Alamo Group Inc.
Q4 2020 Earnings Call Transcript

Published: 27 Feb 2021

[Operator:]

Good day, and welcome to the Alamo Group Inc. Fourth Quarter 2020 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ed Rizzuti, Vice President, General Counsel and Secretary. Please go ahead, sir.

[Ed Rizzuti:]

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 [phone], 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 [phone], with the passcode 6872067. Additionally, the call is being webcast on the company’s website at www.almo-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’ll open up the line for your questions.

[Ron Robinson:]

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 fourth quarter and the year-end 2020. And I will then provide a few more comments on these results. And certainly following our formal remarks, we look forward to taking your questions. So Dan, please go ahead.

[Dan Malone:]

Thank you, Ron. The key takeaways from our fourth quarter and full year 2020 results are

[Ron Robinson:]

Thank you, Dan. And I think we’re all sort of glad to see 2020 come to an end. But I’m certainly pleased and proud of the way our company performed, given the many ongoing challenges we all faced during the year. We’re particularly pleased to see that the momentum, which has been building for the last several quarters, really since the slowness in the end of this -- in the second quarter and -- but it’s built in the third, continued in the fourth. And with strong bookings and a record backlog at the end of the year, and I’m pleased that this trend has continued even into the first quarter of 2021, with our backlog continuing to grow even further, and now it’s over $400 million. However, there were also issues related to the pandemic that impacted our operations in the fourth quarter. These included sporadic cases of COVID, that while not large and not at a lot of locations, always had a follow-on effect. But like you could have one person that went home sick. And then suddenly, we closed down the whole department for several days, while we clean it and get things better and ready to make sure everybody else in there is okay.

[Operator:]

We’ll go first to Chris Moore at CJS Securities.

[Chris Moore:]

Ron, you had just mentioned that Q1 could be a little softer. I’m just trying to reconcile that with the backlog that’s really building, just trying to get a sense as to, is that -- most of those deliveries are a couple of quarters out? Or how does that match up against some of the COVID challenges and things like that you’re seeing in Q1?

[Ron Robinson:]

Yes. It’s not that the deliveries are out, it’s just that with a few COVID issues and a few supply chain issues, we think it’s like that, that’s going to dampen results, sort of like -- a little bit like it did in the fourth quarter. And that -- like I said, I mean, it’s not -- the backlog’s longer term. I mean we would like to actually reduce some of this backlog a little quicker, but I think just some of these operational challenges, supply chain, what we’re working with our vendors, when we’re going to be getting stuff, like I said, chassis and tractor deliveries, have sort of doubled. And so I mean, it’s really just getting geared up that we can gear up production that we can meet this demand. So I mean, like I say, backlog, in some cases, almost a little bit too strong -- a little stronger than I would like. But I’m not too worried, like I say, that any of it’s at risk because everybody’s lead times are pretty well getting stretched a little bit right now, and it’s just taking a little bit longer to gear up to be able to meet this demand.

[Chris Moore:]

Got it. And you had said it’s more skewed towards the ag and Morbark?

[Ron Robinson:]

No, no. I think it’s pretty well broad-based. All of our units are being affected somewhat similarly. I mean I think probably the ag’s being a little bit more affected by some of the port issues. I mean we’ve got a lot of product on the ocean lake to be -- like gearboxes, drivelines that we source internationally got a little bit more of that sitting on the ocean than we would like right now with it having in our plants, but that’s affecting ag a little bit more the port backup. But it’s fairly broad-based. It was -- like I said, it’s not big lot. It’s just -- like I said, all it takes us one item to keep you from shipping the whole like being able to complete a piece of equipment to ship.

[Chris Moore:]

Got it. I appreciate that. So parts with much higher gross margins made up about 21.5% of revenue in fiscal ‘20 from the COVID impact. First, I think 18.5% the last couple years, do you expect that to trend back towards the high teens in ‘21?

[Dan Malone:]

That -- there’s 2 things going on there, one of which is we acquired Morbark and Morbark, just the nature of the equipment, there’s just a much higher level of funds than what was the company average prior to the acquisition. So that will stay. The part that may revert back is when whole good equipment sales recover, then the percentage of parts to total sales will come down a little bit because whole goods will be increasing. So -- but we will be operating at higher than 18.5% because of Morbark. So it may not be 21.2%, maybe it’s more in the vicinity of 20%.

