Q3 2023 RBC Bearings Inc Earnings Call
Speaker 1: I I.
Speaker 2: Greetings and welcome to RBC Bearings third quarter fiscal year 2023 earnings call. At this time all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker 2: As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Josh Carroll, with Investor Relations. Please go ahead.
Speaker 2: Good morning and thank you for joining us for RBC Barring's fiscal 2023 third quarter learning conference call. With me on the call today are Dr. Michael J. Hartman, chairman, president and chief executive officer, Daniel A. Burjaran, director, vice president and chief operating officer.
Speaker 2: and Robert Selvin, Vice President and Chief Financial Officer.
Speaker 3: Before beginning today's call, I will remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995.
Speaker 3: Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to RBC Barron's recent filings with the SEC for a more detailed discussion of the risks that could impact the company's future operating results and financial condition.
Speaker 3: These factors are also described in greater detail in the press release and on the release, please enjoy the testing. Please stay tuned and until next time, bye for now!
Speaker 3: In addition, reconciliation between GAT and non-GAT financial information is included as part of the release and is available on the company's website.
Speaker 3: With that, I'll now turn the call over to Dr. Hart.
Speaker 3: Okay, thank you, Josh, and good morning, everyone, and welcome to the RBC's third quarter conference call.
Speaker 3: So, net sales for our third quarter for fiscal 2023 were 351.6 million versus 267 million for the same period last year, a 31.7% increase.
Speaker 3: For the third quarter of 2023, sales industrial products represented 70% of net sales with aerospace products at 30%.
Speaker 3: Gross margin for the quarter was 146 million or 41.5% of net sales.
Speaker 3: This compares to 93.3 million or 35% for the same period last year.
Speaker 3: Adjusted operating income was 71.6 million.
Speaker 3: 20.4% of net sales compared to last year of 46.3 million and 17.3% respectively.
Speaker 4: Adjusted EPS.
Speaker 4: diluted, came in at $1.64 a share.
Speaker 4: Adjusted to evitd was 103.3 million, 29.4% of net sales.
Speaker 4: compared to 71.4 million, 26.7% of net sales for the same period last year.
Speaker 4: During the period we paid down debt by another $60 million on the term loan.
Speaker 4: And pre-cash flow was $54.4 million.
Speaker 4: Turning now to some of our to our sectors.
Speaker 4: On the industrial business we saw
Speaker 4: and our seeing continued strength from the OAM sector.
Speaker 4: with RBC Classic Industrial up by 14.1%.
Speaker 4: driven by a semiconductor machinery, energy, and mining.
Speaker 4: Both RBC and Dodge showed a 12.
Speaker 4: plus percent growth in the industrial distribution revenues.
Speaker 4: Overall, industrial's were up 11.8%.
Speaker 4: with sector growth mitigated somewhat by Europe and some select OEM weakness.
Speaker 4: On the aerospace and defense side, overall we saw an expansion of 13.2%, with Aero OEM up 26 plus percent.
Speaker 4: The man drivers here are the obvious candidates.
Speaker 4: large plane builders and their supply chain coming to life. It's a production of Boeing's 737 and 787 ships rebound.
Speaker 4: We are at the beginning of this recovery now in pandemic, pandemic, inventories showing less of an impact in production rate increases our well-published size.
Speaker 4: We expect to see increased demand creating double digit growth.
Speaker 4: from the plane builders for many quarters to come.
Speaker 4: and we continue to add resources and planning to support increased build rates.
Speaker 4: Still great driven demand as well as expanded work statements.
Speaker 4: In total, RBC saw an organic growth in revenue of 12.7% during the period.
Speaker 4: There's been some questions about the backlog and much of our commercial aircraft business.
Speaker 4: is done.
Speaker 4: where the backlog isn't represented by the contract and the orders are published on a portal and we ship to those orders. So,
Speaker 4: probably 60% of our business there doesn't ever get into our back walk.
Speaker 4: Regarding the fourth quarter, we're expecting sales to be $375 to $385 million.
Speaker 4: This is becoming an increasingly difficult projection to make now post-adject position.
Speaker 4: which means half our sales, our stock items, where daily shipments are subject to daily orders.
Speaker 4: as opposed to being defined by long-term.
Speaker 4: Contracts where quarterly revenues can be well planned.
Speaker 4: So that puts us into the business of economic forecasting.
Speaker 4: And...
Speaker 4: And we
Speaker 4: We do the best we can.
Speaker 4: That's when they call over to Rob for more detail on financial performance.
