Q1 2021 Moog Inc Earnings Call
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Please standby.
Good day, everyone and welcome to the Moog first quarter of year 'twenty 'twenty One 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 the call your attention to the fact that we may make forward looking statements. During the course of this conference call. These 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.
A description of these risks uncertainties and other factors is contained in our news release of January 29, 2021, 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 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 bulk dot com John.
Thanks Anne.
Good morning, Thanks for joining us we hope all of our listeners continues to be safe and healthy.
This morning, we report 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 Cobra 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.
In 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 have 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 90 days in the U S. We've seen the change in the administration with the Democrats, taking control of both houses of Congress as well as the White House.
It's early stage it is hard to predict the impact of this political shift in our business, but it's probable of the tax trades of defense spending will all of you on the agenda over the coming years.
One thing the does seem clear is that 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 this new trade arrangements between the UK and Europe.
Finally, we all rejoiced and the announcement of approved vaccines against Covid at the same time worried about the emergence of more infectious screens and the surge in cases in Europe and the U S. As.
As the calendar year closed out only China reported of <unk> GDP growth for 2020, while the rest of the world shrunk under 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 NTSB carved up between amphenol at ITW.
The government spending in our defense and space markets remain strong and demand for vertical products continued it.
It was great to see that the truck the 737 Max was certified to begin flying again.
<unk> resumed deliveries to customers on.
Unfortunately wide body demand has continued to weaken and excluding the impact of holidays. There was no appreciable recovery in air traffic.
Third it was a solid quarter for our business under the circumstances realm.
Relative to a year ago sales and earnings were lower.
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 an improved mix and aircraft.
We also generated very strong cash flow in our fourth quarter.
The Covid continued to impact the performance and with the surge in cases in 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 in our aircraft business in 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 add about $40 million to the sales of fiscal 'twenty, one and will be neutral to earnings as a result of the first year accounting impacts.
We also booked our first significant production order for our turret system with the award of the short of that contract.
Now, let me move to the details starting with the first quarter results.
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 of the quarter of $684 million were 9% lower the last year sales.
Sales were up in our defense space and medical markets.
Those were lower across our industrial portfolio of doubt over 50% and our commercial aircraft business.
Taking a look at 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 the lower share count.
Fiscal 'twenty one outlook.
90 days ago, we started the year with what we believe with the 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 will remain strong we predicted no recovery in our industrial markets.
Finally, 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 has been tempered by the surge in cases in Europe, and the U S and the slow pace of Baxter vaccine delivery.
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 in 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, our commercial OEM customers continue to reduce the production forecast.
We believe they are now settling down and the commercial aftermarket actually strengthened in the first quarter.
Given the quarterly variation, we see in the commercial aftermarket it's too soon yet to determine if this is the trends all in all we think the year will continue to unfold much as we thought 90 days ago.
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 of the military side and weakness on the commercial side.
Military OEM sales were very strong this quarter on higher F 35 activity robust part of the military sales and strength in our funded development programs.
The 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 to both Boeing and Airbus were down on every platform ranging from 40% lower of the <unk> hundred 20 to over 90% lower of the 737.
Sales of our two flagship programs 787 of the <unk> hundred 50 were down between 50% and 60% business jet sales were down almost 70%.
The commercial aftermarket was down the third with weakness across the complete portfolio.
Comparing Q1 to the run rate of the second half of fiscal 'twenty, we saw strong growth in 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 the results 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 an unusually positive mix.
This makes with the result of particularly strong foreign programs in Q1.
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 of the commercial aftermarket towards the back half of the year.
As of today those assumptions are unchanged from.
I'm, an external perspective, we're seeing continued strength of the military side the.
The long term commercial OEM that demand is still moving downwards, but seems to be gradually settling.
While the commercial aftermarket was strong in Q1 sales were within the normal quarterly volatility we see in this end market.
Internally, we're managing through increased pressure on our operations capacity as the result of higher Covid cases.
Finally, the completion of the Genesys acquisition will add about $40 million of the aircraft segment sales. This year split 50 50 between military and commercial.
As I said before given the impact of first year accounting the acquisition will have a negative or negligible impact on operating profit.
Turning now to space and defense sales.
Sales in the first quarter of $188 million were in line with the first quarter of last year.
Sales in the space applications continued very strong of over 20% from a year ago.
We had growth in our NASA work across a hypersonic programs and an integrated space vehicles.
Defense sales were 11% lower than last year we.
We serve four submarkets within our defense sector with two up this quarter from $2.
