Q1 2025 Moog Inc Earnings Call
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Speaker Change: Good morning, ladies and gentlemen, and welcome to locate first quarter fiscal 2025 earnings conference call.
This time all lines are in a listen only mode.
Speaker Change: During the presentation, we will conduct a question and answer session and instructions will be provided at that time for you or a question.
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Speaker Change: I would now like to try to control the era.
Speaker Change: Director of Investor Relations. Please go ahead.
Speaker Change: Good morning, and thank you for joining <unk> first quarter 2025 earnings release conference call.
Speaker Change: Astrakhan.
Pat Roche: With me today is Pat Roche, our Chief Executive Officer, and Jennifer Walter Our Chief Financial Officer.
Pat Roche: Earlier. This morning, we released our results and our supplemental slides both of which are available on our website.
Pat Roche: Our earnings press release or supplemental slides and remarks made during our call today contains adjusted non-GAAP results reconciliations.
Pat Roche: Reconciliations for these adjusted results to GAAP results are contained within the provided materials.
Pat Roche: Lastly, our comments today may include statements related to expected future results and other forward looking statements, which are not guarantees.
Pat Roche: 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'm 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 the first quarter financial and operational performance and an updated outlook for the year.
Pat Roche: We've delivered a great quarter with strong sales growth.
Pat Roche: Impressive bookings and solid margin enhancement.
Pat Roche: We are delivering value for our customers and we're being rewarded with significant program wins.
Pat Roche: Our operational initiatives.
Pat Roche: We'll deliver continued margin enhancement and strong free cash flow in the second half of fiscal 'twenty five.
Pat Roche: Now let me provide further detail on our operational initiatives that are driving this strong performance firstly, our customer focus our performance in delivering for our customer. So that's put us in a great position to pursue and capture significant opportunities.
Pat Roche: Rising from broad based defense demand.
Pat Roche: We secured record quarterly bookings of over $450 million.
Pat Roche: In our space and defense segment.
Pat Roche: These wins cover a range of applications and leverage our technical leadership and our operational performance.
Close to half of the bookings or within our missile business with the largest single award being a production order for over $100 million from Lockheed for the control actuation system on the pad III program.
Pat Roche: We also captured initial bookings on collaborative combat aircraft platforms, demonstrating the relevance of our technology in this fast moving segment.
Pat Roche: Bookings were also very impressive and commercial aircraft with close to $400 million in orders with almost 60% aftermarket content.
Pat Roche: We continue to grow our customer base for both total support with additional long term agreements with airlines around the world.
Pat Roche: In December the German government delivered to the Ukrainian armed forces.
Pat Roche: <unk> of 54 self propelled arce H 155 howitzers produced by K NDA.
Pat Roche: In support of our growing defence business in Europe, We've recently added manufacturing space to our booking at sites in Germany.
Pat Roche: Next turning to people community and planet I want to return to the impact of extreme weather with an update on <unk>.
Pat Roche: As you May recall, we experienced severe damage to our kicks pre commercial aircraft facility in September.
Pat Roche: I am pleased to report that we have regained production capacity within eight weeks of the event.
Pat Roche: This is a remarkable achievement, it's a credit to the dedication of our staff who continue to drive the recovery. So that we can deliver on our customers' commitments.
Pat Roche: Reinstatement of our production facility will continue through fiscal 'twenty five.
Pat Roche: It is heartbreaking to see the loss of life and the destruction wrought by the wildfires in Los Angeles, we are concerned for all of those impacted including our staff at our Torrance and Chatsworth operations.
Pat Roche: To date, there has been no impact on our facilities.
Pat Roche: We published our second sustainability report in December 2024.
Pat Roche: In its broadest sense sustainability is about adapting to the evolving needs of our stakeholders and.
Pat Roche: And we've made significant strides.
Pat Roche: Highlights include <unk> emission reduction through <unk> upgrades and the deployment of solar arrays.
Pat Roche: Installation of water purification projects in our communities in India, and the Philippines and progress in tackling hazardous wastes.
Pat Roche: In addition, we made a commitment to cut water consumption by 20% relative to fiscal 'twenty two baseline in areas that are designated water stressed and to better manage our water resources across our footprint.
