Q2 2021 Moog Inc Earnings Call
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Good day and welcome to the Moog second quarter fiscal year 2021 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Anne Laure. Please go ahead.
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 on.
Description of these risks uncertainties and other factors is contained in our news release of April 30th for 2021. Our most recent form 8-K filed on April 30 of 2021 and in 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 did not already have a document a copy of today's financial presentation is available on our Investor Relations webcast page at Www Dot Moog Dot Com John.
Thanks, and good morning, thanks for joining us.
This morning, we reported on the second quarter of fiscal 'twenty one.
Over the last 90 days, we've become more confidence the global operating conditions of stabilized through the point, where we feel comfortable providing guidance for the second half of the fiscal year.
Overall, it was a very good quarter and we're optimistic that the remainder of our fiscal year. We continue the strong performance.
I'll follow the usual format today, starting with the headlines over the three headings of macroeconomic microeconomic and Moog specific items.
First of on the macro front, we've seen a lot of change in the last 90 days.
On the U S. The new administration is firmly in place in Washington, and Federal spending is set to increase dramatically over the next few years as COVID-19 relief infrastructure investments and green initiatives are aggressively pursued.
Eventually U S taxpayers will have to pay for the spending and it now seems inevitable. The corporate tax rates are set to increase the only question is by how much at Wynn for.
For the coming year, the defense budget seems to have of virtually any major impact, but given the defense is a major portion of the federal budget, we assume the longer term defense spending will be impacted.
On the other heads of global tensions continued dissimilar with China, starting to assert itself is the equal of the U S.
Russia, threatening the Ukraine and both of the run in North Korea pursuing their nuclear agendas.
Rage of National security have become intertwined as the U S seeks to reestablish a base in critical capabilities, including chip manufacturer and supply chain for the key components of Tomorrow's clean Tech economy.
On the COVID-19 front, we're seeing optimism in the U S. As vaccinations reach over half of the adult population on the top turns to reopening the economy unfold.
With contrast of the ongoing challenges in Europe, and South America, where vaccination rates of much lower on the emerging crisis in Asia, particularly India as new variance fueled the next wave of infections.
Overall, the global economy is showing signs of renewed strength driving supply chain shortages of critical components, particularly electronics.
Second on the back of the microeconomic fronts of our major markets are continuing to perform well.
Spending on defense and space applications continues to be robust and we're starting to see a slow recovery in some of our industrial markets.
The commercial air traffic is on an upswing driven by domestic demands for.
Boeing is ramping up deliveries of the 737, Max and resumed deliveries of the 787 of the quarter.
Production rates at Airbus of stabilized on the aftermarket is much improved from six months ago.
Overall, the much more encouraging picture of the 12 months ago as we headed into the pandemic.
Third it was another good quarter for our business.
Total sales were down only 4% relative to a year ago. Despite the near 40% declines in our commercial book of business as.
As we discuss our performance relative to the same quarter a year ago. It is important to keep in mind that our second quarter last year was the last pre COVID-19 quarter, we enjoyed.
GAAP earnings per share of this quarter were $1 51 on up marginally from the same quarter a year ago. While included 18 cents of benefit for probably curtailment gain on the foreign pension plan.
Since this gain adjusted earnings per share of $1 33 was the strongest quarter, we've had since COVID-19 hits and clearly show the underlying strength of our diverse portfolio of businesses.
COVID-19 continues to impact our business globally, what are infections have come down over the last quarter on our operations have continued to perform.
We've not yet started to bring our folks back into the office, but we're optimistic that this will start to happen in select geographies as we enter our fourth quarter.
Cash flow in the quarter was soft after the <unk> first quarter <unk>.
Despite the soft second quarter year to date, we're still running of healthy conversion ratio of over 90%.
Looking at our key markets defense and space continued strong industrial is showing early signs of recovery commercial is stable at the medical is solid but coming off of a surge in COVID-19 related demand over the last year.
