ANA Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2023

There are 8 speakers on the call.

Operator

Good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Barnes Second Quarter 2023 Earnings Conference Call and Webcast. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

If you would like to ask Star 1 a second time. Thank you. And I will now turn the conference over to Bill Pitts, Vice President of Investor Relations. You may begin.

Speaker 1

Thank you, Abby. Good morning, and thank you for joining us for our Q2 2023 earnings call. With me are Barnes President and Chief Executive Officer, Thomas Hook and Senior Vice President, Finance and Chief Financial Officer, Julie Strike. If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate website atonebarnes.com. That's onebarnes.com.

Speaker 1

During our call, we will be referring to the earnings release supplement slides, which are also posted on our website. Our discussion today includes certain non GAAP financial measures, which provide additional information we believe is helpful to investors. These measures have been reconciled to the related GAAP measures in accordance with SEC regulations. You will find a reconciliation table on our website as part of our press release and in the Form 8 ks submitted to the Securities and Exchange Commission. Be advised that certain statements we make on today's call, both during the opening remarks and during the question and answer session, may be forward looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Speaker 1

Section. These forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Securities and Exchange Commission. Please consider the risks and uncertainties that are mentioned in today's call and that are described in our periodic filings with the SEC. These filings are available through the Investor Relations section of our corporate website at 1barnes.com.

Speaker 1

Let me now turn the call over to Tom for his opening remarks, then Julie will provide a review of our financial performance and and details of our updated 2023 outlook. After that, we will open up the call for questions. Tom?

Speaker 2

Thank you, Bill, and good morning, everybody. I'd just like to start first by wishing my wife, Beth Ann, a happy birthday. Barnes delivered a good performance in the 2nd quarter, generating top line growth and improvement in adjusted operating income and margin. The team accomplished this while simultaneously advancing the substantial transformation underway at Barnes. Our progress is encouraging, although asymmetric across the company.

Speaker 2

And there remain further opportunities to drive Our integrate, consolidate and rationalize optimization strategy. Our multi phased initiative to improve core business execution continues and some early progress can be seen in the improved industrial results in the quarter. While industrial performance is not at the desired level, there is movement in the right direction. For the time being, I am taking a more active role with each industrial SBU and I have temporarily assumed the Molding Solutions President role. While the ultimate organization structure for industrial is under development, when settled, it will be an efficient structure built to support the execution of our strategic plans.

Speaker 2

For Industrial, organic orders were flat as compared to a year ago, The book to bill was approximately 1.1 times. From a macro standpoint, Trends we have discussed previously are still visible with several end markets performing well and others seeing ongoing challenges. Automation has delivered an increase in sequential revenues for 3 quarters in a row and our multi cavity mold systems business continues to be strong. Segment. On the other hand, our automotive hot runners and sheet metal forming product lines have seen weakness.

Speaker 2

Across industrial markets, We are redirecting our sales efforts to drive a strong vibrant sales funnel, focusing on improved commercial practices and a new customer acquisition. Building that commercial pipeline is a key step to generating the performance we expect from the business. At Aerospace, The market remains very favorable. Our OEM business will benefit from ongoing production rate increases by both Boeing and Airbus. And the aftermarket.

Speaker 2

We continue to deliver strong sales growth given improved passenger traffic and the resurgence of wide body activity. Clearly, the market vibrancy supports our aerospace strategy to enhance, focus and grow this business. Institute. In support of our strategy to grow our military aftermarket business, we have reached an agreement with Blue Raven to provide U. S.

Speaker 2

Military aftermarket distribution support for Barnes Aerospace Products and Services. This agreement will help grow our U. S. Military aftermarket business through Blue Raven's tech enabled, scalable supply chain solutions. While top line performance at Aerospace has been particularly good, we did take a step back with respect to adjusted operating margin performance in the second quarter.

Speaker 2

There are two factors driving this dynamic. First, we have experienced productivity challenges in some facilities. These challenges are within our control and are actively being addressed. 2nd, within OEM, we experienced a product mix impact on margin resulting from less fabrication work and more machining. That said, I am pleased with the overall performance and direction of our Aerospace business and expect our margin performance to get back on track in the second half.

