Transdigm Group Incorporated (TDG) — Q3 2020 Earnings Call Transcript

Thank you, and welcome to TransDigm’s fiscal 2020 third quarter earnings conference call. Presenting this morning are TransDigm’s Executive Chairman, Nick Howley, President and Chief Executive Officer, Kevin Stein; and Chief Financial Officer, Mike Lisman. Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information. Before we begin, we’d 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 filings with the SEC, available through the investors section of our website at sec.gov. We would also like to advise you that during the course of our 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 measures and applicable reconciliations. I'll now turn the call over to Nick.

Good morning, and thanks for calling in. As usual, I'll start with a quick overview of our strategy, a summary of a few significant items in the quarter, and then Kevin and Mike will expand and give more detail. To reiterate, we're 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 aerospace cycle. Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we must stay very focused on both the details of value creation as well as careful allocation of our capital. To summarize, here are some of the reasons we believe this. About 90% of our net 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 products. Most of our EBITDA comes from aftermarket revenues, which typically have significantly higher margins and provide relative stability during downturns. The commercial aftermarket revenue, the largest and most profitable portion of our aftermarket, dropped sharply, as we expected due to the steep decline in air travel. This has happened during other severe shocks. However, in this unique situation, it will likely take longer to recover. Simply stated, our commercial aftermarket will recover as people worldwide start to fly again, though not necessarily in lockstep. There are indications of this starting to happen, but the rate of improvement is spotty and far from clear. 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 organizational structure and a unique compensation system closely aligned with our shareholders. Fourth, we acquire businesses that fit that strategy and where we see a clear path to private equity-like returns. Lastly, our capital structure and allocation are a key part of our value creation methodology. As you saw from our press release, we had decent performance in a very tough quarter. Revenue and EBITDA, as defined, were down substantially, with puts and takes, but roughly in line with the planning scenario we used for sizing. To roughly frame the Q3 revenues versus our planning assumptions, the commercial aftermarket wasn't down quite as badly. The commercial OEM was a little worse and our defense business was not quite as strong, due to backlog timing, tough comparisons and two operating unit-specific situations. Fortunately, the year-to-date defense bookings are running well ahead of shipments, which continues to bode well, and the defense backlog available to ship in Q4 is strong. In addition to safety, the two most important items we focused on for the last quarter were: first, reducing our costs as quickly as possible. Kevin and his team did an outstanding job of reducing these costs very quickly. Our revenues were down roughly a third from the previous run rate, and we got our costs down almost ratably very quickly. We expect to get some further cost reduction in the fourth quarter. The second priority was to assure substantial liquidity. We raised an additional $1.5 billion at the beginning of the quarter. This new money raise is an insurance policy for these uncertain times. It's unlikely that we will need it. This is a great company with outstanding products and market positions. The only way you get in serious trouble due to this market condition is if the situation becomes much worse than anyone expects and you run out of fuel or cash. We filled our tanks as full as we could at a reasonable price. The actual liquidity in Q3 was pretty good. We generated almost $400 million of positive cash flow and closed the quarter with a little under $4.6 billion in cash. Absent some large additional dislocation or shutdown, we should come out of this with substantial amounts of firepower. We continue to look at possible M&A opportunities and are always attentive to our capital allocation. Both the M&A and the capital markets are always difficult to predict, but especially so today. Acquisition opportunities in the last quarter were minimal. This isn't unexpected. We are looking for good proprietary aerospace businesses as they tend not to sell in bad times. We are still actively looking for M&A opportunities that fit our model. In general, on capital allocation, we will tend to be cautious until the recovery picture comes into focus a little more clearly. Hopefully, this won't be too much longer. We continue to suspend guidance. There is still just too much uncertainty. We will reinstate the guidance when we feel we have a clearer picture. We do expect that, absent any large additional dislocation or shutdown, Q4 revenues should be better than Q3. We also expect some additional cost reductions in Q4. Depending on the exact shipping mix, this could result in modest margin expansions in the next quarter. We believe we are about as well positioned as we could be right now. We'll watch the market and react accordingly. And now let me hand it over to Kevin to review our present performance and expand on our assumptions and COVID-related activities.

