Q2 2020 Barnes Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Barnes Group Inc. second quarter 2020, <unk> earnings Conference call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session.
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I'd now like to hand, the conference over to your Speaker today director of Investor Relations built it Mr. Pits. Please go ahead. Thank you James.
Good morning, and thank you for joining us for our second quarter Twentytwenty earnings call.
With me are Barnes group's president and Chief Executive Officer, Patrick Dempsey.
And senior Vice President of Finance, and Chief Financial Officer, Chris Stevens.
If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate web site at BG I N C Dot com.
During our call we will be referring to the earnings release supplement slides, which are also on our posted are also posted on our website.
Our discussion today include certain non-GAAP financial measures, which provide additional information we believe it's helpful to investors.
These measures have been reconciled to the related GAAP measures in accordance with FCC regulations.
You will find a reconciliation table on our website is part of our press release and then the form 8-K submitted to the Securities and Exchange Commission.
Be advised to certain statements, we make on todays call. Both during the opening remarks and during the question and answer session. Maybe forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
These forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected.
Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the FCC.
These filings are available through the Investor Relations section of our corporate web site at BG I NC Dot com.
Let me now turn the call over to Patrick for his opening remarks, then Chris will provide a review of our financial results.
After that we'll open up the call for questions.
Patrick.
Thank you Bill and good morning, everyone.
The second quarter for Barnes group as expected was incredibly disrupted as a result of the global covert 19 pandemic.
The abrupt collapse of commercial aerospace end markets was unlike anything previously experience.
And while our essentially manufacturing operations remained open.
In both our aerospace and industrial segments, albeit at lower production levels. Many of our customers facilities were closed severely restricting our businesses.
In such a challenging environment cost reduction and cash preservation efforts became Paramount.
Unfortunately, this necessitated companywide restructuring efforts, which will lead to a reduction of approximately 8% of our global workforce.
As difficult as soon as such actions can be the consequences of not doing them could prove even more detrimental.
It certainly sounds like the second quarter was one of playing defense.
Yeah, I believed the worst of the crisis is behind us and that we are beginning to see signs of recovery in our businesses.
By no means does that mean art implied the future will be without its challenges as they expect the road to recovery will be arduous and certain of our end markets.
Nonetheless, promising signal.
Have started to appear in a few places an overall there seems to be some ceiling of stabilization.
With that as the background, let me take a moment to discuss our second quarter results followed by some highlights of the business environment on our end markets.
Second quarter sales decreased 37% with organic sales down 32%.
Adjusted operating income decreased 52% compared to a year ago, while adjusted operating margin declined 390 basis points to 11.8%.
Adjusted earnings per share were 27 cents down 64% from last year.
Clearly significant declines from a year ago, but very much aligned with the expectations, we laid out in April.
On a positive note, we performed better margin wise.
And ended at the higher end of our adjusted earnings per share outlook.
Cash performance was also strong given the circumstances and our leverage remains very manageable.
Overall, and what proved to be a very challenging environment proactive cost and cash management actions helped to dampen the pressure on the quarter.
At present all of our facilities are opened an operational.
And prioritize into safety and wellbeing of our employees customers and suppliers, we continue to implement a wide range of safety precautions to protect them.
Most of our workers at the corporate office and segment headquarters continue to work remotely.
Salary related cost actions, including company officers and board members and the reduction of discretionary expenses have all been extended.
Moving now to a discussion of our end markets.
At industrial with select exceptions and markets remain challenged Thunder to cloud of the pandemic.
Manufacturing PMI is for North America in Europe have shown some improvement yet still hovered below a neutral 50.
China has climbed back to a modest to modest expansionary levels and happily we have seen a gradual uptick in China orders and sales from their February lows.
Global automotive manufacturing has restarted though at reduced levels.
Interestingly.
Forecasted auto production levels, which previously had been falling with each new Monte forecast introduced.
Show some relative improvement into July forecast as compared to June forecast.
And that holds true for North America, Europe and China.
