Q1 2020 Earnings Call
Greetings and welcome to the L. three Harris technologies first quarter calendar year 2020 earnings call. At this time all participants are no listen only Mount later, we will conduct a question and answer session and instructions will be given at that time.
You should require operator assistants. Please press star then see around on your touch tone telephone.
It has now my pleasure to introduce your hosts Mister <unk> Vice President Investor Relations. Thank you you may begin.
Thank you just good morning, everyone and welcome to our first Quirk calendar year 2020 earnings call on the call with me today or Bill Brown or is he a rescue based like R.C.O. <unk> R.C.S., though.
A few words on forward looking statements Nongaap matters.
Looking statement involve risks assumptions.
Uncertainties that could cause actual results to defer mature really for more information. Please see the press release, the presentation and R.S.I.C. filing.
Reconciliation of non got financial measures to comparable gotten measures is included in the Investor Relations section of our website, which is <unk> dot com.
They have this call will also be available.
Aid with your your compatibility following me all three hours merger. Prior your results will be on a pro forma basis as reflected in the A.K. Wow yesterday with that bill alternate over to you. Okay well. Thank you receive a good morning, everyone.
We're all aware or the environment is changed considerably since our last update due to the global cooling 19 pandemic.
We're top priority remains the safety and well being of our employees well continuing to deliver the mission to central products and services to our customers.
And it was start by thinking all the more employees for the hard work and dedication through this crisis.
Well, we have a resilient portfolio in customer base, and we're well positioned we're not immune to the effects of Kobe 19.
Despite the solid start to the year, we're trimming our outlook for revenue and earnings per share do principally to our commercial aerospace exposure and our recently completed divestiture plus some anticipated softness it international and public safety.
Potential risks from supply chain disruption.
We moved quickly with cost in other actions to offset these headwinds holding earnings per share within 2% of our prior guidance, while increasing our margin outlook and maintaining free cash flow.
Our core U.S. government business, which represents about 75 per cent of revenue is performing well without significant challenges.
Earlier today, we report it first quarter results with non gap earnings per share of $2, an 80 cents, 21% on five per cent revenue growth.
Company, Marge is increased 170 basis points to 17.5% and adjusted free cash flow was $533 million.
Total company funded booked a bill was 1.11 driving funded backlog of 3% versus the prior year.
The results were ahead of our expectations.
We're actively assessing and monitoring global developments and continue to use best practices to mitigate risks related to Kobe 19.
We've mandated work from home for those who can implemented social distancing and cancelled all travel and external events.
In our production facilities, we've staggered work shifts redesign stations and implemented stringent cleaning protocols as of today, all our facilities are up and running with limited disruptions report it to date.
We continue to receive a great deal with support from our key customers the D.O.D.F.A.A. NASA and others in a large majority of our programs and facilities as well as those of our suppliers have been deemed essential to national security.
The D.V.D. as move quickly to adjust the terms of progress payments to drive cash into the industrial base.
Which we pass through to our small suppliers and started in dialogue with industry on how to size in cover cobin 19 related costs.
These measures combined with potential tax to full benefits through the cares act provide some risk mitigation for our company and supply cheat.
Looking at our credit profile or balance sheet remain healthy and we expect to have over $3.5 billion in liquidity in the form of cash on hand, and revolver availability at the end of the quarter.
J, we'll discuss this in some more detail.
And he's uncertain times, we continue to execute well on the strategic priorities that we've previously outline which is helping his deal with the crisis at hand, while at the same time delivering long term value for shareholders.
First we continue to make great progress on integration despite the environment.
Our team delivered $55 million it net synergies in Q1 from improvements in benefits in overhead costs and we now expect to achieve $165 million of incremental net savings in 2020, Oh versus our previous expectation 115 million as we accelerate savings and managed to the pandemic.
And there's no change to achieving $300 million in cumulative net savings what about $500 million grows in 2021, which as we've announced before is about one year has got a at a schedule.
Second we continue to drive a culture of operational excellent deep into the company to improve quality and productivity and expand margins.
This was evident in our first quarter results, where we built upon last year's performance and delivered eat three savings on top of synergies offset mix headwins.
For the year the combination of costs synergies any three savings.
Increase full year margin by 25 basis points to 17.5% of the midpoint. Despite the costs absorption challenge from revenue headwinds and the expenses bean curd to fight the pandemic.
And I'm working capital we continue on the improvement trajectory from the stub your with another two day operational reductions Cindy year end and about 10 days operationally since the merger close primarily from better inventory management.
We believe we had the tools improper focus to manage in the current environment, leaving the path of 50 days of working capital intact for 2022.
Thirty's to invest in technology and innovation in anticipation of customer needs to grow revenue in the long run and we expect to sustain our industry, leading spend on r. and d. Despite the pandemic.
The team is making terrific progress in improving the efficiency and effectiveness of our investments.
Reading room in our budget to support investment in the growing pipeline of revenue synergy opportunities.
We have now submitted 41 revenue synergy proposals of 18 from last quarter with another three down select out of eight in the first quarter primarily related to classified work in our space in aviation system segments.
To date, we've been down selected on half of the 16 proposals awarded with orders book in that tens of millions and a lifetime revenue potential of over $2 billion.
Our fourth priorities reshaping the portfolio to focus on high margin high growth and technology differentiated businesses and this is not changed.
So far we've announced three transactions told representing about three per cent of revenue that will result in about a billion dollars in proceeds.
Our airport security in automation business the largest of these announcements close yesterday with two smaller ones closing later this month and by mid year, neither which habits financing contingency.
We're still targeting the that's the truth in the range of 8% to 10% of revenue, including the divestitures announced to date.