Our supply chain continues to function well, although the emerging component shortages in the industrial markets are a watch item for the coming quarters.
Finally on February 18, our space team celebrated the success of landing of the persevering through over of the surface of Mars.
The bulk team provided valves, which leaves of the flow of few of the to the <unk> rocket Motors, we use the phrase when performance really matters to illustrate the critical nature of the applications, which use our products.
Ensuring a safe landing of the surface of Mars. After a seven month 350 million mile journey is the perfect example of when performance really matters right.
My congratulations to all of our team members, who contributed to this technological wonder.
Now, let me move to the details starting with the first quarter results.
Sales of the quarter of $746 million or 4% lower than last year.
To the story for the last four quarters sales were up and defense space and medical down slightly in the industrial and significantly lower than commercial.
Taking a look of the P&L gross margin was in line, while R&D was up slightly partly driven by the <unk> acquisition.
SG&A was down on the dollar basis, but up marginally as a percentage of sales interest expenses in line.
We had a one time $6 million gain in the other line associated with the pension curtailments and the foreign plan, which Jennifer will explain in more detail.
The effective tax rate this quarter was 21, 6%, resulting in net income of $49 million down 2% from last year and earnings per share of $1 50 was up two percentage from last year on a lower share count.
Fiscal 'twenty one outlook, we continue to assume the COVID-19 will be a major factor through the end of this fiscal year and are planning accordingly.
We believe the second half will be very similar to the first both in terms of sales by markets and underlying earnings of <unk>.
Slide more detail in the roundup for each segments.
It can altogether, we are expecting full year sales of $2 84 billion and full year earnings per share of $5 plus or minus <unk> 20.
Now to the segments.
To remind our listeners that we provided a three page supplemental data package low.
Posted on our webcast sites, which provides all of the detailed numbers for your models with.
We suggest you follow this in parallel with the text.
Beginning with the aircrafts.
Sales in the second quarter of $304 million were 11% lower the last year.
The pattern of the past year continued with strong military sales compensating for lower commercial sales.
Comparing with the same quarter last year military OEM sales were up a third on increased funded development work and higher F 35 sales.
We also booked $8 million of sales from our Genesis acquisition, which completed at the end of December.
In contrast to the OEM the military aftermarket was down 20% from the very strong Q2 last year.
The softness was the combination of some delayed shipments at the end of the quarter combined with a more general slowdown across the broad range of programs.
It's too early to tell if this is the trends are just the natural fluctuation of the business on a quarterly basis.
On the commercial side OEM sales were down almost 40% from a year ago with continued weakness across the complete portfolio.
Sales on our two largest programs 787 of the <unk> hundred 50 were both down over 40% net sales on business Jets were down almost 50%.
Commercial aftermarket was down 34%.
On a sequential basis Q2 sold showed some encouraging signs over the first quarter.
The military sales remained strong.
The of down slightly from the first quarter on lower aftermarket sales <unk>.
Commercial OEM sales showed nice improvements across almost the entire portfolio.
The production rates stabilized at Boeing deliveries of 780 Sevens resumes the.
Commercial aftermarket was also up as domestic flight operations continued to improve.
Aircraft margins.
In the quarter were seven 2%.
In reviewing the margin before performance this quarter three comparisons help tell the story.
As expected margins were down from Q2 fiscal 'twenty of the lower commercial sales of that.
Also as expected margins were down sequentially from our first quarter.
90 days ago, we explained that we had an unusually favorable mix in the first quarter of we're anticipating lower margins in subsequent quarters.
Third and most important margins are up significantly from the adjusted run rate of three 5% in the second half of fiscal 'twenty.
This improvement in the underlying business is the result of the continued strength of the military book the firming demand in the commercial book and the actions we took last year to resize the business.
Aircraft fiscal 'twenty one.
We're projecting the second half of our fiscal year would be very similar to the first day.
