Bob George - VP Ron Robinson - President & CEO Dan Malone - EVP & CFO Richard Wehrle - VP & Corporate Controller Ed Rizzuti - VP & General Counsel.

Joe Mondillo - Sidoti & Company Tyler Etten - Piper Jaffray.

Good day, ladies and gentlemen. Welcome to the Alamo Group Third Quarter 2017 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, Wednesday, November 01, 2017.

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

Thank you and good morning. 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 release and make sure you're 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 one week. The replay can be accessed by dialing 1888-203-1112 with the passcode 3612612. Additionally, the call is being webcast on the company's website at www.alamo-group.com and replay will be available for 60 days.

On the line with me today are Ron Robinson, Chief Executive Officer and President; Dan Malone, the Executive Vice President and Chief Financial Officer; Richard Wehrle, Vice President and Corporate Controller; and Ed Rizzuti, Vice President and General Counsel.

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. Reconciliation of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release.

Before turning the call over to Ron, I'd like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties which may cause the company's actual results in future periods to differ materially from forecasted results.

Among those factors which could cause actual results to differ materially are the following; market demand, competition, weather, seasonality, currency-related issues and other risk factors listed from time-to-time in 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..

Thank you, Bob. And we want to thank all of you for joining us here today. Dan Malone will begin our call with the review of our financial results for the third quarter of 2017, and then I will provide a few more comments on the quarter's results and following the formal remarks, we look forward to taking your questions. So Dan, please go ahead..

Thank you, Ron. Alamo Group's third quarter and nine months 2017 operating results set company sales and earnings records for the third quarter and nine month periods. In addition Alamo's trailing 12 months EBITDA exceeded $100 million for the first time in the company's history.

Third quarter 2017 sales of $240.4 million were up 10.9% over third quarter 2016 sales up $216.8 million. Excluding sales attributable to acquisitions third quarter 2017 sales grew 5.9% over the prior year quarter. Nine month 2017 sales of $669.1 million were 4.7% higher than nine months 2016 sales up $639.2 million.

Excluding acquisitions, nine month 2017 sales exceeded nine months 2016 sales by 2.9%. Our third quarter and nine month 2017 sales compared favorably to the comparable prior year period across all divisions both including and excluding the sales attributed to business acquisitions.

Industrial division third quarter 2017 sales of $132.4 million represented a 9.2% increase over the prior year third quarter and nine month 2017 sales of $375.5 million increased 3.8% over nine month 2016 sales.

Excluding sales contributed by business acquisitions, sales in this division increased 2.7% and 1.7% over the prior year third quarter and nine month periods respectively. For the third quarter higher sales of vacuum trucks and excavators were partially offset by lower shipments of mowers, sweepers and snow removal equipment.

Agricultural division third quarter 2017 sales were $64.9 million up 15% compared to third quarter 2016 and nine month 2017 sales of $170.9 million or 8.9% above the prior year nine month period.

Excluding sales contributed by business acquisitions, sales in this division increased 10% and 6.5% over the prior year third quarter and nine month periods respectively.

This division continues to benefit from new product introductions and improved demand for our mowing products despite the continued general weakness of agricultural equipment markets.

European division third quarter 2017 sales were $43.1 million or about 10.3% higher than the third quarter 2016 and nine month 2017 sales of $122.7 million or 1.7% above the prior year nine month period.

This division benefited from growth in both vegetation maintenance equipment and vacuum truck sales and for the first time in a while the absence of currency headwind. Third quarter 2017 gross profit of $64.9 million grew by 18.7% over third quarter 2016 gross profit of $54.7 million.

Our third quarter 2017 gross profit was 27% of net sales which compares favorably to 25.2% of net sales for the prior year quarter. Nine month 2017 gross profit of $173.8 million grew 10.6% over nine month 2016 gross profit of $157.2 million.

Our nine month 2017 gross profit was 26% of net sales which compares favorably to 24.6% of net sales in the prior year nine month period. These favorable comparisons continue to be held by pricing actions, improved production efficiencies, new product introductions and purchasing initiatives.

