Q3 2021 TransDigm Group Inc Earnings Call
At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hear.
The conference over to your host director of Investor Relations, Jamie Steven. Please go ahead.
Thank you and welcome.
This call of 2021 third quarter earnings Conference call.
Presenting on the call this morning.
Chairman, Nick Howley, President and Chief Executive Officer, Kevin Stein, and Chief Financial Officer, Michael Lisman.
Please visit our website at <unk> dot com to obtain a supplemental slide deck and call replay 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.
The latest filing with the SEC available through the investors section of our website or the SEC dot Gov. The.
The company would also like to advise you that during the course of the call we'll 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 measures and applicable reconciliation I will now turn the call over to Nick Good morning.
Thanks to everybody for calling in.
As usual I'll provide a quick overview of our strategy.
Then the few comments about the organizational change, we announced and the Kevin and Mike will give more color on the quarter and the performance.
To reiterate where Nick and the industry in both of 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 aerospace cycle to.
To summarize some of the reasons. We believe this are about 90% of of our net sales are generated by proprietary products and over 3 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 cigna.
Secondly, higher margins and over any extended period of time of typically provided relative stability in the downturns.
We follow of 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 are of decentralized organization structure and a unique comp.
Insertion system closely aligned with shareholders fourth we acquire businesses that fit the strategy and where we see a clear path to P like returns.
Fifth our capital structure and capital allocation are a key part of our value creation methodology. Our long standing goal is to give our shareholders private equity like returns with the liquidity of of public market to do this we have to stay focused on both the details of value creation as well as.
For allocation of our capital.
As you saw from our earning release, we had a good quarter, especially considering the market environment. We are still seeing some recovery in the commercial aerospace markets. We continued to generate significant cash we are a little over $4.5 billion as of this quarter.
As of the end of the this quarter absent any capital market activity or other disruptions, we should have about $4.8 million cash by the end of September of fiscal year, and we expect the steadily generate significant additional cash through fiscal year 2022.
We continue to look at possible M&A opportunities are always attentive to our capital allocation, both the M&A and the capital markets are always difficult to predict but especially so in these claims.
On the divestiture front during Q3, we completed the sale of 3 less proprietary businesses for about $240 million.
At this time, we have decided not to sell of the 1 remaining primarily defense business that we were previously considering per sale for now our esterline related divestitures are about done.
At this time I don't anticipate the oil make any significant dividend or a share buyback for the next 2 quarters, we will keep watching and CFR views change.
We believe we are pretty well positioned as usual will closely watch the aerospace in the capital markets develop and react accordingly.
I'd like to address the executive Chairman the chairman change that we announced today just to be very clear. There is no change in the duration of my commitment to Trans Stein.
My contracts had a term that ran through 2024 and this modification anticipates the term through 2024 and the likely beyond if the board and shareholders believe I continue that value.
Going forward as chairman of the board and Chairman of the Executive Committee I won't be particularly focused on mergers and acquisition capital allocation of major strategic issues. Although of course work with Kevin keep the underlying value of trans side moving forward.
Both Kevin and I believe that now is a good time to move into the next phase in the transition the board and I believe that Kevin has done a fine job over the last 3 years of CEO and come up the speed very well the law.
Last 3 years have been eventful for the first roughly 18 months, Kevin and his team successfully integrated the esterline technologies by far the largest in the most complicated acquisition in our history.
For the second roughly 18 months, Kevin and his team dealt with the unprecedented COVID-19 generated downturn in our largest market the commercial aerospace market. They responded quickly and effectively. Additionally, the kept our base business running as smoothly as possible. During this tough period and began.
The integrate another decent sized acquisition no easy task given this level of market disruption all in all of real baptism of fire.
Though there is more value to create the heavy lifting in the esterline integration and related portfolio adjustments of about complete.
We believe that we are now starting to see some light at the end of the tunnel on the Covid related market dislocation. So the time seems appropriate the company also saves a little money partners.
As of personal asset test acid test I remain of sizable investor in Transcon and feel very confident that Kevin will continue to create substantial value for us all.
Now, let me hand, it over to Kevin.
Thanks, Nick I would like to take this opportunity to personally thank Nick for his counsel of support and Mentorship over the last 7 years. He has made the succession planning process of rewarding experience for both of us.