[Operator:]

We’ll go next to Mike Shlisky at Colliers Securities.

[Mike Shlisky:]

Speaking of mix, you’re mentioning that Morbark has been doing quite well from an order and backlog standpoint. If that kind of holds with how shipments go going forward, is there a good gross margin or operating profit mix coming up in the industrial group? Those are often high-margin products, is that going to stick in 2021?

[Richard Wehrle:]

Mike, I think -- this is Richard. I think what Ron was saying is, I think we’re seeing and Dan put in his comments, that forestry and tree care, which is the Morbark piece, actually, the orders are picked up on that area.

[Ron Robinson:]

But as we said, going into -- when we bought Morbark, their margins actually were a little bit higher than our margins -- our average margins and so -- and that has held true. So I mean, yes, we think, plus with some of the synergies, we’re already getting from them, we think that’s certainly the case that the margins will be good. Like I said, I mean, their backlog has grown nicely. Like they need -- we need to gear up there a little bit better because they were like some of the ones that were a little bit short on shipments in December as they were one of the ones that I mentioned, like we had 1 or -- couple cases of COVID in the shipping department and the whole shipping department was down for a week.

[Dan Malone:]

So their EBITDA margins are a lot higher than the -- or little higher than the company average. They’re -- if you look at their whole good equipment margins, they’re about what ours are across the company, but they have a richer mix of part sales. And they have a little bit better relationship of margin to the SG&A component. So that’s what’s drive -- so they -- at an EBITDA level, they’re going to drive a higher EBITDA margin than the average Alamo Group company.

[Richard Wehrle:]

Mike, just to add to that, too, just so that you know that the backlog for industrial is solid, but it’s just we have weird mixes in there right now. As Ron was stating before, it’s just -- we have higher forestry and tree care, but you have other areas like snow and some of the other areas -- some of the other business units themselves are probably below pandemic levels.

[Richard Wehrle:]

But all of them are improving now. I mean they’re all above -- at the end of the year above where they were like in the midyear.

[Mike Shlisky:]

Of course, sure. That makes sense. And that actually bring up my other question about the synergies you were getting at Morbark. Can you give us some sense as to how that progressed during 2020? And is there a lot left to go in 2021?

[Ron Robinson:]

There’s still more to go. And really, to truly milk the initiatives that we complete. We -- I mean, yes, like we got some converted to our operating system went live. It was -- we were a little -- several months late in the process just because restrictions on travel and people working remotely, made it a little bit more challenging, but that’s completed. We also -- most of the purchasing initiatives we identified for them. We have -- those are now in place and exactly where we thought they would be but we haven’t gotten the full benefit because they’ve been purchasing less, with sales being off and they had to work down in -- they’ve been working down inventory. So it’s -- now that we’re starting to -- now their backlogs have really grown and we’re starting to purchase more for them, we’re getting those benefits, but like I say -- so they’ll start to ramp up nicely. We also completed 1 plant consolidation there as well. They had 3 plants, and we closed the smallest one and is actually ahead of schedule and moved it into their -- it was the smallest of the 3 up in Canada and moved it into their other 2. And so yes, I mean, I think we still got more initiatives to go, and we still get to get more money from the initiatives we’ve already done to come, but we’re very pleased that, that’s pretty well been on track.

[Richard Wehrle:]

Probably the 1 that we didn’t get accomplished this year because of COVID was getting Morbark greater exposure in international sales. We didn’t get that opportunity. We just couldn’t get out and actually try to show that product internationally. So that’s, again, really want to try to do this year, if we can.

[Ron Robinson:]

In fact, we still don’t have anybody allowed to travel internationally.

[Richard Wehrle:]

Yes.

[Mike Shlisky:]

Got you. Can we turn to maybe 0 turns and how that’s going? Anything you can tell us about color at Dixie Chopper has been going and 0 turns over a push out?