Speaker 2

Before I conclude my remarks, I'd like to provide an update on our pending acquisition with MB Aerospace. MB Aerospace is an exceptional strategic fit for Barnes Aerospace with highly complementary programs, global operations, technical capabilities and product and services offerings. The transaction is progressing as expected through the regulatory approval process and we anticipate closing the transaction before the end of the year. Upon closing, we will immediately begin integration in driving organizational synergies. At that time, You'll also be able to share more detailed financial and operational aspects of the combined business.

Speaker 2

We're excited about the acquisition and like the balance it brings to our portfolio. To close my prepared remarks, our actions across the company target the core business performance improvement we expect to deliver. These actions, whether transformation related or acquisition integrated related, However, we have the systems, investments and global team to execute these simultaneous objectives. We're on the appropriate path and our commitment to the process is unwavering. Let me now pass the call over to Julie for a discussion of our Q2 performance as well as some end market color.

Speaker 3

Good morning, everyone, and thank you, Tom. Let me begin with highlights of our 2nd quarter results On slide 4 of our supplement, 2nd quarter sales were $339,000,000 up 6% from the prior year period With organic sales increasing 5%. Foreign exchange had a modest favorable impact on sales. Adjusted operating income was $43,500,000 this year, up 8% from $40,100,000 a year ago and adjusted operating margin of 12.8 percent was up 30 basis points. Net income was $17,400,000.78 per diluted share a year ago.

Speaker 3

On an adjusted basis, net income per share of 0.58 expense was up 4% from $0.56 a year ago. Adjusted net income per share in the Q2 of 2023 Excludes $0.19 of restructuring and transformation related charges and $0.05 of acquisition related charges. Last year's adjusted net income per share excludes a goodwill impairment charge of $1.34 interest expense was $6,500,000 an increase of $3,200,000 due to a higher average interest rate. Other income was $2,900,000 up $2,500,000 from last year driven by an increase in non operating pension income. The effective tax rate in the Q2 of 2023 was 22.5% compared to negative 27.1% in the year ago period and 64.7% for the full year 2022.

Speaker 3

The decrease in the Q2 2023 effective tax rate from the full year 2022 rate It's primarily due to the absence of a goodwill impairment charge, which is not tax deductible for book purposes. Now I'll turn to our segment performance beginning with Industrial. For the Q2, sales were $217,000,000 It was $9,400,000 versus a loss of $48,700,000 a year ago. Excluding 13 point $4,000,000 of restructuring and transformation related charges in the current year. Adjusted operating profit of 22 $800,000 was up 17% and adjusted operating margin of 10.5% was up 130 basis points.

Speaker 3

Adjusted operating profit benefited from positive pricing and favorable productivity. With respect to orders and sales for the quarter across our industrial businesses, Molding Solutions organic orders increased 6%, While organic sales decreased 2%. Our multi cavity mold systems product line was once again solid with personal care and general industrial end markets propelling orders and medical, personal care and general industrial lifting the sale. Spect Molding Solutions organic sales to increase low single digits, down slightly from our prior expectation. At Motion Control Solutions, organic orders were down 5% in the quarter, while organic sales grew 4%.

Speaker 3

As was the case last quarter, we saw good orders and sales driven by transportation related end markets, while we saw softness in the sheet metal forming end market. We continue to forecast mid single digit organic sales growth for MCS in 2023. At automation, our organic orders were down 3%, While organic sales increased 5%. We expect high single digit organic sales growth for automation in 2023, unchanged from our prior view. For the Industrial segment, we anticipate low to mid single digit organic sales growth At Aerospace, sales were $122,000,000 up 12% from a year ago.

Speaker 3

OEM sales grew 8%, while aftermarket sales grew by 18% in total. Within the aftermarket, MRO was up 26% and spare parts were up 7%. Operating profit was $16,600,000 down 19%. Excluding restructuring and transformation related charges of $500,000 and MB Aerospace acquisition related charges of $3,600,000 adjusted operating profit was $20,700,000 essentially flat year over year. Adjusted operating margin was 17%, down 190 basis points from a year ago.

