Alamo Group - Q1 2024
May 3, 2024
Transcript
Operator (participant)
Good day, and welcome to the Alamo Group first quarter 2024 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask a question. To ask a question, you may press Star, then one on your touchtone phone. To withdraw your question, please press Star, then two. Please note, 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.
Edward Rizzuti (EVP of Corporate Development and Investor Relations)
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 one hour after the call and run for one week. The replay can be accessed by dialing 1-877-344-7529, with the 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.
Jeff Leonard (President and CEO)
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.
Richard Wehrle (EVP and CFO)
Thanks, Jeff, and good morning, everyone. Alamo Group's first quarter, 2024, ended with a solid performance that produced record net sales, driven by continued strong demand for our products in the Industrial Equipment Division. First quarter consolidated net sales were $425.6 million, an increase of 3% compared to $411.8 million in the first quarter of last year. Gross margin percentage fell by 110 basis points, and gross margin dollars decreased by just under $900,000 in the quarter compared to the first quarter of 2023. Both margin percent and dollars decreased were driven by under absorption and productivity inefficiencies in the Vegetation Management, and to a lesser extent, product mix in the Industrial Equipment.
Operating margin for the first quarter came in at $47 million, versus $49 million in the first quarter of 2023, a decrease of 4%. Operating margin as a percent of sales was 11% for the first quarter, versus 12% for the same quarter last year. Consolidated net income for the first quarter was $32.1 million, or $2.67 per diluted share, a decrease of 4% versus net income of $33.3 million, for $2.79 per diluted share for the first quarter of 2023. Our Vegetation Management division was off in total sales compared to the first quarter of 2023. Softness in both the forestry and agricultural markets continued due to inflation and higher interest rate in the higher interest rate environment.
Net sales were $223.7 million, a decrease of 13% compared to $256.4 million for the first quarter of 2023. We've been monitoring dealer inventory levels, which are up, but not at historical levels. The division's operating income for the first quarter was $21.7 million, almost 10% of sales, but down 40% versus $336.5 million, 14% of sales for the same period in 2023. This division reduced its labor force during the quarter at its larger manufacturing location and still almost hit 10% operating income, a solid accomplishment. This is also an improvement of 50 basis points compared to the fourth quarter of 2023. Industrial Equipment Division net sales had a tremendous quarter, coming in at $201.8 million....
up 30% compared to $155.3 million, $155.3 million for the first quarter of 2023. This was due to a solid performance across all product lines, particularly vacuum trucks, sweepers, debris collectors, and snow removal equipment. While component part receipts continued to return to a more consistent cadence, the division continued to have a few late component deliveries, which impacted operations, although not as significantly as previous quarters. This resulted in a substantial rise in operating margin in the first quarter of 2024 to $25.3 million, just under 13% of sales, compared to $12.5 million, 8% of sales for the first quarter of 2023, an increase of over 102%.
The company's backlog at the end of the first quarter of 2024 came in at just over $831 million, down 16% compared to backlog levels at the end of the first quarter of 2023, but still at a healthy level. A few additional items I'd like to cover that are related to the balance sheet at the end of the first quarter of 2024, which continued to remain strong. Working capital increased about $61 million compared to the end of the first quarter of 2023. The increase primarily resulted from higher accounts receivable and to a lesser extent, inventory.
During the first quarter of this year, as we expected, we had a slight increase in our credit facility, expecting, excluding pay down, paying back intercompany loans at the end of the year. Our bank leverage ratio for the first quarter of 2024 was just over 1.3 to 1, down from 1.7 to 1 at the end of the first quarter of 2023. Finally, the company's trailing twelve months EBITDA came in at just over $246 million, flat to year-end of 2023, which was a record. For 2024, cash flow should remain healthy as our focus will be to continue to reduce both inventory and debt levels.
We will remain disciplined in our execution, controlling costs and expenses as inflation and interest rates are expected to continue to put pressure on our margins. Supply chain deliveries and reduction in freight costs will be a major focus for the company in 2024. So in summary, quarter one of 2024 was what we had anticipated for Alamo Group. Sales were up 3%, but margins and net income were off, mainly due to weak market conditions and Vegetation Management. We were pleased that our board recently approved our regular quarterly dividend of $0.26 per share, up 15% compared to $0.22 per share for the first quarter of 2023. With that, I'll turn the call back over to Jeff.
