Q4 2022 Barnes Group Inc Earnings Call
Good morning, My name is Devon, and I will be your conference operator today at this time I would like to welcome everyone to barns fourth quarter and full year 2022 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time press Star then the number one.
On your telephone keypad, if you would like to withdraw your question at any time press the pound key.
Thank you for your patience I'll now turn the call over to Vice President of Investor Relations. Mr. Bill Pitts, you may begin the conference Sir.
Thank you Devin.
Good morning, and thank you for joining us for our fourth quarter and full year 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.
Yeah.
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.
That's O N E B a R E S dot com.
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.
They've met 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 the 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 Dot com.
Let me now turn the call over to Tom for his opening remarks.
Then Julie will provide a review of our financial performance and details of our initial outlook for 2023.
After that we'll open up the call for questions Tom.
Thank you Bill and good morning, everyone.
It's been an enjoyable six months since moving into the CEO role at Barnes.
I'm pleased with the depth and pace of our drive towards unlocking enterprise value right.
Focus on core business execution.
Beneficial early signs of these efforts are already appearing in many areas across the company.
For example in industrial.
Investments in commercial professionals have reinvigorated our sales funnels. This is precipitated early success in orders in certain targeted end markets.
We are combining two of our strategic business units into one.
And we are making solid progress on our integrate consolidate and rationalize restructuring efforts.
At aerospace aftermarket remains robust.
OEM orders were very good.
We will touch on the details of these points momentarily.
For the fourth quarter organic revenues increased 5%.
Adjusted operating margin decreased slightly.
The ongoing labor productivity challenges.
<unk> related absenteeism in our China operations.
Gross inflation concerns it reflects some progress but not sufficient progress.
Organic orders were good up 10% and book to Bill was a solid one one times.
Cash performance was pressured and Julie will touch on that and additional details shortly.
However, we believe the cash challenge in 2020 to his passing.
Expect more typical performance in 2023.
Before jumping into the financial results, let's talk about what's happening within our businesses.
Beginning with industrial.
Industrial has a strong portfolio of brands some of which had significant strength within their end markets others are being refocused to unlock more value than has been delivered to date.
Integrate consolidate rationalize initiatives power some of that performance improvement.
As an example to begin in 2023, we have combined our engineered components enforce motion control businesses into a single new strategic business unit.
<unk> motion control solutions or M C F.
M C. S will bring the combined brands together and be better positioned to leverage the entire portfolio of products services and solutions, we offer to our global customers.
This integration will allow <unk> to better manage and mitigate global macroeconomic challenges.
And rationalize costs.
A portion of those savings will be reinvested into enhancing our mcs salesforce to drive topline growth.
Our restructuring efforts are well underway with ongoing execution of phases, one and two announced in July and October respectively.
During the fourth quarter as part of our phase two actions, we consolidated one of our molding solutions sensor facilities into other operations and more significantly transitioned our innovation hub activities.
Of course, we remain focused on innovation and believe we are best served driving R&D from within the business in closer proximity to customer revenue generation.
In addition, eliminating the central structure of the innovation hub is demonstratable step in our efforts to rationalize overhead.
At this time planning for additional actions is underway.
With all this activity occurring simultaneously across industrial what early signs of traction can be seen in the organic orders of our molding solutions SBU.
You may recall in July we saw.
Poke through the establishment of key regional markets in the Americas Europe .
Daina and Asia.
This was a deviation away from our branch based commercial strategy with the intent to better leverage our full product portfolio with customers.
This allows us to better tailor, our extensive technology solutions for each customer application.
And generate growth for molding solutions.
That change has resulted in a better feel of the commercial pipeline.
In the fourth quarter, we saw 17% organic orders growth for bolt molding solutions with mold systems demonstrating considerable strength.
That performance could have been even stronger had we not seen our hot runner product line pressured by significant COVID-19 disruption in China at the end of the year.
Molding solutions book to Bill was a solid 116 times.
