Q1 2024 Alamo Group Inc Earnings Call

Participants

Edward Rizzuti; Executive Vice President, General Counsel, Secretary; Alamo Group Inc

Jeffery Leonard; President, Chief Executive Officer, Director; Alamo Group Inc

Richard Wehrle; Chief Financial Officer, Executive Vice President; Alamo Group Inc

Chris Moore; Analyst; CJS Securities, Inc.

Mike Shlisky; Analyst; D.A. Davidson & Co.

Mig Dobre; Analyst; Robert W. Baird & Co. Incorporated.

Tim Moore; Analyst; EF Hutton LLC

Presentation

Operator

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 zero. 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

Thank you. And 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 2128273746 and we will send you a release and make sure we run 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 18773447529 with pass code 9093220. Additionally, the call is being webcast on the Company's website at w. w. w. dot alamo dash 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 and 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 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 what I would now like to introduce Jeff Leonard, Jeff, please go ahead.

Jeffery Leonard

Thank you Ed. We want to thank everyone who has joined us on the conference call today and express our appreciation for your continued interest in Alamo Group first quarter shaped up largely in line with our expectations, and we were pleased overall with the financial results we 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

Thanks, Jeff, and good morning, everyone. Alamo Group's First Quarter 2024 and 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 in gross margin dollars decreased by just under [$800], [$900,000] in the quarter compared to the first quarter of 2023. Both margin percent and dollars decrease were driven by underabsorption and product for productivity, inefficiencies in the vegetation management and to a lesser extent, product mix in the industrial equipment operating margin for the first quarter came 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 for $2.67 per diluted share, a decrease of 4% versus net income of $33.3 million or $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 due to inflation and a higher interest rate and a 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 of $21.7 million, almost 10% of sales, 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 a larger manufacturing locations 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 large due to a solid performance across all product lines, particularly vacuum trucks levers to breed collectors and snow removal equipment. While component part receipts continue to return to a more consistent cadence, the division continued to have a few late component deliveries, which impacted operations, although not a success but 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 or 8% of sales for the first quarter of 2023, an increase of over 102%, the Company's backlog at the end of 2023 at the end 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.
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 were continued to remain strong. Working capital increased about $61 million compared to the first 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 inter-company loans at the end of the year. Our bank leverage ratio for the first quarter of 2024 was just over [1.31], down from [1.7] to 1 at the end of the first quarter of 2023. And finally, the Company's trailing 12 months EBITDA came in at just over $246 million flat to year end of 2023, which was a record for 2024. Cash flow should should remain so should 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. Freight costs will be a major focus for the company in 2024.
So in summary, Q1 of 2024 was what we had anticipated for Alamo Group sales were up 3%. The margins and net income were off mainly due to weak market conditions of 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.

Jeffery Leonard

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 market for Alamos forestry and tree care equipment has been the most impacted by the higher rates. Many commercial tree care contractors who purchased our total chippers and stump riders 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. And the dealer is forced to pass along their own higher floor plan financing costs, then potential buyers or impact of a second time when they see third-party financing to purchase a piece of equipment and incur higher finance charges to do so the result has been increasing constantly in the market with many buyers content to wait for lower interest rates, but for making a firm buying commitments, 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 poultry chippers and grinders is largely driven by waste 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 file. A few 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 remain elevated above contract levels during the first quarter the agricultural equipment market is encountering similar dynamics, the combination of softer commodity price stock 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 US. net cash farm income is expected to decline in 2024 by approximately 5% compared to the 2023 -- 2003 to 2023 long-term trend. US. 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 to 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 down 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. Backlog also declined in the divisions North American agricultural equipment group that serves hobby farm and ranch segment. 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 more products began to show early modest signs of recovery in the final weeks of the third quarter. The slowing demand in these two groups adversely impacted absorption and efficiency of vegetation management, major manufacturing facilities to address this division took actions to reduce production capacity at its largest US 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 equivalent 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 remains bullish. But with this division's larger business groups facing strong headwinds that drove sales lower vegetation management operating income declined 450 basis points, and EBITDA also moved 380 points lower compared to 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 with 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 ended 2024 forecast declines in state revenue for 2023 did not materialize and many states continuing to record budget surpluses last year, steam rainy day funds remain 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 vibrant communities. However, governmental markets for the division's products remained very strong during the first quarter across the board at 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 divisions, 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 product in the division's primary production facilities as the pace of production increased with very strong momentum across all of its product groups. Industrial Equipment Division operating income improved 440 basis points and EBITDA grew 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 were made, truck chassis deliveries continuing to be somewhat constrained by shortages of chassis frame rails, which again impacted production for nearly all of the truck chassis OEMs, a shortage of Allison Transmissions due to production disruptions late in 2023 and a shortage of transmission control modules further held back medium duty truck chassis deliveries during the quarter. Costs for raw materials and industrial components stabilized during the quarter and were another bright spot. Steel prices remain volatile, but generally trended slightly downward during the first quarter and have declined significantly since peaking in late 2021. Skilled labor availability, which has been very challenging in most areas where the company operates since the onset of the pandemic has now improved in many areas, and this is helping fuel 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 that both negative and positive are likely to persist. The headwinds in front of us and 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 lower level, 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 margins.
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's.
This concludes our prepared remarks. We're now ready to take your questions.

