Q1 2021 TransDigm Group Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the 10th trends Stein first quarter earnings Conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation there'll be a question answer session.
Ask a question during the session you will need to press Star then one on your telephone please be advised that today's call is being recorded.
If you require additional assistance you May press Star then two members reached an operator.
I'd like to hand, the call over to Jamie Siemon Director of Investor Relations. Please go ahead.
Thank you and welcome to <unk> fiscal 'twenty 'twenty, one first quarter earnings conference call presenting on the call. This morning are transient <unk> executive Chairman, Nick Howley, President and Chief Executive Officer, Kevin Stein, and Chief Financial Officer, Mike listen.
You visit our website at <unk> dot com to obtain a supplemental slide deck.
Replay information information.
Before we begin the company would like to remind you that statements made during this call which are not historical in fact are forward looking statements for further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward looking statements. Please refer to the company's latest.
Fillings with the SEC available through the investors section of our website or SEC Dot Gov.
The company would also like to advise you that during the course of the call we will be referring to EBITDA, specifically EBITDA as defined adjusted net income and adjusted earnings per share all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP.
GAAP measures and applicable reconciliations I will now turn the call over to Nick.
Good morning.
Hi.
Thank you for calling in.
Usual I'll start with a quick overview of our consistent strategy a few comments about the quarter and then Kevin and Mike will expand and give more color to.
To reiterate we are unique in the industry in both the consistency of our strategy in good and bad times as well as our steady focus on intrinsic shareholder value creation through all phases of the cycle.
To summarize here are some of the reasons why we believe this about 90% of our net sales are generated by proprietary products.
Around three quarters of our net sales come from products for which we believe we are the sole source provider.
Most of our EBITDA comes from aftermarket revenues, which generally have significant higher margins and over any extended period of time have typically provided relative stability through the downturn.
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 and a unique compensation system closely aligned with shareholders.
Fourth we acquire businesses that fit the strategy and where we see a clear path to a P. Like return and lastly, our capital structure and allocations are a key part of our value creation methodology.
As you saw from our earnings release, we had a decent Q1, considering the environment, but we're still in the very top commercial aerospace market.
Our long standing goal is to give our shareholders private equity like returns with the liquidity of a public market to do this we stay focused on both the details of value creation as well as careful allocation of our capital.
The commercial aftermarket revenue typically the largest and most profitable portion of our business dropped sharply in the second half of fiscal year 2020, as we expected following the steep decline in air travel due to Covid.
Sharp drops of happens story other severe shocks, so though not to this magnitude and likely duration at this point there are some indications that Q3 of our fiscal year 2020 was the bottom to the positive we saw significant sequential increases in commercial.
Aftermarket bookings in our fiscal year Q1, but the stalling of the air travel recovery concerns us with regards to timing.
Our commercial aftermarket simply will recover as more people worldwide fly again, so not necessarily in lockstep. This is starting to happen slowly and somewhat a radically but the timing of the recovery is still not clear.
In addition to safety the two most important items. We continue to focus on are the things. We can do some degree control. One we are tightly managing our cost our revenues were down significantly from fiscal year 2021, Q1 versus the prior year Q1 from our costs are down.
About the same the.
The mixed impact of low commercial aftermarket revenues continues to impact our margins, but we have been able to mitigate part of this impact.
Secondly, assuring liquidity, we raised an additional $1 $5 billion at the beginning of our third quarter of fiscal year 'twenty. The money raised was an insurance policy from these uncertain times. It now seems unlikely that we will need it.
We continue to generate cash in Q1 of 2021, we generated about 275 million positive cash flow from operations and closed the quarter with almost 5 billion of cash. This was prior to the acquisition that we made in January.
Absent some large additional dislocation or shut down we should come out of this with substantial firepower.
We continue to look at possible M&A opportunities and are always attentive to our capital allocation.
Both the M&A and capital markets are always difficult to predict but especially so in these uncertain times in general on capital allocation, we still tend to lean towards caution, but we feel better now than we did six months ago for sure.
M&A activity in this last quarter was more active.
As I'm sure you saw we made a good sized acquisition after the quarter end, we bought the Cobham Air connectivity business, which is an antenna and radio business for a purchase price from $965 million I must admit it does feel good to play some offense again.
This is a good proprietary sole source business with high aftermarket content. We also liked the customer diversity and as usual, we expect to get a p/e like return on this transaction, though we are not giving overall guidance for transcon for the little less than nine months that we will own the cobham business and <unk>.
Fiscal 'twenty, one we expect it to contribute roughly 160 million revenue with EBITDA as defined margins running in the 25% to 35% range. The revenue was impacted somewhat by the historical calendar year versus fiscal year shipment timing.
We paid for the Cobham business with cash on hand, so but for the cash impacts much of this will drop right through the earnings.
