Alamo Group Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

There are 8 speakers on the call.

Operator

Good day, and welcome to the Alamo Group First Quarter 2024 Earnings Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Edward Rizzuti, Executive Vice President, General Counsel and Secretary. Please go ahead.

Speaker 1

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 1, please contact us at 212-827-3746, and we will send you a release and make sure you're on the company's distribution list. There will be a replay of the call, which will begin 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1-eight seventy seven 344-7529 with the passcode 9,093,220.

Speaker 1

Additionally, the call is being webcast on the company's website at www.alamo group.com and a replay will be available for 60 days. On the line with me today are Jeff Leonard, President and Chief Executive Officer Richard Worley, Executive Vice President, Chief Financial Officer and Agnes Camps, Executive Vice President and Treasurer. Management will make some opening remarks

Speaker 2

and then we will open

Speaker 1

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 attachment to our earnings release. Before turning the call over to Jeff, I

Speaker 3

would like to make

Speaker 1

a few comments about forward looking statements. We will be making forward looking statements today that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Among those factors, which could cause actual results to differ materially are the following: adverse economic conditions which could lead to a reduction in overall market demand, supply chain disruptions, labor constraints, competition, weather, currency related issues, geopolitical 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.

Speaker 1

I would now like to introduce Jeff Leonard. Jeff, please go ahead. Thank you, Ed.

Speaker 2

We want to thank everyone who's joined us on the conference call today and express our appreciation for your continued interest in Alamo Group. The Q1 shaped up largely in line with our expectations, and we were pleased overall with the financial results we've reported today. Would now like to turn the call over to Richard, who will take us through a review of our financial results for the Q1. I will then provide additional comments on the results and say a few words about the outlook for the Q2 and the balance of 2024. Following our formal remarks, we look forward to taking your questions.

Speaker 2

Richard, go ahead.

Speaker 4

Thanks, Jeff, and good morning, everyone. Alamo Group's Q1 2024 ended with a solid performance that produced record net sales, driven by continued strong demand for our products in the Industrial Equipment division. 1st quarter consolidated sales were $425,600,000 an increase of 3% compared to $411,800,000 in the Q1 of last year. Gross margin percentage fell by 110 basis points and gross margin dollars decreased by just under $900,000 in the quarter compared to Q1 of 2023. Both margin percent and dollars decrease were driven by under absorption and productivity inefficiencies in the vegetation management and to a lesser extent product mix in the industrial equipment.

Speaker 4

Operating margin for the Q1 came in at 47,000,000 versus 49,000,000 in the Q1 of 2023, a decrease of 4%. Operating margin as a percent of sales was 11% for the Q1 versus 12% for the same quarter last year. Consolidated net income for the Q1 was $32,100,000 or $2.67 per diluted share, a decrease of 4% versus net income of 33 point $3,000,000 or $2.79 per diluted share for the Q1 of 2023. Our vegetation management division was off in total sales compared to the Q1 of 2023. Softness in both the forestry and agricultural markets continued due to inflation and the higher interest rate environment.

Speaker 4

Net sales were $223,700,000 a decrease of 13% compared to 200 and $56,400,000 for the Q1 of 2023. We've been monitoring dealer inventory levels, which are up, but not at historical levels. The division's operating income for the Q1 was $21,700,000 almost 10% of sales, but down 40% versus 300 versus $36,500,000 14 percent of sales for the same period in 2023. This division reduced its labor force during the quarter at its larger manufacturing location and still almost hit 10% operating income, a solid accomplishment. This is also an improvement of 50 basis points compared to the Q4 of 2023.

Speaker 4

Industrial Equipment division net sales had a tremendous quarter coming in at $201,800,000 up 30% compared to $155,300,000 for the Q1 of 2023. This was due to a solid performance across all product lines, particularly backing trucks, sweepers, debris, collectors and snow removal equipment. While component part receipts continue to return to a more consistent cadence, the division continued to have a few late component deliveries, which impacted operations, although not as significantly as previous quarters. This resulted in a substantial rise in operating margin in the Q1 of 2024 to $25,300,000 just under 13% of sales compared to 12,500,000 dollars 8 percent of sales for the Q1 of 2023, an increase of over 102%. The company's backlog at the end of 2023 at the end of the Q1 of 2024 came in at just over $831,000,000 down 16% compared to backlog levels at the end of the Q1 of 2023, but still at a healthy level.

Speaker 4

A few additional items I'd like to cover that are related to the balance sheet at the end of the Q1 of 2024, which continued to remain strong. Working capital increased about $61,000,000 compared to the end of the Q1 of 2023. The increase primarily resulted from higher accounts receivable and to a lesser extent inventory. During the Q1 of this year, as we expected, we had a slight increase in our credit facility, expecting excluding pay down paying back intercompany loans at the end of the year. Our bank leverage ratio for the Q1 of 2024 was just over 1.3 to 1, down from 1.7 to 1 at the end of the Q1 of 2023.

