Alamo Group Inc. (ALG) Q1 2024 Earnings Report, Transcript and Summary

Good day, and welcome to the Alamo Group First Quarter 2024 Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask a question. 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.

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) 827-3746, 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 (877) 344-7529 with passcode 9093220. 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 Wehrle, Executive Vice President, Chief Financial Officer; and Agnes Kamps, Executive Vice President and Treasurer. Management will make some opening remarks, and then we will 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 Jeff, I would like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following: adverse economic conditions, which could lead to a reduction in overall market demand; supply chain disruptions, labor constraints, competition, weather, currency-related issues, geopolitical events 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 Jeff Leonard. Jeff, please go ahead.

Thank you, Ed. 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 first quarter shaped up largely in line with our expectations, and we were pleased overall with the financial results we've reported today. I would now like to turn the call over to Richard, who will take us through a review of our financial results for the first quarter. I will then provide additional comments on the results and say a few words about the outlook for the second quarter and the balance of 2024. Following our formal remarks, we look forward to taking your questions. Richard, go ahead.

Thanks, Jeff, and good morning, everyone. Alamo Group's first quarter 2024 ended with a solid performance that produced record net sales driven by continued strong demand for our products in the Industrial Equipment division. First quarter consolidated net sales were $425.6 million, an increase of 3% compared to $411.8 million in the first quarter 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 the first quarter 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. Operating margin for the first quarter came at $47 million versus $49 million in the first quarter of 2023, a decrease of 4%. Operating margin as a percent of sales was 11% for the first quarter versus 12% for the same quarter last year. Consolidated net income for the first quarter was $32.1 million or $2.67 per diluted share, a decrease of 4% versus net income of $33.3 million or $2.79 per diluted share for the first quarter of 2023. Our Vegetation Management division was off in total sales compared to the first quarter of 2023. The softness in both the forestry and agricultural markets continued due to inflation and higher interest rate -- the higher interest rate environment. Net sales were $223.7 million a decrease of 13% compared to $256.4 million for the first quarter of 2023. We've been monitoring dealer inventory levels, which are up but not at historical levels. The division's operating income for the first quarter was $21.7 million, almost 10% of sales, but down 40% versus $336.5 million, 14% 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 fourth quarter of 2023. Industrial Equipment division net sales had a tremendous quarter, coming at $201.8 million, up 30% compared to $155.3 million for the first quarter of 2023. This was due to a large -- due to a solid performance across all product lines, particularly vacuum truck, 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 first quarter of 2024 to $25.3 million, just under 13% of sales, compared to $12.5 million, 8% of sales for the first quarter of 2023, an increase of over 102%. The company's backlog at the end of 2023 -- at the end of the first quarter of 2024 came in at just over $831 million, down 16% compared to backlog levels at the end of the first quarter of 2023, but still at a healthy level. A few additional items I'd like to cover that are related to the balance sheet at the end of the first quarter of 2024, which continued to remain strong. Working capital increased about $61 million compared to the first -- end of the first quarter of 2023. The increase primarily resulted from higher accounts receivable and to a lesser extent, inventory. During the first quarter 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 first quarter of 2024 was just over 1.3:1, down from 1.7:1 at the end of the first quarter of 2023. And finally, the company's trailing 12 months EBITDA came in at just over $246 million, 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 will remain disciplined in our execution of 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. Sales were up 3%, but margins and net income were off mainly due to weak market conditions in 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 first quarter of 2023. With that, I'll turn the call back over to Jeff.

