Good day, ladies and gentlemen, welcome to the Alamo Group First Quarter 2019 Earnings Conference Call. Today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for question. [Operator Instructions] This conference is being recorded today, Thursday, May 2, 2019. I will now turn the conference over to Mr. Ed Rizzuti, VP, General Counsel and Secretary of the Alamo Group. Sir, 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 212-827-3773, 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 one hour after the call and run for one week. The replay can be accessed by dialing 1 888-203-1112, with the passcode 768-9407. 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 Ron Robinson, President and Chief Executive Officer; Dan Malone, Executive Vice President and Chief Financial Officer; and Richard Wehrle, Vice President, Treasurer and Corporate Controller. Management will make some opening remarks, and then we will 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 attachment to your earnings release. 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, 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 Ron. Ron, please go ahead.

Thank you, Ed, and we want to thank all of you for joining us today. Dan Malone, our CFO, will begin our call with a review of our financial results for the first quarter. I will then provide a few comments, give more comments on the results and the following that, we look forward to taking your questions. So Dan, please go ahead.

Thank you, Ron. Record first quarter 2019 sales of $261.9 million beat the prior year quarter by 10%. Organic sales growth was 8.4% without the impact of the Dutch Power acquisition, which we completed in March. Industrial Division first quarter 2019 sales of $158.4 million, represented a nearly 20% increase over the prior year quarter. All product groups contributed to this division's continued strong organic sales growth. Agricultural Division for the first quarter of 2019 sales were $53.2 million, down 9.3% from the prior year quarter. High crop yields and U.S. trade disputes continue to negatively affect crop prices, farm income and demand for new equipment. We estimate retail sales of rotary cutters, the primary product in this division, are down 5% to 10% industry-wide compared to the prior year quarter. Recent adverse weather conditions have also reduced equipment usage, negatively affecting agriculture parsecs. Furthermore, this division's sales were affected by the installation of a paint system upgrade, which shut down production in its largest manufacturing facility for several days in January. The European Division first quarter 2019 sales were $50.3 million, up 6.5% over the prior year quarter, but down 1.2% without the effect of the Dutch Power acquisition. Excluding an unfavorable currency translation effect of $3.5 million, this division's local currency organic sales growth was 6.3% above the prior-year quarter. First quarter 2019 gross margin of $63.3 million grew 5% over the prior year first quarter. Our first quarter gross margin was 24.2% of sales, which compares to 25.3% of sales for the prior year quarter. The compression of percentage gross margin was due to several factors: first, the carryover impact of material cost increases had yet to be fully offset by mitigating pricing actions. By the end of the quarter, we began to see this effect easing…

Okay. Thank you, Dan. We're pleased once again to start of another fiscal year in a positive fashion with record sales and earnings. As usual, there were some pluses and minuses in the quarter and certainly, our Industrial Division was one of the big pluses as they had another strong quarter with good sales and earnings growth. And we believe they are poised, due to their backlog and the market outlook, to continue to move forward in 2019 at a very healthy pace. On the other hand, our Ag Division had a weaker start to the year and we were constrained by the continuing stalled agricultural market conditions, which was further limited in the first quarter by some adverse weather conditions. And we were also a little disappointed by our margins, which were a little weaker than they should have been. There were several factors contributing to this, including a little higher level of shipments, particularly at the start of the year, in January, as, that were booked prior to price increases we had implemented late last year in response to input cost inflation in the second half of 2018. So we also had the cost and associated disruption in January due to a major system upgrade at our biggest agricultural plant. Both of these situations are now behind us, and while the stalled agricultural market and lower farm incomes are continuing to constrain sales, we feel our margin should, started to improve in the second half of the first quarter and should continue to improve as we move forward. So despite some of the pressure in the first quarter, we feel that the pace of input cost increases have actually softened somewhat compared to last year and in some areas, such as steel, have actually come down a little,…

[Operator Instructions] Our first question will come from Joe Mondillo with Sidoti & Company.

