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Good day, ladies and gentlemen. Welcome to the Alamo Group Third 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 opened for question. [Operator Instructions]. This conference is being recorded today, Thursday, November 1, 2018.
I would like to now turn today's conference call over to Mr. Edward Rizzuti. Please go ahead, sir.
Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at (212) 827-3773, 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 one hour after the call and run for one week. The replay can be accessed by dialing 1 (888) 203-1112, with the passcode 1940994. Additionally, the call is being webcast on the company's website at www.alamo-group.com, and a replay will be available for 60 days.
On the line with me today are Ron Robinson, President and Chief Executive Officer; Dan Malone, Executive Vice President, Chief Financial Officer; and Richard Wehrle, Vice President, Treasurer and Corporate Controller. 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. Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release.
Before turning the call over to 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 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, geopolitical 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 the information contained herein, which speaks only as of this date.
I would now like to introduce Ron. Ron, please go ahead.
Thank you, Ed. 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 third quarter of 2018. I will then provide a few more comments on the results and then following our formal remarks, we look forward to taking your questions. So Dan, please go ahead.
Thank you, Ron.
Our third quarter 2018 results again set company records for sales and earnings. In the quarter, our results were significantly helped by $3 million adjustment to the 2017 year-end tax provision which cover the retroactive effects of the 2017 corporate Tax Reform Act. That said our record sales and earnings were achieved both with and without the benefit of the tax adjustment.
Very strong industrial division results were again the main driver of our third quarter performance. While agricultural division results were negatively affected by weak market dynamics and higher input costs.
In Europe, delays in shipments from our French vacuum truck plant more than offset the otherwise good results of our UK businesses.
Overall, third quarter 2018 sales of $257.6 million beat the prior-year third quarter by 7.1% and by about 3.7% without the effective acquisitions. Year-to-date, sales were up 12.5% with organic sales growth of 7% without acquisitions.
Industrial Division third quarter 2018 sales of $156.7 million represented 18.4% increase over the prior year third quarter sales. Excluding the effect of acquisitions, this division's third quarter sales increased 12.3% organically. Year-to-date net sales in this division were up 16.9% over prior year, with organic sales growth of 9.4% without acquisitions.
Agricultural Division third quarter 2018 sales were $61.5 million, down 5.3% from the prior year third quarter. Year-to-date, this division sales were up 4.8%, but essentially were flat to prior year without the effect of acquisitions. Weather, crop yields, and U.S. trade disputes have delayed recovery of the general agricultural market.
European Division third quarter 2018 sales were $39.4 million or about 8.7% lower than the third quarter of 2017. Without a slightly unfavorable currency translation effect, this division's local currency sales were down 8.2% compared to the prior year third quarter. Year-to-date, this division sales were up 9.8% and also grew 3% without the benefit of favorable currency translation. Our European sales were negatively impacted by delayed shipments from our French vacuum truck facility. While much of this miss was the timing of finished product deliveries to customers, much of it was also due to delayed receipts of components from suppliers.
Third quarter 2018 gross margin of $66.8 million grew by 2.8% over the prior year third quarter. Our third quarter 2018 gross margin was 25.9% of net sales which compares to 27% of net sales for the prior year quarter. Year-to-date gross margin was 25.7% of net sales compared to 26% in the prior year period.
Our percentage margins were squeezed in the third quarter by an unfavorable timing of input cost increases relative to pricing actions which have been implemented to offset these higher cost. Third quarter gross margin was also constrained by an unfavorable mix of equipment to aftermarket part sales but continue to benefit from purchasing initiatives and productivity improvements.
Third quarter 2018 operating income of $28.2 million was 1.8% higher than the prior year third quarter, primarily due to the Industrial Division organic sales growth and the R.P.M. acquisition, partially offset by factors constraining gross margins already mentioned as well as a shortfall in shipments from our French vacuum truck plant. Year-to-date, operating income is up 11.8% over prior year and grew 5.7% without acquisitions.
Third quarter 2018 operating income was 11% of net sales compared to 11.5% of net sales for the prior year quarter. Year-to-date, operating income was 10.1% of net sales compared to 10.2% in the same prior year period.
