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spk00: Thank you for standing by and welcome to the Q3 2021 Transdime Group Earnings Conference 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 0. I would now like to hand the conference over to your host, Director of Investor Relations, Jamie Steeman. Please go ahead.
spk03: Thank you, and welcome to Transdime's Fiscal 2021 Third Quarter Earnings Conference Call. Presenting on the call this morning are Transdime's Chairman, Nick Howley, President and Chief Executive Officer, Kevin Stein, and Chief Financial Officer, Mike Lisman. Please visit our website at transdime.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's latest filings with the SEC available through the investor section of our website or at sec.gov. The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income, and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliation. I will now turn the call over to Nick.
spk12: Good morning, and thanks to everybody for calling in. As usual, I'll provide a quick overview of our strategy, then a few comments about the organizational change we announced, and Kevin and Mike will give a color on the quarter and the performance. To reiterate, we are unique in the industry in both the consistency of our strategy in good and bad times, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize... Some of the reasons we believe this are about 90% of our net sales are generated by proprietary product, 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 have typically provided relative stability in 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 simple, well-proven, value-based operating methodology. Third, we have a decentralized organization structure and a unique compensation system closely aligned with shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to PE-like returns. And fifth, our capital structure and capital allocation are a key part of our value creation methodology. Our longstanding goal is to give our shareholders private equity-like returns with the liquidity of a public 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 earning release, we had a good quarter. especially considering the market environment. We are still seeing some recovery in the commercial aerospace markets. We continue to generate significant cash. We have a little over $4.5 billion as of this quarter, as of the end of this quarter. Absent any capital market activity or other disruptions, we should have about $4.8 million cash by the end of September fiscal year, and we expect to steadily increase generate significant additional cash through fiscal year 2022. 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 in these times. On the divestiture front, during Q3, we completed the sale of three less proprietary businesses for about $240 million. At this time, we have decided not to sell the one remaining primarily defense business that we were previously considering for sale. For now, our esterline-related divestitures are about done. At this time, I don't anticipate that we will make any significant dividend or share buyback for the next two quarters. We'll keep watching and see if our views change. We believe we are pretty well positioned. As usual, we'll closely watch the aerospace and the capital markets develop and react accordingly. I'd like to address the executive chairman to chairman change that we announced today. Just to be very clear, there is no change in the duration of my commitment to Transdyn. My contract had a term that ran through 2024. And this modification anticipates a term through 2024 and likely beyond if the Board and shareholders believe I continue to add value. Going forward as Chairman of the Board and Chairman of the Executive Committee, I will be particularly focused on mergers and acquisition, capital allocation, and major strategic issues. I will, of course, work with Kevin to keep the underlying value of Transline 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 three years as CEO and come up to speed very well. The last three years have been eventful. For the first roughly 18 months, Kevin and his team successfully integrated Esterline Technologies, by far the largest and 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, they kept our base business running as smoothly as possible during this tough period and began to integrate another decent size acquisition. No easy task given this level of market disruption. All in all, a real baptism of fire. Though there is more value to create, the heavy lifting in the Esther line integration and related portfolio adjustments are 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 by this. As a personal asset test, asset test, I remain a sizable investor in Trans9 and feel very confident that Kevin will continue to create Substantial value for us all.
