Alamo Group Inc . (NYSE:ALG) reported a mixed financial performance in its third quarter of 2024, with a notable 4.4% decline in total revenue to $401.3 million. The company's Industrial Equipment division delivered strong growth, while its Vegetation Management segment struggled, leading to a comprehensive strategy to reduce costs and improve margins.
Key Takeaways
- Alamo Group's total revenue decreased by 4.4% year-over-year to $401.3 million.
- The Industrial Equipment division saw a 22% increase in revenue.
- Vegetation Management sales dropped by 23%.
- The company is implementing significant cost reduction measures, aiming for $25-30 million in annual savings.
- Facility consolidations are underway, including the transfer of Rayco branded tree care product manufacturing and the closure of the Gibson City, Illinois facility.
Company Outlook
- Alamo Group has a cautious outlook for 2025, with mixed market dynamics expected.
- Modest improvements are anticipated in the Forestry sector by mid-2025.
- The Agricultural sector is likely to continue facing challenges.
- Governmental spending is expected to remain strong, potentially benefiting the company.
Bearish Highlights
- The Vegetation Management segment is facing ongoing market difficulties, particularly in the soft lumber and agricultural markets.
- The company is focusing on reducing costs and increasing operational efficiency to counter these challenges.
Bullish Highlights
- The Industrial Equipment segment has a robust backlog valued at over $540 million and experienced a 22% revenue growth with a 13.1% operating margin.
- A positive outlook is maintained for this segment going into 2025.
Misses
- The overall revenue decline and the significant drop in Vegetation Management sales are primary concerns for Alamo Group.
Q&A Highlights
- CEO Jeff Leonard emphasized the commitment to driving higher margins.
- Leonard also noted that any recovery in the agricultural sector in the next year is uncertain and, if it occurs, would likely be late in the year.
- CFO Agnes Campts highlighted the strong performance of the Industrial Equipment division amidst the restructuring of the Vegetation Management segment.
Alamo Group's approach to navigating the current market involves a combination of strategic cost reduction initiatives and a focus on areas of strength within the company. The company has also initiated a share repurchase program of up to $50 million, signaling confidence in its long-term value proposition. Looking ahead, Alamo Group anticipates margin improvements in 2025 and potential benefits from any interest rate reductions that could bolster the housing and construction sectors.
Full transcript - Alamo Group Inc (ALG) Q3 2024:
Ed, Moderator/Operator, Alamo Group: Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive 1, please contact us at 212-827-3746, and we will send you a release and make sure you're on the company's distribution list. There will be a replay of the call, which will begin 1 hour after the call and runs for 1 week. The replay can be accessed by dialing 1-eight seventy seven-three forty four-seven thousand five hundred and twenty nine with the passcode 610-1611.
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 Campts, Executive Vice President and Chief Financial Officer. Management will make some opening remarks, and then we will open up the line for your questions. During the call today, management may reference certain non GAAP numbers in their remarks. Reconciliations of these non GAAP results to applicable GAAP numbers are included in the attachments to our earnings release.
Before turning the call over to Jeff, I would like to make a few comments about forward looking statements. We will be making forward looking statements today that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following: adverse economic conditions, which could lead to a reduction in overall market demand supply chain disruptions, labor constraints, competition, weather, seasonality, currency related issues, geopolitical events and other risk factors listed from time to time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date.
I would now like to introduce Jeff Leonard. Jeff, please go ahead.
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Thank you, Ed. We want to thank everyone who's joined us on the conference call today and express our appreciation for your continued interest in Alamo Group. The Q3 shaped up 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 Q3. I will then provide additional comments on the results and say a few words about the outlook for the Q4 and a few early thoughts on 2025.
Following our formal remarks, we look forward to answering your questions. Agnes, please go ahead.
