Q1 2020 Astronics Corp Earnings Call
Yeah.
To the Astronics Corporation first quarter 2020 financial results call today's conference is being recorded.
At this time I would like to turn the conference over to Deborah Pawlowski.
Mr Relations for Astronics Corporation. Please go ahead.
Thanks, Kristina and good morning, everyone. We certainly appreciate your time today and your interest and Astronics joining me on the color Peter Gundermann, Our chairman President CEO and they Ernie our Chief Financial Officer.
You should have a copy of the first quarter 2020 financial results were released this morning, and if not you can find them on our website at Astronics Dot com.
Let me mention first that we may make forward looking statements. During this formal discussion as well during the Q1 <unk> session. These statements apply to future events are subject to risks and uncertainties as long as other factors that could cause actual results could differ materially from what I've stated here today.
Risks and uncertainties and other factors are provided in the earnings release as well.
Occupants filed with Securities and Exchange Commission.
These documents can be found on our website or does he see got done.
During today's call. We will also discuss non-GAAP financial measures. We believe these would be useful in evaluating our performance you should not considered a presentation. This additional information in isolation or the substitute for results crane per accordance to gap.
We've provided reconciliations of non-GAAP measures to comparable GAAP measures in the tables that accompany today's release with that let me turn it over to peak began Pete.
[noise] like you're doubling and good morning, everybody.
Oh, we're going to talk through.
A brief summary of our first quarter.
Talk through some of the higher issues.
But it's probably not what people are most interested then we're going to spend most of the time on the call. We believe talking about the covert married to any situation, how it's affecting astronics.
What we're doing about it or have done about it.
Before we get into it all though.
I thought I will briefly cover three goals that we are.
Or tried and true simultaneously achieved as a company.
And they're all three important merrell threed has to happen. The first is to protect our employees on the safety of our workforce we have.
I had at the beginning of the quarter close to 3000 employees working at 18 locations around the world and others have done that took over it became obviously paramount to learn some new trucks and to develop some new practices and we.
Feel like we've done a pretty well and pretty successfully when you do compare continue to do that.
In the future secondly, we wanted to keep serving our customers with the service some products that they expect a need we we're reminded over and over the first quarter and have been recently.
Oh, we're in a central business and that a lot of very large companies.
In the U.S. and around the world are highly dependent on our products and they expect us to keep producing and we feel like we've done that reasonably well.
Through the first quarter and up to today.
The third thing, but we have set out to do this to position our company.
Not only for survival during the pandemic. That's for success afterwards, we want to come out of this thing a strong are stronger than we have been in the past and we feel like Greens Creek and solid steps to do that and we'll talk through some of those in a in the second half of this call.
First quarter, we view I'm going back where it went back to the beginning of December.
We actually thought the first quarter was gonna be a strong start for 2020, I don't mind, telling you now our internal plan at that point wants to see revenues somewhere in neighborhood of 190 million.
We thought that that was do you the slowest and lowest quarter of 2020.
Turns out we were obviously wrong.
Oh, the reason we thought but.
How those assumptions was that we thought we'd made a lot of success in the fourth quarter resolving and cleaning up some issues that have been plaguing us operationally.
For some time I won't go through all the detail, though but many of you follow the company probably remember some of them. They had to do with there are three or what we used to call or three problem children.
We're problem companies. We also were under the assumption in early December though the southern through seven back would be recertify that you're a that was important for us because the ground doing as it went on through all of last year had begun to create a capacity crisis for airlines.
Or capacity challenges, maybe I should say for the airlines, which.
Ah we felt was depressing our aftermarket sales simply because they don't want to take aircraft out of service.
Report on our kind of IC related type products, which we saw the aftermarket on which is an important part of our business.
Turns out that assumption was obviously wrong the.
Max Recertifications slid into the new year, and ER and at this point of still a little bit up in the air conventional wisdom are most people anyway to think that that's likely to occur late summer early fall.
We're hoping that's the case.
But things actually even degraded a little bit further from that.
We have a pretty good lines that position on the something through seven Max we were delivering.
Through all of 29 team to the tune of about 40 ships a month at $95000 per show.
Making it one of the largest production or the largest aircraft production program, but we had as a company in 2019, everybody on the call, it's probably aware that Boeing.