Third quarter 2017 operating income of $27.6 million was about 31.4% higher than the prior year third quarter. Nine month 2017 operating income of $67.9 million was about 22.6% higher than the prior-year nine month period.

Third quarter 2017 operating income was 11.5% of net sales which compares favorably to 9.7% of net sales for the prior year third quarter. Nine month 2017 operating income was 10.1% of net sales which compares favorably to 8.7% of net sales in the prior-year nine-month period.

Net income for the third quarter 2017 was $16.7 million or $1.42 per diluted share an increase of over 25% over net income of $13.2 million or $1.14 per diluted share for the third quarter of 2016.

Net income for the nine-month period to -- unadjusted trailing 12 month EBITDA of $100.7 million is about 13.6% higher than the full year 2016 EBITDA of $88.6 million.

Excluding fourth quarter 2016 non-cash charge related to a pension termination adjusted trailing 12 month EBITDA of $103.6 million is trending about 13.2% ahead of full year 2016 adjusted EBITDA of $91.5 million.

Our operating cash flow remains very strong however, its growth has flattened as meaningful sales growth is now driving higher working capital levels and high utilization rates have cause us to add to our vacuum truck rental fleet during the past two quarters.

These strong cash flows have allowed us to improve our debt net of cash position by $21.7 million over the past 12 month even after paying about $40 million for acquisitions on top of outlays for capital investments, interest and dividends.

Our order backlog ended the third quarter 2017 at $181 million which is 31.7% higher than the third quarter 2016 backlog of $137.4 million. This backlog build is primarily due to increased new order levels excluding recent business acquisitions our third quarter 2017 backlog has increased 21.6% since the third quarter of 2016.

In summary our third quarter 2017 results were highlighted by net sales and earnings records for the third quarter and nine month period, sales and earnings growth across all company divisions, record trailing 12 month EBITDA exceeding $100 million, continued strong operating cash flow and significantly higher new orders and backlogs.

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

Thank you, Dan. Alamo Group obviously had a very good third quarter as both the press release and the comments just made by Dan attest too.

Throughout the current year and as a result of our ongoing focus on our operations, we have been able to show steady improvement in margins but for the first half of the year the top-line growth was very modest, very limited.

And finally, this was in the third quarter we were able to achieve over 10% improvement in sales which together with the margin improvement resulted in record sales and earnings for our company that even exceeded our expectations for the quarter.

We are particularly pleased with this improvement in sales for several reasons as you are no doubt aware we have been facing a number of market headwinds that have limited our top-line growth for all of 2016 and the first half of 2017.

These headwinds have included a week global agricultural market, softness in sales of snow removal equipment due to successive mild winter conditions in North America. Declines in sales of non-governmental end users of certain of our industrial division products mainly vacuum trucks.

Soft market conditions in some of our European markets and particularly which got softer following last year's Brexit vote in the U.K. and the negative effect of the translation of our international sales and earnings into U.S. dollars due to the strong U.S. dollar.

We noted in our comments on our second quarter results that we were finally starting to see some improvement in several of these areas of concern. And while sales were still soft, bookings and backlog in the second quarter showed definite strengthening.

This improvement in bookings we experienced in the second quarter led to the growth in sales we achieved in the third quarter and our growing backlog should also support continued growth in the fourth quarter compared to last year's fourth quarter as well as provide a good base for starting off 2018.

We are also pleased that the sales improvement was spread across all three of our operating divisions, it was good to see all of them show improvement in sales in the third quarter and further that area such as the currency translation effects went from being a headwind to actually being a slight tailwind as the U.S.

dollar grows still stronger than several years ago is actually below where it was during last year's third quarter when compared especially to some of the major international currencies in which Alamo conducts business mainly the Euro, the British Pound, and the Canadian dollar.

So while we are pleased with the improvement in bookings and backlog, we still remain concerned about the lingering effects of the issues that have constrained our markets during the last few years.

For example, the overall agricultural market while we had nice improvement in the third quarter the market itself remains weak and though there are signs of it bottoming out, it is still uncertain when farm incomes will start to rebound. We have done well in Ag, but could do even better when the market starts showing improvement.

