Robert George - VP, Treasurer & Secretary Ronald Robinson - President, CEO & Interim Chairman Dan Malone - Executive VP & CFO Richard Wehrle - Vice President & Corporate Controller Ed Rizzuti - Vice President, General Counsel..

Mike Shlisky - Seaport Global Joe Mondillo - Sidoti & Company.

Good day, ladies and gentlemen, and welcome to the Alamo Group First Quarter 2018 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 for today, Friday, May 4, 2018.

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

market demand, competition, weather, seasonality, currency-related issues and other risk factors listed from time to time in the company's SEC reports. The company does not undertake any obligation to update 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 today. Dan Malone, our CFO, will begin our call with a review of our financial results for the first quarter of 2018, and then I will provide a few more comments on the results, and following our formal remarks, we look forward to taking your questions. So Dan, please go ahead..

Thank you, Ron. Our first quarter 2018 results were certainly helped by U.S. tax reform, but we set company records for top line and pretax earnings as well.

These records were achieved, both with and without the accretive results of recent business acquisitions and even overcame the effects of the union strike at our Gradall facility in New Philadelphia, Ohio. The strike, which began on March 12, has been resolved with a new 3-year contract, and the plant returned to normal operations on April 9.

First quarter 2018 sales of $238.1 million beat prior year first quarter sales by 10.5% and without the effects of acquisitions, by about 3.8%. Excluding acquisitions and the effect of the Gradall strike, organic sales growth for the quarter most likely would have been about 6%.

Industrial Division first quarter 2018 sales of $132.2 million represented a 5% increase over the prior year first quarter sales. Excluding the effect of the Old Dominion Brush and R.P.M.

Tech acquisitions, this division's first quarter sales, which were negatively affected by the Gradall strike, were down about 2.6% compared to the prior year quarter.

Agricultural Division first quarter 2018 sales were $58.6 million, up 13.3% over the prior year quarter as we saw a continued improvement in the broader demand for our agricultural mowing products despite continued weakness in row crop farming income.

Excluding the effect of the Santa Izabel acquisition, this division's first quarter sales grew organically by about 3.7% over the prior year first quarter. European Division first quarter 2018 sales were $47.3 million or about 25.1% higher than the first quarter of 2017.

Even without the favorable currency translation tailwind, this division's local currency sales were still up 9.9% compared to the prior year first quarter, reflecting good market conditions in Europe. First quarter 2018 gross margin of $60.3 million grew by 11.2% over the prior year first quarter.

Our first quarter 2018 gross margin was 25.3% of net sales, which compares favorably to 25.1% of net sales for the prior year quarter.

These favorable comparisons were helped by pricing actions, purchasing initiatives and productivity improvements, partially offset by an unfavorable mix of aftermarket part sales, the effects of the Gradall strike and generally higher material costs.

First quarter 2018 operating income of $21.4 million was 5.5% higher than the prior year first quarter, primarily due to earnings accretion from acquired companies and organic sales growth. First quarter 2018 operating income was 9.0% of net sales, which is slightly below 9.4% of net sales for the prior year quarter.

This decrease is largely due to the Gradall strike, a higher level of spending on R&D projects as well as the timing of legal expenses. All 3 divisions' first quarter operating income came in at about 9% of net sales. First quarter 2018 net income and earnings per share were also helped by the lower U.S. corporate tax rates.

Our first quarter 2018 effective income tax rate dropped to 27.0% from 34.7% in the prior year first quarter, a savings of $1.5 million or $0.13 per diluted share. Net income for the first quarter of 2018 was $14.6 million or $1.24 per diluted share, which is almost a 20% increase over the prior year first quarter.

First quarter 2018 EBITDA of $26.8 million was up 6.2% over the prior year first quarter. The trailing 12-month EBITDA of $111.6 million continues to trend positively, up 1.4% over full year 2017 EBITDA of $110 million.

In the first quarter of 2018, the net cash used in operating activities totaled $28.1 million, which compares to only $1.4 million used in the prior year first quarter.

Most of this difference was due to high demand and order backlog as well as increasing supplier lead times, which drove higher inventories company-wide and increased investment in our vacuum truck rental fleet. We ended the first quarter with $75.9 million cash on hand and $147.3 million in total debt.

Since the end of the quarter, we have begun the process of repatriating excess cash from our overseas operations. By the end of May, we expect that we will have returned between $25 million and $30 million.

After that, we continue the - we will continue the process but we are being careful not to incur local taxes or other indirect costs of moving these funds. Our order backlog ended the first quarter of 2018 at $237.8 million, up about 62% from the prior year first quarter.

