Q3 2022 Barnes Group Inc Earnings Call
Good morning, My name is Chris and I'll be your conference operator today.
This time I would like to welcome everyone to the Barnes <unk> third quarter 2022 earnings conference call and webcast.
All lines have been placed on mute to prevent any background noise. After.
After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question. Please press star one again.
Thank you Bill Pitts, Vice President Investor Relations you may begin.
Thank you Chris.
Good morning, and thank you for joining us for our third quarter 2022 earnings call.
With me are Barnes, President and Chief Executive Officer, Thomas Hook, and senior Vice President Finance, and Chief Financial Officer, Julie strike.
If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate website at one Barnes Dot com.
Oh, any b a R any ads dotcom.
During our call we will be referring to the earnings release supplement slides, which are also posted to our website.
Our discussion today includes certain non-GAAP financial measures, which provide additional information. We believe is helpful to investors.
These measures have been reconciled to the related GAAP measures in accordance with FCC regulations.
You will find a reconciliation table on our website as part of our press release and in our form 8-K submitted to the Securities and Exchange Commission.
Be advised that certain statements we make on today's call. Both 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 call and are described in our periodic filings with the SEC.
These filings are available through the Investor Relations section of our corporate website at one Barnes dotcom.
Let me now turn the call over to Tom for his opening remarks, then Julie will provide a review of our third quarter performance and our updated outlook for 2022 after that we'll open up the call for questions.
Thank you Bill and good morning to everyone.
During my first full quarter at Barnes I've traveled to our manufacturing facilities across Europe , and North America.
I'm impressed with the people operating processes and manufacturing expertise at Barnes.
There is a highly engaged and passionate team of leaders and associates and I appreciate the Frank and clear discussions held with these team members during my visits.
Barnes is a good business portfolio and a solid foundation upon which to build our future that said not all aspects of our core business execution are performing at the level needed.
And we are taking actions to improve our execution to deliver the true value embedded in our businesses.
In particular in our commercial processes.
If you put it in simple terms.
Our focus is to drive revenue improved profitability and secure the backlog required to drive future growth.
This topline Bottomline pipeline Tri Ed you'll hear me repeat often is the guiding principle through which we will steer the company's revival.
Our first step is to determine the most advantageous ways to address the markets we serve.
Approaching our markets in a more holistic manner by leveraging the breadth of our portfolio to more efficiently and effectively serve our customers.
This moves beyond cross selling products to providing valuable solutions that solve customer problems.
Doing so well all Barnes to command price, while creating incredible value for our customers.
With our operations there are significant opportunities to drive enterprise value.
On the aerospace side, and we have a well integrated and aligned business that approaches its global markets is Barnes aerospace.
It's a highly investable solidly performing business with opportunities to scale through greater participation in the industry recovery and further expansion into military and MRO.
Accordingly, well dedicate more resources to top line growth and to evaluate M&A targets in this space.
With integration and alignment top of mind.
At industrial our immediate priorities are different.
The portfolio strategy has been built along decentralized and independent brands and this has led to a high level of complexity.
And while there are pockets of strength the global pandemic has exposed inefficiencies and gaps in our effectiveness.
At this time, we are pausing M&A activity until we more fully integrate consolidate and rationalize the business within this segment.
This includes an evaluation of industrials architecture with a view on simplifying and streamlining the business.
To that end, we have advanced our restructuring efforts.
Since our second quarter earnings call the closure of our Bristol facility announced on our July call is tracking to plan.
We have commenced the closure of our molding solutions facility in our Switzerland.
Would be completed by June 2023.
We have undertaken head count reductions in Canada, Sweden, Spain and Germany.
And we have closed several smaller locations.
In addition in October we approved the second round of our multi phase restructuring, which will drive $12 million in annual savings at a cost of $5 million.
Collectively with what we announced in July we anticipate approximately $26 million of annual savings with a total restructuring cost of $29 million.
