Q3 2024 Park-Ohio Holdings Corp Earnings Call
Operator: Semi-Final Commentary Good morning and welcome to the Park Ohio 3rd Quarter 2024 Results Conference Call. At this time all participants are in a listen-only mode.
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Speaker Change: Good morning, and welcome to the Park, Ohio third quarter 'twenty 'twenty four results conference call. At this time, all participants are in listen only mode.
Operator: After the presentation, the company will conduct a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.
Speaker Change: After the presentation the company will conduct a question and answer session.
Speaker Change: Today's conference is being recorded if you.
Have any objections you may disconnect at this time.
Operator: Before we get started, I want to remind everyone that certain statements made on today's call may be 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. A list of relevant risks and uncertainties can be found in the earnings press release, as well as in the company's 2023 10-K, which was filed on March 6, 2024, with the SEC.
Speaker Change: Before I get started I want to remind everyone that certain statements made on todays call maybe forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
Speaker Change: These forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected.
Speaker Change: A list of relevant risks and uncertainties can be found in the earnings press release as well as in the company's 20 twenty-three 10-K, which was filed on March six 2024 with the S E C.
Operator: Additionally, the company may discuss adjusted EPS, adjusted operating income, and EBITDA as defined on a continuing operations or consolidated basis. These metrics are not measures of performance under generally accepted accounting. for reconciliation of EPS to adjusted EPS, operating income to adjusted operating income, and net income attributable to Park Ohio common shareholders to EBITDA, as defined.
Speaker Change: Additionally, the company May discuss adjusted EPS, adjusted operating income and EBITDA as defined on a continuing operations or consolidated basis. These metrics are not measures of performance under generally accepted accounting principles for reconciliation of EPS to adjusted EPS operating income to adjusted operating income and net.
Speaker Change: Income attributable to park, Ohio common shareholders to EBITDA as defined please refer to the company's recent earnings release.
Operator: Please refer to the company's recent earnings.
Matthew Crawford: I now turn the conference over to Mr. Matthew Crawford, Chairman, President, and CEO. Thank you, Kevin, and good morning to everyone. We appreciate you taking time this morning to join us. We are pleased with the performance during the third quarter, both in terms of the overall results and with the progress we continue to make in reshaping our company as a more nimble, more profitable, and faster-growing enterprise through the business cycle. Specifically, I want to make three points. First, while overall demand was stable during the quarter, there were significant headwinds in numerous industrial markets. Pat will discuss some specifics, but the bottom line is that we're happy about our diverse global business, in addition to new business initiatives that offset some of these challenges and allowed us to remain largely flat in revenue year over year.
Speaker Change: The conference over to Mr. Matthew Crawford, Chairman President and CEO. Please proceed Mr. Crawford.
Matthew Crawford: Thank you Kevin and good morning to everyone. We appreciate you are taking time this morning to join us.
Matthew Crawford: We were pleased with the performance during the third quarter. Both in terms of the overall results and with the progress we continue to make in reshaping our company as a more nimble more profitable and faster growing enterprise through the business cycle.
Matthew Crawford: Specifically I want to make three points.
Matthew Crawford: While overall demand was stable during the quarter there were significant headwinds in numerous industrial markets Pat will discuss some specifics, but the bottom line is that we're happy about our diverse global business. In addition to new business initiatives that that offset some of that some of these challenges and allowed us to remain largely flat in revenue.
Matthew Crawford: Year over year.
Matthew Crawford: While we're not prepared to discuss the future too explicitly, we do believe that we will return to growth in the fourth quarter and are optimistic that many of our end markets that were down double digit amounts and unit volume during 2024 will improve, and along with new business awards and historic backlogs in our equipment business, set us up for growth in 2025. Second, we continue to improve our overall margin profile, including a 60 basis point improvement in year-over-year gross margin. Our focus on execution and on investing in our best products and services will continue to bolster our margin improvements and make them more sustainable.
Matthew Crawford: While we're not prepared to discuss the future to explicitly we do believe that we will return to growth in the fourth quarter and are optimistic that many of our end markets were down double digit amounts in unit volume during 2024 will improve and along with new business Awards and historic backlogs in our equipment business set us.
Matthew Crawford: For growth in 2025.
Matthew Crawford: Second we continue to improve our overall margin profile, including a 60 basis point improvement in year over year gross margin are.
Matthew Crawford: Our focus on execution and on investing in our best products and services will continue to bolster our margin improvements and make them more sustainable.
Matthew Crawford: In addition, these margin enhancements helped offset some of the demand weakness and limited the impact of any negative flow through. In the near term, we will continue to manage closely fluctuations in year-end demand, including a close eye on expenses and improve productivity initiatives, especially in our automotive and forging business. These adjustments will benefit us as we emerge into 2025. Third, we continue to use all tools available to us to reduce leverage. During the quarter, we sold roughly $25 million worth of common stock to support this initiative. These sales were led partially by myself and our family with a $4.5 million investment at $30 a share.
Matthew Crawford: In addition, these margin enhancements helped offset some of the demand weakness and limited the impact of any negative flow through.
Matthew Crawford: In the near term, we will continue to manage closely fluctuations and year end demand, including a close eye on expenses and improved productivity initiatives, especially in our automotive and forging businesses.
Matthew Crawford: These adjustments will benefit us as we emerge into 2025.
Matthew Crawford: Third we continue to use all tools available to us to reduce leverage during the quarter, we sold roughly $25 million worth of common stock to support this initiative.
Matthew Crawford: These sales were led partially by myself and our family with a $4 5 million dollar investment at $30 a share.
Matthew Crawford: We anticipate strong year-end operating cash flows and will continue to use stock sales opportunistically to help meet our debt reduction goals. Last but not least, I want to thank all of our Park Ohio team members. Our improving financial results are the result of taking care of our customers and all 6,000 plus of us committing to be a little better at our job each day.
Matthew Crawford: We anticipate strong year on operating cash flows and we will continue to use stock sales opportunistically to help meet our debt reduction goals.
Matthew Crawford: Last but not least.
Matthew Crawford: Wanted to thank all of our park, Ohio team members, our improving financial results are the result of taking care of our customers and all 6000 plus of us committing to be a little better at our jobs each day.
