Alamo Group Inc. (NYSE:ALG) Q3 2023 Earnings Call Transcript
Alamo Group Inc. (NYSE:ALG) Q3 2023 Earnings Call Transcript November 3, 2023
Operator: Good day and welcome to the Alamo Group Inc. Third Quarter 2023 Conference Call. [Operator Instructions] 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 one hour after the call and run for one 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. We want to thank everyone, who's joined us on the conference call today and express our appreciation for your continued interest in Alamo. The third quarter shaped up broadly in line with our expectations and we were very pleased with the financial results reported today that were produced in an increasingly challenging operating environment. Despite persistent inflation, higher interest rates and ongoing labor constraints, our teams achieved record quarterly results for sales and earnings for the eighth consecutive quarter. I would now like to turn the call over to Richard, who will take us through a review of our financial results for the third quarter. I will then provide additional comments on the results and say a few words about the outlook for the next few quarters. Following our formal remarks, we will look forward to taking your questions. So Richard, please go ahead.
Richard Wehrle: Thanks, Jeff and good morning, everyone. Alamo Group's third quarter 2023 closed with an excellent performance that produced record net sales and net income driven by continued strong demand for our products. Third quarter consolidated net sales were $419.6 million an increase of 14%, compared to $368.8 million in the third quarter of last year. Gross margin percentage expanded by 220 basis points and gross margin increased by just under $22 million in the quarter compared to the third quarter of 2022. Both margin dollars and percentages were driven by higher volume and price initiatives, we began in early 2022 along with improved productivity gains. Operating income for the third quarter came in at $49.8 million versus $35.8 million in the third quarter of 2022 an increase of 39%.
Operating income as a percent of sales was just under 12% for the third quarter versus just under 10% for the same quarter last year. Consolidated net income for the third quarter was $34.9 million or $2.91 per diluted share, an increase of 35% versus net income of $25.8 million or $2.16 per diluted share for the third quarter of 2022. Looking at the division's The Vegetation Management Division, once again delivered solid results. Net sales were $246.9 million an increase of 8% compared to $228.5 million for the third quarter of 2022. Strong sales of governmental and agricultural mowing equipment in North America, UK, Europe -- UK and Europe led the way for this division, despite labour shortages and to a lesser extent supply chain disruptions.
Margins improved primarily due to increased net price realization. Operating income for the third quarter in this division was $30.3 million, up 12% versus $27.1 million for the same period in 2022. Industrial Equipment net sales -- division net sales were $172.7 million up 23%, compared to $140.3 million for the third quarter of 2022. This was due to a solid performance across all product lines particularly vacuum trucks, sweepers, debris collectors and snow removal equipment. While truck chassis deliveries continue to return to a normal cadence -- to a more normal cadence. Some component part shortages continue to impact this division's operations although, not as significant as in previous quarters. This resulted in a substantial rise in operating income in the third quarter for this division of $19.5 million compared to $8.7 million for the third quarter of 2022, an increase of 124%.
Consolidated net sales were a record for the first nine months of 2023 coming in at $1.27 billion up 13% compared to $1.12 billion for the first nine months 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. Nine-month gross margin percentage was up 240 basis points and gross margin increased $66 million versus the first nine months of 2022, an increase of 24%. The margin improvement experienced resulted from improved supply chain conditions which led to higher efficiencies and enhanced capacity utilizations. Operating income in the first nine months of 2023 was $153.2 million or 12% of sales, compared to the same period in 2022 which was $105.9 million or just over 9% of sales a 260 basis point increase.
Net income for the first nine months of 2023 was $104.6 million or $8.73 per diluted share versus net income of $72.8 million or $6.10 per diluted share for the first nine months of 2022, an increase of 44%. The company's backlog at the end of the third quarter of 2023 came in at just under $891 million, virtually unchanged from the end of the second quarter of 2023, but was slightly down by 2% compared to the backlog at the end of the third quarter 2022. Few additional financial items, I'd like to cover related to the balance sheet at the end of the third quarter, which continues to remain strong. Working capital increased $96 million compared to the end of the third quarter of 2022. The increase resulted from higher accounts receivable and to a lesser extent inventory.
During the third quarter, as we expected we reduced our debt level on our current credit facility by almost $24 million and our bank leverage ratio at the end of the third quarter was 1.331 which is at its lowest level in four years. And finally, the company's trailing 12-month EBITDA was a record coming in at just over $245 million, up 25% compared to the calendar year-end 2022. For the balance of 2023 and into 2024 cash flow should remain strong as our focus on the balance sheet will be to further reduce both inventory and debt. Increasing consolidated profits will be extremely important. We remain disciplined in our execution of controlling costs and expenses, as inflation continues to put pressure on our margins. We will continue to focus on further improving supply chain performance, to help reduce the amount of inventory we hold in work in process.
