Q3 2020 TransDigm Group Inc Earnings Call

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Come to the Q3 2020 Transdigm Group incorporated earnings Conference call. At this time, all participants are in listen only mode. After the speaker presentation. There will be a question answer session to ask a question. During the session you will need to press Star then one on your telephone.

Please be advised that todays conference is being recorded if your acquire any further assistance. Please press Star then zero I would now like to have the conference I wish to your speaker today, Ms. slides, a stable treasurer and director of IR. Thank you. Please go.

Thank you and welcome to translate this school 2023rd quarter earnings Conference call. Presenting this morning are Transdigm executive Chairman, Nick How Lee President and Chief Executive Officer, Kevin Stein, and Chief Financial Officer, Michael Smith, Please visit our website and transform that concept Tina supplemental bye.

That and call replay information before we begin we'd like to remind you that statements made during this call which are not historical are forward looking statements are further information about important factors that could cause.

Results to differ materially from those expressed or implied forward looking statements. Please refer to the company's latest filings with the FTC.

Well book or the Investor section of our website at <unk> back up.

I'd also like to advise you that during the course of the call. We will release earnings and EBITDA, specifically EBITDA as defined adjusted net income adjusted earnings per share all of which are non-GAAP financial measures. Please see the tables and related footnote earnings release, our presentation of the most directly comparable GAAP measures and the full.

Creation I'll now turn the call Robertson good morning, Thanks for calling in.

As usual I'll start with a quick overview of our strategy summary of a few significant items on the quarter and then Kevin and Mike will expand to not give more color.

To reiterate we unique in the industry.

Both the consistency of our strategy is good and bad times as wells are steady focus when intrinsic shareholder value creation through all phases of the aerospace cycle.

Our longstanding goal was to get more shareholders private equity like returns within couldn't be of a public market.

To do this we must stay very focused on both the details of value creation as well as careful allocation of more capital.

To summarize here are some of the reasons. We believe this about 90% of our net sales are generated by proprietary products and over three quarters of Burnett sales come from products for which we believe we are the sole source provider.

Most of our EBIT da comes from aftermarket revenues, which typically have significantly higher margin and over any extended period of time provide relative stability in the downturns. The commercial aftermarket revenue loss revenues, the largest and most profitable portion of our aftermarket dropped.

Sharply as we expected to the steep decline in air travel. This has happened during other severe shocks. However in this unique situation it will likely take longer to recover simply stated our commercial aftermarket will recover as people worldwide start the flying again not that's it.

Certainly in lockstep.

There are indications of this starting to happen, but the rate of improvement is spotty and far from clear.

We follow a consistent long term strategy, specifically, we own and operate proprietary aerospace businesses with significant aftermarket content.

Second we utilize a simple well proven value based operating methodology.

Third we have a decentralized organization structure any unique compensation system closely aligned with our shareholders.

Fourth we acquire businesses that fit that strategy, and where we see a clear path to PE like returns.

And lastly, our capital structure and allocation are a key part of our value creation methodology.

As you saw from more press release, we had a decent performance in a very tough quarter.

Revenue and EBITDA as defined with down substantially with puts and takes but roughly in line with the planning scenario, we used for sizing to roughly frame. The Q3 revenues versus our planning assumptions the commercial aftermarket wasn't down quite as badly the commercial OEM was a little worse.

And our defense business was not quite as strong through the backlog timing tough comps and to operating units specific situations. Fortunately the year to date defense bookings are running well ahead of shipments, which continues to bode well and the defense backlog available to ship in Q4 is strong.

In addition to safety the two most important items, we focused on for the last quarter were first reducing our cost as quickly as possible.

Kevin and his team did an outstanding job, reducing these cost very quickly our revenues were down roughly a third from the previous run rate and we got a cost down almost ratably very quickly we expect to get some further cost reduction in the fourth quarter.

Second.

Priority was to assure a substantial liquidity we raised an additional 1.5 billion at the beginning in the quarter. This new money raises an insurance policy for these uncertain times, it's unlikely that we will need it.

This is a great company with outstanding products and market positions. The only way you getting serious trouble due to this market condition is just the situation becomes much worse. They want expects you run out of fuel or cash we filled or tanks is falls, we could at a reasonable price.

The actual liquidity in Q3 was pretty good we generated almost 400 million of positive cash flow and closed the quarter with a little under 4.6 billion cash.

Absent some large additional dislocation or shutdown, we should come out of this with substantial amounts of firepower.

We continue to look as possible M&A opportunities and are always attentive to our capital allocation. Both the M&A in the capital markets are always difficult to predict but especially so today.

Position opportunities in last quarter were minimal this isn't an unexpected we are looking for good proprietary aerospace business as they tend not to sell in bad times. We are still actively looking for M&A opportunities that fit our model.

In general on capital allocation, we will tend to be cautious until the recovery picture comes into focus a little more clearly hopefully this won't be too much longer.

We continue to suspend guidance there was still just too much uncertainty we will reinstitute the guidance when we feel we have a clearer picture.

