Good day, and welcome to the Alamo Group First Quarter 2024 Earnings Conference Call. After today's presentation, there will be an opportunity to ask a question. Please note this event is being recorded. I would now like to turn the conference over to Edward Rizzuti, Executive Vice President, General Counsel and Secretary. Please go ahead.

Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at (212) 827-3746, and we will send you a release and make sure you're on the company's distribution list. There will be a replay of the call, which will begin 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1 (877) 344-7529 with passcode 9093220. Additionally, the call is being webcast on the company's website at www.alamo-group.com, and a replay will be available for 60 days. On the line with me today are Jeff Leonard, President and Chief Executive Officer; Richard Wehrle, Executive Vice President, Chief Financial Officer; and Agnes Kamps, Executive Vice President and Treasurer. Management will make some opening remarks, and then we will open up the line for your questions. During the call today, management may reference certain non-GAAP numbers in their remarks. Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release. Before turning the call over to Jeff, I would like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following: adverse economic conditions, which could lead to a reduction in overall market demand; supply chain disruptions, labor constraints, competition, weather, currency-related issues, geopolitical events and other risk factors listed from time to time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date. I would now like to introduce Jeff Leonard. Jeff, please go ahead.

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

Thanks, Jeff, and good morning, everyone. Alamo Group's first quarter of 2024 showed a solid performance with record net sales fueled by strong demand for our products in the Industrial Equipment division. Consolidated net sales for the first quarter reached $425.6 million, a 3% increase from $411.8 million in the same quarter last year. The gross margin percentage declined by 110 basis points, and gross margin dollars fell by just under $900,000 compared to the first quarter of 2023. The decrease in both margin percentage and dollars was due to under-absorption and productivity inefficiencies in the Vegetation Management division and, to a lesser extent, product mix in the Industrial Equipment. The operating margin for the first quarter was $47 million, compared to $49 million in the first quarter of 2023, reflecting a 4% decrease. Operating margin as a percentage of sales was 11% for the first quarter, down from 12% for the same period last year. Consolidated net income for the first quarter was $32.1 million or $2.67 per diluted share, a 4% decrease from net income of $33.3 million or $2.79 per diluted share in the first quarter of 2023. Our Vegetation Management division experienced a decline in total sales compared to the first quarter of 2023, with softness in both the forestry and agricultural markets due to inflation and the higher interest rate environment. Net sales were $223.7 million, down 13% from $256.4 million for the first quarter of 2023. We have been keeping an eye on dealer inventory levels, which are up but not at historical levels. The division's operating income for the first quarter was $21.7 million, nearly 10% of sales, but down 40% from $33.5 million, which was 14% of sales for the same period in 2023. This division reduced its workforce during the quarter at its larger manufacturing site while still nearly achieving 10% operating income, which is commendable. This also represents an improvement of 50 basis points compared to the fourth quarter of 2023. The Industrial Equipment division had an excellent quarter, with net sales of $201.8 million, up 30% from $155.3 million for the first quarter of 2023. This performance was driven by strong sales across all product lines, especially vacuum trucks, sweepers, debris collectors, and snow removal equipment. Although component part deliveries continued to normalize, there were still some late deliveries that impacted operations, but not as much as in previous quarters. This led to a significant increase in operating margin for the first quarter of 2024 to $25.3 million, just under 13% of sales, compared to $12.5 million, which was 8% of sales for the first quarter of 2023, marking over a 102% increase. The company's backlog at the end of the first quarter of 2024 was just over $831 million, down 16% from backlog levels at the end of the first quarter of 2023, yet still at a healthy level. Regarding our balance sheet at the end of the first quarter of 2024, it remains strong. Working capital increased by about $61 million compared to the end of the first quarter of 2023, mainly due to higher accounts receivable and, to a lesser extent, inventory. As anticipated, we had a slight rise in our credit facility, excluding repayment of intercompany loans at year-end. Our bank leverage ratio for the first quarter of 2024 was just over 1.3:1, down from 1.7:1 at the end of the first quarter of 2023. Finally, the company's trailing twelve months EBITDA was just over $246 million, unchanged from the end of 2023, which set a record. For 2024, we expect cash flow to remain healthy as we focus on reducing both inventory and debt levels. We will continue to manage costs and expenses carefully as inflation and interest rates likely persist in applying pressure on our margins. Supply chain deliveries and the reduction in freight costs will be a key focus for our company in 2024. In summary, the first quarter of 2024 met our expectations for Alamo Group. Sales increased by 3%, but margins and net income declined primarily due to weak market conditions in the Vegetation Management division. We are pleased that our Board recently approved a regular quarterly dividend of $0.26 per share, reflecting a 15% increase from $0.22 per share in the first quarter of 2023. Now, I'll turn the call back to Jeff.