Speaker 4: Thank you, Mike. S-GNA for the third quarter of fiscal 23 was 56.8 million compared to 41.7 million for the same period last year. As a percentage in that sales, S-GNA was 16.1 percent for the third quarter of fiscal 23 compared to 15.6 percent for the same period last year.
Speaker 4: Looking forward, SGNA is a percentage of sales as expected to be between 15.25, 15.75% of sales in the fourth quarter.
Speaker 4: Other operating expenses for the third quarter total 18.9 million compared to 35.8 million for the same period last year. For the third quarter of fiscal 23, expenses included 17.4 million of amortization of intangible assets, 1.2 million of costs associated with the Dodge acquisition.
Speaker 4: and 0.3 million of other expense.
Speaker 4: For the third quarter of fiscal 22, other operating expenses consisted of primarily of 23.5 million of costs associated with the Dodge acquisition 12.1 million of amortization of interchangeable assets and 0.2 million of other items
Speaker 4: Operating income was 70.4 million for the third quarter of fiscal 23 compared to operating income of 15.9 million for the same period last year.
Speaker 4: excluding approximately 1.2 million of acquisition costs.
Speaker 4: Adjusted operating income was 71.6 million or 20.4% of sales for the third quarter of fiscal 23. Excluding approximately 30.4 million of acquisition costs.
Speaker 4: Adjusted operating income for the third quarter of fiscal 22 was 46.3 million or 17.3% of sales.
Speaker 4: Interest expense for the third quarter of fiscal 23 was 20.9 million compared to 11.9 million for the same period last year. We anticipate total interest expense of between 21 and 22 million for the fourth quarter of fiscal 23, and the effective tax rate between 23 and 23.5 percent excluding discrete or unusual items.
Speaker 4: For the third quarter of fiscal 23, the company reported net income of $36.3 million compared to $0.5 million for the same period last year. On an adjusted basis, net income was $53.3 million for the third quarter of fiscal 23 compared to $40.6 million for the same period last year.
Speaker 4: Net income available to common stockholders for the third quarter of Fiscal 23 was $30.6 million compared to a net loss of $5.2 million for the same period last year.
Speaker 4: On an adjusted basis, net income available to commons.colders for the third quarter of fiscal 23 was $47.7 million compared to $34.8 million for the same period last year.
Speaker 4: Diluted earnings per share was $1.5 per share for the third quarter of fiscal 23 compared to a loss of 18 cents per share for the same period last year. On an adjusted basis, diluted earnings per share for the third quarter of fiscal 23 was $1.64 per share compared to adjusted diluted earnings per share of a $1.20 per share.
Speaker 4: for the same period last year.
Speaker 4: Turning the cash flow, the company generated 60.9 million in cash from operating activities in the third quarter of fiscal 23, compared to 40 million for the same period last year.
Speaker 4: Capital expenditures were 6.5 million in the third quarter.
Speaker 4: compared to 14.9 million for the same period last year.
Speaker 4: We paid down 60 million on the term loan during the period leaving total debt of 1.46 billion as of December 31st
Speaker 4: and cash on hand with 82 million. Cumulatively, since November 2021, we have paid 350 million on the term loan, including a $20 million payment in January of this year.
Speaker 4: I would now like to turn the call back to the operator for the question and answer session.
Speaker 2: Thank you. Ladies and gentlemen, at this time we will begin after you question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tunnel indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue.
Speaker 2: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Speaker 2: Our first question comes from line of Pete Skavitsky with a lab that global. Please resume your question.
Speaker 5: Hey good morning guys!
Speaker 5: Hey Mike, maybe you can put your economist hat on for a moment, but you probably see a lot of the macro guys out there are concerned that we could tip into a mild recession later this year. Just wonder if you're seeing anything in your industrial end markets that might indicate that. I know you touched on Europe , but wondering if you're seeing anything else there.
Speaker 4: Well, Pete, on our industrial end markets, we're seeing, let me...
Speaker 6: Right now we see a very strong picture from oil and gas.
Speaker 6: And a lot of demand, you know, demand beyond our capacity, substantially beyond our capacity.
Speaker 6: from the oil and gas sector. I suspect that's going to continue.
Speaker 6: given what's going on with the world events. I personally am a favor fossil fuels.
Speaker 6: And so this is one of my favorite market sectors.
Speaker 6: one of my favorite market sectors.
Speaker 6: getting down I just
Speaker 6: We're also seeing strength from mining. Mining is challenging the same.
