Good afternoon, ladies and gentlemen. Welcome to the Somero Enterprises Investor Presentation. Throughout today's recorded meeting, attendees will be in listen-only mode. Questions are encouraged. They can be submitted at any time just using the Q&A tab situated on the right-hand corner of your screen. Just please, as usual, type in your questions and press send. Before we begin, I'd like to submit the following poll, and if you could give that your kind attention, I'm sure the company will be most grateful. I'd now like to hand over to the management team. Good afternoon.
Hello, and thank you all for joining us today for our Somero Enterprises 2025 results presentation. I'm Tim Averkamp, Chief Executive Officer. Presenting alongside of me is Vincenzo LiCausi, our Chief Financial Officer. I'll begin with an overview and operating context. Vincenzo LiCausi will review our financial performance. Then we will walk through our strategic plan update, summarize, and we'll make time at the end to answer your questions. As we begin the presentation today, I'm excited to note that 2026 marks Somero's 40th anniversary, an incredible accomplishment that began as a simple idea sketched on a paper napkin by the Somero brothers and has grown into a foundation and legacy that's fundamentally changed our industry. That four-decade journey provides important context for the leadership transition that took place in 2025, a pivotal year for our organization.
I'm proud to report that the CEO transition was executed smoothly, providing stability while sharpening our focus on execution. On April 1st, I stepped into the CEO role, drawing on my experience in the construction equipment industry to help guide Somero's next chapter. My first priority was to listen and learn by engaging with our customers, employees, dealers, and shareholders to better understand what drives our success and where we can further improve. This reinforced two clear observations. First, Somero's differentiation is real and durable. Second, there is meaningful opportunity ahead if we remain focused, disciplined, and intentional in how we grow. At this important moment for Somero, I am humbled and energized to carry forward our legacy, and I'm grateful to the board and my team for their support throughout my transition into the CEO role. Continuing with the board, we also experienced an important change.
Bob Scheuer, who has served as the director since 2015, has taken on the role of chairman, succeeding Larry Horsch. We sincerely appreciate Larry's leadership, past and ongoing as a director, and we welcome Bob as chairman. With these transitions, we remain committed to strong governance and a disciplined approach to execution. During the year, we also developed a refreshed strategic framework to guide how we operate and execute going forward. Importantly, our strategy is actively driving execution. We'll come back to that shortly. Continuing on the topic of leadership, I want to take a moment to highlight the depth and experience of our leadership team and board, which are key strengths of Somero. Starting with the executive team, Enzo LiCausi, our CFO, whom I mentioned earlier, has been with the company for more than seven years and serves as a strong business partner.
Howard Hohmann, our Executive Vice President of Sales, brings 28 years with Somero, along with prior experience as a concrete contractor, which gives him deep industry knowledge and credibility with our customers. Many of you have met Howard from previous investor meetings. Lastly, Jesse Aho, our President of Global Operations, is approaching 18 years with the company and plays a critical role in driving operational excellence and execution across the organization, including engineering and customer support. Turning to our independent directors of the board, Bob Scheuer, Tom Anderson, Larry Horsch, and Anne Ellis bring extensive industry and business experience along with strong governance oversight. Together, the board and leadership team provide continuity, discipline, and a long-term perspective as we continue to execute our strategy. In the next few slides, I'll provide some high-level background on Somero.
Somero pioneered the laser screed category over 40 years ago, and we continue to refine it today. We serve customers in more than 90 countries, but our differentiation extends well beyond global reach. It's the combination of equipment, training, parts, service, support, and expertise that enables contractors to place higher quality floors with greater productivity and fewer people. That integrated model is difficult to replicate and underpins our leadership position. From a footprint standpoint, our global headquarters and the Somero Concrete Institute training facility are based in Fort Myers, Florida, with manufacturing, production, and operations centered in Houghton, Michigan. We complement that with regional sales, parts, and service centers in Belgium, the U.K., Australia, and India, allowing us to stay close to customers and support them consistently across markets. Our competitive advantage is layered. We lead with innovation and protected technology.
We design products directly around customer job site needs, and we support customers through training and service that extends well beyond the initial sale. Somero's reputation is built on performance. Our equipment is specified where quality matters most, reinforcing our leadership position. That performance has earned recognition across the industry, and we remain actively engaged to understand evolving requirements and deliver solutions that advance both our customers and the industry. We actively support multiple industry trade associations globally as part of our commitment, where we frequently interact with our customers who are also members. Also note that the image on the bottom right of this slide is from the Concrete Industry Management 2026 auction. Somero is a proud sponsor of the CIM program, and we're pleased to donate a new Hammerhead laser screed in support of this year's auction.
