Good day, and welcome to the Alamo Group Fourth Quarter 2021 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Edward Rizzuti, Vice President, General Counsel and Secretary. Please go ahead sir.

Thank you. 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 212-827-3746, 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 1-888-203-1112 with passcode 5363300. 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 Jeff Leonard, President and Chief Executive Officer; Richard Wehrle, Executive Vice President, Chief Financial Officer and Treasurer; and Dan Malon, 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'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, 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. Richard will begin our call with a review of our financial results for the fourth quarter and year-end 2021. I will then provide more comments on the results. Following our formal remarks, we look forward to taking your questions. So, Richard, please go ahead.

Thanks, Jeff. Good morning, everyone. We appreciate you joining us to hear about our fourth quarter and year end results. One quick reminder before we start and that's the change that we announced in July of 2021, which realize the previous two divisions agricultural and industrial into the vegetation management and industrial equipment divisions. This change took effect at the beginning of the fourth quarter 2021. In the financial information and period-to-period comparisons for 2021 and 2020 are based on the two segments. We delivered record results for the full year 2021 driven by a robust demand for our products and a very challenging operating environment. Fourth quarter net sales for 2021 came in at $337.2 million, an increase of 17% over $288.6 million in the same period last year. Gross margin in the quarter improved compared to the fourth quarter of 2020 and specific price actions we took during 2021 began to offset costs increases we incurred late 2020 and throughout 2021. Net income for the fourth quarter of 2021 was $19.2 million or $1.62 per share on a diluted basis, an increase of 108% versus net income of 9.3 million or $0.78 per diluted share for the fourth quarter of 2020. Vegetation Management division had a solid fourth quarter of 2021 to cap off an excellent performance for the year. Fourth quarter net sales were 204.3 million, an increase of 27% compared to 160.4 million for the fourth quarter of 2020. The increase is primarily due to strong retail demand for forestry, tree care and mowing products and lower dealer inventories. Income from operations for the fourth quarter of 2021 was 18.1 billion, up 212% versus $5.8 million for the same period of 2021. Industrial Equipment division net sales in the fourth quarter of 2021 were $132.8 billion,…

Thank you. [Operator Instructions] We'll take our first question from Chris Moore at CJS Securities.

Good morning guys. Thanks for taking a few questions.

Hi Chris.

Good morning Chris.

Good morning. You talked about a bunch of the challenges in Q4 chassis availability, engine shortage, et cetera, can you maybe just ballpark how much additional revenue you could have recognized in Q4 without some of those challenges?

I don't know that I would want to give you a discreet number, Chris, but it was significant for sure. We had some pretty healthy quantities of our excavators as well as vacuum trucks parked along the fence, built and waiting for one component or another. So definitely significant.

Got it. When we look at revenue up 17% in Q4, can you maybe just kind of give a rough breakdown between price and volume?

I think it varies a lot by the two divisions, Chris. I mean, if you look at vegetation management, theirs was a combination of price and volume, but mostly volume, because what had happened with our forestry and tree care side, their supply chain was very disrupted in Q3 and we finally started to get some meaningful supplies, particularly of diesel engines, the big engines we need for our big poultry chippers and our grinders flowing through into Q4, which help them a lot. On the traditional Ag side of that divisions operations, probably a little bit more price, probably 50/50 to give you a rough estimate overall. And on the governmental mowing side, it's really a combination of both again, it was very mixed. On the governmental side, both in vegetation management and in our industrial equipment division. It's a very important distinction you need to understand in the Ag side of our business, in the Ag market because we have long established relationships with many of our dealers, we were actually able to go and renegotiate price on orders and backlog that had not yet been retailed onto end users. That helped that division along a great deal. On the governmental side, both in governmental mowing, which is part of vegetation management, but also in our vacuum trucks and sweepers. Once you have a contract with the governmental, it's fixed. It takes an act of a city council or a state board to approve those purchases in the first place, and at that point they're fixed. So there's not as much opportunity to reprice on the governmental side. And the governmental side came into the quarter with a healthy back lot to begin with, which is largely fixed. So I mean, it's a mix, but certainly in vegetation management it was probably more volume and a little bit less price and industrial equipment, it was mostly price.

