Q1 2021 Moog Inc Earnings Call
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Good day, everyone and welcome to the Moog first quarter of year 'twenty 'twenty, One and earnings Conference call. Today's conference is being recorded and at this time I'd like to turn the call over to Anne Laure.
Good morning, before we begin we call your attention to the fact that we may make forward looking statements. During the course of this conference call. The forward looking statements are not guarantees of our future performance and are subject to risks uncertainties and other factors that could cause actual performance to differ materially from such statements on.
Description of these risks uncertainties and other factors is contained in our news release of January 29, 2021 of our most recent form 8-K filed on January 29, 2021, and certain of our other public filings with the SEC. We've provided some financial schedules to help our listeners better follow along with the prepared comments for the.
Those of you who do not already have the document a copy of today's financial presentation is available on our Investor Relations webcast page at Www Dot <unk> Dot com John.
Thanks, Dan.
Good morning, Thanks for joining us we hope all of our listeners continues to be safe and healthy.
This morning, we reported on the first quarter of fiscal 'twenty, one and provide color on what we're thinking for the remainder of the year.
Overall, given the ongoing challenging operating conditions, we are pleased with the results of this quarter.
Last quarter, we told the market that we were planning for cohort to be with us throughout our fiscal 'twenty one.
Given this assumption we projected that our business. This year will be somewhat similar to the second half of fiscal 'twenty.
And my prepared remarks today I'll provide my usual comparisons to the same quarter last year and also some reflections on the comparison of Q1 to the average of the previous two quarters.
There remains considerable uncertainty around the ongoing impact of Covid on our business. Therefore, similar to last quarter, we've elected not to provide specific guidance as we believe the range of possible outcomes is beyond our ability to accurately forecast, we will however update the market on our assumptions for the <unk>.
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Similar to last quarter I have a range of my headlines under the headings of microeconomic microeconomic and then Moog specific items.
First on the macro front, it's been a very eventful and 90 days and the U S. We've seen the change and the administration with the Democrats, taking control of both houses of Congress as well as the White House.
At this early stage it is hard to predict the impact of this political shift and our business, but it is probable the tax and trade and defense spending will all of you on the agenda over the coming years.
One thing that does seem clear is and interest rates will remain very low for several years to come.
This quarter four years of Brexit discussions came to a close as the UK left the EU with the last minute deals.
We don't anticipate any immediate impact on our business from the new trade arrangements between the UK and Europe.
Finally, we all rejoiced and the announcement of approved vaccines against Covid and at the same time worried about the emergence of more infectious screens and the surgeon cases in Europe and the U S. As.
And as the calendar year closed out only China reported <unk> GDP growth for 2020, while the rest of the world strong colors of the burden of the pandemic.
Secondly, on the microeconomic fronts consolidation across our major markets continued with Lockheed agreeing to buy arrow, Jess Teledyne, combining with flair and MTS being carved up between amphenol and ITW.
Government spending and our defense and space markets remain strong and demand for medical products continued it was great to see that the trust of 737, Max was certified to begin flying again, and Boeing resumes deliveries to customers.
Unfortunately wide body demand has continued to weaken and excluding the impact of holidays. There was no appreciable recovery and air traffic.
Third it was a solid quarter for our business under the circumstances.
Relative to a year ago sales and earnings were lower.
However on the positive side, comparing our performance with the second half of fiscal 'twenty first quarter sales held steady and earnings per share were up sharply on and improved mix and aircraft.
We also generated very strong cash flow and our first quarter.
The Covid continued to impact the performance and with the surge in cases and the Western Hemisphere, we saw an increased impact on our operational efficiencies across our footprint.
We bought back of 150000 shares this quarter and completed the first significant acquisition and our aircraft business and over a decade.
At the end of December we paid $78 million to acquire Genesis The company, which provides the range of flight instruments displays and autopilot systems for military and commercial programs.
Genesis will out of about $40 million to sales of fiscal 'twenty, one and will be neutral to earnings as a result of the first year of accounting impacts.
And also booked our first significant production order for our turret system with the award of the short on contract.
Now, let me move to the details starting with the first quarter results I'd.
I'd remind our listeners that we provided of three page supplemental data package posted on our webcast site, which provides all of the detailed numbers for your models.
We suggest you follow this in parallel with the text.
Starting with the first quarter sales and the quarter of $684 million were 9% lower the last year sales.
Sales were up and our defense space and medical markets.