Thank you, Richard. I'd like to add my personal thanks to everyone who's joined us on the call this morning. The company's first quarter results were broadly in line with our expectations, given the current dynamics of our markets. Net sales in the quarter established another all-time record despite the ongoing impact of higher interest rates, which are constraining activity, primarily in the markets for our Vegetation Management Equipment. The market for Alamo's forestry and tree care equipment has been the most impacted by the higher rates. Many commercial tree care contractors who purchase our chippers and stump grinders are family-owned small businesses that rely on third-party financing for their equipment purchases. Higher interest rates have affected these customers in the form of higher prices when they walk into a dealership as the dealer is forced to pass along their own higher financing costs. Then potential buyers are impacted a second time when they seek third-party financing to purchase a piece of equipment and incur higher finance charges to do so. The result has been increasing costing in the market with many buyers content to wait for lower interest rates or making a firm buying commitment. Dealers are implementing incentive programs in an effort to reduce inventory but are facing an increasingly reluctant cash-strapped pool of potential buyers. At the upper end of our forestry and tree care range, demand for our large industrial whole tree chippers and grinders is largely driven by waste wood recycling and biomass production. The United States and Canada are ranked #1 and #2 among the world's producers and exporters of wood pellet biofuel. North American pellet producers depend on logging and lumber production residues as primary sources of feedstock. Tighter residue supplies and higher prices have pressured the operating margins of North American pellet producers, causing them in some cases to postpone investment in new processing equipment. At the same time, dealer inventories remain elevated above contract levels during the first quarter. The agricultural equipment market is encountering similar dynamics. The combination of softer commodity crop prices and higher for longer interest rates constrained sales of ag equipment and other outdoor power equipment during the first quarter. After 3 solid years, well above the long-term average, inflation-adjusted U.S. net cash farming is expected to decline in 2024 by approximately 5% compared to the 2003 to 2023 long-term trend. U.S. 2-wheel drive tractor sales in the first quarter were down 13.4% compared to the first quarter of 2023, with tractors in the 40- to 100-horsepower class down 8% and tractors less than 40 horsepower down 17% compared to the first quarter of 2023. In the face of these headwinds, the Vegetation Management division reported net sales that were down 12.7% compared to the first quarter of 2023. The division's order bookings were 41% lower than in the same period of the prior year. Vegetation Management backlog declined by about 48%, primarily due to the combined effects of fewer new orders during the first quarter and cancellation awards during 2023, as previously reported. These were primarily in the forestry and tree category. Backlog also declined in the division's North American Agricultural Equipment Group that serves the hobby farm and ranch segment. In this group, both new orders and backlog declined year-over-year due to the combined effects of higher interest rates and higher channel inventory. However, we were encouraged that order bookings for our lower products began to show early modest signs of recovery in the final weeks of the first quarter. The slowing demand in these two groups adversely impacted absorption and efficiency in Vegetation Management's major manufacturing facilities. To address this, the division took actions to reduce production capacity at its largest U.S. facilities, and further actions will be taken as warranted moving forward. In addition, the division initiated the closure of a facility that produces spare and wear parts for classic agricultural equipment. The benefits of these actions will begin to be evident in the company's second quarter results. Sales of Vegetation Management equipment to governmental agencies was a notable bright spot for this division in the first quarter. The division's governmental mowing businesses in North America, Europe, and the United Kingdom continue to perform well and at a brisk pace. Both sales and backlog remained elevated for this part of the business, and market activity remains bullish. But with this division's larger business groups facing strong headwinds that drove sales lower, Vegetation Management operating income declined 450 basis points, and EBITDA also moved 380 points lower compared to the prior year first quarter. On a sequential basis, the division's operating income improved by nearly 10%, and