All right, well, good afternoon. I guess this kicks off the afternoon session. My name is Jack Ayers. I'm a research analyst at TD Cowen, and we're happy to be hosting Moog this afternoon. Pat Roche, CEO, and Jennifer Walter, CFO. I'm not sure if you want to show the disclosures.
Yes, so we will be making comments on forward-looking information, and you can refer to our public company filings, for cautionary language on that.
Perfect. So look, you guys just reported fiscal Q1 earnings, looked like a strong start to the year, sales margins, all pretty strong. But I guess free cash flow kind of came in a little bit lighter than I think a few folks were thinking. Would love to maybe just walk through that specifically and how we get comfortable the rest of the year, the 50%-75% conversion.
Sure. As you said, it was a great quarter from a P&L perspective. We did have strong sales growth, and we saw that coming from our A&D segments. And each of our segments had increases in our operating margin. Cash flow was a drag. We used $165 million of free cash flow in the first quarter. It came from a number of places, all within our working capital. Physical inventory was a drag. It was a drag because we are building up inventory for strong sales projections we've got starting in the second half of this year. We also had a drag related to our receivables, as we had expected, because in the fourth quarter last year, we collected a high amount of receivables, which left less to be able to be collected in this first quarter. And so it was an anticipated pressure.
Finally, we make our short-term incentive and our profit share payments in the first quarter. So the payments are all in the first quarter, but they get accrued throughout the year. So those were some of the contributing factors to the significant use of cash that we had in the first quarter. As we look to the rest of the year, we'll actually see a reversal of a lot of that come through in positive cash being generated from working capital. I'll start with some of the easier ones first. So for instance, on the compensation payments, we don't make those payments for any of the next three quarters for the ones that I was referencing for the bonus types of awards. So that naturally comes back to us.
On our receivables, we typically see some variation in our receivables every one to two quarters where it's up and down. We may see some more pressure in our second quarter, but we are anticipating nice cash inflows in the fourth, the third, and the fourth quarters this year. Another one that's helpful for us is customer advances. Now, we get customer advances when certain contracts get to a new point setting up for another 18 or 24 months. And we're looking to see some customer advances come through. That's what we're projecting in the second quarter here. So that'll actually help us out as well. And then finally, the hardest one to project for us is always physical inventories. But the physical inventories will improve to generate cash from a couple of reasons. One, just the timing of when we've got shipments and milestones coming.
And then also from activities that we're putting into the business initiatives to reduce the physical inventories. So those things combined are really the generators of the cash. It's really coming from the net working capital to get us up to the 50%-75% for the year.
Got it. And like based on your comments, it's going to be definitely more H2 weighted than obviously Q2.
Yes. Yes.
Okay. So I guess moving forward, you guys have been making like a lot of pretty good initiatives on 80/20, you know, getting the margin expansion 100 basis points a year. I guess how we convert that to free cash flow, what are we doing on the cash flow side? Because it seems like from an earnings P&L perspective, you guys are making really strong progress. You know, when will that, like when will we see that convert to cash?
So that's exactly right. What we're doing right now is the simplification, that type of work. And that really is a P&L type of approach. We will shortly get to the resource type of allocation, which really helps out, smooth out the process and the production flow. That's really where we'll see the benefit coming from 80/20. But in the meantime, as I referenced, we are doing some initiatives for reduction of inventory right now. The specific things that we're working that will contribute to the improvement in the back half of this year include things like constraining some of the supply chain, incoming receipts that we've got, also trying to reduce some excess levels of production that we may have. It's looking at options to get buffer stocks down to lower levels that still make sense for the business.
So there's a number of those types of activities that we have in place that are targeted to drive that. So that's the thing that's really going to drive us right now. 80/20 will carry us on after that. But longer term, we have a structural opportunity in front of us. We have taken action already, but it's probably a few year, maybe three -year journey or so on our Commercial Aircraft business. We send parts from one continent to another continent for our work on it, and then we also send it to different countries for outside processing. So it takes a very long time in the cycle to get everything through that Commercial Aircraft production cycle for the OE. So we're looking at ways to get them and bring something in-house, possibly make something closer to an existing location to really streamline that.