Pat Roche: In relation to supporting sustainable aviation industry.
Pat Roche: We are pleased to be collaborating with jet zero under blended wing body demonstrator, which promises to have fuel burn and emissions as a step towards net zero carbon emissions by 2050 mortgage providing that the flight control actuation on this aircraft.
Pat Roche: Finally, turning to financial strength, we continue to make excellent progress on driving margin enhancement through pricing and simplification.
Pat Roche: Our execution is in line with our Investor day commitments, we continue to simplify our operations and the transfer of all production from a retro to Virginia Motors manufacturing site is complete and we will soon exit that facility.
Pat Roche: This completes the consolidation of our industrial electric motors in the U S to our focused factory in Murphy North Carolina.
Pat Roche: In addition in November we entered a collective.
Pat Roche: Process with staff on the proposed closure of our slip ring manufacturing site and reading in the United Kingdom. The consultation process will conclude by end of January.
Pat Roche: Yes.
Pat Roche: We expanded 80 20 deployment to cover 75% of our business by sales and trained more than 60 leaders, bringing the total to over 900, we're on our plan to deploy to all manufacturing locations by the end of fiscal 2006.
Pat Roche: We continue to develop our capabilities and are using insights gained to drive productivity and reduce complexity in the business. We are building momentum by using our own success stories to educate the wider organization and to show what is possible through 2020.
Pat Roche: It's partially the 'twenty, we've continued to expand the voice of the customer interviews and we're using that feedback to drive improvement further building customer loyalty.
Pat Roche: Finally during a recent visit to our German industrial manufacturing facilities I saw firsthand the strong commitment to driving production efficiency achieved through innovation within our manufacturing process and the integration of robotics and automation.
Pat Roche: Now turning to the macroeconomic and end market conditions.
Pat Roche: With a change of administration in Washington. This week, let me start with a few comments on our defense business.
Pat Roche: The geopolitical environment remains extremely challenging.
Pat Roche: Does the recent ceasefire in Gaza is an extremely welcome development. There is still an ongoing war in Ukraine intentions over Taiwan.
Pat Roche: The threat from growing military capability of near peers is undiminished.
Pat Roche: Sequentially. There is no lessening of the need to replenish arsenals over the next few years to modernize and upgrade existing platforms and to develop new strategic capabilities.
Pat Roche: For these reasons, we believe that our FY 'twenty five guidance is solid and we foresee continued expansion in our defense business based on our significant bookings.
Pat Roche: Whilst the new administration will certainly define its own department of defense priorities, we believe that our broad based exposure across all defense domains positions us well.
Pat Roche: In addition, we expect to see continuing growth in international demand.
Pat Roche: Okay.
Pat Roche: The new administration will likely introduce tariffs, although it is not clear how widely they will be applied not what level.
Pat Roche: We've experienced the impact of tariffs in the past and we will work with our customers and suppliers to mitigate any impact.
Pat Roche: On the commercial side, we remain optimistic that wide body platforms will ramp in fiscal 'twenty six given the feedback received from our customers and their actions.
Pat Roche: The fact that Boeing recently announced a $1 billion investment into its Charleston facility, a strong commitment to the 787 ramp plan.
Pat Roche: Airbus also reaffirm their <unk> hundred 50 ramp plan.
Pat Roche: We're well positioned to support this and we look forward to that increased demand flowing through our business.
Pat Roche: Finally, the industrial business is stabilized despite the soft market conditions in.
In fact, our book to Bill ratio was greater than one for the first time in two years.
Pat Roche: Now, let's turn to the guidance for fiscal 'twenty five.
Pat Roche: We had a good start to the fiscal year and we are maintaining our full year guidance.
Pat Roche: This means solid revenue growth strong adjusted operating margin improvement in line with our Investor plan and a significant improvement in free cash flow relative to fiscal 'twenty four.
Pat Roche: Our revenue guide is unchanged with just minor updates by segment to reflect what was achieved in quarter, one and the impact of unfavorable exchange rates within the industrial business.
