Good day, and welcome to the Alamo Group Inc. Third Quarter 2024 Conference Call. All participants will be in listen-only mode. Should you need assistance, questions. To ask a question, you may press star then one on your telephone keypad. Please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Edward Rizzuti, Executive Vice President, Chief Legal Officer, 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 are on the company's distribution list. There will be a replay of the call, which will begin one hour after the call and run for one week. The replay can be accessed by dialing 1-877-344-7529 with the passcode 6101611. Additionally, the call is being webcast on the company's website at www.alamo-group.com, and a replay will be available for sixty days. On the line with me today are Jeff Leonard, President and Chief Executive Officer, and Agnes Kamps, Executive Vice President and Chief Financial Officer. 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, seasonality, 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 the date.

Thank you, Ed. We want to thank everyone who joined us on the conference call today. We express our appreciation for your continued interest in Alamo Group. The third quarter shaped up largely in line with our expectations as the strong performance from the Industrial Equipment Division continued, and as market headwinds prevailed in the Vegetation Management Division. I would now like to turn the call over to Agnes, who will take us through a review of our financial results for the third quarter. I will then provide additional comments on the results and say a few words about the outlook for the fourth quarter and a few early thoughts on 2025. Following our formal remarks, we look forward to answering your questions. Agnes, please go ahead.

Thank you, Jeff. Good morning, everyone. Third quarter results were largely in line with our expectations. The forestry and agricultural market continued to struggle with difficult market conditions impacting our Vegetation Management Division, while the governmental, industrial, and contractor sectors showed growth within the Industrial Equipment Division. Total revenue for the quarter was $401.3 million, reflecting a 4.4% decline compared to the same period last year. Gross profit for the quarter was $100.9 million, with a margin of 25.1% of net sales, down 206 basis points from the third quarter of 2023. This margin decline was primarily due to lower volume in the Vegetation Management Division. SG&A expenses were $56.7 million, which is a reduction of 8% from the third quarter of 2023, excluding rollover truck acquisition. These reductions are a result of saving initiatives in the Vegetation Management Division. Operating income in the third quarter of 2024 was $40.1 million, sustaining a double-digit operating margin of 10% of net sales. While this represents a decline of 190 basis points compared to the same period in 2023, it is important to note that our third quarter operating income in 2024 includes approximately $1.6 million in separation expenses. Net income for the third quarter of 2024 was $27.4 million, or $2.28 per diluted share, compared with net income of $34.9 million, or $2.91 per diluted share, in the same period last year. Interest expense in the third quarter of 2024 was $1.8 million lower than in the same period in 2023, driven by reduced debt levels. The provision for income tax was slightly lower compared to the same period in 2023. With that overview, let's take a closer look at the performance of our divisions. The Vegetation Management Division reported net sales of $190.1 million, a 23% reduction compared to the…

Thank you, Agnes. I would like to add my personal welcome to everyone who joined us on the call this morning. The company's third-quarter results were in line with our expectations given the mixed conditions in our markets. As we experienced in the second quarter, the governmental, industrial, contractor, and vegetation markets continue to display very divergent activity levels during the current quarter. We were very pleased that our governmental customers continue to invest in modernizing and upgrading their maintenance fleets. In North America, governmental demand remains strong across all of our major markets. We had been anticipating some modest softening in the United States as we approach the end of the year. Municipal finances remain in good shape as a result of solid economic growth and a sustained flow of federal aid. A recent report from the National League of Cities also indicates cities are generally prepared for an eventual tapering of federal aid. Municipal revenue remained stable on the strength of higher property tax receipts despite a modest reduction in sales tax revenue. Similarly, the National Association of State Budget Officers reported that fiscal year 2024 revenues in a majority of the states closed above the original forecast, and in some cases, above upwardly revised forecasts. According to the same report, most states also reported a fourth consecutive year of surpluses, although smaller than in the immediately preceding years, and that rainy day funds continued to strengthen. These reports align well with the results in our governmental markets. Demand for the company's vacuum trucks, street sweepers, debris collectors, crash attenuators, and snow removal equipment remained historically elevated during the quarter. Sales in the Industrial Equipment Division were more than 22% higher than in the corresponding period of 2023. Order bookings in this division increased modestly compared to the…

We will now begin the question and answer session. To ask a question, you may press star then one. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Our first question comes from Mike Shlisky with D.A. Davidson. Please go ahead.

