Q2 2022 TransDigm Group Inc Earnings Call
Thanks, Dan.
Hello, Thank you for standing by and welcome to the second quarter 2022 train done group incorporated earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question answer session.
A question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like turn the conference over to your speaker today.
Jamie <unk> director of Investor Relations. Please go ahead.
Thank you and welcome to transition fiscal 2022 second quarter earnings conference call presenting on the call. This morning are president.
President and Chief Executive Officer, Kevin Stein, Chief Operating Officer, Jordan Valley, Darren and Chief Financial Officer, Mike Lisman. Please visit our website at transact.
Dot com to obtain a supplemental slide deck and call replay information.
Before we begin the company would like to remind you that statements made during this call which are not historical in fact are forward looking statements.
Further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward looking statements. Please refer to the company's latest filings with the SEC available through the investors section of our website right I said dot Gov.
The company would also like to advise you that during the course of the call we will be referenced referring to EBITDA, specifically EBITDA as defined adjusted net income and adjusted earnings per share all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most direct.
Comparable GAAP measures and applicable reconciliation.
I'll now turn the call over to Kevin.
Good morning from Cleveland and thanks for calling in today first of all start off with the usual quick overview of our strategy a few comments about the quarter and discussion of our fiscal 'twenty 'twenty. Two outlook, then George and Mike will give additional color on the quarter to reiterate we are unique in the industry in both the consistency of our strategy and good.
And bad as well as our steady focus on intrinsic <unk> intrinsic shareholder value creation through all phases of the aerospace cycle to summarize here are some of the reasons why we believe this about 90% of our net sales are generated by unique proprietary products most of our EBITDA comes from aftermarket.
Revenues, which generally have significantly higher margins and over any extended period have typically provided relative stability in the downturns. We follow a consistent long term strategy, specifically, we own and operate proprietary aerospace businesses with significant aftermarket content, we utilize a simple well.
Proven value based operating methodology, we have a decentralized organizational structure and unique compensation system closely aligned with shareholders.
We acquire businesses that fit this strategy.
And where we see a clear path to P. Like returns our capital structure and allocations are a key part of our value creation creation methodology.
Our long standing goal is to give our shareholders private equity like returns with the liquidity of a public market to do this we stay focused on both the details of value creation as well as careful allocation of our capital.
As you saw from our earnings release, we had another good quarter, considering the market environment. We continue to see recovery in the commercial aerospace market and are encouraged by the trends in air traffic. Among other factors. Our Q2 results show positive growth in comparison to the same period in 2021 as we are lapped.
The second fiscal quarter of 'twenty, one, which was heavily impacted by the pandemic and then relative availability of vaccines. Although our results have improved they continue to be unfavorably affected in comparison to pre pandemic levels as the demand for air travel remains depressed.
However, the continued steady improvement in global Air traffic is encouraging there was a slight pullback in flight traffic in January as a result of the omicron Varian after strong December holiday travel, but traffic has continued to progress forward. Since then it further illustrates the pent up demand for air travel and bodes well for the.
Continued momentum of the commercial aerospace recovery throughout 2022.
To date the recovery has remained primarily driven by domestic leisure travel. So international travel is slowly improving as many governments across the world have softened or fully lifted travel restrictions China continues to be a watch point as both international and domestic traffic in China is near Covid lows due to strict zero Covid Paula.
These limiting travel.
You know our business, we saw another quarter of sequential improvement in our total commercial aftermarket revenues and bookings with both up approximately 10% over Q1 of fiscal 2022.
I am very pleased that despite this challenging commercial environment, our EBITDA as defined margin was 47, 7% in the quarter contributing to this strong margin is the continued recovery in our commercial aftermarket revenues as well as the careful management of our cost structure and focus on our operating strategy. This.
Was achieved despite the omicron variant impacting travel in the beginning of Q2.
And the sharp drop off in China air traffic during the quarter.
Additionally, we continued to generate cash in Q2, we had operating cash flow generation of almost $90 million and closed the quarter with a little over $4 2 billion of cash we expect to steadily generate significant additional cash throughout the remainder of 2022.
Next an update on our capital allocation activities and priorities I am happy to report that during Q2, we opportunistically deployed $667 million of capital via open market repurchases of our common stock. This equates to approximately 1 million of our shares at an average price of $637 per share we've.
