Q3 2023 Barnes Group Inc Earnings Call
Hello, and welcome to the Barnes third quarter 2023 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. I will now turn the conference over to Bill Pitts, Vice President of Investor Relations. Please go ahead.
Thank you J L.
Good morning, and thank you for joining us for our third quarter 2023 earnings call.
With me are Barnes, President and Chief Executive Officer, Thomas Hook.
And senior Vice President Finance, and Chief Financial Officer, Julie strike.
If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate website at one Barnes Dot com.
Oh, any b a R any S dot com.
During our call we will be referring to the earnings release supplement slides, which are also posted on our website.
Our discussion today includes certain non-GAAP financial measures, which provide additional information. We believe is helpful to investors.
These measures have been reconciled to the related GAAP measures in accordance with FCC regulations.
You will find a reconciliation table on our website as part of our press release and in 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 on 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 Julia will provide a review of our financial performance and details of our updated 2023 outlook.
After that we'll open up the call for questions Tom.
Thank you Bill and good morning, everyone. It was a particularly intensive third quarter in which we made significant progress towards several strategic objectives.
We have aggressively moved barnes to a more balanced value driven business through execution of our strategic priorities to drive core business execution.
Scale aerospace and optimize industrial.
While we are pleased with progress in several areas our success to date. It is unfortunately been asymmetric.
Across the organization overhead remained stubbornly high and whilst it has been methodically addressed it has been a slower than desired pace.
Aerospace has demonstrated its on the right path convincingly.
While performance is generally strong it is not perfect given two struggling aerospace manufacturing facilities.
Industrial has proven to be much more challenging than originally anticipated.
Structural changes needed to integrate consolidate and rationalize that portion of our portfolio are well underway, including additional initiatives commenced in the third quarter.
There remains considerable work to complete <unk>.
<unk> the foundational elements, we have painstakingly put in place however, progress will not be linear.
Our strategy to enhance and grow our aerospace business.
A major leap forward.
During the quarter, we successfully recapitalized, the company's debt and completed our acquisition of N B aerospace earlier than expected.
We welcome the M B aerospace team to Barnes and celebrate the largest acquisition in the company's history.
As a major step to establishing a more balanced portfolio overall for Barnes.
We're off to a fast and effective start integrating MB aerospace and have established traction to deliver the synergies we referenced when we announced the acquisition.
The emphasis on driving integration and synergies from day, one is a significant shift from our previous acquisition practices.
The benefits are already apparent and how the teams are engaging and the pace of integration is progressing on all fronts.
This approach will set the standard for future deals to ensure success.
With respect to aerospace performance last quarter, we identified two facilities operating inefficiently and weighing on our results.
One of the facilities and OEM location is starting to turn the corner as we head into the fourth quarter.
The other an aftermarket facility continues to face challenges.
Ultimate fix for this facility requires a ramp in commercial activities to build a robust pipeline that generates additional bookings.
Continued corrective actions and investments are being implemented to bring these facilities to higher levels of performance as we move into next year.
Previously announced transformation products touching aerospace are making steady progress to increase capacity and capabilities.
These investments secure our ability to grow across our aerospace end markets with all customers.
Our fourth quarter forecast looks solid and we believe that we are well positioned heading into 2024.
In addition, we recently announced two extended long term agreements with safran.
The first agreement is for the repair and overhaul of components for the leap and CFM engine programs, reflecting Barnes aerospace expertise and machining and assembly of complex engine components.
In the second agreement, we extended a CFM 56 component repair agreement, which will secure this mutually beneficial program over the long term.
Combined we expect these two represent over $65 million in future revenues.
To close my remarks in aerospace one of the more promising developments with our now larger business is new commercial opportunities customers recognize our expanded capabilities and have already engaged with our combined commercial and engineering teams to identify work packages, but we have not participated.
Painted in previously.
We look forward to sharing more details on these new opportunities with you at the appropriate time.
At industrial our core business execution is unacceptable, which is driving a very strong mandate for continued change this.
This includes cost rationalization efforts within motion control solutions and restructuring within molding solutions.
My direct involvement and industrial operations leadership, which began in may is providing firsthand appreciation of the need for ongoing strategic operational and leadership changes.
These changes are actively being made to streamline access of overhead.
Strength in commercial go to market strategies, and improved manufacturing and capacity and capability.
Our integrate consolidate rationalize products are generally delivering expected results.
However, we are seeing leakage of these benefits due to ongoing pressures of the weak China markets.
And continued inflation in labor and materials.
We have made progress on our manufacturing facility optimization products with the closure of manufacturing plants in molding solutions and motion control solutions.
This includes the closure of our associated spring plant in Bristol, Connecticut.
Additionally, some smaller underperforming technology and service centers and our automation business have also been shut down.
Yeah.
At molding solutions, we implemented a restructuring project with the objective is to integrate the business comprehensively and streamline the organization.
These changes included.
Integrating our commercial capabilities to more aggressively sell our systems and services globally.
Optimizing the effectiveness and efficiency of our global manufacturing footprint.
Accelerating our technical leadership, and bringing new products and services to market.
And streamlining back office business processes and analysis.
During the quarter, we took an additional restructuring charge to accomplish the above.
These changes include also coincide with several leadership changes.
We reduced the size of the leadership team at molding solutions and implemented additional overhead reductions across the business significantly reducing complexity and expense.
I'm also pleased to share that earlier this week, we appointed a new president of molding solutions.
Marcelo <unk>, who has led the transformation of our automation business over the past two years will move into molding solutions President role full time effective November one.
This move created an opportunity for an additional internal promotion of manually Orlando, who is instrumental in reinvigorating the growth of our multi cavity business will now transition to lead the automation business.
Our motion control solutions business.
Which manufacturers auto component parts is feeling the effects of the ongoing United Auto workers strike.
While the third quarter impacts were isolated we expect shipment delays and lagging orders in the fourth quarter.
Our preliminary estimated six plus million dollars in revenue impact and a 1.5 plus million dollar profit impact in the fourth quarter.
However, the unpredictability of the strike May also require additional layoffs or furloughs to mitigate additional impacts.
If the duration of the work stoppage continues there is a risk of broader contagion to our nitrogen gas products and automotive hot runner product lines.
Yeah.
At automation, we continue to anticipate full year growth. Despite a large distribution partner significantly lowering volume in 'twenty three.
The year over year growth offsetting this major headwinds speaks to the effectiveness of our refreshed commercial strategies we.
We are also working closely with our distribution partner to course, correct demand trends.
The distributor is projecting a 2020 for recovery and core product lines and is also adding our vacuum product line to their sales channel.
Overall, however, as we look to the fourth quarter, our industrial outlook is eroded on industry dynamics softening demand and inflationary pressure.
In closing.
We are aggressively moving borrowings to a more balanced value driven business through execution of our strategic priorities to drive core business execution.
Scale aerospace and optimize industrial.
Significant progress has been made and strategically adding to our aerospace business with the addition of M B aerospace in the quarter.
Progress towards previously announced restructuring actions continues as planned across all businesses.
And in industrial major structural changes are being implemented to reduce costs and enhance our commercial capabilities.
While industrial progress is not moving at the desired pace yet.
Specific targeted actions are underway and our commitment to achieving the industrial turnaround remains very strong let.
Let me now pass the call over to Julie for a discussion of our third quarter performance as well as some end market color.
Good morning, everyone and thank you Tom let me begin with highlights of our third quarter results on slide four of our supplement.
Third quarter sales were $361 million up 15% from the prior year period with organic sales increase increasing 4% acquisition revenues contributing 8% and foreign exchange, adding 3%.
Adjusted operating income was $39 million this year, which is the same as a year ago.
And adjusted operating margin of 10, 8% was down 160 basis points.
Net loss.
Well, it's $21 7 million or negative 43 cents per diluted share.
Compared to net income of 17 million or 33 cents per diluted share a year ago.
On an adjusted basis net income per share of 19.
