Q1 2020 Earnings Call
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Oh no idea the conference over to your Speaker today, Patrick Winter, which Chief Financial Officer. Thank you. Please go ahead.
Good morning, everyone welcome to co Corporation's first quarter Twentytwenty earnings conference call before.
Before beginning to cover the facilities.
But I want to remind everyone about the safe Harbor provisions relates to any forward looking statements. We made during the course of this cool.
Certain statements contained in this call may constitute forward looking statements within the meaning of the private Securities Litigation reform.
99 spot.
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That's factored that be held in a company that Tc five and in last night's usually.
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With me today, and Nick Stanage, Chairman CEO and President.
'cause thought out all vice President Investor Relations.
The talks with the goal is to review our first quarter 20 to 20 result detailed in our news release issued yesterday.
Now, let me kind of called <unk>.
Thanks, Patrick.
Good morning, everyone. Thank you for joining us as we share first quarter results.
Sincerely hope that each of you participating in this call or adjusted to the East trying times as best as possible and are staying safe.
That's an organization, we're committed to the health and safety of our employees.
We have adopted new work practices and our plants in response to the code Red meat cheese virus well those employees that can are working remotely so limit exposure to our dedicated operations team.
The effects of the cold midnight gene pandemic have been far reaching an unpredictable.
Companies across industries are managing through uncertainties, making difficult business decisions setting new expectations for performance and that includes textiles.
While it was a challenging start to the year with sales impacted by both the continued grounding of the 737, Max and the economic downturn caused by the cold bid 19 I'm done.
I can assure you that heck sold is acting swiftly to respond and we have taken a number of decisive actions to realign our business with lower crunch and forecasted demand.
When we last spoke in February EXL was looking for toward completing a third quarter 2020 merger with Woodward.
The Coolfit 19 pandemic had just started to affect the Asian markets.
We could not have imagined the magnitude of the impact on the entire world economy.
Actual began realizing the affects of coal bid 19 on orders and shipments in early in the quarter with our wind operations in China.
That is the virus spread into Europe, and the U.S. did cause widespread closures at many of our customer plants as well and some temporary shutdowns at our own facilities, particularly in Spain and France.
Once we recognize the impact of the cope at night, you pandemic on the global economy, we jointly decided to terminate the merger.
It was disappointing news after so much anticipation enough for.
Yes. It was the right thing to do for our customers our shareholders and our employees.
We made the decision after careful consideration and in response to the economic uncertainties in both the aerospace and industrial sectors, resulting from coal bid 19.
Woodward CEO, Tom Gendron, and I spoke many times over several weeks as the virus spread globally.
As events unfold. It it became clear that are two companies needed to focus solely on the challenges that each of us are facing.
And that is what we are now doing.
Already it is clear the pandemic will surpass every headwind we have ever faced in terms of its immediate as well as longer term impact on our business on the customers we serve.
In addition to a rapid and dramatic decline in air travel.
Global restrictions on businesses and shelter in place orders have led to significant declines in demand.
Within the aerospace and industrial markets.
While we do not yet know how long this pandemic will last for the long term impact on customer requirements, we're committed to preserving the health and safety of our employees, while continuing to meet our customer commitments.
I'm confident that after years of strong performance, we're well positioned to successfully navigate the current marketplace and emerge stronger in the future.
Before I go into additional details around the actions we have taken let me highlight some of the first quarter results and Patrick will provide more details on the numbers in his section.
Sales in the quarter were $541 million down 11.3% year over year.
Adjusted diluted EPS was 64 cents compared to 84 cents in the first quarter of 2019.
We delivered first quarter adjusted operating income of $80 million and an adjusted operating income margin of 14.9% compared to 16.9% in Q1 2019.
Axles liquidity is strong and if you ended the quarter, we had $636 million of liquidity.
Apprised of $329 million in cash and revolver borrowing availability of $307 million.
Our balance sheet remains strong.
As you read in our news release last night, the uncertainty caused by cope at 19 has let us to withdraw our 2020 and our mid term financial guidance.
Did you can imagine it is impossible for us to forecast meaningful financials without knowing how long this crisis will last and how deeply it will affect the global economy without having clear knowledge.
How this crisis will affect our customers operations and overall market demand.
In addition, we are temporarily suspending our quarterly dividend and pausing or stock buyback program.
We will review both of these decisions quarterly as we evaluate the operating environment and as business conditions warrant.
Now, let me turn two or three primary markets.
Commercial aerospace sales in Q1, we're almost $362 million.
