Alamo Group Inc Q2 FY2024 Earnings Call

Good day, and welcome to the Alamo Group Inc. Second Quarter 2024 Conference Call. After today's presentation, there will be an opportunity to ask questions. Please note that today's event is being recorded. I would now like to turn the conference over to Edward Rizzuti, Executive Vice President, Chief Legal Officer and Secretary. Please go ahead, sir.

By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at (212) 827-3746, and we will send you a release and make sure you are on the company's distribution list. There will be a replay of the call, which will begin 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1 (877) 344-7529 with the passcode 251-4245. 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; and Agnes Kamps, Executive Vice President and Chief Financial Officer. Management will make some opening remarks, and then we will open up the line for your questions. During the call today, management may reference certain non-GAAP numbers in their remarks. Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release. Before turning the call over to Jeff, I would like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following: adverse economic conditions, which could lead to a reduction overall market demand, supply chain disruptions, labor constraints, competition, weather, seasonality, currency-related issues, geopolitical events and other risk factors listed from time to time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date. I would now like to introduce Jeff Leonard. Jeff, please go ahead.

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 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 continue to put pressure on the results from the Vegetation Management Division. I would now like to turn the call over to Agnes who will take us through a review of our financial results for the first quarter. I will then provide additional comments on the results and say a few words about the outlook for the third quarter and the balance of 2024. Following our formal remarks, we look forward to taking your questions. Agnes?

Good morning, everyone. Alamo Group's second quarter concluded largely as anticipated. We faced some challenges in the Vegetation Management market, and we completed the first set of actions to rightsize the operation and position this division for improved performance. On the bright side, industrial equipment exhibits promising developments that underscore our strategic growth initiatives. Reviewing the second quarter of 2024, we are mindful that we are comparing that against the strongest quarter of 2023. Here are some figures that highlight our performance. Net sales were $416.3 million, a decrease of 5.5% versus the second quarter of 2023. 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. Gross profit for the second quarter of 2024 was $108.2 million, or 26% of net sales compared to $118.1 million, or 26.8% of net sales during the same period in 2023. The decrease of $9.9 million was due to lower volume in the Vegetation Management Division and the 5-week strike in the Industrial Equipment division. SG&A expenses were $960,000 higher than the second quarter of 2023 due to the Royal Truck acquisition. Any inflationary impacts were offset by cost reductions. As a percentage of net sales, SG&A was 14.4%. As a result of 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. Interest expenses were $6.1 million compared to $6.8 million in the second quarter of last year, primarily due to lower debt levels. The provision for income tax was $9.3 million, which is lower than the second quarter of 2023 of $10.5 million. The effective tax rate was 24.8%, an increase compared to 22.3% last year due to a different mix of U.S. and foreign income and a nonrecurring tax refund in 2023. These results bring us to consolidated net income for the second quarter of $28.3 million or $2.35 per diluted share. In the second quarter of 2023, consolidated net income was $36.4 million or $3.03 per diluted share. The year-on-year deviation was due to the strike and lower revenue. A few words regarding our divisions. The Vegetation Management Division net sales were $211.5 million, representing a 9.1% decline versus the second quarter of 2023. While forestry, tree and agricultural markets are down, the governmental side of the business continues to show nice growth. Operating income for the Vegetation Management Division was $60 million or 7.6% of net sales impacted by the lower revenue and an increase in costs. We will discuss our improvement actions later in the call. The Industrial Equipment division delivered growth of 14.2% compared to the second quarter of 2023 with net sales of $204.8 million. We experienced continued strong demand for our industrial equipment across all groups. 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 the second quarter of 2023. Allow me to also summarize the first half of the year. Year-to-date net sales were $841.9 million, a small 1.2% decrease versus the prior year. While the Vegetation Management Division declined by 16%, the Industrial Equipment Division grew by 21%. Gross profit was $219.8 million or 26% of net sales, representing $10.8 million or 94 basis points below prior year. SG&A expenses were $121.4 million, $1.9 million higher than the previous year due to the Royal Truck acquisition. Operating income was $90.3 million or 10.7% of revenue, a decrease of $13.1 million and 141 basis points. Net income was $60.4 million, $9 million below prior year. Year-to-date, net income includes restructuring costs of $1.7 million. The labor strike in the Industrial Division affected us by approximately $9 million in sales and a bit more than $3 million in profit. Let's review other financial items for the second quarter. Our balance sheet remains healthy. Working capital of $700 million increased compared to December 2023 due to higher cash and cash equivalents and the 21% growth in the Industrial Equipment Division. Working capital in the Vegetation Management Division is decreasing in line with revenue and specifically inventory reduction actions. Operating cash flow for the quarter was $34.3 million. In the second quarter, we reduced total debt by another $28 million. Total debt net of cash was $175 million versus $236 million in June 2023, which represents a $60 million or 26% reduction. We continue to focus on working capital and cash flow and expect our balance sheet to remain robust. Finally, trailing 12-month EBITDA ended at $236.6 million or over 14% of net sales. Looking ahead, as the vegetation markets remain weak, we will continue our improvement program to protect our profitability and cash flow. The actions we have already taken, including reductions in force of 7% globally, are expected to result in $10 million in savings in 2024, net of additional restructuring costs. Jeff will discuss further details. To conclude, we are pleased that the Board has approved a regular dividend of $0.26 per share for the second quarter of 2024. Thank you. I will now turn it back over to Jeff.

