Alamo Group - Q3 2024

Transcript

Edward Rizzuti (Head of Investor Relations)

On the line with me today are Jeff Leonard, President and Chief Executive Officer, and Agnes Kamps, 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 CEO)

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 third quarter 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 third quarter. I will then provide additional comments on the results and say a few words about the outlook for the fourth quarter and a few early thoughts on 2025. Following our formal remarks, we look forward to answering your questions. Agnes, please go ahead.

Agnes Kamps (EVP and CFO)

Thank you, Jeff. Good morning, everyone. Third quarter results were largely in line with our expectations. The forestry and agricultural markets continued to struggle with difficult market conditions impacting our Vegetation Management Division. The governmental, Industrial, and contractor sectors showed growth within the Industrial Equipment Division. Total revenue for the quarter was $401.3 million, reflecting a 4.4% decline compared to the same period last year. Gross profit for the quarter was $100.9 million, with a margin of 25.1% of net sales, down 206 basis points from the third quarter of 2023. This margin decline was primarily due to lower volume in the Vegetation Management Division. SG&A expenses were $56.7 million, which is a reduction of 8% from the third quarter of 2023, excluding Royal Truck acquisition. These reductions are a result of savings initiatives in the Vegetation Management Division.

Operating income in the third quarter of 2024 was $40.1 million, sustaining a double-digit operating margin of 10% of net sales. While this represents a decline of 190 basis points compared to the same period in 2023, it's important to note that our third quarter operating income in 2024 includes approximately $1.6 million in separation expenses. Net income for the third quarter of 2024 was $27.4 million, or $2.28 per diluted share, compared with net income of $34.9 million, or $2.91 per diluted share in the same period last year. Interest expense in the third quarter of 2024 was $1.8 million 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.

The Vegetation Management Division reported net sales of $190.1 million, a 23% reduction compared to the third quarter of 2023. The largest declines occurred in the forestry and agricultural segments, while the governmental segment continued to show growth. Operating income for this division was $12.4 million, representing 6.5% of net sales. The reduction in net sales offset savings from cost reduction actions earlier this year. Additionally, this quarter's result included approximately $1.6 million in separation expenses. On the other hand, the Industrial Equipment Division net sales were $211.2 million, representing 22% growth compared to the third quarter of 2023. Each group within this division achieved growth during the third quarter. Operating income was $27.7 million, or 13.1% of net sales, marking an improvement of 180 basis points compared to the same period last year. The Industrial Equipment Division benefited from increased revenue and efficiency initiatives implemented in 2023.

A few words to summarize year-to-date results. Through September 2024, net sales were $1.2 billion, reflecting a 2.3% decrease compared to the first nine months of 2023. The Vegetation Management Division declined 18.2%, while the Industrial Equipment Division grew 21.8%. Operating income for the first nine months of 2024 was $130.4 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 the Vegetation Management Division was $50.1 million, or 8.5% of net sales, and it includes approximately $3.2 million in employee separation expenses. The Industrial Equipment Division operating income of $80.3 million, or 13% of net sales, is a 300 basis point improvement versus the prior year on higher revenue and improved efficiencies. 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.

Interest expense improved by $2.4 million versus the prior year, benefiting from lower debt levels. The provision for income taxes is $2.9 million lower versus the prior year and represents approximately a 23.7% effective tax rate. Let me speak to the cost reduction actions that are now in progress. To address the challenging macroeconomic conditions in our Vegetation Management Division, we continue to execute a number of cost reduction initiatives. We'll discuss the details later on the call. Our savings target from these initiatives is between $25 million-$30 million on an annualized basis. We already began to see some of these savings in the third quarter, with further savings expected to accelerate over the next 12 months. The costs associated with these actions are mainly employee separation expenses.