Speaker 3

As Tom mentioned, adjusted operating profit and margin were impacted by unfavorable productivity and product mix within the OEM business, segment, offset in part by the benefits of higher sales volume. OEM orders were down 18% in the quarter, So that relates to the lumpiness of order patterns and is not concerning. Book to bill was 1.2 times in the quarter and 1.5 times in the first half, so a healthy order level. Our OEM backlog grew to 805,000,000 Group, an increase of 2% sequentially from March 2023 and up 7% as compared to a year ago. Segment.

Speaker 3

We expect to convert approximately 50% of this backlog to revenue over the next 12 months. Our OEM sales outlook for 2023 is up low 20s percent, a more favorable view than our April outlook. For the aftermarket, we forecast 2023 growth of mid teens for MRO and low double digits for spare parts, Group, both representing an increase from our prior view. Our forecast for Aerospace adjusted operating margin is approximately 18 cent, a small downtick from our prior view. With respect to cash, First half cash provided by operating activities was $42,000,000 versus $9,000,000 in the prior year period.

Speaker 3

The primary drivers continue to be from lower paid incentive compensation in 2023 relative to 2022 and a lower change in working capital compared to the prior year period. Free cash flow was $21,000,000 versus a negative $5,000,000 last year and capital expenditures were $22,000,000 up approximately $8,000,000 from the prior year. With our balance sheet, the debt to EBITDA ratio as defined by our credit agreement was 2.56x@quarterend. When considering our cash position at the end of the second quarter, on a net debt to EBITDA basis, we'd be approximately 2.2 times. Our 2nd quarter average diluted shares outstanding were 51,200,000 shares and period end shares outstanding were 50 point 6,000,000 shares.

Speaker 3

During the quarter, we did not repurchase any shares. Turning to Slide 6 of our supplement, Let me share details of our updated outlook for 2023. We now expect organic sales to be up 7% to 9% for the year with adjusted operating margin between 12.5% 13.5%. We continue to expect adjusted EPS in the range of $2.15 to 2.30 up 9% to 16% from 20 22's adjusted earnings of $1.98 per share. 2023 adjusted earnings per share anticipated to exclude $0.54 from the restructuring and transformation related activities announced to date and $0.08 related to the pending MB Aerospace acquisition.

Speaker 3

We estimate the remaining adjustments to be $0.10 in Q3 and $0.07 in Q4. Please note that the closing and other deal costs associated with the pending MB Aerospace acquisition are not included in our outlook. Like last year, we do expect adjusted EPS in the Q3 to be lower than that of the Q2 by a few cents. A few other outlook items. Interest expense is anticipated to be approximately $26,000,000 and other income to be approximately 1,000,000 Please note, this excludes $1,400,000 of pension income attributable to our restructuring activities.

Speaker 3

We anticipate a full year effective tax rate between 24% 25%, CapEx of approximately 50,000,000 average diluted shares of approximately $51,000,000 and cash conversion of approximately 100%. In closing, we generated good second quarter results and our transformation efforts remain on track. That said, We see pockets of suboptimal productivity and the pace of working capital improvement hasn't gained sufficient traction. We are actively addressing both of these items with our focus on driving revenues, managing working capital and delivering core business execution.

Operator

We will take our first question from Matt Summerville with D. A. Davidson. Your line is open.

Speaker 4

Thanks. Good morning. Good morning, Matt. Can you maybe expand a little bit on the productivity issues you encountered in aerospace, Maybe triangulate a little bit on exactly kind of what they were and why you feel maybe they're transitory in nature. And then Maybe, Julie, if you can comment on how much you think that weighed on margins in the quarter?

Speaker 4

And then I

Speaker 2

have a follow-up. Sure, Matt. So in aerospace, we run a series of facilities across North America and Asia. And in some of our facilities that have seen a significant amount of new employee hiring and we attempted to smooth out train and ramp production. We have run into inefficient operations.