Speaker 6: manufacturing capacity is oil and gas so we need to do a little bit of an expansion there.
Speaker 6: Industrial distribution, very steady.
Speaker 6: Some inventory adjustments are going on, but they're small. Small impact overall on that we're talking about.
Speaker 6: construction of warehouses are down.
Speaker 6: And you know, you all read the Amazon news.
Speaker 6: And, you know, we were a...
Speaker 6: A significant provider of hardware for those warehouses.
Speaker 6: That demand, which runs between $15 and $25 million a year.
Speaker 6: was completely out of our revenues in the third quarter.
Speaker 6: and we don't expect them to be back in the fourth floor. So...
Speaker 6: That's the major shift for us.
Speaker 6: We're seeing a little bit of weakness in semiconductor manufacturing, but that manufacturing capacity that we...
Speaker 6: We're opening up is being used to...
Speaker 6: Productively for industrial distribution where we were a little bit short on product to support that sector.
Speaker 6: So I think overall we're just not seeing it.
Speaker 6: On the defense side, it's...
Speaker 6: In some sectors it's unbelievably strong. We haven't seen shipments yet.
Speaker 6: You know, we've got a sleepy supply chain that we're trying to wake up there and shake things out and make them happen.
Speaker 6: And the aircraft build rates, you know, you know, what's happening there with Boeing and...
Speaker 6: and Airbus and the 737-787 programs. So that's going to be...
Speaker 6: a double digit pro sector for us.
Speaker 5: for at least the next eight quarters. Okay, that's very helpful. Let me ask my last one on commercial aerospace, Mike. He's just.
Speaker 5: It seems like there still is a lot of inventory sitting at Boeing with regard to the MAX and the 787 and they've kind of indicated to us kind of their...
Speaker 5: time frame for getting rid of that inventory for delivering that inventory. So are you guys still delivering kind of below their stated rate? Let me put this on the max.
Speaker 5: I think they're 31 a month now, but some of that is out of inventory. So I'm just wondering if you guys are still delivering on the max a ship set worth that more in line with 20 a month or so.
Speaker 6: No, no, for us it's...
Speaker 6: And we study this pretty closely to make sure that we've got the right planning in place.
Speaker 6: and you know steel is really hard to get now. So I mean you have to be out 12 months.
Speaker 6: is really hard to get now. So I mean you have to be out 12 months on your planning with steel.
Speaker 6: So you really have to be sharp on these numbers or you're going to create a problem for your customer.
Speaker 6: So, it looks like every time we measure it.
Speaker 6: We're right in step with our production rate.
Speaker 7: Okay, okay.
Speaker 5: Okay, very helpful. Thanks guys.
Speaker 2: Our next question comes from the line of Christine LeWig with Morning Stanley. Please assume your question.
Speaker 8: Thanks, Mike, you kind of mentioned it seems like backlog is no longer the leading indicator when we think about revenue growth. So when you kind of think about forecasting your business, what do you guys have to do differently? And how much conviction do you have that...
Speaker 8: you're going to see growth even with the risk of a mild recession.
Speaker 6: Let's take the first question. What do we have to do differently? We actually don't have to do anything differently.
Speaker 9: Giravical!
Speaker 6: The thing that we've evolved to, Christine, is just to understand, for example,
Speaker 6: when we do a contract with following a rear bus.
Speaker 6: exactly what mix we have under contract. So we assign a contract with them, it's three years or five years or whatever it is, and we have a certain...
Speaker 6: Mix.
Speaker 6: and market share maybe a hundred percent maybe eighty percent something like that
Speaker 6: by contract for those ships.
Speaker 6: And so, because we're working against the portal and not against the backlog, it's really important for us to understand their production rates.
Speaker 6: and their consumption rates of our product so that we can...
Speaker 6: rates of our product so that we can, you know,
Speaker 6: plan our plans to have.
Speaker 6: more products in place as they relieve the product that we have to build their ships. And so that's basically
Speaker 6: You know, we've evolved to that over the last five years.
Speaker 6: And I would say five years ago we were really terrible at this.
Speaker 6: and now we're really, really good at it.
Speaker 6: And we take that information and we actually go a lot of the subcontractors that use our
Speaker 6: our hardware
Speaker 6: our bearings integrated into a subcontractor produced.
Speaker 6: system and then ship that to Boeing or Airbus.
Speaker 6: and um...
Speaker 6: They're planning.
Speaker 6: They haven't got to this level. Let's just put it that way.
