Q2 2023 TransDigm Group Incorporated Earnings Call
Good day and thank you for standing by welcome to the Q2 2023 trends <unk> Group incorporated earnings Conference call. At this time, all participants are in a listen only mode. After the speakers.
The presentation, there will be a question and answer session.
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Please be advised that today's conference is being recorded.
I'd now like to hand, the conference over to your first speaker for today, Jamie steaming the director of Investor Relations for Trans time. Please go ahead.
Thank you and welcome to Trans times fiscal 2023 second quarter earnings conference call presenting on the call. This morning are president and she's the Chief Executive Officer, Kevin Stein, Chief Operating Officer, George valid Europe, and Chief Financial Officer, Mike Lisman.
Please visit our website at <unk> 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.
For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward looking statements. Please refer to the company's latest filings with the SEC available through the investors section of our website or at SEC Dot Gov.
The company would also like to advise you that during the course of the call we'll be referring to EBITDA, specifically EBITDA as defined adjusted net income and adjusted earnings per share all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable.
GAAP measures and applicable reconciliation.
Now I'll turn the call over to Kevin.
Thanks for calling in today.
First I'll start off with the usual quick overview of our strategy a few comments about the quarter and discuss our fiscal 'twenty three outlook, then George and Mike will give additional color on the quarter to reiterate we believe we are unique in the industry in both the consistency of our strategy in good times and bad as long as our steady focus on 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. That's typically provided relative stability in the downturns.
We follow a consistent long term strategy specifically.
First we own and operate proprietary aerospace businesses with significant aftermarket content second we utilize a simple well proven value based operating methodology third we have a decentralized organizational structure and unique compensation system closely aligned with shareholders fourth we acquire businesses that fit.
This strategy, where we see a clear path to P like returns at <unk>.
Lastly, our capital structure and allocations are a key part of our value creation methodology.
Our long standing goal is to give our shareholders private equity like returns with the liquidity of a public market.
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 strong quarter. Our Q2 results ran ahead of our expectations and we once again raised our guidance for the year.
We continue to see recovery in the commercial aerospace market and trends are still favorable as demand for travel remains robust global domestic air traffic continues to lead the recovery, but international travel is also moving forward.
Anna's Air traffic has expanded significantly since its reopening in January, especially domestic air travel. However, there is still progress to be made for the industry as our results continue to be adversely affected in comparison to pretax pre pandemic levels since the demand for air travel is still slightly depressed from pre COVID-19.
<unk> in our business, we saw another quarter of substantial growth in our total commercial revenues and bookings revenues sequentially improved in all three of our major market channels commercial OEM commercial aftermarket and defense also bookings outpaced revenues for each of these market channels EBITDA as defined.
Margin improved to 51, 3% in the quarter contributing to the strong margin as our strict focus on our operating strategy and the ongoing recovery in our commercial aftermarket revenues. Additionally, we generated about $130 million of operating cash flow in Q2 and ended the quarter with over $3 4 billion of.
Cash we expect to steadily generate significant additional cash throughout the remainder of 2023.
Next an update on our capital allocation activities and priorities during the quarter, we agreed to acquire <unk> Corporation for approximately $725 million in cash. The acquisition. We are happy to report closed yesterday may eight Carlsbad has established positions across a diverse range of aftermarket focused aerospace and.
Defense development and testing services Carlsbad has a state of the art Transonic wind tunnel.
<unk> utilizes that utilize us to perform testing for both the commercial and defense aerospace markets.
Ill spans unique service offerings exhibit the earnings stability and growth potential that are consistent with our aerospace components centered businesses. We are excited about the acquisition of Carlsbad and expect the business to meet or exceed our long term.
<unk> objectives, we expect the <unk> acquisition to contribute just over $100 million to our fiscal year 'twenty three revenue and for the <unk> EBITDA as defined margin in fiscal year 'twenty three to be just less than half of the trans time total company margin regarding the current M&A pipeline, we continue to add.
We look for M&A opportunities that fit our model as we look out over the next 12 to 18 months, we have a slightly stronger than typical pipeline of potential targets.
As usual the potential targets are mostly in the small and mid size range I cannot predict or comment on possible closings, but we remain confident that there is a long runway for acquisitions that fit our portfolio.
The capital allocation priorities of Trans time are unchanged.
Our first priority is to reinvest in our businesses.
To do accretive M&A and third return capital to our shareholders via share buybacks or dividends, a fourth option paying down debt seems unlikely at this time, though we do still take this into consideration.
