Q3 2020 Astronics Corp Earnings Call
Conference. Please press Star zero on your telephone keypad as a reminder, this conference is being recorded I would now like to turn the conference over to your host Debrowski Investor Relations for Astronics Corporation. Thank you you may begin.
Thanks, Melissa and good morning, everyone. We certainly appreciate your time today and your interest in Astronics joining me on the call are Peter Gundermann, Our chairman, President and CEO and David Burney, Our Chief Financial Officer.
You should have a copy of the third quarter 2020 financial results and the contract award release that was released this morning, and if not you can find them on our website at Astronics dotcom.
Let me mention first that we may make some forward looking statements. During this formal discussion as well as during the Q and a session. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed with securities and exchange.
Commission. These documents can be found on our website or the SEC dot Gov.
During today's call. We will also discuss some non-GAAP financial measures. We believe that these will be useful in evaluating our performance you.
You should not consider the presentation of this additional information in isolation or as a substitute for results in accordance with GAAP.
We have provided reconciliations of non-GAAP measures to comparable GAAP measures in the tables that accompany today's release, so with that let me turn it over to Pete to begin please.
Thank you David and good morning, everybody. Thank you for Dennis.
We our agenda through through first and foremost particle.
Our third quarter, which was very low quarter were heavily impacted by the ongoing global 19 pandemic.
We will talk a little bit about what we see happening in the future. We're.
We're coming up on year ended the year here is for the fourth quarter.
Something we can talk about with some level of surety.
We will review our major market segments.
We're perspectives on the market and then we'll open it up for question and answers.
Before we get going but just a quick review of our major overlying goals of the company as we work through our current situation.
We held the ongoing objective of protecting our employees on the safety of our workplace I.
I think we're doing a pretty good job there in general we've learned to deal with the pandemic can work from home and.
All the stuff that comes along with it.
We have little interruptions here and there but for the most part.
We continue to function and continue to operate pretty well.
We certainly want to keep serving our customers with the level of service and productivity that they expect and need.
That's been a little bit of an exercise through the pandemic has the goalpost keep moving sometimes them sometimes out.
But I think we're doing a pretty good job in general staying in front of our customers requirements, which is important.
And finally, we want to position the company not only for survival during the pandemic, but for success. Afterwards, we are not optimizing the company for our current level of volume or what the market is giving us currently but.
But we're keeping an eye on where we expect to be on the other side of this as the markets recover as we believe they surely will.
That being said digging into the third quarter. It was a very difficult quarter very late heavily impacted by COVID-19 in the vast majority of our business.
As a reminder.
In normal times 2019, before the pandemic hit.
70% of our revenue or so came from the commercial transport industry. Both line fit production of new aircraft and the aftermarket servicing airlines and leasing companies.
That has been a pretty good place for us to be over the last decade or more.
But during a pandemic when people stop traveling that's a pretty tough place to be.
We are when we last talked we were beginning to see a resurgence.
Of air travel domestically anyway in the us in the July August timeframe.
And we have the hope at the time that resurgence was going to continue and strengthen through year end that has not happened will talk more about that.
Later on in the call here, but.
But the.
Our core market, our commercial transport market has largely stagnated since that time in terms of flights and passengers up modestly, but not where we thought it would be not where most people in the industry. We thought it would be.
With that as a backdrop.
Our revenue for the quarter was 106.5 million Bucks as low as we've done since back in 2013.
Down 40% year over year down 13% sequentially sequentially from the second quarter.
Our aerospace segment, which in normal times is 90% of our business.
Was responsible for all the drop down 48% year over year.
Our test business normally 10% of our business was actually up 37%.
Year over year, excluding the semiconductor business that we sold.
A year ago.
That increase in test as a function of.
Consistent and robust government spending also aided by a couple of acquisitions that we did.
Smaller acquisitions in 2019.
Fortunately.
We implemented a number of cost saving measures as the pandemic took hold these are a little bit old news at this point, so I'm not going to go through them in detail we.
We figure today, when we look at our.
The way our company is structured we took about 160 million or so of costs out of our business from where we thought we would be when we entered 2020, which seems like a long time ago now.
These cost saving measures.
Make are.
Income statement look somewhat tolerable GAAP.
Loss was.
