Q3 2019 Earnings Call
You'll need to press star one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star Zero, Oh, now I hand, the conference over to your Speaker today Mr. Bill Pitts director of Investor Relations. Please go ahead.
Thank you Sharon.
Good morning, everyone and thank you for joining us for our third quarter 2019 earnings call.
With me are Barnes group's President and Chief Executive Officer, Patrick Dempsey, and senior Vice President of financing Chief Financial Officer, Chris Stevens.
If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate web site at BG, Alright, and see Dot com.
During our call we will be referring to the earnings release supplement slides, which are also posted on our website.
Our discussion today includes certain non-GAAP financial measures, which provides additional information we believe it's helpful to investors.
These measures have been reconciled to the related GAAP measures in accordance with US He see regulations you.
You will find a reconciliation table on our website as part of our press release in in the form 8-K submitted to the Securities and Exchange Commission.
Be advised that certain statements, we make on todays call well during the opening remarks and during the question and answer session. Maybe forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
These forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected.
Please consider the risks and uncertainties that are mentioned in today's calls in are described in our periodic filings with the FCC.
These filings are available through the Investor Relations section of our corporate web site at BG Fancy Dot com.
Let me now turn the call over to Patrick for opening remarks, then Chris will provide a review of our third quarter results in our updated 2019 outlook. After that we will open up the call for questions Patrick.
Thank you Bill and good morning, everyone.
For Barnes group, the third quarter demonstrated a continuation of several market trends that have been present throughout 2019.
Our aerospace markets remain robust well several of our industrial markets continued to be challenged.
Well this has pressured our top line I'm very pleased with what the team has delivered on the bottom line.
We generated record quarterly operating profit achieved sequential improvement in operating margin.
And delivered one of our best quarterly EPS results.
And what was a clean quarter, it's clearly evident that the power of proactive management actions, coupled with a strong operating system combined to deliver solid results.
Our commitment to effective management throughout business cycles requires that we build upon and leverage commercial operational and financial excellence across the organization.
Employing the Barnes enterprise system, we have created the performance culture that seeks to deliver good results regardless of the economic environment.
And as I've mentioned before well, we're not immune to the impacts of the economic environment or challenges within our end markets, we do expect to adapt accordingly.
For the third quarter total sales increased 1% well organic sales decreased 1%.
Record quarterly operating income of 67.6 million increased 12% over last years adjusted results.
While operating margin was 18.1%.
Earnings per share were 89 cents up 14% from an adjusted 78 cents last year.
Very strong performance given the current environment.
Moving now to a discussion on segment performance beginning with industrial.
Total sales were down 5%, while organic sales declined 8%.
Book to Bill in the quarter was a little better 10.9 times as economic trade economic and trade uncertainty leading to a deferred leading to deferred new program launches continues to pressure certain of our industrial end markets.
Accordingly, we have tempered our 2019 sales outlook for each of our industrial business units.
Have molding solutions sales declined 11% over last year's second quarter with organic sales declined 8%.
Automotive hot runners personal care and packaging end markets remains strained.
Well the medical end market remains a bright spot.
Our modes business did achieve a nice sequential increase as anticipated.
And we expect further improvement into fourth quarter with the backlog in place to supported.
For the year, we now expect molding solutions organic growth to be down high single digits relative to a record 2018.
For some motion control organic sales declined 8%.
While initially we had believed the tool and dye market would improve in the second half.
This did not occur.
Our expectation for an improvement in this market has now been pushed out to 2020 .
In contrast, general industrial markets, particularly in North America continued to demonstrate resilience with slight organic order improvement year over year.
For 29 team, we now forecast organic growth to be down mid single digits.
At engineered components organic sales like wise declined 8% driven by lingering weakness in auto production end markets.
Global auto production forecasts are signaling an approximate 6% decline in 29 theme with China, Europe , and North America, all seeing a reduction.
While manufacturing PMI is for the us in China ticked up slightly exiting the third quarter Europe showed further deterioration.
Our 2019 organic growth outlook for engineered components is now down mid single digits.
I'd automation demand for robotics has slowed year todays, especially in Germany in China.
Lower automation investments given global trade uncertainties and softer end markets has caused us to revise our 2019 sales forecast to 55 million.
That said, our long term assessment of this business hasn't changed.
We see automation as a good growth high margin opportunity for Barnes group.
Overall, our full full year sales outlook for the industrial segment has been trend.
We now anticipate a high single digit organic revenue decline.
