Alamo Group Inc

NYSE:ALG

Earnings Call Analysis

Alamo Group's Mixed Q3 Results: Industrial Growth Amid Vegetation Management Declines

In the third quarter of 2024, Alamo Group's revenue declined by 4.4% to $401.3 million, driven by a 23% drop in its Vegetation Management division, while the Industrial Equipment division grew by 22%. Operating income was $40 million, with a margin of 10%. Despite challenges, the company is focusing on cost reduction initiatives projected to yield annual savings of $25-30 million. Looking ahead, a cautious outlook for 2024 remains, with expectations of continued margin improvements in 2025 and a share buyback program initiated for $50 million. Net income was $27.4 million, down from $34.9 million year-over-year.

Navigating Through Divisional Challenges

Alamo Group Inc. has demonstrated resilience in its third quarter results for 2024, despite navigating through challenges in its Vegetation Management division. The company reported total revenues of $401.3 million, reflecting a 4.4% decline year-over-year. This downturn primarily stemmed from a 23% revenue decrease in the Vegetation Management division, which recorded net sales of $190.1 million. Conversely, the Industrial Equipment division thrived, reporting growth of 22%, with net sales reaching $211.2 million. This stark contrast underscores the divergent market conditions affecting Alamo's business segments.

Cost Reduction Strategies in Focus

In response to the difficult market conditions, particularly in the Vegetation Management unit, Alamo has implemented significant cost reduction initiatives aimed at saving between $25 million to $30 million annually. By the end of the third quarter, the company began realizing some of these savings, with further acceleration expected over the next 12 months. Notably, total debt net of cash has decreased significantly, improving by over 30% from the previous year, enhancing the company’s financial health and flexibility.

Fourth Quarter and 2025 Outlook

Management has outlined a cautious outlook for the remainder of 2024 and early 2025, with expectations for continued pressure in the agricultural sector. Incoming orders in the Vegetation segment have stabilized around $157 million, yet revenue is expected to converge towards this level, suggesting a potential revenue drop of about $30 million compared to the third quarter of 2024. The company anticipates a possible recovery in the Forestry segment by mid-2025, contingent on improvements in interest rates and housing starts.

Restructuring for Better Efficiency

Alamo is undertaking significant restructuring, including the consolidation of its manufacturing facilities, which is expected to permanently reduce manufacturing capacity by about 8%. The workforce is also set to decline by approximately 10% by the end of 2024. While these moves are somewhat painful, they are essential for restoring profitability within the Vegetation Management division. Furthermore, management has highlighted that the cost structure will improve going forward, helping to align expenses with anticipated revenues.

Focus on Industrial Equipment Growth

Despite the challenges faced in its Vegetation Management division, the Industrial Equipment segment remains a bright spot for Alamo. This division enjoyed a strong third quarter with a reported operating income of $27.7 million and improved margins of 13.1%. With a backlog exceeding $540 million, the company anticipates this segment will continue to drive revenue growth. Management remains optimistic about the demand for governmental investments in modernizing fleets, which should support ongoing orders.

Strategic Share Buyback and M&A Potential

Alamo Group recently approved a share repurchase program authorizing up to $50 million in stock buybacks, reflecting confidence in the company’s future. Furthermore, Alamo’s management is keen on exploring acquisition opportunities and foresaw a promising M&A pipeline for 2025. This strategic approach aims to fortify the company’s market position and drive growth in new and existing segments.

Final Thoughts on Financial Health

With strong operating cash flow of $130.6 million for the first nine months of 2024, and a solid free cash flow of $111.7 million, Alamo is well-prepared to tackle current challenges while investing in future growth opportunities. The company’s proactive measures in cost management and its strong financial position situate it well for navigating uncertainties in the market while pursuing long-term shareholder value.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and welcome to the Alamo Group Inc. Third Quarter 2024 Conference Call. [Operator Instructions]. Please note, this event is being recorded.

I would now like to turn the conference over to Edward Rizzuti, Executive Vice President, Chief Legal Officer and Secretary. Please go ahead.

[Edward Rizzuti, executive]

Thank you. By now, you should have all seen a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at [phone], and we will send you a release and make sure you are on the company's distribution list. There will be a replay of the call, which will begin 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1 [phone] with the path of 610-161. Additionally, the call is being webcast on the company's website at www.alamo-group.com, and a replay will be available for 60 days.

