Q4 2023 Moog Inc Earnings Call
Yeah.
Good morning, and welcome to the fourth quarter fiscal year 'twenty, two 'twenty three earnings conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over to Mr. Aaron Aster Chan. Please go ahead Sir.
Good morning, and thank you for joining <unk> fourth quarter 2023 earnings release Conference call I'm, Aaron Astrakhan director of Investor Relations.
With me today is Pat Roche, our Chief Executive Officer, and Jennifer Walter Our Chief Financial Officer.
Earlier. This morning, we released our results and our supplemental financial schedules, both of which are available on our web site.
Our earnings press release or supplemental financial schedules and remarks made during our call today contains adjusted non-GAAP results.
Conciliations for these adjusted results to GAAP results are contained within the provided materials.
Lastly, our comments today may include statements related to expected future results and other forward looking statements.
So not guarantees as our actual results may differ materially from those described in our forward looking statements and are subject to a variety of risks and uncertainties that are described in our earnings press release and in our other SEC filings now I am pleased to turn the call over to Pat.
Good morning, and welcome to the call.
Today, we will share an update on a superb quarter notable for record sales record 12 months backlog strong operating margins and strong cash flow.
It is a tremendous performance from our teams to deliver three consecutive quarters of record sales and to continue to drive our margin enhancement initiatives.
And for that I wish to thank our Moog employees globally, who contributed to our financial performance in the quarter and the operational improvements over the last 12 months.
Before we get into the detail on the quarter. Let me first reflect on what has been an exceptional year for our company.
We delivered record sales, we increased operating margin and we built an all time high 12 months backlog.
We have grown revenue over 11% organically to $3 3 billion.
Each of our three segments contributed double digit organic growth.
The growth was led by a recovery in commercial aircraft.
By broad based demand for our defense and space applications and by strength in our industrial automation in flight simulators.
In addition, we have been successful in winning new business with exceptional exceptionally strong order intake on the defense side of the business, increasing our total backlog to just over $5 billion.
We have expanded adjusted operating margin by 70 basis points from 10, 2% to 10, 9%.
This is notable progress and a great start to our margin enhancement journey.
The effort invested in both pricing and simplification are already delivering improved financial outcomes.
Adjusted earnings per share improved by a solid 11% to $6 15.
And would have been even stronger if not for increased interest costs.
We certainly have had challenges through the year with supply chain and specific labor availability issues, especially in the first two quarters.
Those challenges have eased in the back half of the year and we saw further improvement in Q4, finishing the year with strong cash generation.
Now, let me turn my attention to the operational actions that we're taking to drive our performance improvement firstly customer focus.
We have completed the separation of aircraft into military aircraft in commercial aircraft segments. The.
The business leaders have direct responsibility for the focused factories, the dedicated staff and production resources for their respective businesses there.
They are fully accountable for operational and financial performance of the business in.
And each leader can now better align the business model with a distinct and market needs.
Our forward guidance provides you financial visibility of these new segments.
We have also completed delivery of our first four meteorite satellites to our customer payload integration and testing of hardware and software have been completed successfully this is significant progress for us in our space vehicles programs.
On a further positive note, we are making progress progress slowing the growth of physical inventory. This is a sign of improving supply chain and labor market conditions, resulting in better production flow and labor utilization.
This is enabling us to better meet our customer commitments.
Next people community and planet as I stated in our my first earnings call I believe that we have a moral responsibility to be good stewards of our planet for the next generation.
I want to let you know that we're making good progress and characterizing and measuring emissions and we've already published our sustainability and disclosure report last year.
We've now baselines within our own facilities worldwide, our cotwo emissions water usage and hazardous waste production.
We are strongly committed to drive improvement and I can announce today that we are targeting a 40% reduction in scope, one and scope two greenhouse gas emissions by 2030.
Finally, turning to financial strength.
We are making excellent progress in driving margin enhancement through pricing and simplification.
On pricing we've had good success working with our customers across all end markets to adjust pricing so that it better reflects the value that we deliver.
Those negotiations have taken place over months and in some cases years.
The impact is now feeding through to our financial results.
