Q2 2020 Kaman Corp Earnings Call
Ladies and gentlemen, thank you for Sandy.
Corporation Q2, 2020 conference call at this time, all participants are in listen only mode. After the speakers presentation. There will be a question and answer, especially if you asked a question burden, especially when you to press star one on your telephone if your acquired further systems. Please press star one zero I would now like to specialties Carter's comps for tree trimming who'll give you may begin.
Good morning.
I'd like to welcome everyone to commands second quarter 2020 earnings call.
Conducting the call today, our Neal Keating, Chairman, President and Chief Executive Officer, and Rob Star Executive Vice President and Chief Financial Officer.
Before we begin I'd like to note that some of the information discussed during today's call will consist of forward looking statements setting forth our current expectations with respect to the future of our business the economy and other future events.
These include projections of revenue earnings and other financial items statements on plans and objectives of the company or its management.
Statements, a future economic performance and assumptions underlying these statements regarding the company and its business.
The company's actual results could differ materially from those indicated in any forward looking statements due to many factors. The most important of what you're describing the company's latest filings with the Securities Exchange Commission, including the company's second quarter 2020 results included on form 10-Q, and the current report on form eight.
Okay filed yesterday evening together with our earnings release.
We also expect to discuss certain financial measures and information that our non-GAAP measures as defined in applicable FCC rules and regulations.
Reconciliations to the company's GAAP measures are included in the earnings release filed with yesterday's 8-K.
Finally, we posted in earnings call supplement to our website that we will referenced in this call and is designed to provide additional context on our financial performance key events for the period additional information on the makeup of our sales and cost savings actions and steps we've taken as a result of the cobot 19 outbreak you can find this presentation.
At Www Dot command Dot com slash investors slash presentations.
With that I'll turn the call over to Neal Keating.
Thank you Jamie good morning, everyone and thank you for joining our second quarter 2020 earnings call.
The past three months continued to be difficult as the global community response to the unprecedented cobot 19 pandemic.
And today, our focus remains on ensuring the safety of our workforce, while continuing to deliver critical products to our customers.
I am pleased to report that our team acted decisively and responded well to these challenges.
In the second quarter, our sales of $177.9 million were up 1.8% compared to the prior year driven by the call contribution a ball seal engineering.
Partially offset by lower volume related to the impact of Kogut 19 on a number of our end markets.
As expected our defense markets remained strong.
Led by our joint programmable fuze program, while sales in our commercial business in General Aviation and medical end markets were down across the board.
Comparative purposes, it's important to note that sales in the second quarter 2019 included SH two sales from Peru, as we finalized our contract and the sale of one came Max aircraft impacting our year over year organic comparison by approximately 9 million dollar.
Yes.
A number of expenses related to our acquisition of ball seal engineering restructuring and severance costs.
Expense associated with our distribution transition services agreement contributed to a $100000 net loss from continuing operations for the quarter and mask the underlying improvements we have seen in the profitability of the business.
After adjusting for these and other items adjusted EBITDA increased 40.5% over the prior year to $23.9 million with adjusted EBITDA margin, increasing 370 basis points to 13.4%.
GAAP diluted earnings per share from continuing operations were breakeven.
However, when adjusted for the items I previously mentioned diluted earnings per share was 36 cents, a 125% increase over the 16 cents, we achieved in the prior year period.
These results underscore the ability of our team to execute in this challenging environment, the strength of our business portfolio and the effectiveness of our new organization.
Our production facilities have been deemed essential and our priority from day, one has been on the health and safety of our team.
We continue to adhere to our operating disciplines designed to ensure safe and continuous production.
These include the implementing of social distancing.
Enhance cleaning and sanitizing practices at our facilities.
The use of appropriate personal protective equipment.
Instituting temperature screenings at all locations.
Segregating work groups to enable effective contact tracing while limiting interactions within the facility and maintaining a work from home strategy for our office and nonmanufacturing employees.
Turning to our end markets in near term expectations.
Defense continues to be an area of consistent strength, which continued into the second quarter.
As we noted at the end of the first quarter defenses, approximately 50% of our historical end market mix and we do not anticipate a meeting impact meaningful impact from cobot related disruptions.
Moving forward, we have read designated our commercial aerospace sales as commercial business in general aviation.
This decision was made after careful consideration of the broad range of products, we offer the number of customers, we serve and the underlying trends impacting each market segment.
