ALG
#Good day, ladies and gentlemen.
Welcome to Alamo Group Fourth Quarter and Fiscal Year 2017 Earnings Conference Call.
(Operator Instructions) This conference is being recorded today, Friday, March 2, 2018.
I will now turn the conference over to Mr.
Bob <UNK>, Vice President of Alamo Group.
Please go ahead, Mr.
<UNK>.
Thank you, and good morning, everyone.
By now, you should have 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 1 hour after the call and run for 1 week.
The replay can be accessed by dialing 1 (888) 203-1112, with the passcode 788-3065.
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 <UNK>, President and Chief Executive Officer; <UNK> <UNK>, Executive Vice President and Chief Financial Officer; <UNK> <UNK>, Vice President and Corporate Controller; and Ed Rizzuti, Vice President and General Counsel.
Management will make some opening remarks, and then we'll open the line for your questions.
During the call today, management may reference certain non-GAAP numbers in their remarks.
Reconciliation of these non-GAAP results to applicable GAAP numbers are included in the attachments to our 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 risk 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 date.
I would now like to introduce Ron.
Ron, please go ahead.
Thank you, Bob.
And we want to thank all of you for joining us here today.
<UNK> <UNK>, our CFO, will begin our call with a review of our financial results for the fourth quarter and fiscal year 2017.
I will then provide a few comments on the quarter and year-end results.
And then following our formal remarks, we look forward to taking your questions.
So <UNK>, please go ahead.
Thank you, Ron.
Alamo Group's fourth quarter and full year 2017 results again set company sales and operating income records.
Except for onetime charges related to U.S. tax reform, net income and earnings per share also would have been at all-time record levels.
In the fourth quarter of 2017, we recorded as additional income tax expense a net $10.2 million onetime charge related to the Tax Cuts and Jobs Act.
This consisted of $13.1 million of additional income tax expense related to the mandatory deemed repatriation of foreign earnings, which is payable over an 8-year period, partially offset by the revaluation of net deferred tax assets and liabilities due to the lowering of the U.S. corporate tax rate.
In the fourth quarter of 2016, we recorded a onetime non-cash pretax charge of $2.9 million related to the early termination of a pension plan.
For the balance of my comments, any reference to adjusted earnings simply excludes the above charges from the GAAP results for the applicable time period.
Our 2017 results also included the effects of 3 acquisitions: Santa Izabel and Old Dominion Brush in June and R.
P.
M.
Tech in August.
Santa Izabel is included in our Agricultural Division operating results, while Old Dominion Brush and R.
Tech are included in our Industrial Division operating results.
These acquired businesses contributed $13.9 million and $25.5 million to fourth quarter and full year sales as well as $1 million and $1.7 million to full year and full year operating income, respectively.
For the balance of my comments, excluding acquisitions means we excluded the operating results of these acquisitions from divisional or total company results as applicable.
Fourth quarter 2017 sales of $243.3 million were up 18.4% over fourth quarter 2016 sales of $205.5 million.
Excluding acquisitions, fourth quarter 2017's sales grew 11.6% over the prior year quarter.
Full year 2017 sales of $912.4 million were 8% higher than full year 2016 sales of $844.7 million.
Excluding acquisitions, the full year 2017 sales exceeded prior year sales by 5%.
Net income for the fourth quarter was $3.2 million or $0.27 per diluted share.
Adjusted net income was $13.5 million or $1.15 per diluted share, an increase of about 43% over fourth quarter 2016 adjusted net income of $9.4 million or $0.81 per diluted share.
Full year 2017 net income was $44.3 million or $3.79 per diluted share.
Full year 2017 adjusted net income was $54.6 million or $4.67 per diluted share, an increase of about 30% over full year 2016 adjusted net income of $41.9 million or $3.62 per diluted share.
Our fourth quarter and full year sales compared favorably to prior year periods and ---+ across all divisions, both including and excluding sales attributed to acquisitions.
Industrial fourth quarter 2017 sales of $147.2 million represented a $20.2 million increase over the prior year fourth quarter, and full year 2017 sales of $522.7 million increased 8% over full year 2016.
