Q2 2020 Earnings Call
[music].
Ladies and gentlemen, welcome to cubic Corporation's second quarter fiscal year 2020 earnings conference call.
Time, all participants are in listen only mode. Today's webcast includes a slide presentation as part of management's prepared remarks, followed by a question answer session. You can advance the slides by using the left and right arrows located in the upper right hand corner of your window.
If anyone should require operator assistance during the conference. Please push star zero on your telephone keypad. As a reminder, this conference call is being recorded now what I would like to turn call over to Kyrstin Nielsen Vice President of Investor Relations you may begin.
Hi, everyone and thank you for joining cubic's light cat I'm joined today by Brad Feldmann, Chairman, President and Chief Executive Officer, and and Schuman, <unk> Executive Vice President and Chief Financial Officer before we begin I'll remind everyone that our presentation contain forward looking statements that are made pursuant to the safe Harbor.
<unk> Federal security laws.
Recent FCC filings include risk factors that could cause the company's actual results could differ materially from our expectation. In addition, we have included non-GAAP financial measure as an artist fashion.
Conciliations to the most directly comparable GAAP financial measure it can be found in today's press release and in the appendix today's presentation.
That I'll turn the call over to Brad.
Thank you Justin.
Thank you everyone for joining us today.
Before we talk about the quarterly results and business trends.
It is important to underscore that aren't top priority in dealing with cobot night and pandemic has been to protect their health and safety for people and our communities.
Well at the same time sherbert customers and ensure business continuity.
I want to thank all our employees as.
Well I've kept our business is operational during these unprecedented times.
I am grateful to an incredibly proud of your commitment to serving our customers.
For todays call I'll start with a brief summary of our performance for the second quarter.
Then I'll discuss the notable trends and developments were showing an address show cubic there's navigating the current environment and preparing for the future.
And Truman will discuss the financial.
And our cost savings initiatives, you're more detail.
And we'll finish with culinary and as usual.
Please turn to slide three.
We have a lot to cover today.
So let me start with some key points upfront.
While we were experiencing some customer driven to wage and impacts as a result of cobot 19.
Our businesses are deemed essential.
And we believe that we are fully prepared to be customer commitments and execute our substantial backlog.
We're also reposting or capabilities to support our customers and communities.
Later in this presentation will discuss the actions we've taken to navigate in this challenging environment.
Including measures to safeguard our employees, which was our top priority.
While ensuring business continuity and mitigating the impact and risks associated with cobot 19.
Regarding the current business dynamics as many of you know our transportation business is not driven by transit ridership today.
The vast majority of our transportation revenue is recognized through project deliberate I'm fare collection systems.
Well, there's the maintenance and operations of those systems.
Our transportation customers, However continued to experience significant pressure on their operating budgets.
And mission solutions, while we are seeing some short term order delays the national defense strategy continues to drive robust demand.
We're writing more proposals than ever.
And our training business for sure Unforced ground training exercises have slowed.
But we're very encouraged by our customer engagements regarding cubic's programs for the United States armies synthetic training environment.
We continue to prior to rise reducing leverage.
It's Truman will discuss our cost savings initiatives at our recently completed debt restructuring, which enhances our financial flexibility.
Lastly, the underlying fundamentals of our business are strong.
We believe the industry dynamics in both transportation into badge remain favorable in the long term, which I'll discuss later in the presentation.
Turning to slide four.
Our book to Bill ratio through the first half was 1.33 and our backlog remains strong at $3.6 billion, which represents more than two years from future sales.
Second quarter sales of $321.5 million decreased 5% year on year as growth and defense training was offset by a decline in mission solutions, primarily driven by two factors first orders and shipments of gate or were lower year on.
Here as the prior year benefited from strong order activity in support of the United States Army urgent operational need.
Second primary impact, which related to timing of orders for de Tech, which we currently expect to book and ship in the second half of this fiscal year based on what we're seeing today.
These impacts had an unfavorable impact on adjusted EBITDA in Q2 as these products have high margins.
Second quarter adjusted EBIT da also included higher bid and proposal expansions as we're responding to more RF ease in our history for both commercial and defense customers.
Lastly, during our first quarter earnings call, we communicated that we expected Q2, adjusted EBIT da to be flat sequentially.
We began to see the covert 19 impact in March which drove results below our previous expectation.
Let's turn to slide five and I'll provide more detail on much.
As you can see on the bridge here cope with 19 impacted our results versus our prior expectation by approximately $5 million.