I guess I wanted to first ask about the cost reductions. I guess I want to make sure I understand how permanent these especially are. You did take out the capacity. You said you have a little bit less capacity going forward. Thanks to the deductions as a result of them. Yes. Do you anticipate at some point the need to kind of bring that back, or is that, you know, within the next couple of years, not likely to take place?

Yeah. So Mike, regarding the two consolidations separately, as you know, I think you are well aware that the facility we have in Michigan at over a million square feet has more than ample capacity to meet our future needs. And this consolidation was long anticipated but difficult to execute while Forestry and Tree Care was booming a year and a half or so ago and has been for the last four or five years since we entered that sector. The consolidation in the ag side of our business with Rhino Ag and BushHOG certainly will have adequate capacity for the next couple of years. Beyond that, we will reassess what we do in the future and may add capacity either in one of our existing locations or another one. But that remains to be seen. It looks like the ag market is going to stay soft through most of 2025 at least, so we have some time to reassess. But as you know, Mike, we have lots of manufacturing facilities, and we are able to move things around relatively easily within our network. So I am not really overly concerned about that. I think regarding the cost savings programs underway, what I can say to you is that the majority of the actions we need to take to generate those savings are essentially done as we sit here today. While the physical consolidation of Rhino into Bush Hog remains, we need to move some machinery and some inventory and so on. All of the people actions and the capital investments we need to make in the Bushnell facility are already underway.

Got it. I also wanted to touch on the margin outlook for 2025. Obviously, the cost reductions you made seem to set a bar a point or two higher for the next year. But as far as what is in the backlog and both of the segments, do you feel like you have got opportunities to get a partner to next year on the operating margin line?

Yeah. That is what we are expecting, Mike. You know, Agnes and I have told the market we are going to drive margins higher, and that is what we are going to do. The whole management team is very committed to that. And we are actually taking deeper actions than we otherwise would in this event, and we have planned some further actions so we have some contingencies in the event the markets and then chase management today should continue to decline. Although my personal view is we are fairly close to the bottom. You know, it has been noted that our bookings and backlog and so on have stabilized fairly well now. So I think we are going to have to just ride out Ag where it is for most of 2025. But forestry, I am more optimistic about. I think forestry shows a little bit of life. Not just because of the hurricanes, but generally speaking, there has been a modest uptick in activity that we have seen in that sector. We have talked to a number of the major customers, and they are feeling a little bit more optimistic about 2025 with the expectation that interest rates will come down a little bit. So, yes, Mike, I do believe we have got room to expand margins by a couple of points next year. We need to execute what we are doing, and we need to execute it well. But given where we stand today with the consolidations, I am very confident we will achieve that.

And between Ag and Forestry, I want to confirm right now, forestry is the larger focus. Sales and of your SIP address. Correct?

It is, and it was also the larger decline in dollars in that division.

Got it. Thanks so much. I will pass it along.

Thanks, Mike. Appreciate it.

The next question is from Chris Moore with CJS Securities. Please go ahead.

Hey, good morning, guys. Thanks for taking a few.

Morning.

Maybe we can just start with keeping on the margin discussion, maybe just go a little deeper by segment. But vegetation operating margin was 6.5% versus 7.6% in Q2. If you adjust out that 1.6%, it was 7.4% this quarter. So in terms of the bottom on that, is Q3 likely the bottom or still some uncertainty looking at Q4 versus that?

