Q2 2020 Earnings Call
[music].
Good day and welcome to the mold second quarter F. Why Twentytwenty earnings Conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over to N. or please go ahead and then.
Good morning, before we begin we call your attention to the fact that we may make forward looking statements. During the course of this conference call. These forward looking statements are not guarantees of our future performance and are subject to the risks uncertainties and other factors that could cause actual performance to differ materially from such statement a.
A description of these risks uncertainties and other factors is contained in our news release of April 24, 2020, our most recent form 8-K filed on April 24, 2020, and in certain of our other public filings with the L.C.C.
We provided some financial schedules to help our listeners better follow along with the prepared comments for those of you who do not already have the document a copy of today's financial presentation is available on our Investor Relations webcast page at Www Dot most dotcom. Thank you Josh.
Thanks, and good morning, thanks for joining us.
This morning, we report on the second quarter of fiscal 20 to discuss the future outlook for the company life of the cold with 19 crisis, given the uncertainty in global markets, where suspending are normal practice of providing detailed guidance for the remainder of the fiscal year.
In reviewing my comments from 90 days ago, who was 19 was not a topic on our agenda. Indeed, it wasn't even a word enough vocabulary.
The Big January we talked about Brexit U.S. trade dispute with China, and the rest of the middle East.
Some eight weeks laser all retention shifts to responding to the rapidly changing situation as a result at the spread as the virus.
I hope our comments today, we'll leave our investors with to cure messages about our business.
Of course, Sharps term strike from our diversity and seconds long term value from our fundamentals.
As usual I'll start with the headlines.
[noise] force the second quarter was strong the pandemic only starts to affect our operations later in the quarter I'd had relatively little impact on our results.
Sales for the quarter were up 6% net earnings were up 21% and earnings per share were up 26% from a year ago.
Free cash flow was $12 million during the quarter, we purchased 1.6 million shares under our share buyback program.
The first half of fiscal 20 is a record for the company in terms of sales.
Net earnings and earnings per share that provides a solid foundation as we entered this crisis.
Second or do you in March we started to understand the scope of the emerging pandemic, we set to clear priorities first and foremost was the health and safety of our employees and their families.
The second to continue to meet the needs of our customers, thereby secure the financial well being at the company.
Third we took action we transition to working from old wherever possible and implemented changes in our work practices for production employees continues to come into the plant.
We focused our financial attention on modeling liquidity and leverage we implemented expense and cash conservation actions, including hiring in salary freezes elimination of consulting and other discretionary expenses and focused on minimizing capital expenditures, we paused our share repurchase program and also decided to temporarily suspend upward.
The dividend payments.
Fourth we assessed our markets have developed future business scenarios, we believe we have relatively well position to weather the storm.
Diversity across markets as our strike.
Our defense and space businesses combined make up almost half of our sales and our mostly U.S. government funded.
Both businesses are strong and should continue to be well supported.
Our medical business is close to 10% of our sales and we're seeing increasing demand for our clubs.
Our industrial business is just over 50 of our sales we anticipate we'd see a drop in demand to these markets as the crisis unfolds.
And finally for commercial aircraft business is likely to be the hardest pitch. However to put this into context course commercial OEM customers represented 17% of our total sales in the first half of fiscal 20 and sales into the commercial aftermarket were about 5% of our business at the same period.
Fifth our financial position is healthy and our relationships with our bank group is strong we refinanced our entire balance sheet over the last six months, where conservatively leveraged.
And finally, we are investing where we can to support the fight against the virus, we're adding staff in our medical facilities as demand for pumps surges. In addition, our industry groups supplies small motors that are used in ventilators.
Demand for these motors has increased from 800 units per month to 30000 units per month.
Our SAP is working tirelessly to increase our capacity and expand the supply chain to meet this need.
In summary, I would describe our situation today a stable the vast majority of our staff around the words are working productively.
Most of our facilities continue to produce products at both our supply chain and our customers continue to operate.
Under the new practice of social distancing, we estimate we are operating at perhaps 80% to 90% of our Norbert capacity.
It may be early days, yet the crisis, but so far we're meeting our two primary objectives of keeping our employees safe and maintaining the financial health of our company.
This is a testimony to the commitment of our employees around the globe.
I'd like to thank each of them for their dedication.
Now, let me return to my normal reporting format.
I described the results of the second quarter in a little more detailed but then walk through each of the operating groups.
For fiscal 22nd quarter.
Sales in the quarter of $765 million were 6% higher than last year, driven by organic growth across our portfolio.
Sales were up 17% in our space and defense group up 6% in our aircraft group and that was just 1% in our industry group.
Taking a look at the PML, a gross margin was more or less inline with last year.
R&D spending was down on lower aircraft activity by spending on selling it had been was up at the higher sales.
Interest expense was marginally higher than last year on higher debt levels.
The effective tax rate this quarter was low at 19.2% as result of some special items.