We expect to achieve full run rate savings by 2024.
Plans for additional restructuring actions are in development and will be shared in due course.
With all of the above we will approach the work at hand, with a refreshed organization culture built on candor.
Clarity into action.
We're respectful of the existing company culture, we are moving with greater agility and urgency we are focused on getting things done.
We are more analytically, driven letting data support our decision making processes and.
And we are driving a pay for performance mindset deeper into the organization.
This increase in speed and directness is uncomfortable for some.
But we have a lot to do and we're getting after it.
Before I close my prepared remarks, you may have seen in our 8-K. This morning that Patrick Dempsey has voluntarily retired from his role as executive Vice Chairman.
And that he is also voluntarily resigned as a member of the Barnes Board of directors for personal reasons related to the health matters affecting a family member.
We are incredibly grateful for Patrick's leadership and contributions to Barnes over his 22 years at the company.
Personally I would like to thank Patrick for his support in my transition to the CEO position.
I truly appreciate his advice and counsel.
From the entire Barnes team, we wish Patrick and his family well in this next phase of life.
In closing.
I am incredibly energized by the future I see ahead at Burns the leadership team and I are rapidly working to deploy actions designed to accelerate our financial performance recovery.
Drive core business improvement align our commercial resources.
And address industrial complexity and inefficiency.
These actions will work towards unlocking our full potential delay.
Delivering the top line growth.
Bottom line returns and steady orders flow that Barnes is capable of.
We now pass the call over to Julie for a discussion on our third quarter performance and some end market color.
Good morning, everybody and thank you Tom let me begin with highlights of our third quarter results on slide four of our supplement.
Third quarter sales were $315 million down 3% versus the prior year period with organic sales, increasing 2% foreign exchange negatively impacted sales by 6%.
Operating profit was $30 million down 31% from last year's $43 7 million.
Excluding net restructuring charges of approximately $9 million adjusted operating income was $39 million this year down 11% from $43 9 million last year adjusted.
Operating margin of 12, 4% was down 110 basis points from 13, 5% a year ago.
Net income for the quarter was 17 million or <unk> 33 per share compared to $27 9 million or <unk> 55 per share a year ago.
On an adjusted basis, excluding restructuring charges of 16 <unk> per share net income per share of 49 was down 11% from 55 a year ago.
In the quarter interest expense was $3 4 million a decrease of approximately 670000 as a result of both lower average borrowings and lower average interest rate versus a year ago.
Other expense was $2 4 million versus last year's $1 2 million, primarily driven by incremental pension expense from restructuring actions.
Excluding restructuring charges, our adjusted tax rate for the third quarter was 27, 6% for the first nine months of 2020 to the effective tax rate was 111% compared with 27% a year ago and 21 nine.
For the full year 2021.
The increase in the 2022 year to date effective tax rate from the full year 2021 rate was driven by this year's goodwill impairment charge, which is not tax deductible and last year's benefits related to our realignment of Italian tax basis, goodwill and intangibles and foreign audits.
Adjustments. These items were partially offset by a change in the mix of earnings between high and low tax jurisdictions.
Now I'll turn to our segment performance beginning with industrial.
For the third quarter sales were $204 million down 12% from a year ago organic sales decreased 4%, while unfavorable foreign exchange lowered sales by 8%.
Industrial's operating profit was $8 8 million versus $30 1 million a year ago.
Excluding $9 1 million of restructuring charges in the current year adjusted operating profit of $18 3 million was down 39% and adjusted operating margin of eight 9% was down 410 basis points.
Adjusted operating profit was impacted by lower sales volume lower productivity in part attributable to supply chain challenges and the net impact of inflation.
For the quarter across the industrial segment, we incurred approximately $10 million in gross raw material freight and utilities inflation through.
Through ongoing pricing and procurement actions, we were able to mitigate approximately $8 million, resulting in a net 2 million inflation impact.
For the fourth quarter, we anticipate a net inflation impact of approximately $1 5 million.