Speaker 2

They're all things within our control through training, development, and Obviously, leadership and management of the facility led. We're putting the improvements in place, but those productivity challenges are part of the ramp difficulties and headwinds that we've experienced. Not all facilities have experienced these productivity challenges. We've had Good ramps through the recovery of the aerospace industry. We've been able to hire and train and onboard people effectively.

Speaker 2

But 2 facilities have struggled with that since the recovery from the pandemic. And while we have the teams on board and are still hiring people, we're still struggling with getting The team's efficient and productive from a productivity standpoint. And that was one of the reasons that we saw a drag on aerospace profitability in the quarter, and we expect to have that corrected in the second half of the year with regards to the productivity, in the facilities progressively over the course of the next two quarters, but is we'll

Speaker 4

And then as a follow-up, you maybe talk about The magnitude of pricing you're realizing in industrial, is there still more to be had relative to what you saw in Q2? And can you also remind just the timing of the cost savings cadence associated with your multi phase restructuring there and whether or not any of that has changed?

Speaker 2

Segment. Yes. I'll address pricing first. Since last year, we've been on a progressive and continuous journey with regards to pricing to reflect the inflationary push throughs both on labor and materials, freight, energy and other factors. So given over the past year that we've had a lot of that some $40 plus 1,000,000 hit us in terms of inflationary effects, We've been pricing to offset that in the industrial business.

Speaker 2

As you know, in aerospace, we have more contractual hedges against inflationary pressures, particularly on the material side. In an industrial, we do not. So it's a negotiated item. Expectations are for price. We will continue to prospectively adopt practices with regards to price mitigations with our customers.

Speaker 2

So the current deployment plans are still precipitating into our delivered financial results prospectively on a go forward basis. We will continue to manage pricing very carefully with our industrial company customers to reflect costs appropriately for them. Of course, in parallel with that, we also do productivity efforts across Industrial to make sure that we're holding ourselves accountable for efficiency gains within the business as well. But You can expect that there'll be continued price effects going forward in industrial in response to what we see is still an inflationary environment globally in a lot of markets. Part of that will be environment globally in a lot of markets.

Speaker 2

Part of that will be passed on to customers and pricing. Some of it will be on the average selling prices and some will be in surcharges depending on what the inflationary effect is. We expect to be able to offset that somewhat with the operational productivity At the same time, with regard to the 3 phases of the cadence, I'll let Julie go through the financial, the number summary for it. Those programs remain on track. We've been very satisfied through the first two phases that are coming to fruition.

Speaker 2

We've seen several products reach key milestones in the Q2 and continue to be on track and on time. They've been meeting their timeline and the cost savings objectives. Phase 3, as you know, is got announced earlier in the year is in the rolling out phase and implementation phase, but there's several years left to go on that cadence for the Phase 3 initiatives. But we do expect to hit the cost savings targets and the milestones for 2023 as previously committed on all the programs. Julie?

Speaker 3

Yes. Yes. And picking up, Matt, so What we had previously stated and remains the same is that we expect run rate savings coming out of this year at around $22,000,000 That's a slight uptick now that we've announced the Q3 or the Phase 3, excuse me, initiatives. So we would be looking for about $43,000,000 run rate out of 24 and peaking at the 53,000,000 we previously stated in 2025.

Speaker 4

Got it. Thanks guys.

Speaker 3

Yes, no worries.

Operator

And we will take our next question from Christopher Glynn with Oppenheimer. Your line is open.

Speaker 5

Thanks. Good morning, guys. So Tom, I was Curious, you mentioned taking over the leadership seat in Molding Solutions. Was that An unexpected development, just curious how that came about?

Speaker 2

Yes, certainly, Chris. As you may remember, a lot of my background over the last several decades has been at bowling. So I have kind of unique insights into the market from previous work experience. So in stepping in when Steve Newell transitioned, there was a interim leader in the Molding Solutions business that was Somebody that was not operational. So as given the, in my mind, the need to integrate, Consolidate and Rationalize Our Molding Solutions, SBU.

