Alamo Group Inc. (NYSE:ALG) Q3 2022 Earnings Conference Call November 4, 2022 10:00 AM ET
Company Participants
Edward Rizzuti – VP, General Counsel and Secretary
Jeff Leonard – President and CEO
Richard Wehrle – EVP, CFO and Treasurer
Dan Malone – EVP and Chief Sustainability Officer
Conference Call Participants
Chris Moore – CJS Securities
Greg Burns – Sidoti and Company
Mike Buskey – D. A Davidson
Operator
Greetings and welcome to the Alamo Group, Inc. Third quarter ‘twenty to 2022 conference call. At this time, all participants are in a listen only mode[Operator Instructions]
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Edward Rizzuti, Executive Vice President General Counsel and Secretary. Thank you.
Edward Rizzuti
Thank you. By now you should have all received a copy of the press release. However, anyone is missing a copy but would like to receive one please contact us at 212873746, we will send you a release and make sure you’re on the company’s distribution.
There will be a replay of the call, which will begin one hour after the call and run for one week. The replay can be accessed by dialing 18882031112 with the pass code one 733267. 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, Richard Wehrle, Executive Vice President, Chief Financial Officer, and Treasurer, and Dan Malone, Executive Vice President and Chief Sustainability Officer.
Management will make some opening remarks, and then we’ll open up the line for your questions.
During the call today management may reference certain non-GAAP numbers in their remarks reconciliations of non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release.
Before turning the call over to Jeff, I’d 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. Those factors that could cause actual results to differ materially are the following market demand COVID-19 impacts including operational. Rain disruptions competition weather seasonality currency related issues geopolitical issues 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
Thank you Ed we want to thank all of you for joining us today. Richard will begin our call with a review of our financial results for the third quarter of 2022 I will then provide additional comments on the results. Following our formal remarks, we will look forward to taking your questions. Richard. Please go ahead. Thanks.
Richard Wehrle
Thanks, Jeff and good morning, everyone Alamo groups third quarter 2020 to close with a solid performance with record sales and net income results for the quarter were driven by strong demand for our products, but with continued supply chain challenges and labor shortages.
Third quarter consolidated net sales for 2022 or 368 8 billion, increase of 9% compared to $338 3 million in the third quarter of last year.
Sales were negatively impacted over 3% due to currency translation as the U S. Dollar continued to strengthen against the four yes, the foreign currency.
Gross margin dollars in the quarter improved compared to the third quarter of 2021 by $6 1 billion. Although gross margin percent declined by 50 basis points, both margin dollars and percentage – percentage were negatively affected by supply chain issues labor shortages under absorption at our manufactured opera. Patients and freight surcharges on inbound inventory. Product mix was also less favorable as parts grew at a slower pace the zero equivalent.
Consolidated net income for the third quarter of 2020 to $25 8 billion or $2.16 per diluted share an increase of 47% versus net income of $17 5 billion or $1 47 per diluted share for the third quarter 2021. Continued solid control of cost and expenses helped support the increased profitability.
The vegetation management division had a solid third quarter as markets remain strong third quarter 2022, net sales were $228 5 billion, an increase of 9% compared to $209 8 billion for the third quarter of 2021.
The division continues to see strong demand for forestry tree care and agricultural and governmental mowing products as both North America and Europe .
Margins during the third quarter of 2020 to 40 basis points as compared to the prior year quarter, Despite labor shortages and supply chain disruptions.
Income from operations for the third quarter of 2022 was $27 1 billion up 27% versus $21 4 billion for the same period in 2021. Industrial equipment Division net sales in the third quarter, $140 3 million up just over 9% compared to $128 5 million for the third quarter of 2021. This was due to our solid performance in snow removal products and to a lesser extent improved net sales the division’s excavator truck and sweep of product lines.
While truck chassis delivery showed no real improvement this quarter other component part shortages continued to have a significant impact. On this division’s operations, which in turn drove unfavorable manufacturing deficiencies under absorption.