Across industrial significant end markets, we saw year over year orders strengthen in personal care and medical.
Organically automation orders were very strong.
There was a bit of relative softness in packaging, while automotive and sheet metal forming orders were flattish excluding the impacts of foreign exchange.
Book to Bill was 1.03 times for the third quarter.
With respect to orders and sales across our businesses at molding solutions organic orders were strong increasing 15% year over year, while organic sales decreased 9%.
For 2022, we continue to expect our molding solutions organic sales to be down low to mid single digits.
At force <unk> motion control organic orders were up 4% and organic sales were approximately flat.
We anticipate low single digit organic sales growth for the year, which is a bit softer than our prior view.
Engineered components saw organic orders increased 3% and organic sales increased 6%. The organic sales growth is driven primarily from cost recovery efforts.
Full year organic sales growth is anticipated to be up low to mid single digits.
At automation organic orders were up 22%, while organic sales declined 6%.
Order performance provide some positive momentum heading into the fourth quarter.
We continue to expect flattish organic sales for automation in 2022.
For the segment. We also continue to expect flat organic sales.
We have tightened our adjusted operating margin expectation to the range of eight in a quarter to eight and three quarters percent.
At Aerospace sales were $111 million up 18% from a year ago, primarily driven by strength in the aftermarket business, where sales grew 55%.
This business is clearly benefiting from the continuing narrow body recovery in the commercial aerospace industry.
Operating profit was $21 2 million up 56% as compared to the prior year period.
Excluding a favorable restructuring adjustment of 400000 adjusted operating profit of $20 8 million was up 50% from last year.
Contributing to this strong performance in adjusted operating profit is the benefit of higher sales volumes in particular robust aftermarket sales offset in part by unfavorable productivity due to labor labor labor availability and supply chain challenges.
Adjusted operating margin of 18, 8% increased 400 basis points from 14, 8% last year.
In our OEM business after two consecutive quarters with book to Bill in excess of one five times orders took a pause.
Third quarter book to Bill was <unk> six five times, but we see that as a timing item and nothing of concern.
Our OEM backlog declined slightly from the second quarter as a result, though remained solid at $729 million.
We expect to convert approximately 45% of this backlog to revenue over the next 12 months.
Our OEM outlook is unchanged from our prior view as we see low double digit growth for 2022.
In the aftermarket sales growth remains robust with MRO up 39% and spare parts up 85% for.
For the year, we continue to foresee low 30% sales growth in MRO and now expect even stronger spare parts sales up over 50% for 2022.
Aerospace adjusted operating margin is now forecast to be between 18% and 18, 5% an increase of the bottom and reflecting the higher aftermarket contribution.
The Barnes aerospace team continues to perform strongly and expects to end the year well positioned for 2023.
Yes.
With respect to cash year to date cash provided by operating activities was $43 million versus $128 million in the prior year period.
The primary drivers of the lower cash generation are an increase in working capital and paid incentive compensation related to 2021.
As discussed last quarter inventories have increased as we built buffer stock to combat supply chain constraints.
We will begin to wind inventory down over the next several quarters and it will be a focused priority for 2023.
Free cash flow was $22 million versus $101 million last year capital expenditures were $22 million down approximately $5 million from a year ago.
With our balance sheet, the debt to EBITDA ratio as defined by our credit agreement was a bit under two three times at quarter end down slightly from the end of the second quarter on a net debt to EBITDA basis, we'd be just under two times.
Our third quarter average diluted shares and period end shares outstanding were both approximately 51 million shares during the quarter, we did not repurchase any shares and approximately $3 4 million shares remain available under the board's 2019 stock repurchase authorization.
Moving to our updated 2020 to outlook on slide six of our supplement we continue to expect organic sales to be up 5% to 6% for the year, Although we now anticipate a higher negative FX impact of 4%.
Adjusted operating margin is forecast to be between 11, five and 12% up 50 basis points on the low end of our previous range given the strength of the aerospace aftermarket.
