Q1 2020 Earnings Call
Thank you for standing by welcome to the Woodward Inc. first quarter fiscal year 2020 earnings call. At this time I would like to inform you that this call is being recorded for rebroadcast and that all participants are in a listen only mode. Following the presentation you will be.
Invited to participate in a question and answer session.
Yes today from the company are Mr., Tom Gendron, Chairman and Chief Executive Officer.
Mr check their vice chairman corporate operation.
And Chief Financial Officer, and Mr., Don 'cause Arda, Vice President of Investor Relations and Treasurer, I would now like to turn the call over to Mr. 'cause Aldo.
Thank you operator.
We would like to welcome all of you to Woodward's first quarter fiscal year 220, 20 earnings call.
In today's call, Tom will comment on our markets and related strategies as well as or plan to merger with XL Corporation.
Jack will then discuss our financial results as outlined in our earnings release.
At the end of our presentation, we will take questions for those who have not seen today's earnings release, you can find it on our website at <unk> Dot com.
We have again included in your presentation materials to go along with today's call that are also accessible on our website.
An audio replay of this call will be available by phone or on our website through February 17 2020.
Oh no through the audio replay is on the press release announcing the school as well as on our website and will be repeated by the upgrade or at the end of the call.
I would like to refer to it I like our cautionary statement as shown on slide three.
As always element to this presentation are forward looking or based on our current outlook and assumptions for the global economy, and our business is more specifically.
Those elements can and do frequently change please consider or comments in light of the risks and uncertainties surrounding those elements, including the risks we identify in our filings.
In addition, Woodward is providing certain non U.S. GAAP financial measures direct your attention to the reconciliations of non U.S. GAAP financial measures, which are included in today's slide presentation, and our earnings release and related schedules. We believe this additionally, financial information will help understanding of our results.
Turning to our results for the first quarter.
Net sales for the first quarter fiscal 2020 were $720 million compared to $653 million for the prior year quarter, an increase of 10%.
Net earnings were $53 million or 83 cents per share compared to $49 billion or 77 cents per share for the prior year quarter.
Adjusted net earnings were $71 million or dollar and 10 cents per share compared to adjusted net earnings $62 million or 96 cents per share for the prior year quarter.
Net cash generated from operating activities for fiscal 2020.
$27 million compared to $85 million for the prior year.
Adjusted free cash flow was $29 million.
Free cash flow was $53 million for the first quarter. It only makes team.
Now I will turn the call over time to comment further I know results strategies and markets.
Thank you Don and good afternoon, everyone.
Well Woodward delivered a solid start fiscal 2020 as seen in the first quarter's performance.
Our aerospace segment continued to deliver strong results.
Our industrial segment performed as anticipated headwinds from softening oil and gas and associated aftermarket.
Before turning to our markets I'd like to revisit the exciting news announced in January which Woodward expects to combined with Hexcel Corporation in a merger of equals.
Coming together, we will create a powerful company to develop leading platforms and provide innovative solutions for customers and significant value for our shareholders.
Woodward Heck sell will build upon legacies of these two industry, leading companies to form a premier integrated system provider focused on developing technology rich innovations that deliver smarter cleaner and safer solutions for customers in the aerospace and industrial sectors.
We believe the future of flight and energy efficiency will be defined by next generation platforms, delivering lower cost of ownership reduce emissions and enhance safety, creating an exciting opportunity for Woodward heck so to be at the forefront of such a critical evolution.
Financial benefits to the merger a compelling for our respect to fiscal.
2019 on a pro forma basis, what are the heck sell would have more than $5.3 billion that revenue and EBITDA margin at about 21%.
What are your hex, however, strong balance sheet significant opportunities for enhanced revenue growth.
We intend to deploy cash towards share repurchases, which includes excuse me not unexpected 1.5 billion dollar share repurchase program within 18 months after closing.
This would represent approximately 10% as anticipated market cap of Woodward XL.
