Moog Inc.

Good day, everyone, and welcome to the Moog first quarter year 2021 earnings conference call. Today's conference is being recorded, and at this time, I'd like to turn the call over to Ann Lohr.

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties, and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties, and other factors is contained in our news release of January 29, 2021, our most recent Form 8-K filed on January 29, 2021, and certain of our other public filings with the SEC. We've provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have the document, a copy of today's financial presentation is available on our investor relations webcast page at www.move.com. John?

Thanks, Anne. Good morning. Thanks for joining us. We hope all our listeners continue to be safe and healthy. This morning we report on the first quarter of fiscal 21. and provide color on what we're thinking for the remainder of the year. Overall, given the ongoing challenging operating conditions, we're pleased with the results of this quarter. Last quarter, we told the market that we were planning for COVID to be with us throughout our fiscal 21. Given this assumption, we projected that our business this year would be somewhat similar to the second half of fiscal 20. In my prepared remarks today, I provide my usual comparisons to the same quarter last year and also some reflections on the comparison of Q1 to the average of the previous two quarters. There remains considerable uncertainty around the ongoing impact of COVID on our business. Therefore, similar to last quarter, we've elected not to provide specific guidance as we believe the range of possible outcomes is beyond our ability to accurately forecast. We will, however, update the market on our assumptions for the business. Similar to last quarter, I've arranged my headlines under the headings of macroeconomic, microeconomic, and then most specific items. First, on the macro front, it's been a very eventful 90 days. In the U.S., we've seen a change in the administration with the Democrats taking control of both houses of Congress as well as the White House. At this early stage, it's hard to predict the impact of this political shift in our business, but it's probable that tax, trade, and defense spending will all be on the agenda over the coming years. One thing that does seem clear is that interest rates will remain very low for several years to come. This quarter, four years of Brexit discussions came to a close as the UK left the EU with a last-minute deal. We don't anticipate any immediate impact on our business from this new trade arrangement between the UK and Europe. Finally, we all rejoiced in the announcement of approved vaccines against COVID and at the same time worried about the emergence of more infectious strains and the surge in cases in Europe and the US. As the calendar year closed out, only China reported GDP growth for 2020, while the rest of the world shrunk under the burden of the pandemic. Second, on the microeconomic front, consolidation across our major markets continued, with Lockheed agreeing to buy Aerojet, Taladine combining with FLIR, and MTS being carved up between Amphenol and ITW. Government spending in our defence and space markets remained strong, and demand for medical products continued. It was great to see that the 737 MAX was certified to begin flying again and Boeing resumed deliveries to customers. Unfortunately, wide-body demand continued to weaken and, excluding the impact of holidays, there was no appreciable recovery in air traffic. Third, it was a solid quarter for our business under the circumstances. Relative to a year ago, sales and earnings were lower. However, on the positive side, comparing our performance with the second half of fiscal 20, First quarter sales held steady and earnings per share were up sharply on an improved mix in aircraft. We also generated very strong cash flow in our first quarter. COVID continued to impact performance and with the surge in cases in the Western hemisphere, we saw an increased impact on our operational efficiencies across our footprint. We bought back 150,000 shares this quarter and completed the first significant acquisition in our aircraft business in over a decade. At the end of December, we paid $78 million to acquire Genesis, a company which provides a range of flight instruments, displays, and autopilot systems for military and commercial programs. Genesis will add about $40 million to the sales of fiscal 21 and will be neutral to earnings as a result of first-year accounting impacts. We also booked our first significant production order for our RIP turret system with the award of the Shorad contract. Now let me move to the details, starting with the first quarter results. I'd remind our listeners that we've provided a three-page supplemental data package posted on our webcast site which provides all the detailed numbers for your models. We suggest you follow this in parallel with the text. Starting with the first quarter, sales in the quarter of $684 million were 9% lower than last year. Sales were up in our defense, space, and medical markets. Sales were lower across our industrial portfolio and down over 50% in our commercial aircraft business. Taking a look at the P&L, our gross margin was down slightly on the lower