Q4 2024 Moog Inc Earnings Call
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Speaker Change: Good morning, and welcome to the Moog fourth quarter fiscal year 'twenty 'twenty four earnings conference call.
Speaker Change: <unk> conference is being recorded.
Speaker Change: At this time I would like to turn the conference over to Mr. Aaron Astrakhan. Please go ahead Sir.
Speaker Change: Good morning, and thank you for joining <unk> fourth quarter 2024 earnings release Conference call.
Speaker Change: Aaron Astrakhan director of Investor Relations with me today is Pat Roche, our Chief Executive Officer, Jennifer Walter Our Chief Financial Officer.
Aaron Astrakhan: Earlier. This morning, we released our results and our supplemental slides both of which are available on our website.
Aaron Astrakhan: Our earnings press release supplemental slides and remarks made during our call today contains adjusted non-GAAP results.
Aaron Astrakhan: Reconciliations for these results to GAAP results are contained within the provided materials.
Aaron Astrakhan: Lastly, our comments today may include statements related to expected future results and other forward looking statements, which are not guarantees.
Aaron Astrakhan: 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 happy to turn the call over to Pat.
Pat Roche: Good morning, and welcome to the call.
Pat Roche: Today, we will share an update on our financial and operational performance reporting both on the full year and the current quarter.
Pat Roche: We have matured and strengthened momentum in our pricing and simplification initiatives.
We're building on our strong reputation with customers to open new growth opportunities.
Pat Roche: Consequently, our results show strong sales growth record 12 month backlog strong margins and improved cash flow.
Pat Roche: Our success is driven by our employees' commitment to making this a strong company in a great place to work and for that I want to thank all those who have contributed to our performance over the last 12 months.
Pat Roche: Before we get into the detail of the quarter. Let me first reflect on what has been another exceptional year for our company.
Pat Roche: We delivered record sales.
Pat Roche: We have a record 12 month backlog, we expanded adjusted operating margin tons produced improved free cash flow.
Pat Roche: We grew revenue by 9% to $3 6 billion.
Pat Roche: Commercial aircrafts led the growth, reflecting strong market demand for our current platforms.
Pat Roche: Military aircraft contributed through new programs with the ramp of Florida Engineering and new production starts.
Pat Roche: Space and defense captured business across a broad range of application domains with notable success in Europe.
Pat Roche: Industrial held relatively flat despite a reduction in our industrial automation business.
Pat Roche: We expanded adjusted operating margin by 150 basis points from 10, 9% to 12, 4%.
This is a really satisfying result, given that 110 basis points of the improvement is the direct result of our margin expansion initiatives.
Pat Roche: Adjusted earnings per share grew substantially due to our sales growth and our improvement initiatives.
Pat Roche: And free cash flow was better than the prior year, while it was modest as planned it was stronger than prior year and on a path to further improvement.
Pat Roche: Overall this was another year of excellent financial performance.
From our FY 'twenty two base year, we have now delivered 9% CAGR growth.
Expanded adjusted operating margin by an impressive 180 basis points.
Pat Roche: Grown earnings per share and delivered modest cash as planned this year. Please.
Pat Roche: These results mean that we are in great shape delivering against our Investor day goals.
Pat Roche: We've achieved this remarkable performance through unrelenting focus on our pricing and simplification initiatives.
Pat Roche: We have made great progress, we continue to learn and we continue to improve our approach.
Pat Roche: <unk> has become central to our transformation.
Pat Roche: It is now widely deployed and is positively impacting results.
Pat Roche: We've demonstrated a couple of years of excellent financial results and we're confident that this will continue in FY 'twenty five.
Pat Roche: Now let me provide further detail on our operational initiatives that are driving this exceptional performance.
Pat Roche: Firstly customer focus.
As an integral part of our 80 20 approach we've completed an independent voice of customer analysis that covers approximately one third of our business.
Pat Roche: Over 120 detailed interviews provided us with detailed thematic analysis customer experience and net promoter scores.
Pat Roche: It is gratifying that our customers see us as a partner who can be relied upon to apply our breadth of technical capabilities to solve their difficult technical challenges and to consistently deliver quality products.
Pat Roche: We are well positioned with our customers and nowhere to drive improvements to further strengthen our relationships.
In this context it was fantastic to see a successful certification to flight of the United launch Alliance Vulcan rocket.
Pat Roche: <unk> has already recognized us for our innovation and we are proud to be the supplier of thrust vector control for stage, one and stage two.
Pat Roche: We look forward to Vulcan, becoming a frequent flyer.
Pat Roche: In addition, I am delighted that recent assay 9100, and FAA audits for both commercial aircrafts and military aircraft here in Eastern Aurora completed with no findings and positive comments on the level of staff engagement.
Pat Roche: Furthermore, our performance and delivering for our customers has put us in a great precision to pursue once in a generation opportunities arising from broad based defense demand.
Pat Roche: In the quarter, we made excellent progress in securing our position on several generational pursuits.
Pat Roche: For example, our space business secured a lesser subcontract for an opportunity of $100 million cost plus development program to design and produce a liquid chemical propulsion system.
Pat Roche: This is sort of specialized defense application that could have substantial production follow on.
