Q3 2021 Kaman Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the Command Corporation third quarter 2021 conference call at this time all participant lines are in listen only mode later will conduct.
A question and answer session and instructions will be given at that time.
To ask a question you would need to press Star then one on your telephone.
As a reminder, this conference call is being recorded.
Anyone should require operator assistance. Please press Star then zero I would now like to hand, the conference over to your host today, Rebecca Stat, Vice President Controller. Please go ahead.
Good morning, I'd like to welcome everyone to come in third quarter 2021 earnings call conducting the call today are Ian Walsh, Chairman, President and Chief Executive Officer, and Jamie Coogan, Senior Vice President and Chief Financial Officer before we begin I'd like to note that some of the information discussed during today's call we will.
Consist of forward looking statements setting forth, our current expectation with respect to the future of our business the economy and other future events. These include projections of revenue earnings and other financial items statements on plans and objectives of the company or its management statements of future economic performance.
And assumptions underlying these statements regarding the company and its business the.
The company's actual results could differ materially from those indicated in any forward looking statements.
Due to many factors the most important of which are described in the company's latest filings with the Securities and Exchange Commission, including the company's third quarter 2021 results included on Form 10-Q, and current reports on form 8-K filed yesterday evening together with our earnings release.
We also expect to discuss certain financial measures and information that are non-GAAP measures as defined in applicable SEC rules and regulations reconciliations to the company's GAAP measures are included in the earnings release filed with yesterday's 8-K. Finally, we posted an earnings call supplement to our website.
It's designed to provide additional context on our financial performance key events for the period and additional information on the makeup of our sales.
You can find this presentation at Www Dot command Dot com slash investors flash presentation with that I'll turn the call over to Ian Walsh.
Good morning, everyone and thank you for joining our third quarter 2021 earnings call I'd.
I'd like to begin today's call with a brief summary of the quarter followed by updates on operations and several of our strategic R&D growth initiatives.
I'll, then turn the call over to Jamie for a more detailed discussion of our financial results.
Our business continues to perform extremely well and we are on target to deliver two.
Our revised full year expectations third quarter revenue was $179 8 million compared to $214 million in the prior year period.
As we continue to recover from the impact of the pandemic youre seeing stronger volume in key areas like medical and industrial platforms.
The third quarter also marked the first time, we have demonstrated year over year growth in our bearings business since the start of the pandemic and tool Salesforce Springs seals and contacts are now fully recovered and outpacing pre pandemic levels.
Gains in these areas were offset by anticipated declines in safe and armed devices, because we had record G. If you have deliveries in the prior year, our commercial aerospace products continued to operate below pre pandemic levels.
Notably all of our higher margin highly engineered products are performing well.
This has translated into strong profit performance in the period adjusted EBITDA of $27 8 million or 15, 5% as a percentage of sales in the quarter.
This result was up 70 basis points sequentially, driven by strong gross margin performance in the quarter, but trailed the prior year of $35 5 million or 16, 6% due to lower fuze deliveries year over year.
Turning to our products and beginning with bearings demand continued to improve during the quarter, we delivered growth across the majority of the portfolio.
Our sales volume to Boeing and Airbus increased sequentially for self lubricating bearings, and we saw an increase in engine aftermarket components as commercial airline traffic continues to rebound and we anticipate this trend to continue.
Moving to Springfield, and contacts volume performance continued to improve in the third quarter.
We remain well ahead of pre pandemic levels are now beginning to see the full benefit from the <unk> acquisition with strong profit contribution we are confident in the continued growth we will see for the remainder of the year in these products.
Looking at our key next program recall that the last quarter, we shifted the second K Max delivery. So the second half of the year due to a customer financing and timing of their fleet.
I'm excited to announce we recently signed contracts with two customers for K Max aircraft, we anticipate delivery in the fourth quarter.
Finally in our structures programs, we continue to be below pre pandemic levels. As a result of the commercial aerospace recovery and some challenges related to work force levels and some of our facilities. Despite these headwinds profitability was up sequentially as we benefit from the deployment of our operations Excellence model.
Turning to our business development efforts, we are very enthusiastic with the progress we're making on several key initiatives.
Core of command is innovation and command has a rich 75 history of delivering highly engineered custom solutions to our customers.
Today, we believe there are significant opportunities as our industry's embrace new technologies that will transform A&D and space travel at a pace not seen since the early days of human flight I am proud to say that we are investing in and well positioned to participate in this wave of innovation and autonomous fleet EV Tau in the space.