Speaker 6: And so we actually have to call our subcontractors and tell them when to put orders, not in all cases, but in many cases.
Speaker 6: went to put in orders in order to catch up in being positioned.
Speaker 6: and not to get caught short.
Speaker 6: because if they are caught short, they're going to blame the bearing guy that they can't ship that piece of hardware they produced because they couldn't get bearings. So we don't want them to do that. And so we do actually...
Speaker 6: look at their content and do that and help them with their planning. That's kind of how we...
Speaker 6: You evolved to operate and
Speaker 10: So
Speaker 6: What was the second part of your question?
Speaker 8: In terms of confidence in terms of forecasting, I guess the underlying question to that second part is, with the changing of business being more book to ship, how sensitive is that to the economic environment? And would you still see that grow a for-the-model recession and how?
Speaker 6: How confident do you feel not having a backlog to kind of support that view? Yeah, I'm, you know, it depends on sector. We're very confident on aircraft, not, you know, with...
Speaker 6: with how to deal with the backlog situation.
Speaker 6: That's just standard operating procedure now. In terms of where we stand relative to an industrial, mild industrial recession.
Speaker 6: I don't see a mild industrial recession showing up in the oil and gas area any any time soon.
Speaker 6: If you look at Dodge, I mean they're really important markets.
Speaker 6: are grain and aggregate and mining and those are markets that they service principally through industrial distribution.
Speaker 6: and you look at grain, you know wheat, corn and rice and
Speaker 6: soybeans
Speaker 6: You look at what's happening in the world. Did the man there, I don't see that back and off.
Speaker 6: That's food and the US feeds the world.
Speaker 6: And now it has to feed it more with the problems in Ukraine and Russia.
Speaker 6: And so I think their grain sector is going to be good.
Speaker 6: We look at the
Speaker 6: The instruction sector, the aggregate sector.
Speaker 6: And we talk to our salespeople.
Speaker 6: All the cement plants are at 100% capacity.
Speaker 6: and before the infrastructure bill really gets released for...
Speaker 6: commercialization. And so that looks to me like that sector has a net under it. And the other important part of that business is food and beverage.
Speaker 6: and
Speaker 6: And food and beverages, you know, it's just a staple.
Speaker 6: as long as these machines are operating and producing cans and bottles and boxes.
Speaker 6: and in
Speaker 6: transmitting that material, we're a strong part of that.
Speaker 6: It's a strong part of that business.
Speaker 6: So, you know, I think that Dodge business is...
Speaker 6: It's very low beta in terms when you look at over the past years.
Speaker 6: It's so much a, you know, this.
Speaker 6: of what they do is a staple of life.
Speaker 6: The revenues were impressively stable over many years.
Speaker 6: And then we'll come. What if we have full color? Sorry, go ahead, Joe. Yeah, when it comes to the aircraft business, I think.
Speaker 6: I think you know what's going on there. That kind of speaks for itself.
Speaker 6: And then our marine business is
Speaker 6: It's, you know, they're building we have.
Speaker 6: We have 10 Virginia ships in our backlog.
Speaker 6: and we're only showing one year.
Speaker 6: Oh, for junior ships, but we have cannonball.
Speaker 6: It's a lot. It's a lot. And we're bidding another 10 or 12.
Speaker 6: And we're also bidding Columbia.
Speaker 6: So, you know, we have a serious problem in our marine business with regard to...
Speaker 6: our capacity and our footprint. And so we're trying to deal with that right now in terms of.
Speaker 6: staffing and hardware and supply chain.
Speaker 6: and um
Speaker 6: We've got a lot to do in that sector in order to accommodate the...
Speaker 6: the objectives of the Navy.
Speaker 8: Yeah, I mean, it seems like a good problem to have if you've got strong demand. If I could speak one more in, Mike, I mean, on gross margin, I mean, we looked at the quarter, it's 40.8% for the nine months trailing the quarter, and for the actual quarter itself, it's 41.5%. For more information, visit FlowMe Greek NV Laguna.
Speaker 8: I mean, how much of this was, you know, like the synergies that you guys had outlined with the acquisition of Dodge? Can you give us an idea of where you are in that?
Speaker 8: that synergy extraction and where growth margins could go from here. I mean, your historical target was like what, one percentage point in growth margin each year, you reinvest 50 basis points, you have 50, you know, in terms of the net. Is that how we should think about this or should there be more upside?
Speaker 8: from the synergies, I mean, you know, this is a pretty big jump versus for you all last year.
