Methanex Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2024

There are 16 speakers on the call.

Operator

Thank you for standing by. Welcome to the Textron First Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. This conference is being recorded for digitized replay and will be available after 10 am Eastern Time today through April 25, 2025.

Operator

You may access the replay by dialing 866-207 1041 and enter the access code 8,546,032. I would now like to turn the conference over to David Rosenberg, Vice President, Investor Relations. Please go ahead.

Speaker 1

Thanks, Leah, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website.

Speaker 1

Revenue in the quarter were 3,100,000,000 dollars up from $3,000,000,000 in last year's Q1. Segment profit in the quarter was $290,000,000 up $31,000,000 from the Q1 of 2023. During this year's Q1, adjusted income from continuing operations was $1.20 per share compared to $1.05 per share in last year's Q1. Manufacturing cash flow before pension contributions reflected a use of cash of $81,000,000 in the quarter compared to $104,000,000 of cash provided in last year's Q1. With that, I'll turn the call over to Scott.

Speaker 2

Thanks, David, and good morning, everyone. In the Q1, we saw higher segment profit at Aviation, Bell and Systems. Aviation in the quarter, we delivered 36 jets, up from 35 last year, 20 commercial turboprops down from 34 last year's Q1. Aviation continues to see strong demand across our product lines that resulted in backlog growth of $177,000,000 ending the Q1 at 7,300,000,000 Textron Aviation's fleet utilization remained strong in the quarter, contributing to aftermarket revenue growth of 6% as compared to last year's Q1. Throughout Q1, we saw continued improvements in our supply chain and hours attained in the factory, supporting delivery growth throughout the remainder of the year.

Speaker 2

At Bell, revenues in the quarter were up, driven by higher military volume, reflecting the continued ramp of the FLOWAR program. On the FLOWAR program, we continue to progress through preliminary design reviews and expect to complete milestone B, which allows for the entrance into the engineering and manufacturing development phase of the program later this summer. Also during the quarter, Bell received an award for the production delivery to Nigeria of 12 Ah-1Z Helicopters. For V-twenty 2, the recently enacted FY-twenty 4 budget includes 5 additional aircraft scheduled for delivery in 2027. On the commercial side of Bell, we delivered 18 helicopters down from 22 in last year's Q1.

Speaker 2

During the quarter, we continued to progress toward FAA certification on the 525 expected later this year. Bell recently received its first order for 10 525 Helicopters from Equinor, Norwegian State Energy Company. Moving to Textron Systems, revenue was flat and margin was up versus last year's Q1. During the quarter, we received notification from our government customer of the termination of the shadow program. We're currently working with the Army on winding this program down.

Speaker 2

This decision reflects the Army's transition from Shadow to the future tactical UAS system to fulfill the need of organic intelligence, surveillance and reconnaissance. Earlier this month, we received notification that we were awarded options 34 of the FTIS program and we remain one of 2 competitors for this next generation program. Also in the quarter, systems was down selected with one other competitor to design, develop and manufacture a 30 millimeter autocannon advanced reconnaissance vehicle prototype for the U. S. Marine Corps.

Speaker 2

This 2 year effort will develop an innovative combat vehicle that provides mobile protective firepower for the Marines. In addition, the Army's FY 2025 budget request funds the design of the XM30 ground combat vehicle in preparation for the prototype build and testing portion of Phases 34 in the program's development. Moving to industrial, we saw lower revenues in the quarter, largely driven by lower volume and mix in the specialized vehicles. Kaltex revenues were flat in the quarter. We're encouraged by recent trends in the hybrid space where industry is experiencing increased customer demand and OEM investments in hybrid platforms.

Speaker 2

Aviation, Pipistrel delivered 30 aircraft in the quarter, up from 13 to 2023. Also during the quarter, Pipistrel was granted an airworthiness exemption by the FAA for Velas Electro Trainer, which will allow U. S. Flight schools to use this all electric aircraft in their pilot training programs. With that, I'll turn the call over to Frank.