spk11: Now let me hand it over to Kevin. Thanks, Nick. I'd like to take this opportunity to personally thank Nick for his counsel, support, and mentorship over the last seven years. He has made this succession planning process a rewarding experience for both of us. I look forward to continuing our work together with this fantastic team as we embrace our modified roles. Now to the business of today. Because 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 and divestiture activity and outlook for the remainder of fiscal 2021. Our 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 positive note, the commercial aerospace industry has increasingly shown signs of recovery with vaccination rates expanding and increased air traffic, especially in certain domestic markets. In our business, we saw another quarter of sequential improvement in commercial aftermarket revenues with total commercial aftermarket revenues up 6% over Q2. Additionally, I am very pleased that we continue to sequentially expand our EBITDA's defined margin. Contributing to this increase is 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 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 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 submarkets, 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 continued to outpace sales. To touch on a few key points of consideration, Global revenue passenger miles are still low, but modestly improving each month. Though the timeline and pace of recovery remains uncertain with expanded vaccine distribution and lifting of travel restrictions, passenger demand across the globe will increase as there is global pent-up demand for travel. The Delta variant of COVID and other future evolutions may further complicate this picture. Time will tell. We see evidence of this demand through the recovery in domestic travel. Domestic air traffic increased each month during our fiscal Q3 and into July. Airlines also continue to see strengthened bookings and strong demand for domestic travel, especially in the U.S., and Europe is also starting to pick up. China has now become a watch point, however. The pace of the international air traffic recovery has been slow, and international revenue passenger miles have only slightly recovered. There is potential for international travel opening more as 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 e-commerce. Global cargo volumes are now surpassing pre-COVID levels. Business 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 to business travel. Time will tell if business jet utilization continues to expand, but 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's 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 Cobham acquisition integration is progressing well. We have now owned Cobham a little over seven months and are pleased with the acquisition thus far. On the divestiture front, we closed the sales of Technical, Airborne Components, Sciotech, and Triality during Q3. The divestiture of these three less proprietary and mostly defense businesses was previously discussed on our Q2 earnings call. As a reminder for the divestitures, the financial results of these businesses will remain in continuing operations for all periods they were under Transdyn ownership. Now moving to our outlook for 2021. We are still not in a position 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 digit percent 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 EBITDA 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 21 financial assumptions and updates. Let me conclude by stating that I'm 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 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 you have come to expect from us. With that, I would now like to turn it over to our Chief Financial Officer, Mike Listman. Morning, everyone.
spk12: I'm going to quickly hit on a few additional financial matters. Regarding organic growth, we're now done lapping the pre-COVID quarterly comps and have therefore returned 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 have changed. We now anticipate a lower gap and cash tax rate in the range of 0% to 3%, revised downward from a previous range of 18% to 22%, and an adjusted tax rate in the range of 18% to 20%. The reductions in the gap in cash rates the current fiscal year, are one time in nature and were driven by the release of a valuation allowance pertaining to our net interest deduction limitation and some discrete benefits from exercises of employee stock options. Regarding tax rates out beyond FY21, we're still monitoring potential changes in the U.S. tax code under the new administration and 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 at Transdime as 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 to $900 million area for our fiscal 21, 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 at 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. In coming quarters, This ratio should at worst remain 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.
spk00: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Robert Spingarn of Credit Suisse. Your line is open.
spk02: Hi. Good morning, everybody. Good morning. Kevin, you are still looking for EBITDAs to find margins, I think, of 44% for the year. But you had this uptick in the third quarter. I guess the year-to-date is 44%. Are you expecting the margin mix to deteriorate in the last quarter, or is this just a little bit of conservatism?
spk11: Hopefully, we're conservative. We feel comfortable, given the visibility we have right now, that 44% – you know, makes sense. So hopefully it's conservative and we'll do better. We're not anticipating anything detrimental in the fourth quarter.
spk02: Okay. And then just in the past, I think you've characterized the cost structure at about 30% labor, 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 a go-forward basis?
spk12: Yeah, I think it was 35, 50, and 15 to be more specific. And then not really any material changes. Those are the kind of percentages that have stuck around for a while, and it's not the 35% is not labor.
spk02: Okay, so which is it?
spk12: Just to clarify. About 15% rough justice is all other, 50% material and some direct costs, and 35% overhead. And there are some labor elements in there. It's almost all wages and benefits. Yeah, wages and benefits.
spk02: Okay. Thanks for clarifying that. Appreciate it. Thank you.
spk00: Thank you. Our next question comes from David Struss. Barclays, your line is open.
spk05: Thanks. Good morning, everyone. Good morning. Good morning. Mike, you talked about it sounds like, you know, your measure for cash generation coming in towards the higher end. What has been better than you expected this year? I guess it's working capital, but specifically within working capital, what's been better? And as we think about, you know, things continuing to improve in the next year, what do you expect from working capital?
spk12: Yeah, it is namely the working capital. Specifically within the working capital buckets, we're doing better on accounts receivable, most importantly. Inventory's been a little bit of improvement as well, but accounts receivable's been the main driver. Typically, our business tracks at something like 57, 58 days on DSO days, but we're down now closer to 50. Quite a bit of working capital has come out of the business, 350, 400 million out of AR. Over time, as we get farther into the recovery, that's going to have to go back into accounts receivables, 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 a $350 million to $400 million headwind as we come out of this.
spk03: Okay.