Adjusted EPS is now anticipated to be in the range of $1 90 to $2 per share down.
2% to up 3% from 2021, adjusted $1 94 per share.
Excluded from our adjusted earnings is a 27 <unk> impact on EPS for restructuring primarily associated with our industrial segment and a $1 33 goodwill impairment charge taken in the second quarter.
Yes.
A few other outlook items, we anticipate interest expense of approximately $14 5 million and other expense of approximately $4 million and.
An effective tax rate of approximately 24, 5% excluding <unk> items.
Capex of approximately $35 million, which is lower than our prior view.
Average diluted shares of approximately 51 million and cash conversion of approximately 90%.
In closing.
For the third quarter, we experienced a continuation of the performance trends, we've seen throughout 2022 with strong aerospace and challenged industrial performance.
As Tom articulated in his comments our change agenda that started in Q2 was progressing there are many actions underway and others under evaluation to address our cost structure and competitive positioning we are laser focused on delivering the underlying value of our business and taking the necessary steps to accelerate the process.
Yes.
Operator, we will now open the call for questions.
As a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Myles Walton with Wolfe Research Your line is open.
Hey, good morning of lower federal on for Myles.
Good morning, Lou Halo.
Hi, how are you Julien. Thank you for all the color Tom nice to speak with you.
Clearly can I just go back to them.
I guess the margins in aerospace it will go but I guess, given the mix again sequentially.
And we thought that would've been stronger or is that just the productivity and supply chain, you mentioned or anything else to be aware of.
Yeah.
It is partially attributed attributable to some of the supply chain challenges and then there was a little bit of a mix issue in our OE business that also contributed to that.
Okay, Great and then you said just timing on sort of the backlog and the orders and stuff like that nothing else to mindful of given the slower sales there as well.
No no no nothing you are seeing from the.
From the Oems I guess.
No.
Okay.
I think Julie I think the Oems are just rationalizing their production schedules to a realistic.
Rather than opportunistic and there's really nothing there other than normalizing.
The output right on there and yes, you were linked to that very tightly.
Okay, and just seems like with Hudson.
I heard some comments this week about moving.
Production, not necessarily being where people thought it was gonna be or so I just wasn't sure. If we were starting to see that and you know again, some rationalization that can be done.
I guess also the.
The lower Capex, just obviously anything just pushing out of things nothing major there and then did you give us the industrial margin guide and May have missed it.
So from a capex perspective.
Sure.
Yes, it's just what we're actually seeing is some slowdowns in delivery of the equipment, we have on order, which is pushing cash into next year.
That's been a trend where our suppliers on that equipment or just not living up to.
The original timelines they expected so nothing of concern and the investments are still being made in the business.
And then your question on industrial margins was that for actuals or the outlook.
Yeah. The outlook I just didn't know I know you gave it for error I didn't know if that was all for industrial I may have missed it though.
Yeah, Yeah, Yeah, no worries or our outlook for the industrials for the full year is 8.5% to 875% until late in the quarter to eight in three quarters.
And we just tightened that range.
So it really didn't change the midpoint.
Perfect. Thank you.
Yeah no worries. Thank you.
The next question is from Christopher Glynn with Oppenheimer. Your line is open.
Hi, yes. Thanks.
So.
Ed.
All of the actions being taken in great opening explanations com.
Youre closing risks so curious the revenue there I know you will transfer.
How are we thinking about attrition.
Exit I'll leave any divestiture.
<unk> to the side for now but in terms of intentional shrinking Jos.
To give some mix issues within the industrial portfolio in Europe .
Looking at mix and maybe some attrition as one of the levers.
Yes, Chris that's a great question is is that as part of my learnings and garnering a really deep insights into the industrial business with Julian Steve rule is to kind of look at the tail product lines, we have.
Is evaluate the product portfolio in particular things that are high mix low volume sooner doing this consolidation rationalization.