That takes time and effort because every step along the way, we need to make sure it's gone through the right qualification. And so it's a tedious process, but as we achieve that, it really reduces that level of inventory that we have to have because we're shrinking that cycle. So structural, opportunity, we're starting on that journey, but it's a few years before we'll actually realize that. So there's some short-term items and some long-term items that will help get us there.
Got it. So it's definitely like an investment in inventory. It's an investment for that, you know, inflection of the commercial build rates or anything like that. So I guess once we get through there, you guys do have the 75%-100% target. Is there anything, you know, structurally? I think you might have just answered that, but structurally, like you guys do have high proprietary products, very good systems portfolio. I mean, structurally, is there, can you say 100% over time? Because that's some of your peers, you know, are there?
I would say 100% over time would make sense if we were a flat, sales growth type of business on a long-term sustainable approach. So I would say we've got great growth opportunities, especially in the defense market right now. So with that, I would tone that 100% down a little bit.
Okay. That makes sense. So stepping more tactically to this fiscal year, would love to maybe hear you speak about some of the biggest opportunities or risks to your standing, you know, 3% sales growth guide and margins up 60 basis points, and just remind us again what happened in Q1 from the margin perspective, maybe with the warranty and that kind of skews the optics. Yeah.
So if I think about the sales and the business, I think we have a pretty balanced guidance for the year in terms of risks and opportunities. If I was to think about what might be upside potential during the course of the year, that might be more short cycle stuff. So, you know, we've a lot of replenishment of missiles going on at the moment around the world. And so maybe there's more potential for a pickup in some of that replenishment activity. I mean, we really had record sales in our Space and Defense group in the first quarter, and a big portion of that was half of that was missiles orders coming in. So I see that potential there as an upside. You know, you want fleet readiness to be as high a level as possible with the existing fleet of military equipment.
And so maybe some more aftermarket coming through on that side of the Military Aircraft business might be another upside potential that we have in front of us. We've had a lot of success in the medical pumps business over the course of the last six months as well as we've seized on some disruption in the marketplace and won more share there that could continue for longer for the next couple of quarters. And that might give more upside on that as well. So there's plenty of upside opportunities potentially there. I mean, counterbalancing risks might include European economy degrading further than it has. So we think we're pretty stable on Industrial at the moment, but if the economy got worse, maybe there's a downside associated with that.
Then on the Commercial OE side of the business, if Boeing or Airbus have missteps or have more problems in supply chain, maybe that has some impact on their ability to get units through. Overall, if I look at the projections we have for the year, we think it's reasonably well balanced. In the first quarter, you talked about one-off events going on. We had a surge of activity, let's say, on the Commercial aftermarket side of the business. We converted some customers who were on time and material type contracts into longer-term contract arrangements with us. Some of those then did extra provisioning of parts.
And that pulled through an extra surge of business on the aftermarket side that we don't expect to repeat in, say, quarters two or three, but underlying solid piece of business on the aftermarket side with some, we had some upside in Q1 that doesn't repeat. That helped us offset a one-time out-of-period adjustment that we had on warranty expenses that also occurred in quarter one. So from a margin perspective, those two things sort of counteracted one another.
Got it. Okay. I definitely want to touch on everything you said there, but starting off with Commercial Aero, maybe give us an update on today, what you're hearing from your two main customers.
Yeah.
And maybe explain some of the context behind the back half of last year and why we saw a nice uptick this past quarter and moving forward where we see build rates going.
Yeah. So on the OE side, we're making sure that we're positioned well to support our customers and their growth rate plan. So I would say that's kind of the underlying story there. We did have a little bit of variation related to the timing of orders. So back in the third quarter last year, we did mention that we had timing of orders. It increased our inventory at the time, and we also had a depressed level of sales in Q3 and Q4 compared to what we would have otherwise. That just caught up normal catch-up in timing of orders in the first quarter. So our OE was a little bit higher for that. But if we think about our OE for our major wide-body platforms, we're pretty much level from Q1 through the remaining quarters of the year.
Overall, we will see some uptick in our OE business from the first quarter. That's largely due to some other programs, for example, C919.
