Wesco Aircraft Holdings (WAIR) Dave Castagnola on Q3 2016 Results - Earnings Call Transcript

| About: Wesco Aircraft (WAIR)

Wesco Aircraft Holdings, Inc. (NYSE:WAIR)

Q3 2016 Earnings Call

August 04, 2016 5:00 pm ET

Executives

Jeff Misakian - Vice President, Investor Relations

Dave Castagnola - President & Chief Executive Officer

Richard J. Weller - Chief Financial Officer & Executive Vice President

Analysts

Carter Copeland - Barclays Capital, Inc.

Jason Gursky - Citigroup Global Markets, Inc. (Broker)

Gautam Khanna - Cowen and Company LLC

Sheila K. Kahyaoglu - Jefferies LLC

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Kevin Ciabattoni - KeyBanc Capital Markets, Inc.

Operator

Welcome to the Wesco Aircraft Holdings Third Quarter Fiscal Year 2016 Earnings Call. My name is Anna and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I'll now turn the call over to Jeff Misakian, Vice President of Investor Relations. Please go ahead.

Jeff Misakian - Vice President, Investor Relations

Thank you, Anna. Good afternoon, everyone, and thank you for participating in Wesco Aircraft's Fiscal 2016 Third Quarter Earnings Call and Webcast. We've included slides for today's presentation to help illustrate some of the points being made and discussed during the call. These slides can be accessed by visiting our website at www.wescoair.com and clicking on Investor Relations.

We are joined today by Dave Castagnola, President and Chief Executive Officer and Rick Weller, Executive Vice President and Chief Financial Officer.

Please turn to slide two. As a reminder, today's conference call includes forward-looking statements within the meaning of federal securities regulations. Although the company believes that such forward-looking statements are reasonable, we cannot assure you that any forward-looking statements will prove to be correct. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, which may cause actual results to differ materially from those anticipated at the time the forward-looking statements are made.

Additional information relating to factors that may cause actual results to differ from our forward-looking statements can be found in the company's filings with the Securities and Exchange Commission, including the company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Wesco Aircraft undertakes no obligation to update or revise forward-looking statements except as required by law.

Now, I would like to turn the call over to Dave Castagnola. Dave.

Dave Castagnola - President & Chief Executive Officer

Thanks, Jeff. Please turn to slide three. Results of fiscal 2016 third quarter reflects steady progress across all areas of our business. Revenue in the quarter reflects growth in long-term contracts, progress in MRO and stable ad hoc sales. Cost actions drove a reduction in SG&A, which more than offset a decline in gross profit, and led to an 11% increase in operating income and an expanded operating margin. A net positive impact from currency and a lower tax rate also contributed to an increase in net income and earnings per share, compared to the same period last year.

Please turn to slide four. Adjusted EBITDA was higher in the third quarter, compared to the same period last year, reflecting the same factors that led to the improved operating profit and the net positive currency impact. Improvements in working capital drove stronger operating and free cash flow in the quarter, which allowed us to further pay down long-term debt. I'll provide you with an overview of our third quarter performance. Rick will discuss the results in a more detail, and then I'll share my perspective on our year-to-date performance and full-year outlook.

Please turn to slide five. Revenue increased 3.4% in the third quarter, excluding the effect of currency movements. Growth in long-term contracts continue to be the primary driver of higher revenue. Contract sales rose at a mid-single-digit pace, reflecting increased customer production rates in content, renewals and new business wins. The pace of the new wins with large commercial and military customers continues to strengthen in fiscal 2016, reflecting their recognition of the value in our broad portfolio of hardware and chemical product and supply chain management services as well as an expanding presence in the aftermarket.

Business expansion with commercial and military customers was comprised of new wins, the addition of new sites and the expansion of the scope of products and services we provide. Some of the major deals signed in the quarter included hardware and chemical services in the U.S. for a major Tier 1 supplier and an engine manufacturer in the U.S. and Europe; hardware and electrical services at multiple sites in the U.S. for a major commercial OEM; hardware, chemical and electrical services in North America for an OEM; chemical services for a Tier 1 in the U.S.; an additional hardware product in the U.S. for a Tier 1.