Question and Answer Session

Operator

We will now begin the question and answer session 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 first question comes from Chris Moore from CJS Securities.
Please go ahead.

Chris Moore

Hey, good morning, guys.
Great quarter.
Thanks for taking a couple of questions.

Jeffery Leonard

Good morning.

Chris Moore

Good morning on vegetation vegetation EBIT margin 9.7%, down significantly year over year, up a little bit sequentially. You mentioned actions to protect the margin. Can you stay around the 10% level for the balance of '24 or is visibility just not there to make that to make that up -- ?

Jeffery Leonard

I'm fairly confident we can, and that's what we're expecting to deem, 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 know we're taking enough actions to make sure we can protect that bottom line administration, but that's the whole intent.
Chris, no matter what the market does to us and whatever our sales call we need to maintain 10% distribution.

Chris Moore

Terrific. Thank you. That's helpful. Industrial bookings, backlog both up significantly, what is lead times look like at this point in that segment?

Jeffery Leonard

You know, they're actually normalizing what I will close around about 120 days with the vacuum trucks and the bigger equipment and falling fairly rapidly, though the truck OEMs are really getting one step. Some of the problems I mentioned in my remarks on the call are beginning to clear a little bit. And we're very optimistic about our deliveries of chassis, which really drives that whole division, as you know. So I think three months is pretty typical right now for us and we have more than adequate capacity in that division.
Got you.
You mentioned still a few kind of lingering issues on the supply chain side. Any any worries at this point from where you sit today. Any reason to think that they will kind of marginally continuing to improve versus, you know, sometimes go the other way we're trying to get divided I don't have any visibility going.
Yes, horizontal human situation getting any worse. And I think that 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, cylinders, all kinds of things that we consume as the economy started as a whole whole normalized now lead times are coming down in most parts of our slides.

Chris Moore

Got it up. I appreciate it, guys. I will leave it there.
Thank you, Chris.

Operator

The next question comes from Mike Shlisky, Cesky from D.A. Davidson.
Please go ahead.

Mike Shlisky

Yes, hi, good morning. Thanks for taking my questions. Some of five minutes could you maybe can you remind us of what percentage of your business is serving the public sector or servers?
Private players has served the public sector. I'd imagine that group of customers is seeing fewer problems under the private sector. It sounds like you have said pollinating that's public document and pretty decent business. Private is a little more challenged.
So what are the deep broad what the broad breakdown there?

Jeffery Leonard

It's still I think what we've said before, it's roughly between 20% and 25% of that is from the hub into the hobby farmer Inrange and it allows all data between industrial and governmental book. I'm sorry, I'm sorry.

Mike Shlisky

I was asking is kind of a overall your overall business, what percent of it serves the public sector and what's sort of the private? datacenter taking it broadly? Number two.

Richard Wehrle

Right. I think like I said, I think we're 20% to 25% in that in that space, we're talking about the balances and governmental and industrial and a split.

Jeffery Leonard

Yes, it did appear governmental, Mike runs 40% to 45% of total revenue that.

Mike Shlisky

Okay.