Which is a good result for the largest growth engine within our industrial portfolio.
Our aerospace business continues to perform well despite challenges, especially as it relates to labor.
We have successfully acquired the critical talent that was a constraint earlier in 2022.
However, integrating the newly acquired talent into our production operations has negatively affected productivity in operating margin primarily within the OEM business.
Fortunately this dynamic is changing to the better through enhanced training and development efforts.
We do not anticipate future quarters to be as impacted by these effects.
Oems book to Bill in the fourth quarter was 1.33 times.
Looking forward 2023 provides significant opportunities for renewal.
Extending existing key contracts with GE leap and other programs.
We are highly confident these will present upside prospects for our financial performance.
And provide a baseline of future work, enabling cost optimization and production efficiencies at our Windsor, Connecticut, and Singapore locations.
In the aftermarket overall activity remains robust capping a significant year of recovery.
As additional flight activity builds with China reopening we expect this business to continue to grow through 2023.
To conclude my prepared remarks, our unrelenting emphasis on core business execution will improve our competitiveness provide revenue growth drive operational efficiencies and generate solid cash flow.
Our topline Bottomline pipeline philosophy will direct the actions we've taken across the company.
While much work remains to improve our underlying performance multiple actions are underway with the appropriate sense of urgency from the Barnes team are.
Our collective efforts will unlock the enterprise sales potential we see in Barnes to the benefit of all stakeholders.
Let me now pass the call over to Julie for a discussion on our fourth quarter and full year performance as well as some end market color.
Good morning, everyone and thank you Tom let me begin with highlights of our fourth quarter results on slide four of our supplement.
Fourth quarter sales were $313 million up 1% from the prior year period with organic sales increasing 5%.
Foreign exchange negatively impacted sales by 4% adjust.
Adjusted operating income was $35 million this year down 1% from adjusted $35 4 million last year.
And adjusted operating margin of 11, 2% was down 20 basis points.
Net income was $15 6 million or <unk> 30 per diluted share compared to $28 1 million or <unk> 55 per diluted share a year ago.
On an adjusted basis net income per share of 52 was down 5% from 55 last year.
Adjusted net income per share in the fourth quarter of 2022 excludes <unk> 16 of restructuring related charges and six cents of tax related CEO transition cost.
Tax was a drag in the quarter as our effective tax rate was 18, 6% compared to four 9% a year ago.
The increase in the effective tax rate was primarily driven by the non recurrence of beneficial foreign tax items, a year ago and the current quarter tax charges associated with the company's CEO transition.
Moving to our 2022 full year highlights on slide five of our supplement.
Sales were $1 6 billion up slightly from the prior year.
Ganic sales were up 4%, while FX had a negative impact of 4%.
On an adjusted basis operating income was $145 9 million versus $151 million last year, a decline of 3%.
Adjusted operating margin decreased 40 basis points to 11, 6%.
For the year interest expense was $14 6 million a decrease of $1 6 million due to lower average borrowings.
Other expense was $4 3 million down $1 7 million from last year, primarily because of reduction in non operating pension expense.
The Companys effective tax rate for 2022 was 64, 7% compared with 21, 9% last year.
The increase in the 2022 effective tax rate was driven by this year's goodwill impairment charge, which is not tax deductible.
<unk> charges associated with Barnes CEO transition.
And the nonrecurring benefit the.
The nonrecurring beneficial foreign tax items a year ago.
These items were partially offset by a change in the mix of earnings between high and low tax jurisdictions.
Excluding the tax impacts for the adjusted items of restructuring goodwill impairment and tax related CEO transition costs.
<unk> thousand 22 effective tax rate would be approximately 21%.
For 2022, net income was $13 5 million or <unk> 26 per share compared to $99 9 million or $1 96 per share a year ago.
On an adjusted basis 2022, net income per share was $1 98 up 2% from last year.
Adjusted EPS for 2022 excludes 33 of restructuring related charges.