Reflected a decrease of 12.7%.
In addition to the impact from 737, Max grounding shipments were stalled in both Europe, and the Americas by temporary plant closures and Airbus and Boeing as well as shutdowns that some subcontractor sites.
In addition, we realize some impact from the end of the Airbus Athree 80, as the first quarter of 2019 was the last quarter in which we have meaningful sales for this program.
Overall revenue was supported by higher sales year over year from the Boeing 77, and Triple Sevenx programs.
Sales to other commercial aerospace, including regional and business Jets increased just over 3% compared to Q1 2019.
In space and defense sales of almost $112 million was an increase of 3.5% and 4.1% constant currency year over year.
Growth was driven primarily by rotorcraft, such as the Black Hawk and by other space programs.
This quarter marks the first full year after the acquisition of arc technologies, which has been experiencing robust growth across a broad range of defense programs.
[noise] industrial sales were $66.5 million.
23.2% or 21.6% in constant currency.
The decline in Q1 was the result of a few factors, including temporary plant closures caused by the cope at 19 pandemic as well as some pandemic related softness in demand within our other submarkets.
Our solid performance over the past several years positions us to face this crisis with a strong balance sheet and robust liquidity position.
As we restructured our business to align with current and forecasted demand our top priorities are the health and safety of our employees.
Continuing to serve our customers and build on existing relationships.
And ensuring that hook sell successfully navigate the economic challenges created by the pandemic.
Beginning in Q1 and continuing through May we're implementing significant reductions in our U.S. workforce as well as short term cost savings actions, including temporary salary reductions unpaid furloughs and suspension of arm for one k. match and employee.
Stock purchase plan.
We're also working in Europe to make similar cost adjustments and those changes will be made over the coming months.
My salary and the cash compensation for our board members has been cut in house and our leadership team has taken a 30% reduction in base salaries.
We've implemented a hiring freeze curtailed capital expenditures and are tightly scrutinizing all discretionary spending.
We're ensuring that our operations, including employment levels capacity and inventory our real line to meet the new demand levels ahead.
We're taking these strong measures to rapidly reshape the business and position heck sell to deliver double digit operating margin on an annualized basis throughout this cycle.
Most of our plants are continuing to operate although at reduced efficiency to meet customer commitments, because we have an obligation to the national and economic security of the countries, where we do business and to our customers to keep those plants open as long as we can safely do so.
We're working closely with our suppliers to ensure we received only the material needed took Smith, Phil our customer demands.
Solids sole source provider for many programs, including essential defense platforms.
We're staying close to our customers as we better understand how the pandemic is affecting their operations and future business.
One thing that will not change is our focus on accelerating innovation and growth.
So always has and always will work on leading edge technology innovations to enable our customers to find solutions to improve barrel dynamics energy efficiency and reduce emissions.
So we'll continue to deliver high performance composite rich and safer materials for the future of aerospace and industrial applications.
Our technology leadership in advanced materials.
Incident, working relationships with our customers and our exceptional people are the foundations are but our our investment value proposition.
The growing secular penetration trend for advanced composites will continue as the future of aerospace is increasingly dependent on lightweight materials and manufacturing solutions for greater fuel efficiency lower emissions and more aerodynamic aircrafts designs. The hexcel is uniquely.
Position to develop and supply.
Now, let me turn the call over to Patrick to discuss more of the quarter's financial details.
Patrick.
Thanks ignite.
First quarter Twentytwenty began in January and February tracking their expectations, excluding the lack of filing 77 mass production and a temporary government into shutdown in China due to cope with 19 that impacted our wind energy business.
Mops, then witness an unprecedented monkeys laid out.
While we don't have only ounces yet we are taking robust actions to control costs.
Continuing to do so as we work for understand near and longer term mom tomorrow.
I will begin with my usual overview of market and then a threat cost reduction actions and explain how strong liquidity position.
Before I discuss results I would like to remind everyone that year over year comparisons were in constant currency currency movements influence our reported results.
Some of this in may not be into that.
The majority of our sales is denominated in dollars. However, our cost base is it makes it dollars your rights in British pounds, as we have a significant manufacturing presence in Europe.
As a result, when the tallest strengthens again the euro in the pound our sales trends I know, but I'll call also translate lower resulting in an that tailwind commodity.
Accordingly, we prefer a strong dollar for a week or.
The currency hedging we employ disciplined hedging strategy protects our operating income that lays in hedges over 10 pools at horizon.
