Operator: Our next question comes from the line of Sheila Kahyaoglu from Jefferies. Your line is open.
Sheila Kahyaoglu: Thank you. Good morning, Nick and Patrick. Thanks so much. You guys seem to be beating numbers without breaking a sweat here, Nick, I think you alluded to it, too. You’re watching labor inefficiency, supply chain. Others are stumbling on this. So I guess, what has improved over the last six months for you guys? And what are you guys watching most carefully going forward?
Nick Stanage: Well, I would be remiss if I said it was easy. I can tell you our teams have been working incredibly hard on managing the supply chain, putting out fires which were coming up quite frequently a few quarters back. And they’re not completely out but they have slowed down. So I’d say from our supply base, our supply consistency, lead times, we are definitely seeing an improvement, but it’s still not as steady and stable as it was pre pandemic. And we need to keep an eye on it because we have items pop up regularly. I’d also say on logistics and especially international freight on ships, the lead times have significantly improved and we’re seeing a downward trend there that — it’s too early to claim that it is back to 2019 levels. But again, we’re seeing positive movements in that area from our logistics and supply chain capabilities.
Sheila Kahyaoglu: Great. And I wanted to ask one on Defense and Space. I don’t know if you’ve ever given your breakout of how much space contributes. I wanted to know if your contracts are structured differently there, both within defense and space just given the customer bases.
Patrick Winterlich: So pure space sales are a smaller portion of our Space and Defense. I mean, Space and Defense dominated, it’s the vast majority of that segment that we call out. I mean, in terms of the contract, they’re probably slightly shorter in duration, but we have the same sort of commercial agreements and set up with those customers as we would with many other commercial customers — Commercial Aerospace customers, I should say. Probably, we don’t have decade-long contracts as we do see in the Commercial Aerospace world. But over time, that may develop as well. So similar structure contracts, probably slightly shorter term in nature, but nothing massively different.
Sheila Kahyaoglu: Okay. Thank you.
Operator: Your next question comes from the line of Richard Safran from Seaport Research Partners. Your line is open.
Richard Safran: Nick, Patrick, good morning. How are you? So I wanted to ask your V-280 question, a bit of a different perspective though. I think you made the point, correct me if I’m wrong, that you’re agnostic. However, one, Flora, now that the award has been made and the protest over, could you comment on the transition to the V-280 from the UH60, when the V-280 should start to impact your P&L? And how long you’re expecting UH-60 program to last?
Patrick Winterlich: Yes. So Rich, I mean, a good question. There’s going to be an overlap, I would expect. I mean, in terms of the V-280, we wouldn’t expect to see any real significant revenue probably for a couple of years into 2025. As Nick said, we’re still working on a number of packages to try and get more content on that aircraft, and it’s too soon to declare our shipset status. I would expect the Black Hawk program and the transition over to take several years. I think we’re going to see strength in replacement blade demand around the Black Hawk for some period to come. There could even be a little bit of a bump where we’re supplying to both programs for a period. But I think it will be a steady transition. I don’t think there will be a sudden drop in Black Hawk before the V-280 ramps, I think there’ll be an overlap and we’ll see a fairly gradual transition over time.
Richard Safran: I just wanted to ask a quick one on labor here. Nick, really kind of like — if you mentioned this in your remarks and I missed it, I apologize. But given the headcount increases, I wanted to know if you could offer a comment or two on how the training has been progressing, how quickly you’ve been seeing the workforce been ramping. And given the tight labor market, you even mentioned, if you’re getting the right people, I just have to think that based on your results, I mean, things seem to be doing a little bit better than you were expecting?
Nick Stanage: Well, I don’t know that I’d say they’re doing better than we expected. I think clearly they are improving rapidly. We did expect that. We continue to work our training programs. We continue to work our processes to try to eliminate as much of the potential human error out of our processes as we can. At the same time, during the pandemic, we took the opportunity to work productivity and efficiency improvements within our processes. So you’re seeing some of that flow through. But overall, I’d say the quality of the talent has been outstanding. And the ramp-up has been — I’d say, as we expected, which has translated into efficiencies that are climbing rapidly.
Richard Safran: Okay, thank you.
Operator: Your next question comes from the line of Michael Ciarmoli from Truist Securities. Your line is open.
Michael Ciarmoli : Good morning, guys. Thanks for taking the questions here. Maybe Nick, last quarter, I think it came up at the longer-term kind of margin goals were becoming a bit more challenged. Clearly, you guys had some mix and you covered all the kind of tailwinds this quarter. But has anything changed? I mean, I think last quarter, we were focusing a lot on energy inflation, just general cost pressures. Maybe can you give us a sense, has anything sort of shifted or giving you more or less confidence in getting to those longer-term targets? Any color you might be able to add on pricing as well there?