Income from operations for the third quarter of 2022 was $8 7 million unchanged compared to the third quarter of 2020.
Consolidated net sales for the first nine months of 2020 to the $1 1 billion up 13% compared to $997 1 billion for the first nine months of 2021.
Strong demand for our products in both our available as divisions, along with positive impact of pricing initiatives were the main drivers of the increase. Year to date gross margin was up almost one 8 million versus the comparison period gross margin of 21.
Margin percentage was down about 50 basis points as we continue to experience inflationary pressures and material costs purchase components as well as higher inbound freight costs and labor shortages net.
Net income for the first nine months of 2022 was $72 8 billion or $6.10 per diluted share versus net income of 61 billion or $5 13 per diluted share for the first nine months of 2021, increase of six up 19%.
Excluding one time charges in both 2022 and 2021 adjusted net income was $73 8 billion compared to $58 five, an increase of 26%.
But the first nine months of 2022 net sales for the vegetation management Division were $704 5 million compared to $608 3 billion for 2021 up 16% the.
The division experienced robust demand in all product categories, particularly in forestry tree care land Cleary and in both North America, and European agricultural and governmental Bali.
Year to date 2022 income from operations was $78 3 billion up 29% versus $60 8 million for 2021. First nine months of 2022 net sales for the industrial equipment Division for $422 5 million compared to 388, $388 7 million for the same period of 2021, an increase of almost 9%.
Sales of excavators vacuum trucks and street sweepers led the way with modest support for snow removal. The first nine months of 2022 income from operations was $27 6 million versus $28 3 million for the first nine months of 2021 a decrease of 2%.
This divisions results were negatively impacted by constrained SaaS delivery supply chain disruption under absorption and higher input costs in both material inbound freight. Order bookings increased during the third quarter of 2022 compared to the second quarter 2022, driving our backlog up to just over 909 day.
Backlog was also backlog was also up 41% compared to the end of the third quarter of 2021. Factor out the impact of currency translation on our sales volumes I mentioned earlier, our backlog would’ve been higher backlog is also up compared to the end of 2021 by over 13%.
Turning to a few additional financial items for the third quarter of 2022, our balance sheet remains healthy. Capital increased 138 million to 558 billion or 440 million at the end of Q3 2021.
The increase in working capital came from higher accounts receivable and inventory. Accounts receivable were almost 302 million up 23% from a year ago on solid sales volume for. We’re also a 27% compared to the end of 2021.
We’re really we are really pleased with the receivables and have experienced no major issues on collections and in cap coming cash remained steady in. Inventory’s up almost $68 billion compared to the third quarter of 2021, $42 million compared to the end of 2021. This is a reflection of work of higher work in process.
Cost inflation as well as our efforts to support the growing demand for our products by purchasing higher levels of key components service parts for our customers starting this type of constrained supplies.
The increase since the end of the year is also reflected in our bottles modestly high debt levels. Finally, the company’s trailing 12 months EBITDA is 179 billion, it’s up 10% compared to the full year of 2021.
For the balance of this year cash flow should remain strong as our focus on the balance sheet will be to reduce both inventory and debt levels.
Be disciplined in controlling costs and expenses as inflation is expected to continue to pressure. Our partners. We will continue to adjust prices as needed based on changes in material and transportation costs in order to maintain targeted target partners.
We’re also very focused on improving supply chain deliveries to help reduce working process inventory.
Biggest opportunity will be in the meeting it will be in meeting the high demand for our products throughout the company given current supply chain constraints and labor shortages.
As we did in the first and second quarters of this year. The company approved a quarterly dividend of 18 per share for the third quarter 2022 of 29% increase over the third quarter of 2012.
With that I’ll turn the call back over to Jeff. Thanks.
Jeff Leonard
Thank you Richard I’d like to again, thank everyone, who has taken their time to join the call today during the third quarter activity in most of our markets remained strong order intake was excellent and backlog of 909 million once again approached a record level separately this year.