Thanks, Nick. Today, I will first provide my regular review of results by key market and profitability of the business for the quarter and then cover outlook and some COVID-19 related topics. Q3 was a challenging quarter against the backdrop of an unprecedented slowdown across the commercial aerospace industry and a difficult global economy. In Q3, we saw a significant unfavorable impact on our business from the pandemic as demand for travel declined at a rapid pace and has remained depressed. Despite these headwinds, I am pleased that we were able to achieve an EBITDA as defined margin of 41.5%. Achieving this EBITDA as defined margin was primarily a result of our swift preemptive cost reduction actions and continued focus on our operating strategy. Due to COVID-19, our Q3 GAAP revenues were down approximately 33% versus prior year Q3, and EBITDA as defined was down 36% versus the prior year. Mike will provide more details on the financials later in the call. 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 2019. That is assuming we own the same mix of businesses in both periods. In the commercial market which makes up close to 65% of our revenue, we will split our discussion into OEM and aftermarket. Our total commercial OEM market revenue declined approximately 43% in Q3 when compared with Q3 of fiscal year 2019. The decline in the quarter did reflect a minimal headwind from the impact of the ongoing 737 MAX production halt. However, the decline is primarily due to the pandemic. Our quarterly commercial OEM bookings were down over 70% versus prior year quarter due to the OEM production rate cuts as a result of COVID-19's impact on commercial aircraft demand. We believe some level of inventory adjustment is likely in this result. The pandemic has caused a significant negative impact on the commercial OEM market, and we believe that we will continue to see that. We are under the assumption that the demand for our commercial OEM products will be significantly reduced during the remainder of fiscal 2020 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 significant negative impacts on our commercial OEM end markets for some uncertain period of time. Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenues declined by approximately 52% over the prior year quarter. In the quarter, the decline in the commercial transport aftermarket was primarily driven by decreased demand in the passenger and interior submarkets. There was also a decline in the commercial transport free market, but at a less impactful rate. Our quarterly commercial aftermarket bookings were down approximately 70% versus prior year quarter results. As a result of the decrease in air travel demand and uncertainties surrounding COVID-19, which is directionally in line with observed revenue passenger mile declines. The rapid and dramatic decline in demand for air travel began late in our Q2 as global restrictions on business and shelter-in-place orders went into effect in response to the pandemic. This led to a significant reduction in global flight capacity and parked aircraft across the world. Certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, while others, particularly international markets, remain closed or are enforcing quarantines. Airlines have added back some flight capacity. However, recent events have mostly slowed the recovery in the U.S., while the rest of the world seems to be improving slowly. Considering these variables, the shape and speed of the recovery remain uncertain. 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 recently forecast a 63% decrease in revenue passenger miles in calendar year 2020 compared to 2019. Cargo demand was weaker prior to the COVID-19 crisis as FTKs have declined from an all-time high in 2017. However, a loss of passenger belly cargo due to reduced passenger demand could provide some unexpected opportunities. Cargo operations have been impacted to a much lesser extent by COVID-19 than commercial travel has. Business jet utilization data was pointing to stagnant growth before this economic downturn. Now during this pandemic and in the aftermath, the outlook for business jets remains unpredictable as business jet flights are rebounding, but due to personal and leisure travel as opposed to business travel. The sustainability of this trend is difficult to foresee. As we review the future of the commercial aftermarket, a concern may rise around the potential impact from legacy airframe retirements. A wave of retirements could augment the surplus market or used serviceable material market, which I will refer to as USM. USM has historically been a low risk for TransDigm. We conducted a study a few years back to validate the low-risk of USM for our business and recently did a refresh study that resulted in the same conclusion. We do not see a material exposure to USM at TransDigm. This USM market mainly focuses on high-value parts that have a resale unit price exceeding $5,000 to $10,000, are repairable and typically focused on engine, avionics or landing gear systems. Most of our parts fall well below this $5,000 to $10,000 level, a large percentage are consumable and are not engine-, avionics or landing gear-related. Additionally, our examination of part numbers targeted for USM resale and searches for TransDigm parts for sale in the USM market found an immaterial percentage of our aftermarket parts available for sale in the USM market, validating the low risk of USM for TransDigm. However, we will continue to closely monitor USM to watch for any changes in these historical trends. As the COVID-19 situation is ongoing, the duration and severity of the pandemic are still unclear and longer-term impacts for the commercial aftermarket are hard to predict. We do believe the commercial aftermarket will recover as long as air traffic continues to improve. So that aftermarket recovery is a question of when, not if. Now let me speak about our defense market, which is typically about 35% of our total revenue. The defense market, which includes both OEM and aftermarket revenues, declined by approximately 12% compared to the prior year Q3. As a reminder, we are lapping tough prior year comparisons as our defense revenue accelerated in most of fiscal 2019. Year-to-date, defense bookings were up mid-single digits and have solidly outpaced year-to-date sales. As we have said many times, defense bookings and sales can be lumpy. This quarter, there were specific timing-related issues out of airborne systems due to delays in international parachute sales and a safety-related issue, which delayed shipments at Armtec. We expect our defense business to continue to expand due to the strength of our current order book. Moving to profitability. I'm going to talk primarily about our operating performance or EBITDA as defined. EBITDA as defined of about $424 million for Q3 was down 36% versus prior Q3. EBITDA as defined margin in the quarter was approximately 41.5%. I am pleased that in light of a difficult global economy and commercial aerospace industry, we held the EBITDA as defined margin almost flat with last year. We were able to achieve such an EBITDA as defined margin as a result of our cost mitigation efforts and a consistent focus on our operating strategy. On Esterline, we are now over a year post close. Despite the impact of COVID, the integration continues to progress and exceed our expectations for growth in this largest of TransDigm acquisitions. As we have stated in the past, we will no longer refer to any Esterline specific metrics as these businesses have become part of the fabric of TransDigm. Now let's look at our outlook. As mentioned, we currently expect COVID-19 to continue to have a significant adverse impact on our sales, EBITDA as defined and net income for at least the remainder of fiscal year 2020 under the assumption that the pandemic will negatively impact customer demand, with commercial OEM and commercial aftermarket being the most adversely impacted. I do want to reiterate the market conditions we assumed for the second half of fiscal 2020 that we previously disclosed. As a reminder, this was not meant to be guidance but was used for our organizational rightsizing analysis that drove the reduction in force levels implemented to date. We are still utilizing the following regarding organization sizing needs for the second half of fiscal 2020: Commercial aftermarket declines of 70% to 80%, we will likely perform better here. Commercial OE declines of 25% to 40%, we may perform a bit worse here. Defense growth in the mid-single digits, which is in line with our prior guidance for the defense end market. This still appears possible. Next, I would like to review our COVID-19 response in more detail. We remain confident in our business model over the long term and are focused on mitigating the impact of COVID-19 to our business while supporting customers and employees. Additionally, many of our businesses have taken the opportunity to explore new business opportunities by working on developing highly engineered solutions for emerging needs arising from COVID including antiviral, antimicrobial technology, air purification and touchless technologies, to name a few. A cross TransDigm team has been put in place, led by Joel Reiss, one of our most experienced Executive Vice Presidents, to help drive this effort. Now let me provide an update on specific cost-saving actions we have taken in response to the reduced demand and uncertainty resulting from the pandemic. We are always monitoring these costs closely, but even more so in a downturn to ensure we react swiftly and thoughtfully in response to the current environment. We understand that we cannot control the external factors in the downturn, but we remain extremely focused on those items that we can control, such as our cost structure. These cost mitigation efforts were previously disclosed and include a total workforce reduction of greater than 30% was implemented, including both temporary and permanent reductions. This includes the previous reduction due to the 737 MAX production rate changes and the reduction in force due to COVID-19 implemented in the third quarter of fiscal 2020. This compares favorably to the target provided on the second earnings call. Furloughs continue to be utilized to align operations with customer demands until a more permanent view of the market can be realized. We will continue to vigilantly monitor our operations and external events or forecasts and will react quickly, as we always have, to further cost control needs. So let me conclude by stating I am pleased with the speed at which TransDigm has responded to the pandemic, taking immediate actions to protect employees from the spread of the virus, while also dealing with the harsh reality confronting the broader commercial aerospace industry. The pandemic has been unprecedented, and uncertainty remains about the duration and impact on the pace and shape of any market recovery. However, we have a strong tenured management team that continues to remain poised and ever ready to act quickly and with purpose. We continually monitor the ongoing developments in the commercial aerospace industry and our own business to determine the best course of action. I have the utmost confidence that through our swift cost mitigation efforts and diligent focus on our operating strategy, the company will emerge more strongly from the ongoing weakness in our primary commercial end markets due to an improved cost structure. With that, I would now like to turn it over to our Chief Financial Officer, Mike Lisman.

