Alamo Group inc (ALG) Q3 2021 Earnings Call Transcript

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Alamo Group inc (ALG -2.24%)
Q3 2021 Earnings Call
Nov 4, 2021, 3:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Alamo Group Inc. Third Quarter 2021 Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Edward Rizzuti, Vice President, General Counsel & Secretary for the Alamo Group. Please go ahead.

Edward T. Rizzuti -- Vice President, General Counsel & Secretary

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. Replay can be accessed by dialing 1-888-203-1112 with the passcode 7942443. Additionally, the call is being webcast on the company's website at www.alamo-group.com and a replay will be available for 60 days.

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

During the call today, management may reference certain non-GAAP numbers in their remarks. Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release.

Before turning the call over to Jeff, I'd like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties which may cause the company's actual results in future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following: market demand, COVID-19 impacts including operational and supply chain disruptions, competition, weather, seasonality, currency related issues, geopolitical issues and other risk factors listed from time to time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein which speaks only as of this date.

I would now like to introduce Jeff Leonard. Jeff, please go ahead.

Jeffery A. Leonard -- Chief Executive Officer and President

Thank you, Ed. First, I'd like to again thank all of you for joining us today. Dan will begin our call with a review of our financial results for the third quarter of 2021. I will then provide more comments on the results. Following our formal remarks, we look forward to taking your questions.

Dan, please go ahead.

Dan E. Malone -- Executive Vice President, Chief Sustainability Officer

Thank you, Jeff. The key takeaways from our third quarter 2021 results are: total company net sales of $338 million were up 16%. Industrial Division net sales of $219 million, were up 12%, Agricultural Division net sales of $119 million, were up 25%. Operating income of $30 million was down 3%, net income of $17.5 million or $1.49 per diluted share was down 13%, adjusted net income of $18.9 million or $1.59 per diluted share was down 8%. Adjusted EBITDA was flat to the prior year third quarter and remained up 7% from full year 2020. Total debt outstanding was reduced by $20.7 million during the third quarter and was down 21% from the prior year third quarter. Our -- and our backlog increased to $645 million, which is up 154% over the prior year third quarter.

Third quarter 2021 net sales of $338 million, was 16% higher than the prior year third quarter. We continued to benefit from strong order rates and recent pricing actions, but supply chain constraints and labor capacity issues are still limiting our ability to ship finished product. Industrial Division third quarter 2021 net sales of $219 million, represented 12% increase from the prior year third quarter. Despite stronger customer demand, this division's top line result was particularly hit hard by truck chassis availability as well as other supply chain disruptions.

Agricultural Division third quarter 2021 sales were $119 million, up 25% from the prior year third quarter. During the quarter, favorable agricultural market conditions, low dealer inventories and pricing actions continued to drive organic sales growth in this division which was also affected by port delays and other supply chain constraints.

Gross margin for the third quarter of 2021 was $86.3 million or 25.5% of net sales compared to $78.6 million or 27% of net sales in the prior year third quarter. The favorable gross margin impact we would normally expect from higher volume and aggressive pricing actions was more than offset by continued material inflation, production inefficiencies resulting from supply chain and labor capacity constraints and a less favorable mix of service part sales.

Operating income for the third quarter of 2021 was $30 million or 8.9% of net sales, which was down 3% from the prior year quarter. The gross margin effects already mentioned were offset by a more normal level of operating expenses compared to the reduced spending levels of the pandemic affected prior-year period. As mentioned last quarter, while our recent pricing actions have been aggressive, the effective impact of these actions continued to lag rising cost. On a positive note, September was the first month and over a year that we didn't see a rise in published mill pricing -- mill prices for hot-rolled steel.

Net income for the third quarter 2021 of $17.5 million or $1.40 per diluted share was down 13% from the prior year third quarter. If we exclude from the current year quarter, $1.4 million of after-tax charges stemming from accelerated stock award vesting related to the retirement of our former CEO as well as Morbark inventory step-up expense from the prior year quarter, third quarter adjusted net income of $18.9 million, was down 8% from the prior year result, while income before taxes was up $0.3 million over the prior year third quarter, mainly due to lower interest expense. Net income was lower due to an income tax provision for stock-based compensation in anticipation of a 28% full year effective income tax rate as well as the non-deductibility of compensation expenses related to the retirement of our former CEO.