We believe that this change increases transparency and will help investors better understand this portion of our business.
Sales in our commercial business in general aviation markets, which account for around 30% of our historical sales mix declined 24% from the first quarter of 2020.
This decrease was due to the conditions in our commercial aviation market, which remain under pressure as airline capacity and traffic remain at significantly reduced levels when compared to the prior year, which led to a 36% decline.
In sales to our large commercial airliner customers in line with our previously estimated reduction of 30% to 40% and we expect sales to continue to be under pressure through at least the balance of the year.
Sales to our business in general aviation markets were down significantly less at 15%.
The diversity of our customers in our broad range of platforms will benefit us as we expect modest growth in business in general aviation in the back half of 2020, which will help to offset declines in commercial airliners.
In our medical end market, which accounts for approximately 10% of our historical sales mix. We saw a significant decrease in sales from the first quarter of 30% as these markets were impacted by the deferral of elective procedures during the quarter.
This is particularly true in the United States with elective procedures slowing substantially as cobot 19 case counts began to rise.
While we expect a rebound in this market and then ability to recapture much of the loss volume the timing remains uncertain.
Finally in our industrial end markets, which also account for approximately 10% of our historical sales mix performance held up nicely and we've seen an uptick in order rates, providing an opportunity for improvement in second half of the year.
Looking at our performance by product line, and beginning with our specialty bearing products. The most significant sales decline for our bearing products was to our large commercial airliner customers as volumes decreased significantly in the quarter, while volume declines for our business in general aviation and medical bearing products.
Less significant.
These declines were protect were partially offset by increased defense volumes. Looking ahead, we continue to expect sales of our bearing products to large commercial airliner customers to be pressured but anticipate this to be partially offset by increases for our business in general Aviation defense industrial.
And medical bearing products through the remainder of the year.
In our GPF program, we continue to deliver at a high volume in the second quarter with just over 12000 fuses delivered and through the first half we are on pace to deliver to our full year expectations of 45000 to 50000 fuses in 2020.
Backlog for this product remains strong with 200 at at $266.8 million at quarter end.
We continue to see strong demand for JPS and with the quantities anticipated under options 15, and 16 of our US government contract and potential Dcs opportunities, we could add more than $100 million in new orders to backlog in the coming months.
In our structures business sales were down compared to the prior year with large commercial volume down consistent with OEM production rates, while defense programs continue to perform well excluding the absence of sales on the Peru SH two program.
Looking ahead, we continue to expect improved performance in our structures business and last week, we made two announcements, which illustrate the progress we have made to date.
First we were selected as an elite supplier by Sikorsky for the work we performed on the design and development of the MH 60, our read on program and second we entered into a new long term agreement with a potential value of more than $118 million with a major engine OEM.
To manufacturing pot to manufacture composite components for both existing production and newly developed engine programs.
These are significant achievements for our team and underscores their hard work and dedication.
We remain optimistic about the prospects for both our manned and unmanned K Max programs and we believe it offers a competitive value proposition to commercial operators, the us military and governments around the world.
We've made progress towards the sale of a number of commercial came acts in the second quarter and are happy to announce that we have secured a deposit for an additional aircraft from an existing customer.
We are awaiting final contract approvals and expect to deliver this aircraft in the second half of the year.
With disorder, and the progress we've made with several potential customers over the quarter, we remain confident in our ability to deliver two aircraft by year end.
Moving to ball seal engineering, we are on track with our integration activities and achieved the cost savings we had anticipated at the time of the acquisition.
Operationally volume at ball steel was significantly impacted by cobot 19 related disruptions in their medical end markets in total ball fuel sales were down around 23% on a sequential basis, which was driven by sharply lower medical sales as health care facilities pause.
Just elective and non essential procedures and to a lesser extent lower sales into aerospace in general industrial applications.
As we look forward, we expect medical volumes will recover as schedules for medical visits and elective procedures returned to normal levels. However, we are seeing an increasing likelihood that is sustained recovery will not take place until 2021.
We have navigated through the unprecedented pandemic in the second quarter supported by a more resilient business portfolio and strong balance sheet. When adjusted we delivered improved year over year performance and appreciate the support of command employees around the globe, who executed through a difficult.
Im period and remain committed to safely delivering products to our customers now I'll turn the call over to Rob for a closer look at the numbers Rob.