A negative 5.2 million or 4.9% of sales our adjusted EBITDA.
Was just about breakeven Dave will talk about adjustments in a second.
Cash from operations.
Was a negative 10 million something were a little bit disappointed by but we think we're coming to grips with.
As our business stabilizes that the current at the current level.
Look bookings during the quarter saw a slight uptick of 81.6 million that's.
Fairly significant on a percentage basis, but it goes from small disappointing bookings in the second quarter to mildly less the disappointing bookings in the third quarter.
But it's going the right way.
We feel that we're.
The experience some de stocking effect as Oems settle down at reduced production rates.
We continue to see a pretty weak aftermarket and commercial transport, we'll talk about that.
A little bit later in the call one positive aspect in the business in general is represented by a program that we announced earlier today from a customer called Zenix.
A 20 million dollar order.
Which is.
Not exactly mainline aerospace business for us, but is a complement to some of the design.
Capabilities that we offer the world in general.
And.
And are now complementing with.
Contract manufacturing services.
We also announced earlier this week.
A pretty good order for the Atlanta Rapid Transit authority.
Or our customers, specifically stadler, that's a $30 million program.
For those who keep track of sub such things with these dynamics order was included in our third quarter bookings totals.
The murder Stadler order.
Was not that's a fourth quarter bookings so that will show up in our fourth quarter numbers, when we release them at the end of the year.
I think with that I will turn it over to Dave to go through some details on our income statement and balance sheet and financing and then I'll come back and talk about how we see our markets.
In general.
Dave Thanks Pete.
Really for the quarter is pretty straightforward quarter.
Not a whole lot of commentary.
For me, but walking through the operating results for the quarter, we had GAAP GAAP net loss of $5.3 million.
That's net of an income tax benefit of $5.8 million and.
GAAP pre tax loss of $11.1 million.
On sales of $106.5 million, which as Pete mentioned was our lowest level of sales since 2013.
For the first time in a few quarters we.
We didnt have any large reserves or accruals affecting the quarter.
The loss was simply a function of the low sales level for the quarter.
And representative of our margin profile and our current cost structure at this time.
Roughly speaking our EBITDA breakeven point is about this level of sales, but it can vary subject to to Nexus mix changes.
The $6.3 million Aerospace segment operating loss was reflective of the low sales level during the quarter.
And our cost structure, which supports our current product development initiatives.
And an expectation that revenues will increase over the coming quarters.
The test segment margins were lower than expected, primarily due to higher legal costs and inventory reserves that combined totaled $1.3 million.
Adjusted EBITDA for the quarter was roughly breakeven as I mentioned at $55000 loss.
Adjusted EBITDA as reconciled to net income in a table on page 11 of our press release.
Regarding our liquidity managing liquidity is critical as we bridge to recovery.
To that end, we believe we can hover around cash flow breakeven and positive EBITDA at our current cost model over the foreseeable future assuming no further declines in our markets.
For the third quarter cash flow from operations was a negative $10 million for the quarter and positive 31.5 million year to date.
The negative cash flow from operations during the quarter was driven by net working capital increased it used $5.3 million of cash.
Our challenge during the rapid downturn in the sales since the start of the pandemic has been to renegotiate purchase commitments for raw materials.
Slowing down incoming raw material inventory continues to be a struggle.
With raw material inventory, increasing by $8.7 million during the quarter and 20.5 million year to date.
We're contractually obligated.
For these commitments.
The purchase minimum volumes of certain high volume long lead items.
These commitments were made generally during the fourth quarter of 2019.
Prior to the pandemic and based on our sales forecast in backlog at that time.
Which were based on our pre pandemic run rates.
Our supply chain teams across the company has been working extremely hard with our key suppliers to renegotiate delivery schedules and commitments and continues to do so.
And have finished successful in many cases, helping to dampen the impact Nevertheless was such a significant drop in aerospace sales. The result is this buildup of raw material inventory.
We expect that we will ultimately consume these raw materials.
And we're forecasting at the current level of inventory is stabilizing and expect inventory levels to drop as we move through 2021 consuming the excess on hand material as we adjust our purchase commitments into in 2021.
Switching to Capex for the quarter was just $1.7 million, bringing year to date capex expenditures to $5.6 million.