Pat Roche: Our margin guide also remains unchanged.
Pat Roche: Finally, our free cash flow is unchanged for the year.
Whilst our use of cash in the quarter was high we have a clear line of sight to its improvement in quarter, three and strong cash flows for the back half of the year.
Pat Roche: Now, let me hand over to Jennifer with a more detailed breakdown on the quarter and our guidance. Thanks.
Jennifer: Thanks, Pat I'll begin with our first quarter financial performance I will then provide an update on our guidance for FY 'twenty five.
Jennifer: We had a great start to the year from an earnings perspective sales were up nicely over last year's first quarter and adjusted operating margin and earnings per share were strong.
We continue to simplify our business as a result, we took a $6 million of charges.
Jennifer: So any associated with our footprint rationally rationalization activities in the first quarter.
Jennifer: I'll now talk through our first quarter adjusted results, which exclude these charges.
Jennifer: Sales in the first quarter of $910 million were 6% higher than last year's first quarter military aircraft commercial aircraft and space and defense sales were up considerably.
Jennifer: While industrial sales were down due to our simplification efforts.
Jennifer: The most significant increases in segment sales were in military aircraft in commercial aircraft.
Jennifer: Military aircraft sales of $213 million were up 15% over the first quarter of last year.
Jennifer: Activity on the Flyer program began to ramp midway through FY 'twenty, three and has steadily increased since that time accounting for half of the sales increase this quarter.
Jennifer: In addition over the past couple of years certain other development.
Jennifer: These into production and we're seeing a ramp in that production that will continue for the next few years.
Jennifer: Commercial aircraft sales of $221 million increased 14% over the same quarter a year ago.
Jennifer: Aftermarket sales were particularly strong it was a good quarter for repair activity. In addition, we're partnering with airlines to ensure they can meet early demand on this clean and this resulted in strong conversion interest bearing.
Jennifer: In addition, OE sales were up due to the timing of orders.
Jennifer: Second half of FY 'twenty.
Jennifer: Short term delay in sales and we're now seeing those orders catch up, thereby increasing our sales.
Jennifer: Based on defense sales of $248 million increased 8% over the first quarter last year, we're seeing broad based defense demand that's driving that growth within this segment.
Jennifer: This quarter the growth is most notable for European defense needs and satellite and launch vehicle activity.
Jennifer: Industrial sales were $228 million in the first quarter.
Jennifer: Down 7% from the same quarter a year ago.
Jennifer: Half of the decrease relates to the divestitures, we completed at the beginning of the first quarter otherwise.
Jennifer: Otherwise sales in our industrial automation business is stabilized.
Jennifer: <unk> with the fourth quarter last year and down from the strong level a year ago.
Jennifer: Strengthen our medical pump business, which reached a record high this quarter helped to offset this decline as we benefit from a customer from a competitor challenges.
Jennifer: We will now shift to operating margin.
Jennifer: Adjusted operating margin of 11, 8% in the first quarter was up from 11, 3% in the first quarter last year.
Jennifer: Adjusted operating margins increased over the first quarter of last year in each of our segments.
Jennifer: We achieved margin expansion, despite 80 basis points of pressure from recording an out of period warranty expense this quarter.
Jennifer: The most impactful increase was in space and defense, where operating margin increased 90 basis points to 11, 9%.
Jennifer: This increase is associated with our strong growth, partially offset by a less favorable program mix and investments to prepare for upcoming major program.
Jennifer: Industrial operating margin was 13, 2% in the first quarter up 60 basis points.
Jennifer: This increase is attributable to benefits from simplification initiatives, including the divestitures, we completed at the beginning.
Jennifer: Sure.
Military aircraft operating margin was 11, 8% in the first quarter 50 basis points higher than in the first quarter last year, we benefited from efficiencies associated with higher volume on the Flyer program and lower research and development expense.
These benefits were partially offset by a less favorable sales mix.
Jennifer: Commercial aircraft operating margin was 11 point out.
Jennifer: Up 40 basis points from the first quarter last year underlying operational performance was robust.
Selecting very strong aftermarket sales.
