Q3 2022 NN Inc Earnings Call
[music].
Good morning, and welcome Julie Ann Inc. Third quarter 2022 earnings Conference call.
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Now I'd like to turn the conference over to Jeff tried though please go ahead.
Thank you Andrea good morning, everyone and thanks for joining us I'm, Jeff <unk> Investor Relations contact Brian then Inc. Now I'd like to thank you for attending todays business update yesterday afternoon, we issued a press release announcing our financial results for the third quarter ended September 32022, as well as the supplemental.
<unk>, which have all been posted on the Investor Relations section of our website.
Anyone needs a copy of the press release or the supplemental presentation, you may contact Lambert and company at 3155 to 92348.
Our presenters on the call. This morning will be warned Beltman, President and Chief Executive Officer, and Mike Sculpsure, Senior Vice President and Chief Financial Officer.
Before we begin I'd ask that you take note of the cautionary language regarding forward looking statements contained in today's press release supplemental presentation and in the risk factors section of the company's annual report on Form 10-K for the fiscal year ended December 31, 2021, and other filings with the Securities and Exchange Commission.
The same language applies to comments made in today's conference call, including the Q&A session as well as the live webcast are.
Our presentation today will contain forward looking statements regarding sales margins input cost inflation supply chain constraints the impact of the automotive semiconductor chip shortage statements regarding the planned management transition foreign exchange rates cash flow tax rates acquisitions synergies.
Cash and cost savings future operating results performance of our worldwide markets and the impacts of the coronavirus pandemic and the Washington Ukrainian conflict on the company's financial condition and other topics.
These statements should be used with caution and are subject to various risks and uncertainties many of which are outside of the company's control.
The presentation also includes certain non-GAAP measures as defined by SEC rules, a reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and the supplemental presentation.
In reviewing the agenda for today's call Warren will open with an update on actions. The company has taken the position and then for success and then provide a business update from the third quarter. Mike will then provide a detailed review of the financial results before turning the call back over to Warren to discuss our segment results and markets as well as our outlook for 2002.
92, which has been revised based on our current view of the business and external factors influencing our results there will be a Q&A session. Following the conclusion of the prepared remarks.
At this time I will turn the call over to Warren Veltman, President and CEO .
Thanks, Jeff Good morning, everyone and thank you for joining us. This morning before we dive into a discussion of our results for the third quarter I would like to review the other news we announced last night regarding the management transition plan. This transition includes my planned retirement, and then CEO effective at the end of the first quarter of 2023.
I've given this decision a great deal of thought and consideration.
It was very important to me that the timing would be right for both me personally and for the company.
In the three plus years I served as CEO , we have made significant progress to improve the companys financial structure operating cost drivers and reposition our growth strategy to be focused on the high growth electric vehicle and electrical markets I believe these and other initiatives in place and then on a path for continued success and will ultimately.
Similarly drive improved shareholder value.
Our efforts regarding rationalizing our manufacturing footprint as an example of cost reduction efforts to create a more competitive cost structure for N N.
We have taken action to close five manufacturing facilities by the end of the first quarter of 2023, when complete we expect to see annualized improvement in adjusted EBITDA versus our 2022 outlook of $10 million to $12 million.
The Finalization of these closures will be a huge step in creating a more competitive global footprint and then to support our growth objectives, and our actions I hope to complete before my retirement.
To address my planned retirement of our board of Directors has engaged Korn ferry a global organizational consulting firm to identify a range of potential candidates with particular emphasis on individuals with skills and experience in the electric vehicle and residential and commercial electric grid markets. The board is targeting to announce a new CE.
During the first half of 2023, and I expect that I will remain in my role until a successor is in place. Additionally, I will remain available on a consulting basis beyond that time as necessary to facilitate a smooth transition. In addition to my retirement, we also announced several other management changes starting.
The planned retirement of John Bakken, Our executive Vice President of mobile solutions and power solutions, John and I have partnered together for many years to create value for our shareholders and I. Thank him for his commitment to our organization as.