Got it. C919. Has it meaningfully begun to, you know, go higher in production?
We're seeing a ramp in that, yes.
Wow.
And so that's contributing, yes.
That's interesting. Okay, cool, so I guess from like a build rate and your answer there, they're not Boeing and Airbus, you know, from like an inventory channel perspective. Is that like, are you guys saying that you're well aligned with them? There's nothing building up in the channel. They're still pulling at a pretty healthy rate.
We don't have any major buildup that's going on like we did say in the pandemic, early pandemic type of timeframe.
Okay. So it's clean. Okay.
It's more clean. Yeah.
Yeah. Got it. And then I guess just aftermarket, you know, all our checks on, you know, flight traffic, ASM growth, still pretty strong. You know, airlines are continuing to fly and Q1 was really strong. You guys had the one-time provisioning, but I think your guide towards, you know, through the rest of the year definitely implies some deceleration, you know, there. So would love to kind of walk through what happened in Q1 and where we see, you know, that going forward.
Commercial aftermarket in Q1 was a record level of sales for us. It was gangbusters on all fronts. Two major drivers, Pat mentioned one of them already. The other one is our repair activity. Repair activity, we don't get a lot of visibility on. It's pretty short cycle turnaround time, so we're cautious when we're doing a guide for that because we don't know how much is going to come in, so we had an incredible quarter from that repair standpoint. In addition, as Pat mentioned, we had the conversion of certain contracts from time and materials to capture them long term, which we love to do because then we capture that business, and with that comes the initial provisioning that Pat has referenced. Those are one-time pops. We actually captured a few airlines this quarter. Maybe in other quarters, we might capture none or one.
So it was really a convergence of a unique set of events that led to that coming up. So I wouldn't expect that to repeat, certainly at that level for the remaining quarters. Again, it's harder to predict the repair activity. If that does stay as high as it has, you know, there could be some adjustments there, but we don't have the visibility, so we're not forecasting it. So really incredible quarter because that actually contributed to our margins, the underlying margins, in Commercial Aircraft, again, offset by the out-of-period warranty that Pat referenced.
Got it. And just a quick question on. I know the flooding issue. I think it was last year out in the U.K., and I think it hits this business a little bit. Is there any update there?
Yeah, we're making nice headway as far as the production on that. We're still doing a little bit of the catch-up on production, but everything is moving very nicely on that such that as the year goes on, we should be able to catch up to where we were originally planned.
Got it. Okay. Thank you. And moving to Military Aircraft, your 5% sales growth guide for 2025, maybe just break that down a little bit, some of the key drivers and maybe talk about FLRAA contribution and some other production.
Yeah. So we've got, so Military, as you mentioned, we're looking at sales increase of 5% year -over -year. We're seeing contributions from both the OE side and the aftermarket. The bigger part is actually on the aftermarket, but let me talk a little bit about the split that we've got in the OE business. FLRAA is increasing. It's increasing such that it'll be just over 10% of our OE business this year. So it's a nice increase. It started ramping in the back half of our fiscal year 2023, ramped through 2024. So we're seeing the benefit of that ramp in the overall sales from 2024 to 2025. I'll just stick on this one for just a little bit to answer your other question. We'll run that engineering manufacturing stage right now.
So in that development stage, shifting to low-rate production, from years 2028 to 2032, and then production at increasing levels after that. So FLRAA is a nice contributor to our sales increase. We also have, just as we saw last year, the conversion of some of the projects that we were doing from a development stage for a number of years into production jobs. And those production jobs, those new production are increasing. We'll see that increase continue for the next couple of years as well. So that's a nice contributor in addition. Offsetting that, however, is some changes that are just the maturing of programs that are falling off, such as V-22. So it's kind of that natural mix that's happening within the OE side. In the aftermarket side, we're making some nice headway.
We've got actually a nice increase that we're projecting in the Military aftermarket in the second half of this year, largely associated with some pricing initiatives that we've had success on.
Got it. And I guess just following up on FLRAA, excuse me, just where we are in the scale relative to your other programs, maybe talk about where you see that maybe mid-next decade relative to, you know, the F-35 for you guys, which is pretty sizable.
