Q2 2024 Alamo Group Inc Earnings Call

Good day and welcome to the Alamo Group Inc. second quarter 2024 conference call.

Today, all participants will be in a listen-only mode.

Should you need assistance during today's presentation, please signal for our conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.

Operator: To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note that today's event is being recorded.

To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note that today's event is being recorded.

Edward Rizzuti: I would now like to turn the conference over to Edward Rizzuti, Executive Vice President, Chief Legal Officer, and Secretary. Please go ahead, sir.

Edward Rizzuti: Thank you.

Edward Rizzuti: By now you should have all received a copy of the press release.

Speaker Change: 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.

Operator: 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 251-4245.

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 2514245.

Speaker Change: 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.

Operator: On the line with me today are Jeff Leonard, President and Chief Executive Officer, and Agnes Camps, Executive Vice President and Chief Financial Officer. During the call today, management may reference certain non-GAAP numbers in their remarks. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date.

Operator: This decline is due to continued headwinds in the forestry, tree care, and agricultural markets which affected the results of the vegetation division, partially offset by the growth in the industrial division. H-E-M-A expenses were $960,000 higher in the second quarter of 2023 due to the Royal Truck Acquisition. The provision for income tax was $9.3 million, which is lower than the second quarter of 2023 of $10.5 million. Operating income for the Vegetation Management Division was $16 million, or 7.6% of net sales, impacted by lower revenue and unadulterated costs.

Speaker Change: On the line with me today are Jeff Leonard, President and Chief Executive Officer, and Agnes Camps, Executive Vice President and Chief Financial Officer.

Speaker Change: Management will make some opening remarks and then we will open up the line for your questions.

Speaker Change: 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.

Speaker Change: Before turning the call over to Jeff, I would like to make a few comments about forward-looking statements.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: adverse economic conditions which could lead to a reduction overall market demand.

Speaker Change: 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.

Speaker Change: The company does not undertake any obligation to update the information contained herein, which speaks only as of this date.

Jeff Leonard: I would now like to introduce Jeff Leonard. Jeff, please go ahead. Thank you, Ed. We want to thank everyone who has joined us on the conference call today and express our appreciation for your continued interest in Alamo Group.

Jeff Leonard: The second quarter shaped up largely in line with our expectations, marked by a strong performance from our Industrial Equipment Division and sustained market headwinds that continued to put pressure on the results from the Vegetation Management Division.

Jeff Leonard: Here are some figures that highlight our performance.

Speaker Change: The decrease of $9.9 million was due to lower volume in the Vegetation Management Division and the five-week strike in the Industrial Equipment Division.

Speaker Change: Any inflationary impacts were offset by cost reductions.

Speaker Change: Our percentage of net sales at GNA was 14.4%.

Speaker Change: As a result, operating income for the second quarter came in at $43.3 million or 10.4% of net sales compared to the second quarter last year of $54.4 million or 12.3% of net sales.

Speaker Change: The provision for income tax was $9.3 million, which is lower than the second quarter of 2023 of $10.5 million.

Speaker Change: Operating income for the Vegetation Management Division was $16 million, or 7.6% of net sales, impacted by the lower revenue and unadult costs.

Operator: Operating income for this division was $27.3 million, or 13.3% of revenue, which is an improvement of $8 million and 284 basis points compared to second quarter 2023. Growth profit was $219.8 million, or 26% of net sales, representing $10.8 million, or 94 basis points below prior year. Operating cash flow for the quarter was $34.3 million. In the second quarter, we reduced total debt by another $28 million.

Speaker Change: Let's review other financial items for the second quarter.

Speaker Change: Our balance sheet remains healthy, working capital of $700 million increased compared to December 2023 due to higher cash and cash equivalents and a 21% growth in industrial equipment division.

Speaker Change: Working capital in vegetation management division is decreasing in line with revenue and specifically inventory reduction actions.

Speaker Change: The actions we have already taken, including reductions in force of 7% globally, are expected to result in $10 million savings in 2024, net of additional restructuring costs.

Speaker Change: Thank you. I will now turn it back over to Jeff.

Speaker Change: Thank you, Agnes. I'd like to add my personal welcome to everyone who's joined us on the call this morning. The company's second quarter results, despite a few surprises, were broadly in line with our expectations, given that our markets are moving at quite different paces at the moment.

Speaker Change: Net sales for the quarter reflected the recent divergence of momentum and activity between our industrial equipment and vegetation management segments.

Operator: Consolidated net sales declined by 5.5% versus the same period of last year, and operating income was slightly in excess of $43 million, driven lower by the combined effects of the five-week strike at our Great Hall facility, general weakness in vegetation management, and the associated impact on operational efficiency in several of the company's larger production facilities. Profitability was also strong. Operating income rose nearly 45% compared to the second quarter of 2023, and EBITDA exceeded 16% for the quarter.

Speaker Change: Consolidated net sales declined by five and a half percent versus the same period of last year.

Speaker Change: operating income was slightly in excess of $43 million, driven lower by the combined effects of the five-week strike at our Great Hall facility, general weakness in vegetation management, and the associated impact on operational efficiency in several of the company's larger production facilities.