First quarter 2018 new order bookings well outpaced our record sales levels as our backlog grew nearly $20 million during the quarter.

In summary, our first quarter 2018 results were highlighted by record first quarter sales and earnings; our effective tax rate dropping to 27%, boosting first quarter EPS by $0.13, all divisions returning operating income at about 9% of sales, continued year-over-year improvements in percentage gross margins; continued EBITDA growth over prior record levels; and $20 million of backlog growth during the quarter as new orders exceeded record sales levels.

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

All right. Thank you, Dan. We see that - and I see in general, we are pleased to have started off 2018 on a positive note with record sales and earnings in the first quarter.

This continues the trend we saw developing in 2017, particularly in the second half, in which we start to see some modest market improvement across nearly all sectors of our business after several years of little to no growth.

With this topline growth and our ongoing focus on operational improvement, we were able to once again show even better growth at the bottom line, and of course, in the first quarter. We also benefited significantly from recent U.S.

corporate tax reform measures that had the effect of lowering our average income tax rate by about 7%, adding nearly $1.5 million to our after-tax results in the first quarter. We would believe - we believe we will continue to see contributions from tax reform at similar rates as we move through to 2018.

And while tax reform certainly helped our first quarter results, we are very pleased with our operational execution during the quarter.

Our first quarter is historically one of our weaker ones as business activity in areas where we are strongest, such as vegetation maintenance, is typically less active in winter months and usually less spare parts consumed during those time period.

And on top of this, as we have said, we had a strike at one of our major facilities where we produce both Gradall excavators and VacAll vacuum trucks. And this certainly limited our output of these products.

Plus, we were affected by inflation as the cost of purchased components, particularly steel and steel-related items, increased at above-average rates. Even our product mix was a little less favorable as sales of higher-margin aftermarket spare and wear parts were slightly below our expectation.

Again, we think this was in vegetation maintenance and particularly in - maybe a little bit later winter weather conditions. Yet despite all of this, sales and earnings in total were up, respectively, and even with record shipments, backlog continued to decline.

And it's really comforting to have strong a backlog level as we move through the year, but we feel is [indiscernible] almost too strong and is beginning to affect some of our deliveries in certain areas.

And as a result, we are selectively increasing our staffing to meet this demand, and actually, I'll also mention, we're starting to ramp up our capital spending this year, which will extend into next year as well as we work to increase our overall production mainly by focusing on reducing bottlenecks in our production processes.

Part of this will also be an acceleration of our longer-term plans aimed at upgrading our capabilities with more technical and automated equipment. We want to not just increase our capacity but increase our technology as well to ensure we stay competitive in the markets we serve.

Certainly, having a more favorable tax environment and even the ability to repatriate international earnings in a more efficient manner increases our ability to more economically invest in our businesses for the long term.

And of course, it's the main reason we want to invest in our business, is because we believe in it and we're pleased to see the improving conditions across nearly all sectors in which we operate. These improvements have been modest, but it's been broad-based, which had been very welcomed.

Our Industrial Division, which has been our most steady performer, is continuing to exhibit good stability. And even pockets of activity, which were soft in the last few years such as snow removal and some vacuum trucks are both back on pace.

There was a little weakness in the division's first quarter results, but that was nearly all related to the strike that we had, that we've talked about, at our Ohio manufacturing facility. We're glad this has been resolved, and we have a new 3-year agreement in place, which - terms of which are well within our expectations and operating capabilities.

And further, we feel that some of the shipments from this facility that were delayed in the first quarter will be made up in the second and third quarter of this year. And certainly - and pleased that we didn't lose any orders or any cancellations, but we're able to - so we'll recover from this quite nicely.

Our Agricultural Division also had a nice start to the year, which was, again, welcome given the severe downturn in the overall agricultural sector of the last several years. The farm incomes - as I said, gains were modest, and farm incomes are expected to remain well below record levels.

But it is good to see this market starts to move in a positive direction, which we feel is being further aided for manufacturers such as us by lower dealer inventory levels and generally more healthy dealer conditions. So the flow-through of new orders to us should be better, and that's what we're seeing.

And then our biggest area of improvement in the first quarter was our European Division, where we finally started to see some market strengthening after several years of slow overall economic activity. And they were further compounded by some of the geopolitical turmoils such as Brexit and everything.

And then we were even further affected by the strong U.S. dollar, which limited the translation of our international earnings. And while all these issues like Brexit are yet to be fully resolved, we are very pleased that the economic activity has improved. There's some pent-up demand.

There's - I think people are settled down and are more accepting the changes, and then even currency exchange rates, which had been a headwind, are now even - been more of a tailwind for the last about 9 months.

