Q1 2022 L3harris Technologies Inc Earnings Call
Greetings and welcome to the L. Three Harris technologies first quarter calendar year 2022 earnings call.
At this time, all participants are in listen only mode.
Today's call will be focused on questions and answers following brief opening remarks.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
During this conference call is being recorded.
Now my pleasure to introduce your host Rajeev <unk>, Vice President of Investor Relations you May now begin.
Thank you Rob good morning, and welcome to our first quarter 2022 earnings call on the call with me today are Chris Good basic our CEO and Michele Turner, our CFO first a few words on forward looking statements and non-GAAP measures.
Forward looking statements involve risks assumptions and uncertainties that could cause actual results to differ materially.
For more information please see our industrial letter and SEC filings, a reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the Investor Relations section of our website, which is L. Three terrorists dot com, where a replay of this call will also be available.
And as a reminder, at the start of the year, we began reporting our results and our realigned three segment structure. That's just pension items to the corporate level with that I'll turn it over to Chris for a few comments.
Okay, well, thank you Rajiv and good morning, everyone.
As you saw we released our results after the market closed yesterday, and our new streamlined format.
We're always looking at ways to improve and challenge the status quo. So instead of issuing a press release at 730. This morning, and have Michel and I read prepared remarks, which were very similar to the press release and maybe with some added color and then having you follow along with our web charts, which are just a graphic depiction of what we were going to say.
Anyway, we thought would try something new and come out with what we're calling our investor letter and putting everything in one document and that allows us all the time today to focus on the questions and talk about what is what's on your mind. So just real quickly. The first quarter results are consistent with our prior commentary of a batch.
<unk> 2022 weighted revenue and margin plan.
This will also be the case with our free cash flow as well and for the full year, we're reiterating our guide across the board as we continue to advance our strategy in a dynamic environment, whether it's from the pandemic or the global threats in eastern Europe and elsewhere.
So before opening the line to questions I'd like to express our steadfast support to the people of Ukraine I.
I think we all agree their unwavering strength and resilience are a motivating force behind our mission here at L. Three Harris.
So with that Rob, let's open the lines for questions.
Thank you well now be conducting a question and answer session.
Interest of time, we ask you please limit yourselves to one single part question.
If you'd like to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue.
If I start to feel that you move your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One on please while we poll for questions.
Yeah.
Thank you. Our first question is from Robert Spingarn with Melius Research. Please proceed with your question.
Good morning.
Hey, good morning, I wanted to.
I wanted to ask you really a general question and just elaborate on your agile development group and the strategy behind the partnership with Shield capital, but then something more specific.
On the flight test status for your integrated core processor for the F 35 Tech refresh three and the possibility that delays on tier three might push block four out to fiscal 'twenty nine.
All of this impacts the revenue bathtub that you previously talked about between tier two and tier three.
Okay, why don't I take F 35, first and then I'll ask Michel to give you some of the financial numbers on F 35, and then I'll come back and do a.
D G and and shield. So yeah, we talk about F 35, each each quarter appropriately so and I'll say this last quarter.
It's probably the the best quarter, we've had in a while where we're progressing through the integration and test, which we all know is the most challenging part of any any development program and are they integrated core processor did began safety of flight testing earlier.
In March so that that is a good sign in and progressing well I do want to highlight we do also have the panoramic cockpit display, which just completed its safety of flight and then the aircraft memory system completed its full qualification test. So everything is is tracking well.
To the first flight you know, we just provide us start to Lockheed and I think in 2023 is going to be the first flight of the aircrafts. So all seems to be a to be going well you know on the contractual side, where we secured a contract for ICP for lot 16, and for a M. S. N P. C D on lot 16 in <unk>.
<unk>, so we're getting into production contracts and we're gonna be ready.
To hit the ground running as we complete these are these tests, so as you'd expect where we're investing in R&D and capital to continue to support the program and find more efficient ways to.
