Q3 2024 RBC Bearings Inc Earnings Call
Greetings and welcome to the RBC bearings fiscal 2024 third quarter earnings call. At this time all participants are in a listen only mode question and answer session will follow the formal presentation.
Operator: Greetings and welcome to the RBC Bearings Fiscal 2024 3rd Quarter Earnings Call. At this time, all participants are in a listen-only mode.
Operator: Question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.
You require operator assistance during the conference. Please press Star Zero on your telephone keypad as a reminder, this conference is being recorded.
Now I'd like to turn the conference over to your host Josh Carroll with Investor Relations. Please go ahead.
Good morning, and thank you for joining us for RBC bearings fiscal 2024 third quarter earnings Conference call.
Josh Sullivan: Good morning, and thank you for joining us for RBC Bearings' fiscal 2024 third quarter earnings conference call. With me on the call today are Dr. Michael Hartnett, Chairman, President, and Chief Executive Officer; Daniel Bergeron, Director, Vice President, and Chief Operating Officer; and Robert Sullivan, Vice President and Chief Financial Officer.
With me on the call today, a doctor Michael Hartnett, Chairman, President and Chief Executive Officer, and you're bearish around Erector, Vice President and Chief operating Officer.
Robert Sullivan, Vice President Chief Financial Officer.
Josh Sullivan: Before beginning today's call, let me remind you that some of the statements made today will be forward-looking and are made under the Private Security and Solidification Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors; we refer 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 and 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 and is available on the company's website. With that, I'll now turn the call over to Dr. Hartnett. Thank you, Josh, and good morning, and welcome.
Before beginning todays call, let remind you that some of the statements made today will be forward looking and are made under the private Securities Litigation Reform Act at 1995.
Actual results may differ materially from those projected or implied due to a variety of factors. We refer 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 and 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.
As part of that really is available on the company's website.
With that I'll now turn the call over to Dr. Hartnett.
Thank you Josh and good morning.
And welcome.
Michael J. Hartnett: Net sales for the third quarter of fiscal 2024 were $373.9 million. This represents an increase of 6.3% from last year, and I'm happy to report this is within our guidance range for revenue. In the third quarter of 2024, sales of industrial products represented 65% of net sales, with aerospace products at 35%. As a footnote, over the past five years, revenue growth at RBC has been at a compounded rate of 16.8%. The margin for the quarter was $158 million, or 42.3% of net sales, again within our range.
Net sales for the third quarter of fiscal 2024 were.
$373 $9 million.
This represents an increase of six 3% from last year.
I'm happy to report this is well within our guidance range on revenues.
The third quarter of 2024 sales of industrial products represented 65% of net sales with aerospace products at 35%.
As a footnote over the past five years revenue growth that RBC has been compounded rate of 16, 8%.
Gross margin for the quarter was $158 million or 42, 3% of net sales.
Again within our range.
Michael J. Hartnett: This compares to 146 million, or 41.5%, for the same period last year and an 80 basis point improvement. We continue to see year-on-year improvement in gross margin as we continue to strengthen operational performance and improve both absorption and methods in our plants. This quarter, because of fewer production days, leading to lower overhead absorption, margin is normally the lowest for the year. It's historically bounced back in Q4. There are no surprises here; we see this effect every year. Overall profitability continues ahead of plan, year-to-date, and to reconfirm, we expect to finish the year in the low to mid 40% range on gross margins. Again, our hats are off to the RBC team for this performance.
This compares to $146 million or 41, 5% for the same period last year.
An 80 basis point improvement.
We continue to see year on year improvement in gross margin as we continue to strengthen operational performance.
Bruce both absorption and message and our in our plants.
This quarter because of fewer production days.
Leading to lower overhead absorption margin is normally the lowest of the year.
It's historically bounce back in Q4.
There's no surprises here, we see this effect every year.
Okay.
Overall profitability continues ahead of plan.
Year to date and to reconfirm, we expect to finish the year.
Low to mid 40%.
Range on gross margins.
Again, our hats are off to the RBC team for this performance.
Michael J. Hartnett: We all understand that we are in business to service our customers to the full extent of our abilities, with high quality and service levels always our first priority. More than 70% of our revenues are from products where we are the sole or primary source. Our customers have learned over the years we can trust. When they come to us at the last minute in a crisis, we perform for them. Adjusted operating income for the period was $75.5 million.
We all understand that we are in business to service our customers to the full extent of our abilities with high quality and service levels.
As always our first priority.
More than 70% of our revenues are from products, where we are so our primary source our customers have learned over the years. They can trust us.
So when they come to us at the last minute in crisis, we perform for them.
Yeah.
Adjusted operating income for the period was $75 5 million.
Michael J. Hartnett: 20.2% of net sales compared to last year, 71.6 million, and 20.4%, respectively. A 5.3% improvement. Pre-cash flow is a strong $70.9 million. That reduction continues to be a priority and is progressing as planned. We achieved a $550 million decrease in debt since the acquisition of Dodge in November of 2021, 27 months ago, and a net debt to EBITDA ratio of 2.5 over the trailing 12 months, down from 5.65 in fiscal 22. RBC's record of EBITDA growth over the last five years now stands at 19.4 percent. Adjusted EPS, which includes stock-based compensation, was $1.85 a share.
22% of net sales compared to last year, 70, $126 million and 24% respectively.
Five 3% improvement.
Free cash flow was a strong $79 million.
That reduction continues to be a priority and is progressing as planned.
We achieved $550 million decrease in debt since the acquisition of Dodge in November of 'twenty, 'twenty, one 'twenty seven months ago.
And net debt to EBITDA ratio of 2.5 over trailing 12 months down from 565 in fiscal 'twenty two.
Rbcs record of EBITDA growth over the last five years now stands at 19.4%.
Adjusted EPS diluted was $1 85 per share.
Michael J. Hartnett: Adjusted EBITDA was $109.5 million, or 29.3% of net sales compared to $103.3 million, or 29.4% of net sales the same period last year, a 6.1% increase. We continue to make continual improvements in the execution of our business and are excited to see a robust acceleration in demand for our products from industry leaders in the aircraft, marine, and space industries. We look forward to a March year-end with revenues finishing in the $1.55 billion range on the industrial business. During the quarter, industrial growth was minus 0.6% overall against some strong comps last year.
Adjusted EBITDA was $109 5 million or 29, 3% of net sales compared to $103.3 million or 29, 4% of net sales for the same period last year, a six 1% increase.
We continue to make continual improvements in the execution of our business and are excited to see a robust acceleration in demand for our products from industry leaders and the aircraft marine and space industries.
We look forward to a March year end with revenues finished finishing in the 1.55 billion dollar range.
On the industrial business.
During the quarter, the industrial growth was minus <unk>, 6% overall.
Overall against some strong comps last year.
Michael J. Hartnett: Last year, improved supply chain performance allowed us to ship orders that were late to customers, creating a bulge in sales and distorting year-on-year comps by a few percentage points. We now have a well-performing supply chain on the industrial side. So the environment has changed, and orders late at customers' request are back to normal.
Last year improved slot supply chain performance allowed us to ship orders, which relate to customers.
Creating a bulge in sales and just starting year on year comps by a few percentage points.
We now have a well performing supply chain on the industrial side.
So the environment environment has changed and orders late to customers' request are back to normal.