Speaker 4

And finally, the company's trailing 12 months EBITDA came in at just over 2 $46,000,000 flat to year end of 2023, which was a record. For 2024, cash flow should remain healthy as our focus will be to continue to reduce both inventory and debt levels. We remain disciplined in our execution, controlling costs and expenses as inflation and interest rates are expected to continue to put pressure on our margins. Supply chain deliveries and reduction in freight costs will be a major focus for the company in 2024. So in summary, quarter 1 of 2024 was what we had anticipated for Alamo Group.

Speaker 4

Sales were up 3%, but margins and net income were off mainly due to weak market conditions and vegetation management. We were pleased that our Board recently approved our regular quarterly dividend of $0.26 per share, up 15% compared to $0.22 per share for the Q1 of 2023. With that, I'll turn the call back over to Jeff.

Speaker 2

Thank you, Richard. I'd like to add my personal thanks to everyone who's joined us on the call this morning. The company's Q1 results were broadly in line with our expectations given the current dynamics of our markets. Net sales in the quarter established another all time record despite the ongoing impact of higher interest rates, which are constraining activity, primarily in the markets for our vegetation management equipment. The market for Alamos Forestry and Tree Care equipment has been the most impacted by the higher rates.

Speaker 2

Many commercial tree care contractors who purchase our toad chippers and stump grinders are family owned small businesses that rely on third party financing for their equipment purchases. Higher interest rates have affected these for their equipment purchases. Higher interest rates have affected these customers in the form of higher prices when they walk into a dealership the dealer is forced to pass along their own higher floor plan financing costs. Then potential buyers are impacted a second time when they seek third party financing to purchase a piece of equipment and incur higher finance charges to do so. The result has been increasing caution in the market with many buyers intent to wait for lower interest rates before making it a firm buying commitment.

Speaker 2

Dealers are implementing incentive programs in an effort to reduce inventory, but are facing an increasingly reluctant cash strapped pool of potential buyers. At the upper end of our forestry and tree care range, demand for our large industrial poultry, chippers and grinders is largely driven by waste blue recycling and biomass production. The United States and Canada are ranked number 1 and number 2 among the world's producers and exporters of wood pellet biofuel. North American pellet producers depend on logging and lumber production residue as primary sources of feedstock. Tighter residue supplies and higher prices have pressured the operating margins of North American pellet producers, causing them in some cases to postpone investment in new processing equipment.

Speaker 2

At the same time, dealer inventories remained elevated above contract levels during the Q1. The agricultural equipment market is encountering similar dynamics. The combination of softer commodity crop prices and higher for longer interest rates constrained sales of ag equipment and other outdoor power equipment during the Q1. After 3 solid years well above the long term average, inflation adjusted U. S.

Speaker 2

Net cash farm income is expected to decline in 20 24 by approximately 5% 20 4 by approximately 5% compared to the 2023 2023 to 2023 long term trend. U. S. 2 wheel drive tractor sales in the Q1 were down 13 point 4% compared to the Q1 of 2023, with tractors in the 40 to 100 horsepower class down 8% and tractors less than 40 horsepower were down 17% compared to the Q1 of 2023. In the face of these headwinds, the Visitation Management division reported net sales that were down 12.7% compared to the Q1 of 2023.

Speaker 2

The division's order bookings were down were 41% lower than in the same period of the prior year. Vegetation Management backlog declined by about 48%, primarily due to the combined effects of fewer new orders during the Q1 and cancellation of orders during 2023 as previously reported. These were primarily in the Forestry and Tree Care Group. Backlog also declined in the division's North American Agricultural Equipment Group that serves Hobby Farm and Ranch segment. In this group, both new orders and backlog declined year over year due to the combined effects of higher interest rates and higher channel inventory.

Speaker 2

However, we were encouraged that order bookings for our mower products began to show early, modest signs of recovery in the final weeks of the Q1. The slowing demand in these two groups adversely impacted absorption and efficiency of vegetation management's major manufacturing facilities. To address this, the division took actions to reduce production capacity at its largest U. S. Facilities and further actions will be taken as warranted moving forward.

Speaker 2

In addition, the division initiated the closure of a facility that produces fair and wear parts for classic agricultural equipment. The benefits of these actions will begin to be evident in the company's 2nd quarter results. Sales of vegetation management equipment governmental agencies was a notable bright spot for this division in the Q1. The division's governmental mowing businesses in North America, Europe and the United Kingdom continued to perform well and at a brisk pace. Both sales and backlog remained elevated for this part of the business and market activity remained bullish.