Pat Roche: Our ground based defense business made great progress on significant U S and international pursuits. This included additional orders for our C. H 155 howitzer.
Pat Roche: Our bookings on that program to over $40 million.
Pat Roche: We see significant future demand on this and other European platforms with rising European defense spend.
Pat Roche: Next turning to people community and planet extreme.
Pat Roche: Extreme weather events delayed customer shipments and resulted in lost production at multiple locations around the world.
Pat Roche: In the quarter, our Japanese and Chinese facilities, where both hit by typhoons.
Our Murphy North Carolina facility was hit by Hurricane Helena.
Pat Roche: And our Tewksbury facility was flooded due to extreme weather.
Pat Roche: In the case of Japan, China, and North Carolina, We have suffered just short interruptions to production a few days at most.
Pat Roche: However, the damage to our cheeks pre commercial aircraft facility was severe and we expect that it will take us several months to regain full capacity.
Pat Roche: In all cases, we have robust business continuity plans and the commitment of our staff to mitigate the impact on our customers is truly remarkable.
Pat Roche: Our commitment to the planet includes our goal announced last year to reduce scope, one and scope two equivalent <unk> emissions by 40% by 2030.
Pat Roche: We have a multi year plan to deliver this goal and I'm happy to share that we're already seeing a positive impact from these initiatives. We will soon release, our next sustainability report, which will detail the impact on emissions and further commitments relating to water consumption and hazardous waste.
Pat Roche: We're further developing and maturing our business processes and it is good to see that our Taikang facility in China achieved ISO accreditation for energy management, Environmental management, and occupational health and safety, adding to its existing business management system.
Date seven sites have pursued several of these additional certifications.
Pat Roche: Finally, turning to financial strength, we are continuing to make excellent progress on driving margin enhancement through pricing and simplification.
Pat Roche: Pricing activities are now firmly embedded in how we work and simplification continues to drive transformative change.
Pat Roche: Were making fantastic progress.
Pat Roche: Our commitment to deliver has resulted in strong momentum and a good pace of change.
Pat Roche: We are executing in line with our Investor day commitments.
Pat Roche: We completed the sale of our burner motors facility and of our Luxemburg Hydraulics manifolds facility just after year end as part of portfolio shaping.
Pat Roche: We exited a couple of small European manufacturing sites as part of our footprint consolidation.
Pat Roche: We deployed $8 20 to five additional sites now covering 70, 70% of our business by sales.
Pat Roche: And trained more than 80 more leaders, bringing the total to over 840.
Pat Roche: We are maturing $80 20 at deployed sites.
Pat Roche: <unk> from the initial profitability actions to detailed resourcing decisions as we strive for higher performance.
Pat Roche: We've established clear links between <unk> 20, and other continuous improvement activities, such as lean and advanced product quality planning.
Pat Roche: All of which have a role to play in driving sustainable improvement.
I look at multiyear trends helps illustrate the profound impact of simplification on our business.
Pat Roche: For fiscal year 'twenty, two to fiscal year 'twenty four we.
Pat Roche: We have driven an almost 20% increase in sales.
Pat Roche: While managing head count increases to be just 6%.
Pat Roche: And reducing factory space by more than 10%.
Pat Roche: Our simplification work will continue to deliver on financial and operational improvements throughout fiscal 'twenty five.
Pat Roche: Now turning to macro economic and end market conditions.
Pat Roche: Given the industry wide discussion on Boeing let me start with commercial aerospace.
The demand for air travel continues to strengthen and the backlog of aircraft orders is significant.
Pat Roche: We recognize that there are significant challenges that need to be resolved in industry.
Pat Roche: Whilst Boeing is our largest customer.
Pat Roche: Book of business is weighted 80 20 to their wide body aircraft.
Pat Roche: And therefore, our exposure to the current strike in Seattle.
Pat Roche: And the FAA production rate cap is limited.
We have moderated our production rates for 787, two aligned with Boeing's current plan.
Pat Roche: As a result, our build rate will be lower in fiscal 'twenty five than we had first assumed in our Investor day plan.
Pat Roche: Now turning to defense the ongoing conflicts in Ukraine, and the Middle East continue Consequently, the U S.
Pat Roche: Many European Nations and Australia have committed to increased spending on national security.
Pat Roche: We continue to support existing customers and platforms at an increased rate.
Pat Roche: We are actively pursuing new opportunities that exploit our unique capabilities as we worked to strengthen national security.
25 will be another year of strong growth within our defense businesses.
Finally, industrial markets continued to be soft.
Pat Roche: Purchasing managers index for manufacturing has indicated contraction in the eurozone economies for most of the last two years.
Pat Roche: In our industrial automation orders have as a consequence has been soft.
Pat Roche: We expect industrial automation sales to continue at roughly the current quarterly rate through fiscal 'twenty five.
Pat Roche: Turning to 2025, our performance in 'twenty four was outstanding demonstrating our effectiveness at executing against our strategy on pricing and simplification.
Pat Roche: We will continue to drive these activities with the same vigor in fiscal 'twenty five.
Pat Roche: For that reason I am confident in our guidance for 25, which includes continued solid revenue growth.
Pat Roche: <unk> adjusted operating margin improvement in line with our plan and.
Pat Roche: And significant free cash flow improvement.
