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Q4 2023 Earnings Conference Call
spk05: the RBC Barron's fourth quarter 2023 earnings call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Josh Carroll with Investor Relations. Please go ahead.
spk04: Thank you, operator. Good morning, and thank you for joining us for RBC Barron's fiscal 2023 fourth quarter earnings conference call. With me on the call today are Dr. Michael Hartnett, Chairman, President, and Chief Executive Officer, Daniel Bergeron, Director, Vice President, and Chief Operating Officer, and Robert Sullivan, Vice President, and Chief Financial Officer. Before beginning today's call, let me remind you that some of the statements made today will be forward-looking. They're made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to RBC Barron's recent filing to the SEC for a more detailed discussion of the risks that could impact the company's future operating results in financial condition. These factors are also described in greater detail in the press release and on the company's website. In addition, reconciliation between GAAP and non-GAAP financial information is included as part of the release and is available on the company's website. With that, we'll now turn the call over to Dr. Hartnett.
spk07: Thank you, Josh, and good morning and welcome to all. Net sales for the fourth quarter of fiscal 2023 were 394.4 million versus 358.9 million for the same period last year, an increase of 9.9%. For the fourth quarter of our 2023, sales of industrial products represented 69% of our net sales and aerospace products 31%. Gross margin for the quarter was 166.5 million or .2% of net sales. This compares with 137.5 million or .3% for the same period last year. Adjusted operating income was 88.6 million, .5% of net sales compared to last year's 71.9 million and 20% respectively. Adjusted EPS came in at $2.13 a share. Adjusted EBITDA was 121.1 million, .7% of net sales compared to 104.4 million and .1% of net sales for the same period last year. On the industrial businesses, during the period the industrial sales growth was .4% against some strong comps from last year. Dodge was our leader with .2% expansion rate on combined OEM and distribution sales. The latter showed a low teens expansion rate for Dodge. Overall, the industrials were up high single digits with sector growth mitigated somewhat by Europe. On aerospace and defense, overall we saw a rate of expansion of 16% with aero OEM of 25% and aero commercial distribution of 42.8%. The demand drivers here continue to be the large plane builders and their supply chain in support of production for Boeing and Airbus 737, 787, A320 and A330 principally, as well as other producers of business jets and a myriad of subcontractors needed to support the industry. Additional volume increases were felt from our space initiatives and we saw demand for products to support the new field for of air taxis beginning to trickle in. As mentioned in previous calls, we expect to see increased demand creating double digit growth from the plane builders for many quarters to come as they continue to aggressively expand build rates. We continue to add resources and planning to support these increased rates as well as we expect expanded work statements. To summarize for the period, RBC saw growth and revenue of .9% and an adjusted EBITDA expansion of 16% against the same quarter last year. Regarding our first quarter of 2024, we are expecting sales to be somewhere between 380 and 390 million dollar range. And I'll now turn the call over to Rob for more detail on the financial performance.