Thank you Neil and good morning, everyone.
Net sales from continuing operations for the second quarter increased 1.8% to 177.9 million, primarily due to sales from our ball feel acquisition, partially offset by lower organic sales of 8.5%.
Gross margin for the quarter was 31.9% compared to the 30.1% in the prior year period.
The 180 basis point improvement over the second quarter 2019 included 66 basis point impact from the 1.2 million of inventory step up costs, resulting from the ball seal acquisition.
Without the inventory step up we would have seen in almost 250 basis point improvement in gross margin.
As a reminder, the second quarter will be the last quarter, we will see an impact from the ball seal inventory step up the increase in gross margin was driven in part by higher direct commercial sales in our Jay Pf programs.
An increase in gross profit on defense bearing products and contributions from all sale.
SDMA as a percentage of sales increased to 25.2% for the quarter from 23.9% in the prior year. This was primarily driven by 8.3 million an additional SDMA from the ball sale acquisition, which includes 2.5 million of intangible amortization expense associated with the purchase accounting for the acquisition.
And approximately 700000 of costs related to corporate development activities.
Adjusting for these items SDMA as a percentage of organic sales decreased 150 basis points to 22.4% or 14% reduction when compared to the comparable period in the prior year.
We remain focused on mitigating the risk of covered 19 and have incurred approximately 1 million then expenses during the second quarter supporting these efforts.
Internal research and development continues to be a primary focus for us and we are committed to investing in these programs through the downturn.
Spending in 2020 on these programs has increased over 2019.
In the quarter, we spent $2.8 million and through the first six months. We have spent 7.7 million a 30% increase over the comparable six month period in the prior year.
Restructuring and severance expense in the period was 4.5 million compared to 0.2 million in the second quarter 2019.
In the second quarter, we recorded 1.8 million costs related to our gene a reduction initiatives and 2.7 million to adjust our headcount to the lower volumes, resulting from the impact of corporate 19 on our operations and end markets we serve.
In connection with the sales distribution in 2019, we've taken a number of steps to reduce our DNA expenses by 15 million to $20 million on a run rate basis as we exit 2020.
Through the second quarter, we've achieved more than 10 million in total annualized savings and we have clear line of sight to our 20 million of annualized savings.
In addition to our gene a reduction efforts.
We have been actively reducing costs in light of the following the client we have seen due to covert 19.
In the first quarter, we moved quickly to adjust our cost structure and during the second quarter took a number of additional actions that included workforce reductions managed attrition and employee furloughs.
We expect these actions to generate 11 million of savings in 2020 or approximately 21 million annualized.
Looking at the total impact from all of our cost actions, including the benefit from reduced discretionary spending we expect these cost reduction efforts to result in approximately 22 million of savings in 2020, which represents an annualized run rate of approximately 50 million.
While the majority of the 50 million in savings is structural we expect a portion to reverse when sales volumes returned to pre crisis levels.
On a consolidated basis, we recorded an operating loss of 2.8 million compared to the operating income of 10.6 million in the second quarter over the prior year.
Our results included a number of onetime expenses, including the cost incurred related to the distribution transition services agreement.
4.3 million increase in restructuring and severance expense and 6.9 million and costs associated with the purchase accounting for the ball seal acquisition.
Adjusting for these items operating income increased approximately 26.3% to 13.6 million from 10.8 million in the prior year period.
Pursuant to the terms of the distribution sale, we have agreed to provide certain services such as tax treasury human resources and IP during the transition period.
A cost impacting operating income in the second quarter totaled 4.4 point.
Income earned for these services totaled 3.1 million and as recorded below operating income on the consolidated income statement.
Adjusted EBITDA margin from continuing operations in the second quarter was 23.9 million.
Or 13.4% of sales compared to the $17 million or 9.7% of sales in the second quarter 2019.
During the period, we had diluted earnings per share from continuing operations.
$0, a 23 cents decrease.
Over the prior year diluted earnings per share 23 cents due to the lower GAAP operating income recorded in the period.
When adjusted we saw an increase in diluted earnings per share of 125%, earning 36 cents per share in the second quarter 2020 compared to the 16 cents adjusted diluted earnings per share we earned in the second quarter 2019.
Free cash flow usage.
For the year was driven by an increase in receivables due to the timing of payments from JP have DCF customers.