[Ron Robinson:]

Yes. We haven’t disclosed any numbers publicly, specific numbers, but I mean, we can say that the Dixie Chopper, the acquisition has really been paying off. It really has grown quite a bit since we acquired it, and it’s really helping our agricultural division numbers as well.

[Richard Wehrle:]

It met our expectations for this past year.

[Ron Robinson:]

Yes. We probably exceeded it.

[Dan Malone:]

Exceeded it.

[Ron Robinson:]

Yes. Given the COVID situation, it exceeded them. And fortunately, that one, in 2019, we got that plant. When we bought that, we didn’t buy the facilities, and we moved it into our facility, and we got all that done at the end of 2019. So everything -- that consolidation was done but we didn’t really start getting the benefits until, I’d say, 2020. And so it’s done well for us in 2020. It’s small numbers, but very nice contributor.

[Richard Wehrle:]

High payback to the small amount we have to buy, pay for it.

[Mike Shlisky:]

But the overall strength in that and the order and backlog, you’re seeing going forward is not strictly a 0 turn-based. It’s more broad-based than that.

[Richard Wehrle:]

No, no. It’s across the board. Bush Hog is doing really well. We’re even seeing order rates pick up in Europe. So yes, it’s across the board.

[Ron Robinson:]

Across, yes, Europe, which has been lagging, is now doing, like I say, their order rate has picked up. Brazil’s has, small potatoes for us, but it’s picked up nicely. And certainly, all of our North American units have benefited as well. So our ag backlog is where we’ve had the most growth in backlog.

[Mike Shlisky:]

Got it. One last one for me. I did notice that your leverage was down quite a bit from this time last year, even like cut in half. That’s sounds very, I mean, I thought that was a very strong result. Does that mean maybe it’s time to start looking at some other sizable deals that might be out there? And can you give us some sense as to the M&A market in general for you?

[Ron Robinson:]

Yes. Certainly, the financial, the M&A market is coming back strong. I think it’s lagging a little in industrials because like industrials, I mean, in my case, I think due diligence, hard to do due diligence virtually. You can do it virtually to a point, but you really need to see, feel and touch. And I think valuations are going to be a bit of a challenge because I mean, it seems like some of the deals I’m seeing people are sort of just assuming COVID’s over with and never happened. And I’m kind of, I’m more and more conservative and not quite there yet. But as to your point, yes, I think in the second half of this year, we will be actively starting to look at opportunities. And I think there’s going to be a number of opportunities come down the pike starting, there were people who we want to do stuff last year, they got put on hold, and I think they’re starting to get geared up again. And so yes, I think we will start looking and, but I think it could be a challenging environment to get a deal done in the short-term for us.

[Mike Shlisky:]

Got it. I guess, just don’t get it topped by a stack, which should be in good shape. I’ll leave it there.

[Ron Robinson:]

Yes. That’s right. I mean there’s a lot of money out there chasing deals. And so I mean, like I say, we care what we pay for stuff, and we can’t get on that bandwagon.

[Operator:]

We’ll go next to Greg Burns at Sidoti & Company.

[Greg Burns:]

When I look at the puts and takes between some of the maybe positive mix shifts for next year versus some of maybe the inflationary pressures and maybe COVID efficiencies, do you think that you can expand margins in 2024 from where you ended 2020?

[Ron Robinson:]

And you sort of broke up, but I think you’re talking about can we expand margins? Or what’s the margin impact due to inflationary pressures? You are right. And there certainly is more inflation in our cost these days. And, but I mean, I think we have shown a pretty good ability. I mean we took some of that into consideration. We saw it coming and put it into some of our pricing increases. We also have, in some cases, even put in selective surcharges like fuel, like steel surcharges, energy surcharges. So yes, there will be a little impact on the first quarter results. I think more so just because some of the backlog that we had since we have a pretty good-sized backlog, some of that didn’t have all the inflation built into it that we would have liked. But I think over, as the year wears on, that will be, I think you will see that we’ll get the full benefits of our cost increases, our surcharges and all and new backlog. New backlog has already taken into account some of these inflationary pressures. So I’d say maybe a little impact in the first quarter, but I think as the year wears on, we’ll take, you’ll see our margins won’t be affected by these inflationary pressures. In fact, I think, historically, we’ve shown we can usually take advantage of these situations and hold on to our margins. And so yes, I’m okay. I feel good about that. Like I said, as always, when there’s a big increase in a short period of time, like steel has done lately, it’s hard to react real quick. But I think we have shown over the years, that we do react and maybe a little effect. But, during the course of the year, we should be fine.

