Alamo Group - Earnings Call - Q2 2025

Executive Summary

• Q2 revenue was $419.1M (+0.7% YoY; +7.2% QoQ), driven by 17.6% organic growth in Industrial Equipment; Vegetation Management declined 15.7% YoY but improved 8.8% sequentially. EPS was $2.57; EPS was negatively impacted by FX (~$0.21/share) from USD revaluation in Canadian entities.
• Versus Wall Street: revenue beat consensus ($419.1M vs $409.5M*), EBITDA slightly beat ($60.9M* vs $59.5M*), but EPS modestly missed ($2.57 vs $2.71*) due to FX and mix; 3 EPS and 4 revenue estimates for Q2*.
• Operating margin expanded 83 bps YoY to 11.2% on cost controls and factory efficiencies; Industrial operating margin reached 14.3% (+93 bps YoY) while Vegetation was 7.1% (with consolidation-related costs). Backlog remained healthy at $687.2M (Industrial $509.6M; Vegetation $177.6M) and net debt fell to ~$11.3M.
• Management noted robust demand in government/industrial channels (vacuum trucks and snow removal both >20% YoY) and reiterated a constructive outlook: Industrial strength through year-end and into 2026; Vegetation improvement to continue as consolidations complete and orders build.

What Went Well and What Went Wrong

What Went Well

• Industrial Equipment executed strongly: sales +17.6% YoY; vacuum trucks and snow removal up >20%; division operating margin expanded nearly 100 bps to 14.3% on efficiencies and demand.
  “Ordering activity remained robust across all product groups, and backlog at quarter end… remained above $0.5 billion”.
• Cost discipline and efficiencies: SG&A down 6.1% YoY; consolidated operating margin +83 bps YoY to 11.2%. CFO highlighted interest expense down on lower debt.
• Balance sheet strength and cash: net debt nearly zero ($11.3M), a 93.5% YoY improvement; TTM EBITDA $219.1M (13.7% margin); YTD operating cash flow $36.9M.

What Went Wrong

• Vegetation Management still soft YoY: sales -15.7% YoY; operating margin 7.1% reflecting consolidation-related productivity drag and unfavorable forestry mix; management does not expect margin improvement until Q4.
• FX headwind hit EPS by ~$0.21/share due to USD revaluation in Canada (vs a +$0.02 tailwind in Q2’24).
• Tariffs and labor: tariff uncertainty persists (inflation risk), and management flagged tightening labor as a capacity constraint to monitor. CEO reiterated tariffs are being mitigated via production shifts (Canada→U.S.) and supplier pushback.

Transcript

Speaker 6

Good day and welcome to the Alamo Group Inc. Second Quarter 2025 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 zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone, and to withdraw your question, please press star then two. I would now like to turn the conference over to Mr. Edward Rizzuti, EVP, Corporate Development and Investor Relations. Please go ahead, sir.

Speaker 4

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 are 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 788-8480. 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 in 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.

Speaker 0

Thank you, Ed. We'd like to thank everyone who's joined us on the conference call today and express our appreciation for your continued interest in Alamo Group Inc. Our second quarter results reflected a strong, solid operating performance driven by sustained strength in the governmental and industrial markets, supported by further modest improvement in the markets for our vegetation management equipment. Sales increased modestly compared to the second quarter of 2024. However, operating income improved significantly as a result of the efficiency improvement measures we have successfully implemented over the past several quarters. I would now like to turn the call over to Agnes, who will take us through a review of our financial results for the second quarter. I will then provide additional comments on the results and say a few words about the outlook for the balance of 2025.

Following our formal remarks, we look forward to your questions. Agnes, please go ahead.

Speaker 5

Thank you, Jeff. Good morning, everyone. I am pleased to report that we delivered solid operational performance this quarter, reflecting the strength and resilience of our business model. Our Industrial Equipment Division delivered impressive results. Our Vegetation Management Division continues its recovery, and we are encouraged by the progress made. Second quarter of 2025 revenue was $419.1 million compared to strong prior year's second quarter revenue of $416.3 million. Gross profit for the quarter was $108.3 million, with a margin of 25.8% of net sales compared to $108.2 million and a margin of 26% for the same period last year. SG&A expenses were $57.1 million, which is a reduction of 6% driven by savings in the Vegetation Management Division.