And as were lower across our industrial portfolio of doubt over 50% and our commercial aircraft business.
Taking a look of the P&L, our gross margin was down slightly on the lower sales.
R&D and SG&A spend was similar to last year, while interest expense was down on lower rates.
Last year, we incurred a $4 million charge associated with calling our high yield bonds, which showed up in other income. Excluding these unusual items. The other income line is flat with last year.
The effective tax rate this quarter was 24, 9%, resulting in net income of $38 million, which is down 24% from last year and earnings per share of $1 17 down 19% on a lower share count.
Fiscal 'twenty one outlook.
90 days ago, we started the year with what we believe is a conservative set of assumptions, we believe COVID-19 COVID-19 would be with us throughout our fiscal year.
We assumed our defense space and medical markets would remain strong we predicted no recovery and our industrial markets and free.
And we were optimistic that our commercial OEM business would stabilize and we might see a slight recovery of the aftermarkets towards the end of the year.
With one quarter under our belts, we think our assumptions still largely hold true.
On the Covid fronts of the good news of the vaccine is being tempered by the surge and cases in Europe, and the U S and the slow pace of backed vaccine delivery taken.
Taken together, we believe we continue to have to deal with the effects of COVID-19 throughout our fiscal year.
Relative to the second half of fiscal 'twenty, our defense space and medical markets are holding up as we expected.
Our industrial markets of actually weakened and the first quarter, but we think we may have hit the bottom in Q1 and could see a slow improvements through the rest of the year.
Finally on commercial OEM customers continued to reduce the production forecast, although we believe they are now settling down and the commercial aftermarket actually strengthened and the first quarter.
Given the quarterly variation, we see and the commercial aftermarket it's too soon yet to determine if this is the trends all and all we think the year will continue to unfold much as we thought 90 days ago.
And.
Now to the segments starting with aircrafts.
Sales of the first quarter of $287 million or 16% lower than last year.
It's the same story as the last few quarters with strength on the military side and weakness on the commercial side.
Military OEM sales were very strong this quarter on higher F 35 activity robust foreign military sales and strength and a funded development programs.
Military aftermarket was more or less in line with last year.
On the commercial side OEM sales were down almost 60% from a year ago sales.
Sales to both Boeing and Airbus were down on every platform ranging from 40% lower on the <unk> hundred 20 to over 90% lower of the 737.
Sales of our two flagship programs 787, and the <unk> hundred 50 were down between 50, and 60% business jet sales were down almost 70%.
The commercial aftermarket was down a third with weakness across the complete portfolio.
Comparing Q1 to the run rate of the second half of fiscal 'twenty, we saw strong growth and our military OEM platforms driven by the same three items mentioned above 35, foreign military sales and fund the development.
The military aftermarket was lower after a very strong finish to fiscal 'twenty.
On the commercial side, the commercial OEM business was steady signaling a graduate the stabilizing of demands while the commercial aftermarket was up on higher 787, and <unk> hundred 50 activity.
Aircraft margins margins in the quarter of nine 7% were lower than a year ago as a result of the lower commercial sales.
The good news is that margins were up nicely from the adjusted margins of the previous two quarters as a result of and unusually positive mix.
This mix was the result of particularly strong foreign programs and Q1, we.
We don't anticipate Omics would be quite so favorable as we move through the next few quarters.
Aircraft fiscal 'twenty one.
Coming into the year, we described our outlook for aircrafts as follows we were assuming continued strong demand from our military customers customers stabilization of our commercial OEM demand and a modest pickup and the commercial aftermarkets towards the back half of the year.
As of today those assumptions are unchanged.
On an external perspective, we're seeing continued strength of the military sides of the.
The long term commercial OEM that demand is still moving downwards, but seems to be gradually settling and.
And while the commercial aftermarket was strong and Q1 sales were within the normal quarterly volatility we see in this and markets.
Internally, we're managing through increased pressure on our operations capacity as the result of higher Covid cases.
The completion of the Genesys acquisition will add about $40 million of the aircraft segment sales. This year split 50, 50 between military and military and commercial.
As I said before given the impact of first year of accounting the acquisition will have a negative and a negligible impact on operating profit.
Turning now to space and defense sales.
Sales and the first quarter of $188 million were in line with the first quarter of last year.
Sales in the space applications continued very strong up over 20% from a year ago.
We had growth and our NASA work across of hypersonic programs and and integrated space vehicles. The.