Splendid production of the seventh resettlement as we answered the new year, So our first quarter.
Went from 40 ships come onto essentially to zero.
Which hurt our revenues.
We issued an update on February Threerd, and I covered a lot of these topics and covered up development effort that we.
Called Avenue year, which we'd wrapped up in the fourth quarter and talked about restructuring of our antenna business that talked about an 18 dispute to talk about.
Especially in the stock buybacks and with the drawing guidance because of the 737 situation, but there was no mention that press release on February sort of Coca 19 kind of interesting to look back.
And I haven't gone back and studied the transcript from our fourth quarter call, which was February.
24.
But I bet on that call if were to go back there was little or no mention of covert 19 also.
A week later that situation started change that's where it became clear that the pandemic was affecting Europe and the U.S. and you've been hitting some of the communities that are operations.
Our active in Kirkland, Washington is one of our largest operations and one of the first places where an outbreak was reported.
And we proceeded through March to do all kinds of things to our operations that we never talk never thought about really before.
Involving social that's something that work from home and everybody on this call is probably heard all these terms and as familiar with the concepts and I'm not going to go through him in detail.
Suffice to say that approximately half of our employees by the end by the Middle of March were working from home continue to do so today.
And half of them are working in our facilities I said earlier, we have between facilities sprinkled around the world.
For most part we feel.
But we've been pretty successful keeping those facilities up and running as a central businesses and effectively doing.
The kinds of things that we're supposed to be doing a we have a few shut down by government action. We have a facility in France that was down for a week, we have an engineering operation in India, which is.
Very limited in terms of being on site, but people are working from home.
And across our company.
Started the quarter with about 3000 employees, we did have a handle a handful positive diagnoses, maybe 12 to 15.
No real clusters, but we did have a handful of shutdowns for you know do cleaning in our operations.
It's been an adventure.
If you ended the day, our topline revenue for the first quarter came in at about a 157.6 million.
This is actually in the range of what we expected wanting your shooter February seven update release.
It was our lowest quarterly revenue levels since way back in 2017.
On that we reported a net loss of 67 million, but if you have read the press. We just I'm sure. You have you know that we had a significant write down of intangibles during the quarter.
74.4 million.
It is directly related to a change and expectations in the market.
Related to covert 19 units specifically to airline after markets and Airwatch aircraft production rates at some of our.
More recently in larger acquisitions, where we carried a lot of our goodwill that somebody 4.4 millions and non cash expense.
And it essentially removes half of the goodwill.
And intangibles off of our balance sheet.
We use the new.
That's true.
Profitability adjusted EBIT or.
And even with the right or after ignoring the write downs excuse me.
With the reduced revenue level, we were still able to put him in adjusted EBITDA of 10.3% of sales.
That's a merger, but you can probably expect to see in our financial statements going forward.
Bookings also on the first quarter were relatively strong at 167 million for a book to Bill 1.7.
There were some significant wins in there that we are will be you're talking about in the future, but we're not really able to talk about right now.
So long story short that's really the depth that I intended to go into.
For the quarter.
The press revenue levels.
A big impairment charge.
Adjusted EBITDA that was perhaps a little bit higher than people might have expected on that revenue level.
And pretty good bookings all things considered.
So we'll take questions later on this if there if everybody wants to go into more detail and want to dive instead it into the code at 19 situation and how it is affecting our business.
And what we're doing or have done about it we have done a lot in my opinion.
The first thing we did is really started studying or customer base and our demand streams or the sources of demand that the bringing business to our company and these are categories that are a little bit different than how we typically describe ourselves.
And we're kind of custom crafted for the for the situation that hands. So so these numbers are not numbers that people are used to seeing.
The first demand stream that we assess towards the government and defense demand stream. This is.
Largely our test business and military aircraft.
Or military aerospace and if you add those two together you end up with a total that was about 20% of our 2019 revenue.
If you do the math about $155 million are so last year.
And from our assessment.
This portion of the business appears stable and strong and if anything even seems to be accelerating.
This is our test business that does a lot of government work it's.
Missile programs that we do some power conditioner with some structures work and its military aircraft like joint strike fighter is very large program for us and across the board. It appears to US that this part of the business is is quite stable and dependable at this at this point.