Me.
Given our broad product portfolio, we are serving many of the leading companies in these markets and we expect to continue to be a trusted partner.
Beginning with the Thomas flight I am pleased to report that during the quarter, we unveiled cargo UAV aerial system a purpose built medium lift Thomas aircrafts and event held on our Bloomfield campus in September this cargo hauling systems compact design makes it easy to transport the overseas operating sites.
Also highly capable with 800 pounds of payload capacity.
Our initial addressable market is the U S military which represent a strong use case and straightforward path to production.
Longer term the platform capabilities lend themselves to a wide range of commercial applications and was designed to be upgradeable to E V capability as next generation battery technologies improve.
A link to a video of the event can be found on our website.
We continue to make progress on tightened UAV aerial system and unmanned heavy lift logistics helicopter in support of our customers' requirements last week, we successfully demonstrated the autonomy and obstacle avoidance technology has been integrated into our K Max aircraft for the United States Marine Corps.
We received positive feedback from this demonstration validating our efforts as we continue to upgrade the software and prove out this autonomous heavy lift capability.
As I previously highlighted products manufactured.
Using our proprietary titanium diffusion hardening process provides us with several opportunities to expand our customer base and provide meaningful solutions to a broad range of end markets.
This process opens up new engineered applications by providing a lightweight and high shrink benefits of titanium alloys, while improving service hardness durability and wear characteristics.
Our proprietary parks process hardens, the titanium surface in order to benefit from the properties of titanium with sustainable hardness and more rugged applications.
Customer interest to date has been very strong and we already have products using th processing space E VTOL and A&D applications, but we believe there was a much wider commercial use case for this process beyond these markets we.
We've asked our team to identify the total addressable market and we look forward to sharing those details as they become available.
Next I'd like to touch on some specific high growth end markets, where are gaining traction.
Meaning with E. VTOL command is very well positioned to become a trusted partner to a range of emerging even talk EV toll manufacturers.
We are platform agnostic as our technologies, such as titanium diffusion hardening process seals springs, and contacts and self lubricating bearings aid in the reduction and reducing weight, but these next generation vehicles. For example, our rotary seal applications are currently used in the vertical takeoff unit of a leading E V toll manufacturers propeller system.
And we recently received another award from Hussein E VTOL provider to deliver a specialty bearings technologies made from our th material.
We expect to deliver these bearings in the fourth quarter with validation testing expected for the first quarter of 2022.
Additionally, we had been approached or in active discussions with several emerging E. P Tau companies across the globe.
Turning to end market opportunities and space applications are focused on highly engineered solutions.
That positioned us well with emerging space exploration companies as space in large companies continue to commercialize in billed volume. We anticipate we will gain a growing share of content across manufacturers and launched service providers. We currently have applications on every major commercial launch vehicle in the United States.
Now I will turn the call over to Jamie for a closer look at the numbers Jamie.
You Ian and good morning, everyone.
Today, I will highlight our third quarter results before turning to our outlook for the remainder of 2021.
During the third quarter net sales from continuing operations were $179 $8 million down 15, 9% from the $214 million in the prior year period.
Organic sales, which exclude sales associated with our former UK operation were down 14, 8%.
Lower year over year sales was primarily primarily the result of lower GP up deliveries in the period compared to record deliveries in the prior year period while.
While the commercial aerospace products continued to see pressure, we saw growth in our medical and industrial business, where volumes have returned to pre pandemic levels or above.
Turning to our product lines defense sales were down 27, 6% in the third quarter of 2021 compared with the prior year period, and five 5% lower sequentially.
The year over year and sequential decline was primarily the result of lower <unk> revenue.
For the quarter, we delivered a total of 4000 J P. F units compared to almost 14300 units in the prior year period, and 8200 units in the second quarter of 2021 weeks.
We expected to deliver 28000 to 30000 fuses for the full year slightly below our prior expectations. However, given the overtime revenue recognition method related to our USG contract. The reduction in deliveries does not result in a change to our sales expectations for this product our current J P. F pipeline remains strong and we are looking.
To secure additional Dcs orders in the near term.
Additionally, we continue to make progress in R&D efforts related to our safe and armed devices. In October we had two successful flight demonstrations of our fire burst enhanced fusing device.
<unk> patented height of burst sensor that brings an all new capability to our existing family of safe and armed devices.