On the line with me today are Jeff Leonard, President and Chief Executive Officer; and Agnes Kamps, Executive President and Chief Financial Officer. Management will make some opening remarks, and then we'll open up the line for your questions.

During the call today, management may reference certain non-GAAP numbers in their remarks. Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release.

Before turning the call over to Jeff, I would like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results.

Among those factors which could cause actual results to differ materially are the following: adverse conditions, which can to lead a reduction in overall market demand, supply chain disruptions, labor trains, competition, weather, seasonality, currency-related issues, geopolitical events and other factors listed from time to time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date.

I would now like to introduce Jeff Leonard. Jeff, please go ahead.

[Jeffery Leonard, executive]

Thank you, Ed. We want to thank everyone who joined us on the conference call today and express our appreciation for your continued interest in Alamo Group. The third quarter is largely in line with our expectations as the strong performance from the Industrial Equipment division continued and as market headwinds prevailed in the vegetation management division. I would now like to turn the call over to Agnes who will take us through a review of our financial results for the third quarter. I will then provide additional comments on the results and say a few words about the outlook for the fourth quarter and a few early thoughts on 2025. Following our formal remarks, we look forward to answering your questions. Agnes, please go ahead.

[Agnes Kamps, executive]

Thank you, Jeff. Good morning, everyone. Third quarter results were largely in line with our expectations. The forestry cultural markets continued to struggle with difficult market conditions impacting our vegetation management division. The governmental, industrial and contractor sectors showed growth within the Industrial Equipment division.

Total revenue for the quarter was $401.3 million, reflecting a 4.4% decline compared to same period last year. Gross profit for the quarter was $100.9 million with a margin of 25.1% of sales, down 206 basis points from the third quarter of 2023. This margin decline was primarily due to lower volume in vegetation management division.

SG&A expenses were $56.7 million, which is a reduction of $0.08 from the third quarter of 2023, excluding Royal Truck acquisition. These reductions are built up saving initiatives -- in vegetation management division. Operating income in the third quarter of 2024 was $40 million sustaining a double-digit operating margin of 10% of net sales. While this represents a decline of 190 basis points compared to the same period in 2023, it's important to note that our third quarter operating income in 2024 include approximately $1.6 million in separation expenses.

Net income for the third quarter of 2024 was $27.4 million or $2.28 per diluted share from net income of $34.9 million or $2.91 per diluted share in the same period last year.

Interest expense in the third quarter of 2024 was $1.8 million in the same period in 2023 due to reduced debt levels. The provision for income tax was slightly lower compared to the same period in 2023.

With that overview, let's take a closer look at the performance of our divisions. Vegetation management division reported net sales of $190.1 million, a 23% reduction compared to the third quarter of 2023. The largest declines occurred in the forestry and agricultural segments while the governmental segment continued to show growth. Operating income for this division was $12.4 million, representing 6.5% of net sales. The reduction in net sales offset savings from cost reduction actions earlier this year. Additionally, this quarter -- we included approximately $1.6 million in separation expenses.

On the other hand, Industrial Equipment division net sales were $211.2 million, representing 22% growth compared to the third quarter of 2023. Each group within this division achieved growth during the third quarter. Operating income was $27.7 million or 13.1% of net sales, marking an improvement of 180 basis points compared to the same period last year. The Industrial Equipment division benefited from increased revenue and efficiency initiatives implemented in 2023.

A few words to summarize year-end results -- year-to-date results. Through September 2024, net sales of $1.2 billion, reflecting 2.3% decrease compared to the first 9 months of 2023. The Vegetation Management division declined 18.2%, while the Industrial Equipment division grew 21.8%. Operating income for the first 9 months of 2024 was $130.4 million or [ 10.5% ] of net sales, representing a decrease of $22.8 million and 55 basis points year-over-year. The operating income for Vegetation Management division was $50.1 million or [ 8% ] of net sales, and it includes approximately $3.2 million in employee settlement expenses.

Industrial Equipment division operating income of $80.3 million or 13% of net sales is a 300 basis point improvement versus prior year on higher revenue and improved efficiencies. Net income for the first 9 months of the year was $87.8 million compared to $104.6 million for the first 9 months of 2023. Interest expense improved by $2.4 million versus prior year, benefiting from lower debt levels. The provision for income taxes is $2.9 million lower versus prior year and we represent approximately 23.7% effective tax rate.