The CIM program plays a vital role in preparing the next generation of concrete industry talent, and we're proud to support the students and professionals who help shape the future of our industry. Before we get into this year's results, I want to step back and reinforce what has consistently differentiated Somero, a strong financial profile. This slide summarizes the structural characteristics of the model to support profitability through cycles, strong cash generation, and balance sheet flexibility. Somero's profitability is supported by a premium brand, a flexible operating model, and disciplined cost management. We've demonstrated the ability to remain profitable through the cycles, scale efficiently when demand improves, and protect margins when volumes soften. That resilience is a core strength of the business. We maintain strong cash generation, preserve balance sheet strength, and retain flexibility to invest in growth while continuing to return capital to shareholders.
That financial foundation gives us confidence as we look forward. Our overall product portfolio consists of over 20 products and spans a wide range of applications. Our laser screeds are used in a variety of applications from small to large pours to more complex commercial placements. Importantly, 2025 product launches strengthen our balance across the portfolio. We're no longer addressing just the top end of the market. We're deliberately expanding coverage to serve a broader range of contractors and job site requirements. Beyond core machines, our broader portfolio supports adjacent workflows, including material placement, grading, profiling, and above ground applications. Together, these models demonstrate the versatility of the Somero portfolio across a wide range of application and job site requirements. Now, I'd like to shift our focus to the business and walk through our results from 2025 and the beginning of 2026.
As we step back, there are a few key messages we want investors to take away. First, 2025 was an uneven year for the construction market, with a softer first half followed by improving momentum in the second half. Demand was inconsistent and decision-making slowed in certain segments, but the year also demonstrated the resilience of the Somero business model. With this backdrop, our team executed with discipline, protecting margin, preserving cash, and continuing to invest strategically. Second, our strategy is firmly in action. We refreshed our strategic framework and translated it into how we run the business day to day, guided by three clear priorities, fortify, innovate, and amplify. Finally, as we look ahead, late 2025 non-residential momentum has carried into 2026, and customers are reporting healthier activity levels and backlogs while also remaining appropriately cautious.
At the same time, global macro and geopolitical uncertainty remains elevated, and that backdrop continues to influence customer decision-making, yet long-term fundamentals remain intact. Having walked through the broader context, I'd like to highlight a few key outcomes from 2025 that best summarize how the year played out. 2025 finished largely as we anticipated as the year progressed, with a stronger end to the year and full year performance coming in line with revised market expectations. That outcome reflects disciplined execution in an uneven market environment. New and next generation products launched during the year collectively contributed approximately $13 million in revenue, reinforcing the importance of continued investment innovation even in softer market conditions.
At the same time, we took targeted cost actions that partially offset the impact of lower volumes, enabling us to deliver EBITDA margins of 20% and improving operating cash flow. Strong cash generation supported a solid return to shareholders while still allowing us to invest for the future. Key investments included continued development of our product and innovation pipeline and the advancement of our refreshed strategic framework plan and initiatives. Together, these actions reflect a year where we balanced discipline and investment, protected profitability and cash generation, and positioned the business for its next phase of growth, with additional product launches planned for 2026. With that, I'll hand it over to Enzo.
Thanks, Tim. Before we get into the 2025 results, I'd like to set the market backdrop for the year. As we enter 2025, after coming off a strong December in 2024, we expected market improvement in 2026. It seemed as though the market was coming to terms with the monetary environment and looking forward to a pro-business administration. However, that sentiment changed dramatically with the increase in tariffs, and coupled with interest rate speculation and restrictive immigration policies, created tremendous instability and uncertainty in the market, which persisted throughout the year. Despite these headwinds, we had a strong trading in the second half of the year with the help of new products and a seasonal uplift.
Zooming out a bit, it's challenging to gauge the direction of the concrete laser screed market since it is a niche segment within overall construction with no specific publicly available data. That said, there are broad measures that provide a sense of the overall construction market and may be indicative of future direction. We've called out a few of these market indicators. In summary, they appear to show early signs of market stabilization. Some forecasters call for a slight improvement in 2026. I reiterate that these indicators are not always directly correlated to Somero or our customers, but are nevertheless encouraging. Our most reliable source of information comes from our customers, and they too have relayed a consistent sentiment. Their level of bidding is elevated and their backlogs are in good shape. Still, they remain cautious until there's more clarity and confidence in the market.
The recent developments in the Middle East certainly don't help matters. As with other markets in our ROW region, we have a relatively small base of business in the Middle East. It remains to be seen how this conflict will affect the broader markets. In terms of the competitive landscape, we have not seen any material changes and Somero remains the clear market leader. We stated, we ended the year as anticipated, delivering improved second half results with total revenue increasing 23% over H1, albeit down on a full year basis compared to 2024. Cost-cutting measures undertaken during the year preserved profits and cash. Despite the softer profitability, cash from operations remained on par with prior year aided by several factors, including strong advanced customer deposits.