operating margin improved by 500 basis points compared to the fourth quarter of 2023. Our Industrial Equipment division had an excellent first quarter. State and county governments remained on a solid fiscal footing as they entered 2024. Forecast declines in state revenue for 2023 did not materialize, and many states continue to report budget surpluses last year. At the municipal level, the situation was somewhat more nuanced as a number of American cities struggled with the cost of caring for rapidly growing migrant communities. However, governmental markets for the division's products remained very strong during the first quarter across the board, and both quoting and ordering activity remained historically elevated. Against this backdrop, Industrial Equipment division net sales improved by 30% and backlog rose 17% compared to the first quarter of 2023. The division's order bookings improved by over 25% compared to the first quarter of the prior year and were its highest quarterly bookings ever. All of the division's product groups reported higher sales, strong ordering activity and higher backlog. Non-governmental markets for Industrial Equipment also remained strong on the back of the continued durability of the North American economy and mildly aided by the stimulus effect of the recent Federal Infrastructure Investment and Jobs Act. Efficiencies improved in the division's primary production facilities as the pace of production increased with very strong momentum across all of its product groups. Industrial Equipment division operating income improved 440 basis points, and EBITDA improved 410 basis points. On a sequential basis, this division's operating income improved slightly by 1%, and its operating margin improved by 20 basis points to 12.5% of sales. Turning our attention to the company's operations more broadly. Supply chain performance in both divisions continued to improve during the first quarter, although a few challenges remained. Truck chassis deliveries continue to be somewhat constrained by shortages of chassis frame rails, which again impacted production for nearly all of the truck chassis OEMs. A shortage of Allison transmissions due to production disruptions late in 2023 and a shortage of transmission control modules further held back medium-duty truck chassis deliveries during the quarter. Costs for raw materials and industrial components stabilized during the quarter and were another bright spot. Steel prices remain volatile, but generally trended slightly downward during the first quarter and have declined significantly since peaking in late 2021. Skilled labor availability, which has been very challenging in most areas where the company operates since the onset of the pandemic, has now improved in many areas, and this is helping to improve productivity. We were obviously extremely pleased that through the determined work of our teams, both of our operating divisions were able to sequentially expand their operating margins relative to the fourth quarter of 2023. Regarding our outlook for the second quarter and the second half of 2024, we believe that the market conditions that we encountered in the first quarter, both negative and positive, are likely to persist. The headwinds that confronted us in Vegetation Management in the first quarter are not likely to meaningfully abate until inventory declines and interest rate reductions are announced. Until then, we'll continue to collaborate closely with our dealers to incentivize retail sales and reduce inventory by doing so. While we expect sales growth to continue, we anticipate that the pace of growth will be somewhat more modest for the next several quarters. We will continue our determined actions to reduce costs and further simplify our structure through additional facility consolidations. Finally, we will not hesitate to further adjust our capacity as needed to match future demand on a timely basis. It's worth noting that our balance sheet strengthened during the first quarter as total debt net of cash declined nearly 24% to its lowest level since we acquired the Morbark business in 2019. Our balance sheet positions us well for what we believe will be a more active year for M&A, and we are optimistic about our M&A pipeline as we have more actionable opportunities than we've seen for the past couple of years. In summary, while the next couple of quarters are expected to be challenging, we expect favorable development of the company to continue, albeit at a somewhat more modest pace for the remainder of 2024. We will continue to execute our strategy to grow the company at an attractive rate while expanding operating margin. Before closing my remarks today, I would like to thank our customers, dealers, suppliers on thousands of exceptional employees, and our financial stakeholders for their continued support of the company. This concludes our prepared remarks. We're now ready to take your questions.