Forecasted operating margin for the full year has improved slightly as we now expect an adjusted 12.5% to 13%.
On the aerospace side of our business demand for boat original equipment manufacturing and aftermarket remains favorable.
Excellent performance by the Aerospace team has provided another quarter of record revenues and operating profit.
Total sales were up 12% with OEM growth of 10% an aftermarket growth of 17%.
Operating margin into segment was an impressive 23.2% up 270 basis points from a year ago.
Aerospace OEM book to Bill in the quarter was also a healthy 1.2 times.
Within OEM, we can.
Continued to monitored the Boeing 737, Max grounding, but don't see a delayed return to flight is having any meaningful impact on our OEM business in the near term.
However, we have been asked to move to a 42 per month build rate on this program down from 52 per month.
Raised earlier in the year.
For the aftermarket boat MRO and spare parts remains strong.
With that MRO sales up 20% year over year and spare parts of 14%.
We've again increased our full year sales and margin outlook.
Aerospace sales are now expected to grow low double digits.
With operating margin of approximately 22%.
OEM sales growth is forecasted to be in the high single digits to low double digits.
In the aftermarket.
MRO is now anticipated to be up low double digits. One spare parts are now forecasted to be up low teens.
So in summary.
2019 has been fairly consistent into several industrial end markets remain challenged while aerospace markets demonstrates sustained strength.
We have undertaken steps to ensure that in spite of the topline challenge we continue to deliver solid financial performance.
More promising is that we see additional opportunities to improve our operations in both segments through the application of the Barnes enterprise system.
At the same time, we will continue to make strategic investments in our businesses.
To enhance our competitiveness and to best position them as market conditions improve.
Now, let me turn to call over to Chris for a discussion on the financial details.
Alright, Thank you Patrick.
Good morning, everyone.
Let me begin with highlights of our third quarter results on site slide four of our supplement and then move to a discussion on our updated outlook for 2019.
For the third quarter sales were 373 million up 1% over the prior year period.
Organic sales declined 1% and FX had a negative impact of 2%.
Acquisition sales in the quarter were 4% or 14 million.
And included a full quarter of dramatic sales and a partial quarter of industrial gas springs, or I guess sales.
As Patrick highlighted operating margin was 18.1% up 170 basis points versus adjusted operating margin of 16.4% in the prior year period.
Interest expense was 5.3 million up 1.3 million from a year ago.
Due to an increase in average outstanding debt as a result of the dramatic acquisition, partially offset by a lower average interest rate.
For the third quarter, the company's effective tax rate was 23.4% compared with 25.6% for the prior year period, and net income was 45.8 million or 89 cents per diluted share compared to 39.1 million or 75 cents per diluted share a year ago.
On an adjusted basis net income per share was up 14% from 78 cents a year ago.
With respect to share count.
Our third quarter average diluted shares outstanding was 51.2 million shares we did not repurchase any shares in the quarter and there remains 4.1 million shares available for repurchase under the board's 2019 stock repurchase authorization.
Year to date cash provided by operating activities was 161 million up 3 million from last year.
And keep in mind that this year's operating cash includes a $15 million discretionary pension plan contributions.
Where last year did not have such a contribution.
So we continue to generate solid cash performance in our business free cash flow, which we defined as operating cash flow less capex of 124 million compared to 118 million last year.
And our year to date Capex was 38 million, which is down slightly from last year.
With respect to the balance sheet, our debt to EBITDA ratio was 2.5 times down from 2.7 times at the end of the second quarter and we expect to further de lever into the fourth quarter.
Under our existing debt covenants additional borrowings of approximately 340 million of senior debt would have been allowed at quarter end.
Moving onto the segment performance, let's begin with industrial for the third quarter sales were 232 million down 5% from last year organic sales decreased 8% unfavorable FX decreased sales by 3%, while I guess and dramatic contributed 6% of acquisition revenues.
Operating profit was 34.8 million up 5% from 33.3 million a year ago. It.
Excluding IBG EPS short term purchase accounting adjustments and acquisition transaction costs in the in the prior year quarter. Adjusted operating profit was approximately unchanged from year ago, Although operating margin was 15% up 70 basis points from an adjusted 14.3% last year primarily.
Driven by favorable productivity.
At Aerospace outstanding performance continues with record quarterly sales of 141 million up 12%.
Operating profit was a record $32.7 million up 27%, primarily due to the profit contribution of higher sales volumes.