Jeff Leonard (President and CEO)
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 wood 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 floor plan 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 caution in the market, with many buyers content to wait for lower interest rates before 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 number one and number two among the world's producers and exporters of wood pellet biofuel. North American pellet producers depend on logging and lumber production residue 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 remained elevated above contract levels during the first quarter. The agricultural equipment market is encountering similar dynamics. The combination of softer commodity price, crop prices and higher for longer interest rates constrained sales of ag equipment and other outdoor power equipment during the first quarter. After three solid years, well above the long-term average, inflation-adjusted U.S. net cash farm income is expected to decline in 2024 by approximately 5% compared to the 2023... 2003-2023 long-term trend.
U.S. two-wheel drive tractor sales in the first quarter were down 13.4% compared to the first quarter of 2023, with tractors in the 40-100 horsepower class down 8% and tractors less than 40 horsepower were 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 of orders during 2023, as previously reported.
These were primarily in the forestry and tree care group. Backlog also declined in the division's North American Agricultural Equipment Group that serves 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 mower 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 continued to perform well and at a brisk pace. Both sales and backlog remained elevated for this part of the business, and market activity remained 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 continued to report budget surpluses last year. State rainy day funds remained historically elevated. 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, 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 400 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 continued 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 remained 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, our 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.
Operator (participant)
We will now begin the Q&A. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. The first question comes from Chris Moore from CJS Securities. Please go ahead.
Chris Moore (Senior Analyst)
Hey, good morning, guys. Great quarter. Thanks for taking a couple of questions.
Jeff Leonard (President and CEO)
Good morning. Maybe we'll start...
Chris Moore (Senior Analyst)
Good morning. Vegetation, EBITDA margin, 9.7%, you know, down significantly year-over-year, up a little bit sequentially. You mentioned actions, you know, to protect the margin. Can you stay around the 10% level for the balance of 2024, or is visibility just not there to make that-
Jeff Leonard (President and CEO)
No, Chris, I'm fairly confident, I'm fairly confident we can, and that's what we're expecting to do, to be honest with you. That's why we are adjusting our capacity now. And we've taken some fairly significant 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 of Vegetation Management.
Richard Wehrle (EVP and CFO)
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.
Chris Moore (Senior Analyst)
Terrific. Thank you. That's helpful. Industrial bookings backlog both up significantly. What, what do lead times look like at, at this point in that segment?
Jeff Leonard (President and CEO)
You know, they're actually normalizing quite a bit, Chris. They're out about 120 days for the vacuum trucks and the bigger equipment and falling fairly rapidly. The truck OEMs are really getting on 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 three months is pretty typical right now for us, and we have more than adequate capacity in that division at the moment.
Chris Moore (Senior Analyst)
Got it. You mentioned still, you know, a few kind of lingering issues on the supply chain side. Any worries that this... From where you sit today, any reason to think that, you know, they won't kind of marginally continue to improve versus, you know, some you know, go the other way? Just trying to get the-
Jeff Leonard (President and CEO)
No, I don't see the situation going-
Chris Moore (Senior Analyst)
How much visibility?
Jeff Leonard (President and CEO)
Yeah, 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 chain, and it's not just truck chassis. It's things like hydraulic components and cylinders, all kinds of things that we consume. You know, as the economy starts to, as a whole, normalize now, lead times are coming down in most parts of our supply chain.
Chris Moore (Senior Analyst)
Got it. I appreciate it, guys. I will leave it there.
Jeff Leonard (President and CEO)
Thanks, Chris.
Edward Rizzuti (EVP of Corporate Development and Investor Relations)
Thank you, Chris.
Operator (participant)
The next question comes from Mike Shlisky from D.A. Davidson. Please go ahead.
Michael Shlisky (Managing Director and Senior Equity Research Analyst)
Yes. Hi, good morning. Thanks for taking my questions.
Jeff Leonard (President and CEO)
Uh, Mike.
Michael Shlisky (Managing Director and Senior Equity Research Analyst)
Could you maybe kind of remind us what percentage of your business is serves the public sector or serves 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. Anything that's private is a little more challenged. So what's the broad breakdown there?