Let me speak to the cost reduction actions that are now in progress. To address the challenging macroeconomic conditions in our vegetation management division, we continue to execute a number of cost reduction initiatives. We'll discuss the details later on the call. Our same target from these initiatives is between $25 million to $30 million on an annualized basis. We already began to see some of these savings in third quarter with further savings expected to accelerate over the next 12 months. The costs associated with these actions are mainly employee separation expenses. For the third quarter, we incurred approximately $1.6 million, and for the 9 months, the total severance expense is approximately $3.2 million. At this time, we expect the final total to be between $4 million and $4.5 million, which will be incurred in 2024.

Moving on to the balance sheet. We continue to maintain a strong financial position, which provides us with the flexibility to support ongoing initiatives and navigate the current environment effectively. Our total assets were $1.481 billion at the end of the third quarter, representing a small increase of $25.8 million or 1.8% compared to last year at the same time. This increase is driven by higher cash and cash equivalents. We reduced our accounts receivables by $21 million to $356.6 million also representing a reduction in days sales outstanding of 5 days compared to the end of third quarter in 2023.

Inventory of $372 million was flat compared to the end of third quarter last year. Reductions we achieved in vegetation management division offset an increase in Industrial Equipment division. Higher inventory in the Industrial Equipment division supports revenue growth of 20%, 22% in that division. Operating cash flow for the first 9 months of 2024 was $130.6 million increasing by $53.6 million or 70% compared to the first 9 months of 2023. Free cash flow for the first 9 months of 2024 were $111.7 million compared to $50 million at the end of the first 9 months of 2023.

In third quarter of 2024, we paid down total debt by another $69.5 million. Total debt net of cash of $84.1 million improved by $122 million or 6% compared to the third quarter of 2023.

To conclude, I'd like to emphasize our commitment to delivering long-term value to our shareholders. We had our Board has approved a regular dividend of $0.26 per share for the third quarter 2024, underscoring our confidence in the strength and stability in this business. As we move more, we will remain focused on driving growth and optimization of our operations.

Thank you. I'll turn it back over to Jeff.

[Jeffery Leonard, executive]

Thank you, Agnes. I would like to add my personal welcome to everyone who joined us on the call this morning. The company's third quarter results were in line with our expectations given the mix conditions in our markets. As we experienced in the second quarter, the capital, industrial, contractor and vegetation markets continued to display a very divergent activity levels during the current quarter. We were very pleased that our governmental customers continue to invest in modernizing and upgrading their maintenance fleets.

In North America, governmental demand remained strong across all of our major product lines. We have been anticipating some [ model offering ] in the United States as we approach national elections, but the actual impact has been minimal. Municipal finances remain in good shape as a result of solid economic growth and a sustained flow of federal aid. A recent report from the National League of Cities also indicates that cities are generally prepared for an eventual tapering of federal aid. Municipal revenue remained stable on the strength of high property [ tax receipts ] despite a modest reduction in sales tax revenue.

Similarly, the National Association of State Budget Officers in a recent update, reported the fiscal year 2024 revenues in a majority of the states closed above the original forecast and in some cases, above upwardly revised forecast. According to the same report, most states also reported a fourth consecutive year of surpluses, although smaller than in the immediately preceding years and that rainy day funds continue to strengthen. These reports align well with results in our Industrial Equipment division reported in the third quarter. Demand for the company's vacuum trucks, street sweepers, debris collectors, craft attenuators and snow removal equipment remained historically elevated during the quarter.

Sales in the Industrial Equipment division were more than 22% higher than in the corresponding period of '23. Order bookings in this division increased modestly compared to the third quarter of 2023, but remained at historical levels and ended the quarter with a backlog in excess of $540 million, up nearly 9% compared to the third quarter of 2023. This division reported strong profitability with net income of $27.7 million, up nearly 42% compared to the same period of 2023.

EBITDA was also very strong at 15.9%, an improvement of 160 basis points to the prior year third quarter. Industrial Equipment division order bookings increased by 3% relative to the third quarter of 2023. Unfortunately, conditions in several markets served by the vegetation management division remained steady during the third quarter. Demand for lumber and wood derived products continued at a low level as the residential and commercial construction markets remain soft. U.S. housing starts with our lowest level since the onset of the pandemic has elevated mortgage rates are on the sidelines. As a result, sales of the division's forestry and tree care products declined sharply in North America compared to the prior year third quarter, with the decline partially offset by improved sales in Europe.