Jeffery Leonard

There are governmental and then there are contract versus straddle that as you and I've discussed before, we have good contractors that buying lower and use it for both private and public works. When they get a contract to muddle along and state highways. So the numbers are not pure net there is that that's the best number we've been able to produce.

Mike Shlisky

Got it.
Thank you for that color. Appreciate and cleanup of tell us a little bit about the health of your dealer network, especially the dealers there mainly serve the private sector. My guess is a lot of those are simply our dealers or larger other brand dealers that think the prime mover and just want to make sure that you're not seeing you, I'm unable to even take inventory?

Jeffery Leonard

Actually, we're not we haven't seen any pressure on our accounts receivable. We had one large post the deal last year that we bought new records. We are just going to go and solve and return quite a bit of inventory to us. That was one of the large cancellations I mentioned on the call that Bjorn has since gotten back up to speed and is ordering some equipment from us again. So that's been a positive move. I mean, obviously, dealers are being very cautious right now. I do know that the contractor space closely, but I don't see any that are under particular duress and in light of any probability to fail at this point.

Mike Shlisky

Got it.
And if any one last one for me on during the first quarter, one of the large machinery players, a bit larger than Alamo kind of certain adjacencies like quarry, our aerial work platforms for that company launched their own brand of medication management equipment within motors, chippers and so on. I know there's sure of their trials overlap with yours or not the Cordova one, just to kind of see if there was overlap, tell us a little bit about in the past that would normally have any issues with some startup company trying to displace more of core or other Alamo brand, but this is a pretty large and well-funded parent company.
So can you just maybe give us some some commentary on the strength of the Morbark brand, your distribution and your customer base and feel if you have any plan to kind of tell defend your market or is this a trend makes any contraction?

Jeffery Leonard

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

Mike Shlisky

Okay. That's great color. I appreciate our customer.

Operator

The next question comes from Mig Dobre from Baird.
Please go ahead.

Mig Dobre

Hi, good morning. In the fiber industrial in industrial equipment, can you guys confirm what the contribution from acquisitions was in the quarter revenue-wise?

Richard Wehrle

We normally don't, but probably [$15 million] became a probably roughly.

Mig Dobre

$15 million.

Jeffery Leonard

Okay. Pressure that Baxter sales, maybe competition to sales was $15 million.

Richard Wehrle

If you back that out the industrial division was still up 20%?

Mig Dobre

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

Jeffery Leonard

Yes.

Mig Dobre

So Lisa, it sounds like there were some issues in the quarter, but things are getting better. I mean, 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 led to wage inflation?

Jeffery Leonard

Yes, the short answer is yes, we would have been able to get more revenue out of the quarter. This is simply an issue of these framework.
Also the truck I've mentioned before, you can certainly talk with Daimler and the other big guys about it, they all share a common supplier in Mexico. But having production problems for a long time, it is getting better, though, maybe for sure, and we've got quite a bit more chassis during the first quarter than we did during the fourth and the third of last year and for a year, I can tell you once the chassis supply situation improved industrial 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 would drop the service. We've been living with them for a while and they are steadily improving the Allison Transmission.
What is another really strength analysis? Normally a very, very reliable supplier. They passed 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, made defined chassis off lots of other places to keep our production rolling. So I don't think that really not a 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 on it.

Richard Wehrle

I took a note to add to that. Maybe if you look at our 10-Q, which is like $30 million, which continues to remain too high for our liking with over half of that is going to be industrial. And as Jeff mentioned, if you just get a few things, just be more 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 that division there about half of that, that's a $12 million to $15 million that we have of that industrial divisions are normally around about half of that. So that, as Jeff said, at least between $5 million and 7 million of extra sales that we've had potential could have had during the quarter.

Mig Dobre

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

Jeffery Leonard

Yes, yes, I think we'll generally see high single digit revenue growth in that division for the balance of this year, maybe a little bit better than that depending on how things play out over time. We have this straight running at the moment, 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.

Mig Dobre

So but I'm curious and I'm sorry to press you on this a little bit bigger. There's a there's a pricing element, all of this right. That's that's in our store in backlog presumably has a pricing tailwind. So if you're sort of saying that we 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 why not more and more leverage there?