The overall result was net income of $50 million up 21% for last year and as I mentioned earnings per share of $1.48 up 26% from last year.
This concludes the outlook given the uncertainty of the present economic situation, we're not providing specific guidance for the second half our fiscal year.
However, I will offer some qualitative comments about each of our markets.
I would stress that the situation in each of our markets is very fluid and there are many on those so our commentary today could change materially to the future.
So to the segments that remind our listeners that we provided a two page supplemental data package posted on our web sites. We suggest you follow this in parallel with the test.
Starting with aircraft Q2.
Sales in the quarter of 341 million were 6% higher than last year with all of the growth coming on the military side of the house.
Sales were up over 20% of the F 35.
Sales were also higher on the Blackhawk helicopter, though the KC 46 tanker.
In the military aftermarket it was a similar story with higher F 35, and Blackhawk activity. You also enjoyed higher at 15 aftermarket sales.
This quarter the army down selected to two competitors for the next phase of both the flora and far a future vertical it programs.
Well well positioned on the Textron V. 280 for the Flora contest and are happy to report that we are both the bell Textron and Sikorsky teams for the foreign competition.
On the commercial site total sales were class with higher aftermarket sales compensating for slightly lower sales to our OEM customers.
Well, we have sales the boys were in line with last year, we saw a nice growth at the 70 87 program, which compensated for 737 sales down 50% from a year ago, a triple sales triple seven sales down 20%.
Airbus sales were up over 10% from last year, driven by lower Athree hundred 50 activity at least reset easy sales essentially going to zero.
Commercial aftermarket was up mostly on 77 activity as the size of the fleet out of warranty continues to grow.
Aircraft margins margins in the quarter of 10.2%, we're up from 8.5% a year ago in the second quarter last year, we booked a $10 million charge associated with the quality issue on the vendor supplied part.
The higher margins this year or a combination of the higher sales and the better mix as well as the absence of last year's charge.
However, the margin performance in the quarter was tempered by about 100 basis points as a result of a charge on a development program.
Our operations 2.0 improvement activities continue through the first two months of the quarter, but up since slowed as we focused on restructuring our work environments.
Progress, we continue over the coming quarters, but not at the pace we were flat.
Aircraft fiscal 20.
In offering some thoughts on the cutting six months.
Try to address both the supply side and the mine site issues.
Let me start with the military half of the business.
On the supply side, our facilities are located in the U.S. and the UK have been Dina deemed essentially by the authorities and continue to operate.
Todays our supply base has continued to function well, although we have a couple of suppliers who shop their facilities for multiple weeks.
We're optimistic that they will return to work before our inventory of parts is depleted, but the supply chain will remain our biggest on loan in meeting our customers' needs.
On the demand side, the vast majority of our business is funded by the U.S. Cody and we're confident that this market will remain strong.
In summary, we're optimistic that the military side of the aircraft business will remain solid for the coming quarters with the risks skewed to the supply side of the equation.
Turning now to our commercial business, our major factories are in the Philippines, UK and the use.
All facilities continue to operate the.
Similar to defense, we have risk in the supply chain, but for the moment, we're well positioned to meet the needs of our customers.
On the demand side it is a much more concerning picture.
Our airline customers are dramatically reducing flights, we believed that our OEM customers, we put up cuts production rates significantly.
We're working with all of our customers to get a clearer picture of their demand over the coming quarters, but the situation continues to evolve daily.
In summary, we believe the commercial side of our business will be significantly lower over the coming quarters with the risk skewed to the demand side of the equation.
Turning now to space and defense sales for the second quarter of 193 million or 17% higher than last year. This quarter. It's the space market that is providing the majority of the growth with sales up 38% over a year ago.
We had significant growth in hypersonic launch vehicle activity and that's a development programs as well as strengthen our satellite engine at avionics product line.
Note that we record our hypersonic development activity, partially federal space, Marcus and partially under our defense market.
Launch vehicles used to raise hypersonic weapons into space are included under space.
It's been steering controls on hypersonic vehicles used to reduce sense are included Hunter defense.
[noise] defense sales were up 7% from last year with strength across most of the product lines, including besides vehicles enable systems, our security business was down as planned shipments to customers moved out to future quarters.
Space and defense margins.
Margins in the quarter up 12.8%, we're up from last year.
We're pleased with this margin performance given the high level of funded development within the group.
Responded development is very positive for the long term as it sets the foundation for future production programs, but tend to dilute margins awash in the short term.
Space and defense fiscal 20.
Space and defense, it's a similar story to our military aircraft business.
On the supply side most of our facilities are in the us with a couple of operations in Europe.
Outside the operational and our risks are mostly to the supply chain.
On the demand side most of our business is supported by U.S. government funding, we believe that funding should continue more or less his plans for the remainder of fiscal year.
Staffing challenges and production inefficiencies as a result of social distancing measures will result in lower productivity and lower output the normal but overall the business should whether for next couple of quarters reasonably well.