We also sold two small non proprietary former esterline businesses that did not fit our model for about $30 million. So far in 2021. The total revenues for these businesses in fiscal year 'twenty, we're roughly $35 million and EBITDA was in the 10% revenue range.
We continue to investigate the sale of a few other less proprietary defense businesses that don't fit as well with our consistent long term strategy at this point, it's too soon to know when or if we will sell these businesses.
We still don't have sufficient clarity to give 'twenty 'twenty one guidance when the smoke clears enough for us to feel more confidence will reinstate the guidance in general we are planning to keep tight control on expenses and hold our organization roughly flat until we see more clear signs of a pickup.
We believe we are about as well positioned as we can be for right now we will watch the market develop and react accordingly, now let me hand, it over to Kevin to review, our recent performance and to give more information on Q1 and other thoughts. Thanks.
Thanks, Nick today I'll first provide my regular review of results by key market and profitability of the business for the quarter.
So come on in fiscal 'twenty, 'twenty, one outlook and some COVID-19 related topics, our Q1 fiscal 'twenty 'twenty one was another challenging quarter, considering the continued slowdown across the commercial aerospace industry in a difficult global economy and Q1, we continued to see a significant unfavorable impact on the business from the pandemic as.
Demand for travel has remained depressed. Despite these headwinds I am pleased that we were able to achieve a Q1 EBITDA as defined margin approaching 43%, which was a sequential improvement from our Q4 EBITDA as defined margin.
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 2020 that is assuming we own the same mix of businesses in both periods.
In the commercial market, which typically makes up close to 65% of our revenue we split our discussion into OEM and aftermarket our total commercial OEM market revenue declined approximately 40% in Q1, when compared with Q1 of the prior year period. The pandemic has caused a significant negative impact.
On the commercial OEM market, we are under the assumption that demand for our commercial OEM products will continue to be reduced throughout fiscal 2021 due to reductions in OEM production rates and airlines deferring or canceling new aircraft orders longer term the impact of COVID-19 is fluid and continues to evolve.
But we anticipate negative impacts on our commercial OEM end market for some certain uncertain period of time.
On a positive note Q1 demonstrated significant sequential bookings improvement compared to Q4, which is likely an indicator of OEM destocking slowing.
Additionally, it is encouraging that the Max has been recertified in multiple countries and added back to route schedules, although the near term impact to our business will likely be minimal given the low build rates.
Now moving onto our commercial aftermarket business discussion total commercial aftermarket revenues declined by approximately 49% in Q1, when compared with Q1 of the prior year period in the quarter. The decline in the commercial transport aftermarket was primarily driven by decreased demand in the passenger and interiors.
Submarkets there was also a decline in the commercial transport freight market, but a less impactful rates.
On a positive note total commercial aftermarket revenues increased sequentially by approximately 5% when comparing the current quarter to Q4 fiscal 2020. This increase was driven by the commercial transport aftermarket.
Our quarterly commercial aftermarket bookings were down in line with observed flight traffic declines, resulting from the decrease in air travel demand and uncertainty surrounding Covid. However, Q1 also demonstrated significant sequential bookings improvement compared to Q4 and the bookings in Q.
One modestly outpaced sales. This is likely the result of Destocking slowing at the airlines.
To touch on a few key points of consideration.
Global revenue passenger miles are still at.
Unprecedented lows, though off the bottom as a result of the pandemic IATA is most recent forecast expects the final reported revenue passenger miles for calendar year 2020 to be 66% below 2019, and that calendar year 2021 average traffic levels will be about 50%.
Pre COVID-19 crisis levels.
Cargo demand was weaker prior to COVID-19 crisis.
As FTE case have declined from an all time high in 2017, however, a loss of passenger belly cargo due to flight restrictions and reduced passenger demand has helped cargo operations to be impacted to a lesser extent by COVID-19 than commercial travel.
Business jet utilization data was pointing to stagnant growth before the current disruption.
Now during the pandemic and in the aftermath the outlook for business Jets remains unpredictable as business jet flights were rebounding, but due to personal and leisure travel as opposed to business travel. However, now we face the typical slower winter season, and the sustainability of this trend is especially especially difficult to.
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Although the longer term impacts of the pandemic are hard to predict we continue to believe the commercial aftermarket market will recover as long as air traffic continues to improve the recent approval and rollout of several vaccines will greatly aid in this recovery. We believe there is a.
Global pent up demand for travel and in due time passengers across the globe will return and flight activity will increase.
Historically personal travel has accounted for the largest percentage of revenue passenger miles and forecast still seem to indicate a pickup in personal travel in the back half of this calendar year, followed later by business travel. We were hopeful this will be the case for now the timing of the recovery is uncertain and in the <unk>.
Meantime, we will continue to make the necessary business decisions and remain focused on our value drivers.
Now, let me speak about our defense market, which traditionally are at or below 35% of our total revenue the.