Agnes Campts, Executive Vice President and Chief Financial Officer, Alamo Group: Thank you, Jeff. Good morning, everyone. 3rd quarter results were largely in line with our expectations. The forestry and agricultural market 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 (EPA:TTEF) revenue for the quarter was $401,300,000 reflecting 4.4% decline compared to the same period last year. Gross profit for the quarter was $100,900,000 with a margin of 25.1 percent of net sales, down 206 basis points from the Q3 of 2023. This margin decline was primarily due to lower volume in vegetation management division. SG and A expenses were $56,700,000 which is a reduction of 8% from the Q3 of 2023, excluding Royal Trunk acquisition. These reductions are a result of saving initiatives in the vegetation management division.
Operating income in the Q3 of 2024 was $40,100,000 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 3rd quarter operating income in 2024 includes approximately $1,600,000 in separation expenses. Net income for the Q3 of 2024 was $27,400,000 or $2.28 per diluted share compared with net income of $34,900,000 or $2.91 per diluted share in the same period last year. Interest expense in the Q3 of 2024 was $1,800,000 lower than in the same period in 2023, driven by 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 $190,100,000 a 23% reduction compared to the Q3 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 $12,400,000 representing 6.5% of net sales. The reduction in net sales offset savings from cost reduction actions earlier this year.
Additionally, this quarter's result included approximately $1,600,000 in separation expenses. On the other hand, Industrial Equipment division net sales were $211,200,000 representing 22% growth compared to the Q3 of 2023. Each group within this division achieved growth during the Q3. Operating income was $27,700,000 or 13.1 percent 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 were $1,200,000,000 reflecting 2.3% decrease compared to the 1st 9 months of 2023. The vegetation management division declined 18.2%, while the industrial equipment division grew 21.8%. Operating income for the 1st 9 months of 2024 was $130,400,000 or 10.5 percent of net sales, representing a decrease of $22,800,000 and 155 basis points year over year. The operating income for vegetation management division was $50,100,000 or 8.6 percent of net sales and it includes approximately $3,200,000 in employee separation expenses.
Industrial Equipment division operating income of $80,300,000 or 13 percent of net sales is a 300 basis point improvement versus prior year on higher revenue and improved efficiencies. Net income for the 1st 9 months of the year was $87,800,000 compared to $104,600,000 for the 1st 9 months of 2023. Interest expense improved by $2,400,000 versus prior year benefiting from lower debt levels. The provision for income taxes is $2,900,000 lower versus prior year and represent approximately 23.7 percent 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 savings target from these initiatives is between $25,000,000 to $30,000,000 on an annualized basis. We already began to see some of savings in Q3 with further savings expected to accelerate over next 12 months. The costs associated with these actions are mainly employee separation expenses.
For the Q3, we incurred approximately $1,600,000 and for the 9 months of the total severance expense is approximately $3,200,000 At this time, we expect the final total to be between $4,000,000 $4,500,000 which will be incurred in 2024. Moving on to the balance sheet. We continue to maintain a strong financial position, which provides us with flexibility to support ongoing initiatives and navigate the current environment effectively. Our total assets were $1,481,000,000 at the end of the 3rd quarter, representing a small increase of 25 point $8,000,000 or 1.8 percent compared to last year at the same time. This increase is driven by higher cash and cash equivalents.
We reduced our accounts receivables by $21,000,000 to $356,600,000 also representing a reduction in days sales outstanding of 5 days compared to the end of Q3 in 2023. Inventory of $372,000,000 was flat compared to the end of Q3 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 percent in that division. Operating cash flow for the 1st 9 months of 2024 was $130,600,000 increasing by $53,600,000 or 70 percent compared to the 1st 9 months of 2023.
Free cash flow for the 1st 9 months of 2024 was $111,700,000 compared to $50,000,000 at the end of the 1st 9 months of 2023. In Q3 of 2024, we paid down total debt by another $69,500,000 Total debt net of cash of $84,100,000 improved by $126,200,000 or 60% compared to the Q3 of 2023. To conclude, I'd like to emphasize our commitment to delivering long term value to our shareholders. We are pleased that our Board has approved a regular dividend of $0.26 per share for the Q3 of 2024, underscoring our confidence in the strength and stability in this business. As we move forward, we will remain focused on driving growth and optimization of our operations.
Thank you. I'll turn it back over to Jeff.
