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Alamo Group Inc (NYSE:ALG)
Q4 2020 Earnings Call
Feb 26, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

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'd like to turn the conference over to Ed Rizzuti, Vice President, General Counsel and Secretary. Please go ahead, sir.

Edward T. Rizzuti -- Vice President, General Counsel and 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 a release and make sure you're on the Company's distribution list. There will be a replay of the call, which will begin one hour after the call and run for one week. The replay can be accessed by dialing 1-888-203-1112 with the passcode 6872067. 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, 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-statements. We will be making forward-looking statements today that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the Company's actual results in future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following: market demand; COVID-19 impacts, including operational and supply chain disruptions; competition; weather; seasonality; currency-related issues; geopolitical issues and other risk factors listed from time to time in the Company's SEC reports. The Company does not undertake any obligation to update the information contained herein, which speaks only as of this date.

I would now like to introduce 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 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 E. Malone -- Executive Vice President and Chief Financial Officer

Thank you, Ron. The key takeaways from our fourth quarter and full year 2020 results are: fourth quarter sales were down 3.8%, record full year sales were up 4% with the help of acquisitions, but down 11% without. Fourth quarter net income and earnings per share were down 16% from the prior fourth quarter on a GAAP basis and down about 6% on an adjusted basis. Full year net income and earnings per share were down 10% from prior year on a GAAP basis, but increased more than 2% year-over-year on an adjusted basis. Full year adjusted EBITDA was up 11.6% from the prior year and essentially flat to the third quarter trailing 12-month result with adjusted EBITDA margins expanding by nearly 100 basis points over prior year.

Record full year operating cash flow of $184.3 million was up 108% over prior year, and fourth quarter operating cash flow exceeded an unusually strong operating cash flow performance in the prior year quarter. Outstanding debt was reduced by $158.6 million in 2020, and our debt net of cash position improved by $166.5 million during the year. Record backlog of $354.1 million was up 35.6% over the prior year-end.

Fourth quarter 2020 net sales of $288.6 million or 3.8% lower than the prior year quarter. While we saw a strong rise in order rates and backlog, the COVID-19 pandemic continued to negatively impact our manufacturing efficiencies and inbound supply chain during the quarter. Also the timing of these new orders and the fact that strong customer demand hasn't been consistent across all of our business segments has limited the immediate top line impact. Full year 2020 net sales of $1.16 billion were a Company record and 4% higher than the prior year with the contribution of the Morbark and Dutch Power acquisitions. Without these acquisitions, organic sales were down 11% from prior year.

Net income for the fourth quarter was $8 million or $0.68 per diluted share compared to prior year fourth quarter net income of $9.6 million or $0.81 per diluted share. Excluding the Morbark inventory step-up expense, severance cost related to a plant closure, one-time acquisition transaction cost and acquisition-related amortization expense, adjusted fourth quarter 2020 net income was $13 million or $1.10 per diluted share compared to $13.8 million or $1.18 per diluted share in the prior year quarter.

Net income for full year 2020 was $56.6 million or $4.78 per diluted share compared to net income of $62.9 million or $5.33 per diluted share for the prior year. Excluding the full year impact of the adjustments I just mentioned in the quarter comparison, adjusted full year net income was $70.3 million or $5.94 per diluted share compared to $68.4 million or $5.80 per diluted share in the prior year.

Industrial Division fourth quarter 2020 net sales of $202.7 million represented an 8.9% decrease from the prior year quarter due to the pandemic-related impact on customer demand and disruptions to our supply chain and operations. While this division ended the year with higher backlog than the previous year-end, the surge in orders that created this favorable comparison is largely concentrated in forestry and tree care products. Other business units, notably those serving the municipal government sector, finished the year with order backlog below pre-pandemic levels.

Agricultural Division fourth quarter 2020 sales were $85.9 million, up 10.5% from the prior year fourth quarter. During the quarter, we continued to see strong organic growth across this division. The immediate top line benefit of the surge in customer demand was constrained by the negative impact of the pandemic on inbound supply chain and manufacturing efficiencies, as previously mentioned.

Full year 2020 adjusted EBITDA was $145.2 million, up $15.1 million or about 11.6% over the prior year and was essentially flat to the third quarter trailing 12-month results. Our adjusted 2020 EBITDA as a percentage of net sales improved by nearly 100 basis points over prior year. Higher Morbark margins, favorable product mix, the benefits realized from facility consolidations and other cost containment measures more than offset the negative impact -- the negative pandemic impact previously mentioned.