These repurchases like any other capital investment and expect this will meet or exceed our long term return objectives, Mike will address this more later.
Also during the quarter, we agreed to acquire a dart aerospace for approximately $360 million in cash Dart is a leading provider of highly engineered unique helicopter solutions that mainly service civilian aircraft Dart is expected to generate approximately $100 million in pro forma revenue for the calendar year end.
December 31, 2022, and it fits well with our proprietary and aftermarket focused value generation strategy. The acquisition is currently expected to close during the second half of our fiscal 2022.
Pro forma for the closing of the Dart acquisition, we still expect to have a sizable cash balance of close to $4 billion. This assumes announced share repurchases and dark closing, which together allocates approximately 1 billion of capital for value generating investments, we continue to evaluate our capital allocation.
Options regarding additional acquisitions share buybacks and dividends all three options remain on the table each individually, but then also potentially in some combination over the next nine months or so.
Any significant M&A share buyback and or dividend activity will still leave the company with substantial liquidity and the financial flexibility to deal with any currently anticipated capital requirements or other opportunities in the readily foreseeable future.
We continue to look at possible M&A opportunities and are always attentive to our capital allocation, both the M&A and capital markets are always difficult to predict but especially so in these times regarding the current M&A pipeline. We are actively looking for M&A opportunities that fit our model acquisition opportunity activity continues.
To accelerate and is approaching pre COVID-19 levels, we have a decent pipeline of possibilities as usual, mostly in the small and mid size range I cannot predict or comment on possible closings. We remain confident that there was a long runway for acquisitions that fit our portfolio.
Now moving to our outlook for 2022, we are still not in a position to provide full financial guidance. As a result of the continued disruption in our primary commercial end markets. We continue to be encouraged by the recovery, we have seen in our commercial OEM and aftermarket revenues and the strong bookings received for both bus.
Far in fiscal 2022.
At this time, we expect to Reinitiate guidance on the November 2022 earnings call for our new fiscal year, assuming prevailing conditions continue to evolve favorably.
We continue to expect COVID-19 to have an adverse impact on our financial results compared to pre pandemic levels throughout the remainder of fiscal 2022 under the assumption that both our commercial OEM and aftermarket customer demand will remain depressed due to lower worldwide air travel, although recent positive trends in commercial.
Air traffic could impact us favorably with regard to internal planning. Our teams are now resource planning for commercial aftermarket revenue to grow ahead of the 20% to 30% sizing range. Previously provided we expect our commercial OEM revenue to grow significantly as well, but at a rate less than.
The commercial aftermarket rate of growth as you know we aim to be conservative.
As for the defense market, we still expect defense revenue growth in the low single digit percent range for fiscal 2022 versus prior year. Despite the slow first half of the year.
George will provide more color on our defense end market. As you know this end market can often be quite lumpy on a quarterly basis.
We now expect full year fiscal 2022 EBITDA margin to be approaching 48% due to the rate of commercial aftermarket recovery. We anticipate EBITDA margins will continue to move up throughout the second half of our fiscal year as a note. This margin guidance includes the unfavorable headwind of our Cobham acquisition.
<unk> of about one half of a percent this year.
We believe we are well positioned for the second half of fiscal 2022 as usual will closely watch the aerospace in capital markets and see how they develop and react accordingly, Mike will provide details on the other fiscal 2022 financial assumptions and updates let me conclude by stating that I am pleased with the company's performance in this period of gradual recovery.
For the commercial aerospace industry, and with our commitment to driving value for our stakeholders. We remain focused on executing our operating strategy and managing our cost structure. As we continue on this path to a full recovery of the commercial aerospace industry. We look forward to the remainder of fiscal 2022 and.
The opportunity to continue to create value for our stakeholders through our consistent strategy now let me hand, it over to George to review, our recent performance and a few other items. Thanks, Kevin I'll start with our typical review of results by key market category for the remainder of the call I will provide color commentary on a pro forma basis.
To the prior year period in 2021 that is assuming we own the same mix of businesses in both periods. Any acquisitions are included in both periods and the impact of any divestitures is removed in both periods and the commercial market, which typically makes up close to 65% of our revenue.
We will split our discussion discussion into OEM and aftermarket.
Our total commercial OEM revenue increased approximately 28% in Q2 compared with the prior year period booking.