Term working capital build on K, Max and employee related cash payments, such as a $10 million pension contribution made in the first quarter for the quarter, our cash usage declined $28 million and we remain confident in our ability to generate positive cash flow for the full year.
We went through our full year guidance on our first quarter call and based on the visibility we have today, we do not plan to reinstate guidance for the full year.
In lieu of guidance and similar to our first quarter discussion. We wanted to provide our view on end market performance for the back half of the year.
And our defense business, including Safin arm devices, which historically accounted for approximately 50% of ourselves. We expect second half performance to remains strong with an opportunity for growth in the second half over the first.
For the Jif program, we continue to expect shipments of 45000 to 50000 Caesars in the current year, but the majority of these deliveries to our Dcs customers also unchanged from our previous forecast.
For our commercial business in general aviation markets.
While it's difficult for us to predict how the back half of the year will play out we continue to expect commercial aviation to remain challenged and business in general Aviation, we expect to see topline growth in the back half of the year and provide offsets to the decrease is expected in commercial aviation.
We expect our sales for the medical end market to continue to see pressure from the deferral of elective procedures. However, the speed at which those markets are impacted by cover 19 case levels makes it difficult for us to predict whether a meaningful recovery will occur in 2020.
Our industrial end markets held up well from the first quarter to the second and we anticipate level demand for these products in the back half of the year.
In summary, as we entered the second half the year, we're well positioned despite the continued pressure we expect a number of our end markets. We have made meaningful progress on our gene a reduction efforts have moved quickly to adjust our cost structures to the reduced file on volumes that we've experienced.
We entered the third quarter with ample liquidity and a strong balance sheet, which when coupled with the strength of our business allowed us to repay 100 million of the 200 million, we had outstanding on our revolving credit agreement subsequent to quarter end with that I will turn the call back over to Neil.
Thank you Rob.
As we close I wanted to take a look back at what is perhaps the most volatile six month period, we have all faced in our careers.
We started 2020 with a new business focused on engineered products. After the sale of distribution and acquisition of ball seal engineering.
And despite the early impacts of Cobot 19 on our first quarter results with 24% consolidated revenue growth over 10% organic growth and adjusted earnings per share of more than doubling over the first quarter of 2019 demonstrated the potential of the new command.
While we never could have predicted the impact of cobot 19 out of the world economy, and our business I believe that our second quarter results underscore the many strengths of command today.
These include the strength of our product portfolio and the diversity of applications platforms and markets, we serve across defense aerospace medical and industrial.
The strong team that has enabled us to maintain operations, while taking decisive actions to reduce cost and set the foundation for future success.
And our employees across the globe that have come together under the most difficult circumstances to support one another our communities and our customers.
Today, we move forward with a dramatically improved business model focused on proprietary and critical engineered solutions, a well earned reputation for innovation and a balance sheet to both protect and grow our business. All of these factors position us well to navigate the challenges ahead and demo.
And straight the full potential of the new command.
Thank you Jamie.
Operator may we have the first question. Please.
Ladies and gentlemen, if your question or comment at this time, Please press star than the one key on your touched on telephone. Our first question comes from Pete Skibitski Alembic Global.
Hi, good morning, guys.
During peak I want to beat.
Hey, guys just wanted to start on the structures programs I guess, mainly commercial structures.
Could you help us understand.
The margin pressure on those programs as volumes come down right. We've got we've got kind of updated forecast from Boeing and Airbus. So I'm just curious how much margin pressure, you'll get on those lower production rates.
And then kind of as a corollary can you talk about the impact from the expected shutdown of the 747 lawn.
You know if.
Pete if we take a step back.
Excuse me the structures programs for the six seven the triple seven in the 747 are predominantly made in our Jacksonville facilities add as you know.
They have a really broad range of defense programs, there as well.
So.
It's going to obviously impact the overhead absorption somewhat but I wouldn't see significant impact the.
On those programs because it's just not that big a part of the business there today.
As you know.
Over the last seven or eight years, we really haven't added.
Much in the way of.
Commercial aero structures programs across the businesses that that was a.
That was up.
A significant shift in strategy for us about eight years ago because of the lower margins that were in that business we maintained.
As I said some of the 767 and triple seven and four seven.
But.
It was relatively small part of our business.
Okay, that's great color appreciate.