We are currently evaluating all of our capital allocation options, but both M&A and capital markets are always difficult to predict we continue to maintain significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future.
Moving to our outlook for fiscal year 'twenty three as noted in our earnings release, we are increasing our full fiscal year 'twenty three sales and EBITDA as defined guidance to reflect our strong second quarter results. The recent acquisition of Cal span and our current expectations for the remainder of the year. Please note that.
As the Carlsbad acquisition just closed on May eight we utilize the limited information currently available to include <unk> within our guidance, our preliminary expectations for Cal span will be refined as necessary over the coming months at the midpoint sales guidance was raised $300 million and EBITDA as defined guidance.
<unk> was raised $150 million the guidance assumes the continued recovery in our primary commercial end markets throughout the remainder of fiscal 'twenty, three and no additional acquisitions or divestitures. Our current year guidance is as follows and can be found on slide six in the presentation.
The midpoint of our revenue guidance is now 645 $5 billion or up approximately 19% in regards to the market channel growth rate assumptions that this revenue guidance is based on for the commercial OEM market and commercial aftermarket we are updating the full year growth rate assumptions as.
The result of our strong second quarter results and current expectations for the remainder of the year. We now expect commercial OEM revenue growth in the range of 20% to 25%, which is an increase from our previous guidance of mid teens percentage range and expect commercial aftermarket revenue growth in the range of 25% to 30.
Percent, which is an increase from our previous guidance of high teens percentage range. The commercial aftermarket has been progressing well in our fiscal 'twenty three and we hope that continues however, we aim to be conservative with this guidance as the commercial aftermarket is harder to predict with many orders being book and ship and the adverse.
<unk> bookings only going out a few months or so into the future.
Defense revenue guidance is still based on the previously issued market channel growth rate assumptions, we are not updating the full year market channel growth rate for defense at this time as underlying market fundamentals have not meaningfully changed we expect defense revenue growth in the low to mid single digit percentage.
Range, the midpoint of our EBITDA as defined guidance is now $3 billion to $6 billion are up approximately 23% what are the expected margin of around 55%. This guidance includes about a 50 basis points of margin dilution from the Dart Aerospace acquisition.
Just over 50 basis points of margin dilution from the recent <unk> acquisition.
The pro forma margin dilution from Cal span, meaning if we had owned <unk> for all of fiscal year 'twenty. Three is just over 100 basis points. The midpoint of our adjusted EPS is increasing primarily due to the higher EBITDA as defined guidance and is now anticipated to be $23 75.
Our up approximately 39% Mike will discuss in more detail shortly some other fiscal 'twenty three financial assumptions and updates. We believe we are well positioned for the second half of fiscal year 'twenty. Three we will continue to closely watch how the aerospace in capital markets continue to develop and react Accordingly, let me conclude by stating.
But I am very pleased with the company's performance this quarter and throughout the recovery of the commercial aerospace industry, we remain committed to driving value for our stakeholders now let me hand, it over to George to review, our recent performance and a few other items. Thanks.
Thanks, Kevin and good morning, everyone I'll start with our typical review of results by key market category for the balance of the call I'll provide commentary on a pro forma basis compared to the prior year period in 2022.
That is assuming we own the same mix of businesses in both periods. The market discussion includes the May 2022 acquisition of Dar to aerospace and both periods Dart has been included in this market discussion since the third quarter of fiscal 'twenty two.
The recent May 2023 acquisition of <unk> Corporation is excluded from this market discussion in.
In the commercial market, which typically makes up close to 65% of our revenue we will split our discussion into OEM and aftermarket.
Our total commercial OEM revenue increased approximately 25% in Q2 compared with the prior year period sequentially total commercial OEM revenues grew by 17% and bookings improved over 15% compared to Q1 bookings in the quarter were robust compare.
To the same prior year period and significantly outpaced sales, we're encouraged by the increasing commercial OEM production rates, while risks remain towards achieving the ramp up across the broader aerospace sector. We are cautiously optimistic that our operating units are well positioned to support the higher.
<unk> targets.
Now moving onto our commercial aftermarket business discussion.
<unk> commercial aftermarket revenue increased by approximately 38% in Q2, when compared with the prior year period.
Growth in commercial aftermarket revenue was primarily driven by the continued strength in our passenger submarket, which is our largest sub market. Although all of our commercial aftermarket submarkets were up significantly compared to prior year Q2 sequentially total commercial aftermarket revenues increased.
<unk> by approximately 14%.