For the third quarter, we incurred approximately $1.6 million, and for the nine months of the total severance expenses, approximately $3.2 million. At this time, we expect the final total to be between $4 and $4.5 million, which will be incurred in 2024. Moving on to the balance sheet, we continue to maintain a strong financial position, which provides us with the flexibility to support ongoing initiatives and navigate the current environment effectively. Our total assets were $1,481 million at the end of the third quarter, representing a small increase of $25.8 million, or 1.8% compared to last year at the same time. This increase is driven by higher cash and cash equivalents. We reduced our accounts receivables by $21 million to $356.6 million, also representing a reduction in days sales outstanding of five days compared to the end of the third quarter in 2023.

Inventory of $372 million was flat compared to the end of the third quarter last year. Reductions we achieved in the Vegetation Management Division offset an increase in the Industrial Equipment Division. Higher inventory in the Industrial Equipment Division supports revenue growth of 20.2% in that division. Operating cash flow for the first nine months of 2024 was $130.6 million, increasing by $53.6 million, or 70%, compared to the first nine months of 2023. Free cash flow for the first nine months of 2024 was $111.7 million compared to $50 million at the end of the first nine months of 2023. In the third quarter of 2024, we paid down total debt by another $69.5 million. Total debt net of cash of $84.1 million improved by $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 $0.26 per share for the third quarter 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 CEO)

Thank you, Agnes. I would like to add my personal welcome to everyone who joined us on the call this morning. The company's third quarter results were in line with our expectations given the mixed conditions in our markets. As we experienced in the second quarter, 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 remained 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 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 forecasts and, in some cases, above upwardly revised forecasts. According to the same report, most states also reported a fourth consecutive year of surpluses, although smaller than in the immediately preceding years, and that rainy day funds continued to strengthen. These reports align well with the results in our Industrial Equipment Division reported in the third quarter. 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 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 income of $27.7 million, up nearly 42% compared to the same period of 2023. EBITDA was also very strong at 15.9%, an improvement of 160 basis points to the prior year third quarter. Industrial Equipment Division order bookings increased by 3% relative to the third quarter of 2023. Unfortunately, conditions in several key markets served by the Vegetation Management Division remained challenging during the third quarter.

Demand for lumber and wood-derived products continued at a low level as the residential and commercial construction markets remained soft. U.S. 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 third quarter, with the decline partially offset by improved sales in Europe. Markets for the division's agricultural mowers, tillage, and related products also remained soft during the third quarter. 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 third quarter but remained well below the peak levels recorded in the first half of 2022. The combination of lower crop prices and rising input costs drove farmer sentiment to the lowest level since 2016. Farmers 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 third quarter relative to the corresponding period of 2023 in both North America, 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 continued to invest steadily to upgrade roadway maintenance equipment fleets. Sales of our new Mantis prime mover 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 in what was otherwise a challenging quarter. In the face of these market headwinds, Vegetation Management Division sales for the third quarter declined 23% versus the third quarter of 2023. Order bookings declined 29% from the same period of 2023, and the division ended the quarter with a backlog of $185 million. To address the difficult conditions in vegetation management, the company continued to streamline its operations during the quarter. During the second quarter, the company initiated the transfer of manufacturing of Rayco-branded tree care products to the company's largest forestry and tree care manufacturing facility in Winn, Michigan. The consolidation will be completed during the fourth quarter this year. During August, we announced the divestiture of Herschel Parts to F.P. Bourgault 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 RhinoAg 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 fourth quarter. Following the anticipated completion of this consolidation in the first quarter of 2025, the Gibson City, Illinois, facility will be closed. The facility consolidations currently in progress will reduce the company's global manufacturing capacity by approximately 8%, falling within the Vegetation Management Division. The company is continuing to expand industrial equipment manufacturing capacity, particularly for vacuum trucks and snow 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, third quarter consolidated operating income declined 19% compared to the third quarter of 2023 as a result of lower sales and operating margin in vegetation management, partly offset by improved sales and operating margin in industrial equipment. We were pleased that despite the headwinds in vegetation management, the company achieved an operating margin of 10% for the third quarter net of restructuring costs, again demonstrating 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 quarter and has declined by $126 million compared to the third quarter of 2023. Long-term debt at the end of the third quarter was down more than 30% compared to the same time last year. Third quarter EBITDA was $170 million or 13.7% of sales. We are therefore in an excellent position to benefit from what is expected to be an improved M&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 fourth quarter related to the planned consolidations now underway. The horrific devastation of the two 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 the 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 is authorized to repurchase up to $50 million of its outstanding common stock. The just announced repurchase plan affirms our confidence in the future of our business and is based on the strength of our balance sheet and our expectations of future cash flow. Before 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 (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Mike Shlisky with D.A. Davidson. Please go ahead.

