Q4 2022 Albany International Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Albany International fourth quarter.
And full year 2022 conference call at this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time should you require assistance during the call. Please press Star then zero and an operator will assist you offline and as a reminder.
Your conference is being recorded I would now like to turn the conference over to your host Dan had director of Investor Relations of Albany International. Please go ahead.
Thank you Louis and good morning, everyone welcome to Albany Internationals fourth quarter and full year 2022 conference call.
As a reminder for those listening on the call. Please refer to our press release issued yesterday afternoon detailing our quarterly financial results.
And in the text of the release is a notice regarding our forward looking statements and the use of certain non-GAAP financial measures and their associated reconciliation to GAAP for the purposes of this conference call. Those same statements apply to our verbal remarks. This morning.
Today, we will make statements that are forward looking that contained a number of risks uncertainties, among which are the potential effects of the COVID-19 pandemic on our operations the markets, we serve and our financial results for a full discussion, including a reconciliation of non-GAAP measures. We may use on this call to their most.
Comparable GAAP measures. Please refer to both our earnings release of February 13th 2023, So all of our SEC filings, including our 10-K now.
Now I'll turn the call over to Bill Higgins, President and Chief Executive Officer, who will provide opening remarks bill. Thank you John Good morning, and welcome everyone and thank you for joining our call. We're pleased to report another strong quarter capping a good year in 2022 over the course of the year our team successfully navigated multiple challenges, including continuing COVID-19.
<unk>, the China, Lockdown supply chain shortages higher inflation tight labor markets threats of recession and geopolitical uncertainty. Despite these headwinds we were resilient delivered solid results for shareholders revenue and adjusted EBITDA continue to trend higher approaching 2019 as record highs sales grew 12% year over year to one.
$1.035 billion gross margins exceeded 37% and adjusted EBIDTA margins were 24, 5%.
We had a good year and our long term strategy is on track the past year benefited from a rock solid balance sheet, our global leadership position in machine clothing organic growth from our aerospace composites business and our employees outstanding operational performance.
We continue to focus on customers doing a great job in product quality reliability delivery and technical service, we won new business and brought new products to market.
And our strong balance sheet allows us to invest in our businesses and execute our growth strategies.
At the segment level machine clothing is operational performance and financial results continued to be impressive for.
For the full year 2022, net sales were up nearly 2% on a constant currency basis.
About $10 million in revenue loss from our Russian market exit.
The machine clothing segment delivered excellent profitability with gross margins exceeding 50% and adjusted EBITDA margins exceeding 37% despite the inflationary environment.
The engineered composites segment grew full year net sales, 37% nearly 40% on a constant currency basis with significant contributions from both new work on our Sikorsky CH 53 helicopter and recovering commercial aviation production on the leap program driven by the ramp in narrow body aircraft production of the Boeing seven.
37, Max and Airbus <unk> hundred 20 Neo aircraft.
Adjusted EBITDA was $79 million up about $10 million from 2021's results.
As we entered the year 2023 we expect demand for machine clothing products to be relatively healthy we benefit from our reputation for exceptional reliability quality and delivery.
Our focus on higher value added end markets helps drive profitability, while the replenishment nature of our consumable belt results and relatively steady demand tissue markets, who are Albany has a leadership position holds up better in volatile economic times packaging and printing grade markets tend to be more sensitive to economic activity.
You may recall that when we entered the fourth quarter in 2022 demand in our machine clothing markets was strong and through the fourth quarter demand in the Americas stayed healthy and remains strong today European and Chinese market demand slowed somewhat in Q4, and now appears to be recovering on the reopening in China and the easing of European energy concerns.
Overall, we're encouraged that machine clothing demand should hold up in 2023.
And a C. The longer term outlook for growth remains healthy driven by recovering narrow body production and our portfolio of great programs in defense.
In the near term as you've heard demand in the commercial aerospace market is outstripping the industry's ability to supply.
As a result, the year over year growth driven by commercial aircraft production is more muted than we had anticipated after a year of significant topline growth in 2022.
Once supply chains are improved with growing passenger travel an airplane demand, we would expect to see production growth for the Boeing 737 Max.
Airbus <unk> hundred 20, Neo and Boeing 787 aircraft for now however outlook our outlook for 2023 does not contemplate near term growth in these programs.