Excluding acquisitions, sales in this division increased 10.5% and 3.9% over the prior year fourth quarter and full year periods, respectively.
Industrial Division operating income for the full year 2017 was $51.9 million compared to $36 million in 2016, which included the previously mentioned $2.9 million non-cash pension termination charge.
The Industrial Division 2017 results also included the effects of acquisitions, which contributed net sales of $11.8 million and operating income of $1.3 million to the fourth quarter and net sales of $19.8 million and operating income of $2 million to the full year results.
Agricultural Division fourth quarter 2017 sales were $56.5 million, up 15.5% compared to fourth quarter 2016, and full year 2017 sales of $227.4 million were 10.5% above prior year.
Excluding acquisitions, sales in this division increased 11.3% and 7.7% over the prior year fourth quarter and full year periods, respectively.
Full year Agricultural Division operating income was $24.1 million compared to $20.7 million in 2016.
This division's acquisition contributed net sales of $2.1 million and an operating loss of $200,000 to the fourth quarter of 2017 and net sales of $5.7 million and an operating loss of $300,000 to the full year results.
European Division fourth quarter 2017 sales were $39.6 million or about 16% higher than the fourth quarter of 2016, and full year 2017 sales of $162.3 million were 4.8% above prior year.
Operating income for the full year was $12.8 million compared to $10.9 million in 2016.
Our operating ---+ our profit margins continue to grow faster than our top line.
Fourth quarter 2017 gross margin of $60.9 million grew by about 27% over fourth ---+ 2016's fourth quarter gross margin of $47.9 million.
Our fourth quarter 2017 gross margin was 25% of net sales, which compares favorably to 23.3% of net sales for the prior year quarter.
Full year 2017 gross margin of $234.7 million grew about 14% over full year 2016 gross margin of $205.1 million.
Our full year 2017 gross margin was 25.7% of net sales, up from 24.3% of net sales in the prior year.
These favorable comparisons continue to be helped by pricing actions, improved production efficiencies, new product introductions and purchasing initiatives.
Fourth quarter 2017 operating income of $20.9 million was about 38% higher than fourth quarter 2016 adjusted operating income of $15.2 million.
Excluding acquisitions, fourth quarter 2017 operating income was about 31% higher than the prior year adjusted result.
Full year 2017 operating income of $88.7 million was about 26% higher than full year 2016 adjusted operating income of $70.5 million.
Excluding acquisitions, full year 2017 operating income was about 25% higher than the 2016 adjusted result.
Fourth quarter 2017 operating income was 8.6% of net sales, which compares favorably to 6% of net sales for the prior year fourth quarter.
Full year 2017 operating income was 9.7% of net sales, which compares favorably to 8% of net sales for the prior year.
Our full year 2017 EBITDA was $109.4 million.
This represents about a 24% increase over full year 2016 EBITDA of $88.4 million and about a 20% increase over prior year adjusted EBITDA of $91.3 million.
Our full year 2017 operating cash flow remained very strong at $70.4 million despite the fact that double-digit sales growth drove higher working capital, and high utilization rates caused us to begin to rebuild our vacuum truck rental fleet.
These strong cash flows allowed us to improve our debt net of cash position by $18.6 million over the 12-month period, even after paying out about $39 million for the Santa Izabel, ODB and R.
Tech acquisitions.
Our order backlog ended 2017 at a record $218 million, about 48% higher than year-end 2016 backlog of $147 million.
This backlog build is primarily due to increased new order levels.
Excluding acquisitions, our year-end 2017 backlog has increased 34% since the end of 2016.
One more comment regarding income taxes before I close.
Most of our consolidated taxable income will be subject to the new 21% U.S. corporate tax rate.
Going forward, we expect significant reduction in the effective tax rate as a result of this ---+ of U.S. tax reform.
However, much is it still to be determined regarding the impact of certain provisions of the Tax Act as well as, among other things, how it will affect the income taxes of certain U.S. states.
As a result, we are not giving specific forward-looking guidance with respect to our effective tax rate.