The strong cash generation enabled us to continue to pay out dividends, buy back shares during the year and end the year in a good cash position. Moving on to the regional performance and starting with North America, which is by far our largest market. Revenue in H2 increased 14% compared to the first half of the year, accounting for approximately half of the total increase H2 over H1. On a full year basis, revenue was down 17%, driven by lower sales volumes of our boom and ride-on screeds as the larger projects were more heavily impacted by market headwinds. We continued to attract new customers even during a down cycle, in part benefiting from the entrance into a new customer segment with the launch of the Hammerhead, which Tim will discuss in more detail.
Parts and service revenue declined to a lesser extent than machine revenue, partly due to our heightened focus on recurring revenue. In Europe, revenue in H2 was up meaningfully on H1, albeit down 39% on a full year basis compared to 2024. In addition to the uncertainty in the U.S. which impacted markets globally, the underlying European market continues to be a bit weak, with private investment remaining constrained. As a result, sales volumes were down in our boomed and ride-on screeds. Sales to new customers was consistent with prior years. The purchasing behavior outside of the U.S. tends to be more project driven, and customers tend to hold on to their equipment longer and don't buy equipment on a regular cadence. Therefore, a greater portion of revenue in our international regions comes from new markets.
Whereas in the U.S., customers will also purchase equipment to keep their fleets fresh and/or upgrade to new technology. Therefore, a greater portion of revenue in the U.S. comes from existing customers. Sales of parts and service held up, with customers opting to repair and service machines supported by our local sales and service center in Belgium. The Australian market continued to be challenged with a shortage of tradespeople, persistent inflation and significantly tightened monetary policy to bring inflation back within targets. Consistent with our other regions, trading in H2 was meaningfully higher than H1, but down 15% on a full year basis. The revenue decline was primarily driven by lower sales of ride-on screeds, while sales of our boom screeds held steady. Similar to Europe, a good portion of our revenue comes from new customers.
We continue to believe there remains opportunity for us to further deepen market penetration in Australia. Our rest of world consists of a number of small markets that historically tend to fluctuate. Similar to our other regions, H2 revenue in ROW was also meaningfully up. On a full year basis, revenue from ROW was up 10% over 2024, driven by an increase in boom screeds sold in the Middle East. This was partly offset by a decline in Latin America. The next slide reflects comparable sales by product line. In 2025, we experienced declines across all product lines. Note that our product mix is dictated by project size and application. As mentioned, new and next generation machines provided an uplift in the second half of the year within the boom and ride-on categories.
New and next generation products will remain an integral part of our long term strategy. We have separated sales of parts and service, including accessories sold with machines, which was previously reported in the other product category, as recurring revenue will be a focus for us going forward. As such, we're pleased that sales of parts and service were resilient, declining to a lesser extent compared to our machine revenue despite challenging market conditions. Moving on to our operating results. Gross margin was 52% compared to 54% in 2024, reflecting the impact of unabsorbed overhead due to lower sales volume. On a positive note, annual price increases to offset input cost increases held up. Looking ahead, rightsizing operations puts us in a good position to be more efficient in 2026.
Operating expenses were down compared to last year as expected, following workforce reductions and cost cutting actions which were partly offset by non-recurring administrative costs. Lastly, in H1, we incurred non-cash one-time charge related to foreign tax deferred assets, mostly from Australia, which impacted our provision for taxes. We expect that our effective tax rate will return to normal levels of around 23% in 2026. From a financial position standpoint, the balance sheet remains very healthy. Ending cash was higher than expected as a result of higher advanced customer deposits, a favorable impact of the new U.S. tax legislation, and lower than planned CapEx and interim dividends. Receivables were consistent relative to revenue as the majority of our sales are paid in advance. Inventory remains a bit elevated. There are three main drivers for this.
The first is excess inventory that built up during the COVID period when raw material lead times were extended that has not been fully depleted. Secondly, our short sales order lead times and fluid product mix forecasts necessitates maintaining adequate inventory globally. The third factor is new product introductions. Moving down to liabilities. Current liabilities were up in part due to the increase in advanced customer deposits. With respect to cash flows, as noted, the company is generally highly cash generative. The increase in adjustments to net income reflected a non-cash tax adjustment that I mentioned earlier. Net working capital benefited from relatively high customer deposits, which is a bit of an anomaly and therefore we do not expect will be a recurring trend. CapEx was relatively light compared to our typical run rate of approximately $2 million per year.