The defense market, which includes both OEM and aftermarket revenues grew by approximately 1% in Q1, when compared with the prior year period.
Fence bookings declined slightly in the quarter, driven primarily by a modest decline in defense aftermarket bookings as we have said many times defense sales and bookings can be lumpy. We continue to expect our defense business to expand throughout the year due to the strength of our current order book moving.
Moving to profitability I'm going to talk primarily about our operating performance or EBITDA as defined.
EBIT da as defined of about 474 million for Q1 was down 30% versus prior Q1.
EBITDA as defined margin in the quarter was just under 43% I am pleased that amid a disrupted commercial aerospace industry and in spite of the mix impact of low commercial aftermarket sales, we were able to expand our EBITDA as defined margin by approximately 40 basis points sequentially. This result was made possible by our cost mitigation.
<unk> efforts and a consistent focus on our operating strategy.
Now moving to our outlook for 2021 as Nick previously mentioned, we are not in a position to issue formal fiscal 2021 sales EBITDA as defined and net income guidance. At this time, we will look to reinstitute guidance. When there is less uncertainty and we have a clearer picture of the future we like most aero suppliers.
We remain hopeful that we will realize a more meaningful return of activity towards the second half of the calendar year.
This will be driven by increased vaccination availability and an initial recovery in personal and vacation travel for now we were encouraged by the recovery in commercial OEM and aftermarket bookings in the first quarter.
As for the defense market and as we said on the Q4 earnings call. We expect defense revenue growth in the low single digit to mid single digit percent range for fiscal 2021 versus prior year. Additionally, given the continued uncertainty in the commercial market channels and consistent with our commentary on the Q4 earnings call. We are.
Providing an expected dollar range for EBITDA as defined for the 2021 fiscal year, we assume a steady increase in commercial aftermarket revenue going forward and expect full year fiscal 2021, EBITDA margin roughly in the area of 44%, which could be higher or lower based.
On the rate of commercial aftermarket recovery.
This includes Cobham arrow connectivity, which should have a limited dilutive effect to our EBITDA margin.
Barring any other substantial disruptions of the commercial aerospace industry recovery, we anticipate EBITDA margins will continue to move up throughout the year with this fiscal Q1 being the lowest Mike will provide details on other fiscal 2021 financial assumptions and updates.
Additionally, I would like to touch on our environmental social and governments initiatives or ESG initiative 20.
2020 was a year of progress for our ESG program, though we are still in the beginning of our ESG journey on.
Ongoing conversations with our stakeholders have been an integral part of building and evolving our ESG efforts.
As a leader in the aerospace industry, we recognize we need to extend our industry leadership to ESG initiatives as well. These initiatives are a priority and we are dedicated to continuous improvement as we move forward on our ESG journey more information regarding our ESG initiatives can be found within our recently put.
2020 stakeholder report that is posted on the trans dime homepage, let.
Let me conclude by stating that although Q1 of fiscal 2021 continued to be significantly impacted by the pandemic disruption of the commercial aerospace industry I am pleased with the company's performance in this challenging time and with our commitment to drive value for our stakeholders. There is still much uncertainty about the commercial aerospace market.
But we have a strong tenured management team that is always ready to act quickly and as necessary. The team is focused on controlling what we can control. While also monitoring the ongoing developments in the commercial aerospace industry and ensuring that we are ready to respond to demand as it comes back I am confident that our as a result of our Swift <unk>.
Cost mitigation efforts and focus on our operating strategy. The company will emerge more strongly from the ongoing weakness in our primary commercial end markets. We look forward to the remainder of 2021 and expect that our consistent strategy will continue to provide the value you have come to expect from us with that I would now like to turn it over to.
<unk>, our Chief Financial Officer, Mike Lisman morning, everyone I'm going to quickly hit on a few additional financial matters you can see all the detail on <unk>.
Revenue EBITDA and adjusted EPS in the press release and call slides for today, so I'm not going to rehash that in detail for.
For the quarter organic growth was negative 24% driven by the commercial end market declines that Kevin mentioned.
A quick note on taxes, the lower than expected GAAP tax rate for the quarter was driven by significant tax benefits arising from equity compensation deductions. This is just timing barring some deviations in the rates in this first quarter our tax rate expectation for the full year is unchanged that is we still anticipate.
Our GAAP cash and adjusted tax rates to all be in the 18% to 22% range.
Moving to cash and liquidity, we had a nice quarter on free cash flow free cash flow, which we traditionally define at trans dime as EBITDA as defined less cash interest payments Capex and cash taxes was roughly 200 million. We then saw an additional $70 million plus come out of our net working capital.
Driven by accounts receivable collections.
We ended the quarter with $4 9 billion of cash up from $4 7 billion of cash at the end of last quarter.
