Q2 2023 Alamo Group Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Alamo Group, Inc. Second quarter 2023 conference call. At this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you need assistance. Please press star zero for the operator.
This call is being recorded on Thursday August 2023, I would now like to turn the conference over to Iraq. The City Executive Vice President General Counsel and Secretary. Please go ahead.
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 2128 to 73746, and we will send you a release and make sure you're on the company's distribution list.
There will be a replay of the call, which will begin one hour after the call and run for one week. The replay can be accessed by dialing 184451 to two nine to one with the pass code 97441743.
Additionally, the call is being webcast on the company's website at Www Dot Alamo dashed group Dot com and a replay will be available for 60 days.
On the line with me today are Jeff letter, 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.
Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release.
Before turning the call over to Jeff I would like to make a few comments about forward looking statements.
We will be making forward looking statements today that are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Forward looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results.
Among those factors, which could cause actual results to.
To differ materially are the following market demand COVID-19 impacts, including operational supply chain disruptions competition weather seasonality currency related issues geopolitical issues and other risk factors listed from time to time in the Companys SEC reports the company does not undertake any obligation.
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 on the call today, Richard will begin our call with a review of our financial results for the second quarter of 2023 I will then provide additional comments on the results. Following our formal remarks, we look forward to taking your questions. So Richard Please go ahead.
Thanks, Jeff and good morning, everyone. All my groups second quarter 2023 closed with an excellent performance that produced record net sales and net income driven by strong demand for our products.
Second quarter consolidated net sales were $440 7 million, an increase of 11% compared to $396 2 million in the second quarter of last year.
Gross margin dollars in the quarter improved compared to the second quarter of 2022 by $18 $4 million as the gross margin percent, which was up 160 basis points.
Both margin dollars and percentage increases were from high volume at per price initiatives. We began in early 2022.
With productivity gains continue to.
A experienced improvements in our supply chain as we saw more consistent deliveries throughout the quarter.
Operating income for the second quarter came in at $54 4 million versus $40 9 million in the second quarter of 2022, an increase of 33%.
Operating income as a percent of sales was 12, 3% for the second quarter of 2023 versus 10, 3% for the same quarter last year, an increase of 2%.
Consolidated net income for the second quarter of second quarter was $36 4 million or $3.03 per diluted share an increase of 27% versus net income of $28 5 million or $2 39 per diluted share for the second quarter of 2022.
Our continued efforts to control both cost and equip and expenses helped.
Help support the increase in profitability, despite a dynamic operating environment.
The vegetation management Division once again delivered solid results in the second quarter of 2023 net income was $261 3 million, an increase of 3% compared to $255 million for the second quarter of 2022.
Strong sales of forestry and tree care and governmental mowing products in North America U K and Europe led the way for this division.
Despite labor shortages and to a lesser extent supply chain disruptions.
Margins improved primarily due to increase in net price realization and improvements in operating efficiency.
Operating income for the second quarter in this division was $35 6 million up 8% versus $32 8 million for the same period in 2022.
And the industrial equipment divisions.
In the industrial equipment Division net sales in the second quarter were $179 3 million up 27% compared to $141 2 million for the second quarter of 2022.
This was due to a solid performance across all product lines, particularly vacuum trucks sweepers, three collectors and snow removal equipment.
While truck chassis deliveries showed improvement in the quarter other component parts.
Shortages continued to impact the division's operating operations, which constrained efficiencies along although not as significant in previous quarters.
This resulted in a significant rise in their operating income in the second quarter for 2023 of $18 8 million compared to $8 1 million for the second quarter of 2022, an increase of 132%.
Consolidated net sales for the company were a record for the six months of 2023 coming in at $852 5 million up 12% compared to $758 2 million for the first six months of 2022.
Strong demand for our products in both divisions, along with positive impacts of pricing and.
Initiatives and improved supply chain and productivity were the main drivers of the increase.
Six month gross margin for 2023.
Was up over $33 million versus the first six months of 2022, an increase of 48%.
The margin percentage was up 240 basis points as we experienced improved supply chain conditions.