Operating margin of 23.2% was up 270 basis points.
From 20.5% a year ago solid performance all around from the aerospace team.
Aerospace total backlog ended the quarter at 824 million up 1% compared to a year ago and up 3% sequentially from last year.
For Oems, specifically backlog increased to 810 million.
From 791 million last quarter.
And we expect to ship approximately 50% of our aerospace backlog over the next 12 months.
Turning to our updated 2019 outlook on slide five of our supplement.
We now expect total revenue growth to be approximately flat with organic sales down low single digits.
Which is a reduction from our previous view, we forecast FX to negatively impact revenues by approximately 2% and acquisition revenues to contribute approximately 4%.
Adjusted operating margin is forecasted to be approximately 16% up from our prior expectation.
Adjusted EPS is now expected to be in the range of $3.18 to $3.23 down five cents on the top end of our previous estimate primarily due to softer Q3 orders in our industrial short cycle businesses.
A few other outlook items.
Interest expense is anticipated to be approximately 20 million the effective tax rate is forecasted to be approximately 23.5%.
Our capex expectation is approximately 55 million.
Average diluted shares are forecasted to be 51.7 million shares and cash conversion is forecasted to be approximately 100% unchanged from our prior view.
So to conclude as I mentioned in my closing remarks last quarter, we are focused on protecting operating margins.
The sequential improvement achieved now for two consecutive quarters demonstrates our success in doing so.
At the same time with a difficult top line environment in our industrial segment actions, we have taken to drive productivity, coupled with the investments, we're making and innovation and growth will allow us to be well position as our end markets improve.
Sharon we're going to now open the call the questions.
If you would like to ask a question at this time. Please press Star then the number one on your telephone keypad. If he would like to withdraw your question press. The pound Keith first question comes from the line of Edward Marshall with Sidoti. Please go ahead.
On how are you good morning.
Good morning, good morning that.
So so far.
First question I have is on the industrial margin I mean, obviously the debt that was the first thing that caught my attention.
Curious how much of that was.
It was mix related maybe some of this stuff like springs, similar lower margins like springs falling faster versus.
Productivity any any kind of inside you to provide there would be helpful.
So margins.
In the second quarter, Ed, we're primarily a result of.
Actions that had been taken in the early part of the year so relative to.
The biggest impact came from productivity and so all SP use I think across the board contributed to that because every one of the businesses had seen anticipate and potential headwinds over the course of the year and has taken the actions in Q1 Q2, so those benefits now.
Kevin through and add to sequential.
Quarters.
Q2 from Q1 to Q2 in Q2 Q3, so very pleased with the performance and his team in that regard.
Greg.
Can you kind of if we think about the topline can you.
Talk about maybe what you're seeing from customers say on the shorter cycle.
Industrial versus kind of maybe where you're working from backlog on some of the longer cycle product lines and trying to get a sense to kind of.
What the barometer might be in your industrial business, if I could.
Fair enough.
Well, if I speak to the long cycle aspects of our industrial which is obviously everything is relative.
Long cycle industrial is obviously.
Much shorter than long cycle in our aerospace business, but that said, where we have backlog of significance is in the mole systems cited the business and so there as we highlighted I think in Q2, we had.
Relatively strong backlog.
Within our mobile systems business for the rent rest of the year.
With an expectation of sequential improvement in Q3, and further sequential improvement in Q4.
The team delivered very nicely on what we anticipated in Q3 in that respect and so that was a very positive result in terms of our short cycle businesses, which is primarily.
The automotive hot runners business and our FMC business with respect to the tool and dye industry. There of what we've seen is continued headwinds against the backdrop of trade and economic uncertainties. So.
As you saw with our.
Guidance for the full year, we are a little bit cautious in light of the short cycle businesses and subsequently.
I didn't less the the full benefit of Q3 flow through to the full year.
Got it and just to be clear there's been no change to your spending within the industrial business you continue to invest in those businesses and absolutely.
Yes.
Continued to business as usual in terms of all of the innovation efforts that we have in place.
Which are driven by our global innovation Forum and more recently, the addition of our Chief Technology Officer.
And just finally last one from a 40 42 from 52 first one did that go into effect for you and secondly.
My sense is we probably won't even notice that either in the revenue or the margin profile. Your business just just clarify both those for me. Please yes, no. It just it just happened.
Recently.
In that as you remember at the at the beginning of the year. We had indicated that we were pretty much at the 50 to raise and hadn't seen a drop.