Michael J. Hartnett: Dodge revenues are up 1.4% year-to-date, down in Q3 by minus 0.3%, and we expect to be up again in Q4 by a few percentage points. RBC classic industrial sales were down 1.4% during the last period, driven solely by softness and semiconductor machine makers.
<unk> revenues are up one 4% year to date down in Q3 point minus 23%.
And we expect to be up again in Q4, a few percentage points.
RBC classic industrial sales were down one 4% during the last period driven solely by softness in semiconductor machine makers.
Michael J. Hartnett: Normalizing for semiconductor sales, RBC classic industrial revenues would have been up 3.6%. In a word, our industrial business is performing well and is in the steady-as-she-goes mode for Aerospace and Defense. Commercial aerospace was up 16.5%, and the aerospace and defense sector was up 22.5% overall. The constraint here is not demand; it's production. We are working to expand manufacturing assets as well as increase inbound materials to fuel the continued 20-plus percent per year on-year expansion across many facilities that service these markets, as explained in prior calls. OEM defense includes components and assemblies for jets, missiles, helicopters, and marine valves.
Normalizing for semiconductor sales RBC classic industrial revenues would've been up three 6%.
In a word our industrial business is performing well and is the is in the steady as she goes smoke.
On aerospace and defense commercial aerospace.
Space was up 16, 5%.
The aerospace and defense sector was up 22.5% overall.
The constraint here is not demand it's production.
We are working to expand manufacturing assets as well as increased inbound materials too.
To fuel the continued 20 plus percent per year on year expansion across many facilities.
Service these markets.
As explained in prior calls.
M Defense includes components and assemblies for Jets missiles helicopters marine valves.
Michael J. Hartnett: Satellites, rockets, and it's up 32.7% year-over-year. Bookings overall in this sector have been very strong. We now have over 60 contracts negotiated and signed with a value of approximately $1 billion.
Satellites rockets.
And it's up 32, 7% year over year.
Bookings overall in this sector has been have been very strong.
We now have over 60 contracts negotiated and signed with a value of approximately $1 billion.
Michael J. Hartnett: Additionally, we are in a position to grow this metric substantially again by mid-year. Finally, the aftermarket was up 26.1%, with the main drivers being jets, helicopters, Engines, and Marine. As you can see, the aerospace market is strongly accelerating with increased volumes quarterly. Demand drivers here are defense and, of course, large plane builders, the submarine and weapons OEMs, and their supply chain. Despite the news otherwise, we are building 737 materials at the 42 per month rate, and new orders to RBC are inbound at about the 47 per month rate. We don't expect this change, this situation, to change materially at this time. On the 787, our current build rates are approximately five per month, now at seven per month by April. That's an important ship to us. As you know, Airbus is pushing the 320 ship build rate to exceed the monthly rate of 70 in 2024. So, in summary, just to go over the highlight reel.
Additionally, we are in a position to grow this metric substantially again by mid year.
Finally, the aftermarket was up 26, 1% main drivers jets helicopters.
Engines and marine.
As you can see the aerospace market is strongly accelerating with increased volumes quarterly.
Demand drivers here are defense and of course large claim builders.
The suburb submarine and weapons Oems and their supply chains.
Despite the news otherwise we are building a 737 materials at the 42 per month rate.
And new new orders to RBC, our inbound at about 47 per month rate we.
We don't expect this change to just fix this.
This situation to change materially at this time.
On the 787, our current build rates are approximately five per month.
Now in seven per months by April.
<unk> is an important ship to us.
As you know Airbus is pushing the 320 ship build to exceed the monthly rate of <unk> 70 in 2024.
So in summary, just to go over the highlight reel.
Michael J. Hartnett: Q4 sales were up 6.3% for the period, and EBITDA was $109.5 million, up 6.1% from last year. EBITDA 29.3% of sales, up from 26.7% in Q3 of 2022. Adjusted net income of $60 million, up 12.4%. Debt pay down since November of 2021, $550 million, trailing EBITDA net debt 2.5 versus 5.65 in fiscal 22, and well over half of our revenues are to replace products consumed in use. Foyer Yard Gardens, revenue range, FY 24, in the 1.55 million range, and gross margins will be in the low to mid 40s.
Q4 sales were up six 3% for the period.
EBITDA of $109 5 million up six 1% from last year.
EBITDA.
29, 3% of sales up 20 up from 26, 7% in Q3 of 'twenty two.
Adjusted net income of $60 million up 12, 4%.
Debt pay down since November of 'twenty, 'twenty, one $550 million.
Trailing EBITDA net debt 2.5 versus 565 in fiscal 'twenty two.
And well over half of our revenues are to replace products consumed in use.
Yes.
So your guidance revenue range FY 'twenty four.
And the 1.55.
Million range.
Josh Sullivan: Regarding the fourth quarter of 2024, we are expecting sales to be somewhere between $405 and $415 million. And I'll now turn the call over to Rob, our Chief Financial Officer, for more financial details. Thank you, Mike. SG&A for the third quarter of fiscal 24 was $63.9 million, compared to $56.8 million for the same period last year. As a percentage of net sales, SG&A was 17.1% for the third quarter of fiscal 24, compared to 16.1% for the same period last year. Other operating expenses for the third quarter of fiscal 24 totaled $18.9 million, compared to $18.8 million in peer expenses.
And gross margins will be in the low to mid forties.
Regarding the fourth quarter of 'twenty 'twenty, four we are expecting sales to be somewhere between.
405, and $415 million range.
I'll now turn the call over to Rob.
Our chief financial Officer for more financial details.
Details thank you Mike.
SG&A for the third quarter of fiscal 'twenty, four was $63 9 million compared to $56 8 million for the same period last year as a percentage of net sales SG&A was 17, 1% for the third quarter still 24 compared to 16, 1% for the same period last year.
Other operating expenses for the third quarter of fiscal 'twenty, four totaled $18 9 million compared to $18 8 million.
Josh Sullivan: For the third quarter, other operating expenses included $17.7 million of amortization of intangible assets, $0.1 million of restructuring costs, and $1.1 million of other items. For the same period last year, other operating expenses consisted primarily of $17.4 million of amortization of intangible assets, $1.2 million of Dodge TSA costs and other costs associated with that acquisition, and $0.2 million of other items. Operating income was $75.2 million for the third quarter of fiscal 24, compared to operating income of $70.4 million for the same period last year.
For the third quarter. Other operating expenses included $17 7 million of amortization of intangible assets 0.1 million of restructuring costs and $1 1 million of other items for.
For the same period last year. Other operating expenses consisted primarily of $17 4 million of amortization of intangible assets $1 2 million of Dodge TSA costs and other costs associated with that acquisition and zero point $2 million of other items.
Operating income was $75 2 million for the third quarter of fiscal 'twenty four compared to operating income of $70 4 million for the same period last year.
Josh Sullivan: Excluding approximately $0.2 million of restructuring costs and $0.1 million of transaction-related costs, adjusted operating income was $75.5 million for 20.2 percent of sales for the third quarter of fiscal 24. Excluding approximately $1.2 million of acquisition costs, adjusted operating income for the third quarter of fiscal 2023 was $71.6 million for 20.4 percent of sales. Interest expense for the third quarter was $19.3 million compared to $20.9 million for the same period last year.
Excluding approximately zero point $2 million of restructuring costs, and <unk> 1 million of transaction related costs. Adjusted operating income was $75 5 million or $20 2, Million% of sales for the same for the third quarter of fiscal 'twenty four excluding approximately $1 2 million of acquisition costs adjusted operating income for the third.