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. Net sales for the quarter reflected the recent divergence of momentum and activity between our industrial equipment and Vegetation Management segments. Consolidated net sales declined by 5.5% versus the same period of last year. Operating income was slightly in excess of $43 million, driven lower by the combined effects of the 5-week strike at our Gradall facility, general weakness in Vegetation Management, and the associated impact on operational efficiency in several of the company's larger production facilities. Consolidated second quarter order bookings of $344 million were up 5.5% versus the same period last year. Industrial Equipment orders were nicely higher, while orders for Vegetation Management equipment were essentially flat. Consolidated order backlog declined 14% compared to the second quarter of 2023, but still represents a very reasonable 2 quarters of sales at the current pace. 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. Taking a deeper look at the Industrial Equipment segment, market activity across the governmental and industrial markets remained buoyant during the quarter. Net sales were 14% higher than in the second quarter of 2023 and established a new all-time record for this division. Profitability was also strong. Operating income rose nearly 45% compared to the second quarter of 2023, and EBITDA exceeded 16% for the quarter. These outstanding results were achieved despite the previously announced 5-week strike by unionized workers at the division's largest manufacturing plant in April and May. This work stop has trimmed the division's second quarter net sales by nearly $9 million with a more than $3 million associated reduction in operating income. It's worth noting that the new collective bargaining agreement in that facility spans 5 years and thus provides us with future stability and confidence to continue to invest in production modernization. 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 9 months of sales at the current pace, and thereby positioning this division to continue to provide solid growth and profitability well into 2025. Our sweeper and safety group led the way with solid baseline organic growth, further supported by a strong contribution from the Royal Truck business we acquired in the fourth quarter of last year. Our snow removal group also produced nice sales growth and improved profitability. This was a pleasant surprise as the second quarter is normally seasonally softer in that business. 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. All in all, it was a very strong quarter for our Industrial Equipment division in all respects despite the setback of the lengthy strike. The company's Vegetation Management Division had a challenging second quarter as its forestry, tree care, and agricultural markets remain soft following the unprecedented surge of activity in the aftermath of the pandemic. Channel inventories remained elevated, although progress was made to reduce them. The division's second quarter net sales declined 19% compared to the second quarter of 2023, which significantly was the all-time historical quarterly sales peak for this division. The decline was most notable in its forestry and tree care and agricultural equipment groups. Solidly higher sales of mowers and associated equipment to governmental agencies were a bright spot for this division during the quarter. Although pricing exhibited sustained durability, lower sales adversely impacted efficiencies and compressed operating margin. Second quarter net income declined 55% compared to the same period of 2023 and resulted in EBITDA of just over 11% for the quarter. New orders worth $218 million were booked during the quarter, the same level as the second quarter last year. Sales of the division's flagship industrial wood grinders and shippers remain constrained by the combined impact of the persistent softness in housing and commercial construction, high channel inventories, and elevated interest rates. Higher interest rates and a slower start to the 2024 storm season also caused some of the large national free care accounts to postpone expected fleet renewal and expansion orders. 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. 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 of the agricultural market is gradually improving. The Association of Equipment Manufacturers or AEM reported in June the dealer inventories of small, less than 40 horsepower tractors declined by 12%, while inventory of tractors greater than 40 horsepower but less than 100 horsepower declined 5% in the first 6 months of this year. Also, the persistent drought in many parts of North America is easing, and this bodes well for the harvest this year. To address the impact of the slowdown in Vegetation Management during the second quarter, we continued to take decisive actions to streamline our operations and reduce costs. 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. Part of the freed up manufacturing capacity will be redeployed to the production of industrial products to meet the growing demand in that division. In addition, we're pursuing a divestiture of one of our smaller North American agricultural businesses. 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. Regarding the outlook for the third quarter and remainder of 2024, we believe that the market trends that we encountered in the second quarter are likely to persist, 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. We do not anticipate the headwinds in Vegetation Management to meaningfully abate until channel inventories return to more normal levels and interest rate reductions are announced. Until then, we will continue to further adjust our capacities and cost structure while we collaborate closely with our dealers to motivate retail sales and thereby reduce inventory. On the other hand, we expect the Industrial Equipment Division to continue to produce solid results, solid sales growth, and further improvement in profitability for the remainder of 2024 at least. 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. Looking further ahead into 2025, we expect to return to stronger organic growth, more akin to what we've historically enjoyed. 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. Finally, given how active our M&A pipeline is at the moment, we are optimistic that we can leverage our strong balance sheet to accelerate inorganic growth as well. 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.