Jeffery Leonard

Well, I mean, I think that we're still having that kind of pace of build in our plants take. I mean, we're building at a rate that actually has a very attractive rate right now and that has the added effect of improving efficiencies across the operations. Richard made reference to the under absorption in our vegetation management facilities. We have the opposite effect going on in our industrials group of absorption because continuous improvement. And I'm just being a bit cautious here because there's a lot going on right now in that new build out the plan where we have the strike is a big place for us. We're continuing to negotiate there. We're envisioning again yesterday has been about what needs to get solved when you get that strike settled, and 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 going to get that back, obviously, hence the caution. But you're right, the momentum is really, really good at 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 our capacity at the moment, which will involve some investments. At the same time, our street sweeper group at Presidio sitting here running at the moment, that is at a level of profit we haven't ever seen in that business before running very, very well. And then we have the added boost from the from the Royal Truck acquisition, which has been very nice. So I guess maybe I'm too cautious here. Maybe I don't want to over forecast, but I think the growth is going to be very, very nice.
Interesting.

Richard Wehrle

And something else to add to that big of this division, just like the visitation, they put their price increases in the first part of January 2.5% to 3% of bringing should make some fixed 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 tentative, we're still getting some pretty good volume. Again, it's coming through in the order pace that we've got in all product lines in that division.

Mig Dobre

No, I appreciate all the detail here and you kind of got to some of the things that I've been wondering because and there's a question to be asked about capacity rate. I mean, it's I mean, are you at a point now where on your just operating at full capacity and you're you might be struggling a little bit to increase the volume that's coming coming out of the plants. So while you have great backlog, you might have some constraints elsewhere. And that's kind of what I was trying to figure out.

Jeffery Leonard

First off, David, there's a lot of moving pieces right now. As we've mentioned to the previous quarters, we closed our sweeper plan out of in Washington state and we moved that production into our Wisconsin plant or a contract 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 room. I think the revenue build that you're expecting to see, but I sure like the direction in industrial right now, it's looking really, really positive. But 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 hot and high goodwill to get them to get a contract with inflation. So I'm fairly confident that if it's all to.

Mig Dobre

Understand, I do want to ask a couple of questions about vegetation management and Dell John is you discussed here, you know, there's there's still there's still channel inventory that has to be to be worked through, but it sounds like, yes, you're highlighting some things like interest rates, for instance, who knows what the path is going to be on a go-forward basis?
So I guess my question to you is that actually if nothing changes, if nothing changes in the broader macro environment. How are you thinking about your production and your revenue in this segment for the rest of the year? Is Q1 at a high of $23 million, the high watermark and we should be seeing a gradual sort of production decline here to destock the channel or are you thinking it?

Jeffery Leonard

You know, that's a great question. I think as you look at it piece by piece and I'm going to slice it there because it's the only way I know how to answer your question. I think that we're going to see the large window for us to recover sooner because there's a need for those machines. But again, the fundamentals in that business remain pretty positive. We are the only negative feedstock side that I gave some color on during the call. And as I said, we're starting to see some some rebirth in that business already laid out equivalent to the first quarter as did our more business, our traditional lower business, particularly our books of business at a very nice first quarter and a nice end to it as well. So that's coming back have 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 aside. So as I think about how vegetation embedded since the revenue is going to be going forward, a lot depends on whether the orders continue to flow them into at least the same pace that we saw in Q1 for the next couple of quarters. We have a couple of quarters where the backlog in that space and that we go hold on to that level of backlog, which is a very traditional level for that division from a long-term point of view that I think the revenue will be stable if the orders start flowing in the second quarter and third, then I think you're going to see a tapering of revenue in that division until we conclude the channel inventory out. But it's not going to be a collapse given the given the backlog that we have there, again, the order rate and parts of that business are already picking up.
So it just depends a lot on how the next few weeks shape up in terms of the order book, particularly in the hobby farm and ranch that from my point of view.

Richard Wehrle

I think something else to keep continue to keep in mind what we tried to save or reduce part of the script because no matter what this division does if they have that fall off as Jeff mentioned the sales and the backlog falls down. Our requirement here is to trying to do everything we can to maintain that 10% operating margin, which is there is there are our goal for this year, no matter what the revenue comes out in this division.