Speaker 2

But with this division's larger business groups facing strong headwinds that drove sales lower, vegetation management operating income declined 4 50 basis points and EBITDA also moved 380 points lower compared to prior year Q1. On a sequential basis, the division's operating income improved by nearly 10% and operating margin improved by 500 basis points compared to the Q4 of 2023. Our Industrial Equipment division had an excellent Q1. State and county governments remained on a solid fiscal footing as they entered 2024. Forecast declines in state revenue for 2023 did not materialize and many states continued to report budget surpluses last year.

Speaker 2

State rainy day funds remained historically elevated. At the municipal level, the situation was somewhat more nuanced as a number of American cities struggled with the cost of caring for rapidly growing migrant communities. However, governmental markets for the division's products remained very strong during the Q1 across the board, and both quoting and ordering activity remained historically elevated. Against this backdrop, Industrial Equipment Division net sales improved by 30% and backlog rose 17% compared to the Q1 of 2023. The division's order bookings improved by over 25% compared to the first quarter of the prior year and were its highest quarterly bookings ever.

Speaker 2

All of the division's product groups reported higher sales, strong ordering activity and higher backlog. Non governmental markets for industrial equipment also remain strong on the back of the continued durability of the North American economy and mildly aided by stimulus effect of the recent Federal Infrastructure Investment and Jobs Act. Efficiencies improved in in the division's primary production facilities as the pace of production increased. There's very strong momentum across all of its product groups, Industrial Equipment division operating income improved 4 40 basis points and EBITDA improved 4 10 basis points. On a sequential basis, this division's operating income improved slightly by 1% and its operating margin improved by 20 basis points to 12.5% of sales.

Speaker 2

Turning our attention to the company's operations more broadly. Supply chain performance in both divisions continued to improve during the Q1, although a few challenges were made. Truck chassis deliveries continued to be somewhat constrained by shortages of chassis frame rails, which again impacted production for nearly all of the truck chassis OEMs. A shortage of Allison Transmissions due to production disruptions late in 2023 and a shortage of transmission control modules further held back medium duty truck chassis deliveries during the quarter. Costs for raw materials and industrial components stabilized during the quarter and were another bright spot.

Speaker 2

Steel prices remained volatile, but generally trended slightly downward during the Q1 and have declined significantly since peaking in late 2021. Skilled labor availability, which has been very challenging in most areas where the company operates since the onset of the pandemic, has now improved in many areas, and this is helping productivity. We were obviously extremely pleased that through the determined work of our teams, both of our operating divisions were able sequentially expand their operating margins relative to the Q4 of 2023. Regarding our outlook for the Q2 and the second half of 2024, we believe that the market conditions that we encountered in the Q1, both negative and positive, are likely to persist. The headwinds that's in front of us in vegetation management in the Q1 are not likely to meaningfully abate until inventory declines and interest rate reductions are announced.

Speaker 2

Until then, we'll continue to collaborate closely with our dealers to incentivize retail sales and reduce inventory by doing so. While we expect sales growth to continue, we anticipate that the pace of growth will be somewhat more modest for the next several quarters. We will continue our determined actions to reduce costs and further simplify our structure through additional facility consolidations. Finally, we will not hesitate to further adjust our capacity as needed to match future demand on a timely basis. It's worth noting that our balance sheet strengthened during the Q1 as total debt net of cash declined nearly 24% to its lowest level since we acquired the Morbark business in 2019.

Speaker 2

Our balance sheet positions us well for what we believe will be a more active year for M and A, and we are optimistic about our M and A pipeline as we have more actionable opportunities than we've seen for the past couple of years. In summary, while the next couple of quarters are expected to be challenging, we expect favorable development of the company to continue, albeit at a somewhat more modest pace for the remainder of 24. We will continue to execute our strategy to grow the company at an attractive rate while expanding operating margin. Before closing my remarks today, I would like to thank our customers, dealers, suppliers, our thousands of exceptional employees and our financial stakeholders for their continued support of the company. This concludes our prepared remarks.

Speaker 2

We're now ready to take your questions.

Operator

We will now begin the question and answer session. The first question comes from Chris Moore from CJS Securities. Please go ahead.

Speaker 5

Great quarter. Thanks for taking a couple of questions.

Speaker 2

Good morning,

Speaker 5

Michael. Good morning. Vegetation EBIT margin 9.7%, down significantly year over year, up a little bit sequentially. You mentioned actions to protect the margin. Can you stay around the 10% level for the balance of 24% or is visibility just not there to make that?

Speaker 5

No,

Speaker 2

Chris, I'm fairly confident we can and that's what we're expecting to do, to be honest with you. That's why we are adjusting our capacity now. And we've taken some fairly significant actions and some that we haven't announced yet. So I have to be a little bit careful what I say here. But no, we're taking enough actions to make sure we can protect that bottom line in vegetation management.

Speaker 4

That's the whole intent, Chris. No matter what the market does to us and whatever our sales call, we need to maintain 10% in this division.