Entering 2026, we have no major CapEx projects planned. With the cash generation, we continue to pay out dividends and purchase shares while maintaining a healthy cash position. As it relates to dividends, the board declared a final ordinary dividend based on our fixed payout ratio of 50% of adjusted net income, which were paid on May 8 to shareholders of record as of April 10. Moreover, the board did not declare a supplemental dividend. Having formalized a capital allocation framework, which I'll talk about later in this presentation, we are prioritizing more aggressive M&A activity and share buybacks, which we intend to double in 2026, increasing from our historical 2 million per year to 4 million. Now I'll hand it over back to Tim.
Thanks, Enzo. In the coming slides, I'll talk about how we're positioning the business going forward and walk through our strategy. One of our key priorities in 2025 was the development of a clear long-term strategic plan. We introduced the framework to investors in September, and today we'll provide a brief update. The creation of our long-term strategic plan started with defining a clear set of pillars, simple and durable priorities that reflect what matters most for Somero's next phase of growth. This work has been actively shaped and driven by leaders and teams across the broader Somero organization, ensuring that the strategy is embedded in how we operate day to day. We refer to this next chapter as Somero 3.0, the third phase in the company's evolution shaping excellence. The first phase of the company was about creating the laser screed category.
The second phase focused on expanding the portfolio and building a global footprint. This third phase is about building on that foundation with greater clarity, focus, and consistency across the business. We anchor the plan around fortify, innovate, and amplify because together they capture what the business needs to do well over time, strengthening the core, advancing innovation, and extending our reach in a disciplined way. Since introducing this framework to investors last fall, we've moved beyond definition and have made tangible progress across each pillar, even as market conditions remain uneven. The progress we've made on select initiatives is summarized in the slides that follow. As part of our shaping excellence strategy development, we stepped back to reexamine how we articulate who Somero is and where we are going. This work was about ensuring our purpose and vision clearly reflect the next phase of the company's evolution.
Historically, our vision emphasized the reach of our technology and its presence wherever concrete is placed. That framing reflected an earlier stage of Somero's growth when expanding adoption, scale, and category leadership were the primary objectives. Today, Somero has expanded how we define leadership. We continue to lead with differentiated products and technology while increasingly focusing on the value they create, the problems they solve, and the standards they set for our customers in the industry. Our updated purpose, to shape a future where innovation and excellence lead the way, defines why Somero exists and the mindset we bring to everything that we do. Our vision, to level today's challenges to build tomorrow's solutions, defines the future we are building toward with a clear focus on impact, problem-solving, and long-term relevance.
Together, these statements shift the focus from product presence to customer outcomes, industry leadership, and sustainable value creation while providing clear direction as we execute our strategy. Our core values remain consistent and serve as our guiding principles. Culture plays a critical role in bringing this to life, especially in more challenging markets. Our values emphasize accountability, problem-solving, urgency, and customer focus, and they help guide key decisions throughout 2025 from cost actions to investment priorities. When markets are strong, culture accelerates growth. When markets soften, culture protects the business. Ours does exactly that. Under fortify, our focus has been on reinforcing the foundation of the business, including aligning cost with demand. We took targeted cost actions in 2025, but importantly, we did so while protecting core capabilities and continuing to invest where it matters most.
We are embedding lean practices and improved execution discipline in our operations, creating a more resilient operating model. This work strengthens consistency across the organization, improves decision-making speed, and ensures we can scale efficiently as market conditions improve. The result is a business that remains disciplined through softer markets but is also well-positioned to respond quickly and effectively as demand recovers. Training and support are central to how we differentiate Somero. One such area is the exceptional training offerings that we provide to our customers. Our approach extends and complements long-standing on-site contractor training with structured education through the Somero Concrete Institute, helping customers ramp up faster, use their equipment more effectively, and achieve more consistent job site results. Work began at the end of 2025 on development of our European Somero Concrete Institute in Belgium.
Recently launched in the first quarter of 2026, we've expanded the proven model of the Fort Myers, Florida, SCI to better support customers locally in Europe. We're excited with the launch and expect resulting higher utilization, improved productivity, and stronger long-term value for our customers while also supporting aftermarket engagement and recurring revenue for Somero. Innovate is our second pillar. Innovation has been a core pillar of Somero since our inception. This slide highlights key product launches from 2025 that we referenced earlier in our first half results last September that are now active in the market. These innovations reflect our focus on delivering practical job site value while reinforcing Somero's category leadership. The SRS-4/e, our first electric boom laser screed launched in 2025, delivers gas equivalent performance with zero emissions and onboard charging.
It allows customers to place large volumes of concrete efficiently while meeting evolving environmental and site requirements. We also launched the next generation S-15EZ in the summer of 2025, building on a proven platform with enhanced automation, maneuverability, and integrated intelligence. The result is higher floor quality, improved productivity, and easier operation and maintenance for customers. Together, these 2025 launches demonstrate how we're advancing the core portfolio, addressing customer needs today while expanding our opportunity set for the future. The Hammerhead ride-on screed is strategically important for Somero because it expands our addressable market and lowers the entry point for customers to adopt a Somero machine.
