Alamo Group Inc (ALG) 2022 Q3 法說會逐字稿

Greetings, and welcome to the Alamo Group, Inc. Third Quarter 2022 Conference Call. (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, sir. You may begin.

Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at 212-827-3746, and we will send you a release, and make sure you are on the company's distribution list.

There will be a replay of the call, which will begin 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1-888-203-1112 with the passcode 13733267. 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 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'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.

Among those factors which could cause actual results to differ materially are the following: market demand; COVID-19 impacts, including operational and supply chain 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.

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 look forward to taking your questions.

Richard, please go ahead.

Thanks, Jeff, and good morning, everyone. Alamo Group's third quarter 2022 closed 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 were USD368.8 million, an increase of 9% compared to USD338.3 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 foreign currencies. Gross margin dollars in the quarter improved compared to the third quarter of 2021 by USD6.1 million, although gross margin% declined by 50 basis points. Both margin dollars and percentage were negatively affected by supply chain issues, labor shortages, under absorption in our manufacturing operations, and freight surcharges on inbound inventory. Product mix was also less favorable as parts grew at a slower pace than new equipment.

Consolidated net income for the third quarter of 2022 was USD25.8 million, or USD2.16 per diluted share, an increase of 47% versus net income of USD17.5 million or USD1.47 per diluted share for the third quarter of 2021. Continued solid control of cost and expenses helped support the increase in profitability.

The Vegetation Management division had a solid third quarter as markets remained strong. Third quarter 2022 net sales were USD228.5 million, an increase of 9% compared to USD209.8 million for the third quarter of 2021. The division continues to see strong demand for forestry, tree care, and agricultural and governmental mowing products in both North America and Europe. Margins during the third quarter of 2022 were up 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 USD27.1 million, up 27% versus USD21.4 million for the same period in 2021.

Industrial Equipment division net sales in the third quarter were USD140.3 million, up just over 9% compared to USD128.5 million for the third quarter of 2021. This was due to a solid performance of snow removal products and, to a lesser extent, improved net sales in the division's excavator, vacuum truck, and sweeper product lines. While truck chassis delivery showed no real improvement this quarter, other component part shortages continue to have a significant impact on this division's operations, which in turn drove unfavorable manufacturing efficiencies and under-absorption.

Income from operations in the third quarter of 2022 was USD8.7 million, unchanged compared to the third quarter of 2021. Consolidated net sales for the first 9 months of 2022 were USD1.1 billion, up 13% compared to USD997.1 million for the first 9 months of 2021. Strong demand for our products in both of Alamo's divisions, along with positive impact of pricing initiatives, were the main drivers of the increase.

Year-to-date gross margin was up almost USD28 million versus the comparison period gross margin of 2021. Margin percentage was down about 50 basis points as we continue to experience inflationary pressures in material costs, purchase components, as well as higher inbound freight costs and labor shortages. Net income for the first 9 months of 2022 was USD72.8 million, or USD6.10 per diluted share, versus net income of USD61 million or USD5.13 per diluted share for the first 9 months of 2021, an increase of 19%.

Excluding onetime charges in both 2022 and 2021, adjusted net income was USD73.8 million compared to USD58.5 million, an increase of 26%. For the first 9 months of 2022, net sales for the Vegetation Management division were USD704.5 million compared to USD68.3 million for 2021, up 16%. The division experienced robust demand in all product categories, particularly in forestry, tree care, land clearing, and in both North American and European agricultural and governmental mowing.

Year-to-date 2022 income from operations was USD78.3 million, up 29% versus USD60.8 million for 2021. For the first 9 months of 2022, net sales for the Industrial Equipment division were USD422.5 million compared to USD388.7 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 from snow removal. For the first 9 months of 2022, income from operations was USD27.6 million versus USD28.3 million for the first 9 months of 2021, a decrease of 2%. This division's results were negatively impacted by constrained chassis deliveries, supply chain disruption, under-absorption, and higher input costs in both material and inbound freight.