Quarterly sales totaled $541 million. Besides impact was driven by the 77 mass production installed on the cessation at the age creates the program.
The initial first quarter trends 20 impacted the kind of ignite pandemic across our market.
Estimated to be in the range of $20 million.
Turning to our free market commercial aerospace represented approximately 67%.
So part of cool styles.
And that's what I would say to fail to $363 million decreased 12.7% compared to the first quarter 29 team led by the temporary production start for the filing 77 man and the I created.
Basin defense represented 21% sales into the first quarter type was $112 million.
An increase of 4.1% compared to the same period in spend to 19.
Right was led by several rice crop and based programs.
As a defense contractor and an essential business as defined by the department and we continue to produce fraud defense custom.
Industrial comprised 12% to first quarter twins twin styles industrial sales totaled $67 million decreasing 21.6%.
10, pretty wind energy shutdown in China, and Australia impacted sales as well as pages 19 weakness in other industrial market, particularly also mindset.
We intend to do remain the largest submarket within industrial comprising more than 60% of industrial styles.
On a consolidated basis gross margin for the first quarter with 26% compared to 27.4 person in the first quarter 2019.
77 mass production, so combined be temporary shutdowns private 19 Grayson resulted in manufacturing under absorption during the first quarter.
Okay.
[noise] by selling general and administration and resetting technology expenses decreased year over year in constant currency as we began implementing aggressive cost control measures during the quarter due to the credit 19 antenna.
The other expense category, it's primarily merger related costs that will also include some severance actions related to the 577 months pacing showing the cool.
Adjusted operating income totaled $80.4 million, leading to a 14.9 spending lots in.
This was down year over year due to the previously discussed 77 mass production. So as the initial impacts that the curve at 19 pandemic.
Total depreciation expense was $3.2 million Noah.
Hi, Yes period.
As long life assets, we ended the depreciation period and additions for Newcastle expenses.
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An advantage of our business model is that we have long life production equipment.
The remained operational off the being fully appreciate it.
The year over year impact of exchange rates was unfavorable by approximately 20 basis points.
The concept material segment represented 81 cents to taste and style and generated an operating income of 19.7 cents for the first quarter twins printing as compared to a 22.2% margin in the prior year period.
The engineered product segment, which is comprised of box trucks is an engineer cool businesses represented 19% fail and generated an operating income months in a 6.3%.
At 12.1 person in the first quarter 2019.
This lower margin reflects the significant impact as a seven to seven mass production. So.
Workforce reductions were implemented in early February 20, 27.7, mastercuts installed, but any a portion of the labor cost savings were recognized during the quarter.
As a reminder, engineer products requires a much lower level of investment income materials and under normal market condition engineered products generate attractive returns on invested capital.
The effective tax rate for the first quarter Twentytwenty with 21.9%.
Expected effective tax rate for the remainder yeah, 23%.
Net cash from operations totaled $8.6 million for the first quarter trend 20.
Working capital with the use of $94.3 million quota first quarter trend.
Fixed in prior years.
That's what expenditure on accrual basis with $22 million in the first quarter foreign currency, reflecting rapid action to curtail spending in response to the content compared to $58 million.
Added 2019.
Free cash flow for the first quarter 2020 was negative.
$1.6 million compared to negative $15.2 million pretty comparable prior period.
Hi period. This use of cash reflects the seasonal growth in working capital that we expect.
We repurchased approximately $25 million about common so early in the first quarter prior suspending our share repurchase program.
In this period of unprecedented in reconciling our focus is on generating and setting.
Keeping both maximizing our liquidity, while reducing both fixed and variable costs.
In all the critical technical expenses minimizing discretionary expenses.
With that this difficult actions to align headcount.
Production and temporarily reducing compensation for the board and salaried employees.
Our balance sheet and liquidity position is strong with cash plus underutilized revolver borrowing availability totaling $636 million.
XL has an investment grade credit rating with reinforced the belief in our balance sheet strength.
We have no near term debt maturities.
$1 billion repo them into the 20 to 24 not to senior debt nodes and seven cents 25, and twins 27, respectively.
When markets are predictable, we operate with a minimal cash balance.
Due to the current market dislocation, we proactively through $250 million from the revolver late in the quarter as appealing president measure.
When markets begin to recover we will evaluate that the appropriate time to apply the excess fat to the revolver and that will reduce gross debt position.
Our leverage is measured on a gross stat basis.
With 2.5 times at the end, but of course, the twin 20 compared to 1.8 times 2019 fiscal yearend as a result at the previously referenced 250 million dollar revolted rule.
