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Industrials - Agricultural - Machinery - NYSE - US
$ 194.31
0.673 %
$ 2.34 B
Market Cap
19.59
P/E
EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2015 - Q4
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Executives

Bob George - VP Ronald Robinson - CEO Dan Malone - CFO Richard Wehrle - VP, Corporate Controller Ed Rizzuti - VP, General Counsel.

Analysts

Brett Wong - Piper Jaffray Mike Shlisky - Seaport Global Joe Mondello - Sidoti & Company.

Operator

Good day, ladies and gentlemen. Welcome to Alamo Group Fourth Quarter 2015 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions] This conference is being recorded today, Friday, March 4th, 2016.

I would now turn the conference over to Mr. Bob George, Vice President of Alamo Group. Please go ahead, Mr. George..

Bob George

Thank you, and good morning everyone. 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 212-827-3773 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 in one hour after the call and run for one week. The replay can be accessed by dialing 1-888-203-1112 with the passcode 3720549. Additionally, the call is being webcast on the company's Web site at www.alamo-group.com, and a replay will be available for 60 days.

On the line with me today are Ronald Robinson, Chief Executive Officer and President; Dan Malone, Executive Vice President, Chief Financial Officer; Richard Wehrle, Vice President, Corporate Controller and Ed Rizzuti, Vice President, General Counsel. Management will make some opening remarks and then we will open up the line for your questions.

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, competition, weather, seasonality, currency related issues, and other risk factors listed from time-to-time in the company's SEC report.

The company does not undertake any obligation to update the information contained herein, which speaks only as of this date. I would also like to add that we will file our 10-K after the close of the market today. I would now like to introduce Ron. Ron, please go ahead..

Ronald Robinson

Thank you Bob, and we want to thank all of you for joining us today. Dan Malone our CFO will begin our call with the review of our financial results for the fourth quarter and fiscal year 2015, I will then provide a little more color on the performance of our operations and then following our formal remarks we look forward to taking your questions.

Dan, please go ahead..

Dan Malone Executive Vice President & Chief Sustainability Officer

Thank you Ron. Fourth Quarter 2015 sales of $224.4 million were slightly above fourth quarter 2014 sales of $223.9 million. Our quarter-on-quarter comparison was helped by very strong finish to the year in our industrial division, but was mostly offset by the continued negative effect of a stronger U.S. dollar on the translation of non-U.S.

entity sales and the softening of European and the agricultural markets worldwide. Excluding $0.4 million of sales from the Herder acquisition and $7.3 million of negative currency translation effect, our fourth quarter 2015 sales were up 3.3% over the prior year quarter.

Industrial division fourth quarter 2015 sales of $135.9 million represented a 7% increase over the prior year fourth quarter, excluding an unfavorable currency translation effect of $2.5 million sales in this division were up 9% due to improved sales of excavator, street sweeper, snow removal and mowing products.

Agricultural division fourth quarter 2015 sales were $47.9, a 6% decrease from the prior year quarter. Excluding the Herder acquisition and the unfavorable currency translation effect, this division's fourth quarter sales were down about 5% from prior year due to continued weakness in worldwide agricultural markets.

European division fourth quarter 2015 sales were $40.6 million or about 13% lower than the fourth quarter of 2014. Excluding the unfavorable currency translation effect this division's local currency sales were down about 5% quarter-to-quarter reflecting weakness in European and agricultural markets.

Full year 2015 net sales of $879.6 million were up over $40 million or almost 5% above the prior year. Acquisitions contributed over $60 million to this increase but this was partially offset by nearly $35 million of unfavorable currency translation effect.

Excluding acquisition and translation effects full year 2015 sales were up $12 million or about 1% higher than the prior year.

Excluding the effect of both acquisitions and currency translation effect from the full year 2015 sales comparable year over year local currency sales increased by about 3% in the industrial and European divisions while agricultural division sales were down about 3%.

Net income for the fourth quarter of 2015 was $11.4 million or $0.99 per diluted share compared to $11.4 million or $1.00 per diluted share in the fourth quarter of 2014. Full year net income was $43.2 million or $3.76 per diluted share compared to $41.1 million or $3.42 per diluted share in 2014.

