Patrick Fogarty: Yes Christian, I comment on the margins. I’ll only say that the EMA acquisition will be accretive to our segment margins. We are and have been over many years of doing deals, very disciplined in our approach. We have IRR models. We have return on cash flow. We have many, many metrics that we use to value a business. And in a lot of cases, the owners of these companies, and in this case, was a much larger private company out of Austria, wanted to find a home for this business which wasn’t core to their business, in an area where their employees would be taken care of and would be able to grow with our business and it fit perfectly within the Engineered Products segment. And their expertise lies in induction heating and various applications, not only in Germany, but throughout Europe, covering a wide range of diverse end markets, including wind energy, including auto, including forging and foundry.
Companies like ThyssenKrupp are just one example of the strong OEM relationships that EMA brings to our induction business.
Matthew Crawford: Christian, I would only add to Pat’s point, many people are watching, as we are very carefully, some of the challenges in Europe, and particularly Germany, as it relates to the economy. Adding a brand like this and a team like this, these are, Germany is still a hub for global manufacturing. While they may be and the technical talent may be in Germany, they service German and global customers. Pat mentioned one. I mean, these are major companies that invest through the business cycle and invest globally. So it’s not just being driven by the German economy, if you will.
Christian Zyla: Great. I really appreciate all the color, thanks.
Operator: Our next question is from Dave Storms with Stonegate. Please proceed with your question.
Dave Storms: Good morning.
Matthew Crawford: Good morning, Dave.
Dave Storms: I just want to start. It looks like free cash flow kind of hit the high end of what you were guiding to last quarter, any lessons here that we can expect going forward other than just a really strong focus on working capital?
Patrick Fogarty: We’ve been working on the reduction of working capital for the entire year. I think the fourth quarter benefited from slightly lower sales, which allowed us to harvest some of the receivables in the fourth quarter, but I would love to see our free cash flows be smoother, and we expect that in 2024, but there was a lot of hard work and heavy lifting done by all of our businesses around reduction in working capital. Just to give you an example, we grew our business year-over-year by almost $170 million and used only 8% working capital. That’s a huge accomplishment. We feel there is more room there and each of our businesses are focused on it.
Matthew Crawford: Dave, let me add to that, because I can’t help myself. I mentioned in my comments that we feel as though we entered the year as a less capital intensive business. Pat, I think, addressed 2023 well. I can’t resist the opportunity to say to you, we don’t need to spend much time on General Aluminum on this call, other than to say it consistently represented between 10% and 15% of our revenue and 30% to 40% of our capital, CapEx. So that is an opportunity, I think, to permanently change the profile of this business and to bolster the cash flows of the business.
Dave Storms: That’s very helpful. Thank you. And then I just wanted to touch back on EMA for a second. What is the integration timeline for this? Are there still logistical hurdles or is it pretty much a plug and play acquisition?
Matthew Crawford: Yes, I don’t think we’d want to comment explicitly on that. It’s pretty recent. I would point out the induction heating business is a complex equipment business and we are really happy to get the EMA team. We also do business in the German marketplace, in the induction heating business, and we’ve got great teams making innovative products. So this is about, I think, growing our team, growing our talent, growing our customer list, and growing the products we can serve our global customers with. So it’s a business that has a wonderful backlog. It’s well positioned to succeed this year. Don’t fix what’s not broken. Having said that, we’re going to look, I think, to create a broader presence in the marketplace where again we can sell more global customers with more innovative products. So to some extent, it’s plug and play, but our goal is to make them more successful because they are world class in what they do.
Patrick Fogarty: Thanks for that. One additional comment there. I mentioned in my remarks that EMA is a provider of converters, high efficient power converters. They can retrofit their converters with other brands around the world. This is a huge opportunity if you have operations in places like Spain and Italy where you can market the ability to make those converters and install them locally. We feel that’s just one of the opportunities that we have in this business. But there are others, and most of them are driven around, as Matt mentioned, expanding our ability to sell our various brands through the various local sales teams. And that will take some time, but we’re very optimistic that we’ll be able to take advantage of that.
Dave Storms: That’s great. Thank you very much. And then just one more, thinking about 2023, and it seemed like it was really a year of improvement, operations getting restructuring and sorted. How do you feel about that going into 2024? It sounds like you’re on pretty good footing, but is there any other levers that you’re thinking of pulling to continue that?
