Q4 2023 TransDigm Group Inc Earnings Call
Okay.
Good day, and thank you for standing by.
Welcome to the <unk> group incorporated fourth quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question during the session you'll need to press star one one on your telephone you will then hear an automated message advising your hands raised.
Draw. Your question. Please press star one one again.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Jamie Stephens Director of Investor Relations. Please go ahead.
Thank you and welcome to <unk> fiscal 2023 fourth quarter earnings conference call presenting on the call. This morning are transient President and Chief Executive Officer, Kevin Stein Co Chief operating Officer, Mike Lisman, and Chief Financial Officer, Sarah with.
Also present for the call today is our co chief operating officer jewelry.
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 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 well you'd be the tables and related footnotes in the earnings release for a presentation of the most directly.
Terrible GAAP measures and applicable reconciliation.
I will now turn the call over to Kevin.
Good morning, 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 four outlook than Mike and Sarah will give additional color on the quarter.
As we previously announced on October 27, we had two directors retire from the trans onboard Merv, Don and John Stare.
Mirth has served on our board since 2009 and John since 2012.
We sincerely appreciate both Mervyn John's dedication to trans name over the years.
They each have done an outstanding job as directors and truly contributed to the long term value creation of transcon considering.
Considering these two director retirements. Our board is now comprised of 10 directors for the near term, we feel our board size of 10 as appropriate and composed of highly qualified leaders with the appropriate skill sets to oversee and guide trans done.
However, as we always do we will continue to regularly assess the board composition into the future.
Now moving on to the business of today to reiterate we believe we are unique in the industry in both the consistency of our strategy in good times and bad as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle too.
To summarize here are some of the reasons why we believe this.
Our 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 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 the strategy and where we see a clear path to P. Like returns and 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.
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 closed out the year with another good quarter, we had solid operating performance in Q4 with both total revenue and EBITDA as defined margin coming in strong for the full year fiscal 'twenty three revenue came in at the high end of our most recently published guidance and our fiscal 'twenty.
Three EBITDA as defined margin surpassed that guidance.
Commercial aerospace market trends remained favorable as the industry continues to recover and progress towards normalization global air traffic is still moving forward and demand for travel remains high.
<unk> are making steady headway on aircraft production.
However, total air travel remains slightly below pre COVID-19 levels, and OEM aircraft production rates remain well below pre pandemic levels.
There is still progress to be made for the industry and our results continue to be adversely affected in comparison to pre pandemic levels in.
In our business during the quarter, we saw a healthy growth in our revenues and bookings for all three of our major market channels commercial OEM commercial aftermarket and defense.
Revenue was also sequentially improved in all three of these market channels.
Our EBITDA as defined margin was 52% in the quarter contributing to this strong margin is the continued recovery in our commercial aftermarket revenues along with our strict operational focus and disciplined approach to cost structure management.
Additionally, we had good operating cash flow generation in Q4 of over $460 million and ended the quarter with close to $3 5 billion of cash we expect to steadily generate significant additional cash through 2024.
Next an update on our capital allocation activities and priorities.
As was mentioned in our press release, we have decided to pay a special dividend of $35 per share the dividend will be paid on November 27th Sarah will address this more later in aggregate, including Cal span acquisition completed this past may and this dividend to be paid in late November we are allocated.
Over $2 7 billion of capital to our two are in the interests of our shareholders in under seven months.
Also we disclosed in our press release earlier today, we agreed to acquire the electron device business of communications and power industries also known as CPI for approximately 1.385 billion in cash Cpi's electron device business as a leading global manufacturer of electron.
Components and sub systems, primarily serving the aerospace and defense market. The products manufactured by this business are highly engineered proprietary components with significant aftermarket content and a strong presence across major aerospace and defense platforms.
CPI is electron device business generated approximately $300 million in revenue for its fiscal year ended September 32023. The acquisition is currently expected to close by the end of the third quarter of our fiscal 2024.
As mentioned earlier, we are exiting fiscal 'twenty three with a sizable cash balance of close to $3 $5 billion pro forma for the dividend our fiscal year end cash balance is over $1 4 billion and growing as always we continue to closely monitor the credit markets and we'll be assessing opportunities.
Is to utilize leverage for the acquisition of Cpi's electron devices business and general corporate purposes, which may include potential future acquisitions share repurchases under our stock repurchase program and dividends.