We also will have an initial dividend yield target of 1% <unk>.
Aligned with this target whatever it is increasing its current quarterly cash dividend 28 cents per share effective with our dividend payment on March 3rd as this year.
I'm pleased to in collaboration my XL counterpart, Nick Stanage to bring these two teams together over the next several months would be hard at work to take the next it necessary steps to close this merger and prepare for seamless integration of our companies.
As a reminder, the transaction is expected to close the third quarter calendar year 2020.
Now moving to our markets Aerospace segment continues to be supported by a strong market.
Commercial aerospace continues to benefit from the strong flight utilization trends.
Stained global passenger growth, which are driving increased Airbus narrow body production rates as well as robust aftermarket activities.
Despite uncertainty around the timing of the Boeing 737, Max returned to service.
Woodward had improved initial provisioning in the first quarter.
In defense increased military budgets and spending dropped further demand woodward platforms, including fixed wing aircraft rotorcraft and guided weapons.
Defense aftermarket remained strong due to global upgrade programs as well as U.S. initiative to improve combat readiness.
Strong commercial aftermarket and defense activity is helping us whether the delays related to the 737 Max.
Turning to our industrial markets power generation industrial gas turbine market continues to stabilize as global power demand increases and domestic upgraded initiatives transition from planning and execution.
We continue to expand our content on new turban programs, which is increasing our market share driving revenue growth.
In addition, we determined our renewables business was no longer a key focus area for Woodward from the perspective capital investment and resource allocation.
We're streamlining our power generation business with today's announced divestiture of our renewable power systems protective really businesses to the release group for $23.4 million.
We expect this transition to close in our third quarter.
As a result of the divestiture, we estimate that industrial sales will be reduced by $45 million to $50 million and the related earnings impacts will be approximately zero for fiscal 2020.
The divestiture will have a modest impact on 2020 margins and approximately 100 basis points, a favorable impact on 2021 industrial margins.
And transportation.
Trying to natural gas truck orders and revenue words were strong for the quarter as production rates for China's six compliant trucks.
Covered from large Prebuy, China, five compliant trucks, which had negatively impacted sales in previous quarters.
We anticipate the strong demand for natural gas trucks in China to continue as the Chinese government enforces emission regulations and incentivizes use of natural gas instead of diesel and as John has access to natural gas improves.
Oil and gas long term prospects are promising driven by developing countries. However, the near term market is softening, but a slowing global economy pricing volatility decreased capital investments related to the reduced drilling activity, particularly within the North American market.
In summary, while the overall aerospace market remained solid the ongoing setbacks with the seven to seven Macs are expected to be partially offset by stronger aftermarket in defense.
The industrial strong China natural gas truck sales in recovering gas turbines are offsetting softness in oil and gas.
So we look to the remainder of the year, we look forward to the opportunities created by the expected combination of Woodward and XL, while remaining focused on our operational performance and delivering superior shareholder value.
Now, let me turn it over to Jack to discuss the financials and thank you Tom Aerospace segment net sales for the first quarter of fiscal year, 2020 were $474 million compared to $393 million for the first quarter a year ago, a 21% increase.
The increase in commercial OEM was primarily driven by higher narrow body production rates compare to the prior year quarter.
Commercial aftermarket sales were up 14% in the first quarter of 2020 as compared to the prior year quarter.
Despite uncertainties surrounding the 737 Max initial provisioning in the quarter was higher than the prior year quarter, and we continued to see strong aftermarket on legacy platforms.
Our second quarter of 2020, we anticipate a decline in initial provisioning compared to the prior year quarter as result of the Max grounding.
Defense OEM sales growth in the quarter was driven by smart weapons and fixed wing aircraft, while defense aftermarket activity was robust as a result of increased military spending an upgrade programs.
Aerospace segment earnings for the first quarter of 2020 were $93 million or 19.6% of segment sales compared to $73 million or 18.5% of segment sales for the first quarter of 29 team.