<unk> <unk> of tax related CEO transition cost.
And $1 33 from a goodwill impairment charge, which we recorded in the second quarter.
Now I'll turn to our segment performance beginning with industrial.
For the fourth quarter sales were $205 million down 3% from the prior year period.
Organic sales increased 4%, while unfavorable foreign exchange lowered sales by approximately 7%.
Industrials operating profit was $6 1 million versus $19 1 million a year ago.
Excluding $11 1 million of restructuring related charges in the current year adjusted operating profit of $17 2 million was down 9% and adjusted operating margin of eight 4% was down 60 basis points.
Adjusted operating profit was impacted by lower productivity inclusive of Covid related effects in China.
For the year industrial sales were $833 million down, 7% from $896 million a year ago with organic sales down 1%.
Foreign exchange had a negative impact of 6%.
On an adjusted basis operating profit was $70 million a decrease of 28% while adjusted operating margin was eight 4% down 250 basis points.
Moving to orders and sales for the quarter across our industrial businesses.
At molding solutions organic orders were strong again this year increasing 17%.
As Tom mentioned this is one of the leading indicators we have been looking for as evidence that our actions are on the right path organic.
Organic sales increased 2%.
For 2023, we expect molding solutions total sales to be up low to mid single digits with organic sales up mid single digits.
At force <unk> motion control organic orders were down 3% in the quarter, China was particularly soft orders wise as you would expect given the COVID-19 outbreak.
Organic sales grew by 6%.
Engineered components saw strong orders intake driven by transportation related end markets up 13% versus a year ago and organic sales increased 3%.
As Tom mentioned, we are combining our engineered components and force and motion control businesses into a new strategic business unit called motion control solutions and we expect this business to see low single digit total organic sales growth in 2023.
At automation organic orders were up 4% Y while organic sales increased 13%.
We expect high single digit total sales growth and low double digit organic sales growth in automation for 2023.
For the overall segment, we anticipate low to mid single digit total sales growth and mid single digit organic sales growth for 2023 with adjusted operating margin between nine and a quarter and 10 in a quarter percent.
Yeah.
At aerospace sales were $109 million up 8% from a year ago.
AUM was down 2% due to the timing of customer acceptance of certain orders.
Aftermarket strength continues to be favorable with sales growing 27%.
Operating profit was $18 million up 11% as compared to the prior year period.
Excluding a favorable restructuring adjustment of 300000 adjusted operating profit of $17 8 million was up 8% from last year.
Contributing to the strong performance in adjusted operating profit is the benefit of higher aftermarket sales volumes.
Offset in part by unfavorable labor productivity.
Adjusted operating margin of 16, 4% was flat to last year.
For the full year aerospace sales were $429 million up 18% from $362 million a year ago.
On an adjusted basis operating profit was $75 9 million up 43% and adjusted operating margin was 17, 7% up 300 basis points.
Within our OEM business orders were solid in the quarter up 7% and the book to Bill ratio was 133 times.
Our OEM backlog increased by 3% sequentially from last quarter and was 10% higher than a year ago.
We expect to convert approximately 40% of this backlog to revenue over the next 12 months.
Our OEM sales outlook for 2023 is up low double digits driven by the leap program on narrow body aircraft from both Airbus and Boeing.
As has been the case throughout 2022 aftermarket sales growth remained healthy with MRO up 31% and spare parts up 20% for 2023, we continue to forecast good growth on top of 2020 twos performance with MRO up low double digits.
And spare parts sales up high single digits.
Aerospace adjusted operating margin is anticipated to be between 18 and 19%.
With respect to cash full year cash provided by operating activities was $76 million versus $168 million in the prior year period.
The primary drivers of the lower cash generation in 2020 to remain an increase in working capital and paid incentive compensation related to 2021.
And as I mentioned in the last quarter, we'll begin to wind down inventory as working capital performance is a focused priority for 2023.
Free cash flow was $40 million versus $134 million last year.
