Q4 2023 RBC Bearings Incorporated Earnings Call
The RBC bearings fourth quarter of 2023 earnings call at this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
Should require operator assistance during the conference. Please press star zero on your telephone keypad.
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.
Thank you operator, good morning, and thank you for joining us for RBC bearings fiscal 2023 fourth quarter earnings Conference call with me on the call today are Doctor, Michael Hartnett, Chairman, President and Chief Executive Officer, Daniel Herz, Ryan Director, Vice President and Chief operating Officer, and Robert Sullivan.
President and Chief Financial Officer.
Before beginning today's call, let me remind you that some of the statements made today before looking and are made under the private Securities Litigation Reform Act 1995.
Actual results may differ materially from those projected or implied due to a variety of factors.
For you to RBC bearings recent filings with the SEC for a more detailed discussion of the risks that could impact the company's future operating results.
Financial condition.
These factors are also described in greater detail in the press release and on the company's website.
In addition, reconciliation between GAAP and non-GAAP financial information is included as part of the release.
Bill on the company's website.
With that I'll now turn the call over to Dr. Carlson.
Thank you Josh and good.
Good morning, and welcome to all.
Net sales for the fourth quarter of fiscal 2023.
For $394 4 million versus $358 9 million for the same period last year and.
An increase of nine 9%.
For the fourth quarter of our 2023 sales of industrial products represented 69% of our net sales and aerospace products, 31%.
Gross margin for the quarter was $166 5 million or 42, 2% of net sales.
This compares with $137 5 million or.
Or 38, 3% for the same period last year.
Adjusted operating income was $88 6 million.
22, 5% of net sales compared to last year's $71 9 million and 20% respectively.
Adjusted EPS came in at $2.13 a share.
Adjusted EBITDA was $121 1 million.
37% of net sales compared to 104.4 million and.
In 29, 1% of net sales for the last same period last year.
On the industrial businesses during the period, the industrial sales growth was seven 4%.
Against some strong comps from last year.
Dodge was our leader with 9.2% expansion rate.
Combined OEM and distribution sales.
The letter showed a.
Low teens expansion rate for Dodge.
Overall, the industrials were up high single digits with sex sector growth mitigated somewhat by Europe .
On aerospace and defense overall, we saw a rate of expansion of 16%.
With Aero OEM up, 25% and Aero commercial distribution up 42, 8%.
The demand drivers here continue be the large plain plain builders.
And their supply chain and supportive production for Boeing and Airbus 737, and 787, <unk> hundred 20 and.
A 330 principally.
It's other as well as other producers of business Jets, and a myriad of sub contractors needed to support the industry <unk>.
Additional volume increases were felt from our space initiatives and we saw demand for products to support the new field for Eric taxi speaking beginning to trickle in.
As mentioned in previous calls, we expect to see increased demand, creating double digit growth from the plane plane builders for many quarters to come as they continue to aggressively expand build rates.
We continue to add resources and planning to support these increased rates.
As well as we expect expanded work statements.
To summarize for the period RBC saw growth in revenue of nine 9%.
Adjusted EBITDA expansion of 16% against the same quarter last year.
Regarding our first quarter of 2024.
We are expecting sales to be somewhere between 380 and $390 million range.
And I'll now turn the call over to Rob for more detail on the financial performance. Thank.
Thank you Mike SG&A for the fourth quarter of fiscal 2023 was $59 6 million compared to $54 5 million for the same period last year as a percentage of net sales SG&A was 15, 1% for the fourth quarter compared to 15, 2% for the same period last year.
Looking forward SG&A as a percentage of net sales is expected to be between $15, 75% and 16% of sales in the first quarter, including approximately three to 4 million of stock based compensation expense.
Other operating expenses for the fourth quarter of fiscal 2023 totaled $20 7 million compared to $23 7 million for the same period last year for the fourth quarter of fiscal 'twenty. Three other operating expenses included $17 7 million of amortization of intangible assets $2 5 million of restructuring costs associated with our South Carolina operation.
And zero point $5 million of other items.
For the fourth quarter of fiscal 2022. Other operating expenses consisted primarily of $17 2 million of amortization of intangible assets $5 7 million of costs associated with the Dodge acquisition and zero point $8 million of other items.
