Q3 2023 Alamo Group Inc Earnings Call
Good day and welcome to the Alamo Group, Inc. Third quarter 2023 conference call.
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I would now like to turn the conference over to Edward <unk> Executive Vice President General Counsel and Secretary. Please go ahead.
Thank you.
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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 Leonard President and Chief Executive Officer, and Richard worthy Executive Vice President Chief Financial Officer and Treasurer.
Management will make some opening remarks, and then we will open up the line for your questions.
During the call today management may reference certain non-GAAP numbers in their remarks.
Conciliations 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 19 months.
Forward looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results.
Among those factors, which could cause actual results to differ materially are the following adverse economic conditions, which which could lead to a reduction in overall market demand supply chain disruption labor constraints competition weather seasonality currency related issues geopolitical events.
Other risk factors listed from time to time in the Companys 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 letter Jeff. Please go ahead. Thank.
We want to thank everyone, who has joined US on the conference call today.
And to express our appreciation for your continued interest in Alabama.
The third quarter shaped up broadly in line with our expectations and we were very pleased with the financial results reported today were produced in an increasingly challenging operating environment. Despite persistent inflation higher interest rates and ongoing labor constraints. Our teams achieved record quarterly results for sales and earnings for the eighth consecutive quarter.
I would now like to turn the call over to Richard who will take us through a review of our financial results for the third.
I will then provide additional comments on the results and say a few words about the outlook for the next few quarters. Following our formal remarks, we will look forward to taking your questions. So we're just please go ahead, thanks, Jeff and good morning, everyone.
Group's third quarter 2023, close was an excellent performance that produced record net sales and net income driven by continued strong demand for our products.
Third quarter consolidated net sales were $419 6 million, an increase of 14% compared to $368 8 million.
Third quarter of last year.
Gross margin percentage expanded by 220 basis points and gross margin increased by just under $22 million in the quarter compared to the third quarter of 2022.
Both margin dollars and percentages were driven by higher volume and price initiatives.
We began in early 2022, along with improved productivity gains.
Operating income for the third quarter came in at $49 8 million versus $35 8 million in the third quarter 2022.
An increase of 39%.
Operating income as a percent of sales was just under 12% for the third quarter versus just under 10% for the same quarter last year.
Consolidated net income for the third quarter was $34 9 million or $2.91 per diluted share.
Increase of 35% versus net income of 25 8 million for $2.16 per diluted share for the third quarter 2022.
Looking at the divisions vegetation management Division once again delivered solid results net sales were $246 9 million, an increase of 8% compared to 228 million $228 5 million for the third quarter of 2022.
Strong sales of governmental and agricultural mowing equipment in North America U K Europe.
U K and Europe led the way for this division, despite labor shortages and to a lesser extent Alistair step supply chain disruptions.
Margins improved primarily due to increased net price realization.
Operating income for the third quarter in this division was $30 3 million up 12% versus $27 1 million for the same periods in 2022.
Industrial equipment net sales division net sales were $172 7 million up 23% compared to $140 3 million for the third quarter of 2022.
This was due to our solid performance across all product lines, particularly vacuum trucks sweepers debris collectors and snow removal equipment.
While truck chassis deliveries continued to return to a normal cadence to a more normal cadence.
Some component part shortages continued impact this division's operations, although not as significant as in previous quarters.
This resulted in a substantial rise in operating income in the third quarter for this division.
Of $19 5 million compared to $8 7 million for the third quarter of 2022, an increase of 124%.
Consolidated net sales were a record for the first nine months of 2023 coming in at 1.2 dollars 7 billion up 13% compared to 1.12 billion for the first nine months of 2022.
Strong demand for our products in both divisions long positive impacts from pricing initiatives and improved supply chain and productivity were the main drivers of the increase nine month gross margin percentage was up 240 basis points and gross margin increased $66 million versus the first nine months of two.
22, an increase of 24%.
The margin improvement experienced resulted from improved supply chain conditions, which led to higher efficiencies and enhanced capacity utilization.
Operating income in the first nine months of 2023, it was $153 2 million or 12% of sales compared to the same period in 2022, which was $105 9 million or just over 9% of sales.
260 basis point increase.
Net income for the first nine months of 2023 was $104 6 million or $8 73 eight.