Order of fiscal 2023 was $71.6 million for 24% of sales.
Interest expense for the third quarter was $19 3 million compared to $20 9 million for the same period last year.
Josh Sullivan: For the third quarter of fiscal 24, the company reported net income of $46.6 million compared to $36.3 million for the same period last year. On an adjusted basis, net income was $60 million for the third quarter compared to $53.3 million for the same period last year. Net income attributable to common stockholders for the third quarter was $40.8 million, compared to $30.6 million for the same period last year. On an adjusted basis, net income attributable to common stockholders for the third quarter was $54.2 million, compared to $47.7 million for the same period last year. Diluted earnings per share attributable to common stockholders were $1.39 per share for the third quarter compared to $1.05 for the same period last year.
For the third quarter of fiscal 'twenty four the company reported net income of $46.6 million compared to $36 3 million for the same period last year on an adjusted basis net income was $60 million for the third quarter compared to $53 3 million for the same period last year net.
Net income attributable to common stockholders for the third quarter was $40 8 million compared to $30 6 million for the same period last year on an adjusted basis net income to common stockholders attributable to common stockholders for the third quarter was $54 2 million compared to $47 7 million for the same period last year.
Diluted earnings per share attributable to common stockholders was $1 39 per share for the third quarter compared to $1 five at the same period last year on.
On an adjusted basis diluted EPS attributable to common stockholders for the third quarter was $1 85 per share compared to $1 64 per share for the same period last year.
Turning to cash flow the company generated $85 million in cash from operating activities in the third quarter of fiscal 2024 compared to $60 9 million for the same period last year.
Josh Sullivan: On an adjusted basis, diluted EPS attributable to common stockholders for the third quarter was $1.85 per share compared to $1.64 per share for the same period last year. Turning to cash flow, the company generated $80.5 million in cash from operating activities in the third quarter of fiscal 2024, compared to $60.9 million for the same period last year. Capital expenditures were $9.5 million in the third quarter, compared to $6.5 million last year. Free cash flow conversion this quarter was 152% and 116% for the full nine-month period.
Capital expenditures were $9 5 million in the third quarter compared to $6 5 million last year.
Free cash flow conversion this quarter was 152% and 116% for the full nine month period.
We paid down $60 million on the term loan during this quarter, leaving total debt of $1 $2 6 billion as of December 32023, and cash on hand was $71 6 million.
I would now like to turn the call back to the operator for the question and answer session.
Okay.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question. Please press star on your top star one on your telephone keypad, a confirmation tone will indicate your line is in the queue.
Press Star two if you would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.
Operator: We paid down $60 million on the term loan during this quarter, leaving total debt of $1.26 billion as of December 30, 2023, and cash on hand was $71.6 million. 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 you would like to ask a question, please press star 1 on your telephone keypad, and the confirmation tone will indicate your line. You can press star 2 if you would like to remove your question, or participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first questions come from the line of Kristine <unk> with Morgan Stanley. Please proceed with your questions.
Hey, good morning, everyone.
Good morning.
Industrials was flattish in the quarter and then also your when looking at your fourth quarter outlook for revenue. It just seems a little bit lighter versus what you've seen so far through the year can you give us any color regarding whats driving these pieces how much visibility you.
And and if theres any downside risk to your updated for Q.
Revenue outlook.
Well I think you know I think in terms of air aircrafts.
Aircraft and defense side Kristine the visibility is.
It is really good.
Operator: One moment, please, while we poll for your questions. Our first questions come from the line of Kristine Liwag with Morgan Stanley. Please proceed with your question. Hey, good morning, everyone.
It's really a matter of us.
Making it and we usually do a pretty good job. There. So there's we don't see a lot of risk there.
On the industrial side.
The.
The visibility and mainly the visibility.
And the driver there is largely Dodge.
Kristine Tan Liwag: Morning. Industrials was flattish in the quarter, and then also you're looking at your fourth quarter outlook for revenue. It just seems a little bit lighter versus what you've seen so far through the year. Can you give us any color regarding what's driving these pieces, how much visibility you have, and if there's any downside risk to your updated 4Q?
<unk>.
Dodge dodges accompany that.
So it really doesn't have the kind of.
Backlog.
Our contract relationships with with its customer base because of its customer base as we do.
So we're always.
Extrapolating based upon.
Economic demand and economic forecasts, what exactly dodges sales are going to be so.
Michael J. Hartnett: Revenue Outlook. Um, Well, I think, you know, I think in terms of the aircraft and defense side, Kristine, the visibility is really good. It's really a matter of making it.
If there's if there's any risk to the upside or the downside.
Probably coming mostly from docs.
Great and then I know.
Oh it is.
It's already here in February so based on what Youre seeing out of Dodge, what's the pace of ordering and that you know I know, it's more of a break and fix type business.
Michael J. Hartnett: And we usually do a pretty good job there. So there's, we don't see a lot of risk there. And, you know, on the industrial side, Um, visibility, and mainly visibility. And the driver there is largely Dodge. Dodge.
What's the pace, that's driving that and I guess.
In terms of industrial revenue PMI now is trending higher.
Michael J. Hartnett: Dodge is a company that really doesn't have the kind of backlog or contract relationship with its customer base because of its customer base, as we do. And so, you know, we're always extrapolating based upon, you know, economic demand and economic forecasts, what exactly Dodge's sales are going to be. Um, if there's any risk to the upside or to the downside, it's probably coming mostly from Dodge. Great. And then, you know, I know it's, uh, it's, uh, we're already here in February.
The outlook then for this quarter more conservative Mike.
I hope it is.
I would say that you know.
Here, we are in February and the Dodgers businesses is performing.
Very well so.
We only have about six weeks ago, so what could possibly happen.
Yeah.
I guess on that I'm, sorry, I'll I'll sneak one more in.
The first two years of the deal with dodging of you've always talked about the years of the factory and with the margins where they are you've clearly done.
Your job there. So can you give us an update where you are in terms of revenue synergies between legacy RBC and Dodge.
Michael J. Hartnett: So based on what you're seeing out of Dodge, what's the pace of ordering? And, and, you know, I know it's more of a break and fix type business. Um, what's the pace of striving for that?
Sure Christine Hi, it's Dan.
The revenue side as we talked about in the past, we just don't have a lot of overlap on our Oems. So we're starting to see some nice traction there we've been training the Dodge sales team on RBC products and we've been training the RBC team on Dodge products and we've been doing that.
Daniel A. Bergeron: And I guess, you know, in terms of industrial revenue, PMI is now trending higher. Is your outlook then for this quarter more conservative, Mike? Yeah, I hope it is. Um, you know, I would say that here we are in February, and Dodge's business is performing very well. So we only have about six weeks to go. So what could possibly happen? I guess on that, sorry, I'll sneak one more in, you know, the first two years of the deal with Dodge, you know, you've always talked about the years of the factory, and with the margins where they are, you've clearly done your job there, so can you give us an update on where you are in terms of revenue synergies between Legacy, RBC, and Dodge? Sure, Kristine. Hi, it's Dan.
Both domestically and globally and we're starting to see some traction from those events and I think that will just.
Continuing to be accretive to the top line over the next three to four years.
The sales engineers get up to speed on these different products in these different Oems that there.
Isn't it.
So from that standpoint.
We're feeling good on the margin side I think you already.