We are operating comfortably within covenants conditions.
[noise] approximately two thirds of on cost of goods. So compliance is variable costs.
We are quickly which is more material purchases to meet lower demand levels, well past week scrutinizing safety stock levels. Both can minimize any access to all while can you kind of Italy and sharing we meet ultimate commitment.
We thought supply chain has attended preschool.
As Nick said, we just started doing headcount reductions both direct and indirect we're going through the prices right now of rationalizing production and expect to temporarily idle a limited number of assets.
We are focusing appropriately while recognizing that markets will recover and secular constant growth will review.
We have several so on many programs and we'll continue to remain position and meet the demands of our human.
We will also driving effort to identify opportunities to repurchase.
Wherever possible given the fungible nature of our asset.
Especially within our comp segments.
All the actions about wouldn't show sell continues to maximize margin performance and the return to shareholders.
With that let me call, we turn the call back to net.
Thanks, Patrick.
This global health crisis has touched all of us and made us view the world differently.
However, the hexcel value proposition is unchanged.
Global economy will come back more people will resume flying and airlines once again ordered new lowering mission composite rich aircraft to meet this growing demand.
The trend toward integrating our strong lightweight materials into wind turbines automobiles marine and recreation will continue to enhance overall performance and efficiency.
I could not be prouder of our one hug sold team and how they are responding to the crisis at hand.
Axle remains a global leader in the advanced composites technology.
We've worked hard to stay safe as we continue to operate and meet customer demand and the resilience demonstrated by everyone has been impressive.
The challenges we face are enormous and we remain focused we're staying close to our customers and we continue to strive for excellence.
XL was founded over 70 years ago, and the company has weathered market disruptions before.
We will whether this pent up.
Our hexcel leadership team as unified our financial profile was healthy.
And we're focused on doing the right thing.
Our commitment to operational excellence is sound and its impact on cost savings and productivity has never been more critical.
Again, we're moving swiftly to realign the business and while we don't have all the answers today, we will continue to take the cost actions needed to match to maximize earnings and liquidity, while ensuring the business is appropriately positioned for future growth.
On the crisis passes axell will be even better positioned to support our customers and our shareholders.
With leading technology leveraged fire passion for innovation strong customer relationships that will grow even stronger during these challenging times.
Talented team that perseveres in the face of any challenge.
Im confident that our business will thrive in the future.
Chris will now turn it over to you and are ready to take questions.
Thank you and as a reminder to ask your question. Please press Star then one on your telephone and to withdraw your question press the pound or hash key.
Also please limit yourself to one question and one follow up.
The first question is real Myles Walton TBS joined is open.
Thanks, Good morning.
The first question is around the cost reduction actions, you're taking sorry pretty swift that I think in the 10-Q. It talks about a 30% reduction in labor costs and maybe could you just give us some some flavor as to.
Both a percent of Cogs is labor and also in the the whole scheme of your cost reduction efforts.
Your anticipated impact of that on a run rate basis.
Yeah, Myles so I'll take a shot in the first part not as Patrick to comment.
You know once we.
Understood how large the pandemic was going to impact our business. We immediately took what we classify as short term actions.
To get as much cost out very quickly so that we could preserved as many of the critical skills and long term resources for the market going forward. The other reason for doing that is we simply did not understand.
What our markets, where ultimately going to to migrate to with respect to a new run rate.
So taking the cost out from a.
Direct indirect head count and controlling all discretionary costs was a priority throughout the globe, obviously quicker and easier to do in the us a little more work involved in Europe, but we're in process would when doing that as we speak.
Patrick are you able to a box around the size quantum of the cost reduction or for it and also the percent of.
Cogs is labor.
Yes, so I mean, when no one in a position to be precise today miles because we don't know the exact.
Step down and on demand I mean, we put the 13% ounces of labor costs is sort of a ballpark target, we may end up being slightly stronger or slightly lower than that but our initial estimates suggest that that that's where we go to.
Our biggest.
Cost I think as we've said before is raw materials.
Labor is the second largest cost input we have across the company.
I'm not going to decline that specifically, but it is a significant cost and take I mean raw materials will come out naturally as you can imagine what we have to address this management is our labor costs after that it's sort of utilities and depreciation and obviously the challenge we have is overcoming the depreciation.
Fixed cost and the absorption teletubbies backgrounds, but as Nick highlighted across the board way pacing many many actions.
And just one follow up which is Airbus has come out with the production rates and maybe to just focus on the 350. If you can do you anticipate your realized sales to be below their announced production rates in the near term because of Destocking.
