Q1 2022 Moog Inc Earnings Call

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Good day and welcome to the Moog first quarter FY 2022 earnings call. Today's conference is being recorded at this time I would like to turn the call over to Anne Laure. Please go ahead.

Good morning, before we begin we call your attention to the fact that we may make forward looking statements. During the course of this conference call. 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.

<unk> of these risks uncertainties and other factors is contained in our news release of January 28, 2022, our most recent form 8-K filed on January 28, 2022, 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 remarks for those of you who did not already have a copy of the document a copy of today's financial presentation is available on our Investor Relations webcast page at Www Dot most dot com jobs.

Good morning, Thanks for joining us.

We reported in the first quarter of fiscal 'twenty, two I'll provide color on what we're thinking for the remainder of the year.

Let me start with the key financials.

Earnings per share of $1 44 included a 33 net gain from our portfolio shaping activities adjust.

Adjusted earnings per share of $1 11 were in line with our guidance from last quarter.

Well I mean, <unk> made this quarter more challenging than we had projected 90 days ago.

It's further exacerbated the difficulties associated with labor availability supply chain constraints and inflationary pressures.

Despite these additional headlines we achieved our plan or sorry, the additional headwinds we achieved our plan.

Adjusted free cash flow in the quarter, excluding the impact of our securitization facility with $31 million the conversion ratio of 86% on adjusted net earnings.

There is no change to our guidance for the full year full year sales will be $3 billion with adjusted earnings per share of $5 50, plus.

Plus or minus <unk> 20.

Now, let me move to the headlines.

There were several exciting product announcements since we last reported including a major production when a strategic collaboration and the technology demonstrator.

First we reached agreement on the full order for a rich tourists for sure that program over the last years, we have been working on the initial order for <unk> units, including nonrecurring developers.

Full order for 124 units, including <unk> and options totaled almost $250 million in sales and it's our largest defense bookings ever outside our aircraft business.

It's just the first major win for RV Configurable tourists and we anticipate further wins in the future.

Second in early January we formally launched our bulk construction initiatives with the announcement of the computing consumer.

Electronics show in Las Vegas of a strategic collaboration with <unk> and Bobcat.

Will supply all the controls and actuation on the world's first all electric track loader the T Seven X.

Our controls platform opens the future opportunity to augment the operators capabilities through automation and eventually full autonomous operations.

Wildcats launch customer is sunbelt rentals wants to build at least of all electric vehicles.

We look forward to getting the first units into the field over the next few months.

Converting professional equipment from diesel in hydraulics to electrics is a significant challenge.

Type of challenge our company has solved in other industries in the past.

The electric construction vehicle market is in its infancy and autonomous vehicle operation is still experimental.

The longer term market potential for Moog is enormous.

Third low karger played a critical role in the DARPA Gremlins program this quarter.

In early October the military blend of successful tests to recover on unmanned air vehicle into a conventional airplanes.

<unk> provided flight controls technology for both the air vehicle and the recovery system.

Demonstrating again, our capability to solve our customers' most challenging technical problem.

These programs demonstrate our commitment to organic investments that fuel long term growth.

Over the last few years, we've continued to look for strategic acquisitions, but our strongest to justify the price levels that others. Okay.

We therefore decided to double down on internal investments that will create significant long term value.

These investments come in two categories first investments in new markets products and technology to drive the top line. We've already described some of our growth investments, including a rip tourists, which is now in full production our space vehicles, which are starting to ramp production.

And our construction equipment initiative, which is in the preproduction phase.

Second investments in infrastructure facilities advanced manufacturing systems and portfolio shaping to build a platform for longer term growth at higher margins.

Note that our forecast for fiscal 'twenty two already includes these investments.

Now, let me move to the details starting with the first quarter results.

Sales in the quarter of $724 million were 6% higher than last year.

Sales were up in each of our three operating groups with particular strength in the commercial aircraft and space markets.

Taking a look at the P&L, our gross margin was down on operational inefficiencies attributable to the pandemic.

R&D is in line with last year, selling and admin expenses are up on increased customer interactions, but in line with our plan for the year.

Interest was slightly lower and lower debt levels.

This quarter includes the benefits from the sale of our navigation AIDS business.

The effective tax rate was 24, 7%, resulting in net income of 46 million and earnings per share of $1 44 <unk>.

Excluding the impact of our portfolio actions in the quarter adjusted net income was $36 million and adjusted earnings per share were $1 11.

Fiscal <unk> outlook.

Our first quarter was in line with our guidance from 90 days ago, we anticipated a slow start to the year with increasing sales and earnings as we move through the quarters.

Our outlook remains unchanged and therefore, we are affirming our full year guidance of $3 billion in sales up 6% from last year and adjusted earnings per share of $5 50.

Speaker 1: last year and adjusted earnings per share of $5.50 plus or minus $0.25.

So minus 20.

Now to the segments.

Speaker 1: Next, the segments. I'd remind our listeners that we provided the supplement and data package hosted on our webcast size, which provides all the detailed numbers for your models. We suggest you follow this in parallel with the text.

Mind, our listeners that we provided a supplemental data package posted on our webcast sites, which provides all the detailed numbers for your models.

We suggest you follow this in parallel with the text.

Starting with our aircraft group.

The underlying market dynamics in our aircraft business are somewhat mixed this last quarter.

Speaker 1: The underlying market dynamics in our aircraft business are somewhat mixed to this last work.

Speaker 1: Global political tensions with Russia and China continue to mount, and their strong support for defense spending across both sides of the aisle.

Global political tensions with Russia, and China continue to Mount and their strong support for the defense spending across across both sides of the aisle.

Speaker 1: On the other hand, the continuing resolution and a slower level of activity in the military aftermarket are causes for caution.

On the other hands, the continuing resolution and a slower level of activity in the military aftermarket or causes for caution.

Speaker 1: The recovery in the commercial aircraft Marcus was partially interrupted this war by the Amichron variant. What should resume as a virus wave?

The recovery in the commercial aircraft market was partially interrupted this quarter by the omicron variance what should resume as the virus Williams.

Speaker 1: China flew the 737 MAX, which hopefully means a return to full service sometime in the near future. However, less positive is the fact that the 787 continues to have challenges and deliveries to airlines are not forecasted to resume for several more months.

China, two to 737, Max which hopefully means a return to full service sometime in the near future.

That's positive is the fact that the 787 continues to have challenges and deliveries to airlines are not forecasted to resume for several more months.

Aircraft Q1.

Sales in the quarter of $303 million or 6% higher than last year.

Speaker 1: Sales in the quarter of $303 million were 6% higher than last year.

Speaker 1: This quarter, the commercial sales were way up, with military sales down from you.

This quarter the commercial sales were way up with military sales down from a year ago. We.

Speaker 1: We saw strong growth in both the commercial OEM and commercial aftermarket portfolios.

We saw strong growth in both the commercial OEM and commercial aftermarket portfolios.

On the <unk> on the OEM side, we experienced higher sales across most of our portfolio of programs we.

Speaker 1: On the UNM side, we experience tire sales across most of our portfolio progress.

Speaker 1: We have particular strength on the A350 and in business jets.

We have particular strength from the <unk> hundred 50 and in business Jets to.

The 787 was also up from a year ago.

We had $3 million of additional sales from our Genesis acquisition, which we completed in the last month of Q1 last year.

Speaker 1: We have 3 million additional sales from our genesis acquisition, which we completed in the last month of Q1 last week.

Growth of the commercial aftermarket was driven primarily by the 787 with more modest sales increases on the <unk> hundred 50, and in our business Jets portfolio.

Speaker 1: growth of the commercial aftermarket was driven primarily by the 787 with more modest sales increases on the A350 and in our Business Jets portfolio.

On the military side, we saw decreases in both the OEM book ended the aftermarkets.

Speaker 1: On the military side, we saw decreases in both the only end book and in the aftermarket.

Speaker 1: We have sales on the F-35, we're down over 20% as a result of supply change.

<unk> sales on the F 35 were down over 20% as a result of supply chain challenges.

Speaker 1: In addition, we saw sharply lower sales on foreign military programs as a result of timing.