To meet these commitments and I didn't want to recognize the team because we are working effectively three shifts and weekends is our highest.
Priority.
For everyone and we've had customer visits and they've been very complimentary of the workforce and the progress that we're making so michele yeah. Good morning, Rob to just add a little bit of color from a financial perspective. So our overall mission avionics sector, it's going to be down mid single digits consistent with what we shared before.
For the F 35 development, it's going to be down low double digits before we get into the brand from a production perspective. So we anticipate going into next year that will be flattish to up a couple of percent.
Yeah. So let me let me go back to the first question about the agile development group and our investment in shield. So you've heard us talk about our strategy of being a trusted disruptor investing more in R&D as a percentage of revenue than most trying to prime more.
Contract and embracing the new entrants that are disrupting the marketplace and the D. O D. So we are set up the agile development group is in entities that are previously existed. So some of this is it's just kind of branding it and giving it the recognition it deserves a we have a.
A couple of thousand engineers in this group are there R&D is double digits as a percentage of revenue and they're really the front end of the business and you know they've been working with.
With speed and agility and innovation.
Most of their focus has been on modular open systems, which has been embraced by our customer.
And.
You know, it's hard to give examples because a lot of it where we're doing is in the classified arena initially focused on the air domain. We're also doing some interesting.
Development on new and creative weapon systems. So they are the front end and as we get these contracts out of development and into production they'll hand. These off to another entity, who is a world class at producing them. So.
I don't think it's the most unique thing in the industry, but it's something we thought.
Made sense and they're off to a pretty good start I spend a lot of time in D. C and the customers have been been excited about it and you now have even come down in and visited our facilities generally very impressed with how where we're moving along now shield capital as a as a venture capital firm you know they raised.
$125 million, we're their largest a strategic partner and the thought process. There was trying to find a way to get these new startup technology companies, which I differentiate from small businesses small businesses of compliance.
Contractual compliance and usually applies the service contracts. These are.
Mainly silicon Valley High Tech startup companies, who have great commercial technologies to want to support that.
The department of defense and its hard for these companies to get programs of record. So we're embracing and working with them. So we will make our investments either co investor through shield and these companies, which is secondary to the the goal of making this strategic investment and that's to get this technology into our system.
<unk> quicker faster more affordable and meet the Warfighter need so very excited about that and we'll keep you updated as that progresses in the in the years ahead.
Thank you.
Our next question is from the line of Sheila <unk> with Jefferies. Please proceed with your question.
My name is Chris Michel I think Dave and thanks, so much for that bold new efficient format I like it I think our slide 16, our page 16 is my favorite, though and so you know Chris since the last time, we so there's been a lot of change the budget came out it was more of a robust seven outlets than we thought coupled with NATO members stepping up.
And spending so given your ability to be perhaps more nimble than others. What are you seeing in terms of incremental opportunities and how do you think that could impact the intermediate grade profile about Ajax.
Okay, well, thanks, Sheila well, obviously welcome all feedback on the new Investor letter, but.
I think we got a lot of positive feedback are giving you.
15 hours to read it instead of one hour so hopefully hopefully that was helpful.
Yeah, you know, Ukraine, and I'll, just say, Ukraine and in the whole region.
You know the breaking news yesterday, whereas you saw the White House asked Congress for an additional $33 billion of funding and you know when you look into the details, which I know will evolve over time 20 billion is for for defense.
And of that 6 billion is the USA I, which is the Ukraine security assistance initiative and 6 billion is Fms and those are two vehicles and processes that we're very familiar with and we've used over the last several years or decades in supporting Ukraine. So I think we understand how that price.
<unk> works, which which of course is a is very important to 6 billion compares to 300 million last year. So this is a significant.
Increase in you know, we just need to see how long it's going to take to get this bill passed.
As we read it you know it appears to have a lot more flexibility.
Four four acting quickly to get these contracts.
Moving so as you would imagine we're in discussion with several customers.