Although third quarter order bookings were down 19% compared to the exceptional third quarter of 2021, they were 16% higher than the third quarter of 2020, and excluding the more marketing timber Wolf acquisitions. The company was 29% higher than the pre pandemic third quarter of 2019 in our vegetation management.
Division orders were for three and a tree care equipment were lower compared to the very strong third quarter of 2021. This was primarily due to order timing as backlog in this segment of the division’s business was just under 120% higher than the prior year demand for the divisions large industrial wood recycling equipment remained strong.
Mid sustained investment in waste to energy capacity. Sentiment among north American farmers improved somewhat during the quarter, although concerns about rising input costs and higher interest rates were evident.
The divisions, North American orders for mowers, and other AG equipment were slightly lower but consistent with lower demand reported by the AGM, less than 100 horsepower category, that’s most important for Alamo.
Orders were also lower as the company did not conduct a preseason program. This year, given the high backlog and extended lead times.
Copper metal customers continued to invest in their roadside maintenance suites warrants received from governmental customers for the division specialized Kumar mowers were exceptionally strong and backlog for these special purpose machines set a company record set a record for the company.
Orders for this division’s products from Europe , and South America were stable in local currencies, but lower on a U S dollar basis due to the significant movement in exchange rates year over year.
Concerns about the war in Ukraine continue to weigh on markets in Europe , while in Brazil, There was caution pending the outcome of national elections.
The Entertainment management Division sales were 9% higher than the prior year. Street, and governmental mowing produced strong results sales in these segments rose more than 20% compared to the third quarter of 2021.
Sales of mowers egg equipment and specialty products in North and South America were up 3%, while sales of agriculture and governmental mowers in Europe increased in local currencies, but declined 3% consolidated in U S dollars.
Unseat translation effects also impacted sales in the division by more than $8 million, representing almost 4% of sales.
This division continued to experience supply chain constraints across a variety of industrial components. However, shortages of skilled labor were more significant amorphous significant constraining factor during the third quarter.
Despite these issues the division’s margin improved and operating income rose, 27% compared to the third quarter of 2021 increased sales healthy margin and good control of expenses drove vegetation management third quarter operating margin percentage up 170 basis points compared to the third quarter of 2020, 1% to 12% of sales.
Industrial equipment donation orders declined 12% versus the extraordinarily strong comparison period last year, backlog increased 79% year over year with all product lines showing significant increases.
Vacuum truck order bookings were modestly higher while street sweeper orders were slightly lower after a very strong second quarter snow removal bookings were also lower. However, this was the result of a timing shift of pre season orders that normally occur in the third quarter into the second quarter because of longer lead times for truck chassis.
Third quarter sales in the industrial equipment division were 9% higher than the prior year currency translation negatively affected division sales by nearly 2% during the third quarter sales of vacuum trucks and street sweepers showed modest gains while snow removal sales were up 37% compared to the third quarter of 2021.
Truck chassis allocations continue to constrain sales across all the divisions product lines during the quarter. As we reported in the second quarter, our industrial equipment Division again experienced significant supply chain, driven manufacturing flow disruptions, resulting in lower absorption and lower margin in third quarter.
Currently the division continued to ramp up its investment in product electric electrification during the quarter and also incurred certain one time costs associated with an ongoing plant consolidation and its snow removal segment, although the division demonstrated good control over expenses operating margin percentage for the quarter declined 50 basis, compared to the third quarter of 2021.
Alamo group continued to confront significant supply chain and recruitment headwinds and an operating environment that remained challenging in the third quarter chassis availability does not meaningfully improved during the quarter and allocations again constrained sales in our industrial equipment Division.
Certain other industrial components also remain in short supply, including for example, high pressure pumps heat exchangers on wiring harnesses to name a few.
It was gratifying that despite the headwinds we encountered the company’s third quarter sales reflected a nice improvement in both sales and earnings versus the third quarter of 2021, and again set New company Records, while sales growth was more modest than expected for the reasons described it’s worth noting that sales group growth excluding. Currency translation effects would have been in double digits.