Speaker 2: Yes, Christine Heitzdann. So just to give you a range, you know, Dodge for the last night, for the nine months and suspend it.
Speaker 4: December 21.
Speaker 2: had an average gross margin around 35%, 36%.
Speaker 2: And for the nine months ended this December , it's around 42.8%. So it's about a 7 to 8% jump in gross margin.
Speaker 2: 9 months ended just December , it's around 42.8%. So it's about a 7 to 8% jump in Ghost Margin. So he...
Speaker 2: That's not all synergy, but say a big half of that or more is synergy based on 700 million run rate of sales. You're talking $40 to $50 million of improvement in gross margin over a 12-month period since we've owned Dodge.
Speaker 6: So I would say on our low hanging fruit, it's going well on our synergy, on the integration of our sales team, it's going well, there's a lot of activity and I think that's reflected in our industrial growth rates compared to the competition who have already reported this quarter. So I think that's reflected in our industrial growth rates compared to the competition who have already reported this quarter.
Speaker 6: where the numbers are significantly on the RIS for growth rate.
Speaker 6: We are working on our manufacturing processes and our manufacturing footprint and on
Speaker 6: being a better source of intercompany activity between Dodge, TARBC and RBC to Dodge and those two are kind of the long poem to tend. So we should see the benefit from that activity in fiscal year 25 and 26. So I would say we are definitely ahead of schedule.
Speaker 6: And, um...
Speaker 6: Things that we thought were going to be easy to get done aren't that easy and things that we thought would be very difficult to get done turned out to be a little easier than we thought at first. So I think we're in pretty good shape.
Speaker 11: Yeah.
Speaker 12: Christine, I can add to that a little bit too.
Speaker 12: and you know, um,
Speaker 12: Reacquired Dodge is
Speaker 12: in November of 2021.
Speaker 12: and uh...
Speaker 13: and
Speaker 12: We were at a run rate, an actual rate.
Speaker 12: of sending the previous owner of Dodge $18 million a year to support.
Speaker 12: computer systems and other activities that couldn't be transferred day one.
Speaker 12: We've had a team of dozens of internal people and consultants.
Speaker 12: working on putting Dodge on the RBC.
Speaker 12: computer network and-
Speaker 12: And so as of November 1st this year, that was mission accomplished.
Speaker 12: And so that $18 million.
Speaker 10: Go to work.
Speaker 12: So, um...
Speaker 10: That was...
Speaker 10: That was a big
Speaker 12: The project, it seems ...
Speaker 12: that had to be done in a failsafe matter to be, you know, to, um...
Speaker 12: I think we can complete this acquisition. I think the second, you know, another area that we're working on is in manufacturing integration.
Speaker 12: Some of the Dodge plants were very...
Speaker 12: Full in terms of floor space.
Speaker 12: and utilization and
Speaker 12: and we needed to open up the Dodge floor space in some of those plants.
Speaker 12: to capitalize new products.
Speaker 12: or new manufacturing capacity for existing products.
Speaker 12: where there was market demand but were unable to satisfy that market demand because of capacity constraints.
Speaker 12: So we're in the process of moving some of their processes.
Speaker 12: to Mexico.
Speaker 12: and to open up the floor space so that they can insource some of their materials from outside suppliers and increase the
Speaker 12: throughput capacity for those products.
Speaker 12: You know, where the edges constrained, it seems that our BC had a pretty cost effective.
Speaker 12: solution for that. So this year we'll be opening up some of the forest space and some of the attached plants by using.
Speaker 12: the Mexican resources.
Speaker 12: And I think the final thing we did.
Speaker 12: is in November , we ran a manufacturing seminar.
Speaker 12: for 125 to 150 people.
Speaker 12: in Tennessee for manufacturing management and manufacturing engineers.
Speaker 12: that were selected from our 40 plants with the purpose of
Speaker 12: presenting and exchanging best practices.
Speaker 12: changing best practices.
Speaker 12: Whenever we've done this for the RBC Classic business.
Speaker 3: It's produced.
Speaker 12: amazing results and productivity.
Speaker 12: and each plant seems to be competitive with the other plant with regard to absorbing new technology or new techniques.
Speaker 12: in improving their operation.
Speaker 12: So we expect to see a nice benefit from...
Speaker 12: from that seminar.
Speaker 8: Great... Thank you for all the colour depth.
Speaker 2: Our next question comes from the line of Steve Barger with Keybank. Please proceed with your question.
