Barrick Mining Corp (B) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Barnes Group Inc. Second Quarter 2020 Earnings Conference Call. (Operator Instructions) I'd now like to hand the conference over to your speaker today, Director of Investor Relations, Bill Pitts. Mr. Pitts, please go ahead.

Thank you, James. Good morning, and thank you for joining us for our second quarter 2020 earnings call. With me are Barnes Group's President and Chief Executive Officer, Patrick Dempsey; and Senior Vice President of Finance and Chief Financial Officer, Chris Stephens. If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate website at bginc.com.

During our call, we will be referring to the earnings release supplement slides, which are also on our posted -- are also posted on our website.

Our discussion today includes certain non-GAAP financial measures, which provide additional information we believe is helpful to investors. These measures have been reconciled to the related GAAP measures in accordance with SEC regulations. You will find a reconciliation table on our website as part of our press release and in the Form 8-K submitted to the Securities and Exchange Commission.

Be advised that certain statements we make on today's call, both during the opening remarks and during the question-and-answer session, may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the SEC.

These filings are available through the Investor Relations section of our corporate website at bginc.com.

Let me now turn the call over to Patrick for his opening remarks. Then Chris will provide a review of our financial results. After that, we'll open up the call for questions. Patrick?

Thank you, Bill, and good morning, everyone. The second quarter for Barnes Group, as expected, was incredibly disrupted as a result of the global COVID-19 pandemic.

The abrupt collapse of commercial aerospace end markets was unlike anything previously experienced. And while our essential manufacturing operations remained open in both our aerospace and industrial segments, albeit at lower production levels, many of our customers' facilities were closed, severely restricting our businesses.

In such a challenging environment, cost reduction and cash preservation efforts became paramount. Unfortunately, this necessitated company-wide restructuring efforts, which will lead to a reduction of approximately 8% of our global workforce.

As difficult as such actions can be, the consequences of not doing them could prove even more detrimental. It certainly felt like the second quarter was one of plain defense. Yet I believe the worst of the crisis is behind us and that we are beginning to see signs of recovery in our businesses. By no means does that mean or implied, the future will be without its challenges as I expect the road to recovery will be arduous in certain of our end markets.

Nonetheless, promising signals have started to appear in a few places and overall, there seems to be some feeling of stabilization. With that as the background, let me take a moment to discuss our second quarter results followed by some highlights of the business environment and our end markets.

Second quarter sales decreased 37%, with organic sales down 32%, adjusted operating income decreased 52% compared to a year ago, while adjusted operating margin declined 390 basis points to 11.8%.

Adjusted earnings per share were $0.27, down 64% from last year.

Clearly, significant declines from a year ago, but very much aligned with the expectations we laid out in April.

On a positive note, we performed better margin-wise and ended at the higher end of our adjusted earnings per share outlook.

Cash performance was also strong given the circumstances and our leverage remains very manageable.

Overall, in what proved to be a very challenging environment, proactive cost and cash management actions helped to dampen the pressure on the quarter. At present, all of our facilities are open and operational. In prioritizing the safety and well-being of our employees, customers and suppliers, we continue to implement a wide range of safety precautions to protect them. Most of our workers at the corporate office and segment headquarters continue to work remotely.

Salary-related cost actions, including company officers and board members and the reduction of discretionary expenses have all been extended.

Moving now to a discussion of our end markets. At Industrial, with select exceptions, end markets remain challenged under the cloud of the pandemic.

Manufacturing PMIs for North America and Europe have shown some improvement, yet still hover below a neutral 50.

China has climbed back to modest expansionary levels and happily, we have seen a gradual uptick in China orders and sales from their February lows.

Global automotive manufacturing has restarted, though at reduced levels. Interestingly, forecasted auto production levels, which previously have been falling with each new monthly forecast introduced show some relative improvement in the July forecast as compared to the June forecast.

And that holds true for North America, Europe and China.

While that dynamic is a turn towards the positive, global automotive production is still anticipated to be down approximately 20% in 2020 as compared to 2019.

As a result, the number and timing of new model introductions and model refreshes remains uncertain. In the second quarter, sales in our Molding Solutions medical end markets saw a strong growth once again. And highlighting one of the positive areas I referred to earlier, we saw a significant pickup in both packaging and Personal Care orders in the quarter, reflecting the release of previously held up projects.