Bookings in the quarter were strong compared to the same prior year period, and again significantly outpaced sales sequentially bookings improved almost 10% compared to Q1 with sales improving almost 15%, while we expect demand for our commercial OEM products to continue to be reduced in the short.
Term, we are encouraged by build rates gradually progressing at the commercial Oems.
Now moving onto our commercial aftermarket business discussion.
<unk> commercial aftermarket revenue increased by approximately 46% in Q2, when compared with the prior year period growth in commercial aftermarket revenue was primarily driven by increased demand in our passenger submarket, which is our largest sub market, although all of our commercial aftermarket.
It's submarkets were up significantly compared to prior year Q2.
Sequentially total commercial aftermarket revenues and bookings both grew by approximately 10% <unk>.
Commercial aftermarket bookings were up this quarter compared to the same prior year period, and Q2 bookings strongly outpaced sales.
To touch on a few key points of consideration global revenue passenger miles remained depressed there was a modest sequential decline in revenue passenger miles in January due to the omicron variant and a tough comparison to December holiday travel. However, revenue passenger miles have continued to improve since Jay.
Anyway.
The limited impact on air travel from the Omicron variant along with the Russia, Ukraine conflict, which began at the end of February demonstrates the strong underlying demand and willingness of passengers to travel. This provides optimism for the pace of the recovery of their traffic in the remainder of 2022.
<unk> also recently stated that based on the current recovery momentum they expect passenger traffic to return to pre pandemic levels in 2020, three which is a year earlier than previously forecast.
The recovery in domestic travel continues to be more resilient than international and the most recently reported IATA traffic data for March domestic air travel was only down 23% compared to pre pandemic, while international travel was down about 50%.
The U S and Europe continued to show strong demand for domestic travel, although China has been more volatile due to its zero COVID-19 policies, which caused localized lockdowns and rapid drop offs in air travel, though the pace of the international Air traffic recovery has been slow it is steadily progressing and where.
Hopeful for improvement in international travel in the remainder of 2022.
Many of the government imposed travel restrictions have softened or lifted entirely which is encouraging.
Global cargo volumes continued to be strong, although airfreight demand has tempered a bit recently this trend could continue as the year progresses due to unfavorable impacts on airfreight from the Lockdowns in China, and the Russia, Ukraine conflict time will tell.
Is this jet utilization remains robust commentary from business jet Oems and operators remains positive and these higher levels of business jet activity appear likely to continue in the near term.
Now, let me speak about our defense market, which traditionally is at or below 35% of our total revenue.
The depth the defense market revenue, which includes both OEM and aftermarket revenues decreased by approximately 2% in Q2, when compared with the prior year period. As we've said many times defense sales and bookings can be lumpy similar to Q1, our teams continued to be challenged with supply chain.
Induced delays in fulfilling orders the supply chain issues, primarily surround the lack of availability of electronic components. Our operating units are actively pursuing mitigating actions to overcome these issues.
Our defense order book remains strong and bookings this quarter improved 30% sequentially versus Q1, we expect our defense business to expand throughout the remainder remainder of the year as Kevin mentioned earlier, we continue to expect low single digit percent range growth in fiscal 2022 for our defense.
Market revenues.
Like to finish by recognizing the strong efforts of our teams in continuing to overcome the negative impacts of the pandemic and supply chain disruptions. We remain focused on our value drivers and meeting the increased demand for our products with that I'd like to turn it over to our Chief Financial Officer, Mike Lisman.
Everyone I'm going to quickly hit on some additional financial matters for the quarter and also our expectations for the full fiscal year.
First in regard to profitability for our second quarter EBITDA as defined of about 633 million for Q2 was up 22% versus prior Q2 EBITDA as defined margin in the quarter was approximately 47, 7%.
This represents year over year improvement in our EBITDA as defined margin of about 420 basis points versus Q2 of last year.
Sequentially the margin increased by 40 basis points versus last quarter, and we expect this improvement trend to continue for the balance of the fiscal year.
Next a few additional comments on select financial metrics for the quarter and again also the full year organic growth was 15% for the quarter driven by the rebound in our commercial OEM and aftermarket end markets.
On taxes, we're revising our expected adjusted tax rate for this fiscal year downward slightly to a range of 24% to 26%.