We launched Hammerhead in the second half of 2025 to address a large global segment of contractors who either continue to place concrete manually or have been challenged to understand or justify the return of a larger boom screed, screeding solution. Importantly, Hammerhead creates a new entry-level market, particularly in the U.S. Additionally, in certain international markets, it also provides customers with a compelling Somero alternative to certain lower-priced imported machines while delivering core Somero performance, reliability, and support. Strategically, Hammerhead is more than a single product. By bringing these customers into the Somero ecosystem earlier, it establishes long-term relationships and creates a natural upgrade path as customers grow into larger, more complex applications over time. In that way, Hammerhead expands the funnel, strengthens lifetime customer value, and reinforces Somero leadership across a broader range of the market. Our technology development goes beyond the iron.
Through the 2025 introductions of virtual reality training, the Somero Experts App, and standard telematics on large boom screeds, we're using digital tools to help customers ramp up faster, reduce downtime, and get more value from their equipment. Together, these capabilities improve utilization, uptime, and overall customer experience, again, extending Somero's value well beyond the machine. The next generation S-22EZ+ represents a significant advancement of our flagship S-22 platform and underscores our continued focus on innovation at the top end of the portfolio. We launched the S-22EZ+ at World of Concrete in January 2026, and it builds directly on customer feedback and job site experience. With more than 30 new features, the S-22EZ+ is focused on automation, ease of use, and consistency.
Enhancements like one-touch stabilizers, automated elevation control, proportional head rotation, and improved hydraulic performance simplify operation while delivering more consistent results on the job site. Importantly, the S-22EZ+ also incorporates enhanced connectivity, diagnostics, and utilization insights, along with operator-focused features like cameras, remote control, and the EZ Clean Head. The result is higher productivity, improved uptime, and easier to run machines that help customer place quality floors more efficiently and with fewer people. Viper is another example of how we're expanding the portfolio to broaden access to Somero technology. Launched at the World of Concrete in January 2026, Viper is a compact walk-behind laser screed designed to bring Somero level precision to smaller pours and more constrained job sites. With accurate grade control and a lightweight maneuverable design, Viper delivers consistent floor quality and faster placement, particularly on decks, weight-sensitive applications, and confined spaces.
It allows contractors to improve productivity and reduce labor requirements on small jobs while maintaining the high-quality standards Somero is known for. Under our third pillar of Amplify, we've been focused on strengthening how we go to market and how we support customers across the full equipment lifecycle. A key area of progress has been commercial coverage, ensuring we are closer to the customer, more responsive, and better aligned to their needs. We have continued to strengthen dealer coverage across both domestic and international markets, with particular focus on supporting the launch of the Hammerhead. This expanded dealer presence helps us reach a broader audience of contractors, especially those entering laser screeding for the first time, and improves accessibility in local markets. At the same time, we've introduced product-specific territory managers to provide deeper specialist expertise and clearer accountability across product lines.
This more integrated commercial approach is designed to support adoption and utilization while driving growth in parts, service, and training revenue over the equipment lifecycle. Together, these actions strengthen customer relationships, support more resilient aftermarket performance, and position the business well for long-term sustainable growth. I'll now turn it back over to Enzo to speak about our updated capital allocation and M&A framework.
Thanks, Tim. In conjunction with the refresh of our strategic plan, we formalized a capital allocation framework and an M&A framework as part of our Amplify pillar. Our overall capital allocation philosophy is to take a disciplined approach that prioritizes balance sheet strength, invest in value-creating growth, and return capital reasonably to shareholders. To do this, we have defined the following four priorities in order of importance. The first priority is to maintain a strong and flexible balance sheet with sufficient cash to support day-to-day operations, fund strategic initiatives, and provide a cushion against unexpected market conditions. The second priority is to invest in the business to drive organic growth through commercial and operational expansion, excellence and efficiency.
The third priority is to pursue value, accretive acquisition opportunities that builds on the core business and expands our total addressable market, which we would intend to fund with existing cash and possibly a conservative level of debt, no more than 2x EBITDA. I'll talk more about the M&A framework in a moment. The fourth priority is to return capital to shareholders in a sustained, balanced, and strategically aligned manner via dividends and share buybacks. Next, we establish a disciplined M&A framework designed to expand Somero's reach, enhance capabilities, and drive long-term value creation. Our focus is highly selective and aligned with our strategic priorities, whether that's technology and product enhancement, recurring revenue, or expanding our addressable market. To support this, we've engaged an experienced advisor to reinforce process discipline, targeted outreach, and an opportunity assessment.