Operating income was $86 1 million for the fourth quarter of fiscal 2003 compared to operating income of $59 3 million for the same period in fiscal 2022.
Excluding approximately $2 6 million of restructuring costs associated with our South Carolina operations offset by 0.1 million of acquisition related costs adjusted operating.
Adjustments.
Operating income was $88 6 million or 22, 5% of sales for the fourth quarter of fiscal 2023.
Excluding approximately $12 5 million of acquisition costs adjusted operating income for the fourth quarter of fiscal 2022 was $71 9 million or 20% of sales.
Interest expense for the fourth quarter of fiscal 2023 was $21 7 million compared to $13 6 million for the same period last year, we anticipate interest expense between 20 and $21 million for the first quarter of fiscal 2024, including approximately $1 million of costs associated with the amortization of deferred financing fees.
For the fourth quarter of fiscal 2023, the company reported net income of $49 2 million compared to $31 5 million for the same period last year.
On an adjusted basis net income was $67 7 million for the fourth quarter of fiscal 2023 compared to $61 7 million for the same period last year.
Net income available to common stockholders for the fourth quarter of fiscal 2023 was $43 4 million compared to $25 7 million for the same period last year.
On an adjusted basis net income available to common stockholders for the fourth quarter of fiscal 'twenty, three was $61 9 million compared to $56 million for the same period last year.
Diluted diluted earnings per share attributable to common stockholders was $1 49 per share for the fourth quarter of fiscal 2003 compared to 89.
Per share for the same period last year on an adjusted basis diluted earnings per share attributable to common stockholders for the fourth quarter of fiscal 'twenty. Three it was $2 13 per share compared to $1 93 per share for the same period last year.
Turning to cash flow the company generated $71 4 million in cash from operating activities in the fourth quarter of fiscal 'twenty three compared to $46 9 million for the same period last year capital expenditures were $12 4 million in the fourth quarter of fiscal 'twenty, three compared to $8 million of capital expenditures for the same period last year, we paid down $70 million on the term.
Loan during the period, leaving total debt of $1 4 billion as of April one 2023, and cash on hand was $65 4 million.
Cumulatively since November 2021, we've now paid $400 million on the term loan.
I would now like to turn the call back to the operator for the question and answer session.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session. If.
If you would like to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the queue.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.
Our first questions come from the line of Kristine <unk> with Morgan Stanley . Please proceed with your questions.
Hey, good morning, everyone.
Good morning.
Looking at margins I mean, you guys printed a 42.2 this is al.
One of the highest you've ever had if not the highest can you talk about what drove this margin improvement how much of this is from synergies and last quarter you were already at the point you know you already had.
Synergies from <unk>, how much is left to get to your final target all of them.
M $70 million to $100 million per year by year five.
Hi, Christina Stan.
We had a good mix in the quarter.
And you're right on the synergy side.
Since one and Dodge over this period of time, we've added seven percentage points to.
<unk> gross margin contribution.
And I.
I think on the Cogs side.
That will start to slow for a little for the next 12 months, then pick up again as some of our longer term projects that we're working on the synergy side.
It will kick in on the top line sales side, I think what little be behind target of where we'd like to be on our synergy. So I think we still have some good upside over the next three.
Three to four years to get to that target as we train our sales teams on both sides of RBC and Dodge.
Cross sell each other's products around the world and that's working.
Working well, but it takes time to get everybody trained up and on SG&A. I think we're definitely ahead of where we thought we were going to be we were able to.
Move Dodge off of Abb's systems, and picked up a nice savings on doing that and getting them on to their own system and.
Back of Rbc's group also and so we picked up some nice synergy there so going into this year.
Rob gave you guidance for Q1, you know hopefully we can do a little better than the apples and see what happens.
I think we are definitely.
Ahead of where we thought we would be coming into the first year of our integration with Dodge.
And then following up on just the what how much synergies have already been Oh.
Harvest.
The 70 to 100 million can you just give us a run rate of how much of that's already been done.
Yeah, I'd say on an average have run rate is anywhere from 45 million to $56 million.
Great and then in terms of commercial aerospace you talked about.
Pops for.
For aircraft production rate, Mike and Phil can you level set us in terms of where you are in production right Boeing trying to hold onto 31 per month for the Mac and Theres discussion of moving up to 38 per month.