Or do you think you know the rate Youre pretty much team representative in your sales over the next.
A few quarters. Thanks.
Yeah, Myles so whenever we see rates go down it's very typical given the complexity in the size of the supply chain you will see a meaningful take down in the supply chain as well. So we're building that into our forecast as well not only on the Athree hundred 50, but some of the other chains.
Does that are being evaluated.
The next question is from Robert Stallard with vertical research your line is open.
Thanks, so much good morning.
Good morning.
Just a follow up on a miles his question on the of the de stocking.
My question you've had in the past studies, rather hard to offer but just what is your assessment of what the level of excess buffer inventory that could be in the chain.
It can now come out.
So again, our shipped two locations are multiple on various programs and will supply chains can be very long so to give you a precise number.
We're really not in a position to do that.
I would remind you that.
We stay very close to our customers and much of our material with the fiber in the pre Preg go into freezers. So we had very good line of sight in bowls materials and how much is in stock.
Internally as well as that our customers, but it will be a meaningful supply chain adjustments concurrent with the rate ticked down.
Okay, and then secondly, I'm just following up on the Capex movies. So in the quarter, which is very rapid and should we expect this sort of right to continue in the second quarter going forward through the year was this a one Q expense pretty much what we should expect going forward.
No, we're not going to get into specifics, but interest as a reminder, our maintenance levels and 60 $70 million range.
Given the actions we've taken I would expect to be in that range if not less.
Okay. That's great. Thank you.
Thank you Rob.
The next question is from Mike Sison with Wells Fargo. Your line is open.
Hey, guys glad to hear you guys are safe.
I make when you think about the long term I think you know to little bit and in terms of long term value proposition for carbon fiber.
But feel prices pretty low any thoughts on how that set of flows through to.
Carbon fiber as being the the go to material on on a new airplanes going forward.
Well, Mike I, if you've ever flown on 77 or any threefifty, if you've looked at the advantages of carbon composite intensive airplane provides theres no question in our minds that that is the future of aircraft now given whats going.
Moving on with revenue passenger travel and park planes.
You know my belief is new planes will be required and those planes will be composite intensive. So I think the value proposition is there certainly from a strength.
Our wage.
Maintenance overall productivity improvement that composites and the performance composites have demonstrated.
It is the material of the future and we're confident.
Great and as quick follow up when you think about.
I now probably difficult to sort of give us a feel for but.
If you do you think about the first quarter sales down 30% can you give us a a thought of hot March looked and then.
How how do you think youre.
Order patterns will change.
You know April May June does it does.
Given you know the production rate changes as well as as the.
Plant shutdowns at Boeing Airbus has have had to do over the last couple of weeks.
Yeah, so as you're reading from both Airbus and Boeing their plants are in different states of operation that efficiency and some even close down.
No the big impact and commercial air commercial Aero, we really experienced in March and we expect that to continue certainly into the second quarter third quarter.
Inventory supply chain buffer stock de stocking is going to be.
Added to the rate reductions that are being Ah Ah communicated and announced in the bottom line is.
Nobody really knows where those rates are going to end up.
As as you you know Airbus gave some preliminary rage settle run into summer that took their 323 50 in threethirty down by about a third.
We don't know where Boeing is going to go.
But they're going to be lower and that's what we're anticipating and that's what we're positioning our operations to manage to.
Great. Thank you.
Thanks, Mike.
The next question is from Robert Spingarn with Credit Suisse. Your line is open.
Hi, good morning, just sticking with the rates.
Yeah, I think is there a way to quantify what what breakeven looks like on a cash flow basis with regard to the rates you have talked about trying to maintain double digit.
I guess book margins, but on a cash flow breakeven basis can you make money six per month on a wide body.
I don't know 30 to 40 per month on an arrow body, how do we think about that and then the second question Patrick on the cost going back to where miles was headed is maybe can we maybe I can ask a question about decremental margins, how should we think about decrementals.
Through a period like this thanks.
Yes, Rob so just to start off I'll remind everyone that our bulk of our assets are fungible and and we're certainly looking to re purpose, where we can and you can see from the actions. We're taking we're stripping costs out to rightsize the business. So that we can.
Ensure sustainability and.
Free cash flow and operating margins in the in the double digit range and we're confident we can do that Patrick and I are working multiple scenarios and demonstrating that the board on upside downside, we have very good controls and models to reflect.
The various levels of demand.