Notably within industrial in the second half of the year and within the aircraft in the current quarter.
Those agreements already concluded deliver a substantial portion of our planned operating margin expansion out to fiscal 'twenty six.
On simplification, we've increased the pace of simplification throughout the organization.
This is evident in various initiatives.
Firstly portfolio shaping we are well advanced in the sale of our industrial hydraulics business in Luxembourg, which we hope to complete before the end of the second quarter fiscal 'twenty four.
We will also dispose of another industrial business before the end of fiscal 'twenty, four and have consequently taken a substantial charge in this quarter.
Footprint, we have closed six sites in fiscal 'twenty, three our mix of sales offices and remote engineering sites.
We also sold three factory buildings that we had previously vacated through prior footprint closures.
We announced a further two manufacturing site closures, the first of which will complete in fiscal 'twenty four.
I'm focused factory, we continue to segregate product by end market in order to simplify our manufacturing plants, we have several changes underway, including moving aerospace products out of our industrial facility in Murphy, North Carolina, and using the growth of our space business as an opportunity to tease apart the physical operations of our.
Space and defense businesses since each are driven by different end market requirements.
We continue to build 80 20 momentum in this quarter.
Our pilots are demonstrating significant progress in both pricing and simplification. We're also seeing improvement in customer satisfaction and employee engagement.
We trained a further 250 leaders and the approach.
In addition, we agreed to transfer several more product lines on mature end of life aircraft platforms. Two specialized third party organizations from which we expect to see a gain in efficiency.
Finally, we added two more sites to full implementation under 80 20, bringing the total to 10.
Now before I turn attention to the macroeconomic environment I'd like to share two further updates first we report a positive impact in Q4 from the settlement of litigation we.
We are not able to provide specifics since the terms of the settlement are confidential. We are pleased to have this concluded.
Secondly, I'm also happy to report that we're making good progress on re validating our security clearance with the defense Counterintelligence and security agency and in the meantime, we continue to work without interruption on awarded defense contracts.
We have submitted a mitigation plan that we believe meets the <unk> requirements as.
As we noted previously we expect the plan to involve standing up a subsidiary with an operation with an organizational structure and procedures to ensure the protection of classified information. We're hopeful to have the situation resolved within the next two quarters and we'll provide an update when we have additional information to share.
As a reminder, this matter relates solely to classified U S military programs.
Now turning to macroeconomic and market conditions it.
It is shocking that we now have war in Ukraine, and the Middle East.
Simmering geopolitical tensions are leading most nations to reassess their national security and to increase commitment to defense spending.
Offense constitutes half of our book of business.
The commercial aircraft market continues to strengthen.
We have a clearly defined wide body production ramp over the next few years towards 10% and nine ship sets per month in fiscal 'twenty six for 787, and <unk> hundred 58, respectively. We see no change in those plans.
Industrial markets continued to soften.
There has been a gradual reduction in book to Bill ratio over the last six months.
Market data such as the manufacturing purchasers managers index.
And the survey data from the German Engineering Federation R V DMA all indicate contraction.
We expect this to continue and we are managing our business accordingly.
Now looking forward to guidance for fiscal 'twenty four.
We continue to execute on our Investor day initiatives of growth and margin enhancement.
Our fiscal 'twenty three performance was in line with our expectations and we are building momentum going into fiscal 'twenty four.
For that reason I'm confident in laying out our guidance for 'twenty, four which includes solid revenue growth of 4% year over year.
Yielding a 7% CAGR growth from fiscal 'twenty to fiscal 'twenty four.
Secondly, strong margin enhancement with adjusted operating margin up 110 basis points to 12%.
And thirdly modest free cash flow.
Our guidance is in line with our stated Investor day targets solid revenue growth strong margin enhancement and modest cash flow.
Our growth in 'twenty four is driven by the continued commercial recovery.
A full year of <unk> development.
Broad based growth in defence and space.
Offset by a decline in industrial automation.
We continue to execute on our pricing and simplification initiatives and we will update you on progress throughout the year on portfolio shaping footprint rationalization and building our 80 20 maturity.
Now, let me hand over to Jennifer for a more detailed breakdown on the quarter and on our guidance.