Speaker 2

I elected to step into that role and manage that business directly temporarily for a short period of time to help strategically get that progression into the right direction and we're actively recruiting for a leader that will end up running that business from an integrated standpoint Going forward, we expect to have that completed here by the end of the year. But given its importance to Barnes, and given my multi decades of experience in molding. I felt it was pivotal for us to get some significant traction there immediately.

Speaker 5

That makes a lot of sense. And then, how would you describe the Industrial portfolio now in terms of composition, obviously, Molding Solutions is very core. I wouldn't claim to be aware of all the slices and composition of your industrial components, but I know there's been some rationalization episodes in the past And divestitures are always part of a strategy or often part of a strategy when a company's retooling segment to the extent you are. So curious if you could comment on that.

Speaker 2

Certainly, Chris, as you would Know that we are always actively assessing, our strategy in the company on an active basis at the management level as well as with the Board of Directors and partnership. That process has continued under my tenure over the last year as the Chief Executive Officer. Alma Steve Moll's departure is the leader of industrial has allowed me a kind of a unique set of insights into the underlying SBUs and understanding of the SBUs within the industrial business and very carefully assessing In particular, their go to market strategies to drive commercial pipeline and top line growth and focusing on commercial execution primarily to drive top line, bottom line pipeline performance for those SBUs. As part of that, We're also looking at end market strengths and where we should be investing. There are investing choices to make In terms of emphasizing higher growth markets, like we pointed out in the call, medical technologies, biotechnologies, Consumer Packaged Goods.

Speaker 2

So we've been shifting our commercial team's focus for those areas where the growth is good. And you can see in some of the Automotive Aftermarket, excuse me, automotive hot runner market, that we've not seen as strong of a market. Hence, we've been in more competitive struggles and particularly in Asia in those markets. So we are making investment choices based on Health of our operations and health of our business in positioning our product lines. But in fairness, we're also looking at the strategic balance across the portfolio, where we are today and where it should be in the future.

Speaker 2

Nothing to communicate there other than it's under Active Operational and Strategic Assessment, and has been over the past year of my tenure within the company.

Speaker 5

Thank you. Last one, any issues related to the

Speaker 2

In the current portfolio, we Barnes does not have any GTF content, so no direct exposure and we would Do not anticipate that the Embiero would have any direct impact given that there This is on the OEM content side and Brad also communicated the current production rates and plans are not changing. So it's obviously we haven't closed that deal yet, so we don't have complete perfect line of sight. But overall, we think that the both the current Barnes portfolio in aerospace will have no impact in the prospective portfolio post the MB Aerospace acquisition. We think that the production rates for the GTF for Pratt will be the same for MB Aero.

Speaker 5

Thank you very much.

Operator

And we will take our next question from Myles Walton with Wolfe Research. Your line is open.

Speaker 6

Thanks. Good morning.

Speaker 2

Good morning, Miles.

Speaker 3

Good morning, Miles.

Speaker 6

I I was hoping to maybe touch on aerospace first and in particular the growth rate for OEM up low 20s for the full year. I think year to date you're at plus 10% and you're talking about some productivity challenges. So just curious what is causing The acceleration there, the orders, I mean, you pointed to are lumpy, but still they weren't necessarily

Speaker 2

team. We've done an excellent job of partnering with our OEM customers. And the feedback from all those customers, Both our current customers and prospective new customers of the acquisition have been highly supportive of the direction we're going with the combination of Barnes Aerospace with MB Aerospace. We've done a solid job in terms of operational performance and delivery for OEMs and that has really opened up a lot of opportunities given the perspective close of the MB Aerospace acquisition later in the year. We have a lot of good strategic dialogues with customers.

Speaker 2

We Have been through the COVID period, a significant, reemployment of large operating teams globally that has we've struggled 1st to fill the positions. 2nd, we've been struggling as you know in the first half of the year with training, educating and getting those physicians productive. We continue to struggle with that in several facilities with getting productive output. And there's a balance between how much we can output. We don't want our cost of poor quality to be high and we don't want our scrap to be high.