$8 73 per diluted share versus net income of $72 8 million or $6.10 per diluted share for the first nine months of 2022, an increase of 44%.
The company's backlog at the end of the third quarter of 2023 came in at just under 891 million virtually unchanged from the end of the second quarter 2023.
Was slightly down by 2% compared to the backlog at the end of the third quarter 2022.
A few additional financial items I'd like to cover related to the balance sheet at the end of the ended the third quarter, which continues to remain strong.
Working capital increased 96 million compared to the end of the third quarter of 2020 to the.
The increase resulted from higher accounts receivable and to a lesser extent inventory.
During the third quarter as we expected we reduced our debt level on our current credit facility balance was $24 million and our bank leverage ratio at the end of the third quarter was 133 to one which is at its lowest level in four years.
And finally, the company's trailing 12 month EBITDA was a record coming in at just over $245 million up 25% compared to the calendar year end 2022.
For the balance of 2023, and then into 2024 cash flow should remain strong as our focus on the balance sheet will be to further reduce both inventory and debt.
<unk> consolidated profits will be extremely important we remain disciplined in our execution of controlling cost and expenses as inflation continues to put pressure on our margins we will continue.
We need to focus on further improving supply chain performance to help reduce the amount of inventory, we hold and work in process.
Our biggest challenge will continue will be will continue to be meeting the heightened demand of our products throughout the company given persistent labor shortages.
So in summary, Q3 was a great quarter for Alamo group sales were up 14%, which translated into a 39% increase in operating income and a 35% increase in net income.
We're also pleased our board recently approved a regular quarterly dividend of <unk> 22 per share for the third quarter of 2023.
With that I'll turn the call back over to Jeff.
Richard I would like to express my personal thanks to everyone, who has joined our conference call today, while both operating divisions achieved solid top line sales growth as expected growth in the industrial equipment Division was stronger governmental agencies continued to invest in updating their infrastructure maintenance fleets and as supply chain bottlenecks continued to.
Resolved, although certain types of components remain problematic supply chain performance improved again during the third quarter receipts of class six to eight truck chassis that represent the bulk of our requirements improved sequentially, while the supply of class five and smaller chassis, which are less significant to bus became somewhat more restricted.
As has been the case for the past year or certain types of industrial components continued to be constrained and intermittent shortages once again adversely impacted our production operations.
Markets for our vegetation management equipment Division remained under pressure in the third quarter from the combined effects of higher interest rates, a weaker housing market, a bumper corn crop and persistent drought in much of the Midwest and southern United States.
Order bookings in this division were down slightly compared with the third quarter of 2022, but were sharply higher than the second quarter of this year U S. Farmers continue to express concerns about high input costs rising interest rates and lower crop and livestock prices hobby farm and ranch dealer inventories, while not a concerning level for me.
Historical perspective are under increasing scrutiny due to rising financing costs tighter credit and greater buying buyer caution.
Higher interest rates also constrained demand for our larger for Korean wood recycling equipment as many of these larger ticket purchases are subject to third quarter third party financing.
Housing starts in the third quarter declined about 1% compared to the second quarter, but were up about 5% compared to a year earlier, even considering steadily higher mortgage rates. We were very pleased that despite these headwinds new orders for for free and treat their equipment improved nicely compared to the second quarter, although still below the levels achieved in the third quarter.
2022.
Europe and the United Kingdom were notable bright spots again during the third quarter orders received in the U K, the Netherlands, and France move higher compared to both the second quarter of this year and the prior year third quarter. Despite despite challenging market conditions. It's also worth noting the orders received in South America set an all time company record during the quarter.
<unk> as demand for our sugarcane harvest hauling equipment and other agricultural and forestry products continue to rise.
Against the backdrop of increasing economic headwinds, we were extremely pleased that the vegetation management division third quarter sales increased by 8% year over year orders were sharply higher sequentially and profitability remains strong.
Operating income from this division improved more than 11% compared to the third quarter of 2022, and once again exceeded our targeted level of 12% of sales.
Activity in the governmental sector continued to be strong during the third quarter in all markets, where we operate demand for infrastructure maintenance equipment remained buoyant as it has been all year order bookings in our industrial equipment division were 25% higher than the prior year third quarter and also a nicely higher than the second quarter of this year while <unk>.