As we search for John's successor, we have named two experienced leaders and then to new positions to help ensure continuity of our leadership team.
And then named <unk> vehicles to be interim Chief operating officer of power solutions and Douglas campus to be interim Chief operating officer of mobile solutions, each reporting to John Buchan.
<unk> has almost 30 years of relevant experience within power solutions and currently serves as the vice President of operations with a focus on the electrical business Douglas has experienced in a variety of leadership roles, providing a breadth of commercial operational and geographical experience within mobile solutions, we are confident in the ability.
These two executives to guide our operating teams through this transition.
I would be remiss to not think the incredible <unk> team. It has been an honor and my absolute pleasure to have worked with such a talented and dedicated group of individuals I want to thank all my colleagues for the commitment demonstrated to make such progress in the transformation of <unk>. We all recognize that the work is.
Not complete and that we must continue the work to make and then better each day I also want to thank our customers, who continue to value our products and capabilities and lastly, I want to thank all our shareholders for their continued support and Annette.
Let's now turn to our discussion to our performance during the third quarter on page four of the presentation. We will review some of the key strategic initiatives. Our team completed during the quarter. We continue to focus our sales efforts on key growth areas centered on the mega trends shaping the future of our markets, including the electrical and <unk>.
Markets are 2025 goal is to generate in excess of 20% of our revenues from these markets and year to date, we continue to make progress against the against that goal with 36% of our new business wins associated with electrical or EV markets.
To advance these efforts in the third quarter, we showcased <unk> process technology and components at the battery show in Novi, Michigan for those of you who might be unfamiliar with this show. It's one of the largest trade shows dedicated to advanced battery in electric and hybrid vehicle technology also known as the EV Tech Expo the show attracted more.
Than 15000 attendees and nearly 800 suppliers to the industry. This was a great opportunity for <unk> to showcase our process technology and components to a large audience.
As I previously discussed our efforts to optimize our production footprint and reduce cost has been a significant initiative, we announced the closure of the power solutions Irvine, California facility in October which was the culmination of our strategic review of our aerospace and defense business.
Additionally, we continued efforts to close four additional sites by the end of the first quarter.
Turning to page five we felt it important to summarize how we anticipate the company will perform.
Protecting the expected benefit of fully implemented cost improvements that are underway and will be substantially complete by the end of Q1 2023 first I will review the impact of the closure of Taunton in Irvine on the power solutions business.
Of these facilities manufactured product primarily for the aerospace and defense industries.
On this slide we depict the pro forma nine month results for the power solutions business by removing the financial results of the Taunton in Irvine facilities for the same period on a pro forma basis. The closure of continent. Irvine will result in a significant improvement in operating income and adjusted EBITDA.
A $7 5 million and $5 8 million respectively. These pro forma adjustments would increase power solutions nine months operating income and adjusted EBITDA to $23 2 million and $25 $3 million, respectively on sales of $148 5 million.
Pro forma adjusted EBITDA would represent 17% of sales, which is more in line with our long term targets for the business.
Further the strong nine months performance on our electrical business demonstrates that we have been successful in adjusting our product pricing to recover inflationary cost increases.
We have excluded our medical business from the pro forma carve out as that business will be relocated to our production facility in Attleboro, Massachusetts, We expect approximately $2 million in closure costs for these facilities, but also anticipate proceeds from the sale of equipment in the range of $2 million to $3 million last way although.
We have not secured tenants for these facilities, we expect sublease income will approximate our current lease obligations as we believe our current rental rates are consistent with market terms.
Now if you turn to page six six we will review the impact of our cost improvement initiatives on the mobile solutions business on this slide we show a $7 8 million nine months pro forma impact of our cost improvement initiatives have they been completed at the beginning of 2022.
We estimate the annual cost savings associated with facility closures to be approximately $5 million or $3 9 million for the nine months period.