The positive effect of having a full year of specialized Kallum and Fieldquip added $3.6 million to full year net income or about $0.32 per diluted share. The negative effect of changes in foreign currency translations had less than a $0.01 per diluted share impact in the fourth quarter but about $0.07 per diluted share impact for the full year.

Our quarter to quarter and year to year net income and earnings per share comparisons have been affected by changes in our effective income tax rate.

The unfavorable quarter to quarter comparison was mostly due to the timing of prior year tax provision while the year-to-year increase from 32% in 2014 to 35% in 2015 was primarily due to a full year versus a partial year of operating results from the business we acquired from specialized in 2014.

These businesses have shifted the company's earnings mix toward higher tax jurisdiction. Also before I move on I want to make a comment about inventory evaluation reserves. When you review our 10-K you will changes in both LIFO and inventory obsolescence reserves.

Changes in inventory evaluation reserves largely offset each other and in aggregate had no meaningful impact on our period to period comparisons. In the attachments to our fourth quarter 2015 earnings release we identified five issues which were effecting both our current year and prior year earnings results.

These five items were; one, non-cash charges which were about evenly split between 2014 and 2015 related to the sales of inventories acquired from specialized and subject to a $5.6 million step up to fair value in the purchase price allocation. Two, cost of $1.1 million in 2015 associated with a major systems conversion.

Three, cost of $2.5 million of which $2.1 million was in 2014 associated with the completion of business acquisitions. Four, a net gain of $2.5 million after tax for the fourth quarter 2015 sales of excess land in the UK.

Five, a fourth quarter 2015 provision of $1.9 million after tax for restructuring and consolidation of one of our French manufacturing facilities. In the following discussions of adjusted gross margin, operating margin and EBITDA. The items I just mentioned have been excluded from current period and prior period results.

Adjusted gross margin in the fourth quarter of 2015 was about 21.7% of sales down slightly from 22.2% in the fourth quarter of 2014. The comparison for the quarter was affected by unfavorable product mix caused by soft parts demand coupled with heavier tractor and truck chassis sales related to higher mowing and sweeping product sales.

As well as higher sales of units from our vacuum truck fleet -- from our vacuum truck level rental fleet. For the full year 2015 adjusted gross margin improved to 23.3% of sales up from 22.9% in 2014. The favorable full year to full year comparison was held by improved production efficiencies and lower commodity cost.

Adjusted operating income was essentially flat in the fourth quarter of 2015 compared to a prior year quarter. Full year 2015 adjusted operating income grew 10% over prior year and rose to 8.4% of sales. Excluding the effects of acquisitions the full year 2015 adjusted operating income was up about 2% over the comparable prior year result.

Our quarter-to-quarter and year-over-year adjusted EBITDA comparisons were significantly better. Fourth quarter 2015 adjusted EBITDA was $22.9 million up 6% over the prior year quarter. Full year 2015 adjusted EBITDA of $95.7 million is up 20% over the comparable prior year result.

Year-over-year adjusted EBITDA growth is more favorable then period comparisons of net income and operating income because the ladder of burden by a much higher level of depreciation and amortization expense caused by high valuation of amortizable intangible assets in the acquisition of the specialized business units as well as depreciation of the vacuum truck rental fleet we acquired in the same transaction.

We also had an exceptional fourth quarter and a strong year in the generation of free cash flow which we define as net cash provided by our operating activities less than net of cash used for capital expenditures and proceeds provided by capital asset retirements.

Fourth quarter 2015 free cash flow of $16.9 million was 450% higher than the prior year quarter free cash flow of $3.1 million. Our full year 2015 free cash flow totaled $41.3 million, an 89% increase over the prior year. This represents a cash conversion rate over 95% of net income nearly double the prior year rate.

Our backlog ended 2015 at about $163 million up about 1% from the prior year end, despite currency headwinds. Industrial backlog ended up about 4%, agriculture was down about 1% and Europe was down about 5% which is less than the corresponding devaluations of the British pound and Euro.

In summary our fourth quarter 2015 results are highlighted by a strong finish to 2015 by our industrial division which offset the unfavorable effects of currency translation and softer agricultural and European markets.

Record sales and net earnings despite the aforementioned headwinds, continued year-over-year improvements in gross and operating margins.