Sales into the military market will remain strong with OEM sales in the second half marginally lower than the first half, but aftermarket sales marginally higher.
On the commercial side of the production rates on the major programs of now settled and will probably remain stable well into next year.
On the aftermarket global flight operations continued to pick up but we believe we've already seen this benefit flow through in our first half as sales increased almost 20 percentage from the run rate of the previous six months.
Taken altogether, we're forecasting of second half in commercial in line with the first half.
The net result is full year sales of $1 8 billion, including $40 million for the Genesis acquisition, we closed in December.
This total is down just 2% for fiscal 'twenty sales.
Second half margins will be approximately 8%, bringing full year margins to eight 2%.
Turning now to space and defense.
In the second quarter of $206 million were 7% higher than last year.
Based on new business continues to drive the growth with sales up 19% from a year ago.
We have continued strength in our NASA work as well as growth in our integrated space vehicles product line.
Over the last decade, we've strengthened our components of offerings of watch the combined lease components into integrated space vehicles.
Our operating orbiting maneuvering vehicle on OSB with the first product of this effort on over the last couple of years. We've continued to broaden that offering to include small satellite buses the.
With low cost satellites and the availability of cost effective launch capability is now fueling our growth this business.
Sales into the defense market were in line with last year with for some shifts in the mix.
Sales of components on the military vehicles were up as for sales of the naval applications.
These increases were offset by lower sales of fin steering systems for tactical missiles and into security applications.
Margins in the quarter were 12, 9%. This margin performance is particularly strong given the high proportion of funded development work of this business combined with the challenges of COVID-19.
Based on defense fiscal 'twenty one.
We're protecting full year sales of $795 million, we believe both the space and defense businesses will remain strong and will each have sales in the second half pretty much in line with the first half.
Full year margins would be 12, 3%.
Turning now to our industrial systems business.
Sales in the second quarter of $226 million were marginally lower than last year.
Adjusting for foreign exchange movements real sales were down over 5%.
Sales were lower in our energy and simulation of test markets.
<unk> of last year energy sales were adversely impacted by delays in various exploration projects.
On the more positive note the run rates for energy sales has been fairly stable over the last few quarters, and we're seeing signs of modest growth going forward.
Sales of motion basis for full flight simulators were down over 50% from the same quarter a year ago as the demand for additional additional simulator capacity is kilometers.
Sales of product into industrial automation were in line with last year after adjusting for Forex.
On the positive note sales into industrial automation of up sequentially for the last three quarters, indicating that this market is starting to strength.
Sales into the medical market were up 7% from a year ago and in line with our first quarter.
Margins in the quarter were 10, 5%.
Margins in this business are starting to improve as we see the first signs of recovery, particularly on the industrial automation market.
Industrial systems fiscal 'twenty one.
For the full year, we're projecting sales of $865 million.
Similar to our other two groups. This assumes a second half total in line with the first half.
We will however of some slight changes in the mix.
Comparing the next six months for the last six months, we think sales into the energy and industrial automation markets with strength in marginally sales into the simulation and test will be flat on sales into medical markets will be down slightly the.
The slowdown in our medical markets, it's caused by the reduced need for COVID-19 related equipment, which drove a spike in our pump demand over the last 12 months.
We're projecting full year margins of 10% in line with the first half of this.
Margins are down slightly from the second quarter as the result of additional organic investments for planning to make in emerging opportunities in the industrial off road electric vehicle markets.
Summary guidance.
We're pleased with our performance in the first half of the year and I look forward looking forward to repeating that performance for the second half are.
Our businesses continued to operate effectively despite the ongoing acquisition of COVID-19 restrictions.
Over 60% of our businesses in the U S and with vaccines now widely available we're hopeful that our fourth quarter could be the start of interest of transition back to a more normal work environment.
Our operations in Europe, and in some Asian countries are probably a quarter or more behind the schedule.