Jennifer: This strength was largely offset by 340 basis points of pressure related to recording the out of period warranty expense.
Putting it altogether adjusted earnings per share came in at $1 78 up 16% compared to last year's first quarter. Despite 2018.
Jennifer: <unk> associated with the out of period expense.
Jennifer: The increase is attributable to higher operating margin and additional operating cost associated with higher sales.
Jennifer: Let's shift over to the cash flow in the first quarter, we used $165 million of free cash flow.
Jennifer: Use of cash was driven by working capital requirement.
Jennifer: Use of cash for physical inventory to support future sales growth.
Jennifer: We also used cash for receivables as our strong collections in the first and the fourth quarter last year less left to collect this quarter.
Jennifer: In addition timing of compensation payments impacted us in the first quarter.
Jennifer: Capital expenditures at $33 million were relatively light compared to recent quarter, we're continuing to invest in facilities and equipment to support longer term growth opportunities the lower level of capital expenditures. This quarter simply reflects timing and we're expecting to pick up next quarter.
Jennifer: Capital expenditures represent a key opportunity for us to invest for organic growth and this continues to be a priority within our capital allocation strategy.
Jennifer: Over time, we strive to have a balanced approach to capital allocation in that regard, we repurchased roughly 220000 shares of our stock in the first quarter spending just over $40 million.
Jennifer: In addition, we remain committed to our dividend policy and as announced we're increasing our quarterly dividend by 4% to 29 per share.
Jennifer: Our leverage ratio was two four times as of the end of the first quarter nicely within our target range of two to three times.
Jennifer: We will now shift over to our updated guidance for this year, which is unchanged from 90 days ago at a company level.
Jennifer: Fiscal year 2025 is shaping up to be another strong year with growth in sales continued operating margin expansion and enhanced free cash flow generation.
Jennifer: Both pricing and simplification will drive our operating margin expansion this year, while our focus on optimizing our planning and sourcing activities will contributed to our significant cash generation in the back half of this year.
Jennifer: We're projecting sales of $3 7 billion.
Fiscal year, 'twenty, 5% to 3% increase compared to fiscal year 'twenty four we're projecting sales growth in space and defense commercial aircrafts and military aircraft and expecting a decrease in sales in industrial.
Jennifer: We're maintaining our sales guidance for FY 'twenty five that we shared a quarter ago with a modest shift between segments to reflect what we've seen in the first quarter.
Jennifer: We're increasing our sales guidance in commercial aircraft by $20 million to reflect the strong first quarter aftermarket activity.
Jennifer: We're increasing sales guidance for military aircraft by $10 million <unk>.
Jennifer: To reflect our current run rate.
Jennifer: And we are decreasing sales guidance by $30 million in industrial to reflect the weakening of foreign currencies against the U S. Dollar that we saw in the first quarter.
Jennifer: We're holding our adjusted operating margin for FY 'twenty five at 13, 8%, a 60 basis point increase over FY 'twenty for a 120 basis points. After factoring out FY 'twenty for employee retention credit in FY 'twenty five out of period warranty expense.
Jennifer: Operating margins will be 14, 2% in space and defense.
Jennifer: 14, 1% and military aircrafts, 11, 8% and commercial aircrafts and 13, 4% and industrial all the same as our previous guidance.
Jennifer: We are affirming our FY 'twenty five adjusted earnings per share guidance at $8 20.
Jennifer: Plus or minus 20.
Jennifer: That's up 5% over FY, 'twenty, four or 14% normally normalizing for this year's out of period expense in last year's benefits that are not reflective of our operational performance.
Jennifer: For the second quarter, we're forecasting earnings per share to be $1, 75, plus or minus 10%.
Jennifer: This reflects a similar operating margin in Q2 relative to Q1 with neither the out of period warranty expense, nor the extraordinary commercial aftermarket strength.
In Q2.
Finally, turning to cash we're still projecting free cash flow conversion in FY 'twenty five to be in the 50% to 75% range a solid improvement from the modest level of cash we generated in FY 'twenty four.
Jennifer: Free cash flow in the second quarter will improve markedly from the first quarter as we are projecting no cash usage in the second quarter.