And that was because the engine always were effectively taking the opportunity to catch up.
Relative to the airframe builder and so to your point I agree that we don't think we'll see any meaningful impact in that and translating into our.
Topline our margins in the short term and overall, we think the Max will enter back into service in.
The new year and with that they expect the ramp throughout 2020 .
No.
Considering the backdrop. This you did you guys did pretty good job this quarter. Thanks. Thanks, so much for for taking all my questions.
Thank you thanks.
Next question comes from Christopher Glynn with Oppenheimer.
Thanks, Good morning.
Hi, good morning credit risk.
Hey, so.
It's nice to see can continuing to benefited aerospace from your long term investments there had a question about the margin.
Yes.
How much might be just.
Everything.
You know supply chain, whatever just all clicking perfectly versus this being kind of a reflection of your entitlement at this stage of the cycle relative to your long term investment and positioning to participate in this market.
Great question, Chris and what I would say is that add the margins were.
You know demonstrating that the current time as a reflection of all of our long term segments of investments over the last decade, I might add and more recently over the last five years on the OEM side of the business. So what we have in place as you know is a very strong.
Combination of both new make OEM production and aftermarket with life of program deals in place that have been.
And put in place over many years on the Cfmfifty six cfsix programs in particular thrive in the aftermarket cited the business. So we are in a sweet spot I would argue in terms of where the maintenance cycle is in the industry, which is as you know drives a higher.
Operating margin to the spare parts and the maintenance repair and operations side of the business compared to the add new mix side that said the team has done a really nice job in terms of ramping up to the new requirements positioning ourselves on new strategic.
Platforms for the long term and then drive in the Barnes enterprise system to introduce those new products through our Npis process and then.
Starting to streamline month in terms of.
Production so.
I think that in terms of looking outward send the sustainability of our operating margins within aerospace into Twentys, who will be very much.
Dependent on the combination of strength between the aftermarket in OE on an ongoing basis.
Okay. Thanks for that and looking in the press release, you talked about adapting your business approach to the current environment.
Curious what that means because you did call out managing the cost structure separately from that so just wanted to hone in on weight meant by adapting the business approach.
I think Chris what were referencing is add the whole essence of the Barnes enterprise system and our emphasis across the leadership of the company on commercial operational and financial excellence and what the mantra has been within the management.
Team of the businesses has been that irrespective of what the markets are doing we need to have a winning attitude and a growth oriented mindset and so that's what I mean by adapting the business in that what the leaders are doing is looking for opportunities to seek out.
Opportunities.
When and even with the headwinds that some of the businesses are experiencing because we believed that our customers see the value that we bring and now are even more open top certain deals that we might present.
Now in a in a pressured environment, where previously they might have.
Might not have been so engage to do so and I do think that the portfolio transformation.
Is a big factor in our current performance and demonstrates our resilience as we continue to move through the cycle.
Okay last one for me in.
Kind of looking at the meaningful ramp in the run rate fear industrial margin that you executed in the third quarter Im wondering if you could.
Sort of parse that accomplishment in terms of.
Structural improvements that will retain versus.
Short term cost disciplines.
Yes, I think we have.
It's being in the short term, we very much and tightened on the cost management side of things with respect to.
Just in our businesses to was we were anticipating tons of demand with that we.
Took so.
Yeah.
Proactive actions against what are the normal.
Aspects of things from you know overtime to add cost management to execute uneven more aggressively on our global sourcing to our.
Materials side at the equation and then structurally we continue to evaluate the businesses while of where.
While continuing to look at is what is the timeframe that we might anticipate in terms of these head wins versus.
Maximizing our overall manufacturing strategy and footprints across the globe and I think our scale in some of our businesses now.
Allows us to some flexibility.
To be creative around a range of different potential opportunities.
Versus even our competition.
Great. Thank you for the color.
Thank you as Chris next question, we have is Matt Summerville with da Davidson.
Thanks couple of questions first on the molding solutions business I was wondering I think you said organic overall was down 8% would you mind, giving a little bit more granularity in terms of how some of those key end markets performed relative to that those being auto medical packaging and personal care.
Yes, so what we saw a mass in in the quarter was continued pressure on the.
Personal care and packaging cited the business was the medical side continue to just demonstrated strength.
So relative to.
Molding solutions in total.
As you said, we saw organic growth down.
Approximately 8%, we saw a little bit more pressure on the short cycle.
Automotive hot runners.
And.
You know the real offset was medical in terms of the positive.
