Alamo Group Inc. (NYSE:ALG) Q1 2024 Earnings Call Transcript

Alamo Group Inc. (NYSE:ALG) Q1 2024 Earnings Call Transcript May 3, 2024

Alamo Group Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Alamo Group First Quarter 2024 Earnings Conference Call. [Operator Instructions] After today’s presentation, there will be an opportunity to ask a question. Please note this event is being recorded. I would now like to turn the conference over to Edward Rizzuti, Executive Vice President, General Counsel and Secretary. Please go ahead.

Edward 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 (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 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1 (877) 344-7529 with passcode 9093220. 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 Agnes Kamps, Executive Vice President and Treasurer. 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 attachments to our earnings release.

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Q&A Session

Before turning the call over to Jeff, I would 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: adverse economic conditions, which could lead to a reduction in overall market demand; supply chain disruptions, labor constraints, competition, weather, currency-related issues, geopolitical events 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.

Jeffery Leonard: Thank you, Ed. We want to thank everyone who’s joined us on the conference call today and express our appreciation for your continued interest in Alamo Group.

The first quarter shaped up largely in line with our expectations, and we were pleased overall with the financial results we’ve reported today. I would now like to turn the call over to Richard, who will take us through a review of our financial results for the first quarter. I will then provide additional comments on the results and say a few words about the outlook for the second quarter and the balance of 2024. Following our formal remarks, we look forward to taking your questions. Richard, go ahead.

Richard Wehrle: Thanks, Jeff, and good morning, everyone. Alamo Group’s first quarter 2024 ended with a solid performance that produced record net sales driven by continued strong demand for our products in the Industrial Equipment division. First quarter consolidated net sales were $425.6 million, an increase of 3% compared to $411.8 million in the first quarter of last year.

Gross margin percentage fell by 110 basis points, and gross margin dollars decreased by just under $900,000 in the quarter compared to the first quarter of 2023. Both margin percent and dollars decrease were driven by under-absorption and productivity inefficiencies in the Vegetation Management and, to a lesser extent, product mix in the Industrial Equipment.

Operating margin for the first quarter came at $47 million versus $49 million in the first quarter of 2023, a decrease of 4%. Operating margin as a percent of sales was 11% for the first quarter versus 12% for the same quarter last year. Consolidated net income for the first quarter was $32.1 million or $2.67 per diluted share, a decrease of 4% versus net income of $33.3 million or $2.79 per diluted share for the first quarter of 2023. Our Vegetation Management division was off in total sales compared to the first quarter of 2023. The softness in both the forestry and agricultural markets continued due to inflation and higher interest rate — the higher interest rate environment.

Net sales were $223.7 million a decrease of 13% compared to $256.4 million for the first quarter of 2023. We’ve been monitoring dealer inventory levels, which are up but not at historical levels. The division’s operating income for the first quarter was $21.7 million, almost 10% of sales, but down 40% versus $336.5 million, 14% of sales for the same period in 2023. This division reduced its labor force during the quarter at its larger manufacturing location and still almost hit 10% operating income, a solid accomplishment. This is also an improvement of 50 basis points compared to the fourth quarter of 2023.

Industrial Equipment division net sales had a tremendous quarter, coming at $201.8 million, up 30% compared to $155.3 million for the first quarter of 2023. This was due to a large — due to a solid performance across all product lines, particularly vacuum truck, sweepers, debris collectors and snow removal equipment. While component part receipts continue to return to a more consistent cadence, the division continued to have a few late component deliveries, which impacted operations, although not as significantly as previous quarters. This resulted in a substantial rise in operating margin in the first quarter of 2024 to $25.3 million, just under 13% of sales, compared to $12.5 million, 8% of sales for the first quarter of 2023, an increase of over 102%.

The company’s backlog at the end of 2023 — at the end of the first quarter of 2024 came in at just over $831 million, down 16% compared to backlog levels at the end of the first quarter of 2023, but still at a healthy level. A few additional items I’d like to cover that are related to the balance sheet at the end of the first quarter of 2024, which continued to remain strong.