The bigger chunk of our business and the second one I want to talk about has to do with commercial airplane production or maybe more specifically airplane production for commercial transports and general aviation or business Jets.
This means that an airplane is produced and.
For the airplane to be completed the our products need to be put on it which means we supplied to the Oems or to top tier.
Suppliers, who then supplied at Oems in this category or this demand stream.
There is a little more than half of our revenue last year was about 55% of 2019 revenue.
Run the numbers about $425 million of our business last year.
Of the two commercial transports in G.A. or business Jets transports are by far the most important 350 million out of the 425 million or so.
I'm sure. Many people agree on the call follow the industry closely have been looking at the announcements. So it's not a surprise to see that most producers across the board has talked about plans.
Production rate reductions of about 30.
35% or so.
Yes.
Planned reduction in.
Presumably will affect us.
Almost directly.
And.
We feel we need to model in the.
30% to 35% reductions.
Assuming that the aircraft Oems stick at those rates.
At least for the time being.
The third demand stream is significantly different it's aftermarket.
And for US aftermarket is mostly selling I have few related equipment to commercial airlines around the world I refuse in flight Entertainment and.
Most of you know this but if you go onto an airplane and you want to use your.
Imputed or you want to watch a movie or you want to their crews the internet.
There's a very good yes, you are working with our equipment.
And the significant amount of ourselves in the normal year goes to airlines last year in 2019. It was about 25% of ourselves about a 195 million or so that all of it as I have few related in the aftermarket, but that's the lion's share.
What we do and.
Patients based on the status of the airlines not only in the U.S., but around the world is that source of demand.
It's going to drop dramatically, we figure, perhaps 80% to 90% bybee ended the year.
Combining these three demand streams.
With our existing backlog and our first quarter results.
We imagined.
That 2020 sales could drop somewhere in the region of 30% to 35% from 29 too. So if you run the numbers and I'm sure. Many of you have that puts us in the range of 500 million to 540 million of revenue last year, we did about 773.
I don't mean to suggest this as guidance like many companies in the industry, we're not willing to go out and stake a claim a at this point or commitment on what we're going to be able to do.
But I want to provide color as to how we think the market's evolving and of course.
When you're sitting in my position and you're running the company and you see that kind of demands change.
By significant organizational and structural and cost changes in order to stay solvent in the face of the demand change and you need to know what you're shooting for so in the mean for no. We're shooting for a revenue levels somewhere in that range basis.
On the logic in the analysis that I.
Just talked through.
So what has what have the changes bed that.
That get us to where we think we need to be.
To achieve the three goals I talked about earlier.
Specifically, keeping our customers served and positioning the company for survival.
During the pandemic and success afterwards.
First of all with a big drop in demand comes the drop in material expense our material expenses in the on the order of 35% of sales.
Those kinds of reductions.
Pretty much automatic you don't ship the product you don't have the material expense.
There are some challenges with reducing ongoing purchasing requirements and so the cash maybe a little bit of a challenge as we adjust to the lower volume but.
But we're well underway with that.
Much more significantly maybe we have reduced our headcount across the company by the order of magnitude of 30% already.
We started the first quarter at about 3000 active employees today, we're operating at about 2000, that's a significant step down a very painful one for our organization as you can imagine.
But it's one that we think lines up our cost structure with what are expected to.
Demand picture is likely to evolve white.
We have a number of employees on furlough at this point.
Hoping to bring them back if demands warrants and in some cases, we expect where in a little bit of a short loop of low demand, which will come back in the second and third quarters.
So that we expect it will be some some calling back of people on furlough list, but for the most part were down from 3000 to 2000.
We've also frozen pay adjustments for the year, we've eliminated cash incentives one of the things that we do as a company is have some.
Pretty broad cash incentive.
Programs that stretch throughout the organization.
And its about just higher level employees are managers that are affected here everybody is affected in our little family. So.
It's a although at a minimum people are saying, 5% to 10% pay reductions at the higher level on the organization cashes cash wages will be down.
Closer to 30 or 50%.
We produced all discretionary expenses travel trade shows that kind of stuff and we've also really taken a progressive.
To our capital spending plan when we started the year, we thought we'd be in the neighborhood of 20 to 25 million. Our current plan has that closer to 8 million. So a significant drop in capital.