Turning now to industrial systems.
Sales of the second quarter of 231 billion were down marginally from last year.
Despite the stability on the topline belies the sales shifts in our major markets.
Sales into energy applications, or 23% higher due to the fact that half of the acquired sales from our recent GHG acquisition to Germany. According to this markets GHG specialize in fluid rules were unions, which complements our suffering technologies.
Sales were also up double digits in our medical applications as demand for our infusion pubs continued strong.
We've been gaining share this market over several quarters as a major competitor has struggled with production challenges.
As we'd have to the future. We anticipate continued strength in this market to support the corporate banking crisis.
Sales into industrial automation were down almost 10% there were two factors at play first the continued slow down a global capital spending independent of the pandemic 10 seconds lots of sales of the quarter, particularly in China due to the virus.
Finally sales into our simulation and test market were also lower as demand for both auto and Aero test systems, particularly in China flowed.
Just real margins margins in the quarter were 10.7%. These margins are down from a year ago other less favorable mix.
Our traditional hydraulics products sold into industrial automatic automation applications are up significantly from a year ago and it is issued the sales from our GHG acquisition are at relatively low margin due to first year acquisition accounting effects.
Industrial systems fiscal 20.
The outlook for our industrial business over the next couple of quarters is perhaps the most difficult to project.
We have a combination of both supply and demand on searches.
On the supply side some of our facilities produce products essential in the fight against the virus such as medical pubs, and certain small motors use of vessel, which will.
The these will continue to produce as fast as possible.
However, most of our industrial plants, and they're supporting supply chains are spread across the globe.
Each location is at a different phase there feis to contain the virus that each plant is subject to local government regulations on what practices.
The good news is that so far almost all of our facilities continue to operations and our supply chain is working.
On the demand side, our book to Bill related just above one is the second quarter, but bookings may slow as we move through the rest of the year and our customers adjust their orders in line with the end market demands.
But that amount will look like is difficult to determine.
Let me provide some summary comments before handing you over to Jennifer.
We all find ourselves in unprecedented times.
Today, as we face that meet the media to covert 90 knockdown and the ensuing economic follows we believe we're relatively well positions.
Our diversity across markets and our strong balance sheets are key to navigating the short term challenges, while the strength of our franchise and our fundamental approach to business as a basis for our continued long term success.
Over the years, we've described the fundamentals of our business as follows one we solve our customers' most difficult technical challenges.
Two we developed a leading position in niche technologies across a diverse range of markets.
Three we develop unique ITD, both in product design and manufacturing.
And for we believe it a conservative financial approach to business.
Our highly technical products, specifically designed to meet our customers applications. They could very difficult to be replaced by alternative sources of supply.
Therefore, our fortunes will rise again as our customers recovery over.
Our investment in R&D at our staff of highly skilled engineering talent, we continue to create new opportunities to provide value to our customers.
And our prudent approach to capital allocation and focusing on maintaining a strong balance sheet will allow us to rebuild for the longer term.
Finally, we believe our employees are our most important assets our culture of trust integrity in cooperation means that our leadership and staff around the world are committed to the long term success of the company.
As we look out over the coming six months, we believe our defense space and medical businesses will remain strong our industrial business is likely to face some challenges and our commercial aircraft business will be hard assets as the picture becomes clear we will take all necessary steps to restructure our business to this new reality.
Beyond that horizon, it is difficult to say, but our diversity across end markets should serve us well in some markets recover ahead of us throughout this time, we will continue to invest in R&D process improvements and long term initiatives that will provide benefits for years to come.
So let me finish with this gosh I.
I believe in years to come we will alltel future generations about the time the world stood still.
And then one day it started turning again.
Now, let me pass you to Jennifer will provide some color on our cash flow balance sheets, and corporate 19 financial model.
Thank you John Good morning, everyone, we come into the current situation from physician browser financial strength.
Earlier in our fiscal year, we refinanced our that on our balance sheet, which provides us ample liquidity and financial flexibility.
As business challenges in merger related to the pandemic, we'll maintain our financial highlights from Q2 key factors.
First as John described we will benefit from that diversity in the markets we serve.
Second, we're taking actions and address the financial implications and the current environment.
Ill cover these topics in more detail, but first I'll walk through our cash for the second quarter and other topics they typically drive.
Free cash in the second quarter with $12 million and with $27 million for the first happening here that the conversion ratio of 27%. We had expected that will start to free cash flow generation in the first half of 2020.
The 12 million dollar free cash flow for Q2, and parents with an increase and that that $124 million.
Different include share repurchases.
During the second quarter, we repurchased 1.6 million shares at an average price $75 for a total of $120 million.
We also paid $8 million for the quarterly dividend and $4 million for the early redemption, our senior 300 million dollar.
Networking capital, excluding cash that as a percentage of sales at the end of Q2 was 29.6% compared with 28.8%.