Note that this was prior to the acquisition of the Cobham Arrow connectivity business. The majority of which closed on January 5th there's one remaining piece of that acquisition of Finland facility, representing 2% of the purchase price that's going through regulatory approvals now and should close soon.
Pro forma for the closing of this acquisition, our Q1 net debt to EBITDA ratio was a shade higher than seven five times.
Assuming air travel remains depressed this ratio will continue ticking up through the end of Q2 of our fiscal 2021, when the last remaining pre COVID-19 quarter rolls out of the LTM EBITDA computation.
Beyond Q2 of fiscal 'twenty, one the ratio should stabilize with the potential for improvement showed our commercial end markets start to rebound.
From an overall cash liquidity and balance sheet standpoint, we think we remain in good position and well prepared to withstand the currently depressed commercial environment for quite some time with that I'll turn it back to the operator to kick off the Q&A.
As a reminder to ask a question you May Press Star then one is your question hasn't answered and you'd like to limit yourself from the queue price. The turnkey. Our first question comes from Noah <unk> with Goldman Sachs. Your line is open.
Hi, good morning, everyone.
Good morning.
Nick early in the downturn you you frame the business.
With limited very limited visibility into the end market and top line you.
Framed the business in terms of.
How you were planning from the cost side. So you know you spoke to what you assumed for each end market to therefore plan cost and so I was wondering if you know at this point in lieu of official guidance and given the still limited visibility is it possible to speak to how you're planning the cost side.
Vis vis <unk> the pace of end market recovery on the aerospace side.
I think.
No I don't because we don't want to give guidance I don't want to end up giving it piece by piece by the markets, but poor for the cost essentially.
What we expect here is that we basically will hold our costs tight and about flat.
Now that's going to move one way or the other if we're you know if we're wrong on the on the volume I I would be hopeful that we are and it gets better rather than worse and we know in the other direction, but I think that's about as much as I want to say.
You know the truth is we're just unclear on the rate of recovery.
Yeah, Yeah, and I, you know I wasn't sure. If you answered that question or not but you had taken a shot at it on the way down and it proved.
Reasonably accurate so I thought I would check.
The the sequential increase in bookings in the aftermarket can you can you quantify you know how much that picked up.
I was like 76%.
And the OEM was up 88%, so a significant uptick and and like I said.
Book to Bill slightly ahead.
Modest.
Over shipments so we did a nice quarter on the commercial aftermarket side and I think that's encouraging as is the OEM side to see such a snap back in.
Bookings.
I guess that's off very easy compares do you happen to know how far from the pre pandemic level that order rate us.
Yes, it's about half right.
Still about it's about half of what it is as I said in my comments.
Our Q1 bookings were in line with the fall in flight activity.
Okay. Okay. So we essentially were under bulking and now we're kind of cool yeah. So it kind of went to nothing and now it's matched up with revenue.
Yeah.
And then just last one quickly the cobham business can.
Can you just I know you gave that margin range there, but what were the actual last margins right before you bought it and is this a business that you can get to the trans time consolidated margin, yes, we didn't disclose the actual margins before we bought it.
We just gave you some some kind of range.
The range of course is because we don't exactly know how.
In a very short engine your ownership and the exact speed of which you know things change, we we can't exactly calibrate yet.
Can it get up to the trends by margins.
We didn't model it that way to get our return it does not have to get that high.
And we'll see we'll see over time, but it's a good solid proprietary kind of aftermarket business, but you don't have to get to.
Trains my margins to get the return and that's not how we model, though we hope to model conservatively as you know right.
Okay. Thanks, so much.
Our next question comes from Carter Copeland with Melius Research Your line is open.
Hey, good morning, everyone.
Roll tide Kevin.
Yeah, that's right.
I'll be quick here just.
Two short little.
A clarification and then one can you just give us some color on the <unk>.
Interiors.
Weaker piece of the aftermarket can you give us a sense of just how much weaker that wasn't soon would be meaningfully weaker just given that that's where you've got a lot more of the discretionary sort of stuff there or any color. There would be helpful. And then just with respect to the sales that are going to distribution.
If you've seen any difference in.
Customer behavior buying patterns anything of that to know just within that customer sub segment. Thank you.
Sure on the interior side I think what we are seeing is just as you said in general a slowdown that's.
That's the last place.
People are looking to do work, although recently we've seen.
A nice uptick in activity.
But.
It still is the lowest performing sector of the of the aftermarket business.
<unk> sales I have not seen nor have I heard of.
Any difference in ordering or any difference in behavior by the customer base.
Okay, and just just to be clear on the on the interior piece I mean are we talking again the whole thing down 50 in the aftermarket are we talking about 80 90 or is it that magnitude or am I being too far it's just slightly worse than the rest of our business.
It's not a you know off so dramatically.
Okay, alright, thanks, I'll, let somebody else ask Kevin Thats offset some of the other direction by the freight business.