Commercial aftermarket bookings were strong this quarter compared to the same prior year period, and Q2 bookings outpaced sales.
Turning to broader market dynamics global revenue passenger miles remained lower than pre pandemic levels, but have further progressed over the past few months IATA recently commented that despite uncertain economic signals demand for air travel continues to be strong across the globe, particularly.
In the Asia Pacific region.
China Air traffic, specifically has seen a significant rebound after the lifting of COVID-19 restrictions and the reopening of China to travel this past January the.
The recovery in domestic travel has made great strides over the past several months, primarily due to the sharp uptick in domestic air traffic in China and the most recently reported IATA traffic data for March global domestic air traffic was only down 1% compared to pre pandemic. Similarly.
U S domestic travel in March was also only 1% below pre pandemic levels domestic travel in China was down about 3% in March compared to pre pandemic, which is a significant improvement from being down 55% only three months ago in December .
International traffic also continues to improve but at a slower pace than domestic <unk>.
Approximately a year ago international travel globally was depressed about 52%, but in the most recently reported IATA traffic data for March International travel was only down about 18% compared to pre pandemic levels.
International traffic in North America, and Europe were within 3% and 14%.
Pre pandemic levels respectively.
Pacific International travel was still down about 36%, but should hopefully continue to improve as the China reopening progresses.
Global Air cargo volumes in the most recent March IATA data continued to be lower year over year and versus pre pandemic levels with the continued growth in passenger flying, especially the wide body recovery theres more belly hold space available for cargo transport the reopening of China has.
<unk> positive for the air cargo outlook, but global trade signals continued to be mixed it's too early to determine where air cargo trends stabilize.
Business jet utilization is below the pandemic highs in 2021 and continues to moderate.
<unk> jet activity does remain above pre pandemic levels and business jet Oems and operators forecast strong demand in the near term, we will see how this normalizes over the upcoming months.
Now shifting to our defense market, which traditionally is at or below 35% of our total revenue.
The defense market revenue, which includes both OEM and aftermarket revenues grew by approximately 5% in Q2, when compared with the prior year period sequentially total defense revenues grew by approximately 14%.
Defense bookings are up this quarter compared to the same prior year period, and Q2 bookings solidly outpaced sales, which is a positive indicator for future defense order activity.
Our defense market revenues continued to be impacted by the lag in U S. Government defense spend outlays, we continue to see steady improvement, but they still remain longer than historical average levels.
Overall, our teams have made solid progress with the supply chain with the primary focus remaining on electronic component availability as Kevin mentioned earlier, we continue to expect low to mid single digit percent range growth. This year for our defense market revenues.
Lastly, I'd like to wrap up by expressing how pleased I am by our operational performance in the second quarter of fiscal 'twenty. Three we remain focused on our value drivers cost structure and executing with operational excellence with that I'd like to turn it over to our Chief Financial Officer, Mike Lisman.
Good morning, everyone I'm going to quickly hit on a few additional financial matters for the quarter and expectations for the full fiscal year.
First on organic growth and liquidity.
In the second quarter, our organic growth rate was 17, 6% driven by the continued rebound in our commercial OEM and aftermarket and markets.
On cash and liquidity free cash flow, which we traditionally define a trans dime as EBITDA less cash interest payments capex and cash taxes was roughly $350 million for the quarter.
Below that free cash flow line, we saw net working capital consumed just over $220 million of cash during the quarter as we built both accounts receivable and inventory to support the ongoing and continuing sales ramp up on both the OEM and aftermarket sides of the business.
We ended the quarter with approximately $3 4 billion of cash on the balance sheet and our net debt to EBITDA ratio was five six times down from six times at the end of last quarter.
Pro forma for the <unk> acquisition, which just completed yesterday, we have $2 7 billion of cash and a net debt to EBITDA ratio of about five seven times.
On a net debt to EBITDA basis that puts us below the five year pre COVID-19 average level of six times. Additionally, our cash interest coverage ratios such as EBITDA to interest expense are currently in line with where we've historically operated and been comfortable operating the business.
As always we continue to watch the rising interest rate environment and the current state of the debt markets very closely.
During the second quarter, we completed Refis of two of our nearest maturity term loans E&S as well as the $1 1 billion senior secured 8% rate note that we took on at the outset of Covid out of an abundance of caution.
Net effect is that we extended the debt maturities out from 2025 into 2028.