Sales in our commercial and general aviation businesses were 15, 4% lower compared to the year ago period, but increased eight 8% sequentially.
The year over year decline was due to lower commercial bearings volume, particularly with OEM customers as OEM customers continued to be affected by the impact of COVID-19.
We also shipped one additional K Max aircraft in the prior year, which contributed to the decline.
Sequentially improvement was almost entirely driven by higher volumes of commercial bearings to our OEM customers. We expect this momentum to continue as commercial aerospace end markets continue to recover we've seen order intake at a slightly slower rate than we had previously anticipated and a higher volume of orders with delivery date.
Into 2022.
Sales in our medical end market increased significantly by 25, 6% when compared to the prior year higher volume of bearing products and growth in medical implantable and analytical devices drove this improvement.
Sequentially sales for these products were modestly lower however, we continue to be encouraged by the performance of these products to the first nine months of the year order rates for our medical products remains strong which provides us confidence in our expectations for the fourth quarter and continued growth into 2022.
Finally sales in our industrial end markets Rose 29, 4% from the year ago period and were relatively flat sequentially. The demand for springs seals and contacts as well as for bearings and measuring products improved against the backdrop of ongoing economic recovery, we continue to benefit from the economic recovery and expect to see.
Strong order rates for these products through the balance of the fiscal year and into 2022.
Gross margin for the quarter improved on a year over year and sequential basis.
Gross margin rose to 35, 1% from 31, 3% in the prior year period and 34.0% in the previous quarter as we continue to focus on driving improved performance through the deployment of our operations Excellence model. In addition, the year over year improvement benefited from the sale of our UK composites business in the prior year.
Improved K, Max spares and support performance and stronger profitability for our seals Springs and contacts.
SG&A for the period was 21, 9% as compared to 17, 2% in the year ago period, and 21, 2% in the prior quarter. These.
These increases were largely due to higher employee related cost as we saw an increase in group health expense and higher incentive compensation costs, resulting from our improved year over year performance.
As part of our continued effort to manage costs, we've undertaken a facility's rationalization plan at our structures manufacturing sites. We expect this to result in cost savings beginning in the first half of 2022 with total realization of approximately $4 million by 2024.
On a consolidated basis, our operating income was $16 million compared to an operating loss of $38 $9 million in the third quarter of the prior year.
Higher profitability stem from the absence of the goodwill impairment charge and costs related to the acquired retention plans incurred in the prior year period, as well as lower TSA cost associated with our former distribution business.
We completed these TSA activities during the third quarter of 2021.
Adjusted EBITDA from continuing operations in the third quarter was $27 8 million or 15, 5% of sales compared to $35 5 million or 16, 6% of sales in the prior year period.
The year over year decline in EBITDA margin was largely due to the previously mentioned employee related costs, partially offset by the absence of UK losses, and the improvement we saw in gross margin.
We are proud of the fact that adjusted EBITA margin improved sequentially from 14, 8% of sales in the previous quarter as a result of our ability to maintain gross margin on lower sales volume slightly offset by the higher employee related costs. We continue to aggressively target our efforts at maximizing gross margin and controlling G&A, while making smart.
R&D investments to drive future growth.
Diluted earnings per share from continuing operations were 53 on a GAAP basis compared to diluted loss per share from continuing operations of $1 39 in the third quarter of 2020, which included a goodwill impairment charge.
On an adjusted basis diluted earnings per share from continuing operations were <unk> 60.
Compared to <unk> 70 in.
In the prior year period.
The primary adjustment in the current quarter included restructuring and severance costs.
During the quarter, we generated adjusted free cash flow of $25 6 million improving our adjusted year to date free cash flow generation to $27 $9 million this compared to free cash flow generation of $22 $4 million in the prior year quarter and free cash flow usage of 60.
$6 $6 million for the nine months ended October one 2020 this.
This improvement is primarily driven by strong cash collections and improved working capital management as a function of our operations excellence focus.
Moving to the outlook.
We are revising our full year guidance for 2021, we now expect full year revenue in the range of $710 million to $720 million due to the shift of the K Max sale into 2022 and lower than expected sales from our structures programs. However, we are raising the low end of our prior expectations for adjusted EBITDA to $92 five.
$5 million to 90 $775 million and adjusted earnings per diluted share to $1 84.
Two $1 95.
This reflects the continued strong performance expected in our medical and industrial end markets, the anticipated incremental recovery of commercial business and general aviation products through the balance of the year and overall improvements in operational forecasting planning and execution.