Markets for the division's agricultural mowers, tillage and related products also remained softer during the third quarter. The U.S. Department of Agriculture projects that in '24, farm income will decline nearly 7% relative to 2023 on an inflation-adjusted basis. Despite the expected decline, forecast farm income would be 15% above its 20-year average, but 28% off from the peak recorded in 2022, again, adjusted for inflation.

Commodity prices improved somewhat during the third quarter but remained well below the peak levels recorded in the first half of 2022. The combination of lower crop prices and rising input costs drove farmer sentiment to the lowest level since 2016. Farmers continue to delay purchases of new equipment and that has kept dealer inventories elevated.

Sales of the vegetation management division's agricultural products declined in the third quarter relative to the corresponding period of 2023 in both North South America and Europe. Sales of specialty mowers to governmental agencies for maintenance of roadway aprons and other rights of way remained elevated. The state and municipal governments continue to invest steadily to upgrade roadway maintenance equipment fleets. Sales of our new Mantis prime mover have steadily increased during -- since second generation of this product was officially introduced earlier this year. Sales of these specialty vehicles increased nicely during the third quarter and were a bright spot for the vegetation management division in what was otherwise a challenging quarter.

In the face of these market headwinds, vegetation management division sales for the third quarter declined 23% versus the third quarter of 2023. Order bookings declined 29% from the same period of 2023, and the division ended the quarter with a backlog of $185 million.

To address the difficult conditions in vegetation management, the company continued to streamline its operations during the quarter. During the second quarter, the company initiated the transfer of manufacturing of Rhino and Tree Care products to the company's largest forestry and tree care manufacturing facility in Wind, Michigan. The consolidation will be completed during the fourth quarter this year.

During August, we announced the divestiture parts to FP or golf tillage tools. This was a small transaction that will allow our vegetation management team to focus on developing in its core market areas. Also in August, we announced a second major facility consolidation involving the transfer of [ NOG ] product manufacturing to our larger facility in Selma, Alabama where we currently produce push of branded mowers and related equipment. We expect to book additional expenses associated with these actions in the fourth quarter.

Following the anticipated completion of this consolidation in the first quarter of 2025, the Gibson City, Illinois facility will be closed. The facility consolidations currently in progress will reduce the company's global manufacturing capacity by approximately 8%, falling within the vegetation management division. The company is continuing to expand industrial equipment manufacturing capacity, particularly for vacuum trucks and snow rollable equipment.

Associated with these significant facility consolidations, the company's employee population to decline approximately 10% by the end of 2024 compared to December 2023. While these actions are regrettable, they were necessary to address declining demand in vegetation management and to restore acceptable profitability given current market conditions.

Turning to corporate performance. Third quarter consolidated operating income declined 9% compared to the third quarter of 2023 as a result of lower sales and operating margin in vegetation management partly offset by improved sales and operating margin in Industrial Equipment. We were pleased that despite the headwinds in vegetation management, the company achieved an operating margin of 10% for the third quarter net of restructuring costs, again, demonstrating strength -- serving diverse markets. Our teams did a great job managing the balance sheet during the third quarter as total debt net of cash declined by more than $90 million during the quarter and has declined by $126 million compared to the third quarter of 2023.

Long-term debt at the end of the third quarter was down more than 30% compared to the same time last year. Third quarter EBITDA was $170 million or 13.7% of sales. We are, therefore, in an excellent position to benefit from what is expected improved M&A environment in 2025. Our outlook for remainder of 2024 is somewhat cautious. While we do not anticipate a swing in market dynamics in the final weeks of the year, the potential impact of national elections in the United States near-term uncertainty. We also expect to incur additional employee reduction costs in the fourth quarter related to the plant consolidation is now underway.

The horrific devastation and the 2 major hurricane impacted the South Eastern of United States would require a great deal of specialized equipment to clear the overwhelming mounds of filters and other debris, and we anticipate a short-term movement in demand for chippers -- and will impact earnings positively. Market dynamics for 2025 were expected to remain mixed, pinning by governmental agencies is expected -- to that our market position management product have modestly improved next year despite what is expected to be another challenging year in the agricultural sector. Given the mixed outlook, we will continue to adapt our operating model and cost structure to defend earnings no matter how the markets may develop.

Given the strong backlog in the Industrial Equipment division and its positive outlook, we believe 2025 will be another positive year for the company. We were also pleased to announce a share repurchase program under which the company is authorized to repurchase up to $50 million of its outstanding common stock. The just announced repurchase plan affirms our confidence in the future of our business, and is based on the strength of our balance sheet and our expectations of future cash flow.