Defense sales were 11% lower than last year.
And we serve four submarkets within our defense sector with two of this quarter and two zone.
Sales on the military vehicles and it's the naval applications were up and the quarter by the sales of Lasalle steering systems as well as into security applications were down.
Our security business has been particularly hard hit by the pandemic as much of that business requires on site installation Mark and this has slowed to a standstill over the last nine months.
Comparing this quarter with the run rate of the second half of fiscal 'twenty shows that the space business is right in line, while defense is slightly lower it's still within the normal quarterly variation we might expect.
The margins.
Space and defense margins and the quarter of 12, 2% continued to be healthy, albeit down somewhat from the last few quarters.
And our other businesses, we're seeing some increased pressure on operational efficiency as a result of higher COVID-19 cases across our facilities.
Based on defense fiscal 'twenty one.
Coming into the quarter, our assumption was that we'd see continued strength and both the space and defense markets as we move through fiscal 'twenty volume.
This is true for the first quarter and continues to be our operating assumption as we look out over the coming three quarters.
Turning now to industrial systems.
Sales and the first quarter of $209 million were 9% lower than last year.
We experienced sales declines and three of our four major markets with medical providing the only growth of 3% from a year ago on higher pump sales.
Sales of the energy markets were marginally lower driven by lower sales of components into exploration applications.
Sales into industrial automation were down over 10% with weakness across the entire portfolio of products.
This is our biggest sub markets and continues to be pressured from the combined effects of the industrial slowdown in Europe, and the U S compounded by the impact of Covid.
And finally sales of the simulation and test markets were down almost a third with flight simulation, particularly hard hit as the result of the results of the drop and airline activity.
Compared to the run rate of the second half of last fiscal year industrial and systems were down a further 7% with weakness in each of our submarkets.
Simulation and test was hardest heart assist as sales of our flight simulation customers continued the quarterly sequential decline since Q2 last year.
Sales and medical applications were also lower as surge demand for COVID-19 related components waves.
Industrial.
The systems margins.
Margins in the quarter of nine 5% were lower than last year on the lower sales and the impact of Covid.
And as we're in line with the average adjusted margins of the previous two quarters.
Industrial systems fiscal 'twenty one.
Our sales assumption coming into the year was flat sales and our energy industrial automation and simulation and test markets.
And also predicted that our medical market with the remains strong, albeit down somewhat from the highest we saw and the recent quarters as demand for COVID-19 related equipment slowed.
After one quarter medical sales were in line with our thinking up from a year ago and down from the second half.
Although sales into our other three submarkets continues to weaken and the first quarter, we were encouraged by and improving book to Bill ratio.
And therefore for the full year, our sales assumptions remain unchanged.
Okay.
Summary guidance.
It's been a good start of the year with the.
<unk> of our business practices to live with Covid, and our customers our suppliers and our internal operations continue to function.
We managed our way through some efficiency impacts and the first quarter as the result of increased infections across our footprint.
The good news is the vaccines are underway.
Net good news as of the pace of distribution is slower than we might have hoped.
Therefore, we continue to plan for Covid restrictions across our business for the remainder of the fiscal year.
Looking at our five major markets defense space and medical remained strong industrial and continued to soften in the first quarter and our promotion of <unk> business stabilized relative to the previous six months.
This quarter, we allocated our capital to growth with the acquisition of Genesis and our aircraft segment.
Our overall approach to capital allocation remains unchanged.
Priorities are organic investments acquisitive growth and returns of shareholders with all decisions based on long term value creation.
As we emerge from Covid over the coming year, we are optimistic that wed see more acquisition opportunities and and the recent past.
The present financial markets are providing easy access to all of those free capital, which seems to be driving acquisition prices into the stratosphere.
And from our perspective plentiful and free money does not change the underlying economics and risks inherent in any acquisition and we intend to remain disciplined and our approach to valuation and therefore.
And therefore, we remain cautious not to overpay.
As we look to the coming three quarters will continue we continue our hybrid working practices with most of our staff working remotely.
Over the last nine months, we've learned how to live with Covid and have reconfigured our business to ensure the company remains strong and that we're in the position to invest and growth.
Looking to the future we continue to pursue our long term strategy of technology focus and diverse end markets strong balance sheets, and internal investments and complementary acquisitions.
Now, let me pass it to Jennifer who will provide more color on our cash flow and balance sheet.