But we're optimistic that our fiscal 'twenty two will be the start of the post pandemic era.
Market diversity and financial Prudence of guided us through the pandemic and will continue to be the core of our business going forward.
Our capital allocation strategies unchanged, we look to invest in growth and return excess capital to shareholders through our dividend and buyback book.
As we emerge from the pandemic, we're seeing increasing opportunities to invest in organic growth the combination of capital expenditures and R&D.
Also continued to be active in the M&A market, but with <unk>.
Cash almost free and excess capital looking for a home prices remain at levels, we find unattractive.
We will continue to search for food.
The remain both patient and prudent.
As we look for the second half of the year, we're reinstating guidance after the 12 month hiatus.
We believe the second half of pretty much mirrored the first resulting in full year sales of $2 84 billion on full year earnings per share of $5 plus or minus <unk> <unk>.
For the third quarter, we anticipate earnings per share of $1 16, plus or minus <unk> 15.
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.
Free cash flow of in the second quarter was $6 million compared to $12 million in the same period a year ago net.
All of the very strong first quarter and brings our year to date free cash flow conversion to just over 90%.
The moderation in our cash flow this quarter rebounded from slower collections on receivable shipments late in the quarter and increased investment in capital expenditures.
The second quarter marked the turning point in our inventory, which were a source of cash for the first time since 2018, the substantial amount of effort and focus of our teams across the company and most notably in our aircraft operations resulted in this achievement.
The efficiencies associated with operations to the point now are beginning to be realized as we also continue to focus on optimizing incoming receipt.
The $6 million of free cash flow in Q2, compared with an increase in our net debt of $9 million.
During the second quarter, we paid our quarterly dividend and repurchased just under 100000 share of our stock for $7 million year to date, the inquired about 250000 shares for $17 million.
Net working capital, excluding cash and debt as a percentage of sales at the end of Q2 was 35% share to 29, 2% at Korea right now.
The CFO of grew during the quarter at key customers in the commercial aircraft business both payments at quarter end.
<unk> also increased due to the timing of industrial shipments, which were unusually strong late in the corner.
An increase in customer advances, partially offset the growth on receivable.
Capital expenditures in the second quarter were $38 million up sharply from $20 million on the first quarter.
We are starting to catch up on capital on Boston at the into late during the more on certain time from the pandemic. We are also investing in our operations to achieve greater efficiencies in our facilities since the RFS.
At quarter on our net debt was $878 million, including $91 million of cash.
The Asia components of right that for $500 million.
$396 million of borrowings on our new asking falling cost of 30 and $69 million outstanding on our Securitizations in front of me.
We have $670 million of unused borrowing capacity on the U S revolving credit facility or.
Our ability to draw on the unused balance is limited by on leverage Covenant, which is the NAV.
One final time on the non-GAAP based net.
Based on on leverage we kind of incurred an additional $427 million of NASDAQ as at the end of our second quarter.
We are confident that our existing facilities provide us with the flexibility to invest on our future.
Cash contributions to our global retirement plans totaled $14 million in the quarter compared to $12 million and the.
The second quarter of 2020.
Global retirement plan expense in the second part of the $13 million down from $20 million.
In the second quarter of 2020.
The decrease in expense is.
Is attributable to the 6 million curtailment gain associated with terminating our defined benefit pension plan in the Netherlands.
We replaced this plan with the defined contribution plan and this change benefited both the company and the plan participant.
<unk> is recorded in the non service pension line.
The financial impact resulted from participants transitioning from active status on the plan to defer in Parkinson from Canada, and the related projected benefit obligation decrease due to these participants becoming enacted the crew.
The camera gain increased our earnings per share on 18.
Our effective tax rate was 21, 6% in the second quarter compared to 19, 2% and the same period a year ago.
And each of the period in the second quarter of 2021, there was no tax expense associated with the curtailment gain on the termination of the Netherlands defined benefit pension plan.
By lowering the effective tax range.