Third quarter 2018 net income and earnings per share were also significantly helped by a lower effective income tax rate, most of which was due to the one-time adjustment to the prior year and 2017 tax provision previously mentioned. Excluding the one-time adjustment, our effective tax rate was 23% in the third quarter compared to 33% in the prior year third quarter, and 25% for the current year-to-date compared to 33% in the prior year-to-date period. Our best estimate at this point is that the full-year 2018 effective tax rate excluding the one-time adjustment will be in line with the current year-to-date results.
Net income for the third quarter 2018 was $23.5 million or $2 per diluted share compared to prior year third quarter net income of $16.6 million or $1.42 per diluted share. Excluding the one-time tax adjustment, adjusted third quarter 2018 net income was $20.5 million or $1.75 per diluted share and adjusted year-to-date net income was $53.9 million or $4.59 per diluted share. Adjusted net income and diluted earnings per share are both up over 23% compared to the prior year third quarter and up over 30% compared to the prior year-to-date period.
Nine month 2018 EBITDA of $93.4 million was up 11.4% over the prior year nine month period. Trailing 12 months EBITDA of $119.6 million continues to trend positively and is now up 8.7% over full-year 2017 EBITDA. For the 2018 nine month period, net cash provided by operating activities totaled $3.6 million which compares to $41.9 million net cash provided in the prior year period.
Like last quarter, high order backlog growth and longer supplier lead times have increased our operating working capital requirements and high utilization rates have caused us to increase the investment in our vacuum truck rental fleet.
We also increased the level of capital investment to make targeted improvements in our product lines, production capacities, and operating efficiencies.
Capital spending for the nine month period is $18.8 million compared to $9.7 million for the same prior year period. Primarily due to these additional investments in working capital, rental fleet and capital assets, we ended the third quarter with net debt of cash of $52.3 million which is down from $57.2 million as of the end of the prior year third quarter.
Our order backlog ended the third quarter at $251.2 million rising more than $30 million during the quarter and about 39% higher than the prior year third quarter. Third quarter 2018 new order bookings grew about 9.4% over the prior year quarter. Without the benefit of acquisitions, we saw organic new order growth of about 8%. This reflects continued strong new order bookings in our Industrial Division while order rates in the Agricultural Division also surged in September ahead of an announced price increase.
In summary, our third quarter 2018 results were highlighted by record third quarter sales and earnings both with and without the one-time tax adjustment, continued strong results by our Industrial Division.
Excluding the one-time tax adjustment, a decrease in our year-to-date effective income tax rate to about 25%, continued year-to-date and trailing 12 months EBITDA growth of prior record levels and a $30 million build in our order backlogs during the quarter.
Now, I'd like to turn the call back over to Ron.
Hi, thank you, Dan.
I think that covers this quarter quite well. But I'll add a few further comments. Generally, we're pleased with our record third quarter results and particularly satisfied given that there were certainly some challenges during the quarter. These challenges included above average cost increases on purchase components compounded in some cases by recently enacted tariffs. We also experienced weakened market conditions in the agricultural sector which is being affected by lower farm incomes and our European operations had lower sales than anticipated mainly at one of our plants in France due primarily to internal issues.
Yet despite all this, we had a good quarter in both sales and earnings led by the excellent performance from our Industrial Division where we had strong results from a number of our operating units including our excavators, vacuum trucks, milling equipment, and street sweepers. These products all benefited from our strong backlog going into the quarter but each also performed very well operationally. And even with the record shipments achieved during the quarter, the backlog was even stronger by the end of the period, which will certainly help us going into the fourth quarter as well and we're pleased that our bookings are continuing at a healthy pace.
Excuse me the increased sales in the Industrial Division was certainly a major contributor to the strong bottom-line results but that's really only half the story. I mean I think the cost increases we experienced in the third quarter, combined with tariffs, certainly dampened our results and so to have record earnings even with this dampening effect was very pleasing.
And those -- the tariff we discussed, they came, they were big and came quick. You think it would be on new orders but they were even applied to items we had on order for months and some components were even already on the ocean but they hadn't hit the docks here. They were hit with the tariffs.