spk05: The comment around getting back to capital deployment, is that really just governed by when you get back to call it looks like right around six times net leverage? Is that really the biggest governing factor at this point?
spk12: On dividends and share repurchases, I think is what you're 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 pandemic. current situation that our end markets are in, and then we'll assess things real time. On average, six times net debt to EBITDA is where the business has operated historically. We see no rationale or reason to change that going forward. Now it's obviously elevated 7.6 times, so we'll give it some time to settle down, and then we assess the repurchase and dividend alternatives quarterly.
spk05: Okay. It looks like they're going to get back to around six times early in calendar year 2022. Is that right?
spk12: It's going to keep ticking down. I think on future leverage levels, we haven't given guidance yet, so it's hard to say. It depends on the pace of the recovery here. But it should keep ticking down, as I mentioned in my comments, just as the end markets improve. A couple tenths of a point quarterly.
spk05: Thanks very much.
spk00: Thank you. Our next question comes from Miles Walton of UBS. Please go ahead.
spk07: Thanks. Good morning. Kevin, I was wondering if you could comment on the bookings trends in the quarter. I know you said the books bill was greater than one in aftermarket, but maybe sizing it sequentially. I think last quarter it was up sequentially 30%. I don't know where the bookings better sequentially as well this quarter.
spk11: Yeah, for year to date, we're up considerably. For the quarter, it can be lumpy. So you're right to say that it's 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 that's also the way to look at it.
spk07: Okay. Okay. And anything with respect to the channels you're seeing, your distribution channels in particular, any signs of them having inventory stocks or destocks, or is this progressing as normally as you'd expect?
spk11: I think it's progressing reasonably normally. They're placing orders. We're filling them. 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 handle directly in the aftermarket. And their POS, their sales to the market, look similar to ours, quite frankly. So the business is performing about how we would expect. We don't offer volume-based discounts for a significant percentage of our business, so it doesn't encourage overstocking in the channel.
spk07: Okay. And Nick or Kevin, any update on the DOD IG audit? Thanks.
spk11: Yeah, the DOD IG 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, you know, similar conclusions to prior audits. So, yeah, That's what we see right now. We have closely worked with the DOD, the IG, in 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.
spk07: Okay. Thanks again.
spk11: Yep.
spk00: Thank you. Our next question comes from the line of Christine Luag. Morgan Stanley, your line is open.
spk04: Hey, good morning, everyone.
spk01: Morning. Good morning.
spk04: In 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 demand or are there specific events like aircraft coming off storage that's driving this incremental growth?
spk11: 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 and needs I think all three are at play here. I don't have any ability to differentiate which one is the most important, but I think they're all happening.
spk04: Thanks. And on divestitures, you mentioned that you're not proceeding with that one defense divestiture. Can you provide more color on what happened there? And also, overall, how do you think about the portfolio? Do you foresee future divestitures coming up?
spk12: Yeah, on the first question on the divestiture, you know, ultimately, any divestiture for us just comes down to a question of value and whether or not the offers on the table are, you know, prices which you're 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 didn't fit us most, and we're happy to go on owning the businesses for which the value expectation just wasn't met.
spk04: Thanks. And for future divestitures in terms of your portfolio, are there things that you're earmarking for potential sales?
spk12: Not at this time. As Nick said in his comments, we've now pretty much completed most of the esterline divestitures that we anticipated doing. And this last one, we're happy to go on owning.
spk04: Great. Thank you.
spk00: Thank you. Our next question comes from Peter Arment of Baird. Your question, please.
spk06: Yes. Good morning, Kevin, Nick, Mike. Nice result. Hey, Kevin, you made a comment on China just being a watch item. Maybe you could just give us a little what are your international kind of sales mixes or just in general, if you want to break it down by region, just domestic.
spk11: We don't break down our sales by region. It's difficult for us to tell as we sell to airlines, we 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 that. And what we've seen recently is similar to what we saw a few months ago, China domestically will have a we'll retreat and then come back and we're in a retreat period right now. Um, I can only assume that's because of something COVID 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.
spk06: Okay. And just as a quick followup, uh, just your liquidity continues to be very good in new cash generation. You talk about maybe just your appetite for, on the M&A front, I know you've completed all your divestitures, just if you're seeing much or you're having confidence of looking at any commercial aerospace deals.
spk12: We're always actively looking at aerospace businesses, and we remain active. We're not constrained at all here. We're only constrained by good ideas, but we just don't comment on anything that's anything that we're working on.