Overall, for the second quarter, Industrial's book-to-bill was just under 1x. Due to the severe dislocation in the second quarter, I feel focusing on the highlights of our end markets is more relevant than a discussion of the specific business unit’s performance.

However, to round out my Industrial discussion, organic orders and sales for our Industrial businesses for the second quarter were roughly Molding Solutions, down 10%, Force & Motion Control and Automation down 25% and Engineered Components down 35%.

As we think about how things may progress into the second half, we continue to expect a gradual recovery as many of our customers and end markets come back online.

We anticipate general industrial markets in our Engineered Components and Force & Motion Control businesses will improve in concert with improving manufacturing PMIs.

With auto production restarting and showing signs of stabilization, we expect to see a turn towards sequential improvement across our auto component businesses, although recovery of auto hot runners may be more muted.

As mentioned, we see good medical performance continuing with personal care and packaging improving.

Lastly, we expect automation should benefit from the introduction of new products that have been under development and its customers launching previous delayed projects.

For the segment, we continue to forecast sequential improvement from Q2 to Q3 and then again from Q3 to Q4, as the recovery process progresses.

Moving now to our Aerospace business. Having been involved with aerospace for over 30 years, I can safely say the depth and speed of the industry's dislocation has been astonishing.

In the second quarter, total Barnes aerospace sales were down 49%, with OEM down 52% and aftermarket sales down 42%. Both MNO -- MRO and spare parts saw significant declines.

While our business is exceptionally well-run and well positioned in the industry, volume declines of this magnitude realized in the space of 90 days are just extraordinary.

In spite of that, the team achieved $12 million of adjusted operating profits and adjusted margin of 17.5%. Under the difficult circumstances, highly commendable performance.

Aerospace OEM backlog ended the quarter at $555 million, down 21% from the end of March. Our backlog will continue to be impacted by the industry's adjusting production schedules, with net orders highly variable until the uncertainty settles and the cadence of the new normal is determined.

As you'd expect, we saw negative net orders in the second quarter. So clearly, the second quarter was incredibly difficult for anyone in the commercial aerospace industry and unfortunately, the prospects for the third quarter are not much brighter. While we anticipate some sequential revenue improvement, the outlook for the industry will remain challenged.

On the OEM side, aircraft manufacturers have reduced their production forecasts as pressure from airline customers weigh on their orders backlog.

With global passenger traffic down substantially, parked aircraft abnormally high and significant airline overcapacity in the current environment, it is expected, it will take a couple of years to get back to pre-pandemic volumes.

In the short term, a potentially overstocked supply chain built when higher volume expectations were in place, will need to be bled down before a meaningful increase in part production resumes.

On the aftermarket side, with so much overcapacity in place and airlines in cash preservation mode, the entire industry will no doubt see near-term sustained pressure.

As air traffic begins to ramp up over time, we'll see our aftermarket revenue stream also begin its recovery.

However, we expect that there will likely be a time lag between those 2 events.

In conclusion, the second quarter was one for the history books.

The scale of the business disruption and the speed at which it occurred was unprecedented. Yet within that challenge, I'm very proud that our team stepped up to keep our factories running in order to supply our customers with the essential products we manufacture, doing so with the safety of our employees always at the forefront.

Aggressive and difficult decisions were made that, while painful, will allow the company to remain competitive as the business environment improves.

Given our long 163-year history, as a company, we've experienced many different types of extreme challenges in the past and have always powered through such encounters emerging as an even stronger company.

Such resilience is a testament to the talented women and men that make up the Barnes team. And today, we're seeing that play out once again. As we begin our emergence from the pandemic, we remain committed to our long-standing focus of conservatively managing our balance sheet while leveraging the Barnes enterprise system to drive commercial, operational and financial excellence throughout all of our business processes.

We will continue to make investments in capital expenditures and innovation to position us for future growth. Never has our transformational strategy been so important as it is in times of ambiguity and uncertainty such as now that the highly engineered products and differentiated solutions we bring to our customers, create even more value, forging strong long-term partnerships.

And while the turmoil has not fully passed, we remain optimistic and see good things ahead of us as we move forward.

Now let me turn the call over to Chris for a discussion on the financial details.

Thank you, Patrick, and good morning, everyone. Let me begin with highlights of our 2020 second quarter results. Second quarter sales were $236 million, down 37% from the prior year period, with organic sales declining 32%, primarily given the substantial disruptions brought on by the global pandemic.