And while the timing is now more fluid we continue to have active discussions and are committed to maximizing value.
And then finally or fit priorities to maximize cash flow and sustainably grow free cash flow per share.
We're maintaining are adjusted free cash flow Guy for 20 $22.6 billion to $2.7 billion and remain on track to achieve $3 billion in 2022.
In the quarter, we generated over $500 million in free cash flow and return $883 million to shareholders, including $700 million in buybacks in dividends and dividends, which were increase 13% in the quarter.
For the year, we have now assumed $1.7 billion and share repurchases, including the proceeds from divestitures, which leaves us with plenty of liquidity given the environment.
Moving your 2020 guidance, we expect organic revenue growth of 3% to 5% versus the prior 5% to 7%.
We consider risks related to our commercial aerospace international and public safety businesses due to the bit damaged.
On margins again, we're expanding guidance at the upper end and now reading the reins to 17.4% to 17.6%.
And we expect earnings per share of $11.15 to $11.55 with our free cash flow outlook on changed.
Overall I'm proud of the dedication of L. three Harris employees in their commitment to the mission at hand, and I'm confident in our ability to practically manage risk. So we can navigate these unprecedented times so with that let me turn it over to Chris to provide an update on her operations and segment performance.
Okay. Thank you Bill and good morning, everyone.
I'll start with what we're doing it from an operational standpoint to mitigate business risk due to cope with 19, then shift to our operating performance can results.
Imagine team is taken measures to ensure the safety of our employees that are over 100 facilities.
Modified the workspace, especially in areas with high capacity such as our production floors in Rochester, New York in Clifton New Jersey.
Do either create space for individuals between workstations or to install partitions and social distancing is impossible.
In addition, we've adjusted our work schedules by implementing multiple shift sort staggered chefs across our company.
And at several or location that have higher risk, we have already implemented temperature checks and help screening before employees enter buildings.
We provided P.P.E. two employees, eliminating travel and taking other recommended precautions.
<unk> changes daily and these safety protocols are mitigating risk and continued to limit disruption for our company.
Turning to supply chain, we're managing risk daily with cross company crisis teams established to assess and develop mitigation plans were needed.
We've provided a central certification letters to all of our key suppliers globally and continue to engage in active dialog and analysis to identify areas of vulnerability.
But the recent changes by the D.O.D. around its progress payment policy, we expect the flow down in excess of 100 million of cash to help small businesses trendy is unprecedented time.
Today, we've advanced approximately $80 million and expect to exceed 100 million. This week.
Now turning to quarterly segment results on slide six.
A great admission systems grew revenue, 1% from a ramp in our maritime business unclassified programs, partially offset by timing and electro optical and I.S.R. following double digit performance last year.
Order momentum was broadbased with a funded book to Bill above 1.0, Yeah every I am at sector during the quarter, resulting in the overall segment at 1.37 for the quarter and one point O. nine cents the merger.
One highlight was over 800 million an award activity from our leading position on the big Safari programs.
First quarter operating income was up 22%.
Margin expand it to 160 basis points to 14.7% from operational exit ones and integration benefits.
On five seven space than airborne systems revenue increase seven per cent in the corridor.
The solid performance is driven by a production ramp and increase content on the F. 35 platform as well as it grows on unclassified programs in Intel one fibre.
Funded booked a bill was 1.16 for the quarter and about one no sense the merger.
In the quarter, we secured our position as a prime mission integrator for our nation's space domain awareness program called mosaic.
This award at 40 exercised has the potential to reach $2 billion.
Segment operating income was up 12% and margin expanded 70 basis points to 18.5% driven by strong program execution and integration benefits.
On flight eight communication systems, rather than it was up 5% for the quarter as D.O.D. tactical benefited from modernization demand. That's supported weekly deliveries of the two channel multi band radio increasing by 50 per cent sequentially.
Additionally, solid growth in broadband communications.
Finally, offset by timing of sales in international tactical in prior years strengthen public safety factored into the growth rate.
Funded book to Bill has a slight down shift to 0.8 and a quarter due to time in the what's been solid at 1.3 cents the merger.
The awards included a 383 million sole source hi, D.I.Q. from the U.S. Marines for next generation H.F. radio systems as part of a multi year modernization effort and an I.D.I.Q. for 500 million from the U.S. base force to provide secure anti Jam satellite communications for the eight three.
Program.
Segment operating income was up 11% and margins expanded 120 basis points to 22.9 per cent in the quarter from integration benefits and strong operational performance, partially offset by the mixed impact from the ramp and tactical radio modernization programs.
Lastly on slide nine.
<unk> systems revenue grew 11% of the quarter driven by our defense businesses.
Orders out pay sales on the defense side, leading to a funded segment book to build 1.05 for the quarter and one point O. nine cents the merger.
Operating income was about 40% and margin was expanded 300 basis points to 14.5% from improved operational efficiency you can integration benefits.
Looking ahead, we expect the headwinds on the commercial side to pick up.
As a result, we've taken a number of measures to improve the cross the cost structure based on the market conditions.
The downturn is also been a triggering event that led to over 300 million of mind cash impairments for goodwill and other assets at the site.
We're committed to supporting our employees are supply base and our customers to ensure we get through this together.
With that I'll turn it over to J.
Thank you Chris.
I'll begin with a quick recap of first quarter results before discussing our revised outlook and liquidity position.
Revenue was up 5% and he bit increase 17%.
T.E.P.S. girls of 21%.
Solid margin expansion of 170 basis points, 17.5%, primarily from integration savings and pension benefits.
Free cash flow for the quarter was $533 million and we ended the period with 60 to 62 days in working capital before purchase accounting adjustments.
Overall solid results in the face of a tough compare and deteriorating backdrop.