Capital expenditures were $35 million up approximately $1 million from prior year.
With our balance sheet the debt to EBITDA ratio as defined by our credit agreement was 235 times at quarter end up slightly from the end of the third quarter.
When considering our cash position at year end on a net debt to EBITDA basis, we'd be approximately two times.
Our fourth quarter average diluted shares outstanding were $51 1 million shares and period end shares outstanding were $50 6 million shares.
During the quarter, we did not repurchase any shares and approximately three 4 million shares remain available under the board's 2019 stock repurchase authorization.
Turning to slide seven of our supplement let me provide details of our initial outlook for 2023.
We expect organic sales to be up 6% to 8% for the year with an adjusted operating margin between 12, five and 13, 5%.
Adjusted EPS is expected to be in the range of $2 10 to $2 30.
Up 6% to 16% from 2020 twos adjusted earnings of $1 98 per share.
We currently forecast a 15 cent impact on EPS for previously announced restructuring charges, but we anticipate that number will increase as additional action decisions are taken.
Most of the known impact approximately 13.
Will be split evenly between the first and second quarters, we do see a higher weighting of adjusted EPS in the second half with an approximate 45% first half 55% second half split.
Similar to the last two years, we see the first quarter being the lowest point in the range of 36 to 40.
A few other outlook items.
Interest expense is anticipated to be approximately $24 million driven by a higher interest rate environment.
Other income of two to $2 5 million driven by non operating pension.
An effective tax rate between 24, and a half and 25, 5% cap.
Capex of approximately $50 million.
Average diluted shares of approximately 51 million and cash conversion of approximately 100%.
I would like to note that like our adjusted earnings outlook. This cash forecast includes only previously announced restructuring actions actual cash performance could be negatively influenced by further investments to drive transformation.
The full extent of 2023 cash outflows related to our transformation activities is still in the planning phase.
In summary, 2022 was a year with a steadily recovering aerospace business and are continually pressured industrial business.
As we work to lay a solid footing upon which to build profitable growth will continue to undertake restructuring actions to improve operational and financial performance.
Activities to integrate consolidate and rationalize our operations are expected to show meaningful progress in 2023 that will raise margins and improve working capital efficiency.
Operator, we will now open the call for questions.
Our first question comes from Pete Australia with <unk> Securities.
Good morning, Pete Hey, good morning, Julien Thanks for taking our questions.
Just wanted to start I was wondering if you could give any additional color on what youre seeing for demand for commercial Aero aftermarket now it looks like your order activity was pretty strong during the fourth quarter, but the growth rate you're guiding to for 'twenty three are slowing down a bit. So I was just wondering what youre seeing with shop visits and how youre expecting that to trend over the next few quarters.
So Mike is right.
When you look at Aero tour.
Amount of recovery than we've already seen in the Americas and in Europe .
Getting back to pre pandemic levels, you've yet to really see a lot of the full recovery within Asia.
Both.
More I think so in the narrow body has occurred with with China, but showed wide body in Asia is still coming back that will be a longer trajectory kind of MRO recovery. There. So I think part of the maps with kind of a fuller.
Return to repairs and overhauls in the Americas, and Europe , you still got Asia, coming along particularly in wide body that it'll help us drive our aftermarket business, but the math of it will slow down the growth rate, but still be a nice growth trajectory as more seats are flying around the world.
Yeah, we're not predicting any.
Major disruptions on that recovery, but certainly there's obviously a lot of things happening globally, and geopolitics that could have an effect but.
So we're being Postured conservatively port, but we do feel that Asia is going to come back along that trajectory and you will see continued growth in air travel progressively in the Americas and Europe as well.
Okay.
Alright Thats helpful. Thanks, and then also wanted to ask just.
On the OEM side.
Does your guidance for Aero OEM sales and assume that there's going to be any increase to the underlying production rates, particularly for the narrow body aircraft platforms.
No as I think we are being very realistic to normalize to the overall supply chain that is flowing to the major players. So we are very.
