KLXI
#Pricing in the aftermarket, as you know, is very healthy.
That's the most profitable portion of our business.
The aftermarket business was about flat for the last six months.
And basically what we're seeing is the impact of all of the retirement of the airplanes that were very heavy maintenance users.
That's pretty much on a global basis; no specific region, no specific country.
Basically you've got a lot of retirement, more than 4,000 such retirements.
There were more retirements announced yesterday, as you may have noticed.
So, aircraft like MD-80s and MD-90s and 737 classics and so on and so forth, 747s, are being retired at a pretty healthy clip and that is negatively impacting demand in the aftermarket.
Nevertheless, we were about flat for the six-month period.
We don't expect this to really improve much until the 8,000 or so aircraft delivered over the last half-dozen years begin to move to the point where they will require heavy maintenance, C and D checks.
So no particular region is the issue here.
Pricing is not the issue.
It is solely demand, and demand related to maintenance associated with aircraft, either reduced maintenance from aircraft that have been retired or maintenance not required on the new aircraft which have been introduced into service.
Yes, we have terrific relationships with our suppliers.
And obviously, we do take advantage of the fact that we're probably the largest single customer for every one of the suppliers.
We stay in very close touch with pricing in the marketplace, and obviously that helps them.
On the other hand, it's pretty clear that our customers and our suppliers compete with us.
I mean Boeing and Airbus are competitors; the suppliers are competitors as they continue to sell product or try to sell products to our customers.
Nevertheless, we seem to be gaining share, and I think that's a function of our superior service and execution.
Sure, <UNK>; it's <UNK> <UNK>.
I think as we commented actually at your conference only a couple of weeks ago, we've seen numerous major aerospace manufacturers reporting difficult year-over-year comparisons.
In particular, this extends across most of the major component manufacturers of APUs, wheels and brakes, HVAC systems, avionics, and engines.
The manufacturers I think have reacted by significantly lowering production rate and pushing out supply chain purchases.
We think this is a temporary condition, almost a pause, if you will, relative to the long-term trend of OE activity.
The order ---+ you're talking about the new program wins.
Right.
They are both domestic and international, and there are several new customers involved.
And that is a really nice improvement; we haven't had a quarter like this with so many new program wins for quite a while.
We expect that to begin to be reflected as early as the third quarter of this year, and so that's one of the reasons that we have felt comfortable about giving guidance for organic revenue growth for our core business in the third and fourth quarters of this year to be up mid single-digit.
Yes, I'm going to ask <UNK> to comment, because I want him to do some work here.
I did lots of work getting up to this point; come on.
Yes, <UNK>, we do believe that 18% over the long-term remains the appropriate target, obviously subject to overall activity levels.
But in particular, as the business normalizes for us in terms of mix between OE and aftermarket that will continue to benefit our overall margin as well, as we continue to integrate Herndon and get to the targeted margins for that consolidated business.
Just to add to that, <UNK>, during this year we've got the costs associated with the integration of Herndon, and we've got duplicative IT cost because we have actually double systems going on right now.
We have to operate those in tandem for a few quarters here as we wean ourselves off of the B/E Aerospace Systems to our own independent freestanding system.
And while our ASG segment had its own proprietary developed IT system, the Company overall needs to have its own freestanding systems for all of the other IT functions.
So the combination of the integration cost associated with Herndon, which we expect to be somewhere in the neighborhood of around $10 million, together with the duplicative IT cost will go on for some time.
Then in the second half of 2017 we expect to get back much closer to the 18% margin.
And then with our expectation that at some point here aftermarket activity begins to re-couple with traffic and the aftermarket becomes a higher percentage of the total, we would expect our margins to be in the 18% range.
So for a while, we'll have a drag here because of Herndon and duplicative IT assets and getting the integration complete.
That's going to cost us about $10 million.
But on the other hand, we expect about $10 million of EBITDA annually ---+ benefit.
That is, a synergy benefit from the $10 million one-time investment.
So I think it's obviously a very positive thing for the Company.
And, <UNK>, we're doing a great job of controlling SG&A expenses as a percent of revenues at both businesses, but certainly at ASG, which is a big component of that.
We continue to target 12% to 13% SG&A costs, which I think is excellent.
And I would say, back to <UNK>'s question about pricing, again, our gross margin continues to be quite strong as a result of our value proposition and the work we can do with our suppliers.
So it all triangulates back to what <UNK> said about the incremental drag costs being resolved and getting back to the 18% level.
Well, taking the second half of your question first, those airplanes on average would run for about six years before requiring heavy maintenance.
That's an approximation, okay.
So the airplane which were delivered six years ago would be scheduled to come up for heavy maintenance during this coming year.
And it's a rolling thing, right.
So as the airplanes in general get to an operational period of six years ---+ and of course depending upon the number of flights run and hours run, so this is an average sort of a number.
And it's going to be different from airline to airline, and airplane to airplane; but on average, about six years.
