Q3 2024 Alamo Group Inc Earnings Call
Okay.
Speaker Change: Welcome to the Alamo Group, Inc, third quarter 'twenty 'twenty four conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
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Please note this event is being recorded.
Speaker Change: I would now like to turn the conference over to Edward Rizzuti.
Speaker Change: Executive Vice President Chief Legal Officer and Secretary. Please go ahead.
Edward Rizzuti: Thank you.
Speaker Change: By now you should have all received a copy of the press release.
Speaker Change: If anyone is Mickey a copy and would like to receive one please contact us. If you wanted to 80 73746, 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 one hour. After the call run for one week the replay can be accessed by dialing.
Speaker Change: 187 hundred 70, 344, 75 to nine with the pass code 6101611. Additionally, the call is being webcast on the company's website at Www Alamo dashed group Dot com and a replay will be available for 60 days.
On the line with me today are Jeff Leonard President and Chief Executive Officer in August camps, Executive Vice President and Chief Financial Officer.
Speaker Change: 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.
Speaker Change: Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release.
Edward Rizzuti: Before turning the call over to Jeff I would like to make a few comments about forward looking statements.
Edward Rizzuti: We will be making forward looking statements today that are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act 1995.
Edward Rizzuti: Forward looking statements involve known and unknown risks and uncertainties.
Edward Rizzuti: Which may cause the company's actual results in future periods to differ materially from forecasted results.
Edward Rizzuti: 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.
Edward Rizzuti: Time to time in the company's SEC reports.
Edward Rizzuti: <unk> does not undertake any obligation to update the information contained herein, which speaks only as of this date.
Speaker Change: I would now like to introduce Jeff letter Jeff. Please go ahead.
Jeff: We want to thank everyone, who has joined US on the conference call today and express our appreciation for your continued interest in Alamo group the.
Jeff: The third quarter shaped up largely in line with our expectations as the strong performance from the industrial equipment Division continued and as market headwinds prevail then the vegetation management Division.
Speaker Change: I'd now like to turn the call over to <unk>, 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 asking answering your questions. I guess please go ahead.
Speaker Change: Thank you Jack good morning, everyone.
Speaker Change: Third quarter results were largely in line with our expectations. The first week in agricultural end market continued to struggle in difficult market conditions impacting our vegetation management division the governmental industrial and contractor sectors showed growth within the industrial equipment Division.
Speaker Change: Total revenue for the quarter was $401.3 million, reflecting $4 four declined compared to the same period last year.
Speaker Change: Profit for the quarter was $109 million with a margin of 25, 1% of net sales down.
Down 206 basis points from the third quarter of 2023.
Speaker Change: This margin decline was primarily due to lower volume in vegetation management Division.
Speaker Change: SG&A expenses were $56 $7 million, which is a reduction of 8% from the third quarter of 2023, excluding global truck acquisition.
Speaker Change: These reductions are a result of taking initiatives in the vegetation management Division.
Speaker Change: Operating income in the third quarter of 2024 was $41 million sustaining a double digit operating margin of 10% of net sales.
Speaker Change: While this represents a decline of 190 basis points compared to the same period in 2023.
Speaker Change: Important to note that our third quarter operating income in 2024 includes approximately $1.6 million in separation expenses.
Speaker Change: Net income for the third quarter of 2024, it was $27 $4 million.
Speaker Change: Our $2.28 per diluted share compared with net income of $34 $9 million or $2 91 per diluted share in the same period last year.
Speaker Change: Interest expense in the third quarter of 'twenty 'twenty, four with $1.8 million in the same period in 2023, driven by reducing debt levels.
Speaker Change: The provision for income tax was slightly lower compared to the same period in 2023.
Speaker Change: With that overview, let's take a closer look at the performance of our divisions.
Speaker Change: The gestation management Division reported net sales of $191 million or 23% reduction compared to the third quarter of 2023.
Speaker Change: The largest declines occurred in our forestry and agriculture segments, while the governmental segment continued to show growth.