Nick Stanage: Yes, Michael. So I’d say nothing has really shifted negatively. Actually, probably some positive shifts. Number one, energy, we’ve seen a decline in the energy especially in Europe as those markets stabilize and come down. I think the team has done a great job working with our customers to recover some of the inflationary items on labor and oil, and we’ve translated that well. And again, we’ve always driven for productivity improvements year-over-year, some efficiency improvements year-over-year, which is never ending in an operational environment. So I’d say I feel good about where we are. We have a way to go. We’re going to continue to leverage the volume growth. We’re going to continue to be tight on adding costs and certainly salaried resources, continuing to drive leverage and productivity going forward.
So as we grow, clearly, we’re going to be hiring both as Patrick mentioned, to support the operations and the direct heads virtually follow the revenue. On the salaried side, we’re going to continue to add the technologists, add the positions to help drive the growth for us to deliver well beyond the recovery.
Michael Ciarmoli : Got it, got it. That’s helpful. And then just one more, if I may, maybe going back to Rob’s questions on rate. On the MAX, I mean, if we’re going to keep production at 42 a month potentially by year-end, I think there’s been some commentary that maybe 300 leap composite shipsets were built last year. Is that creating a bit of a headwind for you guys? Just some of the composite-rich engine shipsets that need to be destocked? Or any other color there on MAX that you could talk about?
Nick Stanage: We don’t see the MAX of being a headwind for us at all. We see it as being an opportunity and a tailwind as the issues sit and as Boeing ramps up. Engines, I’m sure the entry manufacturers are working aggressively to maintain and to support the rates required by the OEs. And we’re certainly not prevented from — or have any obstacles in preventing us from supplying composite components for engines and the cells going forward. That’s not a headwind for us.
Michael Ciarmoli : Okay. Got you. Yes. I was meaning one of your suppliers had shipped to maybe 300 extra shipsets at the end of last year. And having to burn those down, they were kind of producing at flat levels for the leap this year. So that’s kind of what I was alluding to.
Nick Stanage: Yes. I think we’ve got that figured into our plan and it’s not a big obstacle for us.
Michael Ciarmoli: Got it, perfect. Thanks guys.
Operator: Your next question comes from the line of David Strauss from Barclays. Your line is open.
David Strauss: Thanks. Good morning, everyone. I know you guys — you maintained your — all your guidance for this year, including your revenue guidance. But within that, is there any change in terms of how you’re thinking about by end market, I think your implied growth in Commercial Aerospace based on your — the 58% you were guiding to of total sales implied only 13% commercial aero growth for the year. So does that still hold? Or is that are you now assuming it’s higher than that?
Patrick Winterlich: So I would say — I mean, we’re not ready at this point to adjust. We’ll watch the trend of sales through the mid-year points. And if we’re going to kind of call out revision to guidance, we would do it all at the same time. Now clearly, stating the obvious, and you’ve kind of just pointed to it, Q1 Commercial Aerospace was strong, a little bit stronger than we expected. But at this time of the year, as Nick talked about, there is still supply chain challenges for the OEMs. Now whether that’s engines or whether it’s other structural or electronic components, we don’t know what’s going to happen to the build rate. So yes, a good quarter for Commercial Aerospace to start the year, but a long way still to go and too early for us to sort of look at the color within our guidance, which we will obviously look at as we move through the year.
David Strauss: Okay. And on A350, you said you’re at six, headed towards nine over the next couple of years. But has there been any change recently in that demand signal from Airbus just in light of the fact, based on their deliveries, there’s some sort of — it looks like some sort of issue there where they only delivered five aircraft in the first quarter, so way below the production rate?
Nick Stanage: Yes. So we are obviously very close with Airbus and Boeing and our customers. And we see movements and the skyline that provides pretty significant detail, but we have not seen any changes that cause us to change our belief for forecast on the 350 ramp schedule.
David Strauss: Okay. One quick one to finish up. The inventory side, Patrick, can you just give a little bit more color exactly what’s going on there? I mean, your absolute inventory levels are pretty close to being back to where they were in 2019, yet your sales volumes are still 25 or so percent below. So why does inventory keep building from here? And how significant of a drawdown should we see?
Patrick Winterlich: So great question and great question for a CFO. So absolutely, I mean, as we talked to last year, we deliberately allowed our inventory to grow, recognizing some of the supply chain challenges and bringing in the materials. And we did that in order to make sure that we didn’t delay or impact our customers or at least we minimize that as much as we possibly could. Coming into this year, we saw the strong Q1 demand sort of late last year. So we built up some inventory levels, and that continued really into January and a bit into February to support the strong first quarter. What I would say going forward, and I think I said to an earlier question, we now expect inventory to stabilize and for inventory to come down.
And we think we’ve probably peaked at the moment. We’ll be focusing on the relative days of inventory that we hold. And I would expect — and we’ll be driving to release a bit of cash, I wouldn’t overstate it, from inventory in the coming quarters. But I certainly would not expect to see more inventory growth from this point onwards. So it was really all about supporting what was actually quite a strong fourth quarter for us and then seeing an even stronger first quarter as we came into 2023.
David Strauss: Great. Thanks very much.
Operator: Your next question comes from the line of Gautam Khanna from Cowen. Your line is open.