Operating income in the second quarter of 2025 was $47.1 million, with an operating margin of 11.2% of net sales, reflecting an increase of 83 basis points compared to the second quarter in 2024. Net income for the second quarter was $31.1 million or $2.57 per diluted share compared to net income of $28.3 million or $2.35 per diluted share last year at the same time. Almost a 10% increase in the net income was driven by stronger operating results. Interest expense decreased $2.4 million compared to the same period in 2024, driven by significantly lower debt levels. Lower interest expense helped offset the unfavorable impact of the revaluation of U.S. dollar-denominated monetary assets held in our Canadian entities. The provision for income tax was $10.3 million, resulting in an effective tax rate of approximately 24.9% compared to 24.8% in the second quarter of 2024.

With that overview, let's take a closer look at the performance of our divisions. The Vegetation Management Division reported net sales of $178.4 million at a 15.7% reduction compared to the second quarter of 2024. While this was a reduction compared to the strong quarter in 2024, it was an 8.8% sequential improvement as bookings and backlog have stabilized. Operating income for this division was $12.8 million, representing 7.1% of net sales. The impact of lower revenue compared to the second quarter of 2024 was partially offset by savings from the cost reductions taken in 2024. Industrial Equipment Division net sales were another record $240.7 million, representing an impressive 17.6% organic growth compared to the second quarter of 2024. Growth in the second quarter was driven by strong sales across the division, especially notable were sales of vacuum trucks as well as snow removal equipment.

Operating income was also a record $34.3 million or 14.3% of net sales, which was a 100 basis point improvement compared to the same period last year, a result of growth in our operational excellence initiatives. Moving on to the balance sheet, we maintain a strong financial position and flexibility to support ongoing initiatives and future investments. Our total assets of $1,558 million at the end of the second quarter increased by $51.7 million compared to last year at the same time. An increase in cash and cash equivalents was partially offset by a decrease in accounts receivable and inventory. We reduced our accounts receivable by $32.3 million to $356.2 million, also representing a reduction in day sales outstanding by about three days compared to the same period in 2024. Inventory of $372.1 million was also reduced by $13.1 million compared to last year.

Reductions we achieved in the Vegetation Management Division were offset by an increase in the Industrial Equipment Division. Higher inventory in the Industrial Equipment Division supports double-digit growth in that division. As a result of our disciplined cash management, the operating cash flow year to date was $36.9 million. At the end of the second quarter of 2025, our total debt was $213.1 million, and debt net of cash was $11.3 million. This was an improvement of $163.8 million or 93.5% compared to the second quarter in 2024, driven by strategic debt reduction and strong cash generation. To conclude, I would like to emphasize our commitment to delivering long-term value to our shareholders. We are pleased that our board has approved a quarterly dividend of $0.30 per share. As we move forward, we'll remain focused on driving growth and optimization in our operations. Thank you.

I'll turn it back over to Jeff.

Speaker 0

Thank you, Agnes. I'd like to add a personal welcome to everyone who's on the call with us this morning. In the second quarter, our markets continued to develop in accordance with our expectations, and improvements in operating efficiencies, combined with lower costs, contributed to the improved earnings per share. Demand remained robust in the government and industrial contractor segments, and our Industrial Equipment Division had another excellent quarter. Sales in the division were up nearly 18% compared to the second quarter of 2024, with all of this growth being organic. Sales of excavator trucks, vacuum trucks, street sweepers, highway safety equipment, and snow removal equipment all improved nicely. Manufacturing facility utilization remained quite strong and resulted in higher efficiencies that supported the expansion of operating margin in this division.

The combination of strong sales growth and improved efficiencies contributed to a 100 basis point expansion of the division's operating income. Industrial Equipment Division EBITDA of 16.7% improved 60 basis points compared to the second quarter of 2024. The order backlog in the Industrial Equipment Division remained quite good at nearly $510 million, providing us very good visibility and confidence through the second half of the year and into the early months of 2026. Second quarter order bookings in this division were up nearly 21% compared to the second quarter of 2024, primarily driven by exceptionally strong orders for vacuum trucks. On a year-to-date basis, Industrial Equipment Division orders are up over 10% compared to the first half of 2024.

Markets for the company's vegetation management equipment continue to improve at a modest but steady pace, and there were several positive indicators pointing to improved market conditions that were evident during this quarter. Notably, this was the division's fifth sequential quarter of improvement in order bookings. Second quarter order bookings were nearly 10% higher than the second quarter of 2024, and year-to-date orders are up nearly 14% compared to the first six months of last year. Agricultural equipment sales were down compared to the second quarter of 2024, but improved solidly on a sequential basis. Agricultural equipment orders in the second quarter were up firmly compared to the prior year's second quarter and were sharply higher sequentially. Sales of governmental mowers further improved in North and South America, but declined somewhat in Europe compared to the second quarter of 2024.