The increase in margin is largely the result of mix as strength in our higher margin engineered solution products more than offset the expected volume declines in our lower margin products.
Finally, before turning the call back over to Ian we are in the process of finalizing our evaluation of our management and reporting structure. We expect to conclude this analysis in the fourth quarter, which will likely result in our full year 2021 results being reported in more than one segment.
With that I will now turn the call back over to Ian for closing remarks.
Thanks, Jamie.
With one quarter left to go in 2021, we are pleased with our profitability and remain encouraged by the improvements we're seeing in the end market conditions, especially as commercial aircraft backlogs are reduced and production rates increase.
We continue to win more profitable programs shed unprofitable work, we focus our growth strategies on global developing markets and reposition our new autonomous technology around the needs of our military warfighters.
We are well positioned to deliver on our on our revised full year earnings targets. We will continue to work diligently to expand our capabilities to innovate and organically grow all of our businesses, while relentlessly improving our operations and achieving excellence in all that we do.
Our future is dependent on our talent and I'm thankful to our workforce of more than 3000 dedicated employees, whose commitment has been instrumental in our success with that I'd like to open the line for questions and we have the first question. Please.
Thank you to ask a question you will need to press Star then one of your telephone to withdraw your question. Please press the pound key.
Our first question comes from the line of Steve Barger with Keybanc capital markets. Your line is now open.
Thanks, Good morning, guys.
Hey, good morning, good morning, Steve.
Ian you talked a lot about innovation and future growth programs I know, it's early to talk about next year, but if I look at revenue from 2018 through consensus 'twenty. Two it's basically flat for five years do you have enough confidence in the cycle and new programs to say 'twenty two revenue will be up from this year and that you can break out of this range.
<unk>.
Yeah, No I do Steve and I think we're we're obviously in the planning phase right now a couple of factors. One is looking at our end markets and what's happening with the commercial recovery and the timing of that is a key part of it.
<unk> already seen I think very strong growth in industrial and medical this year, we expect that to continue through next year.
And obviously with <unk> volumes.
<unk> site through J P up volumes through through option 15, and 16 through 22 in 2023, we've got a great pipeline there of Dcs that we continue to work.
So I mean organically I do expect to see year over year improvements. We're just gonna. It's the variable here is gonna be relatives of certain programs that we're working on and we'll see how that goes I think that the.
Bigger more exciting part to me is quite frankly is the story that and again. This is what we shared with a lot of folks are ready we've got a very nice.
Story to tell that's taking shape and we're excited to kind of tell that story.
Early next year.
So I'll just follow up with a similar question on operating margin given the mix that you see in the programs that you said youre working on and just whatever you can control internally can you start to drive operating margin expansion in a sustainable way and get out of this kind of mid to high single digit range.
Yeah, absolutely I think that's really what the thrust of the new operations Excellence model is all about it is a function of the type of programs. We've had in just to be quite frankly been in some programs that weren't as profitable as they needed to be.
Exited those programs and we're bidding more profitable work winning more profitable work because it's more sophisticated in nature.
So I think that's very much in our control I mean, Jamie talked about just overall networking capital that were.
Pressing hard on a lot more training that we've implemented at all of our business youth business unit specific training around lean and cost out and waste elimination of variation reduction those things. That's taking route. This is the first full year just to be clear that we've had that training in place we are expecting to realize even more benefit from it next year and beyond.
I think just overall program execution planning has gotten much much better again those are all the different pillars and our operations excellence model.
And I'll ask one more and get back in line is your R&D spend more focused on specific end markets like medical or aerospace or more product line focused around bearings for the helicopter and UAV systems I'm, just trying to understand how youre prioritizing the organization for opportunities Yeah Fair question.
I would say that your second part of that is the right answer which is we really are focusing on the <unk>.
Bearings businesses, our precision products businesses, certainly autonomous technology that we think is a great growth market.
What's nice though is when you focus on those parts of our business. The end markets are very diverse.
These businesses cuts across not just aerospace industrial and medical so we're really kind of seeing the benefits play out in the in the inside but the investment is focused on the parts of our business that really drives that return.
Thanks.
Our next question comes from the line of Seth <unk> with J P. Morgan. Your line is now open.
Thanks, very much and good morning.
Hey.
There were some.
Very good gross margin performance in the quarter.
And so I guess, if you can.
