Ladies and gentlemen, good day, and welcome to the Alamo Group Inc. Second Quarter 2022 Conference Call. Today's conference is being recorded. At this time, I would 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 (888) 203-1112 with the passcode 4806226. 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 Treasurer; and Dan Malone, Executive Vice President and Chief Sustainability Officer. Management will make some opening comments, and then we'll open up the line for your questions. During the call today, management may reference certain non-GAAP numbers in their remarks. Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release. Before turning the call over to Jeff, I'd like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of 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 and future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following: market demand; COVID-19 impacts, including operational and supply chain disruptions; competition; weather; seasonality; currency-related issues; geopolitical issues; and other risk factors listed from time to time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date. I would now like to introduce Jeff Leonard. Jeff, please go ahead.

Thank you, Ed. We want to thank all of you for joining us today on the call. Richard will begin our call with a review of our financial results for the second quarter of 2022. I will then provide more comments on the results. Following our formal remarks, we look forward to taking your questions. Richard, please go ahead.

Thanks, Jeff. Good afternoon, everyone. Alamo Group's second quarter 2022 concluded with strong performance and record results for the quarter, fueled by high demand for our products despite a challenging operating environment. Consolidated net sales for the second quarter of 2022 reached $396 million, an increase of 14% compared to $348 million in the same quarter last year. Sales were affected negatively by nearly 2.5% due to currency translation from the U.S. dollar's strength against the currencies of international nations where we operate. Gross margin dollars improved by just over $11 million compared to the second quarter of 2021, while gross margin percentage decreased only by 20 basis points. Both margin dollars and percentage were adversely impacted by inbound freight costs due to ongoing tariffs and surcharges on already high freight invoices. Consolidated net income for the second quarter of 2022 was slightly above $28 million, or $2.39 per diluted share, representing a 9% increase from net income of $26 million, or $2.19 per diluted share, in the second quarter of 2021. Effective cost and expense management contributed to the rise in profitability; however, the 2021 second quarter results included a one-time gain from the sale of a facility in the Netherlands amounting to $3.4 million. Excluding this gain, net income for the second quarter of 2021 was $23 million or $1.97 per share. The Vegetation Management division had an outstanding second quarter for 2022, fueled by exceptionally strong markets. Second quarter 2022 net sales reached $255 million, a 19% increase from $215 million in the second quarter of 2021. The division continues to see robust demand for forestry, tree care, and agricultural and governmental mowing products in North America and Europe. Margins during the second quarter for 2022 increased by 40 basis points compared to the same quarter last year despite supply chain disruptions and rising inbound freight costs. Income from operations for the second quarter of 2022 was just under $33 million, an increase of 45% from $23 million in the same period of 2021. Industrial Equipment net sales for the second quarter of 2022 totaled $141 million, rising by just over 6% from $133 million in the second quarter of 2021, mainly due to pricing actions and strong performance in North American excavators and vacuum truck operations. While truck chassis deliveries improved slightly this quarter, shortages of other component parts continued to significantly impact the division's operations, leading to unfavorable manufacturing efficiencies and lower absorption. Income from operations in the second quarter of 2022 was $8 million, a decline of 26% from $11 million in the second quarter of 2021. Consolidated net sales for the first six months of 2022 reached $758 million, up 15% from $659 million during the first half of 2021. Strong demand for our products in