Q2 2021 TransDigm Group Inc Earnings Call
Yes.
And we're standing by and welcome to the second quarter 2001 train Stein Group incorporated earnings Conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone as a reminder, today's program is being recorded.
And now I'd like to introduce your host for today's program to each segment director of Investor Relations. Please go ahead.
Thank you and welcome to Trans names fiscal 'twenty, 'twenty, one and second quarter earnings Conference call.
On the call. This morning are Trans Dimes, executive Chairman and Nick Howley, President and Chief Executive Officer, Kevin Stein, and Chief Financial Officer, Mike Lisman. Please visit our website at trend and I'm dot com to obtain a supplemental slide deck and call replay information before we begin the company would like to remind you that statements.
The 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 filings with the SEC available through the investors section.
Our website or at SEC Dot Gov.
And 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 and the earnings release for a presentation of the most direct.
Comparable GAAP measures and applicable reconciliation.
I will now turn the call over to Nick Good morning, Thanks, and thanks, everybody for calling in and as usual I'll start off with a quick overview of our strategy a few comments about the quarter and then Kevin and Mike will expand and give more color to reiterate we're unique and the industry and both the consistency of our strategy and good and bad times.
And as wells, our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle.
To summarize here some of the reasons why we believe this about 90% of our sales are generated by proprietary products and over 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 significantly higher margins and over any extended period of time and typically provided relative stability and the downturns.
We follow a consistent long term strategy, specifically, we own and operate proprietary aerospace businesses with significant aftermarket content second we utilize a second a simple well proven value based operating methodology.
Third we have a decentralized organization structure and a unique compensation system closely aligned with our shareholders.
Fourth we acquire businesses that fit this strategy and we see a clear path to P. Like returns and lastly, our capital structure and allocation of our capital are key parts of our value creation methodology.
Our long standing goal is to give our shareholders private equity like returns with the liquidity of our pulp market to do this we have to stay focused on both the details of value creation as well as careful allocation of our capital.
As you saw from our earnings release, we had another decent quarter, considering the environment, we see a bit more light at the end of the tunnel, but they're still and a pretty tough commercial aerospace market environment.
And a positive note we saw another significant sequential increase in quarterly commercial aftermarket bookings and Q2.
This is the second quarter and a ROE with a significant step up.
The stalling of the air travel recovery that concerned us last quarter, though still spotty looks somewhat better now, but may have pushed our ramp up a quarter or so out.
The two most important operating items, we are focused on through this downturn or on the things we can to some degree control one tightly managing our cost and I think we have this well and Hans second assuring substantial liquidity and this also seems well and the and absent some law.
Large additional dislocation was 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 allocation both the M&A and the capital markets are always difficult to predict and especially so in times like these.
But in Q2, we acquired the Cobham Aero connectivity business for an enterprise value of $965 million.
And the divestiture front and the last 60 days, we signed agreements to sell three additional less proprietary and mostly defense businesses for about $240 million collectively these businesses have revenues of roughly 100, and ADT and EBITA margins and the low 20% we expect to receive.
And all the proceeds and Q3.
We still have one primarily defense business that we are currently considering for sale.
At this time I do not anticipate that we will make any significant dividend or share buybacks for the next three or four quarters or at least until the commercial more market.
Market show stronger signs of a rebound and our leverage level settles down a bit, but we'll keep watching and see if our view changes over and over time.
We believe we are about as well positioned as we can be right now and we will watch for market developments and react Accordingly, and now let me hand, it over to Kevin to review our performance. Thanks, Nick Today I will first provide my regular review of results by key market and profitability of the business for the quarter I'll also comment on recent.
Acquisition activity and fiscal 2020 one outlook.
Our Q2 fiscal 2021 quarter, there continues to be a significant unfavorable impact on our business as a result of the reduced demand for travel due to the pandemic.
However, the commercial aerospace industry has continued to show signs of recovery in recent months with the distribution of the COVID-19 vaccine and increasing air traffic, especially in certain domestic markets and our business. We saw another quarter of sequential improvement and commercial aftermarket revenues with total commercial aftermarket revenues up 12.
5% over Q1. Additionally.
Additionally, I am very pleased that we continued to sequentially expand our EBITDA as defined margin as a result of careful management of our cost structure and focus on our operating strategy in this challenging commercial environment now we will review our revenue by market category for the remainder of the call I will provide color commentary on a pro forma basis.
Impaired to the period the prior year period, and 2020 that is assuming we own the same mix of businesses in both periods.
This market discussion now includes the recent acquisition of Cobham Arrow connectivity and removes the impact of any divestitures completed by the end of Q2.