Speaker 5

Terrific. Thank you. That's helpful. Industrial bookings backlog both up significantly. What does lead times look like at this point in that segment?

Speaker 2

They're actually normalizing quite a bit, Chris. They're out about 120 days the vacuum trucks and the bigger equipment and falling fairly rapidly. The truck OEMs are really getting on set. Some of the problems I mentioned in my remarks on the call are beginning to clear a little bit and we're very optimistic about our deliveries of chassis which really drives that whole division as you know. So I think 3 months is pretty typical right now for us We have more than adequate capacity in that division at the moment.

Speaker 5

Got it. You mentioned still a few kind of lingering issues on the supply chain side. Any worries at this from where you sit today, any reason to think that they won't kind of marginally continue to improve versus some go the other way? Just trying

Speaker 2

to get this I don't see how much visibility. Yes, Chris, I don't see the situation getting any worse, and I think it will continue to improve and I expect the pace of improvement will pick up as well. We are seeing notable improvements across the board in the supply chain and it's not just truck chassis, it's things like hydraulic components and cylinders, all kinds of things that we consume. As the economy starts to as a whole normalize now, lead times are coming down in most parts of our supply chain.

Operator

The next question comes from Mike Schulze from D. A. Davidson. Please go ahead.

Speaker 6

Yes. Hi, good morning. Thanks for taking my questions.

Speaker 2

Hi, Mike. Maybe could you maybe

Speaker 6

kind of remind us what percentage of your business is serves the public sector or serves private players that serve the public sector. I'd imagine that group of customers are seeing fewer problems than the private sector. It sounds like you actually said almost anything that public sector is doing pretty decent, everything that's private is a little more challenged. So what are the broad what's the broad breakdown there?

Speaker 4

It's still I think what we've said before, it's roughly between 20% 25% of that is from the hobby to the hobby farmer and ranch.

Speaker 6

And then that was made up in

Speaker 4

industrial and governmental. I'm sorry?

Speaker 2

I'm sorry.

Speaker 6

I was asking kind of overall your overall business, what percent of it serves the public sector and what serves the private? Not sufficient to take you broadly.

Speaker 4

Right. I think like I said, I think we're 20% to 25% in that space we're talking about. The balance is in governmental and industrial and it's split.

Speaker 2

Pure governmental, Mike runs 40% to 45% of total revenue. Pure governmental. And then there are contractors that straddle that as you and I've discussed before. We have contractors that buy a mower and use it for both private and public works when they get a contract to mow along the state highway. So the number is not fewer than there is, but that's the best number we've been able to produce.

Speaker 6

Got it. Thank you for that color. I appreciate it. Can you tell us a little bit about the health in your dealer network, especially the dealers that mainly serve the private sector. My guess is a lot of those are simply ag dealers or larger other brand dealers that make the prime mover.

Speaker 6

Just want to make sure that you're not seeing dealers unable to even take inventory at this point.

Speaker 2

Actually, we're not, Mike. We haven't seen any pressure on our accounts receivable. We had 1 large Foraker dealer last year that we bought was going to go insolvent, return quite a bit of inventory to us. That was one of the large cancellations I mentioned on the call. That dealer has since gotten back on its feet and is ordering some equipment from us again.

Speaker 2

So that's been a positive move. I mean, obviously, dealers are being very cautious right now, Mike. You know that because you track the space closely. But I don't see any that are under particular duress and then like in any probability to fail at this point.

Speaker 6

Got it. Maybe one last one for me. During the Q1, one of the large machinery players, a bit larger than Alamo, kind of serves adjacencies like Quarry and Aerial Work Platforms. But that company launched their own brand of medication management equipment with mulchers, chippers and so on. I'm not even sure if their products overlap with yours.

Speaker 6

I don't know if you've heard of it. I wanted to kind of see if there was overlap. And tell us a little bit about in the past, I wouldn't normally have any issues with some startup company trying to displace more of our other Alamo brands. But this is a pretty large and well funded parent company. So can you just maybe give us some commentary on the strength of the Morbark brand, your distribution and your customer base?

Speaker 6

And if you have any plans to kind of help defend your market share if this brand makes any kind of traction?

Speaker 2

Mike, I'm pretty confident. I know the brands are talking about and we know those products very well. That product line needs a significant refresh that it hasn't received yet, not ours, the competitors. So we don't see any short term threat from that at all. As far as the strength of our dealer network, where most of the money is made.

Speaker 2

Those big machines are long lived. They've been with us a very long time, are deeply invested in the aftermarket business related to those machines, which where most of the money is made. Those big machines are long lived. They run 15, 20 years. So the parts revenue stream runs a long time, which is a fairly big barrier to switching for any large dealer in the space.