Strong quarter-over-quarter and year-over-year EBITDA growth exceptional quarter-over-quarter and year-over-year free cash flow growth and year-over-year backlog growth despite the unfavorable currency translation effects. I would now like to turn the call back over to Ron..

Ronald Robinson

Thank you, Dan. I think everyone can see that it was a busy quarter and the fourth quarter was good quarter, I would necessarily say it was the great one, but a good quarter and particularly given the challenges in our markets which we have talked about all year long that we were very pleased with the results for both the quarter and for the year.

Sales for the year were helped by certainly the full year effects of the acquisition of the unit that are specialized, but we're certainly all -- a lot of that -- some of that was offset by weak market conditions and negative currency translation effects which as a result of the high dollar.

And though we were certainly pleased with the earnings growth for the year which was helped by improved margin due to our internal cost control initiatives and ongoing efficiency programs that which we think will continue to benefit us for the next several years.

In addition as Dan just pointed out our full year adjusted EBITDA was up 20% over 95 million and free cash flow was up 89%, so over 41 million for the year and I think these are strong improvements, which we believe will continue to help us in 2016 and beyond.

As you saw also there were two special events in the fourth quarter both in our European division. The first is where we sold excess land for a sizable gain in the UK, the second though was a restructuring and consolidation of one of our operations in France and long-term that's the one that is really the most important.

As our French units have struggled with over capacity due to the generally weak market conditions in Europe over the last few years and this move certainly better aligns our capabilities with the market demand which is we believe likely to remain weak and fairly -- have a fairly slow recovery and I think this move gets our costs in better alignment with the current conditions and so like I said we're very pleased that we got this move pretty well behind us.

This all consolidation will be completed in the first half of this year, but we think that really get us in better shape to deal with the current level of market conditions that we're experiencing in Europe.

Certainly, our ag division is also facing some weak market conditions with the farm incomes down in 2015 and while our sales has certainly being constrained with the market conditions and we're generally pleased that margins in our ag division have shown steady improvement and we believe we can continue this trend into 2016 even though we don't really think the market itself will improve very much.

I guess I hope that there would be a little bit more improvement in ag sector in 2016, but I’m beginning to think it's going to be still constrained I think in terms of -- I don’t think they will decline like they did in ’15, but I don't think they'll roll a lot in 2016. Still I think we should hold up pretty reasonably well.

As Dan pointed out, we have pretty good backlogs and generals going into 2016. I think the fourth quarter in ag was a little weaker than I thought but fourth quarter is not one of our strongest quarters quarter anyway in ag. But we feel we're off to a very good start in 2016 and that our margins have the good potential to continue to improve in 2016.

Also our real strength continues to come from our industrial division where sales in the fourth quarter alone were up over 7%, as everyone knows most of the sales in this sector are governmental end users work, infrastructure maintenance which continues to hold up quite well.

City country state budgets are in pretty reasonable shape and the demand for our ag type of equipment is still pretty steady.

Certainly some of the non-governmental application for this equipment which is a small part of division sales has been solved, we comment it that throughout the year, but we certainly more than offset this by sales into the governmental sector and further help by some pretty consistent stream of new product introductions.

Some new and improved product which helped the sales in ’15, we think we will continue to help the sales in ’16. So while we remain concerned that the market challenges we have faced are not going away anytime soon, we do feel good about the prospects for improved results in 2016 for Alamo.

We feel demand for our type of products and most of our markets will remain steady. There is -- we also still have some room for margin improvement and we believe cash flow will continue to hold up nicely. Our backlogs have remained steady and as Dan pointed out, we're up 1% for the year despite the negative effects of currency translations.

So we started the year in good shape from a backlog point of view and from inquiry point of view. And we feel we will be further helped by these steady streams of new and improved products that I referenced earlier.

On top of this, we continue to look for synergistic acquisitions, though '15 was probably little disappointing that we didn't find this many we would have liked at prices we were willing to pay and so I mean while we're still very actively looking we're still very determined to maintain our discipline on what types of targets we look at and the prices we pay for those targets.

All in all while we would certainly appreciate help from the markets we feel optimistic about the outlook for 2016 for Alamo group. And with that I would like to entertain any questions you may have. So I'll ask the operator to go there and open up for questions..