Jennifer: The real improvement, though will be in the back half of the year as we reduce inventories from our planning and sourcing activities and collect on receivables.
Jennifer: Overall, FY 'twenty five the shaping up another great year.
Pat Roche: And now I'll turn it over to Pat.
Pat Roche: Thank you Jennifer our first quarter was a strong start to the fiscal year. It provides us with increased confidence in our guidance for the year and we will continue to see our performance improvements reflected in those results now lets turn it over to your questions.
Pat Roche: Okay.
Pat Roche: Thank you.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.
Speaker Change: You have a question. Please press the star followed by the one on you touched on filings.
Speaker Change: <unk> will be taken into order receipt.
Speaker Change: Should you wish to cancel your question. Please question Star followed by the Taylor.
Speaker Change: Using a speaker phone. Please go ahead to handsets quick question any case.
Speaker Change: Once again that is star one should you wish to ask a question.
Speaker Change: And your first question is from John Tomlinson Thomas CJS Securities. Your line is now open.
Speaker Change: Hi, Good morning, Thank you for taking my questions.
Speaker Change: First one Pat I was wondering if you could talk about your CCA involvement. It's nice to hear you are having some activity there how much of an opportunity is that relative to other large programs such as Florida F 35, and kind of when do you see that layering in.
Hi, John welcome to the call. Thanks for the question.
Speaker Change: Yes, I think the reason for indicating our work on CCA is to is to say that we have relevant technologies that we can offer in this space. We have been engaged in conversations on several of the CCA programs and we have development activity underway to prove out our.
So it's early stages I would describe.
But as a mechanical component supplier into these we feel that we have a valuable rule that we can provide on the flight controls side.
Speaker Change: Okay.
Speaker Change: And are you involved with all the players who are competing there or is it just one or two of those platforms.
Speaker Change: Yes, it's in the one.
Speaker Change: There are two.
Speaker Change: It's less than a handful at this point.
Speaker Change: Got it Okay, and then I was wondering if you could talk about the Boeing investment and the 787 production line I was wondering.
Speaker Change: How much capacity does that enable for them or is that more just catching back up to where they were producing before COVID-19.
Speaker Change: A little more detail on that and kind of what kind of forecast of their production rates in the future. If Scott if you have that kind of detail.
Speaker Change: Yeah, I mean, Boeing is still working towards.
Speaker Change: Achieving a rate of 10 for the 787 wide body aircraft.
Speaker Change: By the end of fiscal 2006, so that's that's the goal and the investment is to enable them to achieve that through the Charleston facility.
Speaker Change: Okay understood and then finally I was wondering how you drove some of the.
Speaker Change: Aftermarket orders with in the commercial space with Tewkesbury down is that just the test and how quickly we're getting it back up or is there other capacity or.
Speaker Change: Are those orders for future dates.
Speaker Change: Our repair work goes through both cheeks PREPA at other facilities around the world as well.
Speaker Change: We have quite a nice backlog of work on the aftermarket side. So we were able to get that through our production environments. So that's helped.
Speaker Change: Boost the sales level, we also provisioned.
Airlines directly with spares.
Speaker Change: <unk> them to ensure our fleet readiness so that was.
Speaker Change: What that came through within the quarter. So I would describe it as having a very strong book of business on the aftermarket side with the benefit of some additional work that we were able to push through during the quarter itself and if I turn to the Tewksbury site.
Speaker Change: I think we got back to having our interim production environment working.
Speaker Change: Relatively short period of time, which is allowing us get production through that plant again and meet the customer commitments, we actually still have quite an amount of work to do to rebuild the full production environment that gets us back to our let me say a full capacity, where we'd have some headroom and some additional capability or capacity available to us at the moment, we're very.
Speaker Change: Trained with what we have but we're working and we're getting stuff through the plant.
Speaker Change: Great. Thank you I'll jump back in queue.
John Tomlinson: Thank you very much John.
John Tomlinson: Okay.
John Tomlinson: Okay.
John Tomlinson: Thank you.
Speaker Change: Next question is from Michael <unk> from <unk> Securities. Your line is now open.