Okay, Let's now turn to the 2020 outlook on slide 10, and I'll provide more color on our updated guidance starting with the top line.
<unk> revenue is now expected to be up 3% to 5% versus our original guidance about 5% to 7%.
About two thirds of this comes from resetting expectations for our commercial aerospace businesses to to cope with 19 and its impact on the macro environment.
When it just thing for the sale of airport security and automation.
Many business generated about $800 million in sales in 2019.
Tied to commercial aerospace through training and avionics equipment.
Commercial training represents roughly 40% of the sales and includes the manufacturing of simulators and training of new pilots as well as those of airlines.
And within avionics, we manufacture and service a number of components, including collision avoidance systems transponders as well as voice and data recorders.
These businesses are tied to a broader aviation trends, including air traffic airline profitability in <unk> in production rates, which are all under pressure.
For instance, I had has forecasts of traffic to be down nearly 50% for the year.
As a result, our guidance now reflects approximately $500 million in revenues.
Or a reduction of about half of the sales for the remainder of of the year.
When compared to 2000 in 19.
In addition, we factored in pressures at our public safety radios business, which in 2019 had $500 million in sales.
This business is focused on state and local municipalities in North America.
What's your facing budget and operational constraints due to the pandemic.
Thing to an over 10% decline relative to our prior expectation of low single digit growth.
Finally on the international front, which comprises roughly 20 per cent of our sales. We are now swimming, a more flatish outlook versus an increase in the low to mid single digits previously.
In contrast, we expect higher revenues from our D.O.D. businesses, including tactical radios and I.S.R.
On our margin outlook Bill talked about the acceleration of integration and productivity benefits that drive at 25 basis points increase in our margin guy to 17.5%, putting us at the upper and other prior range.
And that's net approximately 30 basis points of Headwins associated with fixed cost absorption from volume declines that we've offset would expense reductions.
Bring this down to our for your D.P.S., we now see $11.15 to $11.55 or 11 35 at the midpoint.
I'm 20 cents as compared to our prior guide mid point.
The range is premised on 217 million shares inclusive of the $1.7 billion in share buybacks noted earlier and a 17% tax rate.
And bridging U.P.S. two are prior guide on slide 12.
15 cent in 15 cents, an headwins from the timing of divestitures Andrey purchases.
52 cents in cold blood related headwins or nearly upset by incremental synergies <unk> improved performance for mid point to mid point.
Finally, a quick note on the profile a V.P.S. for the remainder of the year.
We expect a pandemic related impact to be most notable in the second quarter, which stronger growth anticipated in the second half.
Moving to free cash flow, our guide of $2.6 billion to $2.7 billion is intact and so is the multi your outlook.
For this year or cash flow is bolstered by accelerated synergies federal stimulus in cost takeout.
Which will offset the reduced revenues discussed earlier.
And I work in capital will also look to manage the environment sore three day goal of improvement in 2020 remains in place as well.
Moving over to liquidity.
Bill noted earlier, we remain in a strong position.
We ended the first quarter with over $400 million of cash in hand.
<unk> of the April debt maturity.
And the 2 billion dollar untapped credit revolver.
We're looking ahead to the end of the second quarter or liquidity should reach over $3.5 billion post about six years.
Which would include at least one and a half a million dollars in cash and full access to the revolver.
Also our next step maturity of $650 million isn't due until early 2021.
And our balance sheet is healthy at two times leverage.
Oh switching to the segment outlook.
We've narrowed are integrated mission systems revenue range to be up 5.5% to 7%.
Versus the prior five to seven per cent guidance.
Primarily by strength and R.I.S.R. business.
Segment operating margin is projected to be about 13.5% or 25 based point increase from the previous midpoint, reflecting performance to date and increased energy benefits.
Space and Airborne systems, we have also never at our revenue range to six to seven and a half per cent growth driven by modernization and to statement on the F. 35 platform admission avionics.
Segment operating margin is expected to be 18.75% and is unchanged at the midpoint.
Communication systems revenue is now expected to be up between 3.5% to 5%.
<unk> the prior guide six and a half to eight and a half per se.
This reflects headwins in our public safety business of about one and a half points.
And a reduction of international volumes and tactical radios in integrated vision.
So I'm an operating margin is anticipated to be about 23.75%, that's up 100 basis points relative to the prior midpoint, reflecting increased cost integration benefits.
And finally in aviation systems, we're forecasting in organic rubbing a decline of 1% to 5% year over year, primarily from the factors I noted earlier in commercial aerospace.
This points to reported revenues of approximately $3.4 billion to $3.6 billion for the year post about six years.
And the commercial side revenues are set to be down around 35% organically for the year.
And for a government related businesses, which include mission networks military training and the fence aviation products, they're expected to be up in the mid to high single digits.
Segment operating margins are expected to be approximately 13.25 down versus the prior guy by 75 basis points from the mid point.
Drew primarily to fix cost absorption from the volume declines partially offset by cost actions.
The margin guide also counts for the airport security in a more automation divestiture, we closed yesterday.
So to summarize and put it all together overall pulled back in our outlook, but one winter pandemic related impacts had been nearly offset by management actions with the remainder being the result of a more flexible approach the capital deployment in this environment.
Would that I'll ask the operator to open the line for questions.
Thank you the forest open for question. If you do have a question. Please press star one on your telephone keypad at this time, you're using a speaker phone we asked how 'bout posing a question you pick up your handset to ride the bus sound quality. We ask that you. Please let me yourself to one question until everyone. The opportunity to ask a question again, ladies and gentlemen.
If you do have a question or comment please press star one on your telephone keypad at this time.
We will go first took harder <unk> research. Please proceed with their question.
