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Alamo Group Inc (NYSE:ALG)
Q3 2020 Earnings Call
Oct 29, 2020, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

Edward T. Rizzuti -- Vice President, General Counsel & Secretary

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 our 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 one (888) 203-1112 with passcode 1987728. Additionally, the call is being webcast on the company's website at www.alamo-group.com, and a replay will be available for 60 days. On the line with me today are Ron Robinson, President and Chief Executive Officer; Dan Malone, Executive Vice President and Chief Financial Officer; and Richard Wehrle, Vice President, Treasurer and Corporate Controller. Management will make some opening remarks and then we'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 Ron, I'd like to make a few comments about forward-looking statements.

We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following: market demand, COVID-19 impact, competition, weather, seasonality, currency-related issues, geopolitical issues and other risk factors listed from time to time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date.

I would now like to introduce Ron. Ron, please go ahead.

Ronald A. Robinson -- Chief Executive Officer and President

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

Dan E. Malone -- Executive Vice President,Chief Financial Officer

Thank you, Ron. The key takeaways from our third quarter and nine -month 2020 results are: record third quarter sales up 7.3% with acquisitions but down 8.5% organically; record nine-month sales up 6.8% with acquisitions but down 11.8% organically; third quarter 2020 adjusted EBITDA up over 35% from the prior year quarter and at 14.8% of net sales compared to 11.7% the prior year; nine -month 2020 adjusted EBITDA up 17.8% from the prior year period and at 13.1% of net sales compared to 11.8% the prior year. Third quarter net income and earnings per share, both up 15% from the prior year quarter and included accretive acquisition results.

Third quarter operating cash flow, over $77 million, up 78% over the prior year quarter. Outstanding debt was reduced by nearly $65 million during the quarter. Quarter-end cash on hand plus loan availability increased to almost $280 million, up nearly 25% since the end of June. And third quarter ending backlog of $254.5 million, up 17.5% since the end of the second quarter. Third quarter 2020 net sales of $291.8 million was a company record and 7.3% higher than the prior year third quarter. Without acquisitions, organic sales were down 8.5%. Without the favorable effect of currency translation, organic sales were down 8.8%.

The organic sales decline was primarily due to the COVID-19 impact. nine -month 2020 net sales of $874.8 million was a company record and 6.8% higher than the prior year, with the contribution of acquisitions. Without acquisitions, organic sales were down 11.8%. Without the unfavorable effects of currency translation, organic sales were down 11.6%. Industrial division third quarter 2020 net sales of $196.2 million represented a 10.1% increase from the prior year third quarter. Without the impact of acquisitions, this division's organic sales were down 14.4% due to COVID-19 disruptions to operations and customer demand. Agricultural division third quarter 2020 sales were $95.5 million, up 2% from the prior year third quarter in U.S. dollars and up 2.1% without the effect of unfavorable currency translation. In the third quarter, we continue to see organic sales growth in our North American operations plus some incremental Dixie Chopper sales, partially offset by weaker results in Europe.

Net income for the third quarter of 2020 was $20 million or $1.69 per diluted share compared to prior year third quarter net income of $17.4 million or $1.47 per diluted share. Third quarter GAAP net income from acquisitions, bearing the full cost of incremental interest, amortization and inventory step-up expense, was accretive by $0.02 per diluted share. Excluding the inventory step-up expense, third quarter accretion from acquisitions would be about $0.07 and EPS would be about $1.74 per diluted share. Net income for nine months -- for the nine months -- first nine months of 2020 was $48.6 million or $4.10 per diluted share compared to net income of $53.3 million or $4.52 per diluted share for the same prior year period. nine-month GAAP net income from acquisitions was accretive by $0.09 per diluted share, including the full burden of incremental interest, amortization and inventory step-up expenses.

Excluding the inventory step-up expense, nine-month accretion from acquisitions would be about $0.30 and EPS would be about $4.40 per diluted share. Third quarter 2020 adjusted EBITDA, which excludes the Morbark inventory step-up charges, was $42.8 million, up $11 million or about 35% over the prior year third quarter. Our adjusted EBITDA as a percentage of net sales was 14.3% in the third quarter compared to 11.7% of net sales in the prior year quarter. Higher Morbark margins, favorable product mix, the benefits realized from facility consolidations and other cost containment measures more than offset the impact of COVID-19 for the quarter. nine-month 2020 adjusted EBITDA was $114.6 million, which was 17.8% higher than the prior year nine-month results.