Speaker 2

So no, I'm not particularly concerned about that. We know that company well. They've always been there. This is not a new thing. It's just sort of refreshing their space a little bit.

Speaker 4

Thanks.

Operator

The next question comes from Mig Dobre from Baird. Please go ahead.

Speaker 7

Hi, good morning.

Speaker 2

In Industrial

Speaker 7

Equipment, can you guys confirm what the contribution from acquisitions was in the quarter revenue wise?

Speaker 4

We normally don't, but probably $15,000,000

Speaker 2

$15,000,000 Yes, roughly. $15,000,000 Okay. That's the sales, mate. The composition of sales was 15,000,000.

Speaker 4

If you back that out, the industrial division was still up 20%.

Speaker 2

Yes, yes, yes.

Speaker 7

And Jeff, you spent quite a bit

Speaker 3

of time

Speaker 7

on the whole supply chain issue and chassis and so on. And I was kind of hoping that we'd be done having these kinds of discussions, but apparently we're not.

Speaker 2

Yes, me too, Bert.

Speaker 7

It sounds like there were some issues in the quarter, but things are getting better. I mean, I can't really see where that impacted you. Would you have been able to recognize higher revenue in industrial equipment if it wasn't for that? I mean, what was the net impact of the supply chain issues?

Speaker 2

Yes. The short answer is yes, we would have been able to get more revenue out in the quarter. The silly issue of these frame rails for the truck I've mentioned before, as you can certainly talk with Daimler and the other big guys about it, they all share our common supplier in Mexico who's been having production problems for a long time. It is getting better though, maybe for sure. And we've got quite a bit more chassis during the Q1 than we did during the 4th and the third of last year.

Speaker 2

And for a year, I've been telling you, once the chassis supply situation improved, industrial would really hit its stride, and it is doing that. So I don't want to say there are no constraints, but I also don't want to say these are drop dead serious. We've been living with them for a while and they are steadily improving. The Allison Transmission 1 is another really strange one. Allison is normally a very, very reliable supplier.

Speaker 2

They've had some quality problems that are related to castings and other things. But the main issue is the transmission control modules are in short supply, and I don't know who their supplier is, but it's been a significant problem for them. And that affects the sort of the high end of the vacuum truck business. But we've done a pretty good job scrambling around that. They've defined chassis off lots of other places to keep our production rolling.

Speaker 2

So I don't think that really had a big constraining impact. We probably could have done another perhaps $5,000,000 in the quarter without those challenges in industrial just to take a ballpark guess at it.

Speaker 4

Yes. Something else to add to that, Mig. If you look at our 10 Q, WIP is like $30,000,000 which continues to remain too high for our liking. But over half of that is going to be industrial. And as Jeff mentioned, if you could just get a few things just be more in a consistent cadence and they change every quarter we have something else that's causing some sort of an issue for a delay.

Speaker 4

But normally in that division, they're about half of that $12,000,000 to $15,000,000 that's in the WIP of that industrial division. They're normally around about half of that. So that as Jeff said, that leaves you between $5,000,000 $7,000,000 of extra sales that we potentially could have had during the quarter.

Speaker 7

That's interesting. So given the fact that things are getting better on the supply chain side, I mean, you have healthy amount of backlog in this segment, What's the right way to think about revenue sequentially as the year progresses here?

Speaker 2

Yes, I think we'll continue to see high single digit revenue growth in that division for the balance of this year, maybe a little bit better than that, depending on how things play out over time. We have this strength running at the moment, Dave, which is obviously a concern. We need to get that resolved. And if that gets resolved in a timely manner, then I think my statement will be fairly correct. And I said high single digit, not low.

Speaker 7

But I'm curious and I'm sorry to press you on this

Speaker 2

a little bit

Speaker 7

because there's a pricing element to all of this, right, that's in backlog presumably has a pricing tailwind. So if you're sort of saying that you can grow at least high single digit, does that really imply any real volume growth coming out of your plans? Maybe some, but it doesn't sound like a lot. And I'm wondering why not more leverage there?

Speaker 2

Well, I mean, I think that we're still having to just kind of pace the build in our plans, Mig. I mean, we're building at a rate that actually is a very attractive rate right now. And that has the added effect of improving the efficiencies across those operations. Richard made reference that the under absorption in our vegetation management facilities, we have the opposite that going on in our industrial absorption, this continues to improve it. I'm just being a bit cautious here, Nick.

Speaker 2

There's a lot going on now. And that new Philadelphia plant where we have the strike is a big plant for us. We're continuing to negotiate there. We're negotiating again yesterday. That one needs to get solved.