Yes.
Our next question comes from Myles Walton with UBS. Your line is open.
Great. Thanks, Good morning, I just had a question on your incentive changes that you have to obviously given the backdrop of how quickly the financials changed and wanting to a line to performance and your move to EBITDA percentage as well as an absolute.
Base and I know that there's a.
You know historically, we can track sort of a 10 to 17, 5% IRR is your target.
But I'm struggling could you maybe fill in the blanks on what the EBITDA percent margin range might look like is 44% at the midpoint to low end or the high end of that performance metric.
Yeah, I don't think we want to go into too many specifics on the margin target. Obviously you know the 44% is what we gave you all so its what we feel pretty good about for the year and that's what we're as you've been through the proxy details it sounds like miles.
Thats what were comped against here for this year, given the challenging industry circumstances.
Okay.
Maybe as we would expect a mile.
Assuming the world stabilizes, we would expect at the end of 'twenty, one to reset on the same kind of.
Value creation parameters that we historically patents just filling things got so disrupted and it was very hard to do that right now.
Okay. Okay, now that makes sense and Kevin could you just maybe unpack the the Aero aftermarket.
What was cargo down and remind me how much cargo is of of your transport aftermarket at this point.
If your air transport of 1% to 15%, we've said all of the Submarkets of 10% to 15% from Cardinal.
And.
The freight has performed the best of any of the of the aftermarket segment.
Still down, but it's a much closer to.
Neutral performance.
Okay, Alright, great. Thanks, I'll leave it there.
Our next question comes from Ken Herbert with Canaccord. Your line is open.
Yeah, Hi, good morning.
Is it is it appropriate Kevin to think about your 5% sequential improvement in the commercial aftermarket bookings.
To continue through the next few quarters and and when does when does sort of we see that kind of sequential improvement in sales.
Yes, I don't I.
I don't know if the if the 5% is going to continue.
And when that will translate to sales remember we are we can put bookings in 18 to 24 months into the future. So this can be over a period of time, it's certainly a positive trend.
Exactly how it translates to revenue we will have to see.
Okay, and if I, if I run out sort of a mid single digit sequential improvement in sales for the next few quarters and maybe that's ambitious but.
It implies as you anniversary the easier comps in your third quarter, maybe <unk>.
<unk>, 2025% growth in that range is that I know, you're obviously not giving guidance, but can you talk about the kind of opportunity you expect in the second half of the year as you start to anniversary the much easier comps and how much of a whipsaw effect so to speak could you expect to see.
Yes.
I haven't looked at it in that way.
We've said and what we will continue to communicate as debt.
We're expecting things to be somewhat flat.
Flat up a little in the first half and some modest improvement in the second half linked to.
<unk> vaccinations in travel activity, that's all that we've communicated and sat on it and I think.
That hangs with what we're saying a small increase in the second half, but that remains to be seen if that happens.
Got it.
We are hopeful that we see a pickup in personal travel towards the you know and many people forecast a substantial pick up but yeah. We have we just you know where.
Just reticent to forecast that now because.
Frankly, it's been it's been delayed a little from what we would've hoped for yeah, that's right.
On that point, just one final question in the fourth and the first quarter. The calendar fourth quarter did you see relative to your fiscal fourth quarter sort of any green shoots I mean, obviously the bookings were up but was there anything that you could point to as sort of tangible evidence of.
Obviously, what we hope to be a recovery in the second half of the year.
Yes, the only green shoots I have or the bookings activity sequential bookings activity that we've commented on.
That's the only green shoots I can comment on.
That I've seen.
Perfect Alright, well, thank you very much.
Yeah.
Our next question comes from Robert Spingarn with Credit Suisse. Your line is open.
Hi, good morning.
I think I might end up beating the dead horse a little bit here, but just on this topic, Kevin or Nick can we identify whether or not Q2 commercial aftermarket is up or flat with Q1 is that is that something you can see at this point fiscal Q2.
No that's not something that we can see.
Okay.
And so going back to what you just said you can't really all you're saying is at least in the second half you have enough.
I guess it is to see some drivers for higher relative aftermarket second half versus first if we get some recovery.
Yeah, that's right if we get some recovery.
You have to follow people flying as Nick and I will said and as I've read all of your analyst reports as well it all depends on whether people are fine and that's still unknown.
And that's all I'd add Rob to that is I mean.
I don't think it's a very complicated formula here.
More people start to fly.
We will start to sell more stuff into the aftermarket probably won't be lockstep, but.
And until then it's all it's just speculative.
Do you have any better insight into what's in the channel at this point now that we're about a year and almost a year into this thing.
We don't really except for the small amount of our commercial aftermarket now it's 20 ish percent.
That is goes through.
Distribution partners I can't see what's in the rest of the of the inventory levels of the rest of the aftermarket.