Around knowledge. This summer and then to 42 by year end is that where you're tracking are you above or below where they are you know it.
Is there some sort of inventory that needs to get a depleted before you get on that rent Harvey Glatt and also any color you could provide on the 77 as well as they get towards 10.
What you think 20 Andy.
Yes.
That's.
But for those who are a lot of answers.
Let's see.
The.
In terms of Boeing's content, and where we are relative to the to the buildup.
You know what what we do is we look as you do if their skylight chart.
And.
Determine or are they first of all are they producing.
Themselves to their chart.
And we think they are.
We kind of kind of.
Monitor that pretty closely and then we look at.
Based upon if theyre going to go to say 38 planes, a year or whatever and they're they're going to do it in January .
We know that we have to have our product.
Six months ahead of time because.
If they're going to build 38 planes the bearings can't show up in the hardware can't show up the day that.
They want 38 planes to exit their plant.
So we kind of offset set the lead time on their on their chart by six months and determined.
What are what our production requirements are in order to have that product available in six months. So.
We're pretty much aligned we know what our mix per plane is and as a result of knowing what that mixed per plane is.
We can kind of back calculate.
Their rate and our rate and are they do they correlate they correlate very well.
We've done a lot of work to make sure that we are completely in cadence with their with their buildup now in terms of inventory in the system.
Right now I would say thank God there is inventory in the system.
Because stepping up production rates, 25% a year.
<unk> is a big order for a company like us.
Who actually have to make it from raw raw material to finished goods.
So.
So where we're doing the best we tend to.
To meet their meet their rate expectation and and we know by the end of the year that are whatever inventories in the system for the 37 and the 87 is going to be pretty much squeezed out of the system.
So we're gonna be commando by about December .
And so we're gonna have to produce very well.
At their production rates.
December and beyond and the difficulty in doing that is is material.
Lead time for these aircrafts steels are.
50 weeks and are in.
And the deliveries after 50 weeks or not.
Not completely certain so maybe that maybe you.
Do you expect to get it in 50 weeks and you get it in 55 weeks or something like that so.
Steel availability is a problem and theres some steels, they're not available at all.
And there are important alloys and.
And they're highly used in the aircraft industry.
And I think I think the aircraft people are going to have.
Some difficulty all the way around not only in bearings within structures too.
To determine how to substitute other steels for the steels that are have already been specified for <unk> for use.
So Mike.
<unk> CFO .
Is there a Boeing master agreement or Airbus Naphtha agreement that can help with poor thing I mean that seems like a fairly.
Important input to have uncertainty over considering the production rate volumes that are in that skyline.
Yeah, we we talk to them all the time I'm sure. Other people have the same discussions not just not just people, making what we make.
And.
Okay.
These specialty steel.
Producers.
Our.
To some extent unwilling to to produce the the chemistry needed.
Some of them have gone.
Bankrupt or.
Have been restructured actually Airbus just bought one of them.
And.
Because of this situation and.
This situation exists in the United States too.
Great. So I think.
I think it's I think it's something that.
What's that.
Sorry, Mike this uncertainty.
How are we going to see the.
50%, 60% volume increases that the Oems want an end to three years.
Does it does the environment, you're describing theme.
Fairly a die.
Tier four are really important input.
And we've got this massive volume ahead of us to meet those rate ramps. How do you think this gets resolved and does that put at risk you know these production rate increases.
It certainly is a a big consideration on these production rate increases and and it needs to be resolved and exactly how it gets resolved.
Is there needs to be some material substitution for for.
For some of these.
These alloys in the design and so.
We can't do that Boeing Boeing that's boeing's design, so they're gonna have to they're going to have to double time, they're engineering department to to provide materials that are modern and available.
Great. Thanks, Mike Thanks, Dan.
Okay.
Thank you our next questions come from the line of Pete Sobecki with Alembic Global. Please proceed with your questions.
Hey, good morning, nice quarter guys.
Hey, Mike.
And Mike just one clarification when you talk about steel and steel alloys are you also including sort of aluminum alloys, and nickel alloys or is it strictly steel and its alloys.
Well I mean, it's it's steel and its alloys and its alloys or you know nickel and chrome and manganese.