Speaker Change: Operating income for this division was 12 $4 million, representing six 5% of net sales.
Speaker Change: Reduction in net sales offset savings from cost reduction actions earlier this year.
Additionally, this quarters results included approximately one $6 million.
Speaker Change: Separation expenses.
And the other hand industrial equipment Division net sales were $211 $2 million, representing 22% growth compared to the third quarter of 2023.
Speaker Change: Each grew up with tenders division achieved growth during the third quarter.
Speaker Change: 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.
Industrial equipment Division benefited from increased revenue and efficiency initiatives implemented in 2023.
Speaker Change: A few words to summarize the year end result at your year to date results.
Speaker Change: Through September 2024, net sales were $1 $2 billion, reflecting two 3% decrease compared to the first nine months of 2023.
Speaker Change: The vegetation management Division declined 18, 2%, while the industrial equipment Division grew 21, 8%.
Speaker Change: Operating income for the first nine months of 2020 for $134 million or 10, 5% of net sales, representing a decrease of $22 $8 million and 155 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 separation expenses.
Speaker Change: Industrial equipment Division operating income of $83 million or 13% doesn't necessary does that 300 basis point improvement versus prior year on higher revenue and improved efficiencies.
Speaker Change: Net income for the first nine months of the year was $87 $8 million compared to $104 $6 million for the first nine months of 2023.
Speaker Change: Interest expense improved by $2 4 million versus prior year benefiting from lower debt levels.
Speaker Change: The provision for income taxes is $9 million lower versus prior year and represents approximately 23, 7% effective tax rate.
Speaker Change: Let me speak to the cost reduction actions that are now in progress.
Speaker Change: Yeah.
Speaker Change: To address the challenging macroeconomic conditions in our vegetation management Division, we continue to execute a number of cost reduction initiatives as.
Speaker Change: Well discuss the details later on the call.
Speaker Change: Your savings targets fungi.
Speaker Change: Initiatives is between $25 million to $30 million on an annualized basis.
Speaker Change: We already began to see some of these savings in third quarter with four of those savings expected to accelerate over the next 12 months.
Speaker Change: The costs associated with these actions are mainly employee separation expenses.
Speaker Change: For the third quarter, we incurred approximately $1.6 million.
Speaker Change: For the nine months I had the total severance expenses approximately $3 $2 million.
Speaker Change: At this time, we expect the final total to be between four and four and a half million dollars, which will be incurred in 2024.
Speaker Change: Moving onto the balance sheet.
Speaker Change: We continue to maintain a strong financial position, which provides us with the flexibility to support ongoing initiatives and navigate the current environment effectively.
Speaker Change: Our total assets were $1.481 billion at the end of the third quarter, we presented a small increase of $25 $8 million or one 8% compared to last year at the same time.
Speaker Change: This increase is driven by higher cash and cash equivalents.
We reduced our country, either both by $21 million to $356 $6 million.
Speaker Change: Also representing a reduction in days sales outstanding of five days compared to the end of third quarter in 2023.
Speaker Change: Inventory of $372 million was flat compared to the end of third quarter last year.
Speaker Change: Reactions, we achieved and vegetation management division offset an increase in industrial equipment Division how are you.
Inventory in the industrial equipment Division supports revenue growth of 2022% in that division.
Operating cash flow for the first nine months of 2024 was $136 million, increasing by $53 6 million or <unk> 70 per cent compared to the first nine months of 2023.
Speaker Change: Free cash flow for the first nine months of 'twenty 'twenty, four was $111 $7 million compared to $50 million at the end of the first nine months of 2023.
Speaker Change: In third quarter of 2024, we paid down total debt by another $69 $5 million.
Speaker Change: Total debt net of cash of $84 $1 billion improved by $126 2 million or 60% 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 are pleased that our board has approved a regular dividend of 26 cents per share for the third quarter of 'twenty 'twenty four underscoring our confidence in the strength and durability and stability in this business.