We expect we will have another $2 million or so on capex in the in the fourth quarter and in 2021 right now we're looking at cash capex spend rate of about $11 million.
Our outstanding balance on our revolver at the end of the quarter was $168 million, we had cash of $29.9 million, giving us net debt of $138.1 million.
Or about 2.5 times trailing four quarter adjusted EBITDA as calculated by our credit agreement.
I will touch a little bit.
To remind the listeners on our amended credit facility that we amended back in May.
The facility matures in February 2023.
And it's a $375 million revolving credit facility.
The key financial covenants of the facility.
As its amended is it the maximum leverage covenant was waived until the third quarter of 2021.
Referred to as a suspension period.
Then it begins phasing in starting at six times EBITDA as defined in the agreement and then decreasing to 5.5 times in the fourth quarter of 2021.
There is currently two key financial covenants during the suspension period, a minimum liquidity in a minimum interest coverage ratio.
We are required to maintain a minimum liquidity of $180 million and liquidity is defined as cash plus the undrawn balance on the revolver.
We had roughly $57 million of liquidity or negative cash flow cushion available as of the end of the quarter.
Also required.
We are also required to maintain an interest coverage ratio of 1.75 times adjusted EBITDA as defined in the agreement.
With the exception of the first quarter of 2021, which is set at 1.5 times.
Moving to other covenants include a temporary restrictions on acquisitions shareholder repurchases and dividends.
And we're currently on the pricing grid, playing LIBOR plus 225.
Basis points.
With a LIBOR floor of 100 basis points, so that equates to about 3.25% interest rate right now.
Yes.
That's all I had for my prepared remarks Pete.
Back to you okay. Thanks, Dave.
Similar to assess our markets and talk through some of the things that are included in the press release.
So there will be some duplicity here, but.
ER duplication, but.
We'll start with commercial.
Commercial aerospace.
Commercial aerospace is our largest kind of single market that's.
Thats again commercial airplanes, both the production of new airplanes and the operation of those airplanes are the maintenance of those airplanes. There was about 70% of our business.
Back in 2019 back in the good old days.
Roughly two thirds of the 70%.
Was related to the production of airplanes, primarily at Boeing and Airbus.
And one third was after market related.
Primarily to airlines, but also to leasing companies.
Looking at those two parts of the commercial transport market.
Most people are aware.
Don't fit or line fit production rates by Boeing and Airbus have been ratcheted down or are being ratcheted down roughly 30% to 50%.
That's a pretty much across the board.
For us a special consideration is the seven through seven Max which everybody knows remains on certified for us that airplane right now is down a 100% were basically.
On hold on that program and last year in 2019 that was actually our biggest single production program.
It's important kind of looking forward here that the Max gets re certified as most of the world expects sometime in the next month or two and that Boeing right.
Resumes production on a meaningful basis, where kind.
Kind of counting on that in the second half of next year to start being a positive impact on our business.
The aftermarket is driven by airline spending.
And for US, it's mostly in flight entertainment and connectivity equipment IFE equipment passenger amenities.
Obviously, everybody knows no news here airlines are having a very difficult time worldwide.
Airlines are operating about 50% of the flights that they did last year. This time load factors are down.
40% of the fleet is grounded international flights or.
Our sparse.
For the kindly and.
And it's really a function of the travel restrictions and quarantine requirements and.
The fear that people have rational or not.
Of transmission in an airplane environment.
We're we're hopeful.
Looking at China, one of the bigger much bigger a population that has got the pandemic under control that people very much want to fly and everybody or many people realize that flight levels in China have pretty much come back to normal which.
Which is what we expect to happen around the world if and when the world ever gets in front of this pandemic.
There are some testing protocols that are being developed in some quarantine.
Agreements that certain airlines are having with certain geographies that we think hold promise and we're hopeful that the airlines will learn to manage.
Testing in conjunction with.
Officials from various governments and municipalities to enable.
National flood sometime in the near future and and we hope that that market picks up.
We expect commercial transport sales to federal at the reduced production rates.
And again seven through settlements important to our 2021 expectations.
And we expect the aftermarket.
Frankly will remain pretty depressed until airlines see a pickup in traffic, we don't know when thats going to happen most experts.
Seemed to be predicting that there will be a major rebound in 2020, one it's looking like the middle or the second half of the year.