In the commercial market, which typically makes up close to 65, 65% of our revenue we will split our discussion into OEM and aftermarket our total commercial OEM market revenue declined approximately 43% and Q2, when compared with Q2 of the prior year period.
We continue to assume the demand for our commercial OEM products will be significantly reduced throughout the remaining half of 2021 due to reductions and OEM production rates and the airlines deferring or canceling new aircraft orders.
Longer term the commercial aerospace market is fluid and continues to evolve we anticipate a depressed commercial OEM and market for some uncertain period of time when compared to pre COVID-19 levels.
However, recent commentary from Airbus on potential <unk> hundred 20 rate ramps in 2020, two and beyond are certainly encouraging.
On a positive note Q2 bookings demonstrated strong sequential improvement of over 20% compared to Q1 bookings.
And solidly outpaced sales as we mentioned last quarter. The bookings improvement we are seeing is likely and indicator of OEM destocking slowing.
Now moving onto our commercial aftermarket business discussion total commercial aftermarket revenues declined by approximately 39% and Q2 when compared to prior year Q2.
This quarterly decline was primarily driven by decreased demand and our passenger and interior Submarkets. However, our commercial transport freight market returned to modest growth and slightly offset this decline to repeat sequentially total commercial aftermarket revenues grew approximately 12% and Q2.
Another encouraging data point.
Commercial aftermarket bookings were still down this quarter compared to the same prior year period. However, the bookings declined less than the observed flight traffic declines with freight and business jet bookings continuing to improve.
Q2 bookings sequentially improved almost 30% and solidly outpaced sales. This is likely the result of Destocking slowing and airlines increased flight activity and future planning too.
To touch on a few key points of consideration.
Global revenue passenger miles are still low, though off the bottom and now recovering.
And I autos, most recent forecast expects that calendar year 2021 revenue passenger miles will be 57% below 2019, but we are cautiously optimistic there was an uptick and domestic air traffic in March and April and airlines are seeing strength and bookings that will drive summer flight schedules.
Certain airlines have already announced domestic wide body routes to serve the anticipated demand this summer.
It does forecast a strong second half of calendar 2021, with a rebound and domestic travel and the U S back at 2019 levels of revenue passenger miles and China, well above that level. There is also potential for international travel openings more as governments consider revising travel restrictions.
For cargo demand this was weaker prior to the COVID-19 crisis as F. T case of decline from the all time high in 2017, however, a loss of passenger belly cargo and the pickup in E. Commerce has helped cargo operations to recover quicker than commercial travel.
Business jet utilization data has shown that activity in certain regions has rebounded to pre pandemic or better levels. This is due to personal and leisure travel as opposed to business travel at this time it remains to be seen if business jet utilization will continue to expand but current trends are encouraging.
We believe there is a global pent up demand for travel we see evidence of this demand through the recovery and domestic travel specifically and the U S and China and the optimism of airlines for the summer season domestic travel is currently benefiting from international travel restrictions and could offset some lost international travel and Mark.
And in due time with vaccine distribution and lifting and travel restrictions passenger demand across the global increase.
Historically personal travel accounted for the largest percentage of revenue passenger miles and forecast still indicate a more meaningful pickup and personal travel and the back half of this calendar year, followed later by business travel and we are hopeful this will be the case.
Now, let me speak about our defense market, which traditionally is at or below 35% of our total revenue.
The defense market revenue, which includes both OEM and aftermarket revenues grew by approximately 8% and Q2 when compared with the prior year period. Our defense Order book remains strong and we continue to expect our defense business to expand throughout the remainder of the year.
Moving now to profitability I'm going to talk primarily about our operating performance or EBIT da as defined EBIT.
EBITDA as defined of about 519 million for Q2 was down 23 present versus prior Q2.
EBITDA as defined margin and the quarter was approximately 43 and 5%.
We were able to improve our EBITDA as defined margin approaching 100 basis points sequentially. Despite the acquisition dilution from the recent Cobham acquisition of about 100 basis points as well.
Next I will provide a quick update on our recent acquisition. The Cobham acquisition integration is progressing well under the leadership of one of our experienced E V. PS Joel Reese, we've now owned Cobham, a little over four months and we are pleased with the acquisition. Thus far we have split cobham into two operating unions you.
And it's cash.
And Aero connect located in Prescott, Arizona, and Shelton Ltd, located in Marlow U K, two experienced trends and I am President's are leading the integration of these two operating units.
Now moving to our outlook for 2021, we are still 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 we have a clearer picture of the future.