We saw a partly similar pattern in forestry and tree care. Sales in the forestry and tree care group declined relative to the second quarter of 2024, but improved nicely on a sequential basis. Orders in these product lines also increased compared to the second quarter of 2024. We were encouraged to see that U.S. residential housing starts were somewhat higher this quarter, but we continue to believe that an interest rate relief is needed to restore and sustain momentum in this part of the division. Overall, despite the positive improvement in trends, markets for this division's products remained under pressure. Dealers remained cautious regarding new inventory commitments on their balance sheets because of the higher floor plan interest rates. Although the Vegetation Management Division sales declined 16% compared to the second quarter of 2024, it was encouraging to note the solid 9% improvement sequentially.

Sequential improvement was mostly attributable to better performance from its North American Ag Equipment business and to a lesser extent from forestry and tree care. This division's results also benefited from better efficiencies resulting from plant consolidations completed last year, as well as from significant reduction in sales, general, and administrative costs. The division's operating margin declined 50 basis points to 7.1% of net sales, while EBITDA declined 120 basis points compared to the second quarter of 2024. On a consolidated basis, the company's solid second quarter results aligned with our expectations. Sales increased modestly on a consolidated basis compared to the second quarter of 2024, but rose more than 7% compared to the first quarter of this year, driven by strong organic growth in the Industrial Equipment Division.

Consolidated operating margin improved 83 basis points to 11.2%, and net income improved by nearly 10% compared to the second quarter of 2024. Second quarter earnings per share of $1.57 improved 9%, net of a $0.21 per share impact to foreign exchange headwinds from the U.S. dollar revaluation in our Canadian operations. Turning now to our outlook for the balance of 2025, we remain optimistic about the company's prospects for the next several quarters and beyond. While risks and uncertainty associated with tariffs remain, the combination of sustained strength of our industrial equipment markets, further recovery in vegetation management markets, improving internal efficiencies, and a lower administrative cost structure continue to point to positive development of company performance for the next several quarters.

We were very pleased to complete the tuck-in acquisition of Ring-O-Matic in the second quarter, as their vacuum excavation equipment nicely complements our vacuum truck and excavator product line and offers potential to accelerate growth in our equipment rental business. Ring-O-Matic employs a group of exceptional employees, and we're thrilled to have them join the Alamo Group team. With the company's net debt approaching zero, we're in a strong position to exploit our increasingly active M&A pipeline. We're encouraged by the quantity and quality of the actionable corporate development opportunities we've identified and are pursuing to accelerate corporate growth. This concludes our prepared remarks. We're now ready to take your questions. Operator, please go ahead.

Speaker 6

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone 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. Our first question will come from Chris Moore with CJS Securities. Please go ahead.

Hey, good morning, guys. Congrats on a great quarter.

Speaker 0

Hi, Chris. Good morning.

Good morning. Maybe we'll just follow up on that, on some of the stuff you're talking about, Jeff. From a visibility standpoint, it sounds like industrial is looking good at least into early 2026. Can you maybe just talk a little bit more about vegetation for Q4 and your thoughts in terms of this improving order, continuing that trend?

Yeah, I think we're likely to see that trend continue for the next several quarters at least, Chris. I mean, we're coming from a very low point, as you know, so the climb out has to be consistent, and I think it will be. I was very encouraged to see how much the ag market recovered during this quarter. It was actually a little better than I thought. Forestry was maybe not quite as good as I thought it was going to be. Forestry is the bigger ticket, more expensive items, and there we definitely could benefit from some interest rate relief, which I'm hoping one of these days we're going to see. All in all, the activity level is improving, and I think the dealer sentiment is slowly improving as well, despite ongoing headwinds in ag. Commodity pricing still isn't brilliant at the moment. Overall, we're encouraged.

I think that's partly just because there's so much inelasticity in our pipeline at the moment. I've shared with you in previous quarters that our pipeline is exceptionally low of inventory in the field, so it doesn't take much to drive the orders higher at this point. We feel very good about where we're going. The reduction in the cost structure is significant in that division, and we're maintaining it. The plant consolidations are finally starting to see the efficiency improvements we were counting on, particularly in ag. The consolidation of our two big ag plants late last year is finally starting to show the real benefits we expected to see. Overall, I'm encouraged. The markets were a little bit better in that space than I thought, and I think the climb out is clear, and I think it'll continue for at least several quarters from what I can see.