I'll, just do one follow up and get back in Q.
Yes, you are going through this downturn that everybody is if we think about commercial bearings.
Are you guys seeing any kind of distressed players out there and you think maybe you'd have an opportunity actually maybe gain some share on bearings during the downturn from from weaker players.
Pete, it's something that that Rick and and Rob Patterson and the team talk about every day and.
We've we've got a very strong.
Bearings business.
And we have a very strong balance sheet to support either growth organic growth. If it if it comes in because those customers would shift demand to us.
Or if there is a player where we think it it makes sense for us to acquire rooms. So.
We would we certainly see that as an opportunity I think we're still early enough in this downturn.
Where it's not become apparent to us, but certainly through the course of the next six months, we would expect that that there should be some opportunities for us in either that organic growth as we take over programs.
As a a more capable reliable long term supplier or there may be an appropriate acquisition that would make sense for us as well.
Okay. That's good I appreciate the color guys. Thank you.
Our next question comes from Steve partner with Keybanc capital markets.
Hi, good morning, guys.
Thanks, Steve.
Rob when you talked about expecting second half growth for defense can you just talked about magnitude are you thinking high single digit growth sequentially or low double digit how are you thinking.
Thinking about that.
Yes, when we look at overall second half versus first half on defense I mean, it's going to be in the range of around plus minus 10% growth is kind of.
Rough range of what we're expecting.
Okay and would you expect similar magnitude for both defense and say, if an arm or will want to grow faster than the other.
I mean, we're not we're not running a lot of detailed guidance here, Steve, but certainly our precision products and second on devices are going to be a meaningful contributor to that.
We do see opportunities elsewhere in the defense portfolios. So it's it's not just a story around.
Our statement on devices.
Okay.
Just does the growth in business in general Aviation mean, the 31% year over year decline for that segment is trough contraction for the year into quarter.
Into Q.
Yes, so yes, so what you're seeing I mean, if you look at the broader.
Commercial market, which includes our large commercial commercial aviation.
And our general business and ideation certainly.
Reduction in large commercial played a very significant impact and in the back half of the year, we do expect to see in particular opportunities we've talked around K Max.
That will certainly help the general business, but there are other programs as well, we're expecting to see some recovery in the second half of the year.
Yes, we have some new programs for for long range business Jets that are going to accelerate.
Or begin production and deliveries in the second half of the year Steve.
Right. Okay. So just just to be clear that 31% year over year decline probably is the worst of it for the year given some of the acceleration and general aviation is that is that fair or or the commercial still going to be a bigger drag.
Commercial still going to be a drag Steve you're right, but we've we've looked at it and we believe that.
That the statement that the second quarter would be the trough would be appropriate from what we know right now.
Okay.
And then just one more and I'll hop back in line just free cash flow obviously, another use in the second quarter.
Press release or in your comments, you said you expect to be cash flow positive, but can you talk about magnitude it.
Negative 90 million for the first half is a pretty big hurdle. So just how are you thinking about free cash flow for the year.
Yes, Steve very good question.
There really are kind of three kind of primary drivers that are going to drive the positive cash flow for the year. The first and we've touched on in our and our printed materials on the.
Outstanding receivables to some of our DCF customers.
To see that resolve itself as we work through the balance of the year.
You are also say that we're expecting to deliver hopefully about to K. Max. That's also we've been building working capital in support of that program based upon the sales leads that we have and then the third item, which doesn't get a lot of play, but you'll notice on our cash flow statement that we've had a more significant use of cash on accounts payable we expect to see that normalize as we go through the balance.
For the year in terms of overall magnitude, while not providing formal guidance, we would expect to see the full year cash flow in the range of what we've produced last year.
Okay.
Alright. Thanks.
Thanks, Dave.
Our next question comes from Chris Tucker Longbow.
Hey, good morning, guys. Thanks for taking my question.
Yes, Chris I.
I guess kind of dig it in first off congrats on the new LTV.
Engine manufacturer.
I guess I know you're limited on what you can say, but maybe any details you could provide just maybe scope of the time period cover put that contract maybe any.
Is it military commercial just any details you are able to provide would be be very helpful. Yes, sure Chris that.
You know the drill.
When when customers for.
For maybe even different reasons today than in the past.
For that we not referred to them or to the specific program.
It's as we said in the press release.
$118 million.