Something in the order of 60% to 70% improvement doesn't get us back to 2019 levels that are not expected for a few years, but 60% to 70% improvement in the market in general in terms of flights and capacity sounds pretty good from today's perspective.
The second part of our markets that I'd like to talk about is the general aviation or business jet market. This was much smaller for us in normal times about 10% of our revenues.
So last year about 78 million.
For us the GA market is mostly line said.
There's a little bit of an aftermarket element, but mostly lines that we would say, it's 80 20 or something like that.
When the pandemic hit most manufacturers, who build business jets and business aircraft announced pretty significant production rate cuts some.
Similar to commercial transports on the order of 35% or so.
However, utilization has rebounded to near pre pandemic levels, especially in North America, which is the biggest market for.
General Aviation aircraft for business Jets.
That's driven very much by strong fractional activity.
From what we know or understand corporate flight activity is still lagging.
As companies continue to in many respects work from home.
The future here is a little bit of a question.
We'll be increased utilization.
Be reflected in the higher production rates. There are some indications that production rates may rebound in 2021 relative to 2020.
Sooner than we might have thought a few months ago, but it's still unclear and we.
We are waiting to see how that develops.
The third part of the market that we cater to is what we call government and defense spending and this part of our market is about 20% of our revenue in normal times and 2019. It includes military aircraft flake joint.
Strike fighter Blackrock.
Numerous others.
And all of our test business for the most part so military aircraft and all of our test business again about 20%. This portion of our business appears stable and strong.
We think it's perhaps continuing to accelerate.
One of the.
Best indicators, we have of that even in these.
In these co. Good times, we continue to see pretty good activity in our test business in our in our transit product line, which we are developing and.
And and improving.
The murder Stadler Award that we announced earlier.
Earlier. This week is a clear indication that added the 30 million about a $30 million program, which will be executing over the next couple of years for consolidated test.
For a number of new train cars, that's stadler, we'll be developing tomorrow.
Marta contracted with stellar stellar contracted with us.
And this is the second major program, we've announced in recent times. The first one was.
A pretty major program for New York City, New York Transit Authority.
That also was about a $30 million program.
You might ask with ridership way down where is the money coming from for these major capital improvements and as best we can tell it's basically a different color on money a different bucket.
Federal grants for long term capital improvements.
Our funded by something other than.
Or is the funding source other than ticket sales ticket sales are obviously way off in the transit authorities are having a hard time, but these programs are major capital programs designed for a postcode environment years from now.
Finally, the other thing worth mentioning is what we will call kind of other markets design build capability. The Zenix order I talked about earlier is.
It is related to this we have had.
Accompany that goes by the trade name of PDP.
Which offers design services traditionally to a wide range of industries using a wide range of technologies.
Not necessarily aerospace, although since PDT came into our orbit a few years ago. Many.
Many of Pts resources have been employed internally on aerospace applications, but they also reach out to the rest of the world.
Using technologies like near field communications in high speed data transfer and certain Sanitization and cleanliness.
Kinds of missions, which happened to coincide pretty nicely with the COVID-19 environment that we're in right now.
One of the things we started doing actually before the pandemic was complementing PDT use design services with manufacturing capabilities, we tend to be pretty good at manufacturing things being an error aerospace company and.
And we found that the combination of design and manufacturing has certain appeals to companies in the space.
The Zenix order is reflective of this capability.
I don't mean to speak for them and that for their technology, and it's not our market, but I encourage interested listeners to look them up on the web Zenix dot com.
And.
And you'll see that they have a branded disinfecting robot called light strike, which uses pulse energy.
To neutralize pathogens, including those that cause.
The current the Corona virus there.
They are traditionally pretty active in health care facilities, but you can imagine that in this environment.
These kinds of machines are finding homes in a wide range of applications that can be schools or hotels or meeting facilities or athletic facilities are locker rooms, or even airports and there seem pretty high demand. So this order.
That we announced is basically our stepping in to help them with capacity as they ramp.
In the face of the co bid 19 pandemic.
I will tell you that this zenix program is representative of a number of initiatives that we have underway.
These initiatives collectively could be.
Pretty important as we move into 2021.
It's unclear, we got a bunch of gates to get through but we have a handful of initiatives underway, which we're pretty excited about.
So with that summary of our market.