Matthew Crawford: With this simple philosophy, we'll build a stronger business, not only for 2025, but for the next 5 to 10 years and beyond.
Matthew Crawford: With this simple philosophy will build a stronger business not only for 2025.
Matthew Crawford: But for the next five to 10 years and beyond.
Patrick Fogarty: Thank you, and I'll turn it over to Pat now to discuss. Thank you, Matt. Our third quarter results were highlighted by year-over-year sales growth in two of our three business segments in higher gross margins and adjusted earnings. Also, we repaid just over $23 million of debt, significantly increased our liquidity during the quarter. consolidated net sales of $418 million were flat compared to $419 million a year ago. In spite of a challenging industrial environment, we saw consistent demand in many end markets in our supply chain business, continued growth in our proprietary fastener manufacturing business, and improved sales in our capital equipment and aftermarket.
Matthew Crawford: Thank you and I'll turn it over to Pat now to discuss the quarter.
Pat: Thank you Matt.
Pat: Our third quarter results were highlighted by year over year sales growth in two of our three business segments and higher gross margins and adjusted earnings also we repaid just over $23 million of debt significantly increased our liquidity during the quarter.
Pat: <unk> net sales of $418 million were flat compared to $419 million a year ago and.
Pat: In spite of a challenging industrial environment, we saw consistent demand in many end markets and our supply chain business continued growth in our proprietary fastener manufacturing business and improved sales in our capital equipment and aftermarket business, which was offset by lower revenues in our assembly components and forging businesses, Arkansas.
Patrick Fogarty: is offset by lower revenues in our assembly components and 4G business. Our consolidated gross margin was 17.3% in the quarter of 60 basis points from 16.7% last year. On a year-to-date basis, our gross margin has increased 80 basis points to 17.1% compared to 16.3% a year ago. The year-over-year improvement was driven by the continued efforts to implement margin improvement initiatives across all businesses. in addition to strong operational execution. On an adjusted basis, total consolidated operating income was $25 million, down slightly from $27 million last year and $26 million in the second quarter. SG&A expenses were approximately $48 million, representing 11% of net sales, compared to $43 million a year ago, with the increase driven by the SG&A expenses related to the acquisition of Yilma Induction, completed in the first quarter, and higher employee-related costs.
Matthew Crawford: Gross margin was 17, 3% in the quarter up 60 basis points from 16, 7% last year.
Matthew Crawford: Year to date basis, our gross margin has increased 80 basis points to 17, 1% compared to 16, 3% a year ago.
Matthew Crawford: Year over year improvement was driven by the continued efforts to improve.
Matthew Crawford: Our margin improvement initiatives across all businesses. In addition to strong operational execution.
Matthew Crawford: On an adjusted basis total consolidated operating income was $25 million down slightly from $27 million last year and $26 million in the second quarter.
Matthew Crawford: SG&A expenses were approximately $48 million, representing 11% of net sales compared to $43 million a year ago with the increase driven by the SG&A expenses related to the acquisition of human reduction completed in the first quarter and higher employee related costs.
Patrick Fogarty: Interest costs totaled $12.1 million during the quarter, compared to $11.6 million last year, a decrease driven by higher interest rates in the current year, partially offset by lower borrowing. During the quarter, the income tax benefit on pre-tax income of $12.6 million was a result of recognizing certain discreet benefits related to federal R&D credits. We continue to implement tax planning initiatives to reduce our overall effective tax rate worldwide. And as a result, our current effective tax rate is expected to be approximately 15 percent. For the foreseeable future, we estimate that our core annual effective tax rate will be between 20 and 23 percent, reflecting the impact of these ongoing tax strategies.
Matthew Crawford: Interest costs totaled $12 $1 million during the quarter compared to $11 $6 million last year with the increase driven by higher interest rates in the current year, partially offset by lower borrowings.
Matthew Crawford: During the quarter the income tax benefit on pre tax income of $12 6 million.
Matthew Crawford: Was the result of recognizing certain discrete benefits related to federal R&D credits.
Matthew Crawford: We continue to implement tax planning initiatives to reduce our overall effective tax rate worldwide and as a result of our current effective tax rate is expected to be approximately 15%.
Matthew Crawford: For the foreseeable future, we estimate that our core annual effective tax rate will be between 20, and 23%, reflecting the impact of these ongoing tax strategies.
Patrick Fogarty: Our GAAP earnings per share of $1.02 was up 3% in the quarter and our adjusted earnings per share of $1.07 increased 8% compared to $0.99 a year ago. Year-to-date, our adjusted earnings per share of $2.94 was up 15% compared to $2.55 in the same period last year. We generated EBITDA of $39 million in the quarter, which is in line with the third quarter a year ago. As a percentage of sales, our EBITDA margin was 9.2%. Year-to-date, our EBITDA has improved 10% over the same period a year ago and we expect our full-year EBITDA as defined to be approximately $150 million, an increase of 12% over $134 million last year.
Matthew Crawford: Our GAAP earnings per share of $1, two was up 3% in the quarter and our adjusted earnings per share of $1 seven increased 8% compared to <unk> 99, a year ago.
Matthew Crawford: Year to date, our adjusted earnings per share of $2 94.
Matthew Crawford: It was up 15% compared to $2 55 in the same period last year.
Matthew Crawford: We generated EBITDA of $39 million in the quarter, which is in line with the third quarter a year ago as a percentage of sales our EBITDA margin was nine 2%.
Matthew Crawford: Year to date, our EBITDA has improved 10% over the same period, a year ago and we.
Matthew Crawford: We expect our full year EBITDA as defined to be approximately $150 million, an increase of 12% over $134 million last year.
Patrick Fogarty: During the quarter, we generated operating cash flows of $9 million, which was negatively affected by the timing of receivable collections in several of our businesses. We expect a meaningful reduction in working capital during the fourth quarter and expect our fourth quarter free cash flow to be approximately $25 million. Also during the quarter, our liquidity increased 21 percent from the end of the second quarter and totaled $194 million, which consisted of approximately $59 million of cash on hand and $135 million of unused borrowing capacity under our various banking arrangements. During the quarter, we raised cash of $25 million through the sale of Park Ohio Common Shares and used the majority of the proceeds to pay down $23 million of bank debt.