Dig into that a little bit more in terms of what what enable that in terms of.
Terms of mix.
Rice cost.
Sort of what.
The drivers were and how to think about that going going forward.
There are a lot of that Seth.
That comes down to it there were some we had some favorable mix for sure in the quarter.
That helped to offset some of the declines when you look over that year over year performance. We did have strong J P. F. Dcs in the prior year, where we delivered the gross margin percentage there that was a nice one but this year, we did better than that despite the lower volumes on Dcs and that speaks again to the value that we see in our <unk> acquisition and the products that they bring to.
With the spring seals, and contacts and seeing that come back in a really nice way with good strong growth year over year out of that business as well as some favorable product mix, we had at our specialty bearings business with some of our our product mix there.
We've taken we've talked about this in the past we've taken a number of steps to really right size the cost structure at the organization and we expect to have some meaningful drop through opportunities as volumes continue to increase. So we think this is a good sign for for gross margin performance going forward, obviously quarter to quarter, depending on when we might sell it.
K Max right.
The portfolio shifts a little bit more towards.
Structures.
Sales and deliveries you could see a little bit of ebb and flow there, but when we look at that the engineered highly engineered product space.
We are seeing those nice gross margins come through.
Yeah, and I would add Seth just just on pricing obviously.
This year.
We've made certain price adjustments, where necessary I think looking forward. The teams are very focused on the value pricing propositions not just as a function of the type of program just in general So we expect to keep pushing on that one hard and again, Jamie mentioned that cost out we've really seen some nice efforts.
Our structures businesses, where it was the most opportunity and we're really focused on those businesses to get them healthier and more profitable.
And our bearings business have naturally been very very profitable and now we are sitting in this.
With K Max in cargo and some other really exciting programs starting to take root.
Opportunities there as well.
Alright, great Alright.
I guess.
We don't want to let our conference cargo via this quarter without asking about supply chain issues and I think there was.
Small mention of it in the.
Our 10-Q.
So maybe if you guys can start to tell us where things stand there.
Potential risks are there and how youre mitigating them.
Yes, a couple of things on that we watch this very closely naturally everybody is.
Just by nature of our business is in the materials. We buy we are seeing lead times push out that.
And that is being countered with just again one of our pillars of operational excellence is looking at our supply chain or the way we plan. So theyre really incorporating that into our planning. So we're handling that I think very nicely.
From a pricing perspective, we're not seeing anything dramatic or material. We are seeing things like adhesives, we're seeing some stuff now with composites coming through.
But again, that's I think being able to price that through and pass it through deal with it from cost out they're handling it very nicely from a margin perspective, but we're not seeing anything dramatically yet we're always watching it very carefully but it's really the lead times that we're watching mostly just.
Just to add on the on the wage side right. We think about the labor the labor portion of that we are seeing a little bit of.
Wage inflation, probably at our entry level positions as we are competing for.
Those folks to come into the organization to help with assembly and tasks as they begin to develop we are working to try to retain the workforce. We haven't had any real material results costs associated with the retention just yet but that is top of mind for us as we move through the remainder of this year for sure.
But at the end of said, we've been able to manage that.
Pretty nicely so far through the year and still deliver on our results, but we're absolutely mindful of it is as we enter the fourth quarter. This year and then looking into 2022.
Right. Okay. Okay, Great and then just one more for now I think Jamie you said at the end of your remarks looking at.
Offering some segments.
Going forward and so maybe what.
I guess, what those would be in.
Yeah.
Yeah.
How to kind of.
What you guys are looking to sort of highlight.
By doing that.
Yeah, I'll just start real quick.
We've heard loud and clear and we've had this on our agenda and we are as Jamie mentioned in his remarks, we're focused on it we're planning on doing it there'll be more than one segment for sure I think it is going to highlight some really important things that we want our community our investor community to know about our business, which really is I think fundamental to where we're going.
Yeah, and you get into that at that point we're.
Part of that process Seth as you know is really evaluating the management structure and we've talked about that for some time as it gets his feet underneath them here and he was just passed its one year Mark.
September of this year so.
We were really evaluating what that management structure needs to look like and making sure. We've got that put in the right place we are being mindful of costs, though as we go through that so I don't want that to come across as if we're going to create these bloated management structure he's here to support that.
But we are that that's an important pillar for us to be able to determine exactly what those look like so we're in we're in the stages of finalizing that it's probably too soon for me to share specifically, what those segments will look like but as Ian noted.