Got it and then just sticking with industrial if I have my numbers correctly are correct. It looks like the backlog there was down maybe 7% on a sequential basis. It looks like it was down like 25% year over year. So correct me if I'm wrong number one number two can you talk about really what.
Sort of driving that those are pretty pronounced decline.
Matt its Chris so what you're right the 7% from a sequential point of view backlog in industrial that makes sense and overall recognize there is not as not as dramatic as you mentioned before we see kind of that mid mid teens reduction.
Call it year over year quarter over quarter recognize there maybe some FX in there, but what we're seeing is and this is a little bit of why we trimmed five cents from the top end of our EPS range, even though we had a terrific quarter for Barnes group all around both in both segments the shorter cycle businesses.
Primarily is where we're seeing.
The reduction that book to Bill in the quarter was 0.9 for industrial.
We have not seen much in the way of that rebounding anytime in the near term and as a result.
We're reflecting that a quarterly in our full year guidance.
What we go back a quarter, what we really looked at in terms of what we can control is that what is in our backlog for molds and given the molds that we delivered we delivered on our expectations in Q3.
And that continue that sequential improvement in terms of the sales profile will continue to continue in Q4, but the watchful eye is just on our shorter cycle businesses. We just it's a reflective of the uncertainty that we've seen globally around trade and and Thats impacting our industrial short cycle business.
Just one final one maybe what's.
With respect to pension can you remind us what you are funded status looks like pose. This contribution you made and then what pension expense will likely be in 19, and if you haven't early read on that 2020. Thanks. Yeah. So good question. So we did make the discretionary $15 million contribution in the third quarter and.
From a funding status point of view, it's taken us into the low ninetys now into the upper Ninetys for purposes of funding. So well funded in terms of our pension plan and again that was discretionary not a mandatory contribution.
But to your point in in 2020, given the interest rate environment, and our expectations going into 2020, as we haven't finalized that and we'll know as a 12 31 engine as you know as we calculate.
For purposes are defined benefit plan and thinking about expense, we do expect a few million dollars of headwind heading into 2020, just as a result of.
The interest rate environment.
Thanks, Chris.
Thank you. Thanks, Matt. Thanks next question comes from Myles Walton with you yes.
Thanks, Good morning.
Good morning warning or above.
So Patrick I hear what you're saying on the industrial side in terms of productivity contributing to the margins in a quarter, but obviously fourth quarter margins are expected to two I guess ramp down into guidance on slightly higher sales.
So just explain.
Kind of where we are on the margins you're seeing this quarter.
And the sustainability of those wells, both in the fourth quarter as well as into 2020.
Maybe I didn't get it but what is your full year expectation for the margins at industrial.
Oh, the full your expectations for and does trailed our 12.5% to 13% for the full year.
And relative to the.
Anticipated.
You know.
And.
Decline relative to Q4 over Q3, what it really is it's our cautiousness around the lowest cycle are to short cycle businesses. So as you know some of our short cycle businesses at the higher margin. So while we're looking at is the mix into Q4, the a little bit.
Cautious in terms of.
The the current outlook and if if the quarter was to soften more than what we might anticipate and so as a result, thats whats truly flowing through to the lower margin.
Profile for Q4.
Okay should we think about this kind of blended second half as being the right run rate for 2020.
I think that's probably a fair assessment 12 week, while we are continuing to target for the industrial businesses mid teens and that would be our goal is going into 2020 .
Clearly you know again it will be it will be determined by some of the recovery of some of our end markets.
Particularly the higher margin.
Business lines, but mid teens is while we have internally set as.
An acceptable margin in the short term and of course over the long term, but have you to continuing to improve upon the.
Got it and then I think I heard.
You talked about in terms of.
By segment spares, and MRO and if I'm backing into right, you're implying that spares implied would be sort of flat year on year and down 15%, but it looks like.
Aftermarket backlog actually rose sequentially, implying book to Bill is probably greater than one in aftermarket so just.
Again is it just the lack of visibility.
But it does look at those the right numbers that you're looking for sort of a meaningful decline.
In the spares sequentially.
I would say that we're looking at as spares and MRO continuing to remain at the current levels into the fourth quarter and not we're not seeing nanny indicators that suggests that.
Spares at this juncture are the maintenance services side of things are met miles sorry.
And so I am I look at the end of year as being a solid continuation of the performance that we're seeing right now pertaining to spares and aftermarket.
Okay, and then just last one on the Bill time for the 42 month that you've been signaled to date.