Order bookings increased during the third quarter of 2022 compared to the second quarter of 2022, driving our backlog up to just over USD909 million. Our backlog was also up 41% compared to the end of the third quarter of 2021. If you factor out the impact of currency translation on our sales volume, I mentioned earlier, our backlog would have 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. Working capital increased USD138 million to USD558 million or USD440 million at the end of Q3 2021. The increase in working capital came from higher accounts receivable and inventory. Accounts receivable were almost USD302 million, up 23% from a year ago on solid sales volume; were also up 27% compared to the end of 2021. We are really pleased with the receivables and have experienced no major issues on collections and incoming cash remains steady.

Inventory was up almost USD68 million compared to the third quarter of 2021 and is up USD42 million compared to the end of 2021. This is a reflection of higher work in process, material cost inflation, as well as our efforts to support the growing demand for our products by purchasing higher levels of key components and service parts for our customers during this time of constrained supplies. The increase since the end of the year is also reflected in our modestly high debt levels. Finally, the company's trailing 12 months EBITDA is USD179 million. 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. We will be disciplined in controlling costs and expenses as inflation is expected to continue to pressure our margins. We will continue to adjust prices as needed based on changes in material and transportation costs in order to maintain target margins. We're also very focused on improving supply chain deliveries to help reduce work-in-process inventory.

Our biggest opportunity will be in meeting the heightened demand for our products throughout the company, given the 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 USD0.18 per share for the third quarter of 2022, a 29% increase over the third quarter of 2021.

With that, I'll turn the call back over to Jeff.

Thank you, Richard. I'd like to again thank everyone who's 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 USD909 million once again approached the record level set earlier 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 Morbark and Timberwolf acquisitions, the company was 29% higher than the pre-pandemic third quarter of 2019.

In our Vegetation Management division, orders for forestry and 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 division's large industrial wood recycling equipment remained strong amid 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 division's North American orders for mowers and other ag equipment were slightly lower, but consistent with lower demand reported by the AEM for tractors less than 100 horsepower, the category that's most important for Alamo Group.

Orders were also lower as the company did not conduct a preseason program this year given the high backlog and extended lead times. Governmental customers continued to invest in their roadside maintenance fleets. Orders received from governmental customers for the division's specialized [boom-mounted] mowers were exceptionally strong and backlog for these special-purpose machines set the company for the 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. Vegetation Management division sales were 9% higher than the prior year. Forestry, tree care, and governmental mowing produced strong results as sales in these segments rose more than 20% compared to the third quarter of 2021. Sales of mowers, ag equipment, and specialty products in North and South America were up 3%, while sales of ag equipment and governmental mowers in Europe increased in local currencies but declined 3% when consolidated in U.S. dollars.

Currency translation effects also impacted sales in the division by more than USD8 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 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's third quarter operating margin percentage up 170 basis points compared to the third quarter of 2021 to 12% of sales. Industrial Equipment division orders declined 12% versus the extraordinarily strong comparison period last year. However, 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 to preseason 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 division's 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 the third quarter. Concurrently, the division continued to ramp up its investment in product electrification during the quarter and also incurred certain onetime costs associated with an ongoing plant consolidation in its snow removal segment. Although the division demonstrated good control over expenses, operating margin percentage for the quarter declined 50 basis points compared to the third quarter of 2021.

Alamo Group continued to confront significant supply chain and recruitment headwinds in an operating environment that remained challenging in the third quarter. Chassis availability did not meaningfully improve during the quarter and allocations again constrained sales in our Industrial Equipment division. Certain other industrial components also remained in short supply, including, for example, in heavy axles, high-pressure pumps, heat exchangers, and 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 growth, excluding currency translation effects, would have been in double digits.

Third quarter operating income improved significantly, up 80 basis points to 9.7% of sales from 8.9% 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 shortages 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 quarter in 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 evident in the third quarter, was less impactful than it had been earlier in the year, and the margin in backlog continued to improve. As we look forward to the fourth quarter and into early 2023, 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 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.

(Operator Instructions) Our first question comes from Chris Moore with CJS Securities.

I'm wondering is there any way that you can quantify or approximate the amount of incremental revenue you could have generated in Q3 without supply chain issues or with significantly lower supply chain challenges. And is any of that lost moving forward?

It's not loss moving forward, Chris. It'd be very difficult to quantify. We have close to USD30 million in our WIP. And again, any piece of that, there's a good chance that we could have had opportunities here. With supply chain support, we could have shipped a lot of that.