In summary, our fourth quarter and full year 2017 results were highlighted by: New sales and operating income levels for the fourth quarter and full year periods; record net income and earnings per share, excluding the onetime effects of the new U.S. tax law; profit margins continuing to grow faster than top line; sales and operating income growth across all company divisions, both with and without the effects of acquisitions; record full year EBITDA of $109.2 million; continued strong operating cash flow exceeding $70 million and a record year-end backlog of $218 million.
I would now like to turn the call back over to Ron.
Okay.
Thank you, <UNK>.
I appreciate that.
So as we can see in the results we released yesterday, Alamo finished the 2017 with a strong fourth quarter which made the year in total the best-ever in our history.
Certainly during the last few years, Alamo has made a lot of progress on improving margins, strengthening our market presence, upgrading our product offering and a number of other achievements.
But during this time, our markets were ---+ constrained our results due to a variety of headwinds which we have talked about each quarter for the last couple of years, things like the weak agricultural sector, soft conditions in the European market, the negative effects of the strong U.S. dollar on our translation of our results, and a variety of other headwinds.
But going into 2017, we were pleased we started seeing some relief from these conditions.
And these continued to show improvement as the year progressed.
And this can be seen most vividly in our sales.
I mean, in 2016, our sales were actually down slightly.
And then as we went into the first half of 2017 ---+ I mean, they were up 2% in the first quarter, 1% in the second quarter, so it was positive but modest.
But then in the second half, they were up 11% in the third quarter and finished the year up 18% in the fourth quarter.
So it was a dramatic change.
And certainly, there were a few acquisitions during the year which helped the sales, but sales were up, like in the fourth quarter even 11%, without the acquisitions.
So this was a very welcome development after several years of little to no market growth.
And we were real pleased that this growth was fairly widespread as nearly every one of the headwinds we've talked about ---+ commented on for the last few years, showed some form of improvement, especially in the second half of the year.
So it was good to finally get some top line growth.
And this sales growth, combined with our ongoing efforts to improve our margins, led to record operating profits for Alamo, both in the fourth quarter and for the year in total.
And I say operating profits rather than net profits because, as you are all aware and have been hearing repeatedly, our tax results were impacted by the effects of the U.S. tax reform measures adopted in December of 2017.
With ---+ this resulted in a onetime net charge to our income tax expense of over $10 million.
We covered this in our press release, <UNK> mentioned this in his presentation and I mention it again here because I don't think any U.S. company, public company, can comment on 2017 results without mentioning the effects of the U.S. tax reform.
So you're probably hearing it more than you want.
But while this onetime tax reduced our 2017 after-tax results, we're actually very pleased with the tax reform measures.
We think even ---+ this will give us a lot more flexibility to repatriate cash held in our international operations without significant incremental taxation.
And of course, moving forward, the reduction in the U.S. corporate tax rate should allow for a variety of benefits which we believe will sort of make us more competitive in the international markets in which we participate.
So ---+ but ignoring tax reform for a minute, the Alamo Group had a great 2017, and we believe we are well positioned for an even better 2018.
Now I would not go so far as to say that our markets are strong, but we certainly believe they are continuing to improve.
And it helps that due to a record backlog, we should be able to start the year on a positive note.
In 2018, we will also get the benefits of the full year effects of the acquisitions we completed in 2017.
And while individually, these were relatively small, actually, they were strategically good fits with Alamo's development plans, brought in some nice products and filled some nice gaps.
And we feel optimistic that we will continue to be able to complete acquisitions going forward that will contribute to Alamo's growth, despite ---+ in spite of this climate we're in now, where higher valuations have certainly impacted our acquisition activity.
But we're pleased that we're seeing ---+ while there's nothing else imminent at this point, we're very pleased that we are seeing a reasonable flow of opportunities to look at in this area.
And even with our sort of self-imposed criteria on pricing and valuations, we feel good about our prospects, that they will continue to bring good fits with our company.
We also feel very good about our internal operations.
In 2017, we exhibited continuing margin improvement, as we have shown for several years now, and we believe there's still further opportunity in this area.
In 2018, we will be spending more effort and more money on our operations accordingly.