We're sitting here at the very end of October within shouting distance of the end of the year.
When you look at what we did through three quarters and our existing backlog.
We are expecting that 2020 sales will be.
On the high side of 500 million 500 million or slightly above I think how we worded.
That implies fourth quarter sales of 112 million or a little more.
Our backs scheduled backlog as we entered the quarter was actually 112 million so to the extent that we execute on the scheduled backlog and to the extent that we get book and ship business, we have the potential of being above that level.
By a bit.
And we expect we will be.
2021 on the other hand is still pretty unclear.
We are waiting for some confirmation of production rates on the aircraft programs, both in the commercial transport level and business Jets.
Business Jets are more fluid the commercial transport manufacturers.
Boeing and Airbus.
Have established rates and stuck with them for quite a while although there is some speculation that if people don't start flying soon then there could be downward pressure there will have to wait and see we don't pretend to know anything that you can't see and read about in the newspaper every day.
The 737 as I mentioned earlier is an important element here, that's a little bit different.
Circumstance of course, most people in the industry are well familiar with that but that is an important program for us.
We put standard line fit.
Of $95000 per ship on each airplane.
And with optional if the equipment that number can double pretty easily.
And then of course, the airline aftermarket as I said earlier.
It's a significant part of our overall business historically, we spend a lot of time with airlines and the airlines are just not in the mood not capable at this point.
Two.
Pull the trigger on programs, although there is a fair amount of planning going on they realize that the world keeps turning in terms of consumer expectations and brand differentiation and our products and capabilities are an important part of that so we are involved in certain exercises and.
Our conversations with airlines that we expect will turn into orders when the environment improves. The question is when will the learn environment improve.
So we are not issuing guidance for 2021 at this point normally we would hopefully we'll be able to in the future maybe when we result, when we announce Q4 results.
In February.
So I think that ends our prepared remarks.
Also we will open it up for questions at this point.
Thank you if you would like to ask a question. Please press star one on your telephone keypad economy.
And Tom will indicate your line is in the question queue.
Let me first start to see that you remove your question from Mccann.
For participants using speaker equipment it may.
Be necessary to pick up your question sorry.
Our first question comes from the line of John.
With CJS Securities. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my question.
Hi, John.
Good morning in your prepared remarks, thank you.
Rob.
Yes.
Pickup in OEM or aftermarket orders.
In Q4, especially his comments searches across the global or is this more of a comment that maybe on a piece of your business. Thanks.
Pick up and make up for that.
It's a little bit of both I think part of what was happening in the third quarter, John It's hard for us to quantify this but there is a bit of a de stocking process that goes on.
As production rates drop so so we would just.
Just the normal scheduling of orders.
Yeah.
Turned out to be such that we were.
A shorter in the third quarter than.
Then we expect to be in the fourth quarter and then there is some pickup in business.
The next thing I was just talking about is actually something that we expect to contribute pretty.
Pretty significantly to the fourth quarter and a lot of the things just just the way that customers have scheduled their orders.
We expect the fourth quarter to be stronger.
We certainly need to see bookings pick up and in order to support a reasonable business plan for 2021.
One of the things that you can do or that we can do is go look at the stated production plans for the Oems.
And that should provide a floor for revenue expectations for us assuming destocking is resolved as we work through the fourth quarter here and I expect it will be with the possible exception of the 737.
Because as best we know that production rate is just really really low.
So.
The the complex part is the aftermarket part and for US again, that's mostly airlines thats, mostly iflix equipment.
And I don't think they know at this point when they're going to be in a position to start pulling the trigger on some of those programs.
I think they need to see some improvement in air traffic before that happens.
Got it that's helpful. Thank you and then just to follow on on that on the next quarter.
Is that all going to hit in Q4, that's bad all right over a longer time period and that's.
Thats successful do you expect a follow on order to that.
Good questions that it's going to contribute to the fourth quarter I think it will dribble into the first quarter also.
I believe at this point, we are expecting another order, but that will be a function of their success in the market.
We're complementing their capabilities from a manufacturing standpoint, so it's.
It's unclear when that would happen or how large it would be but at this point, we are hoping for a continuation of that line of work in the next year.
And maybe just a follow on to that what is the margin for that business was June you average or is there something.
The special one off about it.
