Q3 2024 Earnings Summary
- Engineered Solutions backlog remains at 2× pre-pandemic levels, indicating strong future demand and revenue potential as the company works through this backlog, especially moving into fiscal 2025.
- Automation segment expected to return to growth in fiscal 2025, supported by increased opportunities in mobile robotics, organic growth initiatives, and the acquisition of Grupo Kopar adding approximately $60 million in sales, thereby scaling the business and enhancing its footprint in automation and robotics.
- Strategic investments in key growth areas such as technical MRO, infrastructure, technology, and emerging areas like electrification are positioning the company for accelerating growth and continued outperformance as they enter fiscal 2025. The company remains committed to having the right technical resources to convert projects and capitalize on market opportunities.
- Engineered Solutions segment is experiencing sales declines, with uncertainties around timing and recovery. Sales in this segment decreased 3.2% organically year-over-year, with expectations of continued declines in the fourth quarter due to softer demand and uncertainty around the timing and magnitude of recovery across the technology vertical.
- The Automation business is facing mid-single-digit sales declines, and recovery timing is uncertain. Management expects sales in automation to be similar in the fourth quarter, with mid-single-digit declines, and anticipates a return to growth in fiscal 2025, but the timing remains uncertain.
- Inflationary pressures, particularly in labor and general expenses, may impact margins. The company continues to see supplier price increases and expects ongoing inflation, especially in labor and general expenses, which have not softened and could pressure margins.
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Q4 Guidance and Market Outlook
Q: Is the lower Q4 growth guide due to conservatism?
A: Management expects Q4 organic sales growth of 1% to 4%, potentially down 1% to up 2% at the midpoint, reflecting market uncertainty and potential further deterioration. They're being prudent due to no real recovery in tech or fluid power OEM spaces but see stronger booking trends in engineered solutions with a 1:1 book-to-bill ratio for the first time in seven quarters. -
Grupo Kopar Acquisition Impact
Q: What's the revenue run rate for Kopar, and will it enhance cross-selling?
A: Kopar adds around $60 million in annual sales, broadening presence throughout Mexico beyond maquiladoras. There's opportunity for cross-selling and customer cooperation between the U.S. and Mexico, leveraging strong positions in both markets. -
Automation Business Outlook
Q: When will automation sales bottom out?
A: Automation sales declined mid-single digits but are expected to stabilize in Q4 and return to growth in fiscal '25. With pre-order activity and projects underway, they're encouraged by opportunities, including mobile robotics. The automation business entered the fiscal year at a run rate of a couple of hundred million dollars, with Kopar adding $60 million. -
Inflation Impact and Pricing
Q: What are you seeing on the inflation front?
A: Management anticipates continued inflation, with supplier increases more normalized but at higher rates than historical standards—possibly 100 basis points higher. Material costs may soften, but labor and other G&A expenses remain elevated. They've demonstrated the ability to pass on inflation, though not always directly through price increases. -
Backlog Levels and Bottlenecks
Q: Is backlog still 2x normal levels in Engineered Solutions?
A: Yes, the backlog remains at 2x pre-pandemic levels, which is constructive. Some shipments may be slowed by component shortages or project timing, but they expect the backlog to normalize as they move into fiscal '25. -
Smaller Customer Base Trends
Q: Any insights on smaller customers amid rates and inflation?
A: Smaller customers contributed positively, expanding their reliance on the company due to workforce challenges. Local customers are benefiting from reshoring and increased activity, with 15 markets up, slightly down from 18 in the prior quarter. -
Facility Expansion Updates
Q: Update on the Northwest facility expansion?
A: Progress is good, with beneficial occupancy expected soon. Investments in automation, technology, and semiconductor support are ongoing, despite some expenses impacting quarterly results. -
Adjusting Growth Investments
Q: How will you adjust growth investments if plans don't materialize?
A: While preparing for growth in fiscal '25, they remain flexible. Natural cost "shock absorbers" like commissions and freight adjust with lower volumes. They've demonstrated cost accountability and will respond accordingly if the environment changes. -
Monthly Trends and Linearity
Q: How does April's performance affect Q4 guidance?
A: March showed positive trends, but April comparisons are tougher due to prior timing. Management remains prudent, not reading too much into early April data, and focuses on balancing ahead of fiscal '25.