Alamo Group Inc. (ALG) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alamo Group's First Quarter 2014 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, May 7, 2014. I would now like to turn the conference over to Mr. Bob George, Vice President of Alamo Group. Please go ahead.

Thank you. By now, you should've all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at (212) 827-3746 and we will send you a release and make sure you are on the company's distribution list. There will be a replay of the call, which will begin 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1 (800) 406-7325, with the passcode 4680405. Additionally, the call is being webcast on the company's website at www.alamo-group.com and a replay will be available for 60 days. On the line with me today are Ronald Robinson, Chief Executive Officer and President; Dan Malone, Executive Vice President, Chief Financial Officer; and Richard Wehrle, Vice President and Corporate Controller. Management will make some opening remarks, and then we'll open the line up for your questions. Before turning the call over to Ron, I'd like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown 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, competition, weather, seasonality, currency-related issues and other risk factors listed from time-to-time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this day. I would now like to introduce Ron and turn it over to Ron.

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

Thank you, Ron. Alamo Group's first quarter 2014 sales and net income were, again, records for the company. Sales for the first quarter were $171.2 million, an increase of 8% over the prior year. Operating earnings of $10.6 million were up 9% over the first quarter of 2013. Net income for the quarter was $7.2 million, or $0.59 per diluted share, a 4% increase over the prior year first quarter. In Alamo's Industrial Division, first quarter sales of $77.3 million represented a 12% increase compared to the prior year first quarter. Agricultural Division sales were $49.8 million in the first quarter, this is up slightly over prior year first quarter sales of $49.6 million. European Division first quarter sales were $44.1 million, an improvement of 12% over prior year. During the first quarter, the company's gross margin exceeded prior year both in total dollars and as a percentage of sales, as higher whole good volume continues to drive productivity improvements in our manufacturing facilities. These productivity improvements more than offset an unfavorable sales mix comparison to prior year, as higher equipment sales are also driving double-digit growth in lower-margin tractor and chassis sales, while sales of high-margin replacement parts decreased as a percentage of total sales. SG&A increased $2.3 million over prior year first quarter for a variety of reasons. Some of the more significant differences included acquisition-related cost and trade show expenses. Also in the first quarter, Alamo's effective tax rate increased to nearly 34%, compared to 29% for the prior-year quarter. This increase was primarily due to first quarter 2013 recognition of research and development tax credits, resulting from the delayed enactment of the American Taxpayer Relief Act of 2012, as well as an increase in the current year tax provision to reflect the fact that research and development tax credits have yet to be approved by the U.S. Federal Government for 2014. Alamo Group finished 2013 with -- finished the first quarter of 2014 with cash net of debt totaling $42.3 million, of which $20.9 million was held by its foreign subsidiaries. As expected, cash was used during the quarter to fund seasonal working capital needs. In summary, Alamo Group overcame a very slow start of the year as well as weather-related disruptions to its operations to finish the first quarter strong. We continue to see productivity improvements in the company's margins as strong growth in Industrial and European Division sales drove another solid increase in operating earnings. I would now like to turn the call back over to Ron.