Was down from 49, a year ago.
Adjusted net income per share in the third quarter of 2023 excludes 19 sense of restructuring and transformation related charges 31 cents of acquisition related charges and 12 cents of MB Aerospace acquisition short term purchase accounting adjustments.
Third quarter interest expense was $22 8 million versus $3 4 million a year ago.
The key driver of the increase was the MB Aerospace acquisition.
At the time of closing, we recapitalized Barnes with a fresh $1 billion revolver, and a new $650 million term loan b.
I'll discuss our new debt structure and leverage momentarily, but suffice it to say that a higher average debt balance and a higher average interest rate in the quarter contributed to the increase in interest expense.
In addition, one time bridge financing fees of $9 5 million were incurred in anticipation of the acquisition, which are included in interest expense and excluded from our adjusted earnings as acquisition related charges.
Other income was 900000 versus other expense of $2 4 million a year ago, primarily driven by non operating pension income.
The effective tax rate in the third quarter of 2023 was negative 82% compared to 30% in the year ago period, and approximately 65% for the full year 2022, the unusual tax rate in the third quarter. This year is driven by a.
FX from the non deductibility of a portion of our interest expense.
Transaction costs associated with the M. B aerospace acquisition that are capitalized for tax and a change in the geographic mix of forecasted earnings.
The unusually high 2022 tax rate is primarily due to a goodwill impairment charge, which is not tax deductible and limitations on executive compensation deductions.
Now I'll turn to our segment performance beginning with aerospace.
At aerospace sales were $156 million up 41% from a year ago.
On an organic basis sales increased 17% in the quarter, while the M. B aerospace acquisition increased sales by 24%.
OEM organic sales increased 24% and aftermarket organic sales increased 7%.
Operating profit was $3 6 million versus $21 2 million a year ago.
Excluding restructuring and transformation related charges of $3 9 million acquisition transaction costs of seven 8 million and short term purchase accounting adjustments of $8 million adjusted operating profit of $23 4 million was up 12% from a year ago.
Adjusted operating margin was 15% a decrease of 380 basis points from prior year.
Adjusted operating profit benefited from the contribution of higher organic sales volumes.
Inclusive of pricing and the contribution of M. B aerospace sales, partially offset by productivity.
Keep in mind is that operating margins will be impacted by both short term purchase accounting adjustments and long term intangible amortization from the MB Aerospace acquisition.
While the short term purchase accounting impacts are excluded in adjusted results. The long term intangible amortization is not.
This will have a meaningful impact on reported margins.
Yeah.
Legacy OEM orders were up 29% in the quarter and book to Bill was <unk> six times with the combined Barnes and N B aerospace business. Our OEM backlog now stands at 125 billion and we expect to convert approximately half of this.
Backlog to revenue over the next 12 months.
Our 2023 organic sales growth outlook is up high teens for OEM.
High teens for MRO and low double digits for spare parts collectively.
Collectively aerospace full year organic sales growth is expected to be in the high teens, which is consistent with our July outlook.
Our forecast for aerospace adjusted operating margin is approximately 15, 5% driven in part by long term intangible amortization.
OEM aftermarket mix of the combined entity and the ongoing recovery process in two of our facilities.
And industrial third quarter sales were $205 million up slightly from the prior year period.
Organic sales decreased approximately 3% while favorable foreign exchange was a positive 4%.
Industrials operating profit was $6 4 million versus $8 8 million a year ago.
Excluding restructuring and transformation related charges of $9 3 million adjusted operating profit of $15 6 million was down 14% and adjusted operating margin of seven 6% was down 130 basis points.
Adjusted operating profit was impacted by lower organic sales volumes unfavorable mix and lower productivity, partially offset by positive pricing.
With respect to orders and sales for the quarter across industrial molding solutions organic orders decreased 7%, while organic sales decreased 2%.
Trends that have been in place for several quarters persist.
Our multi cavity mold systems delivered organic excuse me delivered orders and sales growth, primarily driven by packaging and personal care.
Were offset by weakness in our hot runner product line, serving automotive end markets.
For 2023, we now expect molding solutions organic sales to be approximately flat.
At motion control solutions organic orders and sales both decreased by 5% in the quarter.
As has been the trend we saw good orders and sales driven by transportation related end markets and our legacy engineered components business.
However, as Tom mentioned, we expect that to turn negative in the fourth quarter with the ongoing UAW work stoppage.
Sheet metal forming end markets remained stubbornly soft, especially in China, we now forecast flat organic sales growth for Mcs in 2023.
At automation organic orders were down 18%, while organic sales were approximately flat.
We expect mid single digit organic sales growth for automation in 2023, a bit lower than our prior view.
For the industrial segment, we anticipate flat organic sales growth for 2023 with adjusted <unk> adjusted operating margin of approximately eight 5%.
Before moving on to cash I'd like to take a moment to walk our adjusted EPS from the third quarter of last year to the third quarter.
To the current year quarter on slide six of our supplement.
As mentioned there are a lot of moving pieces in the quarter and I want to isolate performance drivers of adjusted EPS.
And looking at the graph it becomes clear that M. B interest and tax impacts are what drove the majority of the year over year decline in adjusted EPS.
With respect to cash performance cash provided by operating activities was $71 million year to date versus $43 million in the prior year period.
The primary drivers continue to be from lower paid incentive compensation in 2023 relative to 2022, and a lower investment in working capital compared to the prior year.
Free cash flow was $34 million versus $22 million last year and capital expenditures were $37 million up approximately $16 million from prior year.
As I mentioned earlier with the M. B Aerospace acquisition, we have recapitalized the company to provide the financing needs to close the deal and to ensure sufficient capital for our ongoing needs.
The new capital structure consists of a $1 billion revolving credit facility with a five year term and a $650 million term loan b with a seven year term.
Each facility uses so far as the base with the revolver, having an interest spread ranging from 1.3, 75% to two 5% based on leverage and the term loan having a fixed 3% spread.
At quarter end, approximately $660 million of the revolver was one we.
Within that approximately $320 million of the revolver debt is euro bar based.
And comes with an approximate 160 basis point lower average rate.
All in our new financing structure has an average interest rate of around seven 7% before swaps.
In order to reduce exposure to rising interest rates, we have hedged approximately $865 million of debt, creating a debt profile that is approximately 65% fixed and 35% variable.
With the interest swaps in place the average interest rate on our debt all in is approximately six 8%.
With our balance sheet, the net debt to EBITDA ratio as defined by our new credit agreement was three eight times at quarter end.
We now anticipate being around the same level at year end and approximately three times at the end of 2024.
Turning to slide seven of our supplement.
We'll move.
Two up we will move to our updated 2023 outlook.
We now expect organic sales to be up 5% to 6% for the year with adjusted operating margin of between 11 and 12%.
Operator: Hello and welcome to the Barnes 3rd quarter 2023 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers are marked, there will be a question and answer session.
We forecasted adjusted EPS in the range of $1 57 to $1 67 down from 2020 twos adjusted earnings of $1 98 per share.
William Pitts: I will now turn the conference over to Bill Pitts, Vice President of Investor Relations. Please go ahead. Thank you, J.L.
William Pitts: Good morning, and thank you for joining us for our 3rd quarter 2023 earnings call.
2023 adjusted earnings per share are anticipated to exclude 70 cents related to restructuring and transformation related activities 36 cents related to acquisition transaction costs and 34 cents of short term purchase accounting adjustments.
William Pitts: With and Senior Vice President, Finance and Chief Financial Officer, Julie Streich. 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 1Barns.com. That's o-n-e-b-a-r-n-e-s.com. During our call, we will be referring to the earnings release supplements slides, which are also posted on our website. Our discussion today includes certain non-gap financial measures which provide additional information we believe is helpful to investors.
With the changes in interest and tax rates, the latter largely driven by interest expense disallowance, we now forecast the impact of the M. B aerospace transaction to be approximately 40% dilute 40 cents dilutive in 2023 and <unk>.