During 2020, we generated $184.3 million of operating cash flow compared to $88.8 million in the prior year, an increase of 108%. Strong operating cash flows continued during the most recent quarter, as we exceeded an unusually strong operating cash generation in the prior year fourth quarter and we further delevered our balance sheet.

We ended the fourth quarter with a record $354.1 million in order backlog, an increase of over 35% since the prior year-end. During the fourth quarter, we saw an acceleration of customer demand, particularly for our forestry and agricultural products, while demand has grown overall for the Company and all of our units have seen improvements in customer demand since the pandemic impacted the second quarter. Order rates for some of our businesses are still below pre-pandemic levels.

To recap our fourth quarter and full year 2020 results, fourth quarter sales down 3.8%; record full year sales, up 4%, but down 11% without acquisitions; fourth quarter net income and EPS down 16% on a GAAP basis and down 6.8% on an adjusted basis; full year adjusted EBITDA up 11.6% from prior year and essentially flat to the third quarter trailing 12-month result with adjusted EBITDA margins expanding by nearly 100 basis points over prior year; record full year operating cash flow, up 108% over prior year with favorable comparisons continuing in the fourth quarter; full year debt reduction of almost $159 million and debt net of cash improvement over $166 million; and record backlog, up more than 35% over the prior year-end.

I'd now like to turn the call back over to Ron.

Ronald A. Robinson -- Chief Executive Officer and President

Thank you, Dan, and I think we are 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 we have -- which has been building for the last several quarters, really since the slowness in the -- the end of this -- in the second quarter and -- but it's built in the third, continued into 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, were -- always had a follow-on effect that like you could have one person that went home sick and then suddenly we close 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 OK. We've always had [Phonetic] a couple of things like that. We are also experiencing more supply chain issues, but again can be small. You cannot ship a product as you have -- are missing a [Indecipherable] O-ring, but that's the kind of ripple effect these can have. All of this together caused shipments in the fourth quarter to be a little below our expectations, but still good. And margins were even better, particularly when adjusted for the non-cash charges that were above average in the fourth quarter for 2020.

The two major non-cash charges were the inventory step-up charge related to the acquisition of Morbark and the reorganization reserve related to the proposed plant consolidation we've announced in the Netherlands. We are not finished with the inventory step-up charges at Morbark, which affected us every quarter since we bought them. But as of the end of the fourth quarter, all goals are now finished and should not be affecting our results going forward. And the plant consolidation in Europe, we're actually -- even though we took a charge in the fourth quarter, it's actually -- the timing was a little bad because that actually, within the next year, will have a projected payback of less than one year on that investment -- on that the plant consolidation. So, it's a very positive move in the long term, even though it impacted the fourth quarter results. But net of these two items, net income from the quarter was just below the previous year's -- adjusted net income was just below the previous year's adjusted net income, despite soft sales and less organic sales and certainly the ongoing COVID issues. So, all in all, we're pleased.

On top of this, we were extremely pleased with our efforts in the fourth quarter and throughout 2020 in controlling cost and managing our assets, which, as Dan pointed out, resulted in very strong levels of cash generation, record EBITDA and reductions in outstanding debt, ensuring the Company's solid financial stability despite the certainly challenging economic environment, which we are all operating. In addition, we are pleased that even with the limitations imposed on us during most of the year 2020 that certainly restricted our travel and caused many of our office personnel to have to work remotely for some periods of time, we were able to complete many of our operational developments that we already had planned for the year. These include most of the integration initiatives related to the 2019 acquisitions of Morbark and Dutch Power. We also completed the construction of a new manufacturing plant for our Super Products unit in Wisconsin that allowed us to consolidate three facilities into one modern efficient facility, and we were able to complete that project totally in 2020. And there was continuous progress on a range of other product development and operational improvement initiatives ongoing throughout the year. So, actually, we really made a lot of progress in a very challenging year.

Alamo Group's Industrial Division performed well in both the fourth quarter of 2020 and for the full year, even though for us, they probably had the most market challenges due to COVID. The biggest end user of their products are governmental entities, most of which struggled with budgetary issues during the year and are still being impacted today. Yet while organically, our sales were off, they still held up well due to the stable nature of demand for our types of products that continued to be used through the year for infrastructure maintenance. And we're pleased bookings, which were very soft in the second quarter and gradually and steadily increased each quarter since then, have continued this trend as we moved into 2021. As Dan pointed out, some of it's a little spotty. Some units are doing better than other units. But certainly in total, they're up. And it's interesting like -- say like Morbark, one of our new units, they were probably hurt the most early on COVID, and yet, they have come back the most -- the strongest, as things have continued to build back up. So, it had been a little spotty but in total, as I said, it continues to be good and strong.