Spending and probably goes without saying, but we have dropped acquisition initiatives and we've dropped to stop buyback initiatives.
So we think these cost management cost reduction initiatives have shaved about 135 million ourselves from where we thought we would be in 2020, when we began the year.
The so what and again this is more a color than we normally give on the bottom line, but in the current situation. We think it's a service to tell you what we think even though we're reluctant to call it guidance at this point, but.
We believe that if demand turns out to be in the 500 to 540 million dollar range.
We first and foremost should be cash positive that's an important benchmark for us because we do well, while we've always been conservative we financed.
Oh, you know obviously when you take that big a hit to your revenue on a big hit to read but covenants can come into play and we're not.
In a crisis situation with our banking arrangement today and we weren't at the end of the first quarter, but we anticipate if demand continues as we expect that we could be by the end of year I'll come back to that one minute doing is going to talk through.
Our financing strategy.
Going forward in a moment.
So we think that what we've done that 500 to 540 million to make us cash positive. We also think.
That we should achieve positive adjusted that Oh, the high single digit percentage of sales so somewhere.
To 9% of sales that's our objective.
It's also important to note, though and I think are our are.
Activities to date kinda approve this that if demand turns out to be different from our expectations. We've got another a number of other levers that we can continue to consider pushing or pulling.
To keep ourselves cash positive first and foremost but also.
To achieve a reasonable but given the situation and yes. It's.
Anyone's guess at this point about how things are going to evolve.
Towards the end of this year and into next year lots of head scratching going on about that around the world, but only at our company.
But we're committed to this plan, we want to stay safe for our employees, we want to keep serving our customers.
And we want to position the company for survival and success subsequently.
So switching to the third topic liquidity in the balance sheet.
We drew down 150 million on our existing revolver at the end of the first quarter.
We had a reasonable quarter for cash anyway. So we ended the quarter with 188 million cash on hand.
They talk to moments ago about the expectation that while we're not in the problem situation at the moment if demand turns out like we think it will we could run in the.
Leverage covenant challenges towards the end of 2020, so we got out in front of that situation and initiated a discussion with our banking group, Dave and his team let us through that they've all that you summarize how that work where we ended up.
All right.
Thanks Pete.
As Pete mentioned we.
Little over a month, because we started pulling together the forecast as the.
As the pandemic.
Information was coming to light.
It it became clear that if our sales were indeed going to drop to the levels Pete I just talked about.
Even even with.
Changes that that we were going to make to the cost structure.
That we were going to bump up against and probably exceed our maximum leverage a coverage ratio so proactively.
We started working with the Bank group.
And ultimately.
Got to deal done that we closed yesterday and.
Some of the highlights of the deals we lease ice the credit facility down from 500 million down to $375 million.
We suspended the maximum leverage coverage a covenant through the second quarter of 2021.
And beginning in Q3 of 2021 or the maximum leverage covenant will come back into play at six times adjusted EBITDA.
And it will step down in subsequent quarters down to five and a half times in the fourth quarter of 2021 and then.
Stepdown beyond that into 2022.
There's a new minimum liquidity covenant that minimum liquidity covenant.
Essentially is cash.
Plus the available revolver and that needs to be at least $180 million.
The plan.
Our plan is in the next week, we will pay down the outstanding revolver balance to carry about $50 million of cash on our balance sheet.
That'll that'll give us.
About $50 million.
Space on that covenant.
Or $180 million.
Liquidity.
For $230 million of liquidity versus $180 million requirement.
Oh, we have a new minimum interest coverage ratio of 1.75 times it'll be measured quarterly.
Except in the first quarter of 2021, which will drop down to 1.5 times.
We have additional restrictions on acquisitions and share repurchases.
And there is a LIBOR floor of 100 basis points on the pricing grid.
So so right now.
For modeling purposes.
We're at a.
About a three in a quarter percent or 325 basis points for the effective borrowing rate on our on our drawn facility.
As Pete mentioned, we expensed expect to be cash flow positive.
And from a very high level.
If you use the.
The range of EBITDA that Pete mentioned earlier up 6% on 500 million.
The math comes out to $30 million of it that.
We expect about $8 million of Capex and about $7 million of interest expense.
[music].
Not anticipating any cash taxes, so that that.