Kind of address that put into our gross margins for the nine months were up 220.
Bps, and 160 bps fell down to EBITDA. So we are definitely again leverage off the investments we're making.
SG&A and we're definitely getting the benefit from the synergies on the cost side and the SG&A side.
Daniel A. Bergeron: On the revenue side, as we talked about in the past, we just don't have a lot of overlap on our OEMs, so we're starting to see some nice traction there. We've been training the Dodge sales team on RBC products, and we've been training the RBC team on Dodge products. And we've been doing that both domestically and globally. And we're starting to see some traction from those events.
Dodge.
On the cost side I think we still have some nice synergies still coming through for $25 26, and 27 on our in sourcing efforts that were kind of our long term goals for us and those are moving along nicely.
We're actually building out manufacturing facility.
Facility.
Space and Mexico to give us more capacity for U S products in the United States for Dodge, So that's going to be.
Daniel A. Bergeron: And I think that will just continue to be a creative contribution to the top line over the next three to four years as the sales engineers get up to speed on these different products and these different OEMs that they're visiting. So from that standpoint, we're feeling good on the margin side, I think you already kind of addressed that, our gross margins for the nine months were up 220 bps, and 160 bps fell down to the dot. So we're definitely getting leverage off the investments we're making in SG&A. And we're definitely getting the benefit from the synergies on the cost side and the SG&A side with Dodge.
<unk> accretive to the top line and gross margins.
And we continue to work on consolidation and our SG&A to see what are the costs. We can continue to drive out between the two divisions.
Okay.
Great. Thanks, guys. Thanks for the color.
Thank you our next questions come from the line of Pete Kubicki with Alembic Global. Please proceed with your questions.
Hey, good morning, guys nice nice free cash quarter.
Ken Thanks.
So maybe just to start there I had a question on inventory.
You guys bought a lot of inventory back in 'twenty three I think.
Fly chain issues, both a little bit.
Daniel A. Bergeron: On the cost side, I think we still have some nice synergies still coming through for 2025, 2026, and 2027 in our in-sourcing efforts, which were kind of long-term goals for us. And those are moving along nicely. We're actually building out manufacturing facility space in Mexico to give us more capacity for US products in the United States for Dodge. So that's going to be hopefully a creative boost to the top line and to gross margins, and we continue to work on consolidation in our SG&A to see what other costs we can continue to drive out between the two divisions. Great. Thanks, guys. Thanks for the caller.
More slowly in the first half of this year.
But it looks like working capital was really kind of de Minimis growth here in the third quarter.
So should we expect your inventory needs to slow going forward.
Maybe your supply chain is becoming more predictable maybe but.
Just was wondering if that should that growth should slow going forward, even as your revenue grows particularly in aerospace.
Well.
I think the the inventory growth that you saw previously.
It's mainly driven by Dodge and their supply chain.
And so.
We've kind of.
Dialed that back.
And it hasn't it hasn't responded as well as we wanted it to I wanted to see it respond so we're going to continue to dial it back.
Kristine Tan Liwag: Thank you. Our next questions come from the line of Pete Skibitski with Alembic Global. Please proceed with your question. Hey, good morning, guys.
Get get Dodge more.
Or into the.
Steady state turns that they demonstrated in 2019.
Pete Skibitski: So maybe just to start there, I had a question on inventory. You guys built a lot of inventory back in 23. I think, because of supply chain issues, built a little bit more slowly in the first half of this year, but it looks like working capital was really, you know, kind of de minimis growth here in the third quarter. So should we expect your inventory needs to slow going forward? Your supply chain is becoming more predictable, maybe, but I just wondered if that growth should slow going forward, even as your revenue grows, particularly in aerospace. Well, I think the inventory growth that you saw previously was mainly driven by Dodge and their supply chain. And so we've kind of dialed that back.
But.
Feed those dollars into the.
Into the aircraft business.
The demand there and the lead time on materials lead time of materials now.
For our types of materials.
Typically averaged 50 weeks and then.
But it actually doesn't get delivered.
Until 60 weeks.
So you have to be really you have to be long on you're planning for for materials for these businesses.
I would expect.
I'd expect the dollars just.
Stay reasonably constant but shift ownership.
Yes, Okay makes sense.
I appreciate that maybe just moving to revenue.
I want to make sure I understand Mike did you say you expect industrial revenue up about 3% in the fourth quarter.
Michael J. Hartnett: And it hasn't responded as well as we wanted it to, wanted to see it respond, so we're going to continue to dial it back and sort of get, get, dodge more, or into the steady state turns that they demonstrated in 2019. But, feed those dollars into the, and to the aircraft business, because the demand there and the lead time on materials, lead time on materials now is, you know, for our types of materials is you know, typically average 50 weeks and then, but it actually doesn't get delivered for until 60 weeks. So you have to be really, you have to be long on your planning for materials for these businesses. I'd expect.
I just want to clarify I felt like that would presume aerospace is sort of flattish sequentially. If industrial is up about 3%.
Yeah, I think I think I said aerospace or industrial would be up a few percent.
And.
Yeah.
Where's the aerospace.
As the aerospace in the fourth quarter Aerospace is anticipated to continue to escalate as as we move forward sequentially.
Okay.
So I think industrials.
Yeah.
We'll be up a couple points, maybe but in aerospace will continue to grow as we continue to deliver.
Okay. Okay.
Industrial up year over year or sequentially.
Sequentially.
Okay. Okay.
Michael J. Hartnett: You know, I'd expect the dollars just to stay reasonably constant but shift ownership. Yeah, okay. Makes sense. Appreciate that.
Okay.
Allow me one more question for me I'll get back in queue, I think Mike last quarter, you talked about going through your planning process for aerospace and defense and you were talking about 20% type growth as I recall I'm just wondering if anything changed there we are under.
Pete Skibitski: Maybe just moving to revenue. Mike, did you say you expected industrial revenue to be up about 3% in the fourth quarter? I just want to clarify, I feel like that would presume aerospace is sort of flat sequentially if industrial is up about 3%. I think I said aerospace or industrial would be up a few percent, and Yeah, I. Where's the aerospace?
Kind of an extended continuing resolution on the defense side, So I'm not sure how the how the visibility is going there and we've obviously had the.
So max issues, although it sounds like for you guys. It hasn't impacted anything. So just was wondering if you're still feeling good about 20% type growth in.
25% for A&D.
I'm trying to think.
Well I wouldn't feel good I think it's going to be in that neighborhood it'll be between 15 and 20 I don't have I don't have the $25 plan in front of me and I don't remember all the details of it but I think it certainly is not.
Michael J. Hartnett: What is the aerospace in the fourth quarter? Aerospace is anticipated to continue to escalate as we move forward sequentially. So, I think industrials, you know. We'll be up a couple points maybe, but the aerospace will continue to grow as we continue to deliver. Okay, okay. We're talking about the industrial up year over year or sequentially? sequentially.
Nothing is backing off.
It's a matter of.
Getting the materials.
Trading the labor.
For the most part we have the we have the capital equipment, although some of it is being augmented.
And then executing.
So I.
It will be in that 20% to 15% to 20% neighborhood for.
Pete Skibitski: Okay, okay. Okay, um, let me move one more question for me. I'll get back in queue.
Sure.
Several quarters.
Okay, Okay and have you guys seen any big labor challenges in terms of getting the people you anticipate needing.