While we ended up not needing the proceeds of that $1 $1 billion insurance policy known as we called it to withstand the COVID-19 downturn. We felt it was prudent to have the excess cash as we headed into those tough times. We will continue to operate the business with that kind of conservatism when it comes to our capital structure and good times and bad and expect to.
Remain proactive and prudent.
Pro forma for this note refinancing in term loan extension our nearest maturity is now 2026.
As a result of these various refinancings, we had some puts and takes on interest expense. The net impact of which is that our interest expense estimate for FY2023 ticked up slightly as you can see in today's update updated guidance.
Over 75% of our total 20 billion gross debt balance is fixed or hedged through fiscal 'twenty six and this is achieved through a combination of fixed rate notes interest rate caps swaps and collars.
This provides us adequate cushion against any rise in rates at least in the immediate term.
Specifically on the interest rate hedging point Youll see some detail in the 10-Q on new hedges that we put in place during this past quarter to extend our coverage out another year through fiscal 'twenty.
One special note on the cash mechanics of the debt Refis due to the way. The timing worked we had $1 1 billion of restricted cash on our balance sheet at quarter end, but that cash was disbursed just after quarter end in the first couple of days of April when we successfully completed the retirement of the 8% bond I mentioned so.
As of today as it pertains to our balance sheet, the restricted cash balance as well as the amount due on the on that 8% note are both zero.
As we sit here today from an overall cash liquidity and balance sheet standpoint, we think we remain in good position with adequate flexibility to pursue M&A or return cash to our shareholders via buybacks or dividends during fiscal 'twenty three.
With that I'll turn it back to the operator to kick off the Q&A.
Thank you.
At this time, we will conduct a question and answer session as a reminder to ask.
You will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.
Please standby, while we compile the Q&A roster.
Okay.
Our first question comes from the line of Robert Spingarn of Melia Research. Your line is now open.
Good morning.
Good morning, good morning.
Kevin I noticed you said something it seemed a little different this time about the M&A pipeline and then perhaps a little bit better than it's been and I am wondering is that because more properties for sale or there's fewer competitors out there bidding against you because of the financing environment.
What's going on there.
Yes, I think theres more properties available more coming available things that have long been rumored.
Have come to market or are we now know are definitively coming.
So that certainly sets up favorably for us.
And how about the pricing environment within that.
I have not noted any difference in pricing, maybe things have come down ever so slightly but they are still going for high multiples people remember.
What.
They can command or what they could and are still expecting that.
Okay. Thanks, so much Kevin.
Yes.
Please standby for our next question.
Our next question comes from the line of Myles Walton of Wolfe Research. Your line is now open.
Thanks. Good morning, I was wondering Kevin if you can comment on the source of the OEM upside in the guidance being raised.
Follow the aftermarket, but what's getting better on the OEM side.
I'll give you my thoughts and George can chime in but build rates are improving deliveries are improving.
And we're finally, starting to see the order book build on the OEM side. So that's really the genesis of it.
Evans comments generally there is some level of offset from the OE production rate increases to when the sub tiers in our business.
Sees that demand.
So we're cautiously optimistic that they are moving the rates up and we will continue to produce more aircraft as we go forward in the future.
Okay, and then one for Mike.
Thanks, Ken.
Working capital consumption $220 million in the quarter I think it was a slight <unk>.
In the first quarter, what's the expectation for the full year at this point.
It's hard to say exactly how it plays out over the course of the year from peak to trough during Covid about $400 million came out if you look at the math around that where we're close to all of that Havent gone back and not quite there, but pretty close though it's hard to give exact guidance by quarter, but I think we're getting closer to the Max amount should be that.
That should be back in there. So we don't expect to see a sizable uptick of the type we saw this past quarter in future quarters.
Okay. Thank you.
Thank you please standby for our next question.
Our next question comes from the line of David Strauss of Barclays. Your line is now open.
Thanks, Good morning.
Good morning, good morning.
Kevin So it looks like if we just look on on revenue that the your aftermarket revenues are now back to 120, <unk> hundred 22025% above pre pandemic levels, where do you where do you think volumes are at this point on the aftermarket side relative to pre pandemic levels.
Yes, I think.
You are right in what you are saying about the percentage up.
But I still think were 10% to 15% volume light in our numbers. That's still has the potential to come in as people fly more.
And that gets us back to really where we were pre COVID-19.
Okay.
And any any comments on supply chain I know you've point out some issues in the past.
How would you characterize your supply chain three months further on now.
Yes, I think our supply chain has done a nice job recovering and trying to support the ramp up.