You know that that sort of thing.
But it's yes, that's I'm talking about steel.
We don't we don't have the aluminum worry that other people have.
But we do have the steel worry.
Okay, Okay got it and I guess I just wanted to ask about the top line in the fourth quarter you guys beat your own revenue guide pretty handily.
Was there a particular market segment that surprised you there or a share gain maybe or something else.
Well I think it is.
The less conference call, it's really hard for us to.
To project, Dod Dodgers' right revenue because of.
They they really don't work with an order book like the rest of RBC does so RBC has a backlog of a year.
And in order book, So we we're very we're very confident in our and our outlook for.
What we're going to produce and it was going to generate for revenues.
Dodge They you know they have they have them.
A much different business model, where.
Where theres sort of G. D. P. Gribben I mean, you tell me what the GDP is going to be and I'll tell you what dodges revenues are going to be so in this particular quarter.
The there are business was stronger than we had anticipated.
When we did our Alaska.
Last conference call and.
And it continues to be strong.
Okay.
That's fair and to that point I mean, you've seen Ism's PMI is below 50 now for a couple of quarters in a row right.
So I'm wondering are you guys kind of seeing out there market softness at all or yeah. Im wondering if theres market softness, but you are kind of offsetting it with pricing gains and market share gains youre things like that.
Or or actually just the end markets just stronger than you might expect for where the PMI is out right now and you talked about Europe being weak as well.
Yeah Oh.
Well I mean in this in the industrial businesses, it's very in and market dependent right.
And right now you you know theres a lot of consolidation going on in these.
With these industrials that are peers, and so I'm sure that's creating some.
Service level problems.
But on the other hand theirs.
D and you know at the very end market dependent and you know our end markets.
If you start with oil and gas very strong.
Semicon is soft, but its not dead.
Mining is steady and.
And the demand is a very acceptable aggregate is very good grain has very good infrastructure is good.
Wind is not as breezy as it was last year.
The general distribution is very good.
And it's you know these industrial markets are surprisingly strong that we serve.
Despite the news are the news of the day on the now what the economy's doing.
Okay and last one for me I appreciate the color.
You guys have been talking a lot about you expect to grow this year, but you've also been talking about.
Additional defense plans.
You did just shooter a restructuring in South Carolina I don't know if that was just a pure kind of a cost take out or not but.
How does it kind of all that roll up into your your capex projections for fiscal 'twenty four.
Yeah, I think we will be right in that 335% of revenue range.
I'd be surprised if it if it bolsters more than that.
Okay.
Theres nothing theres nothing to make it bolt right now on the horizon.
Okay. Okay.
In the South Carolina restructuring was that just a pure cost reduction Dodge is that how to think about that.
Yeah. It was kind of a combination of some cleanup at the Dodge level as well as one of our legacy RBC plants.
Just clean up down there so.
Nothing nothing out of the ordinary.
Gotcha.
Okay. Thanks, guys.
Yep.
Thank you our next questions come from the line of Steve Barger with Keybanc capital markets. Please proceed with your questions.
Thanks, Good morning, guys.
Good morning, I'm not sure Juan.
Yes, good morning thinking about your <unk> revenue guide as I look at the comps. It seems like we will see another double digit organic for Aero maybe single digit for industrial. So first is that how you see it and second is that how youre thinking about the year as well.
Yes, and yes.
Got it.
Yeah.
Absolutely yes.
Absolutely, yes single digit industrial or or just that that you expect solid growth for the full year.
Yeah, I mean, it'll be it'll be single digit industrial I expect you know, maybe maybe a little bit better.
Certainly not into the double digits, maybe the upper singles and aerospace will be.
We will be <unk>.
Strong.
It'll be you know sort of at least mid teens.
And marine Marine.
It will be a contributor and they haven't been this past year, but.
The knots or getting untied and that.
Is that material start to flow.
That sounds good so you know with that in mind, you drove a 174 basis points of gross margin expansion last year, which was the best performance in 10 years, you talked about or Dan talked about the Dodge Cogs benefits starting to slow. This year can you talk to your total company gross margin expansion plans that you see.
What's your target what are the big levers for expansion just how are you thinking about gross margin for FY 'twenty four.
Hmm.