That gets us into about a 15 million dollar cash positive range for the year.
Just using the example that Pete throughout their as far as a.
Cash flow positive some of the things that are.
Keeping an eye on is typically as revenue goes down in a in a typical situation you see some.
Some cash flow pickup as your working capital drops.
We're expecting to get stretched by some of our customers on our cash collections.
We're expecting some drop in our inventory levels I think these two are going to offset each other large largely.
And we've taken some actions to extend our payables by a couple of weeks to a two are our supply chain.
So all told we haven't built in a significant amount of.
Working cap.
Reduction when I talk about positive cash flow I think that could be upside.
To us to the extent that we can manage our inventory levels proportionately to the sales drop.
I think that's it.
Thanks, Dave.
I think that concludes our prepared remarks again.
Our three goals.
Protective employees and creating a safe workplace.
This point, we feel like we've done that pretty well certainly standards will.
We will change as the pandemic a.
Late continues and.
I think we're well plugged into what best practices are will continue to.
Through the best we can with that situation.
I think we've done a good job hitting our customers delivery requirements in many cases, we continue to.
Deal with.
Continuing development of new programs, especially on the military side, which are which have not abated at all as part of this process.
And I think would be steps, we've taken in terms of cost management and.
Modified facility with our banking group, which is which has been very helpful to us.
We feel like we're wells well situated.
Excuse me not only survive the situation but to.
Prosper on the other side, so with that being said Kristina we can open it up for questions now.
If you would like to ask your question. Please signal by pressing star one on your telephone keypad.
I guess speakerphone. Please make sure your mute function is turned off to allow your signal to reach our equipment again press star one to ask your question.
Well go to your first question from.
Jon Tanwanteng with.
Jay of Securities.
Good morning, guys. Thank you for taking my question personal nice quarter Adnan.
Thanks for all the caller I'd tell the cognizant, just a little bit better than.
Most people have been hearing I.
I think first <unk>, how should we think about the pacing of the quarters as you see it knowing what you haven't backlog and one that will deliver and assuming the down 30% to 35% commentary.
Maybe exit the what kind of production run rates and air traffic or are you kind of assuming had.
Touchy that when you take that.
Well, it's a good question, we're expecting me, but the second quarter could be.
Materially later.
Because of shutdowns and customers shutdown and things like that but.
We havent.
At the same time, we haven't seen the set the level of cancellations, particularly on aftermarket programs that we kind of expected to see so we're waiting to see how those two forces kinda play out.
But I think the safe assumption is that we're going to be materially later in the second quarter and it will strengthen in the fourth quarter that she is going to be the strongest them and part of that is timing on some bigger programs, especially on our that our test business.
Got it sets. So do you expect you to at Q3 to be York Your Troughed at this point given that you do have backlog.
We don't know [laughter] depends on how that customer deliveries kind of play out.
I think our current expectation is that Q3 will be a little bit stronger than Q2.
But it could go the other way.
Okay fair enough. Thank you for that and.
Dave you gave some good color on what you expected cash flows. After this year again, assuming that that range, what was that kind of 15 million and free cash at the inclusive of cash restructuring costs at all and then what would those be.
Yes, it wasnt inclusive of that and Ah.
Yeah.
As of now we haven't called out the the any restructuring charges at this point to isolate those but they are netted in with in with those this cost reduction numbers.
Okay.
So that that's included in the ceiling million kind of it.
Yes.
Okay got it a and then Pete any update on how the I think you gave a good break down just generally how commercial aviation is going but any update on the business jet side, and then kind of the problem businesses and how they're not they're looking you know from last year to this year, given you've tried to improve the things.
[laughter] well, John I was hoping we'd get through this fall with all the other stuff going on about talking about three but well look to bring it up.
I think we're in good shape I mean Armstrong, we have basically emerged into CFC at this point. The buildings are sold that people are moved.
And and you know, it's it's almost not identifiable as a separate standalone business at this point.
CCC completed their every year development in December they are.
The first quarter was the weakest quarter over the years, but.
We expect results, Florida strengthen them done through a basically approach breakeven one of the one of the watch items, though to be Frank is that.
The kinds of airplanes that by their type of equipment are disproportionately operated out of the middle East that all places or a driver of wealth there and oil prices are low so.
Historically, there has been some kind of.
