Steering Through Aerospace & Defense Turbulence: Insights from Experts
The Aerospace and Defense (A&D) industry is no stranger to the challenges posed by a rapidly changing world. From the disruptive forces of COVID-19 to inflation, supply chain interruptions, and market volatility, the A&D sector is in a constant state of adaptation. In a landscape where labor, working capital, and raw materials face a relentless squeeze, achieving organic growth might seem like an impossible feat, but Chuck Adams and Corbin Metz, Managing Partners at Coeptis Consulting Group, believe otherwise.
In this Aerospace Executive Podcast episode, we delve into the dynamic world of A&D and the vital role of M&A advisors in helping clients navigate these complex challenges. Chuck and Corbin offer their insights into the industry's exciting opportunities and hurdles. They share their experiences, from their backgrounds at industry giant GE to their entrepreneurial leap.
Here's what you'll learn in this episode:
The Drive for Diversification: How are companies affected by current supply chain constraints responding to these challenges, and what role does diversification play in their strategies?
Private Equity – A Gift and a Curse: With a widespread working capital squeeze, we explore the challenges of choosing a strategic buyer path.
Raytheon GTF – A Cause for Concern: Recent setbacks raise questions about this engine's reliability – what's the potential impact on the industry?
Step Out and Bet on Yourself: Discover the driving forces that led Chuck and Corbin to transition from corporate America to entrepreneurship. We also discuss the stark differences between the two worlds.
Craig: Welcome back to the Aerospace Executive Podcast. I'm really happy to have a couple of good friends back with me, Chuck Adams and Corbin Metz, both with the Coeptis Consulting Group as buy-side M&A advisors, and I love their backgrounds. Both came from GE, have ventured into entrepreneurship, and are betting on themselves. We're ready for some good conversations today, so thanks for coming back on, guys.
Chuck: Hey, thanks for having us, Craig. We appreciate it.
Craig: So, what's happening in the buy-side M&A world? Let's talk a bit about what you guys are doing, the engagements you're involved in, and then we can go from there.
Chuck: Sure yes, Coeptis Consulting Group. You know, over the years, we've transformed, and we really like to focus on the buy-side M&A. We help, as we say, cut through the noise, find more deal flow, and discover some really good deals. That's what it's all about. We've assisted private equity funds, and we've also helped find strategic buyers, people who are out there searching for good deals, especially in the lower middle market. But where do we start? What does aerospace and defense, or these other industries, look like? How should we go about navigating that? That's essentially what we do. We also provide assistance on the growth side of things.
Corbin: I was just going to add that, coming from backgrounds with over a decade in the industrial space, with operations and product development, the A&D (Aerospace and Defense) space is constantly expanding, and there's always something new and exciting happening across the supply chain and, more specifically, the value chain. Navigating this on the buy side of things really helps strategic buyers be aware of what might be happening today, but more importantly, how these developments today are impacting your strategy and long-term plans, especially when you're discussing growth. Inorganic growth is quite challenging these days, with so many rapid changes in technology. It's an ever-adapting environment, and there are many interesting things happening in the A&D sector. It's one of the more exciting places to be right now, I think, for sure.
Craig: You know, we look at what happened with COVID, and things just took a pounding.
Chuck: And then we look at what's happening now in the marketplace, and it's pretty crazy just how much it's bounced back, right? You hear rumblings of a recession, and sure, there's definitely some merit, maybe to that, right? We're not saying that isn't something we should be aware of. But at the same time, especially in Aerospace and Defense, particularly on the commercial side (you know, I know you had Bill Alderman on a couple of weeks ago, right?), the same thing. It's what we've seen too. For a lot of these lower-middle-market companies, especially those below $100 million, the message we hear a lot is, "I have all this demand, and I have these contracts out for years, not just months. Some of them are really trying to serve a lot of these OEMs and Tier Ones, and they're just telling us, 'We got contracts, and we got unit flow to push out the door, whether it's MRO or manufacturing, but we just don't have the capital or the capacity.' That's what we've heard a lot throughout the United States. And I think, to come back to the original point there, Craig, I think where we try to differentiate ourselves is, as Corbin was alluding to, it's not just being investment bankers (and we are registered with a broker-dealer). It's more than that. It's more about your strategy and looking at the big picture. It's not just looking at a shop and having my dress shoes on, thinking, "Oh, look, that's a nice shop." Being that we came from that, and I was an engineer, and we worked together at GE, right? So, there's a lot that goes on in the shop, and you've got to know what you're looking for. So, we try to bring that whole suite of services. It's not just about the financials; it's also about operations, technology, what they're doing, what's their goal, and are they even a good shop, as weird as that sounds.