Speaker Change: Consolidated second quarter order bookings of $344 million were up five and a half percent versus the same period last year. Industrial equipment orders were nicely higher while orders for vegetation management equipment were essentially flat.

Speaker Change: Consolidated order backlog declined 14% compared to the second quarter of 2023, but still represents a very reasonable two quarters of sales at the current pace.

Speaker Change: We were pleased that our balance sheet continued to strengthen during the quarter. Long-term debt, net of cash, is down more than 25% compared to the second quarter of 2023, and this positions us well to take advantage of the rising tide of acquisition opportunities we are seeing at the moment.

Speaker Change: Net sales were 14% higher than in the second quarter of 2023 and established a new all-time record for this division.

Operator: These outstanding results were achieved despite the previously announced five-week strike by unionized workers at the division's largest manufacturing plant in April and May. This work stoppage trimmed the division's second quarter net sales by nearly $9 million, with a more than $3 million associated reduction in operating income. Industrial equipment order bookings were similarly robust, at nearly $194 million during the quarter, up more than 10% compared to the same period last year. The division ended the quarter with a very healthy order backlog of nearly $551 million, representing almost nine months of sales at the current pace, and thereby positioning this division to continue to provide solid growth and profitability well into 2025.

Speaker Change: It's worth noting that the new Collective Bargaining Agreement in that facility spans five years and thus provides us with future stability and confidence to continue to invest in production modernization.

Speaker Change: Industrial equipment order bookings were similarly robust, at nearly $194 million during the quarter, up more than 10% compared to the same period last year.

Operator: Finally, we were especially pleased that our Vacuum Truck and Excavator Group, despite the impact of the strike, produced positive sales growth and strong profitability. Channel inventories remained elevated, although progress was made to reduce... The division's second quarter net sales declined 19% compared to the second quarter of 2023, which was the all-time historical quarterly sales peak for this division. Although pricing exhibited sustained durability, lower sales adversely impacted efficiencies and compressed operating margins.

Speaker Change: The company's vegetation management division had a challenging second quarter, as its forestry, tree care, and agricultural markets remained soft following the unprecedented surge of activity in the aftermath of the pandemic.

Speaker Change: Channel inventories remained elevated, although progress was made to reduce them.

Speaker Change: Although pricing exhibited sustained durability, lower sales adversely impacted efficiencies and compressed operating margin.

Speaker Change: Sales of the division's flagship industrial woodgrinders and chippers remain constrained by the combined impact of the persistent softness in housing and commercial construction, high-channel inventories, and elevated interest rates.

Speaker Change: Orders for land clearing equipment were also soft during the quarter, following the exceptional surge of demand during the pandemic, driven by the popular growth of rural lifestyles.

Operator: Second quarter demand for the company's mowers and other agricultural equipment was flat in both the Americas and Europe due to declining farm incomes, soft commodity prices, and excess channel inventory. There are, however, a few modestly positive signs that the agricultural market is, Thank you. We will now begin the question and answer session.

Speaker Change: The Association of Equipment Manufacturers, or AEM, reported in June that dealer inventories of small, less than 40 horsepower tractors declined by 12 percent, while inventory of tractors greater than 40 horsepower but less than 100 horsepower declined 5 percent in the first six months of this year.

Speaker Change: Also, the persistent drought in many parts of North America is easing and this bodes well for the harvest this year.

Speaker Change: To address the impact of the slowdown in vegetation management during the second quarter, we continue to take decisive actions to streamline our operations and reduce costs.

Speaker Change: Since the beginning of this year, we've reduced our global workforce by nearly 7%. In addition, we've initiated the consolidation of North American forestry and tree care equipment manufacturing into one facility, and we expect to complete this action by the end of the year.

Speaker Change: Part of the freed up manufacturing capacity will be redeployed to the production of industrial products to meet the growing demand in that division.

Speaker Change: Finally, we're planning additional actions to consolidate agricultural equipment production in North America. We expect these actions to produce an additional significant savings net of the associated restructuring costs in the remaining months of this year and the first quarter of 2025.

Speaker Change: With our government and industrial markets demonstrating sustained strength and momentum, while markets for our vegetation management equipment division, including forestry, tree care, and agriculture, will remain under pressure.

Speaker Change: While the company's consolidated sales growth will remain under pressure for the remainder of the year, the efficiency improvement and cost reduction actions we have taken are expected to improve earnings in the third and fourth quarters.

Speaker Change: Supported by the restructuring actions we've taken and will continue to take in the second half of this year, we expect the company's sales and earnings to rebound solidly in 2025.

Speaker Change: I would like to take this opportunity to thank our customers, dealers, suppliers, our dedicated employees, and all of our financial stakeholders for their continued support of the company. This concludes our prepared remarks. We're now ready to take your questions, so operator, please go ahead.

Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw it, please press star, then 2. At this time, we will pause momentarily to assemble our roster.

Speaker Change: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone.

Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Speaker Change: www.globalonenessproject.org

Unnamed Analyst: Hey, good morning, guys. Thanks for taking the time to answer a couple questions.