Got it. That's helpful. Maybe talk a little bit about the drivers of dealer inventories on the ag side. You had mentioned in Q2, with steel prices coming down, may have given some pause in purchasing while dealers made sure that lower-priced steel was fully priced in the equipment. What are you seeing on that front? And what are you seeing in terms of overall demand there?

The dealer orders for ag 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 referenced, we really didn't experience any of that in Q3 that was material to the company at all. I think what you're seeing right now on the ag side is just caution because backlogs are out so far. And I think dealers just -- they don't have to order now because they can't get the equipment. So I think it's just what Rick Raborn likes to refer to as backlog fatigue, which I think is a very adequate description of what's going on.

One other thing to add to that, though, Chris, too, we may have seen steel prices come down on raw materials, but what we haven't seen our component parts that we purchase that have steel in that [actual] part itself, none of those prices have abated. They've stayed up high.

Yes, one other thing, we don't really have a preseason program we're in. We don't really have a preseason program on the ag side. Because the backlogs are so high, there wasn't a preseason program this year. That would normally drive orders up this time of year.

Got it. That's helpful. And maybe 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 12% visibility, timing? Is that a 2024 target at this point in time? Just any thoughts there?

Chris, it's Jeff. I think we can begin running at that late next year, at least that's my hope and expectation. Again, if these chassis situations 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. 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 that have been deferred into 2023. So that will 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 division is very strong and very healthy at the moment.

And are you getting any -- from the chassis producers, have they talked at all about '23 at this point in time in terms of expectations?

Yes. At least our big chassis suppliers have. It's a tale of 2 cities. We have 2 primary chassis suppliers that we deal with, Chris. One is -- our bigger one has got very, very high reliability. In other words, we're getting what they tell us we're going to get, but not able to ramp up production enough to meet our needs. And our secondary supplier has been less reliable in just meeting what he's promised to give to us. That's the situation we face right now.

And then lastly, a new problem arose in the quarter for the market, Isuzu trucks, who produce a lot of the smaller chassis we use on our sweepers, started to defer 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 shuffling this quarter than what we were anticipating on our small sweepers.

Got it. All very helpful. I'll jump back in line.

Our next question is with Greg Burns with Sidoti & Company.

Thanks for all the color on the orders by product line. I just wanted to hopefully maybe get a little bit more detail there. Is it mainly a function of difficult comps from last year why you're seeing the declines? Or are you seeing a little slowdown in demand may be in specific areas?

Are you referring to the orders?

Yes, the order trends, the declines across the business that you're seeing, what are the main factors there? Is it the comps or is there other things going on?

There's a couple of things going on there. 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 because of the chassis lead times. And we've continued to take in an exceptional level of snow removal orders right now. So that business is in great shape with a record backlog.

The other one, though, if you look back into the third quarter of 2021, we had a huge order in flux in our forestry and tree care business. And we also had some timing of orders that were booked into our JD Edwards system as we converted the acquired Rayco company into JD Edwards. So we truly had some odd one-off things going on with the bookings in the third quarter of last year. But overall, all the businesses are in nice shape in the Industrial division. They're all trending up nicely on bookings, and that pace has continued up until today as far as I can tell.

So beyond that, if you look back into Vegetation Management, again, forestries remain good and solid, at a very nice pace. Ag tipped down just a little bit. But as Dan said, that was a function of not having a preseason this year. So overall, we're in a very nice position in terms of bookings, and our markets remain really strong. The inquiry levels are good, and the order flow remains at a very nice pace. I'm very happy with that.

Our next question is with Mike Shlisky from D.A. Davidson.

A questions. And if I missed the last speaker asked these, feel free to have me go to the transcript later. I guess I wanted to ask firstly about seasonality in the fourth quarter. Since you bought Morbark a couple years back, I remember that was a fourth quarter. It was just a really weird situation on EBITDA because you had just made the purchase, if I recall correctly. And then pretty much since then, we've had a pandemic issue. So we haven't really seen, I feel like, a real fourth quarter yet that makes a lot of sense for what the long-term outlook is. Just give us a sense as to what's the seasonality look like in 4Q versus 3Q going forward? And might we see that happening from an earnings standpoint this particular fourth quarter?