The increase largely reflects growth in ethical inventory.
Continuing our operation 2.0 activities in our aircraft sales. These activity slowed late in our second quarter and we'll be looking forward at a rate lower than previously plan.
These activities, both reduced networking capital level overtime.
Capital expenditures in the second quarter $26 million, while depreciation and amortization totaled $22 million.
Capital expenditures and depreciation and amortization continued at levels from our first quarter.
Our leverage ratio, which is net debt divided by EBITDA increased to 2.6 times from 2.3 times acquire it down.
Accretion our leverage ratio was driven by our share buyback activity in the quarter not that as a percentage of total capitalization for 44% up from 39% last quarter.
Our effective tax rate was 19.2% and.
Compared to 23.8% in the same period a year ago.
The lower rate and this year second quarter, primarily reflects a reduction in tax rate related to taxes accrued and accumulated earnings in one of our foreign jurisdiction.
In addition, legal entity restructuring resulted in reduced withholding taxes previously accrued in another foreign jurisdiction.
Cash contribution to our global retirement plan totaled $12 million neckwear compared to $10 million and the second quarter of 2019.
Global retirement plan expense in the second quarter was $20 million up from $18 million and the second quarter 2019.
Nice defined benefit plan is anywhere and has been closed to new entrants from revenue backlog, we fully under this plan in 2018 at which time, we shifted our investment strategies DRAM portfolio, we're invested 80% in liability hedging assets and 20% and return seeking out that.
As a result, our portfolio is largely insulated from the recent market turbulence and we continue to be fully funded the funded status is also remain stable for our international pension plan.
The impact on our business and the cover 19 prices started to become evident late in our second quarter John referenced in our strong second quarter results provide solid foundation as we entered this crisis. The same is true from a balance sheet perspective, we entered the situation, having recently refinance that within our capital structure.
This past October we amended our $1.1 billion, you actually Marvin credit facility obtain more favorable terms.
With respect to interest rate and financial stability. We also extended the maturity such that it now run through October 2024.
In addition, we issued $500 million a foreign at quarter percent senior note.
Sure in December 2027, and leaving teams and retired $300 million five and acquired a percent senior now that we're set to mature in December 2020 tail.
We also extended our securitization program through October 2021.
Program effectively increases are firing capacity and lowers our interest rate on up to $130 million the borrowings.
These refinancing activity position us nicely coming into the situation, we now say.
And that that was $975 million at quarter end, we had $119 million, a cash and $1.1 billion of that nature.
The major components of our GAAP or $500 million a senior note.
$473 million borrowing on less revolving credit facilities and $130 million outstanding on our securitization facility.
We have available borrowing capacity on our New act revolving credit facility at the end is our second quarter, the unused balance and facility with $600 million.
Our ability to draw on the unused balance is limited by or leverage covenant, which is an accident or plain old time on in that that basis.
Based on our leverage we could have incurred an additional $536 million at that as at the end of our second quarter.
We have assessed the financial impact on our business on the pandemic and we'll continue to diesel engine situation evolve.
Estimating the pressures on our sales profit and cash flow other while considering the risks and uncertainties involved that widened the range of potential outcome.
Our businesses are facing bearing level the pressure, depending on the marketplace or looking to the second half a year, our defense and space businesses may face only modest pressures associated with supply chain red and productivity level.
Medical business is strong and likely unaffected.
These businesses represent over half of our sales.
Our industrial businesses may see supply chain productivity and demand challenges. So we're assuming sales to be pressured by up to 25% in the remainder anything there.
Finally, commercial aircraft faces the greatest pressure with demand decline associated with deep reductions in play.
In the short term the aftermarket is likely could be impacted more than OEM and remodeling second half sales declines for our commercial aircraft between third and Uh Huh.
Due to the uncertainties with respect to severity and duration in this situation, we're not providing specific financial guidance as we have in the past. However, we can share some insight.
Scenario I described that suggests that sales could decline from the first half of the year to the second happening here by 10% to 20%.
Right sizing our business will take a little time, so it's possible that we could experience a marginal loss on sale in the 30% to 40% range over the second half of this fiscal year.
We have been proactive in implementing measures to counteracting impact our immediate financial focus.
Solve around cash preservation and cost management.
We're making significant adjustments to our major capital deployment activity in the current environment.
Hi, there M&A proceeds for the timing, we had been asset in our share repurchase activity suspended purchases in mid March when financial uncertainties became evident.
Our off the temporarily suspending our dividend program.
In addition, we enter lane capital expenditures that are not business critical our compliance related.
Each of these actions helped to preserve our liquidity.
We're also preserving liquidity in other ways, such as reducing incoming inventories from our supply chain could be in line with expected demand.
Taking advantage of payment deferral and implementing financing program.
We are implementing measures to mitigate the earnings impact of the situation. In addition to providing cash really these measures include workforce and expense management and are important as they not only preserve our cash but also protect our earnings.