Thanks, Kevin, and good morning, everyone. I'm not going to elaborate on the operating results for the quarter in too much more detail, as you can see that information in the press release and the presentation deck for today. Organic growth for the quarter was negative 33%, driven primarily by the commercial end market declines that Kevin referenced. Two quick updates on interest expense and then one more on taxes. Interest expense expectations are unchanged from last quarter and should be approximately $1.03 billion for the fiscal year. On taxes, our fiscal 2020 GAAP cash and adjusted rates will be 4 to 8 percentage points lower than our initial guide for the year due to benefits included in the CARES Act. This quarter, there was a bit of noise with the GAAP tax rate due to our low EBT that resulted in a rate spike to 114%. But as you'll see in the call slides for today, despite the high quarterly rate, our full-year expected FY 2020 GAAP rate will still be in the 17% to 19% range. Moving over to the balance sheet and liquidity, as of the third quarter end, our net debt-to-EBITDA ratio stood at 6.3 times. Assuming air travel remains depressed, this ratio will continue ticking up in coming quarters as stronger quarters from last year roll out of the LTM EBITDA computation. On liquidity, cash generation for the quarter was stronger than we expected. This was driven primarily by net working capital inflows as a result of collections on accounts receivable, mainly from our commercial customers who are now operating at reduced activity levels. While there is substantial uncertainty in our commercial end markets right now, we expect to continue running free cash flow positive going forward for the balance of the year. From an overall cash liquidity and balance sheet standpoint, we think we remain in a good position here and well prepared to withstand the currently depressed commercial environment for quite some time. Our cash balance is now just under $4.6 billion, and additionally, we have access to over $500 million of our revolver should we need it. And as a reminder, on our capital structure, we don't face any sizable debt maturities until July of 2024, so almost four years from now. With that, I'll turn it back to the operator to kick off the Q&A.