Speaker Change: And we must move forward, we will remain focused on driving growth and optimization of our operations.
Speaker Change: Thank you I'll turn it back over to Jeff.
I guess 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 mixed conditions in our markets as we experienced in the second quarter, the governmental industrial contractor and vegetation markets continued to display a very divergent activity levels.
Speaker Change: 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 remains strong across all of our major product lines, we had been anticipating some modest softening in the United States as we approached national elections, but the actual impact has been there.
Speaker Change: <unk>.
Speaker Change: Municipal finances remain in good shape as a result of solid economic growth and a sustained flow of federal aid.
Speaker Change: 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 higher property tax receipts. Despite a modest reduction in sales tax revenue.
Speaker Change: Similarly, the National Association of State budget officers and our recent update reported the fiscal year 2024 revenues and 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 <unk>.
Speaker Change: Pluses, although smaller than the it would be immediately preceding years and rainy day funds continued to strengthen.
Speaker Change: These reports align well with the results in our industrial equipment Division reported during the third quarter demand for the Companys vacuum trucks Street sweepers debris collectors crash Attenuators and snow removal equipment remained historically elevated during the quarter sales in the industrial equipment division, where more than 42% higher than in the corresponding period in 2002.
Speaker Change: Three order bookings in this division increased modestly compared to the third quarter of 2023, but remained at historically high levels and the division 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.
Speaker Change: Come with $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.
Speaker Change: Unfortunately conditions in several key markets served by the vegetation management Division remained challenging during the third quarter.
Speaker Change: 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 were at their lowest levels since the onset of the pandemic is elevated mortgage rates kept buyers on the sidelines as a result sales of the divisions 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.
Speaker Change: Occupancy the division's agricultural mowers tillage and related products also remained soft during the third quarter.
Speaker Change: U S Department of agriculture projects that in 2020 for 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 for quarter, two 2022 again adjusted for inflation.
Speaker Change: Commodity crop prices improve 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.
Speaker Change: Farmers continue to delay purchases of new equipment and that has kept dealer inventories elevated.
Speaker Change: Sales of the vegetation management divisions agricultural products declined in the third quarter relative to the corresponding period of 2023, and both North and South America and Europe.
Sales of specialty mowers to governmental agencies for maintenance of roadway aprons and other rights of way remained elevated.
Speaker Change: To aid in municipal governments continue to invest steadily to upgrade where maintenance equipment fleets.
Speaker Change: Sales of our new Mantas Prime move we have steadily increased since the 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 and 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 Brikho branded tree care products to the company's largest four three a tree care manufacturing facility in wind, Michigan. The consolidation will be completed during the fourth quarter. This year.
Speaker Change: In August we announced the divestiture of postal parts to F people golf Tillage tools. This was a small transaction that will allow our vegetation management team to focus on developing those core market areas also in August we announced a second major facility consolidation involving the transfer of Rhino AG product manufacturing to our law.
Speaker Change: <unk> 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 fourth quarter. Following the anticipated completion of this consolidation in the first quarter of 2025, the Gibson City, Illinois facility will be closed.
Speaker Change: 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.
Speaker Change: 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 mark.
Speaker Change: Conditions.
Speaker Change: Turning to corporate performance third quarter consolidated operating income declined 19% compared to the third quarter of 2023 as a result of lower sales and operating margin and vegetation management, partly offset by improved sales and operating margin in industrial equipment. We.
Speaker Change: 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 the strength of 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 <unk>.
Speaker Change: 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 of 13, 7% of sales. We are therefore in an excellent position to benefit from.
Speaker Change: What is expected to be an improved M&A environment in 2025.
Our outlook for the remainder of 2024 remained 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 States add some near term uncertainty uncertainty.
Speaker Change: We also expect to incur additional employee reduction costs in the fourth quarter related to the plant consolidations now underway.
Speaker Change: Horrific devastation and with two major hurricanes that impacted the south eastern United States will require a great deal of specialized equipment to clear away. The overwhelming mountains of felled trees and other debris and we anticipate a short term improvement in demand for shippers molders and wood grinders to aid in the cleanup efforts as we look farther ahead.