Segment earnings were primarily impacted by the higher sales volumes.
Turning to industrial industrial segment net sales for the first quarter fiscal 2020 were $246 million compared to $260 million in the prior year period, a decrease of 5%.
In the face of a very strong comparable period in the prior year quarter Industrial segment sales declined primarily as a result of expected softness in oil and gas, which resulted in reduced aftermarket activity and inventory management.
The sales decline was partially offset by improved sales and our renewables business.
Industrial segment earnings and adjusted and Doug or Industrial segment earnings for the first quarter of 2020 or $28 million or 11.5% of segment sales industrial segment earnings were $29 million or 11.2% of segment sales for the first quarter of 29 team.
Adjusted Industrial segment earnings for the first quarter 2019 were $39 million or 14.9% of segment sales.
The decline and then just adjusted Industrial segment earnings was mainly due to softer sales volumes in the quarter, largely due to lower oil and gas aftermarket.
At the Woodward leveled non segment expenses were $51 million for the first quarter fiscal 2020 compared to $29 million for the same period of the prior year adjusted non segment expenses for the first quarter of 2020 were $27 million compared to $22 million for the same quarter last year.
R&D spending for the first quarter of fiscal year, 2020 was 5% of sales compared to 6% for the prior year quarter.
The effective tax rate for the first quarter of 2020 was 13.3% compared to 20.1% and the first quarter of 2019, the adjusted effective tax rate was 17.1% for the quarter compared to 21.
For set for the first quarter of 29 team.
During the quarter one of two parcels of the real property at our former Duarte operations was sold for $19 million, which resulted in an after tax gain of $10 million or 16 cents per share. We anticipate the other parcel to be sold by the end of the third quarter of fiscal Twentytwenty.
Also during the quarter in conjunction in conjunction with our decision to divest our renewable power systems portfolio predominantly related to the announced sale of the Rps and protective related businesses to the really as group.
We realized an impairment charge on the associated assets held for sale, which resulted in a noncash after tax charge of $28 million or 43 cents per share.
Adjusted net earnings excludes the impact of the gain on the sale of the Duarte real property and the financial impacts of the sales of renewables portfolio. The pre tax amounts of both items are reflected in non segment results.
Looking at cash flows net cash generated by operating activities for the first quarter was $27 million compared to 85 million for the prior year quarter.
Capital expenditures were $17 million for the first quarter compared to $31 million for the prior year quarter.
Free cash flow for the first quarter of 2020 was $10 million compared to free cash flow of 53 million for the first quarter of 29 team.
Adjusted free cash flow for the first quarter was $29 million, which includes the $19 million of proceeds from the sale of the first parcel other Duarte real property.
The decrease in cash flow was the result of higher working capital.
Lastly, turning to our fiscal 2020 outlook as we look ahead at the remainder of fiscal 2020. Our previously stated outlook has been updated to reflect the impacts of the 737, Max weaker oil and gas sales the sale of the renewables portfolio, the lower tax rate and higher outstanding share count.
Any potential impact from the Corona virus is unknown at this time and therefore not reflected in our outlook.
Total net sales are now expected to be between 2.9 and $3.0 billion.
Aerospace sales are anticipated to be up low single digits compared to the prior year, we assume a return to service as a 737 Max in mid 2020, and our build rates are inline with our customer schedules.
Aerospace segment earnings as a percent of that sales are expected to be approximately 21%.
Taking into account the impacts of weaker oil and gas sales and the sale of the renewables portfolio industrial sales are now expected to be approximately flat compared to the prior year industrial industrial segment earnings as a percentage segment net sales are expected to be approximately 14%.
This reflects the benefit from the sale of the renewables portfolio being offset by weaker than anticipated the oil and gas sales for the full year.
For industrial we anticipate first half softness to be offset by improved results in the second half of the fiscal year.