In the first nine months of the fiscal year, we have signed multiple new business expansion and renewal agreements for all products and services with our major OEM and Tier 1 customers. We expect to see further sales growth from these deals in fiscal 2017 and 2018. The timing of this growth depends on customer needs and implementation schedules.

With our MRO customers, increasing contract wins includes agreements to provide product and services with airlines and MRO service providers globally. In addition, we continue to expand MRO pipeline opportunities. It's still early to expect a material contribution from this component of our total revenue growth, but we expect MRO expansion to continue in fiscal 2017 and 2018.

Regional sales activities through our global branch network took advantages of opportunities in a relatively stable ad hoc market and continued to support existing LTA contract expansion. Ad hoc sales, excluding currency, increased sequentially in the mid-single-digit range, consistent with our expectation for improvement in the second half of the year.

Ad hoc orders in the third quarter were consistent with our second quarter pace. It's important to remember that ad hoc quarters, by nature, is subject to fluctuations, making them challenging the forecast.

Please turn to slide six. Supply chain management initiatives are making progress. We have improved supplier delivery performance through increased performance metrics and visibility, order book alignment and prioritization, a daily cadence of interaction, on-site reviews with action plans, and capacity assessments and greater accountability.

We also have improved our materials management processes to better align purchases to consumption, which improved working capital performance in the quarter. Commodity-based strategic sourcing activities are securing long-term supplier agreements, leading to improved efficiency with our ordering processes and at critical suppliers.

We also expect these agreements to improve inventory and delivery performance and reduce material acquisition costs over the long-term. We're pleased with the progress that supply chain team has made today.

Please turn to slide seven. We continue to execute operational initiatives for SIOP improving our ability to plan more accurately and forecast material acquisition based on demand that is closer to actual consumption. Site and supply activities continued in the quarter with the closure of one additional facility, bringing the total to 14 consolidations to-date. We also consolidated the facility into the new multi-commodity hub in North America that we told you about last quarter.

In addition, our focus on continuous improvement is driving better logistics flow and delivery performance as we utilize Lean principles throughout our warehouse processes. Finally, customer implementations are running at a faster pace than Wesco has experienced historically, a reflection of the higher level of business wins. We have resourced a cross-functional team to manage more than 30 active implementations across multiple customer sites around the world.

I'll now turn the call over to Rick for a review of the financial results, after which I'll provide a few closing comments. Rick.

Richard J. Weller - Chief Financial Officer & Executive Vice President

Thanks, Dave. Please turn to slide eight. Net sales in the fiscal 2016 third quarter of $375.2 million increased 2% compared to the same period last year. Foreign currency movements had a negative impact of approximately $6 million on fiscal 2016 third quarter sales, similar to what we experienced in the first two quarters of the fiscal year.

Net sales, excluding currency effects, were up 3% compared to the same period last year, led by mid-single-digit contract growth supporting major commercial and military customers. Growth was similar in hardware and chemicals. Ad hoc sales were flat year-over-year, excluding currently impact, but increased at a mid-single-digit pace from the second quarter.

Please turn to slide nine. Income from operations was $40 million in the fiscal 2016 third quarter, an increase of approximately 11% over the same period last year. Operating margin was 10.7% in the third quarter of fiscal 2016 compared to 9.8% in the same period last year.

The increase in operating margin was primarily due to a decline in SG&A as a percentage of net sales, partially offset by lower gross margin. SG&A as a percentage of sales was 15.8% for the fiscal 2016 third quarter, 240 basis points lower than the third quarter of last year, primarily due to a decline in people-related costs, bad debt expense, professional fees and currency. Our ongoing focus on cost management also led to a sequential decrease in SG&A.