While we remain early and patient, active discussions are underway, guided by clear strategic filters and strict financial criteria. Importantly, we're committed to maintaining financial discipline. Any transaction must meet our return thresholds, be accretive to free cash flow, and strengthen the business operationally and commercially. This approach allows us to stay active but disciplined as we look to deploy capital in ways that create durable shareholder value. With that, I'll hand it back to Tim to close out the strategy section.
Thanks, Enzo. As we walk through the strategic plan, it's clear that the fortify, innovate, and amplify framework is embedded in how we operate day to day. I'm encouraged by the level of engagement across the organization and the tangible progress already underway. Our focus now is on consistent execution. That means delivering against priorities, refining initiatives as we learn, and allocating resources where they create the greatest impact. As we move forward, we will continue to build on this foundation, demonstrate progress over time, and translate that strategy into consistent execution and performance. As we wrap up, I wanna bring this all together and leave you with a few key takeaways as we look ahead to 2026. Late 2025 momentum is carried into 2026, with customers reporting healthier activity levels and improving backlogs.
At the same time, customers remain appropriately cautious given elevated macro and geopolitical uncertainty, and we continue to plan with discipline. While softness in the boom screed category is expected to persist, we believe disciplined strategic execution and continued expansion into new customer segments can help offset that pressure over time. Our broadened portfolio, improved commercial coverage, and increased focus on utilization aftermarket engagement are designed to support performance through the cycle. Our strategy is actively driving execution. Our expanded portfolio is broadening customer reach. We are maintaining strong cash discipline and balance sheet flexibility, and the long-term fundamentals supporting non-residential construction remain intact. Taken together, the board expects 2026 revenue, profitability, and cash generation to be broadly comparable to 2025. As I reflect back on my first year as chief executive officer, I'm proud of what the team has accomplished in 2025.
It was a challenging year, but one where we executed with discipline, protected profitability, continued to invest in innovation, and strengthened the foundation of our business. I want to thank our employees across the world for their commitment, professionalism, and resilience throughout the year. With that foundation in place, we are approaching 2026 with confidence, discipline, and flexibility, and we believe Somero is well-positioned to perform through the cycle and create long-term value. With that, I thank everyone for their attention. We'd now like to open the floor for questions.
That's great, Tim and Vincenzo, thank you very much indeed for updating investors. Ladies and gentlemen, please do continue to submit your questions just using the Q&A tab situated on the right-hand corner of your screen. I just like to remind you that of course, a recording of this presentation will be available on the Investor Meet Company platform. Well, Tim and Vincenzo, as expected, you've received a lot of questions today from investors. Firstly, thank you to everybody for your engagement. A lot of them, some of them overlap with one another, so perhaps I'll try to merge some of these that relate to the likes of M&A and competition, so I don't give everybody's question out.
Maybe I can start off with the first one, which is: as you evaluate potential acquisitions, how do you think about Somero's cost of capital and the trade-off between acquisitions versus larger share repurchases?
Thank you. That's a great question, and certainly we take into consideration our cost of capital. We would engage in a potential opportunity for M&A to the extent that we feel we could get a greater return from an acquisition than our cost of capital. Obviously, share buybacks will continue to be part of our capital allocation policy. Nevertheless, we feel that we can generate higher accretive earnings through a M&A deal than simply just doing share buybacks.
Great. Thank you. The new framework references the possibility of up to 2x net debt to EBITDA. Given the cyclical nature of earnings, how should shareholders really think about appropriate leverage through the cycle? If I may, to what has changed strategically that makes introducing leverage appropriate today?
Sure. So that was set out as a cap really, and would only be used for purposes of consummating an M&A deal, and for really no other reason. We've established that threshold really to give us, or that cap, to give us flexibility to potentially do multiple deals over time or to do more meaningful deals. Clearly, we have sufficient cash in and of itself to be able to fund a small transaction. If that was the situation, we would probably not take out any additional debt. To the extent we have multiple deals, multiple opportunities, or opportunities that are of more meaningful size, then we will be willing to take out debt.
We've also demonstrated during the down cycles that we can continue to remain cash flow positive, and so be able to service that debt in the future.
Maybe I'll take a step back and I'll add some additional commentary to that. As Enzo went through our M&A framework, and we put a lot of structure and tools and process in place for us to assess. Again, we're very early in that assessment and that outreach as it works right now. You know, Enzo reinforced that we're really focused on maintaining financial discipline. We know from a historical standpoint, we've been very focused on cash preservation and generation. We'll be very selective as we go forward, so we're not gonna be looking for opportunistic things. It has to be things that make sense and add synergy to us as we go forward. I'm confident that, again, those will be only in play if we have a great deal. Again, we're early in the throes of that advancement.