The nine-month adjusted EBITDA margin was 13.1% of net sales compared to 11.8% for the prior year period. During the third quarter of 2020, we generated $77.3 million of operating cash flow compared to $43.3 million in the prior year third quarter, an increase of 78.4%. Strong operating cash flows continued during the quarter due to management's emphasis on asset efficiencies and controlling expenses. At quarter end, we had $93.5 million of cash on hand and $186.3 million of availability under the existing credit facility, maintaining liquidity of almost $280 million. During the quarter, we reduced outstanding debt by $64.8 million and significantly reduced our debt-to-EBITDA leverage ratio. We ended the third quarter with $254.5 million of order backlog, an increase of 17.5% since the end of the second quarter and 18.2% higher than the prior year third quarter.

Excluding acquisitions, backlog was only down 1.9% from the prior year quarter. During the quarter, we saw modest organic growth in new order bookings primarily due to higher North American demand for our agricultural products. To recap our third quarter and nine -month 2020 results, record third quarter sales, up 7.3% with acquisitions but down 8.5% organically. Record nine-month sales, up 6.8% with acquisitions but down 11.8% organically. Third quarter 2020 adjusted EBITDA, up over 35% from the prior year quarter and at 14.8% of net sales compared to 11.7% the prior year. nine-month 2020 adjusted EBITDA, up 17.8% from the prior year period and at 13.1% of net sales compared to 11.8% the prior year.

Third quarter net income and earnings per share, both up 15% from the prior year quarter and included accretive acquisition results. Third quarter operating cash flow over $77 million, up 78% over the prior year quarter. Outstanding debt was reduced by nearly $65 million during the quarter. Quarter-end cash on hand plus loan availability increased to almost $280 million, up nearly 25% since the end of June. And third quarter ending backlog of $254.5 million, up 17.5% since the end of the second quarter.

I would now like to turn the call back over to Ron.

Ronald A. Robinson -- Chief Executive Officer and President

All right. Thank you, Dan. As numbers reported by Dan, look, we're very pleased with Alamo Group's 2020 third quarter results, given the -- certainly, particularly given the many ongoing challenges we are facing. Our sales continued to improve from the soft conditions we experienced in the second quarter. And we finished the third quarter at record levels of sales, certainly helped by the acquisitions we completed last year. Our earnings also rebounded nicely where, again, we benefited by both improving sales, along with the accretive contributions from our recent acquisitions

But there was so much more in the quarter than just the sales and earnings. Our cash flow was very strong. We paid down nearly $65 million in debt in the quarter and nearly doubled that in the year -- in the last two quarters. While still -- and yet we still ended the quarter with a strong level of cash of over $90 million. Our balance sheet also continues to be very healthy and was further strengthened in the third quarter. So despite the impacts of the COVID situation on our markets and the economy in general, our company showed strong and improving results in almost every measure of financial performance. Also pleased that most of the operational issues we faced in the second quarter showed improvement -- continued improvement in the third quarter and allowed us to return to near-normal operating conditions.

All of our manufacturing plants are open and operating, and we've called back nearly all of the employees we had on furlough or temporary layoff. And in fact, a few of our operations are experiencing some shortages as skilled workers are getting to be in a little short supply, once again, so it's probably good for the economy. And while some of our markets continue to be constrained by the current adverse economic conditions, we saw our bookings and backlog improve throughout the third quarter.

We're particularly pleased that our Agricultural division is actually, in third quarter, running ahead of last year's pace as the agricultural sector in general has shown a broad-based improvement and is operating at near pre-COVID levels. While farm incomes are still soft due to weak commodity prices, they are certainly benefiting from higher government support and -- which has made the overall farm incomes be up this year versus the previous year.

And other sides of this are -- and the fact that like acreage under cultivation remains at a very high level, and I think it bodes well for the overall agricultural outlook. And certainly, the agricultural sector has had a lot fewer operational challenges from COVID than many other industries. Our Industrial division also showed improving performance in the third quarter, though they are still below the previous year on an organic basis. And the products in this division have not improved on a uniform basis. It's been a little more lumpy, some better than others. For instance, our Morbark forestry products have been well ahead of the curve, improving very nicely, whereas some other products, like our vacuum truck lines, have certainly lagged behind their recovery.