In terms of attacks on leverage, allowing us to more fully access to credit on a revolving credit facility.
We believe that our existing financial arrangement along with the actions, we're taking to mitigate the business pressures, we're facing will be sufficient to weather the storm over the coming quarters.
In addition, we have long standing strong relationships with our bankers and access to capital markets that can provide further funding sources said the situation become more staff.
In the current environment, we have stepped up their capital deployment strategy from a long term perspective that balances grow and capital return like one that focuses on liquidity and leverage in the near term.
Our committed to ensuring that we have adequate liquidity during this crisis.
Protecting the long term health of the company and emerging financially strong and ready to capitalize on opportunities once the situation passive.
With that we'll turn it back to John for any questions you may have John.
Thanks, Jennifer and salary we will open it for questions. Please at this time.
Thank you.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad.
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Again press Star one to ask a question.
I will pass or just a moment to not everyone an opportunity to signal for questions.
We will now move to our first question from Robert Spingarn of Credit Suisse. Please go ahead.
Hi, good morning.
Only Rob.
Thank you both for as much color as you're able to give here. It's very very helpful. I was wondering if I might.
Attempt to reach out a little bit don't see what your latest experience has been an aerospace John can you give us any color on what you're seeing in April so.
So far here in the beginning of this current quarter and how markedly it's changed from March [noise].
Well I'd say, what Rob our comments really are based on what we've been seeing literally in the last weekend days and so our if I think about that the military side has I mean, it's almost like an old news that business continues we benefit a little bit from accelerators.
Funding from some of our major customers because of progress payments.
So that's all in April so sort of the military side of the business looks like it's doing just fine space business same thing. So I'd say, there's kind of no news there.
Medical side of the business as we mentioned is strong.
The commercial site is a.
Changing picture we've.
Airbus has come out and said, they're changing rates. So thats no Boeing has not provided any detail yet I think their plan is to do that on their call next week, but we have not received any updates on our Boeing book of business and so and then a commercial airlines I mean, we're talking with our customers daily we're looking at our backlog of.
Actuators caucus as they call them that we have in our shop or looking at the incoming rates on that we're looking at the blend between freighters and and passenger traffic and that of course were rate reading you know all of the materials that you guys are putting out and so thats, what but it's changing everyday.
And it's very hard to put numbers around but I would say the materials that the investment community has put out was are.
As good as anything that we have internally I think you have exactly the same insights at this stage that we have and so what kind of modeling off of what we're hearing from our customers on what what we see you folks putting together for the macro perspective.
Well just stand on a couple specific programs.
Just to get some clarity on Max had juice had you I assume you've been stops since the stoppage in earlier in the year are you starting to ramp in preparation for Boeing going to some level of production and then on eight seven has the opposite happened and maybe on all of the programs because of the.
Cobot 19, driven stoppages that you've seen at at Boeing.
So on the back so as we've described the passing of what Max was running at race. It was that kind of 35 to 40 billion dollar piece of business for us.
Through the first half were excited about that 13 14. So we we bought kind of trying to do a combination of build some safety stocks keep our line warm.
While also and walking with Boeing in terms of their demands we anticipate that that would really dropped off for us over the next several months not necessarily because we're reflecting exactly what Boeing is doing its more reflection of inventories that we already have box that we built a head and so it so it's a little bit disconnected. So we will be we'd be working very few.
Mostly with Boeing to understand their demand, but we think we're probably covered so we think the Max our backs business again relatively small less than $15 billion in the first half that'll probably drop out fairly significantly in the second half of them pick up again, but thats not a reflection of boeing's plans or what they may be in terms of how they will be ramp their business, we will be ready.
Whatever they do and it'll be easy enough to restart if we think that there's a need for more product that we already have in the supply chain and.
And then or the eight seven as I mentioned, we do not have updated production rates from Boeing. So we still have opened appeal was that the race that was prevalence.
234 months ago.
We anticipate that there would be some significant changes so we have not yet received that information.
But in your quarter just reported did you stop at all I guess it was before perhaps Boeing actually shut shut things down in and Seattle, but you were producing at at the mature eight seven rates in the quarter.
Yes, yes, I mean, we produced to the Peos that we have from Boeing and we deliver to the appeals that they give us until and unless they change the peos and typically you wouldn't change you know appeal a week or two before it's due to be ships, we have been producing at the race that was prevalent until in the quarter. It was still have a second quarter sales associates.
Evan we're delighted with the first quarter in line with the fourth quarter. So.
We've not seen our we have not adjusted yet and they say, we adjust we try to address the pace, but what we are appeal, primarily PEO driven to meet the customer needs.
Okay, and then just last thing and maybe this is for Jennifer but can you speak at all to your variable versus your fixed costs, you did give us some sense a decrementals Jennifer when you talked about sales translating to losses, but is there any kind of color or guidance you can give us on the cost structure either for aerospace specifically or for the company.
Overall.