Hi, good morning.

Good morning.

Kevin, just diving right in, I just wanted to reconcile the aftermarket bookings down 70%, but sales down 52% or, I guess, 57%, if we just think about large jet. What is the lag here? And should we - well, you said, you'd outperform that 70% number? Is there a downside from here? And then as a follow-up to that, how do we think about what the level of pricing you're still able to capture?

Your first question pertains to CAM forecasts and pricing. Let me address pricing first. In previous downturns, we have not faced limitations in our ability to implement value pricing when necessary. Our costs are increasing significantly, so we do not foresee any issues with pricing, as we have not encountered them previously. Regarding CAM, our forecast carries some uncertainty. A significant portion of our commercial aftermarket is booked and shipped within the quarter, and there are variables that could influence how this unfolds. I can share that our backlog is reasonably strong and has remained relatively flat year-over-year; we are not experiencing a significant reduction in our backlog. Additionally, there have not been many cancellations, which is a concern some may have. We are seeing some reschedules and pushouts. This gives us confidence that Q3 will serve as a low point and Q4 will show improvement. The exact market split for how things will develop is still somewhat uncertain, but we expect gradual improvement. However, stability will not occur until there is consistency in the end market and in flight operations worldwide. We are monitoring this closely.

And just as a follow-up, how are you thinking about what's in the channel, in the distribution channel relative to what you're producing?

Well, our distribution channel, which is about 20% of our aftermarket, we do have some visibility to some of them on inventory levels, but that is minor by comparison to the rest of the industry. So no, I don't have visibility on what airlines or on the OEM side, what OEM partners are stocking currently. I tend to be surprised at times that the amount of inventory that's in the channel, but I have no indication of that right now. So we don't know what the inventory is like. We are seeing demand. We're seeing some urgent expedite demand in the aftermarket. So that would tell me that this is going to be fits and starts of recovery as we move forward.

Hey. Good morning, team.

Good morning.

I have a couple of quick questions. First, regarding the inventory situation, do you believe we have reached a peak in your inventories? When do you anticipate that these will peak and begin to decline? Secondly, concerning new opportunities, in past downturns, you have managed to identify niches that arise from external needs. Do you see any potential developments in this area that could be pursued profitably, or do you think this situation is too temporary? Thank you.

We've noticed our inventory levels have risen more than we would prefer. This increase is primarily due to scheduled raw material deliveries rather than excess finished goods. We need to address this issue. Mike would agree that while our performance in accounts payable and accounts receivable has been satisfactory, inventory management still requires improvement. We have communicated this to our team and discussed it with each business unit. Regarding new business opportunities, I'm reminded of the opportunities that arose post-9/11, particularly in terms of cockpit door modules and their locking mechanisms, which were developed by us in response to the changing market needs. We are now seeking similar opportunities in light of the current pandemic. To facilitate this, we've engaged Joel Reiss, a seasoned expert in the development of cockpit door modules, to identify potential new business avenues. We've already received interest from airlines and original equipment manufacturers, and we will monitor how this unfolds. There is significant interest in our offerings, and we are aware of our role in helping restore confidence in air travel as the market begins to rebound. We are proactive in this, and while we hope to see results from our efforts, we are actively engaged in exploring innovations such as antimicrobial and antiviral touchless technologies, which we believe present exciting possibilities.