Very actively.
The interface with our key customers normalize our rates to theirs.
Our guidance really reflects that reality, what can not be demand really driven because we know the demand is higher but really what the overall supply chain Bob can actually provide so we've done a nice job and we'll continue to do a nice job on the OEM side of normalizing our output relative to what the supply chain can feed.
And then on to the customers, so again that posture to appropriately and calibrated to what the overall industry can actually achieve that.
That's an important synchronization that we've worked very hard out with our key customers in the OEM side to do.
Yeah.
Alright, Thanks, Thats good color. Thanks, a lot.
Youre welcome Pete Thanks, Steve Thank.
Thanks Pete.
Yeah.
Our next question comes from Matt Summerville with D. A Davidson.
Thanks, a couple of questions can you maybe provide a little bit more detail as to the impact from the labor productivity issues in Aero.
Covid absenteeism in China in the quarter, what that may be what the top and bottom line impact may have been maybe just a little more granularity on exactly what the issue was in aerospace.
Yes.
When we looked at 2022 and the year is ramped very aggressively we obviously, we do the normal things are working overtime and using it.
Some forms its temporary staffing to be able to catch up with output requirements for customers as we can.
Message kind of over the last couple of quarters since our CEO we've been.
With Eon reasons leadership event and dawn.
It had been it actually adding staff into aerospace, but there hasn't been a large number of individuals that have had to be added into those facilities and it has resulted in a significant training and development drag that we knew we were going to have we tried to get ahead of that as much as possible, but just from an output.
Productivity standpoint, yes, it has been a drag.
I don't think we can.
Quantify down to the bottom line of what that effect was I think we have a.
Pretty reasonable it internally what the effect was.
In terms of its drag on output.
Hey.
Obviously higher costs that resulted from I think as you can imagine as you have those new people on board and they come up to speed. They are trained by <unk>.
Our expertise staff, but also us to divert their time to do training and development.
You catch up with that learning curve, so to speak and you get back more to the trajectory around before.
So that kind of phase of hiring and training and development is well underway.
And I think that that really we kind of feel are three to six month timeframe that new hires can be pretty effective that's coming on board either in the OEM side in particular, but also on the MRO side being effective. So we think there is headwinds there.
Hi.
I don't think we could end up giving a precise quantification other than that it's a drag on COVID-19 absenteeism very unique and situational first of all we only China opened.
Virtually overnight.
Everybody started interfacing with the high Covid outbreak. It also coincided with Chinese new year, which was challenging timing.
I think COVID-19.
Went through our operational facilities extremely quickly within a course of a few weeks virtually almost every single employee we had that experience and interface with <unk>.
Colgate. Unfortunately, so it was a big disruption combined with Chinese.
For the year.
So ends up being kind of a drag for us through the kind of the December period ended January we think we're well beyond that now if that effect as well in the past. So I think it will be just kind of a one time hit for us in terms of loss of the business.
But it would be tough really to give you kind of a quantification down to the bottom line of all.
Of what that is Julie you may have other comments.
Comments here that you may want to add to this as well.
Sure, Matt just to add a little bit of color to that the aerospace performance.
In the fourth quarter relative to the third quarter, if that if you're looking at that we also saw a slight dip in our aftermarket sales, which also would have contributed to performance in the fourth quarter. It was just a little bit of change in purchasing patterns as G was going through some of their transitions nothing we're concerned about at all but.
From a mix perspective that also had an impact on the margin performance in the in the fourth quarter.
As a follow up I, just want to understand some of the pluses and minuses.
Impacting Q1, if I look at the 36 to <unk> 47 for Julie mentioned, that's really no better than what you did in the first quarter 'twenty two or in the first quarter of 'twenty one.
So help me understand with the restructuring well underway in industrial why maybe we're not seeing.
Better year on year performance or go through kind of the pluses and minuses.
Sure I can add Julie kind of walk through the macros, there and I can chime in at the end of the Big picture.