That that our potential so we feel good about the actions that we have in place given today's view and the additional actions that we will take if required.
Patrick.
Yes, no no absolutely I mean, we were coming into this and then in a strong liquidity and generating position clearly the reduced revenues impact that but as Nick said, we're going to take action in terms of the detrimental margins.
That's really the task at hand to try and minimize that impact.
In the short term Q1, it's very difficult.
To react fast enough with the with the overhead costs indirect costs in the off price and expenses.
So more of the variable margin impact is going to place to the bottom line item in the first thing and that's what you lose you lose the variable margin.
So our job right now and we've already started as Nate.
Alluded to and in the earnings release in the vital to taking out indirect cost discretionary costs operating expenses.
Well, if you're going to try and minimize decremental margin, but it's always Italians.
I mentioned depreciation before that's one of the biggest sort of fixed cost. The we've got to overcome and that's what Nick and I and the team X out of working to do though we have a clear objectives to minimize that but clearly, especially in the short them that that's a tough time.
On the reason I ask is because when you were adding capacity clearly volumes were so important to extracting the value in those new plants and of course now we're going the other way and so that's why I was hoping we could maybe put a finer point on that and then the point to the question for for Nick was on it because of your comment on depreciation.
On a cash flow basis can you generate cash at.
Rates down, 30% and even maybe down 50%.
So obviously depreciation is a non cash cost and obviously most of what wed stepping out in tax related that so we can keep generating cash and we will pay tax had a working capital.
With step downs in revenue now obviously, we can all speculate on those that sounds in revenue and it gets tougher.
Got upside and downside, but clearly we will be moving the cash cost. It's boxes, we can and as I say, we're entering this in a strong position in terms of a task generating business. So we're pretty confident in the outlook with very positive around our liquidity position.
Through this cycle.
The next question is from Ken Herbert with Canaccord. Your line is open.
Hi, good morning.
Morning.
Nick Nick and Patrick I, just want to follow up once more on your your comments you're regarding.
The indirect caution.
You've obviously move pretty quickly to address your cost structure do you expect that the indirect or cost structure is aligned with sort of demand is this something you're you're able to get you in the second quarter third quarter does it take longer how do we think about the timing now that you've moved pretty quickly on the on addressing the cost structure.
Yeah. So again a is as Patrick mentioned, we've targeted based on what we see today, 30% cost take out and that's including labor, we can realize that fairly quickly in the us.
Many of those have already been communicated and implemented some of which will continue over the next few weeks in Europe, It's a little more time consuming and challenging working with the state regulators as well or is the works council. So that will tend to take a little longer.
Nevertheless, we've got some short term actions in Europe that are underway with respect to surmise furloughs and short term cost takeouts set or help us get so that 30% type of range I'm fairly quickly.
Okay. That's helpful.
And you've talked about.
The opportunity to re purpose. Some of your assets is this something we should think about is potentially material. You know this year is this longer term actually write any more specifics around you know outside the maybe aerospace and defense is that is that really an option at your cost base or what's.
I mean, how how viable does that in the near term or is this and does this represent maybe.
Strategically something longer term the could be part of the mix. Thank you.
Yeah Council clearly, there's some some shorter term opportunities, but they are relatively small and it takes time for us to develop the relationships both in space and defense, which were looking at.
As you know our materials are high performing their there the high end of the performance spectrum on carbon fiber. So that's where we're trying to find opportunities to utilize those materials.
Even in industrial there are opportunities, but again.
Some of the capacity, we're looking to take out.
That will take time for us to re purpose.
Thank you.
I can't count.
The next question is from David Strauss with Barclays. Your line is open.
Thanks, Good morning.
Good morning, David warning.
Wanted to ask on.
Working capital and how you how you see that laying out a Patrick I think there was a comment in the press release around how you expect working capital will be a source of cash over next couple of quarters.
You know just how do we think about.
How working capitals going to move over the course of the of the next couple of quarters as as rates come down.
Yes, so I would sort of look at it over the balance of the year. So over the next three quarters I would definitely expect whats untapped tools to be a source of cash.
We will look to drive down inventory raw materials will come down the line and.
The line demands from our customers.
Finished goods, we will manage very tightly and we've talked about idling capacity were not just going to keep producing so those things together.
Receivables, thus far have been strong collections remain strong we have a very good redcoat on that front.
But undoubtedly we do that with demand lower revenue, obviously will come down.
Our payables Likewise, we will manage working closely with our supply base, but all told we will end up operating with a low.