both of Alamo's divisions, along with effective pricing strategies, contributed to this increase. Year-to-date gross margins for 2022 rose by nearly $22 million compared to the same period in 2021, but margin percentage decreased by about 40 basis points due to inflationary pressures and increasing costs for materials, purchased components, and, to a lesser extent, raw materials and inbound freight costs. Net income for the first six months of 2022 was $47 million or $3.94 per diluted share, compared to net income of $44 million or $3.66 per diluted share for the first half of 2021, reflecting an 8% increase. Excluding one-time charges in both 2022 and 2021, adjusted net income rose to $48 million from $41 million, an increase of 17%. For the first six months of 2022, net sales in the Vegetation Management division reached $476 million compared to $399 million in the same period last year, reflecting a 19% increase. The division experienced strong demand across all product categories, especially in forestry and tree care, land clearing, and both governmental and agricultural mowing. Year-to-date 2022 income from operations was $51 million, a 30% increase from $39 million in the same period of 2021, with strong performance also noted from North American operations supported by favorable results in the U.K., France, Brazil, and Australia. For the first six months of 2022, net sales for the Industrial Equipment division were $282 million, compared to $260 million in the first half of 2021, marking an increase of nearly 9%. Sales of excavators and vacuum trucks led the growth, with some contribution from street sweepers and modest support from snow removal. For the first half of 2022, income from operations in this division was $19 million, down from $20 million in the same period of 2021, reflecting a decrease of 4%. This division faced challenges from constrained chassis deliveries, supply chain disruptions, and high input costs for materials and inbound freight, resulting in delays in the completion of manufactured units. Order bookings experienced a slight decline during the second quarter of 2022, resulting in a backlog of just over $894 million, which is a 78% increase compared to the backlog at the end of the second quarter of 2021. Excluding the impact of currency translation mentioned earlier, our backlog would have been higher. The backlog has also increased by 12% compared to the end of 2021. While we noted a slight softening in North American agricultural equipment, we anticipate this trend may continue moving forward due to inflation concerns. Moving on to additional financial details for the second quarter of 2022, our balance sheet remains strong. Working capital grew by $109 million to $559 million from $450 million at the end of Q2 2021. This increase in working capital was driven by higher accounts receivable and inventory levels. Accounts receivable rose nearly $307 million, up 21% from a year earlier due to a solid sales volume, and increased by 29% compared to the end of 2021. Inventory rose by almost $76 million compared to the second quarter of 2021, and is up $32 million compared to the end of 2021, reflecting increased work in process and material cost inflation, as well as our efforts to meet growing demand by acquiring higher levels of key components and service parts during this time of supply constraints. The increase since the end of last year is also reflected in somewhat higher debt levels. As supply chain issues begin to ease, we expect inventory levels to decrease, which will subsequently reduce our debt. Lastly, the company's trailing 12-month EBITDA stands at $173 million, a 7% increase over the full year of 2021. We anticipate strong cash flow for the remainder of the year as we focus on reducing inventory and debt levels. We will continue to exercise discipline in managing costs and expenses as we expect inflation to persist in pressuring our margins. We are also adjusting prices as required in response to changes in material and transport costs to maintain target margins. Our primary challenge remains meeting the heightened demand for our products across the company, given the current supply chain constraints. As in the first quarter of this year, the company has approved a quarterly dividend of $0.18 per share for the third quarter of 2022, which represents a 29% increase over the third quarter of 2021. With that, I will turn the call back over to Jeff.