I think the seasonality is getting shaken out of the business to a large extent, Mike, by the backlog in forestry. Yes, normally, the fourth quarter would be a little softer in forestry, but I'm not expecting that right now at all. In fact, it's looking like it's shaping up to be a pretty nice quarter in that business. But you're 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 is that a forestry comment, or is that -- I was talking about more like a company-wide discussion of how earnings might shape out?

I'm sorry. I thought you were referring that specifically to forestry. I think the seasonality is largely out of the business at the moment. And the other thing that's -- I've talked to you about few times over the years, the snow removal normally can swing fourth quarter better or worse. Snow removal is in a very, very strong position right now. But like everything else, it's constrained by truck chassis. But the orders came earlier for this year, and I'm optimistic that we'll get a few of those orders out this year. And 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, ag's just a little bit soft, but that's the preseason 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 than what you've seen in the last 2 years. This would be a good barometer, I think.

Great. I appreciate that color. And then I did want to comment -- question again about the ag lack of a preseason and what that means for next year. I guess, on the one hand, it's good news because, hey, you've got a great backlog already. There's no reason to add to it, I guess. Or everything else that has been ordered -- that could be ordered has been ordered. But I guess I'm curious, what does that mean for next spring's shipments. If a farmer needs something quickly, can you get it out? Or are you just like so booked up that you'll be hamstrung from new shipments in the first part of 2023?

Yes. No, I don't think we're going to be hamstrung, Mike. The issue we're dealing with on that side of the business right now is people more than supply chain, just getting enough people on board to get the work out the door. I made reference on the call, the Vegetation Management division, as a whole, had a bigger impact from labor than it did from material or from supply chain in the third quarter.

A couple other things, too, Mike. The preseason program obviously starts like in July and usually goes through November, and it's a little [bit the] increase of a higher discount for them. That doesn't mean they also -- the Ag division also has an in-season program that they usually start in the springtime. And there's probably a good chance that they'll go ahead and do that [and step-up] as well. Those aren't as large of a discount or big of a discount as the preseason program.

So it's all going to depend on how they look at it and the orders that they consistently have now. If it stays up, then they'll probably just decide on way or the other how they're going to handle the in-season program.

Got it. I also wanted to follow up on 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 aluminum coming down a bit over the last few months, do you have to adjust any pricing in your backlog down because of previously announced surcharges [as those] come off for next year? And is that a margin headwind for next year in any way?

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 to speak of with dealers trying to reprice an expectation of -- or realization of 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 and lean, yes, that could potentially happen then. But no sign of it yet.

Okay. And let me just squeeze one more in there, and it's about M&A. Jeff, I know you're always talking with various targets out there. I've been a little surprised as to the number of M&A deals happening in the sector over the last few months given broader market, but there is some activity out there. I'd be curious if you can tell us 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, there aren't 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 wandering 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 timing of those is still a little bit up in the air. But they're long term. We always chase prospects for a very long period of time as you know, Mike. We've talked to you about acquiring a (inaudible) company, I think, for a decade. So the market overall for M&A is probably good in some segments, but we're not invested in some of the areas of business where the deals are coming down.

All right. Well, that's great color.

(Operator Instructions) Our next question comes from Tim Moore with EF Hutton.

And I have several questions for Jeff and Richard. First, for the Industrial segment. Do you have a rough estimate of the margin drag from under-absorption in the September quarter? 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.

Yes, on the second one first, both our divisions are pretty aggressive about doing that. If we're getting the surcharges, as we've stated before on the freight, we're doing everything we can to pass that back on to the customer. They understand that. But I think that the key with that -- handling those increases that we're getting is staying consistent with our customers. They know it, they see it, and we tell them about it, and they're aware of it, and they're accepting it.

But I think, as Jeff mentioned earlier, I think the piece that we're probably most concerned about is, yes, if some of these additional costs are coming down, we have to do what we can to help protect that backlog and not have to reprice anything that we have. There may be chances if we do get some savings from -- not as much -- not as high inbound as high inbound freight and things of that nature, we could drop the surcharge. As long as the surcharges get dropped off of our bills, then we're more than willing to accommodate the customer on that.