Matthew Crawford: During the quarter, we generated operating cash flows of $9 million, which was negatively affected by the timing of receivable collections and several of our businesses. We expect a meaningful reduction in working capital during the fourth quarter and expect our fourth quarter free cash flow to be approximately $25 million.
Matthew Crawford: Also during the quarter, our liquidity increased 21% from the end of the second quarter and totaled $194 million, which consisted of approximately $59 million of cash on hand.
Matthew Crawford: $135 million of unused borrowing capacity under our various banking arrangements.
Matthew Crawford: During the quarter, we raise cash of $25 million through the sale of park, Ohio common shares and used the majority of the proceeds to pay down $23 million of bank debt.
Patrick Fogarty: Turning now to our segment results. Supply technologies generated net sales of $195 million in the third quarter compared to $193 million a year ago. Sales were higher year over year in several end markets, most notably in aerospace and defense, consumer electronics, electrical distribution, and medical equipment, which more than offset lower year over year sales in our heavy duty truck and power sports end market. In addition, sales in our fastener manufacturing business grew 9% year over year as global demand for our proprietary products continues to be robust. Operating income was an all-time record in this segment, a total of $20.5 million, an increase of 31% year-over-year.
Matthew Crawford: Turning now to our segment results supply technologies generated net sales of $195 million in the third quarter compared to $193 million a year ago sales.
Matthew Crawford: Sales were higher year over year in several end markets, most notably in aerospace and defense consumer electronics, electrical distribution and medical equipment, which more than offset lower year over year sales in our heavy duty truck and power sports and markets in.
Matthew Crawford: In addition sales in our faster manufacturing business grew 9% year over year as global demand for our proprietary products continues to be robust.
Matthew Crawford: Operating income was an all time record in this segment and totaled $25 million, an increase of 31% year over year.
Patrick Fogarty: Operating margins were 10.5%, also an all-time record, and improved 240 basis points from 8.1% a year. The higher profitability in the quarter was driven by an increase in sales of higher margin products. Strong operational execution, lower operating costs in our supply chain business, and continued strong demand in our proprietary fast service. At the year-to-date basis, sales in this segment were $594 million, and operating income was $59 million, both all-time records for the nine-month period. Segment operating margin was 9.9%, an increase of 220 basis points compared to last year. Our strategic focus in this segment continues to revolve around expanding operating margins, increasing sales in our industrial supply and aerospace and defense businesses, and expanding our proprietary FASTA products into new applications, customers, and GRs.
Matthew Crawford: Operating margins were 10, 5%.
Matthew Crawford: Also an all time record improved 240 basis points from eight 1% a year ago.
Matthew Crawford: The higher profitability in the quarter was driven by an increase in sales of higher margin products.
Matthew Crawford: <unk> operational execution.
Matthew Crawford: Your operating costs in our supply chain business and continued strong demand in our proprietary fastener business.
Matthew Crawford: Year to date basis sales in this segment were $594 million and operating income was $59 million.
Matthew Crawford: Both all time records for the nine month period.
Matthew Crawford: Segment operating margin was nine 9% an increase of 220 basis points compared to last year.
Matthew Crawford: Our strategic focus in this segment continues to revolve around expanding operating margins increasing sales in our industrial supply in aerospace and defense businesses and expanding our proprietary fastener products into new applications customers and geographies.
Patrick Fogarty: In our Assembly Components segment, sales were $99 million in the quarter compared to $108 million a year ago and $103 million last quarter. The year-over-year decrease in sales was driven by lower unit volumes on end-of-life programs and lower product pricing on certain legacies. which partially offset the sales growth from other OEMs. On an adjusted basis, operating income in this segment totals $6.6 million in the current quarter, and was generally in line with $6.9 million last quarter, with 6.7% operating margins in both periods. Compared to a year ago, profitability was down due to the lower product pricing on certain legacy programs and lower revenue on programs that ended last year.
Matthew Crawford: In our assembly components segment sales were $99 million in the quarter compared to $108 million, a year ago and $103 million last quarter.
Matthew Crawford: The year over year decrease in sales was driven by lower unit volumes and end of life programs and lower product pricing on certain legacy programs, which partially offset the sales growth from other OEM platforms.
Matthew Crawford: On an adjusted basis operating income in this segment totaled $6 $6 million in the current quarter and was generally in line with $6 $9 million last quarter with six 7% operating margins in both periods.
Matthew Crawford: Compared to a year ago profitability was down due to the lower product pricing in certain legacy programs and lower revenue on programs that ended last year.
Patrick Fogarty: On a year-to-day basis, sales were $309 million in this segment compared to $331 million a year ago, and adjusted operating income margin was 7.2% compared to 8.6% a year ago. In this segment, we are focused on new business launches and continuous operational improvement. New business launches, which began during the third quarter, will incrementally add $50 million in revenue once full production levels are met, which we expect to occur by the middle of next year. We also continue to identify and implement product and plan for profit improvement initiatives in each of our manufacturing facilities. to enhance operating margins in future periods.
Matthew Crawford: Our year to date basis sales were $309 million in this segment.
Matthew Crawford: <unk> compared to $331 billion a year ago.
Matthew Crawford: Adjusted operating income margin was seven 2% compared to eight 6% a year ago.
Matthew Crawford: In this segment, we are focused on new business launches of continuous operational improvement.
Matthew Crawford: New business launches, which began during the third quarter, we will incrementally add $50 million in revenue once full production levels are met which we expect to occur by the middle of next year.
Matthew Crawford: We also continue to identify and implement product and plant for profit improvement initiatives in each of our manufacturing facilities, which will enhance operating margins in future periods.
Patrick Fogarty: In our engineer product segment, sales were $124 million and increased 6% compared to $118 million a year ago, driven by higher demand in our industrial equipment. is up 19% year-over-year. The year-over-year sales increase occurred in most regions with notable strength throughout Europe where revenues were up 32% year-over-year. In addition, revenue from aftermarket parts and services in North America were up 19%. New equipment backlogs continue to be strong, holding $161 million compared to $162 million at this time. During the quarter, operating income in this segment was $5.2 million compared to $7.1 million a year ago. The decrease in profitability year-over-year was driven by the lower sales levels and lower operating margins in our forged and machined products.
