Q2 2025 Moog Inc Earnings Call
Following the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press star zero for operator.
This call is being recorded on Friday April 25 2025.
I would now like to turn the conference over to Aaron Astrachan. Please go ahead.
Aaron Astrachan: Good morning, and thank you for joining Moog second quarter 2025 earnings release Conference call.
Patrick Roche: Given the prominence of the trade policy in the current environment, I want to address tariffs before talking further about our business. The new administration is driving change at a remarkable pace and on multiple fronts. of the many changes enacted by executive order, the most significant relate to trade policy and tariffs. Since these changes have created a climate of uncertainty, I want to spend some more time discussing the potential impacts and our mitigation. Over many decades our organization has optimized its manufacturing footprint and strategic supply chain to best meet the needs of our customers in an environment of global trade that was relatively free of tariffs.
I am Eric Astrakhan director of Investor Relations with me today is Pat Roche, our Chief Executive Officer, and Jennifer Walter Our Chief Financial Officer.
Aaron Astrachan: Earlier. This morning, we released our results and our supplemental slides both of which are available on our website.
Aaron Astrachan: Our earnings press release or supplemental slides and remarks made during our call today contains adjusted non-GAAP results.
Aaron Astrachan: Conciliations for these adjusted results to GAAP results are contained within the provided materials.
Aaron Astrachan: Lastly, our comments today may include statements related to expected future results and other forward looking statements, which are not guarantees.
Aaron Astrachan: 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.
Patrick Roche: In addition to investing in our U.S. manufacturing operations, we have also built up world-class manufacturing facilities in the Philippines, India, Ireland, Costa Rica, Germany, and the U.K. In addition, we developed overseas supply chain partnerships that have served us well for decades. This strategy allows us to access exceptional talent and create an economic benefit for Moog and its customers. The changes in U.S. tariffs within the last 100 days, but especially since April 2, altered the context in which we operate. We recognize that this situation is fluid and that it will be some time before tariff uncertainty is reduced.
Pat: Good morning, and welcome to our earnings call.
Pat: We've just delivered another quarter of strong financial results. The results are reflective of our unrelenting focus on improved business performance.
Pat: We achieved record sales and drove improved operating margin and earnings per share both net of prior year's employee retention credit in.
Pat: In addition, we delivered free cash flow in line with our plan.
Patrick Roche: Based on the tariffs in effect today, and our operations and supply chain footprint, we would be most impacted by tariffs that apply to the import of steel and aluminium. to the import of goods from around the world, but especially from our facilities and suppliers in Costa Rica, the Philippines, Mexico, the European Union, Canada, and the UK. In our assessment, we've assumed a 25% tariff on steel and aluminium, a 10% country tariff during the 90-day pause corresponding to our third quarter, and a higher reciprocal rate for the fourth quarter, and a 145% tariff on China. We've not attempted to estimate second-order effects on pricing, or on the economy, or disruption to supply chain and material availability.
Pat: We feel positive about the outlook for our business.
Pat: Year to date, our revenue is up 3% on prior year and we expect an increase in revenue in the second half with 12 month backlog up sequentially in our defense businesses.
Pat: Steady and industrial and slightly down in commercial.
Pat: Year to date, our adjusted operating margin excluding employee retention credit is up 40 basis points on prior year, and we expect stronger performance in the second half from our defense businesses due to secure pricing.
Pat: Finally, we expect to see significant free cash flow generation in the back half as previously indicated arising from our actions to optimize net working capital.
Heather Roche, Aaron Astrachan, Jennifer Walter, Aaron Astrachan, Jennifer Walter, Aaron Astrachan
Patrick Roche: In response, we've taken immediate and specific action to mitigate the impact of these tariffs on MOLC. These steps include maximum utilization of the U.S.-Mexico-Canada Agreement, The effective administration of import and re-export of goods that, by necessity, must return to the U.S. for repair and price adjustments, where appropriate, to reflect our new cost base. We will continue to assess our manufacturing footprint and strategic supply chain to ensure that we can deliver for our customers and perform for our shareholders. We will not act in haste, given the risk of disrupting these highly efficient supply chains that are critical to the global aerospace industry and to our many customers.
Pat: Given the prominence of the trade policy in the current environment I want to address tariffs before talking further about our business.
Pat: The New administration is driving change at a remarkable pace and on multiple fronts.
Pat: Many changes enacted by executive order the most significant relates to trade policy and tariffs. Since these changes have created a climate of uncertainty I want to spend some more time discussing the potential impacts and our litigations.
Year to date, our revenue is up 3% on prior year and we expect an increase in revenue in the second half with 12 month backlog up sequentially in our defense businesses.
Pat: Over many decades, our organization has optimized its manufacturing footprint and strategic supply chain to best meet the needs of our customers in an environment of global trade there was relatively free of tariffs.
Steady and industrial and slightly down in commercial.
Year to date, our adjusted operating margin excluding employee retention credit is up 40 basis points on prior year, and we expect stronger performance in the second half from our defense businesses due to secured pricing.
Patrick Roche: These strategic choices will be given due consideration over a longer period during which we expect more stability around tariffs. We see these tariffs as a potential risk in our business that is otherwise continuing to deliver extremely well. In addition, we believe that our end markets are supportive of further strengthening.
In addition to investing in our U S manufacturing operations. We have also built a world class manufacturing facilities in the Philippines, India, Ireland, Costa Rica, Germany, and the UK.
Finally, we expect to see significant free cash flow generation in the back half as previously indicated arising from our actions to optimize net working capital.
Pat: In addition, we developed overseas supply chain partnerships that have served us well for decades. This.
Given the prominence of the trade policy in the current environment I want to address tariffs before talking further about our business.
Patrick Roche: So let me describe each of our end markets, starting with defense. We continue to see strength in our defence businesses, both short-term and long-term. The Department of Defense budget for 2025 increased with the continuing resolution approved by Congress. And there have been indications that the President's 2026 budget request will be in excess of $1 trillion. Our portfolio of products and capabilities is well-aligned with the administration's key defense priorities such as sixth-generation fighters and collaborative combat aircraft, nuclear deterrence, and elements that could be integral to the Golden Dome, such as hypersonics, space vehicles, missiles, and counter-drone defense.
Pat: This strategy allows us to access exceptional talent and created economic benefit for Morgan its customers.
Pat: The changes in U S tariffs within the last 100 days, but especially since April 2nd Ultra the context in which we operate.
The New administration is driving change at a remarkable pace and on multiple fronts.
The many changes enacted by executive order the most significant relates to trade policy and tariffs. Since these changes have created a climate of uncertainty I want to spend some more time discussing the potential impacts and our mitigation.
Pat: We recognize that this situation is fluid and that it will be some time before tariff uncertainty is reduced.
Speaker Change: Good morning, ladies and gentlemen and welcome to the Moog Second quarter, fiscal year 2025, [inaudible]
Pat: Based on the tariffs in effect to date, and our operations and supply chain footprint.
Speaker Change: Over many decades, our organization has optimized its manufacturing footprint and strategic supply chain to best meet the needs of our customers in an environment of global trade that was relatively free of tariffs.
Pat: We would be most impacted by tariffs that apply to the import of steel and aluminium.
Pat: To the import of goods from around the world, but especially from our facilities and suppliers and Costa Rica facility in Mexico, The European Union, Canada, and the U K.
That's just fine, while I'm starting to listen only more to... [inaudible]
Speaker Change: Following the presentation, we will conduct a question and answer session.
Speaker Change: In addition to investing in our U S manufacturing operations. We have also built a world class manufacturing facilities in the Philippines, India, Ireland, Costa Rica, Germany, and the UK.
Patrick Roche: In addition, increased international defence spending, accessed through our extensive European operations, provides further opportunities for growth.
Pat: In our assessment, we've assumed a 25% tariffs on steel and aluminium at 10% country tariff during the 90 day cost corresponding to our third quarter and the higher reciprocal rate for the fourth quarter and the 145% tariffs on China, we have not attempted to estimate second daughter.
Patrick Roche: On commercial aerospace, our customers have strong order books but struggle with consistent production throughput. We've worked with our customers to maintain a stable production plan that supports their actual needs. Both wide-body OEMs are still intent on ramping in the near future. On the aftermarket side, we continue to see the benefits of increased airline activity.
Speaker Change: In addition, we developed overseas supply chain partnerships that have served us well for decades. This.
Speaker Change: This strategy allows us to access exceptional talent and create an economic benefit from Morgan its customers.
Pat: On pricing or on the economy or disruption to supply chain and material availability.
Speaker Change: The changes in U S tariffs within the last 100 days, but especially since April 2nd Ultra the context in which we operate we recognize that this situation is fluid and that it will be some time before tariff uncertainty is reduced.
Pat: In response, we have taken immediate and specific action to mitigate the impact of these tariffs on mode.
Pat: These steps include maximum utilization of the U S Mexico, Canada agreement the.
Patrick Roche: The industrial market outlook has been stable over the last couple of quarters and our bookings in the second quarter continue to support that view. In summary, in-market conditions continue to favour a significant portion of our business.
Speaker Change: Based on the tariffs in effect to date, and our operations and supply chain footprint we.
Pat: The effective administration of import and re export of goods that by necessity must return to the U S repair and price adjustments where appropriate to reflect our new cost base.
Speaker Change: We would be most impacted by tariffs that apply to the import of steel and aluminium.
Patrick Roche: Now let me turn to the initiatives that are driving our strong underlying operational performance as a business.
Speaker Change: To the import of goods from around the world, but especially from our facilities and suppliers and Costa Rica, Philippines, Mexico European Union, Canada, and the U K.
Pat: We will continue to assess our manufacturing footprint and strategic supply chain to ensure that we can deliver for our customers and perform for our shareholders.
Patrick Roche: Firstly, on customer focus.
Patrick Roche: The focus of the 40th Space Symposium was space as a warfighting domain. This highlights the significant emerging opportunities for Moog. for both components and complex systems of systems. We showcased our Meteor satellite with flight-proven, radiation-hardened electronics and hydrazine propulsion for high-thrust avoidance maneuvers. We also have delivered units for the National Security Space Mission. We also highlighted significantly enhanced computational capabilities in our space avionics. The addition of graphical processor units enables sensor data to be processed on orbit, an example of edge computing. While continuing the space team, we are delighted to see that United Launch Alliance's Vulcan rocket has successfully completed two certification launches and has been recently certified under the National Security Space Launch Program.
Pat: We will not act in haste given the risk of disrupting these highly efficient supply chains that are critical to the global aerospace industry and to our many customers.
Speaker Change: In our assessment, we have assumed a 25% tariffs on steel and aluminium.
Speaker Change: 10% contract tariff during the 90 day cost corresponding to our third quarter and the higher reciprocal rate for the fourth quarter and the 145% tariffs on China. We have not attempted to estimate second order effects on pricing or on the economy or disruption to supply chain and material availability.
Pat: These strategic choices will be given due consideration over a longer period during which we expect more stability around tariffs.
Pat: We see these tariffs as a potential risk in our business that is otherwise continuing to deliver extremely well.
Pat: In addition, we believe that our end markets are supportive of further strengthening so.
Speaker Change: In response, we have taken immediate and specific action to mitigate the impact of these tariffs unmarked police.
Pat: So let me describe each of our end markets starting with defense.
Pat: We continue to see strength in our defense businesses, both short term and long term.
Speaker Change: These steps include maximum utilization of the U S Mexico, Canada agreement the.
Pat: The department of Defense budget for 2025 increased with the continuing resolution approved by Congress.