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Thank you, Agnes. I would like to add my personal welcome to everyone who joined us on the call this morning. The company's Q3 results were in line with our expectations given the mix conditions in our markets. As we experienced in the Q2, the governmental, industrial, contractor and vegetation markets continued to display very divergent activity levels during the current quarter. We were very pleased that our governmental customers continued to invest in modernizing and upgrading their maintenance fleets.
In North America, governmental demand remains strong across all of our major product lines. We have been anticipating some modest softening 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 remains stable on the strength of higher property tax receipts despite a modest reduction in sales tax revenue.
Similarly, the National Association of State Budget Officers in a recent update reported that fiscal year 2024 revenues in a majority of the states closed above the original forecast and in some cases above upwardly revised forecasts. According to the same report, most states also reported a 4th consecutive year of surpluses, although smaller than in the immediately preceding years, and that rainy day funds continued to strengthen. These reports align well with the results in our Industrial Equipment division reported during the Q3. Demand for the company's vacuum trucks, street sweepers, debris collectors, crash 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 2023.
Order bookings in this division increased modestly compared to the Q3 of 2023, but remained at historically high levels and the division ended the quarter with a backlog in excess of $540,000,000 up nearly 9% compared to the Q3 of 2023. This division reported strong profitability with net income of $27,700,000 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 Q3. Industrial Equipment division quarter bookings increased by 3% relative to the Q3 of 2023. Unfortunately, conditions in several key markets served by the vegetation management division remained challenging during the Q3.
Demand for lumber and wood derived products continued at a low level as the residential and commercial construction markets remained soft. US housing starts were at their lowest level since the onset of the pandemic as elevated mortgage rates kept buyers 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 Q3, with the decline partially offset by improved sales in Europe. Markets for the division's agricultural mowers, tillage and related products also remained soft during the Q3. The U.
S. Department of Agriculture projects that in 2024, 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 crop prices improved somewhat during the Q3, but remained well below the peak levels recorded in the first half of twenty twenty two. Combination of lower crop prices and rising input costs drove farmer sentiment to the lowest level since 2016.
Farmers continued 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 Q3 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. 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 the 2nd generation of this product was officially introduced earlier this year.
Sales of these specialty vehicles increased nicely during the Q3 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 Q3 declined 23% versus the Q3 of 2023. Order bookings declined 29% from the same period of 2023, and the division ended the quarter with a backlog of $185,000,000 To address the difficult conditions in vegetation management, the company continued to streamline its operations during the quarter. During the Q2, the company initiated the transfer of manufacturing of Rayco branded tree care products to the company's largest forestry and tree care manufacturing facility in Wind, Michigan. The consolidation will be completed during the Q4 this year.
During August, we announced the divestiture of Herschel Parks to FP Borgall Tillage Tools. This was a small transaction that will allow our vegetation management team to focus on development in its core market areas. Also in August, we announced a second major facility consolidation involving the transfer of Rhino Ag Product Manufacturing to our larger facility in Selma, Alabama, where we currently produce Bush Hog branded mowers and related equipment. We expect to book additional expenses associated with these actions in the Q4. Following the anticipated completion of this consolidation in the Q1 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 removal equipment. Associated with these significant facility consolidations, the company's employee population is expected 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, 3rd quarter consolidated operating income declined 19% compared to the Q3 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 3rd quarter, net of restructuring costs, again demonstrating the strength of serving diverse markets. Our teams did a great job managing the balance sheet during the Q3 as total debt net of cash declined by more than $90,000,000 during the quarter and has declined by $126,000,000 compared to the Q3 of 2023. Long term debt at the end of the Q3 was down more than 30% compared to the same time last year. 3rd quarter EBITDA was $170,000,000 or 13.7 percent of sales. We are therefore in an excellent position to benefit from what is expected to be an improved M and A environment in 2025.