With the largest impact related to delays some high margin software orders and mission solutions as our classified customers procurement processes were disrupted by their transition to tell a work.
We also recorded smaller impacts related to the decline in transit ridership delays, a traffic, where enbridge smart awards and impacts to productivity.
Lastly, we continue to submitted proposals to drive growth.
Our bid and proposal costs for mission solutions were higher than planned by roughly $1 million.
Turning to slide six.
Due to the evolving business conditions and increased uncertainty shrouded opened 19.
And particularly its impact on our transportation agency customers.
We believe it has proven to suspend previously announced guidance for fiscal year 2020.
While we have not experienced significant impacts to date or transit customers have experienced significant revenue declines and are currently focus on safety adherence and budget conservation.
At the end of March we paused or installation work on the New York Omni project due to safety concerns.
Our thoughts our with our M.T. a customer who is lost many lines due to the cope with my team license.
Installation work on the project resumed may 3rd.
Our teams are eager to get back on schedule and we expect minimal to no disruption to the overall project timeline.
While our other major projects remain on schedule, we're seeing minor disruptions more broadly in transportation and could face other potential impacts to project delivery and delays of expected new orders as our customers prior to rise safety and budget conservation.
And during the pandemic.
Additionally, while less than 2% of Cubic's annual sales are tied to transmit ridership. This does have some impact on adjusted EBIT da due to higher margins.
Lastly, we see timing risk to our defense businesses as a result of a slowdown and ground training coupled with potential delays of new orders.
And potential acceptance of shipments.
Delays studio de travel restrictions.
At this time, we are unable to confidently forecast the effect of these impacts on our financial and operational results, which could be material.
I want to be clear.
That these impacts or primarily timing related and our backlog remains solid with no expectation of cancellation of any projects across the company.
Cubic is a market leader Sherbin critical industries, and despite near term challenges and uncertainty the long term secular trends for all our business should remain intact.
Our first priority it is to care for people.
We are teleworking globally across cubic except for a central front line employees and manufacturing locations and other onsite personnel at cubic sites and customer locations.
We are focused on keeping employees shapes through increased annotations measures as well as social distancing and additional safety protocols.
We have distributed face coverings every employee including those working from home.
Cubic is deemed an essential provider by governments and we have taken actions to ensure our facilities remain operational serve our customers.
Thanks to our great team our manufacturing operations are working ahead of schedule and we believe with limited risk of supply chain to wage.
Lastly, we are focused on essential and taking necessary actions to conserve cash and mitigate the impact of cobot, 19, which Alaskan schuman to discuss in a moment.
Turning to slide those.
That's true, but our teams innovate to make a positive difference in People's lives.
We are re purpose and our capabilities and leveraging our innovative solutions to care for our employees customers and communities.
We manufactured face tougher ins and made them available for all cubic employees and their families.
Additionally, we are delivering them to our customers, including the New York MTO and the United States Navy.
And Tennessee, we are re purposing or laser cutting machines to produce state shields, which we have delivered to the New York M.T.A. for testing to protect bus drivers.
We're also assessing additional opportunities to support relief efforts, including Republishing Kubitz inflatable satellite antenna technology to build ventilators.
And leveraging our expertise and game based training to develop immersive synthetic solutions to train medical professionals.
Turning to slide nine.
We continue to see favorable dynamics across cubic's end markets.
And transportation cities need to address the challenges of traffic congestion.
The long term trends of declining gas taxes and increased urbanization remain favorable for investments in technology for road usage charging.
Transit fare collection and traffic management systems and.
And mission solutions, the National Defense strategy continues and the Geo de continues to prior to rise network sheep Orion storage solutions.
In defense training operational readiness continues to be a focus and we expect the ship from wide training to the use of lie virtual constructive solution and all domain.
Turning to slide 10 for an update on the transportation business.
While our business is not fundamentally driven by ridership our customers are impacted from a decline in revenues from all funding sources.
As we saw through the enactment of the terrorist attack or the U.S. Federal government, we expect our customers to receive additional stimulus funding and terrorist Act 2.0.
I'll discuss our observations on the medium and long term outlook in a moment.
The largest strieber of Cubic's transportation revenue is project delivery maintenance and related services. Some fare collection systems for major cities.
Some of our services contracts contained ridership related sales, which collectively add to about 2% of cubic's total revenues.
Because these sales are relatively high margin. We currently expect them to have an impact on EBITDA.