Which led to higher efficiencies and improved capital.
Cap of capacity utilization.
Of sales compared to the same period in 2022, which was $70 million or nine 2% of sales almost a 300 basis point increase.
Net income for the first six months of 2023 was $69 7 million or $5 82 per diluted share also a record versus net income of $46 9 million.
Or $3 94 per diluted share for the first six months of 2022, an increase of 48%.
Six months 2023 net sales for the vegetation management Division were $517 8 million compared to 476 four.
$476 million for the for 2022 up 9%.
The division experienced robust demand in all product categories, particularly in forestry tree care land clearing agricultural and governmental mowing in North North America, the UK and Europe .
Six month 2023, operating income was $72 1 million up 41% versus $51 1 million for the prior year.
For the first six months of 2023 net sales for the industrial.
A 19% increase.
Sales of vacuum trucks, sweepers debris collectors and snow removal led the way with modest support for Mexican players.
Six months 2023, operating income was $31 3 million versus $18 9 million for the first six months of 2022.
An increase of 66% this.
This division's results continued to be impacted negatively by supply chain supply chain disruptions.
Although improved from the last few quarters as well as labor shortages and some currency translation effects.
The company's backlog at the end of the second quarter of 2023 came in at just over $891 million. This is slightly down compared to the backlog at the end of the second quarter for 2022, which was $894 million.
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Turning to a few additional financial items at the end of the second quarter. Our balance sheet continues to remain strong working capital increased 121 $120 million to $657 million from 537 million at the end of the second quarter.
The increase in working capital resulted mainly from higher accounts receivable and to a lesser extent inventory.
Accounts receivable were 379 million thats up 23%.
Inventory was up 16 million compared to June of 2022 work in process.
A major part of that increase is up $6 million compared to the end of several art due to several large orders that we were not able to ship at the end of the at the end of it.
Quarter of the second quarter.
Also we received a high volume of tractors and chassis into inventory towards the tail end of June of this past month.
Material cost inflation drove the bulk of the year over year increase as well and we can do we were pleased the quantities had come in it would come down slightly.
And locations within both divisions.
During the second quarter as expected, we reduced our debt level on our credit facility by almost $25 million.
Finally, the company's trailing 12 months EBITDA was a record coming in at just over $230 million.
Up 18% compared to calendar 2022.
For the balance of 2023 cash flow should remain strong as our focus on balance sheet will continue to reduce both inventory and debt levels increased consolidated profits for 2023.
Extremely important.
We also will remain disciplined in controlling cost and expenses.
As inflation continues to put pressure on our margins were also we will also adjust prices as needed based on changes in material and transportation costs in order to maintain our target profit.
Target margins.
We are also focusing on.
Further improving supply chain performance to help reduce the amount of inventory, we hold and work in process.
Biggest challenge will continue to be meeting the heightened demand for our products throughout the company given current supply chain constraints and labor shortages.
We are pleased the board are that our board recently approved a regular quarterly dividend of <unk> 22 per share.
The second quarter of 2023.
With that I'll turn the call back over to Jeff.
Thank you Richard.
Like to express my personal thanks to everyone, who has joined our call today.
We were very pleased that in the second quarter. Our teams once again set new all time company records for quarterly sales and net income.
As we had anticipated lower material cost inflation and a further improvement in the performance of our supply chain helped to increase sales stabilize our manufacturing cadence and improved operating margins.
Sales improved across both of our operating divisions and consolidated sales were up over 11% compared to the second quarter of 2022. Our teams again did an excellent job keeping our operating expenses under tight control operating expenses, although 9% higher than the first quarter declined nearly 30 basis points as a percentage of sales.
With this solid cost discipline, we were able to achieve excellent leverage on the higher top line. The operating margin in the second quarter was 12, 3% of sales an improvement of 200 basis points versus the prior year.
Second quarter net interest and currency translation costs were 114% higher than the prior year. Despite these headwinds net income improved nearly 28% versus the second quarter of 2022.
Net income also improved 9% compared to the first quarter of this year that it also established a sales and earnings record at the time.