What's the usual lead time before they tell you to go back up.
Is there a signaling lead time that they provide.
I think it varies and I think this particular instance.
My this is.
Unique and so I think that.
Well keeping close communications at this point abnormally.
Any.
Any rate that we have from the engine OE is usually a six to nine month.
Lead to the delivery of the aircraft.
And so but I don't think thats going to hold true in this particular instance, because I think the uniqueness of the situation is going to be a combination of deliveries to deplete none of the current inventories that have built up and then.
So a close coordination with our customer as to how how they want to ramp backup.
Makes sense thanks, guys.
Okay.
Thank you next question comes from Pete Skibitski with Alembic Global. Please go ahead.
Hey, good morning, guys.
Barbie Monte.
Patrick I'll Echo your opening comments.
Comments, great execution in a tough environment for sure.
One thing I'd like to get your thoughts on in molding is just that the area personal care markets being soft.
I would've thought that that niche in particular hall was a little more you know kind of consumer staple like.
I thought that was kind of like the asthma inhaler as and stuff and so.
Is that just being less.
More discretionary then thought maybe or is that normal kind of I know molding takes a little bit longer terms of a product introductions. There. So can you add some color as to what's going on there in terms of what you guys are seeing.
Absolutely.
Yes.
What you highlighted as relative to the performance in the quarter I think.
One thing that we don't maybe give enough credit to is the extent of the intimacy of our relationships with the customers and so one thing Barnes has done over the last couple of years has continued to build strong customer partnerships.
And in that while we're walking with closely is how our customers are prepping and preparing for any future changes in regulations or changes in terms of how in the industry is reacting to.
Particular challenges that its experience and indicates a personal care. What is currently happening Pete is that there is a add a set of regulations that are being contemplated at the moment pertaining to the use of what's known as post consume.
No resin, which is basically recycled material being fed back into the production systems and as that is happening at this juncture with uncertainty as to how those regulations are actually going to play out while we're seeing in the personal care markets is that a lot of the.
Customers are holding off on launching new products.
Pending the outcome of where these regulations are going to fall and so that I think is unique in that to your point personal care would normally be more of a consumer driven product than.
More resilient in any market, but the current environment around this switch over is what's driving it.
I might also add that we just returned add this week from the case show.
Which was a fabulous success for our molding solutions business Im one of the key aspects of our stand was the whole aspect of sustainability and focus on.
So the environment and so while we were.
Demonstrating at the show was some of these steps we've taken working very closely with our customers to ensure that we are a part of this solution going forward to these new regulations and the challenges that the industry's facing.
That's great color I appreciate it.
Any sense of when you might have a resolution one way or another on.
Just a regulatory issue and I guess, it's mainly a European issue right now.
It's predominantly European but I think it has cascading effect worldwide because ultimately.
The whole aspect of the the challenge to the plastics industry is to be could become a better recycler.
All of its product lines than it has in the past however, what that's going to require is.
And different approach and in turn.
Barnes through our complete offering in molding solutions.
With our closed loop systems provided by our controlled cited the business to our hike habitation moulds and our cube technology provided by the molds side of the business.
And that coupled with the hot runners we believe that were at the center of being a part at the solution working very closely with our customers. So it's going to take time piece, it's not going to be you know weeks or months I think it's going to play out over the next year and and maybe.
Even a little longer but.
That said the offset in the current environment is that we have a seen a big uptick in quoting activity around MRO, the maintenance side of our moulds and our systems and so we're looking to capitalize on that as well.
Okay, great and just keeping a two to molding solutions.
No. The U.S. trying to tariff discussions are ongoing but I would think at some point right. The auto OEM slots to come out with new models.
And I know, there's various kind of flavors of model changes.
I'd be do you expect you kind of the auto market for hot runners to reverse in 2020 just given.
The needs for the auto Oems are kind of differentiate themselves.
I think your observations are correct in that they can that can only hold off on launching new products.
For so long.
And as what we've seen in the third quarter is particularly in North America as some green shoots in terms of.
Programs or.
Product changes being released so we've seen that beginning to happen in North America, we've not seen it happen, yes in Europe and in China, you know, it's really it's occurring but it's at a slower rate. So what we're seeing in China is more of a slowdown in.
In terms of the volume of releases that war taken place. So as we move into 2020 , we would expect that add those new launches are model changes would continue to.
Take place, but I am I think it's going to be on a unless these trade uncertainties get resolved I think it'll be on a slower rate than any of us would like.