sales. R&D and SG&A spend was similar to last year, while interest expense was down on lower rates. Last year, we incurred a $4 million charge associated with calling our high yield bonds, which showed up in other income. Excluding this unusual item, the other income line is flat with last year. The effective tax rate this quarter was 24.9%. Resulting in net income of $38 million, which is down 24% from last year, and earnings per share of $1.17, down 19% on a lower share count. fiscal 21 outlook 90 days ago, we started the year with what we believed was a conservative set of assumptions. We believed COVID would be with us throughout our fiscal year. We assumed our defense, space, and medical markets would remain strong. We predicted no recovery in our industrial markets, and finally we were optimistic that our commercial OEM business would stabilise and we might see a slight recovery in the aftermarket towards the end of the year. With one quarter under our belts, we think our assumptions still largely hold true. On the COVID front, the good news of a vaccine has been tempered by the surge in cases in Europe and the US and the slow pace of vaccine delivery. Taken together, we believe we continue to have to deal with the effects of COVID throughout our fiscal year. Relative to the second half of fiscal 20, our defense, states and medical markets are holding up as we expected. Our industrial markets have actually weakened in the first quarter, but we think we may have hit the bottom in Q1 and could see a slow improvement through the rest of the year. Finally, our commercial OEM customers continued to reduce their production forecasts, although we believe they are now settling down, and the commercial aftermarket actually strengthened in the first quarter. Given the quarterly variation we see in the commercial aftermarket, it's too soon yet to determine if this is a trend. All in all, we think the year will continue to unfold much as we thought 90 days ago. Now to the segments starting with aircraft. Sales in the first quarter of $287 million were 16% lower than last year. It's the same story as the last few quarters, with strength on the military side and weakness on the commercial side. Military OEM sales were very strong this quarter on higher F-35 activity, robust foreign military sales, and strength in our funded development programs. The military aftermarket was more or less in line with last year. On the commercial side, OEM sales were down almost 60% from a year ago. Sales to both Boeing and Airbus were down on every platform, ranging from 40% lower on the A320 to over 90% lower on the 737. Sales on our two flagship programs, the 787 and the A350, were down between 50 and 60%. Business jet sales were down almost 70%. The commercial aftermarket was down a third, with weakness across the complete portfolio. Comparing Q1 to the run rate of the second half of fiscal 20, we saw strong growth in our military OEM platforms, driven by the same three items mentioned above, the F-35, foreign military sales, and funded developments. The military aftermarket was lower after a very strong finish to fiscal 20. On the commercial side, the commercial OEM business was steady, signalling a gradual stabilising of demand, while the commercial aftermarket was up on higher 787 and A350 activity. Aircraft margins, margins in the quarter of 9.7% were lower than a year ago as a result of the lower commercial sales. The good news is that margins were up nicely from the adjusted margins of the previous two quarters as a result of an unusually positive mix. This mix was the result of particularly strong foreign programs in Q1. We don't anticipate our mix would be quite so favorable as we move through the next few quarters. Aircraft fiscal 21. Coming into the year, we described our outlook for aircraft as follows. We were assuming continued strong demand from our military customers Stabilization of our commercial OEM demand and a modest pickup in the commercial aftermarket towards the back half of the year. As of today, those assumptions are unchanged. From an external perspective, we're seeing continued strength on the military side. The long-term commercial OEM demand is still moving downwards, but seems to be gradually settling. While the commercial aftermarket was strong in Q1, sales were within the normal quarterly volatility we see in this end market. Internally, we're managing through increased pressure on our operations capacity as a result of higher COVID cases. Finally, the completion of the Genesis acquisition will add about $40 million to the aircraft segment sales this year, split 50-50 between military and commercial. As I said before, given the impact of first-year accounting, the acquisition will have a negligible impact on operating profit. Turning now to space and defense, Sales in the first quarter of 188 million were in line with the first quarter of last year. Sales into space applications continued very strong, up over 20% from a year ago. We had growth in our NASA work, across our hypersonic programs, and integrated space vehicles. Defense sales were 11% lower than last year. We served four sub-markets within our defense sector, with two up this quarter and two down. Sales on military vehicles and its naval applications were up in the quarter, while sales of