Certainly, our Agricultural Division has held up even better and actually showed a small increase in sales for the year and margins did even better. We were -- I think the ag sector in general was helped by increased subsidies to farmers during the year, and actually we started -- COVID [Phonetic] period started with fairly low levels of dealer inventories going into the year 2020 due to the weak agricultural industry of the last several years. So as a result, at the end of the year, as I said, we have record backlogs. Dealer inventories are still fairly on the low end, so there's still more upside potential there. But we're also seeing improved commodity prices in the ag industry. So, the outlook for further growth in this division is very positive as we move into 2021.

In fact, we believe the positive trends we are seeing in both of our divisions bode well for Alamo Group's outlook for 2021, though the pandemic and its repercussions, as well as all the impacts it has had on the global economy are still far from over. For us specifically, ongoing COVID infections are spotty, but certainly are still causing challenges. Supply chain issues are affecting us and many -- almost everybody in our industry. Everything from truck chassis, tractors and all are out -- the lead times on them have nearly doubled for many of our key inputs. Certainly, even the adverse weather conditions of the last several weeks, especially in Texas, not only were a couple of our plants closed for couple days, but we saw like one major supplier that -- they said they were closed four days, and so now they are two weeks later than their plan. So, that's causing some issues. And we're also seeing a few inflationary pressures too in this which -- I think with our reactions to that, that will -- most of that will flow through fairly quickly. But in the short term, it can have some effect on our -- all of our operations.

So, all these issues together will certainly dampen our first quarter performance, but we actually feel quite good about the year 2021 in total. There is positive momentum in our markets. There is stable demand for our types of products, which continue to be used daily in maintenance and operations and are wearing out on a regular basis. In addition, contributions from recent acquisitions, ongoing operational improvement initiatives, as I've said, such as the plant consolidation initiatives we've taken on, altogether make the outlook for the full year of 2021 very bright for Alamo Group. And we certainly hope that the greater availability of the new COVID vaccines will start to take -- have a impact on the pandemic and will begin to abate and we can all return to a little bit more conditions. But regardless, we actually feel quite good about the outlook for Alamo for 2021.

So, we want to thank you for your support during these trying times. And with that, I would now like to open the floor for any questions you might have.

Questions and Answers:

Operator

[Operator Instructions] We'll go first to Chris Moore at CJS Securities.

Chris Moore -- CJS Securities -- Analyst

Hey, good morning, guys.

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

Good morning, Chris.

Chris Moore -- CJS Securities -- Analyst

Good morning. Ron, you had mentioned -- you 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?

Ronald A. Robinson -- Chief Executive Officer and President

Yes. It's not that the deliveries are out. It's just that with the -- a few COVID issues and a few supply chain issues, we think it's -- like that's going to dampen results sort of like a little bit like it did in the fourth quarter. And like I said, it's not -- the backlog is longer term. 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, it's really just getting geared that we can -- gear up production that we can meet this demand. So, like I say, backlog in some cases, almost a little bit too strong -- a little bit 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 -- CJS Securities -- Analyst

Got it. And you had said it's more skewed toward the ag and Morbark?

Ronald A. Robinson -- Chief Executive Officer and President

No, I think it's pretty well broad based. All of our units are being affected somewhat similarly, I think probably, ag being a little bit more affected by some of the port issues. We've got a lot of product on the ocean waiting 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, rather than having on our plants. But that's affecting ag a little bit more, the report back-up. But it's fairly broad based. It was -- and like I said, it's not a -- it's not big a lot. It's just all -- like I said, all it takes is one item to keep you from shipping the whole -- like being able to complete a piece of equipment to ship.

Chris Moore -- CJS Securities -- Analyst

Got it, and appreciate that. So at parts, much higher gross margins, made up about 21.5% of revenue in fiscal '20 from the COVID impact [Indecipherable] the last couple of years. Do you expect that to trend back toward the high-teens in '21?

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

You know that there's two [Phonetic] things going on there, one of which is we acquired Morbark. And Morbark, just the nature of equipment, there's just a much higher level of funds [Phonetic] 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. But we will be operating at higher than 18.5% because of Morbark. May not be 21.2%, maybe it's more in that vicinity of 20%.