Matthew Crawford: In our engineered products segment sales were $124 million and increased 6% compared to $118 million a year ago, driven by higher demand in our industrial equipment business, which was up 19% year over year.
Matthew Crawford: The year over year sales increase occurred in most regions with notable strength throughout Europe, where revenues were up 32% year over year.
Matthew Crawford: In addition revenue from aftermarket parts and services in North America were up 19% from last year.
Matthew Crawford: New equipment backlog continued to be strong totaling $161 million compared to $162 million at the end of last year.
Matthew Crawford: During the quarter operating income in this segment was $5 2 million compared to $7 1 million a year ago. The decrease in profitability year over year was driven by the lower sales levels and lower operating margins in our forged and machine products business more than offset higher sales and improved profitability.
Patrick Fogarty: more than offset higher sales and improved profitability in our industrial economy. In the year-to-date period, sales in this segment were $365 million, an increase of 3% compared to last year. adjusted operating income was $16 million compared to $20 million a year ago. Also, corporate expenses totaled $7.8 million during the quarter, compared to $7.6 million last year. For the year-to-date period, corporate costs were $23 million in the current year, compared to $22 million a year.
Matthew Crawford: Our industrial equipment business.
Matthew Crawford: In the year to date period sales in this segment were $365 million, an increase of 3% compared to last year.
Matthew Crawford: Adjusted operating income was $16 million compared to $20 million a year ago.
Matthew Crawford: Also corporate expenses totaled $7 $8 billion during the quarter compared to $7 $6 million last quarter.
Matthew Crawford: For the year to date period corporate costs were $23 million in the current year compared to $22 million a year ago.
Patrick Fogarty: And finally, with respect to our full-year guidance, we now expect current-year revenue growth between 1% and 2% and revenues to grow in the fourth quarter year-over-year. Overall, we believe most of our end markets will be stable for the rest of the year. In addition, we now expect adjusted earnings per share to increase more than 10% year-over-year and EBITDA is defined to be approximately $150 million, an increase of 12%.
Matthew Crawford: And finally with respect to our full year guidance.
Matthew Crawford: Now expect current year revenue growth between 2% and revenues to grow in the fourth quarter year over year. Overall, we believe most of our end markets will be stable for the rest of the year.
Matthew Crawford: In addition, we now expect adjusted earnings per share to increase more than 10% year over year and EBITDA as defined to be approximately $150 million, an increase of 12% compared to last year.
Matthew Crawford: Now I'll turn the call back over to Matt. Great. Thank you very much, Pat.
Speaker Change: Now I'll turn the call back over to Matt.
Matthew Crawford: Great. Thank you very much Pat I will now open the line for questions.
Operator: We'll now open the line for questions.
Operator: Thank you, we will now be conducting a question and answer session. If you would like to be placed into question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question. Once again, that's Star 1 to be placed into question.
Matthew Crawford: Thank you will now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he like to remove your question from the queue. Once again Thats star one to be placed in the question queue.
Steve Barger: Our first question today is coming from Steve Barger from KeyBank Capital Markets.
Speaker Change: Our first question today is coming from Steve Barger from Keybanc capital markets. Your line is now live.
Operator: Your line is now live.
Matthew Crawford: Hey, good morning, Matt and Pat. Matt, I'm going to start on the gross margin, you know, you pointed out it's been running well, it's really the highest rate in about 10 years, and you mentioned investing in your best products and services. Can you just expand on that?
Steve Barger: Hey, good morning, Matt and Pat.
Steve Barger: Okay.
Speaker Change: I'm going to start on the gross margin.
Speaker Change: You pointed out it's been running well, it's really the highest rate in about 10 years and you mentioned investing in your best products and services can you just expand on that.
Matthew Crawford: Sure. I mean, I think that we've been repositioning the portfolio for really going back to 2018 and 2019, and we've been doing it in several different ways. I hesitate to use the word restructuring, but I think that we underwent a strategy to make our core manufacturing and distribution operations more nimble and more profitable, as I say, through the business cycle. As you know, we invested a lot in increasing productivity, whether it be plant closures or repositioning over a million square feet in the U.S., so we divested ourselves of some low-margin, high-capital businesses. To begin answering your question, I want to talk about capital allocation and say the first horse at the trough, which I like to say, is making our business better and our earnings more sustainable, and that's true across the board.
Speaker Change: Sure I mean.
Speaker Change: I think that.
Speaker Change: We've been repositioning the portfolio.
Speaker Change: For really gone back to 2018, and 19 and we've been doing it in several different ways.
Speaker Change: I hesitate to use the word restructuring, but I think that we underwent I think a strategy to make our core manufacturing and distribution operations more nimble and more profitable as I say through the business cycle. As you know we invested a lot in increasing productivity whether it be.
Speaker Change: Plant closures or repositioning over 1 million square feet in the U S.
Speaker Change: No.
Speaker Change: We divested ourselves of some some low margin high capital businesses. So.
Speaker Change: To begin answering your question I want to talk about capital allocation in say the first horse at the trough, which I like to say is is making our business better and our earnings more sustainable so and that's true across the board, we like our portfolio, we like the businesses, we're in and we believe though we can.
Matthew Crawford: We like our portfolio, we like the businesses we're in, and we believe, though, we can invest in those current business portfolios and be better at what we do to reposition ourselves for landing more business, and we're seeing that happen. We're absolutely seeing our new business pipelines get more robust every day. We see it in firm backlogs in the equipment business, but we've also seen it, I think, across the portfolio from automotive to the more diverse industrial businesses where we see a more robust pipeline of new inquiries and top-of-the-funnel action. So first and foremost, I want to speak to that.
Speaker Change: Invest in those current business portfolio and be better at what we do to reposition ourselves for landing more business.
Speaker Change: And we're seeing that happen.
Speaker Change: Absolutely seeing our new business pipelines get more robust every day, we see it in firm backlogs in the equipment business, but we've also seen it I think across the portfolio.
Speaker Change: Automotive to the more diverse industrial businesses, where we see.
Speaker Change: A more robust pipeline of new inquiries and top of the funnel action. So first and foremost I want I want to speak to that.