And with regards to our margins while we have been pleased with the continued improvement we have achieved, we also know it is unrealistic to think the pace of improvement can continue at the levels we have achieved thus far in 2017. I mean, for example, with sales for the first nine months of 2017 are up about 5% yet net income is up over 25%.

So while this is very gratifying and we feel earnings growth will continue to outpace sales growth, but we do not feel that it will this kind of spread between the two growth rates is sustainable.

Lastly we are pleased that the three acquisitions we completed this summer all seem to be off to a good start and while they were small in total they have been accretive to our results from the start and this should continue to grow. So, as a result as we’ve said for a while we continue to like where Alamo is positioned today.

We feel we are structured to perform well in challenging economic conditions and do even better as our market start to improve as they are doing right now. We have a strengthening backlog, improving operational efficiencies, a strong and growing level of cash flow and all of this has led to the record results we experienced in the third quarter 2017.

And while the rate of improvement we exhibited in the third quarter will moderate some as we go forward, we still feel the outlook for Alamo Group remains positive. So we thank you for your support and we will now like to open the floor for any questions you may have..

[Operator Instruction] And we will take our first question today from Mike Shlisky with Seaport Global. Your line is open..

Good morning guys, its John Bendron for Mike this morning. You guys touched on backlogs and strength that's coming from it.

I was wondering if you can point any individual categories that's driving the growth and maybe categories that might be lagging that growth?.

Generally we were pleased that it was fairly broad based, I mean, certain products I know Europe did well both in industrial products as well as in agricultural products. North America we saw nice pickup in things like vacuum trucks, things like excavators, Bush Hog [indiscernible] mowers, agricultural mowers did well.

So certainly some did better than others but it was fairly broad based and like I said, even things like snow removal product showed some positive momentum, more in the anticipation of the coming winter rather than as a result of the mild conditions the last two winters. So we are pleased that it was fairly broad based..

Okay.

And then were there any quantifiable impacts from the hurricanes during the quarter? I know that Alamo does show in the locating Huston itself but maybe were there any like disruptions on the highways like the higher cost in the quarter?.

Certainly in the short term, no. I mean, we believe in the next few years we will see some modest effect everything from that products like vacuum trucks and excavators and this type stuff, so I mean we believe that we will see some modest effects from those in the next couple of year.

But I can tell you in the short-term really no effect to our results..

Okay and I will get one more in here, with all the demand out there are there any components in short supply right now?.

Not really, I think we are seeing a little more pricing pressure maybe, but I think we have been able to contain that pretty well.

I think as our backlogs grow, I mean our lead times are strengthening a little and we would like to have a good backlog, but we don't want it to get too far ahead itself just because we don't want our lead times to lengthen.

But so far our lead times are very well in control and there are no particular impediments and/or lack of input materials that are causing us any concern at this time..

Alright, I am going to jump back in queue. Thanks guys..

Thank you..

Thank you. [Operator Instruction] we will go next to Joe Mondillo with Sidoti & Company. Your line is open..

Hi guys good morning..

Morning..

I wanted to ask a question on the backlog and I just wanted to ask it in a different way. If you were to give us the growth rates of all three segments of the backlog breach of the segments, which you don't have to do.

But would it be all around 25% growth right around there for each of the three segments or is there higher growth in any of the other segments versus others?.

Yes, so like I said there is growth in all levels certainly I think Europe had probably our strongest growth just because I think they had the lowest backlog going into this period probably industrial had the least growth just because they I mean, they had a fairly healthy backlog even [indiscernible] for the last couple of quarters so they would have been the least and Europe would have been the most.

But then, actually even industrial of course they had a fair bit from the two of the three acquisitions that we did were in the industrial sector so that added to them as well.

But yes, like I said Europe was the strongest but that is because they came from the lowest level, but all three had improvements and it was good to kind of like I said that's why I was saying our sales growth and our growth in bookings and backlog was well distributed..

And I wanted to ask on the margin industrial because obviously the street has been off, I think this is probably where the street has been off at least in my model it is.