Yeah, it's encroaching on that level that we start calling a major program. So it's not quite there yet, but it's getting pretty darn close such that, when we move a little bit further into it, it'll certainly be that. This one has a potential to be much larger than F-35. So, we'll have to get into production beyond that LRIP phase to do that, but certainly an excellent platform for us in the future. So that would be in the mid-2030s. We'd start seeing some nice volumes.
Got it, and then sustainment, hopefully much further down the road.
Yes. Yes.
Then that comes.
I mean, it'll be a great program for decades.
Good. Okay. Switching to Space and Defense, I know you guys work on some pretty cool programs and have exposure to many different facets there, whether on munitions or, you know, space vehicles. Would love to kind of talk through demand signals currently and, you know, where we go from here.
Yeah. I think we've great exposure across all warfighting domains. I mean, Jennifer was talking about the Military Aircraft side of it, but you can complement that with space, land vehicles, marine, and submarine applications that we're covering within the Space and Defense group. So between those two segments, we cover half of our revenue and covers all warfighting domains. If I focus in on the Space and Defense group, we're seeing lots of opportunities in front of us. So it's an opportunity-rich environment for us at the moment. If I think about the composition of that business, about 1/2 of the business is space. About 1/3 of it is actually missiles related, and 20% then is all others. So the land vehicles and, marine and other application areas.
If I think about what's driving demand at the moment, you've got short-term demand, which I think is relating to missile programs. So if you think about the conflicts that have gone on in the world over the last few years, they have depleted arsenals both in the U.S. and in Europe. And the replenishment of those arsenals is resulting in the pull-through of existing products that we manufacture components for across a wide range of missiles. So if you looked at our bookings in the first quarter, our bookings in the first quarter were at a record level for the Space and Defense group, $450 million of orders within the quarter. Half of that was related to missiles, and in one program within that was over $100 million, a win from Lockheed Martin on PAC-3. But we cover TOW, Hellfire, Stinger, PAC-3, PAC-2.
We've got a wide exposure on the missile side of the business. And as I say, as a result of rebuilding the arsenals, that demand is going to continue as far as we can see for the next five or more years, as strong business for us. If I think about a second aspect of it, I think there's a modernization going on of equipment, and so we see this in a number of different domains, whether it's armored vehicles in the U.S. and programs that are beginning to develop there or in Europe, you're looking at upgrading existing vehicle sets. If I take Europe as an example, we've worked for decades with KNDS, formerly called Krauss-Maffei Wegmann, on howitzer systems, PzH 2000. They've modernized their offering there. RCH 155, I've mentioned in previous calls, is a fully automated howitzer vehicle.
So a crew of two, a commander and a driver, can take this vehicle wherever they need to go, and this eight, eight-wheeler, the shells are automatically loaded into the breech of the gun, and the gun is fired without any operator within the turret itself, and so we do aiming, stabilization, we do the loading of the shells in, and that's a motion control system with 15 different axes of control just to take the shells from the storage area into the breech of the gun, so a fully automated system internally, we do all of that, but we've been working with BAE Systems, so formerly Bofors in the Scandinavian countries who had CV90, they're upgrading and modernizing their fleet of armored vehicles as well, so I see that happening on the land vehicle side, both in the U.S. and in Europe.
I think we're well, well placed, and I can talk about growth in Europe in a moment in a bit more detail. So I've talked about replenishment of arsenals. I've talked about modernization of existing pieces of equipment, which is more of a medium-term activity that's going on for us, building off of our existing capabilities and skills. And then I think there's a more long-term strategic play on the Space and Defense side, and that's to do with how the militaries reconfigure themselves for the conflicts of the future and the tension over Taiwan, for instance, with China and what, what you need for those sort of things. And, and so that means, increased levels of spending on new technologies and capabilities, both in space, and defense applications. So we're seeing all of those having an impact on our Space and Defense business.
That range of opportunities gives us a real, real confidence in the size of that business and the growth of that business in the coming years.
Got it. No, that's helpful. I guess just on that, like how enduring this demand signal is for you guys. Maybe it's a geopolitical question, and we can get to that where you see budgets going, but specifically, how are you guys handling that demand signal, maybe from like a CapEx or R&D perspective?