The nine months savings can be allocated to $1 7 million associated with reduced facility costs and $2 2 million associated with shifting production to a low cost facility, where certain operations that were previously outsourced can now be performed internally.
Although we have been proactive in addressing the effect of inflation, we have experienced a lag from the time of an inflationary cost increase to the time of recovery from our customers the pro forma impact on adjusted EBITDA of realizing customer price increases at the time of the cost increase would've increased.
Our adjusted EBITDA by $3 2 million during the nine month period.
Note that the pro forma impact on adjusted EBITDA is higher than the pro forma sales adjustment due to the additional inflation recovery at the at the Companys, China joint venture our China JV sales are not consolidated in our reported results Lastly, we have reflected a 700.
Dollars pro forma adjustment for excessive production startup costs. We are tracking these expected cost reductions with aerie improvement team action plans that are expected to eliminate these cost overruns by the end of Q1 2023.
After considering these pro forma adjustments for cost reduction initiatives underway mobile solutions nine months pro forma sales and adjusted EBITDA would be $228 2 million and $36 2 million respectively. This would yield a 15, 9% adjusted EBITDA margin much closer to our XP.
Patients for this business.
Turning to page eight we have summarized some of the results from our third quarter. Let me start my comments by saying that in spite of the fact that several financial metrics show year over year improvement, we're not satisfied with our financial results for the third quarter and they clearly did not meet our expectations. We did not see the same.
Volume increases were and we were expecting inflationary cost increases adversely impacted margins and we experienced poor operating performance for program launches and mobile solutions and within power solutions Aerospace and defense facilities I had previously discussed the actions we are taking surrounding these issues. These.
Issues also impacted our free cash flow during the quarter, which was a use of $4 4 million.
Sales for the quarter were $127 3 million up eight 6% from the same period in 2021, our power solutions business experienced a 5% increase in sales compared to the same period in 2021, driven primarily by higher pricing and.
And volume, partially offset by lower precious metal pass through pricing and unfavorable foreign exchange effects pricing and increased demand within the end markets of our mobile solutions group resulted in a year over year revenue growth of 11% for this segment, we continue to maintain strong liquidity at $44.
$7 million and our $60 million swap has provided us a level of protection in an environment of increasing interest rates.
On slide nine we review new business wins year to date through the third quarter, we have secured new business wins with peak annualized sales of approximately $31 million. The new business reflects segment growth aligned with our long term strategy as well as increased share of wallet with industry leaders, particularly component share gains.
With our longstanding customer base of note, 36% of the new business win secured through the third.
Third quarter, wherein the EEV and electrical segments further supporting our teams focus on aligning growth consistent with our long term vision. We continue to take a disciplined approach to pole programs, requiring capital and have maintained a low capital ratio with the year to date wins, only requiring $2 1 million of ink.
Mental Capex, we continue to divest invest in additional sales resources with demonstrated expertise in electrical battery storage and electric vehicle markets to improve our coverage and business segments that are consistent with our strategic growth initiatives.
Turning to page 10 focused execution from our sales and business development teams continues to deliver pipeline expansion in high growth markets aligned with our strategy. While the overall pipeline has decreased in recent quarters. It is important to understand that the opportunities in our target markets that are high growth has increased.
The decrease also reflects canceled opportunities following the Irvine in Taunton facility closures.
The opportunities generated by our teams are encouraging and we remain committed to expansion in our <unk> and electrical segments. We are currently pursuing several initiatives to strengthen our position in each market ice dependent pursuits continued to decline and can be attributed to the reduction in programs by Oems and our selective approach to pursuing the.
<unk> in this end market. We are also focused on the opportunity to further expand our presence in the medical market once our noncompete related to the sale of the life science business expires in the fourth quarter of 2023.
I'll now turn it over to Mike <unk>, who will provide a more in depth review of our financial performance for the quarter Mike.
Thank you Oren.