Third quarter operating income improved significantly up 80 basis points to nine 7% of sales from eight 9% of sales in the comparison period of 2021. The 47% improvement in fully diluted earnings per share was achieved despite higher interest charges incurred this quarter on balance while company performance was again constrained by the supply chain challenges labor shortage and currency effects. We were pleased with the ongoing strength displayed by our markets, especially in the governmental segment.
While order bookings were lower relative to an exceptional comparison period last year. They nonetheless showed excellent growth versus the third quarters of 2019 and 2020, our backlog increased sequentially and continues to hover close to the all time high achieved earlier this year material cost inflation, while still Evan.
In the third quarter was less impactful than it had been earlier in the year and the margin and backlog continued to improve.
As we look forward to the fourth quarter and into early ‘twenty. Two ‘twenty three we expect the company’s financial results to continue to improve as the supply chain constraints, we’ve been experiencing for the past several quarters eventually abate.
The timing of the anticipated improvement in supply chain performance remains uncertain as new delays and shortages seem to appear as quickly as the older ones are resolved the.
The increasingly critical shortage of skilled labor is expected to persist we will continue to mitigate this to the greatest extent possible by strengthening our employee retention programs and accelerating investments in production process automation.
So while we expect supply side headwinds to persist in the short term the ongoing strength of our markets combined with our near record backlog and healthy balance sheet position us for continued profitable growth for the near future. We therefore remain optimistic about the company’s prospects for the next several quarters.
This concludes our prepared remarks, we’re now ready to take your questions. So operator. Please go ahead.
Question-and-Answer Session
Thank you we will now be conducting a question and answer session. [Operator Instructions]
Our first question comes from Chris Moore with CJS Securities. Please proceed with your question.
Chris Moore
Good morning, guys. Thanks for taking a couple of questions Hi, Chris. Good morning, I’m wondering is there any way that you can quantify or approximate the amount of incremental revenue you could’ve generated in Q3 with .
Jeff Leonard
Without supply chain issues are with significantly lower supply chain challenges. And is any of that lost moving forward. It’s not loss moving forward Chris. Very difficult to quantify we have close to $30 million and our web.
Any of that piece of that there’s a good chance that we could add opportunities here with supply chain support we could have shipped a lot of that.
Chris Moore
Okay. Got it that’s helpful. Maybe talk a little bit about the drivers of of dealer inventories in the AG side. You had mentioned you know in Q2, but steel prices coming down may have given some pause in purchasing my dealers made sure that lower price steel was was fully priced in equipment.
Jeff Leonard
What are you seeing on that front end and what are you seeing in terms of overall demand there.
Chris Moore
The – dealer orders Frac equipment stabilized during the quarter very nicely, Chris and we haven’t seen any further dealers attempting to reprice backlog. We did see some of that in Q2 as you wrap this really didn’t experience any of that in Q3 that was materials company at all.
I think what Youre seeing right now in the AG side is just caution because backlogs are out so far and I think dealers.
I don’t have the award now because they can’t get the equipment. So I think its just what likes to refer to as backlog fatigue, which I think is a very adequate description of what’s going on.
To add to that too we may have seen steel prices come down our raw materials, but what we haven’t seen our component parts that we purchase. Steel in that actual part itself none of those. Prices have abated they stayed up.
Okay. Interesting so are they. Go ahead, I’m, sorry, Jeff.
Jeff Leonard
One of the things, we normally have a preseason program on the AG side. Our backlogs are so high.
Chris Moore
Okay. That would normally drive orders at this time of year. Got it that’s helpful. Just last one for me. I think you talked about 12% operating margins a medium term goal now that Q3 is done you’re a month into Q4 any updated thoughts in terms of you know 12% visibility timing is that instead of ‘twenty – twenty four. Kind of target at this point in time, just any thoughts there.
Jeff Leonard
Hi, Chris This is Jeff I think we could begin running at that rate late next year at least that’s my hope and expectation. Again. This is these traffic situation start to improve in a meaningful pace.