Look forward to continuing our work together with this fantastic team as we embrace our modified rules now to the business of today.
The 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 and divestiture activity and outlook for the remainder of fiscal 2021.
Current Q3 results have returned to positive growth as we are now lapping the first quarter of fiscal 2020 fully impacted by the pandemic. However, our results continue to be unfavorably impacted in comparison to pre pandemic levels due to the reduced demand for air travel on a per.
Positive note the commercial aerospace industry has increasingly shown signs of recovery with vaccine rates, expanding and increased air traffic, especially in certain domestic markets in.
In our business, we saw another quarter of sequential improvement in commercial aftermarket revenues with total commercial aftermarket revenue was up 6% over Q2.
Additionally, I am very pleased that we continued to sequentially expand our EBITDA as defined margin.
Treating to this increase as of the continued recovery in our commercial aftermarket revenues as well as the careful management of our cost structure and focus on our operating strategy in this challenging commercial environment.
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. This market discussion includes the acquisition of Commerce Cobham Aero connectivity.
We began to include Cobham in this market analysis discussion in the second quarter of fiscal 2021. This market discussion also removes the impact of any divestitures completed by the end of Q3.
In the commercial market, which typically makes up 65% of our revenue we will split our discussion into OEM and aftermarket our total commercial OEM revenue increased approximately 1% in Q3 compared with Q3 of the prior year bookings.
Bookings in the quarter were very strong and solidly outpaced sales sequentially, both Q3 revenue and bookings improved approximately 10% compared to Q2.
Although we expect demand for our commercial OEM products to continue to be reduced in the short term. We are encouraged by build rates gradually progressing at the commercial Oems recent commentary from Airbus and Boeing also included anticipated rate ramps for their narrow body platforms in the near future hopefully this will play out as forecasted.
Now moving on to our commercial aftermarket business discussion.
Total commercial aftermarket revenues increased by approximately 33% in Q3, when compared to prior year Q3 growth in commercial aftermarket revenues was primarily driven by increased demand in our passenger submarket, although all of our commercial aftermarket submarkets were up significantly compared to prior year.
Q3.
Sequentially total commercial aftermarket revenues grew approximately 6% in Q3.
Commercial aftermarket bookings are up significantly this quarter compared to the same prior year period, and Q3 bookings continue to outpace sales.
To touch on a few key points of consideration.
Cool.
Global revenue passenger miles are still low.
But modestly improving each month.
Though the timeline and pace of recovery.
Of the recovery remains uncertain with the expanded vaccine distribution than the lifting of travel restrictions passenger demand across the globe will increase as there is global pent up demand for travel the delta variance of Covid and other future evolutions may further complicate this picture time will tell.
We see evidence of this demand through the recovery of domestic travel domestic air traffic increased each month during our fiscal Q3 and into July Airlines also continued to see strength in bookings and strong demand for domestic travel, especially in the U S. And Europe is also starting to pick up China has now become of watch points. However, the pace of the <unk>.
International Air traffic recovery has been slow and international revenue passenger miles have only slightly recovered there is potential for international travel opening more of his vaccinations increase and governments across the world start to revise travel restrictions.
Cargo demand has recovered quicker than commercial travel due to the loss of passenger belly cargo and the pickup in the E Commerce.
Global cargo volumes are now surpassing pre COVID-19 levels.
This jet utilization data has shown that activity in certain regions has rebounded to pre pandemic or even better levels. This rebound is primarily due to personal and leisure travel as opposed the business travel time will tell of business travel or business jet utilization continues to expand the current trends are encouraging.
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 12% in Q3, 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. No particular program was driving this uptick as the growth was well distributed across the business.
Moving to profitability I'm going to talk primarily about our operating performance or EBITDA as defined.
EBITDA as defined of about 559 million for Q3 was up 32% versus prior Q3.
EBITDA as defined margin in the quarter was approximately 45, 9% we were able to sequentially improve our EBITDA as defined margin versus Q2.
Next I will provide a quick update on our recent acquisition and divestitures the car.
<unk> acquisition integration is progressing well, we have known owned Cobham of little over 7 months and are pleased with the acquisition. Thus far on the divestiture front, we closed the sales of technical airborne components Cytotec in <unk> during Q3.