And in the region and here in the U S. There's lots of opportunities for L. Three Harris.
When you think of secured communications I think it's been pretty well.
Publicize the importance of having secured communications and.
Now that that's worked well with Ukraine has been a longtime customer of ours and I think he can.
We didn't see that the Russians are having difficulty with the communication. So I think that that positions us well you know we have a just under the whole ISR situational awareness, whether its space ISR Air ISR, even the E. O. I are tourists you know out of West camera are examples of things that are.
I think could could be needed and of course, our night vision goggles. So we're really not able to give a lot of a lot of details as you would imagine but.
I think broadly we're well situated.
And many of these capabilities are R&R sweet spot, you know, even including EW electronic warfare.
I think over the.
You know mid term, we continue to believe low to mid single digits.
Is the right guide at this point in time, you know we are starting to get demand signals.
We're responding to <unk>, but you know.
I do like the tailwind.
And I think you know more to come over the next several several quarters I will say relative to being a more agile are nimbler I can't give you the specifics, but I can tell you within 15 days from receiving a request we were able to ship.
Chip product.
To help with the conflict and just so you know a lot of this you know.
Re prioritization right. So we have other customers who are willing to.
To give up their products to get them over in the region and then we have to obviously backfill those as well so.
I don't know if that got to all your point Sheila but.
I think where we're well situated.
Thank you. Our next question is from the line of Robert Stallard with vertical research. Please proceed with your question.
Thanks, so much good morning.
Good morning.
And Chris I would reiterate the thanks to this new format and the timing, especially is very helpful.
In terms of my question.
Inflation, obviously is a big issue across the world at the moment and in relation to defense. There's obviously some concern about how this could flow through on fixed price contracts. So I was wondering if you could comment on that and what sort of alleviation to L. Three Harris might have to this issue.
Okay, well. Thank you know inflation is a challenge.
For all of US and I think all industries and I think a lot of people immediately jumped to the traditional supply chain and materials, which obviously I guess the attention, but I also believe and we're planning for a wage and labor inflation as well as the job market gets tighter. So I think we look at it more more.
Broadly you know when I look at our backlog on our portfolio.
Now we have about a 25% of our contracts are cost plus cost reimbursable.
The way those are are designed.
Added costs flow through.
Now to our end user and I think that's one of the reasons you see the budget.
Increase although I don't think anyone believes it's large enough to absorb all the inflationary headwinds we have about 25% of our business through the.
Not only commercial products, but the commercial business model that we've talked about.
Whether it's our west Cam tourists are our tack com radios and such so you know.
Similar to other industries at the right time, you increase your your prices.
<unk> two.
To take that on so they are the real risk. If you will is the 50% that's a firm fixed price as you know we don't have a lot of multiyear backlog, but we do have a little over 12 months of backlog so in that case.
It is a headwind so.
And a lot of those contracts there's escalation clauses.
The reality of those indices are probably less than the real inflation for that that does absorb some of the headwind we've talked about E. Three and some of the initiatives were taken there we've doubled down on that effort.
You have to continue to find ways to be more efficient, we're really embracing and rolling out digital engineering, you know, we're investing in more machinery and tooling.
To be more efficient so that's going to be the challenge and then you know on new bids of which we do several Michel and I. It seems like every day or reviewing another proposal we have to build those costs into the beds going forward. Obviously, so that is how we address it and it's given us a little bit of headwind as you see here and there.
Quarter, I don't know Michele if you want them to maybe quantify it yes.
Character, I would say consistent with what we shared in our previous guidance and the other thing I would say is that from 2022 perspective, we've locked in most of our supply and pricing. So we've mitigated most of the risk consistent.
Consistent with what we put into the guidance, although I will say that this environment is becoming more elongated so as we're thinking about our strategic planning and this is certainly going to be a headwind as we think about 2023.
Our next question comes from the line of Gautam Khanna with Cowen. Please proceed with your question.
Good morning, guys.
Good morning, Thank you for the very efficient format, both last night and.
On your on your opening comments.
Yeah.
I had a couple of questions.
Related to one another so if you could just broadly characterize kind of how <unk> fared in the fit up our forecast.
Forecast an open ended question if you could talk about.
Radio's you've won a number of iqs.
Yeah Night vision, what have you so take it.
As far as you'd like but talk to us about the fit up.
And how you guys are positioned.
Okay did you have more just is that your only question.
Meaning of life and other questions as well, we can defer that.
Okay, Yeah, I mean, as we saw the the good news.
We did get a 2022 budget finally, and you know we've talked at length of challenges has taken a 165 days to get a get a budget, but nonetheless, we did get a budget now where we're starting to see some contracts and an activity pick up at a quicker pace for.
For 'twenty three I think we've all seen just focused on the top line the $773 billion top line.
You know in my discussions.
With several customers and members of Congress I I believe that number is actually going to go up during the conferencing process I think we've seen about $20 billion.
On the Eupol list the unfunded priorities list.
And I think a majority of that is going to be ultimately rolled into the the final 2023 budget realm.
Relative to.
I'll just go to the ER to the unfunded priority list first you did mention a night vision.
That was in the budget has a zero it was zeroed out.
But ourselves and our competitor are aggressively working the hill.
To get that funding back in with the concurrence of the Army. We generally don't go to the hill without our customers support. So the fact that that's on the <unk> list I think is a positive so that was probably the one thing that caught our eye on that on the negative side, but on the positive side.
I'll, let Michele talk a little bit about the IDI cues everything we looked at.
Seem to align well with what we wanted I mean, we track all of our current programs, but we also look at new opportunities were very aggressive in bidding.
Opening the aperture and looking for new opportunities and we'd like to make sure. Those opportunities are funded even though there are competitors because over the long run we think we're well positioned to win some of those.
The only thing I would just also throw out.
Beyond D O D.
No I mentioned.
You know that are.
We're well positioned with the Nextgen weather satellites vanilla budget went up 17%.
23 over 22, NASA is up 8%, even the FAA, where we do a lot of work is up 4%. So when I look at D. O D. Noah NASA FAA and then I think we've all been following the international budgets are trending up especially in the NATO countries.
I just see this as a lot of positive.
<unk> that put us in a good position to continue to grow for the foreseeable future, but maybe I'll give it to Michel to give a little more color. Yeah. No I agree I think can often leased in recent discussions are a radio business has been overshadowed by our supply chain challenges that when you look at the predictive indicators.
We were talking about the budgets with double digit growth on our handhelds or the IDI cues that we received with the first quarter $10 billion of IDI cues really speak to a predictive indicator on the overall growth within this business and so we're excited about the near term going back to Sheila's question around the immediate opera.
<unk> that we're getting from the conflict environment as well all of the macro.
Indicators would suggest that we're going to have a tailwind related to this business. So we're excited about what's to come we think we do need to get through that hurdle, however, with the immediate supply chain challenges.
Thank you our next.
Question is from the line of Peter Arment with Baird. Please proceed with your question.
Yeah, Good morning, Chris Michel and thanks for your time.
I appreciate the new format like everyone else I think it's really efficient.
Hey, Chris I guess my question is just leaving up what Michelle just mentioned on the supply chain.
Your comfort level around kind of things improving in the second half and then also just how it relates to maybe do you take a more cautious approach and carry more inventory as we kind of look towards this kind of building budget environment, and just kind of have that adjusting K supply versus kind of targeting your working capital days that you've been highly focused on thanks.
Yeah.
Yeah. Thanks.
Great question, clearly that that's the number one.
Risks that we're all following and they've been talking about for at least the last nine months or maybe longer.
But to put it in perspective from last time, we had a conversation.
I would say it's about the same you know.
It feels like we're making progress every day is different you know we get two steps forward one step back I think the only thing that's changed in my mind is maybe the length of the recovery.
There is a belief.
This was going to all be behind us in 2022, I think it's going to go into 2023 and again when I when I look at supply chain I'd put it in three buckets, we have inflation, we have materials and we have labor.
I think I've covered the inflation in our in our prior.
Your question, but again.
We're kind of in the mid to high single digit rates, depending on which index. You are looking at and we know it's going to come back down to lower single digits, but I'm thinking that 2023 were previously people might have projected you know fourth quarter of this year. The materials you know is mainly the electronic components.
You know we've talked about our investments in a variety of tools data analytics.
And those processes are paying off as we get better better visibility by the end of the day.
The lead times continue to extend and even the the freight and shipping challenges are adding to the complexity just getting the products.
Into the country and of course, the increased cost of just just shipping everything.
And labor you know the labor shortage I think the attrition.
Is up pretty much across our industry and.
That's something we've got to figure out how to address but I think the.
The labor shortages even more.
More significant within the supply chain so that therein.
Therein lies lies the challenge we've been very successful in our new College grads recruiting so that that's working well from from our perspective.
But I'd.
I'd say feel about the same as I did 90 days ago, just a little longer recovery is the way I think I would.
To summarize it I don't know Michele yeah, Yeah, if I can add a little bit on a numbers perspective, but I do just because of the components that you see it on the Investor letter I do want to thank Rajeev and the IR team along with our controller team communications and legal a lot of collaborative effort went into creating that and we feel like it's really a win on.
Many levels, but the one that I would highlight for this group is really how we're living into our DNA of being a trusted disruptor across the organization. So it's not just about our products and technology, it's about how each and every one of US show up differently to ensure we're a differentiator. So on the supply chain front just to put some context from the numbers for <unk>.
Active in first quarter. We expect this is going to be slightly under $100 million in terms of top line impact we expect that that's going to be fairly consistent in Q2 with that recovery happening in the second half and into 2023.
So to Chris's point, I think it's very consistent with what we where we were at in January except with a potential elongation into 2023 as well, but I do think it's also really important going back to the budget conversation to note that this is all about timing and in particular within tactical radios the demand.
And for our products remains very strong and so it's really about getting through this short term left from a supply chain perspective.
Thank you.
Our next question is from the line of Doug Harned with Bernstein. Please proceed with your question.
Good morning, Thank you.
All right.
I'd like to.
Continue on the tactical radio side, because you know when I think of the products that you've got here I mean, this is sort of the I think of it kind of post jitters World where you are.
They're trying to have.
Common way form so you need a lot of interoperability. So it means you have to and my my sense is it means you have to really outfit large portions.
You know of the military and when do you think about the idea of accused you've gotten.
Can you talk about how those how you expect those to play out.
In terms of and it says completing the deployment over time of the radios that the.
The army the Marines that they need over time and then second.
How do you think about the conversion of those IDI cues into revenues in terms of your share in terms of the timing of individual awards.
Yeah, No Doug Great Great question.
Yes. So we can let me let me take the first part maybe at a higher level and Michel can give you some of the actual numbers that show you, what we're doing relative to orders and revenue kind of quarter by quarter and the and the outlook. So no look you're absolutely right on the importance of these radios in the resilient.
<unk> a lot of our R&D goes into new wave forms.
And as we've said before the modernization.
Is it still in the in the early phases. So we talk about the so com two channel multi band.
Handheld.
That's an almost $400 million I'd IQ, it's a little over halfway of Utah.
Utilize which still means there's a couple of hundred million dollars of opportunity and so <unk> is a great customer and a lot of our our radios start there and then migrate.
To the other services and even even internationally.
The.
The debt that was the the handheld. They also we also have a single you know these are both single awards, which means we get you know obviously up to the idea IQ ceiling limit.
$550 million for the for the Manpack and again, that's about halfway halfway through the spend so clearly lots of opportunities and so calm in the 100% OE checks.
When we go into the.
Some of the tactical radios for the Marines are we had a two channel handheld opportunity. There that was competitive winner take all again single award $750 million.
That we wanted that that's really just getting started.
Tens of millions of dollars on that.
So far.
I think the ones you read more about and you hear about are there or are the dual awards. So you know if you look at the Army Rifle Man you know, that's that's one where one up to and saying what the manpack and again those were just awarded.
Recently.
And our re competition, but does ceiling limits you know go over a decade, just shy of $4 billion and $12 7 billion.
Step one as you noticed the windy IV IQ kind of call that the hunting license and then you go task order by task order a year by year. So.
We're in really good a really good position and you know the modernization won't continue secured comms and situational awareness are two key things you need and any any conflict before handing to Michelle I will point out notwithstanding.
Some of the headwinds and volatility in our tactical Comms revenue, we still have not missed a customer.
Delivery so the team's doing a great job every day different parts come in get deferred.
Makes it makes for a challenge I will point out we did increase our inventory it's about $30 million just in Tac com as we are trying to get.
Get more and more of the electronic components and sooner rather than later, but as you know the lead times or are now six months to 12 months much more than they used to be so Michelle do you want to give more color yeah and just to.
Put some context around the inventory builds we did build inventory across the enterprise by about 100 million, what we call smart inventory in terms of solidifying the second half revenue growth. So I think that's a good call Chris but on the <unk> as we did have for a substantial IDI cues from our land radio perspective with the first quarter.
The first one is $6 billion 10 year dual source IDI cues. So to Chris's point, you know based on history and how that plays out we would expect to get half of that in terms of as the funding comes in and just a reminder, in terms of how we do our backlog our backlog does not assume these ATI accused until theyre funded and so.
What we saw play out within Q1 on the book to Bill in right around one did not include any of the funding upside that we would anticipate as we add as funding is added to these IDI cues and then just a couple of other noted some bulk of $3 7 billion kind of a five year Navy multi service.
As a sole source 80, ecu, so that that would be 100% coming down pretty Harris. Similarly at $750 million 10 year Award with the Marine Corps that was a competitive.
Award.
And then the final one was that $300 million So Com award.
There is still a source I loved the four book to our sole source except for the first one which was dual source. So again continue to have really strong predictive indicators in terms of our demand for radios.
Thank you.
Our next question comes from the line of Richard Safran with Seaport Research. Please proceed with your question.
Okay.
Chris Michelle Rajeev good morning.
Hum.
So I wanted to ask you.
You've been talking about the bookings book to Bill was one about one in the quarter.
Your comments about continuing to grow it just seems an understatement to say you're optimistic about demand.
Keeping the global increases in defense spending and the upward trajectory of New awards. So what does this say about book to Bill for the how book to Bill for 'twenty. Two ends up I mean are we talking about an improving outlook here do you see international as a bigger driver of your bookings now and I guess.
If you could offer a comment on maybe how youre thinking about it now what what twenty-three bookings might look like and anything you could offer there I think would be helpful.
Okay, well good morning, Richard it's.
Always good to hear from you Yeah. We you know the first quarter was <unk> 98 book to Bill and that's really funded book to Bill is Mel.
Shall explain so maybe a little more conservative than the way others look at it but we've got a plan of about one O five book to Bill. So we're we're looking to be in over one.
0.0, each each of the next three three quarters.
It might be a tad on the conservative side, but you know we did have a CR through mid mid March and now we can.
Have to actually convert these.
And to actual contract. So that's the process, we're going through I see international as a tailwind as well we have some great opportunities for international ISR, we ever <unk> turrets.
And we just have to go through the through the process, we have congressional notifications in dealing with foreign governments and their approval process. So we think we're in a good position a lot of these are sole source that we're just going through the contracting than exports and approval process.
And I would expect those two to.
To close as planned so hopefully over a 105 range for this year, we haven't given a lot of insight into 'twenty three but you know we kind of use that as a cause probably a benchmark for 'twenty three as well because I keep.
We keep talking about the tailwind each and every day there is everything seems to be positive relative to the demand signals that we're getting we just have to win and then move forward in fact, we were.
Where we're going to be announcing but the navy announced something that we're quite excited about and that was a recent award known as spear, which is the shipboard panoramic electro optical infrared system.
And why I want to bring this up is you know it aligns perfectly with our strategy, which is to invest upfront and R&D.
<unk> more opportunities and then embrace new entrants or or flip the paradigm and have some of the more legacy primes on our team. So we will get a press release out on this front shortly but it's a $200 million DMD opportunity and just under $600 million with.
Options and that's just for 'twenty one ships for the U S. Navy, we believe it could be upwards of 100 ships and of course, we have the international market. So it is a competitive win.
Started this actually six years ago by investing or Iraq, or R&D on passive targeting.
Eight different businesses within L. Three Harris working together collaboratively.
This is a multibillion dollar opportunity that we're really excited about and it provides 360 <unk> passive.
Detection and tracking which is what our navy needs. If you want to put it under the janssen to umbrella or whatever.
This is a big deal it's modular open systems, and it's something that you'll see more in the days ahead and then you know we're waiting for award on something called spectral with the Navy, which is the Nextgen <unk>.
Information operations and the electronic attack solutions. So all these things and that's has at least four bidders but.
We're going after these things and it aligns with our strategy and these will start to give us more tailwind and confidence in our growth profile.
Yeah, and just to add a couple of additional words to that because this is part of our second half growth. We are anticipating international ISR missions nation programs in the second half as well and so specifically to the question on International we did land within Q1 with a book to Bill over one point, how is 1.8 <unk>.
Final perspective, with 4% growth and said I think that speaks to the another predictive indicator in terms of our strategy is working and then on the space side clearly continues to be a growth engine for US. We are anticipating announcement of award on SBA tracking tranche, one as well and so that's another competitive award that.
We're anticipating in the second half of the year.
Thank you. Our next question is from the line of David Strauss with Barclays. Please proceed with your question.
Thanks, Good morning.
Good morning, David.
Chris Michel.
Next one that I wanted to touch on yet.
I think that it was.
It sounds like it was a benefit tie in mass in the quarter, but a negative on SA SaaS and I think for the full year.
It was supposed to be a headwind to both of the segments. So if you could just touch on kind of the big.
Moving pieces, when we think about mix and the impact on margins.
And could you also just touch on the size within our I think it's within IMS now commercial aviation, how big that business actually is now given you've sold off a decent decent chunk of it and where that I guess that stands relative to <unk>.
Like for like pre pandemic levels. Thanks.
Davis, Australia, and Chris can jump in from an overall mix perspective to your point.
Our segment margins came in at 16%, you'll know that our guide is 16% to $16. Two five so we came in on the low end of that but to your point. There was certainly some mix variation when you looked across our segments. So I'll start with IMS had a really strong quarter landing at 14, 8% and comparative to our guide.
<unk> 13, and a half to 13 75 really strong execution and my compliments to look in our ISR team, but also overall program mix within our commercial aviation business, So compliments to Alan and his team as well. This is the fourth consecutive quarter of double digit growth within our commercial 80.
The Asian sector, and we're expecting that to continue to grow in the second half as well and so really strong EAC performance, we do expect that to modulate a bit as we get into the second half to align with the guide that we provided and then to your point the opposite dynamic is actually playing out within SaaS. So we've landed Q1 at 11.9.
<unk> versus the guide of 12 five to 12.
Seven five which implies that there is going to be.
Our increased expectations from a productivity perspective, and next now we did have a really strong quarter from a space perspective with an S. I asked that's a lower margin business for us with a lot of the new program wins within it.
So we expect that coupled with our E III savings to help that business in the second half of the year and then finally from a <unk> perspective, we've talked a lot about supply chain today, but that was clearly a headwind within Q1, we do expect with the volume recovery in second half that they're going to be able to get to the overall guide of $24.
Two five to 24 point, 58%.
Just two on the commercial aviation.
We're right about $500 million of revenue this year is the outlook.
Pre pandemic that was in the $900 million range for our commercial training business. So we're continuing to be patient and take advantage of the rebound which should be coming soon.
The previously divested in the military training, so 900 to 500, there and I'll just foot stomp the space business is really.
Doing well well over $2 billion of revenue double digit growth and I just think we're in the sweet spot whether it's prime in these responsive space opportunities.
Such as SDA and HPE TSS that we've talked about some classified opportunities GPS in the MTS three which is the next generation of GPS the weather satellites I mentioned, but also the exquisite satellites, where we are a sub.
Other companies and provide our payload so.
We're gonna take this work each and every time might be a little headwind on the margins, but it positions us long term for growth.
And a follow on opportunities.
Thank you.
Our final question comes from Michael Austin Raleigh <unk>. Please proceed with your questions.
Hey, good morning, guys. Thanks for taking the question here loved the new format.
Chris just.
Michelle backup activity international.
And the demand environment I guess, if we if we looked at the growth trajectory really in the industry prewar. It it was really going to be driven by U S. D. O D modernization next generation programs.
R&D phase shifting to production.
I guess, given what we're seeing with NATO and the increases in their spending plans as a as a percent of GDP.
Are you guys seeing you know more tangible evidence and you pointed out that one point of ROE, We book to Bill that there could be an increase for higher margin legacy systems. As you go forward and that could potentially provide some some structural margin tailwind as you move in to kind of.
This medium term if if these European NATO countries really need to recapitalize their business.
Or are there are industrial based rather.
Yeah, Michael that's a great question on the legacy systems I think we're all learning.
The system.
Is out of production now I think it's almost impossible restart some of these.
[noise] weapon systems that you read and hear about you know having been in production for decades, so being able to restart something I think is is difficult. If it's something that's currently operational but maybe an older.
Version or something I think those are going to be easier to deploy again with the supply chain headwind I think that that is going to be the challenge I don't think anyone in the industry has a lot of these products lying around.
You know when their warehouses, we look for demand signals.
And contracts now what we're seeing is the customer who's been depleting their inventory. So we're more in a restocking situations. So look I'm real optimistic about about our international opportunities I think we are unique relative to other companies because we have a combination of products and we use a global distribution that.
Work and then we have our more traditional business development.
Staff with in country executives and focused countries about 10 focus countries, where we're focused where we think these opportunities for growth are so I'm I'm increasingly optimistic about what we've done in international it's a larger percentage of our company each and every quarter.
Quarter I think this quarter, maybe in the 23% range so more to come and you know now that Covid is.
Using a lot of us are going to be traveling around the globe more and more to continue to build these relationships and try to try to close deals. So with that let me just say first of all I appreciate the the feedback on our new format. So I think we're going to do this again and continue to do it.
At least for the rest of the year and see if we can come up with something even even more creative.
Our customers are under a lot of stress and we're all working in the industry to support our customers you know as I mentioned, the agile development group and shield, but this is a result of listening to our customer and hearing what they want and then taking actions. So a lot of this.
I have to credit our customers for family want new entrants they want innovation they want to work with Silicon Valley type companies. So we're trying to adapt to that and of course I have to thank the employees. The dedication the hard work the innovative spirit. Its all inspiring feel like we got a lot of a lot of momentum a lot of excitement and really looking forward.
I do.
Wrapping up a solid 2022 I will just say in closing that we will continue our humanitarian efforts for the people Ukraine will keep working with Dod and NATO allies and others to support this mission.
The deal with the conflict at hand, so thank you for joining the call and.
We'll wrap up a little earlier than normal have a great weekend and talk to you in a couple of months.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.