Regarding the current M&A pipeline, we continue to actively look for M&A opportunities that fit our model as we look out over the next 12 to 18 months. We continue to have a slightly stronger than typical pipeline of potential targets and remain encouraged concerning deal flow.
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.
As we move into our new fiscal year, the capital allocation priorities that trans time are unchanged. Our first priority is to reinvest in our businesses seconds do accretive disciplined 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 still do take this into consideration.
Moving to our outlook for fiscal 2020 for.
The guidance assumes no additional acquisitions or divestitures and is based on current expectations for a continued recovery in our primary commercial end markets through fiscal 'twenty four.
Fiscal 'twenty three we were encouraged by the recovery seen in our commercial revenues and strong booking trends.
Our strong bookings support the fiscal 'twenty four commercial end market revenue guidance, which I will comment on shortly.
Trends are positive across all three of our major market channels commercial OEM commercial aftermarket and defense. We are cautiously optimistic that the prevailing conditions will continue to evolve favorably. We will watch this closely as we always do and we'll react as necessary, including taking any preemptive strep steps that might.
Be warranted changes in market condition, and the impact to our primary end markets could lead to reviews revisions in our guidance for 2024 are.
Our initial guidance for the fiscal 2020 for continuing operations is as follows and can also be found on slide seven in the presentation.
The pending acquisition of CPI as electron device business is excluded from this guidance the midpoint of our fiscal 'twenty for revenue guidance of $758 billion or up approximately 15% as a reminder, and consistent with past years with roughly 10% less working days than the <unk>.
Sequent quarters fiscal 'twenty 'twenty, four Q1 revenues EBITDA and EBITDA margins are anticipated to be lower than the other three quarters of 'twenty four.
This revenue guidance is based on the following market channel growth rate assumptions, we expect commercial OEM revenue growth around 20%.
Commercial aftermarket revenue growth in the mid teens percentage range and defense revenue growth in the mid to high single digit percentage range. The.
The midpoint of fiscal 2020 for EBITDA as defined guidance is $3 $94 billion or up approximately 16%.
With an expected margin of around 52%. This guidance includes about 100 basis points of margin dilution from our recent Carlsbad acquisition, we anticipate EBITDA margin will move up throughout the year with Q1 being the lowest.
And sequentially lower than Q4 of fiscal 2023.
The midpoint of adjusted EPS is anticipated to be $31 97.
Are up approximately 24% Sarah will discuss in more detail shortly the factors impacting EPS along with some other fiscal 'twenty four financial assumptions and updates we.
We believe we are well positioned as we enter fiscal 'twenty four as usual, we will continue to closely watch how the aerospace and capital markets continue to develop and react accordingly.
Let me conclude by stating that I am very pleased with the company's performance this year and throughout the recovery for the commercial aerospace industry. We remain focused on our value drivers cost structure and operational excellence, we look forward to fiscal 2024 and expect that our consistent strategy will continue.
To provide the value you have come to expect from us now.
Now, let me hand, it over to Mike Lisman, our Trans time group co C O O to review our recent performance and a few other items. Good morning, I'll start with our typical review of results by key market category for the remainder 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.
In the commercial market, which typically makes up close to 65% of our revenue we will split our discussion into the OEM and aftermarket.
Our total commercial OEM revenue increased approximately 22% in Q4 and 24% for full fiscal year 'twenty three compared with the prior year periods.
Sequentially total commercial OEM revenues grew by about 4% compared to Q3 books.
Bookings in the quarter were strong compared to the same prior year period. This strong bookings throughout fiscal 'twenty three support the commercial OEM guidance for revenue growth of around 20% for fiscal 'twenty four.
OEM supply chain and labor challenges persist, but appear to be slowly progressing.
We continue to be encouraged by the steadily increasing commercial OEM production rates at Boeing and Airbus and the strong airline demand for new aircraft.
Supply chains remain the bottleneck in this OEM production ramp up.
While risks remained towards achieving this ramp up across the broader aerospace sector. We are optimistic that our operating units are well positioned to support the higher production targets.
Now moving on to our commercial aftermarket business discussion.
Total commercial aftermarket revenue increased by approximately 27% in Q4 and 31% for the full fiscal year 'twenty three compared with the prior year periods.