Thank you. We will now begin the question one. At this time, we will pause momentarily to assemble our roster. And today's first question comes from Chris Moore with CJS Securities.

Let's start with vegetation. As you've discussed, channel inventories still remain above optimal levels. Can you give any relative sense as to just how overstocked they are?

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 of all products in agriculture. So obviously, we're a short liner in that space. And as the dealers come under pressure on their balance sheets, the pressure exerted on them by the bigger OEMs becomes more intense, and we gradually get squeezed, meaning we have less space than the overall inventory of the dealers. We believe and we've been able to track through our AR accounts. The inventory is down about 10% to 15% at this point compared to the peak, but it's still got a long way to go. And obviously, the dealers are still trying to deplete their balance sheet. So that's my best estimate. That's the best I share with you.

That's fine. That's helpful. It seems almost likely at this point that we'll get maybe a small rate cut or 2 in the second half. Would it take a significant rate cut? Or could 1 or 2 smaller cuts create a little momentum?

Yes. I think the signal of a rate cut is very important, Chris, and I'd like to add a couple of comments here. The part of the Vegetation Management that's struggling the most is actually forestry, not agriculture. And forestry came to a very sharp and sudden halt when interest rates rose. You can actually track it almost dollar for dollar. So I believe just the psychology of the first rate cut will start to restore momentum in forestry and that's the biggest single challenge we have at the moment. So I do believe that first rate cut will start to see our results improve. I don't think it will take a lot more than that because although there is an inventory overhang in forestry, it's not in these big machines. It tends to be in the smaller machines that we used for clearing land, as I commented on the call, but our big grinders and shippers, there really isn't much field inventory. Our dealers hold a demonstrator, but generally, those machines are built to order. So I think that first interest rate cut is very significant, and we might start to see that recovery in forestry probably in the fourth quarter. It depends on when the first rate cut happens. I'm being very cautious because a year ago, I thought we were going to see a rate cut coming, remember, we were all talking about March, right, and here we are in August, and it's not there yet. So forgive me for hedging my bets a little bit there.

All good. Maybe just stay with Morbark for a second. So my rough math is including parts and services, revenue was in the $300 million range last year. Is that close?

Yes, that's fairly close.

Okay. This year, it will likely be around $200 million to $300 million based on your current perspective.

Correct. That's right.

Got it. And just one more question. The vegetation operating margin was 7.6% in Q2. What would it take to approach a 10% operating margin in the second half of the year? Is that unrealistic, but can we expect some improvement from the 7.6%?

I would say a couple of things, Chris. First, that 7.6% takes into account corporate costs. As the division's sales decline, corporate costs have a greater impact. From an operating income perspective, the division is already above 10% before considering the corporate costs I mentioned. This is a decent position to be in, as the company has aimed for a 10% operating margin for many years. Most of the division is already above 10% net of corporate costs, except for forestry and tree care, which have really struggled. You can imagine that forestry and tree care operate from our largest facility, with over 1 million square feet in the primary facility and 400,000 square feet in the secondary one. When the volume decreases significantly, under-absorption becomes a challenge. Additionally, regarding the global headcount reductions we mentioned, nearly all of these cuts are in forestry and tree care within the Vegetation Management Division. These reductions are quite substantial at this time. Therefore, the savings Agnes referred to in the press release and her comments will all be within Vegetation Management. As you consider your model, the $10 million in savings for the last two quarters of this year will be entirely from Vegetation Management.

And our next question comes from Mike Shlisky with DA Davidson.

I wanted to clarify your last answer, Jeff, regarding the cost savings. You mentioned that the $10 million is either a full year figure or just for the latter half of the year.

Back half of this year.

Okay. So then looking at 25, can you give us just to confirm what the annualized number would be, and could you make that a gross number? In other words, not taking out all the one-time cost of severance and so forth.

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 in what we say further about the restructuring actions we're taking. I hope you can appreciate that. I will share more interim 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.