Okay, great appreciate the congrats.
Thanks Pete.
Next question comes from Tim Walsh with Baird.
Hey, guys. Good good morning, as shown on the margins.
Yeah, I want to Tim Thank you.
Yes, so I guess I have two question. So I guess the first is just.
I know some your short cycle businesses are weak in and as you kind of go into 2020, how are you guys kind of balancing.
Productivity and kind of cost management with trying to make sure that you're preparing if there is kind of a short cycle acceleration that you're able to kind of meet that demand without any issues.
Yeah. So to that end again everything we are looking at going into 2020 is being driven by our operating system and how we think about prepping. So.
To that end, what we're looking at is scenarios of upside flat and downside and what the teams have done a really nice job of looking at and preparing is what actions might be taken in any eventuality.
One of the things that I think we've become much more add disciplined on his understanding our manufacturing capacities worldwide and understanding how how we might take advantage in some instances of aid.
Hey.
More challenging environment to maximize and streamline how we're running our overall manufacturing production systems. So.
In general we have been I think very proactive in terms of what we've done today, we continue to assess the situation very closely and one of the key aspects of that is something I mentioned earlier is the intimacy.
All of the relationships and partnerships, we have with our customers because what we're doing is keeping very close tabs with what their plans are and what they're thinking to be sure that we're ready in any in any situation.
Okay. Okay. That's helpful. Thanks, and then on automation.
I mean, it I can understand it's been in weaker this year, how how short or long of a cycle is that business for you guys.
Because it's more I would put it more on the attachment side right. So I'm trying to think if I'm trying to understand if it's a little more shorter cycle or if thats still kind of tie to kind of long cycle automation implementation.
No I'd put it into shorter cycle category.
Because was as you said plus our offering is true dramatic.
Is what's known as end of arm tooling and gripper technology. So we're on the end of the robots so to speak which is the interface between what the robot is doing and the material that's been handled.
Okay. So it's there's a little more of a have a usage impact to that okay.
Good well thanks for the time, guys and I can look on that person here.
Thank you.
Next question, we have is Michael Ciarmoli with Suntrust.
Hey, good morning, guys nice job on in order to Mike margins.
Great. Thank you stay on automation dramatic sales are down 25% sequentially.
I think from 18 free last quarter Thirteensix is that is that normal seasonality or any anything else going on there I mean seems like quite a big big drop on a sequential basis for further dramatic.
Phil.
Yeah, I recognize Mike when we when we referred to our M&A growth we have to two acquisitions that we made that would pop up and and M&A driven growth. So one is the which is smaller as the industrial gas springs business. So in the quarter. We had a month left of of M&A treating it as M&A versus.
Overall organic growth and then second to the point is dramatic which we have a full full quarter dramatic sales.
In Q3 as M&A growth. So when you split the to what we've seen is roughly sequentially about a 15% drop.
To Q2 to Q3 on dramatic and pretty much what we've seen in industrial gas springs, contributing pretty consistently throughout the throughout the year.
Okay got it.
You can take a little bit deeper on on the margins I mean were there it sounded like it was pretty clean quarter. I mean, there were no onetime contracting.
I know last quarter, you guys indicated that there might have been 8 million or so mold related revenues that that pushed out did they ship did they carry a higher margin and you've been looking at U.S. Gionee I mean down pretty substantially 5.8 million sequentially, just trying to get a better understanding I mean, it sounds like you've got a.
The operating system in productivity, but was there anything that that drove you know sort of any any outsized positives in the quarter.
No the short answer because I think.
Was it pretty clean quarter, and so while we saw was the.
The negative impact of.
The top line and basically what you saw was the operations driving the benefit of that the productivity initiatives that have been taken over the course, Didier I would highlight that Q3 was the benefactor of actions that were taken in Q1 in Q2 it all.
It didn't just happened in the third quarter. So it's been a full years.
Set of activities that resulted from Q3, but there were no significant one offs that stand out even internally that contributed to the result.
Got it ended that 8 million of mold related revenue shipped this quarter.
No it did chip.
So basically what that 8 million was is that it was scheduled to ship at the end of June and subsequently shifts in early into the third quarter, Yeah, Mike. So let me add maybe as we kind of concluded on on the second quarter and talked about that shift into Q3, our expectations for the third quarter related to more.
It's shipments and what we said in July came through the team was able to deliver a 100% actually a little bit more than we expected consistent what they would they rolled up in the in the it post June early July timeframe. So great success on team.