However, through a variety of proactive measures, we were able to absorb these costs and still have good earnings. These proactive measures included price increases and surcharges but also a number of cost control initiatives as well and efforts to ensure we're increasing operating efficiencies within our plants.
Our Industrial Division results helped offset the weakness in our other two divisions which still both actually produce reasonable results but were below the previous year's levels.
Our Agricultural Division was impacted by weakening agricultural market economics. Earlier this year we felt the Ag market fundamentals were improving but it is now obvious farm incomes are going to be down in 2018. There is an overabundance of farm production. Commodity prices are softer than anticipated and even tariffs have created some uncertainty among farmers and on their investment thinking. Still our results in this sector were good but not at the pace we were at in the third quarter of last year. Although year-to-date we remain ahead of 2017 and we continue to execute well in this sector but just not enough to overcome a little bit softer demand.
Our European operations were a little bit different story. There was -- we were off in the quarter and there were certainly some market weakness. But I think some of our own internal issues where we missed the expected deliveries either waiting on customers to pick them up, waiting on delayed components from vendors and even waiting on our own production in some cases where we were caught a little shorthanded. I think we're understaffed there right now.
I commented in our press release that filling certain skilled labor openings is a challenge at many of our locations and certainly we felt the effects of this in our reward operation in France. And but we feel these problems we experienced should show improvement in the fourth quarter as we have taken several corrective actions to address the issues we had in Europe plus we're pleased that our UK operations actually did very well and our European operations in general have a nice level of backlog which again we think will contribute to improved production in the fourth quarter.
We think the results we achieved in the third quarter of 2018 are really a testament to Alamo's core business structure which is heavily focused on equipment used in a variety of ongoing maintenance efforts that generate stable demand for our types of products. And that is not just focused on one product or one market but a broad range of products and over a diversity of markets with which we serve.
As a result, we can have a quarter like the third quarter here with a number of challenges and still generate record results. So and that's not the first time, we've been able to do that. So I cannot overstate how important this business model has been to our results in the third quarter and in Alamo's ongoing development.
I'm also proud of our management team who achieved these results by not just taking into account the changing market conditions but reacting quickly to the rapidly changing environment in which we've had to operate. There are some of these issues we face are not likely to be resolved in the short-term. We feel with our core structure, our operational focus, and quick reaction to changing conditions that we should continue to perform well and with the added benefit of a strong backlog, the outlook for the remainder of 2018 looks promising.
For sure we would like to see some resolution into some of these issues like international trade conditions whether its tariffs in the U.S. or Brexit still unresolved in Europe or whatever. Some stability in external conditions is always a benefit. But either way, we feel good about where Alamo is positioned and what our outlook is and we thank you for your support.
And with that, now I'd like to open the floor for any questions you might have. Operator, please go ahead.
Thank you. At this time, we'd like to open the floor for questions. [Operator Instructions].
Thank you. Our first question will be from Joe Mondello with Sidoti & Co.
So I had a couple of question on the tariffs and I'm just curious, it sounds like the 3Q was maybe the most challenging as they really came on quickly following the implementation earlier this year. I'm just curious, do you anticipate given what you've done with price and surcharges and everything else, do you anticipate the headwind that you saw in 3Q to subside a little bit starting in 4Q or will that get worse. Just tell me how you think that sort of plays out both in the Industrial and the Agricultural segment over 4Q and I guess 1Q relative to what you saw in 3Q?
Yes, certainly the fourth quarter will still be affected probably a little bit softer than maybe it was affected in the third quarter depending on I mean I know there is talks of even more tariffs being added. And like I say when they come, they come quick. But probably I say we won't totally mitigate it in the fourth quarter, we'll do a little bit better mitigating by early next year. So I mean I feel better about the first quarter, I feel okay about the fourth quarter. And it's also I mean fourth quarter we're seeing steel softening a little bit. I mean it's gone up a lot in the last 12 months.