Could you breakdown the biggest sort of buckets that are driving I mean you saw I think organic growth of 2% this quarter and pretty modest in the last couple of quarters, but you are seeing I mean, operating margins last year were, in the third quarter was 7.7% and now they are 11.2%.

So you are seeing huge amounts of operating leverage we didn't even see this coming out of the 2009 recession coming out of that we didn't even see that.

So could you sort of maybe try to breakdown the buckets of drivers that are driving this operating leverage?.

Yes.

Again I know that industrial is fairly broad-based you got to remember like in the third and fourth quarter of 2016 our vacuum truck business particularly in industrial was well off compared to the highest we had achieved like even in 2014, 2015 and so and that's the one area where we actually have some rental business where we actually do our own rental activities and so utilization stay good but we actually lowered the rental fleet to keep the utilization good.

And then like I said sales were soft particularly to the non-governmental end users because that's where we saw that had some pretty good business going on, the majority of our sales of vacuum trucks is to governmental, but we had the nice growing and things like oil field construction, petrochem and all of those the non-governmental was off, the rental activity in total was off and over our margin products and so that's what heard on margins in industrial last year but that's what has helped our margins in industrial in the third quarter this year.

I think we also saw some decent little bit margin improvement and things like some mowers, great all excavators have a good quarter.

Snow products were still, for the quarter actually down just because like I said, while bookings and backlog just picked up a little there, sales there were still soft in the third quarter so there margins were down a little. But I think like I said vacuum trucks, mowers, excavators was were industrial saw the biggest pickup in the third quarter..

And I think in that prior year period vacuum trucks were actually still decelerating, now we are kind of accelerating so that's just kind of magnifies the differences in the margins..

And fourth quarter you still have a pretty easy comp, I assume that there is nothing sort of one time in nature in this third quarter and you should have another sort of good fourth quarter just given the comp and then in 2018 obviously the rate of margin expansion I would think would slow because the comps do get a little more difficult.

Is that fair to say regarding the fourth quarter?.

Yes. That's fair to say. I mean, the fourth quarter for us is always a little softer but as you said even last year's fourth quarter was pretty soft. So we have to do definitely better than last year's fourth quarter.

There was no really onetime events in the third quarter this year but like I said, I think it was good and it was a quarter where quite a few things went right and not much went wrong.

But whereas and I think that in the fourth quarter of this year yes, we have got a decent backlog going into it so the comps are easy compared to last year's fourth quarter and we feel that we should have a nice improvement in the fourth quarter.

And exactly what you said about 2018 that's what I was saying earlier certainly I think it's good to go in that we should enter 2018 with the nice backlog. But yes, the comps will be harder and the margins, while I still feel we can – our bottom-line growth can be at its higher pace than top-line growth.

But it will certainly be as much as less levels than we are achieving this year I think keep going 25% improvement in earnings..

And then, in Ag you saw organic revenue up 10% but margins were down.

Is that just a lingering sort of product mix issue where it's just smaller customers with smaller tractors that are buying smaller products?.

A bit of that but I mean, Ag is one where we had really strong, I mean Ag had very good margins, they had very good margins last year. This one like I said, so with the sales growth they were maybe, the average it was a little bit of product mix but it was still a very good result level.

But yes, just slightly like I said, good margins but slightly below last year's which were even better margins..

Okay and then in terms of cash flow, just wondering if you could comment on your thoughts on the cash flow I mean, I think the first nine months of the year you saw that negative $0.50 a share of free cash flow just wondering your thoughts on that and going forward and maybe if you could provide sort of your CapEx for the year?.

Yes I mean, if we were in a flat scenario we would be generating when we were in the 90s and EBITDA and we were in flat, not a sales growth period we felt like that translated to somewhere in the neighborhood of $50 million free cash flow.

What’s happening now though as we are accelerating in terms of sales growth and so during this period of acceleration we are going build some working capital. We have done pretty good on inventories, inventories have built a little bit, but we kept returns up on inventories but we will see more in receivables.

So we should incrementally add the cash flows but that ratio of EBITDA to cash flow will probably narrow will some as we are building working capital. We also need to put some money into the rental fleet or put some more trucks into the row so that will be a big of an offset to the cash flow.