It is not as good a margin from compared to our aerospace businesses two ways to look at it if you stack up the normal overheads and structure as it's really it's really thin because its contract manufacturing after all on the other hand, if you look at it on an incremental basis, we expected to contribute.
Got it.
[music].
Silent.
Now just I was going to ask Dave if you want to add any color there, but he passed.
Okay got it.
And just finally on the transit business congratulations on the Atlanta, when I was wondering.
How many more program.
Half, Mike now I'd like New York like you've done in the pipeline on just assuming a state and local budgets are getting hit going into next year.
That is not based on ticket sales.
With regard to sit down with.
Federal and state funding an open question I'm wondering how much that market cannot.
And contributing 2021.
Yes, it's a it's a very good question and we are watching that very closely.
So far it appears that ridership is one thing capital projects are another thing and the capital projects are continuing even though ridership is way down that obviously is not a long term sustainable kind of thing, but I think you.
No those are the people who run New York City for example, or kind of assuming that.
When 2024 comes around we are not going to have a pandemic on their hands anymore and they are going to have ridership back at at pretty high levels are as I understand it not to speak for them, but as I understand it they have pretty pretty pressing modernization needs to overall and I think that's that's the balance.
So that the municipalities have to deal with so yes ridership down yes that means they may not buy.
By as many cars or field is many test stations right now, but they are proceeding as best we can tell with those capital improvements and I will tell you that we are actively pursuing a number of other municipalities. Another a number of other opportunities. So.
We don't see that slowing down at this point.
Both the murder program and the New York City program should contribute pretty well to our overall results in 2021.
Maybe a question had to do with bookings we would expect that to have another win may be too over the next.
12 months, let's say.
Okay. Thank you very much on back.
Sure.
Thank you. Our next question comes from the line of Kevin.
Okay.
With your question.
Yes, hi, good morning.
Hi, Pete wish with what.
Visibility you have now on the fourth quarter.
With all the moving pieces are is that business is the aerospace business profitable than the fourth quarter at the segment level based on sort of your current thinking.
No fourth quarter.
Quarter.
Yes, no word on an adjusted EBITDA basis, we would like to think to the extent that that is an approximation for cash flow. We would like to think we can run the business cash neutral.
At those levels, but we would not expect our aerospace business to be profitable at that level.
Kind of the catch were on right. We've got the yeah. We've got a business that's structured for a much higher volume we've won and are pursuing a number of.
What we think are very attractive.
Development programs in the market and last time on this call we talked about our fair on Florida X.
Exercise with Bell Textron, which is we think premier program and.
Oh listen we have kind of the legs cut out by the pandemic such that the production side of the house goes way down and with that.
Some amount of engineering effort also goes down, but if not proportional not anywhere close.
So that hurts margins Ken.
It gets close to breakeven it at that point.
You know it could go slightly positive it could go slightly negative but.
It gets close to that debt GAAP breakeven point at the operating segment level.
For the fourth quarter.
Okay. Okay. That's helpful.
And I appreciate all the additional detail, Dave and Pete you continue to pry provide on the business I'm just curious as you look at the 70% of your businesses Aerospace is there any discernible difference in margins between the line fit side of the business in the aftermarket.
Not really.
Well, that's a common that's a good question and I think were a little different than most.
Companies in that sense, but.
And the reason is that a lot of our lines that work.
Is really sold to airlines.
Or sold to other prime sub.
Suppliers, who in turn provides both the line fit side of the business and the aftermarket.
So.
Now ill use American Airlines as an example, if they decide to standardize on our in seat power product for part of their fleet say the 737 fleet.
They will they will put it on their existing airplanes and we'll also have it installed on line fit applications up in Seattle So.
It's the same price doesn't really matter, whether its going aftermarket or align fed so it's.
It's not our our aftermarket is not repair and overhaul, which is sometimes people hear aftermarket and they think repair and overhaul its really more of an upgrade.
Aftermarket application for the most part.
But within that I'd imagine you'd get some spare part sales.
Or provisioning sales or do those how those are classified but spare part sales into the aftermarket which should be higher margin correct.
It's a it's a very small part of our business can it. It is something that I expect will grow but if you think about it we're sitting here in 2020.
If you go back five years, maybe a little more.
Our our Arps cabin power franchise for example was much smaller than it is today so.