Speaker Change: The effective administration of import and re export of goods that by necessity must return to the U S repair and price adjustments where appropriate to reflect our new cost base.
Pat: And there have been indications that the President's 2026 budget request will be in excess of one trillion.
Pat: Okay.
Pat: Our portfolio of products and capabilities as well is well aligned with the administration's key defense priorities.
Speaker Change: We will continue to assess our manufacturing footprint and strategic supply chain to ensure that we can deliver for our customers and perform for our shareholders.
Patrick Roche: Sustainability and digitization were the focus of the 34th Bauma Construction Exhibition, which is one of the largest trade shows in the world. We showcased our Terratech electric traction and actuation solutions and our ZQIP modular energy system for construction equipment. We were pleased to be recognized by Compact Equipment Magazine as having one of the show's top 10 equipment breakthroughs.
Pat: GE has sixth generation fighters and collaborative combat aircraft nuclear deterrence and elements that could be integral controls and Don.
Speaker Change: We will not act in haste given the risk of disrupting these highly efficient supply chains that are critical to the global aerospace industry and to our many customers.
Pat: Such as hypersonic vehicles missile and counter drone defense.
Speaker Change: These strategic choices will be given due consideration over a longer period during which we expect more stability around tariffs.
In addition increased international defense spending access through our extensive European operations and provides further opportunities for growth.
Speaker Change: We see these tariffs as a potential risk in our business that is otherwise continuing to deliver extremely well.
Pat: On commercial aerospace our customers have strong order books, but struggled with consistent production throughput.
Patrick Roche: We launched our next generation Curlin 8000 infusion pump at the 34th National Home Infusion Association Conference. This high-performance intravenous pump will be the mainstay of our market-leading IV business for decades to come. It demonstrates our commitment to the IV market given the decade-long journey through development and certification. These examples across various end markets highlight our continued investment in innovation to meet the evolving needs of our customers. Our innovation successes drive our steady organic growth. In addition, to further strengthen our relationship with our strategic customers and expand our business with them, we've continued to roll out our Voice of the Customer activities.
Speaker Change: In addition, we believe that our end markets are supportive of further strengthening.
Pat: We've worked with our customers to maintain a stable production plan that supports their actual needs.
Speaker Change: So let me describe each of our end markets starting with defense.
Speaker Change: We continue to see strength in our defense businesses, both short term and long term.
Pat: Both wide body Oems are still intent on ramping in the near future.
Speaker Change: The department of Defense budget for 2025 increased with the continuing resolution approved by Congress and there have been indications that the President's 2026 budget request will be in excess of one trillion.
Pat: On the aftermarket side, we continued to see the benefits of increased airline activity.
Pat: The industrial market outlook has been stable over the last couple of quarters and our bookings in the second quarter continued to support that view.
Speaker Change: Our portfolio of products and capabilities as well is well aligned with the administration's key defense priorities.
Pat: In summary, and market conditions continue to favor a significant portion of our business.
Such as sixth generation fighters and collaborative combat aircraft nuclear deterrents have elements that could be integral to the growth in them such.
Pat: Now, let me turn to the initiatives that are driving our strong underlying operational performance as a business.
Speaker Change: Such as hypersonic vehicles missile and counter drone defense.
Pat: Firstly on customer focus.
Patrick Roche: This work is providing valuable customer-specific insights, and our response to the feedback has indeed increased business with those customers. reinforcing the value of this work.
Pat: The focus of the 40th space Symposium was space as a warfighting domain. This.
Speaker Change: In addition increased international defense spending access through our extensive European operations provides further opportunities for growth.
Pat: This highlights the significant emerging opportunities for <unk>.
For both components and complex system of systems.
Patrick Roche: And finally, turning to financial strength, we continue to embed 80-20 as part of how we work. Our priority is driving deeper integration at the sites that have been through the first round of simplification. We're applying 8020 to address specific operational and business challenges at site level. For example, reducing inventory through better flow, simplifying the supply chain using 80-20 analysis, enhancing profitability based on insights from segmented P&L analysis, clarifying investment strategy at lower levels in the organization, and differentiating support for strategic customers to expand the business with them. In all cases, lessons learned and best practices are shared across the organization such that we can accelerate further improvement.
Speaker Change: On commercial aerospace our customers have strong order books, but struggled with consistent production throughput.
Pat: We showcased our meatier satellite with flight proven radiation hardened electronics and hydrazine propulsion for high thrust avoidance maneuvers.
Speaker Change: We've worked with our customers to maintain a stable production plan that supports their actual needs.
Pat: We also have delivered units to the national security space missions.
Speaker Change: Both wide body Oems are still intent on ramping in the near future.
Pat: We also highlighted significantly enhanced computational capabilities in our space avionics the.
Speaker Change: On the aftermarket side, we continued to see the benefits of increased airline activity.
Pat: The addition of graphical processor units enabled sensor data to be processed on orbit and example of edge computing.
Speaker Change: The industrial market outlook has been stable over the last couple of quarters now.
Speaker Change: Bookings in the second quarter continued to support that view.
Pat: While continuing to face team, we are delighted to see that United launch Alliance is Volkan rocket has successfully completed two certification launches and has been recently certified under the National Security space launch program.
Speaker Change: In summary, and market conditions continue to favor a significant portion of our business.
Speaker Change: Now, let me turn to the initiatives that are driving our strong underlying operational performance as a business.
Pat: Yeah.
Speaker Change: Firstly on customer focus.
Pat: Sustainability, and Digitization, where the focus of the 34th Biomet construction exhibition, which is one of the largest trade shows in the world.
Patrick Roche: Now, let me turn to the guidance for fiscal 25. We're driving business development and operational improvement in line with our long-term goals. We've performed well in the first half of the year and have confidence in the business outlook for the second half. Therefore, financial performance of the business is in line with our PRAR guide.
Speaker Change: The focus of the 40th the space Symposium was space as a warfighting domain.
Speaker Change: This highlights the significant emerging opportunities for mode.
Pat: We showcased our terror attack electric traction and actuation solutions, and our secret modular energy system for construction equipment.
Speaker Change: For both components and complex system of systems.
Speaker Change: We showcased our meatier satellite with flight proven radiation hardened electronics and hydrazine propulsion for high thrust avoidance maneuvers.
Pat: We were pleased to be recognized by contacting magazine as having one of the shows top 10 equivalent breakthroughs.
Patrick Roche: Tariffs present a potential risk that could impact our full-year results. The high level of uncertainty around the tariff landscape leads to a range of possible outcomes. We will provide an estimate of that impact.
Speaker Change: It also has delivered units to the national security space missions.
We launched our next generation Kurland 8000 infusion pump at the 34 <unk>.
We also highlighted significantly enhanced computational capabilities in our space avionics.
Jennifer Walter: And with that, let me hand over to Jennifer for a detailed breakdown on the quarter, an update on our guidance, and an estimate of the impact of those tariffs next of our mitigation Thanks, Pat. Our financial performance in the second quarter was strong, with a record level of sales, solid adjusted operating margin and adjusted earnings per share, and free cash flow as we had projected. We continue to simplify our business.
Pat: National Home Infusion Association conference. This high performance intravenous pump will be the mainstay of our market, leading IV business for decades to come that demonstrates our commitment to the IV market given the decade long journey through development and certification.
Speaker Change: The addition of graphical processor units enabled sensor data to be processed on orbit and example of edge computing.
Speaker Change: While continuing to space team, we are delighted to see that United launch Alliance is Volkan rocket has successfully completed two certification launches and has been recently certified under the National Security space launch program.
Pat: These examples across various end markets highlight our continued investment in innovation to meet the evolving needs of our customers our innovation successes drive our steady organic growth.
Jennifer Walter: As a result, we took $7 million of charges, largely associated with our simplification activities in the second quarter. I'll now talk through our second quarter adjusted results, which exclude these charges. Sales in the second quarter of $935 million were just above last year's second quarter. Military aircraft and commercial aircraft sales were up nicely, and space and defense sales were up marginally, exceeding their prior record, while industrial sales were down due to our simplification efforts. In military aircraft, sales of $214 million were up 6% over the second quarter of last year. Activity on the FLARA program began to ramp midway through FY23 and increased steadily through FY24, driving the sales increase this quarter.
Speaker Change: Sustainability, and Digitization, where the focus of the 34th biomass construction exhibition, which is one of the largest trade shows in the world.
Pat: In addition to further.
Pat: Strengthen our relationship with our strategic customers and expand our business with them. We've continued to rollout our voice of the customer activities.
Speaker Change: We showcased our terror attack electric traction and actuation solutions, and our <unk> modular energy system for construction equipment.
Pat: Work is providing valuable customer specific insights and our response to the feedback has indeed increased business with those customers.
Speaker Change: We were pleased to be recognized by contacting magazine as having one of the shows top 10 equivalent breakthroughs.
Pat: Enforcing the value of this work.
Pat: Finally, turning to financial strength.
Speaker Change: Yeah.
Speaker Change: We launched our next generation Kirtland 8000 infusion pump at the 34.
Pat: We continue to embed 80, 20 as part of how we work our priority is driving deeper integration at the sites that have been through the first round of simplification.
Speaker Change: National Home Infusion Association conference. This high performance intravenous pump will be the mainstay of our market, leading IV business for decades to come that demonstrates our commitment to the IV market given the decade long journey through development and certification.
Pat: We're applying the 80 20 to address specific operational and business challenges at site level.
Pat: For example, reducing inventory through better flow simplifying the supply chain using 80 20 analysis enhancing profitability based on insights from segmented P&L analysis.
Jennifer Walter: Commercial aircraft sales of $216 million increased 4% over the same quarter a year ago. Aftermarket sales were particularly strong, driven in part by strong fleet utilization on the A350 program. The aftermarket sales increase was partially offset by lower sales on certain business jets and narrow body programs for which our customers have experienced disruption and delays in production. Space and defense sales were $270 million, up 1% over the second quarter last year. Our sales this quarter were at a record level, reflecting broad-based defense demand. Industrial sales were $234 million in the second quarter, down 7% from the same quarter a year ago.
Speaker Change: These examples across various end markets highlight our continued investment in innovation to meet the evolving needs of our customers our innovation successes drive our steady organic growth.
Pat: Clarifying investment strategy at lower levels in the organization and differentiating support for strategic customers to expand the business with them.
Speaker Change: In addition to further.
In all cases lessons learned and best practices are shared across the organization such that we can accelerate further improvement.
Speaker Change: <unk>, our relationship with our strategic customers and expand our business with them. We've continued to rollout our voice of the customer activities.
Pat: Now, let me turn to the guidance for fiscal 'twenty five.
Speaker Change: This work is providing valuable customer specific insights and our response to the feedback has indeed increased business with those customers reinforcing the value of this work.
Pat: Driving business development and operational improvement in line with our long term goals with performed well in the first half of the year and our confidence in the business outlook for the second half therefore financial performance of the business is in line with our prior guidance.
Speaker Change: Finally, turning to financial strength, we continue to embed 80, 20 is part of how we work our priority is driving deeper integration at the sites that have been through the first round of simplification.
Jennifer Walter: Half of the decrease relates to the divestitures we completed at the beginning of this fiscal year. Other purposeful product exits also contributed to the sales decrease.
Pat: Tariffs present, a potential risk that could impact our full year results the high level of uncertainty around tariff landscape eight to a range of possible outcomes, we will provide an estimate of that impact.
Speaker Change: We're applying 80 20 to address specific operational and business challenges at site level for.