Last year's second quarter rate reflects the reduction in tax rate related to taxes accrued on accumulated earnings and one of our foreign jurisdictions as well as reduced withholding taxes previously accrued and other foreign jurisdictions.
We expect free cash flow generation in 2021 to be in line with our long term target of 100% conversion.
Excluding the non cash gain from the pension curtailment, we were at that level in the first half of this year.
The back half of the year, we expect cash flow generation from working capital.
Inventories will contribute to cash inflows housing dropdown customer's assets.
Capital expenditures will continue to be elevated as the investment.
These data for our future growth and consolidate other facilities as we refine our footprint.
We expect 2021 capital expenditures to be $140 million, and depreciation and amortization of the $91 million.
We are well positioned to inbox generic organic growth and our final net to be an attractive opportunity in deploying our capital.
We continue to explore opportunities to make strategic acquisitions and return capital to shareholders.
12 months ago, we are facing great uncertainties in our business. We came in to the early days of the pandemic, having recently refinanced the debt positioning us nicely coming into the challenging business environment. We are.
Responded by conserving cash and preserving our liquidity and low of managing expenses and certain bachman.
Our approach has paid off and shows on our leverage ratio on.
The leverage ratio was two seven times on a net debt basis as of the end of the second quarter compared to two six times a year ago.
The slightly higher ratio reflects the pressures on EBITDA from the impacts of the pandemic over the last 12 months and our acquisition of genocide offset by very strong cash flow generation during the period.
Our current leverage ratio continues to move on our target zone of queuing of quarter time, two and three quarters of time.
With that I will turn it back to John for any questions you may have.
Thanks, Jennifer and Nick we'd like to open the line for questions. Please.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question and we will pause for just a moment to allow everyone an opportunity to signal.
And our first question comes from kind of an rumor with Cowen. Please go ahead.
Yes, good quarter.
Nice work thanks, guys.
Commercial.
You mentioned.
On the commercial aircraft numbers, while they were down day look certainly better than we'd indicated we'd guess what was.
What was making it up I mean.
Was it the <unk>.
Airbus and Boeing deliveries ex eight seven and $3 50 or was it other.
They looked a little stronger than I would've guessed.
So a couple of things kind of one of the things about our commercial business is that it's so hard to factor in the impact of inventory coming in.
This of course, it's non term contract accounting so it is not based on shipments.
The sales are driven a lot by incoming inventory of course orders from our customers a couple of things happened, though if you look at the Airbus sales that we had a couple of quarters ago. They were doing enormous destocking and one of the headline number was that Airbus with went from 10 to $3, 50% of <unk> hundred Fifty's.
We were shipping almost no product for a quarter or two and so that's now stabilized. So some of it so I think to some extent that's happened as volume as well. So theres been some of that Destocking has kind of washed through and we now feel that we're at a pretty stable production rate, but as the results you've seen sequentially on commercial OE business pick up over the last few quarters because of that and then we.
The fact that orders.
Have been pushed out but nonetheless, we still have open orders and as we get inventory in which we've been working real hard to slow but that inventory gets paid to orders until you actually take sales on that as you go through the system. So there is a lot of moving pieces over the last several quarters that make it difficult to extract some kind of a conclusion of our actual of sales number of one quarter versus.
The past what I would say is that we believe now debt that inventory destocking at the <unk> has washed through we believe that our incoming inventory is now much better matched to the demand going forward and we believe that the rates are relatively stable and thats why we think our second half of kind of lined up pretty much with what we saw in the first half.
So.
That's very helpful. And then you have these very strong military aircraft sales.
And you mentioned the development work is that development work on one program or several programs.
That's a broad range of programs Cai.
It's one of the things.
I emphasize that I think has been part of debt. We have of concern I think everybody on the defense business has that if you move out of few years defense spending.