Michael J. Hartnett: I think, Mike, last quarter, you talked about going through your planning process for aerospace and defense. And you were talking about 20% type growth, as I recall. Just wondering if anything changed there.
Yeah, we're always being challenged there it depends upon.
It depends on what you know what part of the country, you're talking about but certainly in the north east here that's.
That's not an easy salute.
<unk> solution.
We've brought some innovative solutions we've planned.
Michael J. Hartnett: We are under kind of an extended continuing resolution on the defense side, so I'm not sure how the visibility is going there. And we've obviously had some max issues, although it sounds like for you guys that hasn't impacted anything. So just was wondering if you're still feeling good about 20% type growth in 25 for A and D. I'm trying to think of why I wouldn't feel good. I think it's going to be in that neighborhood.
With the growth in our population by plant is tends to be in order to.
To meet.
Our plans.
We are out.
Yes.
<unk> people in doing interesting things in order to.
Attract attract.
Attract people to our plant.
It's it's pretty dry here.
We're being successful, but it's it it comes.
Michael J. Hartnett: It'll be between 15 and 20. I don't have the 25 plan in front of me, and I don't remember all the details of it, but I think it certainly is... Nothing is backing off. I mean, it's a matter of... You know, getting the materials and Training the labor. For the most part, we have the capital equipment, although some of it's being augmented, and then executed. And so I, you know, I think we'll be in that 20 to 15 to 20% neighborhood for several quarters. Okay, okay. And have you guys seen any big labor challenges in terms of getting, you know, the people you anticipate needing? Yeah, we're always being challenged there. It depends. It depends on what part of the country you're talking about, but certainly in the Northeast here, that... That's not an easy solution.
Great Labor investment.
The.
Southern California, it depends upon exactly where.
We are in southern California at your plants are.
I think for the most part we are okay. There.
<unk> in Mexico.
And all the all of the plants in Mexico.
And.
We're pretty good in the.
South Carolinas.
Also so.
I think the major pressure is.
Pretty much in the northeast.
And we have people working on that.
Got it okay I appreciate it guys. Thank you.
Yes.
Thank you. Our next question is coming from the line of Andre <unk> with Bank of America. Please proceed with your questions.
Hi, how are you guys.
Yes.
So I know you said material on 780 Sevens at 42, with new orders and down at 47, but with the recent announcement of the production freeze the FAA and postproduction fees. How are you guys thinking.
Michael J. Hartnett: Well, you know, we've brought some innovative solutions. We planned the growth in our population by plant has to be in order to meet our plans, and we're out, recruiting people and doing interesting things in order to attract people to our planet. It's, it's pretty dry here. We're being successful, but it's, when it comes to it, a great labor investment. Um, you know, Southern California, it depends upon, you know, exactly where in Southern California your plants are.
More prolonged freeze impacts what moves out on yearend how can we think about that and is that something you guys are kind of factoring in the moment or is it really not a concern.
Well right now you know we're.
Listening to Calhoun <unk> conference call.
And trying to understand exactly.
What his direction was.
And we've concluded that this direction was to maintain there.
They're.
There.
Rates Theyre planning rates.
Michael J. Hartnett: And I think for the most part, we were OK there. We're fine in Mexico, at all the plants in Mexico. And... And we're pretty good in the South Carolinas, also. So, you know, I think that the major pressure is pretty much in the Northeast, and we have people working on this. Got it. Okay. Appreciate it, guys.
The Max.
And that's kind of what we came away with so.
We're doing the same.
And I think I think I think boeing's in a tough place.
They have customers, who need the planes or screaming for the planes. They have a long backlog they have.
They have just just now getting their supply chain.
Michael J. Hartnett: Thank you. Yeah. Thank you.
Andre Madrid: Our next questions come from the line of Andre Madrid with Bank of America. Please proceed with your question. Hi, how are you guys?
<unk> to perform for them and I don't think they want to tie a knot in it.
At this point.
Yes.
Hello, everybody down so I think theyre going to be I think theyre going to be using some working capital in order to.
Andre Madrid: So I know you said material on 737s at 42 with new orders inbound at 47. But with the recent announcement of the production freeze, the FAA-imposed production freeze, how are you guys thinking? Could a more prolonged freeze impact what moves out on your end?
To bank some of these components.
And if it's a year. It's 150 planes will didn't they have 500 planes on the tarmac at one point in time and have all that working capital tied up there it seems like 150.
Michael J. Hartnett: How should we think about that? And is that something you guys are kind of factoring in at the moment? Or is it really not a concern?
Which early buying youre only stocking the components would be.
Okay.
Would be small change for them. They certainly can afford it so I think they do.
Michael J. Hartnett: Well, right now, you know, we're listening to Calhoun's conference call and trying to understand exactly what his direction was. And we've concluded that his direction was to maintain their rates, their planning rates, on the max. And that's kind of what we came away with. We're doing the same. And I think Boeing's in a tough place. I mean, they have customers who need the planes who are screaming for the planes.
There are options are limited and I think they have to maintain rate.
Understood got you and then pivoting again to industrial I know it was touched on a little bit already but maybe to get back and it just really clarify.
How much of the softness do you think would just be attributed to diminish and market demand versus actually issues because it really doesn't seem like there's anything on your front, but I might have that wrong I mean, how much can you maybe just talk broadly about.
Michael J. Hartnett: They have a long backlog. They're just now getting their supply chain to perform for them, and I don't think they want to tie a knot in it at this point and slow everybody down. So I think they're going to be using some working capital in order to bank some of these components. And, you know, if it's a year, it's what, 150 planes?
The demand drivers long term on that side of the business.
Yeah, well you know.
Yeah on the industrial side, we saw we see.
Markets of mining and metals, performing pretty well for us even even during this period.
Food and beverage areas. These are important areas for us that's doing pretty well.
Michael J. Hartnett: Well, didn't they have 500 planes on the tarmac at one point in time and have all that working capital tied up there? It seems like 150, which when you're only buying, you're only stocking the components would be, would be small change for them. They certainly can afford it. So I think they don't, I think their options are limited, and I think they have to maintain rates. Okay. Gotcha! And then pivoting again to industrial.
Oil and oil and natural gas is doing.
Well for us.
And.
That's being offset by what we consider aggregate in general industrial and in Semicon.
So I think.
Aggregates, a big one it's an important one to us.
It's very dependent upon this.
It's this infrastructure bill could.
Could be a big aid to the aggregate business and.
Andre Madrid: I know it was touched on a little bit already, but maybe to get back in and just really clarify. How much of the softness do you think could just be attributed to diminished and mark demand versus actual issues? Because it really doesn't seem like there's anything on your front, but I might have that wrong.
And so.
We would expect.
We would.
Expect a little pickup in the overall industrial demand through FY <unk> FY 'twenty, five and that's kind of.
Michael J. Hartnett: I mean, how much... Can you maybe just talk broadly about the demand drivers long term on that side of the business? Yeah, well, you know. You know, on the industrial side, we trust, you know, we see that the markets for mining and metals are performing pretty well for us even during this, this period. Food and beverage areas, these are important areas for us; that's doing pretty well. Oil and natural gas, you know, are doing real well for us.
Kind of what are.
What our budgets are based on.
And so that's that's how we're making the call.
Okay.
Okay.
I'll leave it there thanks so much.
Yes.
Thank you. Our next question comes from the line of Steve Barger with Keybanc capital markets. Please proceed with your question.
Okay.
Thanks, Good morning.
Steve.