Speaker 2

So there's a rate at which we can launch and ramp the business based on those workforce training and onboarding. There's a lot of work These areas that are being done internally to allow us to have better output. So expectation are as those continue to get implemented and are proven out. We'll continue to improve our output performance and we'll continue to ramp the business consistent with the industry. I think from an order perspective, as you know, that orders tend to be lumpy quarter to quarter.

Speaker 2

But from an overall standpoint, we've Had a good start to orders for the year already and we would expect that to continue into the second half. We're in the process of negotiating many large partnerships with OEMs as we continuously do and updating those and refreshing those and we expect to have that more of that to communicate for the balance of the year. So both on the orders side as well as the revenue side, we expect strong trajectories in Aerospace based on our performance and based on the industry recovery. And I think that's going to be not just an OEM effect. I think with the higher number of single aisle airplane flying and also the recovery of wide body in the international travel.

Speaker 2

We also expect that we're going to see the continued recovery in the wide body side, which favorable to us also. So I think there's a combination of effects that will drive the second half. And As you know, because we're broadly linked into the industry and will be even more broadly linked following the MB Aerospace acquisition, we actually feel really well balanced across customers portfolios and geographies. We're confident of that second half recovery.

Speaker 6

Maybe just to ask it a different way. I'm just trying to make sure I have the numbers right there. The first half was 10% growth, second half you have to be 30% growth. And I understand there's slightly easier comps, but obviously it's a big step function still in absolute terms in the second half. Those are the right numbers though, right?

Speaker 2

I'll let Julie answer the numbers question, but yes, that's your From a comp standpoint, is you're correct.

Speaker 3

Yes. We continue to see the second half building Over the first half when you look year over year. So last year from a sales perspective, sales were relatively flat throughout the course of the year and we've seen clearly the 10% bump in the first half. And based on our order book and deliveries, we RA comfortable with the capacity. A lot of it will be at our Windsor and our Singapore OEM facilities.

Speaker 3

And we're We have the backlog to get that out the door.

Speaker 6

Okay. And the converse to the question is on the margin side, if you do that, Why doesn't that put more pressure on your margins in the second half of the year? But the guidance obviously implies a Pretty nice improvement in margins in the second half of the year.

Speaker 2

I mean, I'll give you a top line answer and let Julian There's a combination of effects. There's productivity efforts within across all of Aerospace at every single facility driving underlying productivity within the individual operational sites. But in combination with that, as you know, we also ended having initiatives that we've running to renegotiate commercial terms with customers as well as to ramp output. And there is certainly to your point Miles a mix effect that happens across the product portfolio that we've seen in the Q2. However, we also have these productivity offsets in commercial negotiations that did on go in parallel with those things.

Speaker 2

So the projections we've given is our expectations of productivity and those commercial renegotiations in combination with the ramp that occurs. And the net effect is, we expect to see the mitigation against the mix effect based on those factors team on a tailwind for us as we execute them. We do have confidence we're executing them on schedule. Yes.

Speaker 3

And just to build on what Tom said from a finer point, in addition to the proactive productivity we're getting through all of the commercial dialogues, expected improvements in productivity as our labor force in certain facilities comes up to speed. We'll have the natural benefit of absorption of overhead via enhanced productivity via enhanced production output, which also helps on that front.

Speaker 2

Okay. All right. Well, thanks so much. Welcome.

Operator

We will take our next question from Michael Ciarmoli with Truist Securities. Your line is open.

Speaker 7

Hey, good morning, guys. Thanks for taking the question. Maybe How are you guys? Julie, just to put a finer point on Matt's question on the run rate savings. Just I guess for modeling purposes here.

Speaker 7

Dollars 43,000,000 run rate on top of I guess looking into next year and kind of the trajectory of margins and assuming you're capturing some of that savings this year. But I mean, it seems like there's going to be a pretty big step up in margins, which is just with That kind of savings, not even accounting for maybe incremental volumes in aerospace. But is that how we should be kind of looking at this kind of maybe Some significant margin expansion as we move into next year.