Yeah, Rob so as we looked at that there is depending on how short term in near term you look at the horizon for your fixed and variable cost has a huge dependency there and so as we looked at that what we thought wed not more appropriate to describe it is really into.
Terms of what in the short term, we might see pressures on and so that's why we described it from a short term marginal loss on sale.
As we go through this process, there's a number of things that we are going to be taking action on our short term temporary types of measures and others, depending on the side or the sizing of the business and what the demand looks like afterwards, well help determine what the changes structurally we need to make [laughter] now.
Yes, I would add Rob that it depends on your part of it is what aspects of what variables part of it also is what's the margin on the stuff that's going down of course.
And that so that plays into that overall equation and then I think the problem with the present scenario that we all phase is that demand is potentially dropping precipitously and we as a when we look at what the demand right in certain markets.
When we look at that's about as we have to do a couple of phase. One is we have to first of all wait to see what does that demand looks like and since the changing of the daily basis, you'd like to set into the little bit before you make some structural adjustments and then the second part is the question is flights go to come back in in September January March because we have a very skilled workforce.
And so if you think it's going to bounce back reasonably quickly or even if you think it's going to pick up at some relatively within some couple of months quarter or too you don't want to get ahead of losing the staff to do that and so all of that plays into the equation are there for our ability to adjust the caught the underlying cost base.
There is a function of what we think that future will look like and our I'd say our management approach over the last let's call. It six weeks. Since this crisis has really become a big issue has been let's make sure. We are managing our way to add new kind of way of working as we go through the media crisis, and then at that settles, which I'd say, we're now starting to get to that point.
And demand for our products becomes clearer, let's see and and we put some model in place as to what we think the recovery might look like and what it might happen then you started for clubs around.
What the size of the business needs to be and readjusting their cost structure, but that's all going to play out I think in 90 days side. When we report that we of course will have much more clarity around thats like everybody else flow, but at the Boulder. There's just a lot of uncertainties and that's why I'd say these insights as we call. It it's a wide range, but that's the at wider range as we.
I think it could end up being as well.
Okay. Thank you both.
Thank you.
Thank you.
If you find that your question has been answer you maybe move yourself from the Q by pressing star to.
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Take our next question from Michaels Camelbak Suntrust. Please go ahead.
Hey, good morning, guys. Thanks for taking the questions I Hope you guys are all shapes unhealthy in your families as well.
Yes.
Just maybe a John a little bit more color you know I think you said arrow down 30% to 50% second half versus first half can you maybe parse that out between Oh, we an aftermarket I mean, I would imagine you could see the aftermarket dry up very very rapidly and you know I think you kinda.
It just said you're evaluating sort of you know what's in the shop right now, but could you give any more detail on on how you're expecting the aftermarket or two trends here in the in the short term.
[noise].
Well if it's.
I guess, it's my guess is as good as yours almost to some extent there are some factors that I will offer you, though that you want to keep in mind. We look here. One is so you have a backlog of just parts to be repaired senior shop as you come into that so coming into April we had a backlog of aparts already available so that that's something.
Covers you a little bit as you go through our third quarter, we have a phrase or business that we anticipate should hold up much better that they.
And the customer they see like public business.
We have flyby going we've got fly by hour contracts on some of our new approach. So again these are not each of them as a small piece with the pie, but some of those will continue to have some amount of revenue even to the events that there's a reduction in flight hours.
And that of course, there's the underlying demand. So weve models all kinds of things you know from down in the in the next quarter or to buy 30, 40, 50, 60, 70% and and we don't know like a we really don't really at this stage. We are watching daily how much stuff is committed we are also being very.
Careful about credit terms.
You know right now we're feeling okay, but some of our smaller customers. We got to be careful that they will be able to actually pay us. So that may also be something that could affect that them as I'd say, we're probably anticipated. The aftermarket. This is a safe bet will probably be down more than the OEM demand over the coming couple of quarters.
But if it's a wide range Michael.
Got it no I can appreciate that what about I mean, even for both aftermarket in OEM do you guys think there will be some level of de stocking do you think there was a lot a buffer stock in the supply chain do you think a broader supply chain realignment to you know we know Airbus rates are going down.
I'm sure Boeing will tell us the rates are going down do you think that creates added pressure on too you know the already weak demand environment. I mean do you guys have good line of sight into what what level of product do you guys have been in various channels right now.
I think it of course, I mean inventory and inventory adjustments always happen in the.
In the aftermarket I think that's inevitable, there's a lot to talk our stuff that you read about the U.S service spoke materials is the number of potential retirements or the older platforms. The shift from perhaps the larger quintiles to the smaller twin aisles, which might favor they'd seven but there's a lot of talk of course about a shift from what I was the single iOS the drugs with demand.
I think all of that will play through.
I think that you know if I think at the eight seven of the 350, Boeing and Airbus I've been working very hard over the years not to be building excess inventory of their supply chains, everybody is interested in just in time and reducing those inventory. So I don't know how much they hold on hands I described that we had a fairly strong second quarter on a seven.