The divestiture of these 3 less proprietary.
And mostly defense businesses was previously discussed on our Q2 earnings call.
As a reminder for the divestitures of the financial results of these businesses will remain in continuing operations for all periods. They were under <unk> ownership.
Now moving to our outlook for 2021, we are still not of positioned to issue formal guidance for the remainder of fiscal 2021, 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 in the second half of the calendar year.
We continue to be encouraged by the recovery, we have seen in our commercial OEM and aftermarket bookings throughout the fiscal year along with the continued improvement we have seen in our commercial aftermarket revenues as for the defense market and consistent with our commentary on the Q2 earnings call. We expect defense revenue growth in the mid single.
<unk> per cent range for fiscal 2021 versus prior year. Additionally, given the continued uncertainty in the commercial market channels and consistent with our past commentary we are not providing an expected dollar range for fiscal 2021 EBIT as defined.
We assume another steady increase in commercial aftermarket revenue in this last quarter of our fiscal year 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 Cobham.
Aero connectivity, Mike will provide details on other fiscal 'twenty, 1 financial assumptions and updates let me conclude by stating the I am pleased with the company's performance in this challenging time for the commercial aerospace industry.
And with our commitment to driving value for our stakeholders. The commercial aerospace market recovery continues to progress and current trends are encouraging there is still uncertainty about the pace of recovery, but the team remains focused on controlling what we can control. We continue to closely monitor the ongoing developments in the <unk>.
Commercial aerospace industry and are ready to meet the demand as it returns.
We look forward to this final quarter of our fiscal 2021 and expect that our consistent strategy will continue to provide the value of come to expect from us with that I would now like to turn it over to our Chief Financial Officer, Mike Lisman. Good morning, everyone I'm going to quickly hit on a few additional financial matters.
Regarding organic growth, we're now done lapping the pre COVID-19 quarterly comps and of therefore, a return to positive growth territory organic growth was positive 15% on the quarter.
I won't rehash the results for revenue EBITDA and adjusted EPS as you can see all of that information in the press release for today.
On taxes, our expectations for the full year of changed we now anticipate of lower GAAP and cash tax rate in the range of zero to 3% revised downward from our previous range of 18% to 22% and then adjusted tax rate in the range of 18% to 20%.
The reduction in the GAAP and cash rates for the current fiscal year are onetime in nature and were driven by the release of evaluation allowance pertaining to our net interest deduction limitation and some discrete benefits from exercises of employee stock options.
Regarding tax rates out beyond FY 'twenty, 1 we're still monitoring potential changes in the U S tax code under the New administration, and we will provide some guidance on our future rate expectations. Once any legislation is finalized.
On interest expense, we still expect the full year charge to be 1.06 billion.
Moving over to cash and liquidity, we had another quarter of positive free cash flow free cash flow, which we traditionally define of trans times EBITDA as defined less cash interest payments capex and cash taxes was roughly $305 million.
For the full fiscal year, we expect to continue running free cash flow positive and in line with our prior guidance on free cash flow. We still expect this metric to be in the 800 million the 900 million area for our fiscal 'twenty, 1 and likely at the high end of this range.
We ended the third quarter with $4.5 billion of cash up from $4.1 billion of last quarter end.
And finally, our Q3 net debt to LTM EBITDA ratio was 7.6 times down from 8.2 times at last quarter end and coming quarters. This ratio should at worst remained relatively stable, but more likely continue to show gradual improvement as our commercial end markets rebound.
The pace of this improvement remains highly uncertain and will depend heavily on the shape of the commercial end market recovery.
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 start the Q&A.
As a reminder to ask a question you will need the press star 1 on your telephone to withdraw your question.
<unk> press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Robert Spingarn of Credit Suisse. Your line is open.
Hi, good morning, everybody.
Good morning.
Kevin you are still looking for EBITDA as defined margins I think of 44%.
For the year, but you had this uptick in the third quarter I guess of the year to date 44 are you expecting the margin to.
Mixed to deteriorate in the last quarter or is this just a little bit of conservatism.
Hopefully, we're conservative we feel comfortable given the visibility we have right now.
44%.
Makes sense, so hopefully it's conservative and we will do better we're not anticipating anything.