For for three Q, if I assume your EBIT margin in Aero in your corporate expenses were pretty similar sequentially. It suggests the industrial margin was down maybe 300 basis points versus <unk>.
Michael J. Hartnett: And, you know, that's being offset by what we consider aggregate and general industrial and semi-con. So, you know, I think aggregate's a big one.
First of all is that right and second is that just from revenue being down or is there a mix in there and how are you thinking about <unk> industrial margin.
Michael J. Hartnett: It's an important one to us. It's, is very dependent upon this, you know, it's, this infrastructure bill could be a big aid to the aggregate business. And so, you know, we would expect a little pickup in overall industrial demand through our FY25, and that's kind of what our budgets are based on. And so that's how we're making the call. Okay, I see. I'll leave it there. Thanks so much.
Well I think.
I think the industrial margins were down and I think it's mix driven.
And.
Yes.
Based upon.
Based upon the way we forecast it.
It's mainly a dodge issue.
And basically the way we forecast.
Dodge going forward, it's hard to tell exactly what that mix is going to be so.
Steve Barger: Thank you. Our next questions come from the line of Steve Barger with KeyBank Capital Markets. Please proceed with your question. Thanks. Good morning.
I suspect it will be no no more deterioration than it was in the third quarter end.
Steve Barger: For 3Q, if I assume your EBIT margin and ERO and your corporate expenses were pretty similar sequentially, it suggests the industrial margin was down maybe 300 basis points versus 2Q. First of all, is that right? And second, is that just from revenue being down? Or is there a mix in there?
So worst case, we have we have some pickup.
Steve I'll give them to you right now so you'll see in the Q later, but the aerospace margins, we had a really strong quarter margins were 41 point too. So they continue to escalate as I've talked about in the last few calls industrial margins were 42 eight this quarter.
Michael J. Hartnett: And, you know, how are you thinking about 4Q industrial? Well, I think I, I think the industrial margins were down, and I think it's, it's mixed driven, and you know, based upon the way we forecast, it's mainly a Dodge issue. And basically, the way we forecast Dodge going forward, it's hard to tell exactly what that mix is going to be. But I suspect it'll be no more deterioration than it was in the third quarter. And so, you know, worst case, we have some pick-up. Yeah, Steve, I'll give them to you right now.
I don't want to go back to what Dan said it earlier in the call that for the nine months gross margins are up 220 basis points for the full year consolidated so we're well ahead of what we had said earlier in the year and feeling really good about it.
Yes.
Thank you for that Rob.
Other industrial companies have been guiding to a softer organic growth environment for the first half of 'twenty four calendar and stronger in the back half and I know digest, a backlog basis business, but how are you thinking about general cadence of industrial revenue through calendar 'twenty four.
Josh Sullivan: So you'll see it in the queue later. But the aerospace margins, we had a really strong quarter; the margins were 41.2. So they continue to escalate, as I've talked about in the last few calls; industrial margins were 42.8 this quarter. But I kind of want to go back to what Dan said a bit earlier in the call that for the nine months, gross margins are up 220 basis points for the full year consolidated. So we're well ahead of what we said earlier in the year and feeling really good about it. Thank you for that, Rob. Some other industrial companies have been guiding to a softer organic growth environment for the first half of the 24 calendar year and a stronger one in the back half, and I know Dodge is in a backlog basis business. But how are you thinking about the general cadence of industrial revenue through calendar 24? Is there anything different from what you'd expect from your own normal seasonality?
Is there anything different from what you would expect from your own normal seasonality.
We're not seeing it I mean.
We're off since the since the first of January.
Industrial bookings have been.
Very encouraging so.
Yeah.
You know it.
Okay.
The economists predict one thing and it seems like the economy does something else. So.
So I don't think anybody expected to GDP growth that we saw in the third quarter or was.
Projecting it.
<unk>.
Earlier and.
And so.
Steve Barger: We're not seeing it. I mean, you know, we're, We're off since the 1st of January, the industrial bookings have been very encouraging, so, you know. The economists predict one thing, and it seems like the economy does something else.
I think the yes.
I think we're just.
We're just steady as she goes as I said earlier.
Taking.
Taking it one month at a time.
And so if there is weakness in industrial that you're seeing right now it is on the Dod side, whereas legacy I think he said is is more stable or was up year over year, while Dodge was down.
Michael J. Hartnett: So I don't think anybody expected the GDP growth that we saw in the third quarter or was projecting it, you know, earlier, and And so I think the, yeah, you know, I think we're just, We're just steady as she goes, as I said earlier, we're taking it one month at a time. And so if there is weakness in industrial that you're seeing right now, it is on the Dodge side, whereas legacy, I think he said, is more stable or was up year over year while Dodge was down. Well, the legacy business is more... is more like the RBC aircraft business in that it's servicing OEMs, principally on an 80-20 basis. And so there's long-term POs and there's contracts and there's all that sort of thing that ties it together. And so it's much easier to forecast, I got it. And just one last one.
Well the legacy business is more.
It's more like the RBC aircraft business in that it's servicing Oems principally on an 80 20 basis and so there's there is long term pose and theres contracts and Theres, all that all that sort of thing.
Ties it together and so it's much easier to forecast it.
Got it.
And just one last one as you look across the M&A landscape are you seeing more industrial deals in Aero and.
What are the relative sizes of deals that you see across the two segments.
I'd say the industrial sizes are in the.
$100 million to $200 million kind of range is.
Steve Barger: As you look across the M&A landscape, are you seeing more industrial deals than aero deals? And what are the relative sizes of deals that you see across the two? I'd say the industrial sizes are in the hundred to two hundred million dollar kind of range is what we've been seeing coming and going. And some of the aerospace businesses are larger than that, and they sort of come and go. You know, we're looking, and we're a little picky about exactly what we want, what we want in our space. And, and so, you know. I think during the third quarter, we worked hard.
What we what we've been seeing coming coming by.
And some of the aerospace businesses are larger than that.
<unk>.
And they sort of come and go.
We're looking.
Picky about exactly.
What we want what we want in our space.
And so.
I think during the third quarter, we worked with.
We worked very hard on one.
And sort of missed missed the grade.
So we're all recovering from disappointment this quarter and.
Michael J. Hartnett: We worked very hard on one and sort of missed the grade. So, we're all recovering from disappointment this quarter, looking at other potentials. And just to clarify, those are deal sizes or revenue? Okay. Thank you. Thank you. Our next question comes from the line of Seth Weber with Wells Fargo. Please proceed with your question. Hey guys, good morning.
Yeah.
Looking at other other potentials.
And just to clarify those are deal sizes or revenue.
Our revenue.
Got it okay.
Thank you.
Okay.
Thank you. Our next question is come from the line of Seth Weber with Wells Fargo. Please proceed with your questions.
Hey, guys good morning, sorry.
Seth Weber: Sorry to just go back to the guidance question again for the fourth quarter. I guess to have industrial revenue up a few, you know, 100 basis points sequentially. That implies, you know, on a year-over-year basis, kind of mid to high single digits. I'm just trying to tie that together with your commentary about the January bookings being better.
Sorry, just to go back to the guidance question again for the fourth quarter.
I guess to have industrial revenue up a few a few 100 basis points sequentially.
That implies on a year over year down kind of mid to high single digits.
I'm just trying to.
Tie that together with your commentary about the January bookings being better so would you expect.