All of our product lines remained in high demand from government governmental agencies during the third quarter demand for our municipal snow plows was exceptional.
No removal order bookings increased by more than 100% compared to the third quarter of 2022 and backlog in this part of the business is at its highest level ever achieved. This is very nice growth was partly driven by the successful introduction in rapid acceptance of our new wide wing power system that allows multiple traffic lanes to be cleared snow and ice.
The safe and efficient manner excavator and vacuum truck bookings were also sharply higher during the third quarter and the utilization of our vacuum truck rental fleet remained excellent.
Due to a strong prior year comparable new orders for street sweepers and debris collectors were somewhat lower in the third quarter of 2022.
With the better flow of truck chassis and other components industrial equipment Division sales grew nicely in efficiency improved.
Sales in this division were up more than 23% compared to the third quarter of 2022.
Third quarter operating income improved dramatically in operating margin rebounded by over 500 basis points compared to the prior year third quarter.
We were also very pleased with the recently completed acquisition of Royal truck and equipment that will be integrated into the industrial equipment Division as part of our sweeper and debris collection group. This is a company we've been in contact with for some time. They are a leader in the development and deployment of truck moderate attenuators and adult significantly improve or crew safety through.
The Asian and continuous development of their products.
In summary, we remain optimistic regarding Alamo group's future outlook. We were obviously pleased in the third quarter. Despite the headwinds discussed previously the vegetation management Division continued to perform very well and as expected the industrial equipment Division continued to rapidly regain momentum loss during the pandemic and subsequent supply disruptions.
We anticipate that investments by governmental entities will remain elevated and let the markets served by our vegetation management division will be stable for the remainder of 2023, and then gradually regained momentum in 2020 bore we also believe that the supply chain performance will continue to improve sequentially and will support solid sales growth.
And further improvement of operating efficiencies. This is a powder positive pattern for the company and one that we will believe will continue to support favorable financial development for the next few quarters as we continue to execute our strategy in a disciplined manner.
Before closing my remarks today I'd like to thank our customers our dealers suppliers are thousands of exceptional employees and our financial stakeholders 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.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Mike <unk> with Keybanc D. A Davidson. Please go ahead.
Good morning, and thank you for taking my question.
I might I'd like that.
So have you started out with some commentary on the order of between the two segments. You had mentioned in the press release said.
Backlogged were.
We're up a bit in industrial is down a bit in meditation clearly it was flat overall and that's a great great to see in this environment, but you know that the two segments have margin differences and I'm curious if there will be a big.
Margin headwind to mix over the next couple of quarters.
Well get the volumes that you have in industrial, especially with you know goodbye to places like a snowplow.
That will allow for higher margins than perhaps a little bit more of an evening out.
Of the two segments margins over a period of time here.
Yeah, that's a very insightful question, Mike and you're exactly right. That's how we see this unfolding I think vegetation management can hold our margins for the next couple of quarters and gradually improve next year as I said, but industrial continues to gain momentum and were not where we can be in that division by any means yet and then the nice story as snow removal because.
It's a segment that's traditionally been a little bit dilutive for us from a margin point of view, but it is performing exceptionally well right now with higher backlogs as well and I think that will tend to blend the industrial margins higher and keep on a good pace. There. So we think industrial is still gaining momentum theyre not out of gas yet at all from any point of view with regard to the operating margin they could have.
Cheap and so I don't really think youre going to see that dilution that youre thinking about but it's a very insightful question.
Great and thanks for that.
Then a quick margin question for you have you given a lot of any thought to maybe upping those margin targets over the next few quarters clearly one of your competitors one of your largest competitors.
Their margin targets I'd be curious you know your thought process there Jeff.
Yes, we're gonna be discussing that we're going to have our budget round, starting actually next week mics, and we'll discuss that band effort. We've met with all the marketing teams and then we'll give you our feedback on that but as I said as we get the 12 and we can stay there for a while will bump it up again I just had that conversation with our board of directors yesterday, So yes, I'm sure we will readjust that.
Yeah.
Great maybe one one last one for me maybe it's for Richard.
Given where your business is heading over the next couple of quarters as you know your comments indicated.