On the defense side, we have significant programs, including the Lockheed Martin F 35, Sikorsky CH 53 helicopter and the jazz and missile these programs have stable or growing production profiles for years to come with.
With the CH 53, K set to enter full rate production that program is expected to remain our largest defense program and arrive at the leap program in size.
Additionally, we won several smaller aerospace programs with new OEM customers in both defense and commercial markets programs that our customers do not want us to disclose.
These new wins add to our longer term portfolio for growth further diversifying our customer base and leveraging our composite materials expertise.
Now, let me make a comment about our long term strategy.
Our strategy for long term growth and competitive differentiation is based on two fundamentals.
The first is that we're really good at developing advanced material solutions and the second is that we do a great job for customers.
These two things combined material expertise and operational excellence set us up to be the partner of choice for our customers. This gives us an advantage that our customers value our product development, our ability to industrialize the process, our technical support and our operational consistency to deliver the highest quality products on time and reliably.
We sustain this growth and competitive differentiation, because we continue to invest in our employees the capital equipment and the processes that we need to efficiently produce the advanced material products our customers value.
Effective capital allocation remains a top priority and our focus on driving long term organic growth.
It starts with research and development for both product and process advancement.
You will notice that throughout the pandemic, we invested nearly $40 million per year on average and research and development in our business about 4% of net sales over the past three years.
These are development efforts often in alignment with customer partnerships that are specifically that specifically target product development and process improvement calls these technological collaborations and material advancements are an essential investment in our future success in both machine clothing and engineered composites.
Our capital expenditures are focused not only on maintaining our current capabilities, but on advancing our production efficiency and growing our capacity and capabilities as our business base grows.
In December we increased our regular dividend by 19% to 25 cents per quarter. During the past two years. Our board of directors has authorized a share repurchase program and we've executed just over $100 million of repurchases retiring about 4% of our shares.
Finally, we will continue to evaluate targeted disciplined acquisitions to supplement our long term growth strategy.
Historically acquisitions have played an important role by enabling us to build on our technological leadership and strength in global market positions with key customers in line with our strategic priorities.
In summary, we ended the year 2022 in great shape with a robust balance sheet, our employees doing a great job for customers with a relentless focus on operational excellence and developing advanced materials in both segments.
And we continue to invest in R&D to position Albany for long term organic growth. We believe we are poised for another solid year of results in 2023.
So with that I'll hand, it over to Steven to provide more details on the quarter and our outlook for 2023 Steven Thank.
Thank you Bill good morning to everyone I.
I will talk first about the results for the quarter and then about our initial outlook for our business in the coming year.
For the fourth quarter total company net sales were 268.8 million, an increase of 12% compared to the $239 9 million deliberate in the same quarter last year.
Adjusting for currency translation effects, principally to decline in the euro relative to the U S. Dollar net sales increased by 15, 5% year over year in the quarter.
In machine clothing also adjusting for currency translation effects net sales were flat year over year.
With growth in tissue and packaging grades offset by declines in pulp and the engineered fabric rates.
Engineered composites net sales again after adjusting for currency translation effects grew by 44.7% driven by growth on CH 53, K and leap, partially offset by declines on the F 35, and 787 platforms.
During the quarter.
Page 53, K generated revenues of over $35 million.
Up from 13 million in the same quarter last year, while the a S. C leap program generated revenue of about $41 million.
<unk> $227 million last year.
We finished the year with 159 million of revenue on the a S. C leap program and over 100 million on CH 50 <unk>.
While we had seen a decline in downside risk in Q3.
Entering Q4, we still had been carrying some risk reserve on revenue for the fourth quarter to account for a variety of supply chain and other challenges across our portfolio of programs. However, those risks did not fully materialize, resulting in higher than anticipated fourth quarter revenues.
Fourth quarter gross profit for the company was $97 1 million, an increase of 1.1% from the comparable period last year.
The overall gross margin declined by 390 basis points from 40.0% to 36, 1% of net sales.
Caused primarily by the relatively higher revenues in the lower margin eight east segment.
Within the machine clothing segment gross margin declined from 52, 3% to 49, 8% of net sales.
Caused by higher input costs.
The absence of a one time benefit we recorded in 2021 and lower absorption due to lower production volumes.