The divestiture of the Seeger business had a negative impact on sales of 4%, while FX had a negative impact of 1%. Operating income was $10.1 million as compared to $57 million in last year's second quarter. On an adjusted basis, which for 2020 excludes $17.7 million of restructuring charges and for 2019 excludes $1.4 million of Gimatic short-term purchase accounting adjustments, operating income was $27.8 million, a decrease of 52% from $58.3 million in the prior year period.

Adjusted operating margin was 11.8%, down 390 basis points. Interest expense was $3.9 million, a decrease of $1.5 million from last year's second quarter due to lower average borrowings and a lower average interest rate.

The company's effective tax rate for the second quarter of 2020 was abnormally high as compared to 23.4% for the prior year -- for the full year 2019.

The increase in the second quarter's tax rate over last year is primarily due to a change in the forecasted geographic sources of income relative to our prior forecast, with reductions occurring in several low tax jurisdictions.

This impact was partially offset by a benefit related to a refund of withholding taxes and a reduction of the statutory tax rate at one of our international operations.

We now expect our full year 2020 tax rate to be approximately 34%, which includes the recognition of tax expense related to the Seeger sale that occurred in the first quarter.

Net income for the second quarter was $0.01 per diluted share compared to $0.73 a year ago.

On an adjusted basis, net income per share was $0.27, down 64% from $0.75 last year.

Adjusted net income per diluted share in the second quarter excludes $0.26 of restructuring charges, while last year excludes $0.02 of Gimatic short-term purchase accounting adjustments.

Let's now move to our segment performance, beginning with Industrial. Second quarter sales were $165 million, down 29% from a year ago.

Organic sales decreased 22%, primarily driven by significant volume declines as a result of the pandemic. Seeger divested revenues had a negative impact of 6%, while unfavorable FX lowered sales by 1%.

Industrial's operating loss in the second quarter of $300,000 versus operating profit of $27.4 million last year, primarily driven by the lower sales volume and a $15.8 million restructuring charge. Serving as a potential offset were cost mitigation efforts, which included workforce related action and the curtailing of discretionary spending.

Excluding this year's restructuring charge and last year's Gimatic purchase accounting adjustments, adjusted operating profit was $15.5 million versus $28.8 million a year ago.

Adjusted operating margin was 9.4%, down 290 basis points. At Aerospace, sales were $71 million, down 49% from last year. OEM sales decreased 52%, while aftermarket sales decreased 42%. Not a surprising result as the pandemic essentially shuttered the aerospace industry in the second quarter, as Patrick noted.

Operating profit was $10.4 million, down 65% reflecting lower sales volumes and a restructuring charge of $1.9 million, primarily workforce related.

Like our Industrial business, cost mitigation efforts partially offset the impact of lower demand. Excluding this year's restructuring charge, adjusted operating profit was $12.4 million versus $29.5 million a year ago.

Adjusted operating margin was 17.5%, down 390 basis points. Year-to-date cash provided by operating activities was $123 million, an increase of approximately $15 million from last year's first half, mainly driven by working capital improvements.

Strong receivables collections was partially offset by some inventory build, the latter being our focus area for the second half of 2020.

First half free cash flow was $103 million versus $83 million last year. And year-to-date CapEx of $20 million was down $6 million from a year ago.

With respect to the balance sheet, our debt-to-EBITDA ratio, as defined by our credit agreement, was 2.4x at quarter end, unchanged from both our December 2019 and March 2020 levels. Barnes Group has liquidity consisting of $74 million in cash and $393 million of undrawn revolver -- revolving credit facility.

At June 30, the latter was limited to approximately $260 million based on senior debt covenants.

The company is in full compliance with all covenants under the revolving credit facility, which matures in February 2022.

While we do not anticipate a liquidity concern, we nonetheless maintain open lines of communication with our lenders, and we will diligently monitor the credit environment and the company's cash needs.

Our second quarter average diluted shares outstanding was 51 million shares. As noted last quarter, we have suspended our share repurchase activity.

And we do not have an expectation for when share repurchase will recommence. With respect to our customary annual outlook, our ability to forecast performance with reasonable precision remains challenged.

Accordingly, we continue to suspend our full year 2020 outlook. As we did on our April call, we will provide some high-level color on the upcoming quarter.