This is definitely an area where we will benefit from tax reform that actually provides a better climate for capital investment.
As a result, we anticipate increasing our capital expenditures in 2018 over the average levels of recent years as we work towards eliminating some bottlenecks in some of our operations and to continue to invest in technology and to work to improve our overall operational efficiency.
So with improving margins, acquisitions, further investment in our operations and the benefits of a better U.S. corporate tax structure, we are optimistic about the outlook for Alamo Group in 2018.
As always, we remain cautious and conservative in our approach as we know our markets can and do change quickly.
But we feel good about where we are positioned today.
Alamo Group is stronger than it's ever been, and we are very optimistic about our future.
So we thank you for your support.
And with that, we'd now like to open the floor for any questions you may have.
(Operator Instructions) And we'll go first to Mike <UNK> from Seaport Global.
I wanted to ask about a different topic of the day, it seems, and that is the price of steel and metals.
You've seen some of these reports in the media about tariffs being raised as early as next week on steel as well as on aluminum.
I'm just kind of curious, what levers can Alamo pull if and when we do see substantially higher steel prices from kind of where they already are, which already are pretty high.
Do you have additional operation efficiencies ---+ or pricing power at this point.
Or could the price of steel just be so much higher than it's been over the last couple of years, that it might actually be a very, very tough hill to climb this year to kind of have any kind of growth in your gross margins.
Okay, got it.
That's great color.
I also wanted to turn more broadly to the supply chain.
You had mentioned some pretty big backlog increases, of course.
You also mentioned in your press release, there's been some stretching of some of your lead times.
Are you finding any components, or perhaps, current parts and assemblies in short supply right now.
Or are the sort of the lead times simply bottlenecks at your own facilities, where you just have so much demand you can't catch up.
No.
I mean, we have a couple internal bottlenecks.
But the supply chain, it's not ---+ we're not missing deliveries or anything due to supplier issues.
Though ---+ I mean, truck chassis, certainly, the lead time is growing there, and it looks like it's going to continue to grow.
Things like hydraulic components, certainly, the lead times there are growing as well.
And I mean, we're taking this into account in our ---+ the time frames we're quoting, the lead time we're quoting.
So ---+ but we still get the availability of the things, it's just that the lead times are growing.
And as I said, it's been within a manageable range so far.
I actually think, like, trucks chassis lead times are going to continue to grow.
I think hydraulic components, lead times are going to continue to grow.
And we're trying to probably order a little bit ahead.
Not a lot.
I mean, you can see we're controlling our inventory, I think, fairly well.
But yes, we'll try to get a little bit ahead of that and just try to respond as quickly as we can.
And I'd say we're going to improve a few bottlenecks in our areas, internal areas, that are due to heavy backlogs.
And as far as springtime deliveries in Ag, now that we're already in March, that schedule is not particularly at risk.
You have enough of what you need to make your most earliest deliveries on time.
No, we did not see any effect, I mean, Europe, for us, was very strong in the fourth quarter and had very nice, even, improvements in backlog.
Those ---+ like I said, I think some of those safety regulations effected people like ---+ more like to tractor manufacturers themselves than us.
And so we ---+ it doesn't seem to have caused any shift.
I mean, I don't think this effect was anything near as strong as even, say, like the Tier 4 engine transformation in North America.
This is something, I think, we've been able to adapt to pretty seamlessly.
And we'll go next to <UNK> <UNK> from Piper Jaffray.
I was wondering if you could talk a little bit about snow removal equipment.
We've obviously had some rough years in the past, but there has been quite a bit of snowfall across the footprint this year.
Could you just talk about how orders were in the fourth quarter and kind of your outlook for that side of the business.
Got it.
And then maybe if you could talk about where you're seeing strength in Europe, just kind of the regions.
And maybe which ones, which markets are stronger or weaker.
I think Europe is pretty good across the board.
Certainly, we're strong just in Central Europe.
I mean, England, Ireland, France, Germany, the Benelux, those type of countries ---+ central Europe.
And for us, I mean, it's pretty broad spread.