Main dilutive in 2024.
A few other outlook items.
Interest expense is anticipated to be approximately $50 million, excluding the $9 5 million of bridge bridge loan fees.
William Pitts: These measures have been reconciled to the related gap measures in accordance with SEC regulations. You will find a reconciliation table on our website as part of our press release, and in the form 8K submitted to the Securities and Exchange Commission. The advice of certain statements we make on today's call, both during the opening remarks and during the question and answer session, may be forward-looking statements is defined in the Private Securities Ligation Reform Act of 1995.
Other income to be approximately $3 million, excluding $1 1 million of pension income attributable to restructuring activities. We.
We anticipate our full year adjusted effective tax rate of between 31% and 32% cap.
William Pitts: 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 on 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 1Barns.com.
Capex of approximately $50 million.
Average diluted shares of approximately 51 million and free cash flow of approximately $70 million.
In closing we executed several major transformational actions during the quarter to better position Barnes for long term value generation.
As Tom mentioned, our announced restructuring efforts remain on track and we continue to see green shoots from our commercial efforts.
Delivering improved industrial performance remains the most significant operational challenge, we face given our core business execution focus we will turn the corner and deliver results, reflecting the underlying potential of the business opt.
Thomas Hook: 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 updated 2023 outlook. After that, we'll open up the call for questions.
Operator, we will now open the call for questions.
Thomas Hook: Thank you Bill and good morning everyone. It was a particularly intensive third quarter in which we made significant progress towards several strategic objectives. We have aggressively moved Barnes to a more balanced, value-driven business through execution of our strategic priorities to drive core business execution, scale aerospace, and optimize industrial.
Thank you if you have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue simply press Star One again, one moment for your first question.
Your first question comes from the line of Pete Osterlund of Truest. Your line is open.
Hey, good morning, Julien Thanks for taking our question.
Welcome to <unk> first.
Thomas Hook: While we are pleased with progress in several areas, our success to date is unfortunately been asymmetric. Across the organization overhead remained stubbornly high, and while it is being methodically addressed, it has been a slower than desired pace. Aerospace is demonstrated it's on the right path convincingly.
Appreciate the chart on a year over year EPS walk so along similar lines for Aero margins. When we look at the year over year decline in the quarter. There how much of that was from the impact of the acquisition and how much is organically related to productivity or mix or anything else meaningful call out there just trying to get a sense for what the main drivers.
Thomas Hook: While performance is generally strong, it is not perfect given two struggling aerospace manufacturing facilities.
For improvement moving forward.
Sure. So the most significant driver by far is the impact of the intangible amortization that long term.
Thomas Hook: Industrial has proven to be much more challenging than originally anticipated. Structural changes needed to integrate, consolidate, and rationalize that portion of our portfolio are well underway, including additional initiatives commenced in the third quarter. There remains considerable work to complete, leveraging the foundational elements we have painstakingly put in place.
Purchase accounting.
Excuse me long term purchase accounting items that we have.
And just to give you a sense on a quarterly basis that'll be around $6 $3 million a quarter.
Forward.
So that's a significant impact it was $2 1 million impact for the September month, where <unk> was in the numbers. The second then is the introduction of the OEM.
Thomas Hook: However, progress will not be linear. Our strategy to enhance and grow our aerospace business took a major leap forward. During the quarter, we successfully recapitalized the company's debt and completed our acquisition of NB Aerospace earlier than expected. We welcome the NB Aerospace team to Barnes and celebrate the largest acquisition in the company's history. As a major step to establishing a more balanced portfolio overall for Barnes, we're up to a fast and effective start integrating NB Aerospace and have established traction to deliver the synergies we referenced when we announced the acquisition.
Mix MRO mix with M b as well as our own growth in OE and MRO, it's excellent that theyre, both growing and they're there. They just don't carry the margins at the RSP business does and then the final impact would be from the productivity initiatives, which are there but R. R.
Thomas Hook: The emphasis on driving integration and synergies from day one is a significant shift from our previous acquisition practices. The benefits are already apparent in how the teams are engaging and the pace of integration is progressing on all fronts.
At the lower end of the impacts.
Okay, Great very helpful. And then one just switching to industrial.
Specifically on demand was the downward revision for industrial sales guidance, largely driven by expectations in the automotive market and what are you seeing based on order patterns or customer conversations.
And across your other industrial end markets.
Thomas Hook: This approach will set the standard for future deals to ensure success. With respect to aerospace performance, last quarter we identified two facilities operating inefficiently and weighing on our results. One of the facilities and OEM location is starting to turn the corner as we head into the fourth quarter.
So Pete excellent question is is the automotive end markets that we can see because we sold directly into them.
Thomas Hook: The other, an aftermarket facility, continues to face challenges. The ultimate fix for this facility requires a ramp in commercial activities to build a robust pipeline that generates additional bookings. Continued corrective actions and investments are being implemented to bring these facilities to higher levels of performance as we move into next year. Previously announced transformation products touching Aerospace are making steady progress to increase capacity and capabilities. These investments secure our ability to grow across our aerospace on markets with all customers.
We can see that the UAW strike.
Has definitely had an effect.
But for many of our product line areas, particularly in nitrogen gas products portion of Mcs since we sell through our distribution network, we don't have.
Look down through into the end markets.
So there the demand picture is a little bit more opaque, we do know theres, a UAW strike effect, but we also know that we.
The weak China markets, where as an important market for us.
His have definitely tempered.
<unk> demand.
So it's unclear picture on the Mcs portion goes through distributors, but clearly the UAW strike is having an effect and thats, obviously, we've quantified.
Our best estimate for that in the fourth quarter.
We're planning conservatively.
And obviously expecting with.
Thomas Hook: Our fourth quarter forecast looks solid and we believe that we are well positioned heading into 2024.
Some of the news coming with the potential resolution of the UAW strike.
That will allow us to recover that but right now we see.
Thomas Hook: In addition, we recently announced two extended long-term agreements with Safran. The first agreement is for the repair and overhaul of components for the LEAP and CFM engine programs reflecting Barnes Aerospace expertise in machining and assembly of complex engine components. In the second agreement, we extended a CFM 56 component repair agreement which will secure this mutually beneficial program over the long term.
Orders being pushed out.
And demand softening.
We are watching very carefully, but we're planning conservatively.
Going into the fourth quarter and 24.
As we have unclear effects is what's what would be driving those.
Very helpful.
Welcome.
Your next question comes from the line of Myles Walton of Wolfe Research. Your line is open.
Thomas Hook: Combined, we expect these to represent over $65 million in future revenues. To close my remarks on Aerospace, one of the more promising developments with our now larger business is new commercial opportunities. Customers recognize our expanded capabilities and have already engaged with our combined commercial and engineering teams to identify work packages that we have not participated in previously. We look forward to sharing more details on these new opportunities with you at the appropriate time.
Yeah.
Hey, good morning, Tom jewelry ability of Lou on for Myles.
Hey, Luke.
Hello.
So maybe Julie just to be clear to you what drove the dilution from the MB deals.
240 from the 25 that was in the announcement when the deal close maybe just start there.
The primary driver was that was the order of magnitude of the interest is.
Expense disallowance that we actually hit once the final numbers came in and we got the full geographic impact, we're seeing what's going with rates.
Thomas Hook: An industrial, our core business execution is unacceptable, which is driving a very strong mandate for continued change. This includes cost rationalization efforts within motion control solutions and restructuring within molding solutions. My direct involvement in industrial operations leadership, which began in May, is providing firsthand appreciation of the need for ongoing strategic, operational, and leadership changes. These changes are actively being made to streamline excessive overhead, strengthen commercial go-to-market strategies, and improve manufacturing and capacity and capability.
Going on with rates that is the primary delta.
Okay great.
When you say rate you mean, just the interest rate and after tax rate, yes, exactly the interest rate environment exactly mhm.