At the present time, we expect third quarter organic sales will be lower than last year by approximately 30%, though up approximately 6% sequentially from the second quarter.

Operating margin is forecasted to be approximately 10% while adjusted earnings per share are anticipated to be in the range of $0.22 to $0.32.

Given the strength of our balance sheet, we'll continue to invest in our business with forecasted 2020 capital expenditures of approximately $40 million to $45 million, a bit lower than our prior view.

And as I mentioned on our April call, while an acquisition or divestiture in the near-term is unlikely given the current environment, we continue to analyze potential acquisition targets and end markets that meet our strategic criteria with an emphasis on proprietary, highly engineered industrial technologies.

To close, the global business environment has been challenging. Though our second quarter performance managed to hold the outlook we provided in April through quick management actions enabled by the discipline of our Barnes enterprise system.

We maintain a balance sheet and liquidity profile that are in good standing. Working capital remain the focus area as there's more to be done on inventory optimization.

As Patrick mentioned, while ongoing challenges remain, we're positioning the company to power out of the crisis with a solid financial footing and the agility to be opportunistic in reestablishing our long-term profitable growth strategy.

James, let's open the call to questions.

(Operator Instructions)

And our first question comes from the line of Myles Walton with UBS.

This is Lou on for Myles. So I'll start with the OEM, down 52%. I'm guessing that was a little bit worse than you guys would have expected.

In the backlog you had sort of talked about that likely coming down. Can you just give us any additional color around what you saw in OEM? Was it any customer pool or just your customer? Did they make any sourcing decisions from single source tool source, TRI Source, that sort of thing?

Yes. All of the above in that, I would highlight that Q2 was quite an array of different activities with a tremendous amount of uncertainty throughout the quarter. From communications, sometimes were inconsistent. There was activities that were happening between our major customers, between our suppliers, between our own shops, all with a view to trying to understand the extent of which schedules would change.

And so with that, we kept extremely close communication with our customers as you can imagine, to understand their needs and what -- how they were thinking about the future.

In turn, we expected that we would have been a little less down in terms of our OEM business than the 49% that we ended up or 52% for OEM. But towards the end of the quarter, I think most of our customers probably not unexpectedly, look to hold, receive an inventory into their businesses. And so as a result, a number of products that we had originally planned on shipping got held up.

And of course, that had a negative impact on our inventory as well, which went up slightly in the quarter.

Okay. Great. And then just one more at the aftermarket. You guys have given some color back in April. Can you just lay out sort of what you saw in aftermarket from April, May, June?

And sort of how is July tracking?

Yes. So what we saw as the quarter began in April is probably what lifted the quarter and allowed it to be not necessarily down as much as perhaps the overall industry in that our aftermarket was down approximately 40%. And in that, what we saw was a stronger April but then the impact starting to be felt into May and June.

And that impact, which, as you could imagine, was downward has also continued into July.

So as we look forward for aftermarket from Q2 to Q3 sequentially, we would see a little bit more pressured in Q2 as a result of having potentially 3 months of the impact, of the current environment as opposed to -- we really only felt 2 in the second quarter.

Our next question comes from the line of Matt Summerville with D.A. Davidson.

A couple of questions. First, can you talk about what sort of order cadence you experienced in the Industrial business, April, May, June, July, similar to the commentary you gave on aftermarket, Patrick?

Yes, Matt. April was pretty much the most severe and May not much better, to be honest, in that what we saw, as you can imagine, was a lot of our customers closed their facilities, both in fact, both on the aerospace side and on the industrial side. But the auto OEs were closed for pretty much most of April and then May.

And so June then we saw them coming back online. So orders started to pick up sequentially through the quarter with the first 2 months being the most severe.

And then what are you seeing thus far in July, Patrick, in that regards?

We're seeing the same positive trend and positive becomes relative, right? So relative to April and May, we're seeing July continuing improvement sequentially from June.

Got it. And then can you guys maybe talk about what your expectation is for cost savings realization both in terms of maybe putting it into 2 buckets with what you're doing with respect to the reduction in force, the 8%? And what you might be looking at otherwise from a discretionary standpoint?

Sure, Matt. This is Chris. Let me kind of take that one. Second quarter, as it started to materialize in terms of the overall impact on both our Aerospace and Industrial segment to the testament of both the leaders in both of those segments, really swift actions started to take place.

And it's started, the easier part being just the discretionary spending, the complete shutdown of that type of activity.