Speaker 3

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed starting with Textron Aviation. Revenues at Textron Aviation of $1,200,000,000 were up $39,000,000 from the Q1 of 2023, reflecting higher pricing of $48,000,000 and lower volume and mix of $9,000,000 Segment profit was $143,000,000 in the Q1, up $18,000,000 from a year ago, reflecting a favorable impact from pricing net of inflation of $14,000,000 Backlog in the segment ended the quarter at 7,300,000,000 dollars Moving to Bell, revenues were $727,000,000 up $106,000,000 from last year's Q1, reflecting higher military volume of $95,000,000 dollars primarily related to the FLORA program. This was partially offset by lower volume on the V-twenty two and H-1 programs. Segment profit of $80,000,000 was up $20,000,000 from a year ago, primarily driven by a favorable impact from performance of $30,000,000 which includes $13,000,000 of lower research and development costs.

Speaker 3

Backlog in the segment ended the quarter at 4,500,000,000 dollars At Textron Systems, revenues were $306,000,000 flat with last year's Q1. Segment profit was $38,000,000 up 4000000 quarter. Backlog in this segment ended the quarter at $1,800,000,000 Industrial revenues were 892,000,000 dollars down $40,000,000 from last year's Q1, largely reflecting lower volume and mix of $51,000,000 principally in the specialized vehicles product line, partially offset by higher pricing of $16,000,000 in the segment. Segment profit of $29,000,000 was down $12,000,000 from the Q1 of 2023, primarily due to lower volume and mix at specialized vehicles. Textron E Aviation segment revenues were 7,000,000 dollars and segment loss was $18,000,000 in the Q1 of 2024 compared with a segment loss of $9,000,000 in the Q1 of 2023, primarily related to higher research and development costs.

Speaker 3

Finance segment revenues were $15,000,000 and profit was 18,000,000 dollars Moving below segment profit, corporate expenses were $62,000,000 net interest expense was $15,000,000 LIFO inventory provision was 20,000,000 dollars intangible asset amortization was $8,000,000 and the non service component of pension and post retirement income was 66,000,000 dollars In the Q1 of 2024, we incurred $14,000,000 in special charges under the 2023 restructuring plan, largely related to headcount reductions to improve the cost structures of the Textron Systems and Bell segments in light of the cancellations of the Shadow and Faroe programs in the quarter. We expect to incur additional severance costs in the Q2 in the range of $25,000,000 to $30,000,000 largely related to headcount reductions in the Industrial segment. As a result, Textron has expanded its 2023 restructuring plan from a previously announced range of $115,000,000 to $135,000,000 in pretax special charges to a range of $165,000,000 to $170,000,000 In the quarter, we repurchased 3,600,000 shares returning $317,000,000 in cash to shareholders. To wrap up with guidance, we are reiterating our expected full year adjusted earnings per share to be in a range of $6.20 to $6.40 per share. We also expect full year manufacturing cash flow before pension contributions of $900,000,000 to $1,000,000,000 That concludes our prepared remarks.

Speaker 3

So Leah, we can open the line for questions.

Operator

Thank you. For those asking questions, And we'll start with David Strauss with Barclays. Please go ahead.

Speaker 4

Thanks. Good morning, everyone.

Speaker 5

Good morning, David.

Speaker 4

Scott, maybe if you could just dig in a little bit on the deliveries in the quarter. I think the mix was pretty strong, but relatively flat year over year and you build a lot of inventory. So maybe just how the supply chain is doing? Did you want to deliver more airplanes than you ended up doing? And how do we think about how much deliveries could grow this year off of 168 last year?

Speaker 4

Thanks.

Speaker 2

Sure. Look, I think that we certainly expect to see a nice growth on a year over year basis. The supply chain does continue to improve the number of hours that we're able to get in the factory in terms of labor hours that are productive hours, post training and whatnot does continue to improve. So I think we feel pretty good about how things progressed through the quarter. Look, we always have a few aircraft that we would like to have gotten delivered.

Speaker 2

We definitely had some things that got late in the quarter or just didn't get to where they could transfer in time. But for sure, the trend in terms of productivity and efficiency and throughput in the factory improved as we worked our way through the quarter. So a little bit lighter than we probably would have liked, but not a big number. And I think again, the momentum is good and we certainly are still feeling very good about our guide in terms of a nice increase in volume on a year over year basis.

Speaker 4

Great. Thanks very much. Sure.

Operator

Next we go to the line of Robert Stallard with Vertical Research. Please go ahead.

Speaker 6

Thanks so much. Good morning.

Speaker 5

Good morning. Good morning.