Alright, and then maybe just on taxes, I mean, I know you're not ready to guide to 'twenty four but can you help us just get aligned for what normalized tax rate should be as we kind of look forward versus what it is this year versus what the guidance was previously.
So I would love to be able to do that for 2024.
Just don't know at this point in time that.
Thomas Hook: Our integrate, consolidate, rationalize products are generally delivering expected results. However, we are seeing leakage of these benefits due to ongoing pressures of the weak China markets and continued inflation in labor and materials. We have made progress on our manufacturing facility optimization products with the closure of manufacturing plants in molding solutions and motion control solutions. This includes the closure of our associated spring plant and Bristol Connecticut. Additionally, some smaller, underperforming technology and service centers in our automation business have also been shut down.
We're ready to put a number out there theres a lot of moving parts and pieces at this point in time, so I apologize for that.
No.
Paul.
And then maybe just on the commercial OE.
Definitely good to see it strong for you guys and for MB, it's causing some dilution that's understandable, but just want to make sure. It does look like the guidance did come down it was a strong quarter, but I don't know if that did anything change there that you were looking for.
20% plus guidance for the year now I think it's high teens.
Yeah, the biggest mover beyond that and Tom can can build on my comments was the change in our outlook for our industrial forecast as a result of UAW as a result of ongoing challenges that we're facing in Chinese demand and also the softness Tom mentioned in our nitrogen gas.
Thomas Hook: At molding solutions, we implemented a restructuring product with objectives to integrate the business comprehensively and streamline the organization. These changes included integrating our commercial capabilities to more aggressively sell our systems and services globally, optimizing the effectiveness and efficiency of our global manufacturing footprint, accelerating our technical leadership and bringing new products and services to market, and streamlining back office business processes and analysis. During the quarter, we took an additional restructuring charge to accomplish the above. These changes include also coincide with several leadership changes. We reduced the size of the leadership team at molding solutions that implemented additional overhead reductions across the business, significantly reducing complexity and expense.
<unk> that flow through motion control solutions.
Our.
Our outlook for industrial deteriorated also contributing to the full year guidance decline.
Sorry, I was talking about within aerospace commercial aerospace I apologize yes.
I heard that.
No. There's no there's no other performance expectation that have changed within the aerospace.
Market that causes a decline we're feeling very good about that business at all.
And impact of the mix.
Of the products that have come into the portfolio and then the amortization that we talked about earlier okay.
Thomas Hook: I am also pleased to share that earlier this week we appointed a new president of molding solution. Marcello Vendemiati, who has led the transformation of our automation business over the past two years, will move into molding solutions president role full time effective November 1st.
Thank you very much.
Your next question comes from the line of Matt Summerville of D. A Davidson your line is open.
Excuse me thanks couple of questions.
Thomas Hook: This move created an opportunity for an additional internal promotion. A Manueli Orlando, who is instrumental in reinvigorating the growth of our multi-cavity business, will now transition to lead the automation business.
First I want to talk about molding solutions and the order activity Youre seeing there can you maybe parse that out a little bit in terms of what inbound orders look like in some of the more material end markets to that business like personal care packaging versus medical versus automotive et cetera, and then I have a couple of fold.
Thomas Hook: Our motion control solutions business, which manufactures auto component parts, is feeling the effects of the ongoing United Auto Workers strike. While the third quarter impacts were isolated, we expect shipment delays and lagging orders in the fourth quarter. Our preliminary estimate is 6 plus million dollars in revenue impact and a 1.5 plus million dollar profit impact in the fourth quarter.
Yes.
Certainly Matt as Tom is.
Obviously, I'm very close to molding solutions, having been the temporary president for the past.
Four months.
Personal care packaging medical all strong in particular for our gold sales we are.
Thomas Hook: However, the unpredictability of this strike may also require additional layoffs or furloughs to mitigate additional impacts. At the duration of the work's stoppage continues, there is a risk of broader contagion to our nitrogen gas products and automotive hot-runner product lines.
About 52 weeks lead time on quoting on molds and delivery due to capacity limitations. So I find in the mold side very very healthy.
You have to increase capacity and capability to get more of the orders remitted.
Thomas Hook: At automation, we continue to anticipate full-year growth despite a large distribution partner significantly lowering volume in 23. The year-over-year growth offsetting this major headwind speaks to the effectiveness of our refreshed commercial strategies. We are also working closely with our distribution partner to course correct demand trends. The distributor is projecting a 2024 recovery in core product lines and is also adding our vacuum product line to their sales channel.
And off into the customers. So we can continue to book strongly there are challenges has been in the automotive end market for hot runner systems, particularly in China.
Where we have been struggling with some of the.
A shift from ICD derived customers to EV customers.
We have not been successful in our commercial go to market strategies, there to manage that producing well, so thats where were seeing.
Thomas Hook: Overall, however, as we look to the fourth quarter, our industrial outlook is eroded on industry dynamics, softening demand, and inflationary pressure. In closing, we are aggressively moving barns to a more balanced value-driven business through execution of our strategic priorities to drive core business execution, scale, aerospace, and optimize industrial. Significant progress has been made in strategically adding to our aerospace business with the addition of MB aerospace in the quarter. Progress towards previously announced restructuring actions continues as planned across all businesses.
A large portion of the pressure is on those hot runner product lines to the end markets to mobility and transportation.
That is a operational commercialization challenge.
As well as a market weakness shift that's in China, that's occurring in combination of course, the UAW strike.
As a dark cloud on the horizon, but it has not affected and it is not a reason for that outlook.
Being a little bit more conservative and pessimistic.
I would say that.
As we are repositioning molding solutions and integrating it and streamlining its management significantly.
Thomas Hook: In an industrial, major structural changes are being implemented to reduce costs and enhance our commercial capabilities. While industrial progress is not moving at the desired pace yet, specific targeted actions are underway and are commitment to achieving the industrial turnaround remains very strong.
It will allow us to focus more sales resources on our principal zone structure in terms of sales and marketing to help get us more commercial and market traction.
And that includes whether it's automotive or personal care packaging medical.
Julie Streich: Let me now pass the call over to Julie for a discussion of our third quarter performance as well as some end market color. Good morning, everyone, and thank you, Tom. Let me begin with highlights of our third quarter results on slide four of our supplement. Third quarter sales were 361 million, up 15 percent from the prior year period, with organic sales increasing 4 percent, acquisition revenues contributing 8 percent, and foreign exchange adding 3 percent.
It's a tough transition to make over the third quarter, but it's long overdue and needed to get the business onto a more fundamental track to sell strongly into those markets.
Okay.
And then.
One of my follow ups it would be helpful.
You can sort of bridge to the extent you can Julie how you get from three eight times levered coming out of year end 'twenty three all the way down to three how much incremental EBITDA are you expecting to add in 24 over 20.
Julie Streich: Adjusted operating income was 39 million this year, which is the same as a year ago, and adjusted operating margin of 10.8 percent was down 160 basis points. Net loss was 21.7 million or negative 43 cents per diluted share, compared to net income of 17 million or 33 cents per diluted share a year ago. On an adjusted basis, net income per share of 19 cents was down from 49 cents a year ago.
Three it's a little tough for me to see mathematically how you get down to three by the end of next year.
So so if we look at what's happening from obviously of cash.
Generation perspective, as well, we would continue to see.
A decrease in the investment in working capital with our with the assistance.
Of excellent management on those fronts, which will contribute will continue to see the top line growth. We have noncash charges that are flowing through the P&L that also <unk>.
Julie Streich: Adjusted net income per share in the third quarter of 2023 excludes 19 cents of restructuring and transformation related charges, 31 cents of acquisition related charges, and 12 cents of MBA aerospace acquisition short term purchase accounting adjustments. Third quarter interest expense was 22.8 million versus 3.4 million a year ago. The key driver of the increase was the M.B. Aerospace Acquisition. At the time of closing, we recapitalized Barnes with a fresh $1 billion revolver and a new $650 million term loan B. I'll discuss our new debt structure and leverage momentarily but to suffice it to say, that a higher average debt balance and a higher average interest rate in the quarter contributed to the increase in interest expense.