Sales in the military vehicles and it's the naval applications were up in the quarter by the sales of missile 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 work 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 in the quarter of 12, 2% continued to be healthy, albeit down somewhat from the last few quarters.
As in 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 in both the space and defense markets as we move through fiscal 'twenty volume.
This helps the 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 in the first quarter of $209 million were 9% lower than last year.
We experienced sales declines in three of our four major markets with medical providing the only growth up three percentage 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.
Sales into industrial automation were down over 10% with weakness across the entire portfolio of products.
This is our biggest submarkets and continues to be pressured from the combined the effects of the industrial slowdown in Europe, and the U S compounded by the impact of Covid.
Finally sales of the simulation of test markets were down almost a third with flight simulation, particularly hard hit as a result of the result of the drop in 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.
Emulation testing the hardest heart assist as sales from our flight simulation customers continued the quarterly sequential decline since Q2 last year.
Sales into medical applications were also lower as surge demand for COVID-19 related components waves.
Industrial systems margins.
Margins in the quarter of nine 5% were lower than last year on the lower sales and the impact of Covid margins were in line with the average adjusted margins of the previous two quarters.
The industrial systems fiscal 'twenty one.
Our sales assumption coming into the year was flat sales in our energy industrial automation the simulation of test markets.
Also predicted that our medical market with the remains strong, albeit down somewhat from the highs we saw in the recent quarters as demand for Covid 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 in the first quarter. We were encouraged by an improving book to bill ratio. Therefore.
Therefore for the full year, our sales assumptions remain unchanged.
Okay.
Summary guidance.
It's been a good start of the year, we've adapted 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 from the first quarter as a result of increased infections across our footprint.
The good news is the vaccines are underway.
Net good news is that the pace of distribution the 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 continued to soften in the first quarter and our commercial <unk> business stabilized relative to the previous six months.
This quarter, we allocated our capital to growth with the acquisition of Genesis in our aircraft segment of.
Our overall approach to capital allocation remains unchanged our 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 than in the recent past.
The present financial markets of providing easy access to all of those free capital, which seems to be driving acquisition prices into the stratosphere.
From our perspective plentiful free money does not change the underlying economics and risks inherent in any acquisition and we intend to remain disciplined in our approach to valuations.
Therefore, we remain cautious not to overpay.
As we look to the coming three quarters will continue we continue our hybrid working practices.
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 a position to invest in growth.
Turning to the future we continue to pursue our long term strategy of technology focus diverse end markets strong balance sheets 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 Good morning, everyone. We had another very strong cash flow quarter free cash flow in the first quarter with $74 million.
The conversion of our 200 per song.
That comparison of $50 million of free cash flow in the same period a year ago.
John collections on receivable slower growth in inventory.
Compensation payments and reduced capital expenditures drove the increase in free cash flow the.
The $74 million of free cash flow in Q1 compares with an increase in our net debt of $25 million.
During the first quarter, we completed the Genesis of acquisition in 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 from that as a percentage of sales at the end of Q1 with 29, 2% compared to 28, 4% a quarter ago.
The increase is being driven by the addition of networking capital from the Genesis acquisition will total being added in the land sales due to the timing of the acquisition without the Actelion acquisition net working capital as a percentage of sales within 28, 6%.
The slightly from a quarter ago.
Capital expenditures in the first quarter were $20 million up from $18 million from the fourth quarter and down from $27 million from the same quarter a year ago.
This quarter, we began to invest after the meeting our capital bank of compliance and business critical of project in the early stages of the pandemic.
Our strong financial position affords us the opportunity to catch up from capital investment at the edge of delayed and in fact, an effort to increase productivity and gain efficiencies.
Depreciation and amortization totaled $21 million continuing at the fairly constant level at the experienced last year.
Our leverage continues to be in our target zone. We have had very strong free cash flow generation during the past year, which fully offset the decline in our trailing 12 months EBITDA that resulted from the pandemic.
After the first quarter acquisition, our leverage ratio would have been Q4 time, the ethane in the quarter ago.
The impact from the acquisition cost of our leverage ratio to increase to two six times from the <unk>.
End of quarter.
At quarter end, our net debt was $869 million, including $98 million of cash.
Major components of our GAAP were 500 million of.
Senior note.
<unk> $400 million of firing U S revolving credit facility.
And $67 million outstanding on our securitization facility.
We have $660 million of unused borrowing capacity on our U S revolving credit facility.
Our ability to draw on the unused balance with limited by our leverage Covenant, which is the maximum of four <unk> times on a net GAAP basis.
Based on our long range, we couldnt incurred an additional $474 million of net GAAP path of the end of our first quarter.
