Unlocking Industrial Growth: The Role of AI, Technology, and M&A

December 18, 2023 00:42:40
Unlocking Industrial Growth: The Role of AI, Technology, and M&A
AYNA INSIGHTS
Unlocking Industrial Growth: The Role of AI, Technology, and M&A

Dec 18 2023 | 00:42:40

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Show Notes

In this engaging episode of our Titanium Economy series, we welcome David Hunt, managing director and co-head of the industrials practice at Greenhill, who shares his rich expertise in advising industrial companies, particularly in the capital goods sector. Listen in as we navigate the complex landscape of the industrial sector and its subsectors, with an emphasis on capital goods and the adoption of technology. We dissect the current macroeconomic factors, such as higher inflation and rates, and their impact on the sector. Hunt sheds light on the shift from resource hoarding during the pandemic to growth-focused strategies, especially corporate acquisitions, offering a unique insight into the sector's evolution.

Mr. Hunt joined Greenhill in 2017. He principally advises clients in the capital goods, environmental services, and industrial technology sectors. Prior to joining Greenhill, David spent 20 years at UBS where he was a Managing Director and the Head of Investment Banking for Capital Goods. He began his career at Dillon Read before it was acquired by UBS. David holds a BS in Economics from The Wharton School of the University of Pennsylvania.

 

Discussion Points

Ayna Insights is brought to you by Ayna.AI—a managed service provider that combines domain expertise and transformation capabilities to create alpha—performance superior to market indices—in the industrial and industrial technology sector. The host of this episode, Siddarth Madhav, is President & Chief Strategy Officer of Fernweh Group. Fernweh Group is an investment company that is adapting an engaged investor and operator model to create “segment of one” leaders in the industrial and industrial technology sector.

 