Contribute to that pay down so while we're not prepared to talk about what our EBITDA is for 2024 on either side of the business and looking at the the data that we have available today, we see a path with our cash generation and with expected top line to get the leverage to that level.
Okay.
I'll just ask one more so.
<unk> challenges and Errol can we kind of underlying that a little bit and talk about.
Where that's at versus where it was 90 days ago, specifically, what youre doing to fix those issues.
Then if you can kind of recap.
The go forward restructuring savings you're expecting in 'twenty four 'twenty five and what these incremental actions the impact that may be having on those numbers I would assume they're moving up.
Julie Streich: In addition, one time bridge financing fees of 9.5 million were incurred in anticipation of the acquisition which are included in interest expense and excluded from our adjusted earnings as acquisition related charges. Other income was 900,000 versus other expense of 2.4 million a year ago, primarily driven by non-operating pension income. The effective tax rate in the third quarter of 2023 was negative 82%, compared to 30% in the year ago period and approximately 65% for the full year 2022.
If you can give a little more detail on those topics that would be great.
Certainly so for arrow that is in the legacy Barnes Aerospace we've had two facilities we've spoken to on one of those OEM facility has had operational performance challenges and specifically plant output.
Julie Streich: The unusual tax rate in the third quarter this year is driven by effects from the non-deductibility of a portion of our interest expense, transaction costs associated with the M.B. Aerospace Acquisition that are capitalized for tax and the change in the geographic mix of forecasted earnings.
They're.
We have in the third quarter started to turn the corner with changes in leadership at that facility as well as in the.
How we're actually running the facility.
And that has started to turn the corner into a positive direction.
One month does not make a trend we are watching it very closely with the new leadership in place, but it but it has turned the corner from the kind.
Headwinds that it was facing.
The second facility, we we highlighted that as has operational performance issues in aerospace in the legacy borrowings.
Julie Streich: The unusually high 2022 tax rate is primarily due to a goodwill impairment charge which is not tax deductible and limitations on executive compensation deductions.
Is a aftermarket facility that is continuing to have challenges.
There are commercial challenges based on its performance and reputation historically.
Julie Streich: Now I'll turn to our segment performance beginning with aerospace. At aerospace sales were 156 million of 41% from a year ago. On an organic basis, sales increased 17% in the quarter, while the M.B. Aerospace Acquisition increased sales by 24%. OEM Organic Sales increased 24%, and Astermarket Organic Sales increased 7%.
The solution set is a commercial engagement with customers to bring business in that facility. So that it can.
Put itself on a growth trajectory.
That is in process.
It is premature to call.
Turning around since we still have work to do heading into Q4 and into 2024 to improve that situation. It does involve leadership changes as well, both operationally and commercially to improve it.
Julie Streich: Operating profit was 3.6 million versus 21.2 million a year ago. Excluding restructuring and transformation related charges of 3.9 million, acquisition transaction costs of 7.8 million, and short-term purchase accounting adjustments of 8 million, adjusted operating profit of 23.4 million was up 12% from a year ago. Adjusted operating margin was 15%, a decrease of 380 basis points from prior year. Adjusted operating profit benefited from the contribution of higher organic sales volumes, inclusive of pricing, and the contribution of M.B.
So those are also being put in place by Ian reason to improve that situation.
The last piece I would highlight really is relating to MB arrow in the month of September one of the facilities had an atypical.
<unk>.
Performance, all which is.
Really just an isolated item it is not something that is persistent that kind of affected that.
That productivity of that specific individual facility, but it was kind of a one off incidents.
That was a productivity impact and it's not expected to continue going forward. It was just a one particular project.
That was.
A symmetric.
Julie Streich: Aerospace sales partially offset by productivity. Keep in mind that operating margins will be impacted by both short-term purchase accounting adjustments and long-term intangible amortization from the M.B. Aerospace acquisition. While the short-term purchase accounting impacts are excluded in adjusted results, the long-term intangible amortization is not. This will have a meaningful impact on reported margins. The OEM orders were up 29% in the quarter and booked to bill was 0.6 times. With the combined Barnes and M.B.
So as we move into 2024, there is a transformation comprehensive transformation program going on in aerospace.
Part of the Phase communications have already provided.
Guidance on.
We will.
Add to that transformation project.
Integration and synergy savings that we also highlighted for the MB Aerospace acquisition together and the cabinet, so those two things or individual items.
Now being combined in terms of management, but the impact of those two things together will equal the sum of those two parts.
We when we provide 2024 guidance, we will provide a refreshed view of what those look like but no changes now.
Julie Streich: Aerospace business, our OEM backlog now stands at 1.25 billion and we expect to convert approximately half of this backlog to revenue over the next 12 months. Our 2023 organic sales growth outlook is a high teens for OEM, high teens for MRO, and low double digits for spare parts. Collectively, aerospace full-year organic sales growth is expected to be in the high teens which is consistent with our July outlook. Our forecast for aerospace-adjusted operating margin is approximately 15.5% driven in part by long-term intangible amortization, OEM aftermarket mix of the combined entity, and the ongoing recovery process in two of our facilities.
With regards to those programs, it's still consistent with what we had in our overall transformation activities for aerospace.
And then my follow up on the restructuring.
Earnings cadence Julien, what's incremental from the new actions Youre talking about today.
So the cadence of the previously announced actions is.
Has not changed so we are still tracking towards that annualized run rate savings of around $22 million. These new actions should generate a.
Run rate basis of around three $5 million to $4 million annually, some of which were implemented at already at the beginning of the fourth quarter. So we'll reap a portion of those benefits.
Julie Streich: At industrial, third quarter sales were 205 million up slightly from the prior year period. Organic sales decreased approximately 3% while favorable foreign exchange was a positive 4%. Industrial's operating profit was 6.4 million versus 8.8 million a year ago.
This year, although clearly just a couple of months worth.
And Thats another thing Matt to follow up on your prior question that will help US next year, we've had significant cash outflow. This year in support of the restructuring activities that tapers off next year also giving us greater ability to pay down debt at an accelerated pace.
Julie Streich: Excluding restructuring and transformation related charges of 9.3 million, adjusted operating profit of 15.6 million was down 14% and adjusted operating margin of 7.6% was down 130 basis points. Adjusted operating profit was impacted by lower organic sales volumes, unfavorable mix, and lower productivity partially offset by positive pricing. With respect to orders and sales for the quarter across industrial, molding solutions organic orders decreased 7% while organic sales decreased 2%. Trends that have been in place for several quarters persist. Our multi-cavity mold systems delivered orders and sales growth primarily driven by packaging and personal care. These were offset by weakness in our hot runner product line, serving automotive end markets.
Got it thank you.
And your next question comes from the line of Christopher Glynn of Oppenheimer. Your line is open.
Thank you good morning.
Did you say, Tom just hanging at 52 week lead times for multi cavity and what's the impact on win rates with that kind of lead time.
Chris Great question to molding solutions Emmanuel the Orlando, who has been the multi cavity mold leader that has restructured our sales team globally.
<unk> has been extremely successful in driving engagement of that business our win rates have been high.
We are very unique high end provider of those molding systems globally.
And we effectively are effectively with the work that he has done booked up our capacity within the company.
We're making capacity investments as part of the molding solutions efforts and investments to increase the global capacity of that to get the lead times back down again.
Julie Streich: For 2023, we now expect molding solutions organic sales to be approximately flat. At motion control solutions organic orders and sales both decreased by 5% in the quarter.
When our pricing has been.
Very good and our win rates have been very good.
You know what most product lines there as a percentage of completion accounting that is done for those as we're building the molds. So despite the long lead time, we will see some of that into our P&L as we move forward.