We'll be certainly more than one.
And we plan to let you guys know soon.
Sooner rather than later, what that might look like once we finished our valuation.
Okay, great. Thanks, Thanks, very much guys.
Thanks Seth.
Thank you as a reminder to ask a question you will need to press Star then one on your telephone.
Our next question comes from the line of peaks Kawecki with Alembic Global Your line is now open.
Good morning, Jamie.
Hey, guys.
The shortfall was the fuzes in the third quarter.
Interesting.
A new product but.
How should we envision that as this plan to be maybe sort of an upgrade to prior fuses or.
And maybe who the first customer B, how are you guys thinking about that.
So first of all kudos to the team. This has been a development program.
It's been at work for a while and a huge milestone was achieved with live drops in the weapon went flawlessly.
This is an enhancement to the basic marketing to moms and what it does is it creates a height of burst capability that didn't exist before on these later got it bonds all different sizes of bonds.
That can be deployed and configurable from the cockpit et cetera, So it's enhanced capability.
Historically.
Non sophisticated weapon.
So it really provides a lot more capability working with an overseas customer on that we've got initial order that we're working on right now and the upside here I think is very exciting Julie to tell but the milestone has been that the.
The product has been designed and now it's been validated so we're excited to move forward.
Is there any further testing left to do or.
There'll be some refinement here and there but really.
Now, it's about moving into production with our initial order so.
Down the road, obviously, there's enhancements and things like that but we've demonstrated that capability as it is today very successfully.
Okay. Okay, that's great I appreciate it.
I guess last one for me similar question on the cargo UAV.
There's a lot of I don't know early lot of expressions of interest in.
Unmanned lift and Vod are we to the point, yet Ian where there's kind of a formal program of record in a competition that's ready to go or is that maybe a year out.
Should we think about the timing there with that opportunity.
Yes, no I can tell you exactly what kind of where we are.
Very very excited about the launch of cargo this year engineering team here at cave and marvellous job in a short period of time is taking a concept that was driven as we've expressed before directly from our customers specifically the Marine Corps. Obviously other services now we are at a USA with the army, we've got conversations with Silicon coming up special operations command.
And we're also expecting as I mentioned a lot of commercial applications. We've got some some initial.
Calls and things like that happening bottom line is that from a from a military perspective, which is exactly where we wanted to be we are in the requirements formulation stage with the customer as we speak so that actually supposed to be done by next year that will be midyear. So imagine their requirements finally getting kind of.
Finalized for our medium and possibly a heavy lift as well that's what came next tightened comes in.
Just had another very successful demonstration huge milestone that the team's been working on for over a year.
Just recently at Fort Pickett, and Virginia that went exceptionally well. So now we're expecting that next year those requirements get get detailed out and then at some point probably late next year or into next into the following year, there would be a an RFID or an RFP flooded.
Okay, Great I appreciate it.
I'm going to backtrack I'm going to ask one last one I apologize too I just wanted to Jamie.
Jamie I apologize I always seem to get confused about the K Max orders and deliveries, but there were there were there.
There are no deliveries this quarter and you're expecting one or two in the fourth quarter can you can you just clarify yes.
Yes, So let me just.
Point of reference in the Q3 of 2020, we had one delivery of <unk> right Q3 of 2021, we had zero.
We just announced.
With our press release last evening that we had received contracts for <unk>, which are expected to be delivered in the fourth quarter of this year.
In the fourth quarter of last year, we had one came back aircrafts now our expectation our prior expectation was for four came access through the course of this year, but we did what we did bring down our topline revenue.
Expectations due in part to the potential for that fourth aircrafts to shift into 2022.
Okay. Okay, great. Thanks for the clarification, thanks, guys. Thanks, Dave.
Thank you.
We do have a follow up question from the line of Steve Barger with Keybanc capital markets. Your line is open.
Just a couple modeling questions do you expect commercial business in general will be down again in <unk> against that comp from last year.
Or I guess sequentially, if thats easier just how are you thinking about that business for <unk>, yes.
Yes, Steve it should be up I mean.
There's a couple of things there one with the came back deliveries those flow through that commercial business and general aviation. So when you. When you look at that line item on a quarter by quarter that can impact a little bit of that year over year comparison that you might be looking at but we do expect those to flow through there and we do expect to see continued strength in our commercial business and general aviation product specific.
As we look at like our bearings technologies.
And their ability to deliver.