The adjusted effective tax rate for the year is expected to be approximately 20%.
Adjusted earnings per share, which excludes the impacts of the gain on the sales the Duarte real property and the impairment charge related to the renewable power systems portfolio is now expected to be between $5.22 and $5.52 based on approximately 65 million.
Fully diluted weighted average shares outstanding the increase in share count from 64 million to 65 million has a negative impact of approximately eight cents for the fiscal year.
As a result of the merger agreement with XL, we will not be repurchasing as many shares in the fiscal year as originally planned in our outlook for fiscal 2020.
However, within the 18 months following the close of the merger, we anticipate repurchasing approximately $1.5 billion of Woodward heck sell stock or approximately 10% of the anticipated market capitalization of the combined entity.
Please refer to slide 13 for a bridge of earnings per share from our previous outlook to our current outlook for adjusted earnings per share.
For 2020, we anticipate adjusted free cash flow to be approximately $420 million.
This concludes our comments on the business and results for the first quarter fiscal year 2020.
Operator, we're now ready to open the call to questions.
Thank you the question and answer session will begin at this time.
If you are using any speakerphone, please pick up the handset before pricing any numbers should you have a question. Please press star one on your push button phone.
She was you wish to withdraw your question press the pound key.
Question will be taken in the order. It is received please standby for your first question Sir.
Our first question comes from Robert Spingarn.
Hi, good afternoon.
Hi, Rob.
So a couple of things I think.
Obviously top of mind for lot of people from the merger perspective, Tom is this billion dollar target.
And they does the fact that it didn't really reconcile with what consensus was for the two companies together. We've all talked about this since then is there any more color that you can add.
On the how the two companies get there beyond the synergies since the gap is closer to about 250 to 300.
Million.
Not really at this time, Rob we we are providing any new updates what I would say is its first full year after closing and.
We're both making progress and improvements on free cash flow. So theres been no change start our commentary on that.
Okay, and then with regard to the guidance on free cash. This year, maybe this question for Jack but it does include we understood. This correctly the proceeds from some dispositions I guess this was an duarte.
Andrew.
Sorry go ahead.
Well I was just going to ask you if any further dispositions are contemplated in that long term guide for the combined company.
So rob as you'll recall we.
At the guidance for fiscal year 20, we had announced a target of 400 million of free cash flow.
We're taking that up with the disposition of our Duarte facility.
The first parcel of that to 420 million of that is effectively 19.
Million a proceeds we would anticipate a further $13 million of proceeds when the second parcel closes in.
Q3.
Okay, but theres nothing foundational about dispositions in the billion dollar target.
No.
Okay, and then just a as as of last question, what what does the cotton is for you as while Jack you talked about a backend weighted industrial year.
Some improvement in the Bakken work what gives you the competence that the markets are going to evolve that way.
Well, yeah I'll pick it up first Jack can add to it.
The first thing would be our order book, which is more backend weighted this year.
Recovery, we're seeing in the gas turbine market and the rest of the Turbomachinery market those are longer lead programs. So we've got some good insight that those are recovering.
Second half on China, natural gas and natural gas trucks sales are higher.
So that outlook is in our.
Forecasts and some of that's a.
Transition into the order book, So Thats, what gives us a little more con con confidence in the second half of the here.
Okay. Thank you Tom.
Thanks Jack.
Okay.
Your next question comes from Tom Huh.
Hi, Thanks, just following up on Rob's question.
So if we take the 420 million of adjusted free cash flow this year.
And strip out dispositions, so you're slightly under 400.
Right and then we take XL gap guide of 300 million plus.
700.
And.
I'm just wondering is there something that's.
The work that the street business not understanding that Capex comes way down.
And in 21 or is there some sort of ER.
Kind of catch up or is this just you know the streets in Mis modeling earnings you guys are going to just come in you think you have a better.
Fiscal 21 on tap and.