We do expect <unk>.

Absent any large additional dislocation or shutdown Q4 revenues should be better than Q3.

We also expect some additional cost reductions in Q4, depending on the exact shipping mix. This could result in modest margin expansions in the next quarter.

We believe we are about as well positions as we can be right now we'll watch the market react accordingly, and now let me handed over to Kevin to review, our present performance and expand our assumptions and covert related activities.

Thanks, Nick today I will first provide my regular review of results by key market and profitability of the business for the quarter and then cover outlook in some cold at 19 related topics.

Q3 was a challenging quarter against the backdrop of unprecedented slowdown across the commercial aerospace industry and a difficult global economy. In Q3, we saw significant unfavorable impact on our business from a pandemic as demand for travel declined at a rapid pace and has remained depressed despite.

Yes, I am pleased that we were able to achieve an EBITDA as defined margin of 41.5% achieving this EBITDA as defined margin was primarily a result of our swift preemptive cost reduction actions and continued focus on our operating strategy.

Due to cope with 19, our Q3 GAAP revenues were down approximately 33% versus prior year Q3, and EBITDA as defined was down 36% versus the prior year, Mike will provide more details on the financials later in the call now we will review our revenues by market category for the remainder of the call I will provide color.

Commentary on a pro forma basis compared to the prior year period in 2019 that is assuming we own the same mix of businesses in both periods.

In the commercial market, which makes up close to 65% of our revenue we will split our discussion into OEM and aftermarket.

Our total commercial OEM market revenue declined approximately 43% in Q3, when compared with Q3 of fiscal year 2019.

The decline in the quarter did reflect a minimal headwinds from the impact of the ongoing 737 Max production halt. However, the decline is primarily due to the pandemic.

Our quarterly commercial OEM bookings were down over 70% versus prior year quarter due to the OEM production rate cuts as a result of course nineteens impact on commercial aircraft demand.

We believe some level of inventory adjustment is likely in this result.

The pandemic has caused a significant negative impact on the commercial OEM market and we believe that we will continue and we believe that will continue we are under the assumption that the demand for our commercial OEM products will be significantly reduced during the remainder of fiscal 2020 due to reductions in OEM production rates in the airlines deferring or.

Canceling new aircraft orders longer term the impact of Cobot 19 is fluid and continues to evolve, but we anticipate significant negative impacts on our commercial OEM end markets for some uncertain period of time.

Now moving onto our commercial aftermarket business discussion.

Total commercial aftermarket revenues declined by approximately 52% over the prior year quarter in the quarter. The decline in the commercial transport aftermarket was primarily driven by decreased demand in the passenger and interior submarkets.

There was also a decline in the commercial transport free market, but at a less impactful.

Our quarterly commercial aftermarket bookings were down approximately 70% versus prior year quarter results.

As a result of the decrease in air travel demand and uncertainties surrounding cobot 19, which is directionally in line with observed revenue passenger miles declines.

The rapid and dramatic decline in demand for air travel began late in our Q2 as global restrictions on business and shelter in place orders went into effect in response to the pandemic. This led to a significant reduction in global flight capacity and parked aircraft across the world certain markets have reopened somewhat.

Which have since experienced a resurgence of corporate 19 cases, while others, particularly international markets remained closed or our enforcing quarantines airlines have added back some flight capacity. However, recent events have mostly slowed the recovery in the U.S., while the rest of the world seems to be improving slow.

Early.

Considering these variables the shape and speed of the recovery remains uncertain.

To touch on a few key points of consideration.

Global revenue passenger miles are still at unprecedented lows.

Go off the bottom as a result of the pandemic.

I ATA recently forecasts, the 63% decrease in revenue passenger miles in calendar year 2020 compared to 2019.

Cargo demand was weaker prior to the cobot 19 crisis as F. Teekays have declined from an all time high in 2017.

However, a loss of passenger belly cargo due to flight restrictions and reduce passenger demand could provide some unexpected opportunities.

Cargo operations have been impacted to a much lesser extent by Cobot 19, then commercial travel house.

Business jet utilization data was pointing to stagnant growth before this economic downturn now during this pandemic and in the aftermath the outlook for business Jets remains unpredictable as business jet flights are rebounding, but due to personal and leisure travel as oppose the business travel.

The sustainability of this trend is difficult to foresee.

As we review the future of the commercial aftermarket the concern may rise around the potential impact from legacy airframe retirements.

Wave of retirements could augment the surplus market or used unserviceable material market, which I will refer to as USM.

USM has historically been a low risk for transaction, we conducted a study a few years back to validate the low risk of USM for our business and recently did a refresh study that resulted in the same conclusion, we do not see immaterial exposure to USMLE Transdigm. This USM market, mainly focuses on high value.

Parts that have a resale unit price exceeding five to $10000.

Our repairable and typically focused on engine avionic or landing gear systems.

Most of our parts fall well below this five to 10000 dollar level, a large percentage our consumable and are not engine avionic are landing gear related.