Got it very helpful. Makes sense. I know you don't guide in terms of ’22 revenue, but when you look at ’22, just in terms of that volume versus price discussion, do you see kind of one of them being the most important driver?

I think that's going to vary a lot throughout the year, Chris, is the answer I would give to you. I mentioned the drop in steel prices in Q4, a sharp drop, which creates an additional little bit of a tailwind, although after that will eventually get priced into our inventory as well. So that's a big benefit for us. On the volume side, the first half for industrial equipment is still going to be constrained by supply chain. This truck chassis situation is just not improving. As I said, we met with all the big truck OEMs and we're hopeful that they could give us some upside here at least pointing to the back half of the year give us some commitment for increased volumes which so far they're not prepared to make meaningful commitments on. Even on 2023, we pressed hard to get some better indicators for 2023 and I think all of them are remaining cautious and you can go out, for example, and look at the Daimler Trucks Investor Day presentations and hear what their Chairman and their checkers are saying about that just to give yourself a good cross check. So I think from a revenue standpoint, vegetation management is in a real nice position. The fourth quarter can be seasonally softer, but with the backlog they have the seasonality gets slushed out of the business pretty consistently so I think they're sitting in a pretty nice position. Industrial equipment is the same way. I think industrial equipment will accelerate a little bit more in first quarter and notably in second from where they were and I'm hopeful and I said hopeful that their revenue bill will start to improve if supply chain improves? It's not all truck chassis, Chris, I mean, it's things like…

Thanks very much, Jeff. I guess, the last lesson for me. Operating margins were 8.8% in 2021. What would have to happen to get to the 10% level in 2022, just things kind of normalizing on the supply chain side in the second half of the year? Could that be there…?

Yes. Let me comment and then I'll let Richard make some comments as well. He's itching to get a word in here for me. If you look particularly at our industrial equipment division, they're just -- their operations were very heavily disrupted. So our manufacturing, for instance, were significantly higher than what we expect to see in that division. And, Chris, it's a simple thing, you start building a product, and then you realize a part you need to complete, it isn't available. So you stop working on that product, and you start working on something else. And what I always refer to is the manufacturing cadence that we rely on for continuous improvement and to make sure that our labor costs remain in line and so on, get really disruptive in that period. So for us to get back to 10% margin, we just need the supply chain to settle down a little bit. And we'll be right there. Because the differences in the variances and we've been there before and we'll get there again. And you will see us very shortly start to set some more aspirational targets here for more income for this company. So having said that, I'll turn it back over to Richard.

Chris, a couple of things, we're pleased to see the steel prices are down. But a lot of our purchase components that use steel, we're not seeing that drop yet. That's what would really be helpful for us. Because obviously, the materials and products that we make, it's not just steel, it's everything else that goes along with it. So if we could see some improvement as well from that, that would be awesome. I think the other thing that's probably a big cautionary through as we go forward is freight. There's a lot of volatility in freight, both incoming freight and outgoing freight, the shortage of drivers and just a line having trucks lined up to be able to make deliveries for us is that that's helps. It's -- the level where we're at now. It's like a herd of -- where we used to be. It was very easy to analyst somewhat of a struggle almost every month that we go through. So we could get some stability, that that would be something -- that would be great.

Got it. Thank you, guys. That was very helpful. I'll jump back in line.

Thanks, Chris.

We go next to Mike Shlisky, D.A. Davidson. Your line is open. Please go ahead.

Yes. Hey, good morning, guys.

Good morning.

Good morning,. Mike.

You know, I want to start off real quickly, maybe asking about the very near-term outlook here. It sounds like you've had Omicron issues – were in the end of the fourth and part of the first like most people out there. Most of companies out there? And the supply chain is still a challenge. Is it possible that Q1 looks a lot like Q4 in a really quite a few ways as far as the [indiscernible] concerned.