And where things could go from an inventory and a working capital perspective, I am curious if you've got any room, you think to maybe up the debt reduction over time, given the current environment.
Yeah, Mike I think we're anticipating that we will reduce deaths more here net net debt, we pulled money internationally back at the end of the year to kind of pull it out of cash and go ahead and apply it to that but we only do 30 day notice on that but then but true that we expect it to drop here in the fourth quarter I think.
Q1 is usually one where we actually will start increasing inventory levels just to start manufacturing because all of our preseason programs have come through.
But I think if we can overall hold that are actually reduce a little bit in the first quarter, that's going to send huge.
Momentum for us going into Q2 and Q3 for next year. So our intent is to keep doing it.
Oh, great well, thanks, so much I'll leave it there.
Thank you Mike.
Our next question comes from Chris Moore with.
P. J S Securities. Please go ahead.
Hey, good morning, guys congrats on a great quarter.
Thanks, Chris.
Good morning, just start another question maybe on margins, so industrial margins, obviously up significantly year over year and sequentially, our vegetation down a little bit sequentially, but split up year over year I'm. Just wondering you know when you look out into 'twenty four do you ever see those margins crossing.
Is there a scenario where industrial actually is a little bit better than than vegetation. You know for a couple of quarters or is that not likely.
Chris I'll tell you what I shared with our board yesterday I expect the margins in the two divisions to converge on the higher ground.
If you know what I mean by that.
I think vegetation management will gradually even gain a little bit back because they've had to do some fairly significant incentives to move inventory out of the channel I discussed that last quarter as well and I see that tapering off because that sits with these situations showed nice improvement in the third quarter and then as I said industrial industrial is going to continue to gain momentum and ground on there.
Our margins there are operating efficiencies are stopped still not where they had been prior to the pandemic.
And the supply chain continues to improve the mix and backlog is outstanding right now, it's really really good in terms of price profile in the backlog so.
As I said I think they will converge at the higher ground in pretty close maybe a little bit above our targeted levels.
Fantastic.
You had previously talked about the accounts receivable turnover potentially being an indicator, especially in vegetation on the health of the sector and I'm just wondering what you learned on that front in Q3.
Yes Christmas Richard from vegetation. It held fine we didn't we were a little bit concerned, but overall it did it did well industrial we had a few little hiccups during the quarter, but they've ended up clean it out here in October some of them, where we had a little warranty issue on a couple of products, but other than that no major problems on our on our.
Dsos in turning in the right direction. So.
Got it and then maybe the last one just pure AG is a small percentage of your overall you know vegetation segment I'm. Just wondering you know kind of what you're seeing on the on the more pure AG side.
Yeah.
Yeah, it's kind of holding its own the inventory levels got a little out of control during the second quarter Christmas We mentioned to you, but we did clear quite a bit of that out in Q3, and if you could see the bookings we don't disclose the NIH, but the bookings in AG were very encouraging in the third quarter ended up very sharply from where they were in the second quarter. So thats a very bullish sign.
<unk> for how that sector is going to play out for us and I think that'll turn to revenue in the early quarters of next year as I said I think the middle of next year, we'll be in a much better position.
Terrific I will.
Leave it there thanks guys.
Thanks, I appreciate it Chris.
Our next question comes from Greg Burns with Sidoti <unk> Company. Please go ahead.
Good morning.
So I understand the drivers of that.
The areas of weakness in the vegetation management segment, but on the on the government piece the decided.
Sean good growth are there any specific drivers.
In particular driver.
Driving the demand in that part of the business.
You know I Couldnt say there are anything in particular, Greg. It's just the municipalities continued to be in very good shape.
Because as I've said the gains in industrial go read across our product line and they do cross both division lines by the way the mowing side of our governmental business isn't vegetation management and that's still operating in record territory very high margins and very good backlog. So I don't really see that changing for the time being municipalities are in good shape, but a really really.
<unk> downturn in housing would obviously impact property tax receipts, but that hasnt played out so far housing prices have remained elevated so I don't see it changing in the near term to begin with you and I still think there's a bit of catch up buying from the pandemic going on.
Okay.
And then in terms of Royal truck, how much I guess, what was their trailing 12 month revenue and what kind of growth.