Hello.
Linkage between oil prices on demand in that type of markets were watching that pretty closely.
On top of those most barrels that has been significantly restructured and focused.
On a tail antenna program with Rockwell Collins with a customer that's actually going really well or Collins aerospace I should say that's gone, we think really wall nurse.
It's we're still early in the year and programs getting linked out but were.
I'm not expecting that business to be profitable this year, but we think it sort of good track and we have always been enthusiastic about demand in that particular.
Area that particular corner of the market and we may have finally found a.
The Avenue to get there that we're hoping for so so far so good with all three of those things.
What was your other question John I feel like I, just grabbed on part of it I I think that that answered most of them, but I do have one last one get given just the pretty deep cuts and restructuring you've been making are there any changes to your incremental margins as you come out of the trough.
And as demand comes back and maybe you you.
No I pulled back on some of the temporary cost reductions at that you've taken.
It's a it's a.
It's a difficult question because.
It's hard to see how or when this.
[laughter] situation changes, we feel like we've got clarity to the ended the year, but as you obviously know.
Nobody really knows how this pandemics going to be team doing what the ramifications are going to be for resurgence to the to the airline industry.
There's a lot of attention going into making airplanes safe were actually involved in that are not necessarily a topic for today, but something where.
We're working on and.
And there are lots of a attention the lots of attention is being given to.
Treatments in vaccines are I guess, our thought is that it's just a very unpredictable.
To know how the how the recoveries going to come back and when I will say that.
We're handicapped a little bit because we.
Have been involved in development programs and engineering expenses.
And projects that are you know our are more than what a typical 500 million dollar company might do there were scale more to 800 million dollar company and we.
We've gone from 800 500 million, but those obligations at opportunities and there's significant opportunities we feel have not gone away. So how the margins play out.
Is dependent on that kind of human Yang element of doing that work for customers, who are demanding it and expecting it.
And when you know the airline industry or gets gets off attorneys.
Got it starts flying with load factors above like 10% [laughter].
I would add to that.
If I could be a little bit optimistic that.
Coming through a experience in a situation like this I wouldn't be surprised if we don't.
Identify and find ways to be more efficient than than we have been over the last few years.
I expect that.
We will find those opportunities.
I can't quantify what they are but.
I think when you when you live through a difficult experience like this you tend to come out the other side or with better processes, and some more efficiency and way to do things.
I just want to point to that for David.
Rather optimistic perspective, and that's not something we usually look for from Dave around here, but.
Well that goal.
God I I appreciate that and it that it is quite rare on thank you for the color guys and good luck on [laughter].
So.
We'll go to our next question from Michael Ciarmoli with Suntrust.
Hey, good morning, guys. Thanks for taking the questions glad to your everybody is safe and healthy.
Maybe up Pete just looking at this this forecast for the year you know, what's your confidence level and shipping the 268 million out of backlog I mean is there you know if I put together the current quarter plus that backlog you know you'd have 425 million revenues, but you know.
Is there risk that that backlog gets cancelled deferred pushed out you know any color you could provide there.
Oh, there, there's definitely some risk to that Michael we.
As I said earlier, we spent a lot of time probing around our customers some of our biggest customers.
You know sell the other customers and those customers are airlines and airlines are a little bit of Ah.
Yes, so its been a little bit unclear, how what the quality is in a lot of that backlog, but I will tell you that we've been a little bit surprised.
That we haven't seen more deferrals and cancellations than we have so there is.
There's some reason for hope and let me give you a little bit of color on on some of these things it.
A lot of what we get involved and from an aftermarket area in particular.
Our fleet modifications in the fleet modifications typically are quite a bit more involved than just the our products. So they involve.
Hi, MRO space and time and then involved.
Smitti be and they involve certain monuments that are going into a cabin and to the extent that the trains left the station so to speak on some of those modifications.
It appears that Eric that major airlines are continuing with those programs, which was getting the program done.
I think the ones that are in more trouble are the modification programs that were planned to like for the middle of next year.
There are in engineering at this point in their our commitments or purchase orders outstanding for the products.
At least that's a that's all working thesis right now.
That's interesting perspective in its way too early to put take a lot of this to the bank, but we have seen evidence in the airline industry in particular that there's an expectation of a lot of churn or you know some airlines are going to be.