Seth Weber: So would you expect, you know, 2025 industrial to be..., you know, less negative than the down kind of mid to high single digits that is kind of implied by your fourth quarter industrial revenue, if that makes sense, or is that how you started the year anyway? Yeah. Yeah, I think the fourth-quarter industrial revenue will be, as we said, up by a few percentage points based on what we're seeing so far in the quarter. There doesn't seem to be any.
2025 industrial to be.
Less less negative than the down kind of mid to high single digits.
It's kind of implied by your fourth quarter industrial revenue if that makes sense.
Or is that have you started out here anyway.
Yes, I think I think the fourth quarter industrial revenue will be equal as we said will be up.
A few percentage points based upon what we're what we're seeing so far in the quarter.
There doesn't seem to be.
Michael J. Hartnett: There is a lot of difference between that. I think the issue is the aerospace project. I'm sorry, I'm trying to just discern, I think you're talking sequential improvement, but I'm just trying to think of that on a year-over-year basis, sequentially up, you know. Transcription by CastingWords, I don't know, 7% or 8% year-to-year, or is that not
So much different about that I think the.
Is the issue of the Aerospace project.
Projects I'm, just I'm just stuck.
I'm, sorry, I'm trying to just Europe, I think youre talking sequential improvement, but I'm, just trying to think of that on a year over year basis.
Sequentially up.
A few percent translates down.
I don't know seven or 8% year to year or is that does that not the right math.
That seems very high I don't suspect that its going to be down 78% year over year.
Michael J. Hartnett: That seems very high, and I don't suspect that it's going to be down 70% year over year. Okay. All right. I'm a year over year guy too, Seth.
Okay Alright.
Aye.
On a year over year guide too.
Seth.
Michael J. Hartnett: And yeah, I think the industrial revenue year over year is going to be up a few percent in the fourth quarter. Okay. All right. That's super helpful clarification. Thank you. And I just wanted to go back to the comment about the Mexico capacity ad. Can you just...
Yes, I think I think the industrial revenue year over year is going to be up a few percent in the fourth quarter.
Okay Alright.
Super helpful clarification. Thank you.
And I just wanted to go back to the comment around the Mexico capacity add can you just.
Michael J. Hartnett: I apologize if you've talked about this more in the past, but is that replacing... You know, are you moving capacity from high-cost markets to Mexico? Or is that just incremental capacity? And what will that serve?
Apologize if you've talked about this more in the past but is that replacing.
Are you moving capacity from from high cost markets to Mexico or is that just incremental capacity and what will that be survey. Thank you.
Michael J. Hartnett: Yeah, well, we just completed, we expect to complete this quarter, a plant in Tecate that's about 100,000 square feet. And that will be pretty much earmarked for the Dodge business. And so we will move manufacturing from the U.S. to Mexico for Dodge, for the purpose of opening floor space in one of the Dodge plants, where we have new manufacturing equipment arriving but no fourth floor space to accommodate it. And so we're sort of playing musical chairs there with one of the Dodge plants.
Yeah, well, we just we just completed.
We expect to complete this quarter.
And to cut day, that's about 100000 square feet.
And that will be pretty much earmarked for the <unk> business.
And so we will we.
We will move manufacturing.
From.
In the U S to Mexico Fort Dodge.
For the purpose of opening source space and one of the Dutch plants.
We have new manufacturing equipment, arriving.
And no and no fourth floor space to accommodate it.
And.
So we're sort of playing musical chairs there with one of the Dodge plants.
And.
Michael J. Hartnett: And so the new equipment that's arriving in the plant will be for increased volume on product lines that are very successful but constrained by production. So that's the first phase of Dikate.
So the new equipment, that's that's arriving in the plant what will be for.
Increased volume on product lines that are very.
Successful, but constrained by production.
So.
That's the first phase of decay.
Michael J. Hartnett: That's that's our first phase. Our second phase will probably be for lower cost manufacturing of some of the Dodge products and maybe some insuring, re-shoring, some of the supply chain. That's super helpful; it makes total sense.
That's our first phase our second phase will probably.
B.
For lower cost manufacturing of some of the Dodge products.
And maybe some insuring.
Reassuring.
Okay.
Some of the supply chain.
That makes super helpful and it makes total sense. Thank you for clarifying that stuff for me.
Pete Skibitski: Thank you for clarifying that. Thank you. Thank you. Our next questions come from the line of Pete Osterlund with Truist Securities. Please proceed with your question.
Yep.
Thank you. Our next question is come from the line of Pete Osterlund with <unk> Securities. Please proceed with your questions.
Hey, good morning, I'm on for a much moly. This morning, thanks for taking our questions.
Pete Skibitski: Thanks for taking our questions. First, I just had a question on raw materials. We've heard about some tightness in the bearings market stemming from a lack of material availability, and I was just wondering if you are seeing anything like that, whether any challenges with procuring materials or any additional cost inflation. Any color there would be helpful.
First just had a question on raw materials, we've heard about some tightness in the bearings market stemming from lack of material availability and just wondering if you are seeing anything like that.
Are there any challenges procuring materials or any additional cost inflation, just any color there would be helpful.
Michael J. Hartnett: Yeah, well, in aerospace and defense, materials are more exotic than not and difficult to get if you're, If your planning horizon is short, you're going to be buying them from third parties at extremely higher prices. So your planning horizon needs to be long, and long is probably 60 weeks, and you know, the special grades of stainless steel are, and that's really the only way to acquire them.
Yeah, well I mean <unk>.
In aerospace and defense.
The materials are.
More exotic than not.
And.
Difficult to get if you're.
If you are planning horizon is short and youre going to be buying it from third parties.
Extremely higher prices.
So you are planning horizon needs to be long and long as probably 60 weeks.
And.
The special grades of stainless steel.
R.
Our.
And that's really the only way to acquire.
Michael J. Hartnett: And overall, I think in the aerospace business, from what we hear, from customers that keep coming to us, is that bearings are really hard to get. And so that's kind of music to our ears. And that's part of the reason why, you know, we generate so much. So many contracts with people to supply them over a longer term. You know, unfortunately, you know.
And overall I think in the aerospace business from what we hear.
From customers that keep coming to us.
Is that bearings are really hard to get.
And so that's kind of music to our ears.
And that's that's.
Part of the reason why we're generating so much.
So many contracts with people to supply them over a longer term.
Unfortunately.
Michael J. Hartnett: It takes us a long time to get that material, so to turn that into revenues isn't the most immediate thing, but it turns into revenues over time and very often. Customers are willing to pay a premium if you have to buy steel at, you know, from a third party at a high price and are more than willing to absorb the price difference. I would say there's a lot going on in our business right now with regard to the supply chain. Very helpful. And then, just turning to industrial, what are you seeing within your distribution sales channels in terms of customer inventories? Are they generally right-sized?
It takes us.
A long time to get that material.
So to turn that into revenues isn't the most immediate thing, but it turns into revenues over time.
And very often.
Customers are willing to pay a premium if you have to buy steel at a.
From a third party at a high price and are more than willing to absorb the price the price difference so.
I would say there is a lot going on in our business right now with regard to supply chain.
Very helpful. Thank you and then just.
Turning to industrial what are you seeing within your distribution sales channels in terms of customer inventories are they generally right sized or have you seen any signs of destocking activity there.
Michael J. Hartnett: Or have you seen any signs of destocking activity there? Yeah, I mean... We haven't seen much to stock. As far as I can tell, they're right-sized to be a little bit heavy.