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 first quarter 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 Alamo's forestry and tree care equipment has been the most impacted by the higher rates. Many commercial tree care contractors who purchase our [indiscernible] 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 customers in the form of higher prices when they walk into a dealership as the dealer is forced to pass along their own higher [ float ] 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 costing in the market with many buyers content to wait for lower interest rates or making it a firm buying commitment. 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 whole tree chippers and grinders is largely driven by waste wood recycling and biomass production. The United States and Canada are ranked #1 and #2 among the world's producers and exporters of wood pellet biofuel. North American pellet producers depend on logging and lumber production residues 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. At the same time, dealer inventories remain elevated above contract levels during the first quarter. 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 first quarter. After 3 solid years, well above the long-term average, inflation-adjusted U.S. net cash farming is expected to decline in 2024 by approximately 5% compared to the 2003 to 2023 long-term trend. U.S. 2-wheel drive tractor sales in the first quarter were down 13.4% compared to the first quarter 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 first quarter of 2023. In the face of these headwinds, the Vegetation Management division reported net sales that were down 12.7% compared to the first quarter of 2023. 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 first quarter and cancellation awards during 2023, as previously reported. These were primarily in the forestry and tree category. 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. However, we were encouraged that order bookings for our lower products began to show early modest signs of recovery in the final weeks of the first quarter. The slowing demand in these 2 groups adversely impacted absorption and efficiency in 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. In addition, the division initiated the closure of facility that produces spare and wear parts for classic agricultural equipment. The benefits of these actions will begin to be evident in the company's second quarter results. Sales of Vegetation Management equipment to governmental agencies was a notable bright spot for this division in the first quarter. The division's governmental mowing businesses in North America, Europe and the United Kingdom continue to perform well and at a brisk pace. Both sales and backlog remained elevated for this part of the business and market activity remains bullish. But with this division's larger business groups facing strong headwinds that drove sales lower, Vegetation Management operating income declined 450 basis points and EBITDA also moved 380 points lower compared to the prior year first quarter. On a sequential basis, the division's operating income improved by nearly 10%, and operating margin improved by 500 basis points compared to the fourth quarter of 2023. Our Industrial Equipment division had an excellent first quarter. State and county governments remained on a solid physical footing as they entered 2024. Forecast declines in state revenue for 2023 did not materialize and many states continue to report budget surpluses last year. State rainy day funds remain 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 first quarter 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 first quarter 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. All of the division's product groups reported higher sales, strong ordering activity and higher backlog. Non-governmental markets for Industrial Equipment also remained strong on the back of the continued durability of the North American economy and mildly aided by the stimulus effect of the recent Federal Infrastructure Investment and Jobs Act. Efficiencies improved in the division's primary production facilities as the pace of production increased with very strong momentum across all of its product groups. Industrial Equipment division operating income improved 440 basis points, and EBITDA improved 410 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. Turning our attention to the company's operations more broadly. Supply chain performance in both divisions continued to improve during the first quarter, although a few challenges remained. Truck chassis deliveries continue 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. Steel prices remain volatile, but generally trended slightly downward during the first quarter 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 to improve productivity. We were obviously extremely pleased that through the determined work of our teams, both of our operating divisions were able to sequentially expand their operating margins relative to the fourth quarter of 2023. Regarding our outlook for the second quarter and the second half of 2024, we believe that the market conditions that we encountered in the first quarter, both negative and positive, are likely to persist. The headwinds that confronted us in Vegetation Management in the first quarter are not likely to meaningfully abate until inventory declines and interest rate reductions are announced. 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 first quarter as total debt net of cash declined nearly 24% to its lowest level since we acquired the Morbark business in 2019. Our balance sheet positions us well for what we believe will be a more active year for M&A, and we are optimistic about our M&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 2024. 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 on thousands of exceptional employees and our financial stakeholders for their continued support of the company. This concludes our prepared remarks. We're now ready to take your questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Chris Moore from CJS Securities.

Maybe I'll start. 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 make that?

I'm fairly confident we can, and that's what we're expecting to do, to be honest with you. That's where we are adjusting our capacity now. And we've taken some firmness to get in 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.

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.

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

They're actually normalizing quite a bit, Chris. They're out about 120 days for the vacuum trucks and the bigger equipment and following fairly rapidly. The truck OEMs are really getting one step. 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, and we have more than adequate capacity in that division at the moment.

