Alamo Group Inc

NYSE:ALG

Earnings Call Transcript 2023-Q2

[Operator]

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. [Operator Instructions] This call is being recorded on Thursday, August 3, 2023.

I would now like to turn the conference over to Edward Rizzuti, Executive Vice President, General Counsel, and Secretary. Please go ahead.

[Edward Rizzuti, Investor Relations]

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'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 1-844-512-2921 with the passcode 97441743. Additionally, the call is being webcast on the company's website at www.alamo-group.com and a replay will be available for 60 days.

On the line with me today are Jeff Leonard, President and Chief Executive Officer; Richard Wehrle, Executive Vice President, Chief Financial Officer, and Treasurer; and Dan Malone, Executive Vice President and Chief Sustainability Officer. Management will make some opening remarks and then we will 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.

[Jeff Leonard, President and Chief Executive Officer]

Thank you, Ed. We want to thank all of you for joining us on the call today. Rich 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.

[Richard Wehrle]

Thanks, Jeff, and good morning, everyone. Alamo Group's 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 and price initiatives we began in early 2022 along with productivity gains. We continue to experience 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 expenses helped 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.

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, tree collectors and snow removal equipment.

While truck chassis deliveries showed improvement in the quarter, other component parts shortages continued to impact the division's 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 6 months of 2023, coming in at $852.5 million, up 12% compared to $758.2 million for the first 6 months of 2022. Strong demand for our products in both divisions, along with positive impacts of pricing initiatives and improved supply chain and productivity were the main drivers of the increase.

6-month gross margin for 2023 was up over $33 million versus the first 6 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 -- capacity utilization.

Operating income for the first 6 months of 2023 was $103.4 million or 12.1% of sales compared to the same period in 2022 which was $70 million or 9.2% of sales, almost a 300 basis point increase. Net income for the first 6 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 6 months of 2022, an increase of 48%.

6 months 2023 net sales for the Vegetation Management division were $517.8 million compared to $476 million 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 America, the U.K and Europe.

6-month 2023 operating income was $72.1 million, up 41% versus $51.1 million for the prior year. Labor shortages and currency translation effects negatively impacted the first half of 2023 in this division. For the first 6 months of 2023, net sales for the Industrial Equipment division were $334.7 million compared to $282.2 million for the first 6 months of 2022, a 19% increase.

Sales of vacuum trucks, sweepers, debris collectors and snow removal led the way with modest support from excavators. 6 month 2023 operating income was $31.3 million versus $18.9 million for the first 6 months of 2022, an increase of 66%. This division's results continued to be impacted negatively by 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.

Turning to a few additional financial items for 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, that's up 23% from a year-ago from solid sales volume. We continue to be extremely pleased with receivables, with no major issues on collections and incoming cash continues to remain steady. Inventory was up $16 million compared to June of 2022, work in process was a major part of that increase is up $6 million compared due to several large orders that we were not able to ship at the end of the -- at the end of the quarter -- of the second quarter.

Also we received a high volume of tractors and chassis into inventory towards the trail end of June of this past month. Material cost inflation drove the bulk of the year-over-year increase as well and we continue -- we were pleased the quantities had come in, had come down slightly in 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 will remain extremely important.

We also will remain disciplined in controlling costs and expenses, as inflation continues to put pressure on our margins. We will also adjust prices as needed based on changes in material and transportation costs in order to maintain our target margins.

We are also focusing on further improving supply chain performance to help reduce the amount of inventory we hold in work in process. Our 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 that our Board recently approved a regular quarterly dividend of $0.22 per share for the second quarter of 2023.

So, in summary, few key takeaways from the second quarter that are extremely important. Sales up 11%, which in turn translated into a 33% increase in operating income, coming in at 12.3% of sales and a 27% increase in earnings per share.

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

[Jeff Leonard, President and Chief Executive Officer]

Thank you, Richard. I'd 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 had also established a sales and earnings record at the time. This strong second quarter performance has resulted in a consolidated operating margin slightly above our 12% target for the first 6 months of 2023. In aggregates, 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 had anticipated due to the impact of the extended drought in many parts of North America and Europe. Some market segments began to come under pressure this quarter due to rising channel inventory and the effect of higher interest rates.

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 8.5% 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 of 2022.