I wanted to ask on the Agricultural sector. So I'm wondering, you talked about how, I think at least in the press release if not also in your commentary there, related to weather and that being a factor. In addition to, obviously we've heard from other companies that the sector overall is still a little weak here. Just wondering, sort of, especially with the weather comments, how are you thinking about growth as we progress through the year, relative to the 6% ex-currency that we saw in the first quarter?

Yes, it's really sort of hard to say. I mean certainly, I think weather may, affected some spare parts sales a little because the farmers were a little slower getting into the fields. But I mean I think once they get in there, the activity will pick up. But certainly, the farm incomes are down and we feel that, I mean, like I say, it's, we're seeing that the equipment purchases in total have been off. Yes, I think weather, I mean, there's still some rain in the Midwest, and I mean, but that's fairly localized. So I mean, I think on a broad basis, I think weather will get better. Just like I said, the winter was a little later, so it caused some delays. I don't see it causing any major disruptions long-term, I mean, like to the whole year. There's some delays. But I think it's just the Ag conditions themselves, there's a little too much grain in storage. And so I mean, they need to get crop prices up before I think we're going to see the equipment sales start to rebound.

Okay. And then on the margin side. First off, could you quantify how much, about how much costs were related to the system upgrade?

Like I say, I mean, I know exactly what the system cost, upgrade cost. But it was the disruptions...

Before the disruptions.

Yes, it was the disruptions and then like in other areas. But, again, I don't think we handled it as well as we should, to be honest. But that I can't give you a number for that. So I really...

The actual system was only, the expense side of that was a couple hundred thousand dollars. But it was really the, more of the days we were not producing products, that was the main cost.

Joe, it lasted a little over more than a week. And it just kind of shut us down for a little big because you can't obviously run your lean process until you get it fixed. So...

Okay. So that as well as adverse sort of price cost situation, which I assume improves, maybe even starting in the second quarter. That must have cost over $1 million, at least, would you say?

Correct.

Oh, yes. All that cost over $1 million dollars, yes.

Okay. And in terms of the price cost. I guess overall, but you certainly sort of highlighted more at Ag segment. That starts to improve in second quarter considering the price increases that you have put in place?

Absolutely. I mean because the Ag sector is one of the sectors where we sort of do out of season, preseason sales for dealers stocking orders. And so we had some backlog at the end of the year that was prior to our latest price increases. So we, yes. So, but most of that is behind us, most of that backlog is now shipped that was at the lower margins. And I think most of what we're shipping going forward is all at higher margins. Plus in the second and third quarters, our aftermarket parts are a higher percentage of our Agricultural sales, while, because those are the active orders for farm activity, that's when they're like, say, the first and fourth quarters is a higher percent of equipment sales versus the second and third are, the percent of part sales goes up.

We know that some of our material costs are coming down because we have negotiated, based upon orders placed back in the fourth quarter. And so the lead, with the lead times of those particular products, we know that those are going to be coming as well.

Okay, great. At the Industrial segment, very strong quarter on the top line. Part of that, I assume, was, a little bit of that was due to the favorable comp and the fact that you did have some production disruptions in the first quarter last year, with that strike at the one facility of yours. Could you sort of give us an idea, if you can at all, how much of that was related to sort of that comp? And what is sort of normalized growth? I mean 20% is not sort of normalized, I assume you would agree. Any way of sort of defining what sort of normal growth was?

Actually it was, a high percentage of that growth was normalized in this case, just because the backlog went up, I mean we had, we actually had very good bookings in the quarter. We were helped by some new product introductions. But no, actually, like I say, it was, the comp effect was actually fairly minimal.

Oh, okay. And then on...

It only affected the Gradall plant. I mean, the Gradall plant was the one where we had the, but,, and I mean like in some things, like I know even last year we were saying like our snow group was off a little. This year, I mean, I could say, the good, like I say, the late winter and heavy snow through, of this year, certainly, it maybe caused farmers to be late. But it made our snow division actually have a pretty good year, or finished last year very strong and start this year very good. So I mean, snow was up. And that had nothing to do with sort of the Gradall strike last year. So I mean, like you said, those comps were a little off from last year. But this year, like I say, it was is just solid performance across all products within the division.