Mig Dobre

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

Jeffery Leonard

What we're yes, what we're doing in Vegas, what we've been doing for a couple of quarters offer 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 going to pay off from the actions we took last year. We did see that bump up in orders in our Bushnell 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, which obviously iconic brand, as you know, we'll make. So it's natural that we would see the biggest uplift. Some of our other brands are probably not going to see it see the same immediate lift in both orders and backlog from those incentives. But that's the tool that we have, right, because we have to clear the channel inventory, you know that and I know that we have to clear that in order to get a better running reorder and a rise in fact, well, and also we mentioned as I mentioned to as well as the labor force.

Richard Wehrle

We made reductions to this depletion trends in the labor force because we want to trying to get ahead of this strain a little bit so that that we're allowing ourselves to trying to do everything we can to maintain that 10% if the orders continue to soften.
As Jeff reported, we're going to continue to make more and take more actions to make sure that we reduce our costs and control or expenses.

Mig Dobre

Understood.
Final question for me and going back to the discussion that you had earlier with with Mike on the government exposure that you have. I'm kind of curious as to how you guys are thinking about about funding in that index sector and more broadly. I mean, you know, we've we're coming off a couple of really strong years here. And do you think this is sort of sustainable as we think about '24 and into '25 here in terms of this set of customers continuing 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 somebody to some degree.

Jeffery Leonard

But obviously at some point there's going to be at least two of our expectations, the rollout of a series of very extraordinary circumstances following the pandemic that all of the federal level incentives that have the fleet out there.
And before joining this call and before writing my comments in 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 US, the states are in very, very good shape.
There. And a very strong conviction that they're going to continue to invest. I'm quite certain that the municipalities are more mixed. You know, some of the bigger cities are incurred and lots of costs related to reselling immigrants. You know that everything is the same as I do there, unresolved 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 in terms of prices coming down. Now, obviously that's going to sustain municipal incomes at a traditional level for a long time. So I think you will eventually see a paper. I certainly don't see it coming this year. Maybe I think we're in a strong running all through 2024 on the governmental side of our business and the tapering may come in 2025. And you don't find the answer in my head and whether this was going to be a soft landing in our economy or a bit of a stumble. I'd be able to give you a much more clear answer to that. But I see at least another 12 months of really good running on the governmental side.

Mig Dobre

All right. Thank you for all the color. I know you asked a lot of questions. Appreciate.

Jeffery Leonard

Thanks, Mig. Appreciate.

Operator

As a reminder, if you have a question, please press star one. The next question comes from Tim Moore from EFI. Eaton.
Please go ahead.

Tim Moore

All right. Thanks. I wanted to wish Richard the best in retirement in time with his family dollar who may not have yet. And I'm going to move at a pace, though, is so great and a straight shooter, which is really helpful for seven years. And so maybe we will start with a question for Jeff on industrial equipment. As you look out on this division, then, you know, historically it wasn't too long ago, the operating margin was higher and you've done a great job getting it back to close to that. But what do you think is kind of a realistic operating margin ceiling. If you're looking out to maybe next year without giving formal guidance, if there's no recession, do you think you can do 13.5% op margin next year?

Jeffery Leonard

I'll be up.
Yes, I do Jim competently. Yes, I think that when you look at our most notable competitor name, I won't mention and you also mentioned references to their higher operating margins. If you actually do a side-by-side comparison until the court, we allocate our corporate costs out to our two divisions. As you probably know or most of us, our main competitor. It'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 think we are running very well right now. And I do believe there's further opportunity to expand margins in that group for sure, because there's still some inefficiencies there that will pick up as the volume continues to build from it.

Tim Moore

And that's great. Now going from our math myself, but it didn't seem like the ceilings and close to even have now. But I'm that's good news.
And then 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 Harvey and ag will come back and normalize.
But just switching gears to maybe your made in-country efforts here specifically maybe for Europe rather than shipping heavy machinery from the US over there that cost, how is that going? And is that really more focused on forestry, landscaping and Speakers?