Our outlook for the remainder of 2024 remains somewhat cautious. While we do not anticipate major swings in market dynamics in the final weeks of the year, the potential impact of national elections in the United States adds some near term uncertainty. We also expect to incur additional employee reduction costs in the Q4 related to the plant consolidations now underway. The horrific devastation of the 2 major hurricanes that impacted the Southeastern United States will require a great deal of specialized equipment to clear away the overwhelming mounds of felled trees and other debris, and we anticipate a short term improvement in demand for chippers, mulchers and wood grinders to aid in the cleanup efforts. As we look farther ahead into 2025, we anticipate that cost savings associated with the actions we are now taking will impact earnings positively.
Market dynamics for 2025 are, however, expected to remain mixed. Future spending by governmental agencies is expected to continue at a brisk pace early in the year, but the unknown outcome of the upcoming U. S. Elections makes the longer term more difficult to predict. Recovery in the markets for our vegetation management products will depend significantly on the direction of interest rates in the New Year.
Generally speaking, further reductions in interest rates currently anticipated would be helpful to our markets by boosting the construction and housing sectors and lowering dealer inventory financing costs. On balance, we're optimistic that our markets for vegetation management products could modestly improve 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 has authorized to repurchase up to $50,000,000 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 closing, 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're now ready to take your questions. Operator, please go ahead.
Operator: We will now begin the question and answer session. Our first question comes from Mike Schliske with D. A. Davidson. Please go ahead.
Mike Schliske, Analyst, D.A. Davidson: Yes. Hi, good morning. I apologize for the management. Hi, good morning. Good morning.
So I guess I wanted to first ask about the cost reductions. I guess I want to make sure I understand how permanent these discussions are. You did take out the capacity. You said
Jeff Leonard, President and Chief Executive Officer, Alamo Group: you have a little bit
Mike Schliske, Analyst, D.A. Davidson: of capacity going forward, thanks to
Jeff Leonard, President and Chief Executive Officer, Alamo Group: the reductions as a result
Mike Schliske, Analyst, D.A. Davidson: of them. Do you anticipate at some point the need to kind of bring that back? Or is that within the next couple of years, it's just not likely to take place?
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Yes. So Mike, regarding the 2 consolidations separately, as you know, I think you're well aware of the facility we have in Michigan at over 1,000,000 square feet has more than ample capacity to meet our future needs. And this consolidation was long anticipated, but difficult to execute while forestry and tree care was booming a year and a half or so ago and has been Tree Care was booming a year and a half 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. Beyond that, we'll reassess what we do in the future and may add capacity either in one of our existing locations or in another one.
But that remains to be seen. It looks like the ag market is going to stay soft through 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 BushHogs 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.
Mike Schliske, Analyst, D.A. Davidson: Got it. I also wanted to touch on the margin outlook for 2025. Obviously, the cost reductions you made seem to set a bar a point or 2 higher for next year. But as far as what's in the backlog in both of the segments, do you feel like you've got opportunities to get a point or 2 next year on the operating margin line?
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Yes, that's what we're expecting, Mike. Agnes and I
Mike Schliske, Analyst, D.A. Davidson: have told the market we're going
Jeff Leonard, President and Chief Executive Officer, Alamo Group: to drive margins higher and that's what we're going to do. The whole management team is very committed to that. And we're actually taking deeper actions than we otherwise would in this event. And we've planned some further actions, so we have some contingencies in the event the markets and then Chase 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 I think we're going to have to just ride out ag where it is for most of 2025. But forestry, I'm more optimistic about. I think forestry shows a little bit of light, 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 optimistic about 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 and we need to execute it well. But given where we stand today with the consolidations, I'm very confident we'll achieve that.
Mike Schliske, Analyst, D.A. Davidson: And between Ag and Forestry, I want to confirm, right now, Forestry is the larger focus of sales and
Jeff Leonard, President and Chief Executive Officer, Alamo Group: of your efforts, is that correct? It is. And it was also the larger decline in dollars in that division.
Mike Schliske, Analyst, D.A. Davidson: Got it. Thanks so much. I'll pass it over.
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Thanks, Mike. Appreciate it.
Operator: The next question is from Chris Moore with CJS Securities. Please go ahead.