Slide 11 is a review of our financial highlights for the third quarter increased volumes and demand drove an increase of eight 6% in sales versus the prior year period, which along with favorable mix and higher JV net income equated to improved year over year profit profitability of approximately $4 million.
The JV reported sales of $27 million during the third quarter up $4 3 million or 18, 8% from the third quarter of 2021.
Year over year results were also favorably impacted by reduced incentive and stock based compensation expense of approximately $3 million.
These improvements were partially offset by unfavorable impacts of approximately $2 million due to unrecovered inflation and $1 $7 million related to overhead absorption.
Turning to slide 12, our working capital remained consistent with the prior quarter at four two turns.
Emily to recent quarters, we continue to experience challenges with our supply chain and as a result have maintained higher than usual levels of inventory, while inventory remains above normal levels due to safety stock needed to address increased lead times, we remain focused on reducing inventory levels and are working on several initiatives.
To reduce them by your own.
Turning to slide 13, we provide a look at our capital expenditures.
We continue to take a disciplined approach as we fund investments to support long term growth.
Year to date Capex has decreased from $14 6 million in 2021% to $14 million in the current year.
Moving to slide 14 free cash flow was a use of $4 4 million in the third quarter of 2022 compared to a free cash flow use of $3 7 million in 2021.
Free cash flow use in the quarter was primarily driven by a $3 $1 million increase in working capital and lower operating results unexpected we expect working capital to reduce by approximately $9 million in Q4, driven by inventory reduction initiatives and lower accounts receivable due to the collection of a $2 million.
Dollar receivable related to a customer settlement agreed to in 2021 and normal Q4 sales seasonality.
In addition, we incurred approximately $1 7 million in cash costs for severance litigation and facility closure costs. During the quarter. We expect that these expenditures will be approximately $3 million in the fourth quarter as we make the final payment on cares Act biker deferrals and incur cost related to the previously discussed.
Closures.
While we will incur some additional facility closure costs early in 2023.
Pay zero point $8 million in 2023 per the terms of the agreement to settle breach of contract claims regarding the sale of products by us in 2016 that was agreed to earlier this year. The majority of cash outflows for these items are behind us in 2023 cash outflows for these items are expected to be.
<unk> lower than 2022.
Please turn to slide 15.
Net debt at the end of the third quarter was $151 5 million versus $146 3 million in the second quarter of 2022 and.
An increase of $5 2 million, our net debt to adjusted EBITDA ratio stood at $3. One five times at the end of the third quarter, a marginal decrease from $3. One seven times at the end of the second quarter and slightly above our three times target.
We had $44 $7 million of liquidity, including cash and availability on our revolver as of September 32022, our ABL was drawn by $6 million at the end of the third quarter with Undrawn availability of $32 million.
With that I will turn it back to Warren.
Thank you Mike on Slide 17, we broadly outlined certain market trends surrounding the electrical market. We continue to view the rapid transformation of the energy and electrical equipment markets as significant opportunities government regulations and increased pressure on corporations to accelerate the adoption of sustainable or alternative energy.
Continues to persist corporate investments into the energy storage sector reached $22 billion for the first nine months of 2022 exceeding 2021 investments by 30% renewable power generation electric grids and energy storage account for 80% of total.
It's within the power sector.
On August 19, 2022, President <unk> signed the inflation reduction act with one of the primary goals of increasing the amount of dollars invested to combat climate change as part of these efforts to bill allocated 369 billion in funding for energy security and climate change investment through <unk>.
<unk> credits and loans, we expect legislation in numerous countries to accelerate the amount of investment.
On slide 18, we summarize certain trends in the automotive market the transition to EV continues to gather momentum while rising interest rates, increasing energy costs and ongoing supply chain disruptions continue to affect global vehicle production and elevate price levels. We continued to see increased interest from February .
And state governments to advance the country's EV infrastructure as of 2020 to the U S had a total of 92000, EV Chargers, which increased 12% from 2020 more recently the U S Department of transportation improved EV charging station plans that support all 50 states and cover 70.