The detrimental in the fourth quarter.
Okay, and then just in the past I think you've characterized the cost structure at about 30% labor 50.
The 50% materials and 20% other with all the moving pieces and the cost takeout over the last year and a half how if at all have those ratios changed on the <unk>.
Go forward basis.
Yes.
Hi.
Yes.
I think it was $35.50, and 15 to be more specific.
And then the.
Not really any material changes those are the kinds of percentages.
Dr around for a while and it's not.
The 35% is not labor.
Okay, So some of which.
Alright.
It is the clear about 15, 15% rough justice as all other <unk> material and some direct costs of 30 fives.
Overhead and there are some labor elements in there and it's almost all wages and benefit of wages and benefit okay. Thanks for clarifying that I appreciate it. Thank you.
Thank you. Our next question comes from David stress.
Barclays. Your line is open.
Thanks, Good morning, everyone.
Morning.
Mike you talked about it sounds like.
Your measure for cash generation coming in towards the higher end.
It's been better than you expected this year as it is I guess, it's working capital, but specifically within working capital what's been better than.
As we think about it.
Things continuing to improve in the next year what the.
What do you expect for working capital.
Yes, it is namely the working capital specifically within the working capital buckets, we're doing better on <unk>.
Counts receivable, most importantly inventory has been a little bit of improvement as well, but accounts receivable has been the main driver typically our business tracks that something like $57.58 days on DSO days, but we're down now closer to the 50.
Quite a bit of working capital has come out of the business $3.$50.400 million out of a R overtime as we get farther into the recovery that's going to have to go back into accounts receivable. So it'll be a use of cash the pace at which that happens depends on the pace of the recovery and we have the cash to support it and fuel that.
Increase of course, it's kind of a good problem to have.
But it will be of $3.50 to 400 million headwind as we come out of this.
Okay.
<unk>.
The comment around.
Getting back to capital deployment.
Is that really just governed by when you get back to the call it looks like.
Right around 6 times net leverage of that is that really the biggest governing factor at this point.
On dividend and share repurchases I think is what youre, referring to rather than M&A I think for now we just want to be conservative and keep the cash that we have as we come out of the <unk>.
Current situation that our end markets are in and then we'll we'll set things real time on average 6 times net debt to EBITDA of where the business of operated historically, we see no rationale or reason to change that going forward.
Now, it's obviously elevated of 7.6 times. So we'll give it some time to settle down and then we assess the repurchase and dividend alternatives quarterly.
And options quarterly okay. It looks like Theyre going to get back to around 6 times early in calendar year 2022 is that right.
Yeah.
It's going to keep ticking down I think.
Future leverage levels, we haven't given guidance yet so it's hard to say it depends on the pace of the recovering here.
But it's going to keep and down as I mentioned in my comments, just as the end markets improve.
Couple of 10, Okay of of point quarterly.
Thanks very much.
Thank you. Our next question comes from Myles Walton of UBS. Please go ahead.
Thanks, Good morning, Kevin I was wondering if you could comment on the bookings trends in the quarter. I know you said the book to Bill was greater than 1 in the aftermarket but maybe.
Sizing of sequentially I think last quarter.
It was up sequentially, 30%, I don't know, where the bookings better sequentially as well this quarter.
Yes.
For year to date, we're up.
<unk> of.
For the quarter.
Or it can be lumpy, so you're right to say that it's a.
A little bit off down, 7%, we were up significantly last quarter.
We still are booking more than we're shipping.
In both quarters. So I think Thats also of the way to look at it.
Okay, and anything with respect to hear the channel. So youre seeing your distribution channels in particular any signs of them, having inventory stocks or destock or the.
Is this progressing as normally as you would expect.
I think it's progressing reasonably normally they're placing orders we're filling them there.
Distribution is a smaller part of our business than it used to be it's somewhere below 20% of our business now the rest of it we are handled directly in the aftermarket.
And there are pass their sales to the market look similar to ours quite frankly.
So the business is performing of back about how we would expect we don't offer.
The volume based discounts for the a significant percentage of our business. So it doesn't encourage overstocking in the channel.
Okay, and Nick or Kevin any update on the Vod Iga on it. Thanks.
Yes.
The <unk> audit.