Hey, good morning, gentlemen, I trust everyone's well.
The morning Carter.
Just a a quick clarification on a and a question I wondered j., if you could give us a little bit more color on the cash bridge on the guidance for all the moving pieces with a a syntax and suppliers and progress payments and center Jeez I I think that would help everyone and I just bigger picture a bill.
Chris <unk>.
With respect to how the business that combined business is evolving I mean, you're you're highlighted.
The you know dyssynergy opportunities the revenue synergy opportunities you look at that opportunity pipeline you look at you know what the business is going to look like in the wake a covert 19.
How does how does all of this influence your you know your thoughts on portfolio and and and shaping and whatnot any any updated thoughts there would be great. Thanks.
Car, let me, let me start with the <unk> that a free cash flow you know, we <unk> as as we mentioned earlier in the prepared remarks, we had the benefit of the progress payments going from 80% to 90% you know, it's an access around $100 million, that's being slowed down to the suppliers and so nothing that that's a very little impact or is a benefit.
I'm stimulus related to to to taxes, which is hoping is offset some of the other impacts across the business, but when you take a look at you know net income that that is moving but there's I mentioned that appeared marks as well, we've we've largely offset that and so you know with the benefit of of the the stimulus efforts were just holding that.
As a as a place holder, we may have to go deeper into into into supplier payments. We may have to think about our pension contributions and things like that but for the most part you know we've held the working capital in tact that the three days net income is is a little bit lower we're getting benefits from from the stimulus efforts.
We're just kind of holding that as a place holder for.
Things for later in the year.
Inquired or on your question on those for the long term outlook, but we're very pleased with the progress of the integration. So far that costs energies are going very very well, we're finding great opportunities on revenue opportunities and it gets testament to the power. The combined portfolios is we laid out 18 months ago, well, we announce the merger and.
You know the areas that we could offer new missions sets to our customers and a and cobin 19, notwithstanding it's playing out as we had expected. We have you know much more powerful competitive offering is helping US you know quite substantially in in mitigating some of the risks that you were seeing coming through in small part.
So the portfolio no through the the pandemic knowing the portfolio shaping we've been at this now for 18 months. We made some good progress here, we've about what about a third of the way through in terms of the revenue we anticipated divesting we had size that for investors back in early February that was pre coded.
You know, we keep looking at the portfolio, it's an ongoing process, but we're gonna shape our decisions on on what is in our portfolio based on long term strategy, our ability to differentiate via technology are believed to grow in when in those segments in that hasn't changed based on the pandemic. We continued to look at that I don't think chrissy, if you want it to.
Maybe augment about.
Carter I'll I'll just chime in that you know when I look at our our new business opportunities in some of the things. We're currently working on I I continue to believe our portfolio was well aligned with our customers focus and desire you know you hear a lot about multi function systems.
Which we are currently.
Implementing in space you know, we are submitting white papers on A.B.M.S. and of course, the Navy's coming out with the offering or an R.P. on spectral so I think we're well aligned there on the capability Fronde and then the modular open system architecture I think the up 35 is a good example of those capabilities. So I think it positions as well.
For the long term.
Alright, Thanks, guys. Thank you Carter.
Hi next question comes from David Strauss with Barclays. Please proceed with their question.
Thanks, Maureen ignoring it.
So they'll just wanted to ask on working capital progress it it doesn't sound like the <unk> payment to change benefit you at all and Q1, but you got two days of sequential improvement I think you'd talked about that in Q1, you might have given back somebody outside that you saw on early collections in q. or.
And so maybe just comment on that and I think from here you know you're only assuming about one day of additional working capital improvement through the rest of the year. Thanks, Yeah, David that that that's all factual probably pay didn't really beneficial benefit us in the first quarter is really just starting now in some ways, it's not a big part of our portfolio.
They told me about seven per cent of our revenues, so you're not going to see big numbers and as J. and others and Chris pointed out you know what we're receiving from the government through progress payment acceleration were flowing that out to the supplier base. So that net net won't be a factor in the year. So we're making good progress. So yeah. So today's sequentially 10 days.
Operationally since the beginning of when we closed on the merger. It's a I think it's just fantastic worked into team is done a lot of is coming out of inventory, we're seeing some opportunities elsewhere, but a lot of inventory coming out as we've been playing out to investors for some time, yeah, we're expecting maybe another day towards the balance of the year, there's some perched accounting.
Opportunities. Your if you will in the years. So we'll end we'll end this year below 60, probably to 58 day range and as we look out. The next couple of years again three to four days per year in 21, three to four days in 22. So we are see see ourselves around 50 days working capital by the time you get out into 20.
22, which as you know is still about five days higher than our peers were at the end of 19 and about 10 days higher the where Harris was before we close on their transaction. So we still see some good opportunities to continue to drive were in capital performance beyond 22.
Thank you.
<unk>.
Our next question comes from Robert salary to have particle research. Please proceed with your question.
Thanks Rush company.
<unk>.
Oh me adjustment to the aviation guidance for the I was wrong. If he could elaborate on whether this has resulted from me ordering take hold conversations with your customers whether it is best estimate at this stage is productivity any dice and then relation to that Christ I was running if you could comment on what sort of flexibility you have.
Reallocate coastal capacity in the air space business to defense or elsewhere. Thank you.
So I really don't bother me J. went through the details I think pretty carefully in his script. So the business that was 800 is going down to five hunters are down 40% you we talked about the components to be very clear training is about 40%.
And effectively what in that that we seem being down 40, 45% for the year, but exactly what we've done is said we won't sell any new full flight simulators beyond Q1, So we sorta zero that that could be conservative, but but that's what we've assumed so far is through conversations with the airlines with <unk>.