Christopher Moore: Hi Chris. Good morning. Starting with vegetation. As you've discussed, channel inventories still remain above optimal levels. Can you give any relative sense as to just, you know, how overstocked they are?

Speaker Change: Hey, good morning guys. Thanks for taking a couple questions.

Speaker Change: You know, I don't have discrete data I can share with you on that, Chris, but the bigger problem actually isn't inventory of our products, it's generalized inventory.

Speaker Change: Meaning we have less space in the overall inventory of the dealers.

Speaker Change: We believe and we've been able to track through our AR accounts.

Chris: The inventory is down about 10-15% at this point compared to the peak.

Speaker Change: But it's still got a long way to go, and obviously the dealers are still trying to deplete their balance sheets. So that's my best estimate. That's the best I can share with you.

Speaker Change: That's fine, that's helpful. It seems almost likely at this point that we'll get maybe a small rate cut or two in second half. Would it take a significant rate cut or you know could one or two smaller cuts create a little momentum?

Speaker Change: as I commented on the call. But our big grinders and chippers, there really isn't much field inventory. You know, our dealers hold a demonstrator or two, but generally those machines are built to order.

Speaker Change: Right, and here we are in August and it's not there yet, so forgive me for hedging my bets a little bit there.

Speaker Change: Oh good, oh good. Maybe just stay with Moorbark for a second. So my rough math is, including parts and services, you know, revenue was in the $300 million range last year. Is that close?

Christopher Moore: Yeah, that's fairly close; I got it and maybe my just my last one vegetation operating margin 7.6% in Q2.

Speaker Change: What would it take to approach a 10% operating margin second half of the year? Is that, that's unrealistic, but you can expect some improvement from the 7.6?

Jeffery Leonard: Well, a couple of things I would say, Chris. First of all, that 7.6% is net of corporate costs. And so as division sales fall, corporate costs become a bigger impact on them. That's simple math.

Jeffery Leonard: From an operating, what we call operating margin, operating income, in the parlance of the company, that's already north of 10% before the corporate costs that I mentioned. And that's not a bad spot. You know, for years and years, this company targeted 10% operating margin. It's not a bad place to be.

Speaker Change: That's simple math from an operating, what we call operating margin.

Speaker Change: operating income in the parlance of the company, that's already north of 10% before the corporate cost that I mentioned. And that's not a bad spot.

Jeffery Leonard: But I would tell you that most of that division is already north of 10% net of corporate costs with the exception of forestry and tree care. It's forestry and tree care that has really suffered, and you can imagine, that's the largest facility we have at over a million square feet, just in the primary facility at 400,000 square feet in the second. When the volume drops as significantly as it did under absorption, it becomes an impact.

Speaker Change: You know, for years and years, this company targeted 10% operating margin. So it's not a bad place to be. But I would tell you that most of that division is already north of 10% net of corporate costs, with the exception of forestry and tree care.

Jeffery Leonard: The second comment I wanted to make is when you look at the global headcount numbers that we mentioned, the headcount reduction numbers, those have essentially all been in forestry and tree care, sorry, across the vegetation management division. So the cuts in that division are very, very significant at this point, and so the savings that Agnes signaled both in the press release and in her remarks will all fall into vegetation management. So as you think about your model, that $10 million in savings that we've saved just for the remainder of this year, the last two quarters of this year, will all be in vegetation management. That's very helpful.

Speaker Change: So as you think about your model, that $10 million in savings that we've saved just for the remainder of this year, the last two quarters of this year, will all be in vegetation management.

Christopher Moore: That's very helpful. I'll leave it there. Thanks, guys.

Chris: Appreciate it, Chris.

Unnamed Analyst: I first wanted to clarify your last answer there. No, that's running right for the back half of this year. Okay, okay. So then, looking at 25...

Chris: Yes, good morning. Thanks for taking my question.

Speaker Change: Hello there. You know, I first wanted to clarify your last answer there, Jeff, about the cost savings.

Speaker Change: You said the $10 million is a full year number or just a back half number?

Speaker Change: I'm back after this year.

Speaker Change: Okay, okay, so then looking at 25...

Speaker Change: Can you give us, just to confirm, what the annualized number would be and could you make that a gross number? In other words, kind of net, picking out all the one-time costs of severance and so forth.

Speaker Change: You know, Mike, we anticipated somebody would ask us that question, and we're not ready to signal that yet, because these actions are underway, and we still have employee notifications to do, so we walk a very fine line here.

Speaker Change: in what we say further about the restructuring actions we're taking. I hope you can appreciate that. I will share more information with you when it becomes available, but as of today, I don't want to signal a number like that. We still have employee notifications in progress at various locations.

Speaker Change: Oh, okay. Sure. No problem.

Speaker Change: I've been hearing a lot about electrical infrastructure. There was a big hurricane in Texas. I'm sure you heard about that recently or experienced it.

Speaker Change: Have you gotten any new inquiries from utilities or data center players in trying to find ways to keep wrenches away over the last couple of months as those kinds of issues have been hitting in the headlines more?