Got it. You mentioned still a few kind of lingering issues on the supply chain side. Any worries that 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 to get the sense 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, 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 normalized now, lead times are coming down in most parts of our supply chain.

The next question comes from Mike Shlisky from D.A. Davidson.

Can you maybe kind of remind us what percentage of your business serves the public sector or service 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's public sector is doing pretty decently. I think private is a little more challenged. So what are the -- what's the broad rate down there?

It's still, I think, what we've said before. It's roughly between 20% and 25% of that is from the hobby -- to the hobby farmer and ranch. The balance is made up between industrial and governmental. I'm sorry?

I'm sorry. I was asking kind of your overall business, what percent of it serves the public sector and what sort of the private?

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

Yes, pure governmental, Mike. Rents 40% to 45% of total revenue. Pure governmental. And then there are contractors that straddle that, as you know I've discussed before. We have contractors that buy a lower 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 pure there is, but that's the best of the number we've been able to produce.

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

Actually, we're not, Mike. We haven't seen any pressure on our accounts receivable. We had 1 large Forester dealer last year that we bought [indiscernible] that was going to go insolvent and returned a 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 speed and is ordering some equipment from us again. 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 like in any probability to favor at this point.

Got it. Maybe one last one for me. During the first quarter, one of the large machinery players, a bit larger than Alamo, kind of serves adjacencies like quarry and aerial work platforms. That company launched their own brand of vegetation management equipment with mulchers, chippers and so on. I'm not even sure if their price overlap, but they [indiscernible] if we 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 start-up company trying to displace Morbark or other Alamo brands. But this is a pretty large and well-funded parent companies. So can you just maybe give us some commentary on the strength of the Morbark brand, your distribution and your customer base and if you have any plans to kind of help defend your market share if this brand makes any kind of traction?

Mike, I'm pretty confident. I know that 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, we have long-term loyal dealers at Morbark that have 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. So no, I'm not particularly concerned about that. We know that company well. They've always been that this is not a new thing in a sort of refreshing their space a little bit.

The next question comes from Mig Dobre from Baird.

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

We normally don't, but probably $15 million roughly.

$15 million, okay, appreciate that.

That's the sales [indiscernible] give you the sales for $15 million.

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

Yes, yes, yes. And Jeff, you spent quite a bit of time 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.

Yes, we, too Mig.

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?

Yes, the short answer is that, yes, we would have been able to get more revenue out in the quarter. The sillier 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 first quarter than we did during the fourth and the third of last year. And for a year, I can challenge you, once the chassis supply situation improved, industrial would really hit its stride and is doing that. So I don't want to say there are no constraints, but I also don't want to say these are dropped seriously been living with them for a while, and they are steadily improving. The Allison transmission what is another really strange analysis is normally a very, very reliable supplier. 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 may define chassis off lots and other places to keep our production rolled. So I don't think that really had a big constraining impact. We probably could have done another perhaps $5 million in the quarter without those challenges in industrial just to take a ballpark guess at it.

Yes. Something else to add to that, Mig, if you look at our 10-Q, WIP is like $30 million, which continues to remain too high for our liking, but over half of that is going to be industrial. And as Jeff mentioned, if we could just get a few things to 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. But normally, in that division, they're about half of that $12 million to $15 million -- of that industrial division. They're normally around about half of that. So that, as Jeff said, that leaves you between $5 million and $7 million of extra sales that we could -- potentially could have had during the quarter.

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

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 strike running at the moment date, 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.

But I'm curious, and I'm sorry to press you on this a little bit because there's a pricing element to all of this, right? That's -- and 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.

Well, I mean, I think that we're still having to just kind of pace the build in our plans. 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 and Dan referenced to the under-absorption in our vegetation management facilities, we have the opposite effect going on in our investments to improve that absorption continues to improve. I'm just being a bit cautious here that there's a lot going on right now in 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 1 needs to get solved. 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 second quarter as a result of that strike, and we're not going to get that back, obviously. Hence, the caution. 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 our capacity at the moment, which will involve some investments. At the same time, our [indiscernible] here is running at -- that's there's level of profit we haven't ever seen in that business before and 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, maybe I don't want to over forecast, but I think the growth is going to be very, very nice for the rest of the year.