Yeah, I think broadly so. Mike. I think the one thing that will change is having snow removal won't be so much regret. You know, the early snows in the winter helped us a lot from a parts and service point of view. And we'll continue to have that a little bit of improvement quarter-over-quarter. I know Dan Malone wants to get a word in here about supply chain. So Dan, go ahead.

Yeah, so one help in the first quarter that we'll have is the fact that remember, we lacked the steel price of -- the mill price started dropping in the fourth quarter. Our cost really didn't -- for steel really didn't start dropping in the fourth quarter because we kind of lag that. So we'll start getting some of that benefit of lower steel prices here in the first quarter. So that will be one, you know, hopefully significantly -- a significant difference between first and fourth.

Got you. So I know there ss some chances for some personalized improvement. It sounds like very broadly speaking, that's great to hear. And speaking of the snow business as well, I know you had a good start, but if folks have not been able to get their plow at this point in the season, or snow covered in general or the pressure whatever, have you had any people canceling and same with MSU or folks trying to hold on and get what they can?

No, they're pretty much holding on Mike. In fact our backlog was nicely up in snow removal significantly. So which would give me a lot of encouragement that we actually continue to receive orders and pretty nice pace, and we really didn't have any canceled. I mean, the problem Mike is that this is an industry wide issue. These shortages of things like engines and chassis is there and they're not discriminatory, they affect everybody. And I think the OEMs that produce those kinds of components are being very careful not to show any favoritism among equipment suppliers like us, because they know they need to be with us for the long-term. You know, we're doing our best to make sure that that's the case, obviously, but it's affecting everybody in the industry. What's different for us in our snowblower business is that as a very distinctive business,. We build a batch of snowblowers for the winter season. We plan it every year. We increase or decrease based on what we think is likely to happen. And this year that just got really hurt badly because we didn't receive the engines we were expecting to get it.

I think one thing to add to that Mike is when we have a really good season and so that really bodes well for the following year as well for new orders to come in. So –

Yeah, yeah. All right. That's that maybe two more on the other side. Can you just talk quickly on the Dixie chopper Brand and you [indiscernible] in general. I've seen some increased marketing activity assembly of some of your other competitors across zero terms and elsewhere. I'm curious if you own this for a while now, in case you had any changes or additions to the marketing plan for that brand in 2020.

We actually have,. I had a call it notice our Dixie chopper brand at the Daytona 500 Just a couple of days ago. So we are taking steps to raise our profile there might be -- you may not have seen it yet. But yes, it's happening and it's happening right across the industry. And Dixie is just beginning to roll down their first prototypes that are easy, zero turns which got a really good reception and we were impressed that how the dealers embraced that with open arms. The Dixie chopper dealer guys run on adrenaline there they always have been, that's the nature of that brand. And so we didn't know how they would take to an electric CT. But they were extremely enthusiastic about and we got a really nice reception to that product along the way. So now we are definitely taking steps to raise our marketing profile with the Dixie chopper brand.

Got it. Got it. And then the other question I had on vegetation on the commodity prices. USDA put out the numbers yesterday, cow prices up 12% this year, corn prices down but still $4, $5 a bushel. Do you feel that these kind of price levels that they're putting out today are conducive to more orders in 2022, even if your best brother so for you can deliver until in some cases 2023?

Yeah. I think so Mike. But you always have to be remember that balance by increased input costs for things like fertilizer along the way. So I mean, it's not all sunshine and roses for producers of commodities along the way. But no one drive, really drives our ag business. And the most important thing I can say to you is the dealer inventories remain really low. So there's no pressure at all on that business yet, because everything that's being shipped is being retailed immediately. Do I expect ag to be strong in 2022 as it was in 2022 -- 2021? Probably not. I think 2021 was a really extraordinary year in that market. But I think it's going to be another good year for sure. And I again, so I think that part of our business will do well again this year.

Got it guys. I’ll hop back in queue. Thank you.

Thanks, Mike.