Before ending, I would like to take this opportunity to express sincere appreciation to our customers, dealers, supplier partners, our dedicated employees and financial stakeholders for their continued support of the company.

This concludes our prepared remarks. We are now ready to take your questions. Operator, please go ahead.

[Operator]

[Operator Instructions]. Our first question comes from Mike Shlisky with D.A. Davidson.

[Michael Shlisky, analyst]

So I guess I wanted to first ask about the cost reductions. I guess I want to make sure I understand how permanent these are. You did take out the capacity, you see a little bit less capacity going forward, thanks to the reduction as a result of the -- do you anticipate at some the need to kind of be that back? Or is that within the next couple of years, just not likely to take place?

[Jeffery Leonard, executive]

Yes. So Mike, regarding the 2 consolidation, certainly, as you know, you're well aware of the facility we have in Michigan at over 1 million square feet has more than ample capacity to meet our future needs. And this consolidation was long anticipated of difficult to execute while forestry booming 1.5 years or so ago and has been for the last 4 or 5 years since we entered that sector.

The consolidation in the ag side of our business with Rhino Ag and Bush Hog, certainly, we'll have adequate capacity for the next couple of years. Being that, we'll reassess what we do in the future and may have to be either in one of our existing locations or another one. but that remains to be seen. It looks like the ag is going to stay soft in most of 2025 at least. So we have some time to reassess.

But as you know, Mike, we have lots of manufacturing facilities, and we're able to move things around relatively easily within our network. So I'm not really overly concerned about that. I think regarding the cost savings programs underway, what I can say to you is that the majority of the actions we need to take to generate those savings are essentially done as we sit here today, while the physical consolidation of Rhino into Bush Hog remains, we need to move some machinery and some inventory and so on. All of the people actions and the capital investments we need to make in the Bush Hog facility are already underway.

[Michael Shlisky, analyst]

Got it. I also wanted to touch on the margin outlook for 2025. Obviously, the cost reductions you made a bar 1 or 2 higher for next year. As far as what's in the backlog in both of the segments, do you feel like you've got opportunities to get up more into next year on the operating margin line?

[Jeffery Leonard, executive]

Yes. That's what we're expecting, Mike. Agnes and I have told the market we're going to drive margins higher, and that's what we're going to do to. The management team is very committed to that. And we're actually taking deeper actions than we otherwise would in this event, and we planned some further actions, so we have some contingencies in the event the markets invention management should continue to decline. Although my personal view is we're fairly close to the bottom. It's been noted that our bookings and backlog and so on have stabilized fairly well now. So we're going to have to just ride out where it is for most of 2025.

But forestry, I'm more optimistic about. I think forestry shows a little bit of luck, not just because of the hurricanes, but generally speaking, there's been a modest uptick in activity that we've seen in that sector. We've talked to a number of the major customers and they're feeling a little bit more optimal 2025 with the expectation that interest rates will come down a little bit.

So yes, Mike, I do believe we've got room to expand margins by a couple of points next year. We need to execute what we're doing. We need to execute it well. But given where we stand today with the consolidations, I'm very confident we'll achieve that.

[Michael Shlisky, analyst]

And between ag and forestry, I want to confirm right now, forestry is the larger focus of sales, is that correct?

[Jeffery Leonard, executive]

It is, and it was also the larger decline in dollars in that division.

[Operator]

The next question is from Chris Moore with CJS Securities.

[Christopher Moore, analyst]

Maybe we can just start with -- keep on the margin discussion, maybe just go a little deeper by segment, but vegetation operating margin was 6.5% versus 7.6% in Q2. If you adjust out that 1.6%, it was 7.4% this quarter. So in terms of the bottom on that, is Q3 likely the bottom or still some uncertainty looking at Q4 versus that?

[Jeffery Leonard, executive]

I think we're close to the bottom prior to restructuring costs. You said on the call, we have further restructuring costs coming in vegetation management in Q4. And keep in mind, Chris, all of these restructuring actions were taking our vegetation management. And so if you think about taking several hundred people out of our organization as a percentage of employment and vegetation management is very heavy, to say the least. So we've got to kind of adapt to a new operating situation there in vegetation management.