So much.
Much of the installed base has only been out there for five years or less and our products are designed to last longer than that and it's not so so there is a spares element, but it's it's not anywhere near as big as you would think.
Dave ill be on land.
And on the if there are any spares on on the on the.
In flight entertainment side of it it's going to the same customer in many respects. It the original sale went to under the same pricing.
On the lighting side of things.
There is some margin opportunity.
On the commercial transport side.
But again, that's where new and in into the exterior lighting and on the commercial transports relatively new and don't see a whole lot of volume there right to Dave's point, if I use My American 737 example.
If they have a problem with the box on an airplane they don't necessarily call us up in order to replacement. They just go to their inventory.
It's a modular product they can repaired or replaced that if they want to so there's not much of a pricing opportunity for us in that context.
Okay. Thank you.
Just one final question on on the Max It sounds like because of maybe inventory issues and just a little bill rates Thats really not or sounds immaterial in terms of its contribution here in the third into the fourth quarter did I hear you correctly, Peter that you don't really expect much short or sort of a positive inflection in terms of.
Your shipments on that program until mid 21 or second half of next year.
You heard that correct.
We're basically shutdown and have been for we had a couple of false starts early in the year, but we've essentially been shut down for three months or three quarters.
Since the end of last year I think starting.
Ended the first quarter into the second quarter of next year, we'll start seeing some low single digit Shipsets go out the door.
But but it's not meaningful not only until the second half and that obviously.
Thats very kind it assumes that they get re certified it assumes that they.
Move a certain number of plans that inventory and it's based on discussions they've got ongoing with their customers, none of which were really privy to.
Yes, perfect alright, well thanks, thanks for all the detail.
All right. Thank you.
Thank you, ladies and gentlemen, thank you Mike.
During the question can you please press star one.
Our next question comes from the line of Michael Ciarmoli with Securities. Please proceed with your question.
Hey, good morning, guys. Thanks for taking the questions here.
Good morning, Pete maybe just on the on on the de stocking side I mean.
I know your company is different from clearly some of the other raw material suppliers, but.
Do you guys have the visibility I mean, you kind of just use that that analogy with can that that airlines got some inventory.
Do you have good line of sight into.
What state the Iraqi providers Panasonic as what maybe Collins aerospace and Safran have what what Boeing has been you know.
I guess, just trying to think about where production rates are I mean, obviously, the Max is shut down but still seems like some of the wide body rates are flowing through the system here I mean do you have good line of sight to.
Now.
See a path to your inventory out there, it's kind of been soaked up and we will see a restart or is that is it more just trying to triangulate what's out there.
I would tell you Michael it's not.
We don't have great line of sight, it's hard to get an answer on a lot of the stuff. Okay. We have our belief.
For the most part when it comes to widebody airplanes most of our.
Most of our content is IP related that through the big service providers.
And and we believe that for the most part that's that build to order.
Because if not standard products. So there's there's not a big.
Inventory bubble waiting to be built or.
Drawn down.
It should be that.
If I don't know Singapore is going to buy a certain number of athree hundred fiftys and they want.
Say, a panasonic product that uses our power system on those Athree hundred Fiftys.
If they're buying 10, they'll buy 10 ship sets from Panasonic will buy 10 ship sets from us. So there shouldnt not really an obvious mechanism for a whole lot inventory buildup, there I think where we're seeing it instead is when you have a line fit product.
Which is for us the three seven primarily.
And.
Triple seven for better for worse.
There is no destocking there because it's been whittled down.
Over the last year or so pretty significantly business jets is another area, where we could be seeing quite a bit of destocking because we're on pretty.
Pretty much every business jet that's out there and not as high a shipset content, but a lot of standard product and those rates are all coming down too so.
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Yeah, we're just going to have to wait and see clear.
Clearly weve got a shipment expectation in the market that is much higher than the bookings we've seen over the last two quarters.
We would expect to see bookings come up to match that shipping level, if that shipping levels representative of the of the production plants that the Oems.
Our putting forward and we think.
That's got to happen.
Okay. I mean, you did have you did have good sequential.
Bookings growth.
From from the second quarter, I mean did you see.