Jeffery Leonard

It's not focused on sweepers, in particular at the moment, is mainly focused on the vegetation management side and mostly in mowing products and to some degree in forestry, as you know, that timber that we produce in the UK under the Timber Wolf brand will have a very nice hub 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 that come through on the forestry side. So it's going well. But obviously, all the other headwinds in that division are gaining a lot of our attention right now as I'm sure you can understand.

Tim Moore

So that makes sense from that. Not to ask about another distraction, ibrutinib, I'm pretty excited about the rent to own fleet. It seems like just back of the envelope comparing some peers, it seems like you'd have something like a 35% ROI. And I was just wondering, do you think you can add, are there more trucks chassis this year that maybe get the fleet up to 400 maybe by the end of the year?

Jeffery Leonard

It went up of only modestly during the first quarter, we expect that to continue all through the year. I think we were up 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, not that know where we're going. So yes, I think we'd be very nice growth in the rail space from Zimmer products during this year.

Richard Wehrle

Our expectations tumor to get north of 300 units out there. And I think we close the year roughly 210, 215, 217, something like that.

Tim Moore

I guess it's 300. Yes, that's a that's actually number I was thinking about for now that makes sense. That's a really good opportunity because the airline up and helps customers makes them happy but maybe just switching gears to one other topic. I mean, this is snow removal has been amazing and has a wide wing innovation taking market share. It's pretty clear Like when does that slow down?
I mean, one one does that kind of normalize and you know what I hear.

Jeffery Leonard

You know, the outlook from that team is so bullish. I almost said pinch myself when I talk to them, they just see opportunity everywhere. And we struggled in the airport snow removal space for a while, Tim, we just came out of a big show and Buffalo got a very nice reception there. And customers are finally starting to see the strength of our products in that space, which is a huge turnaround from mobile work three or four years ago, our wide Wayne cloud is selling like hotcakes right now. We can't build them fast enough. And so that's really interesting. And we're still getting modest lease awards out of out of contractors.

Richard Wehrle

We're also picking up some that really big interest now back in our airport area.
So orders for different airports right now for snow equipment, which is really good. We had some struggles with that about three or four years ago, made a tremendous amount of improvements in there, and that's now actually showing a lot of interest for us right now.

Jeffery Leonard

I mean, I think I can share one number would share what I can share one number was it, Tim. We believe in fairly short order here, our snow removal segment can be $250 million a year ago. And while that's going on not only, I'll be disappointed if it doesn't get there.

Tim Moore

That's phenomenal compared to just three years ago.
That's it's amazing. But just one clarification question. I just want to make sure I understood this from the previous comments for the the high single digit sales growth comment, and that's I know you got the strike clearly impacts you, but what if you factor in kind of the Royal trucking acquisition, it doesn't anniversary until early October, I think it was October 10th or something that seems like that would add 8% to 9% sales growth the quarter by itself. Can I just kind of thinking about this the right way is are you maybe being a little conservative?

Richard Wehrle

That is I think you'd be back in.
I think that's what we're trying to say is probably closer to mid single digit increase without oil in there?

Jeffery Leonard

Yes, among them without any uncertainty. Again, the uncertainty isn't around industrial of all. It's in vegetation management. We're waiting to kind of see how the orders flow in the second quarter if the orders picked up nicely. And I couldn't be more optimistic about sales growth for the rest of the year. But we still know, as we sit here today, how that's going to play out, we're encouraged to 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 the corner there yet because I don't believe we have.

Tim Moore

No, that's fair enough. I was just making sure that kind of high single digits, excluding Royal's contribution of 8% to 9% to $50 million a quarter after that really clarifies that.
Thanks so much and that's it for my questions.

Jeffery Leonard

Thanks.

Operator

Alan, this concludes our question and answer session. I would like to turn the conference back over to management for closing remarks.

Jeffery Leonard

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 Worley, who retires today after more than 36 years of service with our company. Richard is an exceptional colleague and a great friend has been extremely instrumental in the positive development of this Company since its earliest days. While I will certainly miss him a lot and wish him a very well deserved long, healthy and happy retirement, and I will miss him very much.
Agnes camps will take over the reins as our CFO for today, and will join us on our second quarter 2024 up conference call in August to present our results and to take your questions.
So we look forward to that basic get one more time for joining us today, and we look forward to speaking with you on our second quarter conference call in August 2024.

Operator

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