Speaker 6

Scott, maybe we'll start with Industrial. A bit of softness there in Q1. I know this is a tough division to forecast given its short cycle nature, but are we finally seeing the U. S. Consumer rolling over here?

Speaker 2

Well, look, I think we talked last year, Robert, towards the end of the year and in our guide that we expected to see the sort of high end consumer dollars, sort of recreational, personal transportation stuff soften and we're seeing that. It's probably even a little bit softer than we would have expected. And the automotive segment is pretty stable, which is fine. There are certainly some pieces in the vehicle business that are doing fine, but those high dollar discretionary items have certainly softened. As you know, those were often financed.

Speaker 2

Finance costs are certainly higher than they have been. So we expected it to be softer. Our PTV business, which has been a great business for us, was a little bit softer than we would have expected. And that's part of what we'll have to do, some additional restructuring on top of our initial plan to dial that in and avoid a situation where we put too much inventory out in the field.

Speaker 6

Right. And then maybe one for Frank. On the revised restructuring plan, do you how do you expect the cash impact of that to flow through? And do you expect the savings to be roughly equivalent to the restructuring charge?

Speaker 3

Yes. I think the savings will be ultimately in the area of $185,000,000 or so, kind of on a run rate basis and that we'll realize a fair amount of that by the end of 2024, but that will roll into 2025 as well. The incremental cash is about $20,000,000 in 24 the additional restructuring and we'll just absorb that into our cash guidance. And overall cash for the restructuring for 2024 is in the area of $60,000,000 to $65,000,000 so but additional $20,000,000 versus where we had been.

Speaker 7

Okay. That's great. Thanks Frank.

Operator

Next we move on to Shia Kayeagu with Jefferies. Please go ahead.

Speaker 8

Thank you. Good morning Scott, Frank and David. Can we start off with maybe Bell? Scott, if we look at margins, they expanded up 130 basis points of Bell to 11% despite maybe $180,000,000 of flower contribution on the top line. So how do we think about the moving pieces to profitability for the year to get to 9.5% to 10.5%?

Speaker 2

Well, I think we'll probably still end up in that range, Sheila. We had a strong Q1, obviously. We did have, as we noted there, a settlement on an industrial property related lawsuit that gave us a little bit of a boost in the quarter. But I would say the team is performing well. As you know, we did restructuring actions to try to deal with the loss of the flower program.

Speaker 2

We were able in a number of cases to take some of the appropriate engineering talent and move that over to the flower program, which helped us ramp that program up. But we also had to take some cost actions both in the as a result of the loss of the FLAR program as well as some of the lower production quantities. Obviously, it will certainly help us as we start to see some flow of the Nigerian H1 order that gets that line back up and going again, the extra 5 on V22, which is above the original program of record, is certainly a nice add and we'll start see some of that flow through in the latter part of the year. So I think Bell had a strong quarter. We're continuing to focus very much on cost to deal with the mix issues there.

Speaker 2

But we'll clearly end up towards the high side of guidance on Bell. I think they're performing well.

Speaker 8

Great. And then if I could ask one on Aviation. Orders held up pretty well, book to bill above 1 times. Maybe if you could provide any color on what you're seeing from your customers? One of your competitors noted interest rates are potentially prohibiting orders, if you could just comment on that.

Speaker 2

Shoal, we continue to see real good strength across pretty much all the product lines in the business. So we're feeling pretty good about the order flow. Again, a lot of these aircraft are going to deliver a couple of years from now. So from a financing standpoint, I don't know, we don't, I guess, hear as much about that, but the order activity was staying pretty strong, very positive.

Speaker 8

Great. Thank you.

Speaker 2

Sure.

Operator

Next, we go to Myles Walton with Wolfe Research. Please go ahead.

Speaker 9

Thanks. Scott, I was wondering if you could touch on the supply chain within Bell. Obviously, the 1Q is seasonally light usually for the commercial kilos, but down year on year. And then also the comment you made on the 525 certification at year end. I know that one of your business heads had been quoted as getting more confident on that into the year end.

Speaker 9

Could you also comment on your confidence level of that certification? Thanks.

Speaker 2

Sure. Look, the Bell supply chain continues to, I would say, improve. We always have a number of parts that are sort of problem children and we're continuing to work that. But in general, I think we are able to manage our way through that. And I don't think there's anything new or surprising that would have in any way affect our guide as we think about Bell commercial volumes through the course of the year.