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Book: The Titanium Economy

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Episode Transcript

[00:00:03] Speaker A: Welcome to INa Insights, where prominent leaders and influencers shaping the industrial and industrial technology sector discuss topics that are critical for executives, boards and investors. InA Insights is brought to you by Ina AI, a firm focused on working with industrial companies to make them unrivaled segment of leaders. To learn more about Ina AI, please visit our website at ww Ina AI. [00:00:40] Speaker B: Good morning everyone. We are pleased to host a new episode of our Titanium economy podcast series hosted by Ina and Fernway Group. We have a wonderful guest joining us today. David Hunt is managing director and the co head of the industrials practice at Greenhill. David joined Greenhill about half a decade ago and advises clients in capital goods environmental services in the industrial technology sector, which is an area we're all very passionate about. Before Greenhill, David had a storied career of over 20 years at UBS. We are delighted to welcome David Hunt to the Titanium Economy podcast series. David, welcome. It's really a pleasure to have you on the series. [00:01:32] Speaker C: Thank you. Thank you for having me. [00:01:33] Speaker B: So great. Let's dive right in. I like to start these conversations usually with a little bit of background on the guest we've invited. So would love to understand your career journey, what you've done over the last 2025 years, as I indicated in introduction. [00:01:53] Speaker C: Sure, yeah. So it's pretty simple. I've covered industrial companies for the last 26 years. I started my banking career in 1997. I worked over those 26 years mainly in New York but also in London, but the whole time within banking, focusing on advisory, mergers and acquisitions, principally for industrial companies. And within industrials, I spend most of my time with capital goods companies. So that will involve either helping companies buy other companies, sell other companies, and sometimes involving at my prior firm financings for those companies as well. [00:02:29] Speaker B: Great. And this is of course the neck of the woods that we are extremely passionate about and spend most of our time on. For those of us who have deferring or lack a definition of what we mean by industrials, it will be great to kind of just get an overview from you of how you think about the industrial sector and the subsectors, if you will, within that. [00:02:56] Speaker C: Sure. So industrials, you're right. Industrials is a very broad sector. It typically encapsulates sectors ranging from building products to industrial services to aerospace and defense, automotive, chemicals. The area that I focus on is a diverse collection of smaller sectors called capital goods. And typically capital goods are products that are manufactured that typically do not go directly to an end consumer. They are typically made for typically process industries in the most cases, and they typically involve a fairly large price point in terms of the cost to make them, but they often result in the end application to be a very small portion of that application's cost. So the focus of a capital good is really to help the end application be more efficient. So technology is really important to capital goods and industrials in general, but particularly capital goods. And the companies that I cover are very focused on adopting megatrends into their business, whether it be through end market demand or whether it be through automation and other forms of technology in their production cycle. [00:04:15] Speaker B: Great. So thank you very much for that overview of the industrial sector. As you know, David, some of my colleagues and we follow the sector very carefully. We invest here out of Fernway, and then we serve a lot of companies in this space. We went as far as writing a book on the sector. We call it the titanium economy. And I will circle back to some themes that we think are relevant and would love to get your perspectives on them, especially as we think about what's exciting, what is underappreciated, and what's often misunderstood about these individual subsectors. We refer to them as micro vertical, but we'll come back to that. I wanted to start maybe from a 30,000 foot level and then dive deeper and deeper. [00:05:02] Speaker C: Today. [00:05:04] Speaker B: We'Re in an environment, at least in the US, of higher, if not as high as it's been in the past, inflation as well as higher rates. How are those macroeconomic factors shaping what is going on in your sliver of industrials? [00:05:20] Speaker C: Sure. So I'd say I look at it in two parts. The first part would be at the beginning of the pandemic in terms of the higher rates, higher inflation, and how people reacted to that. I think there was much more of a hoarding of resources, whether it be cash, whether it be other resources that companies had available, manufacturing industrial companies had available. That was kind of the first phase of the pandemic. Now, luckily, that we're through the medical pandemic, and people's ability in companies ability to work with each other both in person, and then also companies ability to work with each other through having efficient supply chains is now generally restored. I think we're entering a different phase when we're seeing this in terms of redeployment of that capital, whether it be cash or be other forms of steps that companies are using those resources to grow. We're seeing this most particular in my sector, through corporate acquisitions. So companies that have had a lot of capital building up, looking to deploy that to help grow their business, in very targeted approaches to companies that fit exactly with their criteria from a growth standpoint. Often these are premier companies that have not only premier financial performance, but fit exactly where companies are going, and either help expand addressable market, help give exposure to other markets where companies are underweighted. But these are targets from an acquisition standpoint that companies have been looking at for a while. And there was a lot of built up aggression through the pandemic that we're starting