In addition, we saw sharply lower sales on some foreign military programs as a result of timing issues.

Speaker 1: Partially compensating for these reductions were increases in our helicopter product line, higher funded development and additional sales from Genesys.

Partially compensating for these reductions were increases in our helicopter product line higher funded development and additional sales from Genesis.

Speaker 1: In the military after Marcus, we saw decreases across much of the portfolio with the exception of the B20.

In the military aftermarket we saw decreases across much of the portfolio with the exception of the V 22.

Speaker 1: As part of our wider portfolio shaping program, we completed the divestiture of our NavAIDS business in the first quarter.

As part of a wider portfolio shaping program, we completed the divestiture of our <unk> business in the first quarter.

Speaker 1: We received $39 million in cash and booked a gain of $16 million on the sale.

We received $39 million in cash and booked a gain of $16 million on the sale.

Speaker 1: This game contributed over 500 basis points of operating margins to the aircraft business in the port.

This gain contributed over 500 basis points of operating margin to the aircraft business in the quarter.

Speaker 1: Sales of our NavAids business in fiscal 2021 were $25 million.

Sales of our <unk> business in fiscal 'twenty, one with $25 million.

Aircraft margins.

Speaker 1: Excluding the gain from the sale of the NavViz business, adjusted margins in the quarter were 8.5%.

Excluding the gain from the sale of the diabetes business adjusted margins in the quarter were eight 5%.

Speaker 1: These margins were ahead of our average for fiscal 21. However, they were down from the same quarter a year ago.

Margins were ahead of our average for fiscal 'twenty one.

However, they were down from the same quarter a year ago.

Last year, you May remember, we had a particularly positive mix in the first quarter as a result of unusually strong sales on some of our foreign military programs.

Speaker 1: Last year, you may remember, we had a particularly positive mix in the first quarter as a result of unusually strong sales on some of our foreign military programs.

Aircraft fiscal 'twenty two.

Speaker 1: We're keeping our full year sales forecast unchanged from 90 days ago at 1.25 billion up 7% from fiscal 2021.

Keeping our full year sales forecast unchanged from 90 days ago at $1 25 billion up 7% from fiscal 'twenty one.

Speaker 1: We're also keeping the mix between military and commercial unchanged.

We're also keeping the mix between military and commercial unchanged.

Speaker 1: Our full year forecast assumes some acceleration on the military side from the run rate of the first quarter.

Our full year forecast assumes some acceleration on the military side from the run rate of the first quarter.

Speaker 1: easing supply chain bottlenecks on the F-35 and the modest pickup in the military aftermarket was right in the ground.

<unk> supply chain bottlenecks on the F 35 and <unk>.

Modest pickup in the military aftermarket will drive the growth.

Speaker 1: On the commercial side, we're already slightly ahead of our projected run rate coming out of the first quarter.

On the commercial side were already slightly ahead of our projected run rates coming out of the first quarter.

Speaker 1: We had some favorable timing of material receipts in Q1, which drove the bees. We anticipate this will level out over the coming weeks.

We had some favorable timing of material receipts in Q1, which drove the beach, we anticipate this will level out over the coming three quarters.

Speaker 1: As we go through the remainder of the year, we anticipate margins will strengthen to yield full-year adjusted margins of 10.1%. Unchanged from our forecast of the day to day smoke.

As we go through the remainder of the year, we anticipate margins will strengthen to yield full year adjusted margins up 10, 1% unchanged from our forecast of 90 days ago.

Turning now to space and defense.

Speaker 1: under like demand for our legacy components across both the space and the fence markets remain strong.

Underlying demand for our legacy components across both the space and defense markets remained strong.

Global investment in space, both commercial and military continues to create opportunities for growth of our business.

Speaker 1: Global investment in space, both commercial and military, continues to create opportunities for golden-up.

Speaker 1: In particular, our growth has been fueled by our newer, more integrated product offerings in both markets.

In particular, our growth is being fueled by our newer more integrated product offerings in both markets.

Speaker 1: the vehicles for space, and the reconfigurable turrets in the fence.

The vehicles for space and the Reconfigurable tourists in defense.

Speaker 1: Sales in the first quarter of 208 million were 10% higher than last

Sales in the first quarter of $208 million were 10% higher than last year.

Speaker 1: This quarter we enjoyed nice growth in both the space and the fence portfolio.

This quarter, we enjoyed nice growth in both the space and defense portfolio.

On the space side sales were up over 10% on continued growth in our faith based vehicles product line sale.

Speaker 1: On the space side, sales were up over 10% and continued growth in our space vehicles product.

Speaker 1: Failed in this product line more than doubled to over $20 million in the first quarter of this

Sales in this product line more than doubled to over $20 million in the first quarter. This year.

Speaker 1: increases in our avionics and legacy valves business made up for lower sales on hypersonic development programs.

Increases in our avionics and legacy valves business made up for lower sales on hypersonic development programs.

Several of our hypersonic development programs are winding down and we will now have to wait to see which move to the next stage of early production.

Speaker 1: Several of our hypersonic development problems are winding down. We will now have to waste to see which move to the next stage of early production.

On the defense side, the growth was driven by a rich tourists on the shore I program.

Speaker 1: And the defense side, the growth was driven by our ripped turrets on the shore at Probe.

Speaker 1: As I mentioned in my opening, this quarter we agreed the remaining stages of our contract with DRS and celebrated a total program value over several years of almost 250 million dollars.

As I mentioned in my opening this quarter, we agreed the remaining stages of our contracts with Drs as celebrated a total program value over several years of almost $250 million.

We saw some slowdown in our tactical missile business this quarter, but this was compensated by higher component sales.

Speaker 1: We saw some slowdown in our tactical missile business with this was compensated by higher components.

Over the last few years in both the space and defense markets. We followed a strategy of combining our components into more integrated solutions to address the needs of the end customer primarily the defense departments we.

Speaker 1: Over the last few years in both the space and defense markets, we follow the strategy of combining our components into more integrated solutions to address the needs of the end customer, primarily the defense department.

Speaker 1: We call this strategy Agile Prime. Our major growth drivers this year, space vehicles and our turret offering, are examples of the success of this strategy.

We call this strategy agile product.

Our major growth drivers this year space vehicles, and our toilet offering are examples of the success of this strategy.

Speaker 1: Going forward, we will continue to offer world-class components as a sub-tier supplier to all the major primes.

Going forward, we will continue to offer world class components as a sub tier supplier to all the major products.

In parallel we will look to partner with <unk> to offer a more cost effective and flexible solutions that address some of the challenges of their customers.

Speaker 1: In parallel, we will look to partner with the primes to offer more cost-effective and flexible solutions that address some of the challenges of their customers.

Similar to our aircraft business or portfolio shaping continued in space and defense. This quarter, we took a $2 million charge associated with exiting a product line and our security business.

Speaker 1: Similar to our aircraft business, our portfolio shaping continued in space in the fence this quarter. We took a $2 million charge associated with exiting a product line in our security business.

Based on defense margins adjusting.

Adjusting for the portfolio shaping charge underlying margins in the quarter were 11%.

Speaker 1: adjusting for the portfolio shaping charge underlying margins in the quarter were 11%.

These margins were down from a few years ago for a combination of reasons.

Speaker 1: margins were down from a few years ago for a combination of reasons.

First as in all of our businesses Colbert is putting operational pressure on our facilities. Both in terms of labor efficiencies as well as supply chain disruption.

Speaker 1: COVID is putting operational pressure on our facilities both in terms of labor efficiencies as well as supply chain disrupt.

Speaker 1: Second, our new growth factors of tarots and space vehicles are in the early stages of production and are at lower margins than our more mature business.

Second our new growth vectors of tourists in space vehicles are in the early stages of production.

With lower margins than our more mature businesses.

Speaker 1: We expect the margins of these new businesses to improve over the coming years.

We expect the margins on these new businesses to improve over the coming years.

Okay.

Based on defense fiscal 'twenty two.

Speaker 1: There's no change to our forecasted sales for the year. Full-year space sales will be $350 million, in line with the run rate of the first quarter. Full-year defense sales will be $530 million, an acceleration from the first quarter as the SHORAD program continues.