Something else to add to that, Mig, this division just like the vegetation, they put their price increases in the first part of January, like 2.5% to 3% range and make some areas maybe a little bit more, but nothing huge. On average, it's about 3%, and Industrial did $250 million 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.

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 plan. So while you have great backlog, you might have some constraints elsewhere. That's kind of what I was trying to figure out.

We're not. But there's a lot of moving pieces right now. As we've mentioned to previous quarters, we closed our sweeper plant out in Washington State, and we moved that production into our Wisconsin plant, which is our [indiscernible] plant. There, that's getting settled down now, and that production is starting to ramp up 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. But I still like the direction in industrial right now. It is 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 with in place. So I'm really confident about a bit sold to.

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 interest rates, for instance, that who knows what the path is going to be on a go-forward basis. So I guess my question to you is that if nothing changes, 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 a $223 million high watermark, and we should be seeing a gradual sort of production decline here to destock the channel? Or are you thinking differently?

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. We have the only negative feedstock side that I gave some color on during the call, and we're starting to see some rebirth in that business already. They had to put into the first quarter. As to our mower business, our traditional mower business, particularly our bush hog business, had a very nice first quarter 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 you know that story as well as I do. So as I think about how vegetation 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 where the backlog in that space. And if we're going to hold on to that level of backlog, which is a very traditional level for that division from a long-term point of view, that I think the revenue will be stable. If the orders don't flow in the second quarter and in third, then I think you're going to see a tapering of revenue in that division until we conclude the channel inventory out but it's not going to be a collapse given the backlog that we have there. 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 ranch segment, from my point of view.

I think something else, Mig, continue to 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, the backlog falls down, our requirement here is to try to do everything we can to maintain that 10% operating margin, which is an article for this year, no matter what the revenue comes out in this division?.

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 I'm going to try to ask it down...

Yes, what we're doing, Mig, is what we've been doing for a couple of quarters, offering retail incentives to our customers will 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 first quarter, and they actually produced a very, very nice first quarter from my point of view at a very historical level of both revenue and profit. So that was positive. 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 that, that we 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 do the channel inventory. You know that and I know that. We have to clear that in order to get to better running, reordering and a rise in backlog.

Well and also, we mentioned, 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 strained 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 take more actions to make sure that we reduce our cost and control our expenses.

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. Do you think this is sort of sustainable as we think about '24 and into '25 here in terms of the 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?

Obviously, at some point, Mig, there's going to be an ease of temper expectations because we're coming out of a series of very extraordinary circumstances following the pandemic and all of the federal level 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 and they're going to continue to invest. I'm quite certain of that. The municipalities are more mixed. Some of the bigger cities are incurred a lots of costs related to resettling immigrants. So you know that you read the news same as I do and they're are under some fiscal pressure as a result of that. But remember, most of their funding comes from housing costs, property tax. And housing is not stumbled at all. In terms of prices coming down. Now obviously, that's going to sustain municipal income at a traditional level for a long time. So I think you will eventually see in paper. I certainly don't see it coming this year, Mig. I think we're into strong running all through 2024 on the governmental side of our business and the tapering may come in 2025. And if I had the answer in my head about whether this was going to be a soft landing in our economy or stumbled, we are able to give a much more clear answer to that. But I see at least another 12 months of really good running on the governmental side.

The next question comes from Tim Moore from EF Hutton.

All right. I want to wish Richard, the best of retirement and time with his family. So it's great and a straight shooter, which was really helpful for investors. And 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 a realistic operating margin ceiling looking out to maybe next year without giving formal guidance, if there's no recession, do you think it can do a 13.5% op margin next year?