to see unfold right now. That's coming at a time when financial buyers, from an M A standpoint, are really having a tough time competing with the corporates because of this uncertainty and challenge in the capital markets in terms of raising capital on a reliable basis. So we're seeing companies and investors certainly pushing companies to redeploy capital in ways that help grow the company, rather than just buying back shares or increasing dividends. There's much more of a thirst for doing strategic acquisitions. I'd say most of our clients that are looking at acquisitions are not looking at companies that they need to fix, so to speak. These are companies that are premier companies that provide a significant revenue synergy to where companies are headed. And so most of the conversations we're having right now tend to be around that general theme of going on the offense of expanding market access technology access to help continue to drive innovation and drive corporate strategy. [00:08:21] Speaker B: Got it. Now that's very interesting. So what I'm hearing from you is a pent up activity level that exists today, but a little bit of a shift in emphasis from fixing and sort of financial leverage to actually driving growth. [00:08:39] Speaker C: Correct. [00:08:40] Speaker B: And then it sounds like an oversized, or compared to at least historic recent history, a greater level of activity from the corporates and the strategics versus the financial sponsors. Is that a fair. [00:08:53] Speaker C: That is absolutely correct. If you look at financial sponsor activity as a percentage of the M a market, it's at one of the lowest levels it's been in many, many years. And that's just really driven by the lack of financing, reliable financing there is financing available. The question is in the context of an M A discussion, which often takes months, well, certainly weeks as it relates to finalizing agreements, but months from an overall process, how do you make sure you have reliable access to that capital? That's probably been the most challenging aspect for financial buyers to deal with is maintaining reliable access to capital. And so that's where the corporates have a competitive advantage in terms of existing cash, plus available resources to go out and be aggressive, both from a timing standpoint and what they choose to invest in. So yeah, definitely. Relative to any point, certainly in the last decade, corporate activity as a percentage of the overall m a market is much higher. Obviously m a volumes are lower. There's a variety of reasons for that. One is the lack of reliable financing markets. So that certainly takes care of and addresses a lot of the slowdown in financial sponsors that I talked about. The other factor for larger deals is the increasing review from the Department of Justice, the Federal Trade Commission around antitrust regulations. That happens to focus a bit more on larger transactions. From a sector standpoint, we see that happening more in media and technology sectors in general than you see in industrials. So I'd say industrials is probably one of the sectors that's the least disrupted from an M A standpoint. Certainly in terms of number of transactions, the aggregate value of deals is lower. But it's not as not. The decrease in activity is not as severe as we're seeing in other sectors right now. [00:11:03] Speaker B: So David, that's a very interesting segue to an observation my colleagues and I have made, which is around the fact that the industrial sector itself is a grab bag, is a collection of very different sectors with very different dynamics and importantly, quite different players. Yes, one of those things, of course, is that it results in less problems when it comes to things like antitrust scrutiny and so on and so forth, because you don't have the sorts of behemoths that you might have in tech and media. But the flip side of that is we believe that micro vertical focused expertise is more relevant than ever. Absolutely. So how do you see that play out, especially in relation to other sectors that maybe you guys have looked at. [00:11:56] Speaker C: In your prior career, I would say if it's any indication in terms of success, that the companies over the last decade within industrials that have performed the best, that have benefited from the highest valuations and the most explosive share price performance have been the companies that have focused a business model around micro markets with a competitive advantage, a sustainable competitive advantage. Typically, if you were to go back 20 years and look at some of the larger multi industry, more conglomerate models, they were built around industries that were global, very large industries that required a lot of capital to compete. And financing that growth was an important element of that strategy. I think if you look at today's multi industrial companies, it's more around a business system that's built around incremental change, whether it be lean manufacturing, six Sigma Kaizen, whatever approach the operator takes to managing those operations, it's really built more around incremental. Change around stable markets. Stable but growing end markets. Where that business model can create incremental change and where m and a comes into this is MNA helps grow that addressable market with like minded attributes. Those like minded attributes are protected markets where there's people call it the no 500 pound gorilla or a dominant competitor that would have a significant impact on pricing you want most industrial operators, certainly the most successful industrial operators operate in markets with rational pricing. That pricing is driven by known sales channels, whether they be direct or indirect through distribution. I've seen different clients use different models. Some prefer distribution, some don't. But I think the common theme is that they understand the customer, what the customer needs, and there's a level of buy in from the customer direct, regardless of whether or not the sales through a distributor to that company and that company's product and the technology that goes into that product and the delivery of that product. That's the most important common attribute across a variety of different industrial models that have been