missile steering systems as well as its security applications were down. Our security business has been particularly hard hit by the pandemic, as much of that business requires onsite installation work, and this has slowed to a standstill over the last nine months. Comparing this quarter with the run rate of the second half of fiscal 20 shows that the space business is right in line. While the fence is slightly lower, It's still within the normal quarterly variation we might expect. Margins. Space and defense margins in the quarter of 12.2% continue to be healthy, albeit down somewhat from the last few quarters. As in our other businesses, we're seeing some increased pressure on operational efficiency as a result of higher COVID cases across our facilities. Space and defense fiscal 21. Coming into the quarter, our assumption was that we'd see continued strength in both the space and defense markets as we move through fiscal 21. This helps prove for the first quarter and continues to be our operating assumption as we look out over the coming three quarters. Turning now to industrial systems. Sales in the first quarter of 209 million were 9% lower than last year. We experienced sales declines in three of our four major markets. with medical providing the only growth, up 3% from a year ago on higher pump sales. Sales into energy markets were marginally lower, driven by lower sales of components into exploration applications. Sales into industrial automation were down over 10%, with weakness across the entire portfolio of products. This is our biggest sub-market and continues to be pressured from the combined effects of the industrial slowdown in Europe and the US, compounded by the impact of COVID. Finally, sales at the simulation and test markets were down almost a third, with flight simulation particularly hard hit as a result of the drop in airline activity. Compared to the run rate of the second half of last fiscal year, industrial systems were down a further 7%, with weakness in each of our sub-markets. Simulation test was hardest hit as sales to our flight simulation customers continued their quarterly sequential decline since Q2 last year. Sales and medical applications were also lower as surge demand for COVID-related components waned. Industrial assistance margins. Margins in the quarter of 9.5% were lower than last year on the lower sales and the impact of COVID. Margins were in line with the average adjusted margins of the previous two quarters. Industrial systems fiscal 21. Our sales assumption coming into the year was flat sales in our energy, industrial automation, and Simulation and Test Markets. We also predicted that our medical market would remain strong, albeit down somewhat from the highs we saw in the recent quarters as demand for COVID-related equipment slowed. After one quarter, medical sales are in line with our thinking, up from a year ago and down from the second half. Although sales into our other three sub-markets continues to weaken in the first quarter, we were encouraged by an improving book-to-bill ratio. Therefore, for the full year, our sales assumptions remain unchanged. Summary guidance. It's been a good start to the year. We've adapted our business practices to live with COVID and our customers, our suppliers, and our internal operations continue to function. We managed our way through some efficiency impacts in the first quarter as a result of increased infections across our footprint. The good news is that vaccines are on their way. The less good news is that the pace of distribution is slower than we might have hoped. Therefore, we continue to plan for COVID restrictions across our business for the remainder of the fiscal year. Looking at our five major markets, defense, space, and medical remain strong. Industrial continues to soften in the first quarter, and our commercial business stabilized relative to the previous six months. This quarter, we allocated our capital to growth with the acquisition of Genesis in our aircraft segment. Our overall approach to capital allocation remains unchanged. Our priorities are organic investments, coincident growth, and return to shareholders, with all decisions based on long-term value creation. As we emerge from COVID over the coming year, we're optimistic that we'll see more acquisition opportunities than in the recent past. The present financial markets are providing easy access to almost free capital, which seems to be driving acquisition prices into the stratosphere. From our perspective, plentiful free money does not change the underlying economics, and risks inherent in any acquisition and we intend to remain disciplined in our approach to valuations. Therefore, we remain cautious not to overpay. As we look to the coming three quarters, we continue our hybrid working practices with most of our staff working remotely. Over the last nine months, we've learned how to live with COVID and have reconfigured our business to ensure the company remains strong and that we're in a position to invest in growth. Looking to the future, we continue to pursue our long-term strategy of technology-focused, diverse end markets, strong balance sheets, internal investments, and complementary acquisitions. Now let me pass it to Jennifer, who will provide more color on our cash flow and balance sheets.