Clearly there was a an uptick and that means either there was destocking.
Slowed or consumption increase and probably a little bit of both is true.
Okay and just quickly.
It's hard to think that the consumption could be up as much as the bookings that's right I mean no change.
No channel Okay.
Nick I just had a quick one for you just major moving cash flow pieces for this year.
We are focused on.
No no nothing nothing significant other than what we already discussed before the interest expense changed slightly because of the refi. We did from prior guidance down to 1.07 billion, but no other no other major cash flow items.
Okay. Thank you changes.
Our next question comes from Greg Konrad with Jefferies. Your line is open.
Good morning.
Good morning to not ask about the aftermarket, but just to switch to the OE. I mean, you mentioned an expected reduced commercial OE through fiscal year 'twenty. One I mean, when you think about what youre seeing on booking some of the Destocking cadence and also some step down in wide body rates is there another step down.
Or are you pretty in line with build rates.
Well I think we're probably in line with build rates were probably conservative to build rates and the way.
We look at the business so.
Yes, I feel good we're looking at.
Significant uptick in orders from Q4 to Q1 in commercial OEM that's encouraging.
And then just I think this is the at least the second quarter in a row on defense. The OE side is leading aftermarket I mean is that a trend that you expect to continue or are there headwinds in aftermarket or does that eventually reverse.
In the defense every time, I think I understand what's going to happen I'm surprised it's very lumpy its hard to predict.
There are many influences influencers in what gets spent on the defense side. So.
I don't know.
I know we have a strong order book as we go forward and we know that defense orders and shipments can be lumpy.
And we still feel pretty comfortable with the original guidance of low to mid single digits, yes.
Thank you.
Okay.
Our next question comes from David Strauss with Barclays. Your line is open.
Thanks, Good morning, everyone.
Good morning.
Mike wanted to follow up on that cash flow question. So I guess year initial cash guidance you were going to consume a fair amount of working capital. This year. Obviously in Q1. It was a benefit. So was this just timing do you expect it to reverse and we're still work looking at around 40% conversion on an adjusted EBITDA for.
Free cash flow for the full year.
40% is unchanged, we did better this quarter on working capital than I thought we would our internal models.
Didn't have $75 million of additional cash coming out of our $85 million coming out of accounts receivable, but the teams at the op units drove collections and they've been tough the DSO days are down into the low <unk> for us usually it's high fifty's, but they've done a good job of driving the collections and that's really what drove the positive source of work.
Capital.
This quarter, you'll see on the accounts receivable about $400 million has come out of that from where we were 12 months ago rough Justice and as we said on the last call as the recovery starts and then depending on the.
The pace at which it continues roughly that amount of cash is going to have to go back into the accounts receivable, but it'll probably be based on your forecast of a couple of year recovery, it's going to take couple of years to go back in.
Got it okay, I mean, as we look out over the next couple of years would you expect.
Net working capital as a percentage of sales settled back out where we were pre pandemic or is anything structurally changed on working capital and maybe it's a little bit better no strong no structural changes in the fullness of time once we come out to and get all the way out of the recovery, we wouldn't expect the percentage of sales for net.
Working capital to have changed from what we used to be at in the low thirty's, 30% area.
Okay, Mike said another way the one that moves quickly as receivables.
Don't know if there's any reason to think the industry will pay any faster or slower yeah. That's right no structural changes.
Okay.
And then I think the Cobham acquisition, you noted a tax benefit as part of the deal can you can you tell us what exactly that is and how much of the purchase price it accounted for.
Yeah, we got a sizable tax benefit depending on what discount rate you use somewhere between 40 and $60 $65 million.
That obviously is included we paid for that in the 965 that we bought but it reduces that.
Tax structure that arises from the deal will basically reduce the annual cash expenditures for taxes on.
The cobham business, but its roughly 40% to $60 million of NPV the way, we sized it spread over spread over about 10 years.
Okay, that's the NPV of it yes.
Okay got it thanks very much.
Yes.
Okay.
Our next question comes from Peter Arment with Baird. Your line is open.
Thanks, Good morning, everyone.
Nick it sounded encouraging with the back on offense on M&A and carbon seems like a good deal could you maybe just talk a little bit about approaching commercial more commercial aerospace deals in this environment, what you need to see to kind of.
You know kind of enter the waters there on that front.
Yes, I mean, we're we obviously would be interested.
But if it if it meets our modeling are returned.
The fact is you got to deal with what you see in and we're still not seeing a lot of commercial deals.
Some some but not.
It is.
It's the perhaps the commercial people aren't selling.
Most people aren't selling commercial aerospace businesses right now so they can help it.
Okay I'll leave it at one thanks, Thanks Nick.
Yep.
Our next question comes from Robert Stallard with vertical research your line is open.
Thanks, so much good morning.
Good morning, good morning.