Matthew Crawford: First of all, I think that we will continue, I think, to look at each of our businesses and really do a deep dive in understanding where the sustainable investment opportunities are and, candidly, given the opportunity to invest in businesses that not just are high IRR, but high-margin. We've got some wonderful pockets in the business. I would highlight aftermarket in our equipment business. I would highlight adjacent markets like aerospace in our supply tech business. I would highlight some new business in the automotive segment that leans on some innovation that isn't new to us, but one plus one equals three in the extruded hose and bed metal space.
Speaker Change: Are all I think that we will continue I think to.
Speaker Change: Look at each of our businesses and really do a deep dive and understanding where.
Speaker Change: The sustainable investment opportunities are and candidly given the opportunity to invest in businesses and not just our high our IRR, but high margin.
Speaker Change: We've got some wonderful pockets in the business I would highlight aftermarket.
Speaker Change: And our equipment business.
Speaker Change: Highlight.
Speaker Change: Adjacent markets like aerospace and our supply Tech business.
Speaker Change: I would highlight some new business in the automotive segment.
Speaker Change: That leans on some innovation that isn't new to us, but one plus one equals three and the extruded hose and bent metal space.
Matthew Crawford: So I don't want to suggest that we're doing a different allocation broadly across the portfolio. I think the thing is we're more cognizant inside each business of making sure we're investing for sustainable higher-margin businesses long-term, whether that be a new business or, again, first-horse of the trough is making our current businesses better. I think I've highlighted in the past, and I'll highlight again, we invested in vertical integration and mixing capacity in the automotive space. Again, that positions us for long-term sustainable growth. So I don't use those terms to pick one business over the other. I use those terms to say we challenge each business to invest in their highest-margin, most sustainable innovation.
Speaker Change: So I don't I don't want to suggest that we're doing a different allocation broadly across the portfolio. What I'm, saying is we're more cognizant inside each business of making sure we're investing for sustainable higher margin businesses long term, whether that be in new business or again first first the trough is making our current business is better.
Speaker Change: I think I've highlighted in the past and I'll highlight again, we invested in vertical integration of mixing capacity in the automotive space.
Speaker Change: Again that positions us for long term sustainable growth.
Speaker Change: Im not I don't use those terms to pick one business over the other I use those terms to say we challenge each business. It is to invest in our highest margin most sustainable innovations.
Matthew Crawford: Yeah, that's, that's really great detail. And I appreciate that. And, you know, I think the flip side of the investment restructuring sometimes, or divestitures. Are there other lines of business that have gross margin?
Speaker Change: Yes.
Speaker Change: That's really great detail and I appreciate that.
Speaker Change: I think the flip side of the investments is.
Speaker Change: Restructuring, sometimes or divestitures are there other lines of business that have gross margin consistently below corporate average average or which are unable to generate consistent cash flow where divestitures could be additive.
Matthew Crawford: Of course, I did leave out in my discussion just then one of the businesses we are most excited about, which is our fast food manufacturing business. So we have a number of bites at the apple relative to investing in what I say are best product and services. I don't want to single anyone out or leave anyone out because we have a lot of opportunities. But the answer is not in terms of our business portfolio. I would say yes in terms of inside the four walls of our business. Again, around reshaping our ability to compete long-term, our undergoing full-time.
Speaker Change: Yes.
Speaker Change: Of course I did leave out in my discussion. Just then one of the businesses. We are most excited about which is our faster manufacturing business. So we have a number of bites at the Apple relative to investing in what I would say, our best product and services I don't want to single any one out or leave anyone out because we got a lot of opportunities, but but the answer is.
Speaker Change: Not in terms of our business portfolio.
Speaker Change: I'd say, yes in terms of inside the four walls of our business initiatives again around reshaping our ability to compete long term are undergoing full time.
Matthew Crawford: Explicitly, I would say that we continue to close some facilities and sort of rationalize where and how we want to do business. But that's not about walking away from customers per se, although that may happen here and there. That's about making sure that we're serving our customers with the highest quality, lowest cost service to them on a total cost basis. I would say we're tweaking, we're not necessarily broadly exiting parts.
Speaker Change: Explicitly I would say that we continue to close some facilities and sort of rationalize where and how we wanted to do business, but thats not about walking away from customers per se, although that may happen here and there that's about making sure that we're serving our customers with the highest quality lowest cost service to them.
Speaker Change: On a total cost basis, so I would say, we're tweaking, we're not necessarily broadly exiting parts of the business.
Matthew Crawford: Yeah, it's a good segue to my next question in terms of the, you know, closing some facilities. You have a roughly 130. Is that what is the right number of rooftops for the revenue? Participate without having too big of an impact to capacity or your ability to participate. I'll let Pat think about that a second while I start. You know better than anyone the diverse nature of our business. Certainly in the supply tech space, largely, we have distribution centers, but some of those are absolutely locked at the hip with their key customers, providing daily, if not hourly, services.
Speaker Change: Yes.
Speaker Change: Good segue to my next question in terms of the <unk>.
Speaker Change: Closing some facilities you have roughly 130.
Speaker Change: Is that what is the right number of rooftops for the revenue that you anticipate.
Speaker Change: Without having too big of an impact your capacity or your ability to serve your customers.
Speaker Change: Yeah, I'll, let Pat talk about that a second life start.
Speaker Change: No better than anyone the diverse nature of our business.
Speaker Change: Certainly in the supply tech space largely.
Speaker Change: We have distribution centers some of those are absolutely locked at the hip.
Speaker Change: With our key customers, providing daily if not hourly services.
Matthew Crawford: So those are important locations and shouldn't necessarily be viewed in the context of a traditional manufacturing consolidation plan. So as it relates to the rest of the business, again, I think we will continue to see opportunity to consolidate, whether that be consolidating North American facilities or whether that be consolidating into lower cost countries, whether they be in Southeast Asia or Mexico, et cetera. So I'll let Pat jump in here, but I would say the answer is absent acquisitions, we will have fewer rooftops next year than we have this year. Those opportunities still exist. Having said that, 110 sounds like a lot until you really peel back and understand the nature of the supply tech business.
Speaker Change: So those are important locations and shouldnt necessarily be viewed in the context of a traditional manufacturing consolidation plan. So.