Speaker 14: Thanks Mike, you sound pretty optimistic about end markets on both sides of the business, but orders were down 19% sequentially. Can you talk about what parts of the business that came from and has that deceleration extended into 4Q?
Speaker 6: You see the biggest impact on the backlog was our marine business so for marine in September our backlog was a hundred and eighteen million and in December it dropped to ninety one million So that's twenty six twenty seven million dollar drop and reason is because we only reflect in backlog
Speaker 6: what's shipable in the marine product line in the next 12 months. But the gross backlog, Marines total backlog that shipable past 12 months is 179.9 million compared to September of 170 to million. So it's actually up 10 million.
Speaker 6: So it kind of when we put it in a total backlog, 25 million has a pretty big impact on the overall backlog. It's just mainly due to the time and the shipments on our submarine business and how we account for that.
Speaker 6: And the dodge was down about 10.
Speaker 6: September Dodgers about 100 million in backlog and they were down to 85 million. So their supply chain was freeing up and their capacity and their catching up to their past dues that they had in backlog. So those are the big two contributors.
Speaker 14: Nothing else really notable from an end market standpoint as to what decelerated.
Speaker 12: No, it's not, Steve, it's not decelerating, it's accelerating. We have...
Speaker 12: We're adding to our legal staff because we have so many contracts that have to be inked, negotiated.
Speaker 12: And so there was, you know, we booked $100 million with a new contract between December and January . I suspect those even haven't even hit to that clock yet.
Speaker 14: Nice. And then your comment on the 50 million in synergy in the past year or so, if I'm remembering right, the original target was 70 to 100 million over five years. So now that you've had this for a while, has that changed the upside target?
Speaker 14: I guess in terms of either time or dollars, how are you thinking about what's possible?
Speaker 6: I think we're still, you know, targeting that range. And as Mike said, and what I said a little earlier on some of the long poll in the tense, the manufacturing integration that we're doing, it just takes a little longer. You have to...
Speaker 6: You know, pull machines out of one plant, set them up on another plant, teach that plan how to make the product.
Speaker 6: Go to through testing. It could be six to seven months. Make sure it's acceptable to the marketplace and then be able to supply it to the marketplace.
Speaker 6: So, and I think every year we'll just continue to see the activity between the Dodge sales team and the RBC Classic sales team continue to increase where RBC Classic focuses more on OEM type activity and Dodge focuses more on distribution activity.
Speaker 14: Got it. And if I could just get one more in, you know, it seems like most companies are working on some sort of digital strategy.
Speaker 14: Do you guys have any initiatives underway at RBC designed to maximize sales efforts or optimize manufacturing from a data collection and standpoint? Yeah, sure. We do it on both sides. On the front end, Dodge uses the front end of their warehouse.
Speaker 6: consortium that they're part of and it's called PT Place and that's where independent distributors and customers can come through and electronically place orders and get them delivered in 12 to 24 hours. RBC always had eShop, our front end, where our independent distributors also can come on.
Speaker 6: line and guaranteed shipping in 12 to 24 months to keep them going. And we've been making more advances on the manufacturing side on digital data collection and data mining to better run the plants. So if you walk through one of the plants now and took a tour, you'd see a lot of visual screens, a lot of activity.
Speaker 6: At each manufacturer and cell, we've selected information from the machines, from the operator, and where they are compared to the standard that they're running. So I think that part of it's actually become more and more important to our business as we move forward.
Speaker 14: Has that had a material benefit to margins yet or is that more on the come?
Speaker 12: Oh, it's all a cruise. No, no, it's a crewing to margins.
Speaker 6: You know, it's, it all has an impact. It all has an impact. By reducing, you know, touch labor, increasing your efficiencies and obviously for customers being able to go online, place an order and be able to get their delivery in 12 to 24 months, weeks and days, hours. That's a good thing. Thank you. Thank you.
Speaker 12: You need a screen like this to tell you if there's a problem, if the machine is idle, if it's on setup, and...
Speaker 12: so that the manager can dispatch technicians or other talent to...
Speaker 11: to remedy the problem.
Speaker 15: Great, thanks guys.
Speaker 2: Our next question comes from the line of Seth Weber with Wells Fargo. Please resume in your question.
Speaker 2: Hey, good morning guys. I wanted to go back to the growth of the strong growth margin in the quarter. Can you just give us any color on what you're seeing, you know, the pricing environment and price cost?
Speaker 2: what your expectations are for price cost going forward and then just
Speaker 3: whether you expect to retain price increases in a inflation starts to come down. Thanks.