There is so much pent up backlog in our industrial division at really good pricing that I think we’ll get there are you know our industrial division should be doing a lot better than it is and as I made reference to we actually had some chassis we were expecting to receive in the third quarter and also now coming in the fourth. Had been deferred into 2023, so I mean that’ll give us a nice upside in 2023, assuming they do come then. They’ll come out of the plant sooner or later from our suppliers I’m referring to. And we’ll get a nice kit because the backlog in the industrial vision is very strong and very healthy at the moment. And are you getting any push from the.
Kashi [ph] producers have they talked at all about ‘twenty three at this point in time in terms of expectations. Yeah at least our big chassis suppliers have I mean, it’s a tale of two cities. We have two primary chassis suppliers that we deal with Chris One is our bigger one is it’s got very high.
Our reliability in other words, we’re getting what they tell us we’re going to get. Not able to ramp up production and enough to meet our needs and our secondary supplier has been less reliable than just meeting what he has promised to give to us that’s.
That’s the situation we face right now and then lastly, a new problem arose in the quarter for the market you Susan trucks, who produce a lot of the smaller chassis. We use on our sweepers started first chassis into next year.
So we’re working our way through that we have alternatives for those small sweepers. It doesn’t shut us down by any means but it just caused a bit more a bit more. Sharply this quarter than what we’re anticipating on our small sweepers.
Chris Moore
Got it all very helpful. I’ll jump back in line. Thanks, guys.
Operator
Thanks, Chris. Our next question comes from Mike [ph] with D. A Davidson. Please proceed with your question.
Operator
Okay. Sorry, Mike are you on mute
Q – Unidentified Analyat
Okay. It looks like we’ve lost 10, hopefully he’ll come back in the queue.
Operator
Our next question is with Greg Burns with Sidoti and Company. Please proceed with your question.
Greg Burns
Good morning. Thanks for all the color on the orders by – by product line. I was just wondering hopefully. We get a little bit more. Detail there I mean is it mainly a function of.
With difficult comps from last year why are you seeing the declines or are you are you seeing a little slowdown in demand maybe in specific areas. Are you referring to the orders.
Jeff Leonard
Yeah, well the order trends the declines. The business that you’re seeing like what are the main factors. There is it the comps or is there other things. He is going on.
There’s a couple of things going on there and first of all as I made reference to if you look at our snow removal business, we had an extraordinary second quarter in bookings. That’s the shift of timing timing because of the chassis lead times. And we – taken an exceptional level of snow removal orders right now so that business is in great shape with a record backlog.
Well no. If you look back into the third quarter of 2021, we had a huge order influx in our forestry tree care business.
And we also had some timing of orders that were booked into our JD Edwards system as we converted the acquired Rayfield company into JD Edwards. So we truly have some kind of odd one off things going on with the bookings in the third quarter of last year, but overall all the businesses are a nice shape in the industrial division. They are all trending up nicely on bookings and that pace has continued. Up until today.
Far as I can tell so beyond that if you look back into vegetation management again forestry has remained good and solid and a very nice pace AG ticked down just a little bit, but as Dan said that was a function of not having a pre season. This year. So overall, we’re in a very nice position in terms of bookings in our markets remained really strong inquiry levels are good and the. Order flow remains at a very nice pace I’m very happy with that. Yeah.
Greg Burns
Okay, great. Thank you.
Jeff Leonard
Now I’ll hand, it off. Thanks Frank.
Operator
Our next question is with Mike Buskey from D. A Davidson. Please proceed with your question.
Mike Buskey
Oh, good morning, sorry about that guys I guess my phone just cut out entirely can you hear me, Okay. That’s alright, Mike Good morning Barton.
Jeff Leonard
Alright, thank you.
Mike Buskey
A couple of questions and if I missed the last week or at least feel free to go through the transcript later. I guess I wanted to ask firstly about seasonality in the fourth quarter.
Since you bought more of a couple of years back I remember that was the fourth quarter. It was just a really weird situation on EBITDA because you have just made the purchase. Call correctly, and then pretty much since then we’ve had a pandemic issue.