Speaker Change: Into 2025, we anticipate that the cost savings associated with the actions. We are now taking will impact earnings positively.
Speaker Change: Market dynamics for 2025 are however expected to remain mixed future spending by governmental agencies is expected to continue at a brisk pace in early in the year, but the unknown outcome of an 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 do.
<unk> 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 cost on balance we're optimistic that our markets for vegetation management products could modestly improve.
Speaker Change: Next year, despite what is expected to be another challenge meter in the agricultural sector.
Speaker Change: Given the mixed outlook, we will continue to adapt our operating model and crushed 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.
Speaker Change: 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.
Speaker Change: Before beginning I.
Speaker Change: 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.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question you May press Star then one on your telephone keypad if.
Speaker Change: If you are using a speaker phone please pick up your handset before pressing the keys.
Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please.
Speaker Change: Press Star then two at this time, we will pause momentarily to assemble our roster.
Speaker Change: Our first question comes from Mike Smolinski with D. A Davidson. Please go ahead.
Mike Smolinski: Yes, hi, good morning, I'll go through the Bachelor Lake Mine.
Speaker Change: Good morning.
Mike Smolinski: So I guess I wanted to first ask about.
Mike Smolinski: The cost reductions.
Mike Smolinski: And I guess I want to make sure I understand how permanent.
Mike Smolinski: Yes.
Mike Smolinski: We are are you did take out some capacity you said, you'll have a little bit of capacity going forward with the reduction as a result of them.
Mike Smolinski: Do you anticipate at some point.
Mike Smolinski: <unk>.
Need to kind of.
Mike Smolinski: I mean that back or is that you know within the next couple of years.
Speaker Change: Not likely to take place.
Speaker Change: Yes, so Mike regarding with two consolidations separately as you know I think you're well aware of the facility we have in Michigan at over 1 million square feet.
Speaker Change: He has more than ample capacity to meet our future needs in this consolidation was long anticipated but difficult.
Speaker Change: Execute Wellbore Street, <unk> was booming a year and a half or so ago and has been for the last four or five years since we entered that sector.
Speaker Change: The consolidation in the AG side of our business with Rhino Aegean Bush Hog certainly we'll have adequate capacity for the next couple of years beyond that we will reassess what we do in the future and may add capacity either in one of our existing locations or to 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.
Speaker Change: 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.
Speaker Change: As we sit here today while.
Speaker Change: 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 in the capital investments, we need to bake in the Bush hog facility are already underway.
Mike Smolinski: Got it.
Speaker Change: I also want to touch on the margin outlook for 2025 honestly the cost reductions you've made through the center bar.
Speaker Change: One or two higher.
And next year, but as far as what's in the backlog and both of which segments do you feel like you got.
Speaker Change: Opportunities to.
Speaker Change: And of course through next year.
Speaker Change: On the operating margin line.
Speaker Change: Yes, that's what we're expecting and Mike you know I guess and I have told the market, we're going to drive margins higher and that's what we're going to do the whole management team is very committed to that.
We're actually taking deliberate actions than we otherwise would in this event and we plan. Some further actions. So we have some contingencies in the event the markets and vegetation management should continue to decline. Although my personal view is we're fairly close to the bottom you know it's been noted that RMR.
Speaker Change: Bookings and backlog and so on a stabilized fairly well now so I think we're going to have to just ride out at where it is for most of 2045, but forestry I'm more optimistic about I think forestry shows a little bit of life.
Speaker Change: Not just because of the hurricanes, but generally speaking there has been a modest uptick in activity that we see that sector. We've talked to a number of the major customers and they are feeling a little bit more optimistic about.
Speaker Change: 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 are very confident we will achieve that.
Speaker Change: And between AG and forestry I want to confirm.
Speaker Change: Right now partially as the larger okay.
Sales in our Europe correct.
It is and it was also the larger decline in dollars in that division.