Speaker 2

We did have a very strong Q4 obviously on the commercial deliveries and so a little lighter maybe than we expected Q1, but I think we're in good shape and order activity there also remains very healthy. So I think Bell is in a good place. 525 flight test is going very well. The FAA flight testing portion, we're well into that. We have a few more performance flight tests and then we go through sort of what they call FNR, which is about 150 hours of just durability, reliability flying.

Speaker 2

And obviously, as you guys know, we've been flying that aircraft for a long time. It's proven to be very durable, reliable aircraft. So I don't think we'll have any issues going through there. So we'll we should wrap up flight testing here as we get to mid year. And as you know, there's a fair bit of paperwork processing and final documents and all that kind of stuff have to go before the final certification.

Speaker 2

But I'd say at this point, we feel pretty good about where it is.

Speaker 9

And if it were certified, what would be sort of the production rate that you target over the next few

Speaker 2

years? Yes, we haven't released a production rate on the 525.

Speaker 9

All right. Thank you.

Speaker 2

Sure.

Operator

And our next question comes from Peter Arment with Baird. Please go ahead.

Speaker 9

Yes. Good morning, Scott and Frank.

Speaker 5

Good morning, Peter.

Speaker 9

Hey, Scott. Nice results. Did you quantify what the settlement was in the Bell that affected the margins this quarter?

Speaker 2

No, we didn't. I mean, it's not a huge number, Peter, but it's not that it helped the margin rate a little bit in the quarter.

Speaker 9

Okay. Okay. I just wanted to clarify that. And then just a quick one for you, Frank. We expected that you would have higher corporate expenses in Q1.

Speaker 9

Just wondering just from a modeling perspective to calibrate the rest of the Street. Are we thinking more evenly spread for the balance of the year for your $160,000,000 target?

Speaker 3

Yes. As you know that bounces around depending on where the share price is. But kind of we expected it certainly will not be as volatile or may not be as volatile for the rest of the year. So we'll see. But yes, we're still sticking with the same target for the full year.

Speaker 9

I appreciate the details. Thanks guys.

Operator

Sure. Next we have a question from Cai von Rumohr with TD Cowen. Please go ahead.

Speaker 10

Yes. So your competitors Gulfstream and Embraer basically had higher bizjet deliveries and we're kind of closer to where they expected to be and yet you guys continue to struggle. Is part of that related to geography that you guys are in Wichita and you have to fight with spirit to get people because they're trying to ramp to and that therefore this is going to be a longer slog than maybe others are going to see?

Speaker 2

I don't know, Cai. I mean, I thought we feel pretty good about our deliveries. We always would like to get another couple of jets here and there, but I think we're doing pretty good and feeling good about where we are on the labor front where we expected to be. So I don't see a problem with our labor situation in Wichita. I think everybody has been challenged by higher turnover rates just in terms of the amount of churn.

Speaker 2

And that's really been one of the biggest impacts to us on the productivity efficiency side is the number of people that come in and rotate back out. But I think most companies in all industries, frankly, are seeing that. But no, I don't think we have a we certainly don't feel like we have a macro unsolvable problem. It's improved significantly. The number of employees is where we needed to be.

Speaker 2

And I expect we'll say we will continue to see a ramp on deliveries as we go through the year.

Speaker 10

Great. And sort of maybe going back to Miles's question. So energy prices are up 5.25 is clearly targeting that market. You've got an order for 10. Do delivery start relatively early next year?

Speaker 10

So could we start to see some pretty good build on that program?

Speaker 2

Well, we're already ramping up the production side of the program to start to meet deliveries, but I suspect those deliveries will be in the late 2025 sort of timeframe. I think we're in a very good place in terms of the cycle as you allude to. Obviously, Equinor is an energy company and those are for oil and gas offshore applications and we have several other customers whom we're in, I'd say, positive latter stage negotiations that are primarily aimed at the oil and gas market right now. So it's certainly a favorable time to be getting these things through certification. And I think it fits a nice place in that end market.

Speaker 10

Terrific. Thank you.

Operator

Next we go to Seth Seifman with JPMorgan. Please go ahead.