But, yes, I think with steel softening a little the tariffs also I think the dollar has strengthened a little versus the Chinese currency. So some of the tariffs are sort of being offset a little bit by currency. So you take all that, I don't see it getting necessarily worse in the fourth quarter but maybe modestly better but even more so in the first quarter of next year.
And is there any difference in the commentary related to the Industrial segment versus Agriculture. I know Agriculture did see some challenges related to volume in the quarter and that probably weighed on some leverage in some of the margin in the quarter itself but any different dynamics going on between those two segments in terms of tariffs and margin?
I would say much difference between the two. I mean Industrial is still, as I said nice, their backlog is strong, their bookings continue at a healthy pace. Ag, Ag fourth quarter is always a bit of a soft quarter -- fourth quarter is a bit soft quarter for us in general. But relative to say last year, relative to how we did last quarter I don't see much relative difference. Like I said the Ag market is still soft, like I say farm incomes are down. So I think that's going to still weigh on us even though we had a little bump in bookings at the end of the quarter, Dan commented but some of that was driven by farmers or dealers buying in anticipation of price increases, so our backlogs reasonably okay in Ag. Like we're in pretty good shape but it's not like we're it's a soft market and we're going to feel the effects of that. But Industrial is continuing at a very nice pace. And so I think relatively I don't see a lot of difference in either one of them.
And is the tariffs more the 232 steel tariffs or more the 301 Chinese component tariffs that I think was implemented in July time period?
Yes, Joe, this is Dan. I think that the run-up in steel pricing that we saw initially was mainly supply and demand but then steel has remained high because of the 232 tariffs. It has softened over the last several months but just gradually. So and then our -- we did a really good job of deferring steel cost increases particularly in the Ag segment. So that's why you saw a little bit more margin compression in Ag there.
There are certain components in the second round of the 301 that are affected but they're affected really in both divisions. And we just began absorbing some of those tariff, those cost increases in the third quarter but that's pretty well distributed between the two. I still think the biggest impact is steel.
Okay. Yes, I was just asking you must have I guess you must have inventories, a good amount of steel before the increase that we saw in April, May time period I assume because I think you mentioned on the last quarter conference call that tariffs weren't -- were at I think price/cost was actually a net positive in the second quarter --
Up to second quarter.
Up to mid-year it was. We got --
Right, okay.
We did a good job of deferring a lot of increase. And then the timing of the pricing, we mentioned the surge in orders - that surge in orders is to get out ahead of the price increase, so that delays the timing of some of those price increases. So we are -- we did get squeezed a little bit in the third quarter.
Okay. Sounds like you're on track so now.
Yes, we feel like --
Okay, sounds good. I guess it's a wait and see. We never know with what's going on. I wanted to ask about the European segment also because that’s a little area where there was a little bit of weakness. It sounds like a large part of that is sort of little temporary as well, but I know in the past you've - that your UK backlog has been really strong. I'm just wondering since a lot of the issues occurred in France operations, how did your backlog look there? And do you see any risk of some of this delay supply chain constraints, the timing issue I don't think should be a big issue but if supply chain constraints continue that would certainly probably bog down in your operation so just maybe a little more color on the French issues?
Yes, I think [indiscernible] some of that is more under our control, like I say is our issues and so I think -- they are not at all resolved. But we are in better shape than we were in the third quarter. And so I feel that we will certainly do better in the fourth quarter where we recovered all not but fortunately as I said the backlog - Rivard where you had most of the issues their backlog is off a little bit but very strong. I mean it's almost like record high. It may not be like I say maybe off a little but it's still very strong.
And our UK operation has, it also has good backlog as well. I think our franchise operation backlog [indiscernible] a little bit of softness in it, I say because [indiscernible] soft in a lot of places but our UK operation the backlog is good. They performed well, I think they still will, I think our French operations will do better. They won't recover it all but I think we'll do better in the fourth quarter and so and even better after the first of the year.
Okay. And the Ag markets in your European division has there been any change there. Because I know some crop prices haven't been as weak as in the U.S. due to demand shifts as these tariffs have been implemented. What’s going on with your Ag demand in Europe?