There is no change to our forecasted sales for the year full year space sales will be $350 million in line with the run rate of the first quarter full year defense sales will be $530 million.

An acceleration from the first quarter as the short at program continues to grow.

For the full year, we're keeping our adjusted margin forecast unchanged at 11, 5%.

Speaker 1: But the full year we're keeping our adjusted margin forecast unchanged at 11.5%.

Now to industrial systems.

Speaker 1: The major global economies are showing real strength despite the ongoing pandemic. We see the strength reflect

The major global economies are showing real strength, despite the ongoing pandemic.

We see this strength reflected in our industrial bookings.

Speaker 1: Across every market from cars to materials to electronics, demand is buoyant, where the supply chain is struggling to keep up. Cap and spending is up, driving strong demand for automation.

Across every market from cars to materials, the electronics demand as volumes, while the supply chain is struggling to keep up capital.

Capital spending is up driving strong demand for our automation components.

With oil prices firming and flight training on the increase we're feeling positive about the remainder of our fiscal year.

Speaker 1: with oil price is firming and flight training on the increase. We're feeling positive about the remainder of our fish.

Speaker 1: To tell, if the present high level of demand is transitory, as a result of constrained supply chain, or whether it is stable longer term.

It's too early to tell if the presence high level of demand as transitory as a result of constrained supply chain or whether it is stable longer term.

Speaker 1: Sales in the quarter of $213 million were marginally higher than last

Sales in the quarter up $213 million were marginally higher than last year.

Speaker 1: Sales were up in three of our sub-markets, Energy, Industrial Automation, and Sim and Test. Sales of the medical applicant.

Sales were up in three of our Submarkets energy industrial automation and semi test.

Sales into medical applications were down from a year ago.

Energy sales were up across much of the portfolio as oil prices continue to edge upwards.

Speaker 1: Energy sales were up across much of the portfolio as oil prices continued to edge up.

Speaker 1: Industrial automation sales were off, reflected in increasing confidence in the global recovery.

Industrial automation sales were up reflecting the increasing confidence in the global recovery.

Speaker 1: Sales and Desimmon test applications are up as we delivered on some large test programs in China.

Sales into Sim and test applications were up as we delivered on some large tech programs in China.

Speaker 1: Fail the flight simulation systems remain mutant again this quarter actually down from the years.

Sales of flight simulation systems remained usage again, this quarter actually down from a year ago.

Speaker 1: However, on a more positive note, we are starting to see stronger demands for flight simulation systems at the airline market recovery.

However on a more positive note we are starting to see stronger demand for flight simulation systems at the airline market recovers.

Speaker 1: Finally, clear that the medical applications were down in the quarter and the underlying business continues to settle after the COVID surge.

Finally sales into medical applications were down in the quarter as the underlying business continues to settle after the COVID-19 surge.

Industrial systems margins.

Margins in the quarter of eight 1% were down from a year ago, but in line with expectations.

Speaker 1: margins in the quarter of 8.1% were down from a year ago. But in line with expectation.

This quarter, we incurred moving expenses and production disruption as we continue to refine our footprint and consolidated facilities in both Europe and the U S.

Speaker 1: This quarter, we incurred moving expenses and production disruption as we continue to refine our footprint and consolidate facilities in both Europe and the US.

Speaker 1: We also increased our investments in future growth factors, in particular our electric construction vehicle.

We also increased our investments in future growth sectors in particular, our electric construction vehicle initiative.

Speaker 1: were confident that these investments will pay up on both the top line and the bottom line over the coming years.

We're confident that these investments will pay off on both the topline and bottomline over the coming years and.

In the shorter term our strong backlog gives us confidence that the remainder of this fiscal year, we'll see a pickup in both sales and margin.

Speaker 1: In the shorter term, our strong backlog gives us confidence that the remainder of this fiscal year will see a pickup in both sales and margins.

Speaker 1: Industrial Systems Fiscal 22. There's no change to our sales forecast from last quarter. For the full year, we anticipate sales of 910 million with an acceleration as we move through the quarter.

Industrial systems fiscal 'twenty two there is no change to our sales forecast from last quarter for the full year, we anticipate sales of $910 million with an acceleration as we move through the quarters.

Speaker 1: The risk to meeting this plan will not be on the demand side. We already have the backlash.

The risk to meeting this plan will not be on the demand side, we already have the backlog.

Speaker 1: Our primary concern remains the supply chain's ability to meet this increased level of activity. The forecasting full year margins of 9.5% and the supply chain's ability to meet this increased level of activity.

Our primary concern remains the supply chain's ability to meet this increased level of activity.

We're forecasting full year margins of nine 5%.

Summary guidance.

Speaker 1: Overall, it was a solid quarter, in line with our guidance, despite the unexpected arrival of the Omicron variant.

It was a solid quarter in line with our guidance. Despite the unexpected arrival of the omicron periods.

Speaker 1: Business sentiment remains positive across all our markets, but supply challenges are tempering our growth on both the top and bottom line.

This sentiment remains positive across all our markets led supply challenges are tempering our growth on both the top and bottom lines.

Speaker 1: It was an exciting quarter for product announcements with the Shore Ads production program, the Bobcat Strategic Collaboration, and the Grandlands Technology Demonstration.

It was an exciting quarter for product announcements with a short adds production program, the bobcat strategic collaboration and the Gremlins technology demonstration.

Speaker 1: We continue to generate healthy free cash flow and return some of that cash to our investors through our dividends and share buyback programs. Both on the top and bottom.

We continued to generate healthy free cash flow and return some of that cash to our investors through our dividend and share buyback programs.

Growth on the top and bottom lines remains our focus.

Speaker 1: Our search for strategic acquisitions is ongoing, but the last few years have taught us to be wary of overpaying.

Our search for strategic acquisitions is ongoing but the last few years have taught us to be wary of overpaid and.

Speaker 1: In addition, our portfolio review has shown that internal investments have often created more long-term value than some of our acquisition.

In addition, our portfolio review is shown that internal investments are often created more long term value than some of our acquisitions.

Speaker 1: As a result, we're accelerating the pace of internal investment this year, both in terms of capital expenditures as well as investments in new market opportunities. We're very excited about the

As a result, we are accelerating the pace of internal investments. This year, both in terms of capital expenditures as well as investments in new market opportunities.

We're very excited about the long term opportunities for our business.

Speaker 1: Climate change is opening opportunities for us in construction vehicles and demographic shifts are creating the need for additional automation.

Limit changes opening opportunities for us in construction vehicles and demographic shifts are creating the need for additional automation.

The availability of ever lower cost sensors, and advanced computing platforms is enabling transformational change.

Speaker 1: The availability of ever lower cost sensors and advanced computing platforms is enabling transformational change.

Speaker 1: At our core, we are an engineering and technology company. Our greatest strength is working with our customers to solve their most difficult technical challenges.

At our core we are an engineering and technology company.

<unk> strength is working with our customers to solve their most difficult technical challenges.

Speaker 1: We have both the components technology and the systems integration capability to make things what.

We have all the components technology and the systems integration capability to make things work on.

Speaker 1: Our collaboration with Bobcatch came from demonstrating this capability. Within six months of our first conversation, we had a fully operational vehicle.

Our collaboration with Bob cash came from demonstrating this capability within six months of our first conversation we had a fully operational vehicles.

Speaker 1: For the second quarter, we anticipate earnings for share of $1.30 plus or minus 15 cents. Our range is relatively wide again, as we remain unsure about the evolution of the virus and the potential impact of vaccine mandates and further supply chain issues on our business.

For the second quarter, we anticipate earnings per share of $1 30, plus or minus <unk> 15.

Our range is relatively wide again as we remain unsure about the evolution of the virus and the potential impact of vaccine mandates and further supply chain issues on our business.

However, these are transitory issues and they will resolve we believe over the coming quarters, our underlying business remains strong and we're very optimistic about the longer term.

Speaker 1: However, these are transitory issues and they will resolve, we believe, over the coming quarter.

Speaker 1: Our underlying business remains strong and we're very optimistic about the longer term.

Speaker 1: Now let me pass you to Jennifer who will provide more color on our cash flow and balance.