Pat Roche: Our revenue growth will be driven primarily by broad based defense needs and commercial aircraft demand tempered by boeing's challenges and our tewksbury recovery.
Pat Roche: This was offset by a decrease in our industrial business due to market conditions and divestitures.
Pat Roche: Our margin enhancement will be in all segments, except commercial where there is a mix shift towards original equipment production in.
Pat Roche: In our cases simplification initiatives portfolio shaping and pricing are contributing to margin expansion.
Pat Roche: Our free cash flow will improve significantly.
Pat Roche: Following a couple of years in which physical inventory growth placed a high demand on cash we.
Pat Roche: We will reach a turning point in fiscal 'twenty five.
Pat Roche: We intend to fund capital expenditures at an elevated level through fiscal 'twenty five in support of significant business capture now anticipated.
Speaker Change: Now, let me hand over to Jennifer for a more detailed breakdown on the quarter and on our guidance. Thanks.
Jennifer Walter: Thanks, Scott I'll begin with a summary for FY 'twenty four followed by a more detailed review of our fourth quarter.
Jennifer Walter: Financial performance I will then describe our initial guidance for FY 'twenty five.
Jennifer Walter: Sales for FY 'twenty four we are at a record level coming in at $3 6 billion.
Jennifer Walter: This represents a 9% increase over FY2023.
Jennifer Walter: Each of our segments contributed to our sales growth with our aerospace and defense segment driving substantially more growth relative to industrial tomorrow.
Jennifer Walter: Commercial aircraft sales increased 18% as a result of production ramp on wide body narrow body and business jet.
Jennifer Walter: Farm.
Jennifer Walter: Military aircraft sales increased 13% largely due to having a full year's worth of Florida sale as our activity in FY2023 was interrupted by a delay in the contract award.
Jennifer Walter: Sales in space and defense increased 7% due to strong broad based demand.
Industrial sales increased slightly at 1% with softening in industrial automation being compensated for by growth in other sub market.
Jennifer Walter: Our adjusted operating margin of 12, 4% increased 150 basis points over FY2023 we benefited from the employee retention credit, which provided 40 basis point towards that increase.
Jennifer Walter: Operating margins expanded in each of our segments, except for commercial aircraft.
Military aircraft's operating margin increased 300 basis points to 12, 8%.
Jennifer Walter: Benefited on cost absorption from having a full year of activity on flora in FY 'twenty four.
Jennifer Walter: In addition, we had lower level of R&D expense in FY 'twenty four.
Jennifer Walter: Our operating margin in space and defense increased 290 basis points to 13, 4% due to strong operational performance, including improved performance on our space Therefore program.
In industrial our operating margin expanded 90 basis points, largely due to pricing initiatives.
Jennifer Walter: In commercial aircraft, our operating margin decreased 90 basis points to 11, 8% as FY2023 included benefits from specific aftermarket activity.
Jennifer Walter: Slide 23, we had a number of onetime aftermarket initiatives that contributed nicely to our operating margin as well as the sale of inventory upon exiting a mature platform.
Jennifer Walter: Higher production volume in FY 'twenty four helped to offset these impacts.
Adjusted earnings per share in FY 'twenty four was $7 80.
Jennifer Walter: This includes the benefit associated with the employee retention credit that we described in our second quarter.
Jennifer Walter: It also includes an adjustment we made in the fourth quarter to capitalized interest associated with major capital project for FY2023 in FY 'twenty four.
Jennifer Walter: Excluding these two items adjusted earnings per share was $7 24 up 18% over FY2023.
The growth in our earnings per share resulted from our operating margin expansion efforts and our sales growth.
For the year, we generated a modest level of free cash flow net earnings grew substantially with physical inventories also growing in part associated with our strong sales growth.
Let's shift over to our fourth quarter results.
Jennifer Walter: We had a great quarter sales were very strong adjusted operating margin was robust and on plan and adjusted earnings per share even after removing the benefit of capitalizing interest exceeded the high end of our guidance range and is it.
Jennifer Walter: In addition, we generated a substantial amount of free cash flow.
Jennifer Walter: We continue to make progress on simplifying our business in the fourth quarter and took some charges as a result.
Jennifer Walter: We recorded $15 million of losses associated with the industrial businesses that we recently divested.
Jennifer Walter: We also incurred $12 million of restructuring and related charges associated with other portfolio shaping activities in.
Jennifer Walter: In addition, we took $4 million up.
Jennifer Walter: Footprint rationalization charges.
Jennifer Walter: I'll now talk through our fourth quarter results. Excluding these charges.
Jennifer Walter: Sales in the fourth quarter of $917 million were 5% higher than last year's fourth quarter military aircraft and space and defense sales were up nicely, while commercial aircraft sales were up slightly and industrial sales were down modestly.
The largest increase in segment sales doesn't military aircraft sales of $216 million.
Up 17% over the fourth quarter of last year activity on the acquired programs began to ramp in the third quarter last year and has steadily increased since that time accounting for over half of the increase this quarter.
Jennifer Walter: In addition over the past couple of years certain other development work has shifted into production and we're now beginning to see the ramp up in production that will continue for the next few years.
Speaker Change: Thanks, and defense sales of $263 million increased 9% over the fourth quarter last year.