We are confident that our existing facility provide us with the flexibility to invest in our future.
Cash contributions to our global retirement plan totaled $13 million in the quarter compared to $10 million in the first quarter of 2020.
Global of retirement plan expense in the first quarter was $18 million.
Same as in the first quarter of 2020.
Our effective tax rate was 24, 9% in the first quarter down just slightly from 25, 2% in the same period a year ago.
Did not have any significant special items in 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 in each of our segments.
The increase in our total backlog during the quarter was much more dramatic total backlog at the end of Q1 was $4 7 billion.
Per to $2 $6 billion of coronary call.
During the quarter, we renewed several long term arrangements with customers in our aerospace and defense business.
Supply arrangements cover period after 10 plus years.
<unk> and <unk> reporting an ASC 606, the capture the full value of these arrangements and our total backlog.
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 as our customers continue to change their demands and embark to flow our incoming receipts of inventory.
However, the benefits associated with our efforts to create operational efficiencies in our business will outweigh. These pressures later in 2021.
We are beginning to ramp up our investment in capital expenditures from the constrained level of the last few partners.
We are well positioned to investing in our business and we have returned to a balanced capital deployment strategy.
We'll invest in our operations 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 channel.
Sure.
Thanks, Jennifer Lisa avail.
Available to answer questions now if there are questions in the queue. Please.
Thank you if you would like to ask a question on the phone line today, you can press star one on your telephone keypad. If you are on the speaker phone. Please make sure. Your mute option is turned off to allow your signal to reach our equipment.
Again, everyone that of 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% in 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. So those of our providing cash of almost $30 million in the first quarter as we look towards the rest of the year, we will be working on some of that down so that's going to be creating some pressure.
There is also some pressure in some other areas for instance 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 DMD contract changes and the constrained levels of capital expenditures is another area. That's.
We would expect to be increasing our capital expenditures.
Based on our strong financial position that we've got.
So there are some pressures as we look forward as we.
The two to spend in the capital expenditure area as well, but there are some opportunities that will offset that total with receivables.
The potential pressure of there'd be some benefit relief on the payable side for the same reasons.
And then following the incoming receipts on inventory that should provide us from benefit compared to where we are in the first quarter. So that's really a combination of all of those things.
Have a good answer so.
John Your aircraft sales of your military aircraft sales.
<unk> could you give us a little more color in terms of what drove that.
And while it was it was three things 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 you've got contracts.
Materials usage because of course, a lot of it is long term contracts.
So the F 35 was very strong in the quarter, we had strong foreign military sales. This is a seasonal thing that we see.
Each year of the first couple of quarters, we tend to have some foreign military programs that are stronger so that was stronger than the first quarter.
Relative to the second half and then funded developments continues very strong Cogs and so those were the three items that we're really driving the sales the sales increase on the military sides of the OEM military side.
And therefore, we should look for strong gains for the year and military aircraft.
I E.
So I think we'll continue to see a strong year, but I don't think for the for the full year.
It's probably going to be a bit up from last year. That's what we said all along we think military of the whole defense business will remain strong for the year.
I don't think we can continue with the pace of the first quarter, but it will be it'll be of Goodyear. The first quarter was particularly strong I'm not sure of that we continue at 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, maybe give us some more color on that and particularly 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.
As I mentioned, they're in our A&D business, we did sign the mall.
Of the whole supply agreements that for a long term period, we aren't going to comment on the specific.
In terms of our customers that we've had.
We do believe that the terms are mutually beneficial both of our customers and FERC.
Okay Super Thank you.
Thanks Skype.
We will take our next question from Ken Herbert with Canaccord Genuity.
Good morning, Ken.
Hi, good morning, John of Jennifer.
I wanted to first ask on the aircrafts controls really nice sequential improvement of the margins in 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 in 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 So we did see a nice.
Nice sequential improvement if you if you adjust the margins of the second half there were some unusuals in the fourth quarter, but margins are running 4% to 5% in the second half and they popped up over 9% in the first quarter, but as I said, we we have the seasonality in some of our businesses that in the.
First quarter or two we tend to have more foreign military sales as the programs and that really the mix that does impact the make sense. So positive very positive start of the year, but we do not anticipate those 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'd see the probably tick down as we go through the year, but it is.
Yes.
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 some some initial commentary from the by the administration about pausing some international sales.
Considering sort of 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 risk in 'twenty. One specifically just your 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 can I do.
We're not anticipating any significant risk as we look out over the balance of 'twenty, one as you say beyond that.
The things could change but.
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 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 in 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.