You know, I think we are close to the bottom prior to restructuring cost. But as we said on the call, we have further restructuring costs coming in vegetation management in Q3 and Q4. And keep in mind, Chris, all of these restructuring actions we are taking are in vegetation management. And so if you think about taking several hundred people out of our organization as a percentage of employment in vegetation management, it is very heavy, to say the least. And so we have got to kind of adapt to a new operating situation there in vegetation management. So I do not know if it is the absolute bottom or not, but we have taken very severe action. That is what I am trying to say to you. And Agnes and I have a bit of contingency in our pocket as we always do, in terms of what we are announcing and what we plan to execute to make sure we do see some improvement in the margins certainly in 2025. But Q4 is still a bit up in the air, to be frank, where the market is going to go from here. I could say I believe forestry stabilized. We are stabilizing. Ag looks like it is flattening, but it is very uncertain at the moment where that is going to go next year. And I think even the big OEMs are saying more or less the same thing. The picture is not very clear. I can share with you that our inventory out in our dealer network, what is on our floor plan, is down very sharply compared to where it was pre-pandemic in 2018 and 2019. And I will emphasize very sharply. So from that point of view, we are in a much better position. The difficulty we face in ag is that the large OEMs, the tractor OEMs, still have a lot of inventory to push out into that dealer network. So we are not likely to see the benefit of that in the short run. But if you put those two statements together, what it means is that the elasticity in the market from our point of view has declined, which means that as the market eventually recovers, we should see a very fast uptick. Because our field inventory is very low right now. So I hope that helps you a little bit.

And that does. Very helpful. Industrial before I go back to vegetation. So industrial operating margin, 13.1% for the quarter. You know, we are modeling just below 13% for the year. I guess maybe the puts and takes of being able to approach 13% again in 2025.

Oh, I think we will, Chris. I think we are going to stabilize there in industrial at a nice high level given the backlog where it is. And although our bookings looked a little soft in the quarter, the demand for the products is not soft at all. So it is mostly a timing issue. We still have large opportunities ahead of us that our confidence level in is very high. I think industrial is going to have a very nice year next year. We still have some efficiency improvement measures we are carrying out inside the industrial division that are on the back of some of the recent acquisitions we have made. So we have got some further facility consolidations, although small in scale, to do in 2025.

Got it. Very helpful. So you just talked about, you know, inventory levels continue to improve on the vegetation side. Rates coming down a little bit, hopefully more. So still not expecting ag improvement till late 2025. What about vegetation overall? What would it take to grow a little bit in 2025?

Well, I think what it is going to take is some interest rate help, Chris. I think that we got a little bit of interest rate help earlier in the year. Forestry will be the first to tick back up. And as I said, it is already showing some signs of life. You know, our fourth quarter is off to a good start in forestry. Very encouraged to see that. And, of course, our cost structure in forestry is now much leaner, having, you know, essentially closed one of the two larger plants we have. The facility that we have exited for forestry is a 400,000 square foot facility. So it is a big one. So we should see nice savings coming out of that. So I think forestry will be much better next year in the back half. It is not going to be an overnight event, but certainly, I see the progress coming, and I am optimistic about that. Ag is just a tough call right now because we do not know what the actual situation is inside the big tractor OEMs. They still have a lot of inventory they expect to push out into the field, which means that our dealer balance sheets are going to remain under pressure all year, and that makes it hard for a shortliner like us to, you know, hold our space on the shelf in the dealership. So that is why I am more cautious about that.

Got it. Very helpful. I will leave it there. Thanks, guys.

Thank you, Chris. Appreciate it.

The next question is from Mig Dobre with Baird. Please go ahead.

Thank you. Back to vegetation management, you know, the orders there. Your incoming orders have stabilized around $157 million. Yep. You know, throughout the year, you have been bringing down production, right? So Q1 revenue was $223 million, down to $211 million. Q3 was $190 million. So I guess my question is this, you know, given that at least in the way you kind of frame vegetation management into 2025, it sounds like if we are going to see a recovery in orders, it is probably going to be pretty muted. And it might be more back-half loaded. I would imagine that it is fair to assume that your production, your sales in vegetation management are going to continue to converge towards orders, right, towards this, call it, $160 million per quarter worth of sales and orders. Is that the right way to think about the fourth quarter and the front half?