Additionally, our examination of part numbers targeted for us some resale in searches for Transdigm parts for sale in the USM market found an immaterial percentage of our aftermarket parts available for sale in the U.S. some market validating the low risk of USM for Transdigm. However, we will continue.

The closely monitor USM to watch for any changes in the U.S historical trends.

As the Cobot 19 situation is ongoing the duration in severity of the pandemic are still unclear and longer term impacts for the commercial aftermarket are hard to predict we do believe the commercial aftermarket will recover as long as air traffic continues to improve so that aftermarket recovery of the question of when not if.

Now, let me speak about our defense market, which is typically about 35% of our total revenue.

The defense market, which includes both OEM and aftermarket revenues declined by approximately 12% compared to the prior year Q3.

As a reminder, we're lapping tough prior year comparisons as our defense revenue accelerated in most of fiscal 2019.

Year to date defense bookings were up mid single digits and have solidly outpaced year to date sales.

As we've said many times defense bookings and sales can be lumpy. This quarter, there with specific timing related issues out of airborne systems due to delays in international parachute sales and a safety related issue, which delayed shipments at Armtech. We expect our defense business will continue to expand due to the strength of.

Our current order book.

Moving to profitability I'm going to talk primarily about our operating performance or EBITDA as defined.

EBITDA as defined of about 424 million for Q3 was down 36% versus prior Q3.

EBITDA as defined margin in the quarter was approximately 41.5% I'm pleased that in light of a difficult global economy and commercial aerospace industry. We held the EBITDA as defined margin almost flat with last year, we were able to achieve such an EBITDA as defined margin as a result of our cost mitigation efforts and a can.

System focus on our operating strategy.

On Esterline, we're now over a year post close despite the impact of co bid the integration continues to progress and exceed our expertise expectations for growth in this largest of trends I'm acquisitions. As we've stated in the past we will no longer referred to any esterline specific metrics as these business.

Does that become part of the fabric of trends.

Now, let's look at our outlook as mentioned, we currently expect cobot 19 to continue to have a significant adverse impact on our sales EBITDA as defined and net income for at least the remainder of fiscal year 2020 under the assumption that the pandemic will negatively impact customer demand and commercial OEM and commercial aftermarket.

Being the most adversely impacted due to the pandemics impact on air travel worldwide.

I do want to reiterate the market conditions, we assumed for the second half for fiscal 2020 that we previously disclosed.

As a reminder, this was not meant to be guidance, but was used for organizational rightsizing analysis that drove the reduction in force levels implemented to date.

We are still utilizing the following with regard to organization sizing needs for the second half of fiscal 2020.

Commercial aftermarket declines of 70% to 80%, we will likely performed better here.

Commercial OE declines of 25% to 40%, we may perform a bit worse year.

Defense growth in the mid single digits, which is in line with our prior guidance for the defense end market and this still appear as possible.

Next I would like to review our Cubit 19 response in more detail, we remain confident in our business model over the long term and are focused on mitigating the impact of cubit 19 to our business, while supporting customers and employees.

Additionally, many of our businesses have taken the opportunity to explore new business opportunities by working on developing highly engineered solutions for emerging needs arising from coded, including antiviral anti microbial technology air purification and touchless technologies to name a few.

A cross Transdigm team has been put in place led by jewelry is one of our most experienced executive Vice presidents to help drive this effort.

Now, let me provide an update on specific cost saving actions, we've taken in response to the reduced demand and uncertainty resulting from the pandemic.

We always monitor these costs closely but even more so in a downturn to ensure we react swiftly and thoughtfully in response to the current environment.

We understand that we cannot control the external factors in the downturn, but we remain extremely focused on those items that we can control such as our cost structure.

These cost mitigation efforts were previously disclosed and include total workforce reduction of greater than 30, percents was implemented including both temporary and permanent reductions. This includes the previous reduction due to the 737 matched production rate changes and the reduction in force due to covert 19 implemented in the third quarter of physics.

2020.

This compares favorably to the target provided on the second earning second quarter earnings call.

Furloughs continue to be utilized to align operations with customer demands until a more permanent view of the market can be realized.

We will continue to Vigilantly monitor our operations and external events or forecast and will react quickly as we always have to further cost control needs. So let me conclude by stating I am pleased with the speed at which trends them has responded to the pandemic taking immediate actions to protect employees from the spread of the virus while.

Also dealing with the harsh reality confronting the broader commercial aerospace industry.

Pandemic has been unprecedented.

And uncertainty remains about the duration and impact on the pace and shape of any market recovery. However, we have a strong tenured management team that continues to remain poised and ever ready to act quickly and with purpose.

We continually monitor the ongoing developments in the commercial aerospace industry and our own business to determine the best course of action I have the up most confidence that through our swift cost mitigation efforts and diligent focus on our operating strategy. The company will emerge more strongly from the ongoing weakness in our primary commercial end markets due.