Chris Moore, Analyst, CJS Securities: Hey, good morning guys. Thanks for taking a few.
Ed, Moderator/Operator, Alamo Group: Good morning, Bert.
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Maybe we
Chris Moore, Analyst, CJS Securities: can just good morning. Good morning. 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% 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?
Jeff Leonard, President and Chief Executive Officer, Alamo Group: I think we're close to the bottom prior to restructuring costs. But as we 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 we're taking are in vegetation management. And so if you think about taking several 100 people out of our organization as a percentage of employment in vegetation management, it's very heavy, to say the least. And 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 severe actions. 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 margins certainly in 2025. But Q4 is still a bit up in the air, to be frank, where the market is going to go from here. I could said, I believe forestry is 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. 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 2019, and I'll emphasize very.
So from that point of view, we're in a much better position. The difficulty we face in ag is that 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 two 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 eventually recovers, we should see a very fast uptick because our field inventory is very low right now. So I hope that helps you a little bit.
Chris Moore, Analyst, CJS Securities: That does. Very helpful. Switch (NYSE:SWCH) over to industrial 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 puts and takes of being able to approach 13% again in 2025?
Jeff Leonard, President and Chief Executive Officer, Alamo Group: 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 in 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 coming on the backs of some of the recent acquisitions we've made. So we've got some further facility consolidations, although small in scale, to do in industrial to sort of ensure that operating margin and hopefully expand a little bit more.
Chris Moore, Analyst, CJS Securities: 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. So still not expecting ag improvement till late 'twenty five. What about education overall?
What would it take to grow a little bit in 'twenty five?
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Well, I think what it's going to take is some interest rate help, Chris. I think if we get 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 4th 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 one of the 2 larger plants we have. The facility that we exited for forestry is a 400,000 square foot facility, so that'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 coming 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 a short liner like us to hold our space on the shelf in the dealership. So that's why I'm more cautious about that.
Chris Moore, Analyst, CJS Securities: Got it. Very helpful. I will leave it there. Thanks, guys.
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Thank you, Chris. Appreciate it.
Operator: The next question is from Mig Dobre with Baird. Please go ahead.
Mig Dobre, Analyst, Baird: Thank you. Back to vegetation management, the order is there, your incoming orders have stabilized around $157,000,000 Throughout the year, you've been bringing down production, right? So Q1 revenue was $223,000,000 down to 211, Q3 was $190,000,000 So I guess my question is this, given that at least in the way you kind of frame 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, dollars 160,000,000 per quarter worth of sales and orders. Is that the right way to think about the 4th quarter?
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Yes, it is. Is that the right
Mig Dobre, Analyst, Baird: way to think about the front half?
Jeff Leonard, President and Chief Executive Officer, Alamo Group: It is because the backlog, particularly in the ag side of vegetation 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 book and 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, 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 Graber went out and met with a number of our large customers in forestry a few weeks back and got a pretty encouraging report about how they see the future. They're obviously concerned about 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 to between forestry and housing starts is stronger than we had initially thought. When you actually go back and map it over a long period, which we did, to understand that.
So as interest rates fall and eventually housing starts should tick 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, 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 Q1, maybe early in the second. That's how I'm looking at it.
Mig Dobre, Analyst, Baird: 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, $160,000,000 level sometime in the front half of twenty twenty That's still a qualitative $30,000,000 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.
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Yes. And I think, Mig, that's why I was cautious 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, sort of down 60% compared to where it was in 2018 2019. 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 were about 10% of the corporation inside that division, and it's 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 them. So you're right, we're going to be playing defense in that business for at least the 1st 2 quarters of next year, Mig. There's no getting around it. I agree with your comment.
Mig Dobre, Analyst, Baird: 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 thought here, if we're leaving out the cost savings that you've outlined on the call today, what how would you characterize the normal decremental margins
Ed, Moderator/Operator, Alamo Group: that investors need to
Jeff Leonard, President and Chief Executive Officer, Alamo Group: kind of keep in mind when
Mig Dobre, Analyst, Baird: they're modeling any volume 25? Is it 30? Is it 35? So again, this is excluding kind of the cost savings that you talked about.