So I think Jennifer has described previously. We have a commitment of capital to our organic growth, and that means putting in place facilities and capabilities that we need to accommodate that growth. I can give you a couple of examples. We invested in a building close to our main campus in January of 2023. We've been fitting that out for production of thrust vector actuators that are going on to launch vehicles. So our exposure on space involves both launch vehicles to get satellites into space and satellites themselves and componentry thereon. But just the increased cadence of launches to accommodate all of the materials that have to be transported up to space, including commercial and defense applications, drives a lot of rocket launches. So one of the buildings we've invested in is just accommodating the growth of that.
Another building, and capitalization that we're investing in is an automated environment that will be there to produce the FLRAA product when that comes up fully on stream. So we're getting ahead of that. We're beginning to transfer over some of our volume production to that facility during the course of the next 12-18 months for Joint Strike Fighter, for instance. That gives us production advantages and efficiencies associated with the manufacturing processes. I would say it moves us from, you know, 1980s job shop in machining to a fully automated robot-loaded type of job machine shop in the future. So some of the investments we're making are focused on enabling that growth over the course of the coming number of years.
Got it. That's helpful, and I guess just maybe sticking with the space portfolio today, I know this is like a very high-level question, but you know, maybe hit on some of the key programs that you work on in space and, you know, going forward, how you see that business, because it's a very topical, you know, sort of, theme, today. So maybe just going forward, what you're working on.
So maybe it's commentary relating to a little bit to the geopolitical, but you've got near-peer threats that haven't diminished in any way, no matter what administration is in place. In Washington, you've got China and Russia with extensive space capability. You see China demonstrating new capabilities in space that the U.S. needs to stay abreast of and ahead of. I think that results in significant defense investment into the space environment. And our exposure to space is weighted heavily towards space. Maybe 80%-90% of our space activity is related to defense. On those in the defense domain, we have some capabilities that I think that set us apart to differentiate us from others. We have a unique set of capabilities around chemical propulsion systems for space applications.
We have a dedicated facility in Niagara Falls that can test rocket engines for space applications at the size class that we deliver. That allows you to move rapidly in space. So, aside from just your attitude control of your satellite and pointing at the sun and all that, if you need to move your satellite out of position very quickly because there's a threat, you need a chemical propulsion system. And in the, I think it was in the quarter four call, I mentioned that we had a major win on a program that was a chemical propulsion system specifically for a space application. That's a defense application, but it has a high level of urgency behind it as a program. It also has relatively significant volumes behind it as well. So that could become a very significant program for us as a company as well.
So we're seeing defense applications there. We're seeing classified programs coming forward that we're involved in as well, which all leads to building of U.S. capability in space. And we have a unique set of capabilities that we're bringing to bear, including the chemical propulsion I mentioned, but also radiation-hardened avionics boxes that are used to control satellites. That is also a differentiator for us. Again, those two things are helping us carve out a significant piece of business in space and capturing some of that growth.
Got it. And is your strategy? I like, I know like for the SDA contract, you might be a sub to one of the primes. I guess going forward, is that your priority to, you know, being a sub and you know, going forward, or would you like to go up the chain?
So we think there's plenty of opportunity for us, playing where we are. Let me describe where we are then. We have about 50 years of heritage supplying components for space. So we sell our avionics box. We sell our propulsion systems to others. We have solar array deployment components within our portfolio. We have our vibration suppression rings in our portfolio. So we have a range of space components that we supply. We see an uplift in that business as a consequence of what's going on in space anyway. I think the progression for us is to go to more integrated systems. So the chemical propulsion system is a combination of several elements of our offering into one integrated system that we supply then to a prime in that case. We've gone further with payload-ready satellites.
Our space vehicles that we've talked about over the last couple of years involves bringing together a complete package to actually build a satellite. We have four satellites on orbit at the moment. We have a range of different places we're playing in the value chain for space. I could see that expanding in the future. Potentially there's opportunities to add a payload or do something like that. We haven't quite defined what that might be, but we continue to investigate how we expand our space business. We have plenty of opportunity in front of us today, just organically, for the business.