Should we expect the bookings I mean from what you're seeing through through this month, maybe other kind of quoting activity. I mean did you have some confidence in that in that booking maybe not at the sequential level. What you just saw from June to September, but do you think bookings can continue to improve here.
I sure hope so.
And again.
The murder Stadler order is a fourth quarter bookings. So yeah. That's a $30 million program were already that's a big chunk of what we did in the second quarter or the third quarter. So so yes, I would expect sequential improvement.
It's a little early in the quarter to tell in the fourth quarter is always a little fluky, because you have the holidays and great Thanksgiving and Christmas and everything but.
So it's too early to tell but we.
I don't see much room for it to go down frankly, so I'm thinking that.
Theyre going its got to go up.
Okay, and then I mean, I'm sure I know the answer to that but just airline direct airline retrofit programs I mean, obviously airline.
Airlines are kind of.
Saving money as best they can cutting everything, but I think I thought I saw American it kind of proceeding with its a 320.
Kind of interior pretty and they're not doing a lot third store to doing.
As they come up but is it how do you. How are you guys thinking about the retrofit side of the market. I mean, you are you seeing any signals or signs from from certain airlines out there.
We are we definitely are we do work with some 300 airlines around the world.
Some of them are smaller and.
Primarily internationally based oriented and those are the ones that are really struggling the most right now the.
The ones with bigger domestic routes in the us or wherever China even.
Our <unk> are a little bit more active in terms of thinking about what are they going to do next for a conductivity in a passenger entertainment standpoint.
And we're involved in those discussions.
They are not inclined to pull the trigger to spend millions of dollars to upgrade and our plan that is sitting in a desert somewhere.
So the big it's a little bit of a chicken in the egg thing they want to they if they knew they were going to be returning.
Another 50% increase in place in the third quarter.
We might see a lot more activity, but.
They want to see the activity before they spend that money, both but theres definitely our plans to move forward and.
For better or for worse.
A lot of our types of products have relatively short life cycle. So.
The phone that you use is very advanced compared to the phone that use five years ago, if you're like most people. So people expect and require continual improvement in the eye of fee and entertainment capabilities in the airplane in airplanes and I.
I think airlines in todays DNA to understand that nobody's talking about roofing this stuff out and.
In rebuilding their airline after the pandemic without any kind of iffy entertainment options for their customers that we think we're well past that point as being an option.
Got it perfect. Thanks, guys.
Sure.
Thank you. Our next question comes from the line.
Please proceed with your question.
Thank you.
I understand the the caught all the caveats on the commercial Aero side for 2021, our Buddy.
But in past and maybe outside of trends that you talked about some robust programs than the stability. There can you give us a sense of what you think cast can do in 2021.
Oh, we're still collecting that but weve theres.
Let me see this growth if you back out the semiconductor part of their business has been pretty robust.
This year and.
If you add.
The Stadler order to bookings.
The book to Bill ratio for the last trailing 12 months is very positive it's like up 10%. So.
It it's one of those businesses as you know that it's not run rate business. It's you got to have big drinks.
Camels, you know you get to then go a long ways without water, but when it finds upon its got to feed up so.
They get big chunks of business and our revenues next year will be based on.
On.
Big bookings that they're pursuing we call him well month and.
Instead, there was definitely a well New York City was a well there are a couple of others that may fall in the near future and.
And that will determine where they're going to be 2021, and we're not quite ready to issue guidance, but.
I think for the most part with our test business, which you've seen in the past.
Is the best indication of what we will see in the future.
In the near term here.
Okay and just.
The tail mountain the business jet your tail Mount downtown on Whats currently going on or not going on there.
Well, we're running down the road that is going pretty well.
We're a supplier to Collins aerospace their marketing the program.
And they're pursuing the sales and.
In.
Technically we are having we think very good success.
From a performance perspective and.
And we are actually awaiting word now as to what Collins wants to do in terms of volume for.
For for 2021, we expect a significant uptick just a little bit premature you'll probably see a press release.
On that I would guess here sometime by the end of the year.
Okay. Thank you.
Sure.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the call back to Mr. Gundermann for any final comments.
No final comments. Thank you for your time and attention we look forward to talking to you at the end of the fourth quarter.
Hopefully with better news.
Good day.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
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Thank you.
Please hang up on China. Your colleague Jim did you like assisted please dial zero.
Operator, we'll be happy to help you.
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