidated net income for the second quarter of 2022 was just over $28 million or $2.39 per diluted share an increase of 9% versus net income of $26 million or $2 19 per diluted share for the second quarter of 2021.
Solid control of costs and expenses helped support the increase in profitability.
Included in the 2021 second quarter results was a one time gain on the sale of a facility in the Netherlands, a $3 4 million. Excluding this gain net income for the second quarter of 2021 was $23 million or $1 97 per share.
Vegetation management Division had an exceptional second quarter for 2022 as markets were extremely strong.
Second quarter 2022, net sales were $255 million, an increase of 19% compared with 215 million for the second quarter of 2021.
The division continues to see strong demand for forestry and tree care and agricultural and governmental mowing products in both North America and Europe .
Margin during the second quarter for 2022 were up 40 basis points as compared to the prior year quarter, Despite supply chain disruptions and high higher inbound freight costs.
Income or income from operations for the second quarter of 2022 was just shy of $33 million or 45% versus $23 million versus the same period in 2021.
Dust real equipment net sales in the second quarter of 2020 to 141 million up just over 6% compared to 133 million for the second quarter of 2021. This was due to price pricing actions and a solid performance in the North American excavator and vacuum truck operations.
Truck chassis deliveries were slightly more reliable this quarter other component part shortages continued to have a significant impact on the divisions division's operations, which in turn drove unfavorable manufacturing efficiencies and lower absorption.
Income from operations in the second quarter of 2022 was $8 million down 26% compared to $11 million for the second quarter of 2021.
Consolidated net sales for this first six months of 2022 were 758 million up 15% compared to 659 million for the first six months of 2021 <unk>.
Demand for our products in both available as divisions, along with the impact of improved pricing initiatives drove the increase year to date gross margins for 2022 was up almost 22 million versus the comparison period gross margin for 2021.
Margin percentage was.
It was down about 40 basis points, as we experienced inflation pressures and material costs purchase components and to a lesser extent raw material as well as inbound freight costs net income for the first six months of 2022 was $47 million or $3 94 per diluted share versus net income of <unk>.
$44 million or $3 66 per diluted share for the first six months of 2020, one an increase of 8%.
Excluding one time charges in both 2022 and 2021 adjusted net income was 48 million compared to $41 million.
An increase of 17%.
The first six months of 2022 net sales for the vegetation management Division for 476 million compared to 399 million year to date for 2021 up 19%.
The division experienced robust demand in all product categories, particularly in forestry tree care land clearing and bulk I've got governmental and agriculture governmental and agricultural volume.
Year to date 2022 income from operations was 51 million up 30% versus 39 million year to date for 2021 results from North American operations were also supported by strong performance in the U K, France, Brazil and Australia.
The first six months of 2022 net sales in the industrial equipment Division were 282 million compared to 260 million for the first six months of 2021 an increase of almost 9%.
Sales of Suvs excavators vacuum trucks and street Sweepers and Street Sweepers led the way with modest support from snow removal.
First six months of 2022 income from operations was $19 million versus $20 million for the first six months of 2020 one.
A decrease of 4%.
This divisions results were negatively impacted by constrained chassis deliveries supply chain disruptions and a high input costs in both material and inbound freight costs costs, which caused delays in completing manufactured units.
Order bookings experienced a modest decline during the second quarter 2022, resulting in a backlog is still just over 894 million an increase of 78% compared to backlog at the end of the second quarter of 2021.
If you factor out the impact of currency translation I mentioned earlier, our backlog would have been higher.
Backlog is also up compared to the end of 2021 by 12%. We noted some softening in North American AG equipment, but we anticipate some of that going we anticipated some of that going forward due to inflation issues.
Two a few additional financial items for the first second quarter of 2022, our balance sheet continues to remain healthy working capital increased $109 million.
$559 million from 415 $450 million at the end of Q2 2021.
Increase in working capital came from higher accounts receivable and inventory and accounts receivable was up almost were up almost 307, almost three almost $307 million.
Up 21% from a year ago from solid sales volume.
Also a 29% compared to the end of 2021.
Inventory is up almost $76 million compared to the second quarter of 2021 and is up 32 million compared to the end of 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 and service parts for our customers. During this time of constraint supplies.
The increase since the end of the year is also reflected in a modestly modestly higher debt levels as supply chains. It's.
