Alamo Group, Inc.

Greetings, and welcome to the Alamo Grouping third quarter 2022 conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Edward Razouk, Executive Vice President and 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 one hour after the call and run for one week. The replay can be accessed by dialing 1-888-203 1-1-1-2 with the passcode 1-3-7-3-3-2-6-7. 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 Worley, 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'll look forward to taking your questions. Richard, please go ahead.

Thanks, Jeff, and good morning, everyone. Alamo Group's third quarter 2022 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 $368.8 million, an 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 foreign currencies. by $6.1 million, although gross margin percent declined by 50 basis points. Both margin dollars and percentage were negatively affected by supply chain issues, labor shortages, underabsorption on 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 $25.8 Continued solid control of costs 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 $228.5 million, an increase of 9% compared to $209.8 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 40 basis points as compared to the prior year quarters, despite labor shortages and supply chain disruptions. Income from operations for the third quarter of 2022 Industrial equipment division net sales in the third quarter were $140.3 million, up just over 9% compared to $128.5 million for the third quarter of 2021. This was due to a solid performance in 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 Consolidated net sales for the first nine months of 2022 were $1.1 billion, up 13% compared to $997.1 million for the first nine 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 $28 million versus a comparison period gross margin of 2021. 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 income for the first nine months of 2022 was $72.8 million, or $6.10 per diluted share, versus net income of $61 including one-time charges in both 2022 and 2021. Adjusted net income was 73.8 million compared to 58.5 million, an increase of 26%. The first nine months of 2022, net sales for the vegetation management division 2022 income from operations was $78.3 million, up 29% versus $60.8 million for 2021. For the first nine months of 2022, net sales for the industrial equipment division were $422.5 million, compared to $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 from snow removal. For 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 division's results were negative Order bookings increased during Turning to a few additional financial items for the third quarter of 2022, our balance sheet remains healthy. Working capital increased $138 million to $558 million from $440 million at the end of Q3 2021. The increase in working capital came from higher accounts receivable and inventory. Inventory is up almost 68 million compared to the third quarter of 2021 and is up 42 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-month 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. We will be disciplined in controlling costs and expenses as inflation is expected to continue to pressure our margins. We will continue to adjust Our biggest opportunity will be in meeting the heightened 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 cents 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 $909 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 Moorbark and Timberwolf acquisitions, 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 amidst 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 report, 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 arm mowers were exceptionally strong, and backlog for these special purpose machines 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 continued 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 $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 a 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 continued 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 electrical electrification during the quarter and also incurred certain one-time 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, 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 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 evident 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 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.

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Chris Moore with CJS Securities. Please proceed with your question.

Good morning, guys. Thanks for taking a couple 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 have generated in Q3 without supply chain issues or with significantly lower supply chain challenges? And is any of that lost moving forward?

Not lost moving forward, Chris. It'd be very difficult to quantify. We have close to $30 million in our WIP and a gap. I mean, any of that 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, you know, 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 backlogs. We did see some of that in Q2, as you referenced. We really didn't experience any of that in Q3 that was material for 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, you know, they don't have to order now because they can't get the equipment. So I think it's just what Rick Rayburn 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.

Interesting. Go ahead.

I'm sorry. Yeah, one other thing. We normally have a preseason program on the ag side, and because the backlogs are so high, there isn't a preseason program this year. That would normally drive orders up this time of year.

Got it. That's helpful. Maybe just the last one for me. You talked about 12% operating margin is 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 kind of target at this point in time? Just any thoughts there?

Chris, it's Jeff. I think we can begin running at that rate late next year. At least that's my hope and expectation. Again, if these chassis situations start to improve at 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. 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 that have been deferred into 2023. So, I mean, that'll give us a nice upside in 2023, assuming they do come then. You know, they'll come out of the plant sooner or later from our suppliers I'm referring to. and we'll get a nice kick 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?

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, 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 prefer some chassis into next year's. 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. Thanks, guys. Thanks, Chris.

Our next question comes from Mike Schliske with DA Davidson. Please proceed with your question, Chris. Sorry, Mike. Are you on mute? Okay. It looks like we've lost him. Hopefully, he'll come back in the queue. Our next question is with Greg Burns with Sedota & Company. Please proceed with your question.

Good morning. Thanks for all the color on the orders by product line. Sure.

Morning, Greg.

I was just wondering, hopefully, maybe get a little bit more detail there. I mean, is it mainly a function of difficult comps from last year while you're seeing the declines, or are you seeing a little slowdown in demand maybe in specific areas? Are you referring to the orders? Yeah, 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 this 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 influx in our forestry and tree care business. And we also had some timing of orders that were booked into our J.D. Edwards system as we converted the acquired Rayco company into J.D. Edwards. So We truly had some kind of odd, one-off things going on with 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, forestry has remained 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.