So - and while all 3 of our divisions have benefited by the modest market improvements, we believe our own internal developments have contributed this much or more to our results as the market has.

We have been steadily investing in our range of equipment, which has resulted in a stream of new and improved products that have been well received by our customers. And we're excited about some of the new models we will be introducing later this year and early next year as well. I've got some interesting new things coming down the pike.

And with a more favorable tax environment and even as acquisitions have gotten more expensive, we are increasing our focus on such internal developments and in developing things that we may have historically bought. And so - and we're pleased with the results we have had from these product development efforts.

But certainly, acquisitions also remain a key element in our growth strategy, and we're pleased that despite sort of higher prices we think for acquisitions recently, we're still able to find opportunities which we believe are actionable for us and will still allow us to make the kinds of returns commensurate with our overall business objectives.

We completed 3 small acquisitions last year but are still looking at having a lot - seeing a lot of activity in this area. So in summary, it was nice to have a good start to 2018 with record results in the first quarter, and we feel good about the outlook for the rest of the year.

We have a strong backlog, improving markets, growing margins, a more favorable tax environment, all of which should contribute to a stronger 2018 for Alamo Group. So we want to thank you for your interest and continued support of our company. And we'd now like to open the floor for any questions you might have..

[Operator Instructions] It appears our first question comes from Mike Shlisky with Seaport Global..

Good morning, guys..

Morning, Mike..

So I was just trying to get a sense here as to how the high fuel prices in the market might play out in your numbers here. Some companies have actually gone back and re-priced their backlog, so I'm just - have just done a price increase or a surcharge from anything from that day forward has been priced in.

I'm kind of curious as to how you have planned your surcharges.

And will there still be pressure in the back half of the year? Or will the pricing have kind of caught up by then?.

Certainly, we started about 1st of April adding selective surcharges, mainly probably in more of our agricultural-related divisions. Our Industrial Division, there, it's been more price increases because that's more of a build-to-order business.

So as we have been quoting new stuff, we selectively have worked in the prices - the current prices of steel into the new orders. And usually then, I mean, once we get an order, the flow-through is quicken up, that we are able to - it's not like we quote something one day and then 6 months later, the prices are higher. It's a shorter turnaround.

We can buy the material quicker when we get the order, and so that flows quicker. So it's a combination of both surcharges and price increases or at least building steel prices into the new costs.

So as a result, like I said, even our margins were up slightly in the first quarter, and so we're not being - we're probably not getting as much favorable price variances as maybe we got last year, but we're not really giving anything away from a margin point.

I think we've been able to react quick enough and positive enough to take that into consideration. And I think, certainly, you have to see how the year is going to play out. We're - if anything, I think steel prices, which had been going up for the last 6 months or so, has sort of flattened out.

Selectively, we've seen a few maybe even where they come off a little, but we're not planning on going down.

But I think we're in good shape to react to whatever happens out there, and like I said, haven't given up any margin and really think we - as long as we stay on top of it, we should be just fine in that no matter what happens for steel for the rest of the year..

Okay.

Then, secondly, perhaps I missed this, but is there a dollar CapEx that you can share for us? And just got to say that most of the CapEx this year is - in things like automation and robotics are not real greenfield development on some new bricks and mortar?.

A couple of things on that. Yes, like we had been saying in the last several years - I mean - so over the long haul, our CapEx has run usually at or just below depreciation. And what I'm saying is probably for this year and next year, it's going to be a little bit higher than - it will be higher.

I mean, it's not going to be like double or anything, but I mean, it is going to be certainly higher than depreciation for this year or next year. Some - yes, you're right, we are investing in automation, but there is - I mean, I know we just started to - CapEx at our plant in - Rivard plant in France.

And for instance, I mean, we're putting in a new laser cutter, we're putting in some new other machine tools. And - but we had to expand the building to put it in. So I mean, there is a little bricks and mortar in that one.

And it's actually one of our bigger capital expenditures already this year was we had a small facility at our Nite-Hawk plant in the state of Washington that we leased while we bought out the lease. So I mean, that was - it's like - so economically, it's a good payback for us to do that, and - but that's all brick and mortar.

We also - we've talked a long time about wanting - our Super Products Division in Milwaukee operates from three separate facilities, which is inefficient. And we've been talking about consolidating that. And I would say I hope to, before the end of this year, kick off in that.

We'll actually be building a new plant to be able to put 3 plants into 1, which has - and with the associated equipment and everything. That will be a major capital expenditure but all spread over a couple of years, but again, like I said, so will be some brick and mortar. It will also be - but some more state-of-the-art equipment.