Our biggest challenge will continue -- will continue to be meeting the heightened demand of our products throughout the company given persistent labor shortages. So in summary, Q3 was a great quarter for Alamo Group. Sales were up 14% which translated into a 39% increase in operating income and a 35% increase in net income. We're also pleased our Board recently approved a regular quarterly dividend of $0.22 per share for the third quarter of 2023. With that, I'll turn the call back over to Jeff.
Jeff Leonard: Thank you, Richard. I'd like to express my personal thanks to everyone who joined our conference call today. While both operating divisions achieved solid top line sales growth as expected growth in the Industrial Equipment division was stronger. Governmental agencies continue to invest in updating their infrastructure maintenance fleets, and as supply chain bottlenecks continued to resolve. Although, certain types of components remain problematic, supply chain performance improved again during the third quarter. Receipts of Class 6 to 8 truck chassis that represent the bulk of our requirements improved sequentially while the supply of Class 5 and smaller chassis, which are less significant to us became somewhat more restricted.
As has been the case for the past year certain types of industrial components continue to be constrained and intermittent shortages once again adversely impacted our production operations. Markets for our Vegetation Management equipment division remained under pressure in the third quarter from the combined effects of higher interest rates a weaker housing market a bumper corn crop and persistent drought in much of the Midwest and Southern United States. Order bookings in this division were down slightly compared with the third quarter of 2022, but were sharply higher than the second quarter of this year. U.S. farmers continue to express concerns about high input costs rising interest rates and lower crop and livestock prices. Hobby farm and ranch dealer inventories while not at a concerning level from a historical perspective are under increasing scrutiny due to rising financing costs, tighter credit, and greater buyer caution.
Higher interest rates also constrained demand for our larger forestry and wood recycling equipment as many of these larger ticket purchases are subject to third quarter -- third-party financing. Housing starts in the third quarter declined about 1% compared to the second quarter, but were up about 5% compared to a year earlier, even considering steadily higher mortgage rates. We were very pleased that despite these headwinds, new orders for forestry and tree pair equipment improved nicely compared to the second quarter, although still below the levels achieved in the third quarter of 2022. Europe and the United Kingdom were notable bright spots again during the third quarter. Orders received in the UK, the Netherlands and France moved higher compared to both second quarter of this year and the prior year third quarter, despite challenging market conditions.
It's also worth noting that orders received in South America set an all-time company record during the quarter, as demand for our sugarcane harvest hauling equipment and other agricultural and forestry products continue to rise. Against the backdrop of increasing economic headwinds, we were extremely pleased that the Vegetation Management division third quarter sales increased by 8% year-over-year. Orders were sharply higher sequentially and profitability remains strong. Operating income from this division improved more than 11% compared to the third quarter of 2022 and once again exceeded our targeted level of 12% of sales. Activity in the governmental sector continued to be strong during the third quarter in all markets where we operate. Demand for infrastructure maintenance equipment remained buoyant as it has been all year.
Order bookings in our Industrial Equipment division were 25% higher than the prior year third quarter and also nicely higher than the second quarter of this year. While all of our product lines remained in high demand from governmental agencies during the third quarter, demand for our municipal snow plows was exceptional. Snow removal order bookings increased by more than 100% compared to the third quarter of 2022 and backlog in this part of the business is at its highest level ever achieved. This is very nice growth and was partly driven by the successful introduction and rapid acceptance of our new wide wing plow system that allows multiple traffic lanes to be cleared of snow and ice in a safe and efficient manner. Excavator and vacuum truck bookings were also sharply higher during the third quarter and the utilization of our vacuum truck rental fleet remained excellent.
Due to a strong prior year comparable, new orders for street sweepers and debris collectors were somewhat lower in the third quarter of 2022. With the better flow of truck chassis and other components, Industrial Equipment division sales grew nicely and efficiency improved. Sales in this division were up more than 23% compared to the third quarter of 2022. Third quarter operating income improved dramatically and operating margin rebounded by over 500 basis points compared to the prior year third quarter. We were also very pleased with the recently completed-acquisition of Royal Truck and Equipment that will be integrated into the Industrial Equipment division, as part of our sweeper and debris collection group. This is a company we've been in contact with for some time.
They are a leader in the development and deployment of truck mounted attenuators and have helped significantly improve work crew safety through innovation and continuous development of their products. In summary, we remain optimistic regarding Alamo Group's future outlook. We were obviously pleased that in the third quarter despite the headwinds discussed previously, the Vegetation Management division continued to perform very well. And as expected, the Industrial Equipment division continued to rapidly regain momentum lost during the pandemic and subsequent supply disruptions. We anticipate that investments by governmental entities will remain elevated and that the markets served by our Vegetation Management division will be stable for the remainder of 2023 and then gradually regain momentum in 2024.
We also believe that the supply chain performance will continue to improve sequentially and will support solid sales growth and further improvement of operating efficiencies. This is a positive pattern for the company and one that we believe will continue to support favorable financial development for the next few quarters as we continue to execute our strategy in a disciplined manner. Before closing my remarks today, I'd like to thank our customers, our 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. Operator, please go ahead.
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