Speaker 2

We need to get that strike settled, and I think we can do a bit better than that. But we've already lost a couple of weeks of production in the Q2 as a result of that strike and we're not going to get that back obviously, hence the question. But you're right, the momentum is really, really good in industrial right now, both in terms of sales and orders and obviously efficiency in the operations. Our snow removal group is just doing an amazing job right now at a profit level we've never seen before, very strong backlog, very strong ordering. And we are considering taking some steps to expand

Speaker 4

their capacity at the

Speaker 2

moment, which will involve some investments. At the same time, our streets we've regrouped, as the city here is running at a level of profit we haven't ever seen in that business before, running very, very well. And then we have the added boost from the Royal Truck acquisition, which has been very nice. So maybe I'm just being too cautious here, Mig. I don't want to over forecast, but I think the growth is going to be very, very nice for

Speaker 4

the rest of the

Speaker 2

Something else to add to

Speaker 4

that, Mig. This division, just like the vegetation, they put their price increases in the 1st part of January, like 2.5% to 3% range, maybe some areas maybe a little bit more, but nothing huge. On average, it's about 3% and industrial did $250,000,000 worth of new orders. So that kind of tells you we're still getting some pretty good volume of units coming through in the new order pace that we've got in all product lines in that division.

Speaker 7

No, I appreciate all the detail here. And you kind of got to some of the things that I've been wondering because there's a question to be asked about capacity, right? I mean, it's are you to the point now where you're just operating at full capacity and you might be struggling a little bit to increase the volume that's coming out of the plant? So while you have great backlog, you might have some constraints elsewhere. That's kind of what I was trying to figure out.

Speaker 2

We're not, David, but there's a lot of moving pieces right now. As we've mentioned in previous quarters, we closed our sweeper plant out in Washington State and we moved our production into our Wisconsin plant, which is our active truck plant there. That's getting settled down now and that production is starting to ramp very nicely. So we are moving things around within the company that's causing us to see some delay in the revenue. I think the revenue build that you're expecting to see.

Speaker 2

But I sure like the direction of industrial right now. It's looking really, really positive and all parts of that division are running very well at the moment. The only negative I can say about that division is the strike, and I think that's just the times that we're in at the moment. But the parties are continuing to negotiate in good faith with a high goodwill to get a contract put

Speaker 4

in place. So I'm fairly confident that it gets all too.

Speaker 7

Understood. I do want to ask a couple of questions about vegetation management. And as you discussed here, there's still channel inventory that has to be worked through. But it sounds like you're highlighting some things like So So I guess my question to you is this, if nothing changes in the broader macro environment, how are you thinking about your production and your revenue in this segment for the rest of the year? Is Q1 at a $123,000,000 high watermark and we should be seeing a gradual sort of production decline here to destock the channel or are you thinking differently?

Speaker 2

Mig, that's a great question. I think as you look at it piece by piece, and I'm going to slice it here because it's the only way I know how to answer your question. I think that we're going to see the large end of forestry recover sooner because there's a need for those machines. And again, the fundamentals in that business remain pretty positive. The only negative is the feedstock side that I gave some color on during the call.

Speaker 2

And as I said, we're starting to see some rebirth in that business already. They've had a good end to the Q1, as did our mower business. Our traditional mower business, particularly our Bush Hog business had a very nice Q1 and a nice end to it as well. So that's coming back. But some of our other brands, particularly in the ag space, are still struggling a lot with excess channel inventory that I know you know that story as well as I do.

Speaker 2

So as I think about how vegetation management's revenue is going to be going forward, a lot depends on whether the orders continue to flow in at least the same pace that we saw in Q1 for the next couple of quarters. We have a couple of quarters worth of backlog in that space. And if we can hold on to that level of backlog, which is a very traditional level for that division from a long term point of view, then I think the revenue will be stable. If the orders don't flow in the 2nd quarter and in 3rd, then I think you're going to see a tapering of revenue in that division until we can clear the channel inventory out. But it's not going to be a collapse, given the backlog that we have there.

Speaker 2

Again, the order rate in parts of that business are already picking up. So it just depends a lot on how the next few weeks shape up in terms of the order book, particularly in the Hobby Farm and

Speaker 4

the branch segment from my point

Speaker 2

of view. I think something else, Mike, to continue to

Speaker 4

keep in mind what we tried to say in our written part of the script is no matter what this division does, if they have that fall off, as Jeff mentioned, in sales and the backlog falls down, Our requirement here is to try to do everything we can to maintain that 10% operating margin, which is our goal for this year no matter what the revenue comes out in this division.

Speaker 7

No, I appreciate those last comments and I did hear that. It's just that I'm trying to understand what you're sort of doing now maybe proactively to be able to deliver that because if Well, obviously, I'm going

Speaker 2

to be trying to answer that. Yes. What we're doing, Mig, is what we've been doing for a couple of quarters, offering retail incentives to our customers to walk into a dealership and buy a piece of equipment, which works pretty well in the ag side of the space. And while I was a little uncertain whether that was going to pay off from the actions we took last year, we did see that bump up in orders in our Bush Hog division in the Q1, and they actually produced a very, very nice Q1 from my point of view at a very historical level of both revenue and profit. So that was positive.