And again, we're doing that because it will have a very nice payback. So it is - we're continuing to invest in technology, but there is some brick-and-mortar, which is one of the reasons it's being kicked up for the next couple of years..

Okay. And if I could just squeeze in one more here, it would be a two-parter, if you don't mind.

So, Dan, is there an actual tax rate out that you can actually share for us for the full year now? And then, secondly, is there a plan for the cash you plan to bring back to the U.S.? Is this something we should be thinking about, whether it's M&A or potential special dividend, et cetera?.

Well, as we mentioned in the - for the second part of your question, as we mentioned, we are in the process now of bringing cash back. We expect by the end of this month to have brought back between $25 million, $30 million. The rest of it requires a little more analysis.

There are some local tax issues, and then they're not huge numbers, but we certainly want to be as efficient as possible in bringing money back to the states..

Yes, certainly. Yes, as I also said, I mean, I think - tax rate improvement for us, it was about 7% in the first quarter, and that's probably about the rate. I mean, we have - like I say, good news is our international earnings are picking up. I mean, of course, we didn't get tax reform outside the U.S.

So I think the 7% rate, give or take, is about the improvement we think we'll be seeing for most of the year. As far as the cash itself, bringing it back is one thing. No, we do not plan at this point anything like a special dividend or that. Certainly, as I said, one thing, we'll be spending a little bit more than on CapEx.

We said we were going to be kicking that up a little bit. The other thing is I think as at the end of the year - I mean, obviously, the initial use of the cash will be to pay down debt, but we'll - yes, we're, like I said, going to spend a little bit more on CapEx, we're going to spend a little bit more on R&D.

And - but the main focus of the - we still have plenty - we're still generating a lot more cash than the increases in CapEx and R&D, and the main focus of that is for acquisition. Like I said, we did a couple of small ones last year.

We'll - I mean, we're looking at - we're probably looking at more than we look at right now, but I think we're being very selective in what we do. But I mean, we're conscious of that. We understand valuations have gone up, and some of that is justifiable, but we're still looking at making the same kind of returns.

But, yes, I think acquisition activity is still the main focus of our cash flow, and we think we'll be able to find some that meets our criteria and are anxious to continue growth in that way. But like I said, I think we've been focusing a little bit more on organic growth as well.

So those are the three - CapEx, R&D and acquisitions are still the main uses of the cash that - we will repatriate but that we generate internally..

Okay, great. Thanks for that color. Ill hop back in the queue..

Thank you..

Our next question comes from Joe Mondillo with Sidoti & Company..

Hi. Good morning, everyone..

Good morning, Joe..

I just wanted to ask about the raw materials just one last time.

Any of the segments - does raw materials become more of a headwind in the second quarter than in the first quarter?.

No. I don't think so, especially, because like I said, the surcharges and things like that, we don't implement any of that until the second quarter. So I think that we've responded, and I'd say, it's an amount of issue, but I don't see it being any more of an issue in the second quarter or even the rest of the year than it was in the first quarter..

All right. And so material prices continue to rise.

How would the ongoing - sort of how you deal with that pricing-wise?.

Well, first of all, we have a little lag usually in our pricing. Like our suppliers, we lock it in for a month or 2. And usually, that's almost enough once we get them, although we can get the material purchased in time. One thing you all will notice, our - certainly, our inventory and receivables went up as the business has gone up.

And so, I mean, I think selectively, we're buying a little inventory ahead of demand, where - especially - it's not only where we think price increases are coming, but even more so where we think our lead times are getting longer. Everything from truck chassis, tractors, some hydraulic components, we're seeing the lead times go out.

So I mean, one of our responses has been to not only buy a little ahead, so that, number one, we know what our pricing is for those components, but number two, so that we have them in stock when we need them given that lead times are growing a little bit.

So that's why I'd say our inventory has gone up - actually, our inventory turns have stayed the same, but our - absolute inventory has gone up a little in response to the market demand and in response to longer lead times. So I think we're being selective. The main area of cost in areas has been steel and steel components.

I mean, it's not so much, say, plastics or tires or paint or - those seem to be - other - non-steel things seem to be holding just normal types of inflation. It's more steel-related. A little bit on the fuel surge, like freight costs have also - and so we're looking into that as well.

But I think - like I said, I think we feel fairly good about being able to deal with it by selectively buying ahead, by watching it, by ordering as soon as we need it and instead of delaying a little bit.

So I think we're - I'm pleased that our guys seem to be on top of managing the situation that I don't think it will impact margins at all for the year..

Okay. And then at the Industrial segment, excluding the workers' strike of that $5 million, it still looks like organic growth of 1% was lighter than I was expecting, at least.