Thank you John and good morning, everyone. We had another very strong cash flow quarter free cash flow and the first quarter with $74 million.
Our conversion of almost 200 per song that comparison of $50 million of free cash flow and the same period a year ago John.
Try and collections on receivable slower growth in inventory and all of our compensation payments and reduced capital expenditures drove the increase and free cash flow the.
The $74 million of free cash flow and Q1 compares with an increase and our net debt of $25 million.
During the first quarter, we completed the Genesis of acquisition and our aircraft business, which increased our net debt by $78 million. We also repurchased just over 150000 shares of our stock for $10 million.
And paid our quarterly dividend.
Net working capital, excluding cash and debt as a percentage of sales at the end of Q1 was 29, 2% compared to 28, 4% a quarter ago. The.
The increase is being driven by the addition of networking capital from the Genesis of this acquisition with total being added and the land sales due to the timing of the acquisition without the Actelion acquisition networking capital of the percentage of sales within 28, 6% on.
The slightly from a quarter ago.
Capital expenditures and the first quarter were $20 million up from $18 million and the fourth quarter and down from $27 million and the same quarter a year ago.
This quarter and we began to invest after the meeting our capital and to compliance and business critical projects and the early stages of the pandemic.
Our strong financial position today of foreign to us the opportunity to catch up on capital and in Boston and the delayed and in fact and effort to increase productivity and gain efficiency.
Depreciation and amortization totaled $21 million continuing at the fairly constant level at the experienced last year.
Our leverage continues to be and our target zone.
<unk> had very strong free cash flow generation during the past year, which fully offset the decline and our trailing 12 month EBITDA that resulted from the pandemic.
And the first quarter acquisition, our leverage ratio and Q4 time, the athene and the quarter ago.
And the impact from the acquisition cost of our leverage ratio to increase to two six times as of the end of our third quarter.
At quarter, and our net debt was $869 million, including $98 million of cash and the.
Asia components of our debt were $500 million of senior notes for.
$400 million of firing on U S revolving credit facility.
And $67 million outstanding on our securitization facility.
We have $660 million of unused borrowing capacity on the U S revolving credit facility.
Our ability to draw on the unused balance is limited by our leverage covenant, which is the maximum of four.
<unk> on a non-GAAP basis.
Based on our long range, we could have incurred an additional $474 million of net debt as of the end of our first quarter.
And we're confident that our existing facilities provide us with the flexibility to invest on our future.
Cash contributions to our global and retirement plan totaled $13 million and the quarter compared to $10 million and the first quarter of 2020.
Global of retirement planning and the first quarter was $18 million the.
And then the first quarter of 2020.
Our effective tax rate was 24, 9% and the first quarter down just slightly from 25, 2% and the same period a year ago.
And did not have any significant special items and either of the period.
At the end of our first quarter 12 month backlog was $1 9 billion.
Up 14% from $1 $7 billion per quarter ago with increases and each of our segments.
The increase and our total backlog during the quarter was much more dramatic total backlog at the end of Q1 was $4 7 billion compared to $2 6 billion of coronary call <unk>.
During the quarter, we renewed several long term arrangements with customers and our aerospace and defense business.
The supply arrangements cover periods of up to 10 plus years.
And your expanded recording and ASC six on tech and capture the full value of these arrangements and our total backlog.
And we expect free cash flow generation in 2021 to be in line with our long term target of 100% comparison.
We continue to see short term pressures on inventory and our customers continue to change their demand and the work to flow our incoming receipts of inventory.
However, the benefits associated with our efforts to create operational efficiencies and our business will outweigh. These pressures later in 2021.
We are beginning to ramp up our investment and capital expenditures from the constrained level of the last few partners.
We are well positioned to invest in our business and we've returned to our balance capital deployment strategy.
And back in our operation and explore opportunities to make strategic acquisitions and return capital to shareholders.
With that I will turn it back to John for any questions you may have.
Sure.
Thanks, Jennifer Lisa avail.
Available to answer the questions now if there are questions and the queue. Please.
Thank you if you would like to ask a question on the phone lines. Today, you can press star one on your telephone keypad. If you are on the speaker phone. Please make sure you're on mute option is turned off to allow your signal to reach our equipment and <unk>.
The and everyone that the star one.
We'll take our first question from Cai von <unk> with Cowen. Please go ahead.
Yes, thank you great quarter so.