Jeffery Leonard: You know, Mike, that's a very, very interesting and insightful question. And the straight answer is actually no, we haven't, which is very surprising.

Mike: You know, Mike, that's a very, very interesting and insightful question, and the straight answer is actually no, we haven't, which is very surprising. I commented in my remarks on the call that normally the big national pre-care accounts would be doing fleet renewals at this point, adding chippers into the fleet.

Jeffery Leonard: I commented in my remarks on the call that normally the big national tree care accounts would be doing fleet renewals at this point, adding chippers to their fleets, particularly given the forecast for a very active storm season this year. I believe what's holding them back is interest rates. Obviously, these are sophisticated buyers. They buy a lot of equipment. They tend to buy a lot of identical equipment, and large volumes of the same product, to staff their fleets around North America.

Speaker Change: particularly given the forecast for a very active storm season this year.

Speaker Change: I believe what's holding them back is interest rates. Obviously, these are sophisticated buyers. They buy a lot of equipment. They tend to buy a lot of identical equipment, large volumes of the same product.

Jeffery Leonard: But I think they're just sophisticated enough that they know interest rates are coming and they can probably get a better price in a few months down the line. So I think they're gambling a little bit. But the simple answer to your question is no; we have not seen that yet.

Speaker Change: to staff their fleets around North America. But I think they're just sophisticated enough that they know industry trade is coming and they can probably get a better price in a few months down the line. So I think they're gambling a little bit. But the simple answer to your question is no, we have not seen that.

Speaker Change: All right. Could you share with us an industrial truck supply, chassis supply? Have you gotten enough for what you need recently or are you still waiting on a bunch of chassis for that business?

Jeffery Leonard: No, we have excellent news on the chassis front, Mike. First of all, and very interestingly, we've seen an uptick in the electrified chassis for our M6 electric sweeper. We had a very pleasant surprise from our supplier in terms of the number of those chassis they'll be able to deliver to us in the back half of the year. It's still a small number, but it's a more significant small number than it had been. That was a pleasant surprise.

Speaker Change: No, we have excellent news on the chassis front, Mike. First of all, and very interestingly,

Speaker Change: We've seen enough.

Speaker Change: taking the electrified chassis for our M6 electric sweeper.

Speaker Change: We had a very pleasant surprise from our supplier in terms of the number of those chassis they'll be able to deliver to us in the back half of the year. It's still small numbers, but it's a more significant small number than it had been. That was a pleasant surprise.

Jeffery Leonard: Also, we've been offered significant incremental chassis for the remainder of this year. And for 2025, it looks like we're going to get everything we asked for, and believe me, we asked for a lot. So, in short, while the allocations aren't completely over, there doesn't seem to be any restriction from what I can see on chassis. However, chassis mix still matters a little bit. There are large volumes of some chassis, and other chassis still remain constrained.

Speaker Change: Also, we've been offered significant incremental chassis for the remainder of this year, and for 2025, it looks like we're going to get everything we asked for, and believe me, we asked for a lot. So in short, while the allocations aren't completely over, there doesn't seem to be any restriction from what I can see on chassis.

Speaker Change: Now, chassis mix still matters a little bit. There are large volumes of some chassis and other chassis still remain constrained.

Jeffery Leonard: What's happening is the large over-the-road hauling companies are cutting back their purchases, and that's freeing up capacity with chassis suppliers, and they're trying to reallocate based on how many axles they have and the transmissions and so on, Mike. You can imagine how that plays. But we are very, very bullish about our supply chain situation for 2025 and for the back half of 2024 as well.

Speaker Change: What's happening is the large over-the-road hauling companies are cutting back their purchases and that's freeing up capacity with chassis suppliers And they're trying to reallocate based on how many axles they have and the transmissions and so on, Mike You can imagine how that plays

Speaker Change: But we are very, very bullish about our supply chain situation for 2025 and for the back half of 2024 as well.

Unnamed Analyst: Great. Thanks for that. Maybe one last one for me, and this is for Agnes, you know.

Speaker Change: Great. Thanks for that. Maybe one last one for me, and this is for Agnes, you know.

Agnes Camps: You haven't been at Alamo all that long, but can you give us your early thoughts, you know, as to what you've seen so far and what you might look to do to change or change in the financial operation or capital structure of the company or in the broader businesses out in the field?

Agnes Camps: You know, it hasn't been a long time for me, but I feel like I have never not been here, so it's been a really great few months. Alamo is set up very well, so from a capital structure perspective, we're very disciplined in terms of managing our funds, and we will continue investing in our operations, and Jeff alluded to that. So we have a number of capital projects that are approved and in the works to modernize our plans and to expand our capacity.

Speaker Change: You know, it hasn't been a long time for me, but I feel like I have never not been here, so it's been a really great few months.

Speaker Change: Alamo is set up very well, so from a capital structure perspective, we're very disciplined in terms of...

Speaker Change: Managing our funds and we will continue investing in our operations and Jeff alluded to that so we have a number of capital projects that are approved and and in the works to

Jeff Leonard: modernize our plants and to expand our capacity.