Speaker Change: Defense demand continues to be strong and we're seeing that come through most notably this quarter for European defense need.
Speaker Change: In addition launch vehicle activity continued to grow in our space business.
Speaker Change: Commercial aircraft sales of $197 million increased 2% over the same quarter a year ago.
Speaker Change: <unk> increased nicely in the fourth quarter. This growth was muted by sales recorded in last year's fourth quarter for retroactive pricing and the sale of inventory associated with the mature product line that we exited as part of our 80 20 work.
Speaker Change: Industrial sales were $242 million in the fourth quarter, that's down 5% from the same quarter a year ago.
<unk> automation sales were down from the very strong quarter, a year ago, reflecting the slowdown in orders we've seen in recent quarters.
Speaker Change: Strength in our medical pump business helped to offset this decline as we benefited from a competitor challenges.
Speaker Change: Our automotive test business was also strong this quarter.
I will now shift to operating margin.
Speaker Change: Adjusted operating margin of 12, 5% in the fourth quarter matched that of the fourth quarter a year ago.
Speaker Change: Stronger operational performance, including results from our pricing and simplification initiatives were offset by the benefit from retroactive pricing included in last year's fourth quarter.
Speaker Change: Adjusted operating margins increased over the fourth quarter of last year and each of our segments, except for commercial aircrafts.
The most impactful increase wasn't military aircrafts with a 450 basis point increase to 12%.
Speaker Change: This reflects lower research and development expense.
Speaker Change: A more favorable mix within aftermarket and efficiencies associated with higher volume on the Flyer program.
Speaker Change: Industrial operating margin was 12, 8% in the fourth quarter up 90 basis points.
Speaker Change: This increase was attributable to benefits from pricing initiatives.
Speaker Change: Start by pressures associated with lower industrial automation sales and planned product transfers.
Speaker Change: In space and defense operating margin increased 70 basis points to 13, 5%. This increase is associated with improved performance based vehicle program pricing and profitable growth.
Speaker Change: Commercial aircraft operating margin was 11, 4% down 640 basis points from the fourth quarter last year and the fourth quarter last year included benefits from retroactive pricing and the sale of inventory associated with an exit of mature platform.
Speaker Change: I'll now shift to non operating expenses.
Speaker Change: Interest expense was down compared to the same period, a year ago related to the capitalized interest adjustment I described earlier.
Our adjusted effective tax rate in the fourth quarter was 19, 2% up from 18, 5% in the fourth quarter last year with the increase attributable to lower levels of R&D tax credits this year.
Speaker Change: Putting it altogether adjusted earnings per share came in at $2 16.
Speaker Change: Up compared to last year's fourth quarter.
Speaker Change: The increase is attributable to additional operating profit associated with higher sales.
Speaker Change: While we benefited this quarter from the capitalization of interest this is offset by the benefits of the legal settlement and lower nonoperating expenses in last year's fourth quarter.
Let's shift over to cash flow, which was particularly strong this quarter.
Speaker Change: In the fourth quarter, we generated $109 million of free cash flow.
Speaker Change: This represents free cash flow conversion on adjusted net earnings of over 150%.
Speaker Change: The key drivers of the strong cash generation. This quarter was working capital in particular collections from customers and timing of vendor payments.
Speaker Change: Capital expenditures after excluding the capitalized interest adjustment were in line with spending levels in recent quarters.
Speaker Change: We're broadening our target leverage range to be a full turn of EBITDA still centered around a two five times net <unk>. Our leverage ratio is two <unk> times as of the end of the fourth quarter, putting us at the low end of our target leverage of two to three times.
Speaker Change: Our capital deployment priority in the near term continues to be investing for organic growth.
Speaker Change: The anticipation of several significant programs that will provide long term revenue growth starting in just a few years our investments in our facilities will continue at elevated levels to ensure we are well prepared for these exciting opportunities.
Speaker Change: Longer term, our capital deployment priorities will be more balanced.
Speaker Change: I will now shift over to our initial guidance for next year fiscal.
Speaker Change: Fiscal year 2025 will be another positive step on our journey towards our long term financial targets, we will grow our scale expand our operating margin in line with our Investor day targets and improve our cash flow generation.
Speaker Change: We're projecting sales of $3 $7 billion in FY, 'twenty, 5% to 3% increase compared to FY 'twenty four.
Speaker Change: We're projecting sales growth in space and defense commercial aircrafts in military aircraft and expecting a decrease in sales in industrial.
Speaker Change: The largest increase in sales will be in space and defense.
Speaker Change: We're projecting sales to increase 7% to $1 1 billion.
Speaker Change: Our strength, we're seeing strong defense demand across our entire book of business particular in state and European ground vehicle market.
Speaker Change: Commercial aircraft sales are projected to grow 6% to $835 million.
Speaker Change: Demand for commercial aircraft remains high as slight traffic is growing in key routes.
Speaker Change: Production continues to ramp on nearly all of our platforms driving the sales growth.
Speaker Change: The first tempered however by the pressures on our bowling platform and production levels at our <unk> facility as Pat described.
Military aircraft sales are projected to increase 4% to $840 million.
Speaker Change: We're expecting further growth on the <unk> program as we accelerate the pace in FY 'twenty five and.