Within engineered composites, the gross margin increased from 16, 9% to 18, 8% of net sales.
Caused primarily by improved absorption from higher revenues.
And the reversal of $1 4 million of previously established reserves.
Partially offset by losses recognized on the startup program and by a less favorable net change in the profitability of long term contracts.
During the quarter, we recognized an unfavorable net change of $1.7 million of these contracts compared to a favorable change of 1.7 million in the prior year quarter for a net year over year difference of $3 4 million.
Fourth quarter, selling technical general and research expenses increased from $53 2 million in the prior year quarter to $59 3 million in the current quarter and were essentially flat at about 22% of net sales.
The increase was caused by higher higher foreign currency revaluation expense.
Increased our incentive compensation expense and investments in sales and marketing.
Total operating income for the company was $37 9 million down from $41 7 million in the prior year quarter.
Machine clothing operating income fell by $9 5 million caused by lower gross profit and higher S. T G in our expense.
While he see operating income rose by $7 8 million driven by higher gross profit.
Other income and expense in the quarter netted to an expense of $3 8 million compared to income of $1 2 million in the same period last year.
The decline this quarter was primarily driven by unfavorable foreign currency revaluation effects of eight 8 million.
Partially offset by a gain of $3 4 million from the sale of excess IP addresses.
Yeah.
The income tax rate for this quarter was 42, 1% compared to 27, 3% in the prior year quarter.
The higher rate this quarter was caused by discrete tax adjustments primarily related to incremental foreign withholding taxes and the guilty provisions of the U S tax code plus a true up of prior quarter's tax rate.
For the full year, our effective tax rate was 26, 9%.
Net income attributable to the company for the quarter was $18 1 million compared to $28 6 million last year.
Caused by lower operating income and favorable other income and expense and the higher tax rate.
Earnings per share was 58 centers in this quarter compared to 89 cents in the same period last year.
After adjusting for the impact of foreign currency revaluation gains and losses.
Restructuring expenses.
Expenses associated with the <unk> acquisition and integration and the exclusion of the gain from the sale of IP addresses this quarter.
Adjusted earnings per share was <unk> 75, this quarter compared to 86 cents last year.
Right.
Adjusted EBITDA fell from $60 6 million in Q4, 2021 to $58 4 million in the most recent quarter.
Machine clothing, adjusted EBITDA was $52 2 million or 34, 7% of net sales this year.
Down from $59 7 million or 38, 1% of net sales in the prior year quarter.
<unk> adjusted EBITDA was $22 3 million or 18, 8% of net sales up from last years, $16 1 million or 19, 3% of net sales.
During the quarter the company generated free cash flow defined as net cash provided by operating activities less cash used in investing activities of a little over $17 million.
We finished the quarter with net leverage ratio of about 0.58.
I would now like to turn towards the coming year and provide our initial financial guidance for 2023.
Machine clothing deliberate another exceptional year in 2022 with strong topline performance and profitability in a challenging environment with Russia's invasion of Ukraine, and our subsequent exit from our Russian market, the inflationary environment, Europe's energy crisis and China's COVID-19.
<unk>, all creating headwinds for the business.
As we enter 2023 conditions are right for another good start to the year, particularly in the Americas.
For the full year 2022 orders in the Americas were up mid single digits over 2021.
And again for the full year 2022 orders to sales was greater than one.
While Eurasia was strong for 2022 overall with orders to sales above one we did see some tail and weakness in the year.
In Q4, 2022 orders to sales in Eurasia was below one driven by macroeconomic conditions in both Europe and China.
However, we do not expect this to be a long term trend and in fact, we have already seen stronger orders activity in those regions in the first few weeks of 2023.
Unlike in 2022, we do not expect to see a continuation of a foreign exchange headwinds for the full year.
We finished 2022 with an average euro to U S dollar exchange rate of $1.05 for the full year and the current exchange rate is modestly above that level.
That said, we will see some challenging year over year comparisons in the front half of the year.
As the exchange rate in the first half of last year with above current projections for this year.
Okay.
From a product mix perspective, we expect the market for packaging and tissue grades to remain robust and we do not expect to see any material shifts in those grades.
However, we do not expect the rebound we've seen in publication grades since COVID-19 to be sustained in 2023.
Overall for the segment, we are providing initial revenue guidance of $590 million to $610 million.