So I don't know if it's the absolute bottom or not, but we've taken very -- distractions that's what I'm trying to say to you. And Agnes and I have a bit of contingency in our pocket as we always do in terms of what we're announcing and what we plan to execute to make sure we do see some improvement in the margin, certainly in 2025. But Q4 is still a bit in the year, to be frank, where the market is going to go from here. I said I believe forestry has stabilized, we're stabilizing, ag looks like it's flattening, but it's very uncertain at the moment where that's going to go next year. And I think even the big OEMs are saying more or less the same thing. The picture is not very clear.

I can share with you that our inventory out in our dealer network that what's on our floor plan is down very sharply compared to where it was pre-pandemic in 2018 and 2019, and I'll emphasize Barry. So from that point of view, we're in a much better position. The difficulty we face in ag is the large OEMs, the tractor OEMs still have a lot of inventory to push out into that dealer network. So we're not likely to see benefit of that in the short run. But if you put those 2 statements together, what it means is that the elasticity in the market from our point of view has declined, which means that as the market potentially recovers, we should see a very fast uptick because our field inventory is very low right now. So I hope it helps you a little bit.

[Christopher Moore, analyst]

That does, very helpful. Switch over to industry before I go back to vegetation. So Industrial operating margin, 13.1% for the quarter. We're modeling just below 13% for the year. I guess maybe the put and takes of being able to approach 13% again in '25?

[Jeffery Leonard, executive]

I think we will. Chris, I think we're going to stabilize there in industrial at a nice high level given the backlog where it is. And although our bookings looked a little soft in the quarter, the demand for the products is not soft at all. So it's mostly a timing issue. We still have large opportunities ahead of us that our confidence level is very high. So I think industrial is going to have a very nice year next year, and we still have some efficiency improvement measures that we're carrying out inside the Industrial division, that are on the backs of some of the recent acquisitions we've made. So we've got some facility consolidations, although small in scale to do in industrial to sort of ensure that operating margin and hopefully expand a little bit more.

[Christopher Moore, analyst]

Got it. Very helpful. So you just talked about inventory levels continue to improve on the vegetation side. Rates coming down a little bit, hopefully more. Still not expecting ag improvement until late '25. What about the rate overall. What would it take to grow a little bit in '25?

[Jeffery Leonard, executive]

Well, I think what it's going to take is some interest rate help. I think that we got a little bit of interest rate help earlier in the year. Forestry will be the first to tick back up. And as I said, it's already showing some signs of life. Our fourth quarter is off to a good start in forestry, very encouraged to see that. And of course, our cost structure in forestry is now much lower having essentially closed 1 of the 2 larger plants we have. The facility that we've exited for forestry is a 400,000 square foot facility, so it's a big one. So we should see nice savings coming out of that. So I think forestry will be much better next year in the back half. It's not going to be an overnight event. But certainly, I see the progress, and I'm optimistic about that.

Ag is just a tough call right now because we don't know what the actual situation is inside the big tractor OEMs. They still have a lot of inventory. They expect to push out into the field, which means that our dealer balance sheets are going to remain under pressure all year. And that makes it hard for a short liner like us to hold our on the shelf in the dealership. So that's why I'm more cautious about that.

[Operator]

The next question is from Mig Dobre with Baird.

[Mircea Dobre, analyst]

Back to vegetation management, the orders there, your incoming orders have stabilized around $157 million. Throughout the year, you've been bringing down production, right? So Q1 revenue was $223 million, down to $211 million. Q3 was $190 million. So I guess my question is this, given that at least in the way you kind of framed vegetation management into 2025, it sounds like if we're going to see a recovery in orders, it's probably going to be pretty muted and might be more back half loaded. I would imagine that it's fair to assume that your production, your sales in vegetation management are going to continue to converge towards orders, right, towards this, call it, $160 million per quarter worth of sales and orders. Is that the right way to think about the fourth quarter -- right to think about the front half?

[Jeffery Leonard, executive]

It is because the backlog, particularly in the ag side of education management is quite low right now. It's not near an all-time low yet, but it's getting close, which means that we will be living more hand to mouth with booking bill being the key thing, get orders and ship them for at least the first half of next year in ag. Forestry is a little bit different case. As I said, we've gotten off to a good start in Q4 with orders in forestry, and I don't want to say too much about that yet. I obviously can't -- but I'm encouraged with what I see. Some of that was related to the hurricanes, but there's also some underlying demand coming back.

Rick Raven went out and met with a number of our large customers in 4 or 3 a few weeks back and got a pretty encouraging report about how they see the future. They're obviously concerned the national elections and where interest rates go, that's what's creating the uncertainty. And as I said on the call, Mig, the link between 4 or 3 and housing starts is stronger than we had initially thought. When you actually go back and many a long period, which we did, to understand that.