As we had anticipated the division's forestry, tree care North American hobby farm and ranch segments experienced softer activity during the quarter. We received some order cancellations, primarily for mulching equipment and other land clearing equipment partly due to the ongoing shortage of tool carriers relative to the mulching heads in dealer inventories and also to the elimination of certain speculative orders.

Increasing dealer caution toward rising inventories was evident in the face of rising interest rates. As also -- also as expected, activity slowed in the North American hobby farm and ranch segment as channel inventories reached levels that many dealers are not comfortable with given higher and still rising financing costs. To 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, 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 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's 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 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 order timing issue.

Orders for the division's major product lines improved, most notably excavators and vacuum trucks. Our governmental customers and the specially contractors that serve them continued to invest in upgrading their maintenance fleets and we believe that we are beginning to see incremental benefit and 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. The increase was driven primarily by sharply higher orders for its vacuum trucks and excavators, partly offset by slightly lower sales of sweepers and snow removal equipment.

Looking ahead, we continue to like how our company is positioned. Our order backlog of $891 million remains very robust and the sequential decline in order backlog in our Vegetation Management division was actually less than we'd anticipated. Recent indicators show the hobby farm and ranch segment stabilizing as farmer sentiment is rising and the AEM 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 expected to continue to expand both sales and margin in the second half of the year as supply chain improvements allow it to accelerate shipments and drive efficiencies higher. Beyond 2023, uncertainty remains. It's 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'd like to thank our customers, dealers, suppliers, our thousands of exceptional employees and our financial stakeholders for their continued support for the company.

This concludes our prepared remarks. We are now ready to take your questions. Operator, please go ahead.

[Operator]

Thank you. [Operator Instructions] First question comes from Chris Moore at CJS Securities. Please go ahead.

[Chris Moore, CJS Securities]

Good morning, guys. Thanks for taking a couple of questions and great quarter. Maybe we will just start with backlog pricing. Backlog was $1 billion or so in April, down to $890 million, pricing look very favorable in April for at least a couple of quarters. How are you looking at this point?

[Jeff Leonard, President and Chief Executive Officer]

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 we were getting some requests for help from the dealers to move that channel inventory forward to retail sales. And so we did implement some incentives to achieve that. But that hasn't really directly impacted the margin and the backlog at all. And from an Industrial Equipment division point of view, the margin and the backlog remains outstanding. There is really not been any new price pressure on that side of our business at all.

[Richard Wehrle]

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 they are seeing costs, material costs are starting to drop a little bit. So I think some of the pricing that we are 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.

[Jeff Leonard, President and Chief Executive Officer]

And Chris, one more thing I'd add to that what -- 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 caution 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 that's what we're seeing. And that was really confined to the hobby farm and ranch segment by the way. That's the only segment where we experienced any of that pressure.

[Chris Moore, CJS Securities]

Got it. How are you looking at Morbark at this point in time. With interest rates rising, you talked a little bit about potentially some challenges that could make demand there a little bit less certain, maybe just kind of talk about how you're seeing Morbark now for the rest of the year?

[Jeff Leonard, President and Chief Executive Officer]

Morbark's 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 and consumption of lumber falls, it means less branches to be shred it to make mulch to make pellets at the end of the day.

So the cost of feedstock for pellets rises and that's a negative indicator for that business going forward and we are starting to see a little bit of that. But overall, Morbark is in great shape there, operations are stabilizing there, net margins are actually improving at the moment. So we think we are in a great position. And 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.

[Chris Moore, CJS Securities]

Got it. Helpful. And maybe just shift gears to operating margins. 12.3% this quarter even though parts weren't quite as good as you thought they are going to be. We are kind of -- we are estimating north of 12% again in Q3. What are the puts and takes and trying to gauge the likelihood of Q4 being able to generate operating margins in the 12% range.

[Richard Wehrle]

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 -- I think 11.7% operating income in the fourth quarter. So I think it's 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 mix actually pulled that margin. We were at 27.3% for the first quarter and we are 26.8% here.

So I think overall, we are still pleased with the margins that we've got. And as Jeff mentioned the parts were just slightly down than 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 our part sales and same thing for our units. We still got plenty of units out there to put out and to kind of finish off again, I think the fourth quarter will have a little bit of a different split, will have more units going out because parts start to drop off after about the middle of October.