Third quarter 2021 adjusted EBITDA was flat to the prior year third quarter adjusted result as trailing 12 month adjusted EBITDA of $155.3 million remained flat to the trailing 12-month results that we reported at the end of the second quarter 2021. This remains 7% above the adjusted 2020 EBITDA. During the third quarter of 2021, we continued to delever the balance sheet by further reducing debt $20.7 million on the flat adjusted EBITDA performance. We ended the third quarter of 2021 with a record high order backlog of $645 million which was an increase of 154% over the prior year third quarter. We continued to see strong customer order rates and no significant order cancellations, despite supply chain induced shipping delays.

To recap our third quarter 2021 results. Total company net sales of $338 million were up 16%, Industrial Division net sales of $219 million were up 12%, Agricultural Division net sales of $119 million were up 25%, operating income of $30 million was down 3%, net income of $17.5 million or $1.49 per diluted share was down 13%, adjusted net income of $18.9 million or $1.59 per diluted share was down 8%, adjusted EBITDA was flat to the prior year third quarter, but remained up 7% from full year 2020, total outstanding debt was reduced by $20.7 million and was down 21% from the prior year third quarter and our backlog increased to $645 million, up 154% over the prior year third quarter.

I'd now like to turn the call back over to Jeff.

Jeffery A. Leonard -- Chief Executive Officer and President

Thank you, Dan. I'd like to start by again adding my personal welcome to everyone who has joined the call this afternoon as we review Alamo Group's third quarter results. Before discussing our results for the quarter, I'd like to offer a brief update regarding COVID-19. I'm pleased to report that during the third quarter, we experienced very few cases of COVID-19 among our employee population. While the direct impact of COVID was far or less this quarter than what we've experienced during the last several quarters, the lingering indirect effects of the pandemic significantly impacted our operations during the third quarter.

As I commented in the earnings press release, during the third quarter, Alamo Group simultaneously experienced both potent market tailwinds and operational headwinds. Our markets remained strong during the quarter duely across the board and our order bookings for the quarter increased sequentially again as they've done every quarter of this year. In the agricultural market, prices for corn, soybeans and livestock while off from their previous peaks remained at historically attractive levels. Tractor sales were also modestly higher than they were a year ago, although recent demand growth has been skewed to the larger tractors that are somewhat less meaningful to Alamo Group's sales of attachments.

Activity in our governmental markets also remains strong. State, county and municipal governments continue to invest in equipment to update their right of way maintenance fleets. In addition, demand for our industrial products from industries such as steel, cement and mining also continued to rebound. Finally, demand for our forestry and tree care products has been very strong as we anticipated when we acquired the Morbark, Rayco and Denis Cimaf brands late in 2019. The increased pace of order bookings brought our backlog to a new all-time record of $645 million by the end of the quarter. To-date we have not observed any signs that the momentum of our markets will change in the near term nor have we experienced any meaningful order cancellations due to the extended lead times we are currently experiencing. So long as dealer inventories remain at the current low levels, we expect demand for our Agricultural Division's products will remain strong with minimal risk that orders will be canceled or postponed.

Governmental agencies by their nature don't purchase equipment on speculation or warrant [Phonetic] advance of known fleet renewal requirements, so we don't foresee significant risk of order cancellations from these customers. Non-governmental buyers of our industrial products including operators of our forestry and tree care equipment, place orders to meet expanding demand for their own products and also in anticipation of their current equipment reaching the end of their expected lifecycle. While there is some risk that these customers could cancel orders in the event of a recession, we do not anticipate this recurring in the near term -- this occurring in the near term.