Thank you, John. Good morning, everyone. We had another very strong cash flow quarter. Free cash flow in the first quarter was $74 million, a conversion of almost 200%. That compares to $15 million of free cash flow in the same period a year ago. Strong collections on receivables, slower growth in inventories, lower compensation payments, and reduced capital expenditures drove the increase in free cash flow. The $74 million of free cash flow in Q1 compares with an increase in our net debt of $24 million. During the first quarter, we completed the Genesis acquisition in our aircraft business, which increased our net debt by $78 million. We also repurchased just over 150,000 shares of our stock for $10 million and paid our quarterly dividends. Networking capital, excluding cash and debt, as a percentage of sales at the end of Q1 was 29.2% compared to 28.4% a quarter ago. The increase is being driven by the addition of networking capital from the Genesis acquisition with little being added in the way of sales due to the timing of the acquisition. Without the acquisition, net working capital as a percentage of sales would have been 28.6%, up only slightly from a quarter ago. Capital expenditures in the first quarter were $20 million, up from $18 million in the fourth quarter and down from $27 million in the same quarter a year ago. This quarter, we began to invest after limiting our capital spend to compliance and business-critical projects in the early stages of the pandemic. Our strong financial position today affords us the opportunity to catch up on capital investments that we had delayed and invest in efforts to increase productivity and gain efficiencies. Depreciation and amortization totaled $21 million, continuing at the fairly constant level that we experienced last year. Our leverage continues to be in our target zone. We have had very strong pre-cash flow generation during the past year, which fully offset the decline in our trailing 12-month EBITDA that resulted from the pandemic. After the first quarter acquisition, our leverage ratio would have been 2.4 times the same as a quarter ago. The impact from the acquisition caused our leverage ratio to increase to 2.6 times over the end of our first quarter. At quarter end, our net debt was $869 million, including $98 million of cash. The major components of our debt were $500 million of senior notes, $400 million of borrowings on our U.S. revolving credit facilities, and $67 million outstanding on our securitization facility. We have $660 million of unused borrowing capacity on our U.S. revolving credit facility. Our ability to draw on the unused balance is limited by our leverage covenant, which is a maximum of 4.0 times on a net debt basis. Based on our leverage, we could have incurred an additional $474 million of net debt as of the end of our first quarter. We are confident that our existing facilities provide us with the flexibility to invest in our future. Cash contributions to our global retirement plan total $13 million in the quarter. compared to $10 million in the first quarter of 2020. Global retirement plan expense in the first quarter was $18 million, the same as in the first quarter of 2020. Our effective tax rate was 24.9% in the first quarter, down just slightly from 25.2% in the same period a year ago. We did not have any significant special items in either of these periods. At the end of our first quarter, 12-month backlog was $1.9 billion, up 14% from $1.7 billion a quarter ago with increases in each of our segments. The increase in our total backlog during the quarter was much more dramatic. Total backlog at the end of Q1 was $4.7 billion compared to $2.6 billion a quarter ago. During the quarter, we renewed several long-term arrangements with customers in our aerospace and defense business. These supply arrangements cover periods up to 10 plus years. Under expanded reporting in ASC 606, we capture the full value of these arrangements in our total backlog. We expect free cash flow generation in 2021 to be in line with our long-term target of 100% conversion. We continue to see shorter term pressures on inventories as our customers continue to change their demands and we work to lower incoming receipts of inventory. However, the benefits associated with our efforts to create operational efficiencies in our business will outweigh these pressures later in 2021. We are beginning to ramp up our investments in capital expenditures from the constrained levels of the last few quarters. We are well positioned to invest in our business and we've returned to a balanced capital deployment strategy. We will invest in our operations and explore opportunities to make strategic acquisitions and return capital to shareholders. With that, we'll turn it back to John for any questions you may have. John?