Speaker 2

We just have to do that now across some of the other brands and see if we can get the same impact. Bush Hog is an iconic brand, as you know, Mig, so it's natural, but that one would see the biggest uplift. Some of our other brands are probably not going to see the same immediate lift in both orders and backlog from those incentives. But that's the tool that we have, right, because we have to clear the channel inventory. You know that and I know that.

Speaker 2

We have to clear that in order to get to better running, reordering and a rising backlog.

Speaker 4

Well, and also we mentioned this, as I mentioned too as well, the labor force, we made reductions in this division in the labor force because we want to try to get ahead of this train a little bit so that we're allowing ourselves to try to do everything we can to maintain that 10%. If the orders continue to soften as Jeff reported, we're going to continue to make more take more actions to make sure that we reduce our cost and control our expenses.

Speaker 7

Understood. Final question for me. Going back to the discussion that you had earlier with Mike on the government exposure that you have. I'm kind of curious as to how you guys are thinking about funding in that sector more broadly. I mean, we're coming off a couple of really strong years here.

Speaker 7

Do you think this is sort of sustainable as we think about 'twenty four and into 'twenty five here in terms of this set of customers continuing to be well funded and continuing to order? Or should we kind of, I don't know, temper our expectations at some point to some degree?

Speaker 2

Obviously, at some point, Mig, there's going to be a need to temper expectations because we're coming out of a series of very extraordinary circumstances following the pandemic and all of the federal government incentives that have been put out there. But before joining this call and before writing my comments and my remarks, I took a pretty deep dive into where governmental finances are right now. And when you look at it, at least in the U. S, the states are in very, very good shape. They're in a very strong condition that they're going to continue to invest.

Speaker 2

I'm quite certain of that. Mixed. Some of the bigger cities are incurring lots of costs related to resettling immigrants. You know that, you read the news same as I do. And they're under some fiscal pressure as a result of that.

Speaker 2

But remember, most of their funding comes through housing costs, property taxes, and housing has not stumbled at all. In terms of prices coming down, now obviously, that's going to sustain municipal incomes at a traditional level for a long time. So I think you will eventually see a taper. I certainly don't see it coming this year, Mig. I think we're in the strong running all through 2024 on the governmental side of our business, and the tapering may come in 2025.

Speaker 2

And if I had the answer in my head about whether this was going to be a soft landing in our economy or a stumble, I'd be able to give you a much more clear answer to that. But I see at least another 12 months of really good running on governmental side. All right. Thank you for all the color.

Speaker 7

I know I asked a lot of questions. Appreciate

Speaker 4

it. Thanks, Mig. Appreciate

Operator

it. The next question comes from Tim Moore from E. F. Hutton. Please go ahead.

Speaker 3

All right. Thanks. I want to wish Richard the best in retirement and time with his family.

Speaker 2

He's not done yet, too.

Speaker 3

No, I'm going to miss him. So great in a straight shooter, which is really helpful for investors. And so maybe I'll start with a question for Jeff. On Industrial Equipment, as you look out on this division and historically, it wasn't too long ago, the operating margin was higher and you've done a great job getting it back to close to that. But what do you think is kind of realistic operating margin ceiling, looking out to maybe next year without giving formal guidance, if there's no recession,

Speaker 6

do you think you can do

Speaker 3

13.5% op margin next year?

Speaker 2

Yes, I do, Tim. Competently, yes. I think that when you look at our most notable competitor, a name I won't mention, and the off mentioned references to their higher operating margins, if you actually do a side by side comparison and feel we allocate our corporate costs out to our 2 divisions, as you probably know, or most of it. Our main competitor is not. So when you correct for that, we are neck and neck in terms of operating income as a percentage of sales, right neck and neck.

Speaker 2

So I think we are running very well right now. And I do believe there's further opportunity to expand the margins in that group for sure, because there's still some inefficiencies there that will pick up as the volume continues to build.

Speaker 3

That's great. Yes, I was doing some

Speaker 2

of that math myself.

Speaker 3

It didn't seem like the ceiling is close to what you even have now, but that's good news. And maybe just switching gears, I'm just trying to think through other operating margin drivers. Obviously, supply chain will hopefully get better in general, farming and hobby and ag will come back and normalize. But just switching gears to maybe your maiden country efforts, specifically maybe for Europe rather than shipping heavy machinery from the U. S.

Speaker 3

Over there, that cost, how is that going? And is that really more focused on forestry, landscaping and sweepers?

Speaker 2

It's not focused on sweepers in particular at the moment. It's mainly focused on the vegetation management side and mostly in molding products and to some degree in forestry. That chipper that we produce in the UK under the Timber Wolf brand will have a very nice hump in the U. S. And we're just ramping that up now.