Speaker Change: In addition, aftermarket sales will increase as the military look to ensure mission readiness across the fleet.
Speaker Change: Industrial sales will decrease in FY 'twenty five.
Speaker Change: Projecting sales of $914 million down 5% from last year, but only 2% when we adjust for the two businesses. We sold at the start of FY 'twenty five.
Speaker Change: While still very strong sales for both test and simulation will moderate after record levels.
Speaker Change: Let's shift over to operating margin.
Speaker Change: We're projecting our adjusted operating margin in FY 'twenty five to be 13, 8%, a 60 basis point increase over FY 'twenty, four or 100 basis points. After factoring out FY 'twenty fourth employee retention credit benefit.
Speaker Change: Operating margins will expand in each of our segments with the exception of commercial aircraft.
Speaker Change: Military aircraft's operating margin will increase a 110 basis points to 13, 1% for <unk>.
Speaker Change: Transitioning from development to production on several programs and this reduces our risk and increases our operating margin.
Speaker Change: In addition, both volume and pricing are positively impacting our operating margin and military aircraft.
Speaker Change: Industrial's operating margin will increase 100 basis points to 13, 4% simplification will drive our margin expansion within industrial.
Speaker Change: Portfolio shaping including the divestitures completed at the beginning of FY 'twenty, five and product phase outs, resulting from 80 20 activities will contribute to our margin expansion.
Speaker Change: We also made progress with footprint rationalization and this is creating efficiencies within our business.
Speaker Change: Our simplification actions are tempering topline growth in favor of operating margin expansion.
Speaker Change: In addition to our simplification progress pricing will continue to contribute to our operating margin expansion in industrial.
Speaker Change: Our operating margin in space and defense for increased 80 basis points to 14, 2%.
We will benefit from profitable growth in pricing the wholesale pressure from the lack of the employee retention credit.
Speaker Change: Benefited from an FY 'twenty four.
Speaker Change: In commercial aircraft, our operating margin will decreased 80 basis points to 11, 8%.
Speaker Change: Our products and our product mix will be less favorable in FY 'twenty five as OE production outpaces aftermarket growth.
Speaker Change: We will also be negatively impacted from our chip Perry operations as we work to get back up to capacity after the storm damage.
Speaker Change: For FY 'twenty five we are projecting adjusted earnings per share of $8 20.
Speaker Change: Plus or minus 20.
Speaker Change: That's up 5% over FY, 'twenty, four or 11% adjusting for the employee retention credit and normalizing the level of capitalized interest.
Speaker Change: The projected earnings per share increase reflects strong operational performance.
Speaker Change: For the first quarter, we are forecasting earnings per share to be $1, 60, plus or minus 10%.
Finally, turning to cash we're projecting free cash flow conversion to be in the 50% to 75% range a solid improvement from a modest level of cash we generated this past year.
Speaker Change: This is somewhat below the 75% level that we had previously targeted.
Speaker Change: A good portion of that change relates to an increased level of capital expenditures in FY 'twenty five.
Speaker Change: While we had previously expected capital expenditures to begin to decline in equity FY 'twenty five we are now increasing investments in anticipation of longer term business opportunities.
Speaker Change: In addition, we're factoring in potential pressure on cash related to volatility in commercial OEM due to uncertainty in for agility of their supply chain.
Speaker Change: We will drive an improvement in free cash flow generation from FY 'twenty four to FY 'twenty five by relentlessly focusing on optimizing our planning and sourcing activities.
Speaker Change: This involves further development of our supply chain, including dual sourcing and vertical integration as well as having clear accountabilities and increasing visibility to aid in timely and informed decision.
Speaker Change: We'll see the benefit of these actions come through in the form of reduced inventory level.
Speaker Change: We will be pressured with regard to receivables so, particularly early in FY 'twenty five as we come off a very strong collections quarter in the fourth quarter of FY 'twenty four.
Speaker Change: <unk>, we're really encouraged by our financial performance in FY 'twenty four.
Speaker Change: Forward to another great year in FY 'twenty five.
Now I'll turn it over to Pat Thank you Jennifer.
Pat Roche: Fourth quarter was strong bringing to close an exceptional year with record sales and expanded margin.
Pat Roche: Performance reflects the success in pricing and simplification initiatives to continue to build momentum into <unk> 'twenty five.
Pat Roche: Stronger sales expanded margins and improved cash flow generation now, let's open it up to your questions.
Pat Roche: Thank you.
Like to ask a question please signal by pressing star one on your telephone keypad.
Speaker Change: If you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again, you could question I wanted to ask a question.
And we'll pause for a brief moment to allow everyone an opportunity to signal for questions.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Our first question is coming from the line of Cai by more by rumor, sorry with TD Cowen.
Speaker Change: Terrific. Thank you very much and great results again.
Speaker Change: Pat you mentioned.
Speaker Change: Through this quite a bit generational defense wins, and you mentioned two of them could you give us any more specifics and specifically with regard to Europe.
Speaker Change: Yes, hi, good morning Kai.
Pat Roche: Yes, we had a great quarter, thanks for the comment.
Speaker Change: There's a lot of activity going on.
Speaker Change: I'm.
Speaker Change: I'm able to the state that we're involved in a lot of.
Speaker Change: <unk> capture and development activities across the whole broad range of defense applications in all of all of the Warfighting domains.