Thank you, Richard. I'd like to thank everyone who joined us on the call this afternoon. In the second quarter, our major markets continued to perform well, and while orders received were at a good level, they saw a decline of about 7% compared to the second quarter of 2021, partly due to currency exchange effects. Our order backlog is strong with healthy margins, providing a solid foundation for our performance for the remainder of this year and into 2023. The second quarter continued a trend from previous quarters, as persistent challenges in our operating environment affected our results. These challenges included ongoing inflation in material and labor costs, high transportation expenses, supply chain disruptions, and sporadic impacts from another COVID variant on our workforce. However, I'm pleased to share that in the final weeks of the quarter, we noticed some modest improvements in certain areas of our supply chain, which enhanced the efficiency of our manufacturing operations and boosted shipments beyond our previous expectations. Our Vegetation Management division performed excellently across the board. The improvements in supply chain performance helped this division increase sales by nearly 19% and operating income by nearly 45% compared to the second quarter of 2021. Sales in North and South America rose sharply, while European sales remained stable at a high level, increasing in local currency. Better pricing, improved supply chain outcomes, and higher manufacturing efficiencies maintained the division's gross margin despite ongoing inflation in material and labor costs. The teams in this division did a fantastic job managing expenses during the quarter, further enhancing our results. However, order bookings for the Vegetation Management division declined 26% compared to the second quarter of 2021, although the backlog was 56% higher than the same point last year. The decline was influenced by the weakening of the euro, pound sterling, and Brazilian real against the U.S. dollar. It's also important to note that order bookings in the second quarter of 2021 were particularly strong, and we believe order rates are returning to a more sustainable level. Sales teams in the division have not raised concerns about market conditions and continue to report high activity levels. Our Industrial division faced more significant challenges in the second quarter, as its supply chain did not show the same improvement seen in Vegetation Management. Sales increased by 6% compared to the second quarter of 2022, primarily due to pricing. Operating income for the second quarter dropped by 26% as supply chain shortages significantly reduced manufacturing efficiencies, especially in vacuum truck and street sweeper operations. Although we received slightly more truck chassis than in the second quarter of 2021, the numbers have not yet returned to pre-pandemic levels. Shortages and delays of other essential industrial components, such as wiring harnesses and hydraulic fittings, constrained sales and disrupted production flows, negatively influencing gross margin. The second quarter traditionally experiences lower activity in snow removal businesses, and reduced efficiency impacted results in this segment. Additionally, we incurred nonrecurring expenses related to consolidating two U.S. manufacturing facilities and the snow removal business, which will be completed later this year. It was encouraging to see strong preseason bookings in our snow removal segment, suggesting improved results in the upcoming quarters. While the second-quarter results for this division fell short of our expectations, the outlook for the remainder of the year is much brighter. Order bookings increased by 26% compared to the second quarter of 2021, and the order backlog surged by 126% year over year. We are also seeing early signs of improvement in the division's supply chain performance expected in the second half of this year. Overall, we are very pleased that Alamo Group achieved the highest quarterly sales and earnings in its history during the second quarter, despite the persistent challenges we have discussed. Our teams have continued to find innovative solutions to problems arising from the pandemic and global supply chain disruptions, allowing the company to perform well. I'm extremely proud of our employees for their dedication and the many achievements that have led to these strong second-quarter results. Given the current volatility in the global economy and the potential for a recession, we are closely monitoring activity levels in our served markets. In agriculture, while sentiment among U.S. farmers regarding the future is declining, farm commodity prices and farm incomes remain historically high. Ag dealer inventories have begun to rise slightly, but they are not nearing pre-pandemic levels. Although the ag market may be moving away from its peak, the fundamentals of the farm economy remain favorable, and the short-term outlook stays positive. In our Forestry and Tree Care segment, although housing starts are down in North America, construction starts outside urban areas are increasing. This is promising for sustained demand for our forestry mulchers and brush chippers used for land preparation. Weather trends are another key factor for this segment. Extreme weather events, such as hurricanes and drought, heighten the demand for our products. Our Morbark tree chippers and other specialized road mobile machines are essential for removing downed trees and clearing drainage canals. Similarly, our vacuum trucks help address issues caused by wet conditions in municipal catch basins after storms. While we all hope to avoid extreme weather, it's a reality we face today, and Alamo Group products play a crucial role in minimizing impacts and aiding recovery. Lastly, activity in our governmental Infrastructure Maintenance segment remains robust and is expected to remain strong through 2022 and into the first half of 2023. While the municipal bond market faced pressure in the first half of this year, we anticipate better conditions in the second half, as municipalities continue to access capital at a relatively low cost. Overall, state and local governmental agencies are in sound financial health, and we see no signs of them reducing investments in maintenance fleets in the near future. In summary, while the long-term indicators for our markets may appear mixed at the moment, near and medium-term indicators suggest sustained positive momentum. Our solid order intake, strong backlog, and gradually improving supply chain give us confidence in Alamo Group's prospects for the remainder of this year and into early 2023. This concludes our prepared remarks, and we are now ready to take your questions.