We like most aero suppliers are hopeful that we will realize a more meaningful return of activity and the second half of the calendar year for now we are encouraged by the recovery and our commercial OEM and aftermarket bookings and the first half of our fiscal year, along with the improvement we have seen and our commercial aftermarket revenues.
As for the defense market and an update to our defense revenue growth comments on the Q4 and Q1 earnings calls previously we now expect defense revenue growth and the mid single digit percent bricks per cent range for fiscal 2021 versus prior year.
The previous expectation communicated for fiscal 2021 defense revenue growth was low to mid single digit growth.
Additionally, given the continued uncertainty and the commercial market channels and consistent with our past commentary, we are not providing and expected dollar range for fiscal 2021 EBITDA as defined.
We assume a steady increase and 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 a dilutive effect to our EBITDA margin from Arrow from the Cobham Arrow connectivity acquisition.
Mike will provide details on other fiscal 2021 financial assumptions and updates.
Let me conclude by stating that I am pleased with the company's performance and this challenging time for.
The commercial aerospace industry and with our commitment to driving values for our stakeholders. The commercial aerospace market is as recovery is underway and current trends are encouraging.
There is still uncertainty about the pace of the recovery, but the team remains focused on controlling what we can control.
We are closely monitoring the ongoing developments and the commercial aerospace industry and ensure that we remain ready to meet the demand as it returns and we look forward to the remaining half of 2021 and expect that our consistent strategy will continue to provide the value you have come to expect from us.
With that I will now turn it over to our Chief Financial Officer, Michael Lisman.
Morning, everyone I'm going to quickly hit on a few additional financial matters for the quarter and then also the full fiscal year.
For the quarter organic growth was negative 20% driven by the declines and our commercial end markets and despite some healthy defense growth from the quarter.
I won't rehash the results for revenue EBITDA and EPS as you can see all of that info and the press release.
On taxes, our expectation for the full year is unchanged that is we still anticipate our GAAP cash and adjusted rates to be and the 18% to 22% range rig.
Regarding tax rates out beyond FY, 'twenty, one and we're monitoring potential changes and the U S tax code under the New administration and will provide some guidance on our future rate expectations. Once any legislation is finalized.
And on interest expense, we now expect the full year charge to be 1.06 billion reduced from prior guidance primarily for the refinancing activity completed this year.
You can find this revised interest expense guidance and then a few other updated financial assumptions on slide six of today's supplemental presentation.
Moving over to cash and liquidity, we had another quarter of positive free cash flow free cash flow, which we traditionally define it trans time as our EBITDA as defined less cash interest payments cash capex and cash taxes was roughly $146 million.
For the full fiscal year, we expect to continue running free cash flow positive as we define this metric.
In line with our prior and November guidance, we still expect this amount to be and the 800 million area, maybe a little better for our fiscal 'twenty one.
We ended the second quarter with $4 1 billion of cash down from $4 9 billion at last quarters and note that last quarter's $4 9 billion balance was prior to the Cobham acquisition for an enterprise value of 965 million that closed on January 5th.
Pro forma for the closing of this acquisition, our Q2 net debt to LTM EBITDA ratio was eight two times.
And with our last pre COVID-19 quarter, now having rolled out of the LTM EBITDA computation, we believe that the net debt to EBITDA ratio as of our second quarter and is at or very close to its peak and subsequent quarters. It should at worst remained relatively stable, but more likely start to show gradual improvement as our commercial end markets 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.
Lastly, and shifting gears from financial matters I'd like to provide a quick update on our ongoing U S. D O D I G audit.
We've been actively engaged with the IGD office with some ebbs and flows and continue to work through the audit process and our best assessment and based upon what we see this ongoing on it appears to be similar in scope to our prior audits and while it's difficult to know exactly when a final report could be issued publicly we expect that this might happen sometime during Q3 or.
Q4 of our fiscal 'twenty, one and.
With that I'll turn it back to the operator to kick off the Q&A.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one and you touched on telephone and for your question has been answered and you'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of Myles Walton Your question. Please.
Great Thanks, and good morning, Nick.
Nick you made a comment around likely not doing repurchase or dividends for the next several quarters and I'm just curious.
And why it take it off the table given you cant predict the outcome of the M&A environment and how are you.
Generally thought about it and not retaining a cash drag for too long.
Yes, I think miles and I do want to say now.
And we've mentioned a couple of times and the past until we see a couple more months and quarters of recovery here I think the bias is just to be conservative with the cash and what we do with it and hold larger balance for now until the situation and the commercial end markets improves. So it's it's not much more than that.
Okay, and then maybe a clarification is the OEM.
Do you think that has also a trough and I think sequentially. It declined again is there.