I was curious about the infrastructure challenges, especially after the recent hurricane in Texas. These issues are ongoing, with many not properly maintaining their power lines or clearing branches, leading to potential fires and hazards during strong winds. It's not just a theoretical issue; it's a real concern today, exacerbated by the needs of data centers to ensure a consistent power supply. Have you received any new inquiries from utility companies or data center operators about ways to manage branch-related risks in light of the recent headlines?

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 tree care accounts would be doing fleet renewals at this point, adding shippers into the fleet, 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, large volumes of the same product to staff their fleets across North America. But I think they're just sophisticated enough; they know when 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.

All right. Could you share with us in the industrial truck supply, Texas supply have you gotten enough or what you need recently? Or are you still waiting on a bunch of chassis for that business?

No. We have excellent news on the chassis front, Mike. First of all, and very interestingly, we've seen enough tick 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 small numbers, but it's a more significant small number than it had been. That was a pleasant surprise. Also, we've been offering significant incremental chassis for the remainder of this year. And for 2025, it looks like we're going to get everything we ask for, and believe me, we asked for a lot. So in short, while the allocations are completely over, there doesn't seem to be any restriction from what I can see on chassis. Now chassis mix still matters a little bit. There are large volumes of some chassis, and other chassis still remain constrained. What's happening is the large over-the-road hauling companies are cutting back their purchases, and that's freeing up capacity with the 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.

Great. Maybe one last one for me, and this is for Agnes. You haven't been around all that long, but can you give us your early thoughts as to what you've seen so far and what you might look to do or change in the financial operation and capital structure of the company or in the broader businesses out in the field?

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. 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 plants and to expand our capacity. We are committed to returning capital to our shareholders. So we're really happy about the dividend that's been approved just recently. And we'll continue managing our debt. I think we can reduce that 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 plants. And so that's very exciting. We have quite a lot going on at the moment.

Yes, Mike, just to add a color comment to that, we had a very active discussion about that in the Board room 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. And Jeff's answer to that as 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.

Okay. Well, that's great color. Thank you, Agnes. Thank you, Jeff. I'll pass it along.

The next question is from Mig Dobre with Baird.

I want to revisit the discussion about restructuring. Just to clarify, you mentioned $10 million in savings that will be realized in the second half of 2024. How should we think about this in relation to Q3 and Q4? I assume this figure is year-over-year as you described. Is that correct?

Let me start by addressing this. We initiated these actions in the second quarter and even earlier. Currently, we've completed what I would consider the first set of actions, which will yield about $10 million, possibly a bit more this year. We recognized a portion of this in the second quarter, though we also incurred restructuring costs during that time. The $10 million is primarily the impact expected in the second and third quarters. We're actively working on additional actions, which will take place in the third quarter. While we haven't announced those yet, so I can't provide specific details, there are several initiatives in our plans. As we finalize these actions and make announcements, we'll update you on the full-year impact and how it might influence 2025 as well.

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, it has an impact in the way we're kind of modeling the quarter, that's why I'm asking.

This is just the second half impact.

And I would echo that as well, Mig. This is what we anticipate an improvement just in the second half of 2024.

Which will carry into 2025, then at least into the front.

Of course, unless we see a change in the market and need to begin rehiring people. Currently, this situation is entirely related to staffing. The financial impact of the facility consolidations we are implementing has not yet been revealed or announced separately. I wish there were more information available as we proceed with those actions. For now, this is solely a personnel issue.

And from a reporting standpoint, you are not adjusting out the restructuring costs associated with the savings. I'm curious as to why that is.

Yes. Well, Mig, frankly, it's because most of the cost of the restructuring actually were incurred in Q1, not Q2. 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. You know us. We haven't done that in our history. That's just not who we are.

Well, it would be helpful to know the cost because 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 would be helpful.

Sure. And I'm sure we can do that with you in a follow-up call at some point later.

Okay. I do want to go back to a discussion that we've been having for a couple of quarters now in terms of the backlog and Vegetation Management and what that implies for revenues going forward. If I look at your orders, your orders for the past, call it, 6 months or so have really been in the $150 million range, give or take. And the backlog, obviously, is coming down. 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. 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?

I think that's probably more of a first half of 2025 occurrence, Mig. 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 downwards. 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 6 months. So I think we either are or very near rock bottom here. The final piece I can share with you is that in the second quarter, we have very few order cancellations at all. And we've had significant order cancellations in Q3, Q4 and Q1 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. I'm anticipating, as I said earlier on the call, but 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.

Understood. That's helpful color. In your actions, though, in the way you were kind of rightsizing the labor force, is it fair to say that you are rightsizing towards something closer to this kind of $150 million, $160 million revenue per quarter for this segment?