Audit, we look to have a rough draft. This fall.
And a publication shortly thereafter.
We still have not seen that but still anticipate and still quite frankly anticipate.
Similar conclusions to prior.
Audit so.
That's what we see right now we have closely worked with the Dod the the IAG in the regular weekly meetings to review information data and build a working group to continue to improve our relationship with the Dod.
And the important players on the defense side of the house. So that's what we know so far but.
Yeah sometime this fall.
Okay. Thanks again.
Yep.
Thank you. Our next question comes from the line of Chris Kristine the Milwaukee.
Morgan Stanley Your line is open.
Hey, good morning, everyone.
Good morning, good morning.
And the aftermarket Kevin can you provide more color in terms of action events that are driving the strong bookings are these driven by general air traffic recovery of demand or are there specific events like aircraft coming off of storage that's driving this incremental growth.
I think it has to be all of the above we're certainly seeing.
Whatever destocking they had come to an end.
But we are seeing increased.
Takeoff and landing cycles, which we think are important to follow this industry.
And certainly preparing for future capacity of needs.
I think all 3 are at play here.
Don't have any ability to differentiate which 1 is the most important but I think they are all happening.
And on the divestitures are you mentioned that youre not proceeding with that 1 defense divestiture can you provide more color on what happened there and also overall how do you think about the portfolio do you foresee the future divestitures coming up.
Yes on the first question on the divestiture.
Ultimately the.
Any divestiture for us it just comes down to a question of value and whether or not the offers on the table.
The prices, which you are a seller for us the expectation wasn't met here. So we're happy to go on owning this business in the early innings of.
The esterline integration, we divested the pieces quickly that didnt fit us most and we're happy to go on owning the businesses for which the value expectation just wasn't met.
Thanks and for feature.
The charge in terms of your portfolio are there things that you're earmarking for potential sale.
Not at not at this time as Nick said in his comments, we've now pretty much.
Most of the completed most of the esterline divestitures that we anticipated doing.
This last 1.
Happy to go on it.
Great. Thank you.
Thank you. Our next question comes from Peter Arment Baird. Your question. Please.
Yes, good morning, Kevin Nick Mike Nice result of warning smoke.
Hey, Kevin you make when you made the comment on.
China, just being a watch item, maybe you could just give us a little of what.
The your international kind of sales mixes or just in general if you want to break it down by region just domestically, we don't breakout our sales by region, it's difficult for us to tell as we sell to.
2 airlines, we felt still sell 20% or so through distribution. So it's difficult for me to tell you.
Geographic split obviously, we follow the takeoff and landings flight cycles very closely many of you publish different reports on the and what we've seen recently is.
Similar to what we saw a few months ago, China domestically, we will have a will retreat and then come back and we're in a retreat period right now.
I can only assume that's because of something COVID-19 related but I don't know beyond that so hence why I say, it's a watch item, obviously, our visibility and knowledge of what's happening on the ground there is somewhat limited.
Okay, and just as a quick follow up just your liquidity continues to be very good cash generation you talked about maybe just your appetite for on the M&A front I know you've.
Completed all of the divestitures, just if youre, if youre seeing much or youre, having competence of looking at it in commercial aerospace sales.
And we just.
We're always actively looking at.
At the.
Aerospace businesses.
And we remain active we're not we're not constrained at all of your own you're constrained by good ideas, but we don't we.
We just don't comment on the when anything Thats.
If anything.
We're working on.
I appreciate it thanks Nick.
Yeah.
Thank you. Our next question comes from Sheila <unk> Group of Jefferies. Your line is open.
Good morning, guys, Ben Nick Good morning, how are you.
Is that in there that youre going to say transcends the money so.
My first question is on the man.
The business is the third of your business and it's growing 12% that's pretty surprising given what we've seen from other suppliers kind of can you maybe parse your defense exposure if at all and how you kind of expect that the trend.
Yes, we have seen.
The solid growth in defense this year it is a.
Obviously, an important segment.
We continue to look for opportunities to prune that as you've just heard in.
We're happy with our defense portfolio today.
As I look forward I think continued modest growth will be.
The future I think there is enough political geopolitical unrest in the world that will continue. This we are also not involved in the sort of the boots on the ground part of defense. So we're on the technology of the unmanned.