Thank you, Dan. I'll just make a few comments. I think the first quarter was a pretty decent one for us. Always, when you have records, it is, even though as I remember when I commented on our fourth quarter results, we said that the first quarter was starting off pretty slow, and it certainly did. January was particularly weak, February, a little bit better, but fortunately, March really finished very strongly for us, which I think was -- not only helped for the month, but for the quarter as a whole. I think the year started off slowly, mainly the weather-related issues that were affecting North America really played havoc with some of our customers. I think farmers were having trouble getting into their fields, even some normal functions, everything from street sweeping to mowing, are certainly were affected by weather and our customers were more fed up with dealing with snow than they were with ordering new equipment for the spring. We're pleased that, though, as I said that the quarter did end better. Even our own operations. I mean, I think we lost something like 6 days at different -- various plants of production due to the fact that -- we were even shut down because of these weather-related issues, which further impacted our results. But as I said, I think the quarter ended very nicely and we're pleased that it bodes well, I think, not only that the business has started picking up as weather started improving, people are getting back to normal levels of operation, and so we're pleased that our, not only sales started improving, but even backlogs were up for at -- compared to this time last year. And we're also -- I think, probably the slowest part of our business, though, still was Ag. It was certainly affected by the weather in the first quarter. And I think we're also seeing -- I think there was just some general indications that the ag market for equipment purposes is a little softer than it was this time last year, even though, like I said, marginally, we were above last year. Commodity prices have softened a little. But I think the outlook for ag is still pretty reasonable. Farm incomes are, even if they're off, they'll be off from sort of record levels. So I think the farmers continue to have a decent income, and I think there's probably, I think, our type of implements more lower dollar tickets will hold up a little bit better than some of the high-ticket items, high-dollar items such as combines and tractors. So I think, yes, there will be a little softness in that sector, but I think it'll still be reasonable as we go ahead. But it will be very interesting to see how the second quarter develops there as when farm activity starts really picking up. Second, third quarters are, of course, are the highest 2 months, it seems like, historically, in our business in that sector. And so that'll be very key in how that business performs for us this year. Certainly, it was good to see our Industrial Division continued strong. And as I said, backlogs there are up, too, and bodes well for the rest of the year. We're continuing to grow in that division. And that's, like I said, if anything, that growth has probably even exceeded our expectations the way it finished the quarter on quite a strong note. And it was also good to see -- finally start to see some improvement in our European operations. They certainly, for the last several years, have been down and weak. And we saw that turn a little bit in sort of the second half of last year. But it was nice to see with the double-digit growth in our business there in the first quarter of this year that it looks like that improvement and some of the return into market activity there has continued. And again, it looks like it's showing signs of further helping our business as we move throughout 2014. So despite the slow start, I'd say that we had good momentum finishing the quarter. As we go into the second quarter, everywhere, like I say, maybe still a little softness in ag. But hopefully, when the farmers get into the field in earnest, sort of here in May and all that we -- we'll start to see that improve. But as I said, I think even with that being a little soft, we feel that we're in pretty good shape to do well in that sector, and like I say, in spite of what some of the market conditions may be. Then as we also indicated, I think we're very positive about the rest of the year, with the addition of the Specialized acquisition. We're very pleased. As we indicated, we've been really -- everything had been agreed to on that opportunity, except we have been waiting for regulatory approval. That, as I indicated, regulatory approval has now been received, literally, just in the last couple of days. And so that we are online or on time to schedule that next week. And so that's a major acquisition for Alamo Group. It's a good company with -- that's very well run, with very good products that are very complementary to products that we are already in. Their 2 major areas are snow removal products and vacuum trucks, which, like I said, are sectors we are already in, so know the products, we know those markets well. This will enhance our position in both those sectors to our -- we'll be major players in those sectors, mainly in North America. And -- but there also will be some synergies and opportunities on the overhead and purchasing and some of the other areas of -- as we move forward with the consolidations. But we believe this opportunity will be nicely accretive to our -- to Alamo's results from day 1. And so we're -- so that should be -- help us, like I say, even starting in the second quarter. And as we get, for sure, the second half of the year, and then for many years to come. So we're very optimistic and positive about getting this done and moving ahead with that. And I think that gives us good optimism about where Alamo is today. We feel that we're in good shape. We like our product mix. We like our -- and even though we're certainly leveraging up a little bit to buy Specialized, we feel our balance sheet is still an excellent position, probably still even underutilized. And so we are continuing to look for other opportunities and pleased that we've seen a few -- see some more opportunities out there. Also during the last quarter, we closed our -- subsequent to the end of the quarter, we closed on a little one in the U.K. Kellands, which is -- takes us into some agricultural spraying equipment. So it broadens our presence into -- of other agricultural implements, and we're looking for other areas where we can focus in on a few other way -- new implements that would broaden our presence in the agricultural sector. So we like that as well. Like I said, I think we like where we are, we like our product mix, we think this -- we're in good shape for this year, and are continuing to be pleased that we're seeing activity to continue to look for acquisitions that will help enhance our growth as we move ahead. So anyway, I think that's probably it for my comments, in general. But with -- at this point, I'd like to turn it open to see if there are any questions from anybody.

[Operator Instructions] Our first question comes from the line of Robert Kosowsky with Sidoti & Company.

One question on SG&A. I was just wondering how much was due to acquisition due diligence in there, if you can parse that out?

It will be in the Q tomorrow.

It'll be in the Q tomorrow. But -- what?

Close to $500,000.

It's about $500,000. And yes, I think SG&A is a little bit of ahead of itself right now. I think that's 1 area we're going to have to take -- like certainly, legal bills and acquisition costs have been something. First quarter was also high in like trade show expenses, few other things that contributed to that. But so I think we need to watch that a little bit better than we had -- than we did this quarter.

Okay. So you then going forward, absent kind of the impact of the Specialized deal, that you should see better SG&A leverage from an organic basis?

Yes, that is correct.

Okay. And then just curious on Ag business, is there -- what impact has there been from the, I guess, pullback in farm income and bad weather? Was there a negative impact on product mix? And also, just curious if dealers were a little bit more cautious in stocking this year, this season?