Speaker 7

Hey, thanks very much. Good morning everyone. I guess, Scott, you called out the contribution to EBIT growth from pricing at Aviation and we'll see more about the other components in the queue. It looks like the compares for pricing get somewhat tougher from here. Should we think about I know you probably have some visibility into the backlog here.

Speaker 7

Should we think about the $14,000,000 of year on year pricing being a relatively high level compared to what we're likely to see for the rest of the year given that those compares get harder?

Speaker 2

Yes. I think it kind of is pretty stable through the course of the year. I mean, we do have obviously very good visibility to the pricing side of things because they're all in the log. Obviously, what's important to us is to maintain that spread of net pricing over inflation. And so that's really most of work as we go through the course of the year is just managing the inflation numbers around supply base and things like that.

Speaker 2

So but I would expect to see positive price over inflation through the course of the year.

Speaker 10

Right. Okay. Okay. Thanks. And then just

Speaker 7

to follow-up, I think you talked earlier about potentially some upside at Bell, talked about being in good shape at Aviation. I mean, when we think about where industrial came in, in the Q1 and where the guidance is, it looks like they're going to probably have a tough time getting to that guidance and then maintaining the overall guidance for the company of Aviation and Bell to fill in those gaps or that gap?

Speaker 2

Yes, I think, look, the Industrial business, we would anticipate the revenue being a little bit lower than probably our original guide. I think we'll probably hold in the margin range. But I think we have sufficient upside in terms of the performance and how we're doing on the aviation and the Bell front that which is why we're comfortable holding our guide for the overall company.

Speaker 7

Great. Thank you very much.

Operator

We will next go to the line of Noah Poponak with Goldman Sachs. Please one moment here. Please go ahead.

Speaker 9

Hey, good morning everyone.

Speaker 5

Good morning, Noah. Hey, Scott, Frank, just staying on the Aviation margin. I mean, it's a pretty good incremental in the quarter. I think it was a little bit of an easier compare. We kind of have a sense what units and price are doing.

Speaker 5

I think you had cost input inflation, but you've also cited just kind of supply chain and some internal operating performance, maybe that's been a hurdle. Is that behind you now? Is that no longer an issue as you move through 2024? And is that a tailwind year over year?

Speaker 2

I think you'll still see some pressure in Q2. No, remember, a lot of these aircraft are our inventory, a lot of that cost is inventory. So it usually takes the first half of the year to bleed out in the performance levels and productivity levels that we saw in the back half of the previous year in 2023 in this case. So I still think we see some pressure for that. But like I said, the good news is that when look at the metrics in the factory and the efficiencies, productivity and things of that nature, we're we are starting to see some of the benefits that we expect to see in a more stable production environment, less supplier disruption, fewer onboarding, so less impact on the training.

Speaker 2

There's a lot of things the business is doing to try to address some of those issues. So I do think that we'll have margin rates that do continue to improve over the course of the year, but you're still going to have some drag of that inventory release, particularly as yet through Q2.

Speaker 5

Okay. That makes sense. And then I guess just a follow-up on the Bell margin. I know that Florida is still ramping and it will kind of exit the year at a different revenue run rate than it achieved in the Q1. But it's also ramped a decent amount.

Speaker 5

And I think this year you'll get pretty close to what the run rate is in the sort of medium term. And this bell margin just keeps outperforming. I mean the amount of margin compression that was discussed out there in the market I guess in the medium term, is that kind of off the table? Or I guess how do you see this dollar margin hanging in 24, 5, 6 just in the medium term as you continue to ramp Florida?

Speaker 2

Well, look, I mean, I think, yes, the team is performing well. We're doing everything we can on the cost front to deal with the lower production levels, things like the Nigerian order, the additional 5B-22s, these things are all helpful. I guess I would also note, you may have seen if you look at the FY 2025 budget request, one of the allocations of sort of the elimination of FAR and where that money in the out years goes, there is over $200,000,000 of FY 2025 money on FLORA above what was originally in the FIDAP. So I do think that we're going to we're ramping quite nicely on FLRAA. We'll actually probably see that increase in terms of the number of revenues on FLRAA as we get into 2025 above what we might have originally expected on the FIDAP.

Speaker 2

So that's another couple of $100,000,000 probably revenue step as we get into next year. So look, we'll continue to stay very focused on the cost side and executing and performing against all these programs. And as I said, I think that'll drive us to the higher side of the revenue guide or the I'm sorry, the margin guide for this year. And we'll certainly get back to you on the FY 2025 guide sometime in January, February.

