Alamo Group Inc. (NYSE:ALG) Q4 2023 Earnings Call Transcript
Alamo Group Inc. (NYSE:ALG) Q4 2023 Earnings Call Transcript February 23, 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 Incorporated Fourth Quarter 2023 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Edward Rizzuti, Executive Vice President, General Counsel and Secretary. Please go ahead, sir.
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 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 1-877-344-7529 with the passcode 1294689. 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; and Richard Wehrle, Executive Vice President, Chief Financial Officer, 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. Before turning the call over to Jeff, 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; adverse economic conditions which could lead to a reduction in overall market demand, supply chain disruptions, labor constraints competition, weather, seasonality, 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.
Jeff Leonard: Thank you, Ed. I’d like to again thank everyone, who's joined us on the conference call today and to express our appreciation for your continued interest in Alamo. The fourth quarter shaped up broadly in line with our expectations and we were very pleased with the financial results we reported today, despite gathering headwinds in several of our served markets, our teams achieved record quarterly sales and earnings for the ninth consecutive quarter. I would now like to turn the call over to Richard Wehrle, who will take us through a review of our financial results for the fourth quarter. I will then provide additional comments on the results and say a few words about the outlook as we enter 2024. Following our formal remarks, we look forward to taking your questions. Richard, please go ahead.
Richard Wehrle: Thanks, Jeff, and good morning, everyone. Alamo Group's fourth quarter 2023 closed with an excellent performance that produced record net sales and net income, driven by continued strong demand of our products. Fourth quarter consolidated net sales were $417.5 million, an increase of 8% compared to $386.6 million in the fourth quarter of last year. Gross margin dollars increased by $11 million and gross margin percent was up almost 80 basis points in the quarter compared to the fourth quarter of 2022. Both margin dollars and percentage increase were driven by higher volume and price initiatives, we've had in place along with improved productivity. Operating income for the fourth quarter came in at $44.8 million versus $42.7 million in the fourth quarter of 2022, an increase of 5%.
Operating income as a percent of sales was just under 11% for the fourth quarter versus 11% for the same quarter last year. Consolidated net income for the fourth quarter was $31.5 million, or $2.63 per share diluted -- per diluted share, an increase of 8% versus net income of $29.2 million or $2.44 per diluted share for the fourth quarter of 2022. Vegetation management was off in total sales compared to the fourth quarter of 2022. We expected this softness coming in both forestry and agricultural markets. Net sales were $214.4 million, a decrease of 8% compared to $232.5 million for the fourth quarter of 2022. As we have continued to monitor dealer inventory levels, which are up, but not at historical levels, we honored dealer requests during the quarter to reschedule shipments until 2024, which was a big reason for lower sales.
The division's operating income for the fourth quarter was $19.8 million, down 35% versus $30.2 million for the same period in 2022. Industrial Equipment division, net sales had a tremendous quarter, coming in at $203.2 million, up 32% compared to $154.1 million for the fourth quarter of 2022 this was due to a solid performance across all product lines, particularly vacuum trucks, sweepers, debris collectors and stone removal equipment. While truck chassis deliveries and component part receipts return to more consistent cadence, there were a few late component deliveries that impacted this division's operations, although, not as significantly as in previous quarters. This resulted in a substantial rise in operating income in the fourth quarter of 2023 -- just over $25 million compared to $12.5 million for the fourth quarter of 2022, an increase of over 100%.
Consolidated net sales were a record for the full year of 2023, coming in at just under $1.7 billion, up 12% compared to $1.5 billion for full year of 2022. Strong demand for our products in both divisions along with positive impacts of pricing initiatives and improved supply chain and productivity were the main drivers of the increase. Consolidated sales were the highest in the company history. 2023 gross margin percent was up almost 200 basis points and gross margin increased $77 million versus 2022 an increase of 20%. The margin improvement resulted from continued improvement in supply chain conditions, which led to efficiencies and enhanced capacity utilization. Full year operating income for 2023 was just under $198 million or slightly below 12% of sales compared to a full year of 2022, which was $148.6 million, just under 10% of sales up 33% increase in operating income dollars and 190 basis point increase in operating income as a percent of sales.
Net income for 2023 was $136.2 million or $11.36 per diluted share versus net income of $101.9 million or $8.54 per diluted share for 2022, an increase of 34%. The company's backlog at the end of 2023 came in at just over $860 million. That's down 15% compared to backlog levels at the end of 2022. A few additional financial items I'd like to cover that relate to the balance sheet at the end of 2023, which continues to remain extremely strong. Working capital increased $53 million compared to the end of 2022, increased primarily from higher accounts receivable and to a lesser extent, inventory. For the full year of 2023, we reduced our debt level on our credit facility by almost $67 million. Our bank leverage ratio at the end of 2023 was just under 1:1, which is at lowest level in just over eight years -- four years, excuse me.
And finally, the company's trailing 12-month EBITDA was a record coming in at just under $247 million, up 26% compared to calendar 2022. For 2024, cash flow should remain strong as our focus will be continuing to reduce both inventory and debt. We will remain disciplined in execution on controlling costs and expenses in as inflation is expected to continue to put pressure on our margins. Supply chain will continue to be a major focus to reduce the amount of work in process we hold. So in summary, Q4 was a record for the quarter for Alamo Group. Sales were up 8%, which translated into an 8% increase in net income. We are also pleased that our Board recently approved an increase of our regular quarterly dividend of $0.22 per share to $0.26 per share for 2024.
With that, I'll turn the call back over to Jeff.