Now, let me pass it to Jennifer who will provide more color on our cash flow and balance sheet.

Speaker 2: Thank you, John . Good morning, everyone. Inflation and interest rates are getting a lot of attention these days. We're feeling the effects of inflation now. We're seeing the economic growth that comes with inflation. It's also impacting the cost of labor and purchase materials.

Thank you John and good morning, everyone.

<unk> and interest rates are getting a lot of attention. These days, we're feeling the impact of inflation now we're seeing the economic growth that comes with inflation. It's also impacting the cost of labor and purchased material.

Speaker 2: With the bed-likely to hike interest rates soon when we see the tapering the facts of enslave.

With the fed likely to hike interest rates than when we see the tapering effects of inflation.

Speaker 2: we can expect higher interest costs. But since we're not highly levered, we are well positioned to take advantage of acquisition opportunities should prices moderate.

Can expect higher interest cost, but since we're not highly levered, we are well positioned to take advantage of acquisition opportunities should prices moderating.

Speaker 2: Workforce and ability and labor shortages are also affecting us both directly and through the supply chain. It's an interesting backdrop for everyone these days.

Workforce mobility and labor shortages are also attacking us both directly and through the supply chain. It's an interesting backdrop for everyone. These days.

Speaker 2: Moving to moat specific activity, we just announced a 4% increase in our dividend to 26 cents per share for upcoming quarterly dividend.

Moving to milk specific activity, we just announced a 4% increase in our dividend to <unk> 26 per share for our upcoming quarterly dividend payment.

Speaker 2: This quarter, we also amended our Securitization Facility. This facility provides us with lower interest costs compared to those that we would incur with borrowings under our resolving credits.

This quarter, we also amended our securitization facility.

The facility provides us with lower interest cost compared to those that we would incur with borrowings under our revolving credit facility.

We essentially saw receivable of up to $100 million on the amended securitization facility such as those receivables are recognized from our balance sheet.

Speaker 2: We essentially sell receivables of up to $100 million on the amended securitization facility, such that those receivables are derecognized from our balance sheet. This new structure reduces our

This new structure reduces our working capital and debt levels.

Speaker 2: To provide a comparable look at our cash generation and financial position with previous periods, I'll first share a pre-cash flow, networking capital metrics, and debt balances without the benefit of the new Securitization Facility. I'll also include the metrics with calculated off of our financial statements near the end of my comments for you rock.

To provide a comparable look at our cash generation and financial position with previous periods.

First shelf I'll first share free cash flow net working capital metrics and debt balances without the benefit of the new securitization facility.

I will also include the metrics are calculated off of our financial statements near the end of my comments for your reference.

Free cash flow continues to be a good story, we averaged 100% free cash flow conversion since the beginning of last year.

Speaker 2: Precache flow continues to be a good story. We average 100% precache flow conversion since the beginning of last.

Speaker 2: In our first quarter this year, pre-cash flow with $31 million for 86% conversion on adjusted never-ending.

In our first quarter this year free cash flow was $31 million or 86% conversion on adjusted net earnings.

Speaker 2: Customer advances were particularly strong, but drive driven by large advances on military

<unk> advances were particularly strong.

Driven by large advances on military program.

In addition, we continued inventory as a source of cash.

Speaker 2: In addition, we continue to encourage a source of cash.

The $31 million of free cash flow in Q1 compares with a $44 million decrease in our net debt during.

Speaker 2: With $31 million of pre-cash flow in Q1, compares with a $44 million decrease in our net debt. During the first quarter, we received $9 million of proceeds from the scale of the navigation asus.

During the first quarter, we received $9 million of proceeds from the sale of our navigation business.

Speaker 2: Partially offsetting these proceeds were $13 million of share repurchases and $8 million for the quarterly dividends.

Partially offsetting these proceeds were $13 million of share repurchases and $8 million for the quarterly dividend payment.

Net working capital excluding cash and debt also showed nice improvement this quarter as a percentage of sales net working capital was 27, 6% at the end of the first quarter down from 29, 1% a quarter ago cash.

Speaker 2: Networking capital, excluding cash and debt, also showed nice improvement this quarter. As a percentage of sales, networking capital was 27.6% at the end of the first quarter, down from 29.1% a quarter ago.

Cash advances from Japan customers were very strong and drove this improvement.

Speaker 2: Cash advances from defense customers were very strong and drogas and proofs. Partially offsetting this.

Offsetting this with the growth in receivables.

Capital expenditures in the first quarter were $37 million in line with our spend over the past couple of quarters.

Speaker 2: Capital expenditures in the first quarter were $37 million. In line with our spend over the past couple of quarters.

Speaker 2: We're recapitalizing for next generation manufacturing capabilities that will provide us with a strong platform for growth.

We're recapitalizing for next generation manufacturing capability that will provide us with a strong platform for growth.

Speaker 2: We're also consolidating some of our operations in the new facility.

Also consolidating some of their operations into new facility.

Speaker 2: We're in a solid financial position to comfortably be making these.

We're in a solid financial position to comfortably and making these investments.

Speaker 2: At quarter end, our net debt was $759 million, including $107 million of cash.

At quarter end, our net debt was $759 million, including $107 million of cash the major components of our debt for $500 million of senior notes and $272 million of borrowings on our U S revolving credit facility as well as $90 million associated with the securitization facility.

Speaker 2: The major components of our debt were $500 million with senior notes and $272 million, the following is on our US Revolving Credit Pro.

Speaker 2: as well as $90 million associated with the Securitization Facility that does not show up on our balance.

That does not show up on our balance sheet.

Speaker 2: We have $797 million, but unused foreign capacity on our U.S. Revolving Credit.

We have $797 million of unused borrowing capacity on our U S revolving credit facility.

Our ability to draw on the unused balance is limited limited buyer leverage covenant, which is a maximum of four <unk> on a net debt basis.

Speaker 2: Our ability to draw on the unused balance is limited by our leverage covenant, which is a maximum of 4.0 times on a net database.

Speaker 2: Based on our leverage, we could have incurred an additional $635 million of net debt as would the end of our first quarter.

Based on our leverage we could have incurred an additional $635 million of net debt as of the end of our first quarter.

We are confident that our existing facilities provide us with the flexibility to invest in our future.

Speaker 2: We are confident that our existing facilities provide us with the flexibility to invest in our future.

We're in a good shape from a leverage perspective, our leverage ratio with Q2 times on a net debt basis as of the end of the first quarter compared to two six times a year ago.

Speaker 2: We're in a good shape from a leverage perspective. Our leverage ratio was 2.2 times an in nested at basis as of the end of the first quarter compared to 2.6 times a year ago. Strong cast generation.

Strong cash generation drove this improvement.

Speaker 2: Our target zone is between two and a quarter time and two and three-quarters time. So we're just below that.

Our target zone is between two and a quarter time in two and three quarters time. So we're just below that we're comfortable with our leverage falling below that range for a few quarters or in the year.

Speaker 2: We're comfortable with our leverage falling below that range for a few quarters or even in the year.

Speaker 2: We have the full spectrum of options available to us for capital deployment.

We have the full spectrum of options available to us for capital deployment.

Speaker 2: Currently, we're very focused on internal investments that will serve to provide growth opportunities as well as efficiency gains.

Currently we are very focused on internal investments that will serve to provide growth opportunities as well as efficiency gains.

Speaker 2: We continue to explore acquisition targets while remaining disciplined on pricing that's still generally quite high.

We continue to explore acquisition targets, while remaining disciplined on pricing.

<unk> quite high.

Speaker 2: In addition, we may return capital to shareholders by buying back shares. We also have our dividend policy.

In addition, we may return capital to shareholders by buying back shares.

Also have our dividend policy in place.

Okay.

Speaker 2: Gifting to Global Retirement Plan, cash contributions totaled $16 million in the quarter compared to $13 million in the first quarter of 2021.

Shifting to global retirement plan cash contributions totaled $16 million in the quarter compared to $13 million in the first quarter of 2021.

Speaker 2: Contribution to the increased by a desizing contribution plan, but this participation grows in our U.S.

Contributions have increased Bernstein contribution plan participation growth in our U S.