I think in general terms, we've seen a more stable and predictable performance out of the suppliers.
Electronic components as I mentioned <unk>.
To be a little bit of a minor pain point, but I'd say generally that's getting better as well.
Okay, and what about your ability to hire and retain relative to maybe three six months ago.
Yes, I don't think we really run into any significant retention issues.
Through this process definitely we've seen the overall labor market improve.
At most of our locations in terms of the production labor still a little bit tight on the higher technical and engineering expertise, but again, a little bit signs of improvement there as well.
Alright, thanks, very much guys.
Sure.
Thank you please hold for our next question.
Okay.
Yeah.
Yeah.
Our next.
Question comes from the line of Robert Stallard of vertical research. Your line is now open.
Good morning.
Good morning, good morning.
Kevin I'll start with you first of all on the aftermarket.
Strong growth here and in the most recent quarters.
Just looking forward how sustainable do you think this is particularly as you start to lap that price increase towards the end of the year and also given these very low rates of old aircraft retirement.
Well I guess, we'll have to see how the order book continues to evolve.
Of course as we.
It all depends on takeoff and landings and if the flight activity continues to increase then we will see.
Continued strengths I think we're just seeing the opening innings really of China coming back.
And.
It was good to see that in the numbers, but it's.
Hard to put any parameters on it from here, except we do expect things to continue to improve for the year, but it will have to slow down at some point.
Oems start to ship more but we'll have to see how that unfolds.
And then a follow up from Mike on the interest rates.
On the debt market and that's been some what might be optimistic chatter about interest rates actually coming down.
Going forward from here I'm wondering what your thoughts might be on that and what sort of flexibility trans dime has to adjust interest rates if that does occur.
Yes, we generally with regards to the capital structure and interest rates, we don't take a strong position on where theyre going to go.
As we've said before we're in the business of focused in on.
Keeping on time delivery and quality of our parks.
As high as we can rather than trying to predict where rates might go that said this past caller. We did this past quarter, we did take a bit of a different approach and when we did the new hedges we did collars.
Rather than swaps, so that if rates do float down a bit we will get some of that benefit down to about a 2%. So for right. So youll see some of that detail in the 10-Q when it's filed.
Later this week and then there's always I mean, we can if they overall market rates did step back by 2% to three percentage points. You can go in and refi right. We can reprice, our bank debt of which we've still got.
$6 billion, or so and bring down the rate on that and we can also if it makes sense take out some of the fixed notes, there's a breakage cost on the ladder, but it's just math and if the rates come down enough you could take out those notes early or pay the prepayment penalty. So that you get the benefit of the lower rates going forward.
That's great. Thanks, so much.
Yeah.
Thank you please standby for our next question.
Okay.
Okay.
Our next question comes from the line of Ron Epstein with Bank of America. Your line is now open.
Hey, Good morning. This is Jordan line is answer Ron I, just had a question on Carlson.
I know you guys said that the financial profile.
The M&A targets that you guys pursue.
But the company being services base.
Should we view it as a departure and your strategy or a shift.
And then also should we expect more services to be in your pipeline.
I don't think we expect.
Any change in our approach our approach is always to deliver private equity like returns to our shareholders. When we find businesses that are highly proprietary highly engineered and produce a highly engineered product in this case <unk>.
<unk> report I think it absolutely lends itself to our products.
And we'll see how successful we are with this acquisition.
And it certainly opens us up to other markets, we might explore within aerospace.
In defense, but you shouldn't interpret this as any new direction for us we find that this business should produce the same types of returns as we've come to expect from our components businesses.
George you have anything to comment on that yes, I would add.
We were very excited about that position I'd first say excited that we closed at yesterday, but as we evaluated the opportunity. We saw many of the characteristics and attributes that we've seen in other businesses that we've acquired they do very highly engineered proprietary testing.
They are a great partner with their customer base, primarily aerospace and defense.
Which we like as well.
There was no fudging the numbers or changing any type of criteria as we evaluated it we expect it to perform as other acquisitions past acquisitions have performed.
Generate the typical returns that we'd expect so we're very excited about it.
Awesome. Thank you so much.
Sure.
Please standby for our next question.
Our next question comes from the line of <unk> <unk>.
<unk> with Jefferies. Your line is now open.
Good morning, guys at Xerox.
On the last good morning.
I'm glad you brought that up my last name but.
I thought she was great, though I have to say it.
Yes.
On the last call you pointed out volumes were 85% below 2019 levels and playing price of about 25% since 2019, Kevin.