Jeff Leonard: Thank you, Richard. We want to thank everyone who joined us on the conference call today. In the fourth quarter, we produced solid financial results that were broadly in line with our expectations. We were especially pleased that our fourth quarter results established the company's ninth consecutive quarter of record sales and earnings. Overall, our markets continue to display significant strength during the fourth quarter, although they began to diverge directionally as we closed out the year. Municipal, county and state agencies continue to accelerate their investment in renewal and modernization of their infrastructure maintenance fleets. State rainy day funds remain near all-time highs and ended 2023 nearly double what they were before the pandemic in 2019.
The pace of spending by state and municipal governments continue to accelerate last year relative to 2022 and double-digit annual spending growth was reported again in 2023. This continued to drive robust demand across our full product offering in the Industrial Equipment division as well as our roadside and specialty mowing products in the vegetation management division. The market for our forestry and tree care products was more challenging in the fourth quarter as negative trends emerged in the wood biomass market. According to the USDA, United States wood pellet exports increased 6% by weight and the price per ton also increased 6% relative to 2022. Less positively, domestic suppliers are confronting cost pressures and tight supplies of Westwood Feedstocks that are pressuring margins in the long-term supply contracts.
This slowed planned investments in major equipment. Higher interest rates also constrained ordering activity related to these larger and more expensive products. While recent biomass market dynamics were less favorable in the final month of 2023. Demand for our forestry products remained at a good level in the fourth quarter, although off from the peaks of the previous two years. In the hobby farm and ranch segment, fourth quarter trends were also mixed after a long upward run spanning several years, cattle prices declined modestly in the fourth quarter but still ended the year with strong double-digit gains. Hog prices were lower in the fourth quarter and were down for the full year as well. Agricultural crop prices, including corn, soybeans and wheat, all moved lower in the fourth quarter, although they remained at historically good levels.
As a result of these commodity price trends, US farmer sentiment declined in the fourth quarter. The higher interest rates that prevail through the second half of the year caused dealers to push inventories lower. This was most notable in the hobby farm and ranch market, where dealers deferred certain planned equipment deliveries and canceled some longer lead time orders. This dealer de-stocking pattern impacted orders within the vegetation management division. Dealers selling the products of our Industrial Equipment division have not been impacted as much by higher interest rates as they don't carry meaningful inventories of these major order products. Looking at how these market forces drove our business in the fourth quarter. Sales in the vegetation management division were down 8% and new order bookings declined 34% compared to the fourth quarter of 2022.
Year-end order backlog in this division declined 39% relative to the fourth quarter of 2022. These numbers need to be viewed with perspective, though, as the division's sales, orders and backlog remained elevated compared to pre-pandemic levels. The division's fourth quarter EBITDA of 12.6% was 360 basis points lower than the prior year. However, on a full year basis, EBITDA was 80 points higher versus 2022. The division's backlog represents a solid four months of sales at the current pace, two months longer than the level reported pre-pandemic. Fourth quarter sales were lower compared to the prior year in forestry, tree care and the hobby farm and ranch markets, but sales of mowers to governmental agencies were sharply higher. Fourth quarter EBITDA was impacted by costs associated with sales incentives to motivate retail sales, although these incentives were more modest than those employed in the second and third quarters.
Fourth quarter sales in the industrial equipment division were 32% higher than the prior year. The division's order bookings in the fourth quarter were down 9% just due to a difficult comparable. This was the result of an extraordinarily large snow removal equipment order that was received in the final quarter of 2022. The year-end order backlog in this division was 18% higher than the prior year. Fourth quarter EBITDA of 15.1% was 320 basis points higher than the prior year with the improvement driven by better efficiency, better manufacturing flow, as the chassis supply situation continued to improve. Full year EBITDA of 13.6% also marked a 320 basis point improvement versus 2022. And again, this was primarily the result of improved efficiency and higher chassis receipts.
At the 2023 monthly sales pace, the division's backlog represents approximately nine months of sales. All of the product lines within this division achieved fourth quarter sales growth in excess of 20%. We were especially pleased that Royal Truck equipment that we acquired in late October had a very strong fourth quarter, with sales more than 60% higher than the prior year. Royal Truck contributed nicely to the division's sales and EBITDA in the quarter. We're very excited about the new opportunities we have identified in the highway safety market and expect we can continue to grow in this area. We were also pleased that our teams were able to substantially complete the transfer of compact sweeper manufacturing from our Kent, Washington facility to our facility in Mukwonago, Wisconsin in the fourth quarter, and then to divest the Kent facility.
Overall, we were pleased with the results achieved in the fourth quarter, despite a more mixed market environment. The fact that our teams were able to offset much of the impact of the more challenging conditions in vegetation management, with performance improvements in industrial equipment, clearly shows the strength of our product offering. As we enter 2024, the trends evident in the fourth quarter are expected to continue. The excess channel inventory and vegetation management will take some time to work through, and it now appears that the highly anticipated benefits of an interest rate reduction may not occur until later in the year. We are closely monitoring this and will not hesitate to adjust our capacity as needed to match current demand.
We've remained bullish on the prospects for our industrial equipment division and expect the good momentum evident in the fourth quarter to continue, driven by elevated spending by governmental agencies, combined with a modest sustained tailwind from the federal infrastructure bill. We're expecting another sequential improvement in chassis receipts in the first half of 2024, and this will help sustain a reasonable level of organic growth. Our balance sheet is strong, and we've reduced total debt by more than 22%, or more than $67 million during 2023. This positions us well for what we expect will be a more active M&A market in 2024. So in conclusion, we believe the company is in a good position as we enter 2024, and we're optimistic about our prospects for the new year.
Before closing my remarks today, I'd like to thank our customers, dealers, suppliers, our thousands of exceptional employees and our financial stakeholders for their continued support for the company. This concludes our prepared remarks. We're now ready to take your questions. So operator, please go ahead.
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