Thanks, Jennifer. Lisa, we're available to answer questions now if there are questions in the queue, please.

Thank you. If you would like to ask a question on the phone lines today, you can press star 1 on your telephone keypad. If you are on a speakerphone, please make sure your mute option is turned off to allow your signal to reach our equipment. Once again, everyone, that is star one. We'll take our first question from Kaivon Rimmer with Cowan. Please go ahead.

Yes, thank you. Great quarter. So, Jennifer, your conversion was 195% in the first quarter. Why only 100% for the year?

So as we look out for the rest of the year, we've had very strong cash flow in the first quarter. And a lot of that has been driven by our contract advances. So those were providing cash of almost $30 million in the first quarter. As we look towards the rest of the year, we will be working some of that down. So that's going to be creating some pressure. There's also some pressure in some other areas, for instance, in receivables. We did get a one-time benefit last year, so there's potential for some of that to reverse as perhaps funding levels for DOD contracts changes. And the constrained levels of capital expenditures is another area that we would expect to be increasing our capital expenditures based on and our strong financial position that we've got. So there's some pressures as we look forward, as we look to spend in the capital expenditure area as well. But there's some opportunities that will offset that. So with receivables, potential pressure, there'd be some benefit relief on the payable side for the same reason. And then slowing the incoming receipts on inventory that should provide us some benefit compared to where we are in the first quarter. So it's really a combination of all of those things.

Terrific. Good answer. So, John, your aircraft sales, your military aircraft sales look huge. Could you give us a little more color in terms of what drove that?

Well, it was three things, Guy, that really are driving the increase. It's the F-35. A little bit of that is timing-related. As we talked about in the past, it depends on when you've got contracts, material usage, because, of course, a lot of it is long-term contracts. So the F-35 was very strong in the quarter. We had strong foreign military sales. This is a seasonal thing that we see. each year in the first couple of quarters we tend to have some foreign military programs that are stronger so that was stronger in the first quarter relative to the second half and then funded development continues very strong Kai and so those were the three items that were really driving the sales increase on the military side, on the OEM military side.

And therefore we should look for strong gains for the year in military aircraft?

I I think we'll continue to see a strong year, but I don't think for the full year. It's probably going to be a bit up from last year. That's what we said all along. We think military, the whole defense business will remain strong for the year. I don't think we'll continue at the pace of the first quarter, but it'll be a good year. The first quarter was particularly strong. I'm not sure that we'll continue at that pace. If you annualize that, I think that's probably a little bit too far.

Got it. So last question, you have that huge increase in backlog. Maybe give us some more color on that, and particularly the aircraft programs where you signed up for 10 years and whether you feel the contract terms are a little better than they've been in the past.

So these are, as I mentioned, they're in our A&D business. We did sign some multiple supply agreements for long-term periods. We aren't going to comment on the specific terms. and all the other terms or customers that we've had, we do believe that the terms are mutually beneficial both for our customers and for us, so.

Okay, super. Thank you.

Thanks, guys.

We'll take our next question from Ken Herbe with Tenacor Genuity.

Morning, Ken. Hi, good morning, John and Jennifer. I wanted to first ask, on the aircraft controls, really nice sequential improvement in the margins in that business, John. I know you called out mix as a benefit, but can you provide any more detail on your expectations for margins in that business? It sounds like maybe they stepped down a little sequentially into the second quarter, but can you help frame that up for us?

You're right, Ken. We did see a very nice sequential improvement. If you If you adjust the margins in the second half, there was some unusuals in the fourth quarter. But margins are running 4% to 5% in the second half, and they popped up over 9% in the first quarter. But as I said, we have a seasonality in some of our businesses that in the first quarter or two, we tend to have more foreign military sales in some programs. And that really, the mix, that does impact the mix. And so very positive start to the year. But we do not anticipate those 9.5% margins to go throughout the year. just given the loss of business that we've seen on the commercial side. So we'll see them probably take down as we go through the year, but it is better than the second half of last year. I think we'll end up the year better than the second half average, but we're not going to see that same performance as we go through the full year, we don't think.

Okay, that's helpful. And there's been some initial commentary from the Biden administration about pausing some international sales considering sort of the margin benefit there, do you see any risk to any of your, I guess in 21, longer term perhaps, who knows, but is there any risk in 21 specifically around F-35 or other programs that we should think about?