Speaker 5

Okay. And Frank, I guess a decent amount or a lot of the items below segment manufacturing segment EBIT were pretty different in the quarter compared to what the full year implied on a quarterly run rate. If I look at what Aviation did, Finance did, tax rate, corporate interest even, is it worth updating those on a full year basis or are they all just kind of still looking like they'll land in the range of what you had originally embedded in the earnings guidance?

Speaker 3

Well, I think that finance will be in the range of what we had thought. We talked about corporate expense was kind of significantly higher this Q1 due to share price performance. But we'll kind of stick with that type of range. I think interest expense relative to I don't know what we didn't really guide interest expense, but I guess we're probably a little better on interest expense excuse me relative to the $90,000,000 depending on what interest rates do for the year. Our investment in cash is a little better than we had thought given the continuing higher interest rates.

Speaker 3

So there's probably benefit there. But the other stuff is kind of in the range of what we had talked about.

Speaker 5

Okay. Thank you.

Operator

Next, we have a question from Doug Harned with Bernstein. Please go ahead.

Speaker 11

Thank you. Good morning. I wanted to go back to your discussion around pricing at Aviation. This has been a great story with continuing to be able to get pricing ahead of inflation. But when you look at this and I'd say outside of what you have in the order book right now, When you try and plan longer term, is this something you can expect to continue?

Speaker 11

Or do you have to look at this as eventually pricing is going to come back and kind of converge with inflation rates?

Speaker 2

Geez, I don't know. I mean, obviously, I would say at a macro level, generally speaking over very long periods of time, price inflation probably end up pretty close. I think we certainly went through a number of years in this industry where the prices were where the products were way under price. I mean, it just doesn't make sense. So I mean, we had a significant catch up in price, I think got them back to much closer to where they should be.

Speaker 2

And obviously, our expectation is you're going to continue to see inflation on a go forward basis and we expect to see pricing increasing on a go forward basis. And then we're seeing that. I mean, that the pricing in the market is solid. And beyond that, I'm not sure how to forecast over a long period of time, but we still think demand is strong and the price environment is also doing well. As I said, I think when we guided, we talked about the fact that you wouldn't see as significant a price absolute price increase as you saw in the last couple of years, but you also see some inflation starting to come down as well.

Speaker 2

So anyway, for us, what's important is that we net have pricing positive over inflation.

Speaker 11

Okay. And then just switching over to Bell for a moment on again on margins. You've talked in the past and I think is one would expect initially FLRAA is dilutive. But you look at that trajectory, now that you're moving forward, you're headed toward milestone B, I would expect long term, this is a very accretive program once you're in full rate production. Can you give us a sense of how you expect kind of the timeline of warrants contribution to margins to proceed?

Speaker 2

Well, I mean, I think that as you described, that's kind of what you would normally expect for any of these large defense contract programs. FAR is a very big program, right. So the EMD phase of this thing goes out through into 2,030. Now you'll start to see, I would suspect initial production lots. We have LRIP deliveries that happen out in 2028, but you'll start to see some of the follow on production lots be negotiated out in that timeframe.

Speaker 2

But certainly the next several years is very much dominated by the EMD program.

Speaker 11

Okay. And that would be dilutive in that period?

Speaker 2

Yes, correct.

Speaker 11

Okay. Very good. Thank you.

Speaker 2

Sure.

Operator

Next we go to the line of Jason Gerske with Citigroup. Please go ahead.

Speaker 12

Hey, good morning everybody.

Speaker 13

Good morning.

Speaker 3

Scott, I was wondering

Speaker 12

if you could spend a little bit

Speaker 13

of time on EA Aviation.

Speaker 12

Maybe provide us a little bit of

Speaker 13

an update on how things are going in that business and the development that you've got going on there and kind of what the next couple of years look like for you all on product development revenue and how EBIT is going to trend for us here over the next few years given that backdrop?

Speaker 2

Sure. So look, I think there's obviously a couple of pieces that are in here right. There's the Pipistrel business, which I think is doing well. We're seeing we saw a significant increase in number of deliveries here in Q1. I think demand for those products is strong.