And the next part we had the big acquisition we had $40 million in acquisition obviously that used up a lot of cash..

And CapEx sort of outlook, I mean, I know you have been sort of running below depreciation not to what the full year looks like or what you are looking at for 2018 any sort of comments regarding that?.

I think we will finish the year running a little below depreciation. I think next year we will probably do a little bit above depreciation like I said, because I think we are seeing a few, as some of our markets are expanding and sales are growing we are probably going to take on a couple more capital projects than we have this year.

So Ag will see a little bit, anyhow but I am talking small variations pluses and minuses but what I think like I said this year will be little bit below depreciation and next year will probably be a little bit above it..

Okay, great. Thanks a lot and I will let someone else have a chance. Thanks..

Thank you, Joe..

[Operator Instruction] We will go next to Tyler Etten from Piper Jaffray. Your line is open..

Good morning guys. Congrats on another record quarter and really great to see the operating margins break into the double-digit..

We have been talking about that for a while and so we are starting to get there..

That's we got it. I guess lot of my questions have been answered already. Do you have a positive comment in the prepared remarks about the snow equipment business obviously this has been a headwind for the last couple of years because of the mild winters.

Just wondering what the commentary you are hearing from dealers and if this is a year where we might start to see a little bit more out of that business?.

Yes, I think so, like I said I mean, we have seen both some bookings and backlog increase and they are probably what I even thought we would given how mild the last two winters have been. I think there are some expectations this winter. I mean, is off to a decent start and good to see a little bit more activity than last winter.

But even though it was off, it was still a good business and like I say, I think next year it could even be better because particularly things like our [ROSA] has come out with some new products that have been well received. So I think we are helping ourselves with some new products introductions.

I think like I say, we are optimistic I think this winter is going to be a little more normal I don't want to say it's going to be a big winter but I mean little bit normal to the last couple of winters, so but we will see how that goes. But I think we have got some new products.

We have got a little bit better coverage in that area and so I think we will see, we should have a like I say it was off a little bit but not that much. This year we think it could be reasonably better because we are starting out with the even better backlog..

Okay and then in the industrial segment you said that mowers were a little bit weaker in the quarter.

Is there any I guess explanation for that given that we have all the strength in mowers out of the Ag segment or was it just a different mix in the quarter without really any explanation?.

No, I think some of that is because actually little more timing than anything. I don't like I said, we have done pretty well there and so I mean we are big market here, so it's hard to outperform the market when you are a big part of the market.

But no, I think it's going well but I would say there is a little bit of timing on a couple of issues but we think that will continue to be a very attractive part of our business..

That's primarily a bill to order sort of business so when you get a big order sometimes it dies..

Yes, there are some of the big state contracts can be big orders at a time and like Dan those can be a bit lumpy and that's why I am saying some of its timing too is when we get some of those out when you deliver..

Got it.

And then Dan, could you breakout the European segment in terms of organic growth with acquisitions excluding any effects from FX?.

Well, we put into our schedules the effect of FX on the top-line and since it’s mainly translation it’s proportionate of the bottom-line as well. We don't have any FX of acquisitions really in Europe because there is no -- in the comparable periods there are no acquisitions..

Okay, thanks..

Yes, I would say look at the attachment three of our press release because and it shows the effects of currency, but yes it went from like what a 4% headwind to a 2% tailwind..

So you can take the segment earnings for Europe and affect and do the same affect..

Follow the three acquisitions. Two of them were in industrial and one of them was in Ag..

Okay, alright. Perfect. Thanks guys..

Thank you..

Thank you. And we will take a follow-up question from Joe Mondillo with Sidoti & Company. Your line is open..

Hi guys. Thanks for taking my follow-up. So I will just have a few things. For acquisitions that 715,000 of accretion to operating income related to acquisition, how can we look at that for saying going into the fourth quarter next year at a quarterly run-rate because I know one of the deals I think was closed mid, in the middle of the quarter.

You also have the snow operations business that you bought which I imagine would ramp up in the winter months.