At the same time, we introduced furloughs, extended furloughs, salary reductions, short work weeks, et cetera.

So across the board, most of the productivity generated that we saw in the second quarter was a result of just those immediate actions.

And it was quite meaningful. I'd say if you just walked our quarter performance, second quarter last year to second quarter this year, you saw $10 million to $11 million of just productivity benefits, which is a combination of the discretionary spending, the furloughs, the headcount actions, as I mentioned.

As it relates to our -- the restructuring charge, when it became more evident that we had a more structural issue because of the demand was not coming back in that April, May, June time frame, we had to make, unfortunately, a difficult decision to actually enter into a reduction in force, which we announced as you noted.

We expect -- and as we publicly said, we expect $30 million of savings over time as a result of those actions.

I'd categorize it as probably in the range of $4 million to $6 million this year in benefit in the second half of 2020 with the remainder being in 2021.

Our next question comes from the line of Christopher Glynn with Oppenheimer.

Chris, just clarifying the prior, do you expect full realization of the $30 million during 2021?

Yes. So it's going to be a matter of time. It's going to be a matter of how the business comes back. At a point in time, as we look at it, the restructuring charge, the actual cost that's going to be coming out of our business is how you come up with that $30 million, as you know, Chris.

But as we look at when the business comes back, does it get continuously worse versus better. We're seeing some green shoots, if you will, some positive signs in some of our businesses that we would expect that the second quarter is the worst and that we're going to start seeing sequential improvement. However, we're cautious.

I mean, as a senior leadership team, we continue to talk about being prepared for if things don't get better in the near term, will additional actions need to be necessary.

But specific to the severance charge, the restructuring charge and the savings associated with that, we would expect that realization.

So that annual run rate benefit to $25 million to $30 million, we would continue to materialize. If business got better, and all of a sudden, Aerospace, especially Commercial Aerospace came back online quicker than we're going to have to provide the resources to meet that demand.

But as it relates to the charge, it's $30 million of savings, which we expect to realize.

Okay. And just automation was called out as one of the bright spots, can you give us the state of play for Gimatic?

Yes. For Gimatic, Chris, what I would highlight there is that the business continues to be a high energy business independent of what the market is doing, in the sense that the team is always looking for the next opportunity and represents a really innovative engineering team and management team.

And so to that end, just through the quarter was -- on a year-over-year basis, obviously, it was down the number of items or new products that they have in the pipeline, coupled with the feedback they're getting from their customers around the release of projects, we're looking -- and I think automation in general is benefiting from the current environment as labor becomes a challenge within manufacturing.

We see that -- we just -- we continue to remain very optimistic on automation and the prospects as it moves forward and expect similar to what we gave as overall guidance, sequential improvement Q2 to Q3 for automation as well.

Okay. And then on the restructuring charge, pretty minimal at Aerospace, but you're contemplating a multi-year duration to recover on the OE side and the lag on the aftermarket. Is -- should we anticipate something further at Aerospace, just [curious] the lower proportion of the overall charge?

Well, I think, again, what I'd highlight is that the physical location of the employees impacted, which was global in nature, it constitutes the ratio between what you're referring to as the charge between Aerospace and between Industrial.

So higher cost employees in terms of severance, sometimes depending on the global region. With that said, I would say that we also have -- whilst we've been aggressive, we've also kept a clear eye on the future in that, as you're aware of skilled labor in these industries is a premium. And so to the extent possible, we've walked a fine line between managing the drop in demand and the reduction in our workforce against being prepared for any uptick as it comes forward and having the skilled labor available to do it.

That makes sense. So a little risk management involved there. It sounds like.

You're right.

Our next question comes from the line of Pete Skibitski with Alembic Group Global.

I'll start on, I guess, so sequentially higher volumes in the third quarter you -- the margin, you're guiding down sequentially from a great 11.8%.

Is the answer maybe you talked about incrementally more headwind in the aero aftermarket? Is that account for that differential or maybe a little conservatism? I was just looking for some color there.

No, you're right on, Pete. What it is, is that as we move into the third quarter sequentially, we see improvement in terms of revenues both in Aerospace and in Industrial. Having said that, within Aerospace, the mix is going to put pressure on the margin for Aerospace because we see a little lower in terms of aftermarket and then a little as higher sequential growth in the OEM side, but the mix of the 2 will put pressure on the margins of Aerospace and in turn, on BGI's margins.