Operator

Thank you very much. [Operator Instructions] We'll take our first question from Brett Wong with Piper Jaffray..

Brett Wong

I was wondering if you can talk a little bit more about that the M&A side and just any specifics you can provide us around what the pipeline looks like and any specific focus area?.

Ronald Robinson

The pipeline was actually quite a number of opportunities to look at in 2015. I would say I mean a lot of activity, pricing was in my view almost too high I mean for what we thought we could make work and make it reasonably accretive to our operations.

So, we -- and certainly a lot of the opportunities were not won, we were really strong, the interest I mean that the strategic bit we were looking for.

I think our goal is to what we're looking for hasn't really changed -- certainly we're looking for synergistic acquisitions I mean consolidation type acquisitions in both Europe and North America and probably saw more in North America than we did in Europe but again I mean the binding things.

We're looking for some we are looking for some smaller ones in some of the newer markets, so as we did the one in Brazil in 2015 and with that following that up with another one but again we want to stay small because in Brazil we're just trying to get a basic core business which we can grow organically from.

So, like I said would manage to get some little bit more with better capabilities on the marketing side. But pleased with the one we got there and like I said we can have some organic growth there.

So, we're looking for some smaller ones in some new markets but our main thing is in our core markets is to we would like to do some larger ones and both Europe, North America, both industrial and ag we're looking across the board and as always we're really opportunistic about the opportunities we looked at.

And so, I think the pipeline has started off a little slower in '16 but it's still, there's still an active M&A market, I mean I feel optimistic because we feel continue to find opportunities though the timing is always hard to estimate..

Brett Wong

Kind of going into what you've seen at the start of the year -- we've obviously had a pretty mild winter just wanted to know how that's impacted demand or sales for snow removal equipment and kind of how do you see that flowing through to either then end of next -- the end of next -- the end of this year or kind of beginning of next year?.

Ronald Robinson

We finished the '15 with pretty good store sales, because '14 I mean early '15 there was a lot of snow and people were replacing their fleets and all throughout '15 so going into this winter we actually had pretty good sales.

You're right -- if you remember last two years we commented that our first quarter sales were little slow in like mowing and street sweeping because there was so much snow.

Well this winter I mean yes, maybe the -- we haven't sold as many spare parts for snow removal but the mowing and the street sweeping and those unit have held up a little bit better.

So, yes you're right, there's not been as much snow but actually -- the snow equipment was pretty good this winter leading into this winter because of all the equipment consumed last winter.

And spare parts and snow are down a little but spare parts and some of the other divisions have -- didn't suffer like they did the last two years due to the snow.

So, on -- and that's one thing that while we like [indiscernible] mowing and snow and everything because there is some counter cyclicality and some I mean counter seasonal effects, and so while we probably we hurt a little in one, we were helped a little in the other, so on balance we’re in pretty good shape..

Brett Wong

So, then do you think that we setup of for more difficult comps fourth quarter of '16 for snow replacement equipment just because of the lighter winter?.

Ronald Robinson

A little, I wouldn’t say a lot and I mean it's too early to tell. I mean in some places actually March tends to be the snowiest winter month out West.

And we're just getting into March, so I think it's a little too early to write off snow, but yes it could be a little softer but like I said I think if it is a little soft then I wouldn’t suspect that things like mowing would be a little bit better to offset that..

Brett Wong

Okay, fair enough, I hope a little more snow comes; I'm still trying to get another ski day in here at some point I think that's great.

But just wondering, one last question from me, you spoke to the ongoing margin improvement in ag, just can to a little more detail of what you expect that or to continue to move to in 2015 and what's driving that?.

Ronald Robinson

Well, what's driving that, I mean I think we really have some initiatives to make it happen.

I mean you know like lean initiative, I mean you're really working on asset utilization, we're working on getting our cost down and you know one reasons we should do better is because we're really not at the levels we need to be, I mean, we really need to be at that double digit operating profit margin in all of our divisions and certainly ag is still not there yet.

So we believe, but they steadily been improving and with us it's not one big thing that's going to happen.

You know it's half dozen little things that we believe it’s is a little bit in purchasing, little bit in pricing, little bit in shop floor management and flow and so with the number of items and certainly we would get there real quick if we could get some volume increase, but I mean significant volume increase, but I think while we hold steady you know I'm not optimistic that the ag market's going to take off this year.