It's it's really pretty detailed bottoms up analysis that the team has done and really is worked on over the last four to six weeks I think has done a good job on that 60% of the businesses is avionics, we see that business down for the year around around 30%, but you know it's got several components, there's a commercial oh, we in after market component.
That's going to be down substantially based on line raised so we're hearing from Airbus and Boeing based on I add a date on line or P.K.'s. There was a piece of it that provides military avionics in other words provides avionics on a commercial platform as military and use that's relatively stable, which is why avionics.
Being hit quite as much as a as you might expect so <unk> for the year. We've got a you know quite a bit of the back end of the you're in backlog were watch. It is very very carefully watching ordering take rate and we think based on what we see today, we've sized it appropriately again, but it's a very very volatile environment or watching it very closely.
Now, let me be Chris talk about some of the ship that are happening in in the workforce.
Yeah. Good morning, Robert we've we've taken the actions in in commercial aviation to reduce the cost you know with the operating expense, maybe down 20 million for the remainder of the year, we've been pretty aggressive with reductions in forest and furloughs, but to your question specifically on the engineering fraud as of today, we have over 50.
Engineers that were working on the avionics products that have been redeployed to D.O.D. work and now that we're all learning how to work remotely and a little more creatively not many of those individuals needed to relocate so.
I think it's a good story relative to the engineering talent.
That's great. Thank you.
Our next question comes from God I'm Kinda with Kellan. Please proceed with your question.
Hey, good morning, guys the morning.
Just a couple of questions first on communications systems I was wondering.
The revised guidance sort of what's the anticipated foreign tactical Iraq change.
Relative to what the prior was and.
P S.P.C.
How much of a lingering track beyond 2020, do you anticipate seen a as a result.
That'll recession.
Oh, So got them all you know maybe maybe touch on on both of those pieces. So overall tactile we had I think a pretty good start to the year were up 12 per cents of D.O.D. was was really strong international was down the teens and pretty close to what we had expected it'll be down that seem range in the in the second quarter as well recovering in the back.
Have you will start to see a little softer you over your growth in D.O.D. simply because of the tough compare so so now what we see international the B. is roughly flat for the year before we thought it would be up low to mid single digits. So call that three per cent. So now about flat you know in in that flatness, we still see <unk>.
Or easy Pacific region.
Double digits, you Central Asia up significantly you know because of Afghanistan and some of the draw down it's happening there yeah, we still see yeah Middle East Africa to be up low single digits. The data's come down from the last guidance Europe will be down did single digits, we know <unk> Western Europe is getting a little bit better.
Stern Europe is still going to be down and then that's really those really the bigger pieces here Central America is roughly flat in Canada is going to be down as we had expected into your so overall, we still C.D.O.D. being pop up in fact, a little bit better loaded mid teens around 14% and we now we see international being about flat.
On public safety, we've had a very good run here at the last six to eight quarters had been very very strong has been growing like last year was close to 20% growth margins were coming up we've got a great product line better quality really good execution. So we felt very good about that this year, we we're guiding too low single.
Just which is in line with the L.M.R. growth rate in North America. It was J. pointed out you know down more than 10 points from that so call that down 10%. So it's about 60 50 $60 million in revenue erosion, Yeah, we'll see that pretty prominently here in this second quarter and probably you'll see it you know about the same to the balance of the year, it's going to be.
A a pretty tough back into the year for public safety I think beyond beyond 2020, it depends on on what happens to the economy.
Dayton Tat state and local tax revenues, you'll right now, we're fighting and cute too not just a rather we pack, but just the fact that you have to states and localities dealing with coded and not able to work in doing it installed system. That's public safety you know so we're hopeful that could get a little better in in 21, but it's too soon to to say that.
God.
Okay. So that's a very helpful overview, and then just make that mistake.
Integrated.
What's going on there.
Yeah, I can think decline.
Opening remarks.
But what sort of what what changed.
Oh, you you're <unk>, you're you're you're talking about I.M.F.C. integrated mission system business.
Yeah, Oh integrated vision, the the night vision business Oh in a integrated vision systems I'm sorry.
Okay, Yeah integrated vision systems is performing well on the R.E.N.B.G. program. We're we're meeting our our delivery schedules and looking forward to a additional opportunities later in the year, that's more domestically I think the the question is.
Related to some of the opportunities we have in the middle East and we talked about.
You know more more conservatism in in the Mideast, we have not had any cancellations, what we're seeing or delays or or holdups and I think a lot of that just ties to the the several factors you know the export approval process, including congressional notification, there's a whole new processing, that's all being done the remote.
Late and bird toys, and some more international customers are working remotely some of close their ministries in some actual rehab curfews in place. So we just see you all those items contributing to more of a timing issues. So we we reduced the outlook there if that helps.
But but still it's still a low to mid single digits at night vision for the year.
Okay.
That would compare as to what was.
It was in the low double digits.
Thank you.
You bet.
Our next question is that Kinda with Alliance Bernstein. Please proceed with your question.
Thanks, Good morning.
And when you when you talk about the about the synergies see over your head of plan 165 million that synergies for 2020, and you've had the <unk> and you've also had I would assume some impediments from coven 19, I mean, this seems like awfully good progress I mean, how does this.
Give you more optimism.
When you look at 300 million dollar.
Net synergy total overall and I'd say that from two two things one is you're ahead of plan here.
But also you're ahead of plan and perhaps you could have even done better how do not have the covert 19 issues.
Yeah, we're making really good progress your dog well can we we did move forward to 500 and 303 a million dollars net which we expected encountered 22 to kill him 21. So we're not going to be done at the end of 21 are we going to continue working in this into 2022 and it'll become part normal operation. So we do expect that the ultimate.