So we haven’t really seen that I feel like a real fourth quarter, yet that makes a lot of sense for what the kind of long term outlook is good.
Just give us a sense as to what what what’s the seasonality look like in versus versus three Hugh going, Florida, and and might we see that happening clearing standpoint, this particular fourth quarter.
Jeff Leonard
I think the seasonality is getting shaken out of the business to a large extent Mike by the backlog. Enforced for you, yes, yes, normally the fourth quarter would be a little softer in forestry, but I’m not expecting that right now at all impact.
It’s looking like it’s shaping up to be a pretty nice quarter in that business, but youre right in a typical year without all the noise in the supply chain and the backlog fourth quarter would be just a little bit softer than the third. And so…
Mike Buskey
Got it. Is that as far as could you comment or was that I was talking about like a companywide discussion of how earnings by I’m, sorry, I thought you were.
Jeff Leonard
We’re finding that specifically the forestry.
Mike Buskey
Yeah. Go ahead sorry.
Jeff Leonard
I think the seasonality is largely out of the business at the moment and the other thing that I’ve talked to you about two times over the years as snow removal normally can swing fourth quarter better or worse. No removals in a very very strong position right now.
But like every thing else, it’s constrained by truck chassis, but the orders came earlier this year and I’m optimistic that we’ll get a few of those orders out this year, so the fourth quarter could be a little bit better.
Because of that and as I said, just a minute ago forestry is holding up well adds just a little bit soft, but thats the pre season again.
Doing that from my point of view. So I think we should have a pretty good fourth quarter by historic standards. Mike. This is Richard I think Q4 will be more consistent. Last two years.
Mike Buskey
Perfect, great. This would be a good. Great I appreciate that color. I guess on the one hand, it’s good news because hey, you got a great backlog already there’s no reason to add to it. That has an order. It could be or it hasnt ordered but I guess I’m curious you know.
If a farmer needs something quickly can you can you get it out or you just like so booked up that you’ll be hamstrung from you know new. New a new shipments in the first part of 2023.
Yeah, No I don’t think we’re gonna be hamstrung like I mean, the issue we’re dealing with in that side of the business right now as people more than supply chain. Just getting enough people on board to get the work out the door I made reference in the call.
The vegetation management division as a whole had a bigger impact from labor that did from a material more from supply chain in the third quarter. Couple of other things to buy the preseason program.
Obviously starts like July if it goes through November and it’s a little bit increase of at a higher discount for them that doesn’t mean they also.
The AG Division also as a N C. A program that they usually start in the spring time and there is probably a good chance that they will go ahead and do that as. As well those aren’t as large of a discount our biggest. The program so.
It’s all going to depend on how they look at it at any orders that they consistently have that if it stays up then they’ll probably just decide one way or the other how theyre going to handle the program.
Got it got it I also wanted to talk to one of Chris’s questions from earlier about pricing and what’s in the backlog here.
I guess with steel prices coming down and other prices like the aluminum cup coming down a bit over the last few months do you have to adjust any pricing your backlogs down because their previously announced surcharges those come off for next year is that a margin. Hum headwind for next year anyway. I think it’s a little too soon to tell Mike as I said, we didn’t have any of that in the third quarter speak up.
With dealers trying to reprice and expectation of realisation from lower steel prices. So no I don’t think that’s happened so far could it happen in the future well I think if we head into a hard recession and dealers are looking to try to keep their balance sheets nice lien, yes that could potentially happen then but no sign of it yet.
Mike Buskey
Okay, and I can just squeeze one more in there and that’s about M&A. Jeff I know, you’re always talking with various targets out there I’ve been surprised us to the number of M&A deals happening in this sector over the last few months given broader.
Broader market, but there is some activity out there I’d be curious if you tell us. Kind of where some of your more, larger deals stand right now or just the overall state of how targets are talking with you. These days.
Well I mean that there arent many larger deals in the space, where we’re working at the moment Mike.