So I think in response to Schalkwyk question, you implied price is another 10 to 15 points of cross up this quarter is that just rounding or is the shortage of new players.
Exactly I think what I was referring to and I apologize if I.
Ah confused.
I was simply saying Theres still 10% to 15% of missing volume if you look back to the pre COVID-19 levels.
We don't comment on price.
To that extent, so I'm just looking at from a volume point of view, we still there are still flight activity that has not returned that we anticipate will over the coming year or so, but we don't anticipate all the volume to return in 'twenty three some of it will fall into 'twenty four we fully anticipate.
Okay. That's helpful and then.
Maybe just.
<unk> 23, and as you think about 2025 whats the normalized aftermarket outlook you guys are thinking about on a volume basis, and then opportunity for that.
Go ahead, Mike I think Sheila on that point, we will give the guidance when we give it we're just getting started with our detailed bottoms up op unit forecast here for the next 12 months.
This coming month, or so and I think we don't want to get out over our skis in terms of predicting where our commercial aftermarket volumes could go from here.
Things are still changing quickly and as we've said all along that the recovery could be lumpy here okay.
Okay. Thank you.
Sheila as you know, we do a bottoms up forecasting so we don't give our teams expectations, we allow them to tell us.
Think that has proven to be more accurate than announcements from on high.
Sure. Thank you.
Thank you Sheila please hold for our next question.
Okay.
Yes.
Yes.
Yes.
Our next question comes from the line of Ken Herbert of RBC Your.
Your line is now open.
Yes, hi, good morning.
Good morning.
Hey, Kevin when you when you look at the sort of the update and the increase to the full year aftermarket guide for fiscal 'twenty three.
It sounds like it's pretty broad based in China, and some other tailwind there but is it possible as you look at that increase to maybe rank order or prioritize for us maybe what drove the increase or where are you seeing the greatest impact.
I'll, let George take that one yes, I think as you.
You guys know, we have no visibility into the inventory or specific trends in a particular region per se.
Our largest submarket, which is the passenger submarket.
As seen that bounce back in that growth and we're seeing it across multiple operating units.
While cargo is down we are seeing some improvement in terms of the belly cargo.
On some of those businesses as well so I would say generally all of our operating units that support the commercial aftermarket are seeing the rebound in the recovery.
Great and within that are you seeing anything in particular on the interior side when I when I think of some of the businesses there and I think about maybe retrofit opportunities on wide body aircraft does that just add up doing better than the passenger trend or how is that looking.
I would say interiors are following a similar trend.
We're seeing a nice recovery there, we've probably seen that over the last few quarters.
Generally but.
Obviously as they continue to utilize the existing fleet.
Beneficial for potential down down the road modifications and refurbished et cetera.
Great. Thank you.
Sure.
Thank you please standby for our next question.
Our next question comes from the line of Watson corner of TD Cowen. Your line is now open.
Hey, good morning, guys.
Good morning, good morning.
Just to follow up on the last couple of questions on.
Are you seeing any can you any differences in aftermarket demand across kind of traditionally discretionary products versus.
Flight critical.
Or.
These submarkets, whether it be kilos, or what have you better weaker or stronger than others any sort of flavor you can give us.
No I think in general the majority across operating units are participating in the recovery.
There could be some puts and takes across any given quarter.
But we're not seeing any significant differences in the commercial aftermarket there.
Okay.
Okay, I think maybe to add to that commercial transport.
Is stronger than the business jet and helicopter, but business jet and helicopter aftermarket is very strong as well.
And a small portion of overall aftermarket revenue as you know.
Yes.
Maybe Kevin could you speak to your comfort.
With leverage in this environment like how much should the right deal how much would you be willing to take up.
The debt to EBITDA ratio.
I think we're comfortable operating in the same range as we have historically.
As Mike said, we don't get into forecasting we run our business, we make sure we have enough available cash and.
For any available opportunity that we see on the horizon and that we can go after it so I don't see any limitations I think we're comfortable operating within the same range as we historically have.
Five to seven times.
We're right in that Sweet spot I think this is where we would like to continue to operate and as you heard theres, probably some forecast that rates will start to go down in the not too distant future. This is good we have.
Successfully navigated this so.
So far and we will continue to come out the other side stronger so I feel like we're comfortable where we are Mike do you have anything you want to add to that I think thats right. As we said as we've said many times before we feel comfortable in sort of the six times area and then it's always dependent on not just the leverage level right, but how far out to the right can you kick the maturity.