I think as you just implied it's quite holding up a little bit better than the Ag demand in North America. And then also our European operations obviously, they're not being affected by the tariffs, they did not see the same run-up in steel prices. Steel prices are up but not even half of what they were up in North America.
So yes where the British currency is weakening a little against both the dollar and the euro which certainly helps us competitively but it hurts us in translation of earnings from the U.K. So yes, you’re right. Ag has not hurt quite as much. I think there's a little softness but not as soft as North America and cost we’re not being -- is impacted by cost in Europe like we are in North America.
So yes, I think just maybe like the European economy is in general not as strong as the U.S. economy, is still today. But it's more stable than I’d say the Ag situation is a little more stable, cost situation is a little more stable and so we think we get our own issues in order that we ought to do, do better.
Okay. And I wanted to ask about the parts business, so that's been a little weaker than the equipment side of things actually considerably weaker for the last few quarters and third quarter was down year-over-year. It’s as a percent of sales, it's down maybe 150 basis points compared to a year ago and I know that’s higher margin type stuff. So sort of is it just a tough comp relative to last year. Sort of what's your thinking on what's going on there? And do you anticipate any recovery in that or any thoughts there?
Yes, we are actually seeing a little bit better in the fourth quarter already. I won't say it's picked up a lot, I think it was soft. I mean we had sort of a soft snow year and so snow removal parts of were not quite as robust going into the new season as we had hoped. There was a few markets -- there were some soft almost drought like conditions and Texas is a big market for us and Texas was certainly parts were often Texas in just Ag and mowing and that type of stuff because there was some adverse weather conditions but those have picked up nicely. I mean in Texas now I'm saying now, right now too much rain lately. So nobody's is ever happy.
But so yes, there were some specific pockets of softness on some of the parts which have -- which are yes I think are showing improvement in price better than last year like in the fourth quarter but nothing dramatic. I mean I think parts for the year will still be off a little. And you’re right, those are good margins but probably not quite as much they were off in the third quarter.
Okay. And then you mentioned snow which I wanted to ask about, is 3Q remind me if 3Q your biggest sort of snow quarter in terms of the pre-season and where revenue shortfalls or is it more so 4Q? Just thoughts on that?
More so fourth quarter, fourth quarter is when we have the heaviest shipments of new home goods coming, so building it into the third but it’s the fourth quarter.
And how is that tracking? I know we saw a pretty big snow year at the very end of last year. So does that translate to maybe some re-buying of equipment in snow that we got?
Yes, I mean I think we've got fourth quarter snow equipment is going to be up and also it is at a decent pace right now. And so we'll see how well the product shipments are in the season, during the season that will be dependent on how much snow we actually get during the season. But now I think our whole good sales in the fourth quarter are relatively good and should be up compared to last year.
Okay. And lastly industrial equipment flash sales I don’t know range at about 10% of your total revenue. I estimated that, any sort of change in trends that you've been seeing within that more cyclical component of your business?
What are you saying industrial equipment total sales or 10% of sales? No, I mean that's there, our best division of our business, so I don't know, yes.
I'm sorry I meant the equipment that is sold to more cyclical industries. So when I say in dollar, I mean --
I'm sorry, this is a non-governmental piece of our industrial division, you're right. It's a small part of our business but that has rebounded very nicely. I mean that's where our vacuum truck business is, if anything we're being a little capacity constrained on we want to not only have our sales increase there. We are trying to build up our rental fleet even further and we're having difficulty doing both at the same time. So I mean that is up very nicely. That has totaled almost -- that's totally rebounded to where it was before that hiccup we saw sort of in 2016.
Okay. And so it sounds like no signs of any slowing it sounds like.
No, no. It seems to be reasonably good. And I mean yes, just the only signs I worry about is what's the overall general economy which seems to be going at a decent pace even if it is maybe softening a little. But yes, I think it's continuing at a decent pace in our business and that sector is going very nicely.
Thank you. [Operator Instructions].
I'm showing no further questions in the queue at this time.
Okay, well, thank you. And again we thank you for joining us today. We look forward to speaking with you on our fourth quarter call after the first of the year. And appreciate your help and support. Have a good day, thank you.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.