Turning now to Alamo Group's operations in the third quarter. We experienced significant disruption in our normal manufacturing process flows during the third quarter as a result of instability in the supply chain. We experienced extended delivery times for a wide variety of components we required to manufacture our products, including shortages and delivery delays of truck chassis, industrial engines, gearboxes, cutting blades, hydraulic components and even such relatively mundane items as wiring harnesses and specialty assembly hardware. Our operations depend on reliable and timely supplies of these kinds of components to operate efficiently. When the supply chain is significantly disrupted as we experienced broadly in the third quarter, our workforce is less productive as they have to shift production priorities frequently based on what products can be completed with the materials on hand. When a component needed to assemble -- needed for the assembly of our products is delayed, our work in process inventory also increases beyond what is normally expected as orders increase. Input cost inflation was also a significant issue during the third quarter. While our teams have been closely monitoring supplier cost changes and adjusting our prices regularly, there is a lag effect until these pricing actions materialize in our margins.

Our Agricultural Division has had success renegotiating pricing for orders and backlog. However, it's not really possible for our Industrial Division to renegotiate prices for orders and backlog from governmental customers. Shortages of skilled labor were also more impactful during the third quarter than we had experienced earlier in the year. While we've been able to partly address the shortage of welders by increasing the pace of our deployment of robots, skilled assembly technicians with experience in electronics, hydraulics and pneumatics remain difficult to recruit, although this was certainly less impactful to our results in supply chain bottlenecks, it also has contributed to restraining sales growth in some of our operations.

Transportation costs were another headwind we encountered during the third quarter, particularly costs associated with inbound shipments. While transportation costs were higher across the board, we also incurred additional costs to expedite inbound shipments of components to complete production in order to achieve the earliest possible deliver dates to our customers. As a result of the cost pressures I've described, our margins in the third quarter were lower than they were in the third quarter of 2020. However, our margins were actually slightly higher in the third quarter than they were in the second quarter of this year and I think this indicates that better pricing in the backlog is beginning to flow through.

Finally, sales, general and administrative costs were higher in the third quarter. As expected, selling costs increased as COVID related travel restrictions eased and our sales teams were able to travel more regularly to serve our customers in-person and to attend trade shows, many of which were suspended last year. With our higher sales in the quarter, commission expenses also increased. The increase in administrative expense, primarily involved non-recurring costs related to the retirement of our previous CEO.

Our effective tax rate in the third quarter was 37% compared to 27% in the third quarter of 2020. The higher tax rate was primarily the result of a provision for stock-based compensation and an anticipation of a full year 2021 tax rate of 28%. So as you can see, there was a lot going on during the third quarter, and this is reflected in our results. At the moment there is no clear evidence that the external business climate will be meaningfully different or better during the fourth quarter. One positive note is that we've recently seen steel prices begin to stabilize, albeit at higher levels than we would like. Otherwise inflation generally seems to be gradually gaining momentum at least in the United States. In spite of this, I remain optimistic about the future prospects for our company. Our strong record high backlog gives us confidence and good visibility to allow us to make appropriate investment plans concerning the development of our people, our products and our facilities.

I was also very pleased to announce the acquisition of Timberwolf Limited last week. Although this is a small company, they are a UK market leader with a very nice range of brush and limb chippers. They have a comprehensive dealer network spanning the UK, Europe and other areas that will provide important access points into these markets for our full range of forestry, tree care and recycling products. At the same time, Timberwolf Chipper products fill an important product offering gap in Morbark's range that will complete and strengthen our tree care offering in North America.

Finally, I want to take this opportunity to remind the investor community that commencing in the fourth quarter, we will report our business through two new segments, namely Vegetation Management and Industrial Equipment. All of Alamo's products that cut or process organic material will be organized under Vegetation Management. This division combines all of the brands of our former Agricultural Division with the governmental mowing, forestry and tree care operations that had previously been part of our former Industrial Division. More specifically, this means that our Alamo Industrial Tiger Mowers, Morbark, Rayco and Denis Cimaf brands will be reported as part of Vegetation Management going forward. Our Industrial Equipment division includes our excavator, vacuum trucks, street sweeper, leaf removal and snow removal brands. I believe this structure brings improved strategic clarity and more closely balances the size and scope of our two operating divisions.