successful. But it all gets back to finding a market where customers will pay for differentiation. And the most successful multi industrial companies have been able to take that model and populate it into a variety of different sectors. But all those sectors being niche in terms of focus, very few companies today are going after the large markets that you saw in the 1980s. For industrial companies, of large markets, large competitors, a lot of price competition. The key thing, and I think that's part, if you look at the last five years, why the more premier multi industrial companies have outperformed is they're the ones that have been least susceptible to giving up price during times of need from customers. They're the ones that have maintained margins the best. And they're also the ones that because of that niche market focus, have an ability to sustain downturns better than others. Their products are more integrated into customers applications, which make them mission critical to that customer's success. And that's really the definition of the modern day industrial company in terms of success and where growth is built and where investors want to put money and capital, is backing management teams to go after those markets, find opportunities like that and help those companies prosper. [00:15:48] Speaker B: That's very interesting. And I'm hearing you almost talk about a reformation, if you will, of the conglomerate model eighty s to something that is very focused, has a common theme around differentiation of the product offering mission criticality, leading to some rational pricing and good industry structure within those micro verticals. [00:16:15] Speaker C: Correct. [00:16:16] Speaker B: So as to keep that good conduct and structure sustained. [00:16:21] Speaker C: Correct. [00:16:22] Speaker B: Talk to us a little bit about what are the themes around growth that you see, because at the end of the day, growth, we believe, is oxygen for any company. And I think that's just as true for industrial companies. So what are the vectors of growth that you are seeing across these sectors? [00:16:43] Speaker C: So growth coming in a lot of different forms. If you look at going back to the pandemic analogy, the first half of the pandemic, almost all growth is price. In terms of nominal growth, volumes in most industries were at best flat, if not down. Now the price is starting to recede in line with the broader market we're starting to see is volume growth come back? Volume growth is really driven by end market demand. And so most operators and also investors and industrial companies are trying to figure out where to repopulate their business models to attract that demand and volume growth. An example obviously right now, a big driver of growth in the broader economy is AI. So if you look at everything from Nvidia to companies in the industrial sector that supply critical components that go into the AI infrastructure and the value chain, that's an important driver of growth. So a company that's done this well in terms of getting the benefit of that, but also marketing that well to investors, is eaten in terms of reformulating a strategy around power conversion and power delivery to a new market in AI, even though they're not addressing or they're not executing what's happening at the end device level. What they are doing, though, is providing a superior level of power delivery for those applications. So I would use that as an example of a real time change in a business model to adapt to customer demands. And that's what the most successful companies, industrial companies have done over time, is repurpose their technology and products for end market demands. [00:18:34] Speaker B: That's very interesting. So you kind of build on the fundamentally sound structure of these micro verticals. You layer on a growth vector or two that they're capitalizing on to drive both top line as well as, I imagine, investor returns. [00:18:52] Speaker C: Absolutely. The investors look at industrial companies as serving a variety of end markets. It's very hard to build, particularly for multi industrial companies, a model that could reliably forecast revenue growth given the number of end markets that industrial companies are serving. So a lot of times what investors will do is look at a basket of end market growth as a proxy for what they expect those industrial companies to do. And that's why end market selection, both organically and inorganically through M A, is so important to these companies. To highlight the growth potential of volume growth, there is an expectation going back to the micromarket, niche focused strategy of these companies, that they will continue to get through a cycle price increases, that they will stick and they'll be reasonable and there won't be much customer attrition as they go through a cycle and demand price increases for their products. And then what that means from an investor standpoint is there's significant operating leverage that flows to the bottom line of those companies. Typically, both gross margins and operating margins of these premier industrial companies are much higher than a typical industrial company. Gross margins typically of these companies are at least 40, if not 50%. Operating margins are typically at least 20% and that's much, much higher than your average industrial company. So when you start to get volume growth returning with a stable pricing environment, there's massive operating leverage that flows to the bottom line. So 5% top line growth can equate into at least 15% to 20% bottom line growth. And that's what really drives, at the end of the day, share prices, that earnings growth from delivery of this business system. So that's why attaching organically or inorganically through M A, attaching business models to growth markets where there's a defensible position, is, if you will, the holy grail of industrial the new industrial companies that are most successful in the market right now. [00:21:05] Speaker B: That's fascinating. And that leads me to the question. You mentioned the term a business system. [00:21:12] Speaker C: Yes. [00:21:13] Speaker B: Every industrial company out there has its own coinage, its own version of a business system, I think starting most famously with DBS. But it's