Edward Rizzuti (EVP of Corporate Development and Investor Relations)
It's still, I think, what we've said before, it's roughly between 20% and 25% of that is from the hobby, to the hobby farmer and ranch. And then the balance is made up between industrial and governmental. I'm sorry?
Michael Shlisky (Managing Director and Senior Equity Research Analyst)
I'm sorry. I was asking, kind of, overall, your overall business, what percentage of it serves the public sector and what serves the private? Not just vegetation-
Edward Rizzuti (EVP of Corporate Development and Investor Relations)
You know-
Michael Shlisky (Managing Director and Senior Equity Research Analyst)
Broadly, the number.
Edward Rizzuti (EVP of Corporate Development and Investor Relations)
Right. I think, like I said, I think we're 20%-25% in that, in that space we're talking about. The balance is in governmental and industrial, and it's split.
Jeff Leonard (President and CEO)
Yeah, pure governmental, Mike, runs 40%-45% of total revenue.
Edward Rizzuti (EVP of Corporate Development and Investor Relations)
Yeah.
Michael Shlisky (Managing Director and Senior Equity Research Analyst)
Okay.
Jeff Leonard (President and CEO)
Pure governmental. And then there are contractors that straddle that, as you and I have discussed before. We have contractors that buy a mower and use it for both private and public works when they get a contract to mow along a state highway. So the number is not pure, and there is, but that's the best number we've been able to produce.
Michael Shlisky (Managing Director and Senior Equity Research Analyst)
Got it. Thank you for that color. I appreciate it. Can you also 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 other brand dealers that make the prime mover. Just want to make sure that you're not seeing dealers, you know, unable to even take inventory at this point.
Jeff Leonard (President and CEO)
Actually, we're not, Mike. We haven't seen any pressure on our accounts receivable. We had one large forester dealer last year that we thought we were going to lose, thought it was going to go insolvent, 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 his feet 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 in like, in any probability to fail at this point.
Michael Shlisky (Managing Director and Senior Equity Research Analyst)
Got it. Maybe one last one from me. You know, during the first quarter, one of the large machinery players, a bit larger than Alamo, kind of serves adjacencies like quarry and aerial work platforms. But that company launched their own brand.
... of Vegetation Management, equipment with, you know, mulchers, chippers, and so on. I'm not even sure if their products overlap with yours. I don't know if you've heard of it. I wanted to kind of see if there was overlap. And tell us a little bit about, you know, in the past, I wouldn't normally have any issues with some startup company trying to displace, you know, Morbark or other Alamo brands, but this is a pretty large and well-funded parent company. So can you just maybe give us some commentary on the strength of the Morbark brand, your distribution, and your customer base, and, you know, if you have any plans to kind of help defend your market share-
Jeff Leonard (President and CEO)
Yeah.
Michael Shlisky (Managing Director and Senior Equity Research Analyst)
- if this, brand makes any kind of traction?
Jeff Leonard (President and CEO)
Mike, I'm pretty confident I know the brands 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 competitor's. 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, are deeply invested in the aftermarket business related to those machines, which is where most of the money is made. You know, 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.
You know, they've always been there. This is not a new thing. They're just sort of refreshing their face a little bit.
Richard Wehrle (EVP and CFO)
Okay. That's great color. I appreciate it. I'll pass it along. Thank you.
Jeff Leonard (President and CEO)
Thanks.
Operator (participant)
The next question comes from Mig Dobre from Baird. Please go ahead.
Mircea Dobre (Associate Director of Research)
Hi, good morning.
Jeff Leonard (President and CEO)
Hi, Mig.
Mircea Dobre (Associate Director of Research)
In Industrial Equipment, can you guys confirm what the contribution from acquisitions was in the quarter, revenue wise?
Richard Wehrle (EVP and CFO)
We normally don't, but probably 15.
Jeff Leonard (President and CEO)
$15 million, roughly.
Richard Wehrle (EVP and CFO)
Yeah, roughly.
Mircea Dobre (Associate Director of Research)
$15 million.
Jeff Leonard (President and CEO)
That's-
Mircea Dobre (Associate Director of Research)
Okay. Roughly that.