Speaker 6: Well, I mean the pricing environment is
Speaker 12: is positive.
Speaker 12: and
Speaker 6: I think I've set an up on that. And so the inflation. Yeah. And in the contracts that we typically negotiate have a...
Speaker 12: have an inflation index or some metrics tied to some some standard Bureau
Speaker 12: economic standard that allows us to change pricing if there's a change in material cost or if there's a change in labor cost.
Speaker 12: or something else happened, change in volume. So it's a...
Speaker 12: have the change in volume. So it's a... It's...
Speaker 12: To some extent, that's why we have a backlog in our...
Speaker 11: in our
Speaker 12: in our contract...
Speaker 12: the legal side of our contract management because
Speaker 12: These contracts now are more difficult and timely to manage.
Speaker 13: Okay
Speaker 3: I guess maybe just historically in a deflationary environment have you given back pricing or have you historically helped out pricing increases?
Speaker 12: I can't remember a single case where we've given anything back.
Speaker 13: Okay.
Speaker 12: Now maybe there is one, but it's just not coming up.
Speaker 2: Okay and then maybe just pivoting for a minute, just thought, you know, you guys have talked about adding capacity and...
Speaker 2: adding resources and things like that. Can you just...
Speaker 2: level set us kind of where you are, where you're adding some of these.
Speaker 2: additions and just like how we should think about your
Speaker 2: You know, this ramp, I guess, I don't know if it's through next year or just sort of how we should be able to think about your ability to produce higher volumes going forward. Thanks.
Speaker 12: Yeah, well first of all you know for the third quarter
Speaker 12: Our S-GNA was a little higher than normal simply because
Speaker 12: There's production and sales are usually down because of the number of production days, but S-GNA is like constant.
Speaker 12: fixed cost through a quarter. We expect that to normalize into the mid-15s by the end of the fourth quarter.
Speaker 12: We pretty much stay there. It's a matter of...
Speaker 12: getting on top of your cost base. And as we increase our...
Speaker 12: cost base and as we increase our...
Speaker 12: sales and production in a given quarter.
Speaker 12: we may revisit what we're spending on SG&A and let the company earn more SG&A credit.
Speaker 12: But we're just not going to dump in the SGNAs and hope that it gets absorbed. They have to earn it. So everybody understands that, and that's the way it works.
Speaker 3: Okay, so, amid 15 percent.
Speaker 2: S-G-N-A level is it's a good way to think about the business going forward. Yeah.
Speaker 15: All right, thank you very much, guys.
Speaker 2: Our next question comes from the line of Michael, Dear Molly, with drillis. Please distribute a question.
Speaker 16: Hey, good morning guys. Thanks for uh
Speaker 16: taking the questions here. Like just to sum this growth margin, and what we saw on the quarter, and obviously, you know, piecing together what you just said, everything accrued. So it sounds like on a go-forward basis, I mean, I don't wanna get out in front of our skis here, but, you know, it sounds like you've got a new floor here on growth margin, or should we be thinking about anything that might put...
Speaker 16: Perfect. Just on aerospace, I understand what you said, and it's earlier this week we heard Spirit kind of spill the beans. I guess they're going to 38 on the max, then 42. In October , presumably, you're kind of at those rates or prepping and kind of aligned.
Speaker 16: Just on aerospace, I understand what you said, and it's earlier this week we heard spirits kind of spill the beans, I guess they're going to 38 in the max, then 42. In October , presumably, you're kind of at those rates or prepping and kind of aligned. Oh yeah, yeah, I mean, okay. You know, this.
Speaker 16: Spirit spilled the beans. I had the beans right here, but I didn't spill them. Perfect. Just on, I know we've been trying to get at this. You mentioned Dodge, not a lot of back like I guess. I think you talked about the daily orders. Are you just...
Speaker 16: Noticing anything from those daily ordering trends of late. I mean, I guess we're all trying to figure out the global macro backdrop. But what are the daily orders telling you as you're looking real time, trying to gauge the health of the industrial markets, aside from you know, you talked about the strength and oil I guess.
Speaker 12: Yep. Well, the daily orders for badges in the month of January .
Speaker 12: The strength of those orders surprised us.
Speaker 12: And that was a pleasant surprise. So again, I have to, I'm forced to do the job that Chairman Powell does for a living and try to figure out what the next two months are going to be like.
Speaker 12: But you know, that's January was very positive. We're still constrained. It does. I'm very key high margin products.
Speaker 12: that just can't get our leg over the wall on it. I think we're going to be there for...