We will now start the question-and-answer session. The first question comes from Chris Moore from CJS Securities.

Maybe I'll start. Vegetation EBIT margin 9.7%, down significantly year-over-year, up a little bit sequentially. You mentioned actions to protect the margin. Can you stay around the 10% level for the balance of '24? Or is visibility just not there to make that happen?

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

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

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

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

Got it. You mentioned there are still a few lingering issues with the supply chain. Are you concerned that, from your perspective today, there might be reasons to believe that things won't continue to improve marginally, or could they potentially go the other way? I'm just trying to gauge how much visibility we have.

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

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

Can you maybe kind of remind us what percentage of your business serves the public sector or service private players that serve the public sector? I'd imagine that group of customers are seeing fewer problems than the private sector. It sounds like you actually said almost anything that's public sector is doing pretty decently. I think private is a little more challenged.

It's still, I think, what we've said before. It's roughly between 20% and 25% of that is from hobby farmers and ranchers. The remainder comes from industrial and governmental sectors. I'm sorry?

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

I believe we are in the range of 20% to 25% in that area we discussed. The remainder is divided between governmental and industrial sectors.

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

Got it. I appreciate it. Can you tell us a little bit about the health in your dealer network, especially the dealers that mainly serve the private sector? My guess is a lot of those are simply ag dealers or larger brand dealers that make the prime mover. Just want to make sure that you're not seeing dealers unable to even take inventory at this point.

Actually, we're not, Mike. We haven't seen any pressure on our accounts receivable. We had 1 large Forester dealer last year that we bought out that was going to go insolvent and returned quite a bit of inventory to us. That was one of the large cancellations I mentioned on the call. That dealer has since gotten back on speed and is ordering some equipment from us again. So that's been a positive move. I mean, obviously, dealers are being very cautious right now, Mike, you know that because you track the space closely, but I don't see any that are under particular duress and like in any probability to fail at this point.

Got it. I have one last question. In the first quarter, a large machinery company, larger than Alamo and serving areas like quarry and aerial work platforms, launched its own line of vegetation management equipment, including mulchers and chippers. I'm unsure if their pricing overlaps with ours, but they asked if we had heard about it, and I wanted to check for any overlap. In the past, I wouldn't have been concerned about a startup trying to compete with Morbark or other Alamo brands, but this is a significant and well-funded company. Could you provide some insights on the strength of the Morbark brand, your distribution network, and customer base? Do you have any strategies to defend your market share if this brand begins to gain traction?

Mike, I'm pretty confident. I know that brand you're talking about, and we know those products very well. That product line needs a significant refresh that it hasn't received yet, not ours, the competitors. So we don't see any short-term threat from that at all. As far as the strength of our dealer network, we have long-term loyal dealers at Morbark that have been with us a very long time and are deeply invested in the aftermarket business related to those machines, which is where most of the money is made. Those big machines are long-lived. They run 15, 20 years. So the parts revenue stream runs a long time, which is a fairly big barrier to switching for any large dealer in the space. So no, I'm not particularly concerned about that. We know that company well. They've always been that this is not a new thing in a sort of refreshing their space a little bit.

The next question comes from Mig Dobre from Baird.

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

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

$15 million, okay, appreciate that.

That's the sales contribution, give you the sales for $15 million.

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

Yes, yes, yes. And Jeff, you spent quite a bit of time on the whole supply chain issue and chassis and so on. And I was kind of hoping that we'd be done having these kinds of discussions, but apparently, we're not.

Yes, we, too, Mig.

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

Yes, the short answer is that, yes, we would have been able to get more revenue out in the quarter. The key issue of these frame rails for the truck. I've mentioned before, as you can certainly talk with Daimler and the other big guys about it. They all share our common supplier in Mexico who's been having production problems for a long time. It is getting better, though, for sure. And we've got quite a bit more chassis during the first quarter than we did during the fourth and the third of last year. And for a year, once the chassis supply situation improved, Industrial would really hit its stride and is doing that. So I don't want to say there are no constraints, but I also don't want to say these are problems we've been living with for a while, and they are steadily improving. The Allison transmission has also presented another issue related to quality problems and shortages.

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

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

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

I'm curious and I apologize for pressing you on this because there is a pricing aspect to consider. Backlog likely has a pricing advantage. If you're suggesting that you can achieve at least high single-digit growth, does this truly indicate any significant volume growth from your plans? Perhaps some, but it doesn't seem substantial. I'm wondering why there isn't more leverage in that area.