Terrific. So far, direct pain points from tariffs, including shifting production from Canada to the U.S., have been manageable. The issue you've talked about in the past is the potential inflationary impact, impact on demand. Just curious what you're seeing at this point. Are there specific product lines that would be more at risk?

The biggest risk overall is to our snow removal group, and it's really a U.S.-Canada issue, as I've told you before. We've largely mitigated that risk by shifting a good deal of that production from Canada into the U.S., into our plant here in Ohio, where we're at the Greatall facility today, for what that's worth. I don't see that being as too bad. The inflation side has been actually pretty decent. In other words, the pressure on our purchase prices has been far less significant than I think Agnes and I anticipated. So far, we're navigating the tariffs pretty effectively, and I'm very happy with that.

Got it. Perfect. Maybe just the last one. You know, we're at better than $1.6 billion this year, $925 million plus industrial. Just wondering, from an industrial standpoint, how much existing infrastructure can handle from a revenue standpoint before you'd have to add a little capacity?

I think we're okay yet because our plant in Wisconsin is not overwhelmed yet. We still have some capacity there. Our Ohio plant, where we are today, is busy for sure. The backhaul product line has been doing very well as the sales have been up across that product line pretty sharply. We've still got plenty of capacity in Wisconsin that we can go after, and we have other facilities. As you know, our Huntsville facility still has some capacity. We're not feeling too much pressure yet, Chris, with that. I think labor is the bigger constraint again. We're starting to see labor tighten again, sort of like we did during the pandemic, and that's something we're watching very closely.

Got it. Very helpful. I'll jump back in line. Thanks, guys.

Thanks, Chris.

Speaker 6

Again, if you have a question, please press star, then one. Our next question will come from Nick Dobre with Baird. Please go ahead.

Thank you for the time. Good morning, everyone. Yes, hello. Back to vegetation management. What's the right way to think about revenue year and a back half of the year? You know, I'm wondering in terms of both kind of how you see demand play out, but also, at least in theory, there should be some seasonality here that we'd have to kind of take into account.

Speaker 0

I think the seasonality will start to show up again in the fourth quarter in big, but I think as long as we can keep building the backlog back up, we'll be in a better position. The booking bills have been over one again, which is nice to see. The business is reinflating, not as fast as we'd like, obviously. I think you're going to see a slow build of inventory. I don't think it's going to be dramatic for the remainder of this year, but I think it'll start to build again. As we've seen, we've seen that for the past several quarters. We keep talking about the sequential improvements, and I think those will continue.

I'm sorry, just to be clear here, your $178 million of revenue in Q2, you're saying that we continue to build sequentially here in Q3 and into Q4 as the year progresses?

I think so. I mean, there's still some uncertainty out there on the forestry side, not so much in the ag side, but in the forestry side, there's still some uncertainty there. We've still seen some order cancellations in forestry mix, so we're not completely out of the woods there. My assessment is I think revenue will continue to build, but very slowly in that division.

Okay.

Maybe if I could add something, I would agree with that. We are feeling a little more confident on the ag side. The orders have been growing pretty nicely over there, and productivity in the plant after consolidation has been improving. On the ag side, we're feeling a little bit better, but I would agree with what Jeff Leonard had mentioned about forestry.

You mentioned in the press release that the margin in vegetation still reflected some of the effects of the recent facility consolidation costs. Maybe it would be helpful to roll out what these costs are, maybe the magnitude and the nature of the cost. I mean, you're obviously not adjusting them out. At what point in time should we expect this drag to be done with? Implicitly, what would that mean for margins going forward as you kind of lap all of this?

Speaker 5

Yes. I will take this one. What we're referring to in terms of gross margin is productivity. As these plants have consolidated, there were a couple of capital projects needed to complete and a simple learning curve. That has been improving. In our plant in the U.S. ag in Selma, that certainly has been improving, and productivity will improve in the second half. We're still working. We still have a little more left in our plant in the forestry in Wind, Michigan. That's related to productivity.

Can you quantify this? Let me ask the question differently. If for Jeff Leonard's comments, we're thinking that revenue maybe gets a little bit better in Q3 and in Q4, is it reasonable to expect margins to improve sequentially relative to Q2 as well?