Jeff Leonard (President and CEO)
That's the sales, Mig. The contribution to sales was $15 million.
Richard Wehrle (EVP and CFO)
If you back that out, the industrial division was still up, 20%.
Mircea Dobre (Associate Director of Research)
Yep, yep, yep. And you know, Jeff, you spent quite a bit of time on the whole supply chain issue and chassis and so on, and-
Jeff Leonard (President and CEO)
Yes.
Mircea Dobre (Associate Director of Research)
I was kind of hoping that we'd be done having these kinds of discussions, but apparently we're not.
Jeff Leonard (President and CEO)
Yeah, me too. Me too, Mig.
Mircea Dobre (Associate Director of Research)
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-
Jeff Leonard (President and CEO)
Yeah.
Mircea Dobre (Associate Director of Research)
- of the supply chain issues?
Jeff Leonard (President and CEO)
Yeah, the short answer is, Mig, yes, we would've been able to get more revenue out in the quarter. This silly issue of these frame rails for the truck, I've mentioned before, 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, Mig, for sure, and we got quite a bit more chassis during the first quarter than we did during the fourth and then third of last year. And for a year, I've been telling you, once the chassis supply situation improved, industrial would really hit its stride, and it is doing that. So I don't want to say there are no constraints, but I also don't want to say these are drop dead serious.
We've been living with them for a while, and they are steadily improving. The Allison Transmission one is another really strange one. Allison is normally a very, very reliable supplier. They've had some quality problems that are related to castings and other things, but the main issue is the transmission control modules are in short supply, and I don't know who their supplier is, but it's been a significant problem for them. And that affects the, sort of the high end of the vacuum truck business. But we've done a pretty good job scrambling around that to find chassis off lots of other places to keep our production rolling. So I don't think that really had a big constraining impact. We probably could have done another perhaps $5 million in the quarter without those challenges in industrial, just to take a ballpark guess at it.
Richard Wehrle (EVP and CFO)
Yeah. 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 gonna be industrial, and as Jeff mentioned, if they could just get a few things, just be more in a, in a consistent cadence, and they, 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 $12 million-$15 million that's in WIP of that industrial division, they're normally around about half of that. So that, as Jeff said, that leaves you between $5 million and $7 million of extra sales that we could potentially could have had during the quarter.
Mircea Dobre (Associate Director of Research)
That's interesting. So given the fact that things are getting better on the supply chain side, I mean, you have healthy amount of backlog in this segment. What's the right way to think about revenue sequentially as the year progresses here?
Jeff Leonard (President and CEO)
Yeah, 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. You know, we have this strike running at the moment, Mig, 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, so.
Mircea Dobre (Associate Director of Research)
But I'm curious, and I'm sorry to press you on this a little bit, because, you know, there's a pricing element to all of this, right? That's, you know-
Jeff Leonard (President and CEO)
Oh, sure.
Mircea Dobre (Associate Director of Research)
Backlog presumably has a pricing tailwind. So if you're sort of saying that you can grow at least high single digit, does that really imply any real volume growth coming out of your plans? Maybe some, but it doesn't sound like a lot, and I'm wondering why not more leverage there?
Jeff Leonard (President and CEO)
Well, I mean, I think that we're still having to just kind of pace the build in our plants, Mig. 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. You know, Richard made reference to the under absorption in our Vegetation Management facilities. We have the opposite effect going on in our industrial group, that absorption is continuously improving. I'm just being a bit cautious here, Mig. There's a lot going on right now, and that New Philadelphia plant where we have the strike is a big plant for us. We're continuing to negotiate there. We were negotiating again yesterday. You know, that one needs to get solved.
We need to get that strike settled, then I think we can do a bit better than that. But we've already lost a couple of weeks of production in the second quarter as a result of that strike, and we're not gonna get that back, obviously, hence the caution. But you're right, the momentum is really, really good in industrial right now, both in terms of sales and orders and obviously efficiency in the operations. Our snow removal group is just doing an amazing job right now at a profit level we've never seen before. Very strong backlog, very strong ordering. And we are considering taking some steps to expand their capacity at the moment, which will involve some investments.