Well that dynamic is a turn towards the positive global automotive production is still anticipated to be down approximately 20% and twentytwenty as compared to 2019.
As a result, the number and timing of new model introductions and modest refreshes remains uncertain.
In the second quarter sales in our molding solutions medical end markets saw strong growth once again.
And highlighting one at the positive various I referred to earlier, we saw a significant pickup in both packaging and personal care orders in the quarter, reflecting the release of previously held up projects.
Overall for the second quarter Industrials book to Bill was just under one times.
Due to severe dislocation in the second quarter I feel focusing on the highlights of our end markets is more relevant than a discussion of the specific business units performance.
However to round out my industrial discussion organic orders and sales for industrial businesses for the second quarter were roughly.
Molding solutions down 10%.
For some motion control in automation down.
25%, an engineered components down 35%.
As we think about how things might progress into the second time, we continue to expect a gradual recovery as many of our customers and end markets come back online.
We anticipate general industrial markets in our engineered components and for some motion control businesses will improve in concert with improving manufacturing PMI.
With auto production restarting and showing signs of stabilization, we expect to see a turn towards sequential improvement across our auto component businesses.
Although recovery of auto however, owners may be more muted.
As mentioned, we see good medical performance, continuing with personal care and packaging improving.
Lastly, we expect Automations should benefit from the introduction of new products that have been under development and its customers launch in previous delayed projects.
For the segment, we continue to forecast sequential improvement from Q2 Q3, and then again from Q3 Q4 as the recovery process progresses.
Moving now to our aerospace business.
Having been involved with aerospace for over 30 years I can safely say the depth and speed of the industry's dislocation has been astonishing.
In the second quarter total Barnes aerospace sales were down 49% with OEM down, 52%, an aftermarket sales down 42%.
But am I know MRO and spare parts so significant declines.
While our business is exceptionally well run and well positioned in the industry volume declines of this magnitude realized in the space of 90 days are just extraordinary.
In spite of that the team achieved 12 million of adjusted operating profit and adjusted margin was 17.5%.
Under difficult circumstances highly commendable performance.
Aerospace OEM backlog ended the quarter at 555 million down 21% from the end of March.
Our backlog will continue to be impacted by the industries that just in production schedules with net orders highly variable until the uncertainty settles and the cadence of the new norm of is determined.
As you'd expect we saw negative net net orders in the second quarter.
So clearly the second quarter was incredibly difficult for anyone in the commercial aerospace industry.
Unfortunately, the prospects for the third quarter or not much brighter.
While we anticipate some sequential revenue improvement the outlook for the industry will remain challenged.
On the OEM side aircraft manufacturers have reduced their production forecasts as pressure from airline customers weigh on their orders backlog.
With global passenger traffic down substantially parked aircraft abnormally high.
And significant airline overcapacity in the current environment. It is expected it will take a couple of years to get back to pre pandemic volumes.
In the short term potentially overstock supply chain built when higher volume expectations were in place, we'll need to be bled down before a meaningful increase in part production soon.
On the aftermarket side with so much overcapacity in place and airlines and cash preservation mode.
The entire industry will no doubt see near term sustained pressure.
As air traffic begins to ramp up overtime, we will see our aftermarket revenue stream also begin its recovery.
However, we expect that there will likely be a time lag between those two events.
In conclusion, the second quarter was one for the history books.
The scale of the business disruption on the speed of which it occurred was unprecedented.
Yes within that challenge.
I'm very proud that our team stepped up to keep our factories running in order to supply our customers with the essential products we manufacture.
Doing so with the safety of our employees always at the forefront.
Aggressive and difficult decisions were made that why did painful will allow the company to remain competitive as the business environment improves.
Given our long 163 year history.
As a company we've experienced many different types of extreme challenges in the past.
And I've always powered true such encounters emerging as an even stronger company.
So its resilience is a testament to the talented women and men that make up the Barnes team and today, we're seeing that play out once again.