In aggregate our markets continued to display strength during the quarter and activity remains strong in most areas part sales during the quarter were somewhat lower than we'd anticipated due to the impact of an extended drought in many parts of North America and Europe .
Second quarter bookings declined approximately 9% compared to the prior year, although backlog was essentially unchanged compared to the second quarter of 2022.
Our governmental markets continued to display significant strength across all geographic markets and product lines orders received from municipalities and contractors to serve them improved and inquiry activity remains at historically elevated levels.
Our vegetation management Division produced strong results again in the second quarter sales were modestly higher however, operating income was up eight 5% compared to the second quarter of 2022, reflecting better pricing and improved manufacturing efficiencies order bookings of $150 million in the quarter declined 18% from the same period.
A 2022.
As we had anticipated the divisions forestry tree care, North American hobby farm and ranch segments experienced softer activity during the quarter. We received some order cancellations, primarily for multiunit equipment and other land clarity of equipment.
Due to the ongoing shortage of tool carriers relative to the <unk> heads in dealer inventories and also to the elimination of certain speculative orders increasing dealer caution to a rising inventories was evident in the phase of rising interest rates.
As also as also as expected activities slowed in the North American Hobby Farm <unk> Ranch segment as channel inventories reached levels that many dealers are not comfortable with given higher and still rising financing costs.
Combat. This we offered our dealers' retail incentives during the second quarter. These were successful and helped to reduce inventory in the channel and improved collections in the quarter.
Sales of this division's products to governmental customers continued at a brisk pace in North America, Brazil, Europe , the United Kingdom and Australia.
North American governmental demand for tractor mounted mowing equipment remained at record levels vegetation management division backlog at the end of the quarter was $416 million down 32% from the same period of 2022 in line with our expectations on.
On balance we were very pleased that despite these headwinds the vegetation management division produced excellent results again, and the division's backlog remains at a historically elevated level.
Our industrial equipment Division also had an excellent second quarter. This division sales for the quarter were up 27% compared to the same period of 2022 operating income was up 132% compared to the second quarter of 2022 with.
With improvement in supply chain performance and higher truck chassis receipts driving improved efficiencies. This division produced stronger results with operating income above 10% and again in line with our expectations. The division received new orders valued at $175 million during the second quarter, while bookings in this division were flat.
Compared to the prior year this was lower than expected due to an order timing issue orders for the division's major product lines improved most notably excavators and vacuum trucks.
Our governmental customers and the specialty contractors that serve them continue to invest in upgrading their maintenance fleets and we believe that we are beginning to see incremental benefit in certain product lines from demand stimulated by the infrastructure Bill.
Most of our industrial equipment dealers do not carry an appreciable inventory of our products beyond the central product demonstrators and they have therefore not been impacted to the same extent by higher costs associated with rising interest rates.
Industrial equipment division backlog of $475 million, an increase of nearly $130 million or 38% compared to the same period of 2022.
Recent indicators show the hobby farm <unk> Ranch segment stabilizing as farmer sentiment is rising and the.
Recently reported that June U S sales of small tractors less than 40 horsepower ticked upward for the first time this year.
The strong activity in the governmental markets supported by moderating inflation and improving supply chain performance provides confidence that we will continue to perform well for the balance of this year, we expect that our vegetation management Division will continue to perform at a high level, although with more moderate sales growth our industrial equipment Division is <unk>.
Specced it to continue to expand both sales and margin in the second half of the year as supply chain improvements allow us to accelerate shipments and drive efficiencies higher beyond 2020 beyond 2023 uncertainty remains.
Not yet clear whether the U S economy will achieve a soft landing or a further interest rate hikes will be required as we've noted today higher interest rates are now clearly, causing dealers to react more cautiously before closing my remarks today I would like to thank our customers dealers suppliers are thousands of exceptional employees and our financial stakeholders.
Orders for their continued support for the company. This concludes our prepared remarks, we're now ready to take your questions. Operator. Please go ahead.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone.
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The next question comes from Chris Moore CJS Securities. Please go ahead.