Also, our markets in this sector have experienced a little bit more operational challenges and experienced a few more economic difficulties as well since a large part of our industrial sales are to governmental entities for infrastructure maintenance, and certainly, governmental budgets continue to be affected by revenue shortfalls and spending constraints. We believe that this situation will continue to be negative -- to negatively impact these markets for the remainder of 2020 and well into 2021. However, our business should hold up a little bit better during these adverse times, as they have in prior economic challenges, since our equipment continues to be used and employed, maintenance operations on a fairly regular basis, even during economic downturns and are being worn out and need repair and replacing at a somewhat more steady rate.

Our company's Industrial division has also been helped throughout the current year by the acquisitions we made in 2019 of Dutch Power and Morbark. These two have consistently provided positive contributions to our sales and earnings and have proven to be good additions to Alamo's overall operations. Although some of our initiatives to fully integrate them into our company have been hindered by operational challenges related to COVID, these efforts are still under way, and we remain confident we will achieve our intended synergies, though it may take a little bit more time than originally envisioned. While we are pleased with Alamo Group's performance in the third quarter of 2020, we believe our first -- our fourth quarter will be a little bit more challenged since it is a seasonally weak quarter for us, in general, as the equipment is a little bit less utilized in the fourth quarter.

And we also remain concerned about ongoing issues related to COVID, and particularly, in Europe and places where they are actually having almost a resurgence of COVID issues and are reinstituting some broad restrictions on the economies. So I mean, it's -- which is disconcerting to see, and I'm also concerned that there's areas in the U.S. where we're seeing a negative or more issues with COVID than we would like to be seen. So until there is a -- so this whole COVID situation is far from being resolved, and we really -- until there is a proven path to recovery, the pandemic will continue to foster an atmosphere of uncertainty in our markets as well as the economy in general. Still, we are optimistic about the outlook for our company with -- we've seen some positive momentum in our markets.

We have a healthy backlog. We have a very solid financial stability and the ongoing contributions from recent acquisitions. And we have a management team that has been very proactive in responding to challenges, changing market conditions and other kind of operational issues. So with all this positive momentum, we believe we are well poised to prosper despite the uncertain environment in which we are operating. Certainly, to be successful has required a team effort, and we're very grateful for the dedication and commitment we have had from our -- not only our employees but our customers, our vendors and other stakeholders during these challenging financial times and are appreciative of this ongoing support.

With that, I would now like to open the call to any questions you might have.

Questions and Answers:

Operator

Thank you [Operator Instructions] Our first question comes from Mike Shlisky, Colliers Securities.

Mike Shlisk -- Colliers Securities -- Analyst

Hey, good afternoon guys. Can I get a little bit more color about some of your comments on ag, Ron? Can you give us a sense as to what might be some of the stronger products or stronger areas? Is it the large row crop farmer? Is it the rancher or is it the large acreage that's kind of driving most of the upside currently?

Ronald A. Robinson -- Chief Executive Officer and President

I would say it's been fairly broad-based. Certainly, the financial -- the subsidies that farmers are receiving are to the big farmers, not -- they don't go to hobby farmers. So I mean, but -- so we've seen that. But certainly, the small horsepower tractor, sales in the U.S. are up nicely, like double-digit increases in sales there, which I think -- so that means even in the hobby farmer sector, there's been some. But some of the ranching sectors, row crop farm, it's been -- I think that's been sort of good that it's been fairly broad-based. And so like I say, no one sector.

Certainly, there was a little bump in probably the second quarter and early third quarter from, I think, like landowners who were at home more during COVID than they typically were. And we actually -- and there was a big bump in small horsepower tractors and some related type implements, like our single-spindle mowers. But as I said, acreage under cultivation is holding up good. The subsidy payments to farmers is at record levels. And so I mean -- which has helped the big row crop farmers, the big branches. But -- so it's been a pretty -- that's been fairly -- it's been very broad-based, which has been a welcome situation.

Mike Shlisk -- Colliers Securities -- Analyst

Great. Thanks. I wanted to turn to some weather impacts on the order patterns. In snow, you've always said that if you see a heavy snow season, oftentimes, the next year is pretty good for snow plow orders. I guess, first, I'm curious whether that's happened this year, for the snow orders, have been -- met your expectations. And then secondly, this has been a very active hurricane season.

I think one hit the southeast U.S. just yesterday, and it sounds like the 11th of the year. Do you think hurricanes will have any effect on your vacuum trucks or your forestry equipment once the hurricane season is over? Could the government start to plan ahead for next year saying, we really should be more prepared for next year's storms with some more equipment?