Julie Streich: As has been the trend, we saw good orders and sales driven by transportation related end markets in our legacy engineered components business However, as Tom mentioned, we expect that to turn negative in the fourth quarter with the ongoing UAW workstoppage Sheat metal forming end markets remained stubbornly soft, especially in China We now forecast flat organic sales growth for MCS in 2023 At automation, organic orders were down 18% while organic sales were approximately flat We expect mid-single digit organic sales growth for automation in 2023 a bit lower than our prior view For the industrial segment, we anticipate flat organic sales growth for 2023 with adjusted operating margin of approximately 8.5% Before moving on to cash, I'd like to take a moment to walk our adjusted EPS from the third quarter last year to the third quarter on slide 6 of our supplement As mentioned, there are a lot of moving pieces in the quarter and I want to isolate performance drivers of adjusted EPS In looking at the graph, it becomes clear that MB interest and tax impacts are what drove the majority of the year over year decline in adjusted EPS With respect to cash performance, cash provided by operating activities was 71 million year to date versus 43 million in the prior year period The primary drivers continue to be from lower paid incentive compensation in 2023 relative to 2022 and a lower investment in working capital compared to the prior year Free cash flow was 34 million versus 22 million last year and capital expenditures were 37 million up approximately 16 million from prior year As I mentioned earlier, with the MB aerospace acquisition, we have recapitalized the company to provide the financing needs to close the deal and to ensure sufficient capital for our ongoing needs The new capital structure consists of a $1 billion revolving credit facility with a five-year term and a $650 million term loan B with a seven-year term Each facility uses sofa as the base with the revolver having an interest spread ranging from 1.375% to 2.5% based on leverage and the term loan having a fixed 3% spread At quarter-end, approximately $660 million of the revolver was drawn. Within that, approximately 320 million of the revolver debt is Eurobar based and comes with an approximate 160 basis point lower average rate All in, our new financing structure has an average interest rate of around 7.7% before swap in order to reduce exposure to rising interest rates, we have hedged approximately 865 million of debt, creating a debt profile that is approximately 65% fixed and 35% variable. With the interest swaps in place, the average interest rate on our debt all in is approximately 6.8%. Our ratio as defined by our new credit agreement was 3.8 times at quarter end.
What are our primary focus is to leverage that commercial momentum is good operating output for remittance right now so it's a good.
Situation, where we have good pricing flow through good customer engagement good win rate percentages.
But it's focused in a cemetery in molding solutions, we need more mold capacity.
Unfortunately, just happening at the same time of seeing the.
Hot runner product lines in mobility, and transportation, particularly in China be weak in the capacity limitation is hurting our ability to offset the full effect of the hot runner weakness. So we're going to work both.
Sides of that equation.
But as I expect capacity improvements in the mold output side moving into 'twenty four but we have a lot of work to one.
As an operational set one is a commercial solution set so they are different.
Okay. So it sounds like customer expectations as they come for.
Bid and quote an RFP arent all that.
Different from what your actual lead times or Youre, not seeing a rub there with friction.
Im seeing a lot of friction there Chris.
Customers want.
Lead times in the 'twenty to 'twenty five weeks for us to be really world class.
Two weeks is way too long.
And whether the market demand is there.
Certainly our products and technologies are in very high demand.
At the end of the day I want to take advantage of those favorable market conditions, it's not commercial activities holding us up at squarely manufacturing output, So that's where.
Those investments are concentrated in legacy.
On the flip side in the hot runners it's the other way around we have plenty of manufacturing capacity, we need commercial market engagement to ensure that.
We're penetrating into the markets, particularly in mobility transportation automotive to get better engagement with customers.
Different operating challenges in molding solutions.
And of course as you know that is happening at the same time as a considerable amount of operational consolidation and facility rationalization.
It's tough to do all those at the same time, but needed.
Okay.
<unk>.
Then in Tianjin and be aerospace.
As we think about 2024, we've heard it will still be dilutive.
On the one hand, maybe more so given both the 12 months instead of four or five but.
So you'll be doing some integration and normalization there.
Directional relative to the 40.
That we would expect for dilution.
Next year, even directional.
Yeah.
So we're still we're still working.
To fine tune those numbers.
And I wouldn't want to I really wouldn't want to put something out there because the team is still continuing to work through a lot of the complicated.
Accounting.
Elements.
Does that mean that the $6 3 million a quarter amortization, that's in flux I take that to mean.
No no.
Be that will not be a variable Chris that is going to be constant, but as you know we have a rather robust synergy plan for the MB aerospace and as that is implemented that would obviously buffer significantly over the course of the year towards the end of the year it being less dilutive. So there's giving you more qualitative statements here, but.
Julie Streich: We now anticipate being around the same level at year end and approximately 3 times at the end of 2024.
We have a lot of work to do from a planning perspective to give cognizant guidance for 'twenty four on this to give you.
Julie Streich: Turning to slide 7 of our supplement will move to our updated 2023 outlook. We now expect organic sales to be up 5 to 6% for the year with adjusted operating margin of between 11 and 12%. We forecasted adjusted EPS in the range of $1.57 to $1.67 down from 2022's adjusted earnings of $1.98 per share. 2023 adjusted earnings per share are anticipated to exclude 70 cents related to restructuring and transformation related activities, 36 cents related to acquisition transaction costs, and 34 cents of short-term purchase accounting adjustments.
More than just kind of qualitative statements here.
A more definitive information.
Okay that makes sense.
Yes.
That might be a little easier to guide directionally any parameters, we can put on free cash flow. Obviously, the accounting is going on the on the P&L the gap in the adjustments is going to be.
Little bit of.
Pin the tail on the donkey exercise for us today, but in terms of free cash flow margin or.
Some way to ring fence expectations.
Even with caveat that things are still getting worked out and consolidations, which might move working capital.
Should be free cash flow margin for Barnes enterprise in 'twenty four.
Julie Streich: With the changes in interest and tax rates, the latter largely driven by interest expense disallowance, we now forecast the impact of the MB Aerospace Transaction to be approximately 40 cents dilutive in 2023 and remain dilutive in 2024. A few other outlook items. Interest expense is anticipated to be approximately 50 million excluding the 9.5 million of bridge loan fees. Other income to be approximately 3 million excluding 1.1 million of pension income attributable to restructuring activities. We anticipate a full-year adjusted effective tax rate of between 31 and 32%. CapEX of approximately 50 million average diluted shares of approximately 51 million and free cash flow of approximately 70 million.
Yes, Chris excellent question, we know we need to provide that information heard it from Pete's question as well we need to provide a walk.
Kind of deleveraging and cash flows with I think the two things have to be provided together to give you the visibility or looking for.
We have a preliminary view of it we're not ready to share it.
And we know when we provide our 2024 guidance for investors that has to include a clearer picture of the cash projections not just what historically, we've done in terms of EPS because of the differential between.
And more than other deal related expenses, so we take that.
<unk> question as well as yours, as we will come back and provide information with a clear picture on EBITDA slash cash. So you can understand.
Understand what that picture looks like for 'twenty four suffice it to say that operationally we plan on 2020 for putting ourselves in a position to be able to deleverage and drive cash operationally as well as through working capital reduction and the synergy and consolidation plans. So we've got the levers.
Julie Streich: In closing, we executed several major transformational actions during the quarter to better position bonds for long-term value generation. As Tom mentioned, our announced restructuring efforts remain on track, and we continue to see green shoots from our commercial efforts. Delivering improved industrial performance remains the most significant operational challenge we face. Given our core business execution focus, we will turn the corner and deliver results reflecting the underlying potential of the business.
Do it we just have to give you the how we're getting there and what the magnitude of each one is so you can understand the walk and we'll take that as an action item to provide at the beginning of next year.
Okay, we'll wait.
For that thank you.
Welcome.
There are no further questions at this time I will now turn the call back to Bill Pitts for closing remarks.