Not sure what you guys were looking for, but what are your thoughts on that sort of slower growth that you saw in the first quarter even outside of the workers' strike?.

Well, our backlog actually increased more than - like I say, the bookings were up better than that. And that - so it was the strike, and I think $5 million was actually maybe a little modest on the effect there.

I think also that - the area - like I said, it was amazing that we were - probably the unexpected thing was that spare parts in the Industrial Division were all - not just less growth - I mean, actually, less than last year. And that was - boy, like I said, spare parts are our highest-margin item.

And so - and to see that being off by more than $1 million will bother us. We believe it was mainly due to the fact that, like I said, weather, that the winter - it's still snowing. Some of the guys said that - April was the coldest April in history for Chicago. I mean, it's all - weather - farmers are slower getting into the fields.

And we think - yes, I'll say, we were concerned, but we're not really worried because we feel that just the late winter, people aren't getting into the fields just quick. People aren't buying - getting in - mowing the freeways, along the freeways yet, they're getting a later start.

But we think that's, like I say, made up a little of that, a little bit better snow conditions for us, which helps us. But a little - like I say, we believe that's just - may things delay people getting started with all these. We believe it will be fine. We are already starting to see some pickup.

I mean, while - as we have said, our backlog grew faster than - the sales grew in the quarter. And we feel we're in good shape - yes, we actually think we're in good shape for the rest of the year..

All right. And then in terms of the SG&A, it looks like it's sort of tracking a little faster than revenue. Just wondering if there's anything sort of onetime in nature there or sort of what you make of the SG&A that's a little higher relative to the revenue..

Yes, there's a couple of things. First of all, in the first quarter last year, we didn't have the three acquisitions. So there was three acquisitions in the first quarter - that was there in the first quarter of this year. We also - we already have - there's some onetime things.

In Brazil, we had a head of operation, and then we bought the new Santa Izabel. Consolidating those two in the womb, a little extra cost and our ODB, Old Dominion, another acquisition. We're putting new systems conversion effort there, putting them on our operating system, which is, again, sort of a onetime cost.

These are sort of $0.25 million here, $0.25 million there.

And then even a - more of a - again, an anomaly, legal expenses, there was a couple of onetime events there that drove - that legal expenses were up another $0.25 million here and there above sort of what it was last year at this time when we had very low - so it wasn't anything - so I'd say, it was two or three little things that this added up to actually being noticeable..

Okay. And last one for me. The volume - or the organic growth, ex currency, is outpacing what I was looking for at your European segment. Any comments there, what you're seeing? Do you think the growth is sustainable? Anything there would be helpful..

Yes. Certainly, Europe, I think, they've had some fairly soft conditions for several years running. It was nice this year that - I think part - what contributed to this is some pent-up demand, a little bit of pent-up demand as well as - the growth, I think, is sustainable. I think they are but not at the levels - I mean, they were up like 25%.

So we're not going to grow 25%, but I think a healthy growth rate for the next few years is likely. In fact, when I talk about where we had some backlog bottlenecks right now, I think Europe is - I mean, we've got two of our major plants there that are basically almost sold out through the end of the year.

So like I say, we want to try to increase selectively some capacity there because we feel we're - like I say, probably this growth is sustainable, but I mean, just meeting the backlog is going to keep pushing the growth this year..

Okay. And I just have one last question, actually. In terms of the growth, sort of the CapEx projects, any investment-related - I'm just wondering if there's any costs that will hit potentially the growth investment that maybe [indiscernible] CapEx here..

I'm sorry. I lost you. You're saying, with the CapEx we're doing this year, was - are there any costs....

In terms of your sort of growth projects, CapEx projects, I know a lot of that is going to be capitalized, but I'm just wondering, related to that, is there any sort of expenses that will hit the P&L that maybe were not there last year related to growth investments?.

No, I don't see anything out of the ordinary. I mean, most of these CapEx are - like I say, most of that stuff will be capitalized. And when I said we're doing a little bit more on R&D, that will hit some of these. Like I say, R&D expenses are up a little. But like I say, I don't think that, that will be particularly noticeable.

I mean, it's not of a level that should be noticeable. And the CapEx is not like there's some expense associated with the CapEx, things that will be expensed that will have a material effect on anything..

Okay, perfect. Thanks..

Okay. Thank you, Joe..

[Operator Instructions] And it appears we have no other questions at this time..

All right. Well, thank you for joining us on the call today and the questions you did have. And we appreciate your interest in Alamo Group, and we look forward to speaking with you on our second quarter call in August. So have a good day. Thank you. Bye..

That does conclude today's conference. Thank you for your participation..