Good morning, guys. Thanks for taking a couple of questions.
Great quarter.
Maybe we'll just start with that.
Cloud pricing backlog was <unk> billion or so in April down to 890 pricing look very favorable in April for at least a couple of quarters.
How are you how are you looking at at this point.
I think the pricing in the backlog is still in great shape, Chris I'm really not concerned about that but the buildup of inventory in the channel is occurring faster than I had thought it would at the end of Q1 and.
And we were getting some request for helping the dealers to move that channel inventory to retail sales and so we did implement some incentives to achieve that.
But that Hasnt really directly impacted the margin in the backlog at all in from an industrial equipment Division point of view the margin and the backlog remains outstanding there has really not been any new price pressure on that side of our business at all.
Yeah. Chris This is Richard I think also too we are feeling a little bit of pressure, especially in the vegetation management side of the business because.
Theyre seeing costs or material costs are starting to drop a little bit and so I think some of the pricing that we're going to have going forward into the new orders that we've taken that division will just probably drop off some steel surcharges that we have in there, but still maintain our overall.
Net price that we've been charging.
And Chris one more thing I'd add to that unit for what it's worth I mean, if you look at where we are from a dealer perspective with higher pricing that's been implemented over the last couple of years. It means effectively while they have the same amount of space on their balance sheet expressed in dollar terms. It means fewer units that they can afford to have in the channel as interest rates rise. So that's the core.
And I'm, referring to the higher prices don't necessarily mean more dollars of space on the balance sheet for many of our dealers, especially as the financing costs go up.
So I think thats what were seeing.
And that was really confined to the hobby farm <unk> Ranch segment by the way that's the only segment.
<unk> any of that pressure.
Got it.
With interest rates.
Potentially.
Less certain maybe just.
How are you seeing more back now for the rest of the year.
You know more barks order book is holding up pretty well, Chris I've been pleased with that along the way I think that the combination of higher interest rates and a slowing housing market are beginning to have a bite on their business, although it hasn't materialized in our numbers yet I don't really have any evidence of that.
But when housing starts slow.
Consumption of lumber falls it means less branches to be shredded to make mulch to make pellets at the end of the day. So the cost of feedstock for pellets rises.
A negative indicators for that business going forward and we are starting to see a little bit of that.
But overall more barks in great shape. Their operations are stabilizing there are margins. There are net margins are actually improving at the moment. So we think they are in a great position.
I don't have any incremental concern with that business compared to where we were at the end of the first quarter just to be crystal clear.
Got it helpful.
And maybe just.
I just want to shift gears to operating margins of 12, 3% this quarter, even though parts weren't quite as good as you thought they were going to be.
We're kind of where we are.
Hitting north of 12 again in Q3.
What are the put and takes trying to gauge the likelihood of Q4 being able to generate operating margins in the 12% range.
Well I think you can go back to the fourth this is Richard sorry, Chris If you go back to the fourth quarter of last year. We generated 11 point I think 11, 7% operating income in the fourth quarter. So I think it is definitely doable I think.
One thing that happened here in the second quarter, we shipped an extremely high volume of units and I think that that mix actually pull that margin. We were at 27 three for the first quarter and we were at 26.8 here. So I think overall, we're still pleased with the margins that we've got and as Jeff mentioned the parts were just slightly down and then what.
We had anticipated because of some of the drought that's been going on but I think third quarter is another good quarter here for a part of our part sales and.
And same thing for our units, we still got plenty of units out there to put out an end to kind of finish off again I think the fourth quarter, we will have a little bit of a different split we will have more units going out because part start to drop off after about the middle of October .
Yes, a couple of more pieces of the pie I'd throw on the table for you Chris in Q3 in the third quarter, we start to see the parts activity and snow removal.
Preseason snow removal parts ordering starts to pick up so thats potentially a bullish indicator and as I've said for some time I think the industrial equipment Division will continue to gain momentum you remember we've had a number of discussions about.
The margins in industrial equipment inherently lower than what they were in vegetation management and I think I have reminded the audience. Several times that if you go back historically industrial division.