And as I’ve said, we’re going to be disciplined about not wondering too far from our core with M&A at the moment, we’re looking at some nice opportunities in Europe that we’re working the.
The timing of those is still a little bit up in the air but they are long term, we always chase prospects for a very long period of time as you know like we’ve talked to you about acquiring. Chip for a company I think for a decade.
So it’s the market overall for M&A is probably good in some segments, but we’re not invested in some of the areas. This is where the deals are coming down.
Jeff Leonard
Alright, well that’s great color. Thank you so much I’ll pass it along.
Operator
[Operator Instructions] Our next question comes from Tim Moore with [indiscernible] Please proceed with your question.
Q – Unidentified Analyst
Thanks, Matt. Questions for Jeff and Richard. Do you have a rough estimate. The margin drag from under absorption in the September quarter or is it something like. 100, 150 basis points drag on gross margin and the other part of that question is. As of today I’m, just wondering if you’ve achieved. Positive net price realization to cover your cost inflation, including freight surcharges enacted.
Our both our divisions are pretty aggressive about doing that if were getting the surcharges as we’ve stated before on the freight.
Jeff Leonard
We’re doing everything we can to pass that up back onto the customer they understand that but I think that the key with that handling that those increases that we’re getting is we’re staying consistent with our customers. They know it they see it and we tell them about it and they are aware of it and they’re accepting it but I think it’s every as Jeff mentioned earlier I think the piece.
They were probably most concerned about is yeah. If some of these additional costs are coming down do we have to do what we can to help protect that backlog about after reprice anything that we have there may be chances. If we do get some savings from not us, but not as high.
Freight and things of that nature, we could crop surcharges laws of surcharges get dropped out of our bills and we’re more than willing to. To accommodate the customer on that.
And Tim I’ll give you a little bit different color on that because the actual gross margin. One is we track it which is material. Labor standard went higher, as I expected.
Continuing to expect will happen. So the decline that we’re seeing in operating margin is all a function of the inefficiencies on the shop floor and under absorption, which in this division was several million dollars during the quarter, yes, yes, it was going to get.
Back to your first question, Doug, but Jeff jumped in that it’s really tough because.
When we have that increase in web like we are we’re starting and stopping a tremendous amount it probably cost us $34 million in the quarter bucket absorption.
Q – Unidentified Analyst
Got it that’s helpful color. That’s very helpful color and yeah, I think investors understand that’s more industrial segment issue at any of the labor on the visitation side. Another question I had was can.
Can you provide your plan and timing to possibly assemble more products in Europe than concur expensive transportation cost to ship them. They are from the U S could something like that. Leasing a plant or ramping up a bit more on European production start late next year.
Jeff Leonard
Yes, we just started our just completed a policy for us do a little bit more bacon market on that right. Now. So we’re really planning on I tried to kick that off into next year because.
Yes, it’s terrible to try to move any product from one location here in the states over in Europe , and vice versa.
We’re not going to get any margin out of this and if we do a tremendous amount of work just getting product over there to one of our locations and they can’t they can’t make any profit on it. So yes, I think the market is a big deal for us.
We’ve just got finished or policy up and we’re just getting kicked off of that here this year.
And to add a little bit more color on that most of our maternal flows intercompany flow from Europe to North America and not the other way around.
That’s the direction that flow right now we hope we hope and expect that we are anticipating doing an expansion of our sulfur prior facility late next year, which will give us more production capacity in the U K.
And a little bit more in France, although in France, it’s a little bit more modest than in terms of our expansion plans.
Beyond that we’ve just completed an expansion of our facility in Santa Isabel in Brazil to allow us to increase our local production of forestry products. There. We’ve got a very active and growing business in that segment and that’s one where it is very difficult to import from North America into Brazil. So once that production really ramps up and we are a local manufacturer. We’re in a very strong position.
Q – Unidentified Analyst
Okay. That’s helpful. Thanks for giving details on that and that’s something that obviously will help the margin improve and that gets rolling more return the question about free cash flow. Here are a little low in the quarter I know that you.