Got it. And on that point, the space vehicle program, if I recall, maybe a few years ago, you know, there were some technical challenges there that led to some charges, I guess.
I would describe that as part of the learning curve we were on for that. So we were stepping up in the value chain. We were bringing together a quite complex system. It's actually 2 million lines of software code within one of those space vehicles. So it's a highly integrated, highly engineered system. We had some learnings to go through as we did that. We burned down technical risk on a platform we called METEORITE, which is a smaller satellite, of which there are four on orbit at the moment. We have a second class of satellite, which is called METEOR. It's a larger satellite, probably more suited to defense applications. That is going through its environmental testing now with the customer. So the full development cycle has been completed. Hardware has been shipped to the customer and is completing out environmental testing.
I believe where we are at this stage is we've burned down most of the risk that was associated with that. Unfortunately, we took some charges in the earlier years of the program as we learned more about it. Now we are in a position where we have satellite on orbit, a set of capabilities associated with that business. Our focus at the moment is to build out the business and expand the customer base beyond what we have today.
Got it. Out of curiosity, what is the customer base like today? Are they mostly primes or customer base is maybe classified?
No, customer base is a single prime at the moment, and we want to get beyond having one.
That TAM, I guess, is it because I know there's like a lot of commercial operators now, I guess going forward, do you have any visibility on like maybe how campaigns are today?
We're involved in, even with the single supplier, our customer, we're involved with multiple programs of work. So we know that the offering that we have is resonating on a number of those defense type applications, and we see the potential to grow that further than we have today.
Got it. Yeah. Okay. I guess rounding it out with Industrial, it seemed like there was, you know, some green shoots seen in this past fiscal quarter one. What, like, what are you seeing today? And, you know, book -to -bill above one, I think also across industrial automation. So maybe boots on the ground, any update on Industrial.
It was good to see that as maybe an early indicator that things are beginning to improve. I think we've been over the last couple of years talking about the slowdown in that book of business in the orders on the Industrial side. So we've been telegraphing that for quite a while now. So this is the first sign of that, you know, we've reached the bottom as far as we can see, and I would say we have stability in our Industrial business at this point. We saw the run rate in Q1 was obviously less than it was a year ago, but we're sort of on a path where Q4, Q1, and the remainder of the fiscal year are pretty much consistent for us, and that's what we've built into the guidance.
If there's growth to come, it's probably beyond the end of the fiscal, maybe the beginning of the calendar year that maybe Industrial begins to pick up again. But good stability, good visibility where we are at the moment, and early, early signs are for signs of some maybe recovery in that, in that piece of the business, which was positive to see. I guess the other thing to reflect on in the Industrial business is we've been driving a lot of transformation within that business over the last number of years. We just sold two businesses in Europe, which were both dilutive to the earnings of the Industrial group. And we've been driving a lot of the strategic or structural changes within that business as well. Footprint rationalization, divestiture of some of the other businesses, consolidation of production into a fewer number of plants within the Industrial business.
So it is a more profitable business than it has been before. I mean, over the last three years, it's up 300 basis points on its margin performance as a business. So I think we have a good platform there, and it's actually a very solid cash generator for us in the organization, a really diversified customer base with thousands of customers and a variety of different product lines. So consistent cash flow generation from that piece of the business.
Got it. And you also just, you know, to remind everyone here, just what's in the portfolio and the medical pumps business, I guess the medical market, I think it's got, we're all, like we all can agree that there's, you know, secular legs there and, but more tactically here, maybe talk about the share gain that's going on, I think with maybe one of your competitors and how enduring that is.
So in the Industrial group, about a quarter of the revenue at the moment is derived from the medical and markets. That includes predominantly medical pumps, which are used in home care environments. So that's either drug infusion pumps or nutrition pumps to use to get food products into patients that have chronic illness and that are in a home care environment. We're either number one or number two in each of those two markets. One of our major competitors had a misstep on a product launch six months or so ago, and that's resulted in us being able to take share gain from that particular competitor at this point. That's gone on for six months now, and there could be another couple of quarters of gain from that. The gain is important to us because it gets a fielded population of pumps out into the marketplace.