Well, I mean, I think that we're still having to just kind of pace the build in our plants. I mean we're building at a rate that actually is a very attractive rate right now. And that has the added effect of improving the efficiencies across those operations.

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

I appreciate all the detail here. You touched on some of the questions I've had regarding capacity. Are you currently operating at full capacity, and are you experiencing challenges in increasing the output from the plant? While you have a strong backlog, there may be constraints in other areas. That’s what I was trying to clarify.

We're not. But there's a lot of moving pieces right now. As we've mentioned in previous quarters, we closed our sweeper plant out in Washington State, and we moved that production into our Wisconsin plant, which is our main plant. There, that's getting settled down now, and that production is starting to ramp up very nicely. So we are moving things around within the company that's causing us to see some delay in the revenue. I think the revenue build that you're expecting to see. But I still like the direction in industrial right now. It is looking really, really positive and all parts of that division are running very well at the moment.

Understood. I do want to ask a couple of questions about Vegetation Management. And as you discussed here, there's still channel inventory that has to be worked through. But it sounds like you're highlighting some things like interest rates, for instance, that who knows what the path is going to be on a go-forward basis. So I guess my question to you is that if nothing changes, if nothing changes in the broader macro environment. How are you thinking about your production and your revenue in this segment for the rest of the year? Is Q1 a $223 million high watermark, and we should be seeing a gradual sort of production decline here to destock the channel? Or are you thinking differently?

Mig, that's a great question. I think as you look at it piece by piece, and I'm going to slice it here because it's the only way I know how to answer your question. I think that we're going to see the large end of forestry recover sooner because there's a need for those machines. And again, the fundamentals in that business remain pretty positive. We have the only negative feedstock side that I gave some color on during the call, and we're starting to see some rebirth in that business already. They had to put into the first quarter. As to our mower business, our traditional mower business, particularly our bush hog business, had a very nice first quarter and a nice end to it as well. So that's coming back. But some of our other brands particularly in the ag space are still struggling a lot with excess channel inventory that you know that story as well as I do. So as I think about how vegetation revenue is going to be going forward, a lot depends on whether the orders continue to flow in at least the same pace that we saw in Q1 for the next couple of quarters. We have a couple of quarters where the backlog in that space. And if we're going to hold on to that level of backlog, which is a very traditional level for that division from a long-term point of view, that I think the revenue will be stable. If the orders don't flow in the second quarter and in third, then I think you're going to see a tapering of revenue in that division until we conclude the channel inventory out but it's not going to be a collapse given the backlog that we have there. Again, the order rate in parts of that business are already picking up. So it just depends a lot on how the next few weeks shape up in terms of the order book, particularly in the hobby farm and ranch segment, from my point of view.

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

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

Yes, what we're doing, Mig, is what we've been doing for a couple of quarters, offering retail incentives to our customers will walk into a dealership and buy a piece of equipment, which works pretty well in the ag side of the space. And while I was a little uncertain whether that was going to pay off from the actions we took last year, we did see that bump-up in orders in our Bush Hog division in the first quarter, and they actually produced a very, very nice first quarter from my point of view at a very historical level of both revenue and profit. So that was positive. We just have to do that now across some of the other brands and see if we can get the same impact. Bush Hog is an iconic brand, as you know, Mig, so it's natural that we would see the biggest uplift. Some of our other brands are probably not going to see the same immediate lift in both orders and backlog from those incentives. But that's the tool that we have, right, because we have to do the channel inventory. You know that and I know that. We have to clear that in order to get to better running, reordering and a rise in backlog.

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

Understood. Final question for me. Going back to the discussion that you had earlier with Mike on the government exposure that you have. I'm kind of curious as to how you guys are thinking about funding in that sector more broadly. I mean, we're coming off a couple of really strong years here. Do you think this is sort of sustainable as we think about '24 and into '25 here in terms of the set of customers continuing to be well-funded and continuing to order? Or should we kind of temper our expectations at some point to some degree?