As we begin our emergence from the pandemic, we remain committed to our long standing focus of conservatively managing our balance sheet, while leveraging the Barnes enterprise system to drive commercial operational and financial excellence true out all of our business processes.
We will continue to make investments and capital expenditures on innovation to position us for future growth.
Never has our transformational strategy being so important.
As it is in times of ambiguity an uncertainty such as now.
That the highly engineered products and differentiated solutions, we bring to our customers create even more value forging strong long term partnerships.
And while the termite has not fully past, we remain optimistic and see good things ahead of us as we move forward.
Now, let me turn to call over to Chris for a discussion on the financial details.
Thank you Patrick and good morning, everyone.
Let me begin with highlights of our 2022nd quarter results.
Second quarter sales were 236 million down 37% from the prior year period with organic sales declining 32%, primarily given the substantial disruptions brought on by the global pandemic.
The divestiture of the Seeger business had a negative impact on sales of 4%.
While FX had a negative impact of 1%.
Operating income was 10.1 million as compared to 57 million in last year's second quarter.
On an adjusted basis, which for 2020 excludes 17.7 million of restructuring charges and for 2019 excludes 1.4 million of dramatic short term purchase accounting adjustments operating income was 27.8 million a decrease of 52% from 58.3 million in there.
Prior year period.
Adjusted operating margin was 11.8% down 390 basis points.
Interest expense was too was 3.9 million a decrease of 1.5 million from last year's second quarter due to lower average borrowings and a lower average interest rate.
The company's effective tax rate for the second quarter of 2020 was abnormally high as compared to 23.4% for the prior year for the full year 2019.
The increase in the second quarters tax rate over last year is primarily due to a change in the forecasted geographic sources of income.
Relative to our prior forecasts with reductions occurring in several low tax jurisdictions.
This impact was partially offset by a benefit related to a refund of withholding taxes and a reduction of the statutory tax rate at one of our international operations.
We now expect our full full year 2020 tax rate to be approximately 34%.
Which includes the recognition of tax expense related to the Seeger sale that occurred in the first quarter.
Net income for the second quarter was a penny per diluted share compared to 73 cents a year ago.
On an adjusted basis net income per share was 27 cents down 64% from 75 cents last year.
Adjusted net income per diluted share in the second quarter excludes 26 cents of restructuring charges, while last year excludes two cents of dramatic short term purchase accounting adjustments.
Let's now move to our segment performance beginning with industrial.
Second quarter sales were 165 million down 29% from a year ago.
Organic sales decreased 22%, primarily driven by significant volume declines as a result of depend demick.
So you are divested revenues had a negative impact of 6%, while unfavorable FX lowered sales by 1%.
Industrial's operating loss in the second quarter of 300, K versus operating profit of 27.4 million last year, primarily driven by the lower sales volume and a $15.8 million restructuring charge.
Serving as a potential offset were cost mitigation efforts, which included workforce related action and their curtailing of discretionary spending.
Excluding this year's restructuring charge in last year's dramatic.
Sure purchase accounting adjustments adjusted operating profit was 15.5 million versus 28.8 million a year ago.
Adjusted operating margin was 9.4% down 290 basis points.
At Aerospace sales were 71 million down 49% from last year OEM sales decreased 52%, while aftermarket sales decreased 42%.
Not a surprising result, as the pandemic essentially shuttered the aerospace industry in the second quarter as Patrick noted.
Operating profit was 10.4 million down 65%.
Reflecting the lower sales volumes and a restructuring charge of 1.9 million primarily workforce related.
Like our industrial business cost mitigation efforts, partially offset the impact of lower demand.
Excluding this year's restructuring charge adjusted operating profit was $12.4 million versus 29.5 million year ago.
Adjusted operating margin was 17.5% down 390 basis points.
Year to date cash provided by operating activities was 123 million an increase of approximately $15 million from last year's first half mainly driven by working capital improvements strong receivables collections was partially offset by some inventory bet Bill the latter being our focus area for the second half of 2020.
First half free cash flow was 103 million versus 83 million last year.