Agnes Camps: We are committed to returning capital to our shareholders, so we're really happy about the dividend that was approved just recently, and we'll continue managing our debt. I think we can reduce debt further and, of course, be ready for those acquisitions. We're already ready, so we're ready for the next one, and our balance sheet is pretty strong. In terms of operational excellence, there's a lot of collaboration between all of the management in our plans, and so that's very exciting. We have quite a lot going on at the moment.

Jeff Leonard: We are committed to returning capital to our shareholders and we're really happy about the dividend that's been approved just recently.

Jeff Leonard: And we'll continue managing our debt. I think we can reduce debt further. And of course, be ready for those acquisitions. We're already ready. So we're ready for the next one. And our balance sheet is pretty strong. In terms of operational excellence,

Jeff Leonard: There is a lot of collaboration between all of the management in our plans and so that's very exciting. We have quite a lot going on at the moment.

Jeffery Leonard: Just to add some color to that, we had a very active discussion about it in the boardroom this week, various capital allocation alternatives, and while we're not ready to announce anything yet, it's an active discussion because we are getting to the point where the debit on our balance sheet is very manageable. And Jeff's answer to that is, I plan to use that for M&A because our pipeline is looking particularly attractive right now, both short-term and longer-term.

Jeff Leonard: Yeah, Mike, I just had a comment on that.

Mike: Just to add a color comment to that, we had a very active discussion about that in the boardroom this week, various capital allocation alternatives, and while we're not ready to announce anything yet, it's an active discussion because we are getting to the point where the debt on our balance sheet is very manageable.

Jeff Leonard: and Jeff's answer to that is I plan to use that for M&A because our pipeline is looking particularly attractive right at the moment, both short-term and longer-term.

Speaker Change: Okay, well, that's great color. Thank you, Agnes. Thank you, Jeff. I'll pass it along.

Speaker Change: Thank you.

Speaker Change: The next question is from Mig Dobre with Baird. Please proceed.

Mig Dobre: Thank you. Thanks for taking the questions and good morning. I want to go back to the restructuring discussion. Hi. Just to make sure that I understand here, so you know you were saying ten million dollars worth of worth of savings and those are materializing in the second half of 2024.

Unnamed Analyst: So is that, what's the right way to think about it in terms of Q3 versus Q4? And I'm presuming that this is a year-over-year number in the way you're describing it. Is that the way to think about it?

Speaker Change: So, what's the right way to think about it in terms of Q3 versus Q4?

Speaker Change: And I'm presuming that this is a year-over-year number in the way you're describing it. Is that the way to think about it?

Speaker Change: So let me start answering this. So we started these actions already in second quarter and before that and so what we have so far is we've completed I called it a first set of actions.

Unnamed Speaker: And from this first set of actions, we'll have $10 million, maybe even a little bit more this year.

Mig Dobre: And from this first set of actions, we'll have $10 million, maybe even a little bit over this year.

Mig Dobre: Of that, we have a little bit already in second quarter, but we also have restructuring cost in second quarter. So when we look at the $10 million, that is really the impact in Q2 and Q3.

Speaker Change: We are working on more actions, so there are activities that will be going on in the third quarter. We cannot, we didn't announce that yet, so we can't talk very specifically about that.

Mig Dobre: and we have a number of activities in our plans. So as we complete those actions and those are announced, we'll let you know what the full year and how that shapes up for 2025 as well.

Unnamed Analyst: I just want to be very clear as to what this number means. When you're saying $10 million, is this a full-year run rate figure? Is this something that flows through the quarter? I mean, look, you know, it has an impact on the way we're kind of modeling the quarters. That's why I'm asking you.

Speaker Change: I just want to be very clear as to what this number means. When you're saying $10 million, is this...

Speaker Change: a full-year run rate figure? Is this something that flows through the quarter? I mean, look, you know, it has an impact in the way we're kind of modeling the quarters. That's why I'm asking.

Speaker Change: This is just the second half impact.

Speaker Change: and I would I would echo that as well make this is what we anticipate an improvement just in the second half of 2024

Speaker Change: which will carry into 2025 then, at least into the front half of 2025.

Unnamed Speaker: Yeah, well, Meg, Frankly, it's because most of the cost of the actions was actually incurred in Q1, not Q2.

Speaker Change: Yeah, well, Meg, frankly, it's because most of the cost of the actions actually were incurred in Q1, not Q2.

Speaker Change: And I think later on we will begin to publish that. But you know us, that's not our tradition to use adjusted EBITDA. We've just never done that and I frankly don't like it very much. I don't mind sharing what the costs were in dollars, but I don't like constantly adjusting EBITDA. That's just not our style.

Unnamed Analyst: Well, it would be helpful to know the cost, because if those are not recurring, that sort of allows us to have a cleaner base internally on how we're thinking about incremental margins or decrements. So if you can put that out, I think that would be helpful. Sure. And I'm sure we can do that on a follow-up call at some point. If I look at your orders, you know, your orders for the past, call it six months or so, have really been in this $150 million range, give or take, and the backlog is obviously coming down.