As for a big five projects currently in the design and build change the only impact we experienced so far as a meal or.
As I mentioned earlier, the M.T.A. is focused on essential service and safety.
We had to temporarily pause new installations in late March but installation work resumed on may 3rd.
In Boston M. B T. A board has approved the renegotiated contract and we continue to expect financial close in fiscal Q3.
Our other major projects in British been.
San Francisco Bay area in Chicago remain on track.
I'll point out that besides New York British pound is the only other large contract with onsite installation rollout plan for this year.
Of course in this environment, we faced some unknowns in the near term such as potential delay a borders and disruption of projects.
However, despite the challenges of cobot by team, we continue to see progress on our strategic priorities.
We're pleased to announce that cubic was selected as the preferred tender by Ireland's national transported authority to be the operation service provider.
For the T.F.I.E. Lee card system.
The contract will be awarded for a five year term with the possibility to extend for an additional five years subject to the contract shining in a few weeks.
We also had a strategic win and our traffic management business to provide the city a myriad of Mexico within integrated traffic, where and next bucks solution across more than 300, signalized intersections, <unk>, which will reduce the city's congestion and greenhouse.
Gas emissions.
Lastly, we continued to make progress on cheaper suge, including our recent proposals mission for the New York congestion charging back office, leveraging cubic's market, leading one account strategy.
The pipeline remains strong with new RFP is coming out, including New Zealand in Toronto, and we're also working on sole source upgrade proposals at the request of several existing customers.
Let's turn to slide 11.
We believe the recovery following cobot 19 will lead to opportunities in the medium and long term and we were well positioned to support our customers.
We anticipate a gradual relaxation of restrictions and that road usage and traffic will pick up faster than mass transit.
Transit is expected to normalize overtime as it is the only way to effectively move people at scale in large cities.
The challenges associated with congestion, they're not going away.
Infrastructure funding is expected to be a feature a stimulus packages globally.
Which we believe will drive demand for ready to deploy intelligent traffic solutions, which we are well placed to service as a result over recent investments.
We expect increased demand for solutions that improve service in safety such as contact once solutions that create funding sources to increase our customers revenue such as road usage charging and loyalty and advertising platform.
And integrated solutions to enable demand management and influence traveler behavior.
Turning to slide 12 for an update on the mission solutions business.
Our core program orders remain on track and we're responding to more or ease than ever.
Partnering with both commercial and defense customers.
Our new business activity span Fiveg communications, and new space markets on the commercial side and space Communications electronic warfare, and I am sorry services on the defense side.
In the corridor, we were awarded a $99 million sole source contract renewal with the United States Defense Information systems agency decide to continue operating the unified video dissemination system.
Just a system is designed to deliver access to wide full motion video through a global airborne eyesore architecture to defense and intelligence customers.
We also received a 49 million dollar full rate production order brigade or for the T to see two program.
We have experienced some delays this year in part from the continuing resolution as we've previously discussed and now also due to cope with 19.
We believe the primary impact to the business or potential delays of orders and customer acceptance processes could be disrupted by government travel restrictions tomato gate. This we're partnering with customers on revised acceptance procedure.
Turning to slide 13.
As I mentioned earlier defense training continues although for Sean Force ground training exercises have slowed customers are using existing funds to either support smaller training efforts or to upgrade existing products and solutions in advance of resumption of training.
The only anticipated impacts as a result of covert 19, our missed opportunities for surge training events, where customers in a normal year add additional training events to the core schedule.
At the same time, we are encouraged by our customers engage regarding cubic's programs for the United States armies synthetic training environment.
We have successfully completed to use your assessment evaluations on or soldier squad virtual trainer program.
In addition, we have successfully completed to use your assessment evaluations on our laser less direct like fire training solution.
Where are the only company down selected under the live training portion of state to provide this solution.
We're seeing some slowdown of order activity as result of customer transitions to tell a work, but we anticipate these impacts to be short term.
Cubic global defense bookings this quarter included more than $50 million a franchise air and ground training Awards led by an award to continue to support the UK British armies combat training Center exercise. In addition, we won the javelin outdoor training.
Some program, which we believe will expand globally.
Lastly, we want to position on Darpas log decks program.
This strategic program represents further diversification of our program patient advances our digital a bit efforts through application of artificial intelligence and machine learning to logistics.
Now I'll turn the call overdue in Sherman to discuss our cost savings program and financial results.