Speaker 2

So we feel pretty good about where that is. As I mentioned, we did get an FAA exemption on the ability to do flight training on the VELSO Electro, which is fundamentally a training aircraft. So I think that will help us pick up volume as we can now sell those and use those for training in the U. S. Domestic market.

Speaker 2

It's already been accepted and we've seen nice growth in the international markets. We have a couple of new products that are that product line that I think will do well. So I think we feel very good about how Pipistrel guys are doing and how that's performing. On the R and D, which is really the dominant piece of what's driving the financials in that segment, we have the Nexus program, which is progressing well. We're doing the full integration and testing of the first craft.

Speaker 2

We'll probably see we're already sort of doing ground testing and evaluation already. We'll see flight test later on this year on the NEXUS front. That program is also, I'd say, progressing well. Most of supplier selections are done, purchase coming in, we're starting to build the 1st airframe with expectations that we would probably fly that sometime next year. So that's really what drives the financial side.

Speaker 2

Now I would say that we're the level of investment that we're making right now into those programs is probably going to level off. So we saw as we've guided, we saw a significant increase from 22% to 23% and now 23% to 24%. And those that level spending is probably going to level out going forward. So we'll start to see some EBIT, increased contribution on the Pipistrel product sales side. So I think that's clearly a segment that the investments in Nexus and in the newer program are going to continue to have us in a loss position, but it probably stabilizes going out the next few years.

Speaker 13

And as you think about the size of the market that you're going after, you're putting investment dollars against what you expect to be volumes. And so I'm just kind of curious, when do you expect the payback period to start on these investments that you're making?

Speaker 2

Okay. So I think this is a very much an unknown. I mean, there's plenty of studies out there and a lot of other noise in this industry that when you look at the eVTOL side of things that it's a mega market. The exact timing of that I think is still a little bit to be determined. There's still plenty of work to do on the technical front from our perspective, technical work, regulatory work, to make sure that there's viable products to meet that mission.

Speaker 2

So again, I think there's plenty of independent third party data out there that has perspectives about how huge that market could be. Keep in mind guys, our spending here is relatively modest. I think we're taking advantage a lot of cost and cost structure and talent and capability that we already have in the company. So if the market proves to be what 3rd parties would say the market would prove to be, it's going to be a massive return on investment.

Speaker 12

Okay, Thank you very much.

Speaker 5

Sure.

Operator

Next we go to George Shapiro with Shapiro Research. Please go ahead.

Speaker 14

Yes. Good morning.

Speaker 2

Good morning, George.

Speaker 14

Scott, the incremental margin in Aviation as people were talking about was, I mean, like 46%. And I recognize that revenue differences are small, so the numbers can get somewhat distorted. But given that you said inflation will probably pretty much be somewhat similar to the price benefit that you got this quarter. Why won't those incrementals for the rest of the year run somewhat higher than kind of your objective of 20%?

Speaker 2

Well, George, look, I mean, I think when we look at the cost and what's going to come out of inventory and what the margin rates are going to look like. It's I do think you're right. We did have a higher conversion on Q1, but that's certainly I think, certainly higher than we would expect through the course of the year. So I think at this point, as we look at it, our expectations in terms of what inflation is going to look like, what plant performance is going to look like, which as I said, is for sure improving through the course of the year. As we get towards the high side of guide there, it's that 20% kind of range, which is generally what we've guided as a long term measurement for the business.

Speaker 2

I think that's where we'll be.

Speaker 14

Okay. And one quick one for you, Frank. You bought a lot of stock in the Q1 like 1.8% of the outstanding. I guess it was pretty opportunistic or do we expect that you might buy more than 5% for this year?

Speaker 3

Well, we talked about kind of 5% was in our guidance, but we also talked about the fact that we have a strong liquidity position and we are going to return excess capital. So I think that kind of we did a fair amount in the Q1. We'll continue to buy from here. We'll probably be on the higher side of that 5% for the year.

Speaker 14

Okay. Thanks very much.

Operator

Next we go to the line of Ron Epstein with Bank of America. Please go ahead.

Speaker 12

Yes. Good morning, guys. Just maybe circling back on the defense business in the supplemental that just got passed yesterday. Is there stuff in there for you guys? I mean, have you looked obviously, you've looked at it, but can you give us a sense of potentially what's in there for systems or Bell?