Speaker Change: You know us. We haven't done that in our history. That's just not who we are.

Speaker Change: Well, it would be helpful to know the cost because if those are not recurring that sort of allows us to have a cleaner base Internally and how we're thinking about incremental margins or decrementals So if you can put that out, I think that that would be helpful Sure, and I guess I'm sure we can do that with you in a follow-up call at some point. Thank you

Speaker Change: Okay.

Speaker Change: I do want to go back to a discussion that we've been having for a couple of quarters now in terms of, you know, the backlogs in vegetation management and what that implies for revenues going forward.

Speaker Change: If I look at your orders, your orders for the past, call it six months or so, have really been in this $150 million ranger, give or take. And the backlog, obviously, is coming down.

Speaker Change: So, I guess my question to you is if we do not see an inflection in orders in the second half of 2024 in vegetation, we remain in this range, let's call it 150-ish million range,

Speaker Change: At what point in time should we expect your revenues or your production to catch down to these orders? Should this happen in Q4 or do you think this is going to be more of a first half of 2025 occurrence?

Unnamed Analyst: I think that's probably more of a first half of 2025 occurrence, Meg. There are a couple of things I can share with you in terms of additional detail.

Speaker Change: I think that's probably more of a first half of 2025 occurrence, Meg.

Jeffery Leonard: The bookings in forestry alone did tick up a little bit, and we didn't signal a number, and I'm not going to, but they're actually up a bit, while the agricultural side of it continues to trend downward. So, net-net, that's what you see in the numbers. Also, the 12-month trailing order bookings for this division have been flat for the last almost six months, so I think we are either at or very near rock bottom here.

Meg: A couple of things I can share with you in terms of additional detail. The bookings in forestry alone did tick up a little bit, and we didn't signal a number and I'm not going to, but they're actually up a bit, while the agricultural side continues to trend downward. So, net-net, that's what you see in the numbers.

Speaker Change: Also, the 12-month trailing order bookings for this division have been flat for the last almost six months.

Jeffery Leonard: The final piece I can share with you is that in the second quarter, we had very few order cancellations at all, and we've had significant order cancellations in Q3, Q4, and Q1. Q3 and Q4 of 2023 and Q1 of 2024. So what you're seeing is sort of this firming up of the order book, which is a very positive sign. I think agriculture is going to be more challenged in terms of order run rates than forestry.

Speaker Change: So I think we either are or very near rock bottom here.

Speaker Change: The final piece I can share with you is that in the second quarter, we had very few order cancellations at all, and we've had significant order cancellations in Q3, Q4, and Q1, Q3 and Q4 of 2023 and Q1 of 2024. So what you're seeing is sort of this firming up of the order book, which is a very positive sign.

Jeffery Leonard: I'm anticipating, as I said earlier in the call, that with a little bit of help from interest rates, forestry is going to start to tick back up. As I said, bookings have already done that, but I think the order backlog will start to tick up as well.

Speaker Change: I think agriculture is going to be the more challenged in terms of order run rates than forestry. I'm anticipating, as I said earlier on the call, that with a little bit of help from interest rates, forestry is going to start to tick back up. As I said, the bookings have already done that, but I think the order backlog will start to tick up as well.

Speaker Change: understood that's that's helpful color in your in your actions though in the way you're kind of right sizing that the labor force is it fair to say that you are you are right sizing

Speaker Change: towards something closer to this kind of $150-$160 million revenue per quarter for this segment?

Speaker Change: I'm not sure I would say we're right-sizing toward that, but we're still taking very extreme measures to protect the bottom line.

Speaker Change: I'm not sure what normal will be. I think this market will certainly rebound. I mean, this is not a traditional number at all.

Speaker Change: But what certainly got my attention were the dramatic moves that the big OEMs in agriculture have taken over the past, let's say, two months. You've been following them and reporting on them very, very nicely. Thank you.

Speaker Change: which says to me the big ag OEMs are expecting this downturn to be a little harsher and longer than, say, the more cyclic downturns of the past. That got my attention and we are acting accordingly. So, hence the restructuring in North American agriculture to consolidate production there for the long term.

Speaker Change: But I will say, at least one of the facilities that we are going to vacate, we are not planning to divest. We're going to mothball that facility and put it on care and maintenance.

Speaker Change: So that if we see a resurgence of business, we can put that plant back into use very quickly. And as I said, another one of our facilities is going to be reconfigured for industrial products, where we see overwhelming demand at the moment, particularly in vacuum trucks.

Speaker Change: So we need to set up some additional production capacity there. So I think we've got a well thought out plan here, Meg. You know, I called the bottom once before and you told me I was wrong. And unfortunately, you were right. So I'm being a little bit more cautious this time and just sort of defending where the bottom might finally be. So.

Unnamed Analyst: No, I appreciate that. Everybody's crystal ball is a little cloudy these days, so I certainly can't relate to the challenge. But maybe one last question on vegetation management, really surrounding the decremental margins. In the first half, the decremental margins have been north of 40 percent.