To the order rates again, we've seen order rates increase in it.
For those products.
We expect to see an increase there so we're working through that now with the team.
Got it and will medical and industrial stay flattened or <unk> in that same range as <unk> and <unk> or will seasonality caused those to be lower sequentially.
It's going to be a little bit higher right. So we should see an increase there.
Well the specific amount right. It's hard for me to predict right now, but we do expect that to be up just based on what we're seeing with orders.
Hey.
And on slide four under the industrials, there's a bullet that says industry four <unk> and artificial intelligence can you just expand on what that means.
Yes, no I'm happy to.
For our bearings business is one of the things that's the next level of performance.
We're highly machined.
We automated processes and connecting with ERP systems connecting the customer demand is to effectively.
Push into what we call industry for pointed out what does the industry four <unk>. We just did an assessment at our <unk> facility and we're starting effectively with them.
A very strong business that to start with a very strong processes, it's connecting.
All of those value streams together in an automated way so all the data systems coming in.
If you can imagine finish.
Traditionally very manual processes, even though youre using ERP systems, it's a relatively manual process now we're getting a much deeper understanding and ability to kind of streamline to flow through those product lines.
Again from our suppliers to our customers.
As an example, I was just at Spirit Aero systems.
And was there for a day and talking with their leadership and they've done a very nice job there about three years.
Industry four <unk> and give you. An example is optimizing every single machine. So in the past if you think about disruptions and bottlenecks and things like that.
That are again dealt with on a daily or manual basis.
Now have a system that can predict from a planning perspective, how to optimize every single machine that you have.
And those kinds of things so that's where you get that next level of efficiency, that's what industry four <unk>.
And then for the opportunity for us really relies on as people roll that out more meaningfully into their into their operations.
We're positioned with the vendors who are going to provide some of that automation technology.
Whether it be robotic arms and others for four industrial manufacturing.
Food and beverage manufacturing and those types of applications. So we've got nice positions with our technology to be able to support that.
What do you think the timing gap is between seeing a big sophisticated customer like spirit do that versus.
Smaller people in the supply chain.
Let me curious you said that the timing.
I guess like how pervasive is this how is it something that you're pushing or or that you're it's a pull from other.
Customers are presumably you'll do this upstream as well.
Yeah.
Be clear to being an ops guy here and having spent a lot of time in this environment.
This is not a one size fits all is not pushing anything down. This is really adapting kind of the next level of planning.
And automation and digitization to our processes to continually optimize optimized optimize and level load and really understand how we are driving efficiencies through operations. It's us it's the <unk>.
Standard that's now precipitating itself across industry.
And there is those are again have been early adopters and theyre, moving along and seeing really nice.
<unk> and they are in their costs and.
And their operational metrics and so for US we're not blanketing in it we're starting with one of our strongest businesses has got very strong processes to really test. It out. We just finished what they call a smart industry readiness assessment just to see what the gaps are so we're stepping into it very mindfully because at the end of the day I would tell you. This I told the team that we're not doing this for the sake of doing it.
It because we want to optimize margins.
Generate cash we want to show faster returns and really drive quality metrics across our product lines and so that's what it's all about.
Got it and that's actually a nice segue into my last question. You spent a lot of time talking about K, Max and now cargo UAV and just thinking about those in the context of your goals to maximize EBITDA margin free cash flow conversion and ROIC.
Can you talk about what size of those programs need to be to be additive to those metrics and just a timeline for how you see them really being stronger contributors.
Yeah, I'll start I think again, having spent a lot of time and these worlds and the defense contracting world and new product development side of things.
I'll just be upfront I think came acts like I said, we just finished a massive milestone their requirements are still being worked with the Marine Corps. It is specifically a marine Corps program although.
We've talked about we've actually have a relatively strong commercial interest in the unmanned variant for natural reasons when I talk about firefighting.
When I look at the kind of the commercial market I think it will reflect kind of what we're doing today, which as you know.
Felipe it'll be more units.
Say, because it's a different different capability on the military side, certainly with the Marines I'd.
I would say easily within the next probably two years, we'll have a real understanding if theyre going to move forward with this capability and by the way, it's not just heavy lift with <unk> tightened in the autonomous capability is a lot going on with networking and other things.
Argo to me is potentially.
Much much larger program quite frankly, because it's again, it's purely autonomous it's purpose built.
<unk> sets for these are limitless.
And my perception is certainly from what our services are asking.