Our GAAP and cash tax rate guidance is unchanged and still expected to be in the 21% to 23% range.
Moving over to cash and liquidity, we had another quarter of positive free cash flow free cash flow, which we traditionally defined that trans time as EBITDA as defined less cash interest payments capex and cash taxes was roughly $222 million as noted in the press release. This amount was slightly lower this quarter, but this is just timing.
Specifically due to the quarter end date of April 2nd we picked up an extra cash interest payment that was made on April . One. In addition, we had higher cash tax payments in the quarter.
As we've mentioned before cash tax payments and cash interest payments can be lumpy across the quarters for the full fiscal year, our free cash flow guidance is unchanged from the November earnings call that is we still anticipate free cash flow to be in the 1 billion area for the fiscal year, maybe a little better.
As Kevin mentioned, we use 660 $667 million of cash to repurchase shares during the quarter at a weighted average purchase price of about 637 per share and ended the quarter with $4 2 billion of cash.
In total we repurchased about 1.05 million shares and did it through an open market repurchase program.
We view and model these share repurchases just like any other capital investment such as the acquisition of a new business and expect a similar rate of return.
Additionally, in the 10-Q that was filed later today, you'll see that our strong sales rebounded.
Strong sales rebound resulted in net working capital being a 130 million use of cash this quarter.
This resulted in less cash being booked through our balance sheet than in prior quarters.
As mentioned previously we have the cash to fund this investment and we're glad to see our primary commercial end markets rebounding and therefore driving this need.
As we continue to recover from Covid impact on air travel and recovered to 2019 global activity levels, we'd expect an additional $200 million to $275 million of cash to go back into net working capital the timeline over which this will happen remains uncertain, but should generally track the recovery.
Moving on to leverage levels, our net debt to EBITDA ratio is currently at six six times.
Down from eight two times at its peak at the end of our fiscal 'twenty, one second quarter.
We expect to continue running free cash flow positive for the balance of our 2022 fiscal year <unk>.
Barring any additional capital markets markets activities, such as dividends or share repurchases, our net debt to EBITDA ratio will keep ticking down as the year progresses.
We are watching the rising interest rate environment closely we remain 85% hedged on our 20 billion gross debt balance through a combination of interest rate caps and swaps that go out through calendar year 2025. This provides us adequate cushion against any rise in rates.
We have included a supporting sensitivity table in today's slide deck that shows you what our what our annual cash interest expense will be at a range of three month LIBOR values.
In summary from an overall cash liquidity and balance sheet standpoint, we remain in good position and well prepared to withstand the still depressed, but now rebound in commercial aerospace environment for quite some time with that I'll turn it back to the operator to kick off the Q&A.
Thank you.
To ask a question you will need to press star one on your telephone to it.
Draw your question press the pound key.
Our first question comes from Robert Stallard with vertical research you May proceed with your question.
Yeah. Thank you so much and good morning.
Good morning, good morning.
Terry I just wanted to follow up on your comments on China.
And what sort of percentage revenue exposure youre, having there.
They're ready for a moment.
Any sort of short term impact you've already experienced in terms of bookings and the impacts of the Covid lockdowns.
Yeah.
So China and bookings commentary, China, well China's in our numbers now obviously, we've seen depressed flight activity in China, Although Asia is starting to show some green shoots of activity in the rest of Asia.
So remain encouraged there this should be a some sort of upside for us hard to gauge how much as the future unfolds as China starts flying domestically and internationally.
On bookings I think we remain encouraged on aftermarket bookings continue to increase and so do OEM. So does the defense defense had very strong bookings as you heard George comment on its why we remain confident.
Confident and optimistic on the year for defense spending.
That's great. Thank you.
Thank you. Our next question comes from Nov.
Goldman Sachs you May proceed.
Hi, good morning, everyone.
Morning.
Your aerospace aftermarket growth has now.
<unk> exceeded the industry average for it for a few quarters in a row coming off the bottom and that was after declining you know.
Very in line with the industry average on the way down.
Also I guess compared to flight activity, that's true as well. So can you spend a little bit more time on why your aerospace aftermarket business is growing faster than the end market right now and how sustainable that is.
You know I think that our orders and shipments can be lumpy the supply chain is not efficient.