Speaker 2

So we haven't really seen the benefits of that yet. We will start to see it in the Q2 coming through on the forestry side. So it's going well, but obviously all the other headwinds in that division are gaining a lot of our attention right now as I'm sure you can understand. And that makes sense.

Speaker 3

And not to ask about another distraction, but I'm pretty excited about the rent to own suite. It seems like just back of the envelope comparing some peers, it seems like it would have something like a 35% ROI. And I was just wondering, do you think you can add 100 more trucks, chassis this year to that, maybe get the fleet up

Speaker 2

to 400 maybe by the end

Speaker 3

of the year?

Speaker 2

It ramps up pretty nicely during the Q1. We expect that to continue all through the year. I think we're up '17 or 'eighteen something like that in Q1. And we do plan to open a couple of additional rental locations this year. We've got those pretty well mapped out and know where we're going.

Speaker 2

So, yes, I think we're going to see very nice growth in the rental space from super products during this year.

Speaker 4

Our expectations, Tim, are to get north of 300 units out there. And I think we closed the year roughly to 210, 215, 217 something like that.

Speaker 3

Okay. It's 300. Yes, that's actually the number I was thinking about. But that makes sense. That's a really good opportunity to get the ROI up and helps customers make them happy.

Speaker 3

But maybe just switching gears to one other topic. I mean, this is snow removal has been amazing. You have the wide wing innovation, taking market share, it's pretty clear. Like when does that slow down? I mean, when does that kind of normalize and how does it look this year?

Speaker 2

The outlook from that team is so bullish. I almost had to pinch myself when I talk to them. They just see opportunity everywhere. We struggled in the airport snowmobile space for a while, Tim. We just came out of a big show in Buffalo.

Speaker 2

We've got a very nice reception there. Customers are finally starting to see the strength of our products in that space, which is a huge turnaround from where we were 3 or 4 years ago. Our wide wing plow is selling like hotcakes right now. We can't build them fast enough. So that's really interesting.

Speaker 2

And we're still getting large legal orders out of contractors.

Speaker 4

We're also picking up

Speaker 3

some really big interest now back

Speaker 4

in our airport area, orders for different airports right now for our snow equipment, which is really good. We had some struggles with that about 3 or 4 years ago, made a tremendous amount of improvements in there and that's now actually showing a lot of interest for us right now.

Speaker 2

I mean, I can share one number with you, Tim. We believe in fairly short order here, our snow removal segment could be $250,000,000 a year in revenue. That's great. And honestly, I'll be disappointed if it doesn't get there.

Speaker 3

That's phenomenal compared to just 3 years ago. That's amazing. Just one clarification question. I just want to make sure I understood this from the previous comments. For the high single digit sales growth comments, that's I know you got the strike, it clearly impacts you.

Speaker 3

But what if you're factoring kind of the Royal Trucking acquisition, it doesn't anniversary until early October, I think it was October 10 or something, that seems like that would add 8% to 9% sales growth a quarter by itself. Am I just kind of thinking about this the right way as you may be being a little conservative?

Speaker 4

That is, I think if you back them out, I think that's what we're trying to say is probably closer to that single digit increase without oil in there, yes.

Speaker 2

The uncertainty isn't around industrial at all. It's in vegetation management. We're waiting to kind of see how the orders flow in the second quarter. If the orders pick up nicely, then I can be more optimistic about sales growth for the rest of the year. But we still know as we sit here today how that's going to play out.

Speaker 2

We're encouraged. We see some positive signs right at the end of the Q1 in terms of how that business developed. But I don't want to confidently say we've

Speaker 4

turned a corner there yet because I don't

Speaker 2

believe we have.

Speaker 3

No, that's fair enough. I was just making sure that kind of high single digit is excluding Royal's contribution of 8% to 9% to 15,000,000 a quarter. So that really clarifies that. Thanks so much and that's it for my questions.

Speaker 2

Thanks Tim.

Operator

This concludes our question and answer session. I would like to turn the conference back over to management for closing remarks.

Speaker 2

Thank you very much. Before closing the call today, I would like to express my deep gratitude to our Executive Vice President and Chief Financial Officer, Mr. Richard Whirley, who retires today after more than 36 years of service with our company. Richard is an exceptional colleague and a great friend. He's been extremely instrumental in the positive development of this company since its earliest days.

Speaker 2

While I will certainly miss him, I want to wish him a very well deserved long, healthy and happy retirement and I will miss him very much. Agnes Camps will take over the reins as our CFO for today and will join us on our Q2 2024 conference call in August to present our results and to take your questions. So we look forward to that. Thanks again one more time for joining us today. We look forward to speaking with you on our Q2 conference call in August 2024.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Alamo Group Q1 2024
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