Highly likely to be pressure, just given the amount of government spending thats going on but on the other half of the only I think the only indicator of the future is how much development work how much of it were working on the future programs and Thats very strong it's now running well north of $100 million. This year and if we go back for five years. It was $20 million business. So we have won a lot of positions on new per.
<unk> most of them, we kind of talked about I don't know how many of the most hard into big production programs in the future, but it is a positive side. So that is very strong and its up for what we thought entering the year by.
A couple of the 10% $15 million to $20 million just given the strength of some of the programs that we've won on the opportunities we're seeing.
And then the last one for me is space.
You continue to deliver these very very strong numbers. Your full year guide kind of implies you're going to slow down in the second half, which I think is what you were kind of saying last year end and you did could you give us some color in terms of what is driving this very very good growth.
What's the potential that may be the second half is a little better than you're projecting.
Yeah.
So the.
The growth is being driven by a couple of things Kai we book.
Kind of mentioned them over the over the last year or two one of the NASA is just a lot more work on math on the SLS system. So we've really benefited from that the <unk>.
Hypersonic as we mentioned we codes of hypersonic sense of two areas the.
The fifth steering is that our defense side on the large stuff we put on the space side. So that's been obviously, there's been a lot of work on that.
And then the third piece is what of what we're calling integrated space vehicles and this is where we've been working over the years to kind of pull of our components together and offer more of the smaller satellite book and we're seeing some nice opportunities on that at some growth on that side of the business.
Could the second half of the better than the first.
Perhaps.
But I would also caution that you can't keep growing at 19 2020 per cent per quarter on an ongoing basis forever as to what is starting to happen is we're just seeing that level of I mean, it's a tremendous business itself. A lot of was just a few years ago, but that heavy growth is just not going to be something that we're going to continue to see indefinitely. So.
I was wrong last year, maybe I'll be right. The share is there upside, yes, but I'd be cautious about getting the head of us so.
Terrific. Thank you very much. Thank you. Thank you.
Thank you and our next question comes from Ken Herbert with Canaccord. Please go ahead.
Hey, good morning, John of Jennifer.
Good morning, John.
Just wanted to follow up on your comments on the military aircraft market when I look at the second half implied numbers it looks like Youre seeing youre seeing some nice growth high single digits in the business, but youre looking for better.
Teens growth on the OEM side with with the aftermarket down on the military side and I know you.
Made some comments earlier about it's a little early to draw aftermarket and military trends, but I wondered if you could flush that out a little bit I know you've got some tough comps there, but how should we think about about the military aircraft business in the second half of them. What are some of the key puts and takes in that business.
Yes so.
What we're what we're pitching is that we think the second half will be similar to the first on the total of if you look at the run rate of the first half in the App.
And you just double of that it's pretty much of what we're saying, but we believe that the OE side will be down a little bit on the aftermarket side would be up so let me let me do this kind of the cycle.
Go back to 19.
Our OE side was about just the $415 million last year, our <unk> was $470 million and this year, we're forecasting the E at $580 million.
So just to put it in the context. It is up significantly from what we saw a year ago, it's up over 20% for what we saw last fiscal year. We had incredibly strong first and second quarters are at 35 business as being particularly strong and as I mentioned earlier, you've got to keep in mind that some of that has to do with how inventory comes in.
Just Paul shipments. So we think that that's been very strong we think it can continue strong.
We've seen the.
On the development as I mentioned to Kai improved significantly over the last year, but in terms of of just taking a step back rather than just saying that when you look at the second quarter of annualized look at fiscal 2470, <unk> fiscal 'twenty, one five AC on the OE side and Thats the significant pick up other again major drivers are at 35 on the one.
And keep in mind, we also have $40 million of Genesis in there. So so that contributors.
If I do the same for the aftermarket side, if I go back to 19 can pre.
Pre COVID-19 year of $207 million last year, we the $250 million in the military aftermarket. So that was really a blowout year and this year. We're now forecasting 230, so it's still up nicely from 19 off a little bit from 'twenty, but it's still a really strong year and that's up from the run rate in the first half. So we think the first half of.