Thats about a five year period of time.
Ed is.
For.
A range of long range.
Ultra long range business Jets.
Got it got it that's that's very helpful. Thank you.
And that again kind of building off the cash flow question just inventory specifically, obviously the business has kind of changed a lot. How are you thinking about current inventories.
Are we still kind of working things down to the back half of the year with the addition of ball just any comments on inventory specifically would be great.
Yes, no quite happy to address that I would say, we've seen a building inventory ocular more so on our structures programs as we are building inventory for delivery in the second half of the year. So it's certainly seeing a usage there.
In terms or overall inventory performance. Our teams are paying very close attention to inventory given the changing demand patterns. So theres a lot of focus.
Across the business on managing inventory prudently, it's a challenge because a lot of our products are very specific to the end use so theres not always as much common material I mean, a lot of topical for very specify materials.
So it so it is a bit of a challenge for us.
We get used to the new demand environment, but the team has done a really nice job leading the plan forward for the back half of the.
Sorry.
Yeah, Chris is as Rob's kind of outlined a few times, we knew that we're building inventory at it in a number of areas as we entered the year to support second half sales, whether it was JPS were or whether it was K Max so that was anticipated.
And.
We like to think that were pretty good at inventory management, but we when we have as much of its discontinuity in end market demand as we have here in such a short period of time.
We know that were.
We really we've got a little bit of time here certainly through the second half the year to work our inventories down.
To the normalized levels that we would expect.
Our current production levels. So as Rob said the team has demonstrated the ability to manage inventory very effectively and we're confident they will be able to do it in this instance, as well.
That's great color guys. Thank you so much and if you just allow me one one last follow up here I guess on the new K Max deposit is that.
Current operating customers the brand new.
Operator, that's played the deposit.
Yes, Chris.
That is an existing operator.
Perfect that particular deposit relates to the current customer.
Hey, guys, Hey, Chris I'm, sorry, I need to backtrack.
The.
The.
Contract the Ogilvy contract that we reference for a $118 million, it's actually over 10 years.
Not not over five I was thinking of a different kind.
Contract, so I apologize for that.
Perfect. Thank you. Thank you.
Okay, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one key on your touched on telephone.
Next question comes from satisfaction, which if you mark.
Hi, Thanks, and good morning.
Hi.
So on the fuses.
You know given what's them delivered in the first pass and what's kind of left to go relative to the guidance.
You know to see growth.
In the second half of the year off the correct.
Well it seems like maybe should be coming in towards.
Kirk the upper end of that delivery guidance range.
Yeah, Chris I'm, sorry that this is Rob yes, so when we look at our full year range of expectations. We've delivered to the point around 22000 fuses halfway through the year. So certainly.
That would imply if you look at the mid range of the guidance roughly 25000 units in the back half of the year and I would just once again emphasizing the majority of our shipments as we touched earlier in the year will be our Dcs customers.
As we called out the balance of 2020.
Right Okay.
Then you pick.
A couple of years ago.
As as we were.
Talking with you and others, we talked about.
Developing the capability to be able to produce essentially a thousand fuses a week or 50000, a year and.
So that is the upper end of art our guide for this year.
And that's where we anticipate being in that 45 to 50000 unit range, but I think what's what's interesting is that the team without any additional bricks and mortar.
Has been able to.
Not only ramp up to those levels successfully and demonstrate it now for a couple of years.
But also have have done it with.
Some extraordinarily.
Consistent.
In service quality levels as well so theyve maintained that 99, plus in service quality for the JPS, while ramping up and not having any disruptions in supply so I think that.
We intend and we're confident and getting to that that range for the year.
I think that team has really done a great job and being able to consistently deliver as well.
Yes.
Upfront and then just thinking about.
Going forward I guess how.
No thinking about the mix in 2020.
We think were DCF.
When we think about how high is that.
Mix of DCF is relative to what like a normal next might be going forward beyond 2020.
How would you think about that.
Yeah I mean.
Set that that that's a somewhat difficult question to answer, but I would I would say that.
Based on our view of things.
These that that's going to remain are very meaningful portion of our deliveries going forward for a number of years.
So.
This year, we said it would be 60% to 65% Dcs relative to you SG.
I don't think you'll necessarily see a very different type of ratio for at least the next couple of years.
Beyond that that's just it's just hard to see.
That's hard to have visibility into.