Jennifer Walter: We'll now shift to operating margin. Adjusted operating margin was 12.5% in the second quarter, which is down from 13.6% in the prior year. It should be noted, however, that the second quarter is up 40 basis points, excluding the benefit of the employee retention credit. This margin expansion is due to strength in industrial. Industrial operating margin was 13.4% in the second quarter, up 90 basis. This increase is attributable to benefits from simplification initiatives, including the divestitures completed at the beginning of this fiscal year. These benefits were offset partially by last year's employee retention credit benefits. Military aircraft operating margin was 12.0% in the second quarter, 140 basis points lower than in the second quarter last year.
Pat: And with that let me hand over to Jennifer for a detailed breakdown on the quarter and update on our guidance and an estimate of the impact of those tariffs net of our mitigation.
For example, reducing inventory through better flow simplifying the supply chain using 80 20 analysis enhancing profitability based on insights from segmented P&L analysis.
Jennifer: Thanks, Pat our financial performance in the second quarter was strong with a record level of sales solid adjusted operating margin and adjusted earnings per share and free cash flow as we had projected.
Speaker Change: Verifying investment strategy at lower levels in the organization and differentiating support for strategic customers to expand the business with them.
Speaker Change: In all cases lessons learned and best practices are shared across the organization such that we can accelerate further improvement.
Jennifer: We continue to simplify our business as a result, we took $7 million of charges largely associated with our simplification activities in the second quarter.
Speaker Change: Now, let me turn to the guidance for fiscal 'twenty five where.
Jennifer: I'll now talk through our second quarter adjusted results, which exclude these charges.
Speaker Change: We are driving business development and operational improvement in line with our long term goals with performed well in the first half of the year and our confidence in the business outlook for the second half therefore financial performance of the business is in line with our prior guidance.
Jennifer: Sales in the second quarter of $935 million were just above last year's second quarter military aircraft in commercial aircraft sales were up nicely and space and defense sales were up marginally exceeding our prior record while industrial sales were down due to our simplification effort.
Jennifer Walter: Last year, second quarter included two one time benefits, the employee retention credit, and the sale of a mature product line that we exited as part of our simplification effort. The lack of these items this quarter was partially offset by stronger business performance in this year's second quarter. Commercial aircraft operating margin was 11.8%, down 20 basis points from the second quarter last year. Our operating margin was pressured by customer production delays on certain business jet and narrow-body programs. Aftermarket strength offsets these pressures. In Space and Defense, Operating Margin decreased 330 basis points to 12.6%. This was driven by the benefit from the Employee Retention Credit in last year's second quarter.
Speaker Change: <unk> presents a potential risk that could impact our full year results.
Speaker Change: High level of uncertainty around tariff landscape <unk> to a range of possible outcomes, we will provide an estimate of that impact.
Jennifer: And military aircraft sales of $214 million were up 6% over the second quarter of last year.
Speaker Change: With that let me hand over to Jennifer for a detailed breakdown on the quarter and update on our guidance and an estimate of the impact of those tariffs net of our mitigation.
Jennifer: Pivoting on the Flyer program began to ramp midway through FY 'twenty, three and increased steadily through FY 'twenty four driving the sales increase this quarter.
Jennifer: Thanks, Pat our financial performance in the second quarter was strong with a record level of sales solid adjusted operating margin and adjusted earnings per share and free cash flow as we had projected.
Jennifer: Commercial aircraft sales of $216 million increased 4% over the same quarter a year ago.
Jennifer: Aftermarket sales were particularly strong driven in part by strong fleet utilization on the <unk> hundred 50 program.
Jennifer: We continue to simplify our business as a result, we took $7 million of charges largely associated with our simplification activities in the second quarter.
The aftermarket sales increase was partially offset by lower sales in certain business jet and narrow body programs for which our customers have experienced disruption and delays in production.
Jennifer Walter: Putting it all together, adjusted earnings per share came in at $1.92, down 12% compared to last year's second quarter, or up 3%, excluding last year's employee retention credit benefit. The increase is attributable to higher operating margins.
Jennifer: I'll now talk through our second quarter adjusted results, which exclude these charges.
Jennifer: Sales in the second quarter of $935 million were just above last year's second quarter military aircraft in commercial aircraft sales were up nicely and space and defense sales were up marginally exceeding our prior record while industrial sales were down due to our simplification effort.
Jennifer: Space and defense sales were $270 million up 1% over the second quarter last year.
Jennifer: Our sales this quarter were at a record level, reflecting broad based defense demand.
Jennifer Walter: Let's shift over to Cash Flow. In the second quarter, we generated $2 million of free cash flow. This quarter turned out as we had planned. Earnings were strong, cash use by net working capital requirements decreased significantly, and capital expenditures ran low compared to our planned run rate for the year. We secured customer advances on multiple defense programs as planned, halted the growth in physical inventories, and faced anticipated pressure on receivables due to the timing of collections. Capital expenditures of $38 million were generally in line with recent spend levels. We're continuing to invest in facilities and equipment to support longer-term growth opportunities.
Jennifer: Industrial sales were $234 million in the second quarter down 7% from the same quarter a year ago half of the decrease relates to the divestitures. We completed at the beginning of this fiscal year.
Jennifer: And military aircraft sales of $214 million were up 6% over the second quarter of last year.
<unk> on the Flyer program began to ramp midway through FY 'twenty, three and increased steadily through FY 'twenty four driving the sales increase this quarter.
Jennifer: Other purpose fault product exits also contributed to the sales decrease.
Jennifer: I will now shift to operating margins.
Jennifer: Adjusted operating margin was 12, 5% in the second quarter, which is down from 13, 6% in the prior year.
Jennifer: Commercial aircraft sales of $216 million increased 4% over the same quarter a year ago.
Jennifer: Should be noted however that the second quarter is up 40 basis points, excluding the benefit of the employee retention credit.
Jennifer: Aftermarket sales were particularly strong driven in part by strong fleet utilization on the <unk> hundred 50 program.
Jennifer: This margin expansion is due to strength in industrial.
Jennifer Walter: With respect to capital allocation, we return capital to shareholders in the form of share repurchases and dividend payments. We repurchased roughly 290,000 shares of our stock in the second quarter, spending about $60 million, bringing our total year-to-date spend to $100 million. In addition, we spent $9 million on our dividend policy, which remains unchanged. Our leverage ratio was 2.6 times as of the end of the second quarter, nicely within our target range of two to three times.
Jennifer: The aftermarket sales increase was partially offset by lower sales on certain business jet and narrow body programs for which our customers have experienced disruption and delays in production.
Jennifer: Industrial operating margin was 13, 4% in the second quarter up 90 basis points.
Jennifer: This increase is attributable to benefits from simplification initiatives, including the divestitures completed at the beginning of this fiscal year.
Jennifer: Space and defense sales were $270 million up 1% over the second quarter last year. Our sales this quarter were at a record level, reflecting broad based defense demand.
Jennifer: These benefits were offset partially by last year and player retention credit benefit.
Jennifer: Military aircraft operating margin was 12, 8% in the second quarter of 140 basis points lower than in the second quarter last year last.
Jennifer: Industrial sales were $234 million in the second quarter down 7% from the same quarter a year ago.
Jennifer: Last year's second quarter included two onetime benefits the employee retention credit and the sale of our mature product line that we exited as part of our simplification effort.
Jennifer Walter: will now shift over to our updated guidance for this year. Our underlying business is strong. We're reiterating guidance on sales, adjusted operating margin, and adjusted earnings per share from 90 days ago for our underlying business, with just minor adjustments. Sales are projected to be $3.7 billion, the same as previously guided, with a shift within commercial aircraft. OE sales on A350 are projected to slow, reflecting Airbus' current ordering patterns, while aftermarket sales continue to be robust. We're projecting an operating margin of 13.0% with some puts and takes that net out. We're reflecting a reduction in military aircraft due to the mix in that business and an increase in commercial aircraft on stronger aftermarket sales, both realized and expected.
Jennifer: The decrease relates to the divestitures, we completed at the beginning of this fiscal year. Other purposeful product exits also contributed to the sales decrease.
Jennifer: The lack of these items this quarter was partially offset by stronger business performance in this year's second quarter.
Jennifer: We will now shift to operating margins adjust.
Jennifer: Adjusted operating margin was 12, 5% in the second quarter, which is down from 13, 6% in the prior year.
Jennifer: Commercial aircraft operating margin was 11, 8% down 20 basis points from the second quarter last year, our operating margin was pressured by customer production delays on certain business jet narrow body program.
Jennifer: Should be noted however that the second quarter is up 40 basis points, excluding the benefit of the employee retention credit.
Jennifer: This margin expansion is due to strength in industrial.
Jennifer: Aftermarket strength offset these pressures.
Industrial operating margin was 13, 4% in the second quarter up 90 basis.
Jennifer: In space and defense operating margin decreased 330 basis points to 12, 6%.
Jennifer: This increase is attributable to benefits from simplification initiatives, including the divestitures completed at the beginning of this fiscal year.
Jennifer: This was driven by the benefit from the employee retention credit in last year's second quarter.
Jennifer: Putting it altogether adjusted earnings per share came in at $1 92 down 12% compared to last year's second quarter are up 3%, excluding last year's employee retention credit benefit.
Jennifer: These benefits were offset partially by last year and player retention credit benefit.
Jennifer Walter: Earnings per share is projected to be $8.20, plus or minus $0.20. We're now projecting free cash flow to be near the low end of the range we shared 90 days ago due to near-term pressure on physical inventories related to a change in Airbus's ordering patterns on the A350. We expect significant cash flow generation in the back half of this year with a considerable amount of cash generation in the third quarter and further improvement in the fourth quarter. The timing of collection on receivables will be a significant driver of our cash flow generation. The other key driver is physical inventories, which we'll reduce as a result of our planning and sourcing initiatives.
Jennifer: Military aircraft operating margin was 12 <unk> percent in the second quarter of 140 basis points lower than in the second quarter last year last.
Jennifer: The increase is attributable to higher operating margin.
Jennifer: Last year's second quarter included two onetime benefits the employee retention credit and the sale of our mature product line that we exited as part of our simplification effort.
Jennifer: Let's shift over to cash flow.
Jennifer: In the second quarter, we generated $2 million of free cash flow. This quarter turned out as we had planned earnings our strong cash used by networking capital requirements decreased significantly and capital expenditures ran low compared to our planned run rate for the year.
Jennifer: The lack of these items this quarter was partially offset by stronger business performance in this year's second quarter.
Jennifer: Commercial aircraft operating margin was 11, 8% down 20 basis points from the second quarter last year, our operating margin was pressured by customer production delays on certain business jet narrow body program.
Jennifer: We secured customer advances in multiple defense programs as planned although the growth in physical inventories and faced anticipated pressure on receivables due to the timing of collections.
Jennifer: Aftermarket strength offset these pressures.
Jennifer: Capital expenditures of $38 million were generally in line with recent spend level, we're continuing to invest in facilities and equipment to support longer term growth opportunities.
Jennifer Walter: We acknowledge the potential for pressure on our results from tariffs. We expect that commercial aircraft and industrial will be impacted the most, with a lesser impact in space and defense, a negligible impact in military aircraft. In commercial aircraft, we have an extensive global supply chain. Industrial is exposed to tariffs within our medical business that sources from our facility in Costa Rica. Within Space and Defense, our supply base includes countries that are subject to tariffs. Military aircraft supply chain in the U.S. is predominantly U.S.-based and therefore not meaningfully impacted. We are taking appropriate steps to significantly mitigate the impact on our business.