The press a little bit, particularly the second quarter, we had some shipments that didn't go out of it there was a little bit of softness of the business. We're not we're anticipating it and get better as we go through the second half. So we'll see a pickup on the second half. So the story for the second half we put it together, it's kind of flat for the total but the OE side of the off of it coming off of a very strong first half but.
Still much better than last year on the mill.
The military aftermarket will be up from the first half book download again for the very strong last year, so little bit of of mixed shifts there, but overall I think it's still the very strong performance you just have to take a little bit of a step back and look at the longer time period.
No. That's very helpful. As we think for the military aircraft business sequentially from the first half of the second half of 'twenty one.
Shouldnt, the better aftermarket sales and the growth sequentially relative to some of the OE sales down perhaps drive better margin shouldn't you see some more mixed benefit than perhaps the guidance implies in the second half of the year.
So some of the.
If we do the margins in the aircraft business, we had very strong first quarter margins, which we had mentioned last quarter.
Not going to be sustainable for the long term they were in the mid <unk>. We adjusted margins of seven two in the second quarter, which I would say would be more in line with the business our forecasting eight two for the year. So we're forecasting the second half margins will be about 8%. So there'll be up from a run for the second quarter of seven 2%.
But down from as I said, a very unusual first quarter. So actually yes. The margins are up on a slightly improved mix as you as you pointed out the after military aftermarket will be more of a contributor so there'll be up from seven two to about 8% in the second half of cap and the other the comparison I think is really helpful. Is if you look at the second half of last fiscal year. This was the six months of per.
With that we suffered and you adjust for some of the significant restructuring we did underlying margins were about three 5%.
And so we still have the book of business, where commercial is way down military of course is really strong, but those underlying margins have gone from three 5% over the the.
Last six months of last year to what we're saying is going to be north of 8% for this year.
And I think thats the significant improvement in the business. So so yes margins will be up a little bit for the second quarter, but down from the first on the kind of an unusual mix.
Oh, that's great and if I could excuse me just one final question for Jennifer the <unk>.
Free cash flow.
<unk> two to be very strong and I think youre talking about 100% conversion.
For the full year as you as you look into the second half of the year I know you've gone through some of the pieces of working capital, but where could we see upside again on the free cash flow is there more in working capital you can do on inventory in particular of than what you've called out.
So this is on as I mentioned in the prepared remarks, the inventory of the first time that we've had a positive inflow of cash related to inventory the react projecting for the next couple of quarters to also have.
Contributions from our inventory in the cash.
We don't want to get ahead of ourselves to say how quickly that can ramp up but we're certainly feeling good that we have the needle obviously turn that corner as well for when I look at some of the other pieces in there we've had really strong customer advances for the last couple of quarters and certainly we're going to in meeting to work that down.
Over the next couple of quarters. So we are going to see some pressure on there.
And on labor and a pretty balanced position as we're looking on at that especially considering the.
The investments that we are pursuing related to our capital expenditure that's going to.
Of that some of the generation from the working capital.
Okay, great. Thank you very much of nice quarter.
Thanks, Kevin.
Thank you and once again, if you'd like to ask the question. Please press star one.
We will take our next question from Mike CMO Lee with true of Securities. Please go ahead Sir.
Hey, good morning, John of Jennifer Thanks for taking the questions here and nice results.
Maybe I don't know who wants to take this I guess I guess, John just how should we think about the.
The margin sort of expansion journey, and I guess I'll I'll start on aircrafts, you're certainly doing very well now.
Talked about of second half run rate of 8% Youre still dealing with lower volumes.
<unk> got the benefits of operation to point, though and I'm, assuming you've still got higher margin provisioning. The volumes that are still going to be way down.