Gross profit as a percentage of sales was 150 basis points lower in fiscal 2016 third quarter compared to the same period last year, primarily due to currency effects of 50 basis points, inventory adjustments of 50 basis points, and a 40 basis point impact from chemical commodity-based index changes that we have discussed in previous quarters. Remaining 10 basis points of gross margin decline can be attributed to mix. Inventory adjustments in the quarter were primarily related to physical count true-ups for [indiscernible (10:27) supply modes and improvements in warehouse inventory accuracy.

In fiscal 2015, most of the inventory account and royalty adjustments were made in the fourth quarter. The commodity-based index changes were primarily due to a decline in the underlying indices, which had a negative impact on sales and particularly on gross margin. Recent pricing and index adjustments are expected to have a net positive sequential impact on fourth quarter margins.

Net income in the fiscal 2016 third quarter rose 46% to $24 million from $16.5 million in the same period last year. In addition to the items that drove operating profit in the quarter, net income also benefited from a net currency gain in other income and lower effective tax rate. Other income net increased by $5.1 million, primarily due to transactions that are denominated in currencies other than a functional currency of our reporting subsidiaries.

In the fiscal 2016 third quarter, we recorded a gain of $2.6 million versus a loss of $2.6 million in the same period last year. Both periods were primarily impacted by the change in value of the British pound.

The foreign exchange transactional gain of $2.6 million in the fiscal 2016 third quarter was partially offset by net negative translational impact from currency movements of approximately $1 million in operating income. The transactional impact is related to timing differences that arise when net assets are booked and settled, primarily driven by receivables and payables. The transactional impact in the third quarter is net of a financial hedge against the net asset exposure. The translational impact results from functional revenues and costs, primarily those in British pound sterling are translated to U.S. dollars at lower exchange rates.

Our effective tax rate in fiscal 2016 third quarter was reduced by a favorable mix of taxable income across jurisdictions and discrete tax items. We expect our effective tax rate for fiscal 2016 to be in the range of 29% to 30%, primarily due to projected mix of taxable income across jurisdictions.

Adjusted EBTIDA was $50.9 million or 13.6% of sales in fiscal 2016 third quarter. This compares with $42.6 million or 11.6% of sales in the same quarter last year. Adjusted EBITDA margin also reflects the improvement in operating income and the net positive impact from foreign currency that I just described.

Please turn to slide 10. Sales in North America were up 2% in the third quarter, primarily due to increased production in content, new business wins and scope expansion on commercial and military contracts. Operating income and margin in North America were relatively consistent year-over-year as low SG&A largely offset a decline in gross profit. Gross margin was impacted by the mix of ad hoc and contract revenue as well as the commodity-based index change I mentioned earlier. SG&A reflects lower people-related cost, bad debt and professional fees.

Turn to slide 11. Sales in the Rest of the World segment rose 2% in the third quarter and were up approximately 10%, adjusted for currency. Operating income in the Rest of the World was $10.8 million in the third quarter or 14.5% of net sales, compared with $7.1 million or 9.8% of net sales in the same period last year. Higher operating income and margin in the Rest of World primarily reflects an increase in sales volume index. SG&A was lower primarily due to currency.

Please turn to slide 12. As you know, Britain's recent decision to exit the European Union created some additional near-term uncertainty. While the decision could have negative ramifications for the regional economy and potential impact on global financial markets, the actual implementation likely remains months or years away. In the meantime, we'll continue to monitor developments in the region. We remain committed to our operations and providing service excellence to our customers in UK and Europe.

The principal near-term impact on the company will likely come in the form of exchange rate movements, particularly changes in the British pound. The company has hedged a substantial portion of its transactional currency exposure in future periods, which removes most of the transactional risk.

In addition, Wesco is establishing a new UK legal entity that combines legacy hardware and chemical entities. At the site and supply initiative, this will allow for operational efficiency, leverage and improved customer service across multiple commodities. The appropriate functional currency for the new entity is under review and will be determined prior to the establishment of the new legal entity, which is expected early in fiscal 2017.