At the same time, our street sweeper group, that Ed Rizzuti in the city here, is running at a, well, is at a level of profit we haven't ever seen in that business before, and running very, very well. And then we have the added boost from the Royal Truck acquisition, which has been very nice. So, you know, maybe I'm just being too cautious here, Mig. I don't wanna over forecast, but I think the growth is gonna be very, very nice for the rest of the year.
Richard Wehrle (EVP and CFO)
Something else to add to that, Mig. This division, just like the vegetation, they put their price increases in the first part of January, like 2.5%-3% range, and maybe 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.
Mircea Dobre (Associate Director of Research)
No, I, I appreciate all the detail here. And, you know, you kind of got to some of the things that I've been wondering, because, there's a question to be asked about capacity, right? I mean, it's, you know, are you to the point now where, you know, you're just operating at full capacity and you're, you, you might be struggling a little bit to increase the volume that's coming, coming out of the plant. So while you have great backlog, you, you, you might have some constraints elsewhere. That's kind of what I was trying to figure out.
Jeff Leonard (President and CEO)
We're not, Mig, but there's a lot of moving pieces right now. As we've mentioned to previous quarters, we closed our sweeper plant out in Washington State, and we moved that production into our Wisconsin plant, which is our active truck 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 actually like the direction in industrial right now. It's looking really, really positive, and all parts of that division are running very well at the moment. The only negative I can say about that division is the strike, and I think that's just the times that we're in at the moment.
But the parties are continuing to negotiate in good faith with a high, high goodwill to get a contract put in place. So, I'm fairly confident that'll get solved, too.
Mircea Dobre (Associate Director of Research)
Understood. I do wanna ask a couple questions about Vegetation Management and,
Jeff Leonard (President and CEO)
Sure.
Mircea Dobre (Associate Director of Research)
As you discussed here, you know, there's still challenged inventory that has to be worked through. But it sounds like-
Jeff Leonard (President and CEO)
Yeah.
Mircea Dobre (Associate Director of Research)
You know, you're highlighting some things like interest rates, for instance, that... Who knows what the path is gonna be on a go-forward basis? So I guess my question to you is this:
Jeff Leonard (President and CEO)
Exactly.
Mircea Dobre (Associate Director of Research)
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 at $23 million high watermark, and we should be seeing a gradual sort of production decline here to destock the channel, or are you thinking differently?
Jeff Leonard (President and CEO)
You know, Mig, that's a great question. I think as you look at it piece by piece, and I'm gonna slice it here because it's the only way I know how to answer your question. I think that we're gonna 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. You know, the only negative is the feedstock side that I gave some color on during the call. And as I said, we're starting to see some rebirth in that business already. They had a good end to the first quarter, as did 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 I know, you know that story as well as I do. So as I think about how Vegetation Management 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. You know, we have a couple of quarters worth of backlog in that space, and if we can hold on to that level of backlog, which is a very traditional level for that division from a long-term point of view, then I think the revenue will be stable.
If the orders don't flow in in the second quarter and in third, then I think you're gonna see a tapering of revenue in that division until we can clear the channel inventory out. But it's not gonna 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 farmer ranch segment, from my point of view.
Richard Wehrle (EVP and CFO)
I think something else, Mig, to continue to keep in mind, what we tried to say in our, in our written part of the script, is no matter what this division does, if they have that falloff, as Jeff mentioned, in sales and the backlog falls down, our requirement here is to try to do everything we can to maintain that 10% operating margin, which is our, is our goal for this year, no matter what the revenue comes out in this division.
Mircea Dobre (Associate Director of Research)
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-
Jeff Leonard (President and CEO)
Well, I'm gonna be happy to answer that.
Mircea Dobre (Associate Director of Research)
Down.
Edward Rizzuti (EVP of Corporate Development and Investor Relations)
What we're doing, Mig, is what we've been doing for a couple of quarters: offering retail incentives to our customers to 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 gonna 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 that one would see the biggest uplift. Some of our other brands are probably not gonna see it, see the same immediate lift, in both orders and backlogs from those incentives. But that's the tool that we have, right? Because we have to clear 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 this, as I mentioned, too, as well, the labor force. We made reductions in this division in the labor force, because we wanna try to get ahead of this, this train a little bit so that, that we're allowing ourselves to try to do everything we can to maintain that 10%. If it, if the orders continue to, to soften, as Jeff reported, we're gonna continue to take more actions to make sure that we reduce our cost and control our expenses.