To an improved cost structure with that I would now like to turn it over to our Chief Financial Officer, Mike listener, Thanks, Kevin and good morning, everyone Im not going to elaborate on the operating results for the quarter and too much more details you can see that information in the press release in the presentation deck for today.

Organic growth for the quarter was negative 33% driven primarily by the commercial end market declines the Kevin referenced.

Two quick updates on interest expense and then one more on taxes.

Interest expense expectations are unchanged from last quarter and should be approximately 1.03 billion for the fiscal year.

On taxes, our fiscal 2020, GAAP cash and adjusted rates will be four to eight percentage points lower and our initial guide for the year due to benefits included in the cares Act.

This quarter, if there was a bit of noise with the GAAP tax rate due to our low BT that resulted in a rate spike to 114%.

As you'll see in the call slides for today, despite the high quarterly rate our full year expected F. why 20, GAAP rate will still be in 17% to 19% Zip code.

Moving over to the balance sheet in liquidity.

As a third quarter end, our net debt to EBITDA ratio stood at 6.3 times, assuming air travel remains depressed. This ratio will continue ticking up in coming quarters as stronger quarters from last year rollout of the LTM EBITDA computation.

On liquidity cash generation for the quarter was stronger than we expected. This was driven primarily by net working capital inflows as a result of a collection on accounts receivable, mainly from our commercial customers who are now operating at reduced activity levels.

While there is substantial uncertainty in our commercial end markets right now we expect to continue running free cash flow positive going forward for the balance of the year.

From an overall cash liquidity and balance sheet standpoint, we think we remain in a good position here and well prepared to withstand the currently depressed commercial environment for quite some time.

Our cash balances now just under 4.6 billion and Additionally, we have access to over 500 million of our revolver should we need it.

And as a reminder, on our capital structure, we don't face any sizable debt maturities until July of 2024, So almost four years from now with that I'll turn it back to the operator to kick off the Q net.

Thank you as a reminder to ask a question you only to press Star then one on your touched on telephone to withdraw your question from the Q. Please press the pound key Manchester time, we ask that you. Please limit yourself to one question and one follow up question before rejoining the queue.

Our first question comes from Robert Spingarn with Credit Suisse airline has now open.

Hi, good morning.

Good morning, Kevin just.

Diving right and I just wanted to reconcile the aftermarket bookings down 70%, but sales down 52, or I guess 57, if we just think about large jet what is the lag here and should we well you said you'd outperform that that 70% number is there a downside from here.

And then as a follow up to that how do we think about what the level of pricing you're still able to capture.

So your first question is on Cam forecast I think and on pricing I think pricing all hit first.

In previous downturns, we have not seen a limit or restriction on our ability to.

Drive value pricing as needed clearly our costs are going up quite significantly in this.

So, yes, we're not anticipating any issues on price and we havent seen them before on Cam.

Now our forecast is a little bit uncertain as you know.

A.

SCHUNK of our commercial aftermarket is book and ship within the quarter and there is some amount of unknown in how this will unfold I will tell you that our backlog remains.

Reasonably strong it's reasonably flat year over year or close to flat. So we're not seeing a massive drawdown on our backlog we are seeing.

Not a lot of cancellations, either which maybe a question people have we're seeing reschedules and push outs. This leads us to be confident that Q3 will be the bottom in Q4 will be better the exact market split of how that plays out is a little uncertain. As there are as there is uncertainty as we look forward, but we are anticipating.

Things will get.

Modestly better, but consistency here will not happen until there is consistency in the end market and consistent flights.

In the world. So we follow that closely.

And just as a follow up how are you thinking about whats in the event in what's in the channel in the distribution channel relative to what you are producing.

Well, our distribution channel, which is about 20% of our aftermarket we do have some visibility to some of them on inventory levels, but that is minor by comparison to the rest of the industry. So no I don't have visibility on what airlines or on the OEM side.

But OEM partners are stocking currently.

Tend to be surprised the times at the amount of inventory that's in the channel, but I have no indication of that right. Now. So we don't know with the inventories like we are seeing.

Demand, we're seeing some urgent expedite demand in the aftermarket so that would tell me that this is going to be.

Fits and starts of recovery as we move forward.

Thanks, very much Kevin.

Thank you. Our next question comes from Carter Copeland with Malaise Research. Your line is now open.

Hey, good morning team.

Good morning, Good morning Carter.

Just.

A couple of quick ones, one just to expand on that inventory comment Kevin not so much the channel, but your own inventories did do you anticipate that were kind of.

Here when do those when do you expect that those kind of peak and worked themselves down and then second question on new business opportunities I know you guys have and previous downturns found ways to.

Fine niches that get exposed by external need Thats revealed and I don't know if this one is to temporary in nature, but is there anything on that front that you can see developing that there might be worth.

Going after profitably thanks.

So inventory levels and new business opportunity on inventory levels we.

We've seen our inventory levels increased more than we would have liked.

This is not due to producing finished goods and sticking them on shelves and continuing to run.

