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.
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 do not already have a document a copy of today's financial presentation is available on our Investor Relations webcast page at Www Dot Dot Com John.
Thanks, and good morning, thanks for joining us.
This morning, we reported in the second quarter of fiscal 'twenty one.
Over the last 90 days, we've become more confidence the global operating conditions of stabilized to 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'll continue the strong performance.
I'll follow the usual format today, starting with the headlines over the three headings of macroeconomic microeconomic and most specific items.
First of all of the macro fronts, we've seen a lot of change in the last 90 days.
The use of the new administration is firmly in place of 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 it weighted for.
The coming year, the defense budget seems to have a virtuous of 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 items global tensions continue dissimilar with China, starting to assert itself is the equal of the U S.
Russia, threatening the Ukraine, and both of Iran, and North Korea pursuing their nuclear agendas.
Great and that's the security have become intertwined as the U S seeks to reestablish a base in critical capabilities annuity chip manufacturer the supply chain for the key components of Tomorrow's clean Tech economy.
For the COVID-19 front, we're seeing optimism in the U S. As vaccinations reach over half of the adult population of the <unk>.
<unk> turns to reopening the economy unfold.
This contrast of the ongoing challenges in Europe, and South America, where vaccination rates of much lower and the emerging crisis in Asia, particularly India as new variance few of 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 of 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.
Commercial air traffic is on an upswing driven by domestic demands.
Boeing is ramping up deliveries of the 737, Max and resumed deliveries of the 787 of the quarter.
Production rates at Airbus of stabilized, but the aftermarket is much improved from six months ago.
For all 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 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, and up marginally from the same quarter a year ago, but included 18 cents of benefit from a curtailment gain on the foreign pension plan.
Absence of 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 at our operations have continued to perform.
We have not yet started to bring our folks back into the office. We are optimistic that this will start to happen in select geographies as we enter our fourth quarter.
Cash flow in the quarter was soft after a blowout first quarter. Despite the soft second quarter year to date, we're still running of housing 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 and 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 successful landing of the persevering through over of the surface of Mars.
The bulk team provided valves, which needs of the flow of few of the central 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 vial journey is the perfect example of when performance really matters.
My congratulations to all of our team members, who contributed to this technological boulder.
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 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 to the dollar basis, but up marginally as a percentage of sales interest expense was 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 force both in terms of sales by markets and underlying earnings of <unk>.
Slide more detail of the roundup for each segments.
It can altogether, we're expecting full year sales of $2 84 billion and full year earnings per share of $5 plus or minus <unk> <unk>.
So for the segments.
To remind our listeners that we provided a free page supplemental data package.
Posted on our webcast sites, which provides all of the detailed numbers for your models we.
We suggest you follow this in parallel with the text.
Beginning with 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 at 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 a very strong Q2 last year.
The softness was the combination of some delayed shipments at the end of the quarter combined with the 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% led sales on business Jets were down almost 50%.
Commercial aftermarket was down 34%.
On a sequential basis Q2, so chose for some encouraging signs over the first quarter.
The military sales remained strong.
The it down slightly from the first quarter on lower aftermarket sales.
Commercial OEM sales showed nice improvement across almost the entire portfolio as production rates stabilized at Boeing deliveries of 780 Sevens resumes the.
The commercial aftermarket was also of as domestic flight operations continued to improve.
Aircraft margins.
And in the quarter were seven 2%.
In reviewing the margin before performance this quarter three comparisons 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 fourth 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 in 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 it 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.
From the commercial side of the production rates on the major programs of now settled and will probably remain stable well into next year.
In 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 the second half in commercial in line with the first half.
The net result is full year sales of $1 8 billion, including $40 million from the Genesys acquisition, we feel as of December.
This total is Jeff is down just 2% from 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 youth 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 other than auditing maneuvering vehicle, our OLED was the first product of this effort and over the last couple of years. We've continued to broaden that offering to include small satellite buses.
Boom 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, which for some shifts in the mix sales.
Sales of components on the military vehicles were up as for sales of to naval applications since the.
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.
One of your 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 for <unk>.
The 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 in the 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 our up sequentially for the last three quarters, indicating that this market is starting to strengthen.
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 in the industrial automation market.
Industrial systems fiscal 'twenty one.
For the full year for protecting 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 stimulation of tests will be flat net sales into medical markets would be down slightly the.
Slowdown in our medical markets, it's caused by the reduced need for COVID-19 related equipment, which drove the spike in our pump demand over the last 12 months.
We are projecting full year margins of 10% in line with the first half of these margins are down slightly from the second quarter. As a result of additional organic investments, we're 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 of the second half.
Our business has 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 the interest of transition back to a more normal work environments.
Our operations in Europe and into the Asian countries are probably a quarter or more behind the schedule.
But we're optimistic that our fiscal 'twenty two will be the starts for 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 programs.