So in terms of the year over year like you said Matt.
We are underway with the restructuring actions, but as we've been speaking to were not expecting to see run rate benefits for quite some time. There is an expense outflow in a delay between the activity is getting kicked off the facilities closing the <unk>.
Products transitioning.
And when we see that the results flow through to the bottom line. We're also still in an inflationary environment, where we are continuing to catch up with our pricing theres a lot of momentum around the pricing activities across the portfolio now, but we do not see from a labor.
<unk> in our materials perspective, a lot of dampening in inflationary environment, and we're candidly being.
A bit cautious in what we are holding the business accountable to and what we think will be delivered as a result of some of the uncertainty, especially as we were developing the plan with the potential for recession that might be lightening now, but we are still in a rebuild.
<unk> mode and I'm sure. It is frustrating to hear that but we we have the underpinnings that will drive the performance, it's just going to take a little bit of time to get there.
Sorry, I'll just ask one more follow up on that and then I'll pass it on so in that regard Julie and then Thomasville comments as well how much cost savings should we expect to hit the P&L with some industrial in 'twenty three and then what's the carryover in 2004 just based on this.
Stuff you've announced thank you yeah.
Yeah sure so consistent with what we announced last time and emphasizing that because our outlook really hasn't changed which is a good thing as we get farther down the path the $29 million of investment will develop will generate $26 million in run rate savings and the full run rate should be hit in 2012.
For for 2020.
Three we would expect in the neighborhood now as we're looking at things more specifically of $15 million to $17 million potentially flow through in this year.
Okay.
I think that the other thing I'd add there is we are really focused on phase one and phase two implementation and completion to get those cost savings in 2023.
Per the timing that we had laid out the Julian just went through we are purposely.
Putting ourselves to finish up the scoping of additional phases, but we want to digest and complete and execute the phases. We have before you go on to the next ones, which will follow.
But as we move forward, we'll provide more information on those but it's very important we feel to kind of get there.
<unk>.
Learning curve that the organization has had to come up with regards to executing these types of programs. We've got a very good job of keeping them on schedule and we do want to demonstrate that we control the benefits so that leaves the announced future phases.
There is a lead from the Investor community that we can continue to extract those benefits going forward and we do think there's more opportunities out there.
Understood. Thank you.
Okay.
Our next question comes from Christopher Glynn with Oppenheimer.
Good morning, Chris Hey, Thanks, Good morning.
Just wanted to start out with a house keeping I didn't catch the comments jewelry for the segment margin outlooks, respectively.
Sure.
Okay.
I'm sorry, so question again, the margin outlook for 2023.
The two operating segments I didn't quite catch the margin outlooks, Christopher aerospace, it's 18% to 19%.
And for the industrial it's 9.25% to 10.25% that's right.
Okay great.
So.
Just curious kind of continuing on the restructuring plans for industrial how do we anticipate.
<unk> work transitioning to.
Accelerating portfolio yield.
Hi.
Kind of laid out a bit of the lead lag dynamics.
But curious.
Just just a little bit more when do you see.
Do you see kind of pretty full.
Run rate savings exiting the year close to the $26 million.
Yes, I think there is absolutely first of all confirmation, yes exit run rate savings from the year would be on that from what we've announced thus far in phase, one and phase III at that $26 million annualized run rate.
Remember theres two sides of the initiatives, we're talking about one is the restructuring or the cost rationalization consolidation.
Of the one you referred to is the integration of the go to market strategies.
Question, you're asking Chris.
We have to in our mind consolidate and rationalize to be at a lower cost basis, but also the integration of our go to market strategies away from kind of these brand strategies is to go to each zone with full line selling through.
Centralized full line sales teams, that's what's driving our order take rate.
No.
When we have we have the feet on the street now we're getting a good deep.
Robustness in our sales funnel, that's precipitating into higher orders, which are going into backlog and obviously as we go through the remittance process they'll move into the revenue stream.