I'm not sure I would say we're rightsizing toward that, but we're still taking very extreme measures to protect the bottom line, Mig. 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. But what certainly got my attention were the dramatic moves that the big OEMs in agriculture have taken over the past, let's say, 2 months, you've been following them and reporting on them very nicely. Thank you, 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. Hence, the restructuring of North American agriculture to consolidate production there for the long term. But I will say, at least one of the facilities that we are going to vacate is not planned to be divested; we're going to mothball that facility and put it on care and maintenance, 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 to produce industrial products where we see overwhelming demand at the moment, particularly in vacuum trucks. So we need to set up some additional production capacity there. So I think we've got a well-thought-out plan here, Mig. I called the bottom once before, and I was told I was wrong, and unfortunately, you were right. So I'm being a little bit more cautious this time and just sort of depending on where the bottom might finally be.

No, I appreciate that. And everybody's crystal ball is a little hazy these days. So I certainly can relate to the challenge. But maybe one last question on Vegetation Management, really surrounding the decremental margins in the first half, the decremental margin has been north of 40%. 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?

There are a few points to consider regarding the restructuring costs we incurred between the first and second quarters, which will not carry over into the third and fourth quarters. We reported $1.7 million year-to-date, and the $10 million we've identified as savings will be distributed between the third and fourth quarters. I cannot provide further details at this time, but we will share more information once it's available, particularly regarding additional actions we are planning for the third quarter.

Yes, Mig, 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 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. But the under-absorption, the 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 all smaller but similar number or a similarly significant number in agricultural equipment. So the restructuring actions to consolidate that capacity will eliminate significant under-absorption. We started with people, but obviously, people don't take out the semi-fixed costs and facilities; the people related to material handling and maintaining the plants and so on. The only way you capture those costs is to consolidate the facilities. So that's why the urgent need to consolidate production facilities, even beyond what we had anticipated in our strategic plan 2 years ago.

Understood. I have a final question regarding Industrial Equipment, which has two parts. First, how has the strike affected sales and operating income? Do you expect to recover that figure in Q3 and Q4? Is this lost business, or is it just deferred? Secondly, on the margin side, I was impressed with the performance in Q2 despite the strike. If recovering some of this lost revenue is possible, should we expect margins to approach 15% by the end of 2024?

I'll give Jeff to answer to that first. Well, I'm going to give Agnes a minute with a pencil here. I think the margins will continue to rise in the Industrial division, Mig. Yes, that $3.5 million or so that we signaled $3 million plus of operating income effect, that is onetime. So yes, you should get that back. And I'm looking at the guy that runs that business right now, and he's shaking his head up and down in a positive way. 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 complementary toward them. 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. We are to the point now where effectively under absorption is approaching 0. We had significant underabsorption in the second quarter related to the strike. That obviously goes away. But we are to 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. 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 plans to produce industrial products, which we can do relatively quickly. That's a way to also 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 margin expansion potential in this division.

The next question comes from Greg Burns with Sidoti & Company.

The business that you mentioned that you're divesting or to divest, what kind of financial impact might that have? And are you looking at other products or businesses that you might be looking to divest?

We are not looking to sell off other businesses at this time, Greg. I can't disclose too much about this matter, but it represents a very minor aspect of our operations and is not significant to our financial performance. It's more of a cleanup effort. We identified an opportunity to address it now during this phase and plan to proceed with it. However, we have major consolidation efforts planned and in progress within our agricultural sector, as well as in forestry and tree care. We will provide updates on the impact of those initiatives as they develop, but they should not affect revenue and are expected to positively influence our operating margin.

Okay. 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 how should we think about what's driving demand now and the durability of that demand?

Greg, the municipal side of this isn't really showing significant growth. It's holding at a very high level; it's 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. What is going on though is industrial demand for these products. So particularly, vacuum truck rental fleets are getting renewed at a very significant rate. 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 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 of the industrial side and contractor side of business that's showing the sharp uptick in demand at the moment. Will governmental remains still growing, still growing at a nice rate, but sort of low single-digit growth in the governmental side right now. And in an election year, I'll take that all day long.

What is the revenue split between industrial and municipal in the industrial segment?

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. Let's see; I can give it to you on a corporate level, let's do it that way. That's probably better. When you look at the revenue of the company through the first half of this year, approximately 12% is from snow removal, 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 General Counsel just gave me a cross-eyed look already.

I'll leave it at that.

And at this time, we are showing no further questioners in the queue, and this does conclude our question-and-answer session. I would now like to turn the conference over to the management team for any closing remarks.

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. 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. 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. 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.

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