Jennifer: In space and defense operating margin decreased 330 basis points to 12, 6%. This was driven by the benefit from the employee retention credit in last year's second quarter.
Jennifer: With respect to capital allocation, we returned capital to shareholders in the form of share repurchases and dividend payments.
Jennifer: Putting it altogether adjusted earnings per share came in at $1 92 down 12% compared to last year's second quarter are up 3%, excluding last year's employee retention credit benefit.
Jennifer: We repurchased roughly 290000 shares of our stock in the second quarter spending about $60 million, bringing our total year to date spend to $100 million.
Jennifer: The increase is attributable to higher operating margin.
Jennifer: In addition, we spent $9 million on our dividend policy, which remains unchanged.
Jennifer: Let's shift over to cash flow.
Jennifer: In the second quarter, we generated $2 million of free cash flow. This quarter turned out as we had planned earnings our strong cash use by networking capital requirements decreased significantly and capital expenditures ran low compared to our planned run rate for the year we.
Jennifer: Our leverage ratio was two six times as of the end of the second quarter nicely within our target range of two to three times.
Jennifer: We will now shift over to our updated guidance for this year, our underlying business is strong we're reiterating guidance on sale adjusted operating margin and adjusted earnings per share from 90 days ago for our underlying business with just minor adjustments.
Jennifer Walter: After considering the actions we're taking to offset these risks and assuming current conditions persist, we're estimating the potential for $10 million to $20 million of net pressure on our operating profit guidance for FY25. Our estimate does not account for retaliatory tariffs and potential further escalations, nor does it include effects of negotiations to remove tariffs. It does not factor in the impact of second-order effects, non-tariff-related trade constraints, recessionary pressures, or other disruptive shocks to the supply chain or the economy.
Jennifer: We secured customer advances in multiple defense programs as planned although the growth in physical inventories and faced anticipated pressure on receivables due to the timing of collections.
Jennifer: <unk> sales are projected to be $3 7 billion.
Jennifer: Capital expenditures of $38 million were generally in line with recent spend level, we're continuing to invest in facilities and equipment to support longer term growth opportunities.
Jennifer: Famous previously guided with a shift within commercial aircrafts.
Jennifer: OE sales on <unk> hundred 50 are projected to slow, reflecting Airbus current ordering patterns, while aftermarket sales continued to be robust.
Jennifer: With respect to capital allocation, we returned capital to shareholders in the form of share repurchases and dividend payments.
Jennifer: We're projecting an operating margin of 13, 8% with some puts and takes that net out.
Jennifer: We repurchased roughly 290000 shares of our stock in the second quarter spending about $60 million, bringing our total year to date spend to $100 million.
Jennifer: We're reflecting reduction in military aircraft due to the mix in that business and an increase in commercial aircraft and stronger aftermarket sales both realized and expected.
Jennifer Walter: We expect third quarter earnings per share to be $2, plus or minus $0.10. This projection may be impacted by tariffs. Fiscal year 25 is shaping up to be another strong year, with growth in sales, continued operating margin expansion, and enhanced free cash flow generation.
Jennifer: In addition, we spent $9 million on our dividend policy, which remains unchanged.
Jennifer: Earnings per share is projected to be $8 20.
Jennifer: Mr Minus 20.
Jennifer: Our leverage ratio was two six times as of the end of the second quarter nicely within our target range of two to three times.
Jennifer: We're now projecting free cash flow to be near the low end of the range. We shared 90 days ago due to near term pressure on physical inventories related to a change in airbus's ordering patterns on the <unk> hundred 50.
Patrick Roche: And now I'll turn it back over to Pat. Thank you. Our second quarter delivered strong financial performance, and halfway through the year we're in good shape. We're guiding that the business will continue to perform well based on our view of the markets and our success in driving business improvement. We've actions in place to limit the potential impact of tariffs on our business.
Jennifer: We will now shift over to our updated guidance for this year, our underlying business is strong we're reiterating guidance on sales adjusted operating margin and adjusted earnings per share from 90 days ago for our underlying business with just minor adjustments.
Jennifer: We expect significant cash flow generation in the back half of this year with a considerable amount of cash generation in the third quarter and further improvement in the fourth quarter.
Jennifer: Sales are projected to be $3 7 billion. The same as previously guided with a shift within commercial aircrafts.
Operator: And with that, let me open up the floor to questions. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two.
Jennifer: The timing of collection on receivables will be a significant driver of our cash flow generation.
Jennifer: OE sales on <unk> hundred 50 are projected to slow reflecting Airbus is current ordering patterns, while aftermarket sales continued to be robust.
Jennifer: The other key driver is physical inventories, which will reduced as a result of our planning and sourcing initiatives.
Jennifer: We acknowledge the potential for pressure on our results from tariffs.
Jennifer: We're projecting an operating margin of 13, 8% with some puts and takes that net out we're reflecting a reduction in military aircraft due to the mix in that business and an increase in commercial aircraft and stronger aftermarket sales both realized and expected.
Jennifer: We expect that commercial aircraft and industrial will be impacted the most with a lesser impact on space and defense and negligible impact in military aircraft.
Operator: If you are using a speakerphone, please make sure to lift your handset before pressing any key.
Michael Ciarmoli: Your first question is from the line of Michael Ciarmoli from Truist Security. Your line is now open. Hey, good morning, guys. Thanks for taking the questions.
Jennifer: In commercial aircraft, we have an extensive global supply chain.
Jennifer: Earnings per share is projected to be $8, 20, plus or minus 20.
Jennifer: Industrial is exposed to tariffs within our medical business that sources from our facility in Costa Rica.
Jennifer Walter: Jennifer, just housekeeping first, do you have the commercial OE revenue growth and commercial aftermarket growth in the quarter? Yes. commercial, let's see, what were the other numbers? So our commercial OE for the quarter was about $135 million and our aftermarket was $81 million. that compares here. OE of 140 last year and 67. of Aftermarket. Got it. Okay, perfect.
Jennifer: We're now projecting free cash flow to be near the low end of the range. We shared 90 days ago due to near term pressure on physical inventories related to a change in air buses ordering patterns on the <unk> hundred 50.
Jennifer: Within space and defense our supply base includes countries that are subject to tariffs.
Jennifer: Military aircraft supply chain in the U S is predominantly U S based and therefore not meaningfully impacted.
Jennifer: We expect significant cash flow generation in the back half of this year with a considerable amount of cash generation in the third quarter and further improvement in the fourth quarter.
Jennifer: We are taking appropriate steps to significantly mitigate the impact on our business.
Jennifer: After considering the actions, we're taking to offset these risks and assuming current conditions persist. We are estimating the potential for $10 million to $20 million of net pressure on our operating profit guidance for FY 'twenty five.
Jennifer: The timing of collection on receivables will be a significant driver of our cash flow generation.
Jennifer: The other key driver is physical inventories, which will reduced as a result of our planning and sourcing initiatives.
Jennifer: Our estimate does not account for retail Atari tariffs and potential further escalation startups that include effects of negotiations to remove tariffs.
Jennifer: We acknowledge the potential for pressure on our results from tariffs.
Jennifer: We expect that commercial aircraft and industrial will be impacted the most with a lesser impact on space and defense and negligible impact in military aircraft.
Jennifer: Does not factor in the impact of second order effects non tariff related trade constraints recessionary pressures or other disruptive shocks to the supply chain or the economy.
Jennifer Walter: And then just, can you maybe, you talked about the A350, sort of, give us maybe a little bit more detail as, you know, what were you kind of shipping at? What are you expected? Is there going to be a destock period? And does this kind of resolve towards the end of the year? Or what kind of signals are you getting from Airbus?
Jennifer: In commercial aircraft, we have an extensive global supply chain.
Jennifer: Industrial is exposed to tariffs within our medical business that sources from our facility in Costa Rica.
Jennifer: We expect third quarter earnings per share to be $2, plus or minus 10.
Jennifer: This projection may be impacted by tariffs.
Jennifer: Within space and defense our supply base includes countries that are subject to tariffs.
Pat: Fiscal year 'twenty five is shaping up to be another strong year with growth in sales continued operating margin expansion and enhanced free cash flow generation and now I'll turn it back over to Pat.
Jennifer: Military aircraft supply chain in the U S is predominantly U S based and therefore not meaningfully impacted.
Jennifer Walter: Sure, yeah, so Airbus has changed their ordering patterns for us. We experienced this both in the third quarter and fourth quarter last year and caught up a little bit at the beginning of this year. So this is not something new for us.
Jennifer: We are taking appropriate steps to significantly mitigate the impact on our business.
Pat: Thank you our second quarter delivered strong financial performance and halfway through the year. We're in good shape, we're guiding that the business will continue to perform well based on our view of the markets and our success in driving business improvement we have actions in place to limit the potential impact of tariffs on our business and with that let me open up the floor to questions.
Jennifer: After considering the actions, we're taking to offset these risks and assuming current conditions persist. We are estimating the potential for $10 million to $20 million of net pressure on our operating profit guidance for FY 'twenty five.
Jennifer Walter: So what we, for A350, we've reduced our sales guidance. Our net sales guidance within commercial is flat because we've got the commercial OE going down, that's largely Airbus, being offset by the strength in the aftermarket. So those are offsetting each other. We've got inventory that's already built and we get very short-term orders from Airbus and that's how we release those orders. Because of the timing and how their ordering patterns are going now, we'll wind up holding on to some of that inventory. So that puts pressure on our cash. We'll see that pressure in our cash in the back half of fiscal year 25 and we expect that we will then recover that in FY26.
Jennifer: Our estimate does not account for retaliatory tariffs and potential further escalation startups that include effects of negotiations to remove tariffs.
Pat: Ladies and gentlemen, we will now begin the question and answer session.
Pat: Should you have a question. Please press star followed by the number one on your Touchtone phone, you'll hear a prompt that <unk> had has been raised.
Jennifer: Does not factor in the impact of second order effects non tariff related trade constraints recessionary pressures or other disruptive shocks to the supply chain or the economy.
Pat: Should you wish to decline from the polling process. Please press star followed by the number too.
Jennifer: We expect third quarter earnings per share to be $2, plus or minus 10.
Pat: You are using a speaker phone please make sure to lift your handset before pressing any keys.
Jennifer: This projection may be impacted by tariffs.
Michael SureMolly: Your first question is from the line of Michael sure Molly from tourists Security. Your line is now open.
Pat: Fiscal year 'twenty five is shaping up to be another strong year with growth in sales continued operating margin expansion and enhanced free cash flow generation and now I'll turn it back over to Pat.
Jennifer Walter: So that's really what we're seeing on the Airbus front. So it is impacting our sales from what we had previously projected and then we wind up holding that inventory for a little bit longer. So it's just the timing. Got it.
Michael: Hey, good morning, guys. Thanks for taking the questions.
Speaker Change: Jennifer just housekeeping first you have the commercial OE revenue growth in commercial aftermarket growth in the quarter.
Pat: Thank you our second quarter delivered strong financial performance and halfway through the year. We're in good shape. We're guiding this business will continue to perform well based on our view of the markets and our success in driving business improvement, we have actions in place to limit the potential impact of tariffs on our business.
Michael: Okay.
Michael: Yes.
Michael Ciarmoli: And then just the last one I have just on the cash. I mean, even at the low end, the 50% conversion, I mean, it implies, I guess, you know, 300 million or so cash generation second half. I don't really ever recall you guys doing anything that significant over 3Q, 4Q.
Michael: Yes.
Michael: The commercial update.
Michael: Yeah.
Michael: Yes.
Michael: Yes.