And year to date.
Capex of $20 million was down 6 million from a year ago.
With respect to the balance sheet, our debt to EBITDA ratio as defined by our credit agreement.
It was 2.4 times at quarter end unchanged from both our December 2019 in March 2020 levels.
Barnes group has liquidity consisting of 74 million in cash and 393 million of Undrawn revolver revolving credit facility.
At June Thirtyth, the latter was limited to approximately 260 million based on senior debt covenants.
The company is in full compliance with all covenants under the revolving credit facility, which matures in February 2022.
While we do not anticipate a liquidity concerns we nonetheless maintain open lines of communication with our lenders and we will diligently monitor the credit environment and the company's cash needs.
Our second quarter average diluted shares outstanding was 51 million shares as noted last quarter, we have suspended our share repurchase activity and we do not have an expectation for one share repurchase will recommence.
With respect to our customer customary annual outlook, our ability to forecast performance with reasonable precision remains challenged accordingly, we continue to suspend our full year 2020 outlook.
As we did on an rate on our April call, we will provide some high level color on the upcoming quarter.
At the present time, we expect third quarter organic sales will be lower than last year by approximately 30%, though up approximately 6% sequentially from the second quarter.
Operating margin is forecasted to be approximately 10% while adjusted earnings per share are anticipated to be in the range of 22 cents to 32 cents.
Given the strength of our balance sheet will continue to invest in our business with forecasted 2020 capital expenditures of approximately 40 to 45 million a bit lower than our prior view.
And as I mentioned on our April call, while an acquisition or divestiture in the near term is unlikely given the current environment. We continue to analyze potential acquisition targets and end markets that meet our strategic criteria with an emphasis on proprietary highly engineered industrial technologies.
To close the global business environment has been challenging.
So our second quarter performance managed to hold the outlook. We provided in April through quick management actions enabled by the discipline of our Barnes enterprise system.
We maintain a balance sheet and and liquidity profile that are in good standing.
Working capital remains a focus area as there's more to be done on inventory optimization.
As Patrick mentioned, while ongoing challenges remain we're positioning the company to power out of the crisis with a solid financial footing and the agility to be opportunistic in reestablishing, our long term profitable growth strategy.
James Let's open the call the questions.
And as a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad and our first question comes from the line of Myles Walton with Yes go ahead. Please your line is open.
Hey, good morning, perhaps bill Chris This is a little on for miles.
Good morning.
So I'll start with the OEM Delta you percent I'm guessing that was a little bit worse than you guys would have expected.
Backlog you'd sort of cost about that likely coming down can you just give us any additional color around what you saw in OEM.
Does it end customer pool or just your customer did they make in sourcing decisions.
Single source will source tried source that sort of thanks.
Yes, all of the if we have in that I would highlight that Q2 was.
Quite quite a an array of different activities with.
A tremendous amount of uncertainty throughout the quarter from.
Communications.
Sometimes were inconsistent.
There was activities that were happening between our major customers between our suppliers between our role in shops, all with a view to trying to understand the extent of which schedules with change.
And so with that.
We kept extremely close communication with our customers as you can imagine ton understand their needs and loss, how they were thinking about the future.
In turn.
We we expected that we would have been a little.
Less down in terms of our OEM business, then add the 49% that we ended up our 52 for OEM.
But towards the ended the quarter I'd think most of our customers.
Probably not unexpectedly look to hold receive an inventory inventory into their businesses and so as a result yields a number of products that we had originally planned on shipping got held up and of course that had a negative impact on their inventory as well.
Which went up slightly in the quarter.
Okay, great. Thanks for the color.
And then just one more at the aftermarket you guys. Given some color by April can you just lay out sort of what you saw an aftermarket from April may June and sort of how is July tracking yes. So what we so as the quarter began in April is probably what lifted.
The quarter.
On the allowed it to the you know not not necessarily.
Down as much as perhaps the overall industry in that our aftermarket was down approximately 40% and in that.