Do you think that 715 could sort of double on a quarterly run-rate at least on the fourth and first quarter or just trying to get an idea of accretion?.

I mean, we don't give that kind of forward guidance there outlook.

As though I just said in the comments it was – there were off to decent start and then that should grow I mean we should be better as we move ahead because like you said, we are still in a little bit of a weird mode in some of those putting in our operating systems and other types of making changes so we are pleased to have an accretive from the stock.

As you said the RMP the last one when you have a full, I mean we will have a month of that in there so it's fairly modest like I said it's only a partial effect on that one.

So yes, it should definitely be better and especially as we get down running on our operating systems and our purchasing initiatives and our other structure that we can add to them. So yes, it should improve but like we don't give out that kind of detail..

Is there any non-cash amortization or anything that's going to pull off starting in the fourth quarter or anything like that or no?.

No. .

Okay.

And then I wanted to ask regarding over the last couple of years you guys have done a really good job especially sort in slow down years in 2015-16, in terms of productivity improvement opportunities just wondering how that bucket sort of plays a role in margin expansion when looking out sort of 2018? Are there opportunities as big they were smaller or sort of how are you looking at sort of that aspect of?.

Yes. Certainly there is more that we can do and we are not like I said we think we can still have improvements as I said, they won't be at the pace we were able to achieve this year in margin improvements you can’t do that pace on top of the pace we already did this year.

As I did also said, I think we are seeing a little bit pressure on input cost, raw materials, steel, things like that. I think we believe we can manage through that. We certainly won't have any margin deterioration but anyhow we believe we can probably still have a little bit of margin improvement going ahead just not at the pace we have experienced.

I mean, we have to wait and see exactly what's happening with cost but we are seeing a little more pressure there than we certainly experienced this year so far and I think that's one area I think but we believe we have got some good things going that can continue to improve our operating efficiencies.

So as I said, I think we can still have bottom-line growth exceeding top-line growth but just nowhere near at the pace we have achieved in the third quarter..

So no big CapEx projects at any of your facilities that are going to at least play a role in 2018 significantly in terms of productivity?.

Yes. No, the good news and the bad news is we don't have too many eggs in one basket that means like I said no one project or anything usually has a material result affect on our results up or down – were so diversified in the range of products and in the manufacturing operations we have so good news and the bad news..

And then just have one last question regarding backlog, so the backlog is generally less than quarter what the revenue so does that backlog extend sort of year end or does any of it extend in the 2018 and then I was just wondering I don't know if there is any clear mix up or down in terms of gross margins or what you have in the backlog.

Is there anything to highlight in terms of mix to think about that?.

No. Not on the mix I mean certainly, some of the backlog does extend into the first quarter of next I mean I maybe a little bit even in the second quarter, but the majority of it should pull through in the fourth quarter and the first quarter of next year.

You got to remember like about little over 20% of our sales is after market spare and ware parts that's also our most profitable piece of our segment of business and that never goes through backlog I mean, we’ve a little bit it does but you know usually that's in and out business and so that can have more of an effect and as I said that's one of the reasons our fourth quarter is generally little wider than like the second and third quarters just because equipment isn't being utilized in the field quite as much due to winter, due to holidays, and other things like that.

So that's spare parts are usually little softer in the fourth quarter and that's why that effects our margins in the fourth quarter margins usually little less than third quarter margins.

But like I say that's just sort of a natural cyclical part of our business other than that there is nothing in particular in the backlog that's going to hurt or help margins in any material way over and above our operating improvements that we continue to make so like I said I think the spare parts are still like I said, come and go little bit higher or little bit lower than anticipated, but we are in good shape on backlog and that will help us going into the first quarter of next year..

Okay. Thanks a lot. Appreciate it..

Thank you. .

Thank you and I am showing we have no further questions at this time. I will turn the call back to our presenters for any closing or further remarks today..

Okay. Well thank you very much. We appreciate you joining us today and look forward to speaking with you all on our year end call, which should be around the first early March of next year. So appreciate your support and have a good day. Thank you..

This does conclude today's program. Thank you for your participation. You may disconnect at any time..