Meg: No, I appreciate that and...

Speaker Change: everybody's crystal ball is a little hazy these days so I certainly can't relate to the challenge but maybe one last question on vegetation management really surrounding the decremental margins in the first half the decremental margin have been north of 40%

Speaker Change: And with the combination of cost savings that you have coming in the back half and the incremental pressure that we're going to see on volumes, what's the right way to think about decremental margins? And maybe this is a question for Agnes. I mean, how do you have modeled it internally?

Unnamed Speaker: A couple things to think about are the restructuring costs that we had between Q1 and Q2 that will not repeat in Q3 and Q4. So we have reported $1.7 million dollars here to date.

Agnes Camps: A couple things to think about is the restructuring costs that we have between Q1 and Q2 that will not repeat in Q3 and Q4. So we had reported 1.7 million dollars a year to date.

Agnes Camps: and the $10 million that we've reported is pure savings, basically split between Q3 and Q4.

Speaker Change: What I can't tell you more yet is, and we will once we have more information, but what I can't tell you more yet is on the additional actions that we're taking in Q3.

Jeffery Leonard: Yeah, Meg, let me add a little bit more color to that if I might. In terms of pricing, we're not seeing a lot of pricing pressure in forestry, to be candid with you. We are seeing some pricing pressure in agriculture, but it's not actually that significant. However, pricing really doesn't matter when there's no demand to speak of. So the actual cost-price margin is holding up very well. In fact, it actually ticked up just a little bit.

Speaker Change: Let me add a little bit more color to that, if I might. In terms of pricing,

Speaker Change: We're not seeing a lot of pricing pressure in forestry, to be candid with you. We are seeing some pricing pressure in ag, but it's not actually that significant. Pricing really doesn't matter when there's no demand to speak of. So the actual cost-price margin is holding up very well. In fact, it actually ticked up just a little bit.

Jeffery Leonard: But the underabsorption, and efficiency effects of this sudden reduction in demand are significant in this division because this division has large facilities. I said 1.4 million cubic feet of space in forestry and a smaller but similar number or similarly significant number in agricultural equipment. So the restructuring actions to consolidate that capacity will eliminate significant underabsorption. We started with people, but obviously people don't pick out the semi-fixed costs and facilities, people related to material handling and maintaining the plants, and so on. The only way you can capture those costs is to mop up all the facilities. So that's why there is an urgent need to consolidate production facilities, even beyond what we had anticipated in our strategic plan two years ago.

Speaker Change: But the under-absorption, the efficiency effects of this sudden reduction in demand are significant in this division because this division has large facilities, as I said, 1.4 million cubic feet of space and forestry.

Speaker Change: and all smaller, but...

Speaker Change: a similar number or a similarly significant number in agricultural equipment.

Speaker Change: So the restructuring actions to consolidate that capacity will eliminate significant underabsorption. We started with people, but obviously people don't pick out the semi-fixed costs and facilities, the people related to, you know.

Speaker Change: material handling and maintaining the plants and so on. The only way you capture those costs is to mop up all the facilities. So that's why the urgent need to consolidate production facilities, even beyond what we had anticipated in our strategic plan two years ago.

Speaker Change: understood. Final question on industrial equipment, and I guess two parts here. First, the impact from the strike, very helpful in telling us the sales and operating income.

Speaker Change: Do you anticipate you're gonna make that figure back in Q3, Q4, is that lost business or just deferred business? And then the second part of the question, on a margin front, really, really nice performance in Q2 despite the strike. So if...

Unnamed Analyst: If that's the case, that you can actually make back some of this lost revenue, should we think about margins maybe getting closer to 15% by exiting 2024? Thank you.

Speaker Change: If that's the case, that you can actually make back some of this lost revenue, should we think about margins maybe getting closer to 15% exiting 2024? Thank you.

Unnamed Analyst: I'll give Jeff's answer to that first, while I'm going to get back in a minute with a pencil here.

Unnamed Analyst: I think the margins will continue to rise in the industrial division. Yes, that $3.5 million or so that we signaled, $3 million plus of operating income, in fact,

Speaker Change: that is one time so yes you should get that back and I'm looking at the guy that runs that business right now

Speaker Change: and he's shaking his head up and down in a positive way.

Speaker Change: Secondly, we do have good price advantage, as you know in that space we compete with reputable companies who also like to make money, I've said that many times and I mean that to be complimentary toward them.

Jeffery Leonard: You know, right now there's very, very significant demand for all the products right across the portfolio in industrial. So the other thing that's happening is obviously the operating efficiencies there continue to improve.

Speaker Change: We are to the point now where effectively underabsorption is approaching zero.

Speaker Change: We had significant underabsorption in the second quarter related to the strike. That obviously goes away, but we are at the point now where we need to expand facilities. So, for example, we had previously announced a significant expansion of our facility in France that produces vacuum trucks.

Speaker Change: That's underway. A couple of our directors just went to inspect that a couple of days ago and see where we are with that. And as I said, we're going to reconfigure one of our vegetation management plants.

Speaker Change: to produce industrial products, which we can do relatively quickly. That's a way to also...