We're going to be kind of trimming the tail of pricing the tail in a way that would move customers to more standard products, let us drive.
Faster turnaround for them in order to remittance.
In trying to I mean, there's a balance here, we are a solutions provider. So theres a lot of customization, but we don't want to have incident customization, because it's extremely expensive and slow. So it is a tool we are using during the industrial rationalization at each product line.
Embedded into the projects for manufacturing facility consolidations.
And that is active both for the Q2 announcements with Bristol as well as the <unk>, Switzerland facility as well as the phase two restructuring that we just announced in there is is the product lines.
Realignment and rationalization as well.
Okay. Thanks.
So I know, we're not going to chart 23 guidance.
At this point, but a lot of influences such as some of what you just discussed.
On the table so.
Surely you mentioned focus on revitalizing backlog.
Refill to drive growth should we be thinking.
Thinking at this point granted more information to come 23 a year.
Modest organic declines in but.
With some margin level, maybe a little maybe a good bit.
Well Chris.
As the CEO of only 100 days.
It's a little early to give 'twenty three guidance, however, I will not be satisfied with accepting and our industrial segment declines in our revenue opportunities for 2023.
Since my arrival in transition with Patrick Dempsey.
We are heavily focused on core business execution in industrial Julian I and Stephen will demand that we grow that we have to win business.
We'll get into the orders and get it into our P&L through order remittance process.
I won't accept that we're going to shrink in 2023 and the industrial segment.
Okay, and then I have one on Aero.
Mentioned targeting further expansion into military and <unk>.
Our ROE and I think it might have been related to comment John .
Looking at acquisition targeting in that space. So I'm wondering if you could elaborate on that bucket of comments.
Certainly as well I find our aerospace business is performing at a very high level currently and it is managed.
<unk>.
Prior to leadership in the business through the Covid period quite effectively.
Actually improved.
<unk> C and effectiveness during COVID-19 operationally, so coming out of Covid under Ian reasons leadership, we've picked up a lot of commercial momentum and we're leveraging that operating capability.
We feel we can naturally organically use that capability to expand.
Military opportunities and MRO.
But also because that business is really well run and it's recovering.
<unk> strongly in each of its segments OEM MRO is.
In the aftermarket.
We feel that we can also entertained targeted M&A opportunities and we've been evaluating those for where they would be complementary into our portfolio. So we're.
Although barnes is not done in aerospace.
Acquisition for a couple of decades, we still think that is.
Very well prepared and aligned business to consider that.
But we're being very disciplined in the approach of those evaluations right now.
And also.
That extends into investments organically into our operating capabilities within aerospace that could also potentially open up market opportunities for us in particular on customer projects.
Where were we have to think we have competitive differentiation into the market.
So I think aerospace for us is a very investable segment.
We're looking at it very broadly as to where we feel we could grow that.
To continue the growth trajectory in.
And profitability trajectory.
Trajectory that they're already on.
Sorry, if I could do one last one how is the pipeline looking.
The pipeline and in aerospace looks very healthy and we have right now some operational limits as Julie pointed out is.
Labor availability has been particularly complex in certain areas.
But we have also been actively arbitraging production locations to where we have.
Better labor availability to be able to mitigate that effect.
I would say that we.
We expect obviously in the single aisle. The continued robustness in the market I still think the wide body aircrafts recovery is going to occur over a longer period of time. So there the opportunity set is not as robust.
But as of right now we feel very confident in the trajectory of our customers and their demand patterns and if we could get more out we'd be growing faster.
Sorry, sorry, I agree with all that I meant the deal pipeline.
So there is plenty of opportunities in the deal pipeline side is we're being.
Narrow in terms of our focus so is.
Mostly focused on organic core business performance on the aerospace side, but we're looking at individual targets or a handful of targets, but mostly just on the assessment phase.
But I think that.
Our aerospace business looks like.
Similar to many other aerospace companies that went through Covid.