This concludes our prepared remarks. We're now ready to take your questions. So, operator, please go ahead.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Mike Shlisky with D.A. Davidson.

Mike Shlisky -- D.A. Davidson -- Analyst

Hi, good afternoon guys.

Jeffery A. Leonard -- Chief Executive Officer and President

Hi, Mike.

Dan E. Malone -- Executive Vice President, Chief Sustainability Officer

Hi, Mike.

Mike Shlisky -- D.A. Davidson -- Analyst

So, maybe I can start first touching on what you just mentioned about Timberwolf there. Do you think that's going to be an avenue to expand more box distribution outside the US? Is that one of the reasons why you bought it?

Jeffery A. Leonard -- Chief Executive Officer and President

It is Mike. In fact, that's a very significant reason why we bought it. Morbark traditionally was in North America company with only a few distribution points in Europe, that actually weren't very effective. And Timberwolf is a young rapidly growing company and they build out a tremendous network that covers the UK and most of the continent of Europe and also some other places in the Middle East and other areas that can be interesting markets for us. And as I said in the press release, they have a very nice range of smaller chippers starting with 6 inch chippers and 8 inch chippers which are areas where Morbark traditionally has not been very successful or competitive. So we plan to also cross-brand those products back into the Morbark range and bring them back into North America. So we see synergies in both directions, both market and product synergies in this acquisition.

Mike Shlisky -- D.A. Davidson -- Analyst

Great, thanks for that. I wanted to just maybe talk broadly also about the order trends. Obviously great numbers, great backlog, unfortunately in an inflationary environment, can you maybe give us a sense as to whether you think that the two are connected? Are you considering the people are just trying to -- or they can now before they get their prices jacked up on them again. And is there a potential that this is the best in pull-forward for 2022 from the order perspective?

Jeffery A. Leonard -- Chief Executive Officer and President

Yes, that's a great question, Mike. I mean, let's take the easy one first. You've heard me talk about this before. I mean the governmentals don't order on speculation regardless of pricing and so on. So I really don't see any risk or erratic behavior in the governmental side of our business, which is a very large chunk of our company. On the Ag side of it, if you look at it, I've said before, the tipping point will be when dealer inventory start to meaningfully rise. And I think that'll be a signal to dealers that maybe it's time to back off a little bit. I'm sure with some of the dealers there is some speculative buying going on, but at the moment, it seems, they're retailing everything they can get their hands on as quickly as they can get their hands on it. So I think that will eventually come, but I don't see it in the mirror yet. I don't see it coming at least in that segment of our business.

Forestry and tree care, particularly the bigger industrial machines in the Morbark range, those are big ticket items, that demand is just been frankly overwhelming, impressive to say the least. And of course we're new to that space. So we don't know what is well with some of the other markets that we've been in for a very long time. I guess if I have one area of concern that might be that we may eventually see some cancellations or let's call them repricing actions by some other customers in this space. But again, I want to emphasize, there is no evidence of that yet. Absolutely none on the horizon at all and no discussion about cancellation or trying to cancel and reorder. And of course, the problem is anybody that would cancel an order now has to get in the back of the line with another supplier or with the supplier they were originally in line with. So, that obviously just compounds the problem. So until I actually see the demand itself softening, I don't see much risk of that to be candid with you.

Mike Shlisky -- D.A. Davidson -- Analyst

Can I follow-up there, Jeff?

Jeffery A. Leonard -- Chief Executive Officer and President

Yes.

Mike Shlisky -- D.A. Davidson -- Analyst

Would you say that the government customers then are -- if you're a government customer orders are -- maybe call it more rational or just not growing as quickly as the private sector right now. Is that a fair statement?