Working capital increased about $61 million compared to the first — end of the first quarter of 2023. The increase primarily resulted from higher accounts receivable and to a lesser extent, inventory. During the first quarter of this year, as we expected, we had a slight increase in our credit facility expecting — excluding pay down paying back intercompany loans at the end of the year. Our bank leverage ratio for the first quarter of 2024 was just over 1.3:1, down from 1.7:1 at the end of the first quarter of 2023.

And finally, the company’s trailing 12 months EBITDA came in at just over $246 million, flat to year-end of 2023, which was a record. For 2024, cash flow should remain healthy as our focus will be to continue to reduce both inventory and debt levels. We will remain disciplined in our execution of controlling costs and expenses as inflation and interest rates are expected to continue to put pressure on our margins.

Supply chain deliveries and reduction in freight costs will be a major focus for the company in 2024. So in summary, quarter 1 of 2024 was what we had anticipated for Alamo Group. Sales were up 3%, but margins and net income were off mainly due to weak market conditions in Vegetation Management. We were pleased that our Board recently approved our regular quarterly dividend of $0.26 per share, up 15% compared to $0.22 per share for the first quarter of 2023.

With that, I’ll turn the call back over to Jeff.

Jeffery Leonard: Thank you, Richard. I’d like to add my personal thanks to everyone who’s joined us on the call this morning. The company’s first quarter results were broadly in line with our expectations given the current dynamics of our markets. Net sales in the quarter established another all-time record despite the ongoing impact of higher interest rates, which are constraining activity, primarily in the markets for our Vegetation Management Equipment.

The market for Alamo’s forestry and tree care equipment has been the most impacted by the higher rates. Many commercial tree care contractors who purchase our [indiscernible] chippers and stump grinders are family owned small businesses that rely on third-party financing for their equipment purchases. Higher interest rates have affected these customers in the form of higher prices when they walk into a dealership as the dealer is forced to pass along their own higher [ float ] plan financing costs, then potential buyers are impacted a second time when they seek third party financing to purchase a piece of equipment and incur higher finance charges to do so.

The result has been increasing costing in the market with many buyers content to wait for lower interest rates or making it a firm buying commitment. Dealers are implementing incentive programs in an effort to reduce inventory, but are facing an increasingly reluctant cash-strapped pool of potential buyers.

At the upper end of our forestry and tree care range, demand for our large industrial whole tree chippers and grinders is largely driven by waste wood recycling and biomass production. The United States and Canada are ranked #1 and #2 among the world’s producers and exporters of wood pellet biofuel. North American pellet producers depend on logging and lumber production residues as primary sources of feedstock. Tighter residue supplies and higher prices have pressured the operating margins of North American pellet producers, causing them in some cases to postpone investment in new processing equipment.

At the same time, dealer inventories remain elevated above contract levels during the first quarter. The agricultural equipment market is encountering similar dynamics. The combination of softer commodity crop prices and higher for longer interest rates constrained sales of ag equipment and other outdoor power equipment during the first quarter.

After 3 solid years, well above the long-term average, inflation-adjusted U.S. net cash farming is expected to decline in 2024 by approximately 5% compared to the 2003 to 2023 long-term trend. U.S. 2-wheel drive tractor sales in the first quarter were down 13.4% compared to the first quarter of 2023, with tractors in the 40- to 100-horsepower class down 8% and tractors less than 40 horsepower were down 17% compared to the first quarter of 2023.

In the face of these headwinds, the Vegetation Management division reported net sales that were down 12.7% compared to the first quarter of 2023. The division’s order bookings were down — were 41% lower than in the same period of the prior year. Vegetation Management backlog declined by about 48%, primarily due to the combined effects of fewer new orders during the first quarter and cancellation awards during 2023, as previously reported. These were primarily in the forestry and tree category.