spk08: Thank you, Mike. SG&A for the fourth quarter of fiscal 2023 was 59.6 million compared to 54.5 million for the same period last year. As a percentage of net sales, SG&A was .1% for the fourth quarter compared to .2% for the same period last year. Looking forward, SG&A as a percentage of net sales is expected to be between 15.75 and 16% of sales in the first quarter, including approximately three to four million of stock-based compensation expense. Other operating expenses for the fourth quarter of fiscal 2023 totaled 20.7 million compared to 23.7 million for the same period last year. For the fourth quarter of fiscal 23, other operating expenses included 17.7 million of amortization of intangible assets, 2.5 million of restructuring costs associated with our South Carolina operations, and 0.5 million of other items. For the fourth quarter of fiscal 2022, other operating expenses consisted primarily of 17.2 million of amortization of intangible assets, 5.7 million of costs associated with the Dodge acquisition, and 0.8 million of other items. Operating income was 86.1 million for the fourth quarter of fiscal 23 compared to operating income of 59.3 million for the same period in fiscal 2022, excluding approximately 2.6 million of restructuring costs associated with our South Carolina operations offset by 0.1 million of acquisition-related costs. Adjusted operating or adjustments, adjusted operating income was 88.6 million, or .5% of sales for the fourth quarter of fiscal 2023. Excluding approximately 12.5 million of acquisition costs, adjusted operating income for the fourth quarter of fiscal 2022 was 71.9 million, or 20% of sales. Interest expense for the fourth quarter of fiscal 2023 was 21.7 million compared to 13.6 million for the same period last year. We anticipate interest expense between 20 and 21 million for the first quarter of fiscal 2024, including approximately 1 million of costs associated with the amortization of deferred financing fees. For the fourth quarter of fiscal 2023, the company reported net income of 49.2 million compared to 31.5 million for the same period last year. On an adjusted basis, net income was 67.7 million for the fourth quarter of fiscal 2023, compared to 61.7 million for the same period last year. Net income available as common stockholders for the fourth quarter of fiscal 2023 was 43.4 million compared to 25.7 million for the same period last year. On an adjusted basis, net income available to common stockholders for the fourth quarter of fiscal 23 was 61.9 million, compared to 56 million for the same period last year. Diluted earnings per share attributable to common stockholders was $1.49 per share for the fourth quarter of fiscal 23, compared to 89 cents per share for the same period last year. On an adjusted basis, diluted earnings per share attributable to common stockholders for the fourth quarter of fiscal 23 was $2.13 per share, compared to $1.93 per share for the same period last year. Turning the cash flow, the company generated 71.4 million in cash from operating activities in the fourth quarter of fiscal 23, compared to 46.9 million for the same period last year. Capital expenditures were 12.4 million in the fourth quarter of fiscal 23,
spk09: compared to 8
spk08: million of capital expenditures for the same period last year. We paid down 70 million on the term loan during the period, leaving total debt of 1.4 billion as of April 1st, 2023, and cash on hand was 65.4 million. Cumulatively, since November 2021, we have now paid 400 million on the term loan. I would now like to turn the call back to the operator for the question and answer session.
spk05: Thank you, ladies and gentlemen. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad and a confirmation tone will indicate your line as in the queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we call for your questions. Our first questions come from the line of Christine Leeway with Morgan Stanley. Please proceed with your questions.
spk02: Hey, good morning, everyone.
spk09: Good morning.
spk02: So, you know, looking at margins, I mean, you guys printed 42.2. This is, you know, one of the highest you've ever had, if not the highest. Can you talk about what drove this margin improvement? How much of this is from synergies? And last quarter, you were already at, you know, you already had significant synergies from Dodge. How much is left to get to your final target of 70 to $100 million per year by year five?
spk06: Hi, Christine, Stan. You know, we had a good mix in the quarter. And you're right on the synergy side. Since owning Dodge over this period of time, we've added seven percentage points to their gross margin contribution. And I think on the cog side, that will start to slow for a little from the next 12 months then pick up again. As some of our longer term projects have been working on the synergy side, we'll kick in. On the top line sales side, I think we're a little behind target of where we'd like to be on our synergy. So I think we still have some good upside over the next three to four years to get to that target as we train our sales teams on both sides of RBC and Dodge to cross sell each other's products around the world. And that's working well, but it takes time to get everybody trained up. And on SG&A, I think we're definitely ahead of where we thought we were gonna be. We were able to move Dodge off of ABB's IT systems and picked up a nice savings on doing that and getting them on to their own system and on the back of RBC's IT group also. And so we picked up some nice synergy there. So going into this year, you know, Rob gave you guidance for Q1. You know, hopefully we do a little better than that. We'll see what happens. But I think we are definitely ahead of where we thought we would be coming into the real first year of our integration with Dodge.
spk02: I can hear Dan following up on just the, how much synergies have already been harvested, like from the 70 to 100 million. Can you just give us a run rate of how much of that's already been done?
spk06: Yeah, I'd say on average that run rate is anywhere from 45 million to 56 million.
spk02: Great, and then in terms of commercial aerospace, you talked about the significant step up for aircraft production rates, Mike. And so can you level us out in terms of where you are in production rates, going, you know, trying to hold on to 31 per month for the max? And there's discussion of moving up to 38 per month around nowish this summer and then to 42 by year end. Is that where you're tracking? Are you above or below where they are? Is there some sort of inventory that needs to get depleted before you get on that rate ramp? And also any colors you could provide on the 787 as well as they get towards 10, the A320 and the A350.