And Nick or Kevin probably on the government tenant basis can you give us an idea.
What percentage of your sales.
Say defense Aerospace, taking me here sort of the pro forma pre pandemic that'd be helpful. Thanks.
It's predominantly a defense business, but as we've said before in the press release, we did not disclose an exact percentage for it but it is predominantly defense with some select commercial applications as well for those products.
But significant international the significant underlying total defense about close to 60% of the revenue goes international.
And given that international percentage is that saying that you are selling on and what you might call commercial terms, so you'll be able to rebase the aftermarket like on other acquisitions.
Yeah, I don't think we want to comment too much on yes. We're in the early days of owning very early start sorting through and getting more familiar with the business. So hard to make any statement about.
Ways, you'll be able to price it yet.
Okay, and then just finally on the sequential improvement in the OEM bookings can you give us some idea.
There was any specific programs and that's related to.
It was nicely across the board are there really werent any.
Large one time items in there.
So it's not linked to the <unk> hundred 20 rate increase or anything like that no no.
Okay. Thanks, so much.
Our next question comes from Cristina <unk> with Morgan Stanley. Your line is open.
Hi, good morning, guys.
Good morning.
With all the focus on Covid recovery I wanted to switch topics and I asked about Aster line looking.
Looking back in the transaction can you give us an idea in terms of where you are in the cost take out that you've done with Aster line and then also where else. We could go from here and in addition to that with your 44% margin outlook for the year, how much incremental cost takeout is embedded in that outlook.
Yeah.
So on esterline.
The first part of the question again repeat that.
Sorry.
Your line just give us an update in terms of what you've accomplished with cost takeout was that versus.
What do you have enough. Okay. So on cost take outs I think we've made we've made progress obviously on cost takeout.
Our cost takeout continues.
As we've communicated in prior quarters some of our.
Reductions and then Covid reductions.
Have come out in time, but.
But I think that business has more than lived up to the model and expectations that we had going in.
I think that.
Head count reductions and those kinds of cost management activities.
Be somewhat.
<unk> reduced or over for Esterline and now its continuous improvement activities that will drive.
Activity as we go forward I think we initially communicated that.
Your line may struggle to get to trans net margins.
Right out of the chutes and maybe in the longer fullness of time, it would get closer we still believe that and it still has been a fantastic acquisition for the company.
Great and then for the second part of the question, which is more on your margin outlook for the year debt, 44% EBITDA margin expectation, how much incremental cost takeout is embedded in that outlook.
Nothing significantly more we continue to.
Manage costs and we continue to look at this as we go forward and there will be some continued cost takeout because of timing.
With unions and European businesses as we're all aware it takes you still get them done, but it takes a little bit longer. So there is still some gradual take out but I think as Nick said earlier, we're looking at level costs.
With some uptick in activity in the second half.
And I think it's safe to say that the sort of extraordinary step down stuff. We did for Covid is about behind us.
Behind that behind US and then we will see we will see what happens to the to the revenue.
Great.
Thank you guys.
Our next question comes from Hunter Keay with Wolfe Research Your line is open.
Thanks, Good morning, everybody.
A couple of hundred me, Kevin can you give us little more color on the uptick in interiors, what's driving that and then as you think about the.
The interiors market specifically over the next few years, what do you think about the ability.
To drive some innovation.
Maybe.
Some things you guys have done in the past for for maybe new priorities for your airline customers around the world. What are you guys working on.
So uptick in interiors.
I may have missed.
Miscommunicate that we did not see an uptick in tears interiors is our lowest performing parts of the commercial aftermarket.
Trying to give you a little color it seemed like things were.
In some of our interiors business as we're starting to do a little bit better, but its still is the.
The worst performer I guess of our commercial aftermarket submarkets.
What are we looking at new and unusual from the future.
We've talked about some of these in the past.
But.
Materials anti viral materials.
Our importance for flooring seat surroundings, and the like we also have a host of.
<unk>.
Touch free options for.
Bathrooms and overhead bins as well as.
Anti viral webbing for our seatbelts, so theres some real interest and activity, we will see if any of it booked into orders.
There's more activity in interiors and from regions of the world that we usually don't see activity from.
Now are focusing on improving their interiors, but this will be a long March for the interior side as it is the most discretionary of our business.
Okay.
And then you mentioned that on Biz jets or being used from our personal and leisure travel is there an embedded comment in there on pricing or is that just sort of observations.
<unk> that youre, making no it's just an observation.
If we want to see growth in business jet usage takeoff and landings I think business travel is going to have to eventually get involved I don't think the world can afford to just do leisure travel and drive the same level of activity. So it's just that eventually we're going to have to see business travel take off right.
Okay. Thank you.
Our next question comes from Pete Skibinski with Alembic Global your line is open.
Hey, good morning, guys.
Just want to just one question back on the defense side, just kind of on the structure of your defense business.