Mircea Dobre (Associate Director of Research)
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, you know, we're coming off a couple of really strong years here. Do you think this is sort of sustainable as we think about 2024 and into 2025 here, in terms of this set of customers continuing to be well-funded and continuing to order? Or should we kind of, I don't know, temper our expectations at some point, to some degree?
Jeff Leonard (President and CEO)
You know, obviously, at some point, Mig, there's gonna be a need to temper expectations, because we're coming out of a series of very extraordinary circumstances following the pandemic and all of the federal government 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, they're in a very strong position, and they're gonna continue to invest. I'm quite certain of that. The municipalities are more mixed. You know, some of the bigger cities are incurring lots of costs related to resettling immigrants. You know that. You read the news same as I do.
They're under some fiscal pressure as a result of that. But remember, most of their funding comes from housing costs, property taxes, and housing has not stumbled at all. You know, in terms of prices coming down, now, obviously, that's gonna sustain municipal incomes at a traditional level for a long time. So I think you will eventually see a taper. I certainly don't see it coming this year, Mig. I think we're in for strong running all through 2024 on the governmental side of our business, and the tapering may come in 2025. You know, if I had the answer in my head about whether this was gonna be a soft landing in our economy or a stumble, I'd be able to give you a much more clear answer to that.
I see at least another 12 months of really good running on the governmental side.
Mircea Dobre (Associate Director of Research)
All right. Thank you for all the color. I know I asked a lot of questions. Appreciate it.
Jeff Leonard (President and CEO)
Thanks, Mig. Appreciate it.
Operator (participant)
As a reminder, if you have a question, please press star one. The next question comes from Tim Moore from EF Hutton. Please go ahead.
Tim Moore (Senior Equity Research Analyst and Managing Director)
All right. Thanks. I want to wish Richard the best in retirement, and time with his family.
Jeff Leonard (President and CEO)
Don't do it, he's not done yet, Tim.
Tim Moore (Senior Equity Research Analyst and Managing Director)
Oh, no, I'm gonna miss him. He's always so great and a straight shooter, which is really helpful for investors and... So maybe, maybe I'll start out with a question for Jeff. On Industrial Equipment, you know, you know, as you look out on this division, and, you know, historically, you know, it wasn't too long ago, the operating margin was, you know, 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, you know, if, you know, looking out to maybe next year, you know, without giving formal guidance, if there's no recession, do you think it can do 13.5% op margin next year?
Jeff Leonard (President and CEO)
Oh, yeah. Yeah, I, I do, Tim. Confidently, yes. I think that, when you look at our most notable competitor, whose name I won't mention, and the oft-mentioned references to their higher operating margins, if you actually do a side-by-side comparison we allocate our corporate costs out to our two divisions, as you probably know, or most of it, our main competitor's 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, 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 tick up as the volume continues to build.
Tim Moore (Senior Equity Research Analyst and Managing Director)
No, no, that's great. Yeah, I was doing some of that math myself. It didn't seem like the ceiling's, you know, close to what you even have now, but that's good news. And maybe just switching gears, you know, I'm just trying to think through other operating margin drivers. Obviously, the supply chain will hopefully get better in general. Farming and hobby and ag will come back and normalize. But just switching gears to maybe your made-in-country efforts, you know, specifically maybe for Europe, rather than shipping heavy machinery, you know, from the U.S. over there, that costs, you know, how's that going? And is that really more focused on forestry, landscaping, and sweepers?
Jeff Leonard (President and CEO)
It's not focused on sweepers in particular at the moment. It's mainly focused on the Vegetation Management side, and mostly in mowing products and to some degree, in forestry. You know, that timber that we produce in the U.K. under the Timberwolf brand will have a very nice home 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, the other headwinds in that division are gaining a lot of our attention right now, as I'm sure you can understand.
Tim Moore (Senior Equity Research Analyst and Managing Director)
No, that makes sense. And not to ask about another distraction, but, you know, I'm pretty excited about, you know, the rent-to-own fleet. You know, it seems like just back of the envelope, comparing some peers, you know, it seems like it would have something like a 35% ROI, and I was just wondering, you think you can add 100 more truck chassis this year to that? Maybe get the fleet up to-
Jeff Leonard (President and CEO)
Yeah.