And the first part of your question was, I think, about the aftermarket.
Our aftermarket business is 100% commercial aftermarket for the ---+ well, let me rephrase that.
The aftermarket business is both commercial and defense; but our aftermarket business prior to the acquisition of Herndon was an aftermarket business associated with only defense manufacturing customers.
And while we parse that business into both military OE and aftermarket, it's mostly a commercial aftermarket business.
On a going-forward basis, the Herndon business is primarily a military aftermarket business and is partially a commercial aftermarket business, but mostly military.
And as we report on a going-forward basis we will not be able to report Herndon, because that integration is underway.
We'll actually parse their business into the aftermarket, so military aftermarket will become a bigger component of our overall aftermarket business and OE.
And the Herndon OE business is being rationalized and pruned as we speak, as it was not a particularly profitable business.
<UNK>'s back.
<UNK>, you're back.
You know, a year ago we stated that we thought that production and utilization ---+ we would expect production and utilization to be balanced by sometime in 2017.
We are pretty close to a balance between production and utilization now.
We're not there yet, but we're close.
We still have pretty substantial inventories to go through.
But all of those ships that were loaded up with oil sitting on the Gulf Coast are now gone.
So the inventories are being depleted.
Production and utilization are getting into balance.
We don't expect an improvement in revenues in that business in the third or fourth quarters of this year.
In fact, just the opposite: we expect revenues to decline in both of those periods compared to the prior year, but not to decline very much compared to where we are now.
I think we hit the trough in that business in the first quarter from a profit and cash flow point of view.
I think that we are hitting the trough in revenues in this quarter.
And I think that we will improve our cash burn rate in each of the third and fourth quarters of this year, although we're getting to the point where we can't improve very much and still maintain the quality of the services that we provide.
So we're kind of there.
We burned $14 million in this quarter; that is both EBITDA and CapEx.
EBITDA was a negative $12 million; CapEx was a couple of million dollars.
So we burned about $14 million during the quarter.
We might improve that a little bit in the third and fourth quarters of this year.
And then sometime in 2017 we would expect to see things begin to improve with a view towards perhaps getting to profitable operations certainly in 2018, maybe sometime in 2017.
I think most of the analysts that follow the energy companies are basically looking to 2018 as the first year of profitability and trying to value those businesses based on their expectation for profitability of operations in the 2018 period.
<UNK>.
It's going to be a little lower than that, <UNK>, for the year.
<UNK>.
Yes, 100% or a little better.
Yes, what we're saying is that we expect operations to improve in 2017, revenues and profit to improve in 2017, and operating cash flow to improve as well.
We don't yet have a plan for capital expenditures for 2017; I mean, we haven't done our 2017 plan.
But operating cash flow is expected to improve, and we can talk about free cash flow after investments when we talk with investors at the end of this year, which is what we have traditionally done.
Yes, we do, but ---+ and I don't know what it is at this second.
And parsing $2.6 million is not something that ---+ why don't you give <UNK> a call after this call, and he'll see if you can find the two parts of the $2.6 million.
We do not expect it to pick up in the second half materially.
<UNK>, second bite at the apple.
So, <UNK>, you decided you would become a troublemaker at the very end of this call, right.
We don't talk about acquisitions before we do them.
And Herndon was pretty unique.
I mean, it was a market segment that we really were not addressing and weren't participating in.
The aftermarket military depots which basically maintain aged military aircraft and ground vehicles and so on and so forth, that was a market that we were just not participating in at all.
So in doing the Herndon acquisition, most of what we got is a brand-new customer base and in many cases for parts that we already had, were already buying for various manufacturing platform, and buying at much better cost.
So the opportunity there to have lower cost, consolidate facilities, and consolidate headcount, and to squeeze out $10 million of extra EBITDA was a pretty outstanding kind of opportunity.
They don't come along that often.
So we're trying to be judicious here.
We do have $0.25 billion in cash on the balance sheet.
We do have $1 billion of liquidity.
But we're being very careful in marshaling that liquidity, and the bar is pretty high.
We have the alternative of buying back our shares, which are a really good purchase at the present time.
So we're not anxious to do something right now.
If a major opportunity comes along we will address it and analyze it in the context of ---+ does it really add incremental shareholder value.
Does it create value for our shareholders.
Or would we be better off just buying our own shares back.
I think that you have seen that a couple of companies, big companies, have reported high single-digit decreases in revenues in their end items to the market during this past quarter.
All of those customers are our customers.
We serve all the customers ---+ obviously Boeing and Airbus to a much lesser extent.
But the folks that manufacture HVAC systems and APUs and wheels and brakes and engines for rotorcraft, those are all our customers.
And they experienced a tough quarter, and they pushed back by buying less, depleting inventories ---+ which you would expect.
And I think that's very much a temporary thing, <UNK>.
Okay, thank you.
Thank you.