Yes, I think last year we said it was only about $5 million impact on the top quarter sales.

On the sales endpoint. Yes.

Okay.

For the strike.

Just related to the strike, Joe.

Right, right, right. Okay, just lastly, and I'll hop back in the queue. Just curious regarding the new segment reporting. Is there any more color? Or how significant is this, I guess in terms of productivity and cost improvements or whatnot? Or is, could you speak to that or any more color regarding that? If, how significant it is? I'm just trying to...

Well, I don't think it's a lot. I think in the short, there won't be a lot. I think it will make us more efficient internally as we can, as we're having, like units, same kind of, making the same kind of products in Europe and the U.S., start working together better and make that a little bit more efficient and make the flow of information between the units go a little bit better. I don't think this is a major change. But this, we actually truly are changing the way we operate the business internally. I mean, doing a reorganization. And so we had to, we have to tell everybody that we're doing it and, not a big deal, but I think it's the right deal and just be an, it's a pretty small incremental effect, but it will help us be more efficient moving forward.

[Operator Instructions] And our next question comes from [Deafrest Seamon with Rotthason & Co]

Just when we're thinking about backlog, while the terms have been moving around. Can you help us understand if the implied margin in the backlog is higher or lower versus what we have been doing maybe over last quarter or last couple of quarters?

Yes, I think, like I said, we have most of the, they had a little low margin product, Ag in the backlog. We actually still have a little low margin product in Europe, in our Rivard unit in backlog, which is probably going to take another couple of quarters. In fact that, I mean, because we had some big bookings early last year, we've had cost increases that have impacted those, and some those orders are being fully shipped in the second and the third quarter of this year, and, well, I mean are going to, being shipped for the last 2 quarters and for the next 2 quarters. So that's a little bit. But I would say in general the, like those, that's, our backlog is a higher margin than it was, it revealed in the first quarter. We definitely had, like I say, had some residual Ag products, so I think, I mean, in total, our margin and our backlog will be better in the second and third quarters. And combined with the fact that costs aren't going up quite as much, steel prices are actually coming down. And the fact that, like I say, we did some price, we did, last year was an odd year, usually we do one price increase a year. This, we did actually 2 last year and already one this year. So I think our, the margin and backlog is, we're in better shape than we were, say, 3 or 4 months ago. And heavily focused on the AG. Because I mean the industrial stuff usually has more build to order. And we don't have the big lump orders like we do in Ag or like we did this one in Europe, in Rivard, but, so I mean, that kind of stuff, we respond quicker on pricing, on cost changes. And the majority of the backlog is the Industrial Division.

Okay, very helpful. On the inventories you had touched on in the press release. It sounds like the spend their inventory build, on the queue it's kind of across-the-board, raw materials, work deposits, finished goods and Dutch Power probably has some, it's going to add some inventory, or did add inventory in the quarter. Can you help us understand how that moved over the course of the year? Or do we have any internal target that you're willing to share in terms of where we think that inventory needs to go, either in terms of the absolute dollar basis or inventory turn metric?

Yes, last year, of course, when prices were going up, but our lead times were going up. And so, I mean, I think we found ourselves ordering, sort of in advance, and so we end up with little too much, I think we didn't plan our inventory as well. So that's why, and then when Ag sales fell off a little, this quarter, I mean we actually had the inventory and the backlog to meet demand that didn't fully develop. So we ended up a little more there. I think we just didn't manage that as well as we should have. But yes, I mean we don't, to give out, we have individual targets for units that we think need to get back in line. I mean, just with sort of gross numbers, I mean, I think the next quarter or 2, we need to reduce at least $20 million out of inventory, on an, adjusted for whatever sales increase there are, but I mean, just on today's basis, today saving, I expect to get at least $20 million out in the next quarter or 2.

Okay, that's helpful. And then we've closed the Dutch Power deal. Can you give us an update on the deal pipeline? And maybe help us understand some of the multiples that you seeing?