These were scheduled raw material receipts largely.

So we have work to do there I think Mike would admit that as well that are.

Performance on any our has been decent but inventory not to the extent needs to be so we have some work to do there as we go forward, we do have that I think.

Fully outlined to the team we've talked about it with every business as we've gone forward on.

Their current inventory levels and we have a plan.

So I'm not concerned about that but it does give us something to work on.

As we go forward on new business opportunities I'll bring you back to 911 post 911.

And opportunities that occurred there with cockpit door modules and the locking mechanism and depressurization for the cockpit door that was developed by us driven around the world.

That has was a fantastic product that came out of that.

This location, we're looking for similar opportunities now and Thats why Weve put.

A seasoned veteran of that business and that development of the cockpit door module with jewelry is in to help drive new business opportunities that may be coming about because of this pandemic. We've had interest from airlines and Oems and we'll see how this plays out there.

Obviously, a lot of interest and we understand our role in helping to bring people back to flying.

With the confidence necessary for the market to continue to grow so we recognize our position in that and are very active in this we'll see if anything comes because of our efforts.

But we are busy like I said in my comments.

Anti microbial anti viral touchless technology is theres. So much that we have to offer its very excited.

Kevin just very quick I, just had one thing I just had one thing in the free cash flow with that Mike talks about going forward.

That's a free cash flow, assuming you don't get any working capital reduction just to be conservative so okay. Thanks.

Yes important point.

Mentioned inventory issues, that's from my with my operating have not from a cash flow.

And just as a follow up Kevin to that the comment on the new business.

As is the primary hurdle here certification and you know and making whatever it is that you're going to produce.

I guess insulated in some way like many other products you provide.

I don't know how to answer that I think certification will of course be an issue anything that gets put onto a plane needs to be certified it will really be around desire and.

Yes, and seeing how the market unfolds and what the demand is.

Certainly touchless technology, I think would be useful always I don't I think.

There will need to be a different way of thinking around flying well I suppose in a lot of aspects of society. So this is just one aspect of trying to put products in place that would make people feel more comfortable about flying being stuck on a plane for 10 hours or or more and so what does that look like and what can we.

For two to help achieve that.

Okay. Thanks, guys.

Thank you. Our next question comes with David Strauss with Barclays. Your line is now open.

Thanks, Good morning, everyone morning.

In thinking about the the aftermarket from here.

Kevin given your commentary around limited.

Exposure to USM.

Would you expect overall the your aftermarket.

To track just overall departure levels are flight hours do you think there's there are there still is the potential to see.

A wide level variation between your aftermarket an underlying just level of flight activity.

I think Nick said in the prepared comments that you would anticipate that it would be lumpy and there could be some dislocation.

Two people flying more and how the market recovers.

Theres always a bit of a lag that's natural as though whipsaw flows through the supply chain.

We have we're not seeing that yet we'll be prepared for it when it happens but.

I mean, those are our thoughts right now.

We again I want to stress, we react quickly to the market we react quickly.

We see happening and coming at US we adjust costs, we look at driving everything to variable costs.

Eliminating the thought of these are fixed costs and how do we how quickly can we respond.

Our forecasts are fluid often as you know what we can promise is.

Quick execution and Thats, what we delivered this last quarter and that's what we'll continue to deliver as the mark the aftermarket unfolds in front of us it could be lumpy if there could be some disconnects here in there I don't see USM impacting us I don't see PM may impacting us. So eventually as people fly the bid.

And this will come.

Yes, Okay I'd just add the primary said we are watching now is flights.

Is the number of floods because.

To some degree there's not much use worrying about how many people on the flights told the flight start taking off yes, takeoff and landing at I mean, that's what we're watching now.

Okay, and then one ask about the.

The margin comment I think said, we would expect or there's the potential for margin improvement in the fourth quarter relative to what we saw in Q3.

What are you assuming for kind of underlying mix.

In that in that comment and at this point, given where we stand today do you think.

Above continued above 40% adjusted EBITDA margins are sustainable from here. Thanks.

Yes, let me take that because I I made the comment I think the above 40% and we're not going to.

Speak out into next year, but I think the above 40% is a good is is a fine assumption for next quarter again absent some.

Substantial dislocation or shutdown or something like that.

We are we should we expect them. We know we will have some additional cost reductions in the next quarter, what I'm not so sure Kevin or I am So sure is exactly what will be the mixture shipments you do get.

The place you do get some book and ship in the commercial aftermarket.

And that is.

That's the highest.

It's the highest margin a portion of the business and I would say.

Sort of the theme I would say the tolerance band around that could be larger than the savings you might get out of the cost reduction. So it's a little it's just a little hard to put that I I think you bump 40 is fine.

I would expect we would might get little increase but it's hard to know until we hit the mix more is that.

Alright, thanks very much.

Sure.

Thank you. Our next question comes from Ken Herbert with Canaccord. Your line is now open.

Hi, good morning.

Good morning, I just.