England had been ---+ had sort of dropped off the most, especially following the Brexit vote, and I mean, then they kind of ---+ we saw orders and business decline as farmers and everybody was sort of playing a wait-and-see game.
And certainly, the Brexit situation is not totally resolved, but I think the market has come back.
Farm commodity prices have improved some, farm incomes are up.
One of the issues was farm subsidy payments and what was going to happen in the U.K., who are they going to get their subsidies from.
They had been getting them from the EU.
And England came back and sort of gave them some confidence that they're sort of going to mirror what they were getting, at least for the next several years until everything's sorted out.
But they were going to mirror what they had, So that helped.
But generally, I think there's a little pent-up demand, I think, not only in Ag, but even in some of the governmental, like, applications for mowing and vacuum trucks.
I mean, we saw a very nice pick up in orders in vacuum trucks in Europe.
So it's really sort of broad spread.
Like I said, probably the biggest improvement was England just because from the low ends of the Brexit.
Plus, it's also helped that, as I said, currencies there had been a headwind.
I mean, the year before, we were actually up in England, but we're down due to currency.
So now we're finally up in local currency.
We're up even further in dollars just because the dollar softened a little.
So we like it that it's pretty broad spread.
Ag was good, but even like I say, some of the non-Ag, governmental applications were also good.
And then backlog has improved nicely.
And we'll go next to Joe <UNK> from Sidoti & Company.
Just to follow up on that last question.
Just curious ---+ you saw organic revenue in Europe up about 7%, excluding the currency gains, yet your segment profits were actually flat.
And I assume if you probably include ---+ or if you exclude currency, your profits were probably down year-over-year, I would think.
So just wondering what's exactly going on there.
Is that just the unfavorable product shift ---+ mix shift.
And if so, do you think that sort of bounces back.
Yes ---+ I don't think it's as much of ---+ as the mix shift as ---+ the growth was in whole goods.
That's the ---+ like, we had been off in whole goods.
And so when it came back, I mean, the growth in there had been more in ---+ and whole goods are certain ---+ I mean, like I said, it's the spare parts that are our better-margin products.
So I think we saw some growth in the whole goods.
And the fourth quarter anyway is always a little soft, usually on spare parts in that way.
I mean, that's when the activity is a little bit less, so it's ---+ those are usually better in the second, third quarter anyways.
So I think it was kind of a little bit the a mix between whole goods and parts.
We ---+ there was some ---+ as part of some restructuring that we did last year in Europe, there were some severance expense and a few other things that ---+ probably, a few other expenses like that.
When you're restructuring, a little bit ---+ I mean, that's a little bit more expensive exercise in Europe than it is in North America.
And so we had some of that in the fourth quarter as well.
And in fact, I think that was probably the single biggest sort of anomaly factor.
No.
That was 2017 as a total.
Yes.
Yes.
We think so because, like, all of our units had nice improvements in backlog.
Europe probably had the biggest increase in backlog for us.
No.
I think what we're trying to say, that the comparables are going to be harder in 2018.
I mean, 2016, sales were actually down.
2017, they're up, very up nicely.
Profits were up, I mean like 25%, almost, a quarter.
So I think when we say it's not that the growth is slowing, but the rate of change is going to be different.
I mean, we're not going to do 25% better in the quarter.
But we can still do better, and ---+ but the comparables, 2017 to 2016, the comparables were easier.
But 2017 was records across the board, and so to have even ---+ do it even better in 2018, which we think we will do, but the growth isn't going to be double-digit growth across the board.
Look ---+ yes.
And certainly, this is being driven somewhat by a slight ---+ some increases in backlog and some lead times lengthening that we feel we don't want those to get too far out.
And so we've always got a number ---+ I mean, every year, we're investing in our plants.
I mean, more robot welders, more laser cutters, more technology in general.
And just that this year, since there is more backlog ---+ I mean the last couple of years, sales have been fairly modest, flat.
This year, since we are ---+ we're undertaking a few more of those projects than we have.
Like I say, we do a couple every year, now this year, we're probably going to be doing twice as many.
And so already, I think we start off, I mean ---+ and it's fairly broad-based.