Sure.
Understood.
And then.
Definitely hurt.
The commentary about.
Bearings and serve worsening stab and those versus Boeing Airbus portions of the market.
I guess on the Boeing and Airbus portions of the Mark.
Are there still kind of significant headwinds.
To overcome.
You know clonazepam from the top tier or could most of.
The what you expect.
On the large commercial five happened.
In the quarter.
Yeah, I think set them and when we think about large commercial for the quarter. It was in line with our expectation.
We were down.
Between 30% to 40% we have talked about in large commercial and I think.
We would expect.
Second half to be under pressure again with large commercial probably in a similar percent range in terms of second half versus first but this is.
It's not unexpected.
And I think the team is prepared to manage the operations relative to that level of demand.
And then certainly.
Not anyone really has a lot of visibility into what happens in 2021 in 2022, I mean, certainly I think both Boeing and Airbus you look at their production rates and what they're expecting.
It's going to be a slow climb out.
And.
We are certainly hoping like everybody else that.
The development of the vaccine I think you could see very rapid return I mean, this is really going to being somewhat dependent on pent up demand and available mitigation coated.
It's going to play a very meaningful impact in terms of how quickly we recover but I think what's really important understand.
The long term thesis behind commercial aerospace remains very much intact.
And they still have multiple your backlogs at both Boeing and Airbus.
So.
This is a multi year play and if we can accelerate quicker I think all the firms, including command, we'll be ready for that.
And if we take longer to dig ourselves out.
We're once again, we've gotten our cost structure in line.
So we're prepared.
To to managing a lower demand environment, if need be but we're also prepared to accelerate.
Great.
Non coupon offline.
It's about one of the order opportunities and orders.
So we think about growth in the in the backlog.
In the second half of the here.
We would we would certainly anticipate some growth in backlog in the second half of the year.
Seth we've got.
A number of a very strong opportunities here in the near term for K Max that that hopefully would come into backlog and then come out of backlog AD and actually across a number of our defense programs, we have significant opportunities to to be able to conclude contractual negotiations.
With.
Existing customers on existing programs.
That would add meaningfully to our backlog.
And that's just one other and once again to timing, maybe a little difficult to predict if we do see an uptick in the medical markets.
Certainly expect mall feel to it to have some additional backlog there just given their exposure.
And we also commented in our prepared remarks about the near term potential for adding significant backlog in the JPS product line for both.
US government as well as Dcs customers.
Great consumer.
Thank you Thats.
Our next question as a follow up question from fees could this be with Alembic global.
Back Pete.
Hey.
[music].
All right sorry about that I was just talking right now.
A question, we want I wanted you to and summary ask yes, sorry, bill in the style.
No.
One thing I wanted to validate back in May Boeing got a very large international order for the Slam slimy our missile.
You guys do the fuse for that correct.
That's correct correct.
Okay. So that I don't know if your guide if you could say if you've got that.
In backlog already or not or.
In the future.
You know Pete.
Good question.
Don't know that we do but I don't know that we don't I would.
Speculating I'd be a little surprised with the timing of the award to Boeing that that we would have that in backlog yet.
Okay.
You raise it good point we.
It was just a few quarters ago that we tried to highlight.
J.P.F. gets so much visibility and rightfully so because when you have as unique product is well positioned as JPS.
You want to make sure that people understand what the long term potential for that is but we hadn't talked as much about.
The legacy fusing part of our business all the missile fusing programs and now you see a number of those programs over the last year and a half where they really ramped up and I think the slammed the our for Boeing as an example of that ongoing.
Situation for our long range missiles, and we are really we have got a really strong position there.
The next great Okay.
Switching gears, maybe one more show for Rob Rob. This 50 million dollar cost reduction figure that's a big number for a company your size guys right.
So can you give us any color about where that could you know I know, you're probably a little bit reluctant to talk about this but.
Can you give us any sense of where that could take you guys in terms of do now the mid to long term.
In terms of operating margins.
Can you just take you.
In aerospace used to be kind of a mid teens business, even a high teens business and I know Dcs is there's a mix issue but.
No overall can you become a mid teens type of margin business, you know when that kind of works its way through now or any color you could add.
Yes, all biotech and I'm just going to.
Say one thing there is theres no question $50 million is is significant.
And I'm going to give Rob a little time to do some math for you but.