Operator: Operator, we will now open the call for questions. Thank you. If you have a question, please press star one on your telephone keypad. If you wish to remove yourself from the queue, simply press star one again. One moment for your first question.
Operator: Thank you for your question.
Thank you Jill.
Wed like to thank all of you for joining US This morning, and we look forward to speaking with you next in February with our fourth quarter and full year 2023 earnings Conference call. Operator, we will now conclude today's call.
Pete Osterland: Your first question comes from the line of Pete Osterland of Truist.
This concludes today's conference call you may now disconnect.
Julie Streich: Your line is open. Hey, good morning. Thank you for taking our question. I appreciate the chart on the year-year EPS law. So along similar lines for arrow margins, when we look at the year-over-year decline in the quarter there, how much of that was from the impact of the acquisition and how much is organically related to productivity or myths or anything else meaningful that you call out there? Just trying to get a sense for what the main drivers could be for improvement moving forward.
[music].
Okay.
Julie Streich: So the most significant driver by far is the impact of the intangible amortization, the long-term purchase accounting items that we have. And just to give you a sense on a quarterly basis, that'll be around $6.3 million a quarter going forward. So that's a significant impact. It was 2.1 million impact for the September month where MB was in the numbers. The second then is the introduction of the OEM mix, MRO mix with MB, as well as our own growth in OEM and MRO.
Yeah.
[music].
Yes.
Julie Streich: So it's excellent that they're both growing and they're there. They just don't carry the margins that the RSP business does. And then the final impact would be from the productivity initiatives, which are there, but are at the lower end of the impacts. Okay, great, very helpful.
Pete Osterland: And then one just the switching to industrial specifically on demand was the downward revision for industrial sales guidance largely driven by expectations in the automotive market.
Thomas Hook: And what are you seeing based on order patterns or customer conversations about demand across your other industrial and market? Yet Pete, excellent question is the automotive end markets that we can see because we sell directly into them, we can see that the UAW strike has definitely had an effect. But for many of our product line areas, particularly nitrogen gas products, portion of MCS, since we sell through a distribution network, we don't have look down through into the end markets.
Thomas Hook: So there the demand pictures a little bit more opaque. We do know there's a UAW strike effect, but we also know that the week China markets, whereas an important market for us, have definitely tempered demand. And so it's an unclear picture on the MCS portion, goes through distributors, but clearly the UAW strike is having an effect.
Thomas Hook: And that's obviously we quantified the you know our best estimate for that in the in the fourth quarter, but we're planning conservatively and obviously expecting with some of the news coming from the potential resolution of the UAW strike. That all allow us to recover that, but right now we see, orders being pushed out and demands offening and we're watching very carefully but we're planning conservatively I'm going into the fourth quarter and 24 because we have unclear effects is what what would be driving those.
Myles Walton: Your next question comes from the line of Myles Walton of Wolf Research. Your line is open. Hey, good morning, Tom, Julie, Bill, and you have Lou One from Myles. Greetings. Hey, Lou. Hello. Hey.
Myles Walton: So, maybe, Julie, just to be clear, can you what drove the dilution from the MB deals to 40 cents from the 25 cents that was in the announcement when the deal closed? Maybe if we just start there. Yeah, the primary driver was that was the order of magnitude of the interest expense disallowance that we actually hit once the final numbers came in and we got the full geographic impact. We're seeing what's going with rates going on with rates. That is the primary delta. Okay, so when you say rate, you mean just the interest rate, not the tax rate. Yeah, exactly the interest rate environment, exactly.
Myles Walton: All right, and then maybe just on taxes. I mean, I know you're not ready to guide to 24 but can you help us just get aligned for what normalized tax rate should be as we kind of look forward versus what would this year versus what the guides was previously.
Julie Streich: So, I would love to be able to do that for 2024. I just don't know at this point in time that I'm ready to put a number out there. There's a lot of moving parts and pieces at this point in time. So I apologize for that. No, that's fine.
Myles Walton: Maybe just on the commercial. Like I said, definitely good to see it strong, you know, for you guys and for mb calls in some dilution. That's understandable, but just want to make sure it does look like the guidance did come down. It was a strong quarter, but I don't know if did anything change because I think you were looking for. You know, 20% plus guidance for the year. Now I think it's high teams.
Myles Walton: Yeah, the biggest mover beyond that and Tom can build on my comments was the change in our outlook for our industrial forecast as a result of UAW as a result of ongoing challenges that we're facing in Chinese demand and also the softness Tom mentioned in our nitrogen gas products that flow through motion control solutions are. Our outlook for industrial deteriorated, also contributing to the full year guidance decline. I was talking about within aerospace commercial.
Julie Streich: Oh, with an aerospace, I apologize. I heard that. No, there's no other performance expectations that have changed within the aerospace market that causes decline. We're feeling very good about that business. It's all an impact of the mix of the products that have come into the portfolio and then the amortization that we talked about earlier.
Matt Summerville: Thank you very much.
Matt Summerville: You're next question comes from the line of Matt Summerville of the Adivitant. Your line is open. Excuse me, thanks a couple questions.
Thomas Hook: First, I want to talk about molding solutions and the order activity you're seeing there. Can you maybe parse that out a little bit in terms of what inbound orders look like? In some of the more material and markets to that business, like personal care packaging versus medical versus automotive, etc. And then I have a couple of followers. Certainly Matt, this time is obviously a very close to molding solutions having been the temporary president for the past four months.
Thomas Hook: Personal care packaging and medical all strong in particular for our bold sales. We are about 52 weeks lead time quoting on mold and delivery due to capacity limitations. So I find on the mold side very healthy. We have to increase capacity and capability to get more of the orders remitted and off into the customers so we can continue to book strongly there. Our challenge has been in the automotive and markets for hot runner systems, particularly in China, where we have been struggling with some of the shift from ICE derived customers to EV customers.
Thomas Hook: We have not been successful in our commercial quarter markets strategies there to manage that trend just in well. So that's where we're seeing a large portion of the pressure is on those hot runner product lines to the end markets, the mobility and transportation. That is a operational commercialization challenge as well as a market weakness shift that's in China that's occurring in combination. Of course, the UAW strike is a dark cloud on the horizon, but it is not affected and it is not a reason for that outlook.
Thomas Hook: Being a little bit more conservative in pessimistic, I would say that as we're repositioning molding solutions and integrating it and streamlining its management significantly, it'll allow us to focus more sales resources on our principal zone structure. In terms of sales and marketing to help get us more commercial market traction in that includes whether it's automotive or personal care packaging medical. It's a tough transition to make over the third quarter, but it's long overdue and needed to get the business onto a more fundamental track to sell strongly into those markets.
Julie Streich: And then is one of my follow up, it would be helpful if you can sort of bridge to the extent you can, Julie, how you get from 3.8 times levered coming out of year and 23 all the way down the three. How much incremental EBITDA, are you expecting MB to add in 24 over 23? It's a little tough for me to see mathematically how you get down to three bites. So if we look at what's happening from obviously a cash generation perspective as well, we would continue to see a decrease in the investment in working capital with the assistance of excellent management on those fronts which will contribute will continue to see the top line growth.
Julie Streich: We have non cash charges that are flowing through the P&L that also contribute to that paydown. So while we're not prepared to talk about what our EBITDA is for 2024 on either side of the business in looking at the data that we have available today, we see a path with our cash generation and with expected top line to get the leverage to that level.
Thomas Hook: Okay, so then I'll just ask one more. So productivity challenge is an arrow.
Thomas Hook: Can we kind of underline that a little bit and talk about where that's at versus where it was 90 days ago, specifically what you're doing to fix those issues. And then if you can kind of recap the go forward restructuring savings your expected top line growth. We're affecting in 24 and 25 and what these incremental actions, the impact that may be having on those numbers, I would assume they're moving up, but if you can give a little more detail on those topics, that'd be great.