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 the desk 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 patients and privilege.
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 mirror of the FERC, resulting in the first full year sales of $2 84 billion and 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 for 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, the free cash flow conversion to just over 90%.
The moderation in our cash flow this quarter rebounded from the slower collection from receivable shipments late in the quarter and increased investment in capital expenditures.
The second quarter marked the turning point in our inventory, which for a source of cash for the first time since 2018, the substantial amount of effort and focus of our teams across the company.
Notably in our aircraft operations resulted in this achievement.
Efficiencies associated with operations now are beginning to the realized as we also continue to focus on optimizing incoming receipts.
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 GAAP and the percentage of sales at the end of the <unk> with 35% current to 29, 2% at quarter right now.
We've seen both 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 of maintainable.
Capital expenditures in the second quarter were $38 million up sharply from $20 million in the first quarter.
We are starting to catch up on capital in Boston at the into late during the more uncertain time from the pandemic we are.
Also investing in our operations to achieve greater efficiencies in our facility and some of our benchmark.
At quarter end, our net debt was $878 million, including $91 million of cash.
The Asia components of our dot for $500 million.
$396 million of borrowings on our new asking the filing credit facility and $69 million outstanding from our securitization of priority.
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 the end leverage covenant, which is the Max one final time on a non-GAAP basis.
Based on our leverage from kind of incur an additional 427 million net debt as at the end of our second quarter.
We're confident that our existing facilities provide us with the flexibility to invest in our future.
Cash contributions to our global retirement plans totaled $14 million from the quarter compared to $12 million from the second quarter of 2020.
Global retirement plan expense in the second part of the $13 million down from $20 million in second quarter of 2020.
The decrease in expense is.
Is attributable to the 6 million curtailment gain associated with terminating of defined benefit pension plan in the Netherlands.
We replacement plan with the defined contribution plan and this change benefited both the company and the plan participant.
<unk> is recorded in the non service comes from the line.
The financial impact resulted from participants transitioning from active status and the plan to different markets from the data and the related projected benefit obligation decrease due to these markets and becoming inactive.
Current camera gain increased our earnings per share by <unk> 18.
Our effective tax range with 21, 6% in the second quarter compared to 19, 2% and same period a year ago.
And each of these periods in the second quarter of 2021, and with no tax expense associated with the curtailment gain on the termination of the mono line defined benefit pension plan.
By lowering the effective tax rate.
Thanks for your 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 in another foreign jurisdiction.
We expect free cash flow generation in 2021 to be in line with our long term target of 100% conversion.
Excluding the noncash gain from the patching per account than we were at that level in the first half of this year.
In the back half of the year, we expect cash flow generation from working capital.
Inventory for contribute to cash inflows from markdowns customer's assets.
Capital expenditures will continue to be elevated as the investing.
Since the for 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 invest in our organic growth and are finding 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 uncertainty from 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 responded by conserving cash and preserving our liquidity as well of managing expenses and certain bachman.
Our approach has paid off and chosen our leverage ratio.
Leverage ratio of 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 the EBITDA from the impacts of the pandemic over the last 12 months and our acquisition of Genesis assets offset by very strong cash flow generation during the period.
Our current leverage ratio continues to move from our target zone of queuing of quarter time for 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.
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.
The press Star one to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal.
And our first question comes from kind of been rumor with Cowen. Please go ahead.
Yes, good quarter, John Nice work thanks, guys.
Uh huh.
Commercial U.
You mentioned.
As of the commercial aircraft numbers.
They were down the loan 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 87, and $3 50 or was it other.
So it 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's not based on the shipments.
Net sales of 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 while the headline number was that Airbus went from 10 to $3, 50% of <unk> 300 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 the results you've seen sequentially of 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 for 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 the conclusion from our actual of sales number in one quarter versus.
For the past what I would say is that we believe now debt that inventory destocking at the price 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 the kind of line up pretty much with what we saw in the first.
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 is in part of debt. We have of concern I think everybody of the defense business has other people 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 of new <unk>.
<unk> most of them, we kind of talked about I don't know how many of them will turn into the 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% $20 million just given the strength of some of the programs that we've one of 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.
So the.
The growth is being driven by a couple of things Cai.
Kind of mentioned them over the over the last year or two one of the NASA.
There's just a lot more work and thats on the SLS system. So we've really benefited from that the <unk>.
Personics as we mentioned we codes of hypersonic since the two areas the.
The fifth steering is that our defense side of the launch of stuff, we put on the space side. So that's been obviously, there's been a lot of work of that.
And then the third piece is what we're calling integrated space vehicles and this is where we've been working over the years to kind of put our components together now for more of a small satellite losses, and we're seeing some nice opportunities in that and some growth of 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 and so what is starting to happen is we're just seeing that level of.
Tremendous business, it's doubled what it 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 ahead of ourselves.
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, guys, Hey, Jon.