Please turn to slide 13. Net inventory was $3 million higher at June 30 compared to March 31, 2016, primarily to support the increase in new business. However, the pace of inventory purchasing slowed in the fiscal 2016 third quarter, consistent with our comments last quarter and reflects the improvement in materials management that Dave mentioned earlier.

Accounts receivable declined $14 million in the third quarter due to the timing of revenue and our focus on collections. Total debt was $877 million at June 30, reflecting repayments of $46 million in the third quarter and $76 million year-to-date. We expect (16:44) to pay down debt further in the fourth quarter as cash generation continues to improve.

Please turn to slide 14. Cash from operations was $52 million in the fiscal 2016 third quarter compared with $34 million in the same period last year. Free cash flow was $48 million compared to $33 million in the last year's third quarter. Increases in operating and free cash flow are primarily due to working capital improvements. We expect continued free cash flow generation in the fourth quarter as we further strengthen the alignment of inventory to demand through SIOP, higher revenues collected and cash tax benefits are realized.

Now I'll turn the call back over to Dave for closing remarks. Dave?

Dave Castagnola - President & Chief Executive Officer

Thanks, Rick.

Please turn to slide 15. Results in the first nine months of the year have shown steady progress throughout the business. While currency adjusted sales performance this year largely has been in line with our expectation, the mix has been a bit different. Our intent was to drive higher ad hoc sales while we work to regain momentum in contract sales during the year. Actual sales results have been somewhat different. In spite of the positive third quarter trends we mentioned earlier, ad hoc sales remained below our expectations year-to-date. However, contract sales have performed better than we anticipated due to the higher rate of new wins and expansion of existing agreements. While contracts sales generally carry lower gross margins, their greater stability is beneficial to the company over the long-term. This mix shift relative to our expectations has pressured EBITDA margins.

Cost management efforts had met our committed SG&A reductions and we continue to focus on SG&A to drive further efficiencies. While we remain committed to our fiscal 2016 financial goals, the sales mix shift I just described, coupled with increased pressure on the pound, creates challenges in the fourth quarter. We are taking actions to address these challenges primarily through incremental cost savings as well as an expected benefit from the commodity index and pricing changes that Rick described.

Please turn to slide 16. Consistent with our progress to-date, we expect higher sales in our contract business to support our full year target of low single-digit growth in revenue. We continue to target $25 million to $30 million in cost savings this year, which we expect to be the primary driver of our EBITDA margin improvement target of approximately 100 basis points.

Finally, improvements in working capital have led to a stronger free cash flow in the third quarter, and we believe this performance has put us back on track to achieve our goal of 100% free cash flow conversion.

I'll now turn the call over to Jeff to direct to Q&A period. Jeff?

Jeff Misakian - Vice President, Investor Relations

Thank you, Dave. With that, we will open up the call to your questions. We ask that you limit your questions to one initially to allow everyone a chance to participate. We do appreciate your assistance with this process.

Anna, may we have the first question please?

Question-and-Answer Session

Operator

And we have a question from Carter Copeland from Barclays. Please go ahead.

Carter Copeland - Barclays Capital, Inc.

Hey. Good afternoon, guys.

Dave Castagnola - President & Chief Executive Officer

Hi, Carter.

Richard J. Weller - Chief Financial Officer & Executive Vice President

Hey, Carter.

Carter Copeland - Barclays Capital, Inc.

Just a clarification and a question on that commodity index change. Can you just tell us what the biggest movers in terms of components of that index are? And then, as questions go – on the implementation comment, can you maybe give us some color on how that may have deferred for new customers versus new sites with existing customers? Thanks.

Richard J. Weller - Chief Financial Officer & Executive Vice President

Yeah. Carter, I'll take the commodity question. It's primarily petroleum-based product that are index priced. And obviously as those industries have moved, our index has moved along with them. And some of the commodities that are non-indexed were opportunities we're going to have to go back and give some pricing and price impact forward on (20:42), so those were really the two areas there.