Obviously, at some point, Mig, there's going to be an ease of temper expectations because we're coming out of a series of very extraordinary circumstances following the pandemic and all of the federal level incentives that have been put out there. But before joining this call and before writing my comments and my remarks, I took a pretty deep dive into where governmental finances are right now. And when you look at it, at least in the U.S. the states are in very, very good shape. They're in a very strong condition and they're going to continue to invest. I'm quite certain of that. The municipalities are more mixed. Some of the bigger cities are incurring lots of costs related to resettling immigrants. So you know that you read the news same as I do and they're under some fiscal pressure as a result of that. But remember, most of their funding comes from housing costs, property tax. And housing is not stumbled at all. In terms of prices coming down. Now obviously, that's going to sustain municipal income at a traditional level for a long time. So I think you will eventually see in paper. I certainly don't see it coming this year, Mig. I think we're into strong running all through 2024 on the governmental side of our business and the tapering may come in 2025.

The next question comes from Tim Moore from EF Hutton.

All right. I want to wish Richard, the best of retirement and time with his family. So it's great and a straight shooter, which was really helpful for investors. And maybe I'll start with a question for Jeff. On Industrial Equipment, as you look out on this division and historically, it wasn't too long ago, the operating margin was higher, and you've done a great job getting it back to close to that. But what do you think is kind of a realistic operating margin ceiling looking out to maybe next year without giving formal guidance, if there's no recession, do you think it can do a 13.5% op margin next year?

Yes. I do, Tim. Confidently, yes. I think that when you look at our most notable competitor, name I won't mention, and the oft-mentioned references to their higher operating margins. If you actually do a side-by-side to us and we allocate our corporate costs out to our two divisions, as you probably know, our most of it, our main competitor is not. So when you correct for that, we are neck and neck in terms of operating income as a percentage of sales, right neck and neck. So I think we are running very well right now, and I do believe there's further opportunity to expand the margins in that group for sure because there's still some inefficiencies there that will pick up as the volume continues to build.

That's great. Yes, I was doing some of that math myself, and it seems like the ceiling is not as close to what you currently have, which is good news. Switching topics, I'm considering other factors that could influence operating margins. Hopefully, the supply chain will improve overall, and sectors like farming, hobby, and agriculture will return to normal. Now, regarding your initiatives in Europe, how is the progress on reducing costs by minimizing the need to ship heavy machinery from the U.S.? Is the focus primarily on forestry, landscaping, and sweepers?

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

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

It went up pretty nicely during the quarter. We expect that to continue all through the year. I think we run 17 or 18, something like that in Q1. And we do plan to open a couple of additional rental locations this year. We've got those pretty well mapped out and know where we're going. So yes, I think we're going to have very nice growth in the rental space from super products during this year. Our expectations, Tim, are to get north of 300 units out there, and I think we closed the year roughly 210, 215, 217 units, something like that.

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

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

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

That's remarkable compared to just three years ago. Brian, I have a clarification question to ensure I understood your previous comments. Regarding the high single-digit sales growth, I recognize you were impacted by the strike. However, considering the Royal Trucking acquisition anniversary in early October, it seems that would contribute about 8% to 9% sales growth each quarter. Am I on the right track, or are you possibly being a bit conservative?

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

The uncertainty isn't around industrial at all. It's in Vegetation Management. We're waiting to see how the orders flow in the second quarter. If the orders pick up nicely, then I can be more optimistic about sales growth for the rest of the year. But we just don't know as we sit here today how that's going to play out. On product, if we see some positive signs right at the end of the first quarter in terms of how that business develops. But I don't want to confidently say we've turned a corner there yet because I don't believe we have.

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

Thank you very much. Before closing the call today, I would like to express my deep gratitude to our Executive Vice President and Chief Financial Officer, Mr. Richard Wehrle, who retires today after more than 36 years of service with our company. Rich is an exceptional colleague and a great friend, who's been extremely instrumental in the positive development of this company since its earliest days. While I will certainly miss him, I want to wish him a very well-deserved, long, healthy and happy retirement. And I will miss him very much. Agnes Kamps will take over the reins as our CFO for today and will join us on our second quarter 2024 conference call in August to present our results and to take your questions. So we look forward to that. Thanks again one more time for joining us today. We look forward to speaking with you on our second quarter conference call in August 2024.

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