Craig: Look, as you guys will attest, I'm sure, as you're seeing it, the smaller middle market is getting squeezed at every level. Every cost is up. Fuel's up. Labor prices are up. Labor relations are very challenging right now too.
Corbin: There's a lot of turmoil in the union space, so a lot of contract negotiations are coming up for renewal and things like that. Ultimately, it's impacting the small and medium-sized companies the most, and they're the ones that are kind of bolstering the rest of the chain. So, it's making it a tumultuous time to borrow money and find people who will build and produce the goods you're looking for. It's across industries, but because of the depth within the value chain across A&D (Aerospace and Defense), it's even more impactful in this industry.
Craig: Yeah, and it's not like small suppliers, I mean, everybody has to do it. Look at labor relationships, look at the UAW right now. There you go, right? Everybody's following that. But then you look at your smaller middle-market suppliers who have very little pricing power. They're getting squeezed with payment terms and everything else. Material prices are up, and you're thinking about how to keep a healthy supply chain. If the OEMs and the Tier Ones aren't offering better pricing to their suppliers, how do you keep your supply chain healthy? That's the thing that bothers me the most. You lose a supplier, and it takes a year to qualify a new one, or more, depending.
Chuck: I would say when it comes down to three things. I think that we've seen, you know, Corbin and I, over the last four to six months, is three things. The first one is labor. Everybody's always saying labor, labor, labor, and it's tough right now. The second one is with the interest rates rising, etc. Financials, so even if they have the labor, which we've seen with some people we've been talking to, trying to keep accounts receivable flowing and waiting on all these payment terms like you said, they're getting squeezed. So we've seen challenging cash crunch situations and working capital, yeah, but then the third thing is just these material prices and the cost of goods sold is going up. We've seen that in contracts because think about it. You had a Gulfstream contract or a Lockheed contract that you had signed back in 2018 or 2019 when things were a lot different. Some of these small suppliers, we've seen personally, they'll say, "Oh great, I got a five to six-year contract on this program." Even if they're on a good program, whether it's an F-35 versus a 737 Max versus some of the other ones that aren't doing so well, even if you're on a good program, a lot of them went into it without material escalation clauses or some of those types of contract stipulations. So we're seeing a lot of gross margins in some places really get squeezed because they're like, "Well, I've got to serve Gulfstream on this contract, and I want to make them happy, for example." Not that it's specifically Gulfstream, but in order for me to keep servicing them, I've got to buy from these material suppliers. Some people don't know that, which you probably know. You have to use certain vendors sometimes for material quality, which sounds great from a quality perspective, and we're not bashing that. But then when it comes to the pricing, and they keep raising prices, but you know you've got to keep selling to Gulfstream, the particular price on this particular part is just squeezing them out, and it's causing a big headache.
Craig: Everybody knows about the old ballroom bidding process where you bring your suppliers to the hotel, and people beat the snot out of them. Is GE humbled now a little bit with that process, or have they realized that maybe that's not such a good idea anymore? Protecting the suppliers is maybe a bit more advantageous than beating them up.
Corbin: I can't really speak for what they're doing now, but effectively, I would think strategically they would want to humble up a bit because that was a very aggressive way to approach the conversations that are becoming more difficult now. So, I don't really know. That's a good question.
Chuck: I think it's something we saw, Corbin, back then, and we even said, you know, we've done some consulting work for some large OEMs and Tier One since we left GE within Coeptis and other places. So one thing we've noticed across the board, especially on the U.S. side, is that the OEMs and Tier Ones, it's almost like they want to race to the bottom. It's like, especially, I think COVID was kind of a blessing in disguise. It's like, no, you need to partner with your suppliers; you need to have good collaborative relationships. That's something, I think, we’ve been pushing because we've seen both ends. These are Mom and Pops, but also just good companies with great management that want to serve these OEMs and Tier Ones. But don't turn it into some kind of, what's the word, adversarial relationship.
Craig: We're in the canoe! So, you guys are obviously doing the buy-side, and a lot of it's strategy. What trends are you seeing more towards the strategy side of the house? Is there anything that, as you go into these shops, you're seeing trends as to what they can do better or where they go?