<unk>.
That is as important a part of the equation is just what the overall leverage level is and we always try to manage that.
Thank you.
Thank you please standby for our next question.
Okay.
Our next question comes from the line of Peter Arment of Baird. Your line is now open.
Yes, thanks, good morning, everyone.
Good morning, Good morning, Vanessa Alright, Kevin maybe just a quick one on just price your ability to kind of still pass along price any any changes that you've seen as kind of volumes and overall activity has picked up just curious in this inflationary environment.
This is still an inflationary environments.
I don't.
See any changes our goal is to as always to pass along inflation, that's what we try to do.
I think we've all seen reports from the airlines.
Ticket price increases and the like so I would say all of the market has been successful in.
Passing this along as we have needed to perform.
Okay, and just a follow up quick follow up on China.
Overall.
Less than 10% or around 10% of your overall mix in terms of revenue.
Well, we don't give geographic splits.
We don't actually know we sell a lot of that.
That through distribution and OEM, So we don't actually know.
I think the way to model. It is to look at what is missing from the flight activity.
From pre Covid to now and that gives you an idea of what's still missing from our business.
And there is still as George alluded to in his remarks, there is still a chunk of China flying activity that hasn't materialized, yet, but certainly it looks like it will.
I appreciate that the Internet is obviously still lagging considerably compared to the domestic but it's moving in the right direction.
Thanks, so much.
Thank you for your question. Please hold for our next question.
Okay.
Okay.
Yeah.
Scott vessel with credit Suisse. Your line is now open.
Hey, good morning.
Good morning, good morning.
George does your pricing model move at all in response to airline profitability given the value based approach meaning.
If airlines continue to become more profitable kind of on their current course could we see you exercise your pricing power in a manner.
That's perhaps greater than what you've historically done relative to inflation.
But which is consistent with your value based model since the airlines are generating more profit per takeoff of mining cycle.
Yes, I'd say airline profitability doesn't really come into play as we've always stated our pricing objectives.
As to market base, the price and do better than inflation, so obviously with the higher inflationary environment.
We're trying to get real price on top of the inflationary pressures that we're seeing in some of the costs that are flowing through the business but.
But we don't start looking at the profitability of the customer base or anything like that.
Okay and then just finally following up on <unk> do you have a sense for which of the three value drivers will have the most impact on driving accretion there and then on the price side is there an ability to achieve price realizations account spend quickly or does that company have a lot of backlog in Ito work through before you can start to get price.
Yes, I would say our view on value creation is it's a three legged stool right. We're trying to make sure that we're getting the price to reflect the value of the products that we see we're always trying to make sure we're managing the cost structures and pulling costs out of the business and then we want to be able to provide innovative profit.
<unk> solutions to the customer base, and that's not going to change with Cal span and frankly, that's not going to change across any of the portfolio of companies that we own.
So.
Obviously, we just closed on the acquisitions, but we're going to be looking to leverage all three in the process. It's a great business, it's been well managed and run and our hope is to be able to optimize it like we've been able to do with past acquisitions.
Okay and last question, Kevin just a clarification you said the M&A pipeline is stronger than typical.
As you defined typical here are you referring to the past few years as you referenced period or are you, saying the.
The M&A pipeline is stronger than it has typically been across the longer term experience of transplant.
I would take me at face value there, it's typical than what we've traditionally experienced stands more so than the last couple of years Theres a lot in the pipeline right now and the team is busy.
But you cannot that doesn't linearly project closings of quarters, but we're very busy right now.
Right. Okay. Thanks, guys.
Thank you for your question. Please hold for our next question.
Okay.
Our next question comes from the line of Seth Sigman of Jpmorgan. Your line is now open.
Okay. Thanks, very much good morning, everyone.
Hi, good morning.
I wanted to ask about obviously very strong profitability in the quarter and I believe.
Not necessarily guidance for any specific year, but as a framework.
Yeah.
The company has a philosophy that.
In a normal year, it's possible to have roughly a 100 basis points of margin expansion with the same set of businesses.
Is there any reason to think that that shouldnt be the case for next year off of wherever 2023 comes out.
I think that.
When when things stabilize when we get back to.
Normality whatever that looks like I think 100 to 150 basis points expansion per year on margin apples to apples is always what we have modeled and trying to achieve and I think thats a fantastic target.
Okay, Great and then maybe just as a follow up with regard to the M&A pipeline, we see some pretty.
Solid valuations in the public markets. These days.