Hi chain issues ease, we expect inventory to decline, which will in turn reduce the debt.
Finally, the company's trailing 12 months EBITDA is $173 million, that's up 7% compared to the full year of 2021.
The balance of this year cash flow should remain strong as our focus on the balance sheet will be driven will be to drive down inventory and reduced debt levels will continue to be disciplined in controlling costs and expenses as inflation is expected to continue to put pressures on our margins.
We're also continuing to adjust prices as needed based on changes in material and transportation costs in order to maintain target margins. Our biggest challenge remains meeting the heightened demand for our products throughout the company given the current supply chain constraints.
As we did in the first quarter of this year. The company approved quarterly quarterly dividend of <unk> 18 per share for the third quarter of 2022, 29% increase over the third quarter of 2021.
With that I'll turn the call back over to Jeff.
Thank you Richard first I'd like to again, thank everyone, who has joined US on the call. This afternoon during the second quarter activity in our major markets remained strong.
Orders received during the quarter remained at a very good level, but declined approximately 7% compared to the second quarter of 2021.
Hardly due to exchange rate effects, our order backlog remains excellent with healthy margins and this provides a very solid foundation for the company's performance in the remaining months of this year and into 2023.
The second quarter continued the pattern of the past several quarters as persistent headwinds in our operating environment constrained. Our results. These included persistent material and wage cost inflation elevated transportation costs supply chain disruptions and related component shortages and sporadic impacts on our workforce of yet another version of Covid.
Having said that I'm pleased to report that during the final weeks of the quarter, we began to see modest improvement in some areas of our supply chain that helped improve the efficiency of our manufacturing operations and increased shipments beyond our previous expectations. Our vegetation management Division had an excellent quarter in all respects.
Improvement in supply chain performance helped the division increased sales by nearly 19% and increased its operating income nearly 45% compared to the second quarter of 2021 sales in the divisions, North and South American operations were up sharply while its European sales were stable, albeit at a very high level.
European sales increased in local currency.
Better pricing improved supply chain performance and higher manufacturing efficiencies sustained the division's gross margin despite ongoing material and labor cost inflation divisions teams did an excellent job controlling expenses during the quarter and that further improve the results.
The vegetation management division's order bookings declined by 26% compared to the second quarter of 2021, although its backlog was 56% higher than it was at the same point last year, the weakening of the euro the pound Sterling and the Brazilian real.
Relative to the U S. Dollar contributed to the decline. It's also important to note that second quarter 2021 order bookings were exceptionally strong and we believe the pace of new orders is returning to a more normal sustainable level.
Division sales teams have not expressed concerns about market conditions and they continue to report that activity levels remain high.
Our industrial division face deeper challenges during the second quarter is it supply chain did not demonstrate the same performance improvement that was evident in men and vegetation management the.
The division sales increased 6% compared to the second quarter of 2022 with the increase primarily the result of pricing.
Second quarter operating income declined 26% as supply chain shortages drove manufacturing efficiencies and absorption sharply lower most notably in its vacuum trucks and street sweeper operations.
While the quantity of truck chassis, we received under current allocations was marginally better than the second quarter of 2021 chassis receipts have not yet returned to the levels. We enjoyed in the months prior to the onset of the pandemic.
Shortages and delayed receipts of other required industrial components, including wiring harnesses joysticks transfer cases heat exchangers and hydraulic fittings constrained sales disrupted production flows and negatively impacted gross margin. The second quarter was seasonally softer for this division snow removal businesses and lower efficiency and absorption.
Adversely affected the results in this segment as well finally, the division incurred certain nonrecurring expenses related to the consolidation of two U S manufacturing facilities and its snow removal business that will be completed later this year.
It was encouraging to see very strong second quarter pre season bookings and the snow removal segment that point to improving results over the next several quarters, while the division's results for the second quarter did not meet our expectations. The outlook for the remainder of the year is significantly more promising this division's order bookings increased 26% compared to the SEC.
Quarter of 2021, and order backlog is up 126% compared to prior year. We're also seeing early but encouraging signs that the division supply chain performance may begin to improve in the second half of this year.