I don't have any exact commentary on why we might be outperforming today I know at times, we can appear to outperform and at times underperform. Its just the inefficiencies of the market.
Okay Fair.
Fair enough and Kevin could you spend a little bit more time on.
How youre thinking about capital deployment at the minute I mean, I know you touched on in the prepared remarks, but.
The share repurchase.
<unk>.
How do you how do you think about the size of that that's appropriate and how do you balance the decision of that versus the special dividends that you've done in the past.
Well, we've historically done share repurchases. It's has happened in the past a sizable repurchases.
You know we're looking at this as I said in my comments Opportunistically.
As a way to get capital back out to the shareholders were not thinking about it any differently. We're evaluating all options on the table there are M&A opportunities and when we determine that the time is right. We will move forward with other capital deployment in terms of M&A deals or.
Our share repurchase dividends, there's no magic formula to decide which will do it's kind of as we decide as we go but everything's on the table right now.
Are there prospects for sizing that up given you've brought the leverage down and in the scenario, where theres not deal activity you know say through the end of the year or would you look at.
Even larger repurchases.
Well, we have pre authorization from the board to go to I believe $2 2 billion in share repurchases, we've used 660 million $67 million of that.
It depends on the opportunities.
That come along again, we model. This just like an acquisition and we see similar returns.
We're evaluating all options I can't.
Comment much more than that.
We want to ensure we have enough dry powder to do any deals that we see coming along of any sizable extent.
Okay. Thank.
Thank you appreciate it.
Thank you. Our next question comes from Robert Spingarn with Lewis You May proceed with your question.
Hey, good morning.
Good morning, Kevin.
What's the latest on the on the labor side, both our recruiting and attrition and and you know to.
To what extent is this a constraint.
Yeah, I'll take that Rob.
You know from our perspective, we're seeing some pressures at the lower levels of direct labor in general.
As most of you know most of the labor requirements really are driven by the commercial OEM. So we think we're properly resource to support the improvement in the commercial aftermarket.
I wouldn't say that we've seen any significant uptick in turnover IRR.
On the engineering staffs, you know, it's a little bit more of a competitive marketplace.
But as always we're going to be cautious in adding back resources as it's still a little bit of a dynamic situation.
Okay, and then just Kevin at a high level on defense has your long term outlook for defense sales growth in the low single digits changed given the latest defense budgets and obviously the evolving national security environment in Europe and elsewhere.
Well I think we're.
Optimistic about defense budgets in the future. It obviously takes a while for that to trickle down to us.
As a component supplier, but.
But we do see a favorable environment shaping up for us in the future on defense.
Okay. Thank you.
Yeah.
Thank you. Our next question comes from Myles Walton with UBS you May proceed.
Hey, Good morning, I was wondering Kevin you you you said that your commercial aftermarket would track ahead of the targeted 20% to 30% range. It.
It looks like if you just maintain flat for the rest of the year, you're closer to a 40% do you want to put a new bogey out there or is it just greater than what you previously said.
Yeah, I think I said, all that we want to say on that we're not giving guidance.
I did say in my prepared remarks that we would we see.
Outperforming that 20% to 30% resource planning target.
We are not the you know the market isn't so stable right now that we're going to go out on a limb and communicate higher.
We tend to be conservative in our guidance and you know Theres still book and ship that has to happen. So we're sticking with.
We're going to outperform the 20% to 30% that we initially gave at the year, but not put a finer point on it right now.
Okay, Okay, and any reason to think sequentially you can't grow and then the other question is just on on pricing, what's the base level inflation, you're currently passing through not asking about your net price just sort of your base level inflation benchmark.
Well pricing, we don't comment on specifics.
Specifics you know our goal is that we need to overcome inflation inflation as you've seen from CPI values is is running very high historically over many decades.
Is a focus and you know what we part of our job is to evaluate and pass along the inflationary pressures that we see so far we have been successful in doing that.
Okay, Alright, I'll, let it go.
Thanks.
Thank you. Our next question comes from them, but panel with Cowen you May proceed.
Hey, Thanks, good morning, guys.
Good morning.
I'm wondering on the defense side, you saw the big pickup in bookings or was it sort of broad based was it isolated to a couple of product areas I know you've talked about it has been lumpy in the past, but how.
How representative of.
Of ongoing demand do you think about the quarter's bookings.