Kevin just very quick…

I want to add one point. Regarding the free cash flow that Mike mentioned for the future, it's based on the assumption that there won't be any reduction in working capital, just to be cautious.

Okay.

That also we can deal with it, yes, it's an important point.

When I mentioned inventory issues, that's from my operating cash, not from a cash flow.

Okay. And just as a follow-up, Kevin, to that, the comment on the new business. Is the primary hurdle here certification? And making whatever it is that you're going to produce, I guess, insulated in some way, like many of the other products you provide?

I’m not sure how to respond to that. Certification will certainly be a factor, and it relates to something that needs to be certified. Ultimately, it will depend on interest and how the market develops and what the demand looks like. Touchless technology could be beneficial without a doubt. There will likely need to be a new perspective on flying, as well as in many other areas of society. This is just one initiative aimed at creating products that make people feel more at ease about flying, especially on long flights. We need to consider what that entails and what solutions we can provide to facilitate that.

Okay. Thanks, guys.

Thanks. Good morning, everyone.

Morning.

In considering the aftermarket moving forward, and Kevin, based on your comments about limited exposure to USM, do you anticipate that your aftermarket will follow overall departure levels or flight hours? Is there still a possibility of significant variation between your aftermarket and the underlying level of flight activity?

I believe Nick mentioned in the prepared comments that he expects some irregularity and potential disruptions related to increased flying and how the market rebounds. There tends to be a natural lag. As these fluctuations move through the supply chain, we haven't noticed that yet. We will be ready when it occurs. Those are our current thoughts. I want to emphasize that we respond swiftly to market changes and adjust accordingly. We focus on converting costs to variable ones and finding ways to respond promptly. Our forecasts are often fluid, and what we can guarantee is quick execution, which we demonstrated last quarter and will continue to show as the aftermarket evolves. It might be irregular, and there could be some inconsistencies. However, I don't foresee USM or PMA having an impact on us. Eventually, as more people start to fly, our business will grow.

I'd just add that the primary thing we are monitoring now is the number of flights, because to some extent, there isn't much point in worrying about how many people are on the flights until the flights start taking off.

Yeah, take-off and landing.

I would like to inquire about the margin comment. I believe you mentioned the possibility of margin improvement in the fourth quarter compared to Q3. What underlying mix are you considering for that comment? At this stage, do you think that maintaining over 40% adjusted EBITDA margins is feasible going forward? Thank you.

Yes, let me address that since I made the comment. I believe that assuming above 40% is reasonable for the next quarter, barring any significant disruptions or shutdowns. We expect to see some additional cost reductions in the upcoming quarter. However, I am not entirely sure about the exact shipment mix. There is a component in the commercial aftermarket, which is the highest margin segment of our business. The variability around that might exceed the savings anticipated from cost reductions, making it somewhat difficult to predict. I think assuming above 40% is appropriate, and while I would expect a slight increase, it’s challenging to determine until we have a clearer understanding of the mix.

All right. Thanks very much.

Sure.

Hi, good morning.

Good morning.

I wanted to follow up on the aftermarket comments. Kevin, you specifically mentioned some variability in what we've seen geographically. Could you share insights on the trends you're observing in the aftermarket across different regions and whether there are any factors contributing to your aftermarket revenues being higher or lower in a particular area compared to the overall industry trend?

Ken, we don't review our aftermarket performance orders, booking, sales by geography like that. So it's difficult for us. When things go through distribution or some of the OEM partners, we don't get that visibility where things end up. So I don't have any insight for you on the geographies. I've heard from our partners that China is improving, that Asia is doing much better. We're using that as the canary in the coal mine for how the rest of the business should be doing. We're starting to see that pick up. I can only use, say that anecdotally, again, from conversations with our distribution partners. That's the only thing I can offer on geography right now.

Okay. That's helpful. And it sounds, obviously, that you're expecting or seeing some sequential improvement. Can you just provide any commentary on maybe bookings through July in the aftermarket, and sequentially, any of the trends you've seen coming out of the second quarter?