So that integrated go to market is already producing results and we're very eagerly looking forward to that obviously driving the P&L performance as a precipitate to often to remittance in combination with the initiatives savings. We've identified we think those two things in combination are critically important.
For the value creation.
The usage going forward.
Great.
I appreciate the contextualized nation.
The molding solutions orders.
Ramp.
This backlog overall industrial stepping up.
Just curious if that the molding solutions orders have kind of.
Pivoted.
In two in earnest.
Continuity that you cannot freehand, if it started out a little better than you expected.
Relative to what Youre seeing in the pipeline if there is some.
Hedge there and the molding solutions outlook mid single digits, just given that it's still formative.
You said.
Yes, Chris that's ferrets.
I am pleased with our start not satisfied.
Person to get satisfied and so as Julie we have a lot of potential.
John Locke here before I'm going to really say im satisfied, but I'm pleased with the start.
The other comment I'd make is it's asymmetric Chris didn't really nice job of where we have the opportunity to focus, especially in multi cavity molds picky.
Picking up but if we look across the globe.
Look at our hot runner product lines, when we look at ourselves our growth has not been seen in each of those areas. So theres a lot of focus going on.
To be able to penetrate the market deeper so.
So I'm pleased with the start but not fully satisfied we've unlocked all the potential.
There is one.
As you can tell some nervousness within.
Our prospective view Theres a lot of dynamics that are occurring.
Both from a geopolitics as well as an economic standpoint.
And we don't want to get over our ski tips, but.
We are.
Trying to be very aggressive in our go to market approach and win that business and focused very heavily on our operating facilities that are now taking that back log and written net ticket out into the customer base, we see a lot of strong demand, even with China coming back.
So we're optimistic but we're being very disciplined in our execution against that and not getting ahead of ourselves.
Great Nice granularity appreciate it.
Welcome Chris Thanks, Thanks, Craig.
Our final question comes from Myles Walton with Wolfe Research.
Hey, good morning.
Morning, My mouth.
So maybe you could give around the horn a little bit but.
The aerospace in the fourth quarter.
RSP versus MRO mix or growth rates. However, you Wanna provided what does that look like it sounded Julie like the Rfps maybe took a step back is that is that correct.
Yeah. They were down relatively speaking a few million dollars between quarter with relatively flat OEM and MRO. So it was a.
Larry dip in RSP.
Okay. So when I look at the margin profile sequentially that sounds like it's more of the determining factor than an incremental labor inefficiency or instability. That's occurred is that a fair characterization.
They definitely contribute they definitely both contributed.
Okay, and then on the on the margin outlook for 'twenty, three obviously versus the run rate you did in the fourth quarter. You are looking for a couple hundred basis points of expansion.
So again, what is the underlying assumption on R&R RSP in that high single digit.
Outlook, you have for perhaps market.
So as you think about 2023 and the margin blend we saw a very nice ramp this year because the aftermarket sales were growing at an accelerated pace and just as a reminder, RSP sales were up 59% and MRO was up 33% with OEM up 7% as we.
Get into 2023, we're going to see the OEM side ramp like we said low double digits, but we're going to see MRO and RSP slow a bit therefore, there'll be a bit of mix impact on overall margin.
And that's what's built into our outlook did that answer your question a little bit but.
I guess, what Youre, saying is theres, a mix impact, but I'm looking at the run rate from what you did in the fourth quarter to what Youre looking for for next year, and obviously, you're assuming a $60 five in the fourth quarter go into 18 and a half in the 'twenty three time period.
Yeah.
But the mix is against you so.
Oh, yes must be getting materially better in terms of performance.
Absolutely we would anticipate that OEM performance is going to improve Q4 was a dip.
Okay, Alright, and then on the industrial consolidation side, you've got to be use of pretty material size and you've got <unk>.
Automation.
23% of the size of the other Sps is that tee it up for bolt ons or any reason why you don't view that as sort of subscale relative to the other two and then that one has unique European exposure for 2023 is that more of a risk to your to your outlook.