And the bookings strength books, it looks like it probably is indicative of that trough ing, but can you just confirm what the sequential decline was there.
I think the bookings seems that that seems to indicate that we've troughs are I would believe but we'll see how it how it plays out I don't anticipate any.
Future revisions to production rates down and so I would assume that.
Was there a particular unit that you're seeing it and.
And wide body focused and out of airframe no.
No.
Okay, all right I'll leave it there thanks.
Thank you. Our next question comes from the line of Robert Spingarn. Your question. Please.
Good morning.
In terms of the bookings strength, especially as it comes through sequentially here and focusing on the aftermarket Nick or Kevin do you have any sense when that will translate into into some spike and sales I know you've said that you don't have enough here to guide, but between your conversations with your customers and the bookings is there any.
And so when which quarter, we're going to see an improvement and sales. That's that's notable aftermarket.
Yeah I think.
We've seen strong sequential improvement and aftermarket bookings, we've also seen some and OEM bookings.
I think what we need to see is more flight activity.
That will give us a breakout quarter I think we're just starting to see ourselves come out of this I'll remind you that our thoughts were when we went into this year were somewhat flat Q1, and Q2 with a slight uptick and the second half nothing dramatic I still think we're on that pace, but.
For a real breakout, which I think is what you're driving at and when do these orders come through.
It's going to take more flight activity.
We're just at the beginning of the of the takeoff I think and we need more positive signs are that that lends itself to Mike's answer for the last question as well we need just we just need to see more stability here more consistent performance for us to feel comfortable.
And you know with the future quarters, we know that we book up to two years out on OEM and so it's harder to predict when OEM orders will come in aftermarket orders tend to be more book and ship you would expect that there will be more good news on the closer horizon.
Still a lot to be seen.
Okay, and then Kevin just as a follow up you have done very well managing the business through the downturn, but I wanted to.
See if you could talk a little bit about your playbook from managing through this upturn when it comes and and how you deal with input cost pressures and then.
Potential I suppose labor shortfalls.
Well I think it's the same.
Approach and.
Attack plan as always we are very disciplined and adding back costs, we will do so and a very disciplined manner. We.
We will pass along of course increased cost in terms of inflationary pressures.
We will practice the same playbook as always as we go through this.
Think this will.
<unk> worked very well for trans time, as we come out of this we will see.
<unk> improved I think margin position as we come out of this given the cost reductions that we've done as well as.
What has happened with some value pricing.
And as labor available if you need it.
You know as what is going to return first and this market is aftermarket and that requires less labor.
OEM builds that drive our OEM demand that drives labor need quite significantly I'm, not saying that we won't need to hire them, but the aftermarket recovery is less labor intensive.
Okay. Thanks very much.
Thank you. Our next question comes from the line of David Strauss and your question. Please.
Thanks, Good morning.
Good morning.
The 12% sequential improvement and the aftermarket.
And that you highlighted can you maybe just directionally talk about hey, Kevin from a from the perspective of engine versus interiors versus passenger and what youre seeing.
Yeah, I would say in general our sales and the aftermarket we've seen strength and aftermarket free.
We've seen some general strength and business jet.
And our transport business as a sort of on par and some of our interiors, which tend to be a little more discretionary lag.
Does that answer your question.
Yes, I guess.
The more discretionary side of things and carrier side and maybe some of the passengers stuff or are you starting to see any pickup there at all or is it mainly concentrated on the on the less discretionary engine side of things.
I think it's more concentrated on the less discretionary, but we are seeing some uptick.
From some of our more discretionary businesses that have.
<unk> seen some need to refurbish planes around the world So I.
I think we've seen some orders and interest from unknown.
Corners of the world So it's the.
<unk> side is doing okay, but it is weaker than the other piece I think that makes sense given that as airlines are recovering they're more worried about putting people and the seats and some of the look and feel just yet, but we're starting to see that ever so slightly change.
Okay.
And then following up on robs question. So from a cost reduction standpoint, I know you've highlighted the the head count reduction.
But can you can you give us some I guess specific examples of what maybe you've done from more of the structural cost standpoint, any facilities that you've taken out during this or things that for sure aren't going to come back when we get to the other side.
Yes, we have fundamentally looked at some of our our businesses some of their locations. They have satellite facilities and offices that we have looked to close consolidate underperforming business segments for them.
We've taken this opportunity to streamline.
Combine of effectively the lower cost. There's also been a number of of course cost productivity programs automation that we've been able to implement this has been and ongoing effort. We've continued to invest.
And at the same or and even accelerated rates and some of our facilities for automation and cost reductions. During this time. So it continues to bear out for us.
Alright, thanks very much.