Chris Moore -- CJS Securities -- Analyst

Sounds good. All right. Let me jump back in line. Appreciated it, guys.

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

Thanks.

Operator

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

Mike Shlisky -- Colliers Securities -- Analyst

Hey, good morning, guys.

Ronald A. Robinson -- Chief Executive Officer and President

Good morning, Mike.

Mike Shlisky -- Colliers Securities -- Analyst

Speaking of mix, you've been 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 higher margin products. Is that going to stick in 2021?

Richard J. Wehrle -- Vice President, Treasurer and Corporate Controller

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.

Ronald A. Robinson -- Chief Executive Officer and President

But as we said, going into the -- when we bought Morbark, their margins actually were a little bit higher than our margins -- our average margins, and so -- and that has all held true. So, yeah, we think -- plus with some of the synergies we're able -- already getting from them, we think that's certainly the case that the margins will be good. Like said, their backlog has grown nicely. 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 -- they were one of the ones that I mentioned we had a couple of cases of COVID in the shipping department and the whole shipping department was down for a week. So...

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

So their EBITDA margins are a lot higher than the -- or a little higher than the Company average. If you look at their whole good equipment margins, they're about what we -- what ours are across the Company. So, 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 drive that. So they -- at an EBITDA level, they're going to -- they're going to drive a higher EBITDA margin than the average Alamo Group Company.

Richard J. Wehrle -- Vice President, Treasurer and Corporate Controller

Mike, just to add to that too is that -- 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.

Mike Shlisky -- Colliers Securities -- Analyst

Got it.

Ronald A. Robinson -- Chief Executive Officer and President

But all of them are improving now. They are all above -- they ended the year above where they were like in the mid-year.

Mike Shlisky -- Colliers Securities -- Analyst

Of course, sure. That make sense. [Indecipherable] 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?

Ronald A. Robinson -- Chief Executive Officer and President

There is still more to go and really to purely [Indecipherable] the initiatives that we complete. We identified -- I mean, we got some converted to our operating system that went live. There was -- we were a little -- several months late in the process just because restrictions on travel and people working remotely made it a little 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, the sales being off, and they had worked down -- they have been working down inventory. So, it's -- now that we are starting to -- now their backlogs have really grown and we're starting to purchase more for them, we are getting those benefits. But like I said, that -- so that will start to ramp up nicely. We also completed one plant consolidation there as well. They had three plants, and we closed the smallest one actually ahead of schedule and moved it into their -- the smallest of the three up in Canada, moved it into their other two. And so, yeah, I think we still got more initiatives to go and we're still yet 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 J. Wehrle -- Vice President, Treasurer and Corporate Controller

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

Ronald A. Robinson -- Chief Executive Officer and President

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

Mike Shlisky -- Colliers Securities -- Analyst

Got you. If we turn to maybe zero turns and how that's going, anything you can tell us about the color how Dixie Chopper has been going and some of the zero turns over a push-out?

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

Yeah, we haven't disclosed any numbers publicly, specific numbers, but 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 J. Wehrle -- Vice President, Treasurer and Corporate Controller

It met our expectations for this past year but we...

Ronald A. Robinson -- Chief Executive Officer and President

Yeah, probably exceeded it.

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

Exceeded it.

Ronald A. Robinson -- Chief Executive Officer and President

Yeah. 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. 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 would say, 2020. And so, it's done well for us in 2020. It's small numbers, but very nice contributor.

Richard J. Wehrle -- Vice President, Treasurer and Corporate Controller

High payback to the small amount we had to buy -- pay for it.

Mike Shlisky -- Colliers Securities -- Analyst

But the overall strength in the order and backlog seeing going forward is not strictly zero turn basis. It's more broad-based than that?

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

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

Ronald A. Robinson -- Chief Executive Officer and President

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

Mike Shlisky -- Colliers Securities -- Analyst

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

Ronald A. Robinson -- Chief Executive Officer and President

Yeah. Certainly, the financial -- the M&A market is coming back strong. I think it's lagging a little in Industrials because Industrials, not only in my case, I think due diligence -- it's 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 it seems obviously [Phonetic] people are sort of just assuming COVID is over with and never happened. And I'm kind of -- I'm a little 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 pipe, starting -- there was people who wanted new stuff last year. They got put on hold. And I think they're starting to get geared up again. And so, yeah, 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 -- Colliers Securities -- Analyst

Got it. I guess, just don't get [Indecipherable] good shape.