I can't comment on July. What I can say is that during the quarter, we observed our total bookings improve month-over-month across the business. Looking at our distribution partners, we've also seen month-over-month improvement in POS. Although it's down by the same amount that our business is down, we've started to see it improve from the very low point in April. I offer that as an indication that demand and shipments are gradually improving.

Okay. I leave it there. Thank you very much.

Sure.

Thanks. Good morning. Nick, you commented on the lack of – maybe lack of desire and counterparties to sell in a downturn. Just kind of looking back to prior 2008-2009 or even softer situations in the mid-2000s, it's not clear that there was any big pauses in your deal flow during that period of time. So I'm just curious, are you sensing that, that the reluctance? Or are you seeing the reluctance of offerings to the market?

We aren't seeing much. We aren't seeing much. And this – if you have particularly a commercial business, it seems to me to be not a particularly good time to be selling it, if you have any choice. And, as frankly, the data would say that we aren't seeing any or any significant number.

Yeah. Okay. And then, Kevin, maybe can you comment on the Armtec safety situation you mentioned? And this, I think, came with Esterline. Is there something, can you quantify it and how quickly it resolves itself?

Yeah. It's an ongoing effort for us. The Armtec business makes, well, armament products, chaff, flares and the like. And we had a safety incident that has caused us to shut down production and to have to rework some of our manufacturing processes, procedures. This will be resolved, but this competitive business is not – it's a driver of revenue for us, but is very competitive, military. So it's a big driver of revenue, not a great driver of EBITDA. This has been a headache for us, but the team is working through it.

Is it necessary to get back up to that mid-single-digit for the year? Is that the precursor?

Interesting question. As I – I don't think it's necessary for Armtec to be back up and running. We continue to make progress there, as we do across airborne and a few other businesses that we called out some of this, which was just lumpiness. As we look forward, we have the backlog necessary to support our forecast. We just need to now see if it all comes to pass. But it's – the military backlog tends to be more consistent. It tends to be – you can count on that. It's booked out further in advance. So we feel reasonably confident about this – the next quarter here, Q4.

Okay, great. Thanks.

Yeah.

Yeah. Thanks. Good morning guys.

Good morning.

Just two questions. First, I was wondering if – what would you anticipate the duration of the OEM product destocking will be, how many quarters? And just based on indications from customers? And then lastly, to follow-up on Myles' question, how much of an impact did the two issues you cited at the defense units. Like, can you quantify the sales impact from those that are going to make up eventually?

Well, yes, as far as that impact, it was – you follow the lion's share rule. I mean, those are the things that jump out to you. Obviously, that doesn't account for all of it. There was some lumpiness in the rest of the business that bore out in the scheduled deliveries. That seems to shake out in Q4. But again, we'll have to watch that closely. On anticipated product restocking order, you know, the inventory levels that are in the system, how long they will have to burn down, I really don't know. I don't have any visibility on inventory levels. I anticipate that they don't have a lot of our products, but we really don't know that for certain. So I can't give you any time frame on how long destocking will last.

Thank you.

Thank you so much. Good morning.

Good morning.

This is probably a question for Nick. Kevin, you described the downturn you've seen so far as unprecedented. But I was wondering, if you look at what your airline customers have done so far, are they doing anything different from what you've seen in prior down cycles?

I would say the slam down in value is harder and appears to last longer. I mean it just essentially just froze up in April and is still not very good, the ordering levels in the aftermarket. Even after 9/11, by this point, it was probably starting to come back.

Right. That’s helpful.

You all know that you can monitor flights worldwide. I can't recall exactly, but I believe David Strauss publishes information on this daily. Ultimately, this will influence the rate of recovery. If you look at the data, the U.S. has leveled off a bit, operating at about 45% to 50% of its previous rate. It's stalled somewhat. China appears to be recovering quite well, especially in domestic travel. Europe is also seeing a bit of improvement, but it's happening slowly. Overall, the pace of recovery is gradual and inconsistent.

I was wondering if there'd been anything more structural if you've seen any more like aggressive destocking or restructuring of just the phasing of maintenance, you know, a lot of these airlines are in survival mode. I was just wondering about that.

We haven't, I don't think, have we?

No. We've not seen anything like that. Yes, just not there.

Thank you, again. This concludes today's call. Thank you for your time and for joining us today.