Pat: And with that let me open up the floor to questions.
Michael: Okay.
Speaker Change: So our commercial Oes for the quarter was about $135 million and our aftermarket was $81 million.
Pat: Ladies and gentlemen, we will now begin the question and answer session.
Jennifer Walter: Any other puts and takes? I mean, it sounds like 3Q will be stronger, but should we expect an even stronger fourth quarter? And, you know, it's sort of the tariff kind of unknowns captured in that. So the tariff unknowns are not captured in that, but we have a couple major drivers. What we'll see as we go into Q3 is benefit coming through collections on receivables. So we had tough collections on receivables in Q1 and in Q2, and in Q2 we had that planned. It was anticipated. So we have that timing in our favor as we look into Q3.
Pat: Should you have a question. Please press star followed by the number one on your Touchtone phone, you'll hear a prompt that <unk> had has been raised.
Michael: That compares here.
Speaker Change: OE of 140 last year and <unk> 67.
Pat: Should you wish to decline from the polling process. Please press star followed by the number too.
Speaker Change: Aftermarket got it okay perfect and then can you maybe you talked about.
Pat: We're using a speaker phone please make sure to lift your handset before pressing any keys.
Speaker Change: Your first question is from the line of Michael Schirmer Moly from tourists security. Your line is now open.
Speaker Change: 350 sort of give us maybe a little bit more detail as what were you kind of shifting at what are your expected if theyre going to be a destock period in both states.
Speaker Change: Hey, good morning, guys. Thanks for taking the questions.
Jennifer just housekeeping first you have the commercial OE revenue growth in commercial aftermarket growth in the quarter.
Speaker Change: So it's kind of resolved towards the end of the year or what kind of signals are you getting from from Airbus.
Speaker Change: Okay.
Speaker Change: Sure Yeah. So Airbus has changed their ordering patterns for us we experienced this both in the third quarter and fourth quarter last year and caught up a little bit at the beginning of this year. So this is not something new for us.
Jennifer Walter: So that's something that we're feeling comfortable with, such that that will be our major driver for cash flow generation very strong Q2 to Q3. We'll hold that level of collections as we move into Q4, and we'll see a number of things actually helping us out in the back part of the year. First of all, we've got a higher guide on our earnings in Q4 versus Q3, so that's helping. We also have some benefits that are coming in physical inventories. We're looking for next quarter in Q3 to be about similar to our halting of growth in physical inventories like we had this quarter, have that repeat in Q3 as well, and actually generate some cash from physical inventories as we move into the back part of the year.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: The commercial update.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: So what we.
Speaker Change: Okay.
Speaker Change: For <unk> hundred 15 could reduce our sales guidance, our net sales guidance within commercial is flat because we've got the commercial OE going down that's largely Airbus being offset by the strength in the aftermarket. So those are offsetting each other.
Speaker Change: <unk>.
Speaker Change: So our commercial Oes for the quarter was about $135 million and our aftermarket was $81 million.
That compares here.
Speaker Change: We've got inventory that's already built.
Speaker Change: OE of 140 last year and <unk> 67.
Speaker Change: And we get very short term orders from Airbus and Thats, how we release those orders.
Speaker Change: Aftermarket got it okay perfect and then can you maybe you talked about.
Speaker Change: Cause of the timing and how their ordering patterns are going now will wind up holding onto some of that inventory. So that puts pressure on our cash we will see that pressure on our cash in the back half of fiscal year 'twenty five and we expect that we will then recover that in FY.
Speaker Change: 350 sort of give us maybe a little bit more detail as what were you kind of shifting at what are your expected if theyre going to be a destock period and does this.
Jennifer Walter: We've got a number of things that are happening on that, Michael. Manufacturing efficiencies, we're reducing cycle time. We still have a long way to go and have opportunities there, but we're making progress and that's actually helping contribute. Inventory management as we're limiting incoming inventory, hitting milestones so that we can bill and collect. Those are all things that are going to drive that physical inventory. And then we've got just some timing and some other things like payables that we're projecting at the end of the year to get us to where we historically are.
Speaker Change: So it's kind of resolved towards the end of the year or what kind of signals are you getting from from Airbus.
Speaker Change: <unk>.
Speaker Change: That's really what we're seeing on the Airbus front. So it is impacting our sales from what we had previously projected and then.
Speaker Change: Sure Yeah, So Airbus has changed their ordering patterns for our suites variances both in the third quarter and fourth quarter last year and caught up a little bit at the beginning of this year. So this is not something new for us.
Speaker Change: We wind up holding that inventory for a little bit longer. So it's just the timing.
Speaker Change: Got it.
Speaker Change: So what we.
Speaker Change: And then just the last one I have just on the cash I mean.
Speaker Change: For <unk> hundred 15 could reduce our sales guidance, our net sales guidance within commercial is flat because we've got the commercial OE going down that's largely Airbus being offset by the strength in the aftermarket. So those are offsetting each other.
Speaker Change: Even at the low end and the 50% conversion I mean, it implies I guess 300 million or so cash generation second half item.
Michael Ciarmoli: Got it. Perfect.
Michael Ciarmoli: Thanks, guys. I'll jump back in.
Kristine Liwag: Your next question is from the line of Kristine Liwag from Morgan Stanley. Please go ahead. Hey guys, good morning.
Speaker Change: Really I will recall you guys doing anything that significant over three Q <unk>.
Speaker Change: You've got inventory that's already built.
Speaker Change: Any other puts and takes I mean, it sounds like <unk> will be stronger, but should we expect an even stronger fourth quarter in.
Speaker Change: And we get very short term orders from Airbus and that's how we release those orders.
Patrick Roche: Hi, Kristine. Welcome back. Thanks, thanks. Happy to be back.
Kristine Liwag: I was wondering, I know it's still early in the tariff stuff and there's a lot of uncertainty, but I was wondering, can you give some color regarding how, where you think your exposures are? Like, is it when you're an importing entity? And then also from your discussions with your customers, how is this pain going to be shared? Are people sticking to the letter of the contract or their discussions of being able to pass through? Any sort of indication on how this would play out? And I realize it's still pretty early and there's a lot of uncertainty, but any indication on the direction of how these flows could be really helpful.
Speaker Change: Cause of the timing and how their ordering patterns are going now will wind up holding onto some of that inventory. So that puts pressure on our cash we will see that pressure on our cash in the back half of fiscal year 'twenty five and we expect that we will then recover that in FY.
Speaker Change: It's sort of that tariff.
Speaker Change: Unknown captured in that.
Speaker Change: So the tariff when loans are not captured in that but we have a couple of major drivers what we'll see as we go into Q3 is benefit coming through collections on receivables. So we had tough collections on receivables in Q1 and in Q2 and in Q2, we had that planned it was anticipated that we have.
Speaker Change: <unk>.
Speaker Change: That's really what we're seeing on the Airbus front. So it is impacting our sales from what we had previously projected and then.
Speaker Change: We wind up holding that inventory for a little bit longer. So it's just the timing.
Speaker Change: Timing in our favor as we look into Q3.
Speaker Change: Got it.
Speaker Change: So that's something that we're feeling comfortable with such that that will be a major driver for cash flow generation.
Speaker Change: And then just the last one I have just on the cash I mean, even at the low end and the 50% conversion I mean, it implies I guess 300 million or so cash generation second half item.
Patrick Roche: Yeah, no problem. I'll try and address that, Kristine. So, I highlighted in my notes that we have, you know, an extensive external supply chain around the world and also manufacturing sites at different locations. They impact our businesses in different, differing ways. And so, Jennifer sort of highlighted that we would expect maybe the commercial business to see the highest level of impact in the short term, arising from the tariffs, then followed by the industrial group, and then to a much lesser extent by the space and defense group, and almost negligible in the military aircraft group for the reasons that Jennifer gave.
Speaker Change: Very strong Q2 to Q3 will hold that level of collections as we move into Q4, and we will see a number of things actually helping us out in the back part of the year first of all we've got a higher guide on our earnings in Q4 versus Q3, so that's helping.
Speaker Change: Really I don't recall, you guys doing anything that significant over three Q4 Q.
Speaker Change: Any other puts and takes I mean, it sounds like <unk> will be stronger, but should we expect an even stronger fourth quarter.
Speaker Change: Also have some benefits are coming in physical inventory, we're looking for next quarter in Q3 to be about similar to our <unk> of growth in physical inventories like we had this quarter have that repeat in Q3, as well and actually generate some cash from physical inventories as we move into the back.
Speaker Change: Yes, it's sort of that tariff kind of unknowns captured in that.
Speaker Change: So the careful nodes are not captured in that but we have a couple of major drivers what we'll see as we go into Q3 is benefit coming through collections on receivables. So we had tough collections on receivables in Q1 and in Q2 and in Q2, we had that planned it was anticipated that we have that.
Patrick Roche: If I take as an example our commercial business, you know, aerospace is a very global business in terms of its supply chain. We draw from around the world. So, we have The main part, an exposure to aluminum and steel imports, because as our products move around the world in our supply chain, they're getting impacted by tariffs on the way back into the U.S. We also have offshore manufacturing partners on products such as electronics, which come back in from Mexico. And so it's basically those two elements that have the impact on our commercial aerospace business. On our industrial business, the Costa Rica manufacturing site is a core part of the pump and accessories business that we have on the medical side.
Speaker Change: Part of the year.
Speaker Change: We set a number of things that are happening on that Michael manufacturing efficiencies, we're reducing cycle time are still a long way to go and have opportunities there are making progress and that's actually helping contribute inventory management is we're eliminating incoming inventory hitting milestones. So that we can bill and collect those are all things that are going to drive that fiscal <unk>.
Speaker Change: Timing in our favor as we look into Q3.
Speaker Change: So that's something that we're feeling comfortable with such that that will be a major driver for cash flow generation.
Speaker Change: Inventories and then we've got just some timing and some other things like payables that were projecting at the end of the year.
Speaker Change: Very strong Q2 to Q3 will hold that level of collections as we move into Q4, and we will see a number of things actually helping us out in the back part of the year first of all we've got a higher guide on our earnings in Q4 versus Q3, so that's helping.
Speaker Change: To get us to where we historically are.
Speaker Change: Got it perfect. Thanks, guys I'll jump back in the queue.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: We also have some benefits are coming in physical inventory. We're looking for next quarter in Q3 to be about similar to our <unk> of growth in physical inventories like we had this quarter have that repeat in Q3, as well and actually generate some cash from physical inventories as we move into the back.
Speaker Change: Your next question is from the line of Chris <unk> from Morgan Stanley. Please go ahead.
Patrick Roche: And so that's subject to tariff now as it comes into the U.S. And in our space and defense but also in our industrial business, we do use some long-term partnerships with companies in both Mexico and Costa Rica that provide labor. So we send partially finished products to them. They do some work on it, and they send it back to the U.S. again. And so that is also attracting some tariffs in the current model or potentially could attract tariffs in the current model. So that's where it's coming from. So if you think about our exposure, I would say about a quarter of it or so is coming from the steel and aluminum parts of the tariff.
Speaker Change: Hey, guys good morning.
Speaker Change: Good morning, Christine welcome back.
Speaker Change: Thanks, Thanks, I'm happy to be back.
Speaker Change: I was wondering I know, it's still early in the tariff stuff and there's a lot of uncertainty, but I was wondering can you give some color regarding.
Speaker Change: Part of the year.
Michael: We've got a number of things that are happening on that Michael manufacturing efficiencies, we're reducing cycle time are still a long way to go on have opportunities there are making progress and that's actually helping contribute.