Mike Shlisky (Managing Director and Senior Equity Research Analyst)

Yes. Hi, good morning. I apologize in advance for any bad noise. Hi, morning, Mike. 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 reductions are. You did take out some capacity. You said you'll have a little bit less capacity going forward thanks to the reductions as a result 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 just not likely to take place? Yeah.

Jeff Leonard (President and CEO)

Mike, regarding the two consolidations separately, as you know, I think you're well aware of the facility we have in Michigan at over 1 million sq ft has more than ample capacity to meet our future needs. 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 for the last four or five years since we entered that sector. The consolidation in the ag side of our business with RhinoAg and Bush Hog certainly will 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 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 Bush Hog remains, we need to move some machinery and some inventory and so on. All of the people actions and the capital investments we need to make in the Bush Hog facility are already underway.

Mike Shlisky (Managing Director and Senior Equity Research Analyst)

Got it. I also wanted to touch on the margin outlook for 2025. Obviously, the cost reductions you've made seem to set a bar a point or two 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 two next year on the operating margin line?

Jeff Leonard (President and CEO)

Yeah, that's what we're expecting, Mike. Agnes and I have told the market we're going to drive margins higher, and that's what we're going to do. 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 in vegetation 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 Shlisky (Managing Director and Senior Equity Research Analyst)

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

Jeff Leonard (President and CEO)

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

Mike Shlisky (Managing Director and Senior Equity Research Analyst)

Got it. Thanks so much. I'll pass it along.

Jeff Leonard (President and CEO)

Thanks, Mike. Appreciate it.

Operator (participant)

The next question is from Chris Moore with CJS Securities. Please go ahead.

Chris Moore (Senior Analyst)

Hey, good morning, guys. Thanks for taking a few. Yeah, maybe we can just good morning. Keep on the margin discussion. Maybe just go a little deeper by segment. But vegetation operating margin was 6.5% versus 7.6% in Q2. If you adjust out that 1.6%, it was 7.4% this quarter. So in terms of the bottom on that, is Q3 likely the bottom or still some uncertainty looking at Q4 versus that?

Jeff Leonard (President and CEO)

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 hundred people out of our organization, as a percentage of employment in Vegetation Management is 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. Like I 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. I can share with you that our inventory out in our dealer network, that what's on our floor plan is down very sharply compared to where it was pre-pandemic in 2018 and 2019. And I'll emphasize 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 (Senior Analyst)

That does. Very helpful. Switch 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 CEO)

Oh, 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. 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 it a little bit more.

Chris Moore (Senior Analyst)

Got it. Very helpful. So you just talked about inventory levels continuing to improve on the vegetation side. Rates coming down a little bit, hopefully more. Still not expecting ag improvement until late 2025. What about vegetation overall? What would it take to grow a little bit in 2025?

Jeff Leonard (President and CEO)

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 fourth quarter is off to a good start in forestry. I'm very encouraged to see that. And of course, our cost structure in forestry is now much lower, having essentially closed one of the two larger plants we have. The facility that we exited for forestry is a 400,000 sq ft facility, so it's a big one. So we should see nice savings coming out of that.

So I think forestry will be much better next year in the back half. It's not going to be an overnight event, but certainly I see the progress 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 for 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 (Senior Analyst)

Got it. Very helpful. I will leave it there. Thanks, guys.

Jeff Leonard (President and CEO)

Thank you, Chris. Appreciate it.

Operator (participant)

The next question is from Mig Dobre with Baird. Please go ahead.