Speaker Change: The activities, we're talking about in Europe predominantly.
Speaker Change: Aligned around.
Speaker Change: Armored vehicle, which has been a strength of ours in Europe, and we're seeing many of the existing platforms pulling through more sales. So we've got significant uplift in sales in Europe in fact, we've.
Speaker Change: Secured a second building on our global and our campus to help accommodate some of that growth of defense business in Europe.
Speaker Change: In terms of new programs in Europe, We're obviously interested in ground based air defense and we continue to pursue that and in the U S. There are a number of programs that were actively pursuing as well I.
Speaker Change: I would say have developed.
Speaker Change: Commitment our relationships with the main competitors in those for those.
Speaker Change: Programs of work and are working with them, but I don't have announcements to make in this quarter as to any of those particular programs and also some of the other activity that's going on will be under our classified activities.
Speaker Change: Okay, and I can share the details of them, but I think the key thing is there is really strong demand out there the capabilities, we have a matching.
Speaker Change: With the problems that I've been trying to trying to be solved and we feel that we're in a really strong position to announce wins in the future, but we just have to wait until theyre secured before we can share more detail on them.
Speaker Change: Terrific and if we can switch to commercial aircraft.
Speaker Change: Any specifics on the Boeing strike impact because I assume that would hit most heavily in the first quarter and what are you assuming regarding Airbus because they gave us kind of crazy forecast of hitting 70 70 deliveries, even though they haven't done 500 in the nine months now and they did 50 in October so.
Speaker Change: Their numbers look excessively aggressive.
Speaker Change: So on the ongoing Cai, we don't expect any direct impact from the strike.
Speaker Change: <unk> indicated in the script that we have a weighting towards the wide body business is such that the impact on 737, Max on our overall sales levels is relatively muted.
And so there's no real impact from the strike on us at this point in time.
Speaker Change: We're building at a rate that we feel is really now aligned with their current plans. So I think what we have down for our projection for 25 is a really well balanced and judged assessment of what we think we can do in the commercial business in the coming year I mean, there's obviously uncertainty in the industry in general.
Speaker Change: The issues, you mentioned with supply chain affecting both Boeing and Airbus and as a consequence of that when we were thinking through our modeling for next year.
Speaker Change: It was one reason for having the wider range on the cash flow from 50 to 75 to take into account that challenge that's out there in the industry, but.
Speaker Change: But we will continue to.
Speaker Change: Two customers, great and the last one.
Could you give us any sort of specifics in terms of what we should look for this year in terms of how much growth in commercial and military aftermarket.
Speaker Change: Actually when you look at our commercial business into 25, what Youll see is that the growth in OE production.
Speaker Change: Despite all the challenges that we've just described the growth in OE production is outpacing the growth in our aftermarket and our in our commercial business and so the mix.
Speaker Change: Move the mix changes slightly as we go from 24% to 25 more in favor of OA.
Speaker Change: And the second factor affecting us on the commercial side as we do quite an amount of our aftermarket activity through our cheeks per site in the UK and that was the site. That's been affected by flooding that has reduced our available capacity in that plant for part of this year and as a consequence that pulls back our aftermarket content during this year as well.
Speaker Change: On the regulatory side.
Speaker Change: Oh, sorry.
Speaker Change: Go ahead Sir.
On the military side does not much of a change in the mix as we go into next year.
Speaker Change: Terrific. Thank you very much I'll, let someone else go.
Speaker Change: Youre welcome. Thank you Kai.
Speaker Change: The next question is coming from Michael Chairman Li with <unk> Securities.
Speaker Change: Hey, good morning, guys and a real nice result, thanks for taking my questions.
Speaker Change: Hey, Pat maybe we could just stay on on <unk> line of questioning there in commercial.
Speaker Change: Just on the 787 can you give us a sense then I think you had been shipping at <unk>.
Speaker Change: Rates above where Boeing had been is there going to be.
Speaker Change: It's sort of a one year sort of destock situation or how do you see that.
Speaker Change: Program.
Moving throughout the year, and I guess back to Airbus right their commentary on the <unk> hundred 50.
Speaker Change: Certainly targeting that that longer term rate of 12, but it sounded like 25 was going to be a little bit squishy in terms of getting the rates increasing so maybe maybe just a little more detail on those two wide bodies.
Speaker Change: Yes, Hello, Michael Good morning, Thanks for the questions.
Speaker Change: On the commercial side I mean, we've been in a lot of detailed discussion with both of our customers.
Speaker Change: We feel.
Speaker Change: And we have adjusted the plan Accordingly, and so we mentioned in the notes that we had moderated somewhat extra.
Speaker Change: The expectations, we have on on rates from what we had 18 months ago.
Speaker Change: When we laid out at Investor Day, we had a plan in mind. It was built off of boeing's rate increases at that time.
Speaker Change: Things have changed over the course of the last 12 months or so and we've built all of that now into the mountain going forward. So yeah. It is down somewhat on what we thought at Investor day, but it's still showing for us as a business growth in.
Speaker Change: In our wide body and narrow body and business jet business in fiscal 'twenty five.
Speaker Change: Okay. Okay.