Speaker 2: Global retirement plan expense in the first quarter was $21 million, up from $18 million in the first quarter of 2021, also driven by our contribution, our defined country.

Global retirement plan expense in the first quarter was $21 million up from $18 million in the first quarter of 2021 also driven by our contribution our defined contribution plan.

Our effective tax rate was 24, 7% in the first quarter compared to 24, 9% in the same period a year ago.

Speaker 2: Our effective tax rate was 24.7% in the first quarter compared to 24.9% in the same period a year ago.

Speaker 2: Adjusting for debustiture activities are effective catch rates with 24.0% in the first quarter.

Adjusting for divestiture activities, our effective tax rate was 24, 8% in the first quarter.

Speaker 2: The lower factor tax rate this quarter was largely the result of a more favorable earning.

The lower effective tax rate this quarter was largely the result of a more favorable earnings.

Speaker 2: We expect free cash flow conversion in 2022 to be about 45% on adjusted net earn.

We expect free cash flow conversion in 2022 to be about 45% on adjusted net earnings.

Speaker 2: Customer advances and inventories will be sourced with cash. Law receivables and tables will be used through them.

Customer advances and inventories will be sources of cash while receivables and payables will be uses of cash.

We expect $160 million of capital expenditures in 2022, with a slight uptick in spend from our first quarter spending level.

Speaker 2: We expect $160 million of capital expenditures in 2022 with a slight uptick in spend from our first quarter spending level.

Capital expenditures reflect investments in facilities and infrastructure to support future growth and operational improvements in the business.

Speaker 2: Capital expenditures, reflects investment in facilities and infrastructure to support future growth and operational improvement.

Speaker 2: appreciation and amortization are forecast to be $97 million dollars.

Depreciation and amortization are forecast to be $97 million.

While free cash flow moderate this year, we're also generating cash through our portfolio reshaping activities such as cash generated from the sale of the <unk> business this past quarter.

Speaker 2: While free cash flow moderates this year, we're also generating cash through our portfolio-reshaping activities, such as cash generated from the sale of a nav-aid business this past quarter.

Before I wrap up I'd like to share some of the metrics and amount you'll be able to calculate from our financial statements.

Speaker 2: Before I wrap up, I'd like to share some of the metrics and amounts you'll be able to calculate from our financial statements. You three, <expletive> US gap accounts.

To reflect U S GAAP accounting for the securitization facility.

Speaker 2: Pre-cash flow in the quarter was $120 million and is projected to be $179 million for the year, which is about 100% conversion on adjusted net earnings.

Free cash flow in the quarter was $120 million and is projected to be $179 million for the year, which is about 100% conversion on adjusted net earnings.

Speaker 2: Network in capital was 24.5% of sales at the end of the quarter and that debt was $669 million.

Networking capital was 24, 5% of sales at the end of the quarter and net debt was $669 million.

Speaker 2: In summary, our financial position is strong. We're generating cash to fund investment that will provide for our long-term sale growth and margin objective. We remain optimistic in our future. With that, we'll turn it back to John .

In summary, our financial position is strong we are generating cash to fund investments that will provide for our long term sales growth and margin objective, we remain optimistic in our future.

With that I will turn it back to John for any questions you may have.

Speaker 1: Thanks Jennifer. And Genevieve, we would be happy to take questions now from some of our listeners, please.

Thanks, Jennifer.

Genevieve, we would be happy to take questions now from some of our listeners. Please.

Yes.

Speaker 3: Thank you. If you would like to ask a question, please single by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow you single to reach our equipment.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using a speaker phone. Please make sure. Your mute function is turned off to allow your single to reach our equipment.

Speaker 3: You will take your first question from Christine Leward with Morgan Stanley . Please go ahead.

I'll take your first question from Kristine <unk> with Morgan Stanley . Please go ahead.

Good morning, Chris Good morning, everyone.

Speaker 4: Good morning, everyone. Hey, how are you guys doing?

How are you how are you guys doing.

Speaker 4: We were doing better last week before the bills last at the top of the coin. We were okay. Okay. I think we're getting better. Oh, yes, say two. I just wanted to touch base with you about the after 35. I mean, we've heard some of the prime struggle with the after 35 program with labor constraints. What's the pace of slow down your sleep in the program? And how has that affected you if any at all?

We were doing better last week before the bills last at top of the call. Okay. Okay.

Oh, Yeah, Hey, too.

Just wanted to touch base with you about the F 35.

We've heard some of the clients struggle with the F 35 program without labor constrained.

What is the pace of slowdown youre seeing from the program and how has that affected you if any at all.

So in the quarter, Christine we had what I call there.

Speaker 1: So in the quarter Christine, we had what I call, there is clearly COVID-19 quarter, the Omicron variant, also the vaccine mandates which created quite a lot of disruption, not that they went through yet, but just on rest.

There is clearly cover this quarter.

The omicron variants also the vaccine mandates, which created quite a lot of disruption not that they went through yet but just on west.

Speaker 1: That really put pressure on, I'd say, labor productivity in the quarter, which would have affected the F-35. But the bigger issue was we had some idiosyncratic supply chain issues, some specific.

That really put pressure on I'd say labor productivity in the quarter, which would have affected the F 35, but the bigger issue was we had some idiosyncratic supply chain issues. Some specific component related issues that we were struggling with this quarter that we anticipate that that will recover as we go through the next few quarters for the full year, though our sales on the F 30.

Speaker 1: related issues that we were struggling with this quarter that we anticipate that will that will recover as we go through the next few quarters.

Speaker 1: For the full year though, our sales on the F-35 would be down about 10% from what we saw on 21 and kind of in line with what we saw on 20. So that's kind of, you know, we saw that ramp up into 21 and we're back down a little bit about 10% from what we saw on 21 in 22. And that's what, you know, we haven't changed that forecast for the year. We were just a little bit slow out of the gate in the first quarter because it's a little, well, obviously the labor issue, but more particularly some particular issues on the supply chain.

<unk> will be down about 10% from what we saw in 'twenty, one and kind of in line with what we saw in 'twenty. So that's kind of.

We saw that ramp up into 'twenty, one and we're back down a little bit about 10% from what we saw in 'twenty, one and 'twenty, two and Thats why we havent changed that forecast for the year. We were just a little bit slow out of the gate in the first quarter because of some splits while obviously the labor issue, but more particularly some.

Particular issues on the supply chain.

Thanks Anthony.

Speaker 2: And we didn't have supply chain points on, can you elaborate more on exactly what you're experiencing, what you've, what actions you've taken to mitigate the risk and also going forward? Are these things starting to get better or worse?

Supply chain point, John can you elaborate more on exactly what youre experiencing what you what.

With actions, we've taken to mitigate the risks and also going forward are these things starting to get better or worse.

Speaker 1: So we're seeing, I mean, the problem with the supply chain Christine is it's like it's all over the place. On the S35, we had some specific issues with a couple of components, some of our suppliers that had some challenges. Keep in mind that our supply chain issue could be reflected as labor availability issue at some of our sub-suppliers. So it all kind of rips us through, but it's across a range of components. It's not just...

So we're seeing I mean, the problem with the supply chain Christine.

It's all over the place.

On the F 35, we had some specific issues with a couple of components some of our suppliers have had.

<unk> had some challenges keep in mind that our supply chain issue could be reflected as labor availability issue at some of our sub suppliers. So it all kind of rippled through but it's across a range of components. It's not just.

Speaker 1: electronic components, it can be mechanical components, it can be a whole variety of stuff. One of the things that we're, you know, struggling with right now is loctite, nothing to do with our aircraft business in one of our other businesses, but we can't get loctite, you know, glue. So it's across the board, Christine, and it's almost impossible to predict what's going to be the next issue that comes up.

Electronic components it can be mechanical components that can be a whole variety of stuff one of the things that we're struggling with right now is loctite nothing to do with our aircraft business and one of our other businesses, but we can't get Loctite General glue.

So it's across the board Kristine and it's almost impossible.

Possible to predict what's going to be the next issue that comes up in terms of mitigating against it.

Speaker 1: In terms of mitigating against it, I mean, when you're in the storm, all you can do is you can baton down the hatches and do the very best you can to maneuver. And so what it is is it's putting a signature...