Thanks, Chris.
Thank you. The next question comes from Mike Smith from D. A.
Davidson. Please go ahead.
Yes, hi, good morning, Thanks for taking my question.
Maybe my follow up to your comments there Jeff maybe you have two quick follow ups from what you just mentioned in your last answer there.
I'll start with.
Kind of.
The positive feeling on parts of industrial and maybe less.
That's positive about some of the vegetation business.
I guess, yes net.
Net net do you feel like the infrastructure, bill and sort of off the graph types of applications.
More than offsetting what you're seeing on the fly them right now.
This quarter compared to last quarter about how things are kind of looking at here.
I do Mike I wouldn't say.
Not euphoric.
So we think industrial vegetation management division will largely hold the line and our current position and I think industrial continued to gain pace momentum expanding margin all of the things we've been talking about for some time.
The other thing to consider here is our snow removal backlog has never been where it is at an all time record high by far.
And we've had an excellent early pre season, there with regard to truck builds in orders for trucks.
And I think we're going to see the same thing in parts of this year. So I am expecting a pretty good season for our snow removal business and Thats bullish for Q3, and especially for Q4.
So net net I still think we got a little bit of running room here to continue to do a little bit better.
Outstanding.
I want to follow up on that answer as well real quick on the snow business I think I saw some very good about.
No, perhaps the orders weren't as good as they were in the past and just this past quarter.
I'm wondering if that's more a function of you are already full for the year and what it would take a lot more orders.
Or is there something deeper.
No I haven't towards it.
And last year, we had an unusually strong second quarter and snow removal and I believe I commented about that at the time. So we had an interesting comparable there, but no our position in snow removal is very good strong bullish.
The chassis situation is getting much better at the moment much better which means we're able to allocate more chassis to snow removal to support continued growth.
So I'm expecting a very good season, and I would tell you our snow removal team is very optimistic about where they're positioned right. Mike one other thing to add to Jeff's comments here.
With some of this loosening in that we're talking about here on the chassis specifically in the industrial equipment Division.
We'd already negotiated a consignment agreement with one of our major.
Suppliers for the freight I mean for the chat.
<unk>, we actually it actually also were able to negotiate another consignment on another chassis company. So we've got large increases that they're allocating to us as we go forward here and having that on consignment is going to be extremely helpful. For us from an inventory standpoint, because we will be able to consume the unit ship.
Ship it.
Invoice it and then record the actual.
<unk> of that of that chassis. So that's a really positive thing for us going forward.
Well, that's great color thanks for that.
And then.
Turning to your margin commentary.
<unk> got the 12% plus.
Despite some of the headwinds.
The supply and supply chain.
Kind of wondering if you got.
This is the right time to talk about a new little higher targets going forward.
Thank you.
That's great.
Mike I know you were going to ask me that.
We're still discussing that but ive said consistently once we get three or four quarters, so I'd rather before.
Consistently operating at 12% sat out reestablish a new target and I'm going to stick by that for the moment I still think the uncertainty just general uncertainty out in the business environment.
At the moment doesn't really warrant that today, but.
But having said that I still think we can sustain this 12% and that may be even widen the gap a little bit more yet as I said industrial is still gaining momentum and if you go back a few years industrial was a 12% margin business. All day long if you go back to prevent damage.
I'm very confident we're going to get there and then the other very bullish signal is that our receipts of chassis is rising very very nicely at the moment, we've actually been receiving chassis is in access of our allocation.
From at least two of the suppliers that we deal with.
So I think that industrial would be able to ramp up sales a little bit faster in the remainder of the year and as I said, we're looking forward to a really good snow removal season, and one last thing I want to point out just by way of a reminder, we have heavily restructured our snow removal group to lower its operating cost threshold. So.
We feel good about where we said, Mike and continue to and you know me I'm a continuous improvement guy as soon as we have been in that 12% or about a year.
That's all good.
If I may throw one more question. There you had mentioned the ranching business, having a little bit of that time with drought and so forth hobby farms with drought and so forth do you feel okay about sort of the.
The small part of your business it does.