5000 miles on the highway as part of a bipartisan infrastructure package, while we believe the transition to Evs remains inevitable the ultimate ultimate path and time frame for the transition remains uncertain given the recent increase in inflation and sustained impact on supply chain challenges.
That said recent investments by Oems across product development and production expansion in Evs remains encouraging and we continue to view the opportunity is exciting.
Turning to our segment performance, we will begin with power solutions power solutions generated an increase in sales of 5% year over year. The increase was primarily driven by higher customer pricing and volume, partially offset by lower precious metal pass through pricing and unfavorable foreign exchange effects.
<unk> ability increased compared to the prior year period.
Driven by variable cost efficiencies gained from improved volumes and lower incentive compensation expense.
Profitability was also favorably impacted by improved sales mix of our higher value added series of electrical components as we discussed earlier the closure of the closure of our continent Irvine facilities are proceeding on schedule.
On page 20 sales in our mobile solutions group increased 11% versus the prior year period. The increase was primarily driven by increased pricing and improved volume demand, particularly from China, and Brazil, New business launches in Mexico also had a favorable contribution to sales and volumes during the third.
<unk> negative foreign exchange effects, partially offset those positive trends.
Profitability decreased compared to the prior period. The decrease was driven by delayed unrecovered inflation overhead absorption and the startup costs. These impacts were partially offset by higher profits due to improved volumes at our China joint venture, which reported nine months sales of $76 4 million.
<unk> up 11, one at 11, 7% from one year ago.
Looking ahead, we expect Q4 sales in our mobile solutions business to reflect normal seasonality due to reduced number of customer ship days.
We continue to negotiate with customers with the expectation of additional inflationary cost recoveries and are prioritizing pipeline opportunities focused on high growth non ice markets consistent with our long term strategy.
Turning to page 21, we are updating our outlook for 2022 to reflect our reported third quarter results and the changes in market conditions since our last update.
Our full year 2022 outlook now reflects the following net sales in the range of $503 million to $510 million adjusted EBITDA in the range of 45 to 48 million free cash outflow in the range of $9 million to $12 million.
Our sales outlook is reduced due to the temporary automotive volume expectation in North America and in China due to higher interest rates increased OEM inventory and concern regarding the strength of global economies. Additionally, supply chain interruptions, although improved have adversely impacted our <unk>.
<unk> expectations for a major power solutions customer.
Adjusted EBITDA has been negatively impacted by lower sales and lower margin expectations. As a result of product launch inefficiencies and delayed delivery of machine tools and automation expected to drive improved productivity. Additionally.
Additionally, operating performance of our aerospace and defense business did not meet expectations due to labor availability higher labor costs, and lower customer volumes, especially at our Irvine, California site, where adjusted EBITDA declined $800000 from our previous outlook are key.
Current expectations also resulted in a reduction in our incentive compensation, which had a favorable impact of approximately $3 million.
Our free cash flow outlook is driven by the factors previously discussed and includes non operating cash flows for the tax on the sale of life Sciences repayment of the FICA deferral and litigation severance and facility closure cost, which in total represent approximately $8 million.
I would note that our free cash flow does not include the cares act tax refund of $11 million due to uncertain timing to increase from our prior expectation expected refund of $10 million as a result of expected interest income on the refund.
We are actively pursuing this refund through several avenues, including an IRS taxpayer advocate and our congressional representatives.
As I close my remarks, we have summarized some of our prudent actions on page 22.
Although our third quarter results did not meet our expectations I believe our efforts have and then on the path to improved financial performance. Our board is recruiting a successor CEO that will have experienced in our targeted strategic markets and we have talented managerial depth.
We continue to improve the depth of our sales and business development teams and we have a robust sales pipeline of opportunities, which has generated $32 million of new business wins, so far in 2022.
Our sales efforts are directed by our strategy and we are making smart capital decisions by investing in markets that will drive our future growth we.