Dave Castagnola - President & Chief Executive Officer

And then on the implementations, Carter, it's really a combination of a series of different approaches, one, depending on the win or the renewals with existing customers, its expansion into existing sites, so we're leveraging that and growing that. We have some wins that are with brand new customers with brand new products, so we're starting from procurement and implementing sites, and then everything in between. So, really a full gamut of how we're handling that.

Carter Copeland - Barclays Capital, Inc.

Would you say there is more growth in existing sites or more growth in new customers, I guess, is the question I was trying to ask?

Dave Castagnola - President & Chief Executive Officer

Yeah. So we've got actually very good growth rate within existing customers, that's what it's the feeling, basically our mid signal-digit growth, the huge demand pool from there as they work their production systems and move to large scale service providers like us, that demand is there. It's been validated, and there is a lot of pool, and that's in growth – and that's growing.

We're very early on in the MRO stages, a little bit different market implementation, but we have some of those that have started. And then, again, in the renewals, most of those are along the former line I mentioned, which is existing sites with some expansion. We have announced some renewals with expansion, and those are the ones where we will expand on additional sites from our position with them.

Richard J. Weller - Chief Financial Officer & Executive Vice President

One of the things that's been pretty good to see too is cross-selling commodities into existing customer slates. That's where the source of growth has been good as well.

Dave Castagnola - President & Chief Executive Officer

Yeah. That's a good point. We have a very good mix across our commodities selling for both – for all three hardware, chemical and electrical that we explained.

Carter Copeland - Barclays Capital, Inc.

Great. Thanks for the color, gentlemen.

Operator

And we have a question from Jason Gursky from Citi. Please go ahead.

Jason Gursky - Citigroup Global Markets, Inc. (Broker)

Yeah. Good afternoon, guys.

Dave Castagnola - President & Chief Executive Officer

Hi, Jason.

Jason Gursky - Citigroup Global Markets, Inc. (Broker)

Just a quick question on the contract business in the longer-term contracts. Can you talk a little bit about the pricing environment and the gross margin opportunity? I know we're facing some mix because the ad hoc isn't coming in as strong as you had anticipated, but I also love to get some color from you on the contracting business, and how well the pricing and margins are holding up there?

Dave Castagnola - President & Chief Executive Officer

Thank you, Jason. So, our wins for Wesco in a way we're evaluated, our wins in renewals have almost entirely been based on a total value assessment by our customers. That includes price, but it also includes inventory and scrap reduction, working capital improvement and SG&A reduction. So, pricing pressures aren't new and they vary really based on the customer needs or the marketplace demands. But the way our service model is provided, we actually touch those points very well. That's what we're really evaluated on. And in terms of competitiveness, the actions we've taken really allow us to compete very effectively there.

So the bulk of our wins year-to-date have really been in the contract space and really been around that evaluation of the total value to the Tier 1s, because they are looking for all of those values as they make their decisions.

Jason Gursky - Citigroup Global Markets, Inc. (Broker)

Do you have any invisibility at this point on when gross margins can stabilize? Or maybe even perhaps inflect higher at this point, given the book of business that you've gone out and successfully gotten here over the last 12 months or so?

Richard J. Weller - Chief Financial Officer & Executive Vice President

Yeah, Jason, I can say it like this, the sequential improvement we're seeing in the LTA contract business is pretty indicative that the business is being reviewed and replaced as we move forward as that margins are a little bit higher than businesses it's replacing. So that's been a pretty positive trend for the last several quarters.

Jason Gursky - Citigroup Global Markets, Inc. (Broker)

Okay. Thanks, guys.

Richard J. Weller - Chief Financial Officer & Executive Vice President

Thanks, Jason.

Dave Castagnola - President & Chief Executive Officer

Thanks, Jason.

Operator

Our next question is from the Gautam Khanna from Cowen and Company. Please go ahead.

Gautam Khanna - Cowen and Company LLC

Thanks very much. I was wondering if you could comment on what you think explains the sluggish ad hoc environment?