Synergy value coming out of this merger is going to be a beyond the 503 hundred we've talked about previously 'cause we're seeing it already is coming forward and it's likely to go up. So so we had $65 million into stub year. We started out of the gauge very very quickly you know I wouldn't say it was conservatism coming into this year, but you know we were still a fairly new.
Company there were a lot of you know moving parts in the year you know, we guided to an incremental 115 in that synergies earlier. This year, that's getting quite a bit better more visibility that we're seeing right now an indirect spend yeah. We we've seen the consolidation of all of our benefits programs now be completely implemented you know all.
All of the C.H.Q. and say me consolidations are now essentially done you know we've just seen just better better progress. So is there any impact from Kobe is probably on the fringes. There are gonna be some opera some issues that we might have that that are already embedded in in this number that we're talking about your Doug <unk>. Some of the the opportunities are really supply chain.
They may slip out a little bit, but yeah, we feel a very good about the trajectory we happen to be on we've got a very seasoned integration team people that know how to work and drive their jobs and and entered doing a great job remotely. So we we feel good about this and if anything we have maybe a little more opportunity near as opposed to risk.
Okay, great. Thank you.
Hi next question is now a pop inequity Goldman Sachs. Please proceed with your question.
Hey, good morning, everyone.
Yeah, you might know.
Yeah, just trying to trying to rethink through the the 2022 3 billion dollar free cash flow target as we as we all do every every quarter.
And you know it at one point it looks pretty conservative. It's now taken go ahead.
You know, if you're going to divest 8% to 10% of the revenues and then you know if there's still aerospace current virus impacts that far out.
But you're reiterating 2020 with.
The business sold till I was out of the free cash flow and then the reset aerospace businesses and and then the Threebillion as it was kind of five or 6% growth each of the next two years.
So I guess you know one just kind of high level of do you do you still view that number is having some conservatism in it or is it just sort of hanging on despite the the hits that it's taken and specifically on the aerospace businesses do those need to recover by then to get to the three or can they actually just walk along the body.
And you can still got to the correct.
Well, let me start no you know again $3 billion as Bill mention is is you know <unk> being able to to continue to get improvement in the working capital Toronto 50 days, we still see in spite of of the business, where we where things are today.
The path to be able to deliver that we've identified the opportunities and a lot of that it's been mentioned is sitting in inventory.
And a lot of those benefits weren't necessarily pegged to to the commercial business. There's some of it that was there and yes, we'll see the lower cash flow projection then we otherwise would have before coping 19 in commercial but we have the runway working capital to be able to do that we as bill mentioned, we see the.
Path, it's it's not gonna, it's certainly going to be more challenging than it was before but I wouldn't care I wouldn't characterize it as hanging on I I would say that perhaps are bought for our cushions is a little bit lower than it was before but but the path is still very clear to us.
Okay, that's really helpful and J. just as a quick fall by mccurry cost so <unk>.
<unk> any ability to articulate to us what.
Mm no ongoing seasonality through the year.
Should be because I I, if I remember correctly, you would discuss pulling some forward into the fourth quarter 2019, but then you know the first quarter of 2020 is better than expected I know you have some I know, there's a lot of moving pieces in there, but should aren't should the free cash flow through the years going forward.
Be relatively level loaded or should it be a pretty steep ramp through the year.
It's probably somewhere a mix between the two you know it it's been kind of back and loaded over the past number of years I would say in 2019, even 2019 was a little bit more level loaded. This year, you know $533 million a pretty consistent with what we did for the for the company's combined.
Last year and so you know our goal is to make it more linear throughout the year, but I think there's there's just some <unk>. There is some natural level of linear already in there will probably be still a little bit more back and loaded.
<unk> Yeah. It was still probably stay a little backing loaded, but again a lot better than it's been historically in 2019, I think what started that.
Thank you.
Hi next question she had to kind of aglow with Jeffrey. Please proceed with your question.
Oh, good morning, Bell Crescent J. and thanks for the time.
<unk> is muted and 2020 at three to five per cent organic and just from what we've become accustomed to I understand aviation is two points. So that headwind I guess, how do we think about some of the revenue capture opportunities and timing whether it's the 41 proposals you mentioned in the three incremental down flex this quarter and or how the <unk> just we accelerate.
It's in 20 and 21.
Hey, Sheila thanks, Thanks, so much for the the question. The the revenue centers are you going to be you know rolling out over the next probably 12 18 months you know as I mentioned in my prepared remarks orders or in the tens of millions they could grow more substantial in 21 in 22. They require that were down selects they have to be then finally awarded and they start the building.
Time, you know again, you know, you're and a half hour or so.
So yeah, we're down where it 3% to 5% this year the defense business remains very good for US it's up around 8% you know international is as J. mentioned were flatish, but the commercial part of the portfolio, which is aerospace public safety is gonna be down more than 20 per cent. So the defense peace Accord defense part of the organization is is very healthy it's high single.
Digits.
As we look out of the next year you know we you know we've got we see you know good bookings. This year, we see a very good pipeline about $64 billion a pipeline of opportunities you know it's up about 8% since we we close on on the merger we have revenue synergy opportunities are starting to kick in so you know I see is getting back in 21.
22 to more that mid single digit rain, we let's see how the next you know nine months play out this year and what happens with the Kobe pandemic, but in in the in the budget process beyond beyond 21, but you know I think things should recover and we'll we'll be in pretty good shape beyond this year.
<unk>.
<unk>.
Right next question <unk> J.P. Morgan.
Please proceed with your question.
Sorry, we have less to file may have to John Robby What city. Please proceed.
Hey, thanks, everyone in good morning.