Speaker 2

No, there's not. I mean, we really haven't been in the guns and bullet business. So most of that stuff is not replenishments of things that we have. I do think there's opportunities in Ukraine over time when you look at things that are possibilities for Bell and some other things in systems, but not something that's directly tied to these supplementals.

Speaker 12

Got it. Got it. And then kind of back to aviation. Broadly, how is the supply chain doing in that one of the things I've heard oddly enough is like window screens, windshields for airplanes or there's a shortage of those. I mean, is there other stuff like that that's just kind of random stuff that's just kind of short in supply?

Speaker 2

Well, look, Ron, as we said, the randomness is part of what drives us crazy, right. A definite and they change over time. But you're absolutely right. Windshields have been a problem now for several years. And it's, I say, probably getting better.

Speaker 2

But it's been a big problem. It's been a problem for us in terms of production builds and frankly it's been a big problem for us in terms of our customers. If somebody has a damaged windscreen and it's been an area of a lot of dissatisfaction in the industry, not just for the OEMs like us, but also for our ability to provide spares and service. It is certainly has been and remains one of the top problem items by category. Yes.

Speaker 9

When I heard that,

Speaker 12

I was astonished. But yes, I guess the current supplier shut down the other supplier, whatever. All right, cool. Thanks guys. Have a good one.

Operator

Next we go to Christine Liwag with Morgan Stanley. Please go ahead.

Speaker 15

Hey, Scott. Earlier, you mentioned on Industrials, how you're seeing incremental weakness in

Operator

the high end

Speaker 15

consumer. Can you talk about the customer profile of those buyers? And if there are similarities to the customer profile for products like M2 or pistons or King Airs in aviation?

Speaker 2

So I don't know exactly in terms of categorization of that customer per se, but I think that if you look at demand for all the way down to PISNET, right, Cessna 172s, the demand remains very strong and we expect to have strong deliveries even over last year, but availability, the demand environment is very strong for that kind of stuff. And M2 is strong. I mean these are products that we see strength in terms of demand across the product line. I don't think they're the same customer maybe or the same consumer perhaps. But I think if you look certainly what we're seeing and we look at other companies, if you're in the business of doing boats, RVs, recreational vehicles, PTVs, that consumer has clearly slowed down.

Speaker 2

They slowed down last year and we did make some adjustments based on that, but we've seen further slowing of that. But yes, I don't know how to categorize whether it's the same customer or not, but certainly those product categories have slowed down and everything from pistons up into light jets has not. And of course, that's a much bigger, much more important business to us, which is good, I suppose.

Speaker 15

Great. Thanks, Scott. I'll keep it to 1.

Operator

Next, we go to Gavin Parsons with UBS. Please go ahead.

Speaker 2

Thanks. Good morning.

Speaker 5

Good morning. Good morning.

Speaker 3

Just want to confirm if

Speaker 13

I heard the restructuring savings are expected at $185,000,000 given I think the initial plan was $75,000,000 and just what's driving the better number there?

Speaker 3

Yes. That's a full kind of run rate when we get through it all. And it's really driven by the addition of headcount reductions. The unanticipated Shadow, FARA and then the additional actions at Industrial are really focused on headcount where the original restructuring had some asset impairment in it. And so we're getting a much bigger run rate savings as a result of those reductions to kind of right size those activities.

Speaker 12

Got it.

Speaker 13

Okay. What is the transition from shadow to FDUAS look like in terms of kind of revenue and margins over what timeframe?

Speaker 2

Well, look, I think that's still a little bit to be determined. When the Army canceled the shadow program, they did say they wanted to move more aggressively on FTUAS. We have seen that in the awards now of option 34, which is good. There aren't, I don't think formally published dates, but the dates that we hear about in terms of when they'll put a RFP out on the street for the ultimate EMD production decisions. Sounds like they're probably pulling that forward to where that RFP could come out as early as even late this year, which would lead to an early 2025 calendar year award, which would be great.

Speaker 2

So the exact size and scope and therefore the revenue and the margin is, we just don't have visibility to that at this point.

Speaker 13

That's helpful. Thanks.

Operator

This conference is being recorded for digitized replay and will be available after 10 am Eastern Time today through April 25, 2025. You may access the replay by dialing 866-207-1041 and enter the access code 85 46032. This does conclude our conference for today. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Methanex Q1 2024
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