Yes. I do, Tim. Confidently, yes. I think that when you look at our most notable competitor, name I won't mention, and the oft-mentioned references to their higher operating margins. If you actually do a side-by-side to [indiscernible] and we allocate our corporate costs out to our 2 divisions, as you probably know, are 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. 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.

That's great. Yes. I was doing some of that math myself, didn't seem like the ceiling is close to what you have now, but that's good news. And maybe just switching gears, I'm just trying to think through of other operating margin drivers. Obviously, the 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 mid and country efforts, specifically maybe for Europe rather than shipping heavy machinery from the U.S. over there, that cost -- how is that going? And is that really more focused on forestry landscaping and sweepers?

It's not focused on sweepers in particular at the moment. It's mainly focused on the vegetation management side and mostly in loading products and to some degree in forestry that chipper that we produce in the U.K. under the Timberwolfe brand we will have a very nice comp in the U.S., and we're just ramping that up now. So we haven't really seen the benefits of that yet. We will start to see it in the second quarter coming through on the forestry side. So it's going well, but obviously, all the other handlings in that division are gaining a lot of our attention right now, as I'm sure you can understand.

That makes sense. And not to ask about another distraction, but I'm pretty excited about the rent-to-own fleet. It seems like this back of the envelope comparing some peers. It seems like you would have something like a 35% ROI. And I was just wondering you think you can add 100 more trucks chassis here to that? Maybe get the fleet up to 400 maybe by the end of the year.

It went up pretty nicely during the quarter. We expect that to continue all through the year. I think we run 17 or 18, 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. So yes, I think we're going to be very nice growth in the rental space from super products during this year, our expectations, Tim, are to get north of 300 units out there, and I think we closed the year roughly 210, 215, 217 units, something like that.

Okay. It's 300 units. Yes, that's actually the number I was thinking of it. Now that makes sense. That's a really good opportunity to get the ROI up and helps customers make them happy. But maybe just switching gears to 1 other topic. I mean this is snow removal has been amazing. You have a wide wing innovation, taking market share, it's pretty clear. Like when does that slow down? I mean when did that kind of normalize? And how the outlook here?

The outlook from that team is so bullish. I almost have to think myself when I talk to them. They just see the opportunity everywhere. We struggled in the airport snowmobile space, while Tim, we just came out of a big show in Buffalo, got a very nice reception there. And customers are finally starting to see the strength of our products in that space, which is a huge turnaround for where were 3 or 4 years ago. Our wide wing cloud is selling like hot cakes right now, we can't build them fast enough. So that's really interesting. And we're still getting largely lead orders out of contractors. We're also picking up some really big interest now back in our airport area orders for different airports right now for our snow equipment, which is really good. We had to struggle with that about 3 or 4 years ago made a tremendous amount of improvements in there, and that's not actually showing a lot of interest for us right now.

I can share 1 number with you, Tim. We believe in fairly short order here, our snow removal segment can be $250 million a year in revenue. I'll be disappointed if it doesn't get.

That's phenomenal compared to just 3 years ago. That's amazing. Brian, 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. But what -- if you're factoring kind of the Royal Trucking acquisition at [indiscernible] anniversary material early October, I think it was October 10 or something. It 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 or you maybe being a little conservative?

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 Royal in there. Yes.

The uncertainty isn't around industrial at all. It's in Vegetation Management. We're waiting to kind of see how the orders flowing 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 just don't know as we sit here today, how that's going to play out. On product, if we see some positive signs right at the end of the first quarter in terms of how that business develops. But I don't want to confidently say we've turned a corner there yet because I don't believe we have.

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 million a quarter. So that really clarifies that question.

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

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 Wehrle, who retires today after more than 36 years of service with our company. Rich is an exceptional colleague and a great friend, who's been extremely instrumental in the positive development of this company since its earliest days. 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 Kamps will take over the reins as our CFO for today and will join us on our second quarter 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 second quarter conference call in August 2024.

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