We are within reach of significant cost reduction efforts that are expected to improve our profitability by $10 million to $12 million once complete.
We have received approximately $40 million of annualized price increases in 2022 and are focused on additional recovery of inflation driven cost increases for these reasons and the commitment and skill of our employees I believe that <unk> is on the right path.
I am confident in our future.
That concludes our prepared remarks, and I will now turn the call back to the operator for questions.
We will now begin the question and answer session.
Just a question you May press.
Star then one on your telephone keypad.
Thank you you are using speaker phone please pickup your handset.
<unk>.
Joe Your question please.
At this time, we will pause momentarily to assemble the roster.
And our first question comes from Rob Brown of Lake Street Capital markets. Please go ahead.
Hi, good morning, Thanks for taking my question.
Hey, good morning, Rob how are you doing.
Good. Thank you. My first question is on kind of the pricing improvement I know it takes a little time to flow through and you said you got a $40 million last year, how much is sort of yet to come.
You've already negotiated and I guess, how much more.
Is sort of out there that you think you can get.
I would tell you Ed Rob Lara.
Largely depends on how much inflation, we see honestly as we have indicated we have.
Automat, what I would call automatic pricing increases currently built in for anything thats material related with the majority of our customers. Okay on the mobile solutions side on the power side, we've seen increases.
<unk> goes up and down as it relates to precious metals, and we adjust that pricing on the day of shipment we've seen significant material related costs for resins, and we've passed that through proactively to our customers in those cases.
It doesn't require a significant amount of negotiation because we don't have long term contracts. So as prices move there we have the opportunity and as I indicated in my remarks have demonstrated the ability on the electrical side to pass through that pricing on the mobile side, we have the material that is really automatic.
I would tell you there's probably.
Another.
I hate to speculate but theres probably.
Non material related products, there is probably another 5% to 10% as it relates to the cost increases associated with non material related applications that we're pursuing from our customers today.
Okay, great. Thank you.
And then and then moving kind of the <unk> activity.
Pretty good project wins in the quarters in the quarter I guess, how is that pipeline building do you see that sort of cadence continuing in terms of adding projects and then I presume. It takes a few years to get those into revenue, but maybe what's sort of the.
The pace of.
The activity that you've won that that can turn into revenue over the next couple of years.
Yes.
I would tell you obviously, it's a priority for us as I indicated our team is very heavily focused on that the one of the things that was interesting to me when I attended the electric battery show that I referenced in my comments was that there is a lot of research and.
Elements surrounding it but as it relates to the number of factories today that reside in this.
On this continent.
For manufacturing not only batteries for vehicles, but certainly storage related batteries.
For utilization.
The grid there is still a lot of development needs to be done by those customers as it relates to establishing their factories.
No.
The good news is is that we've got we're connected.
With quite a few people that are moving forward with those types of installations, we're seeing a lot of quoting activity.
For that we have.
Had some.
Instances on the EV side, where the.
The person we're quoting the same product with multiple customers. So there is a little duplication in the pipeline and some of those types of instances, but I don't think that we have.
Think that we're right at the forefront of this and certainly our teams are actively engaged.
As this is developing in the United States.
Okay, Okay great.
And then maybe just sort of your kind of comments around the macro environment into next year.
I know theres, some uncertainty, but but.
Sort of the <unk>.
Just kind of outcomes that you've experienced in the past how how much visibility do you have.
And how how do you kind of.
Manage through changes in volume.
If things slow down and I guess, what visibility you have for next year at this point.
Yes, good question.
I would tell you that.
When we did the outlook three months ago, I think that we were looking for a little bit more of a bounce.
Mostly on the auto side in the fourth quarter and through 2023, and I think what we're seeing with some of our customer release schedules is a little bit more cautiousness on their part you saw that inventory levels for the Oems jumped up I think on average when we were talking previously it was in the low 20% now it's at the $34 30.
Five day range.
Ford I think Ashley was a little bit higher when they announced and some of the data that we're seeing they were.