All in all we're very pleased that Alamo group achieved the highest quarterly sales and earnings in its history. During the second quarter in the phase of persistent headwinds we've all been discussing since the onset of the pandemic and the subsequent disruption to the global supply chain. Our teams have continued to find creative solutions to problems as they have arisen to keep.
The company performing well I'm extremely proud of our employees for their dedication and there are many achievements that produced these strong second quarter results that we're discussing today naturally given the current turmoil in the global economy, and the likelihood of a recession, we're paying close attention to the activity levels in our served markets in the AG sector while sentiment.
Among U S farmers regarding future regarding the future continues to erode prices for farm commodities remain at historically good levels as do farm incomes.
Dealer inventories have recently begun to rise modestly, but they are not approaching the levels that were considered normal before the pandemic. So while the AG market may have begun to move off of cyclic peak fundamentals of the farm economy remained favorable in the near term outlook remains quite positive.
And our forestry and tree care segment housing starts are declining in North America, but construction starts outside of urban areas continue to rise that bodes well for sustained demand for our four stream Walters and brushed shippers that are used to prepare the land for construction.
Weather trends are another important indicator for this segment extreme weather events, such as Hurricanes extended periods of hot weather and drought increase the demand for our products are more bark tree shippers and other specialized road mobile machines, we produce such as great. All wheeled excavators are uniquely suited to remove down trees and clear drainage canals and tight workspace.
Paces. Similarly, our vacuum trucks are required to root biomass and trash that makes it makes its way into municipal catch basins. Following severe storms. So while none of us wants to experience. These extreme weather events. Unfortunately, there are a fact of life today and the products that Alamo group offers helped to minimize their impact and aid and recover.
After the fact.
Lastly activity in our governmental infrastructure maintenance segment is strong and is expected to remain elevated for the remainder of the balance of 2022 in the first half of 2023.
While there was pressure on the municipal bond market during the first half of this year. The second half of 2022 is expected to be significantly better and municipalities continue to enjoy relatively low cost access to capital overall governmental agencies at the state and local level remain in good financial health and Theres no evidence that they will take steps to constrain.
Investments in their maintenance leads for the foreseeable future.
So in summary, while the longer term indicators for our markets are somewhat more mixed at the moment near and medium term indicators point to sustained positive momentum our healthy order intake strong backlog and gradually improving supply chain provide confidence regarding alamo group's prospects for the remainder of this year and into the initial months of 2023.
Three.
This concludes our prepared remarks, we're now ready to take your questions. Operator. Please go ahead.
Ladies and gentlemen, if you'd like to ask a question you can see that by pressing star one on your telephone keypad keep in mind, if you're using a speakerphone make sure. Your mute is released so that civil Creech, our equipment once again star one for questions.
We will begin with Chris Moore with CJS Securities.
Good afternoon, guys. Thanks for taking a few questions.
Hi, Chris.
Hey, good afternoon start on the vegetation.
Patient side, so it sounds like dealer inventories are rising a bit not not where they were at the pandemic order flow was slower is that does that signal that were you know kind of near the peak Uh huh.
Vegetation or how.
How do you look at it that at this stage Okay. Great. Great question, Chris first of all my remark about that was confined to AG, specifically vegetation management remains strong and although their orders were a little softer this quarter. Two they had an exceptional first quarter and actually I think lead times tended to pull those orders forward a bit and we're actually making the call today from <unk>.
More bark facility up in win Michigan, we've been with the management team all day, and it's a very bullish but environment and attitude here at the moment, so our forestry and free care business looks really good and on the AG side to answer your question a little bit more specifically the AG business as the cycle what im looking at is things like the track.
Report, which shows the trackers under our Horton under 100 horsepower down about 14%.
Compared to last year, and that's the segment, where we serve so while other large AG Oems are talking about fairly bullish conditions in AG remember they didn't make the most money on the big or the big tractors, which is not our market segment. So I I meant what I said, if you look at the crop prices and farm incomes, they're still pretty good but farms farmer sentiment.
It has been falling now for a couple of quarters that may just be emotional but obviously, it's one key indicator we pay attention to so I hope that's that's clear, but one other point here is this is Richard.
For 'twenty 2021 wasn't a good barometer of orders because I think you had a lot of pent up demand there when we look at those orders in the AG space suggests referring to if you compare those back to 2019. There is still ahead of that pace.
Got it.
I'd like to make about that.