Growth in commercial aftermarket revenue was primarily driven by the continued strength in our passenger submarket, which is by far our largest sub market.
We also saw growth in our interior in Biz jet submarkets compared to prior year Q4.
These increases were minimally offset by a slight decline in our freight submarket.
The post Covid return to flying globally continues and is buoyed our primary commercial aftermarket submarkets passenger biz jet and interior, while announced sustained global softness in declines in global freight volumes seen over the past year plus likely contributed to the minor decline in the freight sub market.
We saw this quarter.
Sequentially total commercial aftermarket revenues increased by approximately 2%.
Commercial aftermarket bookings for this quarter were strong compared to the same prior year period and in the full 2023 fiscal year. These commercial aftermarket bookings exceeded sales nicely.
The strong bookings levels in commercial aftermarket over the past 12 months support our commercial aftermarket guide for revenue growth in the mid teens percent range for fiscal 'twenty four.
As a reminder, when forecasting our commercial aftermarket we always look at rolling historical 12 month average booking trends never just the most recent quarter due to some lumpiness that we can often see and have historically seen in this end market. This lumpiness is not quite as big as what we can see.
The defense end market, but it is there nonetheless.
Turning to broader market dynamics in referencing the most recent IATA traffic data for September.
Global go global revenue passenger miles still remained lower than pre pandemic levels, but growth in air traffic over the past few months has continued to signal steady recovery momentum globally are returned to 2019 air traffic levels is still expected in 2024.
Domestic travel continues to surpass pre pandemic levels and the most recently reported traffic data for September global domestic air traffic was up 5% compared to pre pandemic domestic air travel in China continues to improve and was up 8% in September compared to pre pandemic. This is a significant improvement.
But from China being down 55% only nine months ago in December we did not expect such a steep steep ramp up in China activity. This past year and it was a nice surprise.
Shifting over to the U S domestic air travel for September came in 6% above pre pandemic traffic.
International traffic has continued to make strides over the past few months a quarter ago at the end of June International travel globally was depressed about 12% compared to pre pandemic levels, but in the most recent data for September this travel was only down about 7%.
Now some quick color on our commercial aftermarket submarkets, starting with the Biz jet Submarket.
Business jet utilization is below the pandemic highs reached in 2021 and continues to temper overall global business jet activity does remain above pre pandemic levels by about 10% to 15% and time will tell how this normalizes over the upcoming months without within our business jet Submarket.
Our revenue was well above pre COVID-19 levels.
Next on the cargo Submarket as a reminder, this is one of our smaller submarkets within the commercial aftermarket bucket.
Global Air cargo volumes have continued to struggle and after 19th straight months of year over year declines just returned to flattish to slightly positive growth. These last two months.
Cargo ton kilometers ttk's have been below pre pandemic levels.
Additionally, full freighter aircraft are being used less now and have seen an increase in parked rates due to the return of belly cargo capacity on the passenger side.
As mentioned on our last earnings call. We've started to see some booking softness in the freight sub market of our commercial aftermarket likely as a result of the sustained declines in CDK and the full freighter market challenges that I referenced.
One quick aside to summarize what is currently going on in our commercial aftermarket Submarkets and how we as a management team think about it.
If you take a step back and look at how things have trended from pre COVID-19 to the present over the past four years at Cove. Its onset we saw precipitous drop at first in the passenger Submarket followed shortly thereafter by a big run up in freight to levels well in excess of pre COVID-19 activity.
After a few years of seeing these trends. These markets are now in various stages of returning back to their original trend lines.
Singer traffic continues to surge back in with the belly cargo.
While full freighter cargo aircraft traffic is dropping back to trend.
We are happy to see this dynamic passenger is by far our largest submarket within the commercial aftermarket and we win on this tradeoff between full freighters and passenger.
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 15% in Q4 and 11% for the full fiscal year 2003, compared with the prior year periods.
This full year defense revenue growth exceeded our last guidance expectation of growth in the mid to high single digit range that we gave on the last call sequentially total defense revenues grew by approximately 9%.
Defense bookings are also up significantly this quarter compared to the same prior year period.
We continued to see improvements in the U S government defense spend outlays, which is reflected in our defense revenue and bookings performance this quarter.