[Jeff Leonard, President and Chief Executive Officer]

Yes, a couple of more on pieces of the pie on the table for you, Chris. In Q3 -- in the third quarter, we start to see the parts activity in snow removal. The pre-season snow removal parts ordering starts to pick-up, so that's 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 be 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 Equipment division margins were very much on par with where Vegetation Management has been operating. And I think that gap will continue to close. So I'm confident we can sustain this 12% level for the rest of this year based on what I see right now.

[Chris Moore, CJS Securities]

Awesome. All right. I will leave it there. Thanks, guys.

[Richard Wehrle]

Thanks, Chris.

[Operator]

Thank you. The next question comes from Mike Shlisky from D.A. Davidson. Please go ahead.

[Mike Shlisky, D.A. Davidson]

Yes. Hi, good morning. Thanks for taking my question.

[Jeff Leonard, President and Chief Executive Officer]

Hi, Mike.

[Mike Shlisky, D.A. Davidson]

Maybe to follow-up your comments there, Jeff, maybe ask two quick follow-ups from what you just mentioned in your last answer there. I'll start with the kind of the positive feeling on parts of Industrial and maybe less positive on some of the Vegetation business. I guess net-net, do you feel like the infrastructure bill and sort of off the grass types of applications are more than offsetting what you're seeing on the farm right now. I mean on the whole, do you feel better this quarter compared to last quarter about how things are kind of looking here.

[Jeff Leonard, President and Chief Executive Officer]

I do, Mike. I wouldn't say -- I’m not [indiscernible] higher than it was a quarter ago, but I still feel very good about our position, Mike and I think Vegetation Management can hold its position. That's what I expect. I still think we'll see modest sales growth out of that division in Q3. I don't expect their margins to erode. We haven't seen the full impact of their pre-season yet, I think we're going to see that here very shortly. And the early indicators were very positive for that this year, better than I was expecting to be candid with you.

So we think Industrial -- the vegetation Management division will largely hold the line on their current position. And I think Industrial continued to gain pace momentum, expanding margin, all the things we've been talking about for some time. So the other thing to consider here is our snow removal backlog has never been where it is. It's at an all-time record high by far and we've had an excellent early pre-season there with regard to truck builds and orders for trucks, and I think we're going to see the same thing in parts of this year. So I'm expecting a pretty good season for our snow removal business and that's bullish for Q3, and especially for Q4. So net-net, yes, I still think we've got a little bit of running room here to continue to do a little bit better.

[Mike Shlisky, D.A. Davidson]

Outstanding. I want to follow-up on that answer as well real quick on the snow business. I think I saw some very -- perhaps the orders weren't as good as they were in the past -- in just this past quarter. I'm wondering if that's more a function of, you're already full for the year and you want to take a lot more orders, or is there some deeper [indiscernible].

[Jeff Leonard, President and Chief Executive Officer]

No, it's not really terribly complicated, Mike. A year ago, will be up to $30 million single order in snow removal in the second quarter. And I've always taught our Board that hey, the second quarter is the doldrums for snow removal. It's the off season, nobody is ordering, nobody is talking about ordering 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 are 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 now.

[Richard Wehrle]

Mike, one other thing to add to Jeff's comments here with some of this loosening that we are talking about here on the chassis, specifically in the Industrial Equipment division, our guys have -- we'd already negotiated a consignment agreement with one of our major suppliers for the freight, I mean for the chassis. We actually also were able to negotiate another consignment and another chassis company. So we've got large increases. They are 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 it, invoice it and then record the actual receipt of that chassis. So that's a really positive thing for us going forward.

[Mike Shlisky, D.A. Davidson]

That’s great color. Thanks for that. Then turning to your margin commentary, you've got this 12% plus despite some of the headwinds on chassis supply chain and I was kind of wondering if you got, if this is the right time to talk about a new little higher target going forward, or are you still [multiple speakers]?

[Jeff Leonard, President and Chief Executive Officer]

Mike, I knew you were going to ask me that. We are still discussing that. But I've said consistently, once we get 3, 4 quarters, rather be 4, consistently operating at 12%, we re-establish 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 having said that, I still think we can sustain this 12% and maybe 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 pre-pandemic. So 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 in excess of our allocation from at least two of the suppliers that we deal with. And 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 are 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 its cost structure and is a much better position than it was a year ago. So that's another thing that I think is going to be accretive from our point of view. So we feel good about where we sit, Mike and continue to and you know me, I'm a continuous improvement guy. As soon as we've been hitting that 12% for about a year, we will set new targets going forward. So that's obvious.

