Operator: Thank you. [Operator Instructions] Our first questions come from the line of Dave Storms with Stonegate. Please proceed with your questions.
Dave Storms: Good morning.
Matthew Crawford: Good morning, Dave.
Dave Storms: Just hoping to – sorry, it looks like Supply Tech really was the flag bear for everything that can go right for you guys. How easy or challenging will it be to map some of those process improvements onto assembly components and engineered products to see the same results there?
Matthew Crawford: Yes. I – it’s not uncommon, Dave. I know you’ve looked at the business over a number of years. I often say a great industrial holding companies are full of great industrial businesses. And we have a number of great industrial businesses. Underneath the hood, each of them sort of have their own particular business cycle. So having some volatility between the group and having different leadership profiles is not uncommon to us. And you’re absolutely right. Supply Tech, both on the manufacturing and the distribution side have really performed well for the better part of a couple of years here. So I used the word agile in my comments purposefully because it seems like every month, there’s a different challenge.
But again, I think we’re on a sustainable path there. As I mentioned, ACG I think, is in a really good place relative to the stability of their business. We invested heavily in the restructuring of that business. We’ve put ourselves in a great position from an operating excellence standpoint. It reflects itself in productivity, operating efficiencies. We, I think, put ourselves in a great spot there. So I think the tail to take there is new business, an area of tremendous focus now that we have this operating model that we believe is best in class. So that will play out. And I think we’ll see accretion there as we build that business or continue to build that business going forward. So I think from an operational perspective, my point is we have mapped to use your word, a lot of the success that we hope to bring to the business after a difficult couple of years, and now it’s about building it.
Engineered Products, again, often historically has been the leader in the business has had its own set of challenges related to a few different things. One is some consolidations there where we consolidated businesses, which can be a challenge. That business is – relies heavily on know-how and knowledge, some of which we lost during the changeover. So again, the business principles there around unique assets, strong aftermarket business and tremendous brands in the new equipment space, particularly in electrification, industrial electrification as well as products that are heavy in aerospace and defense. The market’s there. The backlogs are there. I think it’s a usual word, again, mapping over some of the operational excellence that we’ve begun to see in the first 2 units has just taken a little more time than we thought.
Dave Storms: Understood. That’s very helpful. Thank you. When you mentioned a little bit in your response there that you’re working on, obviously, new business in automotive, what does that sales cycle look like? Is – now that we’re in a more normal world than we were a couple of years ago is the contact to contract cycle trending shorter – and any insight you can give us there would be very helpful?
Matthew Crawford: Yes. I think there’s – I mean there’s two types of at least two. I’ll just use two, really three types of new business in the automotive space on the OE side. I think one is replacement business. I think we’re extremely well positioned on key programs to achieve replacement business given where we are in terms of productivity, scrap rates and all the things that drive the performance of an automotive supplier. So I like where we are there. I think there’s new business in the space that we participate in, extrusion, molding, etcetera. And again, I think we’re particularly well suited there, given the consolidation and the productivity improvements we’ve made over the last couple of years. So I think, again, I think we’re – those are sort of two of the areas, I think we’re primed for success in the near-term.
I think that the third is launching new products, and that’s a little longer cycle. So those first two, I see as being impactful, if not later this year, certainly into ‘25 and ‘26, developing new products and launching them typically to be material, could take a couple more years. So no, but the bottom line is we expect – we didn’t just start this new business cycle, particularly not in categories one and two, but I would anticipate us to outperform car builds beginning in 2025 in terms of growth.
Dave Storms: Understood. That’s very helpful. Thank you for taking my questions. And good luck in the future.
Matthew Crawford: Thanks, Dave.
Operator: Thank you. Our next questions come from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your questions.
Christian Zyla: Good morning, everyone.
Matthew Crawford: Hey, Steve.
Christian Zyla: This is actually Christian Zyla for Steve. Good morning. So your gross margin this quarter looks to be the highest since 3Q ‘16. Very impressive. Can you just walk us through what enabled that? Was that due to pricing in your portfolio or more on the material cost side? And do you think this is a sustainable new level?
Patrick Fogarty: Christian, this is Pat. As I mentioned in the script, Supply Tech really led to the operating income performance during the quarter. As a result of a higher level of sales in higher-margin products. I mentioned aerospace and defense increased year-over-year significantly. I mentioned the growth in our Industrial Products business, which typically carries higher margins. So overall, mix was a big factor in the increase. In addition, the growth that we saw in our proprietary fastener products, which we expect to continue really nice margin relative to the products that they are implementing around the world relative to EV and other applications that use our self-piercing and clinch products. So there was a lot that impacted Q1.
Mix obviously has a lot to do with it, but we are very pleased with where margins have been. And a lot of heavy lifting went on over the last 2 years around pricing with customers around reducing product costs, and those initiatives will continue as we continue to drive our operating margins in that segment. In the automotive segment, we saw a nice improvement year-over-year in our operating income. And a lot of that has to do with the consolidations that were completed, as Matt mentioned. And in the early part of the completion of those consolidations, there are additional costs, start-up costs, training costs, inefficiencies that occur on the plant floor that we’re getting over now. And we’re starting to see those improvements occur and throughput increase, which obviously helps drive an increase in our operating margins.