Large row crop of corn and soybean folks, whether it's TV ground pepper.
Okay.
Yes, I do Mike because I think I commented that the AAM tractor retail numbers for June actually ticked up in the under 40 horsepower category and we haven't seen that for quite some time.
And I actually think farmers are starting to see that things might be a little better than they thought even net net of the drought because the war in Ukraine. Unfortunately from a farming point of view is getting worse not better.
So I think thats, maybe a bit of a help there.
You gave I think we've just seen this bubble in the hobby farm <unk> Ranch segment because of the pandemic when lots of people like me went out and bought a few acres in Baltimore.
Those those acres.
End of the day and I think that was a bubble and probably is not repeatable as a great bubble I mean, we've been we've enjoyed that benefit a lot, but that tends to impact the small lowers the single spindles, which are lower margin product relative to our bigger flex wings, which is really our core competence. So im not overly concerned about it at the moment, but we are watching it a lot in the main issue in the hobby farm and ranch.
Was the rapid faster build a dealer inventory than what we had anticipated.
A quarter ago, I think I commented, we were back to pre pandemic levels. When we felt comfortable with that and that was a true statement than it is true now whats changed is dealers are just not willing to inventory as much because of the rising interest rates and I think a lot of Oems like us are competing for space on the dealer's balance sheets at the moment. So that's the dynamic that potentially has changed and.
That segment, but we did some incentives this quarter as I mentioned that drove our marketing costs up a little bit, which probably won't repeat at least not the same degree that really helped clear a lot of that channel inventory at out in the replenishment orders have been very positive.
Since then so I'm pleased with the direction of that Mike We also.
In the AG space.
Introduced the preseason program that started roughly in the middle early part maybe middle of June and ran through the end of July and we were really excellent results out of that and very pleased with the new orders that we were able to get out of that so thats going to give some additional runway for the AG space moving for the balance of this year.
Thanks, So much I appreciate the discussion I'll pass it along.
Okay. Thank you Mike.
Thank you. The next question comes from Tim.
Please go ahead.
Thanks, and congratulations on the continued strong sales growth I mean, it makes sense that the industrial owners have been up so strong the past year to easily offset the vegetation orders.
I mean, if you look at your backlog and it's double what it was the month before Covid started.
Still pretty amazing.
Sure I know someone just because I.
I know someone just beat me to it about getting you to raise your 12% operating margin after I guess 11, 9% last quarter.
12, 3% this quarter, but I was wondering just maybe if you could talk more high level about the continued overall margin expansion drivers you know if the economy.
He is pretty steady.
Specifically I'm curious about.
The improved fixed cost absorption there it seems like the supply chains disruptions are starting to abate or theyre not there yet.
Obviously, the operating Leverages is going to help industrial with growth and it seems like you could get back to the.
12% op margin there looking out a few years ago with the industrial side and then you know if you want to just talk more about the potential for.
Facility consolidations like you're already didn't snow I imagine there is an opportunity in nor.
Northwest.
And then lastly, you know I think a topic that's couple for me as investors as you know.
Your plan for kind of in country manufacturing in Europe to minimize transportation costs in the U S trigger more sales growth. There I think you were working on a plan for that just curious if there's any in country manufacturing Europe update.
Okay bunch of great questions, Thanks, very much for asking them.
Terms of the margin expansion I am.
Confidence that industrial will get to that 12% threshold, Chris you brought that up so Tim So I think we'll definitely.
We hit that.
Can't tell you what month, but it'll happen and.
In terms of some of our strategic.
Initiatives we.
When you consolidate two facilities, you've got to add workforce in one and at those two facilities are 500 miles apart people don't move 500 miles for drop in direct manufacturing typically.
Going forward, so that hasnt changed at all having said that we are short of manufacturing capacity in Europe to the second part of your question and we've just been planning and actually discussing with the board.
Some significant capital expenditures in both our French operations and our U K operations that will add capacity there to allow us to accelerate the making market initiative that we've talked about a few times. So I was very pleased with the support we've received on those discussions and we anticipate that kicking off very shortly so we are continuing to do our thing.