So as interest rates fall and eventually housing starts should pick up. The demand is there for housing. That will certainly help the forestry side of the business. So my view is, if there is a recovery next year in ag, and that's an if, it will be really late, late in the year, from my point of view. I think the forestry recovery could start around midyear. If we get another interest rate cut or 2 in the first quarter and maybe early in the second. That's how I'm looking at it.

[Mircea Dobre, analyst]

I see. Well, really kind of where I was trying to get at with my question. If we're going to see revenues converge towards this, call it, $160 million level sometime in the front half of 2025. That's still, call it, a $30 million erosion relative to where you were in Q3. You do have cost savings like you outlined coming through. I still struggle to see how margins are going to be flat or up relative to what you had in Q3. I would imagine that you should have further margin erosion sequentially simply because of the normal decremental margins that would flow through from that revenue loss?

[Jeffery Leonard, executive]

Yes. And I think, Mig, that's why I was on the earlier question about Q4. You're right. You're exactly right. That's the worry for Q4. But I'm less worried about it as we head into Q1 and Q2 next year. Because as I said, the amount of inventory on our books in the field is the lowest it's been in years by a long way, not even close. So we're down 60% compared to where it was in 2018 and '19. So there's not a lot of buffer sitting out there anymore. So you're right. The revenue run rate is going to remain low for a while, but we have taken a huge chunk of cost out of this business. As I said, all these cost reductions are in vegetation management. And when you look at these employee reductions that we said we're about 10% of the corporation inside that is 30%. So we've taken huge chunks of cost out of there. And as I said, Agnes and I have some additional contingencies that we've already planned, and we're planning some further actions if we need to take. You're right. We're going to be playing defense in that business for at least the first quarter of next year, make -- there's no getting around it. I agree with your comment.

[Mircea Dobre, analyst]

I just want to make sure that we level set expectations here because I think it's sort of easy to get maybe estimates in the wrong place relative to what the business is able to do. So maybe to just kind of finish my thoughts here, if we're leaning out the cost savings that you've outlined on the call today, how would you care to normal decremental margins that investors need to kind of keep in mind when they're modeling any volume contraction into 2025? Is it 25%? Is it 30%? Is it 35%? So again, this is excluding kind of the cost savings that you talked about.

[Jeffery Leonard, executive]

Okay. Difficult question, Mig. I think if you look at vegetation management, the decremental margin in the short term, it could be 2 to 3 points, something like that. That's sort of where agonists are modeling the downside risk. And Agnes, is there anything you want to add to that from your point of view?

[Agnes Kamps, executive]

So the cost savings that you've implemented now, as you heard Jeff describe the consolidations in the plants, those are permanent costs. And what we're doing is to design an improvement in the margins going forward. But we do have to consider the fact that exactly as you described that the revenue might still be lower. We need to consider seasonality, for example, in Q4. So when you model margins, we're not out of the woods yet, let's put it that way. And what we're expecting is an improvement later in 2025 and beyond.

[Jeffery Leonard, executive]

And maybe one last thing here. I didn't mention it specifically on the call. When you look at the consolidation of the Bush Hog and Rhino brands, we've consolidated the SG&A functions as well. We've consolidated sales teams and the engineering team. So the overall cost structure has come down very significantly and we've taken large chunks out of that as well. So it's not just about capacity and absorption. We've made a structural change in that business.

[Agnes Kamps, executive]

And let me add one more thing, maybe. We do have -- another business. So we do like diversity in our business and investor equipment division is still doing quite well. So while vegetation is undergoing this change and we're taking an opportunity to adjust structural costs permanently, industry equipment is still doing very well. So we need to remember that.

[Mircea Dobre, analyst]

Since you brought up SG&A, I had a question about this as well. 6% decline in the core -- pretty significant. And I'm sort of wondering 2 things here. The first one is, is there sort of a variable compensation, bonus accrual reversal, something of the sort that helped us here in Q3. How should we think about Q4 SG&A on a year-over-year basis? And given the restructuring and whatever additional plans you might have, is it fair to expect SG&A will decline in 2025 as well?