Speaker Change: Hey, good morning, guys.
Speaker Change: Good morning, Nice results. Thanks for taking my question.
Speaker Change: Pat maybe just to stay on that that aftermarket a bit.
Speaker Change: And I don't know how you want to take this but you called out in the release.
Warranty expense, excluding that 14, 4% margins that looks to be a multi year high I guess.
Speaker Change: Two questions.
Speaker Change: Why do you cheer up to just adjust out that warranty expense I can't recall I check my notes on what the last time you had one of those charges were and I guess should we should we think about that level being sustainable it sounds like you've got a lot of aftermarket through some provisioning, but just trying to get some color on that 40.
Speaker Change: Eight 4% as it relates to.
Speaker Change: Kind of longer term targets and youre going to get some volume increases so how should we think about that.
Speaker Change: I think we had a really good quarter, obviously and if.
Speaker Change: If you back it out back out that one time expense. It was very strong and it is a record margin quarter for the commercial aircrafts group. So all that is correct Michael.
Speaker Change: Anticipate continuing strength in the aftermarket side, but we had the extra boost coming through from that provisioning and getting some of our.
Speaker Change: Q3 output back out again, so there's some gain coming from those things.
Speaker Change: We're just not banking on that repeating in the subsequent quarters, but we do still have a really solid level of aftermarket business plan.
Speaker Change: Planned and for the rest of the year.
Speaker Change: Okay.
Speaker Change: I think it is a positive it is a positive story, Michael about that strength in the aftermarket.
Speaker Change: Operational improvements on the commercial side.
Speaker Change: Got it fair to say more skewed towards aftermarket versus OE, there wasn't any additional pricing, maybe just kind of ongoing.
Speaker Change: Operational excellence improvements on the OE side.
Speaker Change: The aftermarket was a significant driver to the underlying performance that we saw in the operating margin performance.
Speaker Change: To your question as far as the out of period adjustment. Yes, you can think of this as it's not an ongoing type of thing it doesn't change our warranty expense going forward or anything like that that's why we tried to give you a trail to say how much was included in our numbers typically in our adjustments, we only keep things like restructuring and Noah.
Speaker Change: Types of activities in there.
Speaker Change: Yes, sure Jennifer do you have the commercial OE revenue growth in aftermarket growth in the.
Andy: In the quarter Andy.
Andy: Yes, they were they actually both grew after market was a little bit more of growth than the a little more than half of the growth compared to the total segment.
Andy: Okay perfect.
Andy: And then just shifting on industrial I think you called out the bookings were greater than book to Bill was greater than one time any color there what drove what youre kind of seeing in those markets. It sounds like.
Andy: You've got presumably better visibility here.
Andy: Whether or not that bookings trend kind of continues.
Andy: Yes.
Andy: I think this is a long running story, Michael what we've been talking about that softening of the of the economy in Germany, and then therefore, the softening in our orders as you know that predominantly affects the industrial automation piece of the business and we've had some counter balancing going on because medical has been strong.
Andy: We actually had record sales in our medical pumps business and this quarter, we had in prior quarters. Some strength in the simulation and test, which was helping us as well, but if I take those back out of it and I just focus on that industrial automation piece that industrial automation piece I believe is relatively stable at this point.
Andy: What I was saying in the fourth quarter and when I look forward I still have that view that we keep running at roughly the same level of industrial automation activity through fiscal 'twenty five.
Andy: Okay.
Andy: It's stable.
And the.
Andy: The book to Bill is a positive sign wed like to see that continue for another few quarters before we are certain that our business is picking up again, but thats still in line with what we built into the 25 plans by pipe by saying that it was going to be stable for the year.
Speaker Change: Got it Okay and then just one last one for me.
Speaker Change: Second quarter earnings guidance at the mid point sequentially down versus first quarter I think that's kind of an anomaly for you guys can you give any color as to why we should expect earnings to be down at the midpoint versus the first quarter here.
Speaker Change: Yes, largely largely it's about the same we've got when we think about the out of period and the warranty as we think about either one of those repeating into the next quarter to largely it's pretty much.
Speaker Change: Flat just.