Then what right now is understood yet so it's you know again, it's basically the same commentary you've been before but increased earnings.
Lower capex synergy savings all coming together and.
That is our intent and and on top of that we're anticipating improved working capital.
Okay, there's nothing on tax rates or something else that.
So you can point to.
Okay, and what's the Capex guide implied in the fiscal 20 numbers right now.
$80 million.
Okay, Yeah, because that alone could not explain even if it dropped dramatically.
Okay, and then just on the aftermarket commercial aerospace aftermarket in the quarter itself, what was the growth rate and could you could you maybe parse out how much do you think owed to initial provisioning that doesn't get her as we move through well what we had we had a strong quarter is for up 14%.
Commercial aftermarket we did have strong initial provisioning in the quarter.
You know I believe some of that was.
Utilization of capital budgets or by some of our customers at the end of the year.
Looking forward.
You know, we're being cautious on initial provisioning related to Max sales, obviously, a big program until we really locked down returned to service the rate of return to service we think some.
Some of that a push to the latter part of the year or into next year.
The ongoing MRO is strong.
On commercial but we're also seeing very healthy defense aftermarket. So overall those are positives that continue.
As we look forward through the rest is here.
Any sense for how much of the 14% growth in the quarter owed to initial provisioning was that a third or so is there any sort of qualification.
No I don't have any it got them at this time.
It was it was there was a good.
It was good initial brizzy, but was very strong was legacy.
MRO as well.
Okay.
Okay, and then just a as you move through the year what is your overall expected aftermarket growth commercial aero aftermarket growth.
Yeah, Yeah yeah.
Yeah, Yeah go ahead sorry.
The next question last from.
The last one I know you mentioned that fluid with your customers on the Max do you actually have from schedules right now have they conveyed what rate you should go to and when you should step it up and what have you or is that there are lots okay well that's how it gets both course first is we're projecting mid single digits for commercial aftermarket yes.
The remainder of the for the full year.
Part of that as we had really strong comps that we're going to be comparing against.
The second question you had Oh, we have.
We do have from our customers so from Boeing and we have a wide range tier one customers that we support on the Max we have got various production rates, they're not all the same just due to each individual that you won't see the tier ones have their own rates that they're low.
Looking at.
Our.
Outlook reflects those rates and we think it reflects what Boeing is planning to do and so we think.
That outlook is properly considered in our our full year.
Okay, but just to be clear have have do you have some percentage of customers that have not conveyed.
No we've got what the you've got it okay. We've got it yes.
Okay. Thank you very much like you.
You bet.
Your next question comes from the line of David Strauss.
Thanks, Good afternoon good afternoon.
So going back on the Max it it looks like rough math, you've taken I'll, maybe 300 Shipsets. This year, maybe down closer to inline with what had hexcel is talking about around 200 and that is that correct.
Yeah, I, just like to highlight that.
The rate varies between.
Boeing in some of the tier ones is pretty consistent but that's not way off we have.
I'm hesitant to share production rates since Boeing did not put up formal guidance on their production, but were in line with their plants.
Okay.
And Tom would you anticipate whole pain or you think you just go to a lower rate and in what rate are you at right. Now are you still at 42 or have you already come down no it's down from that and.
You know we have not halted but you know it's come down in line with you know the expected rates at Boeing and others are asking us to go too so.
If the.
Down continues longer that could have an impact on us but right now.
We're we're following the guidance that we've been given by.
Boeing in our tier ones and that's that's what we're running too.
Okay, and as you know, it's a significant drop.
Yep.
And then or the in the in the bridge you you have a box that's cost containment.
Can you talk about what what's what's entailed in that would your what you're looking to do to offset the impact is that isn't labor that taking your own suppliers down or yeah sure. There's there's quite a few things in there yeah, there's definitely some labor elements from.
Adjusting let me let me back up on Labor for first thing we have a highly skilled workforce. So we're being cautious.