<unk> can you talk about cats allocation to do is certainly appreciate the the message around growing free cash flow per share and how repurchases is a is a is a is a big tool for you guys for q. addressed.
The address that tool in an environment, where potentially the norm couldn't move against repurchases you know what else could you do with cash in that kind of dynamic.
Well look at me for at the moment <unk>, our overall philosophy on Capitol deployment really hasn't hasn't changed we're going to drive in generate substantial free cash we're gonna pay an attractive dividend that has a payout ratio in the 30, 35% range you saw back in February raised the division.
13% 10 per cent back in August last year. So we were continued to be committed to paying and attracted give it and we don't have our leverage ratio is j. pointed out is is pretty attractive you know anything debt, that's coming do will likely be refinanced so that won't be a poll on cash we don't see pension contributions for probably another year or two.
Depending upon what happens in rates and returns you know this year. So it does leave a lot of of capacity for deployment and at the moment, we're still committed to return that to shareowners in the former repurchases I mentioned to my remarks for the year, we're going to be at $1.7 billion will and so will return the billion dollars in proceeds from.
Was telling S.T.S. beyond that will will pause it but we'll have a tremendous amount of capacity to back into the year lot of liquidity and I see this sort of normalizing as we get into a calendar 21.
Thank you.
My next question, Ron Epstein with Bank of America. Please proceed with your question.
Yeah.
Good morning does morning.
<unk> <unk> you mentioned, the 64 billion of opportunities now with the the joint company could you talk about some of those that are that are more to your term things. We can keep an eye on to keep score on how you're doing relative to those $64 billion of opportunity.
Good morning <unk>.
We have several several opportunities that I think are a little more.
Never get you can track later in the third quarter. The current plan is for the next Gen Jammer Ah contracted to be awarded to competitive opportunity I think that'll be a an interesting to watch we've talked a lot about our responsive satellites, we've been getting orders and continue to get orders on.
On those satellites.
So you can you can track that on the I.S.R. <unk>.
We've talked a lot about prepared writing program in in Australia that'll help follow on opportunities, but we also have comparable.
Opportunities in Italy, and elsewhere around the world.
He w. capabilities bar rain, you way you'd comes to mind clearly the tactical radios, we have a fair amount to go here and it's in 2020 and then even on the international from we're we're on the maritime.
Teamed with a variety of over yams, and shipbuilders from Romania to Taiwan to Australia, So you'll be able to track track those.
Highlight those are the couple that to follow Ron.
And and if I may just just a farm quickly do you guys have position on the on the forget program that was just awarded to.
To.
<unk>.
<unk> <unk> the the F.F.T.X., yeah, Yeah <unk> yeah.
Question. We we have you know there were there were four beds and given our our capabilities. We were on all four of the teams. So as you would imagine I think we're well positions with.
With <unk> Mac 10, mechanical Meronek Marine and Yeah, you know more to more to come on that you usually they they pick the or the frigate first and then the second tier suppliers or the go skated competed but we feel very comfortable with our capabilities and being able to participate on that program.
Okay, Great. Yeah did you can't scenario, yeah, sorry about that was my air.
Yeah it.
Huh.
My next question Peter I'm in my Fair to please proceed with your question.
And thanks <unk> <unk>.
No you gain it's a it's in color on the international interest flat for this year I mean, what what kind of visibility have our conversations with their customers I know Chris mentioned that there are some export officers are close or some customs or even close just thinking about you know grown since we exit you know a cold in 19 worldwide what people kind of because you see the second half.
This year.
Well as we said we we we think the the revenue in international be roughly flat. This year. So clearly you know booking some of the order is that are important in the back have will require engage with customers happy is happening today, you know via phone, but we're going to have to sort of start to see an ability to see customer to demonstrate product sighing.
Contracts and and that's going to require some face to face conversation. So you know there's been a lot of dialog happening right now we're trying to you'll get a sense for the timing of some of the opportunity we have in the back end of the year. Yeah. We we think was appropriate given some of the short term nature of the opportunities and tactical in my tropical to pull that out is which.
Done here to recalibrate international for the year, but.
As as things started to open up you know we've got a pretty good team internationally in were you know they're out there meeting with their customers talking to their customers and you know, we'll see you know as we get towards the the back into the year, how the orders flow through.
Okay. Okay. Just a quick following that person is there any any incoming on from west can regarding just for my demography perspective, just a an opportunity in the Kobe 19 world. Thanks.
Yeah, no the the west can businesses doing doing quite quite well I think if you're referring to to doing some sort of thermal imaging are such a it's really not at at that price price point. It's it's.
Better sticking with their core market and focused on the Dearborn assets. So.
Okay. Thanks.
Hi, next trashing comes from Pete Skibitski <unk>.
Proceed with your question.
Good morning, guys.
But bill some that I've been curious about kind of top level is this topic a five g.
And I know, it's obviously kind of a commercial standard, but I I've also seen mentioned that duties running some pilot projects you know related to five g. as well. So I'm. Just curious if you can give us your thoughts from a top level on whether or not this impacts l. three Harrison anyway, you know kind of an or if you feel like it's a technology you need to be involved in developing or earn some other way. Thanks.
Yeah <unk>. It's a good question I won't be able to give you a complete fools of answer on this but you know we've had a we've <unk> an internal team focused on on five Gee you know we're not in in venture, but we certainly have applications that you know are using five g. technology. So we do we do play in the space, we need to be president in the area of need to five.
Find a D.O.D. or defense related applications of of five Gee, you know, it's going to affect warfighter effectiveness. So so we do have specific activities here I I wouldn't say, it's a big driver this year, but certainly over time, it's a core capability you know that we need to have as a leader in and spectrum superior.
He already so so so clearly p. That's you know it's something that is central to our strategy over the next several years.