So I think we'll hold steady and show steady improvement..

Brett Wong

Excellent, well thank you so much..

Ronald Robinson

Thank you, Brett..

Operator

We'll go next to Mike Shlisky with Seaport Global..

Mike Shlisky

Good morning from New York where it just stopped snowing, but unfortunately it did not stick to the pavement guys, sorry [Multiple speakers]. Guys I wanted to follow up on you’re restructuring in France.

Can you quantify, you've got any kind of dollar amount you expect to say on annualized basis from that?.

Ronald Robinson

Yes, I mean I guess we haven't totally disclosed that, but we think when we're finished I mean, it's probably, this was the small plant but the -- I don't know $0.5 million in that range..

Mike Shlisky

Okay, okay. I also just wanted to touch on specialized in general or the other companies that you've acquired you know Kallum, et cetera. Did you have -- have you made any cost cuts over the last few quarters in any of those business as you find more synergies.

I know that it’s probably been some purchasing and sourcing, maybe kind of quantify for us since you've made some of these deals, how much you might have taken out from their cost structures in total?.

Ronald Robinson

Again I mean, we haven't really said that, but certainly like in '15 Dan talked about spending $1 million dollars on system development efforts and that was putting all the -- you know we put the two major units that were specialized Warsaw, Everest and super products all on our computer operating systems.

You know you're right, we put them on our purchasing initiative. Super products alone has been a little slow by non-governmental act of direct as planned demand, but they've actually, they held up well but they're off a little bit. Warsaw was certainly helped by the snow demand.

So I mean like we said it's been a good addition to us, but we have cut cost out in a number of areas and even more so, I mean of course we announced this consolidation of French plant but I think next year we -- you know we sort of replied the specialized has too many plants in the Milwaukee area and we hope to consolidate two of those into one next year and so we're already working on the plans for that, I hope to get that accomplished next year.

So that would be two plant consolidations in two years and so -- I mean we've got a lot of initiatives going on but again as I said not one big thing, it's a half a dozen little things and you know they make good addition for us..

Mike Shlisky

Okay great and just one more for me can we just touch on the impact of low oil and gas prices, can you maybe give me just kind of a feel for how that is considering your current backlog and whether you feel like perhaps we're at least getting a little bit more stabilized in that small slice that you -- these guys have that that could have served that market..

Ronald Robinson

Yes, I think I mean, low oil prices have multiple effects I mean certainly they lower our cost in some way, you know energy cost, rate cost, this types stuff.

But I mean we also I think can hurt the governmental budgets, these are little lower less taxes from that they are collecting from this, directly it hasn’t had a big effect on us I mean you are right some of the backing truck rent tools that we do, have our utilization has slowed down a little bit not a lot and so I mean and I think it's probably because some places of oil like say refining are actually doing still pretty good as oppose to certainly drilling that exploration activity which is very soft and I'm likely to stay soft.

So it’s been a mixed bag, probably in there we've been heard a little bit not a lot..

Mike Shlisky

That's great color. Thanks Ron. Thanks guys..

Operator

[Operator Instructions]. Will go next to Joe Mondello with Sidoti & Company. .

Joe Mondello

Just a couple of questions on the quarter itself. I was wondering if you could provide either the segment margins or the segment operating income for the quarter..

Ronald Robinson

As Bob said our 10-K will be released after the market today and that will have more information about that..

Joe Mondello

Okay.

You don’t want to provide that while the stock’s trading today?.

Ronald Robinson

You heard that right. I mean it's there and we haven’t put in this release now but next day it would be optimize..

Joe Mondello

Okay. Also I was wondering if the 2015 itself.

If you exclude acquisitions and currency, do you have any estimation on how much those two sort of benefitted or actually probably effected EPS in 2015?.

Ronald Robinson

As I believe that was in our comments and there is also the attachment to the press release. But the currency is not in the press release the currency was less than a penny for the fourth quarter quarter-over-quarter and it was about $0.07 for the year..

Joe Mondello

Okay.

And in terms of the acquisitions I know you said the Herder was a 0.04 headwind in the quarter but how much was the accretion from specialized for the first two quarters of the year or how much to the acquisitions net-net I guess effect the year?.