No. It's interesting. I think in our kind of pool of dealers, they -- I mean, they still feel fairly optimistic that on -- what the buying habits will be pretty good this year. So I mean, they were still probably more optimistic than I thought they should be. But going into this, I mean, inventories, well, seasonally, this is the high point for inventories, that's why it's a high point for us for us in working capital as inventory and receivables kind of grow. But inventories are sort of in line with expectations. It's not like there's an overhang of inventory at dealers. It's just seasonally higher now than in, I mean, it averages during the year. And I think, like I said, I think smaller ticket items like some of our type implements will hold up a little bit better than big-ticket items. We're also seeing -- it's interesting that the hobby farmer has probably been a little more active in the first quarter and the end of last year than they have been typically. So it's good to see that's at the low-end of the market, but it's good to see them being a little more active. So yes, we don't see anything -- any particular trends or anything that's affecting anything other than, like I said, I think incomes are going to be down a little because of -- but I actually think some of the -- most of the delays in the first quarter were more related to weather than it was to incomes or other trends.

Okay. That's good to hear. And then also, just on the Kellands deal, what's the opportunity here? Because it seems like there's a new product line. And is there a chance to take some of these sprayers to U.S. markets and just -- or even to further within Europe?

Yes, I think that -- we do believe there is a chance to take them further into Europe, but we'll not be bringing them into the U.S. at this time. So we believe there's a chance to do a little more consolidation in that space, even in Europe and to, we think, create a -- this was just sort of our foothold in trying to broaden our presence there, and we believe that we can actually, through some consolidation, take on a little bit more of the market share there, particularly in the U.K. And then through our distribution network, we can expand their presence more into the mainland Europe.

Okay, that's helpful. I guess, finally, just on the industrial market in general. Do you see any pockets of pent-up demand either on mowers, vacuum trucks or street sweepers?

Yes, we still -- I mean, it's -- we still do. I think that the fleet, going back to like 2006, '07, '08 time periods, I think the fleet today, even though our sales have grown nicely, is still older than it was back then, which I think bodes fairly well for the next few years as they sort of get -- as the equipment is wearing out and replacement cycles are getting back to normal. We also feel it's good to see the city and state budgets getting in a little bit better shape. Some of the latest indications are that most of what they're approving in budgets are actually spending these days as opposed to approving something and then not spending it because they are waiting for cash. But I think their cash receipts are more in line with their -- the spending expectations and we think that will help us as well. But yes, I think there's some fleet aging and some economics within the governmental entities that bode well for us for the rest of this year and next year. I mean, at some point, they'll catch up on the pent-up demand, but I don't think it's going to be this year.

Okay, then. And I assume, fleets, you mean like vacuum trucks and street sweepers more so than mowers?

No. I think all of it. All of it.

Okay. And then one final question. Do you -- so it seems like Specialized will close next week, is that what you're referring to?

Yes, that's what we anticipate. Thank you. Yes, that's an exciting one. And certainly, when we do that, we'll try to give out a little bit more information about Specialized in general.

[Operator Instructions] Our next question is from the line of Wayne Archambo with Monarch Partners.

I was just calling to follow-up on the accretion. You said it's nicely accretive. I was curious to know on the deal, if you could quantify the word nicely?

Well, like I said, when we actually close the deal next week, we will try to give out a little bit more information on the economics of it. But at this point, yes, we can't really say much more than what I've indicated.

And is the market fertile for additional deals this year? Do you see -- are you seeing a lot of activity out there? Is it a buyers' market? Or what's the general state of the market out there on the M&A front?

On the M&A front, I wouldn't say it's a buyers' market. I'd say it maybe it's more of a sellers' market because I think pricing is still quite little -- probably a little bit higher than maybe historically. I think certainly, low interest rates have contributed to that as well, plus I think you're also seeing a lot of buyers with -- there's lot of cash available to do acquisitions these days. So there -- like I say, there's usually a lot of buyers in the marketplace. So as I said, I think it's probably still a little bit more of a sellers' market, but I'm at least pleased that we're -- that the level of volume of things we're seeing is still pretty good. Back in '12, it was hard time to find things to even look at. I think '13, we looked at a lot more, and '14 seems to be continuing on that. But there's a fair bit of things to look at. Like I said, pricing seems to be okay, but a little on the high side and I think it's, like I say, a bit of more of a sellers' market, but there's good activity.

[Operator Instructions] I'm showing no further questions. I'll turn the call back to management for closing comments.

Okay. Well, as I said, we will put out some more information next week when we get closed on the Specialized acquisition, and we look forward to moving ahead with that. And that's really all we have right now, so we thank you for joining us today and we look forward to speaking with you next quarter on our second quarter conference call.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.