Kevin or deck I, just wanted to follow up on the aftermarket comments, Kevin your comments, specifically called out some variability and what we've seen geographically I'm. Just wondering if you could comment on trend you're seeing in the aftermarket by various geographic regions and if theres any reason why sort of your aftermarket.

Revenues might be over or under weighted at particular regions sort of relative to the broader industry breakout.

Can we don't review our aftermarket performance orders booking.

Sales by geography like that so it's difficult for us when things go through distribution or some of the OEM partners, we don't get that visibility where things end up so I don't have any.

Insight for you on the geographies.

Heard from our partners that China is improving the Asia is doing much better we're using that as.

Sort of the Canary in the coal mine for how the rest of the business should be doing.

We're starting to see that pickup I can only you say that anecdotally again from conversations with our distribution partners.

Thats the only thing I can offer on geography right now.

Okay. Okay. That's helpful.

And just sounds obviously that you're expecting we're seeing some sequential improvement can you just provide any commentary on on maybe bookings through July in the aftermarket and sequentially any of the trends you're seeing coming out of the second quarter.

Yes, I can't comment its owner I can't comment on July what I can say.

Is that.

Again. This is just an indicator during the quarter, we saw our total bookings improved month over month.

In during the quarter across the business.

And also Pos as I look at our distribution partners, we've seen Pos improve month over month.

Directionally, it's down the same amount that our business is down but.

We've seen it start to improve off of the very deep low in the early on in the quarter in April so I try to offer that as some color on things are gradually improving from demand.

And shipments.

Okay I'll leave it there. Thank you very much sure.

Thank you and our next question comes from Myles Walton with TBS. Your line is now.

Thanks, Good morning.

Can you comment on the on a lack of maybe lack of desire and counterparties to sell in a downturn just kind of looking back to the prior 2008, nine or even softer situations in the mid two thousands.

It's not clear that there was any big pauses in your deal flow during that period of time. So Im just curious are you sensing that.

Be reluctant or you actually seeing the reluctance.

Of offering where market, we aren't seeing much we aren't seeing much and.

And.

This if you have particularly a commercial business.

This seems to me to be not particularly good time to be selling if you have any choice.

And there is frankly the data.

I would say that we aren't seeing any or any significant number.

And then Kevin maybe can you comment on the Armtech safety situation you mentioned in this I think came with Esterline is is there something.

Can you quantify it and how quickly it resolves itself.

Yes, it's a it's an ongoing effort for us.

The Armtech business makes.

Well, our moment products chaff flares and the like and we had a safety incidents that has caused us to shutdown production and to have to rework some of our manufacturing.

Processes procedures.

This will be resolved, but.

This competitive business.

Is not.

It's a driver of revenue for us, but is is very competitive military.

So it's a big driver of revenue not a great driver of EBITDA.

This has been a headache for us but to the team is working through.

Is it necessary to get back up to get to that mid single digit for the years that the.

Precursor.

Interesting question as I.

I don't think it's necessary for armtech to be back up and running we continue to make progress there.

As we do across airborne in a few other businesses that we called out some of this which was just lumpiness as we look forward.

We as we look forward in the Q4, we have the backlog necessary to to support.

Our forecast, we just need to now see if it all comes to pass, but it's the military backlog tends to be more consistent tends to be you can count on that.

It's booked out further in advance.

So we feel reasonably confident about.

This.

The next quarter here Q4.

Okay, great. Thanks, yes.

Thank you. Our next question comes from Gotham Kona with Cowen. Your line is now open.

Yes. Thanks, good morning, guys good morning.

Just two questions first I was wondering if what would you anticipate the duration of the OEM.

Product Destocking.

We will be how many quarters and.

And just based on indications from customers and then lastly to follow up on miles. This question.

How much of an impact did the two issues you said that the defense units.

But can you quantify the sales.

Impact.

From those that we are going to make up eventually.

Well, yes, as far as that that impact.

It was you follow the lion's share rule I mean, those are the things that jump out at you.

Obviously that doesn't account for all of it.

There was some lumpiness in the rest of the business.

That.

Bore out in the scheduled deliveries.

That seems to shake out in Q4, but again, we'll have to watch that closely on anticipated product restocking or the inventory levels that are in the system how long.

They will have to burn down I really don't know I don't have any visibility on inventory levels.

I anticipate that they don't have a lot of our product, but we really don't know that for certain.

So I can't give you any timeframe on how long Destocking will last.

Thank you.

Thank you. Our next question comes from Robert seller with vertical research. Your line is now open.

Thanks, so much good morning, good morning.

On this for a question for Nick Kevin you describe the the dams and you've seen so far is unprecedented but I was wondering if you look at what your airline customers have done so far are they doing anything different from what you've seen in prior down cycles.

I would say the others. The slam down in value is is harder is harder and appears last longer.

I mean.

Just essentially just froze up in April.

And and we still is still not not very good the ordering leverage levels in the aftermarket me even after 911 by this point it was probably starting to come back.