Thank you. Our next question comes from the line of Carter Copeland and your question. Please.
Hey, good morning, guys.
Good morning morning, Nick.
Nick I know you hate to guess, but I wanted to sort of put you on the spot and ask you if you've seen several cycles at this point and watch how M&A.
M&A and I know people don't want to sell assets at the bottom because the EBITDA and depressed, but now as we start thinking about recovery and.
When we get to a point where assets could trade on EBITDA numbers that feel a little bit.
Firm or what would you would you guess at 2020. Three is one of those sort of recovered years, where you began to close the bid ask spreads because people have a bit more conviction and the and the EBITDA or is that still too early just from historical perspective apply but you know what do you think.
I would sure hope so Carter I would sure hope so.
You know I'd be surprised us and see a lot of it and 22.
On the same.
And maybe you get lucky and something comes along but.
I'd say again, probably if you don't have a reason to sell and you have a good commercial business.
And you're probably not now.
No.
And there could be things that are attractive enough and you're close enough from the edge that we're willing to pay a little more to try and make them happen, but thats very.
And I, just I, just can't predict that right now.
Yeah.
Okay, and then one per club and just.
On the.
And <unk> fronts.
How much of a read or is it too early to have conversations with oes.
OEM customers about potential production rate increases there.
Have you had any of those yet any color you can give us on that and market.
Well I think we're starting to hear from Airbus of.
Rate readiness notifications of ramp in narrow body rates seems to make sense. It seems like there'll be a hole in the market that they need to fill.
We will be ready to fulfill that as it comes to pass.
Makes sense that there'll be some of that need though.
What about on the business jet side.
Business Jets been really robust both in aftermarket OEM activity in general.
I'm and I'm encouraged there, although we'll have to see how it plays out that is it just leisure and or is it business jet use you know.
What what happens here, but right now it's been a brighter.
Segment for US now, it's only 10% to 15% of our business. So it's not a massive driver on just the.
Business jet side, but it's still interesting.
Great. Thanks for the color guys.
Yeah.
Thank you. Our next question comes from the line of Ken Herbert Your question. Please.
Yes, hi, good morning.
Good morning.
Kevin I first wanted to ask on your defense sales and you called out OEM revenue growth better than aftermarket can you parse those out and <unk> and can you comment specifically on the defense aftermarket and.
Maybe seeing any trends there that are at all worrisome.
You know, we're not if I I think we're really.
Bullish about the the order book on the defense side.
And we always see Lumpiness and I've talked about it in the past APK Ws parachute orders on Lumpiness.
Lumpiness on OEM, sometimes those orders ship, sometimes the bookings are delayed we.
We've seen strength in aftermarket recent bookings and aftermarket defense aftermarket have been strong so I'm not feeling like there's any weakness any program concerns.
As you know the defense budgets are coming through right now and I think trans diamonds, and a great position because we are on the.
And the capability extension the technological advancement curve were not a booth.
That's on the ground so to speak so it puts us in a good place for the market and the future. So both short term and long term I'm reasonably optimistic about the defense budget and situation for us.
Okay very helpful and if I could on the commercial aftermarket you grew and your fiscal first quarter or 5% sequentially now 12%. This quarter was any part of that step up attributable to where can you comment on maybe average order sizes, you're seeing or maybe any urgency around the orders expedited shipment costs or.
Benefits or anything of that nature.
You know, we don't we don't offer volume discounts so we're not.
And our aftermarket we don't give you a better price if you buy 100 pieces versus one generally speaking so there's not the market.
Market drive to get ahead of anything.
What we're seeing is that this is not overly discretionary driven it's a lot of consumable parts that they need.
And there is some urgency coming out of it so we're starting to hear of some.
Urgent need urgent orders.
And I'll tell you that our Pos with our distribution is running very similar to what we see so all indicators are that the business is generally starting to recover like you said, 5% sequential and Q1, 12% now and an order book that continues to expand.
Great. Thanks for the color.
Sure.
You. Our next question comes from the line of Hunter Keay. Your question. Please.
Thank you good morning, everybody.
Hi, Good morning. Good morning, do you have a preference of a greater mix of leased versus owned aircraft and the global fleet.
I don't I don't know that we do.
Generally speaking the least folks my historically have had more restrictions on PMA and other things, but generally speaking to us it doesn't matter.
Okay.
And then we know that you are pretty well protected and the demand side from inflation and pricing and passing through costs pretty clear track record of that but what about the supply side of the house can can you remind us how you're.
Your structured there with your suppliers and and how you might protect against raw material increases. Thank you.