Yeah I mean.
We havent seen much destocking.
As far as I can I can tell there.
They're there.
They are right sized to a little bit heavy.
Michael J. Hartnett: But not, you know, they're not overwhelmingly happy. Great, I'll leave it there. Thanks for taking the question. Yes, Thank you. Our next questions come from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question. Hi, good morning. This is Vivek Srivastava on for Joe.
But not.
They are not.
Overwhelmingly heavy.
Okay, Great I'll leave it there thanks for taking the questions.
Yes.
Thank you our next questions come from the line of Joe Ritchie with Goldman Sachs. Please proceed with your questions.
Hi, Good morning, this is Phil.
<unk> on for Joe. Thank you for the question.
Joe Ritchie: Thank you for the question. My first question is on the industrial market; just if you can provide some color on how the trends are diverging between original equipment versus aftermarket sales growth and potentially how January is trending, that would be helpful on the industrial side. Yeah, let us refer to our charts here for a minute. I don't think we would have that on how we're trending right now, right?
My first question is on the industrial market.
Can provide some color on how the banks are diverging between equipment classes after market sales call pattern potentially how has January pending that would be helpful.
On the industrial side.
On the industrial side correct.
Yes.
Let us refer to our charts here for a minute.
I don't think we would have that around how were trending right now alright.
Michael J. Hartnett: Because we'd have to break that information down, how much is coming into distribution, how much is coming in to OEM. But Rob, I think you have the industrial OEM and the industrial distribution for Q3. Yeah, so the industrial OEM for Q3 was $79.4 million, effectively flat year-over-year, and the industrial distribution was $165.3 million. So, again, very close to last year.
We'd have to break that information down how much has come into distribution, how much is coming in to OEM.
But Rob I think you have the industrial OEM and industrial distribution.
Yeah, so the industrial OEM for Q3.
$79 4 million effectively flat year over year, and the industrial distribution was $165 3 million. So again very close to last year.
Josh Sullivan: So it's not as if one is diverging, but that's your question. Yeah, no, that's definitely helpful. And then I noticed in the food and beverage market, you said it's going on well for you guys. And we are hearing from your peers that it was actually one of the softer markets for them. So just maybe, I wanted to zoom in on this end market and why you are seeing better trends than some of your peers. Is it more market share driven, or is it product offerings?
So it's not as if one was diverging if thats your question.
Yes.
Thank you helpful. Thank you.
And then.
I noticed on the food and beverage market.
Hey, good claim on value for you guys than Youre hearing.
Finally, rps that it was actually one of the softer markets for them. So just maybe wanted to zoom in on this end market.
Why you are seeing.
<unk> is it more market share driven.
On the call Craig.
Michael J. Hartnett: Yeah, I mean, I don't think we can speak for our peers, but I would say that it's a priority for us. So we direct a lot of attention to that market, both in terms of calling on customers, identifying, you know, problems, problem solving, product development, new product introduction. So, you know, it's, It's active for us. It performs well for us, but we, you know, we have to work at it. It doesn't, it's, it's not on, uh, um, Autopilot.
Yes, I mean I don't I.
I don't think we can speak for our peers.
I would say that we spend.
It's a priority for us so we direct a lot of attention to that to that market.
Both in terms of calling on customers.
Identifying problems problem solving product development.
New product introduction.
No.
It's <unk>.
It's active for us.
Performs well for us, but we have to work at it doesn't it's not on.
Yes.
Auto pilot.
Michael J. Hartnett: Great, thank you. Thank you. Our next questions come from the line of Pete Skibitski with Alembic Global. Please proceed with your question. Yeah, thanks guys. A couple questions on margins.
Great. Thank you.
Thank you. Our next question is come from the line of Pete Skibinski with Alembic Global. Please proceed with your questions.
Yes, Thanks, guys couple of questions on margins.
One of the gross margin it sounds like if you kind of hit your mark for the fourth quarter gross margin.
Pete Skibitski: One of them, gross margin, sounds like if you kind of hit your mark for the fourth quarter gross margin, it sounds like, you know, for the full year, fiscal 24, you'd be up, you know, at least one and a half points, call it, you know, roughly. So I'm just wondering, for fiscal 25, do you see the ability to move it up another point or so on the gross margin line? Well, you know, I think it's very encouraging. I don't think that the margins on the industrial side are going to do much better. Maybe they will, though.
It sounds like you know for the full year fiscal 'twenty four you'd be up.
At least.
Maybe one five points call it.
Roughly.
So I'm just wondering for fiscal 'twenty five.
Do you see the ability to move it up another point or so on the gross margin line.
Well.
I think it's very encouraging.
I don't think that the margins on the industrial side are going to do much better and maybe they will.
There is there is not a major mechanism there thats going to drive that but I can see.
Michael J. Hartnett: But there's not a major mechanism there that's going to drive that, that I can see. On the aircraft side, there is a major mechanism in that as volume increases, we still haven't gotten to the 2019 level of absorption in our aircraft plants. So our aircraft margins are still, you know, trailing what we measured in 2019. So as the volume increases in most of the aircraft plants, the volume is increasing. And it's increasing at a rate that, as we talked about, getting the labor and getting the materials and getting the planning straight is challenging. So that is leading to better absorptions, and better absorptions obviously lead to better margins.
On the aircraft side, there is a major mechanism in that.
Volume increases we still haven't gotten.
2019.
Level of absorption in our aircraft plants. So our aircraft margins are still are.
It's still.
Okay.
Okay.
Trailing.
What we measured in 2019, so is that as the volume increases in most of the aircraft plants to volume is increasing.
It's increasing at a rate that as we talked I talked about.
Getting the labor and getting the materials and getting getting the planning straight in.
As challenging.
So that's that.
He is leading to better absorptions and better absorptions, obviously lead to better margins. So we will see that we will see that.
Michael J. Hartnett: So we'll see that mechanism improve our performance next year and in this quarter. Okay, got it. And that just, Rob, I just want to understand one thing. I think when you talk about industrial in the third quarter, I think you're talking about EBIT of around $42 million, um... And so I'm just trying to understand. Yeah, I was talking gross margin. I was talking gross margin percentage. So, 42.8 percent.
And mechanism.
Improve our performance.
Next year.
In this quarter.
Okay got it and then just Rob I just wanted to understand one thing I think when you're talking about industrial.
Third quarter, I think you were talking about EBIT of around $42 million.
So I am just trying to understand.
I was talking gross margin I was talking gross margin percentage so 48%.
Josh Sullivan: Yeah. Got it. Got it.
Yes.
Got it got it okay.
Josh Sullivan: Okay. Not a problem. Thanks, guys. Sure. Ladies and gentlemen, there are no further questions at this time, and I would like to turn the call back over to Dr. Hartnett for closing remarks. OK.
No problem thanks, guys.
Sure.
Ladies and gentlemen, there are no further questions at this time I would like to turn the call back over to Dr. Hartnett for closing remarks.
Okay, well I think.
Michael J. Hartnett: That completes our conference call for the third quarter. I appreciate everybody's questions and participation, and we look forward to talking to you again in May. 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. And a lot of other facts are online too.
That completes our conference call for the third quarter appreciate everybody's questions and participate.
Participation and we look forward to talking to you again in May.
<unk>.
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.
Okay.
Hum.
Hmm.
Uh huh.
[music].
Oh.
Uh-huh.
[music].
Yeah.