If you look specifically at our Bush hog business and our Rhino business or more business is in North America.
They had an exceptional quarter several quarters in a row and a lot of that equipment hasn't yet been delivered to our dealers. So our dealers are hesitant to keep placing orders, particularly those that are sophisticated and realize that steel prices are falling so rather than keep placing orders now they are waiting for I think a little better conditions in the market steel prices to come down and our surcharges to come.
And then I think ordering will return to a very very normal level. So I'm not really that concerned there is a couple of things in the key indicators to pay attention to but so long as crop prices remain healthy in farm incomes are good I think those are the main drivers of the market.
Got it very helpful.
Maybe just in terms of you know kind of where we are from a margin perspective, obviously is lots of room for improvement.
Industrial side. It sounds like you know you think the second half of the years.
It will be better than the first.
And the 12, 9% vegetation margin is that is that as good as it gets or is there a room for <unk>.
Expansion at some point there how do you how do you look at that.
I think theres going to be some room for expansion there Chris if you'll recall for Q3, that's a big big quarter for us in part sales.
We will have some margin pick up.
Mainly from that I think the other thing we're hoping for is it some of these costs as Jeff had mentioned raw material prices or costs have come down, but the but the component pieces that are being used for our attachments in there that require steel have not dropped so youre still going to have some of that issue there and I think where we're at.
Little bit still concern and keeping an eye on our inbound freight charges that we're receiving.
But god you know like salaries.
Yeah.
Got it and the vegetation excuse me on the industrial side.
You know I always see lots of challenges. There Q2 same kind of conversation. There are you seeing some improvement in in in you know kind of sequentially on the industrial side.
Yes. This is Jeff speaking again.
If you look at the full details of our P&L, which of course, we don't publish you would actually see their pricing margins are higher.
The material or the price to material cost and standard cost is rising, but they are giving it back in the middle of the P&L. So manufacturing efficiencies they've been just extraordinarily disruptive this quarter more so than any quarter through the pandemic from my perspective.
Because of the supply chain and in there as I said Theyre chassis situation actually got a little bit better during the quarter, but now it's all kinds of other things I mentioned joysticks, because thats such a random one who would've thought there would be a shortage of joysticks and then things like radiators that are normally very easily accessible suddenly there is a shortage on those so they came out of the gate in the quarter.
Well that division had a really good start to the quarter and then just wasn't able to finish because of the supply chain and we didn't see that coming on the other hand I've talked to all the teams over the last couple of days and they're feeling good about the back half of the year. I think there are supply chain picture is going to improve I'm getting increasingly confident about that.
So I like where they sit and where they are positioned for the rest of the year and then finally the remark I made about snow removal Q2 is always the bottom of the trough in our snow removal business and you kind of got to take a deep breath and hold your breath until the quarter ends, but we've had a huge intake of orders from municipal plows. During the second quarter. So we're going to have a really good win.
Their season, particularly in Q4 and Q1 of 2023, so I feel very positive about where that division is headed and I expect that they'll get back on step pretty quickly.
Got it very helpful. Last one for me just you know you had talked about it at the at the end of Q1 sequential growth in Q2 and at least into Q3, given the you know kind of the.
They're very strong Q2 revenue.
Is it reasonable to think Q3 revenues down a little sequentially or how are you looking at that now.
You know I think my personal guess is that Q3 is going to look a lot like Q2.
That's how I feel about it but the supply chain can always surprises Chris I mean, that's.
That's a day by day game.
But given where we stand now with chassis deliveries improving and we are seeing some encouraging news on <unk> now for the first time in several quarters I mean genuine improvements in volumes, which we've not seen for a while.
If we can get some of these other commodities sorted out we've got a couple of quarters of good running and I think that's consistent with the conversation you and I had at the end of the first quarter, where I told you. If we got a little bit of relief in the supply chain. This company would be in for two to three quarters of really nice running and I still feel that way.
Got it I'll leave it there I really appreciate it guys.
Thanks, Chris.
Now moving to our next question and that will come from Mike Szeliski with D. A Davidson.
Thank you and good afternoon.
Hey, Mike I wanted to maybe Hello, there, yes, I wanted to ask first about I missed it I'm sorry.
And best loved growth do you have any sense as to how.
How much of the growth year over year was due to pricing.