Thank you, Brad and Hello, everyone.
Please turn to slide 14.
In response to the rapidly evolving over 19 pandemic, we've undertaken many cost reduction and cash preservation initiatives.
We've reduced discretionary expenses optimized overhead and made tough decisions to reduce and different select R&D project.
While continuing to focus on critical investments to drive growth.
Our board of directors and bright I've taken a 15% production and cash compensation for the remainder of the fiscal year and I've taken a seven into half percent production.
We've also made some changes to employee compensation, including a temporary suspension of oral one can match, but the remainder of this fiscal year as well as a salary freeze through fiscal year 2021.
We expect these cost saving actions to result in cumulative net saving more than 30 million through fiscal year 2021.
Additionally, we.
We are focused on improving our cash flow and lowering our net leverage ratio to under three times.
As a reminder, our credit agreement permits us to maintain a net leverage ratio all up to 4.75 times or be read up 12 month in connection with the acquisition Appixia in January and given a typical seasonality an expectation for a stronger second half. The currently expect to be within compliance.
With this covenant or the next two quarters.
You know drunk driving through improved cash flow include recent actions to reduce capex.
As expected financial close on the Boston contracted Q3, the conversion off that 17 million build up in CMS inventory in Q2 to cash later this fiscal year and renegotiation of certain milestone payments with customers.
For example, the pause on installation in New York in late March and April we have worked with our customer forget bid for the scope completed related to this milestone, but it does make a full completion of the milestone.
Turning to slide 15.
As previously announced in March we recently strengthened financial flexibility by entering into a new 450 million dollar unsecured term loan and by upsizing, our existing revolver from $800 million to 850 million.
Part of the proceeds from the new term loan were used for the early prepayment our outstanding private placement.
Our capacity increased by 30% to a total of 1.3 billion, improving a financial flexibility due to more flexible covenants interest saving and a better debt maturity profile.
This extends the average life book on debt by approximately 1.4 years and decreases principal amortization over the next 24 months by approximately 49 million.
Additionally in April we swapped 550 million up one month, LIBOR 274 basis points fixed rate increase can be expected interest savings.
Please turn to slide 16 to cover the second quarter financial result.
Sales in Q2, and 321 million down, 5% as reported and 4% on an organic basis, reflecting growth in defense training, which was offset by a decline in mission solutions due to lower gains are in detect shipments as Brad discussed by transportation systems was roughly flat as a result of project timing.
Adjusted EBITDA for the quarter was 4.5 million, which reflects growth in both transportation on defense spending offset by mission solution.
As a result, a floor high margin fail as well as higher investments, including R&D and investment on franchise programs.
The good 19 pandemic negatively impacted adjusted EBITDA by approximately 5 million versus the prior expectation for the quarter.
Adjusted loss per share was negative 12 cents, reflecting lower adjusted EBITDA and higher interest and depreciation expense.
Actually offset by discrete tax benefit.
GAAP effective tax rate for Q2 was 27%, which differs from the second quarter 2019 effective tax rate of 29% and the U.S. statutory rate of 21%.
Recognized a onetime 13.5 million tax benefit recorded through purchase accounting related to the acquisitions of ixia and done wrong.
As a reminder, tax benefits recorded through purchase accounting and not included in adjusted EPS.
Adjusted free cash flow was negative 37 million in the second quarters, reflecting higher inventory and BMS products that are expected to ship into second half as well as unbilled receivables from Boston and the Bay area.
Moving to a transportation segment results on slide 17 sales declined 2% as reported and were flat, excluding FX impacts primarily reflecting project timing on effect collection project and a 4 million impact you took over 19.
Adjusted EBITDA margins increased 200 basis points, driven by higher margins on services and cost management Govan 19 pandemic negatively impacted adjusted EBITDA by approximately 1 million.
The reason, we don't declines in front of trying to shut and delays of traffic where in goods might awards.
We expect growth to accelerate in the second half of the year driven by the Boston contract reset and the timing of development work on a enough fare collection projects. In addition to growth from traffic we're in good smart.
Moving to a mission solutions segment on Slide 18 bookings included again to order on the T. to see two program from 49 million and we expect to ship in the second half.
Is largely addressed BMS performance already which reflects two key drivers.
First order than shipments of gates or were lower year over year.
As the prior year benefited from orders in support of the U.S. Army urgent operational need.
The second primary impact was related to the timing of orders or detect which we expect to book and ship in the second half of this fiscal year.