Dave Castagnola - President & Chief Executive Officer

So, I think, actually the ad hoc market has been relatively stable. We're flat year-over-year. We're sequentially up quarter-over-quarter. Our expectations coming into the year was to grow that a little bit faster as we work through the transition of recovering and transitioning the sales momentum in the contract business. What we've done is we've held our own. We got in Q2 and Q3, we started to see the increase in bookings sequentially, and then we started to see again in Q3 actually sequential growth in the ad hoc sales. So we had expected to get that a little bit earlier, but the market has been relatively stable.

Gautam Khanna - Cowen and Company LLC

And can you comment on pricing within the ad hoc market, have you seen any change likely or otherwise?

Dave Castagnola - President & Chief Executive Officer

Not really. Given where we are in terms of really holding our margins, we understand the pricing in the market. It's really speed and availability that's driving most of the sales, and a lot of our strategies which are starting to mature later in this year associated around forecasting ad hoc a little bit more and analytically gets us ahead in terms of buying and having that product available for the market. That's what's really, really the key into growing into that stable market is having the product and having the speed to support it.

Gautam Khanna - Cowen and Company LLC

Thank you.

Dave Castagnola - President & Chief Executive Officer

Thanks, Gautam.

Operator

And we have a question from Sheila Kahyaoglu from Jefferies. Please go ahead.

Sheila K. Kahyaoglu - Jefferies LLC

Hi, good afternoon. Thank you for taking my question. I'm just going to follow-up on Gautam's question with regards to ad hoc. I understand the market seems to be flattish, but some of those suppliers noted a pull-forward or just additional cost related to the A350 to meet ramp requirements. Are you guys not seeing that on that platform? Or is it just other platforms that are offsetting ad hoc sales?

Dave Castagnola - President & Chief Executive Officer

Yeah. I think, in general, if you listen to some of the comments from the manufacturers, they talk about a number of things. They talk about distributor destocking. They talk about basin driving inventory reductions. They talk about warehouse consolidations. So there's a number of things they're talking about that may be affecting their direct buy.

For us, we haven't reduced our inventory. We're not destocking. We're really moving to align the materials we seek to demand using SIOP. And then, as Rick said, we've actually increased our inventory buys in Q3. So we haven't really seen a material change in the industry trends along those lines. There's not a lot of disruption in the market. A350 is not creating a bunch of disruption maybe comparatively speaking to three years, four years, five years ago when we had multiple development programs launched, the JSF startup. The industry is relatively stable. The customers are – there's again a very constant demand out there for ad hoc. But we work with our customers really to convert to LTAs, and to work with them long-term. It's a much better way for them to buy from us, and it secures us long-term and then in terms of supply.

Sheila K. Kahyaoglu - Jefferies LLC

Sure. That's very helpful. And then, just on the inventory adjustment of 50 basis points you discussed or impacting margins in the quarter, can you elaborate on that?

Richard J. Weller - Chief Financial Officer & Executive Vice President

Sure. Sheila, the inventory adjustments are primarily related to principal inventory accounts. Typically what we do at Wesco is, we take typical accounts and physical (29:17) that in the fourth quarter, because we're consolidating a lot of locations and sites, we're taking the inventory to coincide with that, and a lot of that work was actually done in Q3. The other thing is, I alluded to in my comments where what's really we're laying out and making warehouses more efficient. As we do that and we're accounting wins (29:39) and getting the inventory accuracy shoot up and we are waiting for year-end comp to get that adjusted. So it's a little bit of a timing thing and that's really why we saw a Q3 versus Q4.

Sheila K. Kahyaoglu - Jefferies LLC

Okay. Thank you. And then, just last question. In terms of the outlook in the press release, you mentioned pricing improvement, but just a clarification, I'm guessing that's related to the commodity price index?

Richard J. Weller - Chief Financial Officer & Executive Vice President

Yes. It is, that's bit same commodity index that was came up in the earlier question, is already been adjusted for the index, has been reset and the prices are now set on the non-index commodities going into the fourth quarter.

Sheila K. Kahyaoglu - Jefferies LLC

Okay. Thanks.

Richard J. Weller - Chief Financial Officer & Executive Vice President

Sure.