And then just on aerospace.
77 rate reduction I mean, you kind of just alluded to Patrick you've got to fix the nine month lead time, if we look at that rate reduction you talked about you are now at 42, a month on the 747 Thats you know I know you kind of characterize the rates on 42 for the 737.
Not impacting margins and you've got small content, but just thinking about your volume throughput and overhead absorption does that take a little bit Adam margin. How should we think about I guess, even the 77 rate reductions as we start to think about aerospace into next year.
So.
We think about a two ways, Mike and that is that the.
The 787 again was the reduction may come down by a couple of aircraft a month.
So there is there is the negative aspect of that Bush going into 2020. We also see is the seven seven sevenx will enter into service in 2020 . Our 2021, and then we'll see some of that benefits starting to translate I believe into.
2020 .
By contrast, we have.
Number of moving parts within our aerospace business from.
The day 777, then is as Sun setting, while we've been pleasantly surprised by there is the extent of which spares continues to be very robust.
For that particular aircraft and so that has.
Dampened the effect of the rate reduction and at the same time our success on the leap day has been such that the.
Our performance over the course of 2019 has really put us in a great place to where there are dual source is on many of the products.
Our associated with the leap program and if one one supplier is is faltering and the other is outperforming which is the category that were in then we're taking a little bit more of the share Dan maybe even was initially agreed to contract.
Actually so with that I think we've seen a positive upside even with respect to.
The ramp.
And the volumes against the Leap day.
Got it and then just last one for me.
Assuming 737, Max does return to service here in the near term.
Has that been a tailwind to your aftermarket and do you think that returned to service kind of a pretty took a little bit of pressure on some of the aftermarket sales given maybe we'll see an acceleration of some of those legacy a three seven instead of remained in service get retired.
It's a great point, Mike and it's something that is hard to quantify but right now were to Cfmfifty six stands relative to being the war curse of this industry on the narrow body the.
Demographics are the fleet was there may be some accelerated retirements. The number of engines that are still flying that haven't seen the first.
Maintenance business.
Our shop is it still is a relatively high number two so overall, we think that the cfmfifty six is going to continue to be a gray program.
For the next.
Number of years with current projections suggest than that early to mid twentys before it peaks in terms of its shop visit rates.
Got it perfect. Thanks, a lot guys.
Thank you.
We have no question from Pete Skibitski with Alembic Global mobile.
Yes, Thanks, guys, Hey, Patrick one of talking about the aerospace MRO business.
You guys are still small in the scope of our MRO overall in terms of the market, but I think you're looking at three straight years now of.
Double digit growth there be now nicely outgrowing traffic growth globally.
I mentioned, the CR fees are somewhat a driver of that but.
Well I understand around up more on a public call, but I'd love to get your thoughts in terms of how you kind of continue to grow this business.
Above trend, whether it's you know organic investments or M&A or something else because it's obviously, it's nice margins you've had nice growth you're still small industrial will be overall industry. So just wanted to kind of get your thoughts on that on that topic.
Yeah Fair comment teeth, and what I would note is that you know all of the growth that we have.
Achieved over the last few years within our Emerald business has been primarily organic.
We have of course med investments into our aftermarket business true the component repair programs. The CR piece as you mentioned, but here's another example of where I think our success has been very much attributed to two things one is the relationships.
We've built with the OE is over many many years and secondly, our strong performance in terms of delivery and quality and in in the aftermarket business in the MRO business performance trumps, all and our businesses have done an outstanding job in terms of driving the enterprise.
Hi system to translate into delivery and quality performance and.
Give tremendous accolades to the aerospace theme in that regard. We we do continue to look as you know acquisitive opportunities from time to time for that business. We not found the rice the right combination as of yet, but we never rule it out either.
So.
The the aspect as we look at continuously is how to ensure that we're positioned well in advance of demand and so we take a long term view to the aftermarket today were Joe we're enjoying the benefits of the Cfmfifty six which we positioned ourselves on back in the early.
Two thousands so almost 15 years ago and today, we're looking at what is the maintenance cycles going to be 10 to 15 years out and how do we position ourselves for them as well.
Okay appreciate the color.
Thank you at this time I will turn the call over to Mr. fit.
Thank you Sharon.
We'd like to thank you all for joining US this morning, and we look forward to speaking with you next in February with our fourth quarter and full year 2019 earnings call.
With that we will now conclude todays call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.