got its sort of descendants from there. As you think about the elements of a world class business system for a multi industrial company, as you put it, I think you already covered access or exposure to the right end markets. A focus on operating leverage. Are there other things that you've seen that the best companies do? Maybe with some examples when it comes to a business system? [00:21:50] Speaker C: Yeah, it's a great question because there are so many different business systems. That's why it's so interesting to look at it. There's everything from an 80 20 philosophy to six Sigma Kaizen. And those are just manufacturing operating principles. The application of those is another element of this. I think the most common thing that we've seen is this move towards defining what markets companies want to get into. I think that the best m a transactions are the ones where the market is defined before the acquisition is found. That's a really important principle that oftentimes gets overlooked. But companies, particularly industrial companies, can hibernate sometimes from the M a market just because there's other more important priorities going on within the company. And oftentimes when they come back out, because they have available time and resources to dedicate towards inorganic opportunities, they often grab what's available rather than what they want to get in terms of the right fit for their business model. And that's typically where we've seen that the models break down a bit, examples being some of the software acquisitions that a lot of industrial companies have made over the last ten years, just because there was a view that software would be the evolution of the industrial company and they weren't really thought through in terms of integration of those businesses. So back to your question Saddarth, about the business model. It's really about understanding the market and what makes the company different. And that's what's so hard to answer because each one is different about how they apply their practices. Some companies are really good at procurement of raw materials. They have an ability from lead manufacturing to have better delivery for customers, and they leverage that competitive advantage to finding acquisitions and adopting a business model where customers pay for superior delivery and quality of product. And so it's really about self awareness of the companies, understanding what makes them different from a competitive advantage. That's so important to driving M A, rather than the common financial characteristics that all management teams and investors would want to see, which is good market positions, good growth opportunities, opportunities for margin improvement, and high levels of profitability. I think that's most common across all types of acquisitions. But the best acquisitions are ones where there's a link to that business system and what makes that business system different. And there's a lot of time spent by companies to develop those business systems. And it's really important that they use that same level of self awareness and identification of what makes their business model different, to apply that to the acquisitions that they make. [00:24:58] Speaker B: So, David, question I had on the theme of M A, in your experience, what have companies that have done M a well done to be the acquirer of choice? You talked about one best practice, which was defining markets before entering them. But other words of wisdom that you would have for companies that are focusing on being acquirers in the industrial space? [00:25:24] Speaker C: Yeah, it's a great question, and we're seeing a lot of it right now in the current market, where there's not many broad auctions of businesses, in part because a lot of the buyers of those businesses are not capable of participating in a meaningful way. And so what that's doing is creating this need for being proactive. And to answer your question about what makes an acquirer the acquirer of choice, it's really around identifying what makes your business model different and gives you a competitive advantage, and then projecting that upon what you think the target business would do, not only as part of you, but what you could do together to make that business better. And the companies that we've seen to give them that acquirer of choice have really reflected upon their own internal dna. Identifying that and then going out and developing relationships with target companies. The most common example of this is family owned companies that have a very difficult decision around actionability and selling and losing that independence. That decision making process often takes much longer than it does in companies owned by financial owners. And so as a result, it's that type of process that you typically go through, as an example, with a family owned company that we're seeing more companies take with even financial owned companies. So as an example, financial sponsor owned companies, we're seeing corporate acquirers speaking to them at least six to twelve months, if not longer, in advance, not only to the, the financial owners, the financial sponsors, but also the portfolio companies themselves to help one understand the company's competitive differentiation, the target competitive differentiation, but also to market themselves to that management team so that they get their vote as a good home, a future home for that company. And applying what they think about their business model to that company and having that dialogue that often helps the buyer before a process or any type of official formal m a dialogue begins to develop how they're thinking about diligence, and also make that diligence much more targeted, which allows for what we call a preemptive look, or a bilateral, oftentimes exclusive discussion with the target. And that's usually what most buyers would like, a situation where they're controlling the flow of diligence. They have the ability to make decisions even though they have to be quickly on their own timeline. And they often feel that that gives them the best advantage to make the most informed decision. Oftentimes in M A, the best deals are the ones not done. And it's really understanding that the ability to know what your red lines are in terms of what is an