It is because the backlog, particularly on the Ag side of Vegetation Management, is quite low right now. It is not near an all-time low yet, but it is getting close. Which means that we will be living more hand-to-mouth with, you know, booking bill being the key thing, get orders and ship them, you know, for at least the first half of next year in Ag. Forestry is a little bit different case. As I said, we have gotten off to a good start in Q4 with orders in forestry, and I do not want to say too much about that yet. I obviously cannot. But I am encouraged with what I see. Some of that was related to the hurricanes, but there is also some underlying demand coming back. Rick Rayburn went out and met with a number of our large customers in forestry a few weeks back and got a pretty encouraging report about how they see the future. They are obviously concerned about the national elections and where interest rates go. That is what is creating the uncertainty. And as I said on the call, Mig, the link between forestry and housing starts is stronger than we had anticipated. So as interest rates fall and eventually housing starts should pick up, the demand is there for housing, that will certainly help the forestry side of the business. So my view is, if there is a recovery next year in ag, and that is an if, it will be really late in the year from my point of view. I think the forestry recovery could start around midyear if we get another interest rate cut or two in the first quarter, maybe early in the second.

I see. Well, really kind of where I was trying to get at with my question. If we are going to see revenues converge towards this, call it, $160 million level sometime in the front half of 2025, you know, that is still a qualitative $30 million evaluation relative to where you are in Q3. You do have cost savings like you outlined coming through. I still struggle to see how margins are going to be flat or up relative to what you had in Q3. I would imagine that you should have further margin erosion sequentially simply because of the normal decremental margins that would flow through from that revenue loss.

Yes. And I think, Mig, that is why I was cautious on the earlier question about Q4. You are right. You are exactly right. That is the worry for Q4. But I am less worried about it as we head into Q1 and Q2 next year. Because as I said, the amount of inventory on our books in the field is the lowest it has been in years by a long way. Not even close. Sort of down 60% compared to where it was in 2018 and 2019. So there is not a lot of buffer sitting out there anymore. So you are right. The revenue run rate is going to remain low for a while, but we have taken a huge chunk of cost out of this business. As I said, all these cost reductions are in vegetation management. And when you look at these employee reductions, that we said were about 10% of the corporation inside that to be, and it is 30%. So we have taken huge chunks of cost out there, and as I said, Agnes and I have some additional contingencies that we have already planned, and we are planning further actions if we need to take them. So you are right. We are going to be playing defense in that business for at least the first two quarters of next year, Mig. There is no getting around it. I agree with your comment.

I just want to make sure that we level set expectations here because I think it is sort of easy to get maybe estimates in the wrong place relative to what the business is able to do. So maybe to just kind of finish my thought here, if we are leaving out the cost savings that you have outlined on the call today, how would you characterize the normal detrimental margins that investors need to kind of keep in mind when they are modeling any volume contraction into 2025? Is it 25%? Is it 30%? Is it 35%? So, again, this is excluding kind of the cost savings that you talked about.

Okay. Difficult question, Mig. I think if you look at vegetation management, it could be two to three points. Something like that. That is sort of where Agnes and I are modeling the downside risk. And, Agnes, is there anything you want to add to that from your point of view?

I think, you know, for the cost savings that we have implemented now, as you heard Jeff describe the consolidations in the plan, total permanent costs. And what we are doing is to design an improvement in the margins going forward. But we do have to consider the fact that exactly as you described, that the revenue might still be lower. We need to consider seasonality, for example, in Q4. So when you model margins, you know, we are not out of the woods yet. Put it that way. And what we are expecting is an improvement later in 2025 and beyond.

And, Mig, one last thing here. I did not mention specifically on the call. When you look at the consolidation of the Bush Hog and Rhino brands, we have consolidated the SG&A functions as well. We consolidated the sales teams and the engineering teams. So the overall cost structure has come down very significantly, and we have taken large chunks out of that as well. So it is not just about capacity and absorption. We have made a structural change in that business.

And that has to be kept in mind.

Since you brought up SG&A, I had a question about this as well. Six percent decline in the quarter. Pretty significant. And I am sort of wondering a few things here. The first one is, is there a sort of a variable compensation, bonus accrual, reversal, something of the sort that helped us here in Q3? How should we think about Q4 SG&A on a year-over-year basis? And, you know, given the restructuring and whatever additional plans you might have, is it fair to expect SG&A will decline in 2025 as well?