Speaker Change: And your comments about Airbus as well I mean, we've built in that into the into the model for next year as well. So I think we're really in line with both of the both of the Oems at this point in the plans.
Speaker Change: Okay, Okay, and then just on the aftermarket.
Speaker Change: Do you actually I know, we'll probably get it in the queue.
Speaker Change: What was the commercial aftermarket growth rate in this quarter and then I guess.
Speaker Change: Absent Tewkesbury Wood wood, you have aftermarket growth in <unk>.
Speaker Change: 25, I mean, it's just it's such a strong market I mean, I'm just trying to figure out.
Speaker Change: Anything with your business gets a little bit more nuanced I mean, obviously youre more wide body exposed, but any other color you can provide there.
Speaker Change: So the Tewkesbury business does have a.
Speaker Change: Substantive piece of aftermarket activity flowing through and so that is tempering our into.
Speaker Change: Into next year I think our mix.
Speaker Change: 225 is something like 70, 30 between OE and aftermarket on the commercial side.
Speaker Change: This year that might have been two thirds one third so.
Speaker Change: The mixed shifts silver as a consequence of the growth on the OE side, I would say shifts over predominantly because of the growth on the OE side and to some degree due to the Tewkesbury capacity challenge.
Speaker Change: Okay, Okay perfect.
Speaker Change: And last one for me and then I'll get out of the way just on these defense.
Opportunities thinking more.
Speaker Change: To be working with some of it.
Speaker Change: Domestic suppliers are you guys have a traction working with some of these newer upstart commercial base defense companies, whether it's <unk> or <unk>.
Speaker Change: Most of the world.
I think I'd prefer not to comment on which customers we're working with.
Speaker Change: I would say, we do have an interest in the CCA market in general and I think we have offerings that can make a contribution to any of the players in that space.
Speaker Change: Okay fair enough thanks, guys.
Speaker Change: Thanks, Michael.
Speaker Change: Our next question is coming from the line of John <unk> with C. J S Securities.
Speaker Change: Hi, Good morning, Thank you for taking my questions and nice quarter.
I was wondering if you could detail your capex plans for this year, maybe you talk.
Speaker Change: Is that a little bit of connection trouble, but where does it stand versus what maybe you thought you would spend.
Speaker Change: Compared to your Investor day last year.
Speaker Change: Yes, so capital expenditures, we're looking to be at $180 million next year.
Speaker Change: That's four 9% of our projected level of sales. So that's on our high or high end of our range. Historically, we have been at 3% to 4%, but in the last couple of years, we've been in it for just over 4% range as we are making some of the changes to support the growth that were having during the investor day period.
Speaker Change: <unk> just been talking about these once in a generational types of opportunities in the defense businesses, and we're seeing progress in capturing and going to continue capturing those types of opportunities and with that includes the need for further capitalization.
Speaker Change: Net capitalization comes in the form of.
Speaker Change: Facilities enhancements to our facilities and equipment for those facilities. So we are deciding to spend that now and FY 'twenty five so that we are nicely prepared for these opportunities which would be in the next couple of years ourselves before we would need that and sell it as really the ramping up of that so we are certainly taking.
Speaker Change: Our capital expenditures up to.
Speaker Change: A higher level than we had planned we had anticipated that in FY 'twenty five we are going to be on the start of our journey to reduce our capital expenditures down to our historical norms of 3% to 4% maybe not quite getting there all the way this year, but that's really the difference.
Speaker Change: Thats the primary driving factor between our 75% free cash flow conversion.
Speaker Change: From Investor day to the range that we've got a 50% to 75%. So it's really another way to deploy our capital just happens to be in our free cash flow calculation and it brings and it brings that down.
It's the same theme, it's investing for organic growth and we've we're seeing incredible opportunities I'm just outside our investor day period, and so we're capitalizing so that will be well positioned to take.
Speaker Change: Take those reality.
Speaker Change: Got it that's very helpful. Thank you and maybe just to dig a little deeper what is the time I guess you expect before you start generating.
Speaker Change: Full run rate income on these facilities.
Speaker Change: A variety of project or end markets that can have different types of durations on the length of the project and then and.
Speaker Change: The platform. So just wondering how you would characterize these additional investments and when they might come back to in terms of profitability.
Speaker Change: So I would say these right now are going to be coming out in the form of cash they are not going to be depreciated, yet because we won't have them placed in service for them.
Speaker Change: Some of them may be have an element placed in service in FY 'twenty five but some of them will continue into FY 'twenty.
Speaker Change: So the investment right now is in cash I would say that we could be in there.
Speaker Change: There's a variety of these types of platforms, but I would say they are outside of our investor day.
Speaker Change: Period, so beginning in FY 'twenty, seven and after for which we would start having some production revenue.
Speaker Change: Okay got it.
Speaker Change: And then outside of growth Capex, just can you give it give us an update on spending for the transformation and kind of what's on deck. This year. What are some of the bigger pieces you have to execute on in 2005.
Speaker Change: So so we're continuing to drive daily <unk> deployments John into the business. So I mentioned that we've deployed into 70% of the business to date.
Speaker Change: Just keep driving that through the coming year, we have some work to do on completing out footprint rationalization activities that are already started but we have an idea of several more to complete out during the course of the year as well. So there's more work to do during the year. The themes are the same as the themes we've been talking about over the <unk>.