Does that business have and margin profile.
I think if you look at our 10-Q, we put in there their trailing 12 months is roughly about $44 million.
Okay great.
Alright, thank you.
And Greg before you go I'll add one more comment about royal Theyre continuing to gain momentum.
We've been able to help them already with chassis supply and I think that's going to help them pick up the pace here in the fourth quarter.
Okay, and I guess, just one last one I mean is this a new vertical segment youre going to look to do additional acquisitions to scale up or does it can royal truck standing on its own or how do you view that.
No. It's a very interesting segmented market is still quite.
It's still quite fragmented Greg so it's an opportunity for us to do what we do enter a new space and then kind of build out our position in it.
We've been chasing Royal since 2016 believe it or not so this was not opportunistic at all.
To bring this one into our family, we really like the space, we really like the people in this company. There are innovators are there sort of a benchmark for on highway safety to protect work crews there.
The company has always set the bar higher and the entrepreneur that started the company has personally known as a leader in that field.
So we really like Royal and we were very pleased to finally get that acquisition across the line.
Okay, great. Thank you.
Yeah.
Our next question comes from Nick Debra.
Please go ahead.
Jeff Richard Good morning.
Good morning Mig.
Thank you for taking the questions.
No.
New I'm new to the story here I am still learning.
I've got a number of questions hopefully, they're not going to be two two basic here, but maybe the the first one on vegetation management can you talk a little bit about it about seasonality here in terms of how your orders are coming through I mean, it's encouraging to see that year over year, you know that decline has stabilized but it in.
In terms of how we're thinking about the sequential uptick and also what what what normally happens with orders for this for this business in the fourth quarter.
Yeah Mig this is Richard in normal cadence environment with this type of business.
They're a bit cyclical from a standpoint that they put up preseason programs that start maybe late summer and then different products to different groups.
And then they'll they'll they'll go out for 60 days and then another one will pop up and they'll go out through November. So what they are trying to do is build their backlog of taking orders and so that allows us to manufacture those products through the fourth quarter and into the first quarter or were able to not just obviously just manufacturer but to make deliveries all the way through that.
Cadence does slow down a little bit as you move into Q2 and Q3, because a lot of.
Farmer hobby farmers and ranchers are out working the proper working their properties. So they don't buy as many whole goods. They will buy some whole goods, but we get a bigger increase in part sales during the second and the third quarter, which is why our margins actually pick up a little bit in the vegetation management division. So that's pretty much how.
How it lines up for them.
And then and then what happens in the fourth quarter.
Fourth quarter, they'll have they'll have preseason programs may probably through to about November and then they'll shut it down but that that builds at backlog and it allows us to manufacture so sales usually stay pretty steady through the fourth quarter as a whole goods standpoint parts will drop off a little bit during the fourth quarter.
In the first quarter.
I guess, what I'm trying to what I'm trying to figure out here is.
What your expectations are in terms of backlog and book to Bill exiting 2023.
And you know related to the backlog has been coming down a bit what are you sort of consider it to be a normal level of backlog at what point in time should we start thinking about your revenue meeting to sort of closely match orders on a go forward basis.
Yes that revenue and backlog are already converging in that division big and the reason for the big ball in backlog. It wasn't a result of block of work orders that was a result of our cancellations through Q2 and Q3, so and that was pretty was particularly notable in the forestry side had nothing to do with egg there had been some speculative buying going on unfortunately, most notably in.
The land clearing space.
That does sort of played itself out over Q2, and Q3 and of course, what we're reporting is net bookings at the end of the day now for three years started to tick back up a little bit and we missed some shipments in Q3 and four if we do the supply chain that have started to resolve now in Q4. So as Richard said Q4 is normally a little bit softer for vegetation.
Management, because it's not their operating season and the <unk>.
Margins are typically a little bit higher in that segment in Q2 and Q3, but we're in the we're in a distorted situation at the moment because of the first of all as a result of the pandemic and the supply chain, but then followed by the inventory build of inventory bubble that built up in Q2 and to a lesser extent in Q3, particularly in the AG space.
Field inventory is now coming down move we're very pleased with that so I think we're returning to a more normal cadence. So normally you could expect in the vegetation management side Q4 will tick down just a little bit in the margins may tick down just scope because of the parks impact that Richard was talking about the wildcard here is the big ticket items in forestry.