Jeffery A. Leonard -- Chief Executive Officer and President

Well, I mean, they are not growing as fast as the Ag business is. I mean obviously the Ag market is in the cyclic upturn. It's just in a very good place generally that's just market-driven as I mentioned in the remarks. The forestry and tree care space, these are big ticket long lead-time items and when the lead times go out beyond a year for those pieces of equipment, if you're an operator, if you have any doubt about the longevity of your machine, if you've got a machine that's reaching the end of its lifecycle, you're going to get in line for sure, and that's the area where as I said there just might be a little bit of risk. But I honestly, I'm not too concerned about it Mike, because there's just no evidence yet. There is no discussion about -- I want to -- steel is tipping down, can I renegotiate the price or are you guys going to move away from the pricing you put in place? We've had no context like that at all thus far. So the momentum just feels really good Mike. And as I said, it's across virtually all of our business. The only part that hasn't seen the momentum really tick up sharply yet is snow removal, but even there our snow removal backlog is sharply upward from where we were last year. So I'm not concerned about that. We're just heading into the snow season. So I think you'll see even further demand there.

Mike Shlisky -- D.A. Davidson -- Analyst

Got it. Just one more out there for you in capital allocation. I mean, I saw you, you paid down more debt this past quarter of $20 million plus. It looks like your leverage levels are -- basically at this point healthy and really of no concern. I would imagine anybody at this point. Yes, you've appeared to have with your backlog a pretty giant, EBITDA coming in, especially if inflation abates at all. Is there -- can you give us as to what your capital allocation plans might be going forward. Is there -- are there any major M&A you guys are looking at other ways to take some of that cash, then that [Indecipherable] and put it to work?

Jeffery A. Leonard -- Chief Executive Officer and President

Well, I mean, obviously, Mike, we're always active in the M&A space, but as I've said to you before, I think one of the things we want to do is pick the deals we want to do. Timberwolf was one of those. It was a private sale. We contacted the owner. There were no other players -- meaningful players anywhere at the table, and we were able to buy that business at an attractive valuation from our point of view. Other than that I'm sure Richard's waiting to jump in here and make a comment about our inventory, among other things.

Richard J. Wehrle -- Executive Vice President, Chief Financial Officer & Treasurer

Yes, a couple of things, Mike. I think our cash is obviously up. It's at $89 million for the end of the quarter. The majority of that is overseas and it's somewhat tied up already with exchange rates and we're somewhat hesitant to bring that back to incur a bunch of exchange rate losses. So yes, we'd like to use those funds as much as we can, especially in the case of what Jeff was mentioning to you for the Timberwolf acquisition. Our inventories are up, our turns are not up, but a big problem with the turns not being up is we're not able to get all the components as Jeff mentioned to you, closing out work orders and getting product shipped to the customer. So I do believe hopefully if we get moving forward, I think that cash -- I mean that inventory probably will go up a little bit more, but I think we're trying to balance that out with what's going on with the deliveries themselves, so.

Jeffery A. Leonard -- Chief Executive Officer and President

We have taken a fair derivative in this quarter Mike, with regard to paying down the debt because of the rising inventories and we expect till the supply chain problems abate, the inventories are going to continue to rise, demanding more working capital over time at least in the short run. But beyond that our balance -- as you said our balance sheet's in very nice shape, and we're going to keep doing the things we do. We're going to keep acquiring businesses and reinvesting in the businesses we have. We had a very interesting discussion with our Board about improving the -- not only the operational efficiency, but also the environmental efficiency of our facilities and that's an area where we'll be increasing our investments over time as well.

Mike Shlisky -- D.A. Davidson -- Analyst

Got it. [Indecipherable] I'll leave it there guys. Thank you so much for the time.

Jeffery A. Leonard -- Chief Executive Officer and President

Thanks, Mike.

Richard J. Wehrle -- Executive Vice President, Chief Financial Officer & Treasurer

Thanks, Mike.

Operator

Thank you. Our next question comes from Chris Moore with CJS Securities.

Chris Moore -- CJS Securities -- Analyst

Hey, good afternoon guys. Thanks for taking a few questions.

Jeffery A. Leonard -- Chief Executive Officer and President

Hi, Chris.

Chris Moore -- CJS Securities -- Analyst

So -- good afternoon. Looks like steel is showing somewhat signs of letting up as you talked about, you don't typically reprice there. Or can't -- government orders, your best guess at this point is you still have a couple of more quarters of lower margins on the government orders?