Right that's them.

As I mean, you all know you can watch the the flights around the World I can't remember I think it's David Strauss publishes everyday.

Ultimately that will determine the ready to pick up.

If you look at that the you have stalled a little at about 50.

A 45% to 50% off run rate the storm level.

No China seems to be coming back fairly well, particularly the domestic wounds.

And youre picking up a little bit slowly.

But but I was at the rate recovery is you slow in spotty.

Yes, I was wondering who had been anything more structurally if you've seen any more of like aggressive de stocking our restructuring of just the phasing of maintenance lower. These airlines written so just wondering we haven't I don't think Kevin have we know we've not seen anything like that.

Yes.

Just thought there.

Okay, and then as a follow up to that have you seen any problems as yet with bad debts on the line side.

All right very limited in the area of $1 million, we look at it weekly and monitor it but nothing nothing material.

Okay. That's great. Thank you.

Thank you. Our next question comes assessment with JP Morgan Your line is now open.

Okay. Thanks, Thanks, very much and good morning.

Morning going.

I guess, if we think about.

You know where I our forecast.

Traffic levels coming back to.

2019, which I guess, what was 2023 now it's kind of 2024 cents in that timeframe pine range.

I would imagine your aftermarket revenues can probably get back their sina, how how would you think about.

The lead time, where your aftermarket revenues would return to.

The prior level.

We don't really know.

We're just we're planning on following it closely.

Hi, I follow the same.

Estimates and guidance that the analyst community throw out whether it's 2023.

Or slightly thereafter.

I don't have any reason to have a better number than that but.

Again, I will say our goal is to react quickly to execute quickly on whatever we see in the marketplace you can count on us to do that.

So that's how we look at the world and the only thing I'd add is and again I don't I have no insight into the future.

I'd watch the flights first.

How are the flights picking up around the world and then once the flight start to get back up close to a number then how full on beginning.

Yes, Okay, and then as a as a follow up just to maybe BT armtech that or slow that further was there any.

I mentioned it was probably a lower than average margin business, but where there are costs related to the safety issues in the quarter that we're in the adjusted EBITDA that then go away in the fourth quarter.

And if there were I don't think though like is shaking his head nothing nothing really material guys Theyve facility that had an issue that's on a partial shutdown and ramping back up but.

Nothing material that we took as an add back in the quarter on costs.

Okay.

Thanks very much.

Thank you. Our next question comes from Sheila Kahyaoglu with Jefferies. Your line is now open hi, good morning, guys and I apologize if I missed it but just on airline commentary what are you seeing in terms of pricing is some of these airlines cuts maintenance capex or expenses more than RP case.

Yes, the pricing possibility the pricing lever in the commercial space commercial world.

We've seen this our prices stick I guess in previous downturns, and we're anticipating something similar.

We have seen our costs go up quite significantly.

As we've worked our way through this and that is justification to.

Work with our customers to pass along some of that the the market is yes fits and starts as we go forward.

Okay, Great and then just on free cash flow conversion. It was really good in the quarter. How do we think about the cash balance to end the year and then just on capital deployment given uncertainty in a cat commercial aftermarket recovery.

Does it make debt pay down more appealing for first time.

Well on the cash balance we expected to be higher at the end of year, but we are.

I would be.

Don't think it will be 400 million higher yes, but it will be high we didn't get the bulk of it came out yes quarter from accounts receivable it should pick up a little bit next quarter, but obviously it depends on the EBITDA, we generate and what happens in Q4, but we are running free cash flow positive it will pick up by at a minimum several tens of millions of dollars, but not 400 million.

Dollars like it did this quarter right right and hopefully more than just.

A few 10 millions.

That's number one what was the second question, Joe that's going on aftermarket recovery prolong recovery nobody selling you probably don't want to buy with revenue projection, so what about debt pay down.

Oh instead of acquisition all instead of acquisitions I I'd be surprised if we do anything like that in the next quarter. Okay.

Thank you.

Thank you. Our next question comes on Peter Arment with Baird. Your line is now open yeah. Good morning, Nick Kevin Mike.

Nick maybe just this is just a quick follow up question for you just regarding when you said you raised when you raised 1 billion five this past quarter, but you probably won't need it just what you're thinking over the over the terms of a period of time throughout this kind of downturn that you won't needed or just maybe I was looking for kind of a timeline of what you're thinking was on that.

Our thinking on raising it was pretty simple.

Like the whole World was Dislocating at the end of March in the beginning April and as I said this is a great business.

And the only way you could possibly followed up to this market condition was to have much worse and one much longer than anybody anticipates and run out of a few and we just wanted to be absolutely sure that wasn't a risk for us.

And we went out and price the that market and the price of a little more insurance didnt seem excessive.

For the protection might give yes.

I think it's very unlikely we need it I believe again absent some large dislocation or additional sort of national shutdown or international shutdown. I think we will continue to pile up cash and we will develop very substantial firepower.

When we feel more comfortable.

And we feel like we got a little clear view of the world.