spk07: Yes, those are a lot of answers. Let's see, in terms of Boeing's content and where we are relative to the buildup, what we do is we look as you do at their skylight chart and determine, first of all, are they producing themselves to their chart? And we think they are. We kind of monitor that pretty closely. And then we look at, based upon, if they're gonna go to say 38 planes a year or whatever, and they're gonna do it in January, we know that we have to have our product six months ahead time because if they're gonna build 38 planes, the bearings can't show up and the hardware can't show up the day that they want 38 planes to exit their plant. So we kind of offset the lead time on their chart by six months and determine what our production requirements are in order to have that product available in six months. So we're pretty much aligned. We know what our mix per plane is. And as a result of knowing what that mix per plane is, we can kind of back calculate their rate and our rate and are they, do they correlate? They correlate very well. We've done a lot of work to make sure that we're completely in cadence with their buildup. Now, in terms of inventory in the system, right now I would say thank God there's inventory in the system because stepping up production rates, 25% a year is a big order for a company like us who actually have to make it from raw material to finished goods. So we're doing the best we can to meet their rate expectation and we know by the end of the year that whatever inventory is in the system for the 37 and the 87 is gonna be pretty much squeezed out of the system. So we're gonna be commando by about December. And so we're gonna have to produce very well at their production rates, December and beyond. And the difficulty in doing that is material. Lead time for these aircraft steels are 50 weeks and the deliveries after 50 weeks are not completely certain. So maybe you expect to get it in 50 weeks and you get it in 55 weeks or something like that. So steel availability is a problem and there's some steels that are not available at all. And they're important alloys and they're highly used in the aircraft industry. And I think the aircraft people are gonna have some difficulty all the way around, not only in bearings but in structures to determine how to substitute other steels for the steels that have already been specified for use.
spk02: I see, and so Mike, in terms of these steels, is there a Boeing master agreement or an Airbus master agreement that can help with sourcing? I mean, that seems like a fairly important input to have uncertainty over considering the production rate volumes that are in that skyline.
spk07: Yeah, we talk to them all the time. I'm sure other people have the same discussions, not just people making it up. We're making what we make. And these specialty steel producers are to some extent unwilling to produce the chemistry needed. Some of them have gone bankrupt or have been restructured. Actually, Airbus just bought one of them. And because of this situation, and this situation exists in the United States too.
spk02: Great, so I think...
spk04: I think it's something that...
spk03: What's that?
spk02: Sorry, Mike. So with this uncertainty, how are we gonna see the 50, 60% volume increases that the OEMs want in two, three years? I mean, the environment you're describing seems fairly dire for a really important input. And we've got this massive volume ahead of us to meet those rate ramps. How do you think this gets resolved? And does that put at risk these production rate increases?
spk07: It certainly is a big consideration on these production rate increases. And it needs to be resolved. And exactly how it gets resolved is there needs to be some material substitutions for some of these alloys in the design. And so, you know, we can't do that. That's Boeing's design. So they're gonna have to double time their engineering department to provide materials that are modern and available.
spk02: Great. Thanks, Mike. Thanks, Dan. Yeah.
spk05: Thank you. Our next question comes from the line of Pete Skibitsky with Alembic Global. Please proceed with your questions.
spk10: Hey, good morning. Nice quarter, guys. Hey, Mike. Hey, Mike, just one clarification. When you talk about steel and steel alloys, are you also including sort of, you know, aluminum alloys and nickel alloys or is it strictly steel in its alloys?
spk07: Well, I mean, it's steel in its alloys, and its alloys are, you know, nickel and chrome and manganese and, you know, that sort of thing. But it's, yeah, that's... I'm talking about steel. We don't have the aluminum worry that other people have. But we do have the steel worry.
spk10: Okay. Okay, got it. And I guess I just wanted to ask about the top line in the fourth quarter. You guys, you know, beat your own revenue guide pretty handily. Was there a particular market segment that surprised you there or a share gain maybe or something else?