Jeffery A. Leonard -- Chief Executive Officer and President

I think that's true. I wouldn't say couple, but I'd say probably at least one Chris is my guess. I was pleased to see our gross margin actually tick up a little bit from Q2, in spite of the fact that we did some inventory revaluation in the quarter. So I think that's a sign that the better pricing is already beginning to show in that space. And for example, in our snow removal space, where we had ended the year with a larger backlog than we normally have, we have started to see some of that reprice coming through now in the snow removal business is beginning to skip back to a more traditional level of margin. So I'm really encouraged to see that along the way. Also in our excavator and vacuum truck segment, I've seen evidence of the better pricing starting to flow through and track that group had an excellent quarter, tremendous quarter.

Chris Moore -- CJS Securities -- Analyst

Got it. That's helpful. Revenue up 16%. I mean roughly the price volume kind of split.

Jeffery A. Leonard -- Chief Executive Officer and President

I don't know, Dan, what would you say about that? You got a guess at that. I mean, I think on average, if you think about that being 5% to 6% on price and the balance, probably on...

Dan E. Malone -- Executive Vice President, Chief Sustainability Officer

Absolutely. And I also think too Chris, if you go back and look, I can't really say, we don't show you the numbers. Our new orders for the third quarter were tremendous. They were high and even though our backlogs up too, we did experience some of the backlog that got left in there because we weren't able to ship inside the quarter, but the majority of the increase in the backlog came from straight up new orders and those do have pricing increases in them.

Chris Moore -- CJS Securities -- Analyst

Got it.

Jeffery A. Leonard -- Chief Executive Officer and President

One of the interesting thing Chris that we faced as this quarter came to a close was having truck chassis delivered to us without chips and building machines on them, an anticipation that the chips were going to reach us in time to get these out for the quarter. And in some cases that didn't happen both in our sweeper operations and in our vacuum truck operations. We've also got a few excavators that were built, that were waiting axles, where we've built the entire machine and we're waiting on an inbound supply of an axle to go underneath it. So those are the kinds of things we're running into. And in one extreme case, we're waiting on trying to find some small electrical connectors, waterproof electrical connectors that are very inexpensive items that are just in a shortage globally. Our European companies are trying to find the same parts and you just can't find them anywhere. We've scoured high and low and that's partly due to defense demand among other things, but it's just a very interesting time to try and operate and when you get the big things like the axles and the chassis in place there is something always popping up. In fact, I got a notice today of a disruption in the supply of hydraulic cylinders related to a strike in an Arcelor Mittal facility. So every day is a new day right now and that's -- we're just working our way through this as best we can.

Chris Moore -- CJS Securities -- Analyst

Got it. I mean on the chassis side, how would you characterize your competitive positioning in terms of your ability to source the chassis? Is there -- is it a level playing field? Is it, you guys are a big player, does that give you a bit of advantage or?

Jeffery A. Leonard -- Chief Executive Officer and President

We are a big player and certainly our competitors are too. I don't want to tell you we're bigger than some of the other players in our space at all. But all manufacturers, typically have to buy through distribution. That's kind of the rules of buying truck chassis and we've aligned ourselves with a particularly good set of dealers who have a great deal of influence and information flow coming out of the major truck OEMs. So if you look back a couple of quarters, where several of our competitors were meaningfully impacted by the truck chassis situation we had not been, and it's begun to catch up now with us as well, because I mean frankly just nobody can get chips at the moment. And even down to small things like the heavy-duty pickup trucks that we build our small sweepers on there, just in very, very short supply, just can't get them at any price right now.

So I don't think we're meaningfully better or worse than any of our competitors in this quarter, in the third quarter and I think at this point everybody's kind of dealing with the same deck of cards. I mean we've all received notifications from the chassis builders about what the impact is going to be on the 2022 build, and how that's likely to be pretty disappointing and we're working our way through that. We've been able to source some chassis from some other manufacturers, which should offset that as long as those manufacturers deliver to their promises. So we're doing all we can to secure our future performance and I like where we are. Obviously, I'm concerned about it, but I think our teams are doing the right things and we're getting very, very good information from our suppliers, and we know they're doing everything they can do to protect our interests.