What we saw was a stronger April but then the impacts that tend to be fell into may and June.
And that impact which.
As you can imagine.
Was downward has also continued into July so as we look look forward for aftermarket from Q2 to Q3 sequentially.
We would see a little a little bit more pressured in Q2 as a result of having potentially three months.
Of add the impact of the current environment as opposed to we've really only about two into second quarter.
Hi, that's great. Thanks for the call us.
You're welcome Thank you lose regular.
Our next question comes from the line of Matt Summerville with D.A. Davidson go ahead. Please your line is open.
Thanks couple of questions first can you talk about what sort of order cadence you experienced in the industrial business April May June July similar to the commentary you gave on aftermarket Patrick.
Yes.
Yes, Matt April was.
Pretty.
Pretty much the most severe.
May not much better to be honest in that while we saw as you can imagine was a lot of our customers close their facilities mode.
In fact boat on the aerospace side and on the.
Industrial side, but the Autolease would close for pretty much most of April and then may and so at June than we saw them coming back online. So order started to pick up sequentially through the quarter with the the first two months being the most severe.
And then what are you seeing thus far.
In July Patrick in that we're seeing we're seeing the same positive trend if.
Im positive comp becomes relative right. So relative to April and May adversely in July continuing improvement sequentially from June.
Got it and then can you guys maybe talk about what your expectation is for cost savings realization. Both in terms of maybe putting it into two buckets with what you're doing with respect to the reduction in force the 8% and what you might be looking at otherwise.
From a discretionary standpoint. Thank you Jeremy This is Chris let me kind of take that one second quarter.
As it as it started to.
Materialize in terms of the overall impact on both our aerospace and industrial segment to to the.
Testament of both leaders in both of those segments really Swift action started to take place and it has started the easier part being just a discretionary spending the complete shutdown of that type of activity at the same time.
We introduced furloughs extended furloughs salary reductions.
Short work weeks et cetera, so across the board most of the productivity generated that we saw in the second quarter was the result of the just those immediate actions.
And it was quite meaningful I'd say, if you just walked our quarter performance second quarter last year to second quarter. This year, you saw $10 million to $11 million or just productivity benefits, which is a combination of the discretionary spending the furloughs the headcount actions as as I mentioned.
As it relates to our the restructuring charge when it when it became more evident that we had a more structural issue be gives us the demand was not coming back in that April may June timeframe, we had to make unfortunately, the difficult decision to actually enter into a reduction in force, which we announced as you noted we expect and as we publicly.
Said, we expect $30 million of savings over time as a result of those actions I'd categorize it as probably in the range of four to 6 million this year and benefit in the second half of 2020 with the remainder being in 2021.
Great. Thank you guys. Thank you thanks, Matt.
Our next question comes from the line of Christopher Glynn with Oppenheimer Go ahead. Please your line is open.
Yes, thanks, good morning, guys.
Thanks, Chris.
Chris just clarifying the prior you do you expect full realization of the 30 million during 2021.
Yes, it's going to be a matter of time, it's going to be a matter how the business comes back.
At a point in time as we look at it.
The restructuring charge actual costs, that's going to be coming out of our business is how you come up that $30 million as you know, Chris, but but as as we look at when the business comes back does it get continuously no worse versus better we're seeing some some green shoots if you will some positive signs and some of our businesses that we would expect that second quarters the way.
First and then we're going to start seeing sequential improvement. However, we're cautious I mean as as a senior leadership team. We continue to talk about being prepared for if things don't don't get better.
In the near term will additional actions need to be be necessary, but specific to the severance charge the restructuring charge in the savings associated with that we would expect that realization so that annual run rate benefit to $25 million to $30 million. We would continue to materialize if business got better and all the sudden aerospace, especially commercial commercial aerospace.
Came back online.
Quicker than we are going to have two we are going up to provide the resources to meet that demand, but as it relates to the charge its 30 million a savings, which we expected to realize.
Okay and.
Just automation was called out in one of the bright spot can you give us the state of play for Jim dramatic.