spk07: Well, you know, I think it's... As I said at the last conference call, it's really hard for us to project Dodge's revenue because they really don't work with an order book like the rest of RBC does. So RBC, you know, has a backlog of a year in order book. So we're very confident in our outlook for what we're going to produce and what it's going to generate for revenues. With Dodge, they have a much different business model where, you know, they're sort of GDP-driven. I mean, you tell me what the GDP is going to be, and I'll tell you what Dodge's revenues are going to be. So in this particular quarter, their business was stronger than we had anticipated when we did our last conference call, and it continues to be strong.
spk10: Okay. Yeah, that's fair. And to that point, I mean, you've seen ISM PMIs below 50 now for a couple quarters in a row, right? So I'm wondering, are you guys kind of seeing out there market softness at all? Or, yeah, I'm wondering if there's market softness, but you're kind of offsetting it with pricing gains and market share gains, you know, things like that, or actually, or just the end market's just stronger than you might expect for where the PMIs are right now. And you talked about Europe being weak as well.
spk07: Yeah. Well, I mean, in the industrial business, it's very end market dependent, right? And right now, you know, there's a lot of consolidation going on with these industrials that are our peers, and so I'm sure that's creating some service-level problems. But on the other hand, there's the end, you know, very end market dependent. And, you know, our end markets are, if you start with oil and gas, very strong. Semicon is soft, but it's not dead. Mining is steady, and the demand is very acceptable. Aggregate is very good. Grain is very good. Infrastructure is good. Wind is not as breezy as it was last year. The general distribution is very good. And it's, you know, these industrial markets are surprisingly strong that we serve, despite the news of the day and what the economy is
spk10: doing. Yeah. Yep. Okay. Last one for me, and I appreciate the color. You guys have been talking a lot about, you know, expect to grow this year, but you've also been talking about, you know, additional defense plans. You did just do a restructuring in South Carolina. I don't know if that was just a pure kind of a cost takeout or not, but how does kind of all that roll up into your capex projection for Fiscal 24?
spk07: Yeah, I think we'll be right in that three, three and a half percent of revenue range. You know, I'd be surprised if it bulges more than that.
spk07: There's nothing to make it bulge right now on the horizon.
spk10: Okay. Okay. And the South Carolina restructuring, was that just a pure cost reduction at Dodge? Is that how to think about that? Yeah,
spk08: it was kind of a combination of some cleanup at the Dodge level, as well as one of our legacy RBC plants, just clean up down there. So nothing out of the ordinary. Gotcha.
spk10: Okay. Thanks, guys.
spk05: Thank you. Our next questions come from the line of Steve Barger with Key Bank Capital Markets. Please proceed with your questions.
spk00: Thanks. Good morning, guys. Morning, Steve. Thinking about your one... Thank you. Yeah, good morning. Thinking about your one key revenue guide, as I look at the comps, seems like we'll see another double digit organic for arrow, maybe single digit for industrial. So first, is that how you see it? And second, is that how you're thinking about the year as well?
spk08: and yes. You got it.
spk07: Yes and absolutely yes.
spk00: Absolutely yes, single digit industrial? Or just that you expect solid growth for the full year?
spk07: Yeah, I mean, it'll be single digit industrial, I expect. You know, maybe a little bit better. Certainly not into the double digits, maybe the upper singles. And the aerospace will be strong. It'll be, you know, sort of at least mid teens. And marine, you know, marine will be a contributor and they haven't been this past year. But, you know, the knots are getting untied and that material will start to flow.
spk00: That sounds good. So, you know, with that in mind, you drove 174 basis points of gross margin expansion last year, which was the best performance in 10 years. You talked about, or Dan talked about the Dodge-Cogs benefit starting to slow this year. Can you talk through total company gross margin expansion plans that you see? What's your target? What are the big levers for expansion? Just how are you thinking about gross margin for FY24?
spk07: Well, I'd love to say that we're going to grow a half a point to a point. I can't tell you what the details of that growth are going to be. That's probably more an objective than a plan. But I don't see we're going to see we're going to have any deterioration in gross margin.
spk00: I mean, just the volume alone should give you pretty good leverage, right? What's the offset?