Speaker Change: Now ticked down in EPS.
Speaker Change: Okay, Alright, thanks, guys I'll jump back in the queue.
Speaker Change: Thanks, Michael.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: Our next question is from Jack <unk> from JD Cowen. Your line is now open.
Jack: Yes, Hey, thanks, guys good morning.
Speaker Change: Good morning, John.
Speaker Change: Good morning, a quick question on cash Jennifer I would love to dig in on you burned $165 million. This quarter, just kind of moving forward. Some of the buckets of working capital I don't know if you want to hit on inventory or Unbilled, just how do we get conviction that free cash flow conversion guide reiterated.
Speaker Change: Thanks.
Speaker Change: Yeah.
Speaker Change: Yes, so I can go through it I'll start with Q2, then and then basically for the rest of the year.
Speaker Change: <unk> that we're going to see in Q2. So again I said, we're not going to have a use of cash in Q2, we're going to see it come across a number of places. So if I do it relative to where we were in Q1 physical inventories will improve we do have stronger shipments that we've got line of sight to and milestones that are going to help our physical.
<unk> inventory.
Speaker Change: We also had the compensation payments in Q1, which is normally happens in Q1. It doesn't happen in Q2. So that is actually another benefit from Q1 to Q2 as we look there.
Speaker Change: Customer advances is another one we do have some defense advances that are on the horizon for us that we expect to come in in the second quarter and finally in receivables, while still a use of cash not the level of use of cash that we have in the first quarter and the first quarter. We just had that access of level of <unk>.
Speaker Change: Sure because we had such strong collections in the fourth quarter, but we're seeing a little bit of an up and down which is quite typical for our receivables. So there is a number of things that are driving our improvement in the second quarter.
Speaker Change: As I mentioned, though the real improvement that we're going to see where we're going to generate the cash is going to be in our third and fourth quarters and thats going to be in a number of places physical inventories is a really important place for us.
Speaker Change: Again, we're going to have the strong operational performance there is milestones and things that we've got going on there.
Speaker Change: In physical inventory, we've got an increase in OE shipments.
Speaker Change: We're also taking efforts to constrain our incoming levels of inventory.
We're optimizing our buffer stock level. So that we are reducing it in the places where we can still meet our customers requirement, but not carry higher levels of inventory and we're reducing excess levels of production to only what we need in areas, where we can do that without risk taken delivery.
Speaker Change: We also have the benefit that Pat talked about as far as the tewkesbury output that three covering on the drawing down inventory and to the extent. We can we are delaying receipt and pushing out in the end in our supply chain we are.
Speaker Change: Starting these activities.
Speaker Change: It takes a little while for that to turn through so thats why we don't have the significant amount of relief in the second quarter, but we are projecting these things to materialize and get into our financial results in the back half of the year.
Speaker Change: Other area that we will see improvement in the back half of the year is going to be in receivables.
Speaker Change: We're looking to have the strong collections and then including on some milestones that are on the horizon as well. So we've got some visibility as far as that goes as well. So those will be the big drivers in the back half of the year.
Speaker Change: So with those activities that we've got in place the.
Speaker Change: The customer advances that we have line of sight to the collections that we've got in place, we're feeling confident to hold our 50% to 75% free cash flow conversion through the year.
Speaker Change: Okay.
Speaker Change: Okay. That's helpful and then.
Speaker Change: Yes go ahead, sorry, sorry, Jack I was just going to say, where we've been working to do.
Speaker Change: Drive increased profitability with defined initiatives. They have a similar approach now internally on cash flow. We know what we're trying to drive with the nature of the businesses and we're tracking that as we go through each of our internal reviews to make sure we are delivering.
Speaker Change: Okay.
Speaker Change: Yes, thats good insight.
Speaker Change: And then I guess, just switching gears back to commercial and I'm not sure.
Speaker Change: If you've covered it Pat just maybe an update.
Speaker Change: Right just kind of assumptions, maybe 780 <unk> hundred 50.
Speaker Change: Because it looks like commercial OE was actually up pretty strongly sequentially from Q4 to Q1.
Which is kind of surprising just just any any update on OE assumptions.