Tim Moore (Senior Equity Research Analyst and Managing Director)
I don't know, 400, maybe by the end of the year?
Jeff Leonard (President and CEO)
It ramped up fairly nicely during the first quarter. We expect that to continue all through the year. I think roughly 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 yeah, I think we're gonna see very nice growth in the rental space from Super Products during this year.
Richard Wehrle (EVP and CFO)
Our expectations, Tim, are to get north of 300 units out there, and I think we closed the year roughly 210, 215, 217, something like that.
Tim Moore (Senior Equity Research Analyst and Managing Director)
Okay. It's 300. Yeah, that's, that's actually the number I was thinking of. But no, that makes sense. That's a really good opportunity to get the ROI up, and it helps customers, makes them happy. But, maybe just switching gears to one other topic. I mean, this is... snow removal has been amazing. You got the Wide Wing innovation, taking market share. It's pretty clear. Like, when does that slow down? I mean, when, when does that kinda normalize and,
Jeff Leonard (President and CEO)
You know.
Tim Moore (Senior Equity Research Analyst and Managing Director)
How's the outlook this year?
Jeff Leonard (President and CEO)
You know, the outlook from that team is so bullish, I almost have to pinch myself when I talk to them. They just see opportunity everywhere. You know, we struggled in the airport snow removal space for a while, Tim. We just came out of a big show in Buffalo. Got a very nice reception there. Customers are finally starting to see the strength of our products in that space, which is a huge turnaround from where we were three or four years ago. Our Wide Wing plow is selling like hotcakes right now. We can't build them fast enough. So that's really interesting, and we're still getting large fleet orders out of contractors.
Edward Rizzuti (EVP of Corporate Development and Investor Relations)
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 some struggles 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.
Tim Moore (Senior Equity Research Analyst and Managing Director)
All right.
Jeff Leonard (President and CEO)
I mean, I can share one number with you, Tim. We believe in fairly short order here, our snow removal segment could be $250 million a year in revenue.
Tim Moore (Senior Equity Research Analyst and Managing Director)
Oh, wow. That's great.
Jeff Leonard (President and CEO)
Honestly, I'll be disappointed if it doesn't get there.
Tim Moore (Senior Equity Research Analyst and Managing Director)
That's phenomenal compared to just three years ago. That's just amazing.
Jeff Leonard (President and CEO)
Right.
Tim Moore (Senior Equity Research Analyst and Managing Director)
Just one clarification question. I just wanna make sure I understood this from the previous comments. For the, you know, the high single-digit sales growth comments, that's... You know, I know you got the strike, you know, it clearly impacts you. But what-- You know, if you factor in kind of the Royal Truck & Equipment acquisition, it doesn't anniversary until early October, I think it was October tenth or something, that seems like that would add 8%-9% sales growth a quarter by itself. Am I just kind of thinking about this the right way, is... Are you maybe being a little conservative?
Edward Rizzuti (EVP of Corporate Development and Investor Relations)
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, yes.
Tim Moore (Senior Equity Research Analyst and Managing Director)
Okay, without-
Jeff Leonard (President and CEO)
The uncertainty.
Tim Moore (Senior Equity Research Analyst and Managing Director)
Okay.
Jeff Leonard (President and CEO)
The uncertainty isn't around industrial at all. It's in Vegetation Management. We're waiting to kind of see how the orders flow in, 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 gonna play out. You know, we're encouraged. We see some positive signs right at the end of the first quarter in terms of how that business developed, but I don't want to confidently say we've turned a corner there yet, 'cause I don't believe we have.
Tim Moore (Senior Equity Research Analyst and Managing Director)
No, that, that's fair enough. I was just making sure that kind of high single digit was excluding Royal's contribution of 8%-9%, with $15 million a quarter. So that, that really clarifies that. Thanks so much, and that's it for my questions.
Jeff Leonard (President and CEO)
Great. Thanks, Tim.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to management for closing remarks.
Jeff Leonard (President and CEO)
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. Richard 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. Thank you again, one more time for joining us today.
We look forward to speaking with you on our second quarter conference call in August of 2024.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.