Backlog also declined in the division’s North American Agricultural Equipment Group that serves hobby farm and ranch segment. In this group, both new orders and backlog declined year-over-year due to the combined effects of higher interest rates and higher channel inventory. However, we were encouraged that order bookings for our lower products began to show early modest signs of recovery in the final weeks of the first quarter.

The slowing demand in these 2 groups adversely impacted absorption and efficiency in Vegetation Management’s major manufacturing facilities. To address this, the division took actions to reduce production capacity at its largest U.S. facilities, and further actions will be taken as warranted moving forward.

In addition, the division initiated the closure of facility that produces spare and wear parts for classic agricultural equipment. The benefits of these actions will begin to be evident in the company’s second quarter results. Sales of Vegetation Management equipment to governmental agencies was a notable bright spot for this division in the first quarter. The division’s governmental mowing businesses in North America, Europe and the United Kingdom continue to perform well and at a brisk pace.

Both sales and backlog remained elevated for this part of the business and market activity remains bullish. But with this division’s larger business groups facing strong headwinds that drove sales lower, Vegetation Management operating income declined 450 basis points and EBITDA also moved 380 points lower compared to the prior year first quarter.

On a sequential basis, the division’s operating income improved by nearly 10%, and operating margin improved by 500 basis points compared to the fourth quarter of 2023. Our Industrial Equipment division had an excellent first quarter. State and county governments remained on a solid physical footing as they entered 2024. Forecast declines in state revenue for 2023 did not materialize and many states continue to report budget surpluses last year. State rainy day funds remain historically elevated.

At the municipal level, the situation was somewhat more nuanced as a number of American cities struggled with the cost of caring for rapidly growing migrant communities. However, governmental markets for the division’s products remained very strong during the first quarter across the board, and both quoting and ordering activity remained historically elevated. Against this backdrop, Industrial Equipment division net sales improved by 30% and backlog rose 17% compared to the first quarter of 2023. The division’s order bookings improved by over 25% compared to the first quarter of the prior year and were its highest quarterly bookings ever. All of the division’s product groups reported higher sales, strong ordering activity and higher backlog.

Non-governmental markets for Industrial Equipment also remained strong on the back of the continued durability of the North American economy and mildly aided by the stimulus effect of the recent Federal Infrastructure Investment and Jobs Act. Efficiencies improved in the division’s primary production facilities as the pace of production increased with very strong momentum across all of its product groups. Industrial Equipment division operating income improved 440 basis points, and EBITDA improved 410 basis points.

On a sequential basis, this division’s operating income improved slightly by 1% and its operating margin improved by 20 basis points to 12.5% of sales.

Turning our attention to the company’s operations more broadly. Supply chain performance in both divisions continued to improve during the first quarter, although a few challenges remained. Truck chassis deliveries continue to be somewhat constrained by shortages of chassis frame rails, which again impacted production for nearly all of the truck chassis OEMs. A shortage of Allison transmissions due to production disruptions late in 2023 and a shortage of transmission control modules further held back medium-duty truck chassis deliveries during the quarter.

Costs for raw materials and industrial components stabilized during the quarter and were another bright spot. Steel prices remain volatile, but generally trended slightly downward during the first quarter and have declined significantly since peaking in late 2021. Skilled labor availability, which has been very challenging in most areas where the company operates since the onset of the pandemic, has now improved in many areas, and this is helping to improve productivity.

We were obviously extremely pleased that through the determined work of our teams, both of our operating divisions were able to sequentially expand their operating margins relative to the fourth quarter of 2023. Regarding our outlook for the second quarter and the second half of 2024, we believe that the market conditions that we encountered in the first quarter, both negative and positive, are likely to persist. The headwinds that confronted us in Vegetation Management in the first quarter are not likely to meaningfully abate until inventory declines and interest rate reductions are announced. Until then, we’ll continue to collaborate closely with our dealers to incentivize retail sales and reduce inventory by doing so.