From a machine clothing profitability perspective in Q4, we saw the continuing impact on gross margin, but the current inflationary environment as more of the higher cost raw material that had been sitting in the inventory was incorporated into cost of goods sold.
However on the inflation front, we are beginning to see some bright spots ahead of us.
Logistics and energy input prices have both seen reversals of prior increases.
And while raw material and labor input prices remain higher we've been able to offset some of that impact through higher pricing to our customers.
In 2023, we may have some tough year over year adjusted EBITDA margin comparisons in machine clothing.
<unk> in the first three quarters of the year as.
As we compare ourselves to periods prior to recognition of the full impact of inflation in our financial results.
However, we still expect to deliver margins in line with our long term expectations for the segment of adjusted EBITDA margins in the mid to high Thirty's for the full year.
As a result for 2023, we are providing initial guidance for machine clothing, adjusted EBITDA of $205 million to $225 million.
Turning to engineered composites.
Segment significantly over delivered on the top line in 2022.
While none of this was an intentional pull forward revenues from 2023. It does given the nature of the programs in which we are performing limit the upside in 2023.
As bill referenced our guidance does not envisage any material upside on the Boeing 787 frames program in 2023.
There was also limited near term upside on the leap program.
In 2022, Asce's Leap program generated close to 160 million of revenue truth. The supply of engine cases fan blades and spacers on the 737, Max and <unk> hundred 20 neo platforms.
However, as has been well publicized both Boeing and Airbus are facing supply chain challenges that are limiting the output of single aisle aircraft.
We now expect that in 2023.
Elite revenue will be largely flat compared to 2022 before.
Before growing again in 2024.
We also expect revenue from the CH 53, K program overall, including the App to transition work package.
To be more or less flat 2022.
With an increase in recurring production.
Fully offset by a decline in nonrecurring revenue, both tooling and nonrecurring engineering related to the after transition portion.
That said as bill indicated longer term as we transition to full rate production on that program. We expect solid growth on the CH 53 K program.
In 2023, we also expect to see growth on several other programs, including some recent wins.
Overall for the EC segment, we are providing initial revenue guidance of $420 million to $440 million.
Yeah.
From a profitability perspective, an AC we expect to see some inflation headwinds primarily with respect to labor cost in 2023.
However.
We expect better overall operational performance and better overhead absorption down in 2022.
As a result, we are providing initial <unk> adjusted EBITDA guidance of $80 million to $90 million.
At the total company level, we are providing initial 2023 guidance as follows.
Revenue of between 1.0 and 1.05 billion.
The effective income tax rate of 28% to 30%.
Depreciation and amortization between 70% and $75 million.
Capital expenditures in the range of $90 million to $100 million.
GAAP and adjusted earnings per share of between $3 10, and $3 60.
And adjusted EBITDA of between 225 and $255 million.
Returning to the present, you're very pleased with how the company performed in 2022 overall.
We're also excited about the long term positioning of both segments and look forward to delivering another strong year of performance in 2023.
With that I would like to open the call for questions Lois.
Thank you and ladies and gentlemen, if you wish to ask a question. Please press one zero I know touchtone phone.
We'll hear an acknowledgment Tom that you've been placed in the queue and you may remove yourself from queue at any time by repeating the Wednesday, Aquaman and if you're on a speakerphone. Please pick up your handset before pressing the number once again if you have a question. Please pass them on non zero at this time.
Our first question is from the line of Peter Arment from Baird. Please go ahead.
Oh, yes, good morning, Bill and Steven.
Wondering if I could just touch base on the on the Leap program you mentioned that it had a kind of a really strong 2022 could you maybe Steven Bryan a little clarity on just kind of.
Currently kind of in sync with the existing build rates or you or are you are you kind of lagging because you've kind of already delivered some additional chipsets.
Yes, Peter this is bill.
As we look at the year.
We you know we set a plan and we level load the factory for the full year in cooperation with Safran our customer based on their outlook. There is some there is some material in the channel inventory that we produce and then I imagine further down the channel.
But it's not that unusual.
It will level that I'm aware of so.
If that's your question you know what the channel looks like so as we look at the first part of the year.
We are setting our plan is relatively flat.
If things pick up in the latter half of the year, we could we could improve that.
