We’ve made some investments to improve our capability there. As recently as this quarter, we’ve invested both in people and in systems to improve our supply chain capabilities. And that’s really to enable ourselves to operate more productively and support our growth going forward. We’re not going back and preparing for yesterday’s problems. We’re looking forward and saying, we’ve survived, we’ve built some new muscles, most of the investments we’ve made have paid off over time, and now, we want to make sure that we have the capability to support the business going forward. I think your question led off with kind of the backlog reduction and how to think about backlog. In the quarter, we took backlog down at the enterprise level from $255 million to $214 million.
At our inflation adjusted rate, a normalized backlog level for the enterprise would be in the $50 million, $60 million range, varying by quarter. Obviously, we have some seasonality. We would be buying ahead to service, but $50 million to $60 million. So, you can think about the gap still to close from the $214 million that we’re exiting this quarter, down to the more normalized rate. And we expect to make progress against that in the continuing quarters on the strength of supply chain and the strengthening supply chain. Having said that, the backlog is becoming increasingly consolidated in industrial product that is manufactured in one plant in Minneapolis. And those products are only built for the globe. They’re only built in that one plant.
And so, when you think about having an elevated backlog, concentrated in one or two or three assembly lines, it becomes more difficult to move the needle on a quarterly basis as we reduce those backlogs. So, it allows us a laser focus on the investments and adjustments we need to make to reduce the backlog. Every dollar of backlog represents a customer that’s waiting on a Tennant product. So, we are highly motivated to get the product out the door. And we’ll update on the progress we make, but I expect that we’ll be able to reduce backlog at a decreasing rate as we move forward because of the consolidation on single products within the Minneapolis plant.
Tim Moore: Great. That’s helpful color. I just have a two-part question now. Maybe can you — Dave, you’ve done a great job explaining some of the drivers behind the industrial end markets. We get the warehouses and logistics and compact. And is there any other things that are driving kind of the industrial side and market growth, which seems to be vastly outpacing retail and schools and hospitals?
Dave Huml: Yeah. I think it’s a really dynamic space, maybe more dynamic than it’s been over the past, at least, my tenure here at this company. So, depending on how wide you open your aperture, there are conversations around reshoring, and we’ve got some of our businesses reporting some benefit out in the future from reshoring. Primarily along the border and in Mexico is where we hear companies are contemplating expanding square footage on a more — to serve domestic market closer — kind of closer to home. I think that you see companies investing in kind of Industry 4.0 because they’ve got labor shortages and a rising inflation, cost of labor and the labor component of their — whether they’re a manufacturing environment or a warehousing logistics environment, labor is becoming more scarce and more expensive.
And so, to the extent they can invest in automation to reduce the reliance on labor, that’s going to be a positive across vertical markets. And the labor tailwind is consistent across all of our vertical markets. So, you see, virtually every vertical market we operate in is trying to automate to reduce the reliance on labor and/or make it easier to hire lower-skilled labor to do the work. And then — so, I think the macro trends are largely blowing in our favor. You mentioned specifically manufacturing and warehouse and logistics. I think there has been — obviously, there are segments within those categories that are growing at a higher rate than some other segments. If you think about the growth in EV and the growth in the supply chain for EV and lithium-ion batteries, et cetera, those are primarily new square footage to service those categories.
And then, the last one that has been more of a decade-long trend has been e-commerce. As e-commerce has grown, there has been a differing addition in square footage, both in retail as well as back end back in the distribution centers to support e-commerce. And so, as e-commerce continues to grow, and all the outlook is that e-commerce will be a significant portion of the holiday season this year through Q4, that creates opportunity for us. What I would tell you is, as we translate the tailwinds of macro trends into what it could mean for Tennant, the Tennant equipment tends to come in late stage after a new square foot is built. So, you’ll hear about the project and you’ll read about it, and even if you get Dodge reports. And then, they’ll be in construction.
Construction will take longer than they would like because they can’t find the labor. And then, the last thing they do before they turn the keys over to the owner is clean the space, and then they move into more operational maintenance cleaning. And that’s when we see the incremental benefit of the new square footage being added. But we think the vertical markets we serve have a number of tailwinds to them on a macro basis. So, we’re really excited about 2024 and beyond.
Tim Moore: Great, Dave. That was very helpful. My next question is about Gaomei. Can you update us — that’s a more affordable cost platform in China. Is it being rebranded still for other low-cost countries like Brazil? And maybe if you can give us some progress update on that and the opportunity there for maybe that low-cost compact ride-on too?
Dave Huml: Yeah. We’ve been leveraging — when I talked about new products, answering the earlier question, we’ve been leveraging our acquired platforms to more competitively position ourselves and compete in those mid-tier markets around the world. And so, that’s both our IPC legacy Italian-manufactured platform, as well as our legacy Gaomei China-produced platforms. We’ve been bringing those into local brands throughout the world, both the Italian legacy product, as well as the Gaomei legacy product. Really excited about it. We’ve moved the Gaomei, yes. But Gaomei specifically, we have rebranded that product into Latin America with some success, early success, because it’s a pretty recent occurrence. And we’re also taking it elsewhere within China, and so — excuse me, within Southeast Asia.
So, you can imagine, and we’ll bring that into other brands. So, there’s still upside from taking that Gaomei brand — excuse me, Gaomei legacy platform into other brands. We’re contemplating a move into other geographies, and we’ll do it where it makes sense. For our developed markets, meaning North America and Europe and Australia, New Zealand, for example, we’re assessing whether we need to have three different price points to compete in the marketplace, meaning a good, better, best; Gaomei legacy, IPC legacy and Tennant legacy. It’s probably overkill for the majority of markets we’re in. So, a two-tiered offering makes more sense as we look at the applications and the customers and the channels and our positioning strategy. So, the decision is whether the IPC product is a better fit or the Gaomei product is a better fit for the mid-tier within those geographies.
Tim Moore: That’s terrific to hear. Thanks for sharing that. And I’ll turn it back over to the operator. Thank you.
Operator: Since there are no further questions at this time, I would like to turn the call over to management for closing remarks.
Dave Huml: Thank you. And thank you for your interest in Tennant Company. This concludes our earnings call. Have a great day.