A lot of activity in the private market obviously.
To what extent do you see that being driven by valuation and does that.
Kind of hit.
Hibbett things at all or is there still plenty plenty of value out there.
I think there is plenty of value out there I don't I don't.
Given our ability to generate value I think we don't.
Turn away when prices go up necessarily as long as we remain convicted with.
The individual property products.
The value what we have to pay it doesn't factor in to too much.
So we're not concerned if prices stay high go higher.
When you find a business that matches the criteria that we look for highly engineered products.
You're going to have a successful run with those kinds of products over their lifetime.
Great. Thanks very much.
Thank you for your question. Please standby for our next question.
Our next question comes from the line of Michael <unk> of <unk> Securities. Your line is now open.
Hey, good morning, guys. Thanks for taking my question good morning, good morning.
Good morning.
Kevin just to go back to Scott's question on California.
Said, the EBITDA margin for about half of what Youre doing now.
Given that these are more services is there a path do you think to get these margins up.
Up to kind of transplant historical levels or is there anything with the type of services and testing that they provide that would prevent you from driving that margin.
I think we are in the early innings here and difficult to comment too much.
I don't know if this business gets to the average of trans time, but I would I guess argue that it doesn't have to as long as we continue to find pathways to private equity like returns I don't know if the business has to get to.
<unk> average margins, but there is no reason to believe any business in the aerospace sector that is highly engineered produces a technical product like what we specialize in that it couldnt get there, but right now we're not modeling that it definitely will but we'll have to see.
There's lots of room for value generation.
Okay Perfect and then just on the defense market can you give any additional color there may be parse out OEM growth aftermarket growth.
You might have some more of the consumable exposure, there, but any any noticeable or discernible trends within within defense marketplace.
Yes, I'll take that as you know, we really don't separate out the defense OE from from the aftermarket I think both are are performing relatively equally in terms of how they're tracking.
It's a difficult environment as the government continues to do its best to support Ukraine and figure out how they're going to spend funds.
So I think our.
General commentary that I provided in the opening in terms of we're seeing a slow but steady improvement in the outlays, but the fact remains the outlays are still a little bit slow in terms of solicitations closing into orders as we look at the historical Timeframes.
Got it and then just last one on that topic are you able to get real pricing in your defense markets are grappling with some of the same issues, we're seeing and hearing about about.
From fixed price is just not being able to pass through those cost until the contracts reopen are you getting new task orders.
Yes, I really don't want to comment or get into specific contract terms as you know each of our operating units.
Independently negotiate the contracts with the government and I would be speaking out of turn.
Okay fair enough thanks, guys.
Thank you for your question. Please standby for our next question.
Okay.
Our next question comes from the line of Christine lag of Morgan Stanley . Your line is now open.
Hello.
Good morning.
Hey, how are you guys doing.
Great.
<unk>.
Wonderful to hear yes.
Hearing from some of the MRO facilities, we're hearing that aircraft turnaround times are extending from three months to maybe even as long as six months and part of that itself from some parts shortages and then some from labor.
Can you talk about how this environment is benefiting your pricing power.
And is that something and if you are is that something that you could sustain.
For longer.
Yes, I don't know that we would have any comments specific to that environment benefiting pricing again as I've stated many times our pricing philosophy remains unchanged. It's based on a market based value for the products that we deliver in design and produce and we look.
To realize real pricing on top of inflation.
And I think that has been something that's been very consistent in the history of the company and Thats, how we continue to approach it.
Great if I could impact that.
Question.
Question here. So when you think about available part when you think about the order activity that you have in the market what percent of those orders do you.
Are you able to deliver on and are there any specific shortages that youre facing.
In terms of providing to the market.
Yes.
Each each business and each operating unit has its own stated lead times with that they provide to the end users in the airline customers when they come in for any particular demand in those lead times can vary based on an operating units in general given the recovery that we've seen in the after.
The market in the commercial transport aftermarket specifically.
We've tried to invest in some inventory to be able to support the customer base.
And.
Off hand, I am not aware of any specific pain points in terms of supplying airlines are turning around spares activity again as a general comment electronic component availability is still a little bit tight.
But the teams have been doing a nice job managing through that.
Great. Thank you guys.
Sure sure.
Thank you for your question at this time I would now like to turn it back to Jamie Friedman for closing remark.
Thank you all for joining US today. This concludes the call. We appreciate your time and have a good rest of your day.
Thank you for your participation in today's conference.
The program you may now disconnect.
Okay.
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