Yes, the deal pipeline is staying pretty active. I mean, we're seeing lots of stuff, I mean, half of it we're not interested in. It doesn't really fit us and our strategy. But even the things we are, we like actually, I mean, we're all involved around these calls, been in from our side, and spending a lot more time on just analyzing and looking at the deals right now than we typically do. And that's what I say, it always comes down to a case-by-case basis. But I think in general, we're seeing that valuations, kind of, have softened a little bit. And so, yes, I mean, they, not that we're ever paying like these double-digit multiples, but I'm seeing those the last several deals I have actually seen since the first of the year, have been certainly below that. And so, I think that bodes well for us. It will come down to a case-by-case basis, but at least we're getting more to look at, and I think we've done 1 and I'd be, and I think we're seeing a couple other things that are actual, that we're interested in, that are probably actionable, valuations that are actionable. But that will allow us, I mean, our goal is not as much what the multiple is, it's what we think within a couple of years we can have it, that needs to be making the same kind of returns as our organic, as our internal businesses are already. So that's sort of where our target is and so we analyze each case of, excuse me, what we can do between synergies and growth opportunities, excuse me, synergies and growth opportunities. What would, can we get it to where it's making the same kind of returns that our existing businesses already are, within a reasonably short period of time? Because, I mean, since we're sort of mature products in mature markets, I mean, this isn't some 10-year strategy. If we can't get there in the next year or 2, I think you would be disappointed. So that's how we try to evaluate things and come up with multiples. But we're seeing more that are coming in, that are available and sort of within the ranges that we think we can achieve that.

Okay, that's very helpful color. Can you update us on what type of debt-to-EBITDA leverage you are comfortable with at this time, when it comes to do a review?

Gees, we're fairly conservative. I mean, I, we certainly, I mean, all of our borrowing is sort of unsecured and very low covenant, covenant-light and usually 3, 3.5x leverage multiples, we can maintain that. I mean, if you go above that, I think you put a little more restrictions in all like this. But even within that, we can do $300 million or $400 million worth, of that kind of, with our EBITDA, and the EBITDA of what the acquisition target brings, like I said, $300 million, $400 million I'd be glad, I'd love to find something at that range that we could buy. And we would probably even be willing to do more than that, but if we did more than that we'd probably want to do a more of a combination of debt and equity rather than, and all that, just because again, we're fairly conservative thinking. And we want to have it dropped out or hold it so that we're, but just because we do an acquisition doesn't mean that we're out of the acquisition market for a while, because we want to continue to be active in there. So like I said, even with conservative leverage, 3x, 3.5x that gives us more than enough capacity to do anything we're looking at right now.

Once again, helpful color. And then just update on the outlook for share purchases, given the authorization if you need how you balance potential share repurchases with potential deals.

Well, I think the share repurchases are fairly, like I say, we're not trying to do a big share repurchase, we're just trying to avoid the steady creep in our stock due to other things like stock options and so, we're not doing a lot. I don't see that being affected since the amount we're doing, I mean, the total amount we said we would buy was over a multiyear period. So in any one year, we're not doing a lot and I don't see that is going to be, that would be affected by acquisitions or any other thing. I mean, we still raised our dividend, even with the stock repurchase. I don't see that being affected by anything else we're doing. Like I say, we're very conservatively financed and I mean, a conservative financial structure, and like I said, nothing we're going to do is going to, either way, would inhibit us from doing that program.

[Operator Instructions] And our next question will come from Joe Mondillo with Sidoti & Company.

I was wondering what the backlog looks like organically, so excluding Dutch Power percentage-wise?

I think I said that 2.6% year-over-year. Organically.

Organically, the backlog was up another 2.6%, with Dutch Power it was up 8.4%.

Yes, 8.4%

Okay. And where, could you just walk us through maybe some of the strengths and weaknesses within the backlog? Because that does sort of project a slowing from, I think it was up 10% at the end of the fourth quarter?

You've got slowing parts, Ag. And Industrial was up, Ag was down a little bit. Actually, Europe without Dutch Power was off a little. But I mean, I know in Europe it was against a very strong comparables last year. So I think I said, backlog is important, but as we said, in some ways we don't want it to get too big. Because like I say, if it gets too far out, we like to keep our deliveries fairly reasonable. So I would say, yes, I like little more backlog down in Ag. Industrial is more than a healthy level, and I think Europe is at a reasonable level for, been able to maintain good lead times. So I would, like to say is that, I think, and as I said last year's first quarter, somebody was a little bit off in the sales, it was actually very strong in bookings. So I think, backlog to me is at a healthy level other than, I would like to see a little bit more in Ag.