Speaker Change: Where you were and where you are kind of looking to go to 325 would be helpful. Thanks.
Speaker Change: So I think both of us are going to come in on this one Jack So just the first high level comments.
Speaker Change: When we.
Speaker Change: Sales of the FY 'twenty five plan, we had lots of conversations back and forth with the customers on the wide body programs, which are really important to our numbers.
Speaker Change: And we have strong alignment now between their plans and our plans and are very confident in those levels that we have loaded into.
Speaker Change: Into our plan.
Speaker Change: <unk> comment.
Speaker Change: Seeing no change in that over the last 90 days, so I would describe that as very stable for us at the moment and Jennifer you have some comments as well related to the back half of last year and the strong OE. This quarter is an element basically just a timing in the third quarter last year, we actually started to see a <unk>.
Speaker Change: Short term delay and that carried in both Q3 and in Q4 related to some orders of ordering patterns of our customer that has normalized and we have essentially caught up and those orders. So its really just affecting the timing of orders that has otherwise been very stable and normalize a little bit of a DAU.
Speaker Change: In depth and the last half of last year, when we actually got our sales guidance down now we've actually seen the catch up of those orders have fulfilled such that we could have that higher level that we saw this time so it's more.
Speaker Change: So we got a little bit of a pop from from that catch up.
Speaker Change: Got it thank you.
Speaker Change: Alright.
Speaker Change: Thank you.
Speaker Change: Next question is from Jon <unk> from CJS Securities. Your line is now open.
Jon: Hi, Thanks for the follow up I was just curious about the medical device business you had mentioned.
Speaker Change: <unk> achieved a record.
Speaker Change: Based on a competitor having challenges I'm wondering how long that window might be opened four and do you expect a reversal or just stabilization.
Speaker Change: If your competitor catches up.
Speaker Change: Think about the timeframe around those type of venues in the six or nine months period.
Speaker Change: It's a little bit of time to work through issues when they do arise and thats, what our competitors are experiencing.
Speaker Change: We've been gaining from this over the prior quarter and we will continue to fall.
Speaker Change: For the rest of the year. So we're up mid single digits to high single digits.
Speaker Change: Relative to the prior year.
Speaker Change: The product.
Speaker Change: Product lines.
Speaker Change: Okay and would you expect to give that back or more of maybe some of the share that you took when you can put on it.
Speaker Change: We would expect to hold John because once you get that fleet out into the field.
Speaker Change: <unk> exited the drawdown consumables from us as well so people don't like flipping are moving around too too much. So I think it's relatively sticky.
Speaker Change: Okay got it that's what I thought.
Speaker Change: Okay, and then just could you maybe provide a little more detail on your international exposure by currency I know you mentioned the headwind in the industrial business, but I know you do have foreign military sales as well as those sales in dollars or they are denominated in any other currency.
Speaker Change: Okay.
Speaker Change: So that question is relating to our sales rather than purchases is that right.
Speaker Change: No not on the territory line here, yes, okay.
Speaker Change: Just calling it off here.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Sorry, John we're nearly there.
Speaker Change: We can also do it offline later.
Speaker Change: Yes.
Speaker Change: Can you give a quick summary, now our sales regionally, let's say, 72% of sales for fiscal 'twenty four or in the U S, 18% and Europe, 3% in Asia Pacific and then seven and various other currencies around the world.
Speaker Change: Okay, great. Thank you.
Speaker Change: Thank you.
Moderator: There are no further questions at this time I will now hand, the call back to Patrick Lynch for any closing remarks.
Speaker Change: Thank you thanks very much for the questions everyone.
Patrick Lynch: That closes out our first quarter call. It's been a good quarter for us on a good start to the year strong sales record orders impressive margin performance. We have had heavy use of cash in the quarter, but we can see a line of sight to improving that in the back half of the year. So we remain confident in our full year <unk>.
Patrick Lynch: <unk>. So thank you for your time and attention and look forward to talking to you again on the next call.
Patrick Lynch: Thank you.
Ladies and gentlemen, the conference has now ended thank you all for joining you may all disconnect your lines.