Speaker 12: for another year.
Speaker 11: another year. Okay.
Speaker 16: Okay. Last quick one for me, I think you mentioned so Europe and maybe some specific OEM weakness that you saw anything, anything notable with with certain OEMs or just just kind of isolated.
Speaker 16: Last quick one for me, I think you mentioned so Europe and maybe some specific OEM weakness that you saw anything, anything notable with with certain OEMs or just just kind of isolated.
Speaker 12: I think the OEM weakness that we saw is pretty much in the machine tool sector.
Speaker 12: Okay. In China, which is mainly machine tools.
Speaker 17: Got it.
Speaker 16: Got it. Perfect.
Speaker 13: Thanks, Chris.
Speaker 2: Our next question comes from a lot of Joe Richie with Goldman Sachs. Please receive with your questions.
Speaker 18: Thanks. Good morning, everybody. Morning, everybody.
Speaker 18: So it sounds like Dodge orders accelerated in January . I'm curious as I was trying to back into it, what was Dodge revenue for the quarter and what was it up or downed organically?
Speaker 4: So, the Dodges revenue in the third quarter was 174.8 and it was up 8% from last year.
Speaker 19: organically.
Speaker 18: I'm just curious, and I know that it is putting your pallet hat on a little bit, but a lot of the industrial companies that we cover, some of them are flashing yellow.
Speaker 18: on their businesses, you know, the down turning or seeing some D stock from their distributors. I recognize that, you know, two thirds of your industrial sales now go through distribution. So I'd be curious to hear, you know, what you're seeing on the distribution side. I know that you call that a little bit of D stock.
Speaker 18: And then how are you thinking about that as we progress through calendar year 2023? Well, you know, I think...
Speaker 12: I think the fourth quarter, calendar quarter for the distributors is normally an unusual quarter. And we normally see...
Speaker 12: seasonality in that quarter.
Speaker 12: because of the distributors are trying to meet some working capital target.
Speaker 12: that they had in order to achieve their bonuses for the year. So they really, they really...
Speaker 3: clamp down on...
Speaker 12: clamp down on their hardware purchases.
Speaker 12: And typically the business can't really run effectively there. So you usually see a pretty good snapback in the fourth quarter.
Speaker 12: And I think that was the January effect. And...
Speaker 18: and probably is going to continue through February . Got it, okay. That's helpful. If I could maybe sneak one more in. Your defense business you called out, I saw in the queue some of the decline there was due to revenue recognition. Like is there any,
Speaker 18: dollar amount and you can kind of quantify how much of the down revenues were a timing impact.
Speaker 12: Yeah, we don't have that number in front of us, but I know on the defense side, I know that some of the operations can order for us to ship.
Speaker 12: A lot of our product, it has to be bought off by a government inspector.
Speaker 12: And sometimes our product isn't ready until the third week, sometimes the fourth week of the month. And it's hard to get the government inspector into your plant when it's, which is the third week of the month and the month is December . So we had definitely had some of that.
Hi, good morning.
I was hoping you could give us a little color on your expectations for revenue growth in the fourth quarter. I think your guide implies somewhere lower, obviously, than it was in the third quarter. I was just wondering what that's attributable to, where you're seeing is the slowdown in the items you mentioned earlier or somewhere else.
It's pretty much the fact that we're not going to see any revenues out of that sector where they were building.
It's pretty much the fact that we're not going to see any revenues out of that sector where they were building warehouses as fast as they could.
as they could build warehouses. As a matter of fact, last July .
You know, those same people were visiting us, asking us what would take the triple our capacity.
And so.
You know, that's kind of a boomer bus.
area and it's busted right now and that's sort of 15 to 25 million a year annualized and
It doesn't have particularly good margins, so frankly we don't really miss it.
Okay. And then you said there's some past dues that were – that DOGE worked through. How many past dues are still in tour?...
The level of pass-do it does. It should back-lock. Yeah, their backlog is passed-do. Those are orders that about 85 million left in backlog at this point. Those are orders that are shipable, the championship for reasons that we can't get supply chain organized.
Okay. Okay. Got it. Great. Thank you very much. Fair enough further questions in the queue. I'd like to hand the call back to Dr. Hartman for closing remarks.
Okay, well I appreciate all the interest in the call today and
Look forward to speaking to you again. I guess that'll be in May.
Thanks for your participation and good day.
Ladies and gentlemen, this does include today's telecomments. Thank you for your participation. You may just connect your lines at this time and have a wonderful day.