These two items are the largest driver of the lower adjusted EBITDA in Q2.
Second quarter. Adjusted EBITDA also included additional investment the mission solutions. In addition to higher bid and proposal expenses.
As a reminder, if you look back at prior years Cubic's typically seasonality reflects Q4 major adjusted EBITDA.
Turning to slide 19.
Bookings in a global defense segment grew 121%, reflecting ground training wins by the balance grew 13% as reported and 14% organically driven by air training adjusted EBITDA margin of 9.2% increased 50 basis points, reflecting continued strong project execution and cost management.
And.
Turning to slide 20.
I'd like to briefly remind everyone of our revenue recognition policies and payment terms for each of our businesses.
And transportation a product sales mainly costs to cost percentage of completion by payments are tied to milestones and that's everything was that primarily fixed price, but certain variable element and I both monthly.
The mission solutions revenue is primarily recognize when products are delivered an accepted by the customer with cash collection typically are growing 30 days after shipment.
And defense trending a product sales primarily cost across percentage of completion wireless service sales are generally recognized based on billable among.
Our U.S. government customers pay off as cost incurred and our international customers place a down payment at the beginning of the contract a product sales that's remaining payments tied to milestones while so the sales of billed and collected a month and then renters.
Turning to slide 21.
Well, obviously spending a previously issued guidance they wanted to provide some information around potential low and scenarios for the third quarter and the full year.
For the third quarter, we expect adjusted EBITDA to be at or better than our Q3 fiscal 19 performance 30.6 million.
We've provided our key assumptions, including the completion of the Boston contract resets, which was approved by the NBT Headboard on April 27.
As well as continued delivery offs Pts project.
Unexpected orders and shipments on a short cycle detect and intelligent transport systems business.
For the full year at the low end, we expect adjusted EBITDA to be at or better than typical 29 team baby delivered 146.6 million.
Compared to a previous expectations. We believe there is approximately 15 million actress and the Pts business related to covert 19, including ridership and project delays.
Which will be offset by our cost savings program.
We continue to expect performance and mission solutions to be related to the fourth quarter driven by the timing of high margin orders and shipments in mission solutions, including Gator detect and Vyxeos largest software renewal.
We also expect continued growth in our intelligent transport systems business.
There are potential upsides to the slow and scenario include timing of shipments and customer acceptance from Cantor.
As well as upside than our transportation business.
And our customers recover faster than expected.
Currently our expectation is public transit brightest should both be a slow you shipped recovery as lockdown restrictions on gradually eve to the calendar year.
The content in the critical service, but people rely on and we expect ridership to return to near normal level.
We expect roads usage, which drives demand for our traffic management solutions to return faster than mass transit.
It's important to note that there continues to be significant uncertainty related to the covert 19 pandemic, including the potential impact the timing of orders and customer acceptance manufacturing and supply kindred and the full extent and duration of the revenue declines experienced by our transportation agency and municipality customers.
We are aggressively managing orders within our control to mitigate risk and achieved the best possible results.
Now I'll turn the call back over to Brad.
Thank you and Sherman.
Turning to slide 22.
To conclude I'll reiterate that our top priority during the cobot 19 pandemic is the safety of our employees.
We have re purpose our capabilities to support our customers and communities.
And we have taken necessary actions to manage through their current environment and to mitigate the impacts of cobot 19.
Our strategic priorities and the long term tailwinds of our businesses remain intact.
Well, we faced some uncertainty and the challenges in the near term, we are well positioned to continue to drive growth delivering innovative solutions that solve our customers' hargis challenge.
This concludes our prepared remarks for today.
Let's proceed to the QNX session.
Thank you.
This time, if he would like to ask a question. Please press star one on your telephone handset.
And our first question comes from Ken Herbert from Canaccord. Please go ahead.
<unk> line is open.
Yeah, Hi, good afternoon.
Right or not Sean.
Hi, Ken.
Hey, Brad I, just wanted to follow up on on CMS said, and obviously, the the drop there and it sounds like a lot of its timing, but I know you appreciate all the detail, but can you just go through again, the key drivers and the confidence sort of into the in the back half.
Fiscal fourth quarter, which I know, it's typically very big seasonally for this business, but where do you see the risks that some of this could slip into fiscal 2001 or confidence around CMS Senate and the fourth quarter and second half numbers.
We expect a CMS actually to do better.
This fiscal year than last.
We see some margin expansion.