On maintaining that workforce, we do.
Regularly have contract and temporary labor that supports surges in production and variation from month to month quarter to quarter. So we've adjusted that contract temporary labor, we've dramatically taken down overtime that we were running we've redeployed.
Skilled labor into.
Other parts of our business to preserve that skilled labor.
Weve gone after all discretionary expenses discretionary spending.
And you know, we've we were attacking a productivity and.
We are working.
Hana and with our supply base to also have them be able to handle the a temporary downturn and then the recovery in the route. So it's a challenging environment because you know you're going to go down, but then you're going to come back up and the type product we make a it does require very skilled labor and a lot of especial much.
Chainrai that and specialty activity from our supply base that we need to retain so we're working hard to do that but we we you know as we saw this coming we were very aggressive on our cost actions. So that's how we're recovering some of that back.
Okay. Thanks very much.
Welcome.
Your next question comes from Sheila Kahyaoglu.
Hi, good afternoon, everyone and thank you for the time.
Hey, I'm wanted to ask about free cash flow. So following up on some of the ones that are asked already just two questions I guess, Jack why raise that so early given the volatility with the Max that we might have is mostly oil and gas and a follow up to that Tom just given we've had a chance to digest the deal looking at what words inventory and payables working.
Capital turns are actually quite good relative to commercial suppliers. So you know how do we think about that working capital opportunity longer time.
Okay sure shave a a I'll start so yeah as you might expect we had.
Some measure of visibility into into the Max with respect to the delay in returning to service and so as we're building our forecast for the year.
Factoring that as well as what we saw as initial insight into oil and gas softness in the industrial side.
We believed our 400 million dollar forecast was very achievable.
And so with the actions that we began taking the Tom referenced earlier around cost containment.
Some of the puts and takes with respect to the strong aftermarket and defense.
Oh, we haven't aftermarket sales that we've seen a we felt we had it we had a oh good anchor at 400 million, we've taken that up just to reflect really to the benefit of the sale of the Duarte parcel.
And we feel we have a good degree of visibility and levers we're under our control to it that 420 or better number.
And then second half your question Sheila.
The place to really look as we do manage receivables very well placed look is around inventory.
And our inventory is higher than.
Well, we would normally expect.
We think there's.
Performance improvement there operationally, but second as a reminder, you know we still ramped up a lot inventory for some of the facility moves.
Wrapping up for.
The the launches of the narrow body programs and so we see a a sizable reduction in our inventory over the next couple of years.
Is there a benchmark, but you have.
In terms, how we should look at it and days outstanding or.
Percentage of sales.
Yeah, if you look at inventory.
We're in the 20.
Percentages points of inventory and I really see that getting down 15 16.
And then I had a follow up on the Max.
Given you did have initial provisioning associated with that and aerospace profitability was better how do we think about the decrementals associated with that business is the only loss, making is that breakeven on coupled with the aftermarket.
Yeah, you know what I would say yeah. We're we're very proud of it. The company is we don't lose money on OE sales.
Okay. So sometimes I think people have a person.
Perspective that that's the.
The case there is obviously a a wide margin difference between aftermarket an OE, but we're not losing money on OE sales. So you know as you look at that.
So when we factored in.
You know we still have strong.
Strong volume sales across the board our aftermarket strong defense has been strong so you take.
Defense aftermarket is strong so.
So when you add all those up you get a very strong margin mix and we're highly confident and maintaining our 21% guidance for the year.
Thank you.
Your next question comes from Christopher Glynn.
Thank you good afternoon.
Hey, only aerospace outlook, obviously implies down revenue Q2 to Q4.
It was a during quarter, Sean just wonder if you could help us.
Sure how that.
Uses and you have it coming back in the fourth quarter for instance in kind of absorbing all the negative variance in the next couple of quarters or what's kind of a way to think about that.
Chris I'd say that the balance of the three quarters is is flat.