Operator

Our next question is from Myles Walton from Deutsche Bank. Please go ahead.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Thanks, good evening. I was hoping to touch on the outlook as well, and I'm just trying to understand on the revenue side it seems like a pretty lofty 4Q expansion required to hit 1% growth year-on-year. And so, is that where the biggest pressure is or is the biggest pressure on the EBITDA implied in the fourth quarter, which I guess would be just under 15% to get 100 basis points year-on-year?

Dave Castagnola - President & Chief Executive Officer

Yeah, Myles, I think some involve trade (30:57). I do think that we've got aligned straight to the revenue that we need in the fourth quarter. I think it's there for us to get, I think the EBITDA margins are combination of the variable what currency might look like, as the quarter plays out and really the traction of return to get to over drive SG&A efficiency in the quarter to be able to influence the EBITDA margin.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

What in particular do you see on the revenue side kind of having this free acceleration or acceleration, is there something that you expected this quarter didn't play out that you are expecting next quarter?

Dave Castagnola - President & Chief Executive Officer

I will try to characterize it as continued new business momentum, but things we booked earlier in the year continued to get the sites up and running and being efficient and seeing that come through we will have to influence the revenue and of course the build rates that we're seeing from our customers. So those are the things that primarily are going to drive that on the contract side of the business.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Okay. But no inflection implied or needed on the ad hoc, you've kind of – you've tempered that expectation I imagine?

Dave Castagnola - President & Chief Executive Officer

Yeah. That's really us.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Okay. All right. Thanks.

Operator

And we have a question from Kevin Ciabattoni from KeyBanc. Please go ahead.

Kevin Ciabattoni - KeyBanc Capital Markets, Inc.

Thanks. Good afternoon.

Dave Castagnola - President & Chief Executive Officer

Hi, Kevin.

Kevin Ciabattoni - KeyBanc Capital Markets, Inc.

We look at the inventory maybe from the other side and get an update on what you are seeing in terms of inventory levels that your customers and then maybe more specifically with some of the announced wide body rate cuts. How do you look at those impacts in the business over the next year or two?

Dave Castagnola - President & Chief Executive Officer

So, as we see with our customers, we carried inventory for most of our customers, particularly on the capacity side and then to some extent as well on the chemical side. And so – and we're on replenishment systems with min/max (32:56) agreements – agreements in terms of duration of inventory we carry. And in many cases, we do daily replenishment, and then we do reordering dependent on whatever those min/maxes [33:07] are. And really managing the inventory – it's really us managing the inventory and that's why we're very focused on and moving our [ph] binding (33:17) and material acquisition against consumption just to be much more effective of our working capital to use.

So, in terms of our customers, we carry the inventory. I think I made comments earlier about what could be happening to the OEMs that are managing their inventory, and I made those comments earlier to another question. I think there was some realization, some of the manufacturers had mentioned relative to the OEMs maybe slowing down and taking a look at getting their inventory under control, but we don't feel that with the way we're contracting with our customers.

Kevin Ciabattoni - KeyBanc Capital Markets, Inc.

And on the wide-body part of the question, I mean, any changes to kind of how you're looking at things there?

Dave Castagnola - President & Chief Executive Officer

No, not at this at point. I mean, by the very nature of our business, we've got a very, very good mix of 60:40 commercial to military. By the nature of our product, it delivers into customers and goes on all of their platforms. So they've got a start-up program, we're on that. If they're ramping up, we're on that. If it's in full production, we're on that. (34:28) we're on that. So we have a very good balance and very good mix. And let's just say a major advance or a business loss, we've got puts and takes to look at, but they typically tend to balance out.

Kevin Ciabattoni - KeyBanc Capital Markets, Inc.

Great. Thanks.

Operator

Jeff Misakian - Vice President, Investor Relations

Okay. Since there are no further questions, on behalf of everyone here at Wesco Aircraft, I would like to thank you for participating today. We appreciate your interest in Wesco, and look forward to speaking with you all again soon. Have a good evening.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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