Speaker Change: As it relates to the rest of the business again, I think we will continue to see opportunity to consolidate whether that be consolidated north American facilities, or whether that be consolidating into lower cost countries, whether they'd be in southeast Asia, or Mexico et cetera. So.
Pat: I'll, let Pat jump in here, but I would say the answer is.
Speaker Change: Absent acquisitions, we will have fewer rooftops next year, then we have this year those opportunities still exist, having said that the 110 sounds like a lot until you really peel back and understand the nature of the supply Tech business doesn't mean, we don't have opportunity. It means that thats a different business model than the <unk>.
Patrick Fogarty: It doesn't mean we don't have opportunity. It means that that's a different business model than the high cost manufacturing looking Yes, Steve, this is Pat.
Speaker Change: Cost manufacturing locations.
Speaker Change: Yes, Steve this is Pat.
Patrick Fogarty: I would add that this is a normal process that we go through and have gone through for many, many, many years. You know, as you know, we consolidated almost a million square feet of space over the last three or four years. Each of our business leaders is actively looking for ways to improve on our margins. It's somewhat fluid because customers move and change locations, and we have to react to that. But it's something that we do quite well, and we're experienced in it, and we're not afraid to do it. So if we have plants that are under-absorbed, for example, we're always looking for ways to consolidate into plants that may have the capacity to take on that business without losing market share, without losing customers.
Speaker Change: I would add that this is a normal.
Speaker Change: Process.
Speaker Change: Go through and have gone through for many many many years.
Speaker Change: As you know, we consolidated almost 1 million square feet of space over the last three or four years.
Speaker Change: Each of our business leaders is actively looking for ways to improve on our margins.
Speaker Change: On what fluid because customers move and change locations and we have to react to that but.
Speaker Change: But but it's something that we do quite well and we're experienced in it and we're not afraid to do it. So if we have plants that are under absorbed for example.
Speaker Change: Always looking for ways to consolidate into plants that may have the capacity to take on that business without losing market share without losing customers.
Patrick Fogarty: So to try to pin a number off the 130 is very difficult. But to Matt's point, to the extent that we've got excess capacity that cannot be filled, we will react pretty quickly. And as all of our businesses grow, there's going to be opportunities to exit certain locations and move into higher, larger, more efficient operations. And Steve, we're not trying to be loose with the answer. We have consolidated operations both in Europe and in the U.S. during the third quarter. So this is happening. It just won't be as notable as maybe we did when we closed that million square feet, but it is absolutely an ongoing initiative in each of the business segments and will continue to happen in 2025.
Matthew Crawford: So to try to pin a number off the 130 is is very difficult, but to Matt's point to.
Speaker Change: To the extent that we've got excess capacity that cannot be filled we will react pretty quickly.
Speaker Change: So.
Speaker Change: As all of our business businesses grow there's going to be opportunities to exit certain locations and move into <unk>.
Speaker Change: A larger more efficient operations.
Speaker Change: Steve we're not we're not trying to be loose with the answer.
Speaker Change: Have.
Speaker Change: Consolidated operations, both in Europe, and in the U S. During the fourth quarter or during the excuse me the third quarter. So this is happening it just won't be as notable as maybe we did when we closed that 1 million square feet, but it is absolutely an ongoing initiatives in each of the business segments and will continue to happen in 2025.
Matthew Crawford: Yeah, I know at some point, the rate of in tough markets over the last few years, and we're just looking forward to pull those levers for. So, appreciate it. Yeah, I think, Steve, I appreciate that. I think our next leg up on consolidated margin is going to have to be, we will continue to benefit, I think, explicitly in the automotive business as we rebuild with new product initiatives, as I mentioned, at higher margins. And also, I think, in continuing to improve the operations specifically in the Ford Group. I mean, those are isolated opportunities for improvement going into 2025 that will move the needle.
Speaker Change: Yes, I know at some point the rate of expansion is to slow you have driven 300 basis points of expansion in tough markets over the last few years and we're just looking forward to seeing you continue to pull those levers for additional improvements. So I appreciate the time.
Speaker Change: Yeah, I think Steve I appreciate that I think our next leg up on consolidated margin is going to have to be we will consider continuing to benefit I think.
Speaker Change: And explicitly in the automotive business as we rebuild with new new product initiatives as I mentioned at higher margins.
Speaker Change: And also I think in continuing to improve the operations specifically in the fourth group I mean, those are those are isolated opportunities for improvement going into 2025 that will move the needle.
Matthew Crawford: Supply Tech has done a great job. We have a diverse portfolio for a reason. We expect great things out of them in 2025. But in terms of moving the needle, we're going to have to look at some of the other businesses as well, because they've done a fabulous job. or 2024, excuse me. Understood.
Speaker Change: <unk> has done a great job.
Speaker Change: We have a diverse portfolio for a reason.
Speaker Change: We expect great things out of them in 2025, but in terms of moving the needle we're going to have to look at some of the businesses as well because they've done a fabulous job placement.
Speaker Change: Our 2024 excuse me.
Speaker Change: Understood. Thank you.
Operator: Thank you.
Speaker Change: Thank you. Your next question today is coming from Dave storms from Stonegate. Your line is now live.
Dave Storms: Next question today is coming from Dave Storms from Stonegate. Your line is now live.
Speaker Change: Good morning.
Operator: Hey Dave. Hi Dave. Just wanted to touch, you just mentioned the FORGE segment and improving operations there.
Speaker Change: Hi, Dave.
Speaker Change: Just wanted to touch.
Speaker Change: As mentioned to forge segment in <unk>.
Speaker Change: <unk> proven operations there.
Matthew Crawford: Is there anything more you could give us on maybe the outlook? I think I've probably discussed over the last few, at least last two or three calls, the challenges in the Forge group that I think are unique. And we've seen some of this in all of the engineer product group, including our equipment business. Some of the challenges that existed in the COVID and post-COVID environment, and I think I promised last time I'd never say COVID again. The kinds of employees and the kinds of knowledge that left the business have been the most difficult to replace anywhere in our business.
Speaker Change: Is there anything more you could give us on maybe the outlook and forged.
Speaker Change: Operational improvement looks like there.