You will see some some.
Commercial aftermarket softness in Q2 as we referenced earlier, we had really strong.
IP sales in the in the second quarter of fiscal year 19, we would not expect that to repeat in in a second quarter fiscal year 20.
But generally speaking aerospace is flat the following three quarters.
Okay. Thank you for that and I'm just in terms of that defense markets looks didn't like Danny took another step up how would you describe the kind of continuity in the ramp in those markets. If we get a little more granularity around that.
So so from a year over year perspective, I think you'll see a you saw a strong Q1.
We would anticipate not quite as strong that's but relatively strong Q2 with.
Tempering of year over year performance in the back end of the year to roughly flat.
[noise] Friday.
During the year.
Correct in Q3 in Q4, we had strong performances in Q3 and Q4 of last year, we'd expect to repeat roughly repeat those this year.
Okay, and just wanted a lastly check in on the launch performance.
I think as we as we spoke to with respect to our the entirety of our diesel fuel systems business, we did.
Have anticipated softness in the quarter, we would expect that to continue in Q2.
With materially improved volumes in Q3 in Q4 fiscal year 2020.
Great. Thanks, a lot.
[noise]. Your next question comes from Christopher how.
[noise] a good afternoon, good start to the year.
Thanks.
A few questions your remaining.
I guess just for clarification purposes, if we were to strip out your expectations for the Max and the remainder of your or for the year entirely.
[music].
How would this year compared to last on an aggregate basis and on a commercial aftermarket business.
You mean year over year without Max is that what you're talking about four of them on a pro forma basis, just trying to understand underlying strength within aftermarket and then as a whole yeah.
Yeah.
It's still strong I guess.
I don't have that calculation in front of me, but you know even Wi Max aftermarket really hasn't I mean, we had a nice.
It's an initial provisioning but.
Year over year.
The biggest driver is legacy programs and the strong legacy aftermarket.
Yeah.
<unk>.
Okay and then a another question just on the industrial segments, you got into 14%.
Whether it's this year or beyond how should we look at the different puts and takes that would lead to margin expansion within industrial.
Yeah, well one as we highlighted the removal of the renewable portfolio from industrial is about a 100 basis points.
And then volume volume increases, which.
We're coming off some yes.
We're coming off some lows that were in.
The Turbomachinery market, that's coming back and then overall, we're also seeing productivity. So combination of those is how we get to 16 16 plus.
Okay, Great. That's all the questions I have right now I appreciate it. Thank you thanks, Chris.
Your next question comes from Pete Skibitski.
Good afternoon guys.
Hey, Tom how did the short cycle businesses performing industrial in the first quarter. Just I think people are sold to respond to global macro and the krona virus and I wasn't sure. If you guys comments earlier about Mirage and diesel was a proxy for all that or not.
Well the Raj is usually tied to more longer cycle industrial and maybe just a little more clarity on launch launch as a total business is still doing quite well.
We saw over the last.
18 months to 24 months.
There was a resurgence and.
The Oh I see the fracking market and we saw.
Lot of rigs needed to be rebuilt inventory needed to be replenished and we saw a really strong oil and gas sales both new but also in the aftermarket and that really benefited the Raj as we moved into for our first quarter here, we were anticipating but we did see some softness.
Tied also to oil oil prices and the the.
Point at which it.
You know attracted to drill and so if we call it like a pullback, but pullback is that the reduce drill count the inventory had been replenished and so on the distribution channels and so you saw those slowness there overall neurologist still doing strong we're very happy with it.
You know integrated but we did see a reduction in sales tied to that market what Roger.
That would be that's our longer cycle shorter cycle is when you get into some of the activity around our small engine business. The natural gas activity in China are tied to the.
On highway truck business.
As we highlighted we saw early on it there in the quarter.
Some of the the Prebuy effects, if you recall from going from China, five to China six emission standards, we started seeing recovery in that going forward here, we have a very positive outlook for China six emission compliant engines. That's our short that's one of the shorter cycle businesses, we have.