Speaker Change: Got it thanks, so much I'll pass it along.
Speaker Change: Thanks, Mike appreciate it.
Speaker Change: The next question is from Chris Moore with C. J as Securities. Please go ahead.
Chris Moore: Hey, good morning, guys. Thanks for taking a few yeah morning, maybe we can just good morning.
Chris Moore: To start with keep on the the the margin discussion maybe just go a little deeper by segment, but vegetation operating margin was six 5% versus 7.6 in Q2, if you adjust out that 1.6.
Chris Moore: It was seven 4% this quarter so.
Speaker Change: In terms of of the bottom on that is Q3 likely the bottom or still some uncertainty looking at Q4 versus that.
Speaker Change: You know 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 late 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 hundred people out of our organization as a percentage of employment and vegetation management.
It's very heavy to.
Speaker Change: To say, the least and so we've got to kind of adapt to a new operating situation there and vegetation management. So I don't know if its the absolute bottom or not but we've taken very severe accidents. That's what I'm trying to say to you in AG 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.
Speaker Change: In 2025, but Q4 is still a bit up in the air to be Frank we're where the market is going to go.
Speaker Change: I'm here I guess, you said I believe fourth street stabilized we're stabilizing.
Speaker Change: And it looks like it's flattening, but it's very.
Speaker Change: 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's all of our floor plan is down very sharply compared to where it was pre pandemic in 2018 in 2019 and I'll emphasize very soon.
Speaker Change: So from that point of view, we're in a much better position the difficulty we face today. It gives us because it's the large Oems the tracker 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 uptake because our field inventory is very low right now so I hope that helps you with it.
Speaker Change: It does very helpful switchover at industrial probably go back to agitation so enjoy.
Speaker Change: Industrial operating margin 13, 1% for the quarter were modeling just below 13% for the year I guess, maybe the puts and takes of being able to approach, 13% again in <unk> and 'twenty five.
Speaker Change: Oh I think we will of course, I think we're going to stabilize there and 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.
Speaker Change: 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 on the backs of some of the recent acquisitions. We've made so we've got some further facility consolidations, although small in scale.
Speaker Change: To do an industrial to sort of ensure that operating margin or to hopefully expand it a little bit more.
Speaker Change: Got it very helpful. So you just talked about inventory.
Speaker Change: Inventory levels continue to improve on the vegetation side, you know rates coming down a little bit hopefully more.
Speaker Change: So you're still not expecting AG improvement till late 'twenty five.
Speaker Change: Well, what about that yeah that and overall what would it take to grow a little bit in 'twenty five.
Speaker Change: Well I think what it's going to take some interest rate help Chris I think because we've got a little bit of interest rate held earlier in the year Forrester you'll be the first to tick back up and as I said, it's already showing some signs of life.
Speaker Change: Our fourth quarter is off to a good start in forestry very encouraged to see that and of course, our cost structure and forestry is now much lower having essentially closed one of the two larger plants we have.
The facility that we exited for Forrester has a 400000 square foot facility. So that's a big one.
Speaker Change: So we should see nice savings coming out of coming out of that so I think forestry will be much better next year than 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.
Speaker Change: It's 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 space on the shelf in the dealerships. So that's why I'm more.
Speaker Change: It's just about that.
Speaker Change: Got it very helpful. I will leave it there thanks guys.
Speaker Change: Thank you Brad I appreciate it.
Speaker Change: The next question is from Mig <unk> with Baird. Please go ahead.
Speaker Change: Thank you.
Speaker Change: Back to vegetation management.
Speaker Change: The order is 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 Q3 was 190.
So I guess my question is this you know 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 is probably going to be pretty muted.
Speaker Change: And it might be more back half loaded.
Speaker Change: I would imagine that it's fair to assume that your production your yourselves and vegetation management are going to.
Speaker Change: Turning to converge towards orders right towards this call at $160 million per quarter worth of.
Worth of sales and orders is that the right way to think about.