Thank you Pat I'll begin with the headlines for FY2023 followed by a more detailed review of our fourth quarter financial performance I will then describe our initial guidance for fiscal year 'twenty four.
Sales for FY2023 we're at a record level coming in at $3 billion. This represents a 9% increase over FY 'twenty, two and adjusting for divestitures, 11% each.
Each of our segments contributed to our strong sales growth.
The growth in aircraft controls was driven by the commercial aircraft recovery offset somewhat by declining funded development work in the military business.
In space and defense control sales grew as a result of the production ramp and the Reconfigurable turret program and strong demand for satellite components.
The growth in industrial systems related to increased demand for capital equipment, driving industrial automation sales as well as air traffic recovery boosting flight stimulation activity.
Alright, adjusted operating margin of 10, 9% increased 70 basis points over FY 'twenty two.
In industrial system, our margin expanded 200 basis points, largely due to pricing initiatives.
And aircraft control our margin expanded 70 basis points again pricing was the key driver of margin expansion the reduced somewhat by negative impact on military aircraft funded development work in.
In space and defense control, our margin contracted 40 basis points as charges in our space vehicles business Nast and otherwise stronger core business.
As Pat described we've made progress in both our pricing and simplification efforts.
<unk> has already begun to contribute to our margin expansion in fiscal year 'twenty three.
Margin loss from our early learnings and space vehicles is behind us and we will see that benefit come through in fiscal year 'twenty four.
And simplification efforts will show up more meaningfully in the out years.
Our adjusted earnings per share of $6 15.
11%.
This increase is driven by our adjusted operating profit which grew 17%.
Offset by a significant increase in interest expense.
For the year, we had negative free cash flow of $37 million. This resulted from an increase in working capital specifically physical inventory and a high level of capital expenditures as we invest in our facilities.
Let's shift over to our fourth quarter results.
Performance of our underlying business in the fourth quarter was exceptional for the third quarter in a row, we hit a record level of sales for the company. Our key initiatives drove our operating margin expansion and cash flow performance was robust.
<unk> made progress on simplifying our business and took some charges in the fourth quarter as a result.
We incurred $17 million of impairment and restructuring charges associated with planned portfolio.
Print rationalization activities, mostly in the industrial systems.
We also continued our journey to get out of the pension business settling over $40 million of our projected benefit obligation through a lump sum buyout, which resulted in a $13 million nonoperating settlement charge.
We also recorded $4 million for unrelated asset impairment.
I'll now talk through our fourth quarter results. Excluding these charges.
Sales in the fourth quarter were $872 million, increasing 14% over the same quarter a year ago.
The largest increase was in aircraft control.
<unk> of $377 million increased 16% over the same quarter a year ago.
Commercial OE sales in the quarter were strong driven by the continued market recovery and wide body platforms as well as the growth in business Jack.
Commercial aftermarket sales were at a record high.
Strong sales on the <unk> hundred 50 program, which has been steadily ramping over the past several quarters we are.
Also sold inventory associated with mature programs that we decided to exit as part of our simplification effort.
Sales in space and defense control of $241 million increased 11% over the fourth quarter last year.
Adjusting for the divestiture of our security business last year sales increased 13%.
Sales growth was driven by increased activity on avionics and components for satellites and new defense work that's ramping up.
Industrial systems sales increased 12% to $254 million, we experienced sales growth related to high demand on flight simulation systems associated with recovery in commercial aircraft flight hours.
In addition, our industrial automation sales grew driven by demand for capital equipment.
This business has recovered nicely since the pandemic, though we've been seeing order slowdown in recent quarters.
I will now shift to operating margin.
Operating margin adjusted of.
12, 5% in the fourth quarter increased 210 basis points from the fourth quarter last year.
The increase was due to pricing initiatives and to a lesser extent transactions, resulting from our focus on simplification.
Operating margin in aircraft controls was 12, 8% in the fourth quarter up nicely from 10, 7% in the same quarter a year ago.
Increase was driven by retroactive pricing in the fourth quarter in.