Speaker 2

It's project based, Michael, is If we step back and think of the phases we've announced, Phase 1, 2 and 3, in that we've communicated some pretty large scale projects, closure of facilities we've had globally in Barnes Industrial, that are already underway in reaching their completion in 2023. So as we exit 2023, we'll be getting more of full year effective loan savings, facilities we had in Switzerland, facilities we had in Sterling, Virginia Bristol, Connecticut as well as in Germany in our Benzymes Inventive operations. Each one of those will end up coming to completion and Drive savings on a full year basis as we get into 2024. I'll let kind of Julie kind of go down a little bit more on the timing effects of those, but a lot of the savings that drive in 2024 for products that are being executed in 2020 2 in 'twenty three. We're just getting full years effects of the savings that drive the margin effects.

Speaker 2

Of course, as you know, there's products that are starting execution in 'twenty three. They've been executing in 'twenty four for savings in 'twenty five, but Julie can give you a little bit more of a qualitative The quantitative feeling on how that looks as the quarters progress.

Speaker 3

So I think Mike from a modeling perspective, it's spare coming out of 2023 to model in that $22 ish million number that I mentioned earlier. And then throughout 2024, we would ramp to exit the year, so Enter 2025 with the $43,000,000 and then ramp up to the $53,000,000 in 20 20 5. I'm not giving quarterly estimates for 2024 yet for obvious reasons. But to date, Things have been tracking as we mentioned and we've all heard about or been involved in these projects before, But they're being managed effectively and we intend to keep total transparency about how they're progressing. So at this point in time, as Tom mentioned things are progressing to plan and you should be okay modeling those effects in.

Speaker 7

Okay. And then just back to aerospace. What I guess we've been sort of in recovery mode here. There have been bottlenecks around engines, presumably your volumes have been elevated. Did anything sort of happen recently for this to manifest now with the labor and productivity?

Speaker 7

And then we've heard Recently from Boeing and Airbus where they want to take rates. I mean, do you have the labor in place to keep up with the OEM production section and presumably a strong aftermarket as well.

Speaker 2

Well, Michael, excellent question is that I think Your question obviously, is very important because it connotates continued growth within the industry, Which is a positive factor for us from OEM all the way through aftermarket. And but that what that requires us to do to maintain the pace Of the demand output, both to OEM and aftermarket is for us to add production capacity and add Direct and indirect labor now and train it and get it capable of increasing output. That in and of itself, that incremental labor, which tends to come with not as much training. And we have there's a training lag that has to occur to the higher that growth demand. We've had to get ourselves an inflection point of catching up, which we've been doing all year on productive operations by onboarding more labor.

Speaker 2

That's been a headwind that we've had to face. It has affected our numbers in the Q2. We're jumping ahead of it with more aggressive leadership and management. Some facilities in fairness have already mastered that productivity training dilemma, but several facilities have not, which has created the drag and our expectations are we will fix that over the course of the second half and get ahead of that, so we can maintain our output at what the industry is ramping towards. We're very well aware of the ramp.

Speaker 2

We have clear signal from our customers on what it looks like. So we're doing all the operational things in terms of property, plant, equipment and workforce to be prepared for it. It's a and so you would expect growth is its own set of challenges in the aerospace side, And we don't want to be a lagger. We're not holding up any of our customers today. So we're very purposely making sure that the customer is taken care of.

Speaker 2

We've done a very good job of that, but it is a headwind in terms of profitability that we've had to face, that we knew was coming. We just Didn't proactively manage it at all the facilities as well as we should have.

Speaker 6

Got it. That's helpful. I'll jump

Speaker 4

back in the queue. Thanks, guys.

Speaker 3

Thanks, Mike.

Operator

And there are no further questions at this time. I will turn the call back to Mr. Bill Pitts for closing remarks.

Speaker 1

Thank you, Abby. We'd like to thank all of you for joining us this morning, and we look forward to speaking with you next in October for our Q3 2023 earnings conference call. Abby, we will now conclude today's call.

Operator

Thank you. And ladies and gentlemen, once again, this concludes today's conference call, and we thank you for your participation. You may now disconnect.

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