Okay, Mark on next to the car more to come.
My next question miles problem with U.P.S. Please proceed with your question.
Thanks.
Maybe they'll do in addition to the higher progress payments. The D.O.D. seems to be also mmm getting pretty aggressive on pulling for contract awards and.
Getting kind of the money out of the hands of their duty and obligating that it's quickest for 10 I'm. Just curious did you see that in the quarter. Obviously, good buttons at S.S.I.M.S. or is that something that might help help looking this I'm continue to be strong and second and third quarter.
You know look miles is a good question I you know credit due to the folks in a in D.O.D. really across the services. We've had you know very active diallo, both Christian I in some others on the team with a lot of leaders across D.O.D.N. across the services and you know they've been very aggressive not just on prod pay but accelerating awards.
I've heard you know on though in the at the Navy accelerating quite substantially awards. So we did see some opportunities move left some out of cute too into Q1, some out of the back half of the year into the front have you know Chris mentioned 83, M.. That's an opportunity you know we saw an acceleration of a an opportunity in I.M. as to Virginia.
And so we did see some opportunities moving left you know and I think that will continue to see that it's it's you know the D.V.D.'s really focused on this are trying to put money on on contract that we then quickly then put suppliers on contracts, we keep not just cash flowing but opportunity flowing into the supply base. So certainly something we're all we're all focused on.
Okay and clarification J. on the slide on the on the walk a V.P.S., there's pension call down under operations. Another 28 cents, how much of that 20th senses pension.
About 10 cents have a in that 28, there's a lot of moving parts in there, but but pension is incremental about $25 million.
Okay. Thanks.
Okay next time I go see I'm only it was Suntrust planes per se, but their question.
Hey, good morning, guys. Thanks for taking the questions just as I I guess as you guys are thinking about you know coated related impacts disruptions you know any any other color that you have on your broader supply chain. I mean, you guys are pretty technology drip and I'm I'm sure. There's a lot of a smaller components sub systems discrete.
<unk>.
During or are you seeing any potential risk you know you know from parks procured and you know the Asia Pacific geography, or or How're, you kind of sizing that potential risk as you go forward here any need to build a buffer stock of inventory on on certain maybe at risk product lines.
Yeah, Great. Great question. This is Chris there you know at any given day there there's tens of millions of revenue a risk to changes on a weekly basis.
Really started looking at this back in January and can be Asian.
Markets I think we've been able to.
Mitigate all that risk you know and a lot of this depends on the countries you know India Scotstown, Mexico separate down you know we have to monitor those requires looked for a second sources, but I think we're doing a real good job we have a dedicated.
[noise] focus specifically on coded supply chain and but when I get the daily updates on on the progress. So great question, we're trying to use predictive analysis identify the risks and.
Mitigated on a regular basis.
Okay. Thanks, guys yeah.
And our final question comes from Robert staying arm with Credit Suisse. Please proceed with your question.
Hi, Good morning, too too quick things Bill on the state and local budget constraints, you talked about before in public safety.
How do you think about how the crisis may have revealed any shortcomings in public safety communications and what might be the opportunity coming out of this thing and then I have a higher level question.
Just on budget austerity, and how you and Chris think about the possibility that some you know that the budget. The defense budget at some point B. funding, you know stimulus repayment that sort of saying not necessarily what we saw 10 years ago, but some kind of shift and spending priorities at the federal level couple of years, though so hey look really good good <unk>.
<unk> on on public safety I is this could drive an accelerated a shift from alomar to L.T. He you know that's been gaining some esteem with a with first net Fortunately we've got a radio that is alomar L.T. capable. Both are qualified <unk>. So I think we're really well positioned for that trends.
<unk> you know I think that having a a domestic supply base here is important in a in that particular area. You know we have you know certain technologies an application that you know could allow us to open up new markets. I go beyond you know first responders to health care providers that we've we've seen that happen over the last.
<unk> months. So you know the the state local finances, I think we'll be impacted in the near to medium term and we've tried to capture that in our thoughts you know, but it could drive an acceleration from alomar to L.T.E.I. relative to your question on the budget. So says you know that 21 budget came out you know a couple of months ago from the president.
Including I think two per cent pre a growth in the fight at that obviously was all all pre coded you know there's a there's a lot of discussion happening right now between the Authorizers and and the appropriators on what the budget will be for for 21. It was it came out about flatish from the president a lot of the things that we're focused on our our well funded in that and.
Putting a lot of the classify budget look pretty good there's $135 billion of so if you will surplus investment account funding. That's still remains out there is going to provide a little bit of you know tailwind to US you know as you out in the 20 to be on 22, and a 23, you've got an election here you know eventually you Gotta four trillion dollar.
Deficit that you know going to have to be sort of paid for in some ways you know, but at the same time, you got a very dangerous world you could see what what the North Koreans are doing with their ratings are doing with Chinese would do in Russia. So we're going to continue to be tested.
Threats remain there in the investments that to deal with the is trying to make a really long term investment <unk> in technology that to sustain beyond the next couple of years and I'm hopeful that that's a there'll be a bipartisan alignment to make sure. We continue to find a D.O.D. So so thanks very much for that question Robert appreciate that.
Thanks Bill.
That.
So thank you all for joining the call. This morning. During these uncertain times, we're managing risks aggressively and taking appropriate actions to drive value for all of our shareowners I hope we will soon be operating under more favorable conditions on the close by thanking our employees for going above and beyond to support our customers in are essential.
Missions as well as they healthcare workers first responders and everyone on the frontline fighting cold in 19, Thank you all and be safe.
Thank you this kind of play today's teleconference. He may disconnect Caroline Tat. This time. Thank you for your participation and have a wonderful day.
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