In addition, as part of our 80 20 work, we've exited some mature commercial platforms and sold associated inventory, the resulting benefit to margins from that activity was offset by charges unfunded development work that's winding down.
Operating margin in space and defense controls was 12, 8% up from nine 4% a year ago.
This quarter, we had the benefit of lower charges associated with our space vehicles startup business stronger core business performance and pricing initiatives.
Operating margin in industrial systems was 11, 9% up 110 basis points over 10, 8% in last year's fourth quarter.
<unk> associated with our pricing initiatives drove this margin expansion.
Interest expense is another area, that's impacting our financial results in the fourth quarter interest expense was $18 million up $7 million over the fourth quarter last year.
Our adjusted effective tax rate in the fourth quarter was 18, 5% down from 23, 4% in the fourth quarter last year as we benefited from higher levels of R&D tax credits.
Putting it altogether adjusted earnings per share came in at $2 a ton.
Well above the range, we provided a quarter ago.
<unk> was up 54% from the same quarter, a year ago, driven by the increase in operating profit.
And the benefits of a subtle legal settlement and lower tax rate.
Relative to the midpoint of our previous guidance, our EPS was up three after adjusting for the lower tax rate and legal settlement.
Let's shift over to cash flow, which was another highlight for the quarter and the fourth quarter, we generated $105 million of free cash flow. This represents free cash flow conversion on adjusted net earnings of over 150%.
The key driver to the strong cash generation. This quarter was working capital in particular collections from customers and timing of compensation and vendor payments.
Capital expenditures were relatively high at nearly $50 million this quarter as work progressed on facilities, most notably our advanced integrated manufacturing facility for military aircraft.
We're continuing to invest in facilities to accommodate our growth focus our factories and enhance our capabilities through automation.
Our leverage ratio calculated on a net debt basis as of the end of the fourth quarter was two two times around the low end of our target range of 2.25 times to 275 times.
Our capital deployment priorities, both long term and near term are unchanged. Our current priority continues to be investing for organic growth.
I'll now shift over to our initial guidance for next year.
Fiscal year 2024 will be another positive step in our journey towards our long term financial targets, our operating margin will expand by over 100 basis points and earnings per share will increase over 10%.
Over the past four months, we have worked on separating our aircraft business into two segments military aircraft and commercial aircrafts.
As of the beginning of FY 'twenty four there officially split and we will now begin to report on them as separate segments.
The sales breakdown that we've historically shared will largely be the same as in the new organization.
I'll also share estimated operating margins for these segments looking back at FY2023.
We're projecting sales of $3 5 billion in FY 'twenty four that's a 4% increase compared to FY 'twenty, three and a 7% CAGR from FY 'twenty two where.
We're projecting sales growth in military aircraft commercial aircraft and space and defense and expecting a decrease in sales to industrial.
The largest increase in sales will again be in commercial aircraft, we're projecting sales to grow 14% to $785 million.
The production ramp on our wide body programs, most notably the 787 account for most of the increase in OE sales.
Aftermarket sales will decrease from the record high in FY2023 reflecting the absence of some one time sales activity that occurred in FY2023.
Space and defense sales are projected to increase 7% to one point or $1 billion.
We're seeing strong defense demand across our entire book of business areas.
Areas in which were experienced strong demand in particular, our satellite components missile control and new defense programs.
Military aircraft sales are projected to increase 5% to $735 million.
A full years worth of V 280 sales will drive OE sales up in FY 'twenty four while aftermarket sales continue to soften as defense priorities shift to modernization.
Industrial sales will decrease in FY 'twenty four we're projecting sales of $915 million down 7% from last year or 6% loans suggest for divestitures.
This decrease relates to the softening of orders that we're seeing in the industrial automation and is consistent with macro indicators for capital spend.
We will see increases in our other sub markets, partially offset the lower industrial automation business.
Let's shift over to after operating margins.
We are projecting our operating margin in FY 'twenty four to 12 point out percent of 110 basis point increase over FY2023 operating.
Operating margins will expand in each of our segments with the exception of commercial aircraft.
Our operating margin and space and defense will increased 300 basis points to 13, 5% due to the absence of charges on a space vehicle program and reflecting our otherwise strong operational performance.