Okay. Okay. And then one more for you, Patrick. I feel like if we went back a year or so ago, the expect -- or the forecast out there for CFM56 shop visits. They're probably for like a peak in 2025 or so and a very gradual runoff thereafter. Now it seems like a lot of the global airlines are talking about retiring older aircraft, maybe more so than I initially expected.

Do you have any sense at this point when you might see peak shop visits on the CFM56 now?

Does that get pulled forward, do you feel like?

I don't know if it gets pulled forward or gets pushed to the right a little bit in the sense that the -5 and the -7, remember, make up the majority of the demographics of the CFM56. And whilst I don't rule out that even the -5 and the -7 may see some retirements are cannibalizing over time.

At the same time, the fleet is relatively young in terms of the fact that the majority of the fleet has only seen its first overhaul and in a lot of cases, not even its first overhaul. So with that said, I think that the outlook for the CFM continues to be bright.

The peak, clearly, that we had anticipated in the mid-20s now is probably disrupted as a result of this pandemic.

But overall, whilst you look at the industry recovering and passenger traffic coming back online, of course, where that will happen initially is domestically. And of course, the narrow-body aircraft is going to be the first aircraft to come back online to serve those needs, whether that's domestic in the U.S. or domestic in Europe or domestic in Asia.

So again, clearly, it's going to disrupt or it has disrupted the shop visit curves that we had anticipated. But still very optimistic on the overall CFM56 program.

Okay. That's great. I appreciate that color. One last one for me for Chris. Chris, I don't know what happened with that receivables collection this quarter, but that was pretty extraordinary. You guys are talking about inventory now. I mean, what kind of magnitude of inventory reduction are you contemplating?

Well, first of all, thanks for the comment on the receivable side. I mean it was a full-court press across the company, really on cash management.

I mean, at times like these, recognizing the growth is not going to come. Our focus has been on cost managing and what we can contain and control as well as on the cash side.

So across the company, the efforts on the receivables side and getting collections on time with very little past due was a significant improvement, which allowed for us, and I don't want to underemphasize, actually I want to overemphasize is the fact that we were able to maintain our 2.4x debt-to-EBITDA in this environment is a testament to the team. So that's good. So that -- so now with coming sequentially, top line receivables probably wouldn't be as big of a difference as we would expect where the focus is on inventory.

Inventory is a challenge for us, primarily in our longer cycle business, specifically on Aerospace, as we're trying to manage the inventory levels, we're trying to manage the input in terms of what's coming in at the same time, we've got a customer that can make those 11th hour decision in terms of what they accept in a particular month in a particular quarter. So that one is the best we can do is just stay close to our customer to try to manage inventory, the incoming raw material as quickly as we can, and we've been doing that.

So to quantify it, and I want to suggest that we could probably hopefully get $10 million or $15 million out of inventory when you look at it quarter-to-quarter. But that's not a small task. So I don't want to overemphasize the opportunity in the near term.

I think it's going to be a longer-term play where inventory will settle. We will get improvements on inventory reduction. But it will take some time, and it may be beyond a quarter, I guess, is the point.

(Operator Instructions)

Our next question comes from the line of Michael Ciarmoli with SunTrust.

Just on the commentary on aero OEM, why are you guys thinking there's going to be sequential growth off of this quarter?

I mean, what are you hearing from your customers? Do you have a good sense as to where we are with removing all of the excess buffer stock in the supply chain. It seems like some of the other suppliers are talking about realignment of this supply chain for the next couple of quarters.

No, it's a great point. And I would say that in principal and at a high level, those statements are absolutely correct.

One of the areas that will allow us, I think, some sequential improvement in terms of Q2 to Q3 is a combination of our commercial and military business, where the military will continue to ship, whilst the commercial -- what we saw was as product that was say, held under dock in the second quarter, which, in turn, we expect will ship in the third quarter.

As I mentioned in my prepared remarks, overall, I think that the next couple of quarters are going to be somewhat muted in the sense of any type of growth.

We're only talking a few million in terms of when I talk about sequential growth over -- because of the fact that the supply chain has to clear itself.

And to that end, I think there's lack of clarity as to what the demand -- the true demand will be, and there's a lack of clarity as how much inventory is in the actual channel. And so all of that will have to purge, if you like, or bleed down over the next few quarters before there's any meaningful improvement in growth within the OEM side.