Thomas Hook: Certainly, so for arrow mat is in the legacy barns arrow space, we've had two facilities we've spoken to on one of those OEM facilities has had operational performance challenges and specifically plant output. There, we have in the third quarter started to turn the corner with changes in leadership at that facility, as well as in the, you know, how we're actually running the facility. And that has started to turn the corner into a positive direction. Of course, one month is not make a trend. So we're watching it very closely with the new leadership in place.
Thomas Hook: But it has turned the corner from the, you know, kind of headwinds that it was facing the second facility we we highlighted that has operational performance issues in arrow space and the legacy barns is a aftermarket facility that is continuing to have challenges. There are commercial challenges based on its performance and reputation historically. The solution set is a commercial engagement with customers to bring business in that facility so that it can put itself on a growth trajectory.
Thomas Hook: That is in process, it is premature to call it turning around since we still have work to do heading into Q4 and into 2024 to improve that situation. It does involve leadership changes as well, both operationally and commercially to improve it. So those are also being put in place by Ian reason to improve that situation.
Thomas Hook: The last piece I would highlight really is relating to MB Arrow. In the month of September, you know, one of the facilities had an a typical month of performance, which is really just an isolated item, and it's not something that's persistent that kind of affected that productivity of that specific individual facility, but it was kind of a one-off instance that was a productivity impact, and it's not expected to continue going forward. It was just a one particular project that was asymmetric.
Thomas Hook: So as we move into 2024, there is a comprehensive transformation program going on in aerospace that we, part of the phase communications, have already provided guidance on. We will add to that transformation project the integration and synergy savings that we also highlighted for the MB Arrow Space acquisition together. So those two things are just individual items, but they're now being combined in terms of management, but the impact of those two things together will equal the sum of those two parts.
Thomas Hook: And we, when we provide 2024 guidance, will provide a refreshed view of what those look like, but no changes now, with regards to those programs, it's still consistent with what we had in our overall transformation activities for Arrow Space.
Julie Streich: And then my follow-up on restructuring savings cadence, Julian, what's incremental from the new actions you're talking about today? So the cadence of the previously announced actions has not changed, so we're still tracking towards that annualized run rate savings of around 22 million. These new actions should generate run rate basis of around $3.5 to $4 million annually, some of which were implemented already at the beginning of the fourth quarter, so we'll reap a portion of those benefits this year, although clearly, you know, just a couple of months worth.
Julie Streich: And that's another thing, Matt, to follow up on your prior question that will help us next year. We've had significant cash outflow this year in support of the restructuring activities that papers off next year, also giving us greater ability to pay down debt and an accelerated pace.
Christopher Glynn: And your next question comes from the line of Christopher Glinn of Oppenheimer. Your line is open. Thank you. Good morning. Did you say you had come? Did you say you had 52 week lead times for multi-cavity? And what's the impact on wind rates with that kind of lead time? Chris, great question. The molding solutions, you know, Emmanuel Orlando, who has been the multi-cavity mold leader that has restructured our sales team globally, you know, has been extremely successful and driving engagement of that business.
Christopher Glynn: Our wind rates have been high. We're very unique high end provider of those molding systems globally, and we, you know, effectively, effectively with the work that he has done, booked up our capacity within the company. We're making capacity investments as part of the molding solutions, efforts, and investments to increase the global capacity of that to get the lead times back down again. Our pricing has been very good and our win rates have been very good.
Christopher Glynn: As you know on those product lines, there is a percentage of completion accounting that is done for those as we're building the molds. So despite the long lead time, we will see some of that into our P&L as we move forward. But our primary focus is to leverage that commercial momentum is get operating output for remittance right now. So it's a good situation where we have good pricing flow through good customer engagement, good win rate percentages.
Christopher Glynn: But it's focused in a symmetry in molding solutions and we need more mold capacity. Unfortunately, it's just happening at the same time of seeing the hot runner product lines and mobility and transportation, particularly in China, be weak. And in the capacity limitation is hurting our ability to offset the full effect of the hot runner weakness. So we're going to work both sides of that equation. But is that I expect capacity improvements on the mold output side moving into 24.
Christopher Glynn: But we have a lot of work to, you know, one is an operational set. One is a commercial, you know, solution set so they're different. Okay, so it sounds like customer expectations as they come for fit and quote in our P aren't all that that, you know, different from what your actual lead times are. You're not seeing a rub there, a friction. Oh, I'm seeing a lot of friction there, Chris is with customers want, you know, lead times in the 20 to 25 weeks for us to be really world class, you know, 52 weeks is way too long.
Christopher Glynn: And there the market demand is there. Certainly our products and technologies are in very high demand. And we, you know, at the end of the day, want to take advantage of those favorable market conditions. It's not commercial activities holding us up. It's squarely manufacturing output. So that's where those investments are concentrated. And like I said, on the flip side in the hot runners, it's the other way around. We have plenty of manufacturing capacity.
Christopher Glynn: We need commercial market engagement to ensure that we're penetrating into the market, particularly in mobility transportation automotive to get better engagement with customers. Different operating challenges and molding solutions. And of course, as you know, that is happening at the same time as a considerable amount of operational consolidation and facility rationalization. So it's tough to do all those at the same time, but needed. Okay. And then in terms of mb arrow space, as we think about 2024, we heard it'll still be dilutive.
Christopher Glynn: On the one hand, maybe more so given that for 12 months instead of four or five, but also you'll be doing some integration and normalization there. And anything directional relative to the 40 cents that we would expect for dilution next year, even directional. So we're still working to fine tune those numbers and I wouldn't want to, I really wouldn't want to put something out there because the team is still continuing to work through a lot of the complicated accounting elements.
Christopher Glynn: Does that mean that the 6.3 million a quarter amortization that that's in flux I take that to me? No, it will not be a variable. Chris, that's going to be constant, but as you know, we have a rather robust synergy plan for the mb aerospace and as that is implemented, that would obviously buffer significantly over the course of the year towards the end of the year, it being less pollutive. So there's, I'm giving you more qualitative statements here, but we have a lot of work to do from planning perspective to give cognizant guidance for 24 on this to give you, you know, more than just kind of qualitative statements here, you know, kind of more definitive information.
Christopher Glynn: Okay, that makes sense and, you know, something that might be a little easier to guide directionally any parameters we can put on three cash flow, obviously the accounting is going on the P and L, the gap and the adjustments is going to be a little bit of a pin the tail on the donkey exercise for us today, but in terms of free cash flow margin or you know, some way to ring sent expectations, you know, even with caveat that things are still getting worked out and you have consolidations which might move work in capital. What's a should be free cash flow margin for bonds enterprise in 24?
Christopher Glynn: Yeah, Chris, excellent question. We know we need to provide that information, heard it from Pete's question as well. We need to provide a walk and kind of leveraging and cash flows. We, I think the two things have to be provided together to give you the visibility you're looking for, we have a preliminary view of it, we're not ready to share it. And we know when we provide our 2024 guidance for investors that has to include a clear picture of the cash projections, not just what historically we've done in terms of EPS because of the differential between, you know, the amort and other the correlated expenses.
Christopher Glynn: So we take that, you know, Pete's question as well as yours as we will come back and provide information with a clear picture on EBITDA slash cash. So you can understand what that picture looks like for 24 suffice it to say that operationally we plan on 2024, putting ourselves in a position to be able to deliver and drive cash operationally as well as through working capital reduction. And the synergy and consolidation plans.
Christopher Glynn: So we've got the lovers to do it. We just have to give you the how we're getting there and what the magnitude of each one is so you can understand the walk and we'll take that as an action item to provide at the beginning and next year. Okay, we'll wait for that.
Operator: Thank you.
William Pitts: There are no further questions at this time. I will not turn the call back to Bill Pitts for closing remarks. Thank you, Jail.
Operator: We would like to thank all of you for joining us this morning and we look forward to speaking with you next in February with our fourth quarter and full year 2023 earnings conference call operator. We will now conclude today's call.
Operator: This concludes today's conference call.
Operator: You may now disconnect.