As you could tell we booked the 50 million dollar T to see two contract towards the end of the quarter and so that'll get shipped out in the second half.
There are a number of orders and Ditech that are quote unquote in the.
Contracting officers typewriter that we'll get in their short shipment cycles.
We're also you remember we won that large tropo order with the Marine Corps.
In the first quarter and that is is ramping up as well and then finally, you'll remember we bought picture, which was a commercial software company and they have.
A few orders that or a software and software licensing kinds of agreements that have very high margin.
So net net I'm very confident that CMS will.
That this is timing and that CMS will actually have a better year than we did last.
Is it is it fair to assume appreciate that.
Organs in in the fourth quarter of this year for CMS through the second half.
We'll be better than what we saw last year as well.
I think we'll do a little better Ken.
Okay.
Okay, that's great for at and if I could just one final question on on Cts I mean, I appreciate that not about tied to ridership right now, but how do you view the risks, especially in New York City in Boston as things to start to reopen and people ideally start to incur.
This ridership budget constraints on your customers and what are your conversations like today with with timing and you see any risk as they face budget pressure on either timing or.
Or potential changes in scope choose the projects you're on right now.
Yes, so as you know we have a near record backlog in our transportation business, we had a slow Paul a pause for a month as we talked about.
In New York City.
We're now putting omni.
I would aiders, we started a few days ago will will pick up lots of schedule there. So.
That contract is on track and you might note also.
I was tremendously impressed by our team.
This ability to have agility and to create faced coverings from we're providing over 300000 face coverings to the M.T.A. So we're very proud of that we also commented that there was a public a board meeting.
In the last week or so in Boston, where they approve the restructure the contract value.
Going up near a couple of hundred million dollars and so.
Yeah, we're moving out on that as well Enbridge spin.
You know, we're moving along that.
You know Burgess been obviously, Australia is different than we've experienced in the U.S. and we don't anticipate slowdowns in installation later this year San Francisco is moving out as well. So you know over the next and I and I don't see.
Cancellations or.
Reductions in contract I mean, if these agencies or <unk>.
And these agencies are short revenue, obviously, our business is to help them to get revenue and so you know were essential for that and we see opportunities quite frankly at our traffic business.
You know as as we rebound some I think they'll be more people in cars for awhile and there'll be more congestion and as you might remember we did that.
Congestion management.
Job in New York City, using our our omni back office and there's inherent advantages for that so.
You know can I don't I don't see major impacts.
I see this continuing the issue is.
You know mass transit is subsidized by governments, we expect that to continue.
And so just out of abundance of caution while our.
You know our customers are.
Experiencing obviously revenue issues.
You know that that's why we withdrew guidance.
Appreciate it Brad Thank you very much.
Operator.
Thank you. Our next question comes from John Roberts from Citi. Please go ahead. Your line is open.
Thank you.
Brett It's Jim and just a question about a about their fleets when it guide I know you've pulled it back here, but just give us a sense, where you want path to achieve that without krona virus or perhaps some of the higher CMS investments and higher BMP, you mentioned, which I assume are not crude a virus related.
I was through things a bit off track that.
No we were on track to be within the range.
Okay and.
And then another question here as of the of the higher bid and proposal stuff that you're mentioning that CMS.
So first thing can you characterize some of those projects that you're seeing it seems like they kind of came out I know he was a million dollars that extra spending in the quarter, that's pretty big number and then also what's your perspective on when that kind of did it fulfills are writing is going to translate to positive EBITDA growth margin expansion sort of fits you Miss business really pick up thank you.
I think overall you know our country has the national defense strategy.
And.
You know given given covidien discussions on where that started or whatever I see the country doubling down we see the department defense trying to speed up activities and so that very much as in the sweet spot for a mission solutions and yes.
I'd also remember our Nuvo tronics.
Acquisition that we did gives us opportunities for commercial bids as well.
Particularly in five GE and commercial space and so we had invested in technology called Halo.
Which allows wideband network pipes are we put out a a bid related to that we put out some bids.
Related or actually a couple of bids on the Halo, we put out some bids in space. We've done some stuff on a on fiveg related to base stations.
And you might remember we have this a unified videoed dissemination system and that with the pick she a and other things.
We're bidding.
You know she two is our platform so an awful lot of activity.
In terms of timing on when that turns into revenue and EBITDA.
I would say it's possible to get some awards later this year, but.
It's probably more probable.
During the first half of next year.
Thank you.