Level of working capital a natural at some point during this year and it won't be perfectly smooth, but over the balance of this year, we will release cat.
Out about what you got to buy.
So with your with your expectation.
The that throughout this the you wouldn't be able to remain free cash flow positive I guess on a on a rolling 12 month basis.
I mean, I think as we looked at the world today My own yes, but you need to tell me walk the demand is ultimately going to be so we're not forecasting we're not guiding it depends on the overall of impact.
We have that he's a realistic.
Okay, and then last last question on on pricing do do any of your programs. Nick on the aerospace side, you have volume based pricing, where you potentially get a higher price it at lower volume.
So our contracts vary.
Depending on the application customer in the segments, but we do have contracts that are volume based and that.
When volume goes up we pass on part of that volume leverage savings to our customers. Similarly, if volumes dropped below than pricing as adjusted accordingly, So it's not across the board, but we we do have certain contracts that.
To include volume contingent center.
Okay. Thanks very much.
Thanks, David.
The next question is from Gautam Khanna with Cowen and company. Your line is open.
Hey, guys. This is Dan on for GAAP and thanks for the question.
Morning.
So I I know we discussed this a couple times in the beginning of the call, but have you actually started to see any de stocking by falling subcontractors.
And are you able to parse that out by program or how widespread that might be if so.
So to differentiate again.
You know you have to imagine the multiple shipped two locations, we have and each of those subcontractors for the primes are at different levels of production and pulling at different rates, depending on what their inventory levels are there a buffer stock their backlog so to give you any real clarification.
And around how much has been rates coming down versus how much has been supply chain adjustments, we really can't provide much more color on that I could tell you that clearly there's some supply chain adjustments taking place today and again, it's a when your rates are coming down.
In supply chains are coming down it's just a multiplies the downward effect and that's really what we are bracing for in Q2 Q3.
Got it understood on thanks for that.
Then just one other question was 10 mall can space and defense actually continue to grow regardless of the fall.
Macro situation.
Or is that theres, they're significant disruption there as well.
Well, we certainly believe.
Based on defense town, and we'll continue to grow the budgets are strong now I won't say, there won't be cobot 19 supply chain impacts or potential closures based on site closures, but in total we view that market as fairly robust.
And it's certainly a target for us to continue to drive.
Not only growth in the programs, we have been incremental growth in some repurchasing opportunities that we see.
Thanks very much.
Thank you Dan.
The next question is from Paretosh Misra with bear in Berg. Your line is open.
Thank you good morning.
Can you completely idle the plant and move production to to another facility and does it require a good to get recertified, but that customer like how does that process work.
So it depends on the product form so I would just.
We mine.
The flows on the call today that our russi on plan.
Makes precursor and carbon fiber it is shut down shut down a function of the cold that 19.
And is scheduled to be down until mid.
May.
That material those materials are qualified another plants indicator in salt Lake City that we can continue to run and continue to support so most of our products can be moved around between plants.
It's one of the benefits of our operating model. The fact that our assets are fungible, we can move them around we can change them over very quickly. So that we can optimize our supply chain and flex as and when we need to so.
We do have quite a bit of flexibility there.
Interesting and then maybe if you could just quickly remind me how many fiber and preprint facilities, you currently have or frankly operating.
Fiber, we have two sites that make precursor that's and russi on France and indicator, Alabama, we have three sites that make carbon fiber that salt Lake City, Yes, Skus and russi on.
Then pretty Preg, there's numerous plant saw in multiple countries in Europe as well as a in the U.S. in Salt Lake City another.
Thank you and and good luck that everything thanks, guys.
Thank you.
Your next question is from Ron Epstein with Bank of America. Your line is open.
Yes.
Good morning does.
Morning, Iran.
Would you think about.
Just maybe your supply chain and more importantly, a broader aerospace supply chain.
How do you think about bad impacting build rates, so on and so forth meaning.
You guys are actually seemed like.
Every good liquidity situation, but many of your peers do I mean, I mean, how do you think that plays out I mean do you think the broader supply chain is going to the government help or.
How are they going to get through this because ultimately you can't deliver your stuff if they can't deliver their stuff.
Yeah. So that's a pretty good question Ron I I don't know from qualified to answer that I can tell you. We're focused on what we're doing I can to also tell you with respect to our supply chain for incoming materials.
One of the first things we did is to make sure our team got with our key suppliers to make sure. We were aligned because we started pushing back on orders, we did not want to take in excess inventory since our customers were slowing down their build rate. So.