The pumps business is a razor, razor blade type market. We have pull-through on consumables that continue to be drawn for the next five years on pumps throughout the field. Getting the fielded population up is an important win. I think the other thing is underlying growth rates in the medical business are roughly mid-single digits, but over the last decade, we've probably had double-digit growth in our medical business because this isn't the first time that we have seen issues in the marketplace that we've been able to effectively respond to and meet the needs of customers that were being unmet in the marketplace. I think part of that is due to a decades' worth of journey with the medical business on optimizing operational performance.
So we have a plant in Costa Rica that has a Shingo Bronze Medal for lean and operational improvement activities that they've driven over the last decade. So a really strong manufacturing base, which is turning into share capture in the marketplace. Actually, if I look at that model as well, and I reflect back on our space business and the missile business, on missiles, we're winning share in the market because of our operational excellence in producing product for that end application. 100% on time, 100% quality, and an ability to deliver for the customers, which is beating our competitors.
Got it. Today, just like from a strategic perspective, you guys still see Industrial as core. You're happy with it?
Yeah, we're happy. We're happy with it as a business. As I said, it's a solid cash flow generator for us. And it has technology synergies across with the rest of our business as well. We produce valves to go into industrial applications. We produce valves to go into aircraft as well. So you've got design engineering overlap. You've got the manufacturing capability overlap as well. And so when we automate manufacturing in the U.S. for, say, a FLRAA program or a Joint Strike Fighter, we share that capability and know-how on automation back to the other parts of the Industrial business as well. So I think they benefit from one another.
Got it. Okay. I have a few more, but I know in the interest of time, if there's any questions, I don't know if anybody wants to raise their hand. I've still got a few more. Okay. Sticking on Industrial, I guess just tariff risk.
Yep.
Maybe talk through what you're enduring.
Yeah, I mean, the first round of proposed tariffs were Canada, Mexico, China. The China one went through. But I mean, if we size that, if I look at our defense businesses, I could say we have reasonable levels of vertical integration. We also have most of our supply base U.S.-based for the defense side of the business. So that mitigates some of the exposure to those other markets. But if we sized it, I think our imports annually from Mexico amount to about $50 million. Actually, some of it is outsourced labor where we send parts and materials to Mexico. We build up through one or more stages of manufacture and bring them back to finish them in the U.S. Canada, we have about a $30 million exposure. And most of our business in China is for China.
We don't take much out of China at all. There's only about $10 million that comes from China. Overall, if you took all those and you said it was unmitigated and it was a 25% tariff, that would have been a $20 million impact. Mitigation involves repricing, changing supply chain, and we would do all those things as well. The tariff side is manageable for us as a business. We've worked through it before under the first administration. It takes a little bit of time to adjust and you're a little bit disruptive as you go through it, but it's all, it's all doable. The latest tariffs on steel and aluminum don't really have much of an impact on us. We source most of our metals from within the U.S. Okay.
There could be some general market inflation as a consequence of constraints on capacity, but no direct impact from the tariffs themselves. So that would be a secondary effect.
Okay. And, I guess last question, if there's no others, yeah.
Yeah, if you look forward several years, like three years out, say, how do I get my stock to $300? Is it a revenue push? Is it changing the model margins up, multiple ROIC up? I mean, what do you think would drive it? Or do you have those aspirations?
Oh, we have those aspirations. So we continue to drive the margin enhancement exercise. We've talked about what we want to deliver by fiscal 2026. It's 100 basis points on average per year, continuing to drive that. Our aspiration is more. So we'll see beyond 2026 what we want to commit to in terms of the improvement. So margin enhancement continues as an organization. Growth is there. I mean, we have an opportunity-rich environment. We've demonstrated the growth over the last couple of years. We've been 9% CAGR. We've actually been above what we said we would do in the investor day. We see strength in the end market support for what we're doing, but also our innovation is hitting with our customers and we're getting more share. So that's positive.
And I think if I look beyond, it's driving our cash performance as an organization, delivering improvement upon that that will really accelerate it. Does that help?
That helps. Thank you.
Okay.
Perfect.