Okay. That's helpful. And then just as you you mentioned 787 also kind of looking.
Relatively.
Not a big contributor I guess this year, but you know Boeing.
Boeing had some some some longer term outlooks, maybe your thoughts on just kind of thinking up from what youre seeing for seven eight and seven demand to step up.
Yes, it's seven days great airplanes, so we're hoping to see that pick back up but at this point. We've you know we've nearly idled the production line or keeping it.
<unk> qualified but we don't have any expectations at least in the beginning.
Part of this year to do any production there. So we're waiting for the call to <unk> to ramp that back up but it's not in our it's not in our guidance.
Okay and then just one last follow up on just takes an AC you mentioned the kind of the nonrecurring on the CH 53, K will be coming down, but offset to a degree.
<unk> picking up.
Are we expecting any impact on kind of margin mix, there or how do we think about that thanks.
Yeah.
Yeah, I think Peter look take the gross margin is comparable on both the nonrecurring and recurring production and the different day, it's a recurring production.
He is out on the factory floor at absorbing plant overhead and I referenced in my comments that where I was talking about the AUC profitability guidance that we do expect improved overhead absorption in 2023, leading to better margins and that's part of what's driving that so the while the gross margin is.
Comparable the contribution margin is higher on recurring CH 53, K revenue.
Non recurring revenue.
I appreciate all the detail thanks, guys.
Thanks Peter.
And the next question is from Atlanta kind of Cowen. Please go ahead.
Hi, good morning, guys.
Alright.
I was curious I'm trying to square the.
The leap commentary just because.
If you listened to what.
You know what CFM is said is theyre going from approximately 1100 units in 2022 to 1800 or more.
Target of 2000 this year. So what explains the disconnect did you actually shipped.
Much closer to the 2000 unit level.
Maybe I'm not following.
I think part of what happened here is as Safra and put together third demand plan for us.
For 2022.
Had anticipated entering 2023 at our higher production rate for Boeing and Airbus under our aircrafts and so they had to us probably produce more than they might have done had they know what that actual profiles would look like as Boeing and Airbus wrapped up.
And so I think they are in the situation right.
He may have a little more of our product than they had anticipated and therefore it will.
<unk> been through some of that inventory in 2023, and so they may end up we don't fully insight Gotham I've seen led the public statements you have to I don't I don't have additional insight into our production rates, but they may produce more engines. In 2023, then we eat the labor certainly produce components in 2020.
Great.
Okay. I mean do you anticipate at any point of sequential dip are you getting destock or just held at a flat rate.
You know in the guidance that you've embedded in Q1, and Q2 et cetera.
Okay got it got it bounces around.
Quarter to quarter. It Theres rises with <unk> certainly as we look for the year and as Bill mentioned, we had that <unk> has great strength possible to level load across all four quarters. There's no material that it's effectively flat from 2022 to 2023, but quarter to quarter is a little noisy depending India, how many holidays and other things and then.
Given quarter, but roughly flat.
As I said, we try to play in a year working with safran setting a level loaded blend for the year. So you know if the 737 Max goes from the low authorities per month to the high <unk> for months that might change, but right now we.
We planned it as it is for the year and we will come back later in the year and adjusted of.
If things pick up, but we're not expecting things to do.
Would you be willing to opine on.
What.
Your unit shipments were up by one a one b in 'twenty two.
In Hungary and in aggregate are okay.
Yeah.
We happened in the past or where you're going to get into right now at disclosing you know production rates or or or delivery volumes. One of the reasons being our customer has asked us to.
Two turned off discussed what we're charging per ship set we do disclose the full revenue obviously for the program given the materiality to the company, we don't want to get into giving exact chipset quantities, because it's pretty easy to calculate the price at that point I think when safran reports in the next few days you can listen to what they say about engine production.
And I work closely with them.
Yeah, well that's one for me in your opening remarks, I think you made reference to some unnamed aerospace programs, where you picked up some content.
Are these new programs or are these is this gaining additional.
Additional content on existing and production program. So if you could at least give us some color around.
Yes.
They are actually new programs with with new customers. So as you think about the customers that we talk about the hear us speak about.
Saffer our Gulfstream.
Who is it.
We work on hypersonic.
In a few different programs anyway.
There's a number of customers, we're working with in both commercial and defense.