Well, we won't be able to protect against raw material increases we will have to pass them along through our indices and our price increases that we have and the mechanisms. There is no way to protect yourself unless you're willing to buffer with huge amounts of inventory, which generally we do.
Don't like to do we also don't see the need to go really long on some of these ingredients we have a tendency to have a lot of specialty.
Products that we source from our supply chains around our facilities.
I don't see this as a huge issue of supply yet it doesn't mean that it won't get to that point as people struggle with a.
Possibly re laboring their facilities, but right now we're.
We're not in any danger position on raw materials supply or supplies.
In general.
Okay.
Kevin.
Sure.
Thank you. Our next question comes from the line of Sheila <unk> from <unk>.
Question. Please.
Thank you guys and good morning.
And she is written.
Moving on.
Commercial OE you know you guys were down 50% and the quarter I think your peers are trending down 40 and.
And any sort of puts and takes on where you guys are in rates and destocking or when do you expect that business to start Flatlining alright.
Turning to positive territory.
I assume we're making that.
We're crossing some threshold as we move through this now.
Defense or I'm, sorry, commercial OEM bookings can be can be lumpy, we haven't lost any positions.
There is simply working through inventory and the mix that they have today.
And I'm confident this will shake out in the coming months and quarter.
Okay, and then maybe on EBITDA margins and how you guys were at 43 two for the first half.
Your guidance is about 44 implies the second half is 45%, but you also have a 100 and to 150 basis points of dilution from Cobham and so what are some of the underlying assumptions if you could give us some color there.
Yes, I guess the underlying assumption we have is that people will fly more and the second half there'll be more commercial aftermarket activity and a continued improvement and not dramatic we have said from the beginning we had a modest uptick and the second half that was in our thinking.
And I still think that's where we're at to get to the 44% with as you pointed out about Ah.
A percentage point of headwind is yes that is going to be the feet that we have ourselves dialed into achieve right now I don't see that.
And there's always headwinds to that continued cost reductions that we continue to look at but I think we feel.
Okay about that right now as our forward forecast.
Okay. Thanks, guys.
Thank you. Our next question comes from the line of calling from kind of your question. Please.
Yes, thanks, good morning, guys.
Good morning, good morning.
Wanted to get your perspective on how things moved on the aftermarket sequentially within the quarter so to be up near line.
30%.
And thats the rate like very.
We saw some real change and the last month last six weeks.
Of the quarter.
The month of March was very different than January and February and I think that's you can see that and flight activity and interest and people traveling to websites I mean, there's so many trackers that all of you out there follow that I religious Lee read every day that show some.
And the March timeframe, there was an uptick and activity and that translated to an uptick and activity for us as well.
And would you say that's continued in April that level of.
Well I can't comment on April I can't comment on April whether that's continued but the I think the flight activity and interest as we have seen continuous.
And.
Is there any way to to gauge whether.
The uptick and aftermarket activity is F Park is it four parked aircrafts coming back into the active fleet and therefore, it's sort of a.
And unnaturally high bump relative to what the underlying consumption might actually be.
And I'm, just wondering if theres any way to parse all of the data you guys get to figure out and consistent placing that and I would say that.
Yes, some of it must be for returning aircraft, although the park fleets.
Has slowed as to what's coming back out of park until there is more revenue passenger miles flown and so I think.
They continue to pull out capacity. They then have to get it ready to fly so theres a little bit of that.
I don't.
I don't say that Theres, a whole lot of it is getting planes ready I think it's actual usage.
And having inventory staged where you'll need it. It's just the return of flight activity and maybe there was a.
And some harvesting of available hours on different planes or ship sets that they needed to manage now and now I'm just kind of you get into speculation.
Right.
Last one from me.
You mentioned, the dividends and buyback hiatus, but.
On the M&A front, what is the pipeline like these days.
Are there any actionable things.
Is it a lull.
And the actionable at the small to medium size.
And of the range and continues to weigh the opportunities we see continue to weight more towards defense.
To Nick's comments earlier, we will see what comes if theres a big good commercial business that comes down the pike, we'd like to see that but currently active as we always are and weighting more towards defense.
Thank you very much guys.
Sure.
Thank you. Our next question comes from the line of Robert Stallard. Your question. Please.
Thanks, so much good morning.
Good morning.
And Nick or Kevin first one for you on the OEM bookings I was wondering if you could give us any additional detail on what's in there and it's just coming from narrow body is it coming from restock or we may be seeing some offset from wide bodies just from a color if he could.
Yes, there's not a lot of color I can offer on that except that we're delivering on.
And the order book of today, which is as you know is more slanted to a narrow bodies right now.
Yeah, I don't have a lot of insights there.