How do we I'm not going to ask you for guidance next year, but it seems like exiting at 8% should be definitely of new floor and it would seem like as the volumes come back you get some more of the efficiency benefits with with operation 2.0, and even provisioning volume.
It should seem like you've got a good trajectory here for for margin expansion.
Any kind of thoughts on how we should think about this going forward.
Yes, I think your thesis makes sense Mike.
But I think to see it so we could we've seen some nice improvement as I've said for the second half run rate for the first half of this year on all of the year and what's come through is of course, the benefit of the restructuring that we've done on the continually the continuing focus on efficiency improvements and so we should continue to see some marginal gains from that I think as we go out over.
The next couple of years, but the real gain is when you start to get those volumes back up both on the on the commercial aftermarket and on the.
Sites I mean, that's really looking out at the moment.
Not clear that Boeing and Airbus on going to be ramping up their 87, and $3 50 rates anytime soon and while the aftermarket the aftermarket should continue to come back so that would be good if they started flying particularly the international routes, but thats that also looks like that could still be a ways away. So yes, if we could see the commercial book continues to improve we continue to see that margin expansion.
And the.
The military stuff is very strong if that continues we'll continue that we've continued to enjoy that and on.
Our operational activities continued to show some benefits, but I think the real catalysts from here on the commercial book is still 40% down on what it was a year ago.
If we could see that come back we'd start of enjoyed much better margin performance.
Got it got it and then just.
Jennifer you were just talking about inventory being a tailwind.
Cash and John you just said you don't know windows those wide body rates theyre going to come back, but how are you thinking about your inventory levels. We've already been hearing from some management teams thinking about potential tightness in the supply chain. If there is the potential big ramp back up to those production rates.
As you evaluate your your suppliers and think about inventory levels do you feel comfortable.
With the ability to ramp back up and that you will have access to your raw material.
Yes.
The question is certainly on an area that has gotten more attention on the news we have been paying more attention to add on.
Because of the discussion with what's happening in automotive and other types of areas right now.
We are closely monitoring now for that we will mitigate the risk associated with <unk>.
The <unk> disruption that we feel like we're on.
In reasonable shape, and making sure that we're managing inventories to appropriate levels of all of our China manage the risk.
Yes, I can't imagine Mike debt, we're going to go back to build on 10 to 787 a month.
The overnight.
The license, if we had that problem to struggle with the.
It feels to me like the acceleration of the ramp up my concern on all of US in the aircraft business is not the ramp up it's always the rock down because of the rep that would happens overnight and we just saw that in the last 12 months typically of the ramp ups are pretty well plaza can be scheduled out so.
We manage I think.
We would be happy to have that problem and we've got plenty of inventory at the moment. So we're feeling I think we're feeling pretty good about any ramp up.
Just on that ramp down you mentioned are you are you guys still dealing with they're struggling with a lot of excess capacity costs have you been able to reallocate the other military programs or for how much of a drag as sort of excess unallocated overhead to the.
For the aircraft margins right now.
So we business significantly sizing, we actually ended up doing at a couple of times, Mike much is we didn't want to.
Through the end of last calendar year.
That's all behind us in terms of the staffing levels. We took some significant write downs as well on some equipment. The facilities. If you remember at the end of our third of the fourth quarter in particular last year.
However, you still.
So that the carrying if you think of just the organization you need to add the fact that you are buying instead of buying tenants up on your buying five yourself and you still have the same number of suppliers. The same number of inspections et cetera, and so there is excess overhead excess overhead relative to the size of the business in other words as you scale up you get more efficiencies out of that I wouldn't put a figure on it.
Now as I say, we've tried to cut to the level that we think of sustainable, but there's no doubt if rates start to go up.
We would start to see nice incremental margins from there.
But it is there is a bit of pressure on that in terms of having.
That's been fully utilized facilities and probably carrying more of the overhead side based on the larger organization, which was what we needed before.
Got it perfect. Thanks, guys.
Thanks, Mike.
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