We're in the space I think we're on the right side of defense business to continue to grow as I looked at our growth for the quarter I Couldnt really point to 1 program that was leading the day, it's nice growth across the board our parachute business has been.
Doing well.
The F 35 business has continued to do well for us, but it's really across the board.
Okay cool thanks for that color and then on commercial aftermarket trend.
Trending at about 65% of 2019 revenue.
Correct me, if I'm wrong on that side of it do you kind of expect of that every day.
Every quarter from here or does it fall out as the kind of see like hick up in China or Asia Pac on air traffic.
I would expect this to be lumpy I would expect there to be fits and starts.
I don't think youre going to have a seamless perfect growth out of this but.
I still expect things to be moving in the improving direction, but it doesn't mean much like we say defense kind of times be lumpy. We've said from the beginning that we anticipate this recovery will also be lumpy in the way we ship product.
Okay, great. Thank you so much.
Sure.
Our next question comes from Ghansham economy of.
Your line is open.
Hey, Thanks, good morning, guys.
Good morning, I was wondering if the if you could elaborate on the trends you saw during the quarter and through July in the aftermarket.
And in commercial OE sort of month by month.
The things, just getting better and better at kind of how it compared to the.
The exit rate at last quarter's Inc.
Things that have improved.
They were improving our monthly much like.
If you look at the world's of global.
Takeoff and landings. It continued to improve you know Europe has come back that's certainly driving our business on the commercial aftermarket side does that.
Maybe refine your question.
Yes, no that's.
So I guess I'm wondering is it sort of broad based across the product suite is it.
We talked about Lumpiness I am just curious if there is.
Was there any 1 month.
Substantial is there any trend of discern I E.
Better than March made way, but I don't think so Jim.
So is there anything that is gradually improving and the book of a gradually improving within within the quarter you can get lumpiness within the quarter as well so.
What we look at is our flight activity continuing to ramp up any of this and that's what gives us encouragement for the future. We also see an order book Thats up significantly year over year.
The sequentially is improving.
And are there any areas in the portfolio that are in the aftermarket portfolio of products that are still lagging like interiors. The schneller I'm. Just curious are you seeing some improvement item on the boiler business sorry, we've seen some improvement from schneller in business. We've also seen some of our.
Higher volume runners have been slower on some products some of our larger aftermarket businesses is the way I mean.
But in general it's happening across the business.
I don't think we're seeing any.
Loss of business any loss of the ship set content as we go forward. We continue to monitor the PMA in used market very closely so anything thats happening is just timing in the marketplace and airlines picking and choosing what they're working on.
Thank you very much growth.
Thank you. Our next question comes from Hunter Keay of Wolfe.
Wolfe Research. Please go ahead.
Thank you good morning.
Morning.
Hi, I was wondering if you talk about Biz Jets all day.
Obviously, you've been noting its leisure oriented you've been saying that now for a while I'm kind of curious.
Individually owned aircraft for the studies corporate fleets that are being used for personal trips.
The wheels up I mean, I'm trying to get a sense for sort of how demand and usage and that market is translating to what of what we're seeing in the aftermarket sales for you guys. Thanks, well, we've certainly seen an uptick in the biz jet cycles, I think up quite dramatically this last quarter.
We're getting back close to the pre pandemic levels I think the bulk of it is still leisure oriented it has to be most of travel as leisure oriented I think we're starting to see some business travel mix in there.
The business jet has been a bright spot, but its a very small part of our business I think about 15%.
Got it.
Okay. Thanks, and then on the R&D you saw a decent uptick last year of R&D dollar spent in fiscal 2008, despite COVID-19 kind of curious how much of that of sort of organic growth versus maybe incremental spend the U.
Acquired from company that you bought and sort of just looking forward, where youre going to prioritize your R&D dollars over the next couple of quarters. Thanks.
Do you mean hunter of step up on a dollar basis or on a revenue basis no net percentage of dollar of about yes that was exactly the nature of is it just a function of just being bigger.
Overall, so yes, the dollar basically.
On a dollar basis, it's likely a function of it being bigger.
Okay.
Generally when we acquire businesses we have.
And to keep the R&D in place.
And so that could be what's driving the step up that youre that youre seeing on a dollar basis.