We have got a lot of meetings coming up here with all of the services, who have expressed interest we got commercial operators as well.
And I would say as I've said before our goal here.
And by the way, we're trying to fast track. This we're not trying to go through normal acquisition process Theres ways to fast track these types of programs.
It can be a very meaningful program for us certainly within five years is my kind of my timeline on that that's the goal we're setting for ourselves.
Really have something thats in production on both the <unk> and cargo potentially and I'll also say that that's that's the beginning state we talk about having a family of autonomous capabilities.
That's kind of where we're headed and that's beyond that probably the five year window, but.
Very strong reception right now with cargo.
And certainly with the latest K Max demos.
And I think you had mentioned this in your prepared comments, but if you do an analyst day or you'll have.
Youll have some numbers in terms of addressable market to be able to update us sometime next year.
Absolutely.
Our game plan is to early next year as we've talked about we've got acquisitions and work.
Got commercial recovery really strong operational excellence.
I'll ask Steve just to put a fine point on this we had a really great quarter. Overall, if you look at Firebird and K Max and cargo launch.
We've had some of our series one in particular, just got a massive manufacturing award margins are strong cash is strong.
We're really positioning ourselves relative to share and with segmentation coming to really share where we're headed as a company, which is very exciting and to tell that story and talk about the addressable markets in.
In line it out for you guys early next year.
Since you brought it up any more color on the massive manufacturing award.
Well, yes. It was Jacksonville it was an industry excuse me it was a.
He was award called the <unk>.
The first coast manufacturer of the year.
And that was a it's a reasonable award there was about 200 companies that are part of it it's really a function of their operational excellence improvement in lean journey.
And they just got that award.
Got it thank you.
Yes.
Thank you we do have a follow up question from the line of Seth Sigman with Jpmorgan. Your line is open.
Hey, Thanks, Good morning, just a follow up.
One on the defense business and sort of the play.
Places in defense, where boehringer supplier.
I know, there's various puts and takes going on.
Clients on the Blackhawks, but some growth on new helicopters like CH 53, K. So I guess when you look out for that.
Excluding the safe and are but that sort of.
Defense business.
How do you think about the progression there as we as we move into 'twenty two.
I'll start.
No.
To start with.
So there is Jacksonville has a black Hawk cockpits, I mean, I think a lot of the Oems really this year is a function of COVID-19, we're going through the exercise of trying to figure out what they wanted to continue sourcing and outsourcing and things like that that really was a function of their own capacity and what's happening with COVID-19 and trying to fill your factories.
What we did and what we are doing is we're demonstrating to them that we are best in class in what we do and as an example.
Our relationship with Sikorsky Black Hawk cockpit, which we've been doing for many years.
The Jacksonville facility was struggling on that program.
We brought in a lot of great professional help part of our lean journey part of our operational excellence model extent, now where they're actually come back to us and said that we are key to their success.
Going forward. So we are expecting more work, they're seeing with I met with.
My colleagues and Bell helicopter and Textron aviation and really outlining our capabilities with those folks.
But on the defense side, I think where.
The helicopter industry is going for sure, we're very well positioned with <unk>.
Things like that in our bearings businesses.
We've got some really exciting work that's going on in our structures businesses. CH 47 fuel probe is a great example of a program that's extremely profitable that we're very excited about.
So I think like I said earlier, we're repositioning ourselves in the right ways relative to certain defense programs. Now were also very well positioned on the future vertical lift and Florida and those those those upcoming.
Upcoming big programs, which is also going to be upside for us.
Yes, just to add in Columbia class submarines.
Joint strike fighter, we've got content on that across the business and art in our engineered product space.
There are some really nice again growth programs inside of our defense portfolio and again that really just speaks to the broad proliferation of our products across that where we have structures. We've got bearings, we've got sealing technologies.
Across a broad range of those defense products right in various stages of their lifecycle and then because of the extension of use set that we're seeing with certain platforms.
They're running into problems today, and they're coming to us to help solve those problems.
Some will call legacy aircraft. Another example is.
Our facilities Jacksonville for example, just just got their 145 certificate. So there's a lot of aftermarket work that's very profitable that those folks are very good at doing so that's another growth opportunity for us.
Great. Thanks very much.
Yes.
Thank you there are no further questions I will now turn the call back to Rebecca for closing remarks.
Thank you for joining us on today's conference call. We look forward to speaking with you again, when we report our fourth quarter results.
Yeah.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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