attribute of a business that you're trying to buy, how is that going to fit in your business system? And there should be red lines in terms of integration that your business model is not set up to handle. And knowing that in advance is really important because you can't learn that it's going to be very costly to learn that post closing, because then at that point you own it and so it's really important to use the period before a formal discussion on an acquisition occurs to develop a thesis around the integration, why you are the best buyer. That's really important to understand that and what's reasonable from a valuation standpoint. This is where we help our clients think about what's realistic to assume from evaluation and competitive landscape to understand what can be done and what is not reasonable to assume can be done. So I think self awareness as a company is really important as part of this process to give that ability, to have that early look, to have an ability to test drive an integration thesis. And usually the acquisitions that have worked out the best over time are the ones with that prolonged dating period, if you will, in advance, where strategy is exchanged between the buyer and the seller. And there is at least a view, less about financials and more about strategy, that the integration would make sense and the integration could help both companies grow better than what they're doing on their own. [00:30:20] Speaker B: Got it. Very interesting. I have two more questions at the micro level, at a company level, before I zoom out. You've touched on the fact that industrial companies have attempted a number of software acquisitions. It's probably been a mixed bag in terms of results having to do with differences in business model and people. We're talking at a time when it feels like the pace of technological disruption is faster than it's ever been with AI. You touched on the AI data center theme. How are the best industrial companies that you work with thinking about that? On the one hand, a history of at least industry wide mixed results when it comes to dipping their toe on technology and software. On the other hand, kind of almost undeniable trend towards disruption from technology. How are companies thinking about this? [00:31:18] Speaker C: I think it gets back to one of your first questions, which is about finding that micro niche, that is your competitive differentiation. That happens to be in a sector going through a megatrend of growth, multi year tailwind of volume and demand for that product and the mission critical application of that product into that megatrend. And so whether it be the powering or the delivery and conversion of power in a data center AI example, it's being that critical piece of a merchant supplier in someone else's end device or end application. I think when companies start to get, and this is where industrial companies, today's business model is very different to business models of the past. When they start to focus on being part of a customer solution and being very narrow in scope and focus around what they do that makes that better, and not focusing on the end market application or end market delivery and marketing of that solution. I think that's best done by the customers of industrial companies, not the industrial companies themselves. And that's a very important distinction that we're seeing of the best in class companies. They're marketing themselves when they make acquisitions, they're often not rebranding those companies to that parent company level. What they're doing is letting those, they're trying to accelerate the penetration of those brands into customers applications and giving those customers more opportunities to further their growth. And by helping customers accelerate their growth, they're getting paid better for that in terms of margin price competition by focusing on those applications, rather than trying to go directly to that end application themselves, or getting into markets that are very price competitive from a global standpoint, whether it be low cost countries or other barriers to entry that are lower in that application. So it really gets back to knowing what makes you different and then knowing where to apply that. I think those are the two most important aspects of a successful industrial business model. Because once you know the first, you have to know the first element of what makes you different. And then applying that both to your own business model through organic growth, and then also inorganic growth through other models. It's really important to bring those two elements together. And the most successful companies have done that in an application, a very methodical application of what makes them different and how they can deliver excess value to the end customer. And most successful companies are focused on the efficiency that they bring to an end customer application and the value that they bring to that end customer application, not the price of their product. And that's what's really different about if you look at the most successful, largest multi industrial companies, very few of them are competing on price. [00:34:42] Speaker B: Very interesting on that point. Companies that we work with, that we run into, are made up of the people that lead them. I found a proliferation of fantastic leaders in industrial companies, and I do think leadership matters everywhere, but even more so in these business models that are quite reliant on the judgment of their leaders. How do you think about the markers of great leadership? Maybe the lessons learned from great leaders you've worked with or had the good fortune to run into in these industrial companies? [00:35:21] Speaker C: I would say the attributes that I've seen from the most successful industrial clients and executives are the ones that are so focused on the customer and so focused on meeting the customer demand, that everything else almost comes naturally to them. Whether it be the way in which they run their factories, the way in which they price their products, the way in which they look at what m a opportunities make sense and what don't. I think it all comes from their knowledge and empathy with the customer, and that's really important bond that they create with the customer