spk07: Yeah, just the aircraft volume going through the plants, which is, you know, we're seeing quarter to quarter better absorption of our overheads because we've had some of those plants on a slow cadence. And so that by itself is going to accrue to the benefit. You know, on the other hand, the Dodge business is heavily dependent upon subcontractors and purchase parts. And those variances have, you know, we're crazy last year and they're under control this year. They seem to be normalizing. On the other hand, you know, counter to that, we're we're working to in source some of that product from Asia to the United States and to Mexico and to our Mexico plants. So so there'll be some startup expenses on, you know, based on learning curve that we'll probably have to absorb. But it's it's absorbable. And, you know, over the longer term, we'll get we'll get better absorption in the in the Mexico plants just just by doing that. So, yeah, I think overall, there should be some some expansion. I wouldn't say that we're going to see the same year that we saw last year.
spk00: Yeah, understood. You know, going back to Pete's question about PMI being sub 50 for six or seven months now, but but really strong industrials, not just from you. That's what we heard through earnings season in general. What are your thoughts on the divergence? Why, you know, you study cycles. What do you think's going on?
spk07: That's a good question. You know, I, I study, I study our our sectors pretty well, and I kind of know what's going on there, but I don't I don't know. I mean, we're, you know, we're not into automotive and heavy truck and all that sort of thing in any major way. And so those markets, those those markets are not going to be as good as the other markets. Our our, you know, as you can, as you can see, haven't been haven't been robust. They've been acceptable. Consumer goods is is not our thing. What we what we do is, you know, produce the basic, you know, food stuffs and aggregate to keep the to keep the economy moving. And, you know, we're we're you look at the Dodge business, it's a very low beta business in terms of in terms of its demand profile across the years. So, you know, I think I think we're a little bit. I wouldn't say immune, but we're a little bit different than the than the normal industrial business that's servicing, you know, automotive and consumer products.
spk00: Yep, that makes sense. Thanks for the time.
spk05: Thank you. Our next questions come from the line of Seth Weber with Wells Fargo. Please proceed with your questions.
spk09: Hi, guys, this is Larry Stavitsky on for Seth this morning. Thanks for taking the questions. You know, you guys mentioned the areas of strength, industrial strength in terms of end markets. Have you seen any change in industrial customer appetite due to macro concerns quarter over quarter? Anything that's that's of concern to you guys?
spk07: Well, we're we're thinking about that. No, I guess I guess the overall answer is no, we haven't seen any any concern. I think the only soft spot that we've seen in the industrial side was the the reversal of Amazon's decision to build all those warehouses. So I think I think that kind of, you know, kick kick the legs out of, you know, a few stools in in in the industry and in our business softened up last year at this time in that sector. But we've completely been able to, you know, overcome and restructure around it.
spk09: OK, OK. And then on supply chain, you mentioned, you know, steel availability is still a problem. How has how has this situation, you know, the dynamics with the supply chain, how have they changed quarter to quarter or year over year? I mean, are things loosening up a little bit for you guys or is it still pretty, you know, pretty tight out there?
spk07: Well, it's you know, it's it's pretty much normalized with, you know, for most steels, for, you know, 80 percent of our steels, which are, you know, in production and, you know, the planning lead time has expanded. And so we just have to expand our planning lead time to accommodate it. So as long as you can get ahead of that game, you'll do you'll do fine. And we're we're ahead of the game. And, you know, on the specialty steels, those are those are still hard to get. I mean, those are that's a problem that still needs to be solved.
spk09: Yeah. And you expect that to go on for a couple of quarters?
spk07: I don't you know, I don't I think new new new suppliers have to be will be will be told. I mean, I think I think there's there's got to be some new people entering this market that they can produce these things. It's it's. You know, it's capital intense, but a lot of people already have this capital. And and if they realize, you know, that there's there's decent volume and decent profitability in these in these alloys, I think. You know, I think the problem will get solved.
spk09: Got it. Thank you guys. Appreciate the call.
spk05: Thank you. Our next questions come from the line of Joe Richie with Goldman Sachs. Please proceed with your questions.