Chuck: I would say the first one, by far, and we were alluding to this before, right before the call, just diversification is definitely one of them. It's something that all of them are really trying to do and exploring. I think everything we've done in some of our current mandates, we've seen that where all of them are saying, "Yeah, I got these contracts, but I want to diversify. I want to develop business with different OEMs and also different industries too." Especially up in Boise, Idaho, and we're close to the Pacific Northwest. The big one going around is Boeing, right? Boeing is getting pummeled, and in turn, what are they doing? They're pummeling a lot of their suppliers. I'm not necessarily faulting all the people at Boeing. Obviously, there are a lot of brilliant people there. But the suppliers are getting pummeled that are really reliant on Boeing. The question that goes around all the trade shows, all the conferences, especially up in the Northwest, is, "Where can we go find more business? How can we diversify, not even just in Aerospace and Defense, but also in medical, nuclear, even new technologies like additives?" So, that's something we've seen across the board in M&A. When we're approaching targets and looking at them, all of them seem to be very conscious of that, which is a good thing for their business. But I think I've seen much bigger focus on it now than we did before COVID, for sure. Anything to add, Corbin?
Corbin: I mean, just from a diversification standpoint, I just wanted to add it's both on the supply side of things and on the product output. So, like looking at kind of de-risking where you have, like, sole-source suppliers, for example. That's kind of ultimately a part of the conversation now, whereas it wasn't necessarily as strategic before. And then on the diversification on the output side of things, looking for different ways that you can start growing into the products that a good strategic fit might have or what you could offer to bring to the table from an innovation standpoint, something new. So, ultimately, that would be a really good benefit to that.
Chuck: I would say yes to that, and I'm adding to that the last thing that we've seen too because the big discussion has been around when we look at the PE side of the house. Dry powder, everybody's talking about it, right? There's a lot of dry powder out there, and they're all trying to seek a place to park that and find a good investment. I can see why the PE space and just people are, you know, we've seen some activity, right? But I think we're going to start seeing more and more going forward because there's a lot of dry powder, there's a lot of places they want to park, a lot of industrial capital. I can see why people have been cautious, but as I heard on the podcast with Bill the other day, right, deals are still happening. People aren't really gun-shy about it. I look at our clients too. It's not always about interest rates, right? That is a factor, but people still want to find those good deals, and they're still good places to find them. With the number of baby boomers right now, especially that are starting to retire, and as well as we saw in 2020, people wanted to sell or they were thinking about getting out of the business. What was the thing we heard? "Oh, well, I needed to wait, or I wanted to wait." Now, everybody, it's more of a pressing matter, them wanting to get out of the business, I think. So, there's a lot of great Tier Two, Tier Three suppliers out there; it's just a matter of finding them and developing relationships and seeing what makes sense.
Craig: So there's private equity coming into the space a little less leveraged up, I mean, yeah, if there's a lot of dry powder out there, can they still meet their IRRs with less leverage? Or is it still a leveraged game, and we'll just figure out interest rates as they go along?
Chuck: That's a good question. I would say that I think there's still a big enough IRR to justify it in a way because we've been looking at some deals on our side where we pose the question to them, not necessarily private equity, but just the deal itself. We still see some opportunities out there where private equity would be willing to maybe not necessarily lever up completely, especially if you're doing things like add-on or bolt-on acquisitions. Now, platforms, yeah, that's a large acquisition, and I'm sure they're going to be looking at interest rates, etc. But keep in mind, the larger the fund, typically, they can find better terms in some ways, not always. But I think that's my comment on that. What I've seen is that if the deals are small enough, and it's a bolt-on, okay, we'll just do mostly equity. There's the IRR and the EBIT multiple grouping it together effect, right, that you can get sometimes with rolling strategies, especially.
Corbin: Yeah, I was just going to add in. It ultimately, I think, kind of depends on what space they're playing into, what type of strategy they have going in to diversify their own risk across the different platforms.
Chuck: You know, whether across the aircraft, yeah. In every private equity, just like any strategic buyer, every private equity fund, it's beautiful and a curse, depending on how you look at it. They're all different. They all take on risks differently, have different timelines. There are lots of permanent equity and family offices, right? It just really depends on who you're working with and what their timeline is, no doubt.
Craig: I got you. Where do you see the opportunities? Is it manufacturing, MRO? A lot of people are saying engine MRO right now has a long way to run. Is it airframes, engines, the aftermarket, the digital space? Where do you guys see the most opportunities on the buy side?