Thanks ever so much, guys. I mean, staying with maybe acquisitions for a little bit longer, what capabilities do you think give you a better long-term, you know, you becoming the better owner, I guess, of assets rather than potential buyers such as private equity sponsors?
Yeah, that's a great question. Again, we're very early in that outreach. As we talked about, and some of you who are very familiar, Somero is a leading brand, right? We really created the laser screed category. Our brand is synonymous with quality and robustness. As we've had early conversations with certain potential strategics, they've actually commented to us that they may have been approached by other private equity, other investors, but they see the strategic value by joining forces with Somero. Again, not every target will be something that we wanna pursue, but again, we see that, we hear that feedback. When we think about our customer interactions, my first year in the job, I've visited a lot of customer job sites, and we often hear from our customers that we make great products.
Again, we change the lives of the contractors and the way they do business. It's not just the equipment, again, it's the service, the solutions, all those type of things that we provide. They often say, again, as you guys support your equipment, if there was other things that were part of your offering, we'd be more than willing to purchase that. Again, those are things that we think with confidence. Again, it has to be a great match for us, but we have received feedback that from a strategic perspective, we can add value.
Thank you very much indeed. Just switching, I guess, around, competition question here. Can you add some more color on the competitor environment?
Yeah, absolutely. We had previously reported that we've had competition historically from the beginning. In the U.S., there is one competitor. Outside the U.S. and Europe, there are a handful of competitors. Most of them are just entrepreneurial individuals, don't have the capabilities that Somero does. However, in 2024, there was a manufacturer from China that started gaining some traction in European countries, particularly Spain and Portugal and the like, really marketing to the low end of the market. They're selling purely on price, typically less than half of what we sell our machines at. They don't have sort of the staying power, haven't demonstrated staying power, the ability to support their customers like we do, the ability to supply parts.
You know, laser screeding is a high-risk industry. Our customers are relatively small companies, and if they have a floor that does not pass the flatness specification, then they may have to tear it up and replace it. It can potentially be very tough on them. You know, particularly in the U.S., highly unlikely that they would risk their reputation and their business by taking on a Chinese machine. In Europe, customers tend to be a little bit more price sensitive. Again, at the low end of the market, they're willing to take a risk on this equipment. You know, generally, if they're customers working on a high-profile project, be it a data center or a warehouse, highly unlikely that they would take that risk.
Year-over-year, we have not seen any material change. Somero remains the market leader. We had engaged a outside party to undertake a study for us because there is no public information relative to market share. In conclusion, basically came out that Somero was at least 80%-85% of the market. Still clearly the market leader. We continue to monitor the situation with the Chinese and really promote the fact that, you know, our support and service and parts availability, training, expertise, there's also a consultative aspect to our selling is really unparalleled, and that is really the moat around the business.
Yeah. Great point. I'll add to that. As Enzo talked about, as part of our strategic plan refresh last year, we did do some research on market penetration and strategy, and certainly that solidified that we continue to maintain that market share. We'll continue to do that as we go forward. From a strategy, as we talked about with the pillars, the focus on fortify, innovate, and amplify is really helping us.
Take back share, look for opportunities there. We talked about increasing our level of training, increasing our level of service support. Again, we believe that that's great value prop that Somero provides that the competition can't, so we're really close to our customers on that side. The launch of that Hammerhead product really bringing a lower entry point product that's in the Somero ecosystem to provide a different offering at a lower price point to bring customers in where they don't have to pay for the lower price machine and have a concern about the lifetime support of it. And then again, growing our channel footprint to get our reach out there to expand that. We're attacking that through our strategic initiatives, and we're very focused on making sure that we maintain and deliver solutions to our customers.
That's great. Thanks ever so much. Question from Ramon. Thank you for your question, Ramon. How are you currently benefiting from the AI data center boom in terms of orders and revenue from ultra-flat concrete flooring needs? Potentially maybe looking forward, what key growth opportunities do you see from this trend over the next three to five years?
Yeah. Our customers do a variety of work, including data centers, and that is a hot area for us. But really to put it into context, at least in the U.S., data center spending represents 5%-6% of total private non-residential construction. Although the headlines make it sound like it's sort of a boom, which, you know, to some extent it is, in the big picture, it's really not as big as the broader markets. Given the fact that some of the other market segments have declined since the peak in 2021, warehousing in particular, manufacturing. Warehousing, although it's contributed and it's been accretive, it hasn't completely backfilled for the declines in other segments. Overall, construction continues to decline since 2021.
That's great. Thank you. If I may turn to a question from Angus. Angus, thank you very much indeed. What examples of lean efficiency initiatives are underway, and what targets or reasonable timeframe for delivery can you share with us?