Military aircraft's operating margin will increase 280 basis points to 11, 6%.
Benefit from having a full year of activity on the V 280 program in FY 'twenty four.
Slide 23, our activity was interrupted by the delay in the contract award followed by a ramp up to the current activity level.
In addition charges incurred on certain funded development programs will not repeat as those programs are winding down.
Pricing will continue to drive operating margin expansion in industrial controls were operating margin will increase 80 basis points to 12, 3%.
In commercial aircraft, our operating margin will decrease 260 basis points to 10, 2% as aftermarket specialists don't repeat in.
In FY2023 we had a number of onetime aftermarket initiatives that contributed nicely to our operating margin as well as the sale of inventory upon exiting mature path.
For FY 'twenty four we're projecting adjusted earnings per share of $6 80.
Plus or minus 20.
Which is up 11% over FY 'twenty, reflecting.
Strong operational performance.
For the first quarter, we're forecasting earnings per share to be $1, 45, plus or minus 10.
Finally, turning to cash we're projecting free cash flow for FY 'twenty four to be modest relative to FY2023 we will see stronger cash from net earnings and working capital while capital expenditures remain around the same level.
We used less cash for working capital needs next year.
<unk> inventories will grow at a slower rate, reflecting the improvement we saw this past quarter. However.
However, we will see pressure from customers as we work down advances that came in during FY2023.
Overall, we had a great quarter and our outlook for next year looks strong with that I will turn it back to Pat.
Thank you Jennifer I'm really pleased with our outstanding performance this quarter and I look forward to another year of even stronger performance in fiscal year 'twenty four.
Let's open the floor up to questions.
And if anyone would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment a voice popped on the phone line will indicate that your line is open. So please state your first and last name before posing your question again, you can press star one.
Wanted to ask a question, we'll pause for a brief moment to allow everyone an opportunity to signal for questions.
Our first question is coming from Cai von <unk> with TD colleagues.
Yes, thank you very much and good performance.
Did I Miss it I didn't hear a guide for free cash flow.
And in 'twenty, four and much color in terms of what you expect.
Hi, Cai.
We shared that it's going to be modest so we're going to have positive cash flow generation next year, but.
But it's not going to be either at a robust level thats similar to what we had projected and shared back in the Investor day in June.
Looking at some of the pieces that make up our cash flow, we're going to have adjusted net earnings are up that talks about 2000 $25 million. So that's a big part of it as well.
Capital expenditures will stay around the same level will have a little bit of an increase in depreciation and amortization, but the two things that are going to be moving the malls are both happening within working capital.
Okay.
The pressure that we'll see is actually going to be in receivables and advances and it's really related to the advanced side of it for the most part we got great customer advances in 'twenty, three especially earlier in the year, we had it on military commercial programs, we had a nice advance on the roof as well.
We started working them down later this.
This past year, and we're going to continue to work them down such that the combination of receivables and advances is going to be pressure for us next year.
But the real change that we're going to see the improvement is going to be driven by our physical inventories.
We had a significant use of cash for physical inventories this year, especially in the middle part of the year.
So we've made improvements in the fourth quarter, we still grew our physical inventories, but it's obviously a nice growing business.
And we've been able to slow that down for two reasons, we're seeing benefits on the external standpoint, we've seen some components.
Common shake out that we can actually get product out the door to a greater extent than we have in the past and additionally, you've got higher utilization within the company, that's helping that flow as well.
So we're projecting that the use of cash for physical inventories is going to continue around the improved level that we saw in the fourth quarter for all of next year, So that really makes it a much.
More better situation for cash than it was in 'twenty three obviously in 'twenty three we used cash we'll generate cash next year, but theyre still.
Pressures associated with our growing business.
I'll shift from that standpoint.
That's on a path towards improvements again in fiscal 'twenty five 'twenty six and as we said in Investor Day, We would expect free cash flow at that time to be up around 75% to 100%.
Got it and then.
Basically if you could give us where are we in terms of <unk>.
Sure.
Right charges, I guess <unk> been delivered.
Through those charges or do we still have exposure.
We've made a lot of success I think kai in reducing the risk on those programs as.