Chuck: Oh, that's a good question. The answer is yes or, you know, they answer it right, but it depends again. It depends on what you're after. There are droves, and I don't have a statistic right now; I know they're out there. There are so many business owners in their late 50s, 60s, and even older who are trying to get out of their businesses. They've built it over the last 20 or 30 years, and they're all over the place. We've always said, especially if you're a private equity person and you're trying to roll up, there are some areas that are more ripe for that than others. I think the classic one we've seen that many people have been looking at is things like accessories. It's such a fragmented market, and we've known this for years, and we said, "Yeah, you want to look for competitive advantages or IP." Not that that's particularly a concern with MRO specifically, but it can be. Really rolling up those areas where it's like, nobody's this is so fragmented, and there are contracts all over the place. There's that. But then also on the airframe side or maybe the manufacturing side is a better way too. There are just a lot of good companies that have solid contracts. As long as, Corbin mentioned, you're managing the cost a little bit on the supplier side, and you're thinking about sole sourcing and suppliers, you've got some pretty stable cash flow in a lot of those airframes and those, what's the word I'm looking for, non-sexy areas. If I can say that, well, those areas that, you know, oh, okay, maybe they're not cutting edge, but hey, those are great areas that are stable. Sure, it's a spar, but hey, it's not.
Craig: You know, overhauling independent drive generators isn't really all that sexy or pretty, but you can make money doing it. So, hydraulic components, fuel, you know, fuel accessories, fuel pumps, etc.
Chuck: Yeah, there's a huge aftermarket. There's a huge aftermarket, and I think with space coming along too, we've noticed over the last year that space is growing faster than people think. There's a big renewal and focus on that as well, especially on the commercial side. There was always this notion in the last five years that all the focus was on military aspects like intercontinental missiles or satellites. I'd say, 'Yeah,' but the commercial side, especially with SpaceX and Blue Origin challenging the established players, there's a lot of activity in the space realm. They need machine parts, avionics skills, and electronics manufacturing for their components, etc. We see that taking off a lot in the future. So, yeah, it's awesome. I love it. It's all good.
Craig: Right, I'm gonna shift gears now. I get a lot of people calling me up, asking, "Do I play it safe and go to a big company or try a different, smaller company?" Let's talk about your careers, Corbin. You were on the fast track at GE Engines, part of the management program, etc. How long were you with GE?
Corbin: I was with GE for 11 years.
Craig: 11 years. And you decided to step out and bet on yourself. Chuck, you have a similar story. What made you guys decide to take that leap, bet on yourselves, and how do you like the entrepreneurial path compared to the big corporate world? What do you see in the differences between working in big and small companies?
Corbin: What drew me into GE and what I fell in love with, kind of working in Corporate America, is the reason why I wanted to pursue entrepreneurship. It's a double-edged sword, ultimately. What's exciting about Corporate America is the opportunity. You don't know what you don't know. You get into this space as a young engineer, eager to learn, and you're like, "Teach me everything. I'm a sponge." That was a fantastic experience. I was able to navigate through different products, teams, processes, and operations in a large organization, exposing myself to a variety of aspects. Unfortunately, you can get lost in the large corporate environment too. From a leadership standpoint, I sometimes felt unheard. That's when I decided I wanted to step out, take the skills I've developed, and apply them to a new challenge. I wanted to own my experiences, the failures, and the successes. Partnering with Chuck was a breath of fresh air, and it allows us to help more people by establishing relationships with small companies.
Chuck: I'm nodding my head here. We're obviously two peas in a pod, being partners. I agree with the sentiments. Big organizations offer a certain culture and mentality, a kind of groupthink, which can be limiting. Still, you also meet some incredible mentors and people. The best thing about GE, and we've heard this from others too, is the high bar they set. That's one of the blessings we've received. We try to maintain a high bar and aim to deliver value. What we offer our clients is often met with a "Wow, I hadn't thought of that." We pride ourselves on offering fresh perspectives, not just relying on standard tools and processes. This approach to looking at things differently and challenging conventions is what we enjoy about working with small companies.
Craig: Absolutely. I've received calls from people working at large companies who want to move to other large companies, essentially changing geography. The more exciting aspect is working with small companies, where you're not merely changing your location but making a meaningful impact, like taking a company from $10 million to $20 million. To change lives is much more fulfilling than playing with large corporate figures. I understand how the large corporate environment can desensitize you to the value of small changes.
Corbin: Changing lives is significant. To impact lives and make a difference for smaller companies is what motivates us as entrepreneurs. We can focus on delivering value and are adaptable. We can say no when something doesn't work for our clients. Being agile allows us to take on more responsibilities and provide a holistic view that's often lacking in larger companies. Our background and experiences enable us to speak both languages, bridging the gap between small businesses and larger corporations. Moreover, our affinity for embracing new technologies and tools allows us to bring innovative and robust solutions to our clients.
Chuck: We tend to focus on value and push the bar high. Our ability to offer fresh perspectives and deliver value in an innovative and relatable way is what sets us apart. We bring a different approach to the table and, as lean-focused individuals, we aim to help our clients see the whole picture. Instead of relying solely on spreadsheets and presentations, we look at things differently. Working with small companies allows us to translate our expertise and add agility to the deal-making process.