Certainly perking airplanes or some of them are going to be moving away from certain fleets are certain models and the others may be picking those airplanes off and we tend to do reasonably well in the aftermarket side and that kind of an environment because invariably some airlines will pick up.
Fleets that aren't equipped.
The way their normal fleets wouldn't be an increasingly it as normal.
For aircraft for airlines to want to have our product on it. So they look for consistency across their fleet and and we've seen some evidence that that could be a meaningful driver of our business not necessarily this year, because I think everybody's just kind of holding onto the boot straps, but.
But as we kind of come out of this and as the airline industry settles down.
It's going to be something that we're going to watch very carefully related to that is.
The fact that leasing companies have become a.
Significant supporters of our business they like having to name brand products on their aircraft. So.
There are increasingly <unk> buying bigger portions of the tweets from the Oems Airbus and Boeing in particular, and they're increasingly when that when that when when used aircraft come through and get re issued their outfitting the airplanes with or without equipment. So.
Turn we think could work to our benefit in time.
Got it no that's helpful and what about I mean, you know your.
Modeling I guess for the the OEM transport declined 30, 35%.
You guys have you thought about or looked into what kind of inventories in the channel and what might have to be.
Burn down from some of your other customers you know the tier ones too you know or are you going at Boeing directly could that could that exacerbate some of the OEM declines and does that maybe.
Run a little bit of a risk to your inventory I'm working capital tailwind.
Well.
We really don't think so our major OEM shipments.
And our business a lot of that comes out of our Peto operation in Portland, Oregon, PS News passenger service units and certain structural components and certain injection molded components and.
And we've really been on a fine tune just in time.
Type of situation there for a long long time, where.
You know, we rebuild the parts and load them up into a crazy and a Boeing truck pulls up it five in the afternoon picked up the crate and takes it up to the production line and other it or whatever and.
And then comes back the next day gets another one so I don't there, maybe a little bit inventory, but it's nothing material the other big source of.
Product that we ship is more on the wide body side. It's a high after you related it usually doesn't go direct from our facility to Boeing but it goes through the.
The major I have few companies Panasonic tell us they react we.
We don't have as much visibility into that pipeline, but.
When you think about it.
The to be aircraft going down the production line are all fleet aircraft.
Bought by specific airlines, who want them configured for there.
Particular fleet so.
So boeing's Gonna order.
DFI or maybe the airline orders I don't know how it works with the IP companies, but there are specific shipsets matched to specific airplanes and there's no real reason the build up inventory.
Either at the IP company or on the production line and Boeing or Airbus or so so we don't think that's a major source either there could be some.
Inventory in the aftermarket, but even in the aftermarket you know, it's usually lead purchases.
Ship set of materials bought fresh for an airplane so I don't.
I don't feel like we think that's a major concern for our business is that makes us.
That makes sense now that's helpful. All I'll jump back MCU your guys. Thanks.
Okay.
[noise] well take our next question from Austin Muller with Canaccord.
Please check your mute button were unable to hear you.
Hi, This is Austin on for Ken.
Hi.
Hi, I'm. So just a quick question about.
The Boeing resumption of production on the Max So weirdos Stronach stand with the MXK shipments have they restarted and sort of how do you expect volumes to ramp this year on the Max now that production is going again and do you think that performance could be a little better than what's in the guide.
So if we get a recertification for the Max.
Well there are things that I know one can talk about and the things I don't know and up but I still talking about those but.
What we don't know is when Boeing is going to restart production at a Max and what their production late is going to be that's obviously something for them to work out and I'm sure. It's linked to essay certification and that's something but I know.
A much better than I did for sure.
I can say that we are building and we're building to the tune of plus 20, Shipsets a month or so we've been shut down for January February.
In March, but weve resumed that now and we have purchase orders going out for a few moments and as far as we know that that's what we think we're going to be continuing at.
I've read you know like a lot of people have that Boeing expects to start slow and ramped up 30, it could be that they want to keep the supply chain going at 20.
A month, which means they're going to build some inventory and they're going to eventually get up.
Beyond that and then we'll be shipping less than they are building I I don't know, how thats going to work out.
I know that some suppliers I see you have have gone down from 24 month, they've stated that publicly but today that is not done our experience.