There are new customers and new programs and in some cases Gotham It would be a program that certainly on the platform that is new for us, but might be and in production platform.
So in some cases, they are new programs genuinely new in some ways. It's a switchover from an incumbent to us on an existing yes, theyre not new aircrafts they put it that way.
Okay No I appreciate it thank you guys.
The next question is Steve Tusa from Jpmorgan. Please go ahead.
Hi, This is Sam yellen on for Steve Tusa I was just wondering what the overproduction loaded into Q4, I don't recall hearing it.
Through Q3, just as a follow up to the last one.
Okay.
So I want to clarify sorry I went.
Went a little fuzzy at the moment, there youre asking for the overproduction.
Yeah.
Yeah, the overburden over project.
Whereas there at all in Q4.
Oh, sorry look again.
As we mentioned on the leap for the year overall.
We probably.
As Bill mentioned, we effectively level low quarter to quarter.
So it's not that there was necessarily over production in Q4, you know for the year overall the rate was probably higher than again chosen by our customer safran in consultation with US and then they might have chosen had we known you know the profile problem at Boeing and Airbus production profile, but I wouldn't look at.
Q4, I think that with some big over production quarter, we certainly did not intentionally hold additional production in Q4 from future periods, but just given the nature of our program if you take a leap.
If we produced more collectively over 2022 than our customer customer might have decided it had they have perfect insight into future that means we'll produce less in 2023, and we otherwise might have done. So in some ways. There has been a shift of revenue from 'twenty three 'twenty, two but not I don't want.
If you look at Q4 and think it's materially higher because of that this was the over the full year.
Alright got it and then on the inventory does that get at this.
Catherine.
It's a combination and so we certainly recognize revenue as we produce parts and when we when we ship them, we invoice for them have prior to us producing aracari. After we produce them prior to us shipping the Sydney contract assets on our book, we have recognized revenue on them and they're sitting.
In our books and contract assets, when we deliberate them, which entails shipping them across a yellow line in the middle of the factory floor and they would they flip over to be an accounts receivable until we collect the money for them, but so right now.
Some of that is in our books, but not a not a huge amount of inventory. It's all sorts of situations where in a couple of years ago, where we talked about having 250 ships. That's I think.
In the factory with excess inventory, but SaaS rat and does hold some excess inventory I think of our product as well and just don't have to burn through and just as part of our arrangement with them, we will always hold some of that.
If things happen.
This is where to pick up we have inventory in the system.
That's part of it part of the arrangement that we ship to but its not an unusual level.
Okay got it and then just one last one for me it looks like and ASE Q1 seasonality typically calls for high single digit sequential step up how should we think about the seasonality. This year any reason Q1 should be different than normal.
Yeah, and look at you know I understand it looks like seasonality and you know the nature of our <unk> businesses. It really isn't season the bowl it's more of that.
It's growing and the fact that we lap a load for example on leap <unk> leap sees sees a lot of that growth when one year to the next that appears in Q1, because we staff up all of the quarters and so there's a big jump from Q4 in the prior year to Q1 in the current year.
It's not really seasonality, it's more effect like that I wouldn't expect to see some big jump up in.
In Q1 of this year in fact look if you look at Q4.
We delivered revenue up in last year quite high.
I would you know.
We expect this year.
I'm not saying the quarters it won't be identical, but you'd get close you know by just taking our annual guidance and dividing by four.
And even some of the programs are.
I was going to add some of the programs are not seasonal like as we go from the establishment of the production lines for the <unk>.
Have transitioned Sanchez pre K as we've done all the tooling working all of that and then as we converted over to actual production. There. There's a changeover there so its not seasonal at all it actually may be counter seasonal.
Okay. Thank you very much.
Thank you and the next question and some of the line of Pete Kubicki from Alembic Global. Please go ahead hey, good.
Morning, guys.
Couple of a couple of housekeeping questions, Steve and I might have missed this but what are you guys assuming.
Directionally for corporate expenses in 'twenty, three and then second one just on Capex kind of came in above the guide for 'twenty, two and it stays elevated for 'twenty three so I'm just wondering what was going on there. Thanks.
Yeah.
We don't explicitly guide corporate to that but you can certainly get there bye bye take care our segment guidance at our overall company guidance and looking at that a couple of factors.