We just put in a ---+ we've done a little expansion in Rivard in France with the ---+ a new press brake and a new laser cutter.
We just approved, I mean, literally this week, a [Lefebvre] laser in Gibson City, Illinois.
We've already, I mean, just approved putting in a new robot in McConnel.
We're putting in ---+ upgrading our production line in Bush Hog.
And so I mean I'd like to say it's just a few more initiatives than we usually would take just because of the backlogs and us wanting to keep our lead times reasonable.
So it's ---+ like I said, it's not dramatic, it's not like CapEx is going to double or anything.
But it will be above just as we take on a few more projects, and probably take them on, a few earlier.
There's also like ---+ there was one thing that will ---+ we had a facility in Washington that we had been under a lease with a purchase option.
The purchase option came up, it was a good deal, so I mean ---+ it's like $3 million.
And that's something we usually don't do every year, buy out a plant.
But like I say, it was just ---+ the economics were right to do that then.
So there's a ---+ like, so that's a bit of an anomaly.
But yes, just doing a little bit more than we normally do.
Yes.
I mean, we've been saying all along that we need to be at double-digit operating profit margins.
I mean, this year and last year, we were ---+ in '16, we were at 8.6%.
In '17, we were at 9.7%.
9.7% is getting awfully close to double digit.
And ---+ but we're not just trying to get to 10%.
We can do above 10%.
And so we think that ---+ I think that once we hit the double digits, that growth at the top ---+ at the operating profit margin may slow a little because while we still want to improve it, at that point, we're more ---+ we want to really more focus on sales growth than just continuing to see how far we can drive the profit margins.
I mean, I think where we are, we still want to improve the ---+ our operating margins.
And I think we can.
Certainly, like I say, sales obviously helped in that.
And we can get there quicker.
That's why we made more progress this year than the previous year just because we had more sales.
And so yes, there's still room to improve the operating profit margins.
And even once we get to the double-digit, we will still work on improving them.
But I think the shift a little bit focus more to top line growth than just seeing how far we can push the margins.
I mean, we want to take market share, we want to grow our overall presence in the market.
So like I say, there will be a slight shift.
But not ---+ but I mean, we will still work on ---+ we're not finished by any means of improving our operating profit margins.
Yes.
I think they could ---+ they have ---+ there's potential at both sides of that.
Like ---+ yes, it's ---+ yes.
Top end bound.
I think modest prices are ---+ we can pass them along pretty regularly.
I mean ---+ even during the downturn of the Ag market for the last several years, I mean, we've actually had positive pricing increases every year.
So they're very modest, very modest, but positive.
And you're right, in some pieces of ---+ in Ag, I mean, combines weren't getting pricing or in some other specific areas.
So I think if we can do it in sort of the worst Ag decline in the ---+ of the last several decades, then I think we can do it, especially because this time, we won't be alone.
And I mean, it's not like we ---+ like I said, everybody's going to be faced with the same thing, everybody.
And I think ---+ forget us, but even the John Deeres and the new Hollands, and those are usually fairly aggressive at adding on steel surcharges and this kind of stuff.
And I think when the big players do it, it's much more accepted for people like us to do it.
Yes, there will be a little bit in there, Mike, comparing to year-over-year, yes.
We have so many products in between the divisions.
But ---+ and it seems like ---+ and so we ---+ it's not just 1 or 2, it's half a dozen.
We've got the new sweeper coming out we're pleased with.
We've got ---+ expanding our remote control mower business.
Some new opportunities on some of our own powered platforms and the governmental mowing business.
Geez, it's ---+ I mean ---+ I know Bush ---+ our Ag guys have a couple of new mowers that we introduced at the recent February Ag show that we're real pleased with and think ---+ and had a very good response from the market on.
Like I said, it's not one thing that's going to ---+ it's a dozen things, a dozen new products that we think are all going to help in a small way rather than one thing that's going to help in a big way.
All right.
Well, thank you for joining us today.
We appreciate your participation and your interest in the company.
Certainly, if we can ---+ don't hesitate to give us a call if you've got any other questions.
And we look forward to speaking with you on our first quarter conference call in early May.
Thank you for participating.