Craig: When you work with small companies, you experience different challenges. How does your GE background factor into your consulting group? You've worked with large companies but now operate as entrepreneurs, managing cash flow, and working closely with smaller suppliers. How does your GE experience relate to your ability to understand and support smaller companies?
Chuck: You're absolutely right. Entrepreneurship is do or die. We don't have the luxury of a large corporate safety net behind us. Our passion, commitment, and the need to provide for our families drive us to work tirelessly and take on challenges. We recognize that we work relentlessly because it's a make-or-break situation. We aim to set a high bar in everything we do. This rigorous approach is what we bring to small companies. We've noticed that when it comes to bringing fresh and innovative perspectives to our clients, our small size and agility allow us to excel. We offer services that differ from traditional standardized approaches and bring a unique viewpoint to the table.
Corbin: Our lean focus and ability to adapt make us agile. We can cater to our clients' needs and help them make more informed decisions. Our clients have appreciated our ability to offer fresh insights and present solutions they may not have considered before. Our goal is to create robust, dynamic, and forward-thinking strategies, which is sometimes missing in the market. We're equipped to fill this gap and help our clients improve and excel.
Craig: I see how your agility and innovative thinking benefit your clients. Working with small businesses allows you to make a substantial impact and provide valuable insights. Now, back to your backgrounds in the aerospace industry and your time at GE. Raytheon and the geared turbofans (GTF) have been in the news due to a significant charge they've taken. Some believe it's a more substantial issue than what's been reported in the media. How do you view the GTF in comparison to other engines like the Leap 1A, 1B, and CFMs? Do you think this is a significant concern, or is it downplayed?
Chuck: I might be a bit biased, considering I've contributed to some engineering drawings for the Leap engine. However, when discussing this topic in the past, the issue isn't merely about comparing the Leap to the GTF; it's about how original equipment manufacturers (OEMs) are feeling. The GTF's challenges could raise questions about the engine's reliability. Aircraft engines, especially high-touch assets like these, are treated differently from other components because they require frequent maintenance. If an engine like the GTF faces these issues and struggles, it can affect its reputation. Even if nothing significant happens, it can still create doubts about its reliability. It's like owning a car; small issues are expected, but major problems can deter potential buyers. It's all about the perception of how reliable the engine will be. It can result in red flags for leasing companies and engine buyers.
Corbin: I agree with Chuck. The longevity of engines, particularly high-touch assets like aircraft engines, means that even a small concern can affect their reputation and raise questions about reliability. Engines play a crucial role in the airline industry, and doubts about their dependability can have far-reaching consequences. This issue may not be getting the attention it deserves in the media, but it has significant implications for the industry.
Craig: Absolutely. It can put doubts in the minds of leasing companies and potential buyers, affecting the engine's value. Well, thank you both for your insights. It's been a pleasure to have you on the Aerospace Executive Podcast.
You can reach out to me directly at Craig@northstaresg.com or visit our website at www.northstaresg.com. You can subscribe to this podcast on iTunes, Stitcher, Podbean, or YouTube by searching for Aerospace Executive Podcast. Thanks again, and I'm Craig Picken.
About Your Hosts:
Chuck Adams: As the Managing Partner of Coeptis Consulting Group, Chuck brings a wealth of experience in aviation/aerospace, automotive, and industrial goods. His strong technical engineering expertise and business acumen offer a unique blend of skills for in-depth technical-business examinations.
Corbin Metz: Corbin, also a Managing Partner at Coeptis Consulting Group, has a decade-plus track record of driving value in aviation/aerospace, rail transportation, and industrial goods. She excels in digital transformation and operational optimization, using techniques like Lean Six Sigma, Change Management, and AGILE development.
To learn more about Coeptis Consulting Group, visit their website at CoeptisCG.com, or reach out contact@coeptiscg.com.
Craig Picken: Craig is a co-founder and Managing Partner at Northstar Group, specializing in executive recruitment for aviation and aerospace industry leaders. With over 150 executive searches to his name, Craig's unique background in flying airplanes, selling them, and running a business provides him with unparalleled insights for serving executives and the boards they work with. His thorough, disciplined approach ensures that both candidates and companies find their perfect match, working towards achieving their business goals.
Reach out to me directly at Craig@northstaresg.com or visit our website at www.northstaresg.com. You can subscribe to this podcast on iTunes, Stitcher, Podbean, or YouTube by searching for Aerospace Executive Podcast.