[Richard Wehrle:]

And I think that once our volumes recover and we get past some of these COVID pandemic impacts that we, obviously, the bigger backlog should start driving some favorable operating leverage into our margins as well.

[Greg Burns:]

Okay. Makes sense. And then when you think about the demand in the industrial segment. When you look at the relief and the support that you might be seeing for state and local governments, how do you see that potentially benefiting Alamo Group?

[Ron Robinson:]

Well, yes, it’s interesting. State and local governments, they all are having pressures. I’ve been surprised the states haven’t usually, haven’t been hurt as much as the municipal government budgets have, which I’ve been surprised. I mean I think state budgets, in general, has held up a little bit better than I thought. Some of them were in a little bit better shape going into this. And so it was interesting. Early on in the pandemic, I think our bookings were really soft as much affected by governmental operational challenges in that they were trying to work remotely. They were having offices closed. And even though the equipment in the field was staying fairly busy, on a fairly regular basis, the office people had a few more challenges. So I think we’re seeing them. They’re now functioning, they were functioning much better by midyear, and that’s when orders started to pick back up again and things have picked up. So I think the equipment generally is being used. We had a little slow start to like the snow season we were saying, the backlog is there because, why because this year? This is year is lot of snow know, but last year, there wasn’t much, so which meant the orders going into weren’t bad, but we’re already starting to see our spare parts orders pick up since there’s been heavy snows sort of in February around the country, and that we think the orders are really strong going into next year. So some of that’s, like I said, seasonal, some of that’s government and then operational process. By and large, they’re operating pretty good. Their budgets are still though very tight and, like I say, they’re probably in a little bit better shape than I thought. And the good news is our equipment is being used regularly and being worn out on a fairly regular basis. So we’re seeing, I think that bodes well for us, even if their budgets stay tight. I’m glad their budgets aren’t quite as bad as I thought they were. And I’m glad they’re using our equipment on a pretty regular basis these days.

[Operator:]

We’ll take a follow-up from Mike Shlisky at Colliers Securities.

[Mike Shlisky:]

One thing that’s not been discussed, Ron, has been that your upcoming retirement. Congrats, first of all. I guess I wanted to see, first, do we have one more quarter of your left here? And then how the search is going? Have you heard anything from the Board on that? And also more broadly, what kind of person do you think we’re looking at here to take over the shoes of a person probably cannot be cloned, Ron Robinson?

[Ron Robinson:]

Very kind of you. But no, I mean, this is a process that even though -- that we’ve been thinking about and plan doing succession planning for a number of years lately, and I mean I know I’m not going to be here forever. And -- but I think like probably we’ll come to a conclusion with the process in the next month or so. And I’ll be ready to make announcements, and then there will be a smooth and orderly transition following that. I think that I can say that mostly, we’re looking internally. And so I think people who know us, know what we do, know how we do it and have sort of bought into our philosophy and strategy. So I think you will see not a lot of changes and a fairly smooth transition. And then as you know, it’s not like I’m walking out the door. I mean I’m still be on the Board, and following this -- and still be involved and have a very invested interest in making sure the Alamo Group is very successful. So I feel very comfortable with -- that the Board is doing a very excellent, methodical and spending a lot of time in the process to make sure it is. But we’re all dedicated to making sure it’s a good, smooth, orderly transition. And I feel very good about the direction of the company. And I think it will go very smooth even without me.

[Operator:]

And that does conclude today’s question-and-answer session. I’ll turn the conference back over to management for any closing remarks.

[Ron Robinson:]

Okay. Well, again, we thank you for joining us today. We -- and your questions and comments and your support of us is, like I say, these are still challenging times, but we’re very optimistic about where we are. And we look forward to speaking with you on our 2021 first quarter results in May. Thank you much, and have a good day.

[Operator:]

And that does conclude today’s conference. Again, thank you for your participation.