When youre in the storm all you can do is batten down the hatches and do the very best we can to maneuver and so what it is is its putting a significant amount of additional efforts into chasing down alternative sources of supply we can't of course and much of the aerospace stuff you can't get alternative sources of supply. So we're spending a lot of time with our suppliers working with them directly trying to solve.

Speaker 1: of additional effort into chasing down alternative sources of supply, we can't, of course...

Speaker 1: and much of the aerospace stuff, you can't get alternative sources of supply. So we're spending a lot of time with our suppliers, working with them directly, trying to solve whatever problems that they may have, looking for if it's...

All of our problems that they may have looking far if it's commodity stuff is there another supplier that we can get that locked tight from a vendor or a trade or that you can get from so same as every other company just spending a lot more time and a lot more efforts doing what a year or two ago will be just placing appeal. So it is a.

Speaker 1: commodity stuff, is there another supplier that we can get that loctite from, is there a vendor or a trader that you can get it from. So same as every other company, just spending a lot more time and a lot more efforts doing what a year or two ago would be just placing the peel. So it's a drag in terms of efficiency.

Drag in terms of efficiency, but theres no theres no solving it in the short term building inventory, which is one of the concerns I mentioned on the industrial side as you get this huge.

Speaker 1: But there's no, you know, there's no solving it in the short term, you know, building inventory, which is, you know, one of the concerns I mentioned on the industrial side is you get this huge.

The pickup in demand.

Speaker 1: Because, you know, because supply is constrained and the question then always remains, is that just, will that unwind as we go forward because people are over ordering because they can't get this stuff or not? But there's no simple solution because if we don't know tomorrow what the new issue will be on the supply chain. So it's a, it's a continuous fight. And you asked the third piece and I'm trying to remember what your third piece was. I mean, are there any.

Because supply is constrained in the quarter. The question that always remains is that just with that unwind as we go forward because people are over ordering because they can't get the stuff on us.

But theres no simple solution, because we don't know tomorrow, what the new issue will be on the supply chain. So.

It's a continuous fight and you ask the third piece that I'm trying to remember what the third piece was.

I mean are there any parts of that are actually getting better.

Oh, yes.

Speaker 1: Oh, yeah, I mean, well, what happens is, you know, you have, you have an issue with the parts you work really hard and that part gets better. And then something else comes up. So is the supply chain in totally getting better?

Yes.

It happens is you have an issue with the power to work really hard in that part gets better and then something else comes up so is the supply chain and totally getting better.

Speaker 1: I don't think it's getting better yet. I know on the F-35, the team there would say, well, we had these three or four components of our real issues. And we think we pretty much saw those. So that we get better in the next quarter. But that's not to say that something new is not going to turn up at a different part of the business. So I wouldn't say at this stage that it's getting better yet in aggregates. I think that's still to play out. And if you think of.

I don't think it's getting better yes, I know on the F 35, the team there I would say, while we had these three or four components of real issues and we think we pretty much saw those so that will get better in the next quarter, but that's not to say that something new is not going to turn up at a different part of the business. So I wouldn't say at this stage that it's getting better yes in aggregate I think thats still.

To play out and if you think of China's zero Covid policy and the spread of omicron the potential for China to shutdown large parts of their supply chain for weeks at a time could further make for difficulties in the future.

Speaker 1: China's zero-coated policy and the spread of Omicron, the potential for China to shut down large parts of their supply chain for weeks at a time could further make for difficulties in the future. So it's still a mixed bag, Christine. We're still in the middle of the storm. It's not better yet. And that's one of the questions I would say about.

It's still a mixed bag Kristine we are still in the middle of the storm, it's not better yes, and Thats one of the cautions I would say about Q2 and Q3 as these things are very hard to estimate.

Speaker 1: Q2 and Q3 is these things are very hard to estimate and they can have a significant impact, which is why we have a much wider range on the quarters at the moment that we would normally have if we had more stable conditions. Thank you, John .

They can have a significant impact which is why we have a much wider range on the quarters at the moment that we would normally have if that if we had more stable conditions.

Thank you John and thank you for all the color and best of luck.

Thank you.

Yes.

And then we will take our next question from Michael <unk> with <unk> Securities. Please go ahead.

Speaker 3: And we will take our next question from Michael, Charmoli with true of securities. Please go ahead. Hey.

Hey, good morning.

Good morning, guys. Thanks for taking the questions here, Hey, John just.

Speaker 5: Morning guys, thanks for taking the questions here. Hey John , just to, you know, not to pick on the margins, I guess I know obviously commercial aerospace, everyone, you know, had a tough go that, you know, we're certainly seeing some, you know, good expansion across the sector as we come out of this, but.

Not to pick on the margins I guess I know, obviously commercial aerospace everyone's had a tough go okay.

Certainly seeing some good.

Good expansion across the sector as we come out of this but can you just give us an update I guess it was right a couple of years ago, you kind of.

Speaker 5: Can you just give us an update? I guess it was right a couple of years ago, you kind of uncovered all the inefficiencies in the aircraft control segment. I think there were a lot of sort of changes and process improvements and just a broader kind of operational improvement plan put in place. Can you give us a sense of

Uncovered all the inefficiencies in the aircraft control segment I think there were.

A lot of sort of changes and process improvements in.

Just a broader kind of operational improvement plan put in place could you give us a sense of what's happening there and I mean, obviously.

Speaker 5: What's happening there? And, you know, I mean, obviously some of the Omicron supply chain inflation probably impacting those potential gains, but maybe just an update on what's kind of been happening in aircraft, sort of under the hood with the overall operation.

Obviously, some of the omicron supply chain inflation, probably impacting those those potential gains, but maybe just an update on what's kind of been happening in aircraft sort of under the hood with the overall operations.

Yes.

Speaker 1: Yeah, you know, we have continued down that path, Michael, you know, we talked about investing, we're investing more in CAPEX, we're investing in more modern equipment, we're investing in new facilities, and so we continue to invest in improving our operational capability, staffing, talent, etc. So all of that has continued, but it's completely masked by a 50 or 60 percent drop in the demand for the commercial side, which, you know, devastated our facility in the Philippines.

We have continued down that path.

We talked about investing we're investing more in capex, we're investing in more modern equipment were investing in new facilities and so we continue to invest in improving our operational capability staffing talents etcetera. So all of that has continued.

But it's completely masked by a $50 or 60% drop in the demand for the commercial site, which devastated our facility in the Philippines in terms of our hourly throughput we are down.

Speaker 1: terms of our already true puts. We are down, so we're under recovery this year, and yet the hours through that facility are downed by 50% from what they were in fiscal 1990.

On a recovery this year and yet the hours through that facility are down by 50% from what they were in fiscal 90. So you get that type of impact, which is which is enormous as you say you've got the labor availability because of Covid, you've got the supply chain issues. So all of those mask, what I would say is underlying improvement having said that we're forecasting margins in.

Speaker 1: So you get that type of impact, which is enormous. As you say, you've got the labor availability because of COVID. You've got the supply chain issues. So all of those mask what I would say is underlying improvement.

Speaker 1: Having said that, we're forecasting margins in the aircraft business to go from 8.3% last year to 10.1% this year, and if, you know, commercially continues to strengthen, we should see that increase over the coming years. So we are seeing that margin improvement, but it's, as I say, it took a real...

Aircraft business to go from eight 3% last year to 10, 1% this year.

Commercial continues to strengthen we should see that increase over the coming years. So we are seeing that margin improvements.

But it's as I say, it's it took a real hit when Covid came on us yes.

Speaker 1: hits when COVID, you know, came on us. Yeah.

Speaker 5: I think, I mean, assuming we continue to get volume recoveries on narrow bodies, certainly wide bodies, I guess, will be challenged, but I mean, you guys have been kind of bouncing around at 10% for the past seven or eight years. You think there's, after you see the volumes come back, you think there's runway to finally kind of break out of that channel, if you would?

I think I mean, assuming we continue to get volume recoveries on narrow bodies, certainly wide bodies, I guess there'll be challenge, but.