That we every every trend is in the right direction, except for the Corona virus, and we really don't know how to forecast or predict what's going to happen there. So.
Short cycle is down a little bit do those factors, but will.
Start recovering.
Subject to that that doesn't become a major issue.
Okay, and then just referred to the wrong Marine aftermarket he comes to talk about that a lot it and that's still.
I was out there still doing well.
Okay. Okay last question for me I, just can you give me a sense of the non cash revenue how that impacted this quarter in aerospace you guys are starting to disclose disclose that in your 10-Q's I guess post asked you six of sex I, just wonder if that impacted the growth here in the first quarter or <unk>.
Truly all the IP, though it was that was that was.
Basically flat.
Okay. Okay got it Okay you bet.
As a reminder, should you have a question. Please press star one on your push button headphone once again that star one on your push button on phone.
Your next question comes from the line of Michael harm only.
Hey, good evening guys. Thanks for taking my questions here.
Maybe just on a in light of kind of the cadence for the year in aerospace with a flattish revenue run rate you know how should we be thinking about the margins expanding you know is that going to be from the cost containment measures I mean, presumably you're going to have some some excess capacity.
There, but what gives you the confidence in that margin expansion and I know the aerospace growth rate will be down on on tougher comps, but maybe not down in absolute dollars, obviously, but but how do we get comfortable with margins expanding on the on the flattish volumes from here Yeah, well first you know there is that the cost containments that I described earlier.
But we also have had ongoing.
Productivity improvements around the major new programs as well as.
Using full capacity of our capital in the facilities, we built and those are coming together and we're seeing a margin improvement.
Even even with the downside to the Max across you know across the board on all or other programs in our portfolio.
So.
So it's positive that way and then you know we're also I said continuing to see good aftermarket so that plays into it.
Okay, and that's clearly offsetting the excess capacity from pulling out the 300 give or take unit for the Max.
That's correct and some of you know when it talks about redeploying.
Some of those are skilled labor or some of that redeployment is going into our aftermarket activities. Okay.
At or serve that so.
Got it.
Okay.
Okay, and then just back to the on on the free cash flow for year, one post closing.
Can you give us a sense I mean, we sort of have a big road map here, where the 737 rates might go but I mean do you need.
Reach or was that target predicated on something north of 52, or 57, or where does that number become a little bit more challenged if production rates are only in a low to mid forties and then how does that contemplate I mean, we're going to see it fairly extensive cottier on on the 77 going down to 10 so.
Does that billion dollars become a little bit more challenged given given you know maybe where that rate is and where the 77 is gone.
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Well you know there's no doubt rate cuts you know.
Let's put some stress on on those numbers, but you know weird.
We're committed to delivering those and we're going to get into like you said that road map of activities.
And you know we were be anticipating yeah stronger sales throughout the rest of the portfolio as we go into 2021 and onto 2020 to 2022 and continued.
Productivity working capital improvements and.
You know synergy savings so.
Yes, when you Gotta production cut that puts some extra stress, but overall you know where we think we're be able to handle that.
Continue to drive to those numbers.
It's low fortys or mid Fortys had a production rate for the three seven is that doesn't mean.
Would you articulate what you guys have built into that billion dollars on a rate.
Yes, we had an estimate you know when we release.
Since then.
The supply chain, you know from Boeing into tier ones, it's gotten a new indication of raids.
Those differences are very small between what we had and what those newest estimates are coming from our customers. So.
I don't think there's a dramatic difference.
I'm looking at.
Okay perfect. Thanks, guys appreciate it okay you're welcome.
Mr. Ginger.
There are no further questions at this time I'll now turn the conference about to you.
Thank you and I appreciate everybody joining us today. Thank you for your questions and.
I'll look forward to seen many of you throughout the next quarter. Thanks again bye.
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