Speaker Change: Prior years.
Speaker Change: All of it to drive simplification within the organization and therefore takeaway that complexity and costs associated with it.
Okay, Great and last one for me I was just wondering whats your forecast would've looked like I guess under the old rate of 787 production and maybe its too experience had been damaged by the storms.
Speaker Change: It certainly would have been higher we reflected what we've got in our current type.
Speaker Change: Types of those different trade offs associated with us.
Speaker Change: Want to make sure that we're balancing.
Speaker Change: But different things with different elements here, we want to make sure that we've got a stable supply chain and everything along those lines as well as making sure that we're not building up inventory. So our plans are really too.
Speaker Change: We put our plans in place that are going to make sense for keeping that healthy supply chain. So that we are ready to ramp when our customers are ready to ramp and not building excess inventory in the meantime.
Speaker Change: So we don't have a pre model as far as where that is that we'll share but it's really.
Speaker Change: It's reflective of a lower level of sales activity than we previously had projected.
John just on the the Tewkesbury capacity constraint, we're not anticipating that resulted in us losing the business.
Speaker Change: Think it pushes some business out into the start of 2006.
The amount that gets pushed out as a little bit dependent on the pace at which we can.
Speaker Change: Regained full capacity at the Tewksbury sites. So there is a couple of moving pieces, there, but it's not lost business.
Okay, Great. That's very helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question is coming from Kristine <unk> with Morgan Stanley.
Speaker Change: Hi, This is Justin on for Kristine. This morning, Thanks for taking the question.
Speaker Change: I wanted to ask on <unk>.
Speaker Change: Mentioned strength in European Defense sales, maybe you could just touch on the trends Youre seeing in terms of overall international mix in defense and how fast do you see that growing and maybe how that might impact margins going forward.
Speaker Change: So I think the.
Speaker Change: The feeling of insecurity in Europe is pretty high with what's going on in the Ukraine Russian War and it has certainly changed perspective, there and that has resulted in increased defense commitments as a percent of GDP in many of the countries across Europe.
Speaker Change: Youre seeing that.
Speaker Change: Having an impact on the industry and the industry in some cases it doesn't have the capacity to keep up with that.
Speaker Change: That increased spend commitment thats in Europe, and we're seeing it as a pull through and modernization of platforms and.
Speaker Change: Fleet readiness activity. So we've got a lot more work going through our German operation as a consequence of.
Speaker Change: <unk>.
Speaker Change: The readiness requirement I guess in Europe at the moment I think there is.
Speaker Change: Further work in opportunity for newer platforms in the future that's not what we're seeing at the moment, what we're seeing at the moment is a pull through on existing platforms, but it is a significant lift up in the size of that European business European business as a percent of our overall is not huge as a percent of our overall debt.
Speaker Change: <unk> business.
Speaker Change: It's not insignificant, but it's not huge but it has doubled over the course of the last two years.
Speaker Change: And that's why as Jennifer mentioned, we've invested in increasing our facility footprint in Germany. We've added another building to be able to accommodate the work that's going on there.
Speaker Change: So we see it as really positive.
Speaker Change: It is at the moment on the ground vehicle activity, but there are more opportunities out there that we're pursuing as well in a wider range of domains.
Speaker Change: Got it that's helpful. And then maybe just sneak one more on the <unk> situation.
Speaker Change: Great if I could be.
Speaker Change: Tough to get precise, but let me just how youre thinking about when you might be able to get that facility back up performing to pre flood levels, yes.
Speaker Change: Yeah. So let me, let me give you a little bit more color about that and Justin.
Speaker Change: The notes that we had robust business continuity plans, we have just consolidated our operations in tewkesbury into a brand new facility, which was which we took the keys over a year ago. We moved all of our manufacturing equipment in there and we were seven days ahead of an official opening of that site when it was <unk>.
Speaker Change: By this floor. So it was a really.
Speaker Change: Crushing incident for the SaaS on site, who have invested so much time and effort and setting that facility of our for the future. However, when when the slot happened we had all hands on deck 24 hours a day I would say people work totally committed walk through weekends to see what we could do.
Speaker Change: And we had installed I would say redundant facilities at the site. So we have two different types of oil that are used in our hydraulic product. We had two separate development labs fitted out and what we were able to do was move what was.
Speaker Change: Standard production into those development labs and to get running again within about a week or a week and a half of the flood event in those.
Speaker Change: The two development labs, they won't give us full capacity at the site, but we are certainly over 50% capacity with that capability already on stream.
Speaker Change: The work that we have to do during the course of the year is to rebuild the clean room in Tewkesbury and that will get us back to the full capacity. So its not that were knocked out we're open running again, we just don't have the full capacity available.
Speaker Change: And we believe that we can regain that during the course of the fiscal year.
Speaker Change: Got it that's super helpful Best of luck on that front.
Speaker Change: Thank you.
Speaker Change: And it appears there are no additional questions in the queue I will now turn the call back to Pat <unk> for any closing remarks.
Pat Roche: So thank you very much for joining us today on the call.
Pat Roche: I look forward to talking to you again in January. Thank you for your time Bye now.
Speaker Change: This concludes today's call. Thank you for your participation you may now disconnect.
Okay.