We are hopeful we will continue to see steady improvement, but as we have said many times before defense sales and bookings can be lumpy, we know the bookings and sales will come but forecasting them with accurate accuracy and precision is difficult.
Lastly, I'd like to finish by recognizing the strong efforts and accomplishments of our 48 49 op unit teams during fiscal 'twenty three it was a good year and we're pleased with the operating performance they delivered for our shareholders.
We enter our new fiscal year, our management teams remain committed to our consistent operating strategy and servicing the now very strong demand for our products.
With that I'd like to turn it over to our CFO Irwin.
Thanks, Mike and good morning, everyone I'm going to review a few additional financial models for fiscal 'twenty three and then also our expectations for fiscal 'twenty four.
Just a few additional fiscal 'twenty three data points on organic growth taxes in liquidity in the fourth quarter organic growth rate was 18, 5% driven by the continued rebound in our commercial OEM and after market and market on taxes.
And adjusted tax rate finished the year within our expected range at a fiscal 'twenty three cap rate with 24% and the adjusted rate was just under 25%.
Cash and liquidity free cash flow, which we traditionally defined as EBITDA less cash interest payments capex and cash taxes with roughly $1 8 billion for the year higher than the $1 $4 billion. We had originally expected driven primarily by the good operating performance that Kevin and Mike mentioned and the extra EBITDA.
<unk> above our original guidance carries over to cash flow as Kevin mentioned, we ended the year with approximately $3 $5 billion of cash on the balance sheet or over $1 $4 billion when pro forma for the 35 dollar dividend at year end net debt to EBITDA ratio was four eight times down.
The five three times at the end of last quarter pro forma for the $35 per share dividend announced this morning.
Debt to EBITDA ratio is five four times the dividend payment date is expected to be November 27th.
We continue to watch the rising interest rate environment closely we remain 80% hedged on our totaled $20 billion gross debt balance through a combination of interest rate cap swaps and collars through 2025. This provides us adequate cushion against any rising rates at least in the immediate term.
EBITDA to interest expense coverage ratio, which as a reminder becomes more important in a higher interest rate environment and is a metric we actively monitor taken into consideration in these times of elevated interest rates ended the year at three one times on a pro forma basis, which sits comfortably in line with our pre <unk>.
Average range of two to three times, we continue to be comfortable operating the business within these brackets.
With regards to any potential changes to our long term approach to using that to boost our equity returns. We're actively watching the interest rate environment closely but do not anticipate any big changes in our approach at this time.
Next on the fiscal 'twenty four expectations I'm going to give some more details on the financial assumptions around interest expense taxes and share count special note. All of my comments on data here include the payment of the $35 dividend, but exclude the acquisition of Cpi's electron device business entirely.
<unk>, which is still subject to regulator approval and we expect to close by the end of third quarter and fiscal 'twenty fall net.
Net interest expense is expected to be about $1 two $5 billion in fiscal 'twenty fall and this equates to a weighted average cash interest rate of approximately six 3%. This estimate assumes an average so for rate of five 4% for the full year.
On taxes, our fiscal 'twenty, four GAAP cash and adjusted tax rates are all anticipated to be in the range of 22% to 24%.
Slight decrease in our tax rate versus the prior year due mainly the additional interest expense, we're able to deduct the tax purposes, given our higher expected EBIT of 24 on the share count we expect our weighted average shares outstanding to be 57 8 million shares and 24.
With regard to liquidity and leverage for fiscal 'twenty four as we would traditionally define our free cash flow from operations at Trans time, which again is EBITDA as defined less cash interest payments capex and cash taxes. We estimate this metric to be close to $2 billion in fiscal 'twenty fall with regard to the dividend the 35.
<unk> payment announced this morning represent the gross payout of just over $2 billion.
The record date for the special dividend is November 20th on the payout date is expected to be November 27.
After paying out the $35 a share dividend in cash and assuming no additional acquisitions or capital market transactions. We would end the year with over 3 billion of cash on the balance sheet, which would imply a net debt to EBITDA ratio close to four times at the end of fiscal 'twenty. Four however is exclude.
The acquisition of CPI electron device business, which is still subject to regulator approval and we expect to close by the end of third quarter in fiscal 'twenty for us.
Kevin mentioned at the outset, we are actively monitoring the capital markets and assessing opportunities to utilize leverage for this acquisition and general corporate purposes, which may include potential future acquisitions share repurchases or dividends and as a reminder, there has been no change in our approach to how we think about capital allocation.