They went through difficult times.
So we theres targets that potentially could fit in there is plenty of targets that really strategically wouldn't fit with us. So a lot of evaluations right now.
That we're going through on the aerospace, but really nothing to communicate in terms of.
Deal opportunities.
Great. Thank you very much for everything.
Thank you Chris Thanks for thanks, Chris.
The next question is from Matt Summerville with D. A Davidson your line is open.
Thanks, Good morning.
Good morning realized impoundment, because Mike made.
Hey, Tom.
Realizing that this might make some internal people uncomfortable that might be listening that I have to ask the question you've done there 100 days what is your assessment as to the effectiveness of the leadership team here at Barnes.
Where are you finding gaps and what are you doing to affect change there.
Yeah, No that's a fair question.
Leave in a lot of candor and communication and I never mistake effort for our results our results.
In particular on our industrial performance need to improve dramatically.
I think from a leadership perspective.
We have leadership improvement that needs to be done have already started that.
On a targeted basis as you know many of the senior leaders here are fairly new Steve Moodle two years in reason six months Julie has been here 18 months myself 100 days.
I find there's a lot of very good leadership talent on the manufacturing floor.
Gone to about 27 facilities and 100 days to do very comprehensive visits to garner deep insights into the business. So I think manufacturing leadership wise were strong.
We are weak commercial leadership I come from a background of much stronger and impactful commercial leadership. So on the industrial side <unk> been reorienting, our entire go to market here quickly and the first 100 days and that has meant the transitioning and displacement of leaders.
In several of those businesses.
View that it will be a progression matched over the course of quarters too.
To have this done due to the upheaval in the tumultuous ness of making these types of changes.
So it's a progression that I am working on with Dawn Edwards, Julie Steve rule to do.
It's really more focused on industrial the operational leadership and executive leadership and aerospace is very good commercial teams manufacturing teams very good in aerospace so most of it I think.
The references that I would make towards leadership transitions will occur on the industrial side of the house.
Understood.
A follow up maybe.
Bigger picture your strategic view on the industrial asset base and <unk>.
The structure by which that business.
<unk> operated upon what's your early assessment thereof.
Too much complexity and too much inefficiency in.
And part of the <unk>.
Integration.
Cost rationalization and consolidation initiatives.
Really communicating at the second quarter in the second round today in phase III today.
Is aimed at.
We're realigning driving efficiencies and reducing that complexity.
If I had a year to do all the evaluations in real time, and then kind of do it at one time sometime next year. That's the approach we would have taken but given the urgency of the need to make a change and do these realignments integrate consolidate rack cost rationalized.
We've made the decision to do this in a series of <unk>.
Phases.
And that way it allows us to plan out.
Decide and lock off on buckets of opportunities like.
We announced in the second quarter conference call in July and today for the second phase.
And you can expect that going forward there will be additional phases.
<unk> are a continuation of.
Addressing that complexity and driving efficiencies and effectiveness.
In the end is underlying product lines in industrial are very sound.
We have too many facilities that need to get aggregated.
My background is doing a lot of facility consolidations and there is a lot of efficiencies to gain.
A more comprehensive facilities at a scale that can leverage.
Better productivity.
That's the direction we're going.
You don't have a lot.
We don't have we have a lot of opportunity, but we have a resource limitations on how fast we can do this within the company. So by taking these and phases. A series of quick phases kind of chunks at a quarter at a time and allow us to get a lot of progress over the next 12 months.
Any kind of an orderly and effective manner to let us dramatically improve not only the.
The profitability of the industrial business segments, but I'll simplify it and will give us the ability to invest more impactful in go to market to get the topline moving more aggressively.
Hopefully that's helpful. Matt.
Well that is helpful. Tom.
Maybe just one more follow up the $26 million of anticipated cost savings from phase one and phase two can.
Can you maybe bucket how much of that will be realized and benefit the P&L 22 versus <unk> 23 versus 24, I'm kind of looking for I guess kind of a cadence of realizations.