Mig Dobre (Associate Director of Research)

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

Jeff Leonard (President and CEO)

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-to-bill being the key thing. Get orders and ship them for at least the first half of next year in ag. Forestry is a little bit different case. As I said, we've gotten off to a good start in Q4 with orders in forestry. And I don't want to say too much about that yet. I obviously can't. But I'm encouraged with what I see. Some of that was related to the hurricanes, but there's also some underlying demand coming back.

Rick Wehrle 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. As I said on the call, Mig, the link 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 to tick up, the demand is there for housing. That'll 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 the forestry recovery could start around mid-year if we get another interest rate cut or two in the first quarter and maybe early in the second. That's how I'm looking at it.

Mig Dobre (Associate Director of Research)

I see. Well, really kind of where I was trying to get at with my question. If we're going to see revenues converge towards this, call it $160 million level sometime in the front half of 2025, that's still, call it a $30 million erosion relative to where you are 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 CEO)

Yeah. 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. 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 and 2019. There's not a lot of buffer sitting out there anymore. 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, 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 first two quarters of next year, Mig. There's no getting around it. I agree with your comment.

Mig Dobre (Associate Director of Research)

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, how would you characterize the normal decremental margins that investors need to kind of keep in mind when they're modeling any volume contraction into 2025? Is it 25%? Is it 30%? Is it 35%? So again, this is excluding kind of the cost savings that you talked about.

Jeff Leonard (President and CEO)

Okay. Difficult question, Mig. I think if you look at vegetation management, the decremental margin in the short term, this could be two to three 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 Kamps (EVP and CFO)

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

Jeff Leonard (President and CEO)

And Mig, one last thing here. I didn't mention it specifically on the call. When you look at the consolidation of the Bush Hog and RhinoAg brands, we've consolidated the SG&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 Kamps (EVP and CFO)

And let us remind. Yeah. Let me add one more thing, maybe. We do have Latvia as a business, so we do like diversity in our business. And the 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 (Associate Director of Research)

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

Jeff Leonard (President and CEO)

Yeah. Well, okay. So to the first part of your question, Mig, yes. There's obviously an elimination of accruals for compensation for myself and everybody else in this company, as it should be. So yes, that's true. I don't know the amount of that 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&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&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&A next year? Well, obviously, management's not going to profit at the table until this business starts making more money. So it's a bit of a wild card. I don't want to tell you management's not going to earn bonuses next year. I certainly hope we do, but it's got to be on the basis of improved profitability. And at this point, we haven't even discussed that with our board of directors yet. We're still doing our budget for next year as we speak.

Mig Dobre (Associate Director of Research)

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

Jeff Leonard (President and CEO)

Well, there is. I mean, yeah, go ahead, Mig.

Mig Dobre (Associate Director of Research)

I guess the final question on the industrial equipment demand here is very good. I guess what I'm wondering about, when I'm looking at 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 in mix here or if some of the positive price costs that we've seen earlier in the year is starting to moderate. Really, the essence of the question is, can we continue to underwrite significant margin expansion in 2025 relative to this kind of 13% level that you've been running in 2024?

Jeff Leonard (President and CEO)

Yeah. There is certainly room for more margin expansion in industrial, Mig, 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 third quarter bookings. So we're feeling very confident about that. The other 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've followed us long enough. Usually, election year is a tough year for us in industrial. The governmental start to get really cautious. And 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 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 (Associate Director of Research)

Thank you for taking the question.

Jeff Leonard (President and CEO)

Thank you, Mig.

Operator (participant)

Again, if you have a question, please press star, then one. The next question is from Greg Burns with Sidoti & Company. Please go ahead.

Greg Burns (Analyst)

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&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 CEO)

Yeah. The M&A pipeline for 2025 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 habit 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 had 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.

Greg Burns (Analyst)

Great. Thank you.

Operator (participant)

This concludes the question-and-answer session.

Jeff Leonard (President and CEO)

I would like to turn the conference back over to management for any closing remarks. Thank you again for joining us today on the call. We look forward to speaking with all of you on our fourth quarter conference call in February 2025.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.