Contributing to a somewhat higher corporate expense in 2023 and 2022 at one is just a compensation overall, which is a combination of a higher than normal increase in merit raises just given the current inflationary environment plus the additional addition of some yet is hard.
It head count and where we felt we were lacking some capabilities at corporates and we allowed those in 2023 and secondly in the Gis area, where well sorry, I T area, we call. It T. I S internally in the area, where we are.
Anything to add to the expenses to comply with U S. D O D cyber security our requirements for our programs as a government contractor we're required to comply with C. O M C. The cyber security maturity model.
Which requires some degree of separation of our data with the NAC in some additional expenses some of that.
Hit in 2023, and disproportionate to 2022, and that's why you see it's a somewhat higher corporate expense level next year from a capex perspective.
A number of things going on one is.
New program growth as we've discussed.
We would be expense spending.
Significantly on programs such as the App transition program 53, K portion of that was in 2022, a portion of that will be in 2023.
And also look in general at the were certainly capital expenditures, which were approved back in 2021 and even 'twenty to have which we talked we're good expenses to make are good investments to make sorry.
But which were deferred because what was going on with the pandemic and some uncertainty around you know cash flow end to end future program growth. So a lot of those expenses, where now you're playing catch up prepare we're incurring those expenses as we make those investments here in 2023.
So it's a combination of some of those deferred yet of catch up spending I Wouldnt view, you know, where our 2023 is a new normal.
It's it's Aberrantly high I think driven by both of those factors.
Okay I appreciate the color. Thank you.
Thank you once again, if you do have a question. Please pass them on net zero and well move to the line of Michael Tamale.
<unk> Securities. Please go ahead.
Hey, good morning, guys. Thanks for taking the questions.
Just just to go back to.
The leap and production just just for clarity what what's your lead time.
Four we are expecting you know rate breaks higher later in the year, if Boeing is successful getting the.
87 up to five per month, how soon or how far ahead, you guys start ramping up that production.
Okay.
Yeah.
We don't think about that particularly as a lead time, but from an ability to ramp.
Business in the processes.
As you May recall, we have the we have the capacity we have the equipment in place and then it's about training people and.
Maybe that's a few months to bring somebody new on and train them.
But we'd be ready to go so I don't think we okay. I don't think it would take us too long, yes. Some of it if you think about it.
The rate increases as safra and gets that when did they have to switch as odd.
It does vary based on how much finished goods inventory safran has at that time and how much of that kind of safety stock like theyre willing to absorb in anticipation. So it does vary but yeah. If you think it probably something like six months, Mike might be a reasonable thing up at Pearson.
Our plan would be step up but as I say it does vary depending on how much safra and is willing to do with its existing finished goods. We would know well ahead of time is that the kind of thing that would happen in the last minute.
Okay. Okay, and then so you just mentioned training.
People knew employees I mean are there any other choke points out there in the supply chain I mean as you look at your current staff and think about where you might need to be I mean, these days, they're going to be a significant demand for new employees or how are you thinking about additional staff here.
Yeah, you know the labor market has been really tight in general if we look back over the last year or so and they've gotten a little bit better, let's say, they're wide open, but we've been able to do to get the people, we need and focus on training, new folks and bringing them up to speed and doing a lot of training with existing employees. So we're feeling more comfortable that things got a little bit.
On the logistics side as well so I don't see anything that's a major bottleneck at this point.
Okay. Okay.
And then Steve just one for clarity.
Engineered EBITDA margins in the quarter down year over year down sequentially was that just due to mix was that just a higher revenues from the CH 53, K or or anything that happened in the quarter to push those margins down.
No look I did let me touch on what you see at 53 K is certainly not a low margin program. It's a it's a it's a good solid program.
I think it's combination that and I've mentioned this briefly in my remarks.
One of our newer programs had some startup challenges.
And one of the challenges on new programs.
Is as we think about the end of the process. We go through the terms of this long term program accounting error, where we where we spreads the pain or gain.
Hi, there bad news or good news over the life of a program at the just the booking rate on the new program. We typically have an order for just a very short period. So that gained all gets kind of recognized almost like a period expense rather than doing the long term broker on the accounting so significant hit in the quarter really.
It to that.
Got it okay helpful.
Perfect. Thanks, guys.
Yeah.
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