Often might have a seasonal working capital reduction from receivables collections in the very late summer that helps free cash flow you know I grasped the inventories weapons still high and that makes sense you have to go back to the final assembly stages.
But did you know receivables reduction may be shipped out to October and I’m. Just wondering do you expect pretty strong free cash flow in the fourth quarter. We’ll have it Tim.
Tim definitely through October because a lot of pre season gets paid off basically almost through that timeframe it’ll drag a little bit into November .
But overall I think our DSOs are in great shape in both divisions. Said earlier, we’re extremely pleased with the collection process I think. Outside of the AG business when you look at the industrial pieces of your.
Their collections are staying pretty strong and steady as well I think our bulk and collections as heavier as I mentioned basically August September and October because that’s what a lot of the preseason programs last year come due from the acquisition. And Tim Jeff one more thing I’d add to that.
I mentioned in the in the script for the call that our governmental mowing business in North America is very active at the moment very high backlogs high orders a good chunk of that business is scheduled to ship in the fourth quarter. So if you look at the increase in inventory that we’ve experienced since the start of the year approximately one third of that in monetary value was track.
support the growth of that particular part of our business and as I said, a good chunk of that work is scheduled to ship in the fourth quarter and we have the tractors in our hands for parked 100 people Werent sitting right now [laughter]. So assuming all goes well, we should see a nice production and inventory in the fourth quarter that will help us with our cash flow. That’s terrific that’s really great to hear.
I’m modeling a pretty strong free cash flow for the fourth quarter can you give any maybe update on electrification and hybrid innovation and is there any thing compelling coming out of the pipeline next year that might launch by summer.
There’s some very interesting things going on Chris I made reference to the call that we probably could have done a little bit better in our industrial division in this quarter, but we’ve been ramping up the investment in electrification, which is kind of keeping our expenses a little bit more elevated than would normally be the case.
We’re intending to launch several new products that are electrified versions of our current products at the Con Expo in March of next year.
We’re well advanced we set up a technology center down in Huntsville, Alabama to produce them and we just made a check on them last week and we’re on schedule for that we just launched a hybrid wood chip or in the UK under our timber Wolf brand, which is a very interesting product that utilizes the 28 horsepower diesel engine combined with large.
Storage capacity capacitors that allow the power to surge up over 60 horsepower under peak load. So very interesting product that’s been very warmly received by the market. So.
So far so yes, we have a quite a bit going on there and I think next March Con Expo should be exciting I hope you can attend. That’s terrific.
Q – Unidentified Analyst
One last question. And I was just looking at geographic sales in the 10-Q and I realize snow removal was strong in the quarter was there anything driving the.
Jeff Leonard
You know very large growth of maybe 50% to 60% in Canada, or Australia, I know that Australia is up a low year ago small base, but anything else going on there with penetration or launches or new customer wins.
It’s it’s mainly mainly our Canadian snow removal business 10, co. We opened several new up fitting centers across Canada last year. Those are now loaded we typically look to produce 100 trucks a year at each one of those centers and obviously, that’s also compounding our truck chassis problem.
Because historically, we were a supplier of attachments for snow plows into in recent years, we changed our strategy to supply the complete product and deal directly with the end user which in many cases, either a governmental agency or a contractor that works for a governmental agency that business has just shown explosive growth and it came in the second quarter of this year and again we.
We’re starting to see some really exciting activity in the fourth quarter and that business. So that’s the biggest single driver of what you see again I think it just another point to that too is if you just think about the exchange rate and the currency drop I guess. Dollar would have been much higher than what’s shown in the 10-Q.
Q – Unidentified Analyst
Thats helpful very impressive in the quarter well that’s it for my questions, Jeff and Richard Thanks for taking them.
Operator
Thank you there are no further questions at this time I would now like to turn the floor back over to management for closing comments.
Jeff Leonard
Okay. Thank you very much and we thank you again for joining us today and look forward to speaking with you again on our fourth quarter and year end 2022 call in February of next year. Thank you.
Operator
This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.+
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