While we expect sales growth to continue, we anticipate that the pace of growth will be somewhat more modest for the next several quarters. We will continue our determined actions to reduce costs and further simplify our structure through additional facility consolidations.

Finally, we will not hesitate to further adjust our capacity as needed to match future demand on a timely basis. It’s worth noting that our balance sheet strengthened during the first quarter as total debt net of cash declined nearly 24% to its lowest level since we acquired the Morbark business in 2019. Our balance sheet positions us well for what we believe will be a more active year for M&A, and we are optimistic about our M&A pipeline as we have more actionable opportunities than we’ve seen for the past couple of years.

In summary, while the next couple of quarters are expected to be challenging, we expect favorable development of the company to continue, albeit at a somewhat more modest pace for the remainder of 2024. We will continue to execute our strategy to grow the company at an attractive rate while expanding operating margin.

Before closing my remarks today, I would like to thank our customers, dealers, suppliers on thousands of exceptional employees and our financial stakeholders for their continued support of the company. This concludes our prepared remarks. We’re now ready to take your questions.

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Chris Moore from CJS Securities.

Christopher Moore: Maybe I’ll start. Vegetation EBIT margin 9.7%, down significantly year-over-year, up a little bit sequentially. You mentioned actions to protect the margin. Can you stay around the 10% level for the balance of ’24? Or is visibility just not there to make that make that?

Jeffery Leonard: I’m fairly confident we can, and that’s what we’re expecting to do, to be honest with you. That’s where we are adjusting our capacity now. And we’ve taken some firmness to get in actions and some that we haven’t announced yet. So I have to be a little bit careful what I say here. But no, we’re taking enough actions to make sure we can protect that bottom line in Vegetation Management.

Richard Wehrle: That’s the whole intent, Chris. No matter what the market does to us and whatever our sales call, we need to maintain 10% in this division.

Christopher Moore: Terrific. That’s helpful. Industrial bookings backlog both up significantly. What do lead times look like at this point in that segment?

Jeffery Leonard: They’re actually normalizing quite a bit, Chris. They’re out about 120 days for the vacuum trucks and the bigger equipment and following fairly rapidly. The truck OEMs are really getting one step. Some of the problems I mentioned in my remarks on the call are beginning to clear a little bit, and we’re very optimistic about our deliveries of chassis, which really drives that whole division, as you know. So I think 3 months is pretty typical right now for us, and we have more than adequate capacity in that division at the moment.

Christopher Moore: Got it. You mentioned still a few kind of lingering issues on the supply chain side. Any worries that this — from where you sit today, any reason to think that they won’t kind of marginally continue to improve versus some — go the other way? Just trying to get the sense how much visibility…

Jeffery Leonard: Yes, Chris, I don’t see the situation getting any worse. And I think it will continue to improve. And I expect the pace of improvement will pick up as well. We are seeing notable improvements across the board in the supply, and it’s not just truck chassis. It’s things like hydraulic components and cylinders, all kinds of things that we consume as the economy starts to — as a whole normalized now, lead times are coming down in most parts of our supply chain.

Operator: The next question comes from Mike Shlisky from D.A. Davidson.

Michael Shlisky: Can you maybe kind of remind us what percentage of your business serves the public sector or service private players that serve the public sector. I’d imagine that group of customers are seeing fewer problems than the private sector. It sounds like you actually said, almost anything that’s public sector is doing pretty decently. I think private is a little more challenged. So what are the — what’s the broad rate down there?

Richard Wehrle: It’s still, I think, what we’ve said before. It’s roughly between 20% and 25% of that is from the hobby — to the hobby farmer and ranch. The balance is made up between industrial and governmental. I’m sorry?

Michael Shlisky: I’m sorry. I was asking kind of your overall business, what percent of it serves the public sector and what sort of the private?

Richard Wehrle: Right. I think — like I said, I think we’re 20% to 25% in that space we’re talking about. The balances in governmental and industrial and it’s split.