Well I'd Love I'd Love to say that we're gonna grow a half a point to a point.
I can't tell you with the details of their growth are going to be.
That's probably more a.
And objective.
Then.
Then our plan.
But I don't see we're going to see we're going to have any deterioration in gross margin.
Maybe just the volume alone should give you a pretty good leverage right, what's the offset.
Just the just the aircraft volume going through the plants, which which as you know we're seeing quarter to quarter better absorption of our overheads. Because we you know we've had we've had some of those plants.
On.
Dennis slow cadence and and so that's that that by itself is going to accrue to the benefit.
On the other hand, we you know.
<unk> business is heavily dependent upon.
Sub contractors and.
And purchase purchase parts and you know those variances have you know we're crazy last year and they are under control this year they seem to be normalizing.
On the other hand, you know.
Counter to that.
We're working to and.
In source some of that product from Asia to the United States into Mexico into our Mexico plants Soc, So there'll be some startup expenses on.
Based on learning curve that we'll probably have to absorb.
But it's it's observable and.
Over the longer term, we'll get we'll get better absorption in the in the Mexico plants are just just by doing that so.
Yeah.
I think.
Overall, there should be some some expansion I wouldn't say that we're going to see the same year that we saw last year.
Yes understood.
Going back to Pete's question about PMI being sub 54, six or seven months now.
But really strong industrials not just from you that's what we heard through earnings season in General what are your thoughts on the divergence Y O y.
Your study cycles, what do you think's going on.
That's a good question.
I study a study.
Our.
Sectors pretty.
Well.
I don't know, what's going on there, but I don't I don't know I mean.
We're not into automotive and heavy truck and all that sort of thing in any major way and so.
Those markets those markets are.
Our.
As you can as you can see haven't been haven't been robust they've been.
Acceptable.
Consumer goods.
Not our thing.
But what we what we do is.
Produced the basic foodstuffs and aggregate to keep the to keep the economy moving in.
Uh huh.
You look at the Dodge business, it's a very low beta.
Business in terms of.
In terms of its demand profile across the years so.
And I think.
I think we're a little bit.
I wouldn't say immune, but we're a little bit different than the norm and the normal industrial business that's servicing.
Automotive and consumer products.
Yes that makes sense thanks for the time.
Yep.
Thank you. Our next question is coming from the line of Seth Weber with Wells Fargo. Please proceed with your questions.
Hi, guys. This is Larry stood at Ti for Seth. This morning, Thanks for taking the questions.
You guys mentioned.
Areas of strength industrial strength in terms of end markets.
Have you seen any change in an industrial customer appetite due to macro concerns quarter over quarter anything that's of concern to you guys.
Well, we're thinking about that.
No I guess I guess the overall answer is no we haven't seen any.
Any concern I think the only.
Soft spot that we've seen in the industrial side was the.
The.
Reversal of Amazon's decision to build all those warehouses.
So I think I think that kind of.
Kick the legs out of.
A few stools and the industry and.
And our business softened up last year at this time in that sector, but we have completely been able to overcome and restructure around it.
Okay.
And then on supply chain, you mentioned steel availability is still a problem.
How has how has the situate the dynamics with the supply chain, how do they change quarter to quarter or year over year, I mean, I think loosening up a little bit for you guys or is it still pretty.
Pretty tight out there.
Well, it's you know, it's it's pretty much normalized.
If most steels for 80% of our steels, which are now in production.
<unk> and <unk>.
The planning lead time has expanded and so we just have to expand our planning lead time to accommodate it so as long as you can get ahead of that game.
You will do fine and we're ahead of the game and.
On the specialty steels.
Those are those are still hard to get I mean.
Those are that's a problem that still needs to be solved.
Yes, and you expect that to go on for a couple of quarters.
I don't.
Uh huh.
I think new new new suppliers have to be will.
We'll be we'll be tooled I mean, I think I think there's there's got to be some new people entering this market that are that can produce these things it's.
It's.
You know, it's capital intense but a lot of people already have this capital.
And.
And if they realize.
There is.
There is decent volume in decent profitability in these in these alloys I think.
I think the problem will get solved.
Got it. Thank you guys appreciate the color.
Yep.
Yeah.