And Tim, I'll give you a little bit different color on that. The actual gross margin, one, as we track it, which is material plus labor [and standard] went higher as I expect and continue 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. I was going to get back to your first question, and I'm glad Jeff jumped in, that is really tough because when we have that increase in WIP like we are, we're starting and stopping a tremendous amount, and it probably cost us USD3 million, USD4 million in the quarter of under-absorption.

Got you. That's helpful color. That's very helpful color. And yes, I think investors understand that's more of a Industrial segment issue and then you have the labor on the Vegetation side. Another question I had was, can you provide your plan and timing to possibly assemble more products in Europe than to incur expensive transportation costs to ship them there from the U.S.? Could something like that -- leasing a plant or ramping up a bit more on European production start late next year?

Yes. We just started or just completed a policy to do a little bit more make-in-market on that right now. So we're really planning on try to kick that off in the next year because it's terrible to try to move any product from one location here in the States over in Europe and vice versa. You're not going to get any margin out of this. And if we do a tremendous amount of work just getting a product over there to one of our locations, and they can't make any profit on it. So yes, make-in-market is a big deal for us. And again, we just finished our policy up, and we're just getting kicked off on that here at the end of this year.

And Tim, a little bit more color on that. Most of our material flows intercompany flow from Europe to North America, not the other way around. So that's the direction of the flow right now. We hope and expect to reverse that. We're anticipating doing an expansion of our Salford Priors 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 in terms of our expansion plans.

Beyond that, we've just completed an expansion of our facility in Santa Izabel 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's 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.

That's helpful. Thanks for giving details on that, and that's something that obviously will help the margin improve when that gets rolling more. Richard, a question about free cash flow. It appeared 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. I grasped that the inventories WIP is still high, and that makes sense. You have to go back to the final assembly stages. But did receivables reduction maybe shift 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, definitely through October because a lot of preseason gets paid off basically almost through that timeframe. It will drag a little bit into November. But overall, I think our DSOs are in great shape in both divisions. And as I said earlier, we're extremely pleased with the collection process. I think outside the Ag business, when you look at the Industrial pieces here, their collections are staying pretty strong and steady as well. I think our bump in collections is heavier, as I mentioned, basically in August, September and October because that's when a lot of the preseason programs from last year come due from -- in the Ag division.

And Tim, Jeff. One more thing I'd add to that. I mentioned 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 1/3 of that in monetary value is tractors to 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. They're parked 100 feet from where I'm sitting right now. So assuming all goes well, we should see a nice reduction in inventory in the fourth quarter that will help us with our cash flow.

That's terrific. That's really great to hear. And yes, I'm modeling a pretty strong free cash flow for the fourth quarter. Can you give any maybe update on electrification and hybrids innovation? Is there anything compelling coming out in the pipeline next year that might launch by summer?

There are 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 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 CONEXPO in March of next year. Those are well advanced. We've 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 chipper in the U.K. under our Timberwolf brand, which is a very interesting product that utilizes a 28-horsepower diesel engine, combined with large storage capacity capacitors that allow the power to surge up over 60 horsepower under peak load. So a very interesting product that's been very warmly received by the market so far. So yes, we have quite a bit going on there. And I think next March's CONEXPO should be exciting. I hope you can attend.

That's terrific. I just have one last question. And I was just looking at the geographic sales in the 10-Q, and I realize snow removal was strong in the quarter. Was there anything else driving the very large growth of maybe 50% to 60% in Canada or Australia? I know that Australia is off a low year-ago small base, but anything else going on there with penetration or launches or new customer wins?

It's mainly our Canadian snow removal business, Tenco. We opened several new upfitting 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 snowplows. And in recent years, we've changed our strategy to supply the complete product and deal directly with the end user, which in many cases, is 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're starting to see some really exciting activity in the fourth quarter in that business. So that's the biggest single driver of what you're seeing.

Again, I think just another point to that, too, is if you just think about the exchange rate and the currency dropping against the U.S. dollar, it would have been much higher than what's shown in the 10-Q.

That's helpful. It's very impressive quarter. Well, that's it for my questions, Jeff and Richard.

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.

Okay. Thank you very much. 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.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.