Yes for dramatic Chris water water.
I would highlight there is that the business continues to.
I will be a high energy business independent of what the market is doing in the sense that the team is always looking for the next opportunity and represents a really innovative.
Engineering team and management team and so to that end just through the quarter was.
On a year over year basis, obviously, it was down the number of.
Items or new products that they have in the pipeline coupled with the feedback youre getting from the customers around the release of projects.
Look in.
And I will now take automation in general is benefiting from the current environment as labor.
Becomes a challenge within manufacturing yet we've we see that we just we continued to remain very optimistic on automation and add the prospects as it moves forward and expect similar to what we gave as overall guidance sequential improvement.
Q2, Q3 for automation as well.
Okay and then on the.
You know restructuring charge pretty minimal at aerospace.
But you're contemplating a multiyear.
Duration to recover on the OEM OE side in the lag on the aftermarket.
It is.
Yes.
It should we anticipate something further at aerospace just curious the load for portion of the overall charge well I think.
Again, what I'd highlight is is that the the physical location of the employees impacted which was global in nature and constitutes the ratio between.
And what you're referring to as the charge between aerospace and between industrial so.
Higher cost employees.
In terms of severance.
Sometimes dependent on the global region.
With that said I would say that we also have once we've been aggressive we've also kept that clear I on the future in that as you are aware skilled labor.
In the in these industries is at premium and so to the extent possible we've walked a fine line between managing the.
Drop in demand and the reduction in our workforce against being prepared for any uptick as it comes forward and having to skilled labor available to do it.
That makes sense, a little risk management involved there sounds like right. Thank you. Thanks for the color. Thanks, Chris Thank you.
Our next question comes from the line of Pete Skibitski with I'll.
Our lender group our global go ahead. Please your line is open.
Good morning, guys and good morning safely.
I'll start I guess, so sequentially higher volumes in the third quarter.
Your guide, but margin you're guiding down sequentially from Great 11.8 is the answer maybe you talked about incrementally more headwind in the arrow aftermarket is that account for that differential or maybe a little conservatism I was just want to note color there now you're right on.
That's what it is is that as we move into the third quarter sequentially. We see improvement in terms of revenues both in aerospace and industrial having said that within aerospace the mix is going to put pressure on the margin for aerospace because we see a little lower in.
In terms of aftermarket.
And then as little as hired a sequential growth in the OEM side, but the mix into two will put pressure on the margins of aerospace and in turn on BG eyes margins.
Okay, Okay and that will more few Patrick.
I feel like if we went back a year. So we'll go the expectation of forecasts out there for Cfmfifty six shop visits.
Hi for like a peak in 2025 or so in a very gradual runoff thereafter.
Now it seems like a lot of global Airlines are talking about retiring older aircrafts, maybe more so than initially expected.
Do you have any sense at this point when you might see peak shop visits on the Cfmfifty six now does that get pulled forward do you feel like.
I don't know if it gets pulled forward or gets pushed to the right a little bit in the sense that the dash five and the dash seven remember make up the majority of the demographics of.
The.
The cfmfifty six and while side on rule out that even the dash five into that seven may.
Some retirements are.
Cannibalize in overtime.
The same time that they fleet is relatively young in terms of the fact that the majority of the fleet has only seen.
Its first overhaul and in a lot of cases, not even its first overhaul. So with that said I think that the outlook for the CFM continues to be bright.
The peak clearly add that we had anticipated in the mid Twentys.
Now is probably disrupted as the results of this pandemic, but overall.
Was.
You look at the industry recovering and passenger traffic traffic coming back online of course, where that will happen. Initially is domestically and of course, the narrow body aircraft is going to be the first aircraft to come to come back online to serve those needs, whether thats domestic into us or domestic in Europe Board.
Domestic in.
Asia So again.
Clearly clearly, it's it's going to disrupt our it has disrupted the.
Shop visit curves that we had anticipated, but still very optimistic on.
The overall Cfmfifty six program.