So we don't know all of the details of what that might mean at this stage, Ken. We're not anticipating any significant risk as we look out over the balance of 21. As you say, beyond that, Things could change. But, you know, given the lead times on most of the types of things that we do, typically, you know, the next 6, 9, 12 months are oftentimes already pretty much baked in. So there could always be a change, but we're not anticipating any significant impact from changes there over the rest of this fiscal year.

Okay. And then just finally, in your space business, really nice growth against obviously very difficult comps. The rest of 20, you put up, you know, 30 to 40% growth in the space business. Do we see a step down sequentially in growth in the space business? Or are you able to maintain the growth against, obviously, the really strong growth in 20?

So, you know, we went from fiscal 19, we did about 220 million in our space business. . We did almost 300 million. We're anticipating that we see some additional growth this year, but not that type of growth percentage. I mean, that was an enormous growth. That was a 30 to 40% growth. So we anticipate that we might see high single digits maybe growth this year in the space business if it continues to play out the way it is, but not that same level of growth. But it's still growth of a very strong 20, and so I consider that a real positive. So our space business is becoming a bigger part of the portfolio.

It's very impressive. Were you surprised by the first quarter growth in space? Because it seemed to be a bit ahead of expectations.

No, I mean, because the backlog, you know, the contracts in these businesses tend to go out quarters or sometimes even years, Ken. So it's relatively, it's not too difficult to look at the contracts that you have in backlog and what you think is coming in to predict the sales over the next couple of quarters. So to say that the first quarter was a significant surprise would not be true on the sales side. I'd say the broader, the growth in the space business over the last three, four, five years has been a real surprise. If we were sitting here together three or four years ago, I could not have anticipated, we would not have anticipated, I don't think the market is the type of strength we're seeing in space. And of course what's happened is we want to get back to the moon by 2024. Would that change now? Perhaps. started spending a ton of money. You've seen the emergence of the space force and the space layer and all of these applications where space is viewed as the next frontier in terms of the battleground. And so all of that is driving it. Then you've got the hypersonics, huge push on hypersonics over the last few years. A good portion of that is in the space side of our business. So there's a whole series of what I call macroeconomic effects coming out of the government that John, thanks a lot for all the color. Nice quarter. Thanks, Ben.

All right, as a reminder, everyone, that is star one to ask a question. We have a question from Michael Caramoli with Truist Securities.

Hey, good morning, guys. Morning. Thanks for taking the question. Nice results. Maybe just to kind of go back to Ken's kind of original question on the margins, can you maybe just, you know, obviously the second half was pretty depressed you got this this mix up um you know this quarter but as I as I think about aircraft maybe going back you know I guess it was mid-19 you had um you know the operational uh challenges that you disclosed you know it seemed like that was going to be you know a multi-year effort to make improvements there around you know quality on time scrap can you just give us a general update around you know kind of What's been happening in the aircraft control segment on those operational improvement initiatives? And I would think, obviously, volumes fall off a cliff in aerospace, but amid lower volumes, it might actually have been a little bit easier to implement some of these changes. And I guess what I'm getting at is when do we really start to see some of those benefits. Should we think about that, you know, exiting, you know, this fiscal 21 or just any color there on what's been happening on the operational side?