Purely volume was not producing at the same level given that they close them back we talk about that there'd be more towards it at more of an effective April so I think there's an inevitable adjustments associated with us.
But I think you know when you think it was bigger problems I think those are not precipitous that inventory management itself. It slows down, but it's not precipitous drop a drop from you know 14 amongst the some other a seven so I don't think a number seven days a month overnight best will be the bigger impact that we will have to try at adjusted.
Yes, I think all of that could play out.
That's part of what makes it so difficult to forecast the future I would say on our commercial lapped our commercial aftermarket products. Our stuff is played critical and so it's not.
Not a nice to have in terms of keeping the airplanes in the years, it's absolutely critical and so if there are flights that if our our stuff needs repair and overhaul.
That that has to happen.
Got it got it and it just one more can I mean, I know you guys are cutting a lot of non a central cost you know, but but how is this going to impact the status of sort of the operational initiatives. You had you know been implementing in the aircraft control segment. You know did you still or where are you still relying on the level of consultants and I mean obvious.
Actually you know the demand environment, Yeah, I mean, it just seems like there's throws off a wrench in that whole equation. So how do we think about what you had been implementing in aircraft controls as it relates to what's happening here with go but.
Yeah, I I feel like we said in the carbon steel. The first couple of months, we continue down that path and the last month.
The quarter right and its April has been around.
Social assistance, saying and an all other things going with that setting up separate shifts moving people around.
All of that as of course slowed I would say for the last call. It six days weeks the initiatives around fundamental improvements have completely being displaced by continuing making sure that we're continuing to make products in the present environment that we've got as you said, we've essentially cut off all.
Consulting again at the last month or two but I wouldn't say, Michael though as the first of all at the business as we stabilize and we normalize into a new way of working with social distancing and all of that it starts to give a little bit of you. If that's okay off the first few weeks because its who's who's not what what's the sheets are running what needs to be there and how much support staff.
With all of that and then you get to weigh that settles out I'd say that is set is right, though that we should start to think again about okay. Let's think about how we start to do so we established some of those improvement activities parts of the budget example would be things like we laying out the shop.
We laid out the shop at doing value stream mapping is typically stop that started with the crews are folks altogether to rule walking itself moving equipment around to become more efficient.
Clearly would be.
Hindered by some of these things.
But I look at what are the thought as we get a better sense of what the impact in the business would be we will try to reengage and what I will call long term specific investments that we think have a benefits over the next year 2345 across the business to get very cautiously and selectively but I would like to start spending.
Somebody on those critical consulting areas of investment areas that we think this is going to be along come. So maybe that brings us again to the short term it as long as we're from a liquidity and leverage perspective, feeling pretty comfortable about where we're going on we take a hit on the personnel to make sure that we're investing for the longer term, it's not big numbers, but what we will try to make sure we continue.
Due to invest for that long term improvement.
Got it thanks, guys stay safe and I'll get out of the way here.
Thanks, Mike.
Thank you.
Once again, if you'd like to ask a question. Please signal by pressing star one.
We'll take our next question from Cai von Rumohr of Cowen and company.
Hey.
Yes. Thank you very much Jennifer maybe give us some color on the balance sheet you know.
Where do you see inventories going because you had basically building a buffer is just the process changes in aircraft.
One of the receivables what are you doing to make sure those stay under control what can you do in payables and then also you had a very nice uptick in advances in this quarter, where should we look for those to go to future.
Sure. Thanks, Hi, yeah, as they look at our balance sheet certain certainly there there's lots of uncertainty around all of that so I'll just caveat that without perspective, I'll start with inventories because that's the one that has done that sources.
Rolls over the past couple of course fraud and was previously anticipated to be providing some relief as we headed toward the end of this fiscal year.
With that benefit was largely attributed to the operations to Plano activities that Johnny just just described a moment ago. So.
So certainly with those activities, we are going be delayed embracing the Santa Fe I'm not sure when that'll happen, it's all going to depend on how quickly folks can get back to work when things start parents are normalizing and priority start shifting back around to focus on it I am.
The program is going well as John described however, it is taking longer than anticipated.
Well, we probably we'll see some pressure on our inventories in the short term however longer term, we will see the benefits associated with those but we may not be down near the end of this fiscal year actually had a patient [laughter].
We are taking a number of actions to look at the demand side of the business.
And some of our customers have not forecasting changes yet, but we anticipate those to calm, but we're considering those things in mind.
We can put controls in place and we are putting controls in place to limit the amount of receipts as inventory coming in.
Consider those more mitigation efforts so that we can temper the right that we would otherwise be feeling any inventory side of thing.
On receivables we are in good trends there as far as on invoicing and collections, we've not seen anything as far as crashers on that just yet I think we're still in the early days on some of the uncertainties, though from an 80 pressures on on folks wanting to just delayed.