Miles very insightful question.
I think there is scale differences as you know we're looking at a lot of opportunities for how we integrate consolidate.
Rationalize the entire portfolio so.
As you are right to point out there's other opportunities for how we could manage the sbu's Raleigh communicating obviously, the natural fit between engineered components and FMC can do kind of a motion control business today.
We actually feel pretty well positioned with.
Our automation portfolio.
The items that we referred to last quarter was bringing that automation portfolio to Americas and a more purposeful way. So we've made investments with feet on the street. In addition to our distributor.
In the Americas to be able to jointly selling confuse the market. So we're actually opening up more global markets for our automation business and we do feel this is a line of business it Scott.
Strong growth potential going forward and we're investing accordingly.
You are right the size wise relative to the scale of what we're doing in the motion control.
Definitely a smaller business, but has much higher growth potential so we're treating it.
As a kind of a growth trajectory product line and in particular getting global distribution and sales of all of it.
Our force motion control.
In our engineered components businesses that now form Mcs for motion control solutions are already globally based.
Global distribution for those but automation is a catch up.
But given the end customers are different.
For those product lines were kind of bringing that go to market strategy.
Through a separate channels, because just more effective to pick up opportunities. So we have seen some really nice.
Pick up both in orders and sales there.
As you know the that business.
We've got tremendous potential given the pressure for automation.
It exists globally, but we just haven't done a really good job of taking the product lines that we have acquired the genetic.
Acquisition that forms that business, we haven't done a good job of commercializing them globally, and we're doing a much better job since the third quarter of last year. We most teams in place to leverage that and we plan on doing that very aggressively going forward as a growth driver. Once you write material because of size wise won't be as material to the overall picture okay.
Okay.
And then just kind of a clean up ones. If I could I think Julie you said 24 million of interest expense is that right.
Their idea you should maybe term out.
The revolver.
So.
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The $24 million.
Is that the right number and we were quite fortunate in that Michael Kennedy, our head of tax and Treasury here did some repositioning of the portfolio last year before interest rates started to pick up so.
I think we're while we don't appreciate the higher interest expense I think we're comfortable we're comfortable with the terms we have right now and if an opportunity would present itself.
Two.
Reduce the overall interest burden for the company, we would certainly look at it but I think we're actually fairly well positioned in terms of the renegotiation, we did last year and the repositioning of that revolver.
Okay, and then last one sorry on the cash flow I guess I'm still a little unclear.
50 million.
Miss in the fourth quarter free cash flow.
What was the primary driver and then also the outlook for 'twenty three I think your DNA is $50 million above capex. So why would the conversion not be significantly better than 100% given what happened in 'twenty two in that conversion.
Sure no. It's a good question. So the Q4 performance was I mean.
It was disappointing to me I, we had intentions of driving down our inventory at a greater rate. This is all an inventory question that we're dealing with right now and for a variety of reasons. The inventory did not come down at the rate we expected what I would say is that in the back half of the year both though.
Our excuse me, both the third and fourth quarter delivered well above 100% cash conversion. So that gives me confidence going into 2023 that will be able to continue on that trajectory. We are laser focused on.
The inventory drawdown in managing that process now and to your point around greater than a 100% cash conversion. We have approximately I would love to see us get back up to the levels. We were at historically, which is above 100% cash conversion.
What we need to do is be thoughtful about the timeline over which the inventories will come down it's not going to happen overnight. It will work down over the course of the year and we'll ultimately see what that delivers us from.
From a free cash conversion.
Okay alright, thank you.
Thank you miles.
Thank you there are no further questions at this time I will now turn the call over to Mr. Pitts for closing remarks.
Thank you Devin.
We'd like to thank all of you for joining US This morning, and we look forward to speaking with you next on April 28, with our first quarter 2023 earnings Conference call.
Operator, we will now conclude today's call.
Thank you for attending today's presentation you may now disconnect.