You ship a million dollar machine those are high margin products for us out of more bar and we're going to pick up a few of those that we missed in Q3 issue. One other point to make on that is that just remember the backlog right now and the vegetation management is still to tie us twice as big as it was pre.
Pre COVID-19.
It's doing really well and it's holding up just fine.
If you look at the small AG and fall hobby farmers.
They did a bunch of COVID-19 buying during 2021.
Partially 'twenty two that's has repeated itself just just yet so.
But to be clear in terms of in terms of normalized backlog in this business would you considered one quarter's worth of shipments to be normalized backlog is it more is it less.
Yes.
In the AG piece of that division one quarter as normal in forestry, it's more like two so it depends on the mix in the division between the two big but yes. Your thinking is right. It's about a quarter normally in AG.
And then two quarters and for US if it gets much bigger than that then you start pushing out past the deliveries more than three to four months and that can keep that could be a problem, but actually it's it's fine right now as Jeff said.
Understood.
A couple of questions on industrial two if I may.
The first one is on the supply chain, where it sounds like things are getting better you didn't talk about any impact from the UAW everything thats going on on that side.
Anything to comment on that on that end.
I actually had a comment and then later took it out in my remarks made because I didn't think it was significant we haven't really seen a meaningful impact from the UAW strike, where its aftermath. The supply of these class three to five chassis was tight even before the strike and it remains tight but some of the smaller sweeper contractors, that's really where we use these and on the very.
Low end of our snow removal business Theres still where dealer inventory is available. So we've kind of scour the country to buy up as much of that as we can and we've been able to hold our own there. So I'm not really losing a lot of sleep on that particularly with the strike now having resolved to begin it.
Understood.
Then the final question and the guys before me, we're asking about margin I will ask about margin as well.
You know when recognizing the fact that you have a lot of backlog in this business and obviously the supply chain like like you said, it's gotten better as we think about the fourth quarter is it sort of reasonable to expect that revenue would be.
On a similar level as Q3 or maybe better and if that's the case do we continue to see this trend that frankly, you put up for like five quarters in a row here of continued sequential improvement in margin Q4 versus Q3. Thank you.
Well I'm, certainly, hoping so mig and I as I've said industrial could normally ticked down a little bit in Q4, but I don't think it will this year because of the behavior of snow removal.
Our snow removal business is in unchartered territory in terms of size scale volume and profitability.
And it hasn't begun behavior stride, yet to be candid with you. So we've got some some new products that we get a nice margin on we're the only player in the market with those products and I think we're really doing a good job capturing a nice bit of share in that space and we do supply the complete cloud truck, including the chassis. We didn't always do that I was the reason.
Change in our strategy about a year ago, I think you and I spoke about that this time last year made that's really playing out very well for us. So I think so I think we can set another record in the fourth quarter I never guarantee anything, but I think industrial has got some room to run here as I said theyre not a gas from either a sales point of view or a margin work.
Super Thank you.
Thanks, Craig.
Again, if you'd like to ask a question. Please press Star then one at this time.
Next question comes from Chip Moore with <unk> partners. Please go ahead.
Congratulations on the impressive continued execution and it was really nice to see that backlog hold up when the overall sector backlogs rolling off from.
Pretty much broad based.
My first question is about industrial equipment, you know it had.
Consecutive very large sales growth jumped 23% Richard I was just kind of curious if theres any way to quantify or parse out maybe half that 23% growth was from the supply chain catch up with the chassis and not as many sub component shortages and not the other half might've been from just higher broad based demand for the end markets.
Any thoughts to maybe have I. Thank you all.
Yes, I think your latter comment is definitely there I think probably the biggest thing that we continue to feel very comfortable with is our chassis deliveries.
We are on consignment on all of our chassis deliveries and that has really worked out extremely well for us.
The component pieces the component parts.
But it has really improved a tremendous amount since since Q1 of this year Q2 got better Q3 is even better. So I think the key to those is making sure that those come in in a timely fashion and we don't have to wait that.