Yeah, We think it was in general broad based in nature, there wasn't one or two specific programs are driving that in general we saw that pick up with the passage of the Dod's budget.
Throughout the quarter.
So we expect that there may be a little bit of catch up that the D. O D and DLA are playing there with that delay.
Interesting.
Do you expect that you know.
If some of these funds have to be put on contract by the fiscal year under the government will see sustained bookings you know in the next are you still seeing that if you will that trend has continued into the third fiscal quarter would you expect it to.
And in general these can be lumpy.
So we're not in a position to comment on whether we're seeing any increases right now and you know what we hope were being cautious here, but time will tell I think we're seeing an uptick in aftermarket defense out a bit weighted towards the aftermarket that's fair.
Okay I'll leave it there thank you.
Yeah.
Thank you. Our next question comes from David Strauss with Barclays. You May proceed.
Thanks, Good morning.
Kevin just to level set it.
I have been some acquisitions some divestitures as your commercial transport aftermarket so down about 15%, 20% from from kind of prevent them levels is that the right level.
We arent splitting out the pieces all of the markets rents have gone up and are doing better.
We're not splitting out the segments.
That activity, though has I think increased the most of any of the submarkets so far.
Okay, and what about you talked about passenger being the strongest what are you seeing on the interior side.
Interiors has also improved quite surprisingly.
You know the only I think as George touched on it the only sector that still growing but starting to slow its growth a little bit was the freight as we've already heard there would be some slowdowns, but interiors all of the Submarkets are up until the right. It's a the first two.
Tim I think we've seen something that pronounced across all of the submarkets.
Okay and Mike.
The loss amortization, how does that play out over the next year or does it kind of hold at these levels or does that start to start to bleed off.
Sorry, the last contract amortization from the <unk> acquisition.
It starts to bleed down I think you probably remember when we came out with it we expected something in the area of 30 to 40 million Bucks, a year or so and it trails off so as we get farther out youre right that amount will continue coming down.
And then it in about five years post deal completely.
Okay, great well, you'll see that continue to trend down a bit.
Okay got it thank you.
Thank you. Our next question comes from Ken Herbert with RBC Capital markets. You May proceed.
Yeah, Hey, Kevin good morning.
I just wanted to follow up on the aftermarket bookings comment is it is it fair to assume from your comments.
We saw some of the softness in cargo related bookings in the quarter relative to transport ore.
Business Jets and helicopters or can you can you parse out the bookings for the aftermarket in the quarter any further.
Hey, Ken This is George I'll I'll take this one yeah in general is as we've noted we saw decent recovery across all the submarkets there wasn't any specific <unk>.
<unk> in any particular market and you know we're we're cautiously optimistic that that will continue as you know we don't get any visibility to the inventory levels at the airlines.
And how are you viewing inventory levels, maybe across the industry either either with your own operations at distributors and then of course, if the airline it sounds like your lines you don't have much visibility, but how do you view inventory levels at the distribution and in your own your own shop floors.
Yeah, we are we have limited.
News on inventory at distribution I think in general we believe that the Destocking cycle is kind of running out of gas and everyone is hopeful with the commentary from the airlines on a busy summer travel season, and you know trying to prepare accordingly.
Great. Thanks George.
Thank you. Our next question comes somebody because of oil Wells Fargo. You May proceed.
Hey, good morning, Thanks for the question.
Could you talk about the defense. So the full year guidance implies kind of a big acceleration in the back half on a year.
Year over year basis can you talk about what that looks like sequentially like Q2 versus second half just wondering if there's like a year over year comparison that that makes that look bigger than it really yes, yeah.
Yeah, I think we don't want to get into giving quarterly guidance on defense revenue outlooks, but generally as George mentioned, there were such strengths in the booking and as we look out over the next two quarters that we feel pretty confident that we're going to be able to hold the low single digit range for the year, So Q3 and four it will be.
Quite a big ramp up to your point, but in terms of forecasting how big each quarter.
I don't think we want to get on the quarter the expectations.
Defense bookings up 30% clearly that's why.
We're still sticking with what we communicated at the beginning of the year as George alluded to the the budget just being signed things are opening up a bit we will see.
Got it thanks, and then I guess.
Supply chain disruptions there within that that you kind of touched on this earlier, but are those.