Thank you our next questions come from the line of Joe Ritchie with Goldman Sachs. Please proceed with your questions.
Thanks.
Eviction, Alaska, one for Joe Ritchie.
My first question is on industrial.
Inventory at.
Distributor could you provide some color on the destock, there, especially on the industrial and distribute with higher than.
Maybe any color by end market, where there is more destocking it's Craig.
Or less.
Any color on the timeline.
Let me start.
Yeah.
Well.
Yeah, I think the industry at large is as far as we can see there hasn't been any overt.
Overstocking situation.
I think during the pandemic it was hard to hard to get the materials and so no I think most of our distributors are happy to have.
Have to be able to happy to get people to get these materials and.
And put them on there put them on their shelf.
You know 50% of their sales is is from break fix so and so.
Thing is broken in the marketplace.
And somebody needs an immediate repair and.
It's a it's a profitable sale for them if they have having an inventory. So they don't they don't like not to have an inventory now theres been some lift inventory liquidation over the past.
Six to nine months as is.
As a couple of our major customers consolidated.
And during the consolidation stores were closed and inventories were combined.
And we definitely saw a.
Hum.
A drop in revenues from some major customers.
Has this occurred.
<unk>.
And that was Rob.
Probably.
It seemed to have been completed around.
December January time period.
<unk> may have been part of the reason why our fourth quarter was.
Stronger than we had anticipated but hum.
That's that's.
The only only.
Mechanism that we saw that was unusual in place over the last 12 months.
Yeah.
Got it that's super helpful and then.
And just maybe on your backlog it.
It looks like sequentially backlog for pretty strong.
And maybe it's driven by AD or any any indication you can provide on holiday industrial side of the backlog on RBC.
What are you seeing from order trends on the industrial side.
Yes, sure most of the sequential increase was driven from our defense business.
Via SGT are actually one of our legacy businesses.
The Dodge backlog was actually down $10 million, which is not a bad thing because as we've talked about there are not a business that traditionally carries a significant backlog, but the orders have remained strong holistically in the industrial side of the business.
Thanks.
Helpful. My last last one just across like some of your peers talk about.
Having portfolio outside of just bearings and broadly across the industrial drivetrain could help.
Gaining more traction with the customers just any indication on how much of your portfolio maybe outside of bearing more on the industrial drivetrain.
And.
What is your counter to some of those.
Claims that.
<unk>, probably will have more products across the diaphragm can gain more share.
Yeah, I would think that maybe 25% to 30% of our of our sales are products that are.
That are not bearings, they're there.
So, they're either systems gearbox systems or valves or whether they're rods to go into structural.
Components for aircraft so.
I'd say you know.
We haven't made those calculations, so but so I'm.
Extrapolating, what I know about the business, but I'd say, it's 25% to 30% of our revenues are outside the direct bearing aligned.
Great. Thanks, Mike.
My question.
Okay.
Thank you. Our next question comes from the line of Michael <unk> with Truest. Please proceed with your questions.
Hey, good morning, guys. Thanks for taking the questions nice results and margins here.
Maybe Mike just.
A lot of this talk on supply chain and narrow I mean as you look at the year, you said double digit Aero growth I mean, how how do you risk adjust that for not getting access to supply I mean is there.
Is there a big threat there.
Meeting your objectives for the year and I mean, I think we would keep you or in some cases bearing lead times stretch are stretching out like three years, but how do we just think about the risk of you guys executing if you don't get that supply.
Well.
We do get to supply you know it's it's.
More than 90% of our or our bearing products, probably 95% of our bearing products use.
Materials that are that are.
And are readily available.
There is there is that other 5% of not only bearings, but structural components.
There are more difficult to get in.
And I think I think it's a bigger problem for somebody like Boeing.
Who uses these materials widely across their aircraft line than it is for RBC.
Okay. Okay that helps so youre, okay. So if you're exposed its about 5% of your product and where youre seeing some of that tightness on alloys.
Yep maximum five okay. Okay.
Okay.
And then just back to the gross margins.
I know you called out some of these learning curves and startups, but you've got a little bit of I guess volume step down in the first quarter, but what else is driving the gross margins to step down I know you guys were pretty enthusiastic a couple of quarters ago, calling out a new floor and now we're going to.