Speaker Change: Where you think your exposures are like is it one year on importing entity and then also from your discussions with your with your customers.
Speaker Change: How is this <unk> going to be sure that our people sticking to the letter of the contract or are there discussions of being able to pass through any sort of indication on how this will play out and I realize it's still pretty early and there's a lot of uncertainty, but any indication on the direction of how these flows could be very helpful.
Michael: Inventory management is we're eliminating incoming inventory hitting milestones. So that we can bill and collect those are all things that are going to drive that physical inventories and then we've got just some timing and some other things like payables that were projecting at the end of the year.
Patrick Roche: And then the balance comes from importations from our other intercompany or suppliers. All told, we import about $200 million into the U.S. And if I could add on the 70s, if I could just talk about the mitigations, Dan, you know, anything that's moving back and forth in the North Americas across the border from Mexico and Canada potentially falls under elements of the U.S.-Canada trade agreement, U.S.-Mexico-Canada trade agreement. And so we're making sure that we are understanding how to apply that to our products and get the administration right on the movement of those goods in and out of the country to minimize the tariff output or the tariff that's claimed.
Michael: To get us to where we historically are.
Speaker Change: Got it perfect. Thanks, guys I'll jump back in the queue.
Christine: Yes, no problem I'll try and address that Christine so.
Michael: Okay.
Speaker Change: I highlighted in my notes that we have.
Michael: Okay.
Speaker Change: Your next question is from the line of Chris <unk> from Morgan Stanley. Please go ahead.
The extensive external.
Speaker Change: Hi chain around the world and also manufacturing sites for different locations.
Chris: Hey, guys good morning.
Speaker Change: They impact.
Speaker Change: Our businesses in different differing ways, and so Jennifer sort of highlighted that.
Christine: Good morning, Christine welcome back.
Chris: Thanks, Thanks, I'm happy to be back.
Speaker Change: We would expect maybe the commercial business to see the highest level of impact in the short term arising from the tariffs that followed by the industrial group and then to a much lesser extent by the space and defense group and almost negligible.
Chris: Was wondering I know, it's still early in the tariff stuff and there's a lot of uncertainty, but I was wondering can you give some color regarding.
Chris: Where you think your exposures are like is it one year I'm importing entity and then also from your discussions with your with your customers.
Patrick Roche: And then in terms of repair goods for the commercial aerospace business, as product moves back in and out of the U.S. from partner airlines in other parts of the world, we got to make sure that we are importing those specifically for re-export later. So we have to work through the administration of that to make sure that we don't incur tariffs unnecessarily. And then finally, where we have issues associated with pricing, if it's coming in from an offshore partner and it increases our cost base, then we've got to reflect on how we pass that through to customers in terms of pricing, if necessary.
Speaker Change: The three aircraft group for the reasons that Jennifer gave if I take as an example, our commercial business.
Chris: How is this <unk> going to be sure that our people sticking to the letter of the contract or are there discussions of being able to pass through any sort of indication on how this will play out and I realize it's still pretty early and there's a lot of uncertainty, but any indication on the direction of how these flows could be very helpful.
Speaker Change: Aerospace is a very global.
Speaker Change: In terms of its supply chain, we draw from around the world. So we have.
Speaker Change: And the main part and exposure to element human steel imports because as our products move around the world and our supply chain. They are getting impacted by tariffs on the way back into the U S. We also have offshore manufacturing partners.
Christine: Yes, no problem I'll try and address that Christine so.
Christine: I highlighted in my notes that we have.
Speaker Change: Such as electronics, which come back in from Mexico, and so it's basically those those two elements that has the impact on our commercial aerospace business.
Speaker Change: The extensive external supply chain around the world and also manufacturing sites for different locations.
Patrick Roche: And that's only in certain parts of the business that are impacted.
Kristine Liwag: Great. Thank you, Pat. Thank you for all the color. A lot to digest there.
Christine: They impact.
Speaker Change: On our industrial business, the Costa Rica manufacturing site as a core part of the pump and.
Christine: Our businesses in different differing ways, and so Jennifer sort of highlighted that we would.
Kristine Liwag: Maybe another question on the 787. You know, going from this, they talked about that there are fives per month and going to seven per month later, and it looks like from their perspective, all 787 KPIs, quote, look green. So, look good. So, yes, for you guys, you were delivering at a higher pace and they were producing for the past few quarters.
Speaker Change: Accessories business that we have on the medical side and so thats subject to the tariff now as it comes into the U S and in our space and defense, but also in our industrial business, we do use some.
Christine: Maybe the commercial business to see the highest level of impact in the short term arising from the tariffs that followed by the industrial group and then to a much lesser extent by the space and defense group and almost negligible.
Speaker Change: Long term partnerships with companies in both Mexico, and Costa Rica that provide labor. So we partially finished products to them. They do some work on it and they send it back to the U S. Again, and so that is also attracting some tariffs in the current model or potentially could attract Harrison current models. So that's that's where it's coming from so if you think about our.
Christine: The aircraft group for the reasons that Jennifer gave if I take as an example, our commercial business.
Patrick Roche: I was wondering where are you now? And when they do get to seven per month, when would you start seeing that uplift and volume for you? So typically, there's a few months. We're working a few months ahead of them as well. So when we're confident that we're at a higher rate, it will pull through from our manufacturing operations. I would describe us as running at a relatively stable production rate during the course of this year, which is aligned with our actual needs.
Christine: Aerospace is a very global.
Christine: In terms of its supply chain, we draw from around the world. So we have.
Christine: And the main part and exposure to element human steel imports because as our products move around the world and our supply chain. They are getting impacted by tariffs on the way back into the U S. We also have offshore manufacturing partners.
Speaker Change: Exposure I would say about.
Speaker Change: A quarter of it or so is coming from the steel and aluminium parts of Vitaros and then the balance comes from importations from our other intercompany our suppliers.
Christine: Such as electronics, which come back in from Mexico, and so it's basically those those two elements that has the impact on our commercial aerospace business.
Speaker Change: All told we import about $200 million into the U S.
Kristine Liwag: Well, thank you. I'll get back in queue.
Operator: Thank you.
Speaker Change: Thank you Pat.
Operator: Thanks.
Christine: On our industrial business, the Costa Rica manufacturing site as a core part of the pump and.
Speaker Change: And if I can.
Speaker Change: If I can David.
Jonathan Tanwanteng: Your next question is from the line of Jonathan Tanwanteng from CJS Security.
Speaker Change: Christine I'd like to just talk about the mitigation than anything.
The accessories business that we have on the medical side and so thats subject to the tariff now as it comes into the U S and in our space and defense, but also in our industrial business, we do use some.
Patrick Roche: Please go ahead.
Speaker Change: Anything thats moving back and forth in the North America's across the border from Mexico, and Canada potentially falls under elements of the U S kind of the trade agreement U S. Mexico, Canada trade agreement and so we're making sure that we are understanding how to apply that to our products and get the administration right on the movement of those goods in and out of the country.
Jonathan Tanwanteng: Hi, thanks for the question, guys. I was just wondering if you could talk about your exposure to 787 and 8350. to China International and back to the U.S. from Airbus, I guess, and if there's any risk to deliveries and how that would pull through from you guys. Yeah, contemplated at all in your guidance or not. I mean, we've seen, you know, China refused deliveries of 737s. Is there a risk there for you guys? It doesn't matter even if they can get by.
Christine: Long term partnerships with companies in both Mexico, and Costa Rica that provide labor. So we partially finished products to them. They do some work on it and they send it back to the U S. Again, and so that is also attracting some tariffs in the current model or potentially could attract Harrison current models. So that's that's where it's coming from so if you think about our <unk>.
Speaker Change: Minimize the tariff the tariff.
Speaker Change: Claims and then.
Speaker Change: In terms of.
Speaker Change: Payer goods for the commercial aerospace business as product moves back in and out of the U S from partner Airlines and other parts of the World. We've got to make sure that we are importing goes specifically for Reexport. Later, so we have to work through the administration of that to make sure that we don't incur tariffs are unnecessarily and then finally, where we have issues associated with pricing.
Christine: <unk> I would say about a.
Patrick Roche: Yeah, thanks for the question, Jon and good morning. We are not anticipating an impact from that on our business. There is quite an extensive backlog on both of the OEMs on the white bodies. It's likely that it's a redistribution of orders that happens as a consequence of any Trade restrictions having an impact on their ability to ship into China. I think it was reported earlier in the week that Boeing actually moved aircraft out of China to reuse them for other customers during the course of the week. And so we don't expect to see any impact of that flowing through China.
Christine: A quarter of it or so is coming from the steel and aluminium parts of a tariff and then the balance comes from importations from our other intercompany our suppliers.
Christine: All told we import about $200 million into the U S.
Speaker Change: If it's coming in from offshore partner and it increases our cost base and we've got to reflect on how we pass that through to customers in terms of pricing if necessary and then.
Christine: Okay.
Christine: And if I could.
Christine: Thank you.
Christine: Christine I, just talk about the mitigation than anything.
Speaker Change: In certain parts of the business that are impacted.
Christine: Anything thats moving back and forth in the North America's across the border from Mexico, and Canada potentially falls under elements of the U S. Canada trade agreements U S Mexico, Canada trade agreement and so we're making sure that we are understanding how to apply that to our products and get the administration right on the movement of those goods in and out of the country.
Speaker Change: Great. Thank you Pat Thank you for all the color a lot to digest there.
Speaker Change: Maybe another question on the 77.
Speaker Change: Okay.
Speaker Change: He talked about the five per month and going to seven per month later and it looks like from their perspective, all 77 kpis.
Jonathan Tanwanteng: Great.
Jonathan Tanwanteng: I was wondering if you could touch a little bit on next-gen programs at all. I think you mentioned Golden Dome. I didn't hear if you mentioned F47.
Minimize the tariff.
Speaker Change: Green So look good so I guess for you guys you were delivering at a higher pace than they were producing.
Christine: The tariff.
Patrick Roche: Are you competing on that, or is there an opportunity there that might be possible? Maybe the only thing I'd say on the 6th generation aircraft are that we're a leading supplier of primary flight controls for these military aircraft and we have a strong, funded development book of business.
Christine: Claims and then in terms of.
Christine: Repair goods for the commercial aerospace business as product moves back in and out of the U S from partner Airlines and other parts of the World. We've got to make sure that we are importing those specifically for Reexport. Later, so we have to work through the administration of that to make sure that we don't incur costs unnecessarily and then finally, where we have issues associated with pricing.
Speaker Change: For the past few quarters I was wondering where are you now and when they do get to seven per month. When would you start seeing that uplift in volume for you.
Speaker Change: So typically there is a.
Patrick Roche: This program is a restricted program and we can't speculate who the suppliers are, specifically on F47. all of us to say that, you know, we have capabilities that are useful in these types of aircraft. And you mentioned Golden Dome. There's no defined architecture for Golden Dome at this point, but in all likelihood, it requires a combination of different types of assets to be effective. It requires missile defense on the ground. It requires assets in space to be able to understand what's going on and to inform decision making. And if you're trying to defend against an incoming missile, it could involve counter drone defenses as well.
Speaker Change: A few months work in a few months ahead of them as well. So when we are confident that we are at a higher rate it will pull through from our manufacturing operations I would describe us is running at a relatively stable production rate. During the course of this year, which is aligned with our actual needs.
Christine: And if it's coming in from offshore partner and it increases our cost base and we've got to reflect on how we pass that through to customers in terms of pricing if necessary and thats only in certain parts of the business that are impacted.
Speaker Change: Okay.