Ronald A. Robinson -- Chief Executive Officer and President

Yes. Weather impacts on snow removal, first of all, snow is actually starting off quite good for us this quarter. So I mean -- so yes, we think that we are seeing some benefits there. And certainly, I think actually, fires have had an impact on us as well. I mean, certainly, some of our forestry products that have been needed in the clean-up and remediation of those type areas. So snow products are off to a good start. Forestry products are off to a good start, like I said, somewhat related to fires. Hurricanes, yes, I mean, there seems to be a little bit more activity.

I don't think -- while it's been bad, not only have been quite as severe like the Katrina's or this kind of stuff. So -- and we have not really seen -- I mean our vacuum truck business, as I stated earlier, is actually been one that has been softer. I think it's because a lot of -- especially where we rent vacuum trucks is to some of the non-governmental customers. And some of those areas have been soft, so like oilfield and some construction and mining, these type of things. So they've been a little soft. So I have not seen a big influx from hurricanes that has offset that. So I'm not saying we haven't benefited a little. It's kind of a little early to benefit from the one yesterday. But -- so yes, that will help us a little bit. Like I say, vacuum trucks are soft and have remained soft throughout most of this period. I mean it's gradually improving but, still, that's been one of the softer sectors.

Mike Shlisk -- Colliers Securities -- Analyst

Okay. And then turning to the balance sheet. Looking at your debt and your leverage ratio, it has gotten relatively low. You're probably around two times levered right now on net debt, if my calculations are correct. I guess first, Dan, is this area comfortable for you? And then kind of secondly, since you're in this range, is it now time to go out and look for your next good-sized M&A deal?

Dan E. Malone -- Executive Vice President,Chief Financial Officer

I think we'd like a little more certainty in the marketplace before we're really motivated. But the debt level is not an issue right now. It's been brought down. We'd like -- if we were in a certain market, it would -- we'd start feeling like we got a lot of dry powder.

Ronald A. Robinson -- Chief Executive Officer and President

Yes. No, I think there is -- as Dan said, I mean, balance sheet-wise, you're right. We're very comfortable. And yes, I mean, we would say, yes, that's not holding us back from acquisitions. There's a lot of other things holding us back on acquisitions. There are some -- there hasn't been much activity. I think a lot of people have been on the side lines for the last couple of quarters

And people are starting to get more interested and looking at bringing some things to market. But I think as opposed to maybe some high-tech or as opposed to maybe healthcare, which I think have seen more M&A activity going on, I think it's sort of our industrial space is going to lag in a little bit. It's hard, still hard to physically visit assets. It's still hard to -- while we all think valuations are a little hard because we don't know -- we think it's got to be -- they'll recover from the COVID lows, but the timing is still very suspect. Until we have a clear path to recovery, I think it would be -- it's a little harder to value industrial-type products, the prospects of industrial -- of acquisitions of industrial-type companies.

So -- but yes, we're starting to open our eyes to things that are coming up there. And like I say, acquisitions are definitely still part of our strategy and we're comfortable with our balance sheet. But I think it's still -- the right -- take the right circumstances for us to move ahead at this time. But we're starting to look. But yes, it's a little bit more challenging environment.

Dan E. Malone -- Executive Vice President,Chief Financial Officer

Like our goal is to continue to be diligent to pay debt down as we move forward. So as Ron said, that's correct, like with the environment that we're at, it moves us to continue to do what we're doing.

Mike Shlisk -- Colliers Securities -- Analyst

Okay. Got it. Well, guys thanks again. I appreciate as always.

Ronald A. Robinson -- Chief Executive Officer and President

Thank you.

Dan E. Malone -- Executive Vice President,Chief Financial Officer

Thank you. Mike.

Operator

[Operator Instructions] Our next question comes from Chris Moore with CJS Securities.

Chris Moore -- CJS Securities -- Analyst

Hey, good afternoon guys. So just trying to get a sense, it sounds like Morbark is one of the bright spots on the industrial side. Organic growth was down, I think you said 14.4%. You didn't own Morbark in Q3 of last year. Roughly, in terms of -- from a revenue standpoint, was Morbark revenue down meaningfully year-over-year in the quarter? Or just kind of any sense there that's doing better than the overall industrial segment?

Dan E. Malone -- Executive Vice President,Chief Financial Officer

Chris, they were a little slow this quarter and it did pick up from -- I should say, slow in Q2. It actually picked up here in Q3. But compared to last year, we've not given you that information out. And -- but yes, we're seeing a nice pickup with them, both in sales as well as orders and backlog.