spk06: Appreciate it. Thanks, Nick.
spk00: Thank you. Our next question comes from Sheila Kayoglu of Jefferies. Your line is open.
spk03: Good morning, guys. And Nick, congrats on the move. I like how you squeezed that in there that you're going to save Transcend some money. So my first question is on defense. You know, with the business is a third of your business and it's growing 12%. That's pretty surprising given what we've seen from other suppliers. Can you maybe parse your defense exposure, if at all, and how you kind of expect that to trend?
spk11: Yeah, we have seen solid growth in defense this year. It is obviously an important segment. We continue to look for opportunities to prune that, as you've just heard, and we're happy with our defense portfolio today. As I look forward, I think continued modest growth will be the future. I think there's enough 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, the unmanned, we're in 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 couldn't really point to one program that was leading the day. It's nice growth across the board. Our parachutes business has been doing well. You know, the F-35 business has continued to do well for us, but it's really across the board.
spk03: Okay, cool. Thanks for that color. And then on commercial aftermarket, it's trending at about 65% of 2019 revenues. You know, correct me if I'm wrong on that stat, but do you kind of expect that to improve every quarter from here, or does it stall out as we kind of see like hiccups in China or Asia-Pac air traffic? Yeah.
spk11: I would expect this to be lumpy. I would expect there to be fits and starts. I don't think you're going to have, you know, 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 can at times be lumpy. We've said from the beginning that we anticipate this recovery will also be lumpy in the way we ship product.
spk03: Okay, great. Thank you so much. Sure.
spk00: Our next question comes from Gautam Khanna of Cohen. Your line is open.
spk09: Hey, thanks. Good morning, guys. Good morning. I was wondering if you could elaborate on, you know, the trends you saw during the quarter end through July in the aftermarket and in commercial OE, you know, sort of month by month. Were things just getting better and better? Kind of how to compare to the exit rate at last quarter's end?
spk11: Things have improved. They were improving monthly, much like if you look at the world's global takeoff and landings, it continued to improve. Europe has come back. That's certainly driving our business on the commercial aftermarket side. Does that maybe refine your question?
spk09: Yeah, no, that's – I mean, so, A, I guess I'm wondering, is it sort of broad-based across the product suite? Is it – you know, we talked about lumpiness. I'm just curious if there's – was any one-month, you know, substantial – is there any trend to discern, i.e., you know, April better than March, May way better than April, June? I don't think so. You know, like, is there anything there?
spk11: I think things are gradually improving, and the bookings are gradually improving. Within the quarter – you can get lumpiness within the quarter as well. So what we look at is, is flight activity continuing to ramp up? And it is. And that's what gives us encouragement for the future. We also see an order book that's up significantly year over year and sequentially is improving.
spk09: And are there any areas in the portfolio that are in the aftermarket that portfolio of products that are still lagging, like interiors, the Schneller. I'm just curious, are you seeing some improvement from Schneller business?
spk11: Sorry, we've seen some improvement from Schneller 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 ship set content as we go forward. We continue to monitor the PMA and used market very closely. So anything that's happening is just timing in the marketplace and airlines picking and choosing what they're working on.
spk09: Thank you very much, guys.
spk00: Thank you, our next question comes from hunter key of wolf research, please go ahead.
spk10: Thank you good morning. morning. hi I was wondering if you talk about this just a little bit I you know you obviously been noting it's leisure oriented you've been saying that now for a while i'm curious if these individually owned aircraft or these are these corporate fleets that are being used for personal trips is it is it wheels up I mean i'm trying to get a sense for. Sort of how demand and usage in that market is translating to what we're seeing in the aftermarket sales for you guys. Thanks.
spk11: Well, we've certainly seen an uptick in bizjet 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 is leisure-oriented. I think we're starting to see some business travel mix in there. But business jet has been a bright spot, but it's a very small part of our business. I think about 15%.
spk10: Got it. Okay, thanks. And then on R&D, you saw a decent uptick last year in R&D dollars spent in fiscal 20 despite COVID. Kind of curious how much of that is sort of organic growth versus, you know, maybe incremental spend that you acquired from companies that you bought and sort of just Looking forward to where you're going to prioritize your R&D dollars over the next couple quarters. Thanks.
spk12: Do you mean, Hunter, a step up on a dollar basis or a percent of revenue basis?