I mean, you guys have been kind of bouncing around a 10% for the past seven or eight years. You think there is after you see the volumes come back you think there is run in a way to find that kind of break out of that channel. If you would.

Speaker 1: Absolutely. Although I would caution, the narrow bodies are a very small part of our business. It really is the wide body that drives our business.

Absolutely, although I would caution.

Narrow bodies are very small part of our business. It really is the wide bodies that drives our business. So yes, yes.

Speaker 1: Yeah, so the 737, if they start taking them again at 30 or 40 a month, it'll be a bit of a pickup for us, but it's not like the 87 getting back to 10 a month.

So the 737, if they start taking them again.

A third party.

It'll be a bit of a pickup for us, but it's not like <unk>.

Getting back to 10 a month.

Gotcha.

Speaker 5: Gotcha. Just quickly on that 8-7, I think he said the revenues were up year over year. You know, maybe a bit surprising, I guess, just given production has been kind of stalled. What drove the revenues up on the 8-7?

Just quickly on that as Kevin I think you said the revenues were up year over year.

Maybe a bit surprising I guess just given.

Reductions been kind of stalled what drove revenues.

Revenues up on the 87 in the quarter.

Speaker 1: Yeah, so what we've been doing like, you know, a year ago, as you know, a year ago, 18 months ago, Boeing and Airbus were oscillating up and down dramatically on their production rates. And it was kind of months to months there was a new production schedule, which was typically dropping farther and farther, you know, with an outlook in six months time, we're gonna get it back up. Eventually we got to the point where we said, look, we have to just stabilize our production.

Yes so.

What we've been doing Michael a year ago as you know a year ago 18 months ago at Boeing and Airbus were oscillating up and down dramatically on their production rates and it was kind of month to month. There was a new production schedule, which was typically dropping farther and farther and outlook in six months time, we got to get it back up eventually.

We got to the point, where we said look we have to just stabilize our production rates.

Speaker 1: At a level that we think will be in line with four things kind of demand over the next 12 months.

At a level that we think will be in line with boeing's kind of demand over the next 12 months and then we'd be prepared to move up from there, but our supply chain. We can go from no deliveries to afford delivery. So no deliveries to six deliberate we can't do that I mean, it will shut down all of our supply chain and so several quarters ago. We said, we're just going to level load and that kind of.

Speaker 1: And then we'd be prepared to move up from there. But our supply chain, we can't go from no deliveries to four deliveries to no deliveries to six deliveries. We can't do that. I mean, it would shut down all of our supply chain.

Speaker 1: And so, several quarters ago, we said, we're just going to level those in that kind of low to mid single digits for both the A350 and the 787, that we will make sure that we will absolutely meet Boeing's requirements and air buses requirements.

Low to mid single digits for both the <unk> hundred 50, and the 787 that we will make sure that we will absolutely meet boeing's requirements and Airbus has requirements. It may mean in the short term as you can imagine we'd have a little bit of an inventory build as we go with that would be receivables and that will be pressure on cash, but in terms of keeping the supply chain.

Speaker 1: It may mean in the short term as you can imagine, we'd have a little bit of an inventory build and we go with that would be receivables and that would be pressure on cash. But in terms...

Speaker 1: keeping the supply chain going, making sure it remains efficient. It's much better to continue at 234 every month and have that stable, then go from 0 to 4 to 0 to 5 to 0. It's just...

Going making sure it remains efficient it's much better to continue at 203 for every month and have that stable than go from zero to 420 to five to zero. It's just a much more central to it and so we settle that down over the last six to nine months and as a result, our 87 sales are reasonably constant on a run rate basis.

Speaker 1: And much more sensible thing. And so we settled that down over the last six to nine months. And as a result, our 8-7 sales are reasonably constant on a runway basis now, and that just happens to be a little bit off from what we did a year ago. It'll oscillate up and down a little bit based on material receipts and stuff, but it should be reasonably stable as we go through the next year. And then hopefully, as going starts to get back into shipping and inching up, we'll inch it up kind of gradually with them over the following 12 months.

Now and that just happens to be a little bit off from what we did a year ago. It will oscillate up and down a little bit based on material receipts and stopped but it should be reasonably stable as we go through the next year and then hopefully as Boeing starts to get back into shipping and inching up and should help kind of gradually with them over the following 12 months.

Speaker 5: Got it. That's helpful. Last one I had just on the kind of inflationary environment. Can you give us a sense of what you can pass through, you know, if it is, you know, aircraft content to Boeing and Airbus, you know, obviously there's a lot tied up under their master contract degree.

Got it that's helpful last one I had just on the kind of inflationary environment can you give us a sense of what you can pass through.

If it is aircraft content to Boeing and Airbus, Obviously, theres a lot tied up under their master contract agreements.

Speaker 5: Can you pass through pricing to, if it is directly to Boeing, or if it's up to your delivering product to other tier ones? I'm sure you have to eat some of the costs, whether it might be labor or just consumables or other types of materials you need around shop floors. But what's the general sense on the ability to pass through pricing and what percent, do you think you just guys, you guys have to eat that my way on March.

Can you pass through pricing.

Two if it is directly to Boeing or if it's up to you are delivering product to other tier ones.

I am sure you have to.

Some of the cost whether it might be labor or just consumables or other types of materials, you need around shop floors, but what's the general sense on the ability to pass through pricing in what percent do you think you would just guide you guys have to eat that might weigh on margins.

On the commercial side, there is relatively little opportunity to pass through pricing typically year end youre engaged in long term <unk>.

Speaker 1: On the commercial side, there's relatively little opportunities, bad surprise, typically you're engaged in long term.

Speaker 1: contracts with the OEMs, there is sometimes a

Contracts with the Oems there is sometimes a.

Speaker 1: CPI clause, but it's limited at much, much lower levels than what we're running right now, if you say we're now running 7%. So there is...

At CPI clause.

It's not it's limited at much much lower levels than what we're running right now if you say, we're now running 7%. So there is.

Speaker 1: very little opportunity on the commercial side. On the military side, of course, there is an opportunity, but it probably takes 12 months before it filters through. So take the F-35 as an example. Our contracts for this year were already set, so it's kind of the next.

Very little opportunity on the commercial side on the military side of course, there is an opportunity, but it probably takes 12 months before it filters through so take the F 35 as an example, the next hour contract for this year, we're already SaaS. So it's kind of the next negotiation that you have that opportunity to reflect prices. So there is clearly longer term the opportunity.

Speaker 5: negotiation that you have that opportunity to reflect price. So there is clearly longer term, the opportunity on the ministry side of the business to re-adjust pricing based on inflationary impacts, but as you say, it doesn't happen one quarter to the next. The typically happens over probably 12 or longer period of time. And then on the industry side, there is more opportunity there. We have more opportunity to adjust prices there based on inflationary costs. What about on the arrow after market?

On the military side of the business to readjust pricing based on inflationary impact, but as I say it doesn't happen in one quarter to the next to typically happens over a probably 12 over a longer period of time and then on the industrial side. There is more opportunity. There. We can we have more opportunity to.

Adjust prices they are based on inflationary costs.

Okay, what about what about on the Aero aftermarket.

Opportunity to drive price higher.

Speaker 1: No, typically the arrow after market is governed by a contract that is a that's based off of the OE, OE prices. It's obviously different pricing, but it's based on the OE pricing levels. It's not independently adjusted. Okay, got it.

No typically the Aero aftermarket is governed by a contract that is a that's based off of the OE OE prices, it's obviously different pricings, but it's based on the OE pricing levels, it's not independent of the adjusted.

Okay got it I'll jump back in the queue. Thanks, guys.

Thanks, Michael.

Once again, if you would like to ask a question. Please signal by pressing star one and we'll take our next question from came from Remora with Cowen. Please go ahead.

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Yes, thanks, so much so.

Speaker 6: Yes, thanks so much. So um

Portfolio shaping John maybe walk us through kind of quickly any sort of hits you had where you had them from moving facilities. Because you mentioned that was a factor and then how much longer is this is this process now done or is there more to do.

Speaker 6: Portfolio shaping, John , maybe walk us through, you know, kind of quickly, you know, any sort of hit you had Where you had them from moving facilities because you mentioned that was a factor and then how much longer is this process now done or is there more to do?