Okay, that's great I appreciate that color.
One last one from me for Chris.
Chris I don't know what happened with that receivables collection this corner, but that was pretty extraordinary.
You guys you're talking about.
Inventory now I mean, what kind of magnitude of.
Inventory reduction are you contemplating well first of all thanks for the comment on the receivable side I mean, it was a full full court press across across the company really on cash management I mean at times like these recognizing the growth is not going to come our focus has been on cost managing what we can contain and control as well as on the cash side so across the company the effort.
It's on the receivable side and getting collections on time with very little pass to was a significant improvement which allowed for us and I don't want to under under emphasize actually want to Overemphasizes effect that we were able to maintain our 2.4 times debt to EBITDA in this environment.
As a testament to the teams so thats good so so that so now with coming sequentially.
Topline receivables probably wouldn't be as as big of a difference as we would expect or the focuses on inventory inventory is a challenge for us.
You know primarily in our longer cycle business, specifically on aerospace as we're trying to manage the the inventory levels of trying to manage the input in terms of whats coming in at the same time, we've got a customer that can make those those 11th hour decision in terms of what they except in a particular month in a particular quarter. So that one is the best we can do is just stay close to.
Our customer to try to manage inventory the incoming raw material as quickly as as we can and we've been doing that so you know to quantify it I want to suggest we could probably hopefully get 10 or 15 million out of inventory when you look at it quarter to quarter.
But that's not that's not a small that's not a small task so I don't want to overemphasize.
The opportunity in the near term I think it's going to be a longer term play where inventory will settle we will get improvements on inventory reduction, but it will it will take some time and it may be maybe beyond a quarter as I guess is the point.
Okay. Okay guys. Thanks, so much guys. Thank you. Thank you.
And again as a reminder, if you'd like to cure for question. Please press star followed by one on your telephone keypad. Our next question comes from the line of Michael Ciarmoli with.
Interest go ahead. Please your line is open.
Hey, good morning, guys. Thanks for money market Tomorrow morning, how are you guys are good.
Commentary on Aero OEM why are you guys thinking there's going to be sequential growth software. This quarter. I mean, what are you hearing from your customers do you have a good sense as to where we are with removing all of the excess buffer stock in the supply chain. It seems like some of the other suppliers are talking about.
Realignment of this supply chain for the next couple of quarters.
No. It's a great point and I would say that in principle on at a high level. Those statements are absolutely correct. One of the areas that will allow us I think some sequential improvement in terms of Q2 Q3 is a combination of our commercial and.
Our military business.
Where the military will continue to shift.
Whilst add the commercial while we saw was as product that was.
Say held on the dock in the second quarter of which in turn we expect will ship in the third quarter.
And as I mentioned in my prepared remarks overall I think that the next couple of quarters are going to be some loss.
Muted in the sense of any type of gross.
When you talk in a few million in terms of when I talk about sequential growth over because of the fact as the supply chain has to.
Clear itself and to that end I think there's lack of clarity as to what the demand the true demand will be and there is a lack of clarity as how much inventory is into in the actual channel.
And so all of that we'll have to purge you feel like or bleed down over the next few quarters before does any meaningful.
Improvement in gross within the OEM side.
Got it does that so then if I looked at your backlog and you obviously had negative orders kind of implying 45% is shippable over the next 12 months, which I guess 62 million quarterly run rate would be a material uptick from the 45 million this quarter, but it sounds like even that.
Backlog would be somewhat vulnerable and maybe that 12 months shippable rate is kind of like you. Just said there is a lack of clarity there. There is but also I'd point out that the way we think about it is it's a sequential in that the second half of that 45% would be higher than the first half in other words the six.
Months of yes, 2020 versus the six the first six months at 2021, so even there we see a split weighted to the first six months and the first six months again as pending that clarity coming from the channel Destocking.
Got it and then just where are you guys on specific platforms.
What's going on with the Max right now and you probably as expected I mean, the triple Sevenx getting delayed does that does that create any additional headwind for you guys.