We run R&D through our individual businesses. So it's a function of the programs and what they do or individually. We don't have the central R&D team as you probably know so this is all linked to programs and projects locally for the business got.
Got it and the sort.
The prioritizing going forward R&D spend any particular areas you're going to be focused on.
It varies by individual op unit day, I'll decide where to invest their dollars they run their own R&D budgets. Okay. Yes, we'll work on good stuff. Nick is telling me, we only work on good stuff and I think he's right.
Okay. Thanks, a lot everybody.
Thank you. Our next question comes from Michael <unk> of Choice Securities. Your line is open.
Hey, good morning, guys. Thanks for taking the questions.
Maybe maybe Nick or Kevin is there any way to parse out.
What the drag current views on.
On the aftermarket revenues in terms of like wide bodied narrow body I mean, obviously the bulk of the utilization, we're saying, it's still narrow body driven or are you guys able to kind of give any specifics to maybe what youre seeing is youre looking at product and pulled the distribution or what the airlines are buying or are you seeing any noticeable pick up there as well.
By the still a pretty big headwind.
Yes, I assume given the takeoff and landings and it's unreasonable headwind for us, but we're market weighted.
So you have to look at what's flying recently, we've seen more wide bodies flying domestic routes.
<unk> hundred <unk>, and 780 sevens and the like doing longer domestic routes than they did previously.
So I think as we look at the business we've been slightly.
Surprised that the wide body doing a little better than we thought it would.
Given what we thought was just the narrow body largely narrow body market. So.
We don't have it all split out and we don't look at it that way on a quarterly quarterly basis, but we tend to be market weighted here and so we follow the takeoffs and landings.
Got it on that takeoff and landings it looks like through through.
August here Theres, probably some flattening on that activity and down mid 20% versus 19, youre not going to give us full guidance, but I think the street's got you probably modeled for up sequentially into the fourth quarter at 5.9% I mean based on on the trends Youre seeing obviously APAC going a bit backwards here.
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Anything we should you should be aware of going into the quarter or next couple of quarters here.
Just on the outlook and as it refers to the FY 'twenty 2 guidance I think we don't want to give guidance yet we don't want to give guidance just for the sake of giving guidance. We think we will give it when the market stabilizes and we feel like we can accurately predict whats to come so for now it's hard to give too much commentary on what the next couple of quarters will look like.
Given the lumpiness of the recovery.
Got it fair enough, thanks, guys I'll jump back in the queue.
Thank you again to ask a question. Please press star wanting a touchstone telephone again Thats star 1 on your <unk>.
Sean telephone to ask a question.
Our next question comes from Seth seismic <unk> of Jpmorgan. Your line is open.
Hey, thanks, very much and good morning.
Good morning.
Just wanted to ask about the.
A portion of the improved.
Our gross adjusted gross margin and EBITDA margin it looks like it came from an uptake and walk contract amortization.
It looks like it was about $20 million in the quarter.
Of which was a.
The tick up from Q2, what is it that the.
That drive that and how should we think about where it's headed.
Yes, they are.
There are puts and takes every quarter on the accounting side, you get pluses from a lost contract reserve release, but there might be a couple of minuses from reserve increases.
On issues that arise that go against EBITDA. This quarter, we netted to a spot that is not that different from where we typically end up every quarter, but you are right. The loss of contract reserve the step up a bit it was $20 million. This quarter last year same quarter was about 7 or $8 million. So it did.
And what drives it is.
From an accounting standpoint, if the GAAP convention, it's tied to individual loss.
Contracts and products and based on when they ship you released the reserves.
Great. Okay, Okay, great. Thanks, and then.
Kevin or Nick.
You guys think of it all about the.
The new start of aggressive.
Antitrust regime that the by the administration is trying to implement and what that could mean for capital deployment going forward.
I mean I just this is Nick I, just don't have any way of making any judgment on that so I'm trying to I just don't want to comment on interest.
Yes, it is difficult for us to get into the political sphere. So we will react as the things, but not speculate.
Great. Okay. Thanks, very much guys.
Thank you at this time I would like to turn the call back over to Jamie statement for closing remarks.
Thank you all for joining US today. This concludes today's call. We appreciate your time and out of the rest of your day. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yes.
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