Yeah. Well, okay. So to the first part of your question, yes. There is obviously an elimination of accruals for compensation for myself and everybody else in this company, as it should be. So yes, that is true. I do not know the amount of that off the top of my head, but I am sure Agnes can get it for you, or we can give it to you, you know, after this call. But secondly, as you think about SG&A going forward, the cost savings in the ag side of our business did not appear. That consolidation is a Q4 event. It is behind us, but it is a Q4 event. So you will see further savings in the SG&A that will be permanent. Because this consolidation is not going to unravel. This is the new structure. So I think those two things will largely offset. Now to the second part of your question, what should you think about SG&A next year? Well, obviously, management is going to profit at the table until this business starts making more money. So it is a bit of a wild card. I do not want to tell you management is not going to earn bonuses next year. I certainly hope we do, but it has got to be on the basis of improved profitability. At this point, you know, we have not even discussed that with our board of directors yet. We are still doing our budget for next year as we speak.

No. Understood. I was just wondering if there is, like, a structural component in the SG&A line item that you wanted to call out, but that part is understood.

Well, yeah, that part is. I mean, yeah. Go ahead.

I guess the final question on the industrial equipment. Demand here is very good. My guess what I am wondering about when I am looking at margin, right, your revenues have continued to tick up sequentially. Margin, however, has not at 13.1%. It was down sequentially versus the first half, and the incremental softened a bit in the quarter as well at 21%. So I am wondering if there is a function of mix here or if some of the positive price-cost that we have seen earlier in the year is starting to moderate. Really, the essence of the question is can we continue to underwrite significant margin expansion in 2025 relative to this kind of, like, 13% level that you have been running in 2024.

Yes. There is certainly room for more margin expansion in industrial, but we have taken big steps in that direction. They will moderate for sure because it gets tougher as you go. We are still running some under absorption in industrial. We have some facilities that are running flat out full capacity. We have others that are not. We have taken one of the forestry plants that we vacated and are making some industrial products there for snow removal to accelerate the deployment of backlog into revenue, which should help us going forward. So I think the industrial margins will continue to expand modestly all through 2025. I do not see any reason why it should not, and the orders that are coming in are very high quality for us right now. As I said, our markets are stronger than what was reflected in third-quarter bookings. We are very, very confident about that. The other thing I would say, I made a couple of references to national elections on the call. You know me well enough, and I think you follow us well enough. Usually, an election year is a tough year for us in industrial. Government will start to get really cautious. Normally, that starts in the second quarter and then carries through in the third. So I think some of the flattening of orders we saw in the industrial segment reflects that. And I am pretty confident once the election is over, no matter which way it goes, the governmentals will get back to doing what they do, which is spend money and upgrade their fleets, you know, that they have to. That is why I made all those remarks about, you know, with good shape the municipalities and the states are in in the US, which matters a lot. We have also talked to our largest customers, our vacuum truck rental operators, and our dealers, and they are all feeling pretty good about the direction of things right now. So I think the future look for industrial is pretty bright.

Thank you for taking the questions.

Thank you, Mig.

Please press star then one. The next question is from Greg Burns with Sidoti and Company. Please go ahead.

Morning. Your debt levels and leverage continued to decline, cash flow remained strong, and I appreciate the implementation of the buyback, but I was just wondering what your plans for M&A are, if any, what the pipeline of maybe opportunities looks like? Are you looking to expand into any new adjacent categories? What are the opportunities maybe for some inorganic growth to offset some of the weakness we are seeing now in vegetation management?

Yeah. The M&A pipeline for 2025 is looking interesting, with a couple of big opportunities coming that are pretty much right in our sweet spot. I am encouraged about that, and that is why Agnes and I are hoarding a bit of cash right now, and the share buyback program is more opportunistic. We are generating a lot of cash right now, Greg, exactly to your point. We are back to our old habits there, and I mean habit in a positive way, of spending lots of cash, and as we have taken this much cost out of the business, we should continue to have very positive cash flow going forward. We still have opportunities to take inventory down farther. We made nice progress with inventory in the Vegetation Management Division, and unfortunately, we had to eat up some of that growth with industrial, you know, running so well at the moment. But the pipeline looks good. There are a couple of small tuck-ins we are chasing that maybe are not material to the top line but are very material in terms of our internal operations. And then some big ones stacking up for next year. So that is why we are making sure the balance sheet is nice and taut so we have got the opportunity to move quickly on these opportunities that come right next year.

Great. Thank you.

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

Thank you again for joining us today on the call. We look forward to speaking with all of you on our fourth-quarter conference call in February 2025.

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