Speaker 0

I would not say that for what it's worth because we still have a fairly unfavorable mix in forestry at the moment. I did comment, I think, on the call that, or at least I did on the previous call, that it's the large forestry equipment that still remains down. The tree care side is coming back nicely, but the margins in the tree care side, the smaller products, are not what they are in the big industrial machines. The mix is still relatively unfavorable in forestry, and we're still working through some demons on the inventory side. I mentioned with dealer cancellations and so on. I wouldn't factor in too much of a margin improvement for the next quarter at least. I think if we see it, it'll be more like a Q4 event in that side of the business in forestry and tree care.

I think we could probably give you a shot at quantifying it, but I don't think we want to do that on this call today, maybe on the after call.

Okay. Final question for me. You know, Jeff, we talked in the past about your intent to retire and looking for a replacement for you. We're sitting here in August. I haven't heard anything new on a matter, so I'm wondering kind of how your thinking has evolved and, you know, what's going on in terms of internal, external candidates. How is the board looking at this?

Okay. I can give you a very satisfying answer to that, Nick, for what it's worth. We're with our Board of Directors here in Ohio this week. The process is going exactly according to the plan, and I think you're going to see it reach a conclusion in the third quarter. Yeah, it's getting more close for sure. You know, that's both a happy and a sad thing for me personally. We've got a very active M&A pipeline, as I commented on the call, and I certainly want to see the company pilot its way through that with success. I've offered to stay involved as much or as little as needed going forward. That's about all I could say about it. The actual succession process is well advanced at this point.

All right. Appreciate that. Thank you.

Speaker 6

Again, if you have a question, please press star, then one. Our next question will come from Mike Siskly with D.A. Davidson. Please go ahead.

Yes. Hello. Good morning. Pardon the background noise here.

Speaker 0

Hi, Mike.

Good morning. Yes, hi. I guess I have a couple of quick ones here. Maybe one. The first one's not that quick. It's about capital allocation. I know you're pursuing some M&A deals. It sounds like despite the strong orders in industrial and the backlogs, you're not pursuing any large capacity additions there. I was wondering if you had any thoughts about trying to enter any new product categories with an amped-up R&D budget or other ways to put capital to work in an organically positive way.

We're always pursuing them, Mike. We obviously don't talk about them publicly, what we've got in our R&D pipeline. Yeah, we've looked for that growth to come partly from acquisition, but also from organic developments inside. We really like this little Ring-O-Matic acquisition. I know that's inorganic, but that offers a new platform for us to really drive our rental business very nicely. We were very happy to get that one, and the response from our customers has been very positive to that. We're very encouraged by the way that should unfold under our leadership. In terms of the R&D pipeline, we've had to change gears a little bit. We were investing very, very heavily in electrification, and now the need, or let's say the drive and demand for that, has taken a time out for the moment.

Of course, we also have the change in emission standards coming up here in another year or two. We have to be paying attention to that and getting prepared for that, and that causes you to spend more on R&D just in the preparation phase because you have to advance all those products forward. In terms of new verticals that we would develop organically within the company, no, I don't think we've got anything major in the pipeline there that I want to talk about today. We don't need to. We've got more than adequate growth coming out of our existing initiatives, so capital allocation remains very heavily toward M&A at the moment. I think that's going to be the case for the remainder of this year.

Great. I also wanted to touch on your snow business. You've done quite well for several years in a row here. I thought that you've got pretty decent orders left for the rest of this year to next. Curious as to the lengths of that. How much of your business has become chassis plus blade, and how much is still just the blade? That's been a large part of the growth. I kind of want to get a feel for whether there's more than one year of legs left in your snow business.

In the snow business, I'm sorry, yeah, we do have a lot of noise on the line, Mike, but we were both, Agnes, I struggled to hear your question. The snow business remains very, very active for us. It's like the vacuum truck business. It's a little bit spiky. You get a large order, and then the market takes a time out and so on, but the activity is very strong right now, especially in Canada. There's still some significant orders to be placed there, which is encouraging. The U.S. market has been stable. I followed the Douglas earnings call and looked closely, and they were reporting an uptick in snow, which we're seeing as well. There seems to be plenty of legs left in that market from my point of view, Mike. I don't see any kind of a slowdown coming there.

Outstanding. Thanks so much. I'll pass it along.

Thank you.

Speaker 6

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.

Speaker 0

Thank you. This concludes our preparation for today's meeting. We look forward to speaking with you again on our third quarter conference call in November.

Speaker 6

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