As we said as I mentioned in my notes in the call.
Three of the units the first sorry for the units. The first four meter units have shipped to the customer to have an integrated with the customers hardware and test the system subject to environmental testing and Theyre ready for launch.
That's a really positive step forward. So the risk is burned down significantly in those programs.
We haven't yet shipped a meteor satellite to the customer they are in development.
And Finalization.
I think it will be sometime during next year that we deliver <unk> satellite to a customer there are some further deliveries of meteor right. I think there's another three units have been delivered to our customer site. So my summary is that we're making good progress with Italian more and more hardware shipping through there are still some development work ongoing so you can see.
Yes, there still remains some risk, but we're not anticipating any charges.
And I guess the last two.
First can you give us any color in terms of the quarterly.
Rollout of earnings over the year end.
And maybe on the industrial Youre looking for a big dip in industrial.
Real automation, how much of that is the divestitures and how much of that is just the business softening.
The Luxembourg entities that were looking to divest is about $15 million of revenue in total so thats.
And maybe it helps you characterized the piece that's being taken out of the business.
We are expecting a slowdown in the industrial automation business is sort of signposts of it for a while now that the economies are slowing down in Germany has seen two quarters of basically stagnant economic growth.
And so we've built that into our plans for the year I mean, we've already we took some restructuring charges in this quarter that sort of getting ahead of that contraction in business that we're showing here and that's what helps us maintain our profitability through the year and the industrial side. The other thing is that we will we've had nice margin expansion from pricing in industrial.
During FY 'twenty, three we're going to build on that going into 'twenty four as well.
But I mean, you have the sales down usually you don't account for divestiture until it's done. So have you is the <unk> guide assume the $15 million or the $50 million from Luxembourg will take it down further.
It's only in for a sharp right at the beginning of the year Cai we have it in for a quarter or the end before out of the floor.
Okay.
And.
The quarterly pattern and what are you looking for in the first quarter, what sort of a range.
So in the first quarter were looking for $1 45, plus or minus 10, so it's a little bit of a slower start.
We've seen that in and other first quarters as well and so that's what our numbers are telling us and we will share more on the second quarter as we get into the first quarter.
Thank you so much.
Thank you Kai.
Okay.
And we have a question coming from Michael.
Normally choice Securities.
Hey, good morning, guys real nice results. Thanks for taking the questions here.
Pat or <unk>.
Sure Jennifer.
Can you give us any sense as to what the pricing true up in commercial was in the quarter I was thinking maybe $6 million ballpark or so im just trying to get a sense of what the underlying.
Underlying margins.
<unk> are looking like in 'twenty, four obviously, you've got that big bump here in the fourth quarter.
Okay.
Yeah. So when you look at 24, you see that our commercial margin is down because we don't have that true up so that is actually making up for a large portion of that.
Less aftermarket and 24 channel on the after market is.
Perhaps good margin so as the mix shifts as well Michael.
Okay was it about what is in that $6 million range.
Cook.
Retroactively in the quarter, just so we can kind of do.
Do some rough math on it into next year.
We have only a limited number of customers there Michael.
Good to hear.
No actual number sorry.
Fair enough.
Got it and then.
Same thing for for aftermarket I guess.
Good year tough comps you are selling.
Some lines. There are you seeing any changes with the underlying trends on an apples to apples the businesses that youre keeping.
For the commercial aftermarket commercial the commercial aftermarket.
So that business, we definitely had so many specials that came and you remember that we had specials in FY 'twenty two in a bunch of those actually continued into 'twenty three as well the one part that we have seen growth in the underlying business is on the <unk> hundred 50, and Thats happened over the past few quarters.
Still seeing that continue to grow but most of the underlying business I would characterize as stable.
With maybe that one exception and then you've got the noise. The very positive noise that we experienced in 23 associated with certain initiatives and activities that we've had on platforms that are not of a recurring kind of constant base as well as exiting some work that we were able to sell from.
Tori outcome.
Consider it it's stable, but there are certain elements that are growing somewhat.
And I would agree with Jennifer's comments earnings slide dollars in fleet utilization are high again.