We went from fiscal 19, we did about $220 million of 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 in 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 are you were you surprised by the first quarter growth in space, because it seemed to be a bit of ahead of expectations.
No.
Does the backlog.
Contracts in these businesses tend to.
The go out quarters of sometimes even years Ken so.
It's relatively it's not too difficult to look at the contracts that you have in backlog of 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 surprise would not be would that be two of the sales side I.
I would say the broader the the growth in the in the <unk>.
In the space business over the last 345 years has been of 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 market is the type of strength, we're seeing in space and of course of what's happened is.
We wanted to get back to the moving by 2024 would that change now perhaps with NASA started spending a ton of money you've seen.
The emergence of the space force and the space layer in all of these.
Applications, where space is viewed as the next frontier in terms of the battleground and so all of that is driving it then you've got the hypersonic huge push on hypersonic over the last few years. The good portion of that is in the space side of our business. So there is a whole series 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 may.
Pick up again over the coming years, but that's actually been the the doldrums for quite a few years.
So that's not where it's that it's really on the defense side of it that we've seen it so of hypersonic. It's a lot of additional satellites for space defense and space defending space and then it's the pick up and Thats 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 Carroll Mali with true of Securities.
Good morning, 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.
The mix up.
This quarter, but as I as I think about aircraft, maybe going back I guess it was mid 19 you had.
The operational challenges.
Challenges that you disclosed it seemed like that was going to be a multi year effort to make improvements there around quality on time scrap can you just give us the <unk>.
General update around kind of what's been happening in the in the aircraft control segment on those operational improvement initiatives and I would think you know obviously vol.
Volume fall off a cliff in aerospace, but amid lower volume might actually have been a little bit easier to implement some of these changes and I guess one of them getting out is when do we really start to see some of those benefits should should we think about that exiting fiscal 'twenty, one or just any color there on what's been going on.
Happening on the operational side.
Sure.
Yes, so a couple of years ago, Michael as you described as we kind of.
Hit a real challenge of the aircraft business that we kind of took a step back and said look we built the business that was designed around the component supplier and we've now become of system supplier and we have discovered that our operational capabilities are good enough of your components Sky and they are not good enough at the level that we're not playing it and we really need to kind of retool around us.
As 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 of the aircraft side as they are now well engaged in doing a lot of really good stuff, we changed out of the I think we got.
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.
So we really are injected a lot of how the down through the supply chain et cetera into the 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.
The large a 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 in working on the.
It's happened of course is.
The nine months ago, as Covid hit us and so our plan is 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 in the <unk>.
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 shift we may have a relatively small skeleton crew and of particular area, let's pick an area like grinding we've got three of four people.
If one of the contracts Covid, we send the mall.
The pulse folks around them.
For two weeks until were down for two weeks in that particular area of which of course is a step in 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're also in the past we would have the changeover shifts the next guy who would come in before the last person left now we have a GAAP.
We've got cleaning procedures when people come they do they also have their own training procedure. So we've seen an impact on efficiency associated with that and a lot of the the great ideas we had about.
Improving the processes and related of the value streams and all of that that has really taken a backseat partially also because we spent a lot of people home we want the minimum people in the factories. 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've 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 the realizations.
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 in inventory force, but first of all we see it in the customers better delivery on time.
Making sure our customers the more satisfied second we'd see it in inventory that should start to come down and then finally, we'd start to see from the margins.
The 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 quantities dropping off significantly in 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 quickly.
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. The advertising continued to come down. So we continue to go back to our supply chain.
<unk> be less and less but they're smaller players and we don't want the just shut them up so our inventory our ability to slow it has come down and so we're not seeing the inventory impact of the operational improvement because it's being masked by the impact of Covid and the drop in the commercial and then of course as I said the margin piece, we'd see measure 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 margin on.
The emerging from this downturn, obviously the margins were challenged into the upturn barely scratching the kind of 10% level do you envision structurally higher margins, even if maybe the 787 to $83 50 kind of hold these rates, if we don't get back to the narrow body.
Volume do you think you can do structurally higher margins than say, what you were doing in kind of the.
2018.
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 per month.
That's the physically that site. So you end up no matter, how you do it you end up having under utilization.
Asian in 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'd start to see the operations improvement come in 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 <unk>.
To see improvements, particularly if we started the see the volume of the commercial sites of a couple of day.
Got it thanks, guys I'll jump back in the queue.
Thanks, Mike.
Alright, I must remind everyone that is star one to ask a question.
Alright, and there are no further questions at this time I would 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 start in fiscal 'twenty one.
Will inevitably remain.
The challenging year I think for all of us as we struggle 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 in 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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