Robert Mehrabian: Thank you.
Operator: And next we have Elizabeth Grenfell with Bank of America. Please go ahead.
Elizabeth Grenfell: Hi. Good morning.
Robert Mehrabian: Good morning, Elizabeth.
Elizabeth Grenfell: Could you give us — could you give us some color on defense on a consolidated basis for the quarter and then what your expectations are for defense growth on a consolidated basis for the year? Thank you.
Robert Mehrabian: Yeah. Sure. I think, overall, in Q1, defense was flat year-over-year and we think for the year, it will be probably low-to-mid single-digit growth in our defense businesses. The primary reason, again, I am saying the U.S. Government programs were flat, primarily driven, as I said, but the on ground vehicles — unmanned ground vehicles. We think for the year we are probably growing in the mid-single-digits in our defense.
Elizabeth Grenfell: Great. Thank you very much.
Robert Mehrabian: For sure your excellence.
Operator: And next we will go to Joe Giordano with TD Cowen. Please go ahead.
Joe Giordano: Hey. Good morning, guys.
Robert Mehrabian: Good morning, Joe.
Joe Giordano: You talked about pulling forward some revenue from 2Q into 1Q. Can you give some detail there as to like where it was and what that means for that business from here?
Robert Mehrabian: I think, basically, we have pulled in about $10 million and most of that was in Instruments, most of that was in our marine businesses. We shipped more underwater vehicles in Q1 that we had anticipated. We have some really good orders — we actually have good orders for Q2 also. So that’s — that was just to ensure that we hit what we expected to. And also, as I said, that was affected by the fact that we are having improvements in our supply chain. We are seeing improvement, significant improvement and I expect that to continue the rest of the year based on what we are seeing and based on what the Chief of our Procurement is doing with various companies. So that’s why we pulled it forward, we felt we could and did.
Joe Giordano: No. That makes sense. Now when I think about the full year guide, I mean, so you come in, it’s clearly at the high end of your guide here. You are guiding the second quarter high end is basically in line with consensus. You guys tend to be — you are holding the full year, understanding that the macro is uncertain, like, are you trying to give the impression that the second half is weaker than you thought three months ago or are you kind of like derisking that full year guide, like, how should we think about the — what the — between the lines there?
Robert Mehrabian: Between the lines, I don’t think it’s going to be weaker, except that something terrible happens. It’s — I feel good about, look, as you know, we are always more conservative. I can go out and say we are going to make a lot more in our earnings per share and we probably could. On the other hand, with the uncertain environment that we are facing, with semiconductors being down, everybody is projecting semiconductors will recover in 2024, not this year, both equipment and supply. We grow — we — which obviously we serve those markets. I am being cautious as we always are. But I don’t think the second — right now I don’t think the second half is going to be weaker. I think it’s going to be actually stronger. If you look at earnings per share, they have to improve in the second half of the year for us to make the $19.10 that we projected or $19.20, if you want to take the high-end.
Joe Giordano: Yeah. Okay. Two more quick ones from me. You started off the year, free cash flow is pretty high, like what are your expectations for the year now, does that go up, higher than what you thought before? And then just curious on the supply chain improvement and the lack of having to pay as much gray market, like, how much benefit is that — of that 40 bps, like, how much you are getting from there and where is it getting offset from in other elements of costs? Thank you.
Robert Mehrabian: Let me start with the free cash flow. We are going to beat last year’s free cash flow by a couple of $100 million, let’s just say, $850 million is our current estimate. I hope we can do better than that and we have just continued deleveraging the company, get ready for — when all of this is uncertainty is behind us and use our capability and ability to buy things that have not there, perhaps, done as well in this environment. Coming back to the supply chain, we have seen improvement in Q1. Last year, in Q1, we — our brokerage, we bought about $23 million of goods from brokerage and that does repay 70% premium let’s say. This year first quarter, it’s the same type of thing, cost us about half as much as that and so that’s a savings, obviously.
But more importantly, if you look at revenue that’s being affected by the shortages. That is improving, which is much more comforting to me, because it makes our revenue projections a little more predictable, because we don’t have — we are not missing a lot of revenue, because we don’t have parts. So there is improvement in the supply chain. We are seeing that. There is improvement in the premium that we are paying and also the fact that we are not going to miss as much revenue, because we can ship products, because they are sitting on the shelf, waiting for one or two parts. That’s it.
Joe Giordano: Thanks very much.
Robert Mehrabian: For sure.
Operator: And next we have got Guy Hardwick with Credit Suisse. Please go ahead.
Guy Hardwick: Hi. Good morning.
Robert Mehrabian: Good morning, Guy.
Guy Hardwick: I think the previous — good morning, all. I think the previous guidance for at Group level was a 50 basis points improvement in the adjusted margin, so you are now guiding to 40s. So what are the kind of the main parts of the change and is it bias towards Digital Imaging?
Robert Mehrabian: Actually, what we have is a mixture. January, you are perfectly correct. We guided 50 basis points and now we are guiding 40 basis points. We are taking some guidance down in Instrumentation from January to today. We had over 100 basis points, we are closer to 80 basis points. Digital imaging, we are taking down about 10 basis points, all in. Aerospace and Defense, we are actually guiding — we are guiding flat and we had it going down and so that’s good. And then in Engineered Systems, we have a moderate up, which are smaller business, but we still have a moderate 45 basis points or so up. So, overall, I think, we will be up 40 basis points. Again, we hope to do better than that and the way to do better than that is if we can stick some more price increases in our portfolio, because inflation is moderating.
Nevertheless, our wages are going up 4.5% to 5%. Our purchasing of direct and indirect goods is going up with inflation and so we have to catch-up a little more with price increases to make-up for those in order to keep or be able to increase our margins. That’s the kind of uncertain part. How much can we gain from price increases? First quarter, we were okay. We made up what we paid out and we are a little positive actually. So, rest of the year, can we keep that pace of reasonable price increases to make up for inflation in both goods, as well as wages.
Guy Hardwick: And is the intention to be price/cost neutral or do a little bit better than that and then on the second…
Robert Mehrabian: I’d like to do better than that. I’d like to do better than that. For sure.
Guy Hardwick: Okay.
Robert Mehrabian: Last year…