As to whether one and <unk>.
Ship said is in a better inventory position or anything like that I, just don't have that color.
And if I'm Abbas with firm up this speculated rate of 53. When do you think you would get sort of need notice on that.
Probably later in the fall if they were going.
Going to go for a 2022 rate change and it's usually six months or so ahead of time I think.
Okay, and then just finally to follow up on <unk> question.
If things were to improve in aerospace land and say the next 12 months or so would you be willing to look good.
Scale acquisition like Esterline, if somebody would be that.
Sure and I think yes.
And it's awful hard to predict yes, yes, I mean, we consider looking at yes, yes of course, I mean, we have the capital to deploy and we'd like to be out there and it's too.
And <unk>.
Putting it to work, but you know we can't make those things happen. So we remain.
At the ready to take advantage of it if the opportunity happens.
It makes sense. Thanks, so much.
Sure.
Thank you. Our next question comes from the line of Cristina <unk>. Your question. Please.
Hey, good morning, guys.
Good morning.
Mike earlier, you mentioned that the IGT audit is similar to previous audits and I wanted to clarify is that on the audit process or does that also include the size and scope of what theyre looking at.
Both.
The process and then also the scope in terms of auditing and reviewing profitability on a set number of of contracts. That's what we saw and the 2006 audit and it's also what we saw on the audit that generated the 2019 report and it's it's what we're seeing now as well.
Great and a follow up to that would be how do you think about the underlying business that are driving these audits and some.
One point I mean, it could be pretty distracting or.
With the time that you spent in 2019.
Do you view these businesses as core or would you consider exiting them just to keep the distraction at a minimum from the rest of the business.
And I say I'll take this one and net you can jump in I think these are still great businesses core businesses. This is part of the <unk>.
Process of doing.
Work with the government you have to.
Go through this process.
The U S as a military Dod fantastic customer.
We understand that they are trying to get the best deal for their constituents as.
As well so it's a natural part of the process I don't think.
We are.
Afraid of it we've spent more time.
And integrating into it we now have regular reviews and meetings with the D O D. The DLA.
We're very connected and it's a very different today than 510 years ago.
And in terms of our connection so.
If your question is will we eventually want to get rid of these businesses because of the nuisance of military.
And I don't see that happening.
Net.
And at all these are still great businesses core to us.
These are products developed and a commercial environments are these are fantastic products and businesses for us.
All of that is there to your point on the commercial environment Theyre very frequently intertwined and very similar products it's not.
Not that there are several from.
And they are very close to the St product and many situations if not the exact same product and we have very few businesses that are just 100% military.
And we've been talking about some of those and Offloading some of those from the esterline side of the house. So we continue to look at this and work on it.
Great. Thank you guys.
Okay.
Thank you. Our next question comes from the line of Test segment. Your question. Please.
Thanks, very much and good morning, everyone.
Good morning.
And I think you mentioned some more some more M&A opportunity on the defense side, which makes sense given the environment.
Do you have any hesitancy about that just given where the mix sales for the company right now is there a certain.
Point beyond which you would not want to see the revenue mix tilt.
Towards defense.
Historically, we've always had as Kevin mentioned in his comments and defense mix and a non COVID-19 environment. That's 35% of revenue, we're slightly less I think we see ourselves kind of staying in that ballpark with some of the divestitures that happened out of the esterline portfolio.
And as well as some of the ones that could be coming in.
Near term months.
We actually weighed down on the defense side, a little bit when you run rate for a.
For an environment, that's not impacted by COVID-19. So we're looking at defense opportunities and when we look on the M&A side for companies, we look for products that hit our criteria not so much narrowing in on a specific end market and just looking at commercial and not focusing on defense we.
We look at the defense stuff that's out there now and size up the products to see if it fits our criteria and and we're active as we mentioned so shouldn't keep us out of that.
That market and looking at opportunities and the future.
Okay. Thanks, and then.
I think you mentioned, Kevin on the last call that.
Most of the cost out actions and kind of completed for the year and there were still some color.
<unk> and restructuring.
During the quarter I think fairly similar to the level in Q1.
Or are there new sort of cost out opportunity that came up during the quarter and and I guess, how do you see that kind of playing out I guess and two there is some new things and then thats continuation and pay.
Paying for the actions that we already started the majority of the COVID-19 actions have now been completed and fleet, one and Q2, you'll see a little bit and Q3 and Q4, but at a far diminished rate versus what you've seen these past two quarters.
Great, Okay and then.
And we're never done looking at our cost position right. So.
You shouldn't ever anticipate things completely cease there.
Yes, yes that makes sense and.
And then just to put it.