We will begin with Chris Moore from CJS Securities.

Starting with the vegetation segment, it seems that dealer inventories are increasing slightly, although not to the levels seen during the pandemic. The order flow has slowed down. Does that indicate we might be approaching a peak in vegetation, or how do you view this situation at this point?

Okay. Great question, Chris. First of all, my remark about that was confined to ag, specifically. Vegetation Management remains strong. And although their orders were a little softer this quarter too, they had an exceptional first quarter. And actually, I think lead times tended to pull those orders forward a bit. And we're actually making the call today from our Morbark facility up in Wynn, Michigan. We've been with the management team all day, and it's a very bullish environment and attitude here at the moment. So our Forestry and Tree Care business looks really good. And on the ag side, to answer your question a little bit more specifically, the ag business is a cycle. What I'm looking at is things like the AEM tractor report, which shows the tractors under 100-horsepower down about 14% compared to last year, and that's the segment where we serve. So while other large ag OEMs are talking about fairly bullish conditions in ag, remember, they make the most money on the big iron, the big tractors, which is not our market segment. So I meant what I said. If you look at the crop prices and farm incomes, they're still pretty good, but farmer sentiment has been falling now for a couple of quarters that may just be emotional. But obviously, it's one key indicator we pay attention to. So I hope that's clear.

One other point to note is that 2021 wasn't a reliable indicator of orders due to a lot of pent-up demand. When we examine the orders in the agricultural sector that Jeff mentioned, they still exceed the pace of 2019.

And one last comment I'd like to make about that. If you look specifically at our Bush Hog business and our Rhino business, our mower business is in North America. They had an exceptional quarter, several quarters in a row, and a lot of that equipment hasn't yet been delivered to our dealers. So our dealers are hesitant to keep placing orders, particularly those that are sophisticated and realize that steel prices are falling. So rather than keep placing orders now, they're waiting for, I think, a little better conditions in the market, steel prices to come down and our surcharges to come down. And then I think ordering will return to a very, very normal level. So I'm not really that concerned. There's a couple of things in the key indicators to pay attention to. But so long as crop prices remain healthy and farm incomes are good, I think those are the main drivers of the market.

Got it. Very helpful. Maybe just in terms of kind of where we are from a margin perspective. Obviously, lots of room for improvement on the industrial side. It sounds like you think the second half of the year will be better than the first. The 12.9% vegetation margin, is that as good as it gets? Or is there room for expansion at some point there? How do you look at that?

I think there's going to be some room for expansion there, Chris, if you recall for Q3, that's a big quarter for us in part sales. So we'll have some margin pickup mainly from that. I think the other thing we're hoping for is that some of these costs, as Jeff had mentioned, raw material prices or costs have come down. But the component pieces that are being used for our attachments in there that require steel have not dropped. So you're still going to have some of that issue there. And I think we're a little bit still concerned and keeping an eye on inbound freight charges that we're receiving, so.

And that helps. And

I believe it.

Got it. And on the industrial side, there are clearly many challenges, similar to what we saw in Q2. Are you noticing any sequential improvement in the industrial sector?

Yes, this is Jeff speaking again. If you examine the full details of our profit and loss statement, which we don't publish, you would actually see that their pricing margins are higher. The cost of materials and standard costs are rising, but they are offsetting this through manufacturing efficiencies. This quarter has been particularly challenging due to disruptions in the supply chain, more than any other quarter during the pandemic from my perspective. While the chassis situation improved slightly during the quarter, there are now various other issues. I mentioned the shortage of joysticks; it's quite unusual to experience that, along with shortages of radiators which are typically easy to obtain. The division started the quarter strong but couldn't maintain that momentum due to supply chain issues, which took us by surprise. However, I've spoken with all the teams recently, and they feel optimistic about the latter half of the year. I believe their supply chain situation will improve, and I'm increasingly confident about that. Overall, I like where they stand for the remainder of the year. Additionally, regarding snow removal, the second quarter is typically the lowest point for our snow removal business, so we need to remain patient until the quarter concludes. We have received a significant amount of orders for municipal plows during this quarter, which positions us well for a strong winter season, particularly in Q4 and Q1 of 2023. I'm very positive about the direction of that division and expect them to get back on track quickly.

Got it. And very helpful. Last one for me. Just you talked about at the end of Q1, sequential growth in Q2 and at least into Q3. Given the kind of the very strong Q2 revenue, is it reasonable to think Q3 revenue is down a little sequentially? Or how are you looking at that now?

I think my personal guess is that Q3 is going to look a lot like Q2. That's how I feel about it. But the supply chain can always surprise us, Chris. I mean that's a day-by-day game. But given where we stand now with chassis deliveries improving, and we are seeing some encouraging news on chassis now for the first time in several quarters. I mean, genuine improvements in volumes, which we've not seen for a while. If we can get some of these other commodities sorted out, we've got a couple of quarters of good running. And I think that's consistent with the conversation you and I had at the end of the first quarter where I told you, if we got a little bit of relief in the supply chain, this company would be in for 2 to 3 quarters of really nice running. And I still feel that way.