Jennifer your conversion was 195% and the first quarter why only 100 per cent for the year.
So as we as we look out to the rest of the year, we've had very strong.
Cash flow in the first quarter and a lot of that has been driven by our contract advances for both of our providing cash of almost $30 million and the first quarter as we look towards the rest of the year and we'll be working on some of the back down so that's going to be creating some pressure.
And Theres also some pressure and some other areas for instance on in receivables, we did get a one time benefit last year. So there is potential for some of that to reverse as perhaps.
Perhaps funding.
Levels for Dod contract changes and the constrained levels of capital expenditures is another area that.
We would expect to the increasing our capital expenditures.
Based on our strong financial position that we've got.
And so there is some pressures as we look forward as we.
Got it and look to to spend and the capital expenditure area as well, but there are some opportunities that will offset that total with receivables.
On potential pressure and there'll be some benefit relief on the payable side for the same reason and.
And then on slowing the incoming receipts on inventories and that should provide us on.
On benefit compared to where we are and the first quarter. So that's really a combination of all of those things.
Good answer so.
John Your aircraft sales of your military aircraft sales.
And the huge the OE could you give us a little more color in terms of what drove that.
And while it was it was three things guy that really are driving the increase it's the F 35.
A little bit of that is timing related as we talked about in the past it depends on when <unk> got contracts.
Material usage because of course on a lot of it is long term contracts.
On the F 35 was very strong and the quarter, we had strong foreign military sales. This is a seasonal thing that we see.
Each year and the first couple of quarters, we tend to have some foreign military programs that are stronger so that was stronger and the first quarter.
And relative to the second half and then and fund the development continues very strong Cogs and so those were the three items that we're really driving the sales the sales increase on the military side on the OEM military side.
And therefore, we should look for strong gains for the year and military aircraft.
And I E.
So I think we'll continue to see a strong year, but I don't think for the full year.
It's probably going to be a bit up from last year. That's what we said all along and we think military and the whole defense business will remain strong for the year.
Don't think we would continue with the pace of the first quarter, but it'll be it'll be a good view of the first quarter was particularly strong and I'm not sure that we continue with that pace of.
Annualize that I think thats, probably a little bit too far.
Got it. So last question you had that huge increase in backlog and maybe give us some more color on that and particular the the aircraft programs, where you signed up for 10 years and whether you feel of the contract terms are a little better than they've been in the past.
So all of these are all of the as I mentioned, there and our A&D business and we didn't find the multiple supply agreements that for a long term period.
Aren't going to comment on the specific.
In terms of our customers that we've had.
And we do believe that the terms are mutually beneficial both for our customers and current.
And so.
Okay Super Thank you.
Yeah.
Thanks, guys.
We will take our next question from Ken Herbert with Canaccord Genuity.
Good morning, Ken.
Hi, good morning, John and Jennifer.
I wanted to first ask on the aircrafts controls.
Really nice sequential improvement of the margins and that business. John I know you called out mix as a benefit but can you provide any more any more detail on your expectations for margins and that business. It sounds like maybe the stepped down a little sequentially into the second quarter, but can you help frame that up for us.
Yes.
You're right Ken.
We did see a nice a very nice sequential improvement if you if you adjusted the margins and the second half there were some unusuals in the fourth quarter, but the margins are running 4% to 5% and the second half and they popped up over 9% and the first quarter, but as I said, we and we have a seasonality and some of our businesses that in the first quarter or two and.
We tend to have.
More foreign military sales as the programs and that really the debt that does impact the mix and so positive very positive start of the year, but we do not anticipate that was nine 5% margins to go throughout the year just given the the loss of business that we've seen on the commercial side. So we see the probably ticked down as we go through the year, but it is.
Better than the second half of last year, I think we will end up the year better than the second half average, but we're not going to see that same performance as we go through the full year, we don't take.
Okay. That's helpful and Theres been been some some initial commentary from the by the administration about pausing some international sales.
Considering sort of on the margin benefit there do you see any risk to any of your.
I guess in 'twenty one.
Longer term, perhaps who knows but is there any risks and 'twenty, one specifically share round of 35 or other programs that we should think about.
So we don't we don't know all of the details of what that might mean at this stage again I don't we're not anticipating any significant risk as we look out over the balance of 'twenty. One as you say beyond that things could change, but the <unk>.
Given the lead times on most of the types of things that we do typically.