Then we'll decide what to do with that.

I would say as always once the smoke clears our preference is always to make accretive acquisitions, while our first preference is to fund our businesses.

But that shouldn't be a problem because they'll run cash positive. Our next choice is always to make accretive acquisitions that fit our strategy, we can find them.

If we can't find them our third choice is to give it back to the shareholders in some form.

And our last choice is probably to pay off of that particularly given the.

Given the level of our cost the cost of debt now.

That that priority hasn't changed now.

As we bring down our prior it was kind of drop through our priorities exactly where we'll yet we will end up.

For the depends on how the market.

Both the capital market the acquisition market in the aerospace market play out.

That's great color. Thanks. Thanks.

Thank you. Our next question comes from Ron Epstein with Bank of America. Your line is now.

Hey, good morning, guys.

This is a follow up on maybe a couple of questions that happened earlier.

Got it actually right and we don't get back to 2019 global air traffic levels, and so 2024 right.

Does that change at all how you think about the strategy the business what would you do differently. The M&A become more important do you think about diversifying into other engineered product engineered highly engineered products or is everything just kind of stay the same it just takes a little longer to get back to where we work.

I think we will have to watch that as it goes along.

Our inclination our strong inclination is to is to stay what we do stay with what we do well.

We'd love to see some good acquisitions in our space come up.

But again thats always hard to predict but if we're if we're out there a chipping away at the rock I can't imagine we won't find something.

And our next choice generally would be if we have extra money to give it back to the shareholders and I think that's those are still our priorities now if things went on and on and on and we saw no way no way to go.

To accrete value, we'd have to think about what else, we might want to do but thats pretty far down the.

Pretty far down the pecking order right now.

Okay, great. Thanks.

Yes.

Thank you and our next question comes from Michael Ciarmoli with terrorist your line is now open.

Hey, good morning, guys. Thanks for taking the question, maybe Nick just to think about.

Improvement into the fourth quarter, I mean, clearly it sounds like defense is going to improve but without knowing the inventory in the channel on the OEM side, taking into account. The recent caused by Boeing and Airbus and I mean, I guess I'm looking at the aftermarket bookings being down 70%.

You are kind of touched on some of the older planes being retired from a USM perspective, but.

I can recall you guys had I don't know if it was real old slide deck exposures to triple seven five Sevens, you know thinking about the headwinds just from those planes not flying anymore from consuming your parts I mean.

I mean.

I guess I'm, just trying to figure out the probabilities or how you guys you're thinking about the scenarios improve of improvement in this coming fourth quarter. It still seems like Theres a lot of unknowns out there.

There are of course on zones.

But and I don't we're surely not going to give a number for the for the fourth quarter, particularly because the commercial aftermarket is kind of hard to get your arms around exactly but we again absent any significant dislocation or additional shutdown, we're pretty comfortable that the revenue will be higher next in the fourth quarter that was in the third quarter.

I think much more specificity than that were not comfortable with.

Taberna, who agree I do and I would also as that the what we think is importance to our business as we talked about earlier and Nick alluded to it is not necessarily passengers on the plane, its takeoffs and landings and cycles it's flights.

Whether there is people on them or not or their load factors those impact airlines, but.

There's a lot of our products.

I have to be change no matter, what no matter how many people are on the plane that's not true for everything in the aftermarkets obviously.

Boarding and disembarking from a flight certainly will wear out.

Some of the materials on the walls and floors and seat belts, but a lot of the plane needs to be service no matter, what and that's what we're counting on we believe were market weighted to as we look at wide bodies and narrow bodies.

Clearly international wide bodies.

For a large.

Just proportionate share of RPM. So that's why takeoff and landing cycles. We think are a great way to look at a driver for.

Aftermarket content.

What about those legacy platforms that have gone retired I mean is that a big headwind I mean, those cycles are just going to be gone yeah marketplace. It's certainly a headwinds theres no doubt about it we're not going to Barry our heads in the sand on this and pretend that thats not going to be an impact certainly and as planes are brought back.

From retirements, it's generally newer planes that are brought back clearly that's in the mix, but let's remember the what matters most to us in the aftermarket is planes off of warranty, whether they're very old legacy or newer plants that have entered the aftermarket realm.

Yes, you make more money on old legacy.

Plan slightly more percentage points, but there's many less of them flying so again, it's market weighted that matters to us.

And that's again, what we're following his those takeoff and landing so cycles. The flights that's what will drive and I think our results so far have shown that.

We'll see how this continues I expect it will be lumpy as we go forward, including the aftermarket defense business.

On both markets, but it will it will improve as people fly.

Got it helps me to answer we don't we don't believe there's any disproportionate waiting on older airplanes that are being retired that's right.

Okay. Thanks, guys.

Thank you and I'm showing no further questions in the queue at this time I like to turn the call back to life is favorable for any closing warm.

Thank you again this concludes todays call. Thank you for your time and for joining us today.

Okay.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and you may now disconnect.

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