Hey, Matt we've not seen that yet, but there certainly that risk out there with respect to refi involved.
We are managing our payables and I'm starting to put some vendor.
Your next facility types the programs in place.
So we're trying to work and from that perspective, and as you mentioned, we do have our fire advances that are up when I look at advances I often look at those kinda coupled with our receivables so where we are seeing an increase from both a receivable so far and an increase in on the customer advances. So there's there's.
There is really an offsetting what we've experienced on between both of those I and.
Certainly we are hoping to make some improvement and expecting to make some improvement in our working capital at the end up towards the end of year largely again attributed to the activities that we've got going on in the aircraft that's now.
Again lots of uncertainty around what we're able to do but we are actively managing it very actively managing our cash in our cash spend that's going out at the door as we're focusing on liquidity [laughter].
That's very helpful.
And then the tax rate was lower this quarter I mean, obviously you were at 25% before I mean should we assume that the tax rate more likely is going to be somewhat lower than huh.
I would say our ongoing tax rate at 25% and I'm pretty fair still however, we had a couple of specials that room, one timers that brought it down to the lower 19, 19%.
Both of them related to at holdings that there's two independent one that is on a change in India, where made its or in key only replacement capital on them and holding and then we had legal entity restructuring in Germany that reduced our went home and caster Semenya amplify that organization those are both onetime specials and.
Quarter that would not repeat but the ongoing rate would continue as is depending again on the next it varies but there's not much variation between jurisdiction. These days is there had been prior to tax reform.
Terrific John you cited a ventilators small motors.
Big roughly is that business and how big can it be how big can it grow.
Yeah. So.
I think like almost everything kind of book of business. Each one is a relatively small speaks piece of the scheme of things, but let me put that into side. So.
This is actually where we're supplying motors to fill up so who make these ventilators and as you can imagine the ventilator business right now is exploding for all of the companies that do as.
It was a product that as I understand it was approved kind of towards the end of last calendar year and we were just starting.
And we've got to this 800 more motors per month and now the demand has gone north of 30000 up motors promote the overall demand we had got for the next couple of years. Originally was about 30000 motors and that's no tech. So it's no 300000, the voters over the next year 18 months and it's a one motor Professor later.
The motors, though our double digit 50, 60 dollar pieces of kit Cai. So it's you know if you take 300 thousands of them, it's maybe a $15 million to $20 million business over the next 18 months I think we'd see a lot of other pressures in our industrial businesses. As you go we have a business that's related to the oil.
The oil offshore oil production I think that will probably dropped by could drop by a similar amount or more and so so it's it's great to be able to help with the effort folks are welcome flat out to increase production as you can imagine going from 830000 that a month.
Not easy so that'll take us a few months and it'll be a little bit about a shot the arvind our industrial business, but it's a there'll be lots of other things I think in industrial World will overwhelm us. So it's it's good it's nice to be able to help with whoever they possibly can but it's not a material impact in the state of the financials I'd say.
Very helpful. So turning to the defense side you had.
The $1 million hundreds of 100 basis points development loss can you tell us is that it classified program and secondly, you highlighted [noise].
For some mix is being strong roughly how big is your hypersonics business and what's the profile going forward.
So I'm Oh, we have dozens and dozens of development program Sky and the aircraft business and as you say some of the reclassified so I won't go into which particular program. It was.
But it was it was I would say, it's it's a military program as I say, though what I call. The normal course, when you have the type of portfolio. The size of book of business that we have some military programs our cost plus some of our fixed price some of those technical assumptions when they go into those that don't quite turned out the way you saw some of the.
I think its shape, so I I won't go into specifics of which program. It was but I would describe it as it's somewhat the normal course of business.
The overall book of business.
Hypersonics business, it's divided between our space sector, and our industrial sector I started our space and our defense sector. We typically don't straight to break it out tight in terms of separate from our midsize business in total so if I give you our you know our Miss our business.
Oh systems businesses, a 40 40 billion dollar business a quarter and that includes the hypersonic development activities.
So I, we don't break that I was specifically as a subcategory. It's like everything you know if I take our space business as running ass.
50, $60 million a quarter it would be 10, 20% to that it's not you know it's not half that are more.
Terrific. Thank you very much.
Right.
Thank you once again, ladies and gentlemen, if you'd like to ask a question the signal by pressing star one.
It appears there no further questions. At this time is disconnect I'd like to turn the conference back to for any additional closing remarks.
Thank you Valerie Thank you to all our listeners we do hope that everybody is staying safe and healthy it is.
An amazing time for every one of us.
We hope to come back in 90 days time that have a much clearer picture of what our future looks like.
We hope your future looks better at that stage as well and in the meantime, we wish everybody. The very best that we'll be working real hard to make sure that could today. The company continues on a very solid footing. Thank you.
This concludes today's call. Thank you for your participation you may now disconnect.
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