Speaker Change: a way to continue to employ people in that facility. So we are very bullish on industrial. I've said for a long time industrial could get to where it is now. That part of my prognostication came true, and I think there is still operating margin expansion potential in this division.

Unnamed Analyst: I appreciate it. Good luck.

Unnamed Analyst: Thank you. I appreciate it, Vic.

Unnamed Analyst: Appreciate it. Good luck.

Unnamed Analyst: Thank you. Appreciate it, Meg.

Speaker Change: As a reminder, if you do have a question, please press star then one on your telephone keypad.

Operator: The next question comes from Greg Burns with Sidoti and Company. Please proceed.

Operator: The next question comes from Greg Burns with Sidoti & Company. Please proceed.

Gregory Burns: Morning. The business that you mentioned that you're divesting or did divest, what kind of financial impact might that have, and are you looking at other opportunities?

Jeffery Leonard: Yeah. No, we really are not looking to divest other businesses at this point, Greg, and I can't say too much about this except that it's a very small part of the business.

Jeffery Leonard: products or businesses that you might be looking to divest? Yeah, no we really are not looking to divest other businesses at this point, Greg, and I can't say too much about this except it's a very small part of the business.

Jeffery Leonard: It's really not material to our financial results, so it's just one that's been lurking out there. It's a clean-up activity.

Jeffery Leonard: But we saw an opportunity to take care of it now at this point in the cycle and are going to do that. But we do have very significant consolidation actions being planned and underway.

Speaker Change: in the agricultural side of the business as well as in forestry and tree care. So those are the common. We will share the impact of those as we go. But again, those should not be revenue impacting. That should only impact operating margin in a favorable way.

Gregory Burns: Okay. The strong demand on the industrial side of the business, what are the primary drivers there? Is it just more federal dollars flowing to municipalities, and they're accelerating their upgrade cycles? How should we think about what's driving demand now and the durability of that demand?

Gregory Burns: Okay.

Speaker Change: And the strong demand on the industrial side of the business, what are the primary drivers there? Is there just more federal dollars flowing to municipalities and they're accelerating their upgrade cycles or, you know, how should we think about, you know, what's driving demand now and the durability of that demand?

Speaker Change: You know, Greg, the municipal side of this isn't really showing significant growth. It's holding at a very high level, is the way I like to describe it, which in an election year is a victory in and of itself. You typically can see pressure on these markets in an election year, particularly in the second quarter, and I've said that before publicly, so I think people know, at least I believe that to be the case.

Speaker Change: What is going on though is industrial demand for these products, so particularly a vacuum truck rental fleets are getting renewed at a very significant rate.

Speaker Change: And then finally, we're gaining some market in some of these businesses. We've had very good take-up on our new range of products in our sweeper group, particularly our electrified products have been launched with great acceptance.

Speaker Change: by the market. We've been pleased with that and as I said our vacuum truck demand is still rising so we need to expand capacity there. So it's more the industrial side and contractor side of this that's showing the sharp uptick in demand at the moment while governmental remains still growing, still growing at a nice rate, but you know sort of low single-digit growth in the governmental side right now and in an election year I'll take that all day long.

Speaker Change: What is the revenue split between industrial, municipal, and the industrial segment?

Speaker Change: Okay, I anticipated you might ask me that so this time for a change I'm actually prepared for that if you give me just a second.

Unnamed Speaker: Let's see, I can give it to you on a... at a corporate level. Let's do it that way. That's probably better.

Unnamed Speaker: Let's see, I can give it to you on a...

Unnamed Speaker: a corporate level. Let's do it that way. That's probably better.

Speaker Change: When you look at the revenue of the company through the first half of this year, approximately 12% is from snow removal.

Speaker Change: approximately 14% is from sweepers and safety equipment and approximately 22% or thereabouts from vacuum trucks and please don't press me to go farther my my general counsel has given me a cross-eyed look already so

Speaker Change: Okay. All right. Thanks. I'll leave it at that.

Speaker Change: And at this time, we are showing no further questioners in the queue. And this does conclude our question and answer session.

Speaker Change: I would now like to turn the conference over to the management team for any closing remarks.

Speaker Change: Okay, thank you, Operator. Before closing the call today, I'd like to express my congratulations and deep gratitude to Mike Haberman, Executive Vice President of the Industrial Equipment Division, who retires this month after more than 37 years of exemplary service with our company.

Speaker Change: Mike is a very good friend and an exceptional business executive who navigated his division through several very challenging years During and immediately after the pandemic and all of the supply chain challenges that followed I want to wish him a very well-deserved long healthy and happy retirement

Speaker Change: Mike is being succeeded by another extremely capable leader, Mr. Kevin Thomas, who has most recently been leading the Industrial Equipment Division's Excavator and Vacuum Truck Group, where he's produced outstanding results.

Unnamed Speaker: We wish Kevin many years of continued success in this expanded leadership role. Thank you for joining us today. We look forward to speaking with you on our third quarter conference call in November 2024.

Speaker Change: The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.

Unnamed Speaker: [inaudible]