I think in the industrial Division. Most you know they are up year over year, they're up I think 9% if I've got my number right in my head.
And obviously, Mike when you look at that Division I would say the majority of that is price probably two thirds price to take a guess.
When you look at vegetation management, it's a very different story, there, it's probably half and half organic growth and price just to give you a rough idea.
Great I wanted to follow up on some of your comments you made throughout this call about chassis supply as well.
Yes, you've made some internal efforts on Chinese supply, both with trying to find new suppliers and other sources.
Can you give us some kind of feel for how much.
Do you think it's the efforts of your own team two very recently improved chassis supply and you pay for it. So how much is it just the overall supply chain for the trucks getting better they're able to just ship better from.
From there.
We have we've historically had one supplier that supply to the.
I will say that the vast chunk more than 50% of our chassis demands are and that supplier has been struggling a lot as I said at the end of the first quarter. We've diversified now we now have three chassis suppliers supplying us.
To secure our future demands for chassis, Mike, but our core supplier is finally getting back on staff and that you've heard me talk about Daimler Freightliner a lot in their production situation is starting to improve.
And they've assured us now with reasonable certainty that we're going to receive a few more trucks next year than we were originally expecting.
Got it.
And then.
You don't always discuss it.
Too often Jeff because maybe give us some sense.
As to how things are going on the new product development side any major divisions have anything big coming out either at the upcoming trade shows or for next for next winter and next spring.
Yeah, we have a bunch of things in the fire I, probably mentioned a quarter or two ago.
This technology center down in Huntsville.
To start beginning working in earnest on electrification and we expect to be showing what I've always called near market ready prototypes.
Next spring I think that's the timetable so youre going to see a burst of things hitting the market next spring.
Okay. Thanks, so much I'll pass it along.
Thanks, Mike appreciate it.
As a reminder, ladies and gentlemen to ask a question. Please press star one on your telephone keypad moving onto a question from Greg Burns with Sidoti <unk> Company.
Yeah.
In terms of.
The production constraints, how much idle capacity you have and how fast can you could you turn up production.
If the supply chain does start to get to.
Normalized.
Well I can tell you we had a chunk of under absorption in the quarter, Greg. So I mean, that's a pretty good indicator, we've got capacity available, particularly in industrial there. They they got hit pretty hard by under absorption during Q2.
We're in good shape from a manpower point of view and we still have lots of our operations that are still running only a half of a second shift.
Come up here to more bar to this giant million square foot plant, there's a lot of capacity available up here. So I don't feel we're constrained in any way by our internal capacities at the moment with one caveat and that would be another wildfire spread of COVID-19 that knocked the workforce out again, we've just had sporadic rounds like everybody has somebody gets sick and comes in and we.
Got it department that dentist quarantine for a few days, but we've learned to live with that and manage our way around it but if theyre really where another bad outbreak that would change my outlook, a little bit, but I don't feel we're internally constrained at all at the moment and Greg. This is Richard I think the other thing to keep in mind is our width is probably double what we normally carry in a lot of that we're getting so.
<unk> start and stops and as Jeff mentioned in his presentation. It's not the chassis. It's the pieces of the components that we need to complete the units and we've carried way too much in their weakness.
$1 million worth of orders just in the last quarter and we could have had if the supply chain and cooperated.
Okay, Great and then in terms of some of the federal support programs are on the munis.
The municipal side of the business.
Particularly like the cares act and the I think it was like $350 billion of.
Payments are being made have you seen any benefit from that is that.
Showing up in your orders in backlog, yet or is that still.
Something is starting to show up in our in our order book, Greg We had a really good quarter for sweeper bookings this quarter as several of our competitors also reported our excavator bookings are in good shape. That's also driven by things like the infrastructure Bill, but I would say it's in the early stages I think we're going to see more than we're seeing right now I don't think a lot.
That money has been spent frankly.
Don't think anybody has really seen the impact of that yet.
Okay, Alright, great. Thank you.
And ladies and gentlemen, this does conclude your question and answer session I'll turn the call back over to management for closing remarks.
Okay that concludes the call today, we look forward to having you join us on our Q3 conference call when.
When we expect to have more news to report to you. Thank you very much.
With that ladies and gentlemen, this does conclude your conference for today. Thank you for your participation and you may now disconnect.
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