Speaker Change: Okay, well, thank you I'll get back in queue.
Pat: Great. Thank you Pat Thank you for all the color a lot to digest there.
Christine: Thank you thanks Christine.
Speaker Change: Okay.
Speaker Change: Maybe another question on the 77 Boeing from from this quarter. He talked about the five per month and go into seven per months later and it looks like from their perspective, all 77, Kpis cookbook Green.
Speaker Change: Your next question is from the line.
Speaker Change: San Juan <unk> from CJS Securities. Please go ahead.
Speaker Change: Hi, Thanks for the question.
Speaker Change: I was just wondering if you.
Speaker Change: If you could talk about your exposure to the 70 $783 50.
Speaker Change: Look good so I guess for you guys you were delivering at a higher pace than they were producing.
Speaker Change: To China International and back to the U S from Airbus I guess.
Patrick Roche: So we think it has an impact on a whole range of different products and technologies that we actually have a position in. So if you think about our RIP turret that's used in drone defense, that could be an element of it. If you think about our missile programs, we have a whole range of exposure there, Hellfire, Javelin, TAC-3, as we announced back in the first quarter, we had a large order from Lockheed Martin on that. You'd imagine that would be part of some system like that. Our CAD missile program that we're on also could play a role in it.
Speaker Change: If there is any risk to deliveries and how that would pull through from you guys in the near term.
Speaker Change: For the past few quarters.
Speaker Change: I was wondering where are you now and when they do get to seven per month when would you start seeing that uplift.
Speaker Change: Yes.
Speaker Change: Related at all in your guidance or not I mean, we've seen China refuse deliveries of 737.
Speaker Change: Volume for you.
Speaker Change: So typically there is a.
Speaker Change: Is there a risk there for you guys and how.
Speaker Change: Few months work in a few months ahead of them as well. So when we are confident that we are at a higher rate it will pull through from our manufacturing operations I would describe us is running at a relatively stable production rate. During the course of this year, which is aligned with our actual needs.
Speaker Change: Can we capture that doesn't matter, even if they can deploy it was completed with the virus.
Speaker Change: Yes. Thanks, Thanks for the question John and good morning.
Speaker Change: We are not anticipating an impact from that on our business.
Speaker Change: There is quite an extensive backlog on both of the.
Speaker Change: Okay.
Patrick Roche: So we feel that those, and on the space side, we've got space vehicles, and we've got space vehicles that are aimed at defense applications. So, I mean, they're perfectly suited for these types of roles.
Speaker Change: Oems on the wide bodies.
Speaker Change: Okay, well, thank you I'll get back in queue.
Speaker Change: It's likely that it's a redistribution of orders that happens as a consequence of any.
Christine: Thank you thanks Christine.
Speaker Change: Okay.
Speaker Change: Your next question is from the line of Jon <unk> from CJS Securities. Please go ahead.
Speaker Change: Trade restrictions.
Patrick Roche: So, a combination of those technologies and products could form part of Golden Dawn when it is defined, and so that's why we think that's a positive for us as well.
Speaker Change: Being an impact on their ability to ship into China.
Speaker Change: I think it was reported earlier in the week that the Boeing actually moved aircraft out of China to reuse them for other customers. During the course of the week and so we don't we don't expect to see any impact of that flowing through John.
Jon: Hi, Thanks for the question guys.
Speaker Change: I was just wondering if.
Speaker Change: You could talk about your exposure to <unk> 77, and <unk> hundred 50.
Patrick Roche: And then lastly, at a high level, how do you perceive or reconcile, I guess, the recent commentary that there might be a trillion-dollar You know, compared to prior commentaries of looking for 8% reductions in reality. And how does that square with your longer term? So, I think I reflected back in the previous quarter that The threats or the issues that we face in terms of national security, they didn't change. And so from my perspective, it's a reflection of the necessary investment that is there to ensure you are able to provide for national security. So I think it's a reflection of the reality when you're dealing with large near-peer threats.
Speaker Change: To China International and back to the U S from Airbus I guess.
Speaker Change: If there is any risk to deliveries and how that would pull through from you guys in the near term.
Speaker Change: Okay. Great I was wondering if you could touch a little bit on Nextgen programs at all I think you mentioned Golden Dome I didn't hear if you mentioned a 47% as I think I might've missed that if you did.
Speaker Change: Yes.
Speaker Change: Related at all in your guidance or not I mean, we've seen China refused delivery system <unk> 37.
Speaker Change: Are you competing on that or is there an opportunity there.
Speaker Change: Is there a risk there for you guys and how can we capture that doesn't matter even if they can deploy it was can please please for those buyers.
Speaker Change: Might be substantial.
Speaker Change: Yes, maybe the only thing I would say on the sixth generation aircraft startup.
Speaker Change: Yeah. Thanks, Thanks for the question, Tom and good morning.
Speaker Change: Leading supplier of primary flight controls for these these military aircraft and we have a strong funded development book of business. So.
Speaker Change: We are not anticipating an impact from that on our business.
Speaker Change: There is quite an extensive backlog on both of the <unk>.
Speaker Change: This program is a restricted program and we can certainly through the suppliers are specifically on that 47.
Speaker Change: Bowie Oems on the wide bodies.
Speaker Change: All of this to say that.
Speaker Change: It's likely that it's a redistribution of orders that happens as a consequence of any.
Speaker Change: We are capabilities that are useful in these types of aircrafts.
Speaker Change: Trade restrictions.
Speaker Change: And you mentioned it goes down.
Speaker Change: Having an impact on their ability to ship into China I think it was reported earlier in the week that Boeing actually moved aircraft out of China to reuse them for other customers. During the course of the week and so we don't we don't expect to see any impact of that flowing through John.
Speaker Change: There is no defined architecture for Golden Dome at this point.
Speaker Change: In all likelihood it requires a combination of different types of assets to be effective requires missile defense on the ground. It requires assets in space to be able to understand what's going on and to inform decision making.
Operator: Thank you very much. No problem, thanks. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star followed by the number one on your touchtone phone.
Speaker Change: Okay great.
Speaker Change: I was wondering if you could touch a little bit on Nextgen programs at all I think you mentioned Golden Dome I didn't hear if you mentioned a 47%.
Tony Bancroft: And if you are using a speakerphone, please make sure to lift your handset before pressing any Your next question comes from the line of Tony Bancroft from Gabelli. Please go ahead. Thanks so much and congratulations on a great quarter and all the great work you've done. Just really quickly on, you know, you've seen those articles, there was one this morning about... countries exempting aerospace and defense parts from offsetting, you know, from counter-tariffs.
Speaker Change: And if you are trying to defend against an incoming missile.
Speaker Change: If you did.
Speaker Change: Are you competing on that or is there an opportunity there.
Speaker Change: It could involve counter drone defenses as well. So we think it has an impact on a whole range of different products and technologies that we actually have a position and so if you think about a return thats used in.
Speaker Change: Might be substantial.
Speaker Change: Maybe the only thing I would say on the sixth generation aircraft startup.
Speaker Change: We're a leading supplier of primary flight controls for these these military aircraft and we have a strong funded development book of business. So.
Speaker Change: Drone defense that could be an element of it if you think about our missile programs, we have a whole range of exposure there Hellfire javelin Pac three as we announced back in and.
Speaker Change: This program is a restricted program and we can certainly through the suppliers are specifically on that 47.
Speaker Change: All of this to say that we are capabilities that are useful in these types of aircrafts.
Patrick Roche: Good morning China. I think it was last week about France, the French aerospace industry. Just what, you know, is there anything you can maybe talk to about that? You sort of mentioned a little bit before, but maybe some more color on that. for me.
Speaker Change: In the first quarter, we had a large order from Lockheed Martin on that you would imagine that would be part of some system like that.
Speaker Change: And you mentioned it goes on them.
Speaker Change: <unk>.
Speaker Change: Missile program that we're on also could play a role in it so we feel that those.
Speaker Change: There is no defined architecture for Golar enrollment at this point.
Speaker Change: In all likelihood it it requires a combination of different types of assets to be effective requires missile defense.
Speaker Change: The space side, we've got space vehicles, and we've got space vehicles that are aimed at defense applications. So perfectly.
Patrick Roche: Good morning, Tony, and welcome to the call. This is all this is all the uncertainty around tariffs. I mean, we mentioned it in the note that we we've tried to model out what might happen or potentially could happen based on the known imports that we have and the current rate of tariffs, but they change sometimes day by day. So it's not there's no certainty in this. And I think there will be negotiations on an ongoing basis on a country basis, but also people lobbying for carve outs as well for certain industries. And you saw that with the automotive side as well.
Speaker Change: For these type of rules.
Speaker Change: So a combination of those technologies and products could form part of Golden Dawn when it is defined and so that's why we think thats a positive for us as well.
Speaker Change: On the ground it requires assets in space to be able to understand what's going on and to inform decision making.
Speaker Change: And if youre trying to defend against an incoming missile.
Speaker Change: And then lastly at a high level.
Speaker Change: How do you perceive a reconcile I guess the recent commentary that there might be a trend on the defense budget compared to prior commentary looking for 8% reductions in Reallocations.
Speaker Change: It could involve counter drone defenses as well. So we think it has an impact on a whole range of different products and technologies that we actually have a position and so if you think about a return thats used in drones.
Speaker Change: Square with your longer term outlook and targets.
Speaker Change: Drone defense that could be an element of it if you think about our missile programs, we have a whole range of exposure there hellfire javelin Tac three as we announced back in and.
Speaker Change: So.
Speaker Change: I think I reflected back in the previous.
Patrick Roche: So that certainly could happen. And that would definitely help also mitigate what we've indicated as a range here. That's great.
Speaker Change: Quarter.
Speaker Change: The threats are the issues that we face in terms of national security, They didnt change and so in my from my perspective, it's a reflection of the necessary investment that is there to ensure you are able to provide national provide for national security.
Speaker Change: In the first quarter, we had a large order from Lockheed Martin on that you would imagine that would be part of some system like that.
Tony Bancroft: So that's all I've got. Thank you so much. You're welcome. Thank you.
Speaker Change: <unk> missile program that we're on also could play a role in it so we feel that those and then on the.
Ed: Your last question comes from the line of Gautam Khanna from TD Cowen, please go ahead. Oh, hi, actually, this is Ed in for Gotham. I just have a couple questions.
Speaker Change: Space side, we've got space vehicles, and we've got space vehicles that are aimed at defense applications. So I mean, they're perfectly suited for these type of rules.
Speaker Change: So I think it's a reflection of the reality when you're when you're dealing with large near peer threats.
Speaker Change: So a combination of those technologies and products could form part of Golden Dawn when it is defined and so that's why we think thats a positive for us as well.
Ed: One is on the Bumpy Gaze commercial for commercial aftermarket. Could you give a little more color on what you're seeing in the aftermarket of the positives and if there's any offsetting negatives that you see out there?
Speaker Change: Got it thank you very much.
John: No problem. Thanks, John.
Speaker Change: Got it and then lastly, it at a high level.
Speaker Change: Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star followed by the number one on your Touchtone phone and if you are using a speaker phone. Please make sure to lift your handset before pressing any keys.
Speaker Change: How do you perceive a reconcile I guess the recent commentary that there might be a trend on the defense budget compared to prior commentary looking for 8% reductions in Reallocations and how does that square with your longer term outlook and targets.
Jennifer Walter: And the second question is on the potential net tariff risk of 10 to 20 million.
Jennifer Walter: Could you remind me sort of exactly what that's addressing? Thanks.