spk10: No, not percent of revenue. Yeah, that was exactly the nature. Is it just a function of just being bigger?
spk12: Yeah, on a dollar basis, it's likely a function of it being bigger. Generally, when we acquire businesses, we tend to keep the R&D in place. And so that could be what's driving the step up that you're seeing on a dollar basis.
spk11: You know, we run R&D through our individual businesses. So it's a function of the programs and what they do at our individual. We don't have a central R&D team, as you probably know. So this is all linked to programs and projects locally for the business.
spk10: Got it. And then sort of prioritizing going forward R&D spend, any particular areas you're going to be focused on?
spk12: It varies by individual op unit. They all decide where to invest their dollars. They run their own R&D budgets.
spk10: Okay.
spk12: Yeah, we'll work on good stuff.
spk11: Nick is telling me we only work on good stuff, and he's right. Right.
spk10: Okay, thanks a lot, everybody.
spk00: Thank you. Our next question comes from Michael Ciamoli of Choice Securities. Your line is open.
spk01: Hey, good morning, guys. Thanks for taking the questions. Maybe Nick or Kevin, is there any way to parse out, you know, what the drag currently is on the aftermarket revenues in terms of like wide body, narrow body? I mean, obviously the bulk of the utilization we're seeing is still narrow body driven. Are you guys able to kind of give any specifics to maybe what you're seeing as you're, you know, looking at product and pull the distribution or what the airlines are buying? Are you seeing any noticeable pickup there or is wide body still a pretty big headwind?
spk11: Yeah, I assume given the takeoff and landing that it's a reasonable headwind for us. But we're market-weighted, so you have to look at what's flying. Recently we've seen more widebodies flying domestic routes, A350s and 787s 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 at the wide body doing a little better than we thought it would, given what we thought was just a 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.
spk01: Got it. On that takeoff and landings, it looks like, you know, through, through August here, there's probably some flattening on that activity and down mid 20% versus 19. You're not going to give us, you know, full guidance, but I think the streets got probably modeled for up sequentially into the fourth quarter, eight and a half, 9%. I mean, based on, on the trends you're seeing, you know, obviously APAC going a bit backwards here. I mean, Anything we should be aware of going into the quarter or next couple quarters here?
spk12: You know, just on the outlook and as it refers to FY22 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'll give it when the market stabilizes and we feel like we can accurately predict what's to come. So for now, it's hard to give too much commentary on what the next couple quarters will look like given the lumpiness of the recovery.
spk01: Got it. Fair enough. Thanks, guys. I'll jump back in the queue.
spk00: Thank you. Again, to ask a question, please press star 1 on your touchtone telephone. Again, that's star 1 on your touchtone telephone to ask a question. Our next question comes from Seth Seifman of J.P. Morgan. Your line is open.
spk08: Hey, thanks very much, and good morning. Good morning. Just wanted to ask about a portion of the improved adjusted gross margin and EBITDA margin, it looks like, came from an uptick in lost contract amortization. It looks like it was about $20 million in the quarter, which was a takeoff from Q2. What is it that drives that, and how should we think about where it's headed?
spk12: Yeah, Seth, there are puts and takes every quarter on the accounting side. You know, you get pluses from a lost contract reserve release, but there might be a couple minuses from reserve increases on issues that arise that go against EBITDA. This quarter, we netted to a spot that's not that different from where we typically end up every quarter. But you're right, the lost contract reserve did step up a bit. It was $20 million this quarter. Last year, same quarter, was about $7 or $8 million. So it did step up. And what drives it is, from an accounting standpoint, it's a GAAP convention. It's tied to individual lost contracts and products. And based on when they ship, you release the reserves.
spk08: Great. OK. OK, great. Thanks. And then, Kevin or Nick, Do you guys think at all about the new sort of aggressive antitrust regime that the Biden administration is trying to implement and what that could mean for capital deployment going forward?
spk12: I mean, this is Nick. I just don't have any way of making any judgment on that. So I just don't want to comment.
spk11: Yeah, it's difficult for us to get into the political sphere. So we will react as things but not speculate.
spk08: Great. Okay. Thanks very much, guys.
spk00: Thank you. At this time, I'd like to turn the call back over to Jamie Steeman for closing remarks.
spk03: Thank you all for joining us today. This concludes today's call. We appreciate your time and have a good rest of your day. Thank you.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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