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Okay. Difficult question, Mig. I think if you look at vegetation management, the decremental margin in the short term could be 2 to 3 points, something like that. That's sort of where Agnes and I are modeling the downside risk. And Agnes, is there anything you want to add to that from your point of view?
Agnes Campts, Executive Vice President and Chief Financial Officer, Alamo Group: I think for the cost savings that we have implemented now, as you heard Jeff describe the consolidations in the plant, 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.
Jeff Leonard, President and Chief Executive Officer, Alamo Group: And Mig, one last thing here. I didn't mention it specifically on the call. When you look at the consolidation of the BushHawk and Rhino brands, we've consolidated the SG and A functions as well. We've consolidated the sales teams and the engineering teams. So the overall cost structure has come down very significantly.
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 Campts, Executive Vice President and Chief Financial Officer, Alamo Group: And let us remind Yes, let me add one more thing, Mehdi. We do have Latin and other business. So we do like diversity in our business and industrial 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, Industrial equipment is still doing very well. So we need to remember that.
Mig Dobre, Analyst, Baird: Since you brought up SG and A, I had a question about this as well. 6% decline in the quarter, pretty significant. And I'm sort of wondering 2 things here. The first one is, is there a 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 and A on a year over year basis?
And given the restructuring and whatever additional plans you might have, is it fair to expect SG and A will decline in 2025 as well?
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Yes. Well, okay. So to the first part of your question, 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 off the top of my head, but I'm sure Agnes can get it for you or we can give it to you after this call.
But secondly, as you think about SG and A going forward, the cost savings in the ag side of our business didn't appear. That consolidation is a Q4 event. It's behind us, but it's a Q4 event. So you'll see further savings in the SG and 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 I think those two things will largely offset. Now to the second part of your question, what should you think about SG and A next year? Well, obviously, management is not going to profit at the table until this business starts making more money. So it's a bit of a wildcard. 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
Ed, Moderator/Operator, Alamo Group: we speak.
Mig Dobre, Analyst, Baird: No, understood. I was just wondering if there's like a structural component in the SG and A line item that wanted to call out, but that part is understood.
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Well, yes, there is. I mean
Mig Dobre, Analyst, Baird: yes, go ahead, Mig. I guess the final question on the industrial equipment. Demand here is very good. My I guess what I'm wondering about when I'm looking at margin, 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 cost 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've been running in 2024?
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Yes. There is certainly room for more margin expansion in industrial, but we've taken big steps 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 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 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 Q3 bookings.
So we're feeling 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 follow us long enough. 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 3rd. So I think some of the flattening of orders we saw in the industrial segment reflects that. And I'm pretty confident once this election is over, no matter which way it goes, the governmentals will get back to doing what they do, which is spend money and 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, in the U.
S, which matters a lot. We've also talked to our largest customers, our vacuum truck rental operators and our dealers, and they're all feeling pretty good about the direction of things right now. So I think the future look for industrial is pretty bright.
Mig Dobre, Analyst, Baird: Thank you for taking the questions. Thank you, Mig.
Operator: The next question is from Greg Burns with Sidoti and Company. Please go ahead.
Greg Burns, Analyst, Sidoti and Company: Good morning. Your leverage or your debt levels and leverage continue to decline, cash flow remains strong and I appreciate the implementation of the buyback. But I was just wondering what your plans for M and 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?
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Yes. The M and A pipeline for 'twenty five 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 hoarding a bit of cash right now and the share buyback program 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 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 farther. We made nice progress with inventory in the vegetation management division. And unfortunately, we have to eat up some of that growth with industrial running so well at the moment. But the pipeline looks good.
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 taut. So we've got opportunity to move quickly when these opportunities come right next year.
Operator: This concludes the question and answer session. I would like to turn the conference back over to management for any closing remarks.
Jeff Leonard, President and Chief Executive Officer, Alamo Group: Thank you again for joining us today on the call. We look forward to speaking with all of you on our Q4 conference call in February 2025.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.