Ronald A. Robinson -- Chief Executive Officer and President

Yes. Morbark, in second quarter, I mean, since they have some really big-ticket items, they were off a little bit more early in the second quarter, probably more than the average. But like I said, by the -- midway by the third quarter, they were actually one of above-average in one of our stores. I think they're still running slightly behind last year's pace. But it picked up nicely in the third quarter, but that had a weak second quarter.

Chris Moore -- CJS Securities -- Analyst

Got it. All right. Thank you. Dan, I might have missed it, but parts and services as a percentage of revenue? And how big of an impact did that have on margins this quarter?

Dan E. Malone -- Executive Vice President,Chief Financial Officer

I mean, certainly, it helps margins. The mix of parts was higher than last year, but it helped -- it was one of our favourable product mix impacts.

Ronald A. Robinson -- Chief Executive Officer and President

Yes. As is typical in a downturn, parts hold up better than whole goods, and that has certainly been the case here.

Dan E. Malone -- Executive Vice President,Chief Financial Officer

Yes. Both second and third quarter to that way, Chris.

Chris Moore -- CJS Securities -- Analyst

Right. And roughly, what percentage of the revenue was that?

Dan E. Malone -- Executive Vice President,Chief Financial Officer

We don't provide that [approximate] [Indecipherable]

Chris Moore -- CJS Securities -- Analyst

Got you.

Dan E. Malone -- Executive Vice President,Chief Financial Officer

It's a little over 20.

Ronald A. Robinson -- Chief Executive Officer and President

Year to date, we don't have.

Chris Moore -- CJS Securities -- Analyst

Got it. Yes. And just from the ag perspective, that's obviously doing pretty well. Is -- Ron, is that level low single-digits, 1% to 2% organic growth, is that -- from where you're sitting today, is that reasonable over the near term?

Ronald A. Robinson -- Chief Executive Officer and President

Yes. I mean, I think so. I think Ag, you saw the strengthening in our backlog. I can tell you the biggest strengthening was in Ag. The biggest strengthening in the backlog was in our Ag. They're, in fact, well ahead of last year. So Europe is lagging a little bit. And as I just said, Europe is actually -- you may have seen that France is reinstituting a lot of shutdown measures to deal with COVID. The word is England will follow suit by the weekend. And so I mean, I'm worried a little bit. That's a big part, good Ag sales in England and France and Europe.

But -- so a little bit concerned there. But right now -- so actually, the U.S. organically has even been up more than that couple of percent, and I think it should continue nicely. But like I say, there's always some uncertainty. But the backlogs are good, the outlook is good and commodity prices are still a little weak, and we would rather see farm incomes be improving more from -- that their basic incomes are improving, not that their subsidies are improving. So I mean, that's always subject to change.

Dan E. Malone -- Executive Vice President,Chief Financial Officer

Chris, we like where it's going. If you go back to the last couple of years, it's been really a decline because the market, the Ag market has been really tough. So we like where it's going. It's not rebounded to the levels we've seen before in the past.

Ronald A. Robinson -- Chief Executive Officer and President

Yes. Commodity prices are still a little soft. And the China situation is still -- all those commitments China made to buy cultural commodities from the U.S. have certainly not been fulfilled at the way they said they were going to. So I mean, that's still a bit of a wildcard there.

Chris Moore -- CJS Securities -- Analyst

Got it. I appreciate it, guys. I'll jump back in line.

Dan E. Malone -- Executive Vice President,Chief Financial Officer

Thank you.

Operator

We have no further questions in the queue at this time. I would like to turn the call back over to management for closing remarks.

Ronald A. Robinson -- Chief Executive Officer and President

Okay. Well, again, I appreciate you all being on the call today joining us. We're -- like I said, we're pleased with the -- even though -- as I said, still a lot of challenges out there, but pleased with the progress we are making, and appreciate your ongoing support. So thank you for joining us today, and we look forward to speaking with you when we report our 2020 year-end results. Thank you much. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Edward T. Rizzuti -- Vice President, General Counsel & Secretary

Ronald A. Robinson -- Chief Executive Officer and President

Dan E. Malone -- Executive Vice President,Chief Financial Officer

Mike Shlisk -- Colliers Securities -- Analyst

Chris Moore -- CJS Securities -- Analyst

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