That takes care of a lot of our under absorption problems that we've been having in the past and I think you remember we had that conversation in Q1, which is what really hurt us there, but overall, it's moving in the right direction, we just need to keep that consistency moving forward and we should continue to see those margins going out.
Great that's helpful and chip.
Jim It's Jeff here I'll want to want to add a remark to that if I could.
The growth of our rental fleet and vacuum trucks has also been constrained by the chassis supply. We're now starting to receive enough chassis that we can start really building that fleet again, which will help us from a profitability point of view and a sales point of view.
So that's a very important change in sort of the cadence of industrial that's been constrained very harshly by by the chassis supply situation. If you go back and look at the value of our fleet over the last couple of quarters its been really flat.
I'm optimistic now we will start to get that fleet growing again and that will help us from a profitability.
That's a great point on the fleet.
Just maybe switching gears to in country production.
Are the European plant expansion is on track, maybe for the UK and France and you.
Are you planning on doing some expansion in Indiana or anywhere else.
The U K expansion is going very well, we're slightly ahead of schedule. There right. Now we were just discussing with our board. This week a further expansion of our racking truck facility in France.
And we'll be making a fairly sizable investment there as well. So I think the timing of that is going as expected from our point of view, the Indiana plant doesn't need a lot of capex, it's already bigger than what we need for Dixie chopper, but we are starting to accelerate the transfer of other products into that plant now because we do have a workforce available there that hasn't really played out in our financials yet Tim.
I think youll start to see back late Q1, and early Q2 of next year.
Great. That's really helpful. And then maybe just switching gears on the topic that hasn't maybe come up in a little while.
Youre electrification and hybrid launches seem to be more of a 2024 story.
You know I think a lot of that seems to be driven just by the world changing annoys Orient no noise, where an instance in cities away from diesel and fuel.
Is there any kind of a sneak preview you can give us some more penetration maybe.
The hybrid timber Wolf Chipper small nighthawk sweeper, the gen two mantas or any type of.
Other launches coming out next year or innovations.
Yeah. The official market introduction of Gen. Two mantas is happening in Q4.
That was held up by the supply of the engines.
In engine certification process needed by the EPA that we finally got complete so those engines now.
Tagged as compliant we have them in our hands. They can be tagged as compliant we can start shipping so thats beginning to ramp up.
On the sweeper side Theres only a handful of electrified chassis is coming out of the Daimler organization for next year, but we're getting most of them, which is a really pleasing sign.
Of the relationship that we have with Daimler. So I think thats, probably a back end of 2024 issue when youll start to see.
We're going to market in meaningful numbers.
The night off hybrid is just being introduced now the reception has been tremendous to that really really good and we also have a hybrid version of our leaf vacuum trucks. It's been very well received in the market. So I think youll start to see us actually putting a bit of product on the on the streets, Let's say second quarter next year. That's all I think this will play.
That's helpful Jeff.
My last question is just you know Richard pointed out and we've been watching the terrific free cash flow and the debt deleveraging there.
So very clean balance sheet I mean, it's very impressive.
That royal truck acquisitions seemed like a nice bolt on you name it.
I don't know maybe nearly 3% of your annual sales do you see you know as you look out maybe the next few quarters do you have a preference on doing maybe a few more of those bolt on acquisitions.
Funnel or do you think that you would be ready to maybe do a larger strategic acquisitions, a couple of quarters out.
We're ready to do a larger strategic acquisition right now we just haven't found the right thing. So in the meantime, we're back to doing what we do we're just making a steady diet of smaller things. We got a couple of others in the pipeline that we're very excited about and as I said, we were very very patient with royall.
I remember when I was still running the industrial division when I met the Royal folks for the first time years ago. So it was nice to see that when come but theres a couple of other tuck ins like that that we're in kind of a middling stages with that I think we'll see play out early next year. So we're just kind of doing what we do and they are waiting for something big that we like to come available there hasnt been much come available.
In the <unk> space.
When the right fit for US and of course, we have to have something but we're not going to have issues with the federal government about from a market share point of view.
Welcome.
Great Geoff Thanks for that color and that's it for my questions.
I appreciate it a lot thanks, Tim.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Alright again, thank you everyone for joining us on the call today and appreciate all the great questions that were put forward to us and we look forward to speaking with you again on our fourth quarter conference call in February of 2024. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.