In the area that we saw backlog come down most significantly in the quarter was the Athree hundred 50, the wide wide body aircraft as you can imagine and so as you look to aerospace OEM and you split it between narrow body and a wide body.
Clearly the wide body was staff, which.
Came under more pressure and now as recent as yesterday you saw the.
Headline, suggesting that the seven sevenx may be pushed out.
Year or so.
We hadnt anticipated major volumes on the seven Sevenx Internet 2021, so we're not that necessarily concerned about its impact.
You know into short term clearly, we see that as a program for the future for us and one.
That we think we'll still be successful overtime.
I contrast to 737, Max we remain very confident in its re entry back into service and thing once it gets through the current hurdles will be.
Great aircraft than I do think that you've seen a number of key endorsement by major airlines.
We stayed none reiterating the confidence in India aircrafts. So all of that I think will play out over time to deposit.
Got it and then just last one on the aftermarket you, obviously talked about having that that benefit.
In April and can you give us a sense of.
What what the activity looks like now.
Obviously, we've seen flight hours produced a ground lease, but can you give us any sense of what may be shop activity looks like our engine overhauls really being pushed out or how much visibility.
During this quarter with versus you know kind of like you said that that benefit of closing out maybe March give you a little bit of a boost in April I mean is that just as activity just really drawn down to a minimum right now.
I think thats pretty that an accurate statement.
That visibility right now is.
Somewhat foggy in the sense that.
We will keep in close contact with all the engine overhaul shops, but the engine overhaul shops are reacting as you can imagine to the airlines and so to that end or a lot of open slots and yet there are opportunistic and shop visits that are coming in as well.
But overall.
Bloggers, while we expect going into third quarter is our aerospace business in total should be down again year over year approximately 50%.
With our aftermarket probably.
Which.
They are now better as you highlighted because of April only being down 42% in.
As Q2.
And even there I'm choking on the words only.
Right, but the.
We'll see aftermarket climbing to the 50 range mid.
In the third quarter as well.
Got it okay helpful. Thanks, guys. Appreciate it thanks, Mike Thank you.
And our next question comes from the line of Tim mortgages with Baird Go ahead. Please your line is open.
Hey, guys good good morning.
Morning.
I just had one question.
Going back to the industrial business and in just the hot runner portion of it and maybe specifically automotive.
What's your best sensitive kind of whats happened around model changes and Rollouts as it.
Is it really just a shift to 2021 or is there just kind of more of a permanent kind of push out or delay at this point just trying to understand if there could be a meaningful improvement in that business in into next year. It's a great point them because while we're doing there is making sure that again all of our business.
Sales people within the business are keeping close communications with the customers and for the most part while we believe is that a lot of.
New model changes or new model introductions.
For the most power to have basically been deferred or pushed out as opposed to being canceled. So we don't.
Think that the recovery will be you know.
A a V shaped.
In any sense, we do think it'll be a little bit more protracted over a couple a few quarters.
In general.
So that business continues to be.
Hi, highly differentiated business the.
You know team there have some great positions in terms of the market overall, we've seen positive signs in terms of China and.
We look to China as it pertains to.
All of our businesses the.
They are in that market as an.
An indicator of what might be add to come with the rest of the globe in Europe, and North America, and what we've seen since the February lows, which is when the Corona virus hit hardest in China, we've seen a consistent uptick in orders and sales.
Yeah.
Similarly within.
At our automotive hot runner business as well as our for some motion control business and so that bodes well, albeit that not fully up to the levels of pre call that but nonetheless, an upward trend.
Okay. Okay. Thanks for the color appreciate it and to look on the second half guys. Thank you very minor Jason.
And there are no further questions at this time I'd like to turn the conference back over to build to please thank you James.
We would like to thank all of you for joining US. This morning, and we look forward to speaking with you next in October with our third quarter 2020 earnings call.
James We will now conclude todays call.
Ladies and gentlemen, this does conclude todays conference call you may now disconnect.
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