Ronald Robinson

$0.32. .

Joe Mondello

$0.32 for the year.

And does that includes the Herder?.

Dan Malone Executive Vice President & Chief Sustainability Officer

Yes the Herder was not a 4% headwind and it was too smaller to be anything..

Ronald Robinson

And it was like a 4/10 of the percent headwind..

Joe Mondello

Okay, I understand that.

So acquisitions added $0.32 to the year?.

Ronald Robinson

Yes..

Joe Mondello

Okay. I guess further looking forward it looks like European segment sort of weaken throughout the year and the backlog I think you said was down 5% it seems like a lot of companies are sort of actually seeing maybe some positive improvement within the Europe.

I'm just wondering what you sort of are seeing or hearing and what your sort of outlook for 2016?.

Ronald Robinson

Well as I said early in the fourth quarters not one of our strongest quarters to begin with from an operating point of view. I mean you see second quarter and third quarters are strongest not because of the sales good then, but spare part sales are really high on the second quarter the equipment utilization is high in those times..

In Europe yes the fourth quarter was a little softer than I thought, but it was interesting, our out of season programs which usually ends our strong just in like November and December and provide sales a little sales in that period.

We’re actually more delayed this year so many of the pre-seasonal orders that we usually would get in November or December we won't get into January.

I think dealers were really holding off to about last minute to see what the outlook was like dealers were, I'd say there was a lot of concern there, there was a lot of concern not about currencies amounting to the dollar but between the pound and the Euro because some of our sales like even into to the continent from UK which shows pound selling to Euro there was some uncertainty there, I mean in England alone there is uncertainty now with this the vote coming up on whether they are even going to be in the European union which I'll think is giving [Indiscernible] set for June.

I think the gap that's really going to be a hard one to call.

But as a result of that's fourth quarter probably did quite strong but actually bookings in the first quarter have already stepped up nicely so we think that as you said might be a little, few signs of improvement and we think we will actually hold up pretty decent in 2016 in Europe it will be a better shape with this restricting in France like say there were some of the delays, but now in the first quarter were seeing reasonable bookings and activity it's not it hasn’t taken off by any means, but certainly it’s stronger than the fourth quarter would have indicated..

Joe Mondello

And so in the back half of the year was the weakness both on the agriculture side as well as on the other side of the business in Europe or was it?.

Ronald Robinson

Probably a little more on the agricultural side because our industry side in Europe had a nice finish to the year..

Joe Mondello

Okay and then just I guess in general or looking at the industrial segment if you want, does it sort of -- historically, does it require or does it take tax revenue sort of starting to decline or start to see a downturn in the business or historically what you generally tend to see in a downturn in your industry?.

Ronald Robinson

If you follow us for all the last 25 years, you would have seen that the governmental spending on our type of products actually has remained fairly stable except when governmental spending get goes under extreme pressure like say in 2008 and 2009 timeframe.

I mean that was the most dramatic time we've seen in our industrial division in 25 years and even then sales -- we stayed profitable, sales were less down like that 25% I this division. So like I said, I think we planned this pretty steady. Certainly I think we do a little bit better when governmental budgets are in better shape.

But we are very small part of governmental budgets and thus I said this on several times, I mean even when you add up all the city, county and state budgets even forget the bid, I mean even in bad times they’re spending like $3 billion a day.

And so we're very small part of that and we're function a that infrastructure maintenance has to go on some basic levels. Certainly they can try to cut back on it, but I mean they've been trying to cut back for decades to and yet it still has to go on basic levels, when it snows you have to have the ploughs out.

It’s obviously there is still sweeping the streets daily they got to maintain the righter ways or actually cannot not just aesthetics, but can affect [indiscernible] can lead into the concrete I mean there is a lot of reasons why you have to maintain the infrastructure safety.

So I mean we have seeing pretty steady demand for our type of products there. They are type of products tends to wear out on a regular basis so it's a replacement cycle that's fairly consistent. Like I said in extreme times it can be hurt somewhat but generally it holds up pretty steady and yes we do little bit better when budgets are better.

But I mean it's a small part of governmental budgets and it's a necessary part and it's shown a lot of stable stability over decades..