And backlog is only about a quarter's worth of revenue, right? So it's not, you've got a lot of bookings in the quarter...

It's a little bit more than that because you remember about 20% of our sales are aftermarket parts and those don't really flow through the backlog number.

Right, okay, good point, okay, all right. And then at the European segment, I was surprised to see certainly beat my expectations on the growth, excluding currency. I know you had some supplier constraint issues at the end of last year and some issues over there. Was part of the growth some timing because of supplier constraints and any other issues that you were seeing over in that French operations or even in the [indiscernible] maybe? Was that, things were just a timing issue and this just pushed in the first quarter? And then going forward, not to expect that kind of growth going forward. Can you just talk about, why that was so strong?

Well, no. The issues we were more in the third quarter, and not, like I said, I think we had solved most of those by the fourth quarter. Like I just said, in France, we still got a little bit of low margin backlog in one of our units. But yes, no, I think I mean we've been helped in Europe by some new product introductions. I mentioned the ROBOCUT at our McConnel unit in England. And so I think our UK group actually has done quite nicely. It's a little bit of slowing I think in the overall European economy, more on the continent, I think. The UK, we still got this Brexit overhang and I think part of that is, actually the orders have been coming pretty smoothly even with Brexit, but they're not coming in advance. I mean people aren't, they're ordering kind of day-to-day stuff pretty regularly, but they're not doing some of big preseason orders like maybe they've done in years past because they don't want some, they don't mind ordering something that's going to be delivered next month, they don't want to order something that's going to be delivered in 6 months when they don't know what the tariff rate between England and France are going to be and this type of stuff. So that's still a bit of an overhang and I'm kind of disappointed. We just keeping kicking the can down the road. And I think they had this big deadline at the end of March and then there was one in the middle of April, and now its October, I forget, but I'm kind of losing track of these important deadlines. So all in all, like I say, I think our UK group is certainly doing better, but our French group is actually, like I say, is actually up a little too, even though they got a little bit of some low margin backlog. And I think, and I'm real pleased with Dutch Power. Like I say, we've been kind of disappointed at the lack of acquisition activity in Europe for the last couple of years. But this is a good one, it really fits nicely with us. And so I think we'll be able to something with that throughout some of the rest of our distribution. So yes, actually Europe is holding up reasonably well for us. And like I say, it would be a little bit more evident if it wasn't for currency.

I was just wondering what your sort of outlook related to investing in the rental fleet? And could you talk about sort of utilization rates and sort of demand that you're seeing overall there?

I mean our demand and utilization rates are holding up at or above our expectations at our units. We got 2 new, the 2 is a little bit, the weakest are the 2 newest because we're still, we're just building up fleet there. We added 2 branches there last year, and we're, due to their constraints on production, we actually have not fully staffed those from a product point of view. So like I say, we still have some internally pent up demand to get our, to get our equipment at, all of our units, especially the 2 newer ones. So that is continuing to drive that and utilization rates are holding up at or above our expectations. And we'll probably open another branch as well this year as we continue to, which will, like I say, will consume product just in setting up another branch too. So that seems to be progressing at a healthy pace.

Joe, we also expect to be higher than we are at the end of Q1. Our expectations were at $49 million, we want to grow it more than that this year.

That's the equipment in the rental fleet.

And at this time, there are no further questions in the queue. So I would like to turn the conference back over to management for closing remarks.

All right. Well, again thank you all very much for joining us today. We're glad to be off to a decent start for 2019. As always, a few challenges, but I think we feel good about the outlook for the company. And again, thank you for joining us, and we look forward to speaking with you on our second quarter conference call in August. Have a good day, thank you.

Thank you, ladies and gentlemen, this concludes today's teleconference and you may now disconnect. Please enjoy the rest of your day.