Chris Moore -- CJS Securities -- Analyst

Got it. I appreciate that. I will jump back in line.

Jeffery A. Leonard -- Chief Executive Officer and President

Thanks, Chris.

Operator

Thank you. [Operator Instructions] Our next question comes from Greg Burns with Sidoti & Company.

Greg Burns -- Sidoti & Company -- Analyst

Good afternoon.

Jeffery A. Leonard -- Chief Executive Officer and President

Hi, Greg.

Greg Burns -- Sidoti & Company -- Analyst

When we look at -- hi. So looking at the backlog, could you just maybe give us a little bit more color on the breakdown of the growth in that backlog between Ag versus Industrial?

Jeffery A. Leonard -- Chief Executive Officer and President

Yes, I mean the Ag backlog has been growing very rapidly and demand has been frankly euphoric. I don't know, a better word, than that. I mean, it's -- these are happy times in the Ag business and it's been really, really good. In the Industrial side, if you look at our forestry and tree care businesses, I said, that's been overwhelming, particularly on the large end of our product range, the big machines that Morbark is really good at making and also in the mulching products that our Denis Cimaf brand produces through our Rayco operation. There actually we have a significant challenge to ramp-up the production. We've got an opportunity there to do a lot better if we can expand production and we're working on that. We're looking at leveraging a couple other facilities to get that growing a little bit faster.

In the traditional governmental space it's been more steady, but that's what you expect from governmental agencies. As I said they don't increase or decrease buys based on things like supply chain disruptions. They plan their fleets typically five years out. They have to go through a procurement process involving town councils or state governments and so that tends to be less affected by the ebb and flow in the supply chain than the other parts of our business. So while everything is up, right across the board in our business, the biggest movers have been our Ag sector and our forestry and tree care sector inside Industrial.

Greg Burns -- Sidoti & Company -- Analyst

And then, is there any way that you can quantify by how much revenue the supply chain and labor issues cost this quarter?

Jeffery A. Leonard -- Chief Executive Officer and President

I don't know that I could give you a discrete number, but I would hazard a guess to say it was a good $15 million, $20 million with ease. Maybe a bit more.

Greg Burns -- Sidoti & Company -- Analyst

Okay. Okay. And then, I know Deere [Phonetic], there is a strike going on Deere, I don't know if that overlaps with the products that you compete with them with, but as there been any impact on your business from that?

Jeffery A. Leonard -- Chief Executive Officer and President

There hasn't been yet and the facilities that are on strike in Deere are not the ones that we source our tractors from. So that's the first bit of good news. On the other hand, the facilities that are on strike, feed parts into those facilities that we get our tractors from. So I think what you're going to see is a worsening effect of the longer the strike goes on, at the moment there is really not been any impact on our business yet, but I think if that strike goes on another month or two, then I think we're going to see a real shortage of tractors emerge, just like we're seeing in the chassis space.

Greg Burns -- Sidoti & Company -- Analyst

Okay. All right, thank you.

Jeffery A. Leonard -- Chief Executive Officer and President

Thanks, Chris.

Operator

Thank you. There are no additional questioners at this time. I'd like to now turn it back to management for any closing remarks.

Jeffery A. Leonard -- Chief Executive Officer and President

Okay, thank you very much. I appreciate you all joining us today. We look forward to speaking with you again on our 2021 fourth quarter and year end call in February. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

Edward T. Rizzuti -- Vice President, General Counsel & Secretary

Jeffery A. Leonard -- Chief Executive Officer and President

Dan E. Malone -- Executive Vice President, Chief Sustainability Officer

Richard J. Wehrle -- Executive Vice President, Chief Financial Officer & Treasurer

Mike Shlisky -- D.A. Davidson -- Analyst

Chris Moore -- CJS Securities -- Analyst

Greg Burns -- Sidoti & Company -- Analyst

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