Okay, great. Thank you. I'll hand it over. Thanks, Frank.

Our next question is with Mike Schliske from D.A. Davidson. Please proceed with your question.

Good morning. Sorry about that, guys. I guess my phone just cut out entirely. Can you hear me okay? That's all right, Mike. Good morning. All right. Thank you. A couple questions, and if I missed the last speaker, feel free to have me go to the transcript later. I guess I want to ask firstly about seasonality in the fourth quarter. Since you bought Morbar a couple years back, I remember that was a fourth quarter. It was just a really weird situation on EBITDA. because we 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 kind of long-term outlook is. Can you 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 your understanding of 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... Is that a forestry comment or is that I was talking about more like a company-wide discussion of how earnings might shift?

I'm sorry. I thought you were referring that specifically to forestry. Go ahead. Sorry. I think the seasonality is largely out of the business at the moment. And the other thing that I've talked to you about a few times over the years is snow removal normally can swing fourth quarter better or worse. Snow removal is in a very, very strong position right now. But, you know, like everything 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. Ag is 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?

Perfect. Great.

This would be a good barometer, I think.

Great. I appreciate that color. I did want to comment or get a question in about the lack of a preseason and what that means for next year. I mean, 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 that could be ordered hasn't been ordered. But I guess I'm curious, you know, what's does that mean for next spring's shipments, if a farmer needs something quickly, can you get it out, or are you just so booked up that you'll be hamstrung from new shipments at the first part of 2023?

Yeah, no, I don't think we're going to be hamstrung, Mike. I mean, the issue we're dealing with in that side of the business right now is people more than supply chains. just getting enough people on board to get the work out the door. I made reference to that in 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 in July and usually goes through November, and it's a little bit of an increase of a higher discount for them. That doesn't mean they also as large of a discount or as big of a discount as the pre-season 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 one way or the other how they're going to handle the in-season program.

Got it. Got it. I also want to follow up on Chris's question 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? In other words, will 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 speak of. with dealers trying to reprice an expectation or a 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, yeah, that could potentially happen then. But no sign of it yet.

Okay, let me 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 a little surprised as to the number of M&A deals happening in the sector over the last few months given the broader market, but there is some activity out there. I'd be curious if you could 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, 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 chip company, I think, for a decade now. So 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.

All right. Well, that's great, Keller. Thank you so much. I'll pass it along.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Tim Moore with EF Hutton. Please proceed with your question.

Thanks, and I have several questions for Jeff and Richard. Okay, go ahead, Jeff. Yeah, good morning. First, for the industrial segment, do you have a rough estimate of the margin drag from under absorption in the September quarter? You know, is it something like 100, 150 basis points drag on gross margin? And the other part of that question is, you know, as of today, I'm just wondering if you've achieved positive net price realization to cover your cost inflation, including freight surcharges enacted?

The second one, both our divisions are pretty aggressive about doing that. If we're getting the surcharges, as we 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 handling that, those increases that we're getting is, But I think, as Jeff mentioned earlier, I think the piece that we're probably most concerned about is, yeah, 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 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 won as we track it, which is 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. Yeah, that was good.

That's a helpful caller.

That's a very helpful caller. And yeah, I think investors understand that's more of an 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.? Something like that. leasing a plant or ramping up a bit more on European production start late next year?

Yeah, we just started or just completed a policy to do a little bit more make and market on that right now. So we're really planning on trying to kick that off into next year because it's terrible to try to move any product from one location here in the States to over in Europe and vice versa. It's you're not going to get any margin out of this. And 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, making margin is a big deal for us.

And, again, we've just kind of 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 in our company 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 sulfur prior facility late next year, which will give us more production capacity in the UK 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 San 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.

That's helpful. Thanks for giving details on that. That's something that obviously will help the margin improve when that gets rolling more. Richard, I have 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 grasp that the inventory's whip 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 time frame. It'll drag a little bit into November. But overall, I think

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 one-third 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 production and inventory in the fourth quarter that will help us with our cash flow.

That's terrific. That's really great to hear, and Yeah, I'm modeling a pretty strong forecast 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'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 ConExpo in March of next year. Those are 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 chipper in the U.K. under our Timberwolf brand, which is a very interesting product that utilizes a 28-horsepower diesel engine that 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 far. So yes, we have quite a bit going on there, and I think next March at ConExpo should be exciting. I hope you can attend.

That's terrific. I just have one last question. I was just looking at the geographic sales in the 10Q. and I realized 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's off a low year ago, small base, but anything else going on there with penetration or launches or new customer ones?

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 snow plows, 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 10Q.

That's helpful. Very impressive in the quarter. Well, that's it for my questions, Jeff and Richard. Thanks for taking them.

Okay, Tim, thanks for calling.

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.