Thank you and our next question comes from Michael Tier Moly from Suntrust. Your line is open.
Hey, good evening guys. Thanks for taking the questions Cloudier, but it is safe and healthy.
Brett just on the on Cts you know given given all the strain being applied to you know some of your larger customers. How do you think that's going to impact you know your receivables collection a milestone should we should we think about the cobot environment here change.
Thing you know anything regarding free cash flow I know you guys have kind of directed us to think about cash over a three year period, but but how should we think you know again as there are financially strange strained and we've seen the M. P. I ask for for bail out and maybe reorganizing and re shuffling similar projects. How are you think.
Talking about you know sort of a you know cash.
May I haven't Schuman answer that question. Please.
Sure Hey, Mike how are you doing.
So from a cash perspective, I would say the through your guidance, we've given that remains intact.
We don't see any risk related to payment from our customers, we've been working with our customers and actually as I mentioned in the prepared remarks, we had we work with our customer in New York too I actually move forward, but some payments, which are tied to a milestone went to work what stopped we work with them for a partial milestone payment based on work already completed.
And they agree to that got a trip collecting our strong relationship with the customer and obviously the strong progress we've made on this omni system for them.
Okay, and what what about you talked about the kind of revenue your total revenue exposure to kind of ridership.
What what are you thinking about sort of the maintenance exposure and you know do you expect across your your transportation customer base that you know you're kind of if there is sort of a predictable annual revenue stream. You got there did you think theres any impact on on sort of maintenance revenues.
We don't see that.
So go up 25 million ridership risks that we talk about so that's part of the operations and maintenance bucket. So it's not tied to the design built.
Okay. Okay.
And then I guess or the other one I had just on.
Back to the broader whether it's a global defense or mission systems can you give any color as to what you you might be sand from some of your international customers. I mean, you know I, obviously every everyone's dealing with the same issues here you know I know you had some delays however, how're projects in programs on the international front tracking.
Right now in a in a defense a landscape.
Yes, theres quite a few international opportunities that we're close on.
You know some of these countries like us are gradually opening up.
But we have.
[noise] been in discussion with the customer and.
Particularly in the training area. These are things that they vitally needed and there are funded and.
No, it's close to actually being in the contracting officers typewriter. So.
You know we expect a good order inflow in fact, we had some you saw that in the prepared remarks and cubic global defense and we expect that to continue I'd say, there's been a slight pause, but people are eager to get back to work.
And you don't get on with Us.
Okay. Okay that last one I had just you know as you guys look at your supply chain probably across all the segments.
Procurement of technology related smaller components I mean, how are you.
Sizing up four or thinking about the potential risks a as you look to procure or raw materials. Other inventory you know it is there any required pre buying where you might see some potential.
Tightness in certain product lines or what have you I mean have you guys.
Given some some thought to that area as well.
As you might expect where micromanaging the heck out of that.
We have all parts.
For the third and fourth quarter anticipated shipments are either in house or we have extreme visibility on it.
You know in general we don't by many parts offshore I.
I think it was less than a handful.
But my.
A manufacturing and procurement Guy is working on like like that no tomorrow.
The best way to preclude all this is to get ahead.
And so we're working very hard yeah.
Perfect.
Thanks, a lot guys I appreciate it.
Thank you and our next question comes from Mike Sicoli from Needham and company. Please go ahead. Your line is open.
Hey, guys. Thanks for taking the questions I'm just wanted to follow up on the cost savings plan that you guys haven't played so that $30 million to $35 million that we should be seen over the next couple of quarters.
I'm trying to get a sense how much of that is being implemented on on a permanent basis go forward versus temporary.
And I guess and a follow up to that is how much should we expect to be flowing through a in the cogs versus in in Opex.
Sure. So the 30 to 35 million is not over the next couple of quarters, that's over Fetsko talk amend or fiscal 20 and 21, so over the next six quarters.
The large jobs some of the large drivers on there are temporary actions weve job or basically they'll have a salary freeze to the next fiscal year for fiscal 2021. They suspended the four one can match, but a part of those drivers so in terms off optimize them overhead costs.
And ready looking at a present positions, it's probably more off a permanent but a large part of it as.
Temporary based on the current conditions.
From a Cogs so of course of SGN perspective, a large part will show up in our cost of goods sold so probably little more than half effect, though 60% lots will show up in cost of goods sold out that's employee base and the remainder busy and.
SGN and other line items.