Got it. Does that -- so then if I looked at your backlog and you obviously had negative orders, you're kind of implying 45% is shippable over the next 12 months, which I guess the $62 million quarterly run rate would be a material uptick from the $45 million this quarter, but it sounds like even that backlog would be somewhat vulnerable and maybe that 12-month shippable rate is kind of like you just said, there's a lack of clarity there?

There is. But also I'd point out that the way we think about it is it's sequential in that the second half of that 45% would be higher than the first half.

In other words, the 6 months of 2020 versus the first 6 months of 2021. So even there, we see a split weighted to the first 6 months and the first 6 months, again, as pending the clarity coming from the channel destocking.

Got it. And then just where are you guys on specific platforms, what's going on with the MAX right now? And then probably as expected. I mean, the 777X is getting delayed, does that create any additional headwind for you guys?

It's -- the area that we saw backlog come down more significantly in the quarter was the A350, the wide body aircraft, as you can imagine. And so as you look to aerospace OEM and you split it between narrow-body and wide-body. Clearly, the wide-body was that which came under more pressure.

And now as recent as yesterday, you saw the headlines suggesting that the 77x may be pushed out a year or so.

We hadn't anticipated major volumes on the 77x into 2021. So we're not that necessarily concerned about its impact in the short term, clearly, we see that as a program for the future for us and one that we think will still be successful over time.

By contrast, the 737 MAX, we remain very confident in its reentry back into service and think once it gets through the current hurdles will be a great aircraft.

And I do think that you've seen a number of key endorsements by major airlines restate and reiterating the confidence in the aircraft. So all of that, I think, will play out over time to the positive.

Got it. And then just last one on the aftermarket. You obviously talked about having that benefit in April. Can you give us a sense of what the activity looks like now?

I mean, obviously, we've seen flight hours reduced the grounded fleet, but can you give us any sense of what maybe shop activity looks like, are engine overhauls really being pushed out, or how much visibility are you entering this quarter with versus kind of like you said, you had that benefit of closing out maybe March, give you a little bit of a boost in April.

I mean, is it just -- has activity just really drawn down to a minimum right now?

I think that's pretty an accurate statement that visibility right now is somewhat foggy in the sense that we are keeping close contact with all the engine overhaul shops, but the engine overhaul shops are reacting, as you can imagine, to the airlines. And so to that end, there are a lot of open slots and yet, there are opportunistic shop visits that are coming in as well. But overall, what we expect going into the third quarter is our Aerospace business in total to be down again year-over-year, approximately 50%. With our aftermarket, probably, which beared out better as you highlighted because of April, only been down 42% in Q2.

And even there, I'm choking on the words only. But we'll see aftermarket climbing to the 50 range in the third quarter as well.

Our next question comes from the line of Tim Wojs with Baird.

I just had one question. Going back to the Industrial business and just the hot runner portion of it and maybe specifically automotive.

What's your best sense of kind of what's happened around model changes and rollouts? Is it really just a shift to 2021? Or is there just kind of more of a permanent kind of pushout or a delay at this point?

Just trying to understand if there could be a meaningful improvement in that business into next year.

It's a great point, Tim, because what we're doing there is making sure that, again, all of our business sales people within the business are keeping close communications with the customers. And for the most part, what we believe is that a lot of new model changes or new model introductions, for the most part, have basically been deferred or pushed out as opposed to being canceled.

So we don't think that the recovery will be a v-shaped, in any sense, we do think it will be a little bit more protracted over a couple -- a few quarters. But in general, that business continues to be a highly differentiated business. The team there have some great positions in terms of the market overall. We've seen positive signs in terms of China.

And we look to China as it pertains to all of our businesses that are in that market as an indicator of what might be to come with the rest of the globe being Europe and North America.

And what we've seen since the February lows, which is when the coronavirus hit hardest in China, we've seen a consistent uptick in orders and sales, primarily within both our automotive hot runner business as well as our Force & Motion Control business.

And so that bodes well, albeit that not fully up to the levels of pre COVID, but nonetheless, an upper trend.

And there are no further questions at this time. I'd like to turn the conference back over to Bill Pitts, please.

Thank you, James. We would like to thank all of you for joining us this morning, and we look forward to speaking with you next in October with our third quarter 2020 earnings call.

James, we will now conclude today's call.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.