Matthew Crawford: Yes. I’ll echo a few comments I think I made in the last call. The broad strokes have been done, right? I mean, I can’t and I’ve got to pause and thank the people in our forge group or in our automotive group explicitly for the work they’ve done over the last couple of years of closing and relocating facilities. That work is done in the trenches. It’s hard. It’s difficult. It isn’t on time. It’s rarely on budget. The broad strokes have been completed. Having said that, we are only at the front end I think of really optimizing the consolidations and the restructurings we’ve done. So no, we absolutely anticipate. And again, Pat will probably kick me under the table for saying this. I am not upset that we’re seeing a slower growth year.
I’m not upset of seeing that we are not, that we may see unit volumes flatten out because we need to do a lot of work. I think I said this in the third quarter call, I’ll say it again. It’s nice on paper to do a nice white paper and move thousands of jobs. For example, with a couple of businesses in the automotive segment to south of the border, there’s certainly a lot more labor there, but there’s still turnover, there’s still training. At the end of the day, while there may be some labor cost arbitrage, we’ve walked away from some tenured employees who are really good at what they do. So our journey on decreasing cost, increasing productivity in these locations that have been affected in particular, but across the business are going to be in the details and they’re going to be in the value drivers.
We like to think mind over wallet here, but we’re going to be focused on funding the $75,000 investments that yield value drivers in the hundreds and hundreds of thousands of dollars. That’s where we need to be. We highlighted recently on a call our investment in a rubber mixer that I think has given us not just a great return, but a competitive balancing in our rubber and plastic business. That’s where we’re going to be focused this year, and there’s a tremendous amount of opportunity there across the business in optimizing the restructuring dollars we have spent and just getting better at what we do as the system stabilizes, particularly on the labor side.
Operator:
Sponheimer:
Gabelli:
Brian Sponheimer: Hey, good morning, everybody. Hey, Matt.
Matthew Crawford: Hey Brian, how are you?
Patrick Fogarty: Good morning, Brian.
Brian Sponheimer: I am great. So it seems like you guys excel at finding these niche businesses in various parts of the world. This is a European business. I’m wondering if your scope, just by virtue of your size, is now potentially expanding your addressable net for where you can look to find businesses that you want to potentially add to your array?
Matthew Crawford: Yes, Brian, it’s a good question. You know that in general we operate very strong, credible brands in reasonably to midsized marketplaces. We’re not competing in $50 billion or $100 billion marketplaces. Most of our business address markets that call it our $2 billion to $4 billion in size where we are a significant player or less, where we have significant player known and understood appreciated brands or unique equipment. So I would just tell you, we don’t think about scale may be the way that you said. We think about scale and our teams think about scale in terms of what is really strategic to us. No deal is too small if it brings to us an adjacent new product, we can take over our network. It brings us a new geography where we can infiltrate new products.
So we don’t really think of scale maybe. I know you’re thinking about it financially, what moves the needle? But the first question we ask here is, how does this make our broader business more successful in three to five years? What does success look like? If we can answer that question with a resounding yes, then we talk about if it moves the needle. Then we talk about if we like the financials. Sure, we’d love to buy a bigger business that checks all those boxes at the right multiple that would move the needle, but that’s not how our process starts. Again Brian, I particularly again in this environment, Brian acquisitions are, people will get sick of me saying this, are not the first horse at the trough.
Brian Sponheimer: Yes, I think it was whether the size of your business is allowing you to find more opportunities now that are adjacencies that fit. And I guess along those lines you have delevered a little bit, but still more I would assume you’d want to work on there, but what does the pipeline look like as far as other EMA type sized businesses that are out there for you?
Matthew Crawford:
Ajax TOCCO:
Patrick Fogarty: You know, the pipeline continues to be strong and I think over the last five to 10 years, our growth and our size has definitely broadened the net of at least those deals that come to us from M&A investment banks. But we’ve got great brands and they’re global and so as a result of that, people often come to us when they’re looking to sell their business and so that hasn’t changed and that goes back years and years of success relative to buying and integrating businesses.
Brian Sponheimer: Excellent. Well, good luck for 2024.
Matthew Crawford: Thanks, Brian. I appreciate your support.
Operator: We have reached the end of the question-and-answer session. I’d now like to turn the call back over to Matthew Crawford for closing comments.
Matthew Crawford: Great. Thank you all for your time and support. Great questions today. So any closing comments I might have had, I think I made as I responded to those very good questions. We appreciate a knowledgeable and hardworking and supportive investor base. Thank you and we look forward to again refining our message and our goals as we move towards and through 2024. Thanks.
Operator: This concludes today’s conference. You may disconnect your lines at this time, and we thank you for your participation.