Now moving to our next question, and that will come from Mike Shlisky with D.A. Davidson.

I wanted to ask about the sales and backlog growth. Can you provide any insight into how much of the year-over-year growth was due to pricing?

In the Industrial division, most metrics are up year-over-year, approximately 9%. A significant portion of this growth is attributed to pricing, likely around two-thirds. In contrast, the situation in Vegetation Management is quite different, with the growth being roughly evenly split between organic growth and pricing.

Great. I wanted to follow up on some of your comments you made throughout this call about chassis supply as well. You've made some internal efforts on chassis supply, both with trying to find new suppliers and other sources. Can you give us some kind of feel for how much do you think it's the efforts of your own team to very recently improved chassis supply and your efforts? Or how much is it just the overall supply chain for the trucks getting better and they're able to just ship better from there?

We've historically had one supplier that supplied the vast chunk, more than 50% of our chassis demands. And that supplier has been struggling a lot. And as I said at the end of the first quarter, we've diversified now. We now have three chassis suppliers supplying us to secure our future demands for chassis, Mike. But our core supplier is finally getting back on step. And that you've heard me talk about Daimler and Freightliner a lot, and their production situation is starting to improve, and they've assured us now with reasonable certainty that we're going to receive a few more trucks next year than we were originally expecting.

Got it. And then you don't always discuss it too openly, Jeff, but could you maybe give us some sense as to how things are going on, the new product development side? Any major divisions have anything big coming out either at the upcoming trade shows or for next winter or next spring?

Yes. We have a bunch of things in the fire. I probably mentioned a quarter or two ago, Mike, we started this technology center down in Huntsville to start beginning working in earnest on electrification. We expect to be showing what I've always called near-market-ready prototypes next spring. I think that's the timetable. So you're going to see a burst of things hitting the market next spring.

Moving on to a question from Greg Burns with Sidoti & Company.

In terms of the production constraints, how much idle capacity do you have? And how fast can you turn up production if the supply chain does start to get to normalize?

Well, I can tell you, we had a chunk of underabsorption in the quarter, Greg. So I mean, that's a pretty good indicator. We've got capacity available, particularly in industrial; they got hit pretty hard by underabsorption during Q2. We're in good shape from a manpower point of view, and we still have lots of our operations that are still running only half of a second shift. If you come up here to Morbark to this giant million-square-foot plant, there's a lot of capacity available up here. So I don't feel we're constrained in any way by our internal capacities at the moment with one caveat. And that would be another wildfire spread of COVID that knocked the workforce out again. We've just had sporadic rounds like everybody has, somebody gets sick and comes in, and we've got a department that needs to quarantine for a few days. But we've learned to live with that and manage our way around it. But if there really were another bad outbreak, that would change my outlook a little bit. But I don't feel we're internally constrained at all at the moment.

Greg, this is Richard. I think the other thing to keep in mind is our WIP is probably double what we normally carry. And a lot of that, we're getting so much start and stops. And as Jeff mentioned in his presentation, it's not the chassis; it's the pieces and the components that we need to complete the units. And we've carried way too much in there. We missed several million dollars worth of orders just in the last quarter we could have had if the supply chain had cooperated.

Okay. Great. Regarding some of the federal support programs for municipalities, particularly the CARES Act and its $350 billion in payments, have you seen any benefits from that? Is it reflected in your orders or backlog yet, or is that still something to be determined?

It is starting to show up in our order book, Greg, we had a really good quarter for sweeper bookings this quarter as several of our competitors also reported. Our excavator bookings are in good shape. That's also driven by things like the infrastructure bill. But I would say it's in the early stages. I think we're going to see more than we're seeing right now. I don't think a lot of that money has been spent, frankly, I just don't think anybody has really seen the impact of it yet.

And ladies and gentlemen, this does conclude your question-and-answer session. I'll turn the call back over to management for closing remarks.

Okay. That concludes the call today. We look forward to having you join us on our Q3 conference call when we expect to have more news to report to you. Thank you very much.

With that, ladies and gentlemen, this does conclude your conference for today. Thank you for your participation, and you may now disconnect.