spk03: Thanks. This is the one for Joe Richie. My first question is on industrial inventory at distributors. Could you provide some color on the stock especially on the industrial distributor side and maybe any color by end market where there is more stock risk right now versus less or less and any color on the timeline of when the stock can happen?
spk07: Yeah. Well, yeah, I think the industry and it at large is as far as we can see there hasn't been any overstocking situation. I think during the pandemic, it was hard to it was hard to get the materials. And so now I think most of our distributors are happy to have have to be able happy to get able to get these materials and and put them on their put them on their shelf. You know, 50% of their sales is is from break fix. So when something is is broken in the marketplace and and somebody needs an immediate repair and you know, it's a it's a profitable sale for them if they have have it in inventory. So they don't they don't like not to have it in inventory. Now there's there's been some inventory liquidation over the past six to nine months is is is a couple of our major customers consolidated. And during the consolidation, stores were closed and inventories were were combined. And we definitely saw a a drop in revenues from some major customers as as this occurred. And and that was probably it seemed to have been completed around the December January time period, which may have been part of the reason why our fourth quarter was stronger than we had anticipated. But that's that's the only only mechanism that that we saw that was unusual in place over the last 12 months.
spk03: Got it. That's that's super helpful. And just maybe on your backlog looks like sequentially backlogs were pretty strong. Maybe it's driven by arrow. Any any indication you can provide on how the industrial side of the backlog on RBC is pending and what are you seeing from audit trends on the industrial side?
spk08: Yeah, sure. Most of the sequential increase was driven from our defense business, you know, be it Sargent or, you know, actually one of our legacy businesses. The Dodge backlogs actually down 10 million, which is not a bad thing because as we've talked about, they are not a business that traditionally carries a significant backlog. But the orders have remained strong holistically in the industrial side of the business.
spk03: Thanks. That's helpful. My last last one just across like some of your peers talk about having portfolio outside of just bearings and broadly across the industrial drive train could help with gaining more traction with the customers. Just any indication how much of your portfolio maybe is outside of bearings more on the industrial drive train side and like what what is your counter to some of those claims that peers probably have more products across the drive train can gain more share?
spk07: Yeah, I would think that maybe 25 to 30 percent of our of our sales are products that are that are not bearings. They're either systems, gearbox systems or their valves or their their rods to go into structural components for aircraft. So, yeah, I'd say, you know, we haven't made those calculations. So but I'm so I'm I'm I'm extrapolating what I know about the business, but I I'd say it's 25 to 30 percent of our revenues are outside the direct bearing line.
spk03: Great. Thanks for all my questions.
spk05: Thank you. Our next questions come from the line of Michael Charmoli with Truist. Please proceed with your questions.
spk01: Hey, good morning, guys. Thanks for taking the questions. Nice results and margins here. Maybe, Mike, just a lot of this talk on supply chain and arrow. I mean, as you look at the year, you know, you said double digit arrow growth. I mean, how how do you risk adjust that for for not getting access to supply? I mean, is there a is there a big threat there to meeting your objectives for the year? And I mean, I think we keep hearing in some cases bearing lead time stretch or stretching out like three years. But but how do we just think about the risk of you guys executing if you don't get that supply?
spk07: Well, we do get the supply. You know, it's it's more than 90 percent of our our our bearing products, probably 95 percent of our bearing products use, you know, custom materials that are that are readily available. There is there is that other five percent of not only bearings, but structural components that are more difficult to get. And and I think I think it's a bigger problem for somebody like Boeing who uses these materials widely across their their aircraft line than it is for RBC.
spk01: OK, OK, that helps. So you're OK. So if you're exposed, it's about five percent of your product and where you're seeing some of that tightness on Aloys.
spk07: Yeah, maximum five. OK, OK,
spk01: OK. And it's just back to the gross margins. You know, I know you you've called out, you know, some of these learning curves and startups. But, you know, you got a little bit of, I guess, volume step down in the first quarter. But but what else is driving the gross margins to step down? I know you guys were pretty enthusiastic a couple of quarters ago calling out, you know, a new floor. And, you know, now we're going to we're going to see it. I mean, still phenomenal margins. But is there anything else to read into? I mean, is it just conservatism? And again, I know you called out some of those subcontractors purchasing parts, some of the moves. But is that is that kind of the driver or how should we think about that in the first quarter?