Speaker Change: Your next question comes from the line of Tony Bancroft from Gabelli. Please go ahead.
Jennifer Walter: I'll start with the first one on the commercial aftermarket. So our commercial aftermarket has been really strong this year. If I go not just to this quarter, but I go to a quarter ago, we were strong both in spares and repairs. We had strong repair activity, lots of flight hours, lots of activity going on there. Spares in the past, we'd also seen on last quarter in particular, the shift from some of our customers from time and materials over into longer term contracts that they actually provisioned some spares for us was really strong. Looking at this quarter, this quarter is really on the repair side, rather.
Speaker Change: So.
Tony Bancroft: Thanks, so much and congratulations on a great quarter and all the great work you've done.
Speaker Change: I think I reflected back in the previous quarter.
Speaker Change: The threats are the <unk>.
Jennifer Erin: Jennifer Erin.
Speaker Change: <unk>.
Speaker Change: Just really quickly on <unk>.
Speaker Change: We face in terms of National security, They Didnt change and so in my from my perspective, it's a reflection of the necessary investment that is there to ensure you are able to provide.
Speaker Change: <unk> seen those article this morning about obviously countries exempting aerospace and defense parts from offsetting from counter tariffs I think there's one this morning in China last week about France, France, French aerospace industry.
Speaker Change: <unk> provide for National security. So I think it's a reflection of the reality when you're when you're dealing with large near peer threats.
Speaker Change: Is there anything you can maybe talk to you about that.
Jennifer Walter: The repairs activity continues to be strong, it continues to be robust. The flight hours are strong and up. We're seeing it on the newer wide body aircraft platform, such that we're expecting it to increase from our previous guide. So that's the offset to some of the A350 ordering patterns that I had mentioned. So definitely commercial aftermarket is helping us from a margin perspective on commercial business. And it's the repair activity that continues to be robust, and we see it continuing in the future to be robust.
Speaker Change: Are you sort of mentioned a little bit before but maybe some more color on that.
Speaker Change: Got it thank you very much.
John: No problem. Thanks, John.
Speaker Change: Potential.
Speaker Change: Good morning, Tony and welcome to the call.
Speaker Change: Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star followed by the number one on your Touchtone phone them and if you are using a speaker phone. Please make sure to lift your handset before pressing any keys.
Speaker Change: This is our this is all of the uncertainty around tariffs I mean.
Speaker Change: And as <unk> noted.
Speaker Change: We've tried to model out what.
Speaker Change: Might happen or potentially could happen based on the known imports that we have and the current rate of tariffs both the change sometimes day by day. So it's not there's.
Operator: Your next question comes from the line of Tony Bancroft from Gabelli. Please go ahead.
Tony Bancroft: Thanks, so much and congratulations on a great quarter and all the great work you've done.
Speaker Change: No.
Speaker Change: Certainty in this and I think there will be negotiations on an ongoing basis on a country basis, but also people lobbying for powerhouse as well as to certain industries and you saw that with the automotive side as well so that certainly could happen and that will definitely help also mitigate what we've indicated is a range here.
Jennifer Erin: Jennifer Erin.
Jennifer Walter: And then hi, Ed, welcome. If I think about the tariff, I mean, our exposure on the tariff side is Steel and Alumina, as I should have said on the call. Apologies for using the European version of it. But that's one of the big elements. And then, I guess, if we look at Costa Rica being one of our plants importing a lot of materials into the U.S. on the medical business. After that, I would say some exposure to Europe. We have a manufacturing plant in Ireland, another one in Italy that bring product in which supports our space and defense group.
Tony Bancroft: Just really quickly on.
Tony Bancroft: <unk> seen those article this morning about obviously countries exempting aerospace and defense parts from.
Tony Bancroft: From counter tariffs I think Theres one this morning in China last week about France, France, the French aerospace industry.
Speaker Change: Yeah, that's great.
Speaker Change: That's all I've got thank you so much.
Is there anything you can maybe talk to you about that.
Speaker Change: Youre welcome. Thank you.
Speaker Change: Yeah.
Tony Bancroft: Are you sort of mentioned a little bit before but maybe some more color on that.
Speaker Change: Your last question comes from the line of Gautam Khanna from TD Cowen. Please go ahead.
Tony Bancroft: Sure.
Speaker Change: Good morning, and welcome to the call.
Speaker Change: Oh, Hi, actually this is Ed in for Gautam I just wanted a couple of questions. One is.
Tony Bancroft: This is our this is all of the uncertainty around tariffs.
Jennifer Walter: And then Mexico, some subcontracting going on there. Canada, some sourcing of sensors and materials to go into some of our military products. So that's how I'd characterize the impact. So the commodity tariff is a large element. And then those countries that I called out specifically contributing to it. Okay, thank you. You're welcome.
Tony Bancroft: We mentioned it in the note.
Speaker Change: On the bumpy gaze commercial for commercial aftermarket could you give a little more color on what youre seeing in the aftermarket.
Speaker Change: We've tried to model out what Mike.
Speaker Change: It might happen up potentially could happen based on the known imports that we have and the current rate of tariffs both the.
Speaker Change: It is and if there's any offsetting.
Speaker Change: Negative such as the out there and the second question is on the potential net tariff risk.
Speaker Change: They change sometimes day by day, so it's not.
Speaker Change: And the $20 million could you remind me sort of exactly what that addressing thanks.
Speaker Change: Theres no.
Speaker Change: Certainty in this and I think there will be negotiations on an ongoing basis on a country basis, but also people lobbying for carve outs as well as certain industries and you saw that with the automotive side as well so that certainly could happen and that will definitely help also mitigate what we've indicated is a range here.
Speaker Change: I'll start with the first one on the commercial aftermarket so our commercial aftermarket has been really strong next year.
Operator: There are no further questions at this time.
Patrick Roche: I'd like to turn the call over to Pat Roche for closing comments. Sir, please go ahead. Thank you.
Speaker Change: If I go not just to this quarter, but I go to a quarter ago are strong both in spares and repairs. We had strong repair activity lots of flight hours lots of activity going on there spares in the past. We had also seen on last quarter in particular, the shift from some of our customers from time and materials over in <unk>.
Patrick Roche: So that concludes our earnings call. It was a solid quarter, a positive outlook, and a managed tariff risk.
Speaker Change: Yeah, that's great.
Speaker Change: So thats all Ive got it. Thank you so much.
Operator: I appreciate you taking the time to listen to the update on the business, and I look forward to providing another update in 90 days' time. Thank you.
Speaker Change: Youre welcome. Thank you.
Speaker Change: Yeah.
Speaker Change: Your last question comes from the line of Gautam Khanna from TD Cowen. Please go ahead.
Operator: This concludes today's conference call. Thank you very much for your participation. You may now disconnect.
Speaker Change: New longer term contracts that they actually provisions some spares for them.
Oh, Hi, actually this is Ed in for Gautam I just thought.
Speaker Change: Looking at this quarter. This quarter is really on the on the repair side rather the repairs activity continues to be strong and continues to be robust.
Speaker Change: A couple of questions one is.
Speaker Change: On the bump you gave commercial for commercial aftermarket could you give a little more color on what youre seeing in the aftermarket of the <unk>.
Speaker Change: Flight hours are strong and up we're seeing it on the newer wide body aircrafts.
Speaker Change: Positives and if there's any offsetting.
Speaker Change: Negative such as the out there and the second question is on the potential tariff risk of Tim.
Speaker Change: Platforms, such that we are expecting it to increase from our previous guidance. So that's the offset to some of the <unk> hundred <unk> ft ordering patterns that I had mentioned for <unk>.
Speaker Change: And the $20 million could you remind me sort of exactly what that addressing.
Speaker Change: I'll start with the first one on the commercial aftermarket so our commercial aftermarket has been really strong this year.
Speaker Change: Definitely commercial aftermarket is helping us from a margin perspective on the commercial business.
Speaker Change: And it's the repair activity that continues to be robust NBC are continuing in the future to be robust.
Speaker Change: Not just to this quarter, but I go to a quarter ago are strong both in spares and repairs. We had strong repair activity lots of flight hours lots of activity going on there.
Speaker Change: And then I add welcome.
Speaker Change: Think about the tariffs I mean, our exposure on the tire side is.
Speaker Change: <unk> in the past, we'd also seen on last quarter in particular, the shift from some of our customers from time and materials over into longer term contracts that they actually provisions some spares.
Speaker Change: Steel and aluminium steam steel and alumina as I should have said on the call apologies for using the European version of it but.
Speaker Change: That's one of the big elements and then I guess, if we look at.
Speaker Change: Thanks.
Speaker Change: <unk> being one of our plants.
Speaker Change: Looking at this quarter. This quarter is really on the on the repair side rather the repairs activity continues to be strong and continues to be robust.
Speaker Change: Putting a lot of materials into the U S. On the medical business after that I would say from exposure to Europe we.
Speaker Change: We have a manufacturing plant in Ireland and another one in Italy that bring product in which supports our aerospace and defense group and then Mexico.
Speaker Change: Flight hours are strong and up we're seeing it on the newer wide body aircrafts.
Speaker Change: Platforms, such that we are expecting it to increase from our previous guidance. So that's the offset to some of the <unk> hundred <unk> ft ordering patterns that I had mentioned so definitely commercial aftermarket is helping us from a margin perspective on the commercial business.
Speaker Change: Some subcontract thing going on there, Canada, some sourcing of sensors and materials that go into some of our military products.
Speaker Change: So that's that's how I'd characterize the impact the commodity tariff is a large element in those countries that I called out specifically contributing to it.
Speaker Change: And it's the repair activity that continues to be robust NBC are continuing in the future to be robust profile.
Speaker Change: Okay. Thank you.
Speaker Change: And then I add welcome.
Speaker Change: Youre welcome.
Speaker Change: I think about the tariffs I mean, our exposure on the tower side is.
Speaker Change: Okay.
Speaker Change: There are no further questions at this time I'd like to turn the call over to Pat Roche for closing comments Sir. Please go ahead.
Speaker Change: Steel and aluminium steam steel and alumina as I should have said on the call apologies for using the European version of it but.
Speaker Change: Thank you for that.
Speaker Change: Concludes our earnings call. It was a solid quarter and a positive outlook and managed tariff risk I. Appreciate you taking the time to listen to the update on the business and I look forward to providing another update in 90 days time. Thank you.
Speaker Change: That's one of the big elements and then I guess, if we look at Costa Rica being one of our plants.
Speaker Change: Putting a lot of materials into the U S on the medical business after that I would say from exposure to Europe.
Speaker Change: This concludes today's conference call. Thank you very much for your participation you may now disconnect.
Speaker Change: Manufacturing plant in Ireland, and another one in Italy that bring product in which supports our aerospace and defense group.
Speaker Change: Then Mexico, some subcontract thing going on there, Canada, some sourcing of sensors and materials that go into some of our military products.
Speaker Change: So that's that's how I'd characterize the impacts of the commodity tariff.
Speaker Change: As a large element in those countries that I called out specifically contributing to it.
Speaker Change: Okay. Thank you.
Speaker Change: Youre welcome.
Speaker Change: Okay.
Speaker Change: There are no further questions at this time I would like to turn the call over to Pat Roche for closing comments Sir. Please go ahead.
Speaker Change: Thank you for that.
Speaker Change: Concludes our earnings call. It was a solid quarter and a positive outlook and managed tariff risk I. Appreciate you taking the time to listen to the update on the business and I look forward to providing another update in 90 days time. Thank you.
This concludes today's conference call. Thank you very much for your participation you may now disconnect.