Our five point on Christy and last question and then with the.
D O D audit the extent that you can see and the scope and and kind of the scale.
Of the audit being similar to prior ones.
Expect a similar result as well.
It's hard to say our forecast any kind of result, we don't have good insight into that to us. It seems just based on the activities, we're doing and the dialogue and discussions we're having it seems a lot like those prior audits, but to make a claim on what the outcome might be that's not under our control. So I don't want to speculate, but we take the seer.
<unk>, we're very engaged.
We're working closely with the the IAG on the audits, we meet with them regularly.
This has a yeah, it's been something that we've continued to work.
Much like in the past so the conclusions are similar.
Great. Okay. Thanks very much.
Thank you. Our next question comes from the line of Peter Amit Your question. Please.
And second one Nick Kevin and Mike and Kev.
Kevin.
And coming up on a lot of calls about supply chain shortages and maybe you could just give us a little color and what youre seeing on on Europe and on the supply chain side.
You know.
We are hearing of some critical raw.
Raw materials some critical materials.
Some materials that have gone up dramatically in our price.
And so far we haven't seen any.
Dramatic supply disruptions because of this of the supply chain being stressed.
We have seen prices go up and some spot market buys on certain metals and other components, but as a whole we're able to pass along our inflationary costs surge pricing expedite pricing.
The one area that we're looking very closely at of course is.
Electronic components, we do consume those and a number of our businesses, whether they're chips resistors.
Fats and the like and.
And making sure that we have the supply of those that we need that continues to be a focus again, we make a lot of what we need and consume.
So we are not overly exposed, but it's something that we have to continue to watch closely.
And I'll leave it at one thanks, Thanks for the color group.
Sure.
Thank you. Our next question comes from the line of Michael <unk> from Ali Your question. Please.
Hey, good morning, guys. Thanks for taking the question here.
And maybe Nick or Kevin just to go back to the aftermarket bookings can you provide a little bit more color from what you're seeing in terms of geography I'm, assuming the platforms are narrow body driven but even what are you seeing from distributors or are they starting to pull more was there anything from <unk>.
Provisioning for the Max and the quarter and pricing if we look sequentially from last quarter are you getting any pricing and there in those bookings numbers.
So we are always you know what.
And regular intervals looking at pricing.
Pricing our business and.
Putting passing along inflationary and expedited Inc.
Increases as far as the Cam.
Cam bookings or any color on geography, we don't track our business that way per se. Many of our customers are global so I don't have geographic information my expectations are that certainly what I'm seeing what we're seeing and the U S.
Is driving our business, but also China the domestic flight surge there.
And we anticipate that we see that activity, but where.
We don't see any concrete geographies and our results.
Got it and then just on.
From an organic aftermarket revenue standpoint, do we need to see traffic to get back to pre pandemic levels for you guys to get back to that that pre pandemic quarterly revenue run rate.
Okay.
Right.
<unk> and kind of followed the takeoffs and landings. So I think and time is the takeoffs and landings jumped back up to where they used to be we'd expect our aftermarket.
And do the same.
Yes, I think because.
The.
The price that we've been able to drive I think the.
New products programs and the like I think will be and a better position when the volume returns, but we'll have to see how that unpacks.
Got it thanks, a lot guys.
Thank you. Our next question comes from the line and Robert Epstein with your question. Please.
Yeah, Hey, good morning.
Good morning, Ron.
Parsing out what are the end markets free.
And is doing quite well you guys mentioned that and we see that and the numbers are there any organic or inorganic opportunities that are more focused on freight that you guys are considering.
Yeah, we're always considering opportunities.
And we look at.
And the passenger to freighter conversion business.
We're looking at a number of opportunities there I don't know on the inorganic side that I can comment there, but on the organic side, we're constantly looking at new products innovations to better service that market because it seems like one that is evolving very quickly and there's a.
A lot of players a lot of interested parties.
Got it got it and then.
And kind of following back up on M&A.
Would you guys be willing to do anything outside of a and b if it fit the criteria that you guys large sole source.
Proprietary IP.
And <unk> that.
And that kind of thing.
And we engineered and would you be willing to look at something and an adjacency or.
Does it have to be and A&D.
I can try this I would say you never say never but we would be it would be a significant hurdle for us to get over I mean, and we have a very strong preference to stick to our net.
Yes, yes.
And aerospace I think that's the best way I would answer it and be very high hurdle, but you know you never say never.
Got it fair enough. Thank you.
Sure. Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Jamie statement for any further remarks.
Thank you all for joining US today. This concludes today's call. We appreciate your time and thanks again for joining have a good day.
Thanks.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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