I think one thing we would ask everybody up to keep in mind is as we entered the year.
We had talked very clearly about our GE and a reduction activities.
As we redesigned our processes and organizations across finance HR Eni Ti as a result of the sale is a distribution business and we talked about a 15 to 20 million dollar savings there. So.
Today, we talked about the fact that we would be at the high end of that savings range. So $50 million is a big number but lets keep in mind that that 40% of that was due to activities that were underway.
Before the beginning of the year.
And with that I'll turn it to that.
Yes. Thank you now and I think I think they will raise a very important point that.
Long before the endemic arrive.
We had a multi faceted plan in place to pick the 15 20 million and we're very much on track to do that to the high end of the range. So when you talk about the other 30 million.
Clearly we had a separate.
With a portion of our workforce as a reduction of though.
Volumes impacted us.
Flows discretionary spend and as I said in our prepared commentary, we would expect a portion of those to come back as business hopefully returns to pre crisis levels.
But I think your points of good one feet.
If you assume for a moment and this is really just math right that we're able to capsule lets say even on 40.
The 50 right long term, that's long term structural savings that I'm just.
Because the map simple and you apply that against let's call. It roughly 800 million dollar topline.
Talking 500 basis points of additional operating margin that we would expect to see in the business.
Which is really important and I think what's also important understand on this.
Cost reductions.
That is a direct impact also operating cash over the forecast period. So what it allows us to do is to have a much stronger.
In addition to drive better cash flow in the future as well as we move forward.
That's correct, yes, we'll look forward to volumes return right.
Yes that we're not alone and all of our peers and competitors and customer it's absolutely.
Obviously, the voluntary term.
Sure I appreciate the color guys. Thanks, so much thanks to the thank you.
Your next question comes from Robert Kirkpatrick of Cardinal capital.
Good morning could you.
Address the M&A environment during these tumultuous times please.
Sure.
It's actually in terms of.
Jamie is activity with incoming calls.
It's it's picked up in the last let's say four to six weeks, it's still a little bit tough to too.
Commit to doing onsite diligence as you can imagine rep.
But we are at a point now where we can begin to to look at a meaningful way and timelines in which we would plan to be able to due diligence to be able to do some of the upfront work before you would even do plant tours or management presentations and quite honestly.
We can do management initial management presentations.
Via video today, because everybody's used to doing that so we've seen an uptick.
But I.
I think one of the challenging things still will be.
How you model.
The.
The environment in which.
If you acquire that business.
What are the volume's going to look like in those first two to three years that that's going to be the hard part still.
Thank you or the incoming calls.
More third party driven.
Im Sanker, we lost you there we got to the incoming calls and then last year.
Sorry, let me try again.
Our the incoming calls more third party driven okay. Rob we can't hear you. If you can still if you can still hear us certainly call back we'd be more than happy to answer any any follow up but you might be struggling with the power failures from the storm still down in Greenwich. So.
Thanks, Operator, we'll move to the next question.
Next question comes from Steve Order with Keybanc capital markets.
Okay. Thanks, I was going to ask that M&A question, but I do have one more.
I don't think you talked about this how long is the lead or lag between seeing Boeing or Airbus change production schedules before that affects your business.
When you check.
Yes.
Sorry.
Yeah.
Oh.
Kevin.
Are we still live on the line.
Yes, there is still there.
Can you hear me.
Can you hear me.
We can hear you Kevin.
I'm not sure we can't hear Steve is on the line asking a question we cannot hear him and we missed part of Mr. Patrick's tall Oak tree I can hear the upward.
I can hear the other personal.
And then I could also here Steve.
Which you can use the JV here do you hear me.
Did you hear Jeremy.
A follow up with them offline.
Okay.
Are you guys still there.
We are still here yet.
So on the lost cost. These said he will follow up with you on line I'm not sure why you couldn't hear bucket hero and there are no other questions in the queue to do you want to go head end the call in their knocked about fourth this year.
Okay.
So Kevin.
Going to officially conclude the call. So I'll just for the for posterity will say the closing remarks. Thank you for joining us on todays conference call.
And we look forward speaking with you again, when we report our third quarter results.
Ladies and gentlemen. This concludes todays presentation you may now disconnect and that will wonderful day.
And ladies and gentlemen. This concludes todays presentation you may now disconnect and have a wonderful day.