Okay, So you're you're expecting going forward through the time being to maintain 20 a month.
That's the best information we have yes.
Okay.
And so just sort of shifting gears overture business jets. It seems like OEM build rates are down but they are starting to see some more business jet retrofit activity and so do you do you have any color on that part of the business at all.
I'm not really that that's not been an active part of our business certain of our product lines or could be adjusted to more adequately address the aftermarket, but but today, we're primarily line fit.
Okay, and so have you seen any changes sort of in the airline industry in general associated with the risk around the Wisconsin technique lawsuit.
No no not at all no.
That's an ongoing process of course, and we've got some of them scheduled for the summer which were.
Wondering if theyre going to actually happened because there are over in Europe.
But but no we don't see any market ramifications to that process at this point.
Okay and I just one other thing one other comment one other comment there just.
Since you brought it up we and just the.
They make it clear we the infringing technology.
Even if were found to be infringing at the end of the day, we designed out of the system way back in 2014, and we've got Boeing and Airbus to actually approved the design changes in what I consider record timely.
Three months or something so so everything we've done since bomb and do today is really not subject to that but soon.
Okay. So I guess irrespective of the outcome of the lawsuit it doesn't it doesn't really change what you're currently delivering to Boeing and Airbus fall.
No.
Okay.
Okay.
And then.
Can you comment at all on the public test business, and what happened to that or ER for public transit.
Well, it's an active pursuit.
And were working hard on New York City program that we.
Alex earlier last year.
And there are others that we're pursuing so our plan.
To have that'd be a very active part of our test business increasingly active as the year, whereas on.
So so we're expecting a couple of other a program wins and announcements.
Timings, a little bit fuzzy municipalities are are working from home.
Just like everyone else. Your question, maybe is wondering more specifically, whether the pandemic will affect demand for public transit and I think in the short term that's likely the case I mean I'd understand ridership is way down for example in New York City.
But I think the municipalities that were in touch with.
These are long range very expensive programs that go way beyond our company.
And I think there's a commitment that public transportation is going to become more important than the future not less important. So we're not seeing any pandemic related delays associated with those programs at this point.
Okay. So even in New York City that sort of a continuing forward in the pipeline irrespective of the demand shock going on.
Well absolutely yep.
Okay. Thank you so much because of color appreciate it.
Thank you.
And as a reminder, if you'd like to ask a question. Please press star one at this time again, not a star one for questions.
Well go to our next question from Scott Lewis with Lewis Capital Management.
Good morning peak days Debbie.
That's correct.
Right.
I think approximately 400 Max's that Boeing as part.
As I have seen been delivered or purchase for those airplanes, yet or might that be some additional revenue we know start being delivered.
Uh huh.
Probably a little bit of both for the most part.
I would say.
I'm speculating here a little that Scott that's good question I haven't.
Specifically dug into it but.
My working assumption is that most of those airplanes were ordered long ago.
And when they were ordered we weren't offerable.
On me on the airplane so the narrow body try and really it's picked up speed in the last couple of years and so most of the airlines are in the habit of installing a higher fee.
After delivery.
So so I would think most of them, we'll get whatever theyre going to get aftermarket or what's their delivered.
But at the flight deck question and I got it I'm just not completely confident in my answer I think over time line fit it's going to become more of the standard for a narrow bodies like it is for wide bodies today, a wide body airplane. Its <unk> do you just don't see why.
Body airplanes built without.
Power for example from nose to tail VIP configuration can vary depending on who the customer as but for the most part.
You're going to see a a in seat power system ended in a C or.
They are.
The feedback video system, but I.
I think im a narrow bodies, where a good decade behind that so some will have some will be equipped and some will be equipped aftermarket.
Okay. Thanks for that and just congratulations on.
That's how to make a lot of difficult decisions, but it seems like got the company in a.
Nice to deal with this situation. Thanks.
And it appears there no further questions at this time I'll turn call back management for any additional or closing remarks.
Well thanks for your attention.
As Scott was saying, we feel like we've been through the ringer here a little bit over the last quarter.
In a way, we're kind of looking forward to the second quarter being a little quieter.
But we'll look for two reporting back soon and again. Thank you for your interest in Astronics.
This concludes today's call. Thank you for your participation you may now disconnect.
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