Ronald A. Robinson -- Chief Executive Officer and President

Yeah, that's right. There is a lot of money out there chasing deals. And so, like I'd say, we care what we pay for stuff and we can't quite get on that bandwagon.

Mike Shlisky -- Colliers Securities -- Analyst

Indeed. Thanks so much, Ron.

Ronald A. Robinson -- Chief Executive Officer and President

Thank you.

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

Thanks Mike.

Operator

[Operator Instructions] We'll go next to Greg Burns at Sidoti & Company.

Greg Burns -- Sidoti & Company -- Analyst

Good morning. When we 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 inefficiencies, do you think that you can expand margins in 2021 from where you ended 2020?

Ronald A. Robinson -- Chief Executive Officer and President

You sort of broke up, but I think you were talking about can we expand margins or what's the margin impact due to inflationary pressures. And there certainly is more inflation in our cost these days and -- but I think we have shown a pretty good ability. We were -- 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 steel surcharges, energy surcharges. So, yeah, 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 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 would be -- I think you will see that we will get the full benefits of our cost increases, our surcharges and all, and new backlog. New backlog is already taking 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 up -- 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 to hold onto our margins. And so, I'm OK. I feel good about that, like I said. As always, when there is 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've shown over the years that we do react and maybe little effect. But during the course of the year, we should be fine.

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

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

Greg Burns -- Sidoti & Company -- Analyst

Okay, makes sense. [Technical Issues] demand in the Industrial side, when you look at [Technical Issues] the support that you might be seeing for state and local governments, how do you see that potentially benefiting Alamo Group?

Ronald A. Robinson -- Chief Executive Officer and President

Well, yeah, it's interesting, state and local governments, they are having pressures. I've been surprised, the states usually haven't been hurt as much as the municipal government budgets have, which I've been surprised. I think [Phonetic] states budgets in general have held up a little bit better than I thought. Some of them were in a little bit better shape going into this. And so, yeah, it was interesting, early on in the pandemic, I think our bookings were really soft, as much affected by governmental, operational challenges. And 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 they are now functioning -- they were functioning much better by mid-year, 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 the snow season we were seeing. The backlog is there because last -- because this year, there was a lot of snow. But last year, there wasn't much, so -- which meant that the orders going into weren't bad. But we're already starting to see our spare parts orders pick up since there has been heavy snows surely in February around the country, and that we think the orders would be strong going into next year. So, some of that is, like I said, seasonal. Some of that's government operational balance [Phonetic]. But by and large, they are operating pretty good. Their budgets are still very tight, and like I'd say, but they are 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 are 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, but I'm glad they're using our equipment on a pretty regular basis these days.

Greg Burns -- Sidoti & Company -- Analyst

Okay, thank you.

Mike Shlisky -- Colliers Securities -- Analyst

[Operator Instructions] We'll take a follow-up from Mike Shlisky from Colliers Securities. Hey, thanks for taking my follow-up questions here. 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 you 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 who probably cannot be cloned, Ron Robinson?

Ronald A. Robinson -- Chief Executive Officer and President

That was very [Indecipherable]. Very kind of you. But no, this is a process that even I -- that we've been thinking about and doing succession planning for a number of years lately. And, yeah, no one is going to be here forever, and -- but I think we probably will come to a conclusion with the process in the next month or so and be ready to make announcements. And then, it will be a smooth and orderly transition following that. I think that I can say that mostly we are looking internally, and so I think people who know what -- 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, I'm -- it's not like I'm walking out the door. I'm -- still be on the Board and following this and still be involved and have a very vested 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.

Mike Shlisky -- Colliers Securities -- Analyst

Okay, I'll leave it there. Thanks so much, Ron.

Ronald A. Robinson -- Chief Executive Officer and President

Thank you, Mike.

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

Thanks Mike.

Operator

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

Ronald A. Robinson -- Chief Executive Officer and President

Okay. Well, again, we thank you for your -- joining us today and your questions and comments and your support of us. I would 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

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

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

Ronald A. Robinson -- Chief Executive Officer and President

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

Richard J. Wehrle -- Vice President, Treasurer and Corporate Controller

Chris Moore -- CJS Securities -- Analyst

Mike Shlisky -- Colliers Securities -- Analyst

Greg Burns -- Sidoti & Company -- Analyst

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