Up in the 50 range getting back more towards where they have been historically, so I think that there is a certain amount of cautiousness going on as it relates to the higher interest rates.
The ability to move product as a result of that and we've seen that in some of our releases.
I would tell you.
Our expectation is that we don't think that it's going to be a significantly down from where we are today at least what we're seeing.
It's simply because we've been operating at lower levels.
So far in 2022 as a result of.
The semiconductor chip shortages and supply chain interruptions, which impacted us for the majority of the first half of this year. So I think that and then is well positioned.
With a diversified portfolio on.
On the electrical side and the automotive side and certainly as it relates to our ability to flex I think we've proven that we have a very.
Strong and capable management team that demonstrated throughout 2020 that we can do that the majority of our facilities run at 50 hour work week. So we can flex back 20% on the labor side without losing any skilled machinist.
<unk> engineers, which is a key part of what we would like to retain in the event that there is a downturn.
Okay, great. Thank you for all the color I'll turn it over.
Thank you.
The next question comes from Steve Barger of Keybanc capital markets. Please go ahead.
Hey, Good morning, guys. This is Jacob on for Steve Thanks for taking the questions.
Good morning Gordon.
So the first one just organic growth levels seem to be pretty decent in the quarter, maybe a little bit lower than the double digit levels that we were talking about last quarter can you just talk about how you see those trends moving into Q4, specifically and then maybe what that implies for momentum heading into the first half of 'twenty three.
Yes.
I think the guidance that we gave for the whole year that we went through honestly I think kind of covers where how we expect that to build through the fourth quarter.
So just.
Not at this point in time, giving guidance on 2023, we'll do that certainly when we report our year end results, but as I indicated.
Our view is that.
There is some adjustment going on in the market today.
We're seeing some cautiousness as it relates to.
Our customers' volumes, we've seen inventories jumped just a little bit they are certainly not as robust as they were pre COVID-19 and I think that there is there is some doubt on whether they will get back to that level given how the Oems have.
Been able to run their businesses and maintained lower inventory levels for a period of time so.
Our expectation is that.
We will continue to see improvement in sales throughout 2023 as it relates to the degree I think we'd like to see things develop a little bit here over the fourth quarter and see where the economy goes especially post election.
Okay got it thanks, that's good color there.
Second one just kind of a follow up on the cost recovery side I know a lot of your contract negotiations are centered around end of year, maybe only some twice a year do you think we're going to have to wait until first quarter to start seeing a majority of the rest of those recoveries to coming through.
Most of what we're talking to our customers about right now relates to pricing adjustments on January one.
Okay understood there.
So maybe one or two more for me.
Typically on the medical market the reentry into your medical market I know you talked about the noncompete from our life Sciences business until October of next year, but I'm, just kind of curious what areas, you're specifically targeting in the medical market.
Well, we're not targeting any areas right now because we're still subject to a noncompete agreement I would tell you that when we get to that point in time, there are applications within the medical space that fit the core processes that and then has so.
Anything that would be focused on precision turning or grinding or stamping would play very clearly into the skill set that we have and obviously we have a small medical business today that was grandfathered into our noncompete.
And some of the capabilities that we have there as it relates to instrument manufacturing, we could we could expand into other customer relationships.
Okay understood I mean, I guess, maybe do you have any sense of sort of the magnitude of what that opportunity could be you know as you get back into it once it is knocking pizza.
Yes.
Is it $10 million business for us today.
Certainly we think that over a period of time, we did.
In a period of time once we're into it over a two year two or three year period of time, we could.
Triple or quadruple the size of that business I would think.
Okay got it and then maybe just one last quick one in the beginning of your prepared remarks, you talked about getting to 20% plus of your revenues from sort of those megatrend markets by 25, I'm just curious what percentages of your business right now.
Where do we have Mike we're at like.
15.
Yes, I think it's.
13, or 14, and I think as well.
Yes.