And Thats, just what I can say.
Adding to that Tim if I could.
As we move forward, both in France, and in the U K and by doing so it accomplishes two things one they still have opportunities to increase volume there, which is great. But the second thing goes back to your last question, which is the in country manufacturing, which we call making market.
Really going to start pushing that forward here because part of these capital expenditures that we're putting in place is to increase that makeup market all of those locations that we're going to do these capex is to have the right equipment in place for us to be able to do this.
And Thats still bidirectional by the way, we're just starting to introduce our timber wolf shippers that are made in the U K into the U S market. So these flows are making market are going in both directions.
Great. That's terrific color, that's really helpful, Jeff and Richard and I'll save my other questions offline later today with you.
Okay. Okay. Thanks look forward to chatting with you Tim.
Thank you ladies and gentlemen.
Should you have any questions. Please press star one.
Next question comes from Felix Raymond.
Raymond James Please go ahead.
Hey, good morning, everybody.
I feel like.
Hey.
Appreciate the comments on getting industrial back to 12% margins over time.
I guess, what I'm curious about.
You mentioned chassis for improving quite a bit on the call, but could you maybe comment on the magnitude of cost inefficiencies that are still running in the P&L today in that business line.
What I'm trying to figure out is if those were to normalize from here could you get to that 12% margin.
Helix. This Richard Yes, we definitely feel like we can get there would hurt us probably a good point to a point and a half is the inefficiencies and the under absorption in there as I mentioned in my comments there that in both several a couple of different locations we had several.
300, 403, three or $4 billion worth of sales that we were not able to ship out because we were still missing a few component parts to complete.
If we can just get this more of a continual it is improving we just need this on a regular consistent basis.
And I think it maybe even a little more explicit in answering that we don't need top line to get to 12% in industrial.
Just to be Crystal clear I don't need it.
Got it Super clear and then I know you've made some operational changes in your snow removal business and I think the idea is really to help drive profit per unit output.
What I'm curious about is how much of that improvement is already in the numbers today versus what do you think might still be on the come into the back half in coming years.
Yes.
Definitely improve because in the past we've had some issues on some warranty items in the snow, but doing this consolidation and taken some of the cost out it definitely is.
At least 150% improvement where we were last year. You also have to remember Felix in the second quarter as Jeff mentioned earlier, we're not going to have a lot of opportunity to push that to 10% in the snow business in the second quarter, just because it's summertime.
And in terms of operating margins feel like snow removal is still one of our lower businesses in that regard with plenty of room to grow and to get.
I think we've done the right things with the fixed cost structure and the manpower and the organizational structure of that business. It's very lean now it's one team working hand in hand, together the energy and the team is just awesome and of course, they've got this huge backlog of really nice price truck builds in the background. So now that we're able to allocate more trucks to them they can accelerate.
The deployment of that backlog into sales. So I'm looking forward to a really nice season out of snow removal for the remainder of this year and really even into the first quarter next.
Got it and then just my last one but again with the chassis flow improving the way that it is.
Could you talk about the size of your rental fleet today.
Today versus maybe how you think it might shake out in coming years I'm. Just curious if it's good enough to the point, where you can sort of reignite growth in that in that business.
Yes, I'll tackle that for you I was going to bring that up anyway. So I'm glad you're prompted to comment our vacuum truck fleet has been stable and I don't want to disclose number that's obviously commercially sensitive information, but its been stable its been flat, we havent really been able to add trucks to the fleet. The way, we would like and obviously when trucks move out of that fleet.
Yeah.
Rental configuration contract configuration, that's very nice margin for US is a nice margin business for us and our rental fleet utilization is already so high we really can't push it any higher so now with more chassis is coming in we will definitely be able to add trucks into that rental fleet and we think we can hold the utilization and that will drive higher profitability in industrial in that time.
And other profit improvement level.
Got it I'll stop there I appreciate the time.
Thanks, Felix look forward talking to you again.
Thank you at this time there are no further questions I will turn the call back over to management for closing comments.
Okay.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.