Yes, let me have Julie answer it with the kind of the data forensics on that that should be able to do that easily.
Hey, Matt So for 2022, the net impact is pretty de Minimis. When you when you consider the charges.
For 'twenty 'twenty, three we would expect somewhere in the neighborhood of call. It <unk>.
$17 million to $20 million to drop through and we'll be at full run rate in 2024.
Got it.
Thank you guys I appreciate it.
Welcome. Thank you. Thank you.
The next question is from Michael <unk> with Truest Securities. Your line is open.
Hey, Good morning. This is <unk> on for Mike. This morning, Thanks for taking the question.
Pete.
Alright.
First.
Just wanted to get your thoughts on the supply chain and labor dynamics and how you are thinking about that.
At the time of year approach in Gist.
Trying to get a sense for if there are specific raw materials that you are building inventory for or.
If you expect that you'd be able to continue mitigating any cost pressure you see with higher pricing.
Yeah, Great question Pete.
Sure.
Apply chain challenges continue to exist. However, they are abating.
But is so both within the aerospace and industrial product lines.
We do still see longer lead times.
In some levels of constraints and availability, but it's nowhere near as bad as it was in prior years during kind of peak COVID-19.
We systematically as a company are focused very heavily on.
Late in the mitigation of inflationary effects from materials to labors by.
Working with our customers to do.
Pricing pass throughs value engineering as ways to mitigate those effects.
We cannot as a company except that we will accept the brunt of inflation without fully offsetting it with our customers and our own productivity efforts with in partnership with our customers.
We do see labor availability constraints that asymmetric.
<unk> is more by region, so certain regions have.
Less recovery in the labor markets and availability than others.
So we've been using some level arbitrage to production areas, where we can.
Correct.
Direct labor.
That allows us to grow the business.
As you know because we're doing a lot of consolidation work in the industrial segment in particular were.
We're making some decisions with regards to where things are consolidated into <unk>.
Based on there being labor availability in those markets to pick up the business and expand in our facilities. So were partially addressing it through the consolidation programs.
Going forward I expect that there's going to be continued inflation in 2023. So the reason for very quickly here with Ian reason in aerospace, Steve Moore and.
In industrial and Julie and very focused on getting under rational terms with customers on an ongoing and continuous basis, because the secret for installation management is to mitigate the full amount of inflation at the time, it's occurring and unfortunately for Barnes 2022 was a really tough year.
Of learning because we were late and mitigating it.
Did not have the systems in place to mitigate the full amount.
And so we've basically been on a recovery loop with that and we don't want to be on a recovery leap for inflation in 2023. So we will have the we have the operating mechanisms to ensure that does not happen prospectively.
Very helpful color, Thanks, and.
I also wanted to ask where within your production footprint or your supply chain would you be most exposed to any potential energy related disruptions in Europe are there any specific product lines or facilities, where there'd be elevated risk of production curtailments. If the situation does worsen over the winter.
Yes, I mean Thats a fair question, Matt is as I think as that are particularly sensitive to our operations that are in Germany, and Italy for natural reasons. So as I think as we end up having to be somewhat.
Somewhat.
Careful in terms of how we're going to plan our operations right now we don't see that as a.
A significant factor.
But it's something we're very aware of and if.
We do have limitations, we will alter our production schedule to use off hours with our manufacturing teams to run the facilities. When energy is more available on a reliable basis. So we're going to be nimble.
But as we have contingency playbook, but right now we don't necessarily see that from being an issue.
Very helpful. Thank you.
Youre welcome Pete.
Okay.
We have no further questions at this time I will turn it over to Bill Pitts for any closing remarks.
Great. Thank you Chris.
We would like to thank all of you for joining US. This morning, and look forward to speaking with you next on February 17th of 2023, with our fourth quarter and full year 2022 earnings Conference call. Operator, we will now conclude today's call.
Yeah.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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