And that's with US with the stable part of it is driving more business into us on behalf of the market size in the absence of the specials that Lulu is reflected in the reduction.
Got it got it and then just.
In fact, the Cai, we take one more mill workshops modest cash flow I mean, the puts and takes and we can look at net income DNA up a little bit capex sounds like inventories still builds I mean modest $25 million is that we've got kind of Howard and I know, it's consistent with what you guys called out at the Investor day, but.
Is that the general direction or is there a bigger sort of advanced repayment receivables headwind.
Yes, the biggest thing that's going to happen is going to be that the change in the physical inventories because we grew so much.
As you saw during the year, we had such wide variation.
Our our cash flows and even this quarter came in higher than you are anticipating for the <unk>.
Timing of these things just have can have some decent size variability and thats why we are limited to just saying modest it'll be cash okay.
Not looking at.
<unk> 2 million of cash flow or something.
At close to zero, but we're not at a robust level that will ultimately get back to.
Either the big driver is going to be really in the physical inventories, we're seeing that utilization internally.
Come through and that feels like.
We're in great shape whats happening there is there's more of that.
The training Thats happening thats getting through in our throughput and so that's actually helping we don't have as much turnover, where we need to have more folks go through training, where they've got those hours that are not efficient and it so thats definitely turning what happens in supply chain we.
We saw some good news this quarter, we will have to see how that actually come. So that's a variable that we've got.
With us, but we're projecting right now to be at the level of growth that we had in the fourth quarter, which was.
Quite low compared to where it was in the first three quarters of the year.
So.
That's why we are projecting that we will.
Free cash flow generation, but we're also mindful that we're growing the business as well.
Got it got it and then last one for me I think Pat Jennifer you made a lot of comments a lot of different markets didn't really hear much on medical it looks like it's only going to be up about 1% any any kind of simplification restructuring pricing anything that you can say in sort of that market in terms of what's happening.
23% to 24.
Yes.
Some realignment going on within the market with some of the distribution channels changing during the course of 'twenty three Michael.
That resulted in strong flow through.
Are flushing through of inventory that was in the system and so that caused a reduction in demand on us.
Partial part of the picture.
That's still normalizing.
So okay. That's the main thing thats going on from changes in the market dynamics.
Yes, let me stop there.
Got it alright ill jump back in queue guys. Thanks.
Thank you.
Again, if anyone would like to ask a question star one on your telephone keypad.
Our next question comes from Kristine <unk> with Morgan Stanley.
Hi, This is Justin on for Kristine good morning.
Good morning, and good morning.
You mentioned that.
Half of the book of business I was just hoping you could touch on maybe how you're thinking about the defense budget environment and sort of what are the baseline assumptions that underpin the outlook for next year, and what sort of maybe scenario planning you're doing given the sort of range of potential outcomes.
So.
Audio broke up slightly when you start with Christian but I think it is around the defense budgeting for next year and is there going to be any impact if there are let's say or delays in Congress.
Ladies and continuing resolutions and I start with the question Justin we're not expecting any impact on our business next year as a result of that.
But that'll be a transient thing that will get resolved, but are you willing to take the programs that are actually running in our facilities at this time.
Okay perfect.
And and just maybe back on the margin guide for 'twenty four is there a way to parse out how.
How much lift is coming from the pricing initiatives versus the simplification efforts.
We haven't split that out Justin in detail.
While we did say during the Investor day was that the pricing activity would be coming in stronger at the front half of our program over the three years and the simplification activities would flow through in the latter part of the three year period, they take a little bit more time to execute and therefore, you see the benefit of them further downstream so what youre seeing.
Today and then.
About six months or so feeding through in industrial I mean aircraft group is predominantly coming from pricing activity.
Okay, great. Thanks.
Youre welcome.
There are no additional questions in the queue I will turn it back to you Pat for any closing remarks.
Well thanks, everyone for attending the call I think we had.
Outstanding quarter, we're really pleased with the progress we're making on our on our journey and we look forward to reporting further progress in the Q1 call, which will be my first earnings call. Thank you very much bye now.
This concludes today's call. Thank you for your participation you may now disconnect.