Speaker 1: So in terms of we took a charge we are mentioned in the text guy who is about a two-minute dollar charge associated with an inventory right down as we get out of the product run in our

So in terms of we took a charge that I mentioned of the tech Guy It was about a $2 million charge associated with an inventory write down as we get out of the product.

Security business. We did not include anything in terms of what I call inefficiency disruption charges associated with moving so thats not we didn't put in any number for that but that clearly impacted us in terms of production output and.

Speaker 1: We did not include anything in terms of what I call inefficiency, disruption charges, associated moving. So that's not, we didn't put in any number for that. But that clearly impacted us in terms of production output and some margin headwind in the quarter. Well, we didn't call it out separately because that, we didn't feel that that was appropriate to do that. It is an ongoing process, I mean, I guess to some extent you'd say, you want to be doing this all the time.

Some margin headwind in the quarter, what we didn't call it out separately because of that.

We didn't feel that that was.

Appropriate to do that it is an ongoing process Cai I mean, I guess to some extent you'd say you wanted to do this all the time, we continue it will be an ongoing process I would say that we know that we've already identified over this year next year.

Speaker 1: We continue, it will be a non-going process, I would say, that we've already identified over this year and next year. And we continue to look at pieces of the business.

<unk> to look at pieces of the business from.

Speaker 1: From the time if you decide that there's a piece of business that we don't, we've decided that we've exhausted the internal opportunities, we just don't think that fits until you've actually sold it. It's a 12 month process. If I take the Navi, it's business. From the time we said...

From the time, if you decide that there's a piece of business that we don't we've decided look we've exhausted the internal opportunities. We just don't think that fits until you've actually sold or it's a 12 month process. If I take them that base business from the time, we said.

Speaker 1: It doesn't seem like it's got a long-term fit to actually closing it. It's typically 12 to 18 months. So it's an ongoing process that then has quite a long lead time before it goes out.

It doesn't seem like it's got a long term fit to actually closing at its typically 12 to 18 months. So it's an ongoing process that <unk> has a quite a long lead time before it rolls out.

Speaker 1: So the moves and the consolidations we've been doing, we've been doing those step-by-step as well.

That's the moves it moves in the consolidations, we've been doing we've been doing those step by step as well.

Again, there is building a new facility consolidating facilities is a 12 to 18 month program and we're trying to make sure. We do it there's not major disruptions to the supply chain and of course <unk> has made.

Speaker 1: Again, building a new facility, consolidating facilities is a 12 to 18-month program, and we're trying to make sure as we do it there's not major disruptions to the supply chain.

Speaker 1: And of course, COVID has made it more difficult to do some of those types of things. So I would describe this as ongoing. I don't know that it will ever end. I think we are in a more intense period over the last couple of years and probably the next year or two. And then I would hope we would settle down after that. But there will always be some amount of our business. I think that at any time, we'll invest more in one and perhaps decide that we want to get out of a different one.

<unk> made it more difficult to do some of those types of things. So I would describe this as ongoing I don't know that will ever and I think but I think we are in the more intense period over the last couple of years and probably the next year or two and then I would hope we would settle down after that but there'll always be some amount of our business I think that at anytime we will invest more and more than perhaps decided that we wanted to get.

The difficult.

Got it.

Speaker 6: And then on the balance sheet, the customer advances were up substantially. I guess you mentioned defense. Are those going to burn down? Because that's the biggest step up I think I've seen in a long time.

And then.

On the balance sheet, the customer advances were up substantially I guess, you mentioned defense those kind of burn down because thats. The biggest step up I think I've seen in a long time.

Yes, it was a huge step ups and Amazon defense programs that we had particularly in our space and defense segment.

Speaker 2: Yeah, it was a huge step up, and it was on defense programs that we had, particularly in our safe defense segment, were the largest ones that we've got. I'd probably say, you know, 75% or so of that was burned down this year.

We're the largest ones that we've got.

I'd, probably say, 75% or so of that down.

Yet this year.

Okay, Okay and.

Speaker 6: forget this like why is? I like that

So mix in aircraft.

Speaker 6: So mix in aircraft, you know, was the margin was the margin impacted by the fact? I mean, my understanding is you make more money on your military business than on your commercial business. And so, you know, the FMS business was down, the F-35 business was down. So, so mix was really going against you, even though commercial aftermarket was up on a net basis in the first quarter. Is that correct or not?

Yes.

What's the margin was the margin impacted by the fact I mean, my understanding is you make more money.

Your military business than your commercial business and so.

<unk> business was down the F 35 business was down so so mix was really going against you, even though commercial aftermarket was up on on that basis in the first quarter is that correct or not.

Speaker 1: Yes. Yes. And if you go back to the first quarter of last year, Kai, you may remember that we specifically said it was a pretty good quarter, you know, particularly coming off of COVID and the lower levels on the commercial side. And it was because we had an unusually strong mix up, particularly in the middle of the OE side, and that that wouldn't repeat, which it didn't. And so that really was the difference.

Yes, yes, and if you go back to the first quarter of last year, you may remember that we specifically said it was a pretty good quarter, particularly coming out of Covid and the lower levels on the commercial side and it was because we had an unusually strong mix are particularly in the military OE side and that that wouldn't repeat which it didn't and so.

No.

That really was the difference.

Yes.

Speaker 6: Got it. And if you look at your commercial aftermarket sales, this is the fourth sequential quarter in which it's been up. So and your full year guide of, I think, 120 basically assumes that it's going to slow down. Is there any evidence that it will or is this basically, you know, a number that could continue to to move up as traffic comes back?

Got it.

If you look at your commercial aftermarket sales. This is the fourth sequential quarter in which it's been up.

So in your full year guide of $1 20, basically assumes that it's kind of a sign of slowdown is there any evidence that it will or is this basically.

A number that could continue to move up as traffic comes back.

Speaker 1: It could continue to move up, Kai. I mean, as you say, as traffic comes back, it could do. However, maybe we're just being a little bit cautious. We're...

It could continue to move up Cai I mean, as you say as traffic comes back it could do.

However, maybe.

Maybe we're just being a little bit cautious were 31% $32 million in the quarter. So we're a little bit ahead of the run rate for the year, but not much last year, we did.

Speaker 1: 31, 32 million in the quarter. So we're a little bit ahead of the run rate for the year, but not much. Last year we did, for the full year on the commercial aftermarket, we did 105. So it's still a 12% increase from last year. And I guess maybe we're just being a little bit cautious, but you're right, it has been ticking up nicely over the last quarters. And perhaps there's a little bit of upside there as we look through the end of the year.

For the full year on the commercial aftermarket we did.

Five so it's still at a 12% increase from last year and I guess, maybe we're just being a little bit cautious, but youre right. It has been ticking up nicely over the last quarters, and perhaps a little bit of upside there as we look through the end of the year.

Speaker 1: Amitron, I mean, 8, 7, get back into production. No, not that that affects it so much, because of course, they're in warranty for a few years. But...

Army Kron 87 getting back into production now not that that affected so much because of course labor and warranty for a few years, but.

Speaker 6: International travel is not yet roaring back as you know, so so maybe we're just being a little bit cautious. Terrific, thank you very much.

International travel is not yet roaring back as you know so so maybe we're just being a little bit cautious.

Terrific. Thank you very much.

Thanks Cai.

Okay.

And that concludes today's question and answer session.

Speaker 1: Genevieve, thank you very much indeed for your help. Thank you to all our listeners for your interest.

Thank you very much indeed for your help thank you to all our listeners for your interest.

Speaker 1: Unfortunately, I wanted to say go Bills, but we can't say that, but we do look forward to next year. It's always a new year for the Bills. In the meantime, we will continue to do our very best, and we look forward to talking to you again in 90 days. Thank you for your time. Bye-bye.

Unfortunately, I wanted to take all those but we can say that but we do look forward to next year with all of this new year for the <unk> and <unk>.

We will continue to do our very best and we look forward to talking to you again in 90 days. Thank you for your time Bye bye.

This concludes today's call. Thank you for your participation you may now disconnect.

Speaker 3: This concludes today's call. Thank you for your participation. You may now disconnect.