Yeah, it's a great question. Again, we're a very agile organization. I think we've demonstrated over time our flexibility to move with the business, to move with the market and the cycle. You know, we're a very capital light business. We're predominantly assembly manufacturing operation. We do some shot blast and painting. We source a lot of our bigger components. Our focus is really trying to streamline some of our assembly operations. We put it within the presentation. You know, simple focus on success, which is very rudimentary, but focus on lean manufacturing, continuous improvement. Some examples would include visual management boards, focus on safety, quality, delivery, cost, and really rolling that out for a pilot program right now.
We don't have programs, deliverables that we're gonna share right now, but again, we're early in that journey, but providing some visual management to really get our system more efficient as we move forward. Again, we're good, but we think we can get better and fortify the business overall.
Thank you. Question from Marco. I'll try and read it, I think as he meant, but how conservative is your guidance for 2026 revenues and earnings to be flattish relative to 2025? Conditions improved in the second half of 2025. The momentum continues through this year, and you continued to cut costs last year.
Good question. So our base case for 2026 considers the decline in our large line boom screeds. For the previous three years, we've seen 20%+ decreases in the large line booms that are sort of applicable for the larger projects that have been more acutely impacted by some of the macro factors that we talk about. Therefore, the base case assumes that trend will continue in 2026. Now, we have seen some early signs of stabilization. As noted, we certainly had momentum at the end of 2025, and that has carried over into 2026. It's a bit early to conclude that that's a trend. For the moment, from a budget standpoint, we're assuming that trend on the large line continues.
We'll offset that with increases in sales of our Hammerhead, which we had launched in August, really when we were really fully selling. We'll have a full year of selling the Hammerhead, as well as adding to the dealer network. On balance, we'll be broadly in line with 2025. That said, I think if the trend on the large line sort of settles and we don't get that, the continued decline, there could be the potential for improvement in 2026.
Of course, that's sans us considering any geopolitical or other things that happen in the overall global perspective, right? Yeah, good question. Thank you for asking that.
Thank you guys for responding. Question from Will. Thank you, Will. Why is the share buyback plan only $4 million? Is there a plan to upsize this? It seems there is more cash than is needed on the balance sheet, and the shares feel very undervalued, certainly close to the 52-week low.
Yeah. At the moment, we are prioritizing a heightened emphasis on M&A, so in part preserving some of that cash to fund an M&A transaction. We did increase the share buyback 100% compared to what it was before, so it was previously $2 million. We've doubled it to $4 million. There are currently no plans to change that, but we will continue to assess it on a go-forward basis.
That's great. Thank you very much indeed. A follow-on question from Will. What is the replacement cycle for your products? How much demand pull forward into 2021? He said 2021, but I think I'm not sure about that, but the other years continue to impact demand today.
Yeah, generally it's five to 10 years, depending on utilization and also depending on geography. In the U.S. it tends to be shorter. Customers like to keep their fleets fresh. They'll also upgrade for new technology, and they tend to replace the equipment after it's paid off. Whereas in Europe and Australia, they tend to hold on to the equipment a bit longer. They'll purchase for specific projects. They don't tend to upgrade for new technology.
I'll add to that. I think part of that question was, you know, what's that look like from a recovery? When Vincenzo talked about the declines that we've experienced over the past two or three years, that's really off a high peak that happened in 2022 when Somero's business really grew 150% overall. Again, that's forecasted decline. It really depends on utilization. You know, we've done some simple math, and we would expect that there could be some stabilization replenishment starting later this year or next year. We're not quite sure what that looks like. Again, as that gets to be more normal model, we expect that it'll be past similar to the past cycles that we've seen over time in terms of replenishment.
Well, great. Thank you very much to you both for taking the time to respond to those questions. Thank you to everybody for your engagement. If there are any topics or anything that we may have missed, we'll supply those questions to the company post today's meeting. Tim, Vincenzo, I know investor feedback is particularly important to you both. I'll shortly redirect those on the call to give you their thoughts and their expectations. I guess before doing so, if I may, Tim, just ask you for a couple of closing comments.
Yeah. Thank you so much. Again, thanks for everybody's time. I'll maybe just end on three notes just to kind of summarize where we've talked about today. I think we've carried late 2020 to 2025 momentum into 2026, and customers remain cautious considering some of the uncertainty. We're focused still on delivering robust financial performance overall like we've demonstrated over time. Then third, really our strategies and actions no longer theory. It's really in action. We're focused on execution right now. With that, I thank you all for your time and appreciate your engagement today.
That's great. Thank you very much to you both for updating investors. If I could please ask investors not to close this session, as we'll now redirect you so that you can provide your feedback in order that the company can better understand your views and expectations. It'll take a couple of moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of Somero Enterprises, Inc, we'd like to thank you for attending today's presentation, and good afternoon to you.