[Mike Shlisky, D.A. Davidson]

If I can throw one more question in there. You mentioned the ranching business having a little bit of tough time with drought and so forth hobby farms, ranch and so forth. Do you feel okay about sort of the small part of your business that does large, row crop, the corn, soybean folks, whether it's still [indiscernible] et cetera.

[Jeff Leonard, President and Chief Executive Officer]

Yes, I do Mike, because I think I commented that the AEM 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 of the war in Ukraine unfortunate from a farming point of view is getting worse, not better. So I think that's maybe a bit of a help there.

The negative I think we've just seen this bubble in the hobby farm and ranch segment because of the pandemic when lots of people like me went out and bought a few acres and bottom them over to work those acres at the end of the day and I think that was a bubble and probably is not repeatable. It is a great bubble, I mean we've enjoyed that benefit a lot. But that tends to impact the small mowers, the single spindles which are lower margin product relative to our bigger flex wings, which is really our core competence.

So I'm not overly concerned about it at the moment, but we are watching it a lot. The main issue in the hobby farm and ranch was the rapid faster build of dealer inventory than what we had anticipated. A quarter ago I think I commented we were back to pre-pandemic levels and we felt comfortable with that and that was a true statement then, it's true. What's 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 dealers balance sheets at the moment. So that's the dynamic that potentially has changed in 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 to clear a lot of that channel inventory out and the replenishment orders have been very positive since then. So I'm pleased with the direction of that.

[Richard Wehrle]

Mike, we also in the ag space they introduced a pre-season 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 are able to get out of that. So that's going to give some additional runway for the ag space moving for the balance of this year.

[Mike Shlisky, D.A. Davidson]

Thanks so much. I appreciate [indiscernible]. I will pass it along.

[Jeff Leonard, President and Chief Executive Officer]

Okay. Thank you, Mike.

[Operator]

Thank you. The next question comes from Tim Moore at EF Hutton. Please go ahead.

[Tim Moore, EF Hutton]

Thanks and congratulations on the continued strong sales growth. I mean, it makes sense that the industrial orders have been up so strong 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 start. So it's still pretty amazing. I have a multi-part question that can probably count is my complete time, Jeff, if you want to take some time on this. I know someone just beat me to it about getting you to raise your 12% operating margin after I guess 11.9% last quarter and 12.3% this quarter.

But I'm wondering, just maybe if you can talk more high-level about the continued overall margin expansion drivers if the economy remains pretty steady. Specifically, I'm curious about the improved fixed cost absorption. It seems like the supply chain disruptions are starting to abate, they're not there yet. They are two-thirds of the way back to normal today, obviously the operating leverage is going to help Industrial with growth and it seems like you could get back to the 12% op margin there like you had a few years ago on the Industrial side.

And then if you want to just talk more about the potential for facility consolidations like you already did in snow, I imagine there is an opportunity in the Northwest. And then lastly, I think a topic that's helpful for me as investors, is your plan for kind of in-country manufacturing in Europe to minimize transportation cost in the U.S and 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.

[Jeff Leonard, President and Chief Executive Officer]

Okay. Bunch of great questions. Thanks very much for asking them. In terms of the margin expansion, I am confident that Industrial will get to that 12% threshold, because you brought that up. So I think we will definitely hit that. Can't tell you what month, but it will happen. In terms of our strategic initiatives, we still have plant closures in the pipeline that we are working and we continue to sell off facilities and book gains on those along the way that we don't need any longer. So those are all positives.

What's slowing that a little bit is labor. When you consolidate two facilities, you've got to add workforce in one and those two facilities are 500 miles apart, people don't move 500 miles for a job and direct manufacturing typically. So we need a little bit of help from the labor market to get back on pace in terms of the consolidation. But having said that, and we discussed that with our Board, there's still lots of potential there. Lots of opportunity there relatively near-term from our point of view. So we still have plenty in our pipeline to keep driving margins higher and to continue to refine our cost structure going forward. So that hasn't 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 make in 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. Tim, that's just what I can say.