So it's getting it to 20%, but with sales growth throughout the period right. So it is not.
<unk>.
The growth aspect of it and that is.
The stated target certainly we've had conversations.
About.
Setting our goal is higher than that and internally they are.
But that is our our external stated objectives.
Okay understood. Thanks for taking my questions. This morning.
Thank you.
The next question comes from Tom <unk>.
Zack investment research. Please go ahead.
Hey, good morning, guys.
Good morning, Good morning, Tom.
Yes, I think most of my questions have been asked and answered a couple of quick ones any current commentary on the inflation situation, you're one month into the fourth quarter any signs of hope or anything like that.
Well I think the signs of hope are that we continue to secure.
Pricing adjustments from our customers.
As I indicated we've done that on the.
Our solution side, and we'll continue to do that we haven't seen on the power side.
The sales are impacted by lower precious metal prices that we've seen silver come down a little bit.
And that.
From a quarter over quarter comparison standpoint, it doesn't necessarily change our margin significantly, but certainly changes the sales.
And I would say margin I am talking about dollar.
Alright.
It can impact the percentage.
But.
I would tell you that.
By fee only today is.
We have a lot of conversation customers.
And I think early on they were maybe a little bit more at the serial than they have been recently, because I think that I think our customers understand that it's important that they have the conversation with us and we reach some sort of an agreement.
Because they want a healthy supplier supplying them product and now they've already had an opportunity to talk to the Oems and deal with some of their pricing related issues because they have some of the same concerns and now that they have a clearer path on how that is working I think theyre more.
Reasonable and the approach in dealing with us.
Alright sounds good.
Any additional color on the China JV is back to normal or recovered.
You expected.
Yes look at sea.
I would tell you.
We had a little bump there in our China operations.
In the second quarter with the Covid, that's still an issue that we're concerned about there, but we're really.
Jim and pretty hard.
With the volume $27 million for a quarter, obviously, well over $100 million run rate.
Our worthy is performing.
Reasonably well as is.
As well.
So we feel pretty good about what's going on in our China operations at this point in time I think the one negative for US is that we still are negotiating.
Some pricing with the customer.
For the JV, we concluded on a pricing arrangement with them. It was unfortunate that we didn't conclude on it.
Prior to the end of September , but we agreed to an adjustment for the first half of the year, but we concluded on that in October and we didn't get an opportunity to book it in.
The third quarter, but we'll pick that up in the fourth quarter and then we are.
We've already started the negotiations with the customer on the second half of the year, so little bit of a lag.
China.
Arena as it relates to talking about pricing for inflationary matters.
Got it Okay. A couple of quick ones I think last quarter, you talked about the leverage ratio being under three at year end.
I'm, assuming that's still not a goal or is that can that still happen.
Yes.
We're obviously focused on getting it below three I think given the revised outlook.
Could it be more early in 2023 of them at year end at this point.
Yes.
Okay.
Last one you guys talked about how youre, not giving 2023 guidance until the next quarter, but you did give pro forma.
Segment adjusted EBITA margins.
Can you consider that.
<unk>, our expectation going forward on a normalized basis.
So regarding the $10 million to $12 million, we outlined our current view is that sequentially versus 2022, we'd realize about 75% of that in 'twenty three.
Obviously, some continued impact as we get through the closure of those facilities and the work transfer when we provide our 2023 outlook in March.
We'll have a better estimate on that it's going to depend on.
Sublease timing and terms and various other factors, but our current view is of the $10 million to $12 million that we outlined.
For the facility closure savings that we'd be able to realize about three quarters of that in 2023.
Got it okay. That's all I got thank you.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Warren.
Any closing remarks.
Yes, I just wanted to think.
Our analysts and shareholders for participating in this call today as well as our employees.
We certainly as I indicated at the beginning we appreciate that.
The support that we've had from all of our stakeholders and I. Appreciate you taking part in the call today. Thank you have a good day.
Vince has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yeah.