The next six 912 months are oftentimes already pretty much baked in and so there could always be of change, but we're not anticipating any significant impact from changes there over the next over the rest of this fiscal year.
Okay, and then just finally and your space business.
Really nice growth against.
Obviously very difficult comps the.
Rest of of 'twenty, you put up.
30% to 40% growth in the space business.
Do we see a step down sequentially and growth in the space business are you able to maintain the growth against.
Obviously, the really strong growth in 'twenty.
Yeah.
So.
Yes.
We went from fiscal 19, and we did about $220 million and our space business fiscal 'twenty, we did almost $300 million.
We're anticipating that we'd see some additional growth this year, but not that type of growth percentage I mean that was an enormous growth that was a 30% to 40% growth. So we anticipate that we might see high single digits, maybe growth this year and the space business. If it continues to play out the way it is.
But not that same level of growth, but it's still growth off of a very strong 2000, and so I consider that a real positive. So so our space business is becoming a bigger part of the portfolio.
It's very impressive.
A price by the the first quarter growth and space because it seemed to be a bit of ahead of expectations.
No.
Does the backlog.
And the contracts and these businesses tend to.
Go out quarters of sometimes even years Ken its.
It's relatively it's not too difficult to look at the contracts that you have and backlog and what you think is coming in to predict the sales over the next couple of quarters. So to say that the first quarter was the significant surprises of nothing would that be true on the sales side I'd.
I'd say the broader the the growth and this and the.
And the space business over the last 345 years has been a real surprise. If we were sitting here together three or four years ago I could not have anticipated we would not of anticipated I don't think the marketed the type of strength, we're seeing and space and of course of what's happened is.
We want to get back to the moving by 2024 was that changed now perhaps with NASA started spending a ton of money you've seen.
The emergence of the space force and the space layer and all of these apps.
Applications, where space is viewed as the next frontier in terms of the battleground and so all of that is driving it and then you've got the hypersonic huge push on hypersonic over the last few years a good portion of that is and the space side of our business. So there's a whole series of of what I'd call macroeconomic effects coming out of the government, that's really driving that it's not the commercial side of it that that may.
Pick up again over the coming years, but that's actually been and the doldrums for quite a few years.
So that's not where it's at it's really on the defense side of it that we've seen and so on hypersonic and it's a lot of additional satellites for space defense and space defending space and then it's the pick up and that is the spending on the SLS.
John Thanks, a lot for all of the color nice quarter.
Thanks, Ken.
Yeah.
Alright, as a reminder, everyone that is star one to ask a question you have a question from Michael <unk> with true of Securities.
Hi, Good morning, guys. Good morning, Thanks for taking the question nice results.
Maybe just to kind of go back.
Ken its kind of original question on the margin can you maybe just.
Obviously, the second half was pretty depressed you got this mix up.
On this quarter, but as I as I think about aircraft, maybe going back I guess at the mid 19, you had the.
The operational challenges.
Challenges that you disclosed it seems like that was going to be a multiyear effort to make improvements there around <unk>.
Quality on time scrap can you just give us the <unk>.
General update around.
And of what's been happening and the in the aircraft control segment on those operational improvement initiatives and I would think you know obviously <unk>.
Volume fall off a cliff and aerospace, but amid lower volume as it might actually have been a little bit easier to implement some of these changes and I guess, what I'm getting at is when do we really start to see some of those benefits should we should we think about that exiting this fiscal 'twenty, one or just any color there on on what's been going <unk>.
Turning on the operational side.
Sure.
Yes, so a couple of years ago, Michael as you describe it we kind of hit.
We hit a real challenge of the aircraft business and we kind of took a step back and said look we built the business that was designed around the components component supplier and we've now become the system supplier and we have discovered that our operational capabilities are good enough of share component sky and theyre not good enough at the level that we're not playing it and we really need to kind of retool around us.
And you May remember at the time, we said we need to bring in additional talent into that area in order to do that and we did two things we've moved quite a lot of it we moved quite a lot of internal talent some of our best management folks into the operations on the aircraft side as they are now well and engaged and doing a lot of really good stuff, we changed out of debt.
I think we got six six major production facilities I think five of the six of the difference manager running them now different guy running it at the most senior level.
And so we really the injected a lot of times and down through the supply chain et cetera, and sort of internally. We then also engage with outside consultants. We spent the year with them working through primarily the supply chain side of it because that was the biggest challenge area for us.