Sure. Yeah, so a couple of years ago, Michael, as you described it, we kind of hit a real challenge in the aircraft business and we kind of took a step back and said, look, we, you know, we built a business that was designed around a component supplier and we've now become a system supplier and we've discovered that Our operational capabilities are good enough if you're a components guy, and they're not good enough at the level that we're now playing at. And we really need to kind of retool around that. And you may remember at the time we said we need to bring in additional talent into that area in order to do that. And we did two things. We moved quite a lot of internal talent, some of our best management folks, into the operations on the aircraft side. They are now well engaged and doing a lot of really good stuff. We changed out I think we've got six major production facilities. I think five of the six have a different manager running them now, different guy running it at the most senior level. So we really injected a lot of talent down through the supply chain, et cetera, internally. We then also engaged with outside consultants. We spent a year with them working through primarily the supply chain side of it because that was the biggest challenge area for us. Learned a ton from that. have been working really hard over the last couple of years to implement those. Our engagement with the consultants has kind of wound down, mostly because, you know, we got to the point where we established the processes. Now it's a matter of embedding them and working them. What's happened, of course, is, you know, nine months ago is COVID hit us. And so our plans to continue making the types of improvements that we were going to do really got derailed because of COVID. And, you know, there's been a dramatic shift in terms of what I described in the in my remarks, just our available capacity. We've had situations where we're running three shifts, but on the second or third shift, we may have a relatively small skeleton crew in a particular area. Let's pick an area like grinding. We've got three or four people. Well, if one of them contracts COVID, we send all the folks around them home for two weeks. And so we're down for two weeks in that particular area, which of course is a step in the process of getting products out. And so we've seen Those have been the challenges we've been working with and have really absorbed time and efforts. We also, you know, in the past, we would have the changeover shifts. The next guy would come in before the last person left. Now we have a gap. We've got cleaning procedures. When people come, they also have their own cleaning procedure. So we've seen an impact on efficiency associated with that. And a lot of the great ideas we had about improving the processes and relaying up the value streams and all that That has really taken a backseat, partially also because we sent a lot of people home. We want minimum people in the factory. So I would say that our operational improvement program, we continued to move along, but it has dramatically slowed over the last nine months from what we would have hoped and anticipated. Having said that, now that we've got COVID, you know, at least we know how to deal with it. We are continuing to work those issues. And I would anticipate that over the next nine months, I think by the back end of this year, We should start to see that impact. If you remember, when it came up, I said what we'll probably see is we start to see it in inventory first. But first of all, we see it in the customers, you know, better delivery on time or, you know, making sure our customers are more satisfied. Second, we see it in inventory that should start to come down. And then finally, we start to see it in the margins. Definitely on the customer front, we've already seen that. We've seen that over the last year. And we've maintained that through the COVID situation. Of course, with quantities dropping off significantly in the commercial sites. It was relatively easy to do that, but we had already seen that before that happened. The inventory fees, we've not seen, and that's because our commercial business has just fallen off so quickly that our ability to slow our incoming receipts, we've been chasing down this curve for the last nine months. And as Jennifer said, even this quarter, we saw the long-term production rates at the OEM, their advertising, continue to come down. So we continue to go back to our supply chain and say, you've got to send me less and less but they're smaller players and we don't want to just shut them off. So our inventory, our ability to slow it has come down and so we're not seeing the inventory impact of the operational improvement because it's being masked by the impact of COVID and the drop in the commercial. And then, of course, as I said, the margin piece we'd see later. We anticipate that as we get through this year, we should start to see both the inventory piece and into next year that margin improvement piece.

Got it. That's helpful. So, I mean... As we look at margins on, you know, emerging from this downturn, you know, obviously the margins were challenged. into the upturn, you know, barely scratching that kind of 10% level. Do you envision structurally higher margins even if, you know, maybe the 787, A350, you know, kind of hold these rates if we don't get back to the narrow body volumes? Do you think you can do structurally higher margins than say what you were doing in kind of the, you know, fiscal 18, you know, fiscal 19 time frames?

I think if we can stabilize the demand, of course we've got factories that are sized for 10 or 12 A350s and 787s a month. They're physically that size. So you end up, no matter how you do it, you end up having underutilization in some of those factories. But we've resized the staff, although we continue to look at that because the quantities continue to come down, but we think we've resized and we will stabilize and then we start to see the operations improvement come in. So yes, even at the lower quantities, assuming it can stabilize and we start to get some rhythm there, we believe that as we look out over the next couple of years, we can get the margins back up to what they were a couple of years ago and from there we can continue to see improvements, particularly if we started to see the volume of the commercial side tick up a bit.

Got it. Thanks, guys. I'll jump back into Q&A.

Thanks, Mike.

All right, and as a reminder, everyone, that is star one to ask a question. All right, and there are no further questions at this time. I'd like to turn the call back over to John Scannell for any additional or closing remarks.

Thank you, Lisa. Thank you very much to everybody for listening in. As we said, we feel like we're off to a good start in fiscal 21, but it will inevitably remain a You're welcome. That does conclude today's presentation. Thank you for your participation. You may now disconnect.