The two 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, some of the business, but youre looking for better high 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 military trends, but I wonder 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 from what are some of the key puts and takes in that business.
Yes.
What we're what we're pitching is that we think the second half will be similar to the first on the total if you look at the run rate of the first half.
You just double of that it's pretty much what we're saying, but we believe that the OE side will be down a little bit on the aftermarket side of the up so let me let me do this kind of if I 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 <unk> at $580 million.
So just to put it into the context. It is up significantly from what we saw a year ago, it's up over 20% from what we saw last fiscal year. We had incredibly strong first and second quarters are F 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 and it's not.
Paul shipments. So we think that that's been very strong we think of it continues strong.
We've seen the sponge.
From 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 and annualize that and look at fiscal 2470 fiscal 'twenty, one five AC on the OE side and Thats the significant pickup of again major drivers are at 35.
The development and keep in mind, we also have $40 million of Genesis in there. So some of that contributors if.
If I do the same for the aftermarket side, if I go back to 19 kind of.
Pre COVID-19 here of $207 million last year, we did $250 million in the military aftermarket. So that was really a blowout year of this year. We're now forecasting 200 the strategy. So its still up nicely from 19 off a little bit from 'twenty, but it's still a really strong year and thats 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 to get better as we go through the second half. So we see a pickup of the second half. So the story for the second half of you put it together, it's kind of flat for the total for the OE side of the off a bit coming off of a very strong first half, but still much better than last year.
And the military aftermarket will be up from the first half.
Download again from the very strong last year, so little bit of a mixed shift 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 over 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 town, 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 the if.
If we do the margins in the aircraft business, we had very strong first quarter margins, which we had mentioned last quarter, that's not going to be sustainable for the long term debt, whereas the midnight hours.
We just did a margin 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 theres the up from the run from 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 would be more of a contributor so there'll be up from seven two to about 8% in the second half cash and the other of the comparison I think it's really helpful. Is if you look at the second half of last fiscal year. This was the six months of COVID-19.
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 force was really strong, but those underlying margins have gone from three 5% over 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, the margins will be up a little bit from the second quarter, but down from.
The first on the kind of an unusual mix.
Oh, that's great and if I could.
Just one final question for Jennifer the free cash flow continues 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 talked 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 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 and we are projecting for the next couple of quarters to also have.
Contributions from our inventory in the FERC.
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've been able to turn that corner as well.
And 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 that we're going to see some pressure on there.
And feeling like we're in a pretty balanced position as we're looking at that especially considering.
The investments that we're pursuing related to our capital expenditure, that's going to offset some of the generation from the working capital.
Okay, great. Thank you very much nice quarter.
Thanks, Kevin.
Thank you and once again, if you would 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 maybe.
Don't know who wants to take this I guess I guess, John just how should we think about.
The margin sort of expansion journey, and I guess I'll I'll start on the aircraft.
Certainly doing very well now and you just talked about of second half run rate of 8% Youre still dealing with lower volumes you have 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 in it.
Would seem like as the.
The volume come back you get some more of the efficiency benefits 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.
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 and all of the year and what's come through as of course of the benefit of the restructuring that we've done of the continually the continuing focus on efficiency improvements itself. 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 of the mirror on the commercial aftermarket and the.
OA sites I mean, that's really looking out at the moment.
Clear of that Boeing and Airbus are going to be ramping up their 87 to $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.
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The military stuff is very strong if that continues we would continue that we've continued to enjoy that.
Our operational activities continued to show some benefits, but I think the real catalysts from here out of our commercial book is still 40% down on what it was a year ago.
If we could see that come back we'd start to enjoy much better margin performance.
Got it got it and then just.
Jennifer for you were just talking about inventory dean of tailwind.
Cash and John you just said you don't know windows those wide body rates are 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 in that Youll have access to your raw material.
Yes.
The question is certainly an area that has gotten more attention on the news we have been paying more attention to it.
Because of the discussion with whats happening in automotive and other types of areas right now.
So we are closely monitoring now for that.
We'll mitigate the risks associated with.
The <unk> disruption, but we feel like were in.
In reasonable shape, and making sure that we're managing the inventory to appropriate levels, while off of our China manage the risk.
Yes.
The kinds of imagined might that we're going to go back to build the 10 to 787 a month.
Of overnight.
At the likes of if we had that problem to throw the word but it feels to me like the acceleration of the ramp up my concern all of us of the aircraft business is not the ramp up it's always the rock down because of the reptile happens overnight and we just saw that in the last 12 months typically of the ramp ups are pretty well plan that can be scheduled out so we.
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.
Got it 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 to the aircraft margins right now.
So we did the significantly sizing we actually ended up zone 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 as 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 10 of us up and you're buying five yourself and you still have the same number of suppliers. The same number of inspections et cetera, and so there is excess overhang of 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.
Right 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 of that in terms of having.
Less than 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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