[Operator Instructions] We'll go next to Greg Burns with Sidoti & Company. Your line is open please go ahead.

Morning. Are you going to be putting out historical financials for the new reporting segments?

Yes, we will. As we move into each of these quarters, Greg, first, second third, you'll see that the new setup that way for both vegetation management and industrial division.

Okay. So we're just going to wait for the quarterly reports. No, nothing correct?

Correct.

Okay. And then in terms of pricing, looking at the backlog and how it stands now, how many quarters until you are seeing the full benefit of the current pricing structure flow through?

Well, I think in vegetation management, we're already seeing some of it flow through In Q4, and then the margins were really nice and that I think you noted in your report. On industrial equipment, I think it'll start to flow out probably at the back half of Q1 this year. Most of our really troubled contracts were in things like snowplows where the price is fixed and steel has gone up so much in the earlier quarters of 2020 -- 2021. And so I think that better price backlog will start to flow through. I'm optimistic the industrial equipment margins are going to take a nice improvement for the next couple of quarters. And that's my expectation to people.

Okay. Great. And then I'm fishing capacity to produce the demand you're seeing? Do you feel like you need to add capacity? Where are you in terms of your capacity, utilization and ability to ramp up?

Okay. In our larger key factories, we are not at all capacity constrained in terms of footprint, people are always an issue. Now the good news as our employee turnover actually picked down a little bit in Q4, for the first time and several quarters, we were happy about that. We've obviously had to take some steps to make sure that happened along the way. We have a couple of plant expansions already underway in several places, notably in Brazil, and I wanted to highlight Brazil, because we've been investing there for a number of years. And we're really finally to get some nice traction down there. So we're putting an investment on that facilities expense footprint now, and may actually acquire some additional profit property to go a little bit farther there with it. So no, I don't feel like we're significantly capacity constrained. The one area where we have been struggling with capacity is in our land clearing business, which came along with the acquisition of Morbark. And as I mentioned in my remarks, we're setting up a couple of additional assembly lines and a couple of different plants to really take a big step up or capacity there. That's been a nice business for us. And the demand has been very steady over the last two years in that space. So you'll see us shifting some production amongst our facilities to debottleneck, those that are producing those products in addition to setting up some additional assembly lines. So we're honest, and we don't need more bricks-and-mortars to clear answer, from a bricks-and-mortars point of view. We're fine.

Okay, great. Thank you.

Over to, Mike Shlisky with D.A. Davidson. Your line is open. Please go ahead.

Oh, hey, thanks for taking my call question here. I'm also, I'd be curious a little bit about the recent infrastructure bill that was that was passed. And you started seeing any orders related to funds flowing for natural yet, especially in excavators and certain kinds of more equipment, or is that still something that's going to be coming in the future?

Mike, it's hard for me to give you a discreet answer for that. Although, I can tell you are extraordinary excavator orders were really nice and Q4 and unusual for Q4. So I think that's a bit of an indicator to answer your question. Secondly, is, as I've mentioned a couple of times, in other places, the states and municipalities are in pretty good shape, states are in great shape as they go into 2022. And I believe that we're going to see really nice up-ticks in our governmental business in terms of orders, compared to 2021. Because the states particularly are flush right now. They're in really good shape. And some of that is the infrastructure bill that you're referring to like, as a negative is the one that I've talked to you about a few times in the past. And that is, we're pouring gasoline onto a bonfire in terms of the supply chain. So the additional orders and the additional demand just makes our supply chain situation get more complex, because people like cat and deer and the big guys that are producing yellow iron, they need as much as they can get because of the infrastructure bill. So, the both positive and negative impacts I would say.

Got it. Thanks so much, guys. I'll leave it there.

Thanks Mike.

There is no else holding, I'll turn the conference back to management for any additional or closing comments.

Okay. That concludes our remarks on the call. We look forward to speaking to you at our next quarterly call. Appreciate you all joining us today. Our next call will take place in May.

Ladies and gentlemen, we thank you for your participation. You may disconnect at this time. And have a great day.