Speaker Change: The fourth quarter. It is I hate to think about the front half.
Speaker Change: It is because of the backlog, particularly in the AG side of vegetation management is quite low right now its not near an all time low yet, but it's getting close.
Speaker Change: Which means that we will be living more hand to mouth would be in our book and bill will be the key thing get orders and ship them.
Speaker Change: For the 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 for three and I don't want to say too much about that yet obviously can but I'm encouraged with what I see some of that was related to the hurricanes, but theres also some underlying demand coming back.
Speaker Change: Rick waiver and went out and met with a number of our large customers in four three a few weeks back and got a pretty encouraging report about how they see the future. There are obviously concerned about the national elections, and where interest rates go thats whats, creating the uncertainty and as I said on the call Mig the linked to fall to between four three and housing starts is stronger we had initially.
Speaker Change: Thought when you actually go back and map out over 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'll be really late late in the year from my point of view I think.
Speaker Change: The forest the forestry recovery could start around midyear, if we get another interest rate cut or two in the first quarter maybe early in the second that's how I'm looking at it.
Speaker Change: Yeah.
Speaker Change: I see well.
Speaker Change: Really kind of where I was trying to get out with my question is if we're going to see revenues converge towards call. It 160 million dollar level sometime in the front half of 2025.
Speaker Change: That still call it a 30 million.
Speaker Change: Erosion relative to where you were in Q3, you do have cost savings like you outlined coming through.
Speaker Change: I still struggle to see how margins are going to be flat or up.
Speaker Change: Relative to what you had in Q3 I would imagine that you should have further margin erosion sequentially.
Speaker Change: Simply because of a normal decremental margins that would that would that would flow through from Bob talked about revenue loss.
Speaker Change: Yes, and I think maybe Thats why I was cautious on the earlier question about Q4, I mean, you're right you're exactly right that that's the worry for Q4, but I'm less worried about it as we head into Q1 and Q2 next year.
Speaker Change: 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.
Speaker Change: Down 60% compared to where it was in 2018 and 19, so there's not a lot of buffer sitting out there anymore. So.
Speaker Change: Youre 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 of 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%.
Speaker Change: So we've taken huge chunks of cost out of there and as I said I guess I have some additional contingencies that we've already planned and we're planning some further actions that we need to take them. So you're right. We're gonna be playing defense defense in that in that business for at least the first two quarters of next year, maybe there's no getting around it I agree with your comment.
Speaker Change: I just wanted 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 what the business is able to do so maybe to just kind of finish my thought here.
Speaker Change: If we're leaving out.
Speaker Change: The cost savings that you've outlined on the call today.
Speaker Change: What how would you characterize the normal decremental margins that investors need to kind of keep in mind when they're modeling.
Speaker Change: The volume contraction into 2025 is it.
Speaker Change: 25 is it 30% to 35%. So again this is excluding kind of the cost savings that you talked about.
Speaker Change: Okay.
Speaker Change: Difficult question Mig I think if you look at vegetation management, the decremental margin in the short term it could be two to three points something like that that's sort of where Agnes iron mountain the downside risk and Agnes is there anything you want to add to that from your point of view.
Speaker Change: I think for the cost savings that we have implemented now.
Speaker Change: As you heard Jeff described book consolidation from the plant those are permanent cost on that.
Speaker Change: What we're doing is to design an improvement in the margins going forward, but we do have to consider is the fastest that exactly how he described that the revenue might still be dollar we need to consider seasonality for example in Q4, So when you model.
Margins you know what we're not out of the woods, let's put it that way.
Speaker Change: And what we're expecting is an improvement later in 2025.
Speaker Change: Beyond.
Speaker Change: And maybe one last thing here I didn't know you had mentioned that 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 with consolidated 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 absorption.
Speaker Change: We've made a structural change in that business.
Speaker Change: And like.
Speaker Change: Yeah, Let me add one more thing maybe.
Speaker Change: We do have a lucky enough that so we do like diversity.
Speaker Change: Industrial equipment Division is still doing quite well.