Joe Mondello

And then also I was just wondering in this environment with some of the ag, OEM manufacturers that you buy from, do you see any benefit on a pricing standpoint or to your cost of goods sold do you see any sort of benefit or how does that?.

Ronald Robinson

Yes, I mean, right now I'd say we're certainly being hurt by the strong dollar, but the few rates we're being helped as our international purchases and we just we did a lot of components at places like gearboxes out of China and just had really about 10% price decreases in dollars to take advantage of the fact that Chinese currency is down and so they were getting a windfall further about a quarter there and we kind of reacted fairly positively as going after some and we’re successful and getting some price decrease.

So steel I think is area where the steel prices they keep on raising but actually, we're seeing almost small decrease in prices there this year. Nothing’s that's helped by the strong dollar, so even in Europe the pound versus the euro we have to take advantage of our purchasing internationally to offset some of the effects of the strong U.S.

dollar by using that strong dollar to purchase more effectively..

Joe Mondello

And how much new like tractors that's what I was really specifically sort of referring to, how much do tractors make up of say your cost of goods sold, is it a big component? I imagine it's some sort of component..

Ronald Robinson

It's one of the bigger components for sure I don't know Dan how much tractor --?.

Dan Malone Executive Vice President & Chief Sustainability Officer

I mean individually its tractors and truck chassis both are -- if you add it all up are probably the two biggest components of our --..

Joe Mondello

The quarter of magnitude would there be, do you have a plan?.

Dan Malone Executive Vice President & Chief Sustainability Officer

Yes, in order of magnitude they're the top two..

Joe Mondello

But I mean how much?.

Dan Malone Executive Vice President & Chief Sustainability Officer

Well, we haven't disclosed that, but it's over 20%..

Joe Mondello

Okay and so really I was specifically sort of asking sort of on ag side on the tractor side of things what the downturn you're seeing there even with your domestic customer if you will do you see any sort of pricing benefit given the severe decline in the agriculture market and yet you are actually doing quite well in market that you use there tractors for?.

Joe Mondello

Unless you got working against us is Tier four. I mean all the new ETA regulations prices of tractors are going up because of all the pollution control environment and I'm -- and by the way I think my 20% it’s a little high. But it's, lower than that.

But, no pricing of tractors and truck chassis over the last year or two have gone up because of the tier four final requirements and those affect everybody equally. So, and not like because there's any advantage or disadvantage it's just simply raises the cost of the products to the end customer.

And when you look at tractor sales, first of all in our ag division we're not buy any tractors, I mean it's only our industrial divisions that we actually buy tractors and combines.

In the ag division one thing you will note -- the tractors that have been hurt the most are the big ones, over 100 horse power, the four wheel drive, the ones with big commercial farms -- the ones that are used in indiscernible.

Again smaller tractors which are -- everything from ranches to hobby farms, sales of those were actually up and especially with less than 40 horse powers, sales we up I think they've been held by hobby farms abruptly.

Like weekend farmers and all they've held up [indiscernible] and so like I said the tractors, volumes in that sector are up versus the big stuff is worth, it’s the big tractors and big combines that are hurting the work in the ag sector.

And so, and that’s why we say on the stay among rest of the whole across the broad range of agricultural pursuits and so while grow crops farms are soft, ranches had held a up bit better, they had softened a little in the last half of the year.

Certainly orchards have held up reasonably well, hobby farmers have held up reasonably well, so I mean I think that's why we've seen very decent steady results in that division..

Joe Mondello

And then just lastly wondering about the tax rate, any change in 2016 relative to 2015?.

Dan Malone Executive Vice President & Chief Sustainability Officer

No, no I would say that I think where we're at now given mix of earnings and everything else so that's as good a number as any..

Ronald Robinson

And the one thing it should be a little bit more stable in that, the last couple years [indiscernible] hadn't approved these R&D tax credits and all till late in the year whereas now they're pretty well set for this year, for '16, so I think you won't see -- like quite lumpiness in it..

Operator

And with no further questions in the queue, I would like to turn the call back over to management for any additional or closing remarks..

Bob George

Alright, well thank you for joining us today and we look forward to speaking with you on our first quarter call which will be I think it's first week in May. But again we appreciate participating and appreciate your interest and support in Alamo group. Thank you and have a good day..

Operator

This does conclude today's call, we thank you for your participation..

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