Im wondering if you have any thoughts with regard to if we see some big budget shifts and a defense budget, maybe away from army towards Navy towards Air Force space. How would you expect that to impact your business positive or negative just was interested in your thoughts.
I think the scenario you just predicted of.
From Army Air Force and Navy and space those are all good for us as we move to more technology.
More drones more remote observation monitoring that's all good for US we are heavily engaged in those platforms and our products are really focused on the technology side of the aerospace world.
Okay, great. Thank you.
Sure.
Our next question comes from Seth Sigman with Jpmorgan. Your line is open.
Okay. Thanks very much.
Hey, guys.
Good morning.
Just kind of conceptually that I've kind of wondered if we think about coming out of there.
The downside of the pandemic in a situation where demand starts to run fairly hot on the other side. When you guys are sole sourced as you are in a lot of your portfolio.
And demand is really strong are you under a certain obligation.
To provide parts or if there are shortages there are shortages and that's that's it.
Ah, yes, if theres shortages there are shortages I mean, we take it personally if we can't ship a part.
And Thats why we focus so much on our fill rates and on time delivery and quality of our products. So that we're so responsive.
Right, but there's no like contractual obligations.
No.
Okay. That's okay, because there is the whole range.
<unk> rules I mean, well they are what they are and I guess I should say, we do there are some contractual items with Boeing that we have to have certain delivery performance.
Now that I'm thinking about it but it's not.
A huge.
Limitation or assignment across the business I think it's safe to say that we have very adequate capacity and competitive historically, we've never had an issue with.
With the capacity step up.
Particularly in the App and the aftermarket yeah, that's right.
Alright, okay.
Then.
Just as far as the outlook for the back half of the year I know.
Auto was out with or at least last week.
Really highlighting.
What they pointed to was a fair amount of downside to their traffic forecast for 'twenty one.
And so.
And then you guys are running three months ahead of 2012 calendar 'twenty one in your fiscal year and so if we saw a situation where for the entire year.
As kase, we're only up.
I don't know, 10% to 20% or something like that with debt with that caused you guys to have to work a little harder.
Maybe dig in a little bit more on the cost side to get to the 44%.
I guess I don't know is.
Is the answer we will always dig in on the cost side.
That may be the case I'd have to think about it some more.
Alright, Okay, and then final one just on the car.
Carbon deal the margin target that you gave is that is that before the application of the value drivers.
Yes, yes.
That's about where we'd expect to see this year, yes.
As hard as we sit here today, we can't exactly.
Sort of cranking the timing of improvements in the line can go.
For six or nine months.
Well, thanks very much.
Our next question comes from Michael Scherer, Mali, that's true.
Securities Your line is open.
Hey, good morning, guys. Thanks for taking my questions here.
Nick or Kevin I'm trying to get a sense of how big of a component is is wide body versus narrow body and could you parse out maybe what youre seeing on the booking side, there and I guess I'm getting at do we need to see a real material in international travel for your for your aftermarket revenues to sort.
Uh huh.
I don't want to say to get back to prior peak, but I'm just thinking about the weakness we're seeing in international in the wide bodies in the sense that you know the widebody fleet is now much younger so under warranty, but any color you can kind of give us there or maybe parse out the bookings or how that might play into the recovery.
So we've said in.
In the past and it continues to hold today that we're market weighted so.
There isn't a lot of wide body activity, we're market weighted in.
Our activity levels. So it's clear wide body is slower I do not have granularity of orders to be able to say.
Are we seeing more wide body work or not.
It's true to get back to prior Covid prior to Covid.
Levels, we will need a strong international.
You know performance that is an important part of rpms and and activity on the wide body side.
But I've been very encouraged by the rate of activity that we have today on what is really just a narrow body market today.
And we've performed very well in that so again. It gives me the reassurance that we are market weighted and that is the way you should look at wide body versus narrow body.
It's a smaller portion of the business of the larger aerospace business.
Got it and then just thinking you know second half even even the recovery on your margins.
I'm, assuming you have your own OE forecast, we all have our own forecast.
You're obviously at the aftermarket recovery here, you're mixing more in favor of your higher margin business should we think that your EBITDA margins.
The potential to sort of recover to those pre pandemic 46, 47% levels.
Foster.
Stays depressed and you get this aftermarket snapback, just given that that margin differential.
I think it's possible, but I certainly don't know.
And.
I hate speculating on the future on that we'll have to see the way the mix comes in.
Simply relative rate of change calculation when changes faster than the other could move one way or.
Got it got it thanks guys.
There are no further questions I'd like to turn the call back over to Jamie Steven for any closing remarks.
Thank you all for joining today's call. This concludes today's call will be available to address your follow up questions throughout the day. Thanks again for joining.
Ladies and gentlemen, this does conclude the program you may now disconnect everyone have a great day.
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