Speaker Change: Anything you can give us there would be very helpful.
Speaker Change: Hi.
Speaker Change: I think.
Speaker Change: Hi.
Speaker Change: Probably discussed over the last few at least last two or three calls the challenges in the forge group that I think are unique and we've seen some of this in all of the engineered products group, including our equipment business some of the challenges.
Speaker Change: That existed in the Covid and post Covid environment, and I think I promise last time, I'd never say Covid again.
Speaker Change: The kinds of employees and the kinds of knowledge that left the business.
Speaker Change: Have been the most difficult to replace.
Speaker Change: Anywhere in our business.
Matthew Crawford: So, I think I've talked openly about Hammerman in front of a forge. It's an art and a science, losing decades and decades worth of experience. We are making progress. We are seeing incremental improvement month over month, and I expect 2025 to be a better year, and we have reason to be optimistic. But just to be clear, I don't anticipate that turning on a dime. I mean, we've got a lot of work to do there. And again, when those businesses are running well, they have proven to be our most sustainable, highest margin. We have great exposure to great end markets, including aerospace and defense, including rail, some really nice long-term markets where we have good market share.
Speaker Change: So I think I've talked openly about hammerman in front of us for just an art and science, losing decades and decades worth of experience.
Speaker Change: We are making progress we are seeing incremental improvement month over month, but and I expect 2025 to be.
Speaker Change: A better year, but but and we have reason to be optimistic, but just to be clear.
Speaker Change: Don't anticipate that turning on a dime.
Speaker Change: A lot of work to do there and.
Speaker Change: Again, those when those businesses are running well they have proven to be our most sustainable highest margin businesses.
Speaker Change: We have great exposure to great end markets, including aerospace and defense, including rail some really nice long term markets, where we have good market share.
Matthew Crawford: But we have to get better at executing. It's not for lack of market opportunity. It's not for lack of demand. It's not for lack of customers, not for lack of good assets. It's just we got to get better at executing. So we are getting better.
Speaker Change: But we have to get better.
Speaker Change: And.
Speaker Change: Executing it's not for a lack of market opportunity, it's not for lack of a demand it's not for lack of customers not for a lack of good assets. It's just we've got to get better at executing so we are getting better but at the same time I don't want to suggest to you or anyone that that is going to be as simple as.
Matthew Crawford: But at the same time, I don't want to suggest to you or anyone that that is going to be as simple as a light switch or one quarter. But we are improving, and I would anticipate continued improvement into 2025.
Speaker Change: A light switch or one quarter, but we are improving and I would anticipate continued improvement.
Speaker Change: And into 2025.
Speaker Change: Understood and then just sticking with end markets Aerospace and defense spend a great tailwind for you guys really capitalize there.
Operator: Thank you for joining us. Thank you.
Operator: How do you see the runway for aerospace and defense? So is it a sustainable path that...
Speaker Change: How do you see the runway for aerospace and defense. So is it a sustainable.
Speaker Change: Past that your own or how do you view that.
Matthew Crawford: So let's back up and make sure we're talking the same language. Our aerospace exposure runs the gamut from defense and commercial and also aftermarket to OEM stuff. We have a tremendous amount of exposure across the customer base. I think in some of the longer lead time aftermarket stuff, we see backlogs that still extend through 2025. So, I think we feel pretty comfortable. We've got some good runway there. You know, we've seen lead time shorten or evaporate on steel, and especially specialty steels, which is a good thing in terms of our ability to execute. But we've got pretty good visibility there.
Speaker Change: So let's back up and make sure we're talking the same language our aerospace exposure runs the gamut from defense and commercial and also aftermarket OEM stuff, we have a tremendous amount of exposure across.
Speaker Change: Across the customer base.
Speaker Change: I think in some of the longer lead time aftermarket stuff.
Speaker Change: We see backlogs is still extend through 2025.
Speaker Change: So I think we feel pretty comfortable that we've got some good runway there.
Speaker Change: We've seen lead times shorten or evaporate on steel and specialty specialty steels, which is a good thing.
Speaker Change: In terms of our ability to execute but we've got pretty good visibility there I think on the supply chain side more of the hardware business.
Matthew Crawford: I think on the supply chain side and more of the hardware business, I think that, you know, supply chains have been more challenged there. So, while I think that, as I think about over the next three years, and I think about OEs like Airbus in particular and some of their supply chain, I think we know it's going the right direction. I don't think we know, per se, if, you know, what they're, you know, they kind of keep moving their build rates around based on how they're managing their own supply chain. So, I think we feel pretty good about directionally where it's going.
Speaker Change: I think that.
Speaker Change: Supply chains have been more challenged there so while I think that as I think about over the next three years and I think about OEM like Airbus in particular, and some of their supply chain I think we know it's going the right direction I don't think we know per se.
Speaker Change: What what's.
Speaker Change: That kind of keep moving their build rates around based on how they're managing their own supply chain. So I think we feel pretty good about directionally, where it's going I don't know that we have wonderful visibility I don't know that they have wonderful visibility. We obviously were pleased to see the machinist strike settled 737 to get back to production levels here. Shortly in 2025 that are meeting.
Matthew Crawford: I don't know that we have wonderful visibility. I don't know that they have wonderful visibility.
Matthew Crawford: We obviously were pleased to see the machinist strike settle, the 737 to get back to production levels here shortly in 2025 that are meaningful. So, good news, but the visibility is a little less.
Speaker Change: So good news, but the visibility is a little less.
Patrick Fogarty: Dave, I would I would add one, one other one other point to Matt's comments that, you know, in the supply chain business, we operate a fantastic brand called Apollo. which covers both commercial and defense. locations in the U.S., Birmingham, England, France. Poland, and those locations were opened up to grow that business. And we expect to grow that business, not only with the OEMs, but also the Tier Ones who assemble different modules for Airbus. So, although, you know, the picture isn't very clear relative to build rates because of supply chain issues, our goal is to continue to grow that business by further penetration of some of the tier ones that we haven't had.
Speaker Change: Dave I would I would add one one other one other point to Matt's comments that when the supply chain business.
Speaker Change: We operate.
Speaker Change: Fantastic brand called Apollo Aerospace, which covers both.
Speaker Change: Commercial and <unk>.