With respect to their performance you're right, it's probably all over the map we're in a great position, we've got great liquidity.
There are some in the supply chain that don't I know the cares program will potentially help some of them help many of them.
But really I don't I don't have a crystal ball to tell you know who's going to get in trouble and what possible release, they might have down the road.
Okay Fair enough and then maybe as a follow on them and have the Oems either of them.
Reached out to you guys are to your knowledge other suppliers offering to help.
Well.
We're talking with Boeing and Airbus and our other customers on virtually daily basis to make sure we're aligned with their needs.
They know were very strong they know our global position and quite honestly, we're working to help them not only technical solutions, but other cost reduction initiatives and continuing to provide ideas and opportunities. So they haven't reached out saying do we need.
Help we've reached out and asked how can we hope you.
Okay, great. Thank you very much.
Thanks, Ron.
The next question is from Hunter Keay Wolfe Research your line is open.
Thank you good morning, everybody.
Little bit of a derivative follow up Toronto sort of seem there how do you think about the potential of the always building redundancy into the supply chains in a in a post Corona virus World you know the any event that that some of these these suppliers both large and small fail and don't don't recover is there risk or even a potential opportunity there.
And that there's redundancy built in.
Thanks.
Yeah. Thank you Hunter so again.
We do believe there will be some companies that will be stressed through the process.
We are continuing to keep our competitive.
Lands and our pipeline active so that we can understand what technologies what areas might be we'd be interested.
Yes, if certain assets were to become available which they made during this crisis.
So with respect to our customers and their procurement strategies. Our focus has been on provides the best technical solution.
The best value proposition and to continue to show how we can deliver that not only on the existing platforms looks for the new platforms that will be developed ultimately and that's what our focuses and we think we're in a great position to do that.
Okay. Thanks, and then can you just give us a of the most recent thoughts updates on what you're saying of the Biz jet market right now thanks very much.
Yeah, and we called it out in the first quarter, our Gulf stream was extremely strong.
I think it's a little slower to respond in the regional you know I'm.
Reading the same materials you are reading, there's no doubt there was going to be a falloff on demand what it looks like and how it translates to the larger scale versus the mid and small size business jet remains to be seen so we're keeping a close eye on that talking with our customers regularly but it's just a bit early for us to.
Predict.
Thank you.
Thank you.
Our final question is from Noah Poponak with Goldman Sachs Your lines.
Hey, guys.
Good morning, with regard to with regard to Boeing and Airbus.
Production in the immediate term you alluded to Airbus having provided some some numbers into the summer has Boeing not done that.
Specifically and then do you have any insight into you know just how much disruption.
In terms are facing that the airlines, it's hard to tell if its.
You know some kind of quantify you know normal and type of environment you'd see in a downturn, where there's some deferrals some cancellations versus if its full on you know literally almost every airline asking to defer cancel within the next six months.
Yeah. So to answer your first part of your question No. Boeing has not provided any guidance on build rates as you know the Max has not been recertified.
And is not being produced today and there is no deed on when it will be produced or at what rate they would initiate production. So.
Really no guidance there.
With respect to the turmoil you can only imagine with travel down pick a number anywhere from 90% to 97% depending on the route.
You know the cash position I'm sure. There's many discussions going on but I'm really not going to speculate on the amount of turbulence.
I feel for Boeing and Airbus and we're doing everything in our power to help them navigate through and I'm sure they're doing everything in their power to help the airlines get back into an operating mode.
Okay and Nick on the just following up on the Max there.
You know Boeing at least.
Somewhat recently Boeing has stood by the somewhere in the zone of mid year re entry into service and has also talked about starting to production system backup prior to that.
Spirits talking about restarting production within a few weeks.
And obviously you are feeding into those companies.
So I guess, it's a little surprising to hear.
Your comments that suggest less clarity on that am I reading that correctly or how do I heard about square.
Well, there's some you know we provided.
Time frames on how quickly we could turn production on depending on what build rate there's inventory in the pipeline. So I don't read my message to mean anything other than we don't have any longer term Boeing build rates.
Obviously, the supply chain or in different places you mentioned spirit, which we provide materials too as well. So we're just not going to get ahead of Boeing and we'll let them to clear what their schedules and time frames, our end up recertification and production for the Max.
Okay. Thank you.
Thank you know.
Okay, Chris that's it.
Thank you every yet this now this now concludes the heck sell first quarter 2020 earnings call. Thank you all for participating and you can go ahead and drop your lines have a good day.
Patrick you there.
This concludes today's conference call you may now disconnect.