spk07: You mean for the for the revenue projections for the first quarter?
spk01: The gross the gross margin projection, forty one to forty one and a half percent stepping down sequentially from what you just did this quarter.
spk07: Yeah, yeah. Well, I think that's probably a little conservatism playing a role there. There's there's no there's there's no there's no supporting mathematics behind that behind that estimate, believe me. OK,
spk01: OK, that's good to know. And what about, you know, you talked about the synergies, I think you talked about the cogs kind of slowing down. But I guess, you know, going back to when you made this Dodge deal, you did talk about, I guess, two hundred million or so of material and supply you could source in house. I mean, is is that you know, where are we there? And I think you may be said, you know, beyond the next 12 months that kicks in. Can you give any color in terms of how much runways left on that?
spk07: Yeah, we're right. Right at the beginning of that. I mean, that's you know, we've only we've only been doing this for a little bit over a year plus a quarter. So, yeah, we're right at the beginning of sort of looking at at that mix, identifying, you know, what part of that mix could be best made in in some of our lower cost plants. What part of that mix needs to be made in order to support the volume demands that we see. And also, you know, at the same time, you know, as we got into Dodge, we found a lot of areas of of growth potential that could be could be achieved if we if we made this product or we made that product or we insourced certain materials that our supply chain had always had problems producing. So if we insource, capitalize and insource those materials, we could see upside to our revenues and our margins. And and so it's it's sort of the outside the synergy concept. But but clearly there's there's plenty of upside in the Dodge product offering if to take advantage of by by by incorporating some of these product strategies.
spk01: Okay, okay, that's that's that's good to know. So then, I mean, if again, the margins have been fantastic here, but if we look at, I think you kind of said mid 30% EBITDA margin target by by year five. And certainly it sounds like you've got runway and levers to pull starting with that COGS. I mean, so you're still confident in that that mid 30% up EBITDA margin. Well,
spk07: that's a good goal. I mean, you need to have a humongous goal. So I think we're making our way towards it. Let's put it that way. Okay,
spk01: fair. Last question. I'll get out of the way. I guess the implied defense, you didn't give the defense revenues, but I guess they look to be down 7%. I mean, I know you talked about Maureen not being a contributor, presumably laughing some easy comps, you know, get some of that that product flowing on the subs. So should we expect a pretty good rebound in defense next year? Or this year for yeah, I will 24.
spk07: Yeah, probably it comes in later in the year because, you know, first of all, I think I think the marine, the marine business gets, you know, gets its mojo going. And it looks like it's it's on track for that. And at the same time, we have a lot of a product that has to be replaced that was used in the Ukraine situation. And so that'll probably start phasing in at the end of the year. Okay,
spk01: perfect. All right. Thanks, guys.
spk05: Thank you. Our next questions come from the line of Pete Skibitsky with Olympic Global. Please proceed with your questions.
spk10: Yeah, thanks. Just one follow up for me, guys. I don't think all the data is out yet, but it looks like probably fiscal 23 ended up as a big, you know, big inventory build year for you guys. And I imagine some of that is, you know, safety stock, maybe some is to support the growth. Just wondering if you expect inventory to build, you know, at a similar level on fiscal 24 that it did in 23. Thanks. Hey, Pete,
spk08: it's Rob. So inventory build for the year was about 70, a little more than 70 million. Some of that was at the Sergeant business where, as we've talked about in the past, you know, we do get reimbursed for some of that material purchase on the marine program. The rest of it was Dodge primarily, and I don't expect that level of growth in the next fiscal year.
spk10: Okay, okay. What drove the Dodge growth? Just curious.
spk07: Supply chain, you know, when you can't get it from supplier A, you order it from supplier B and then supplier A delivers and supplier B delivers. Gotcha.
spk10: Gotcha. Okay. Sounds great. Thank you.
spk05: Ladies and gentlemen, there are no further questions at this time. I would now like to turn the call back over to Dr. Harnett for any closing remarks. Okay,
spk07: well, that's the end of our conference call. We thank you for participating and look forward to speaking to you again in the July August timeframe.
spk04: Good day.
spk05: Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your