Okay. Thank you for that and then I guess.
The follow up I have few is on the CGD segment.
Can you describe I guess the customer conversations you're having hearing I guess I'd just like to get more color.
For the customer budgets being largely placing the the fact that these orders should be coming so.
Yes, so as we know a the department of defense budget is at a high water Mark.
So the budgets are pretty solid.
And Ah overseas.
You know, we see the things that we're chasing funded.
And Oh, we have.
You know as I stated very good chances and there are some orders that are.
We believe actually in the typewriter when people are come back from a from Covidien. So are there they are pretty high probability stuff as we know a internationally or timing is always an issue.
But.
We will get these intended orders.
Thank you for that.
Thank you and again, if he would like to ask a question. Please press star one on your telephone handset.
Next question comes from Jim Ricchiuti from Needham and company. Please go ahead. Your line is open.
Hi, Thank you I joined the call a little bit late but I did have a couple of questions just on the decision to.
Draw the guidance it sounds like it was mainly in the transportation business and I'm assuming is it mainly as a result of the uncertainty within the New York contract that.
Jim It's mostly it is on transportation, that's a fact.
We're seeing a lower ridership across all the properties and you know where customers have a you know less revenue coming in by quite a bit. So it's not a new York thing.
That country contract is funded we're continuing on it it was out of abundance of caution of things getting delayed and.
And so forth is there a lower on revenue, but to be be clear, they're a bit no canceled contracts, nor do I anticipate any.
Okay, and yeah, maybe their turn it around a little bit if we put aside New York for a moment in aggregate. If you look at the rest of the transportation contracts that you have.
What's your level of confidence and the predictability of that business, New York's high profile, New York chances are it's going to get the funding. It's that's required to just looking at the rest of the business and the various systems that you're dealing with their authorities.
How confident are you about that part of the business.
Yeah. So overall very confident as we stated in the call Jim that only 2% of our revenue.
It's actually a little less than that is tied to.
Quantity of people.
Writing mass transit around the world or the issue is is I don't know what else might happen right, so, but I'm very confident that.
No we're going to finish the are strong and so forth there may be delays of new orders, but I'm very confident that and as you know.
We have high visibility because it's all in backlog.
Okay. Thanks, a lot.
Yes, Sir.
Thank you and our next question comes from John Roberts from Citi. Please go ahead. Your line is open.
Hi, Thanks, a follow up a an already what little bit long Euro most the question on the on the on the covenants I know I'm you're below the four in three quarters other than that ratio.
EBITDA to be flat this year again.
Not asking for guidance for saying if rates were down, but it's fair to assume that we'd get some of that EBITDA growth fit and 21 that we otherwise would have seen this year based on essentially a recovery if you will.
Yeah, John just a couple of ways to think about our or EBITDA or a leverage ratio. Our EBITDA Hoff, one is down where some tough one last year and be set at the low end. They expect EBITDA to be flat to last year, which means the second stronger second half. So that's going to help our leverage ratio a sub.
Second happy, but that was going to be stronger. The second thing, we will have better cash flow in the second part positive cash flow into second half, which will help but our leverage ratio and then again.
2021, as a if the U shaped recovery that we expect and most strawn that we should start seeing some growth out there. So we feel pretty comfortable that our leverage ratio and simply our and we're very focused on paying down debt and have a very keen eye on their balance sheet.
Thank you and then just a question on the refer proceed with facilities I understand the <unk>.
The social imperative to do that in Brazil for doing that I'm. Just curious the facilities that are purposely where they seem as that were not particularly busy at the time or because of delayed orders you have some down time, there's kind of wondering where you're getting the capacity three purpose facilities, including or something like theater. Thank you.
John we want to more shifts.
Understood. Thank you.
Thank you and that clears the queue of questions. At this time I'll turn the call back to Brad Feldmann for closing remarks.
Thank you everyone for joining us today.
Before we sign off I want to provide an update on our previously announced plans for an Investor day scheduled for June 18th 2020 in New York.
As a result of the covert 19 pandemic and recommendations from public health care authorities to restrict travel and group gatherings, we have decided to postpone or event.
Our highest priority is the safety of our people in communities and we believe that postponing. This event is the right thing to do considering the circumstances.
We will announce a new date for this event soon as soon as feasible and look forward to remaining engaged with our analysts and investors.
Thank you so very much we appreciate your time and interest in cubic.
Thank you ladies and gentlemen, this concludes our call today you may now disconnect.
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