[Richard Wehrle]

Adding to that, Tim, if I could is, as Jeff mentioned, the capital expenditures. And when you look at our cash on our balance sheet, 99% of that is international. We cannot bring that back with the exchange rates that we were and we've mentioned this before that we sent them over to. So we've actually pivoted here and what we are going to try to do is do some of these capital expenditures that are going to be pretty significant 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, the manufacturing, which we call make in market. We are going to start pushing that forward here because part of these capital expenditures that we are putting in place is to increase that make in market. All of those locations that we are going to do these CapEx is to have the right equipment in place for us to be able to do this.

[Jeff Leonard, President and Chief Executive Officer]

And that's still bidirectional by the way. We are just starting to introduce our Timberwolf. Timber is made in the U.K into the U.S market. So these flows of make in market are going in both direction.

[Tim Moore, EF Hutton]

Great. I mean that’s terrific color. That’s really helpful, Jeff and Richard. And I will save my other questions for offline later today with you. Thanks.

[Richard Wehrle]

Okay.

[Jeff Leonard, President and Chief Executive Officer]

Thanks. Look forward to chatting with you.

[Richard Wehrle]

Thanks, Tim.

[Operator]

Thank you. [Operator Instructions] Next question comes from Felix Boeschen at Raymond James. Please go ahead.

[Felix Boeschen, Raymond James]

Hey, good morning, everybody.

[Jeff Leonard, President and Chief Executive Officer]

Hi, Felix.

[Felix Boeschen, Raymond James]

Hey, I appreciate the comments on getting Industrial back to 12% margins over time. I guess what I'm curious about, you mentioned chassis flow 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 target within that business on the revenue base today or is it really about further volume throughput output from here.

[Richard Wehrle]

Felix, this is 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 in the under absorption in there. As I mentioned in my comments there that in both several couple of different locations, we had several $3 million or $4 million 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. The net under absorption drops and all of a sudden your margin start shooting up closer to that 11.5%, 12%. So we can definitely get there, there is room for us to do this.

[Jeff Leonard, President and Chief Executive Officer]

Yes, and I think 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, don't need it.

[Felix Boeschen, Raymond James]

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 you think might still be on the comment to the back half in coming years.

[Richard Wehrle]

Yes, it definitely improved, because in the past we've had some issues on some warranty items in this snow, but doing this consolidation and taking 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 are not going to have a lot of opportunity to push that 10% in the snow business in the second quarter, just because it's summer time. But as we move forward into the third quarter and the fourth quarter, it's definitely on radar for us to be able to do that and with the backlog that we have and the efficiencies that we are at, it's definitely doable number as we go forward and the division is doing great and that location in that snow removal group, so.

[Jeff Leonard, President and Chief Executive Officer]

And in terms of operating margins, Felix, snow removal is still one of our lower businesses in that regard with plenty of room to grow and to get to be up to the level of its peers inside the company. 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 to gather the energy and the team is just awesome. And of course, they've got this huge backlog a really nice price truck builds in the background. So now that we are able to allocate more trucks to them, they can accelerate the deployment of that backlog into sales. So I'm looking forward to really nice seasonality snow removal for the remainder of this year and really even into the first quarter next.

[Felix Boeschen, Raymond James]

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 versus maybe how you think it might shakeout in coming years. I'm just curious if it's good enough to the point where you can sort of reignite growth in that business.

[Jeff Leonard, President and Chief Executive Officer]

Yes, I will tackle that for you. I was going to bring that up anyway. So I'm glad you prompted the comment. Our vacuum truck fleet has been stable and I don't want them to just close number that's obviously commercially sensitive information, but it's been stable, it's been flat. We haven't really been able to add trucks to the fleet the way we would like. And obviously when trucks move out of that fleet in rent out [ph] configuration -- contract configuration, that's very nice margin for us, 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 coming in, we will definitely be able to add trucks into that rental fleets and we think we can hold the utilization and that will drive higher profitability in Industrial. That's another profit improvement level for Industrial.

[Felix Boeschen, Raymond James]

Got it. I will stop there. I appreciate the time.

[Jeff Leonard, President and Chief Executive Officer]

Thanks, Felix. Look forward to talking to you again.

[Operator]

Thank you. At this time there are no further questions. I will turn the call back over to management for closing comments.

[Jeff Leonard, President and Chief Executive Officer]

Thank you for joining us today. We look forward to speaking with you on our first quarter conference call -- third quarter conference call in November. Thank you very much.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.