Are there signs that those are easing and does that need to kind of get fixed to hit that guidance or is there upside there if those get better.
Yeah.
As I noted, primarily what we're seeing our difficulties on the electronic components.
We would anticipate there's probably still some headwinds excuse me and challenges in.
The second half, but we do expect you know it was six months to go that will be able to clear.
Fair amount of those are the teams are are working the details daily and communicating with the customer base. So we think we think we can get there by the end of the year.
Okay. Thank you.
Thank you. Our next question comes from Seth Sigman with Jpmorgan you May proceed.
Hey, thanks, very much and good morning.
Good morning.
When you think how should we think about the role of <unk>.
No.
Opportunistic in terms of the.
The amount of share repurchases youre going to do from here.
They gather that probably your outlook for the company probably hasnt changed.
Very much from what it was in the March quarter and the stock market is just doing all kinds of weird stuff right. Now so you know I'd imagine that return proposition.
Our guys are you're probably looks better today so.
Should we expect you to continue to be very opportunistic in that regard or is there just a lot more to think about in terms of balancing that.
With other potential.
Uses of cash.
I think we I'll, let Mike.
Chip in on this as well.
You know we will be opportunistic we will keep.
Keep all the options on the table as we said clearly the return would be better at this share price are we remain very bullish on the business. So as we see the market recovery, Mike do you want to add behind so that's right were always looking at all options. Every you know every week everything's on the table.
Okay, Okay, Great and then I guess, just as far as far as M&A opportunities you guys have made at times.
Acquisitions.
In Europe , and with the increase in defense spending there does that does that become a place where you might spend a little bit more time looking for opportunities or not so much.
We actively look for opportunities around the world certainly in Europe , we're always evaluating opportunities I don't think we want to be grow defense exposure, where a commercial aerospace company and we will continue to look for those opportunities and value them generally higher.
Other than defense opportunities, but all options are open and on the table, including in Europe , where we've had excellent luck doing acquisitions.
Great. Thank you very much.
Thank you our next question comes.
Comes from Cristina <unk> with Morgan Stanley You May proceed.
Hey, good morning, guys.
Good morning, good morning.
When we start looking at air traffic it seems like it's starting to pick up.
International travel starting to open up to and then this quarter. We saw the engine guys post aftermarket growth of you know above 20% 30%.
How are you guys thinking about.
The opportunity in other parts of the aftermarket where youre not as present for example, the opportunities in engine PMA is how are you thinking about those things and do those become more attractive in.
It's like today.
We are not a big PMA player we are.
<unk> and.
And heavily engineered product developer.
So I'm not sure. We're looking at are getting out of our comfort zone or the products that we make.
To get into other areas.
Aerospace unless acquisitions lead us there.
I see yes, that's really helpful context, and maybe if I could do a follow on I mean, Kevin you know in a rising interest rate environment. If we're going to be here for longer how do you think about the sustainable leverage for the business do you do you have a target in mind.
I would just say and I'll, let Mike jump in that.
Even in this rising interest rate environment, it's still historically very low interest rates. So there's a long way for us to go it's not changing my mentality around capital allocation or that might give I think that's right and we're hedged as you guys know too so the near term impact of any rising.
Rates is somewhat muted.
Just by the impact of the offsetting impact of the hedges.
Great. Thanks, Kevin Thanks, Mike sure.
Sure.
Thank you. Our next question comes from Peter Arment with Baird You May proceed.
Yes, good morning, everyone, Mike maybe just a clarification on the working capital comments you made.
The $200 million to $2 75 kind of going back into networking capital.
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You're saying it kind of tracks the commercial market. So we've seen a big recovery for you how what's the right way to be thinking about that just spread over multiple quarters or we see that come in stronger in the second half of this year.
I think it will be spread over multiple quarters, and it's hard to say right, it's sort of tracks the.
Revenue and where we go with the end markets and things have been so lumpy there that it's hard to you know.
Pinpoint exactly where working capital is going to go but there's still 200. Some that will have to go back into working capital. When you look at the receivables inventory and payables balances. That's how we are we look at it from peak to trough, we were down about $400 million during COVID-19, so somewhere on the order of like $130 million.
So as our $150 million or so has gone back in.
To date, we've still got 200 to 275 more to go.
And the pace over which it happens, we'll see right it depends on how commercial recovers.
That's really helpful. And then just related to that I guess, Kevin do you do you see yourself just more strategically carrying a little more inventory just because of the supply chain comments you guys have talked about with the electronic side.
We've certainly encouraged our teams not to skimp on inventory in this environment that are not.
Not having necessary inventory and not being able to complete a sale is not acceptable. So if we need a little bit extra to help us bridge through this time, we've certainly told our teams too.
Look at those options.
Options.
I appreciate all the color. Thanks.
Yeah.
Thank you. Our next question comes from Pizza Kubicki with them. The global you May proceed.
Hey, good morning, everyone just one for me.
Can you guys talk a little more just about kind of the relative risks and opportunities with regard to your adjusted margins next year or so because it seems like now for this year, you're only call it a point or sell below prior peak.
And certainly you've got volumes on your side going forward, maybe you can talk about the magnitude of the mixed shift necessary.
To keep margins flat or should.
We'd be pretty confident that youre going to.
Breakthrough prior peak.
You know, it's hard to say and I think we'll give guidance when we go back to giving guidance as far as next year goes but you know generally you guys know the way we like to run the business, we should always see our margins.
Given some stability in the end markets March upward each year by exactly how much is just hard to say given where commercial aftermarket is and how the mix shift there can impact your margins, but generally obviously should trend upward but at this point I don't think we want to say by how much.
To do that.
Thanks for the color.
Operator.
Did we lose our operator.
The call.
Okay.
Okay.
Thank you Aaron because anyone there Michael.
Sure Securities You May proceed.
Hey, good morning, guys nice results good morning, sorry about that.
No no worse and worse.
Maybe Kevin just to kind of go back a little bit to know was line of questioning and even maybe dovetail kind of Myles just questioning on pricing I mean, do you guys think youre outperforming due to having better pricing practices.
Then your peers and Theres been some chatter out there I guess from some of your customers that you guys are considering a midyear price hike do you think if that's the case do you think youre seeing.
Some ordering ahead of that price hike, you know and you know I don't know if its called restocking but.
Maybe airlines customers, just kind of trying to get in under that if that's a if you can comment.
Yeah. Michael This is George I'll take that one in general you know, we don't provide specifics about our pricing our long standing approach has been to get real prices above inflation, obviously, we're generally in a higher inflationary environment.
And the goal is still the goal so we're trying to get some real prices.
Increases above that inflationary level and that's how we approach it.
Got it got it and then any any thoughts on I know it kind of came up but thoughts on airlines restocking I mean, it seems with supply chain tightness everybody is looking to have some inventory on hand, so not necessarily over ordering but do you think theres a little bit of that going on in the marketplace to kind of have that buffer.
Talk available.
I think in general terms as a supply chain issues arise in any industry right in any good buyer would.
Try and get some inventory on the shelf.
What extent airlines distributors are doing that we just don't have enough visibility there.
Okay Fair enough. Thanks, guys I appreciate it.
Sure.
Thank you and as a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Ellen Page with Jefferies. You May proceed.
Hi, good morning.
Good morning.
Commercial OE, you were up pretty significantly quarter over quarter, but when we look at what the ollie's.
And staying with particular like Boeing with the Max expected pretty steady around 31 per month and ongoing headwinds in the 787 is there opportunity for sequential improvement from here or how do we think about that business.
Yes, I think in general as Mike commented earlier, we don't provide any guidance on a quarter to quarter basis, obviously Boeing recently.
Announced their expectations in terms of increasing the 737 Max production rate I think later this quarter or they continue to work with the FAA.
In resolving the outstanding issues on the 787.
But across our entire business space, everyone has different lead times, and where they may enter and see those future.
Rate increases depends by business.
Okay, and just on supply chain and the commercial side of the business is there any area where longer lead times may limit growler.
Right now, we don't see any issues on supporting the growth on the commercial side.
It's been a little bit more concentrated all of our defense businesses and again towards electronic components. The teams have been pretty active.
Over the prior couple of quarters trying to adapt and adjust their mlps as they need to plan for.
Additional supply and anything that might happen, but we do not see that limiting our growth prospects at all.
Thank you that's it.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Jamie Standen for any further.
Or are there looks.
Thank you all for joining US today. This concludes today's call. We appreciate your time and have a good rest of your day.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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