We're going to see I mean, it's still phenomenal margins, but is there anything else to read into I mean is it just conservatism and again I know you called out some of those subcontractors purchasing parts. Some of the moves but is that is that kind of the driver.
How should we think about that in the first quarter.
Oh, you mean for the for the.
Revenue projections for the first quarter gross margin.
The gross the gross margin projection, 41% to 41, 5% stepping down sequentially from what you just did this quarter.
Yeah, Yeah, well I think that's probably a little conservatism.
Paying a role there.
Theres no.
Theres no theres no supporting mathematics.
Behind that.
And that estimate leaves me.
Okay. Okay, that's good to know.
And what about.
You talked about the synergies I think you've talked about the Cogs kind of slowing down, but I guess going back to when you made this Dodge deal you did talk about I guess $200 million are still material and supply you could source in house I mean.
Is that where are we there and I think he may be okay.
And the next 12 months that kicks in can you give any color in terms of how much runway is left on that.
Yeah.
It's right at the beginning of that maybe that's.
We've only we've only been doing this for a little bit over.
A year plus a quarter. So yeah, we're right at the beginning of sort of looking at.
At that mix identifying.
Identifying.
What part of that mix could be best made in.
In.
Some of our lower cost plants.
Okay.
You know what part of that mix needs to be made.
In order to.
Support the the volume demands that we see and also at the same time.
You know as we got into that we found a lot of areas.
<unk>.
Gross potential debt.
That could be could be achieved if we if we made this product or we made that product or are we in sourced certain materials that our supply chain. It always had problems producing.
So if we in sourced capitalized in source those materials, we could see upside to our revenues and our margins.
<unk>.
And so it's sort of the outside the synergy.
Concept, but but clearly there is plenty of upside in the Dodge product offering if I'm to take advantage of bye bye.
Yeah.
By incorporating some of these product strategies.
Okay. Okay.
Thats good to notice that and again the margins have been fantastic here, but if we look at I think you kind of said mid 30% EBITDA margin target by.
Your five and certainly it sounds like you've got runway and levers to pull starting with that Cogs I mean, you're still confident in that mid 30% EBITDA margin.
Well, that's a good goal.
I mean, you you need to have.
What do they say.
A humongous goal. So I think you know.
<unk>.
We're making our way towards it let's put it that.
Okay Fair last question I'll get out of the way I guess the implied defense you didn't give the defense revenues, but I guess it looked to be down 7% I mean, I know you talked about marine not being a contributor.
Presumably lapping some easy comps you know get some of that product flow and on the subs. So should we expect a pretty good rebound in defense next year for.
For this year for ICL 24.
Yeah, probably it comes in later in the year because.
First of all I think I think the marine.
The marine business gets.
Yes, its mojo going in and it looks like it's is on track for that and at the same time.
We have a lot of key product.
Does it has to be replaced it was Houston.
Crane situation.
And so that will probably start phasing in at the end of the year.
Okay.
Perfect Alright, thanks, guys.
Thank you. Our next question comes from the line of Pizza Kubicki with Alembic Global. Please proceed with your questions.
Yeah. Thanks, just one follow up for me guys I don't think all the data is out yet, but it looks like probably fiscal 'twenty three ended up as a big.
Big inventory build year for you guys and I imagine some of that is safety.
Safety stock, maybe some as to support the growth.
Just wondering if you expect the inventory to build.
At a similar level in fiscal 'twenty four than it did in 2003.
Hey, Peter it's Rob.
So inventory build for the year was about 70, a little more than $70 million.
That was at the Sargent business, where as we've talked about in the past.
You get reimbursed for some of that material purchase on the Marine program. The rest of it was Dodge.
Primarily and I don't expect that level of growth into next fiscal year.
Okay, Okay, what drove the charge.
Growth just curious.
The supply chain you know when you can't get it from supplier a you order it from supplier B and then supplier a delivers and supplier b delivers.
Gotcha Gotcha, Okay. It sounds great. Thank you.
Okay.
Ladies and gentlemen, there are no further questions at this time I would now like to turn the call back over to Dr. Hartnett for any closing remarks.
Okay well that's.
That's the end of our conference call. We thank you for.
Participating in.
Look forward to speaking to you again.
Yeah.
In the July August timeframe good day.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.