Speaker Change: Locations in the U S.
Speaker Change: Birmingham, England.
Speaker Change: France.
Speaker Change: Poland.
Speaker Change: And those those locations were opened up.
Speaker Change: To grow that business and we expect to grow that business not only with with the Oems, but also the tier ones, who are assembled different modules for Airbus and others. So although.
Speaker Change: The picture isn't very clear relative to build rates because of the supply chain issues.
Speaker Change: Our goal is to continue to grow that business by further penetration of some of the tier ones that we haven't had in the past.
Matthew Crawford: I'd add one more thing, and it bears a little bit more on the equipment business. You've heard us talk a little bit about aerospace and defense and the equipment business. You know, a lot of that clarity, and we've gotten some great orders during the last year, year and a half. You know, I think a lot of uncertainty around the election sort of slowed that down. I don't, not being political, I think either way, I think there will be some continued clarity around investments in the defense sector, which will help the equipment business, and again, how that in the forge business, by the way.
Speaker Change: I'd add one more thing and it bears a little bit more on the equipment business you have heard us talk a little bit about aerospace and defense in the equipment business.
Speaker Change: A lot of that clarity.
Speaker Change: We've got some great orders.
Speaker Change: During the last year year and a half.
Speaker Change: I think a lot of uncertainty around the election sort of slowed that down.
Speaker Change: Not being political or I think either way.
Speaker Change: I think there will be some continued clarity around investments in the defense sector, which will help the equipment business and again, how that in the fourth business by the way again Im not sure Thats. So political as it is just getting past the election.
Matthew Crawford: Again, I'm not sure that's so political as it is just getting past the election.
Operator: That's fantastic, Holler. I appreciate that, and a point completely taken on maybe some pent-up demand there post-election.
Speaker Change: That's fantastic color I appreciate that point completely taken on and maybe some pent up demand there.
Speaker Change: Okay, Great selection.
Operator: Sticking kind of in U.S. politics, some of the rhetoric. The election was around increased terror.
Speaker Change: Sticking.
Speaker Change: Kind of U.
Speaker Change: U S politics, some of the rhetoric, leading up to the election was around.
Speaker Change: Increased tariffs.
Matthew Crawford: Now that we have maybe a little more clarity on the potential for increased tariffs domestically, are there any parts of your business that you feel are uniquely exposed or uniquely positioned to take advantage? Well, again, our general business philosophy is to produce in the markets where we do business, now on the manufacturing side. On the supply chain side, we do rely out of some important vendors out of Asia. Generally, that's not China, by the way, to the extent we want to talk about a specific area of interest for the president-elect. You know, we don't import a ton of product out of China.
Speaker Change: Now that we have maybe a little more clarity on the potential for increased tariffs domestically.
Speaker Change: Are there any parts of your business that you feel are uniquely exposed are uniquely positioned to take advantage.
Speaker Change: Should that come to life.
Speaker Change: Well again.
Speaker Change: General business philosophy is to.
Speaker Change: Produce in the markets, where we do business now on the manufacturing side.
Speaker Change: On the supply chain side, we do rely on.
Speaker Change: Out of some important vendors out of out of Asia.
Speaker Change: Generally that's not China by the way to the extent, we want to talk about a specific.
Speaker Change: Area of interest for the President elect.
Speaker Change: We don't import a ton of product out of China. So we don't that's a risk its not a huge risk, but we do import a fair amount of a harbor out of Asia. So.
Matthew Crawford: So we don't – that's a risk. It's not a huge risk, but we do import a fair amount of hardware out of Asia. So, you know, I don't – so I'd say generally, I think our expectation is that it will not be a significant impact to the business because of generally liking to produce locally. Having said that, you know, we're decidedly a North American company. At the end of the day, 70% of our business is North American. So a strong investment cycle in North America is disproportionately good for us. So I don't know how that's going to play out precisely.
Speaker Change: I don't.
Speaker Change: So I'd say generally I think our R. R.
Speaker Change: Our expectation is that it will not be a significant impact to the business because of generally liking to produce locally having said that yes. We are decidedly in North American company at the end of the day, 70% of our business is North America. So strong.
Speaker Change: Strong investment cycle in North America is disproportionately good for us So I don't.
Speaker Change: I don't know.
Speaker Change: How that's going to play out precisely, but if trade policy.
Matthew Crawford: But if trade policy allows for an investment cycle in manufacturing, in the energy grid, in defense, in rail, in semiconductors, in you name it, that's disproportionately good for our business, despite what kind of offset we might see in a little bit of inflation on our supply chain. That's my opinion, and that's, I think, what we've seen over the last couple of years. Again, we've been, this, the steel industry, another good one, you know, these are important markets for us. So, I think, net-net, if it, whether, whoever is in charge, if their goal is to help American manufacturing, those are our customers.
Speaker Change: Allows for an investment cycle in manufacturing in the energy grid and defense.
Speaker Change: In rail in semiconductors in you name it.
Speaker Change: That's disproportionately good for our business, despite what kind of offset we might see in a little bit of inflation in our supply chain.
Speaker Change: That's my opinion and Thats I think what we've seen over the last couple of years.
Speaker Change: Again, we've been of the steel industry another good one.
Speaker Change: These are important markets for us so I think net net.
Speaker Change: Whether whoever is in charge if their goal is to help American manufacturing those are our customers.
Speaker Change: Understood Thats great color. Thank you for taking my questions and good luck in Q4.
Operator: Thank you for taking my questions and good luck in Q4.
Speaker Change: Thanks, Thank you.
Operator: Thank you.
Operator: We reached the end of our question and answer session. I'd like to turn the floor back over for any further Thank you again for your time. This morning, we, again, are excited about the performance, especially with some of the headwinds and some of our key markets. So, makes us optimistic for the future. Thank you very much. Bye-bye. Thank you.
Speaker Change: Thank you we reached end of our question and answer session I would like to turn the floor that corporate for any further or closing comments.
Speaker Change: Okay. Thank you again for your time.
Speaker Change: This morning, we.
Speaker Change: Are excited about the performance, especially with some of the headwinds in some of our key markets. So it makes us optimistic for the future. Thank you very much bye bye.
Speaker Change: Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation.