Q3 2022 Woodward Inc Earnings Call
Will benefit our customers shareholders and members.
Woodward also has substantial machining capabilities and a history of producing complex precision engineered components and systems.
We can further leverage this capability to improve quality delivery and cost in the near future.
Have the opportunity to selectively dual source critical components and relieve capacity constraints in our supply chain, which should reduce lead times and solve some of the challenges we face today.
While we largely have the equipment in place this approach puts more pressure on hiring training and retaining talent.
But we believe it will set us up for long term sustainable success.
We're already increasing investment in our members to enable superior performance and have ramped up our recruiting and hiring efforts.
We continue to prioritize developing our members in helping them build a career at Woodward.
Turning to the third quarter the team delivered double digit sales growth in a challenging operating environment.
Orders are up in nearly all market segments, and our backlog has grown but we have not been successful at reducing our past due commitments to customers.
This is due to a combination of part shortages from suppliers and inefficiencies associated with new we hired production workers.
This is one of the most complex operating environments that we have seen.
Our continued investments in the next generation of machinist and technician will.
It will be a key element in resolving these complex challenges and improving on time delivery, increasing production velocity and lowering cost of goods sold.
Profitability was negatively impacted by ongoing global supply chain and labor disruptions increased material and labor inflation and foreign currency exchange rates.
All of which had a larger than expected impact during the quarter.
We don't expect these issues to improve substantially during our fourth quarter and as a result, we are reducing our fiscal year outlook.
However, demand is robust and nearly all market segments.
Orders are not lost in our sole source positions are intact, our long term outlook remains strong.
Mark will provide more details on the financials in a few minutes.
Moving to our markets.
Rising global passenger traffic is driving increased utilization of commercial aircraft fleets.
U S and European domestic passenger traffic is nearly at pre COVID-19 levels.
And China's domestic passenger traffic is now rebounding.
International travel continues to improve as well.
In the defense market, we expect U S procurement to increase slightly in the near term.
And geopolitical tensions may lead to increased international defense spending.
In power generation demand for industrial Turbo machinery is driven by strong growth in Asia.
Global aftermarket activity continues to increase and demand for backup power at data centers remains strong.
In transportation the global Marine market is strong.
Increasing ship build rates higher utilization at elevated transport pricing, all of which drive current and future market activity.
Demand in China for natural gas trucks remains at depressed levels.
The oil and gas market is favorable as prices and equipment utilization remain elevated both of which are driving higher rig counts and should result in additional capital investment and increased aftermarket demand.
In summary, we believe our markets will remain strong.
Increased demand signals for fiscal year, 2022, and 2023 continued to be received from our customers.
We are focused on improving operations to mitigate the challenges we face related to supply chain disruptions.
We remain committed to delivering value to our customers and shareholders and positioning Woodward to capitalize on future market opportunities.
I am excited to be here and I'm energized by the bright future ahead for the company.
I will now turn the call over to Marc to review, our quarterly results and our revised fiscal year outlook.
Thank you chip.
Our Q3 sales and earnings continued to be negatively impacted by the supply chain and labor disruptions as well as labor inefficiencies, we anticipated these disruptions and inefficiencies would improve during the quarter, but they did not.
That persisted longer than anticipated.
Had a more significant impact than expected.
We anticipate these headwinds to last into 2023.
Net sales for the third quarter of fiscal 2022 for $614 million, an increase of 10%.
For the quarter were again negatively impacted by approximately $100 million due.
Due to ongoing global supply chain and labor disruptions.
Sales were also impacted by approximately $18 million from unfavorable foreign currency exchange rates.
Aerospace segment sales for the third quarter of fiscal 2022 were $402 million an increase of 18%.
Commercial aftermarket and OEM sales were up 44% and 37% respectively driven.
Driven by continued recovery in both domestic and international passenger traffic and increasing aircraft utilization as well as higher OEM build rates.
The increase in segment sales was partially offset by delayed shipments of approximately $50 million to $55 million.
Caused by global supply chain and labor disruptions.
Defense OEM sales were down 2%.
Aftermarket sales were down 12%, primarily due to global supply chain and labor disruptions.
Aerospace segment earnings for the third quarter of 2000 $20 million to $57 million.
Or 14, 1% of segment sales compared to 40 $53 million or 15, 6% of segment sales.
The increase in segment earnings was a result of higher sales.
Segment earnings, including as a percent of segment net sales were negatively impacted by net inflationary impacts, including material and labor cost increases as well as increases in manufacturing costs related to the supply chain disruptions and inefficiencies related to training new hires.
We are taking pricing actions to address inflationary pressures, our timing can be delayed due to certain contractual arrangements.
Turning to industrial.
Industrial segment sales for the third quarter of fiscal 2022 or $213 million.
Compared to $216 million a decrease of 1%.
Unfavorable foreign currency rates negatively impacted segment sales in the third quarter by approximately $16 million.
In addition segment sales were negatively impacted by weakness in China natural gas engines, and global supply chain and labor disruptions delayed shipments of approximately $45 million.
The negative sales impacts were partially offset by increased marine sales driven by higher utilization of the in service fleet as well as greater industrial turbo machinery sales supporting increasing demand for power generation and process industries.
Industrial segment earnings for the third quarter of.
2022, or $21 million or nine 9% of segment sales.
$27 million.
Our 12, 6% of segment sales.
Industrial segment earnings decreased primarily as a result of net inflationary impacts, including material and labor cost increases as well as increases in manufacturing costs related to supply chain and labor disruptions.
And inefficiencies related to training recent hires.
Similar to our aerospace business, we are taking pricing actions to address inflationary pressures, however, timing can be delayed due to certain contractual arrangements.
Non segment expenses were $19 million for the third quarter of 2022 compared to $14 million.
At the Woodward level R&D costs for the third quarter of 2022 were $32 million or five 2% of sales compared to $30 million or five 3% of sales.
SG&A expenses for the third quarter of 2022 were $46 million.
<unk> to $48 million.
The effective tax rate was 21, 6% for the third quarter of 2022 compared to 16, 8%.
Looking at cash flows.
Net cash provided by operating activities for the first nine months of fiscal year 2022 was $86 million.
Compared to $318 million.
Capital expenditures were $37 million for the first nine months of 2022 compared to $21 million.
Free cash flow was $49 million for the first nine months of fiscal 2022 compared to free cash flow of $297 million adjusted.
Adjusted free cash flow was $52 million for the first nine months of 2022.
Adjustments to free cash flow for the first nine months of this year included payments related to business development activities and restructuring activities.
There were no adjustments to free cash flow in the prior year period.
The decrease in free cash flow and adjusted free cash flow was primarily related to working capital increases with inventory increases as a result of production delays due to supply chain and labor disruptions as well as higher sales driving increased accounts receivable.
Leverage was 2.0 times EBITDA at the end of the third quarter.
During the first nine months of fiscal 2022.
$462 million was returned to stockholders in the form of $34 million in dividends and $428 million of.
Of repurchase shares.
Lastly, turning to our fiscal 2022 outlook.
In light of the continuing global supply chain and labor disruptions and net inflationary impacts we are revising our FY 'twenty two guidance as follows.
Total net sales for 2022 are now expected to be between.
235 billion and $2 four zero billion.
Aerospace sales growth is expected to be between 8% and 10%.
Industrial sales are now expected to be approximately flat.
Aerospace segment earnings as a percent of segment net sales are now expected to be approximately 15%.
Industrial segment earnings as a percent of segment net sales are now expected to be between 9% and 10%.
The adjustment.
<unk> tax rate is now expected to be approximately 17%.
Adjusted free cash flow is now expected to be approximately $100 million to a $120 million.
Capital expenditures are still expected to be approximately $60 million.
Adjusted earnings per share is now expected to be between $2 55 and.
And $2 75.
Based on approximately $63 million and fully diluted weighted average shares outstanding.
This concludes our comments on the business and results for the third quarter of 2022, operator, we are now ready to open the call for questions.
Thank you the.
A question and answer session will begin at this time.
We are using a speaker phone please pick up the handset before pressing in the numbers should you have a question. Please press star one on your push button phones.
Should you wish to.
Wish to withdraw your question.
Press Star one your question will be taken in the order is received.
Please standby for your first question Sir.
Our first question comes from the line of Robert Springer <unk> with <unk> Research. Your line is open.
Good afternoon.
Good afternoon, Hello, Robert.
Yes.
Chip.
The commercial aftermarket.
It's up 44% in the quarter, but it was flattish from the March quarter to the June quarter, if I have our numbers right and if you could talk a little bit about what happened there.
I would have expected a sequential increase.
Yeah.
Rob I'm, not sure where to start with that one since I wasn't around for the March quarter.
But there is some seasonality in the way we see the we see that business flow in width.
Heavier removals driven in the Sun in the summertime, which flows into our.
Later in the year.
In addition to that Rob that the other.
The other side of this and we've been talking about this for a little while now it's really around the deferred maintenance.
That's been out there.
Airlines did a really good job during the pandemic and coming out of the pandemic to deferring maintenance as long as they could and you did see.
Good growth in our second fiscal quarter, and so we were seeing some of that coming through it's still coming through.
Based on the utilization of the aircraft, but some of the the timing may be a little different than what you would anticipate from quarter to quarter just based on when the airlines.
To do some of that deferred maintenance.
Okay, Alright, and ship, if I could ask a follow up and perhaps.
Focus on her extensive background in the engine business.
Airbus has some aggressive production targets out there obviously Boeing is doing what it can get narrow body on 787 is going to come back here.
Based on your experience with <unk> in our chronic after that is it realistic to expect the engine Oems to be able to meet these longer term production targets I'm talking about 75 on the on the <unk> hundred 20 that kind of thing is that going to happen by mid decade.
I'd be speculating at best Rob on that but these these.
These Oems are are very experienced and have a really good command of what their capacity is and given time investment and confidence. It's just a matter of the will to put the capacity in place to serve that a lot of discussion in the marketplace about if the rates go that high can they be.
And is there enough demand to sustain them at that at that level for long enough to justify the investment and I think that really is the dialogue for the air framers and the engine Oems to come to some conclusion and also look at the pinch points in the supply base and talk to.
To folks like us an investment casting and other other places where the investment is substantial to increase capacity and if the if the if everyone gets their head around that there is a demand out there thats long enough to justify a capacity increase then there's a good return on that investment.
But if people are worried that it's it's.
It's a bubble or something that will be shorter lived.
A lot of discussion about flattening that out.
You mentioned capacity and investment just on a shorter term basis is the issue that we see today and particularly on the engine side one of capacity or is it labor shortage in other words, the capacity today or at least to get hit the.
The near term rates. This year next year, the problem is labor or do they really need to invest more or is that to you.
Some of that investment to get to the 25% rate.
So I don't know enough about where the engine Oems are on their internals right now, but looking at us and looking at upstream into our supply chain, what I see is a combination of of labor and material.
Not too much equipment in the way and not too much tooling in the way and what I.
What I say sometimes is that.
One company's material shortages and other companies labor shortage, if you look one tier.
In front of that one and I think most of what we're seeing experiencing at Woodward is.
As people shortage by and large somewhere in the supply chain, whether it's from the China, all the way back to a China Lockdown, where nobody can go to work or it's just.
Moreover, domestic source, that's having trouble.
Getting staffing ahead of attrition.
Okay, I think that distinction is really important thank you.
Yes.
Okay.
Your next.
Question is from the line of Pete <unk> Kubicki with.
Global your line is open.
Hey, good afternoon guys.
Guys can we drill down deeper into aerospace earnings this quarter it was.
You saw some benefit from volume and we're talking about labor here, but yes.
You've been through a capex that you have I think some of the more modern facilities in automation in the industry. So.
<unk> not seen that benefit of automation yet in aerospace.
Yes so.
One of the things we had in our prepared remarks is really around the <unk>.
Both the inflation impact and.
Labor inefficiency impact we mentioned back in the February timeframe that we are going to be needing to hire 100, new direct labor members a month for the remainder of the year in getting those numbers in and trained.
Was it would have an impact kind of on our earnings and we're continuing to see that.
As chip just said related to our capital and I. Appreciate your comment and anybody that has seen our facilities knows that we are have a very automated facility and we will be able to get product out at at rates that we're talking about but it does come down to having trained.
Members in having trained machinist, specifically and being able to get them in.
Them hired get them up the learning curve.
Have seen attrition you've probably heard me talk previously about the number of retirements that we've had but we are still seeing that retirement and the attrition and so as we're trying to get those.
Members in and on the lines and productive on the line. That's the impact we're seeing here in the short term.
And we actually have some site to site variability in terms of how much is automated on the on the machining and so if you go to a place like rock Youll see a lot of thought of automation.
Go to a place like Santa Clarita, you might see a lot more <unk>.
Annual participation in the machining process.
Having trained labor ability ability to facilitate an efficient lee get through making a quality part the first time.
Target build rate for the shift is.
And that we're going to continue to put a focus on.
When you guys talk about net inflation.
It seems like we've talked about that for at least a couple of quarters now should we assume are you assuming that within a couple more quarters.
Your pricing actions should start to take hold so by I don't know the second quarter of fiscal 'twenty three we should see some some net inflation improvements hopefully.
Yes, so Pete thanks for the question.
That is a.
Good.
The story for US overall, we've talked about we are able to realize price, but the timing may be delayed. So generally let me break it into two buckets. The first being on our OEM side of our business typically it's <unk>.
Contractual based.
Industry base.
And during the calendar year.
Increases that we get so what we saw on January one of 2022, we did see a price increase but that only had the 2021 inflation impacts.
We will see in January of 2023 is the industry based pricing increases that we will get based on the 2020 to inflation, which I think where everyone is aware has been significantly higher than any preceding year in any.
Last few decades.
So that's one price realization that you'll see in addition to that we do have cat.
Catalog pricing increases that we put in for our aftermarket and that is both on parts and labor and we output that pricing increases and however, some of it takes some time to flow through for example, if we have purchase orders from our customers, we don't reprice them. So that although we did.
Start to see some price realization here during our third quarter, we would anticipate that price realization to grow as we go forward.
Okay. Thanks for the color guys.
Thank you.
Your next question is from the line of Matt Akers with Wells Fargo. Your line is open.
Hey, good afternoon, guys. Thanks for the question.
Wanted to ask if you have any early thoughts on next fiscal year.
And then kind of a.
The slower narrow body ramp up we've heard from Boeing and Airbus.
On the other hand, I guess, maybe you guys had some catch up work from this year. If you have any thoughts on just how to stack up relative to some of the long term target to you at the Investor day.
Yeah.
Well, maybe those are a couple of different questions I think it's too early to really.
Any specific remarks about 2023 other than saying that the demand is strong and our customers.
St.
And of note to all members. This week I said I've met two kinds of customers on the road as I've traveled around.
One kind of subset because were past due on deliveries and the other kind is worried that we're not expanding capacity fast enough to meet the 2023 demand, but we have an impacted them yet on on being past due so I think the trend for 2023 on the demand side is quite strong and we're very bullish.
About that.
The challenge is it's such an unstable.
<unk> chain environment that we're focused on really getting our arms around that and making sure. We we understand that well enough before making any statements about what 2023 it looks like <unk>.
Let mark comment on anything from Investor day So.
Matt as we disc.
<unk> discussed in Investor Day, we had the overall woodwork sales CAGR over the next five years at 9%.
Generally consistent across both segments.
As chip just mentioned, we do see demand is strong and so that wouldnt be anything that we would be changing today and we'll look forward to having that discussion.
In early calendar 'twenty three at the Investor Day.
Great. Thanks, and then I guess, if I could ask a little bit more detail on the supply chain disruption that I think.
Chips was one that you highlighted at the Investor Day, I think it was kind of the long pole in the 10 is that has that got any better or is labor kind of the bigger focus now just if you could kind of touch on some of the individual components.
Sure on the computer chips that go on the printed circuit Board assemblies.
Into our different kinds of ela or use our equipment that we that we shipped to our customers.
A number of those supplier problems that we encountered have gotten better some by doing things like screen.
Industrial grade or military grade.
Chip requirements against.
Commercial grade chips, so we've been doing some different kind of.
Substitution of comp.
<unk> that meet the requirements.
When we had shortages of the ones that were on our bill of material we have.
Also work through brokers and.
Things like that.
Find enough supply the main activity, though has been redesigning our <unk> to accept the higher volume chips that are being produced for automotive and the current generation.
So as we look at long term how do we how do we stay ahead and be proactive we're looking at a different cadence on our.
Product management lifecycle as far as that because that goes maybe a quicker.
Turn time, there on on Redesigns for supporting high volume chips.
We've had a number of issues with suppliers that have labor shortages, we have been responding to those.
And a variety of ways.
Some of which has been too.
In source or dual source ourselves if its machining operations, we've added quite a lot of activity on that.
So we've retired on the order of 20 different supplier risks since the last.
Conference call, but new ones.
Cropped up in.
It's just that's the nature of the current supply chain, we had one in the raw material category that impacted.
Our rock cut plant.
It was something that resulted from our from the China, Lockdown and labor shortage there their inability to ship some ceramic insert parts to one of the mills that we get.
Aluminum ingots poured then that shipped to our forging supplier of ours. So it's like three three tiers away from us.
Labor problem was encountered.
And we've been working through alternate sources there to to make sure. We can recover production for the rest of the year on that one.
So I guess to summarize some of the earlier problems that were highlighted.
A quarter ago have been solved but new ones have have shown up in where we're deploying our resources further into the material stream and working hard to.
To control, our destiny by bringing a little bit more in house.
Okay, great. Thank you.
Yep.
Your next question is from the line of David Strauss with Barclays. Your line is open.
Thanks, Good afternoon and welcome Shelley.
Hey, good afternoon, how are you Dave.
So wanted to ask about the defense side of the business. It looks like from a supplier was down slightly year over year, but it looks like from a sequential standpoint that the business actually grew and.
Have we hit bottom there on the defense side, mainly talking about the OEM side.
Yes, and then defense OEM side, David as we've been talking about for some time now right the softening.
On the guided weapons, specifically the <unk> product line.
We werent able to completely offset that with the rest of the guided weapon programs small diameter bomb and <unk>.
Actually the.
As we look forward here it is starting to stabilize however, we do still anticipate some of the.
J D M softness to continue as we go forward, but.
We do anticipate and I think you've heard us talk about that we do anticipate that the.
Defense OEM side of our business, we would excluding the <unk> impact that we would expect to grow and obviously with the <unk>.
<unk> in Ukraine, and what some of our NATO Allies may do we would anticipate that that would be an opportunity for us as we go forward.
Okay and Mark any any.
Any sense or indication on when that Genie NAND portion actually bottoms out or <unk>.
Zero for you guys.
Yes, well, so I wouldn't say bottomed out hit zero.
The one thing that we have a little bit longer visibility to is the Dod orders for that but as we've talked.
Over the last few periods.
The one thing that always can I don't want say drop in like it's next month or anything, but we do get foreign military sales orders on that program and they can be not necessarily as long of a lead item visibility to us. So that's always the opportunity for us.
Just on what the foreign military partners might do over the next couple of years, but you can see in the Dod budgets that there is still some softening there with the current ordering pattern that's out there.
Okay and.
On free cash side, it looks like your guidance doesn't it doesn't imply any sort of.
Working capital reversal in the in the fourth quarter I think year to date, you seem like a $120 million or so increase in working capital.
How would you expect that some unwind from here and then.
In terms of the Investor day guidance, Mark is the $2 billion over five years for free cash flow is that still good.
So let me let me take the shorter term one so you're right obviously the investment in working capital.
It's primarily been inventory we've increased that significantly.
Since the beginning of the supply chain disruption, that's impacted us at well over $100 million.
I think.
What we would anticipate for the rest of this year as you say, we don't see much improvement.
Kind of the sales that we have in Q4, we do anticipate receivables would increase based on the timing of those sales we may get a slight decrease in inventory as we shipped that product out, but generally working capital would be pretty constant from where we sit at June 30.
As we as we look out to the future one of the things we've talked about is a lot of these as chip mentioned our demand is strong.
Sales are not loss based on the positions that we're in so it's just the timing of cash flow.
And so what we're looking at as we move over the next four plus years is that approximate $2 billion that we talked about at Investor day would still hold and it's just the timing.
Initiatives as we go forward and we'll look forward to again kind of look given our thoughts along the five year plan. When we have our investor day in early calendar 'twenty three.
Alright, thanks very much.
Welcome.
Your next question is from the line of Chris Barry Sorry, Chris Howe with Barrington Research. Your line is open.
Good afternoon shifting market.
Hey, Chris just one other follow up.
Just wanted to follow up on some of your commentary worthy.
For the China region.
As it pertains to aerospace you mentioned you see some rebounding.
You also mentioned some positives in the industrial area.
Can you just put channel into further context.
Amidst the consequence.
Level of uncertainty that seems to overlay that region.
How we should.
Okay.
Panic, China coming back as we get to more normal aerospace margin in other words.
How much is China, taking away from where you would like aerospace segment earnings.
Okay.
Well I think it's fair to say that we weren't very positive on China, or we didn't mean to come across as very very positive on China, it's very hard to predict.
No it is not really market driven.
It's driven by the government at the top and so.
Hard to predict using using first economic principles.
Our positive statement was really around Asia power Gen and Thats not really China I think that's ex ex China is what we're looking at there.
We don't have a good visibility to improvements in the natural gas.
Truck market. So we're not we're not calling any forecast for improvement there, we just have to wait and see.
As far as the commercial aircrafts.
Commercial airline traffic.
We're seeing the start of <unk>.
That recovery.
We're counting on is the government not to not to get in the way of that.
For us the opportunity there.
The seven 3% of Max starts flying again.
Carrying revenue passengers.
We'll look to opportunities for initial provisioning.
With airlines that take.
Deliveries of the $700 of Max.
Going forward, so that's really where our opportunity is generating cycles. Therefore, the aftermarket new aircraft being delivered there.
And initial provisioning for those airline customers that.
A certain critical mass of planes in their fleet.
Perfect and then one quick follow up I.
I think about fiscal year 'twenty three.
G&A expense, which you can comment.
Do you still anticipate.
Kind of getting back to historical levels on a run rate basis.
Maybe not so much in the early part of 'twenty, three but as we get to the latter portion of 232.
Return to pre Covid levels.
Yes.
What your what you mentioned is exactly what we talked about Investor day, obviously with the demand that we're seeing out there we were anticipating that in Q4, we would be returning to pre.
Pre COVID-19 levels I would say with the demand that we're still seeing we would still anticipate that.
Okay. Thanks for taking my questions.
You bet.
Your next question is from the line of <unk> Khanna with Cowen Your line is open.
Hey, guys.
I was just curious.
Sales reduction.
And what.
It looks like it's implying like 50% decremental margins is that right and then.
The arrears of $100 million, what does the guidance embed.
For the fourth quarter and when do you expect to have caught up.
Hey.
There are two kind of above normal.
Shipments.
And still win.
So to answer the first question on kind of the volume decline and the impacts thereof.
It does come down to the.
Fairly.
I believe your math, 50% is in the ballpark definitely but really a lot of that.
The back of both the inflation impact on material and labor and also the labor inefficiencies as I was mentioning earlier related to the new higher training and the impact that that has related to training them and then putting on the line and then trying to trying to get those numbers up and productive the other impact that.
In the quarter that we had and it's primarily the euro was the FX impact and that's really just a I call. It a translation impact is just translating our euro based business that has revenue and costs in euros and that has an impact when you translate those over to $1.
Almost at par with.
With the euro, which it hasnt been in almost 20 years. So that's that.
Currently.
Within the quarter the impact that.
That we had.
Related to the.
The supply chain disruption and what we mentioned is we do plan on that continuing into 2023.
As chip mentioned, obviously, we have a lot of activity, we redeployed a lot of resources, we have a lot of suppliers that are in our escalation program that we're working with on a daily and weekly basis, but we don't plan for that to abate until 2023.
Okay.
Got it.
Just to be so we should not think of.
Adding 100 $150 million.
Or whatever the variances from the original guidance for next year, it will still be a gradual workout.
Yes, Gautam I think I think the fact of the matter is that there is.
Not enough capacity to just sort of shoot out all that all of that.
Past due its going to have to be burned down over over the year 2023, I think it's still.
Potentially aggressive to say, we get to get everything out next year, just due to the fact that.
But I think we will be managing supply chain disruption externally and internally.
Through 2023, so we'll be doing our best to burn that down and we will burn it down how much I don't know, but I think you can count on the fact that it won't be.
Slug output in a single quarter.
Okay.
Thank you guys.
Yes.
You're welcome.
Okay.
Your next question is from the line of Sheila <unk>.
<unk> with Jefferies. Your line is open.
Hi, Good afternoon, guys. Thank you and welcome Jeff Jeff Since this is your first.
Kind of a tough one for you I think we can all agree that Woodward has done a good job in terms of organic growth and increasing EPS over the years, but the quarterly volatility.
One for Ed.
The stock price.
What are your observations in terms of how you can maybe improve forecasting if you have any yet.
Well im not sure about forecasting it Sheila but the one of the things that I think drive some variation quarter to quarter as is operational performance and so at least that's the thing I've seen in my in my brief.
Less than 90 day tenure is a thing to work on and so.
I really think thats an area to to focus.
To develop excellence internally as well as maybe add a few resources to the team.
The lean continuous improvement.
Arena.
So I think thats really the focus there is to get our very predictable.
Delivery and quality performance and that will help us.
Have a lot of confidence around the.
Financial numbers that we put forth.
Okay. Thanks for that and then.
Aerospace margins when we look year over year revenues are up almost 20% sequentially. They are up 10%, but yet your EBIT dollar.
Flat the prior year and almost <unk> the prior quarter.
What sort of drove that.
Margin in the quarter concludes talked about labor since February supply chain for several quarters now, but what kind of got worse in the quarter.
Yes, so like you mentioned, we've been talking about.
The impacts on both labor and material inflation, even if you go back to early in the year, we talked about that we wouldn't be able to get productivity to offset those.
The labor and the.
Material inflation, obviously with the acceleration of the inflation even here during our Q3 that had an impact on us and the earnings on a year over year comparative basis.
But that did impact us.
The continuing of hiring of.
The.
New members and getting them in and trained Sheila you'll recall, we talked about needing to have to get a higher 100 higher on average kind of per month over the remainder of the year.
That our attrition has picked up a little bit so we are hiring.
We're a little behind on hiring to that rate.
And also then being able to get those people online and get them through our our offline training and putting them online and making them more efficient the third one really on the aerospace side of the business Chip mentioned earlier.
About the.
The impact of the Bill it all the way back to the kind of the China shutdown is kind of the root cause of that.
That does have an impact on.
Our production and our flow capability, and obviously that volume.
Output when it's slow and it's not moving smoothly and efficiently that has an impact on overall earnings.
Phil.
Okay that makes sense and then last question for you Mark.
When we think about your contracts in aerospace Guang.
Where are you falling behind them.
When we think about commercial Aero defense.
Helicopter Jonathan on the OEM after market that and where are you ahead.
Yes, the biggest impact in this year.
In the short term is definitely been on the commercial OEM side I mentioned earlier on the call.
That's.
Generally the contracts are in the sea based increases on a calendar year and so as the first half of this calendar year. The inflation has been significant we have not been able to reprice. Those at this point again, it's just the timing difference that we will be able to realize those prices and we will realize them in the January time.
Frame.
Definitely the largest impact that we're seeing.
Okay awesome. Thank you.
Welcome to welcome.
Yes.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your next question comes from the line of Michael Chairman Li with <unk> Securities. Your line is open.
Hey, good evening Chip Clark, Thanks for taking the questions I guess.
If we went back to <unk>.
Last quarter it sounded like.
The guidance didn't assume any recovery in the supply chain.
Obviously, the outlook got significantly worse, and I guess, you've been industrial revenue down significantly the China Nat gas.
I was under the impression that was kind of baseline, but I guess, what's significantly got worse on the industrial side of the business could drive this drastic.
Change on the revenue equation.
Yes, so I'll take kind of the top level, and then I'll double click into the industrial side. So.
Our range previously at the low end assume that things weren't going to get any better generally in the supply chain disruption and what we're calling out now with only one quarter to go yes. They are not getting better I mean, obviously you heard about you heard chip.
Chip talking about kind of the things that we're seeing out there so.
But really that impact.
As it related to a lot of inefficiencies the continuation of higher inflation impact.
The supplier disruption.
Cost impact we have is.
As chip mentioned 20, plus suppliers in the highest escalation supplier escalation process that we're in where we have people on site. So.
We're redeploying people redeploying engineering resources for redesign et cetera, et cetera, and so theres a lot of costs that are impacting that related to industrial specifically I would say the largest individual impact is really the currency impact.
A lot of our it's not China I mean, you are right, Michael we talked about.
The word we used last time was the OE market had evaporated.
And we kind of anticipated that would remain that way for the remainder of this fiscal year and that definitely transpired. So it wasn't it wasn't China that was the OE business specifically it was really the primarily the euro impact.
Generally you know you remember our <unk> business that we acquired in 2018, the euro denominated business and unfortunately, the currency rates the euro to dollar.
That impact is offsetting all of the growth in all of the other markets in industrial that we're seeing and that's in essence, why we're ending up flat for this year.
Got it that's helpful. And then maybe just one other one back to Gautam I think it was Scott was asking this question about picking up this $100 million.
What would be the biggest governor on capacity I mean pre COVID-19.
Aerospace you guys did one 9 billion and we're doing quarterly revenue close to 500 million is it.
Is it labor would that be the biggest choke point in capacity I mean, obviously, you just mentioned other suppliers and material, but certainly you've done $500 million revenue quarters before so what would be the biggest holdup to getting there and getting more product out the door.
It's labor Michael I mean.
Our labor and our suppliers' labor is is really the biggest to use your word governor on the ability to increase throughput.
And we're we're putting.
New strategies in place on development pipelines in and bringing people onboard that are.
Somewhat qualified and well trained the rest of the way as far as machinist go in Assembly technicians.
The rest there is additional.
Additional labor categories like programmers for CNC machines, and things like that that.
When you think about how to get high mix low volume through some of the lines you need some of these.
These talents as well.