[Jeffery Leonard, executive]

Okay. So to the first part of your question, Mig, Yes,, there's obviously an elimination of accruals for compensation for myself and everybody else in this company as it should be. So yes, that's true. I don't know the amount of that on the top of my head, but I'm sure this can get it for you or we can give it to you after this call. But secondly, as you think about SG&A going forward, the cost savings in the ag side of our business didn't appear. That consolidation in Q4 event. It's behind us, but it's a Q4 event. So you'll see further savings in the SG&A that will be permanent because this consolidation is not going to unravel. This is the structure of our ag business going forward forever.

So those 2 things will largely offset. Now to the second part of your question, what do you think about SG&A next year? Well, obviously, management is not a profit at the table until this business starts making more money. So it's a bit of a wild card. I don't want to tell you management is not going to earn bonuses next year. I certainly hope we do, but it's got to be on the basis of improved profitability. At this point, we haven't even discussed that with our Board of Directors yet. We're still doing our budget for next year as we speak.

[Mircea Dobre, analyst]

No, understood. I was just wondering if there's like a structural component in the SG&A line item that you wanted to call out. But that part is understood.

I guess the final question on the industrial equipment. Demand here is very good. I guess what I'm wondering about when I'm looking at more, right, your revenues have continued to tick up sequentially. Margin, however, has not at 13.1%. It was down sequentially versus the first half and the incremental softened a bit in the quarter as well at 21%. So I'm wondering if there's a function of mix here or if some of the positive price costs that we've seen earlier in the year, is starting to moderate. Really, the essence of the question is, can we continue to underwrite significant margin expansion in 2025 relative to this kind of like 13% level that you're being in 2024?

[Jeffery Leonard, executive]

Yes. There is certainly room for more margin expansion than industrial, but we've taken bits in that direction. They will moderate for sure because it gets tougher as you go. We are still running some under absorption in industrial. We have some facilities that are running flat out for full capacity. We have others that are not. We've taken one of the forestry plants that we vacated and making some industrial products in there for snow removal to accelerate the deployment of the backlog into revenue, which should help us going forward. So I think the industrial margins will continue to expand modestly all through 2025. I don't see any reason why it shouldn't and the orders that are coming in are very high quality for us right now.

As I said, our markets are stronger than what were reflected in the third quarter bookings. So we're fully very confident about that. The only thing I would say, I made a couple of references to national elections on the call. You know me well enough, and I think you followed us usually an election year is a tough year for us in industrial. The government will start to get really cautious. Normally, that starts in the second quarter and then carries through into the third. So I think some of the flattening of orders we saw in the Industrial segment reflects that. And I'm pretty confident once the election is over, no matter which way it goes, the governmental will get back to doing what they do, which is spend money to upgrade their fleets. They have to. That's why I made all those remarks about what good shape the municipalities and the states are in the U.S., which matters a lot.

We've also talked to our largest customers, our acting truck rental operators and our dealers, and they're all feeling good about the direction of things right now. So I think the future look for industrial is pretty bright.

[Operator]

[Operator Instructions]. The next question is from Greg Burns with Sidoti & Company.

[Gregory Burns, analyst]

You leverage your debt levels and leverage continue to decline. Cash flow remains strong. And I appreciate implementation of the buyback. But I was just wondering what your plans for M&A are, if any, what the pipeline of maybe opportunities look like? Are you looking to expand into any new adjacent categories. What are the opportunities maybe for some inorganic growth to offset some of the weakness we're seeing now in vegetation management?

[Jeffery Leonard, executive]

Yes. The M&A pipeline for '25 is looking interesting with a couple of big opportunities coming that are pretty much right in our sweet spot. So I'm encouraged about that, and that's why Agnes and I are holding a bit of cash right now. And the share buyback -- is more opportunistic. We are generating a lot of cash right now, Greg, exactly to your point, we're back to our old habits there, and I mean to have it in a positive way of spending lots of cash. And as we've taken this much cost out of the business, we should continue to have very positive cash flow going forward.

We still have opportunities to take inventory down further. We made nice progress with inventory in the Vegetation Management division. And unfortunately, we had to eat up some of that growth with industrial running so well. at the moment. But the pipeline looks good that there's a couple of small tuck-ins we're chasing that maybe aren't material to the top line but are very material in terms of our internal operations and then some big ones stacking up for next year. So that's why we're making sure the balance sheet is nice and taught. So we've got opportunity to move quickly when these opportunities come right next year.

[Operator]

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

[Jeffery Leonard, executive]

Thank you again for joining us today on the call. We look forward to speaking with all of you on our fourth quarter conference call in February 2025.

[Operator]

The conference has now concluded. Thank you for attending presentation. You may now disconnect.