Speaker Change: Oh Wow vegetation is undergoing their phones and we're taking an opportunity to adjust structural cost permanently.
Speaker Change: Industrial equipment.
Speaker Change: So it sounds like we need to remember that.
Speaker Change: Okay.
Speaker Change: Since since you brought up SG&A I had a question about this as well.
Speaker Change: 6% decline in the quarter pretty.
Pretty significant.
Speaker Change: I'm sort of wondering two 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&A on a year over year basis.
Speaker Change: You know given the restructuring and whatever additional plans you might have is it fair to expect SG&A will decline in 2025 as well.
Speaker Change: Yeah, Okay. So to the first part of your question there, yes, there's obviously an elimination of accruals for compensation for myself and everybody else in this company as it should be.
Speaker Change: Yes, Thats true I don't know the amount of that off the top of my head, but I'm sure <unk> can get it for you or we can give it to you after this call.
Speaker Change: But secondly, as you think about SG&A going forward the cost savings in the AG side of our business didn't appear that consolidated Q4 event is behind us, but its 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.
Speaker Change: So I think those two things will largely offset now to the second part of your question. What did you think about SG&A next year will obviously, you know 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. The 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.
Speaker Change: At this point, we havent, even discussed that with our board of directors, yet we're still doing our budget for next year as we speak.
Speaker Change: 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 that part is understood.
And yes, there is.
Speaker Change: Yes, Greg.
Speaker Change: I guess the final question on <unk>.
Speaker Change: Industrial equipment.
The demand here is is very good my my.
Greg: I guess, what I'm, 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.
Greg: Versus the first half and be incremental soften a bit in the quarter as well at 21%.
Greg: So I'm wondering if there's if there is 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.
Speaker Change: It 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.
Speaker Change: Yes, there is certainly room for more margin expansion in industrials, we've taken big steps in that direction. They will moderate for sure because it gets tougher as you go we're 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.
Speaker Change: That we vacated and making some industrial products are 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 at a very high quality for us right now.
Speaker Change: As I said, our markets are stronger than what were reflected in third quarter bookings were feeling very confident about that they're able to say I made a couple of references to national elections on the call. You know me well enough and I think you followed us long enough usually in election years, a tough year for us in industrial and governmental and start to get really cautious.
Speaker Change: 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 this election is over no matter, which way. It goes the governmental is we'll get back to doing what they do which is spend money to upgrade their fleets that they have to that's why I made all those remarks about what good shape the munis.
Speaker Change: Valleys in the states or 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 pretty bright.
Speaker Change: Thank you for taking the questions.
Speaker Change: Thank you Mike.
Speaker Change: Again, if you have a question. Please press Star then one the next question is from Greg Burns with Sidoti and company. Please go ahead.
Good morning.
Greg Burns: Here's your leverage or your.
Greg Burns: Debt levels and leverage continues to decline cash flow remains strong and I appreciate our implementation of the buyback, but I was just wondering.
Greg Burns: What your plans for M&A or if any what the pipeline of maybe opportunities look like.
Greg Burns: Are you looking to expand into any new adjacent categories. What are the opportunities maybe for some inorganic growth offset.
Greg Burns: Some of the weakness, we're seeing now and vegetation management.
Greg Burns: Yes.
Speaker Change: M&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 Thats why I guess and I are holding 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 Abbott's, there and I need to have it in a positive.
Speaker Change: Wei of spinning 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 and 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.
Speaker Change: There's a couple of small tuck ins, we're chasing that maybe aren't material to the topline 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 thought so.
Speaker Change: So we've got opportunity to move quickly when these offer.
Speaker Change: <unk> <unk> next year.
Speaker Change: Okay, great. Thank you.
Speaker Change: Yes.
Speaker Change: This concludes the question and answer session I would like to turn the conference back over to management for any closing remarks.
Speaker Change: 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.
Speaker Change: The conference has now concluded.
Speaker Change: Thank you for attending today's presentation you may now disconnect.