Both us and our supply base and we're going to we're.
We're going to work too.
Attack that part of the problem, but that's really the biggest.
The biggest constraint.
That's helpful. And then just the last one as we look to maybe.
But January.
Kind of 'twenty three price increase environment do you guys expect that you can get sort of a real price increase there.
B price increases that are just going to offset the headwinds from inflation and maybe wouldn't be that accretive to margins.
Yes, so the.
I would speak to that one so really the January one is just the contractual based on industry, which in essence is just offsetting the cost increases that we're seeing that are coming through during calendar 'twenty two.
You are familiar enough with our business you know that the price realization.
On the aftermarket side based on kind of our sole source position our high intellectual property.
We're on the hot part of the engine.
Part of our aerospace business, So thats, where we would have more opportunity for price realization out of just the cost.
Perfect. Thanks, guys.
Welcome.
Your next question comes from the line of Noah <unk> with Goldman Sachs. Your line is open.
Yes.
Okay.
Hey, good afternoon everybody.
Hello Noah.
The.
Revenue CAGR that you've laid out for the segment.
Flying to next year.
Or does that look more back end loaded in the multiyear period.
Given kind of the headwinds.
Yes, I'd say, it's a five year CAGR.
And obviously the math.
Works over the five years.
Obviously, our 2022 revenue based on both the supply chain disruption impact and the currency impact.
Get you to a different base in the first year, but it's definitely over the five years.
I mentioned, we see strong demand across.
Most of our markets and that's what's driving that CAGR.
Okay.
And I guess I'm still not understanding the aerospace margin down sequentially and year over year.
When the revenue was up sequentially and year over year.
I understand.
The items, you're just you're talking about in terms of supply chain and labor cost inflation.
But.
Sure.
Last quarter and to some extent a year ago.
Is it is it really incremental cost to solve those issues.
I'm struggling with what their store.
Yes, so it's a couple of things.
One is.
I'll start with the one you mentioned the incremental costs.
Resolve some of these issues chip mentioned that the investment that we're looking to make.
<unk> dual sourced through in sourcing we've redeployed a significant amounts of people we've redeployed engineers to help on redesigns to help on.
Transitions from bringing on another external source or moving.
Capability internally and all of that has cost and thats definitely impacted us.
Also sequentially. If you think about the inflation impact that we're all seeing through the April May June timeframe right. I think we're all especially in June anticipating that it was it peaked and would be coming down and then sure enough June comes in that it's even higher than what it had been prior to that so we're definitely seeing that also so I would say.
Generally thats the two impacts that we see is the investments that we're making.
<unk>.
Help with the supply chain disruptions that we can get it.
Improvements starting to move forward and also the continued high inflationary period that we saw during our fiscal Q3.
How long do you anticipate making these incremental investments and expenditures.
I think we're going to be <unk>.
Experiencing the supply chain disruption problem well into 2023.
But as we as we.
Bring more operations in house as we.
Realign our supply chain with those that are performing and not having.
Disruptions.
Believe we will see lower cost later into the end of the year and be able to burn down that past due backlog just to give you an idea of the type of activity we're already engaged in.
Move 500, part plus parts.
This year already and there is another.
<unk>.
<unk> that in process and being identified for for from two kinds of.
Planning processes and our part transfer process has taken a lot of resources right now, but it's the right way to deploy our resources because we want to serve customers, we want to restore our profitability and.
We're just going to have to work through this over the next year and get where we want to be from a.
A simpler supply chain and a more robust supply chain. That's also resilient and that we play a larger role and frankly, we do a better job of of how we engage with our suppliers and transmit our demand.
Theyre read back that that demand is received and they can meet at these kinds of things that may sound simple, but when you are earning this complex of an operation sometimes.
Things aren't as clear as they as they need to be so I think I think this is going to be with us for.
For a bit, but we'll be stronger on the other side of it.
Okay.
You've had guidance.
Probably the aerospace segment.
From prepaying dynamic the 20% plus.
While exiting 2000 fiscal 'twenty three.
Is that still in the scenario analysis or.
Should we should we push that out a bit.
Given these.
New items.
Yes, I'm not really ready to confirm any forward looking guidance on profitability Noah.
Can't tell you that.
No.
Ill be smarter and we'll understand more.
November when we talk about 23%.
Then the same in late February .
We have an investor conference and we'll be able to I think paint that picture a little bit more.
Clarity for you.
Okay.
Okay I appreciate it thanks, so much.
Yes, you bet.
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