and design everything else in their business around that. So in a sense, the best salespeople that can take the skill of selling the product and understand customer needs and then bring that back into designing a business that helps their customers succeed. And when that happens, everything else falls into place, everything else around pricing sourcing. It's much easier to understand how to back solve into what that customer needs when you know the destination of where you're trying to take the company. And most the best industrial executives that I've seen have always been focused on the customer and that's really the guiding principle around how they operate their companies. [00:36:51] Speaker B: Got it. That's interesting. A relentless focus on the customer, their needs, while sticking to their own knitting. It sounds like. [00:36:59] Speaker C: Absolutely. We've seen this also with private equity companies and a lot of private equity companies and private equity firms that I've dealt with, adopting business models and compensation structures that make it not just the top five executives beholden to the customer and compensation driven by the results of the company and meeting the demands of the customer, but making everyone in the company part of that journey. Employee ownership is a big trend that we're seeing across both public and private companies. And that gets back to your question about which executives have the best are often the most successful through the long run. It's really attaching themselves to customers. [00:37:46] Speaker B: Got it. Now that's very interesting. The theme of employee ownership is probably a whole other podcast episode, a whole other book on it. In closing, David, maybe as we zoom out. Yes, right. We are extremely optimistic about the future of the industrial sector, broadly defined. We think it's going to be capitalized over the next 510, 15 years by a number of big trends. Like you talked about AI, you talked about digital. That's reshoring the sort of revitalization of the american manufacturing base as you cast an eye out over the next couple of decades. I imagine you share our optimism, but would love to get your kind of crystal ball view of where the industrial sector goes from here. [00:38:34] Speaker C: Sure. Yeah. I too am very excited about the industrial economy. There are, as you pointed out, a number of very important tailwinds that have just started to unveil themselves, whether it be the Infrastructure act, the ChiPS act, the IRA act, massive amounts of spending through various industrial end markets that are starting. The reassuring trend that you referred to is very important. The decoupling of supply chains and bringing those more centralized. The energy independence certainly in North America that we're seeing has helped spur a lot of that growth. So there's a lot of multi year trends that are happening. If you look at the health of the industrial customer, it's still very strong. The rise in interest rates are not affecting industrial companies nearly as much as they are in other sectors that are much more beholden to consumer spending. So when you put all that together, it's a very good time for industrial companies. A multi year trend. When we look at the Q three reporting season for the companies, industrial companies that have given guidance, over half of them increased that guidance for 2023. In this past earnings season, companies haven't given 2024 guidance yet, but I'd expect that to be very strong. Most companies and ceos that we speak to are very optimistic about the future on a multi year basis. Obviously, there's a lot of geopolitical headwinds and uncertainty in the near term, but industrial companies are very well positioned. If you look at the, we talked about the micro niche advantage of business models that in today's industrial economy, that's one element on a micro level. On a macro level, if you look at what's happening from a pricing standpoint, a supply chain standpoint, there's a lot of historical concerns that have been addressed that provide also tailwinds for industrial companies to continue to prosper. And the last thing I'd say about the outlook that gives me the most amount of promise is if you look at the profitability, both margins, operating margins that you'd see on an income statement, but also, more importantly, free cash flow in terms of the conversion of that operating profit into real cash, those levels have not been this high in a very long time. And that gets back to the evolution of business models and what companies are doing to create cash, not only create it at high levels, but also maintain those levels and use the business systems to increase that. So even in a market where volume growth may be for most industrial end markets, low single digits, with some pricing on top of that, that provides a very solid base for high margin companies to convert inordinate amounts of cash and use that to help grow their businesses. So there's a lot of growth drivers heading out into the future for industrial companies, and it's a very good time for them going forward. [00:41:50] Speaker B: Great. We agree on that. I want to thank you very much for your time and your perspective. We look forward to continuing this dialogue and sharing your perspectives with the audience. Of the Techie Economy podcast series. Thank you very much. [00:42:05] Speaker C: Thank you for having me. Appreciate it. [00:42:12] Speaker A: Thanks for listening to Ina Insights. Please visit Ina AI for more podcasts, publications, and events on developments shaping the industrial and industrial technology sector.

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Paul Reitz: Much More Than a ‘Stodgy Old Industry’

In this episode, host Gaurav Batra welcomes Paul Reitz, President and CEO of Titan International, to discuss Titan’s unique niche in the industry and...

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April 28, 2023 00:32:21
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Darron Ash: Leading a Differentiated Investment Platform

In this episode, host Nick Santhanam, CEO of Fernweh Group, welcomes Darron Ash, CEO of Sammons Enterprises and Sammons Industrial. The Sammons portfolio of...

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