Lawrence of ton from that have been working really hard over the last couple of years to implement those our engagement with the consultants as kind of wound down mostly because we got to the point, where we've established the processes now it's a matter of embedding them and working on <unk>.
And what's happened of course is.
Nine months ago, as Covid hit us and so our plans to continue making the types of improvements that we will go to do really got day rails because of Covid and theres been a dramatic shift in terms of I described and the and Mike.
And my remarks, just our available capacity, we've had we've had situations where.
We're running three shifts but on the second or third shifts we may have a relatively small and skeleton crew and of particular area, let's pick and area like grinding we've got three of four people.
If one of the contracts Covid, we send the mall.
All of the postal folks around them on hold for two weeks and so we're down for two weeks and that particular area of which of course is a step and the process of getting products out and so we've seen those have been the challenges we've been working with and have really absorb time and efforts. We also and the past we would have the changeover shifts the next guy who would come in before the.
And that person left now we have a GAAP, we've got cleaning procedures when people come they do they also have their own unique procedure. So we've seen and impact on efficiency associated with that and a lot of the the great ideas we had about.
On improving the processes and re leg of the value streams and all of that that has really taken a backseat partially also because we spent a lot of people home and we want minimum people and the factory. So I would say that our operational improvement program. We've continued to move along but it has dramatically slowed over the last nine months from what we would have hoped and anticipated.
Having said that now that we've got Covid at least we know how to deal with as we are continuing to work those issues.
And I would anticipate that over the next nine months I think by the backend of this year, we should start to see that impact. If you remember when it came up I said, what we probably see as we start to see it and inventory first but first of all we see it and the customers better delivery on time.
Making sure our customers and more satisfied.
And we'd see it and inventory that should start to come down and then finally, we start to see it and the margins.
Currently on the customer front, we've already seen that we've seen that over the last year and we've maintained that through the COVID-19 situation of course with quantity is dropping off significantly and the commercial side. It was relatively easy to do that but we had already seen that before that happened the inventory piece, we've not seen and thats because our commercial business has just fallen off so quick.
And that our ability to slow our incoming receipts as we've been chasing down the curve for the last nine months and as Jennifer said, even this quarter. We saw the the long term production rates at the Oems and their advertising continued to come down. So we continue to go back to our supply chain and so you got the SNB less and less but our smaller players and.
We don't want the just shut them up so our inventory and our ability to slow it has come down and so we're not seeing the inventory impact of the operational improvements because it's being masked by the impact of Covid on the drop and the commercial and then of course as I said the margin piece, we'd see nature, we anticipate that as we get through this year, we should start to see both the inventory piece and into next.
Year that margin improvement piece.
Got it that's helpful. So I mean, as we look at margins on.
The emerging from this downturn, obviously the margins were challenged into the upturn barely scratch and that kind of 10% level do you envision structurally higher margins, even if maybe the 787% and $3 50 kind of hold these rates, if we don't get back to the narrow body.
The volumes do you think you can do structurally higher margins than say, what you were doing and kind of the.
2018.
The fiscal 19 timeframe.
I think.
If we can stabilize the demands of course, we've got factories that are sized far 10 of 12 <unk> hundred 50 787 of the month, yes.
And thats the physically that site. So you end up no matter, how you do it you end up having under utilization and some of those factories, but we have we've resized. The staff. Although we continue to look at that because of the market.
The quantity has continued to come down, but we think we've resized and we will stabilize and then we start to see the operations improvement come in and so yes, even at the lower quantities of assuming the can stabilize and we start to get some rhythm there. We believe that as we look out over the next couple of years, we can get the margins back up to what they were a couple of years ago and from there we can.
To see improvements, particularly if we started the see the volume of the commercial sites of couple of things.
Got it thanks, guys I'll jump back in the queue.
Thanks, Mike.
Alright, and must remind everyone that is star one to ask a question.
All right and there are no further questions at this time I'd like to turn the call back over to John Mcconnell for any additional or closing remarks.
Thank you Lisa Thank you very much to everybody for listening in as we said we feel like we're off to a good starts in fiscal 'twenty one.
And will inevitably remain the.
The challenging year I think for all of US as we struggle of our way through Covid and hopefully we'll continue to see improvements over the coming quarters. Thank you for your time, we look forward to come back to you and the 90 days. Thank.
Thank you Lisa.
Youre welcome that does conclude todays presentation. Thank you for your participation you may now disconnect.
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