<unk> all leverage without typical propagate in the five to seven net debt ratio range and we'll continue to watch this ratio along with the cash interest coverage ratio of EBITDA to interest expense as we actively pursue options of maximizing value to our shareholders through our capital allocation strategy.
So a final note on that we think we remain in good position with adequate flexibility to pursue M&A or returning cash to our shareholders via share buybacks and our additional dividends during the course of fiscal 'twenty four.
With that I'll turn it back to the operator to kick off the Q&A.
As a reminder.
To ask a question. Please press star one one on your Touchtone telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby will be compile the Q&A roster.
Our first question will come from the line of Myles Walton with Wolfe Research.
Thanks, Good morning.
I was hoping to hear.
Give us a little bit more color on the CPI.
Business itself understanding that you obviously haven't closed on it but maybe just a little context of the nature of the aftermarket than it has maybe it looks a little bit more defense than than commercial so how does that flow.
And then maybe just from a process perspective is this something that's been on your watch list for a while or or something thats more recently popped up.
Thanks, Myles this is an acquisition that.
Came through deal flow.
It is a business we have looked at a number of times over the years.
It is a company that makes a vacuum tube type products power generation products for high power applications in aerospace and defense a lot of it flies.
If it doesn't it big applications, though are.
Tend to be a little more defense, but there is an industrial and medical products technology here. We look at this acquisition is right down the fairway for us.
This is a component business highly highly engineered.
With significant access to the aftermarket these products need to be repaired and overhauled every three to four years.
At regular intervals. So we believe this provides the the basic tenants that we look for.
Yes.
Then just one quick one on defense the sales in the quarter, obviously youre expecting it to be flat is up about 9% is that short cycle stuff coming through with the supply chain there improved I see from the slide it Phil called it out as a watch item, but was it with a better sales result of customer poll or supply performance.
It was both we saw a bit of increased demand.
Free up from all the main customers a bit more on the aftermarket side and stuff we were able to.
Get out this quarter, the bookings also ticked up which sets us up well.
Heading into next year.
Supply chain side that is starting to ease a little bit.
With regard to getting the stuff we need in to build the port build our components and ship them out the door, we're probably in a better spot than we were say 12 or 18 months ago, but the supply chain. Our supply chain is still not back to where it was pre COVID-19 in terms of <unk>.
Deliveries in.
Getting stuff to us perfectly on time, so heading in the right direction, but probably still a bit more.
Work to do there and definitely not as much of a headwind as it was say 12 months ago.
Okay. Thanks, guys.
Okay.
Our next question will come from the line of Noah <unk> with Goldman Sachs.
Hello can you hear me.
Yes, good morning.
Oh no no I was hoping we could I was hoping we could pick apart the exact aftermarket bookings by month in the quarter.
Just kidding.
We don't pull apart bookings.
Uh huh.
I was kidding.
Sure.
Yes.
My blood pressure was starting to go up sorry Noah.
Well, a little bit as you know, we don't even give the quarters anymore.
Right as you Shouldnt.
Hey, so when you just went through all that math on the balance sheet.
After all this capital deployment and you mentioned.
Ending the year at four turns of net debt to EBITDA.
Recognizing that the pre CPI close, but even once you close that the.
The balance sheet lever that won't change the leverage that much once you add the EBITDA and then keep generating cash flow.
As you saw as the special dividend.
Was that.
With an eye towards the acquisition pipeline and should we read that to mean that you still see a lot out there to.
Maybe go after and therefore, you wanted to leave that firepower on the balance sheet.
Yes, I think we're always ambitious and.
Casting that wide to find opportunities that fit our criteria.
We want to be aerospace you'd love to be more commercial than defense, because you can make more money better returns on the commercial side, but no I think we see we will need to do something on the capital allocation side next year.
Even.
With the CPI that we will look to take on possibly we.
We will need to do something towards the end of the year and whether that's a buyback or a dividend or other acquisitions will have to see how the market unfolds.
Pretty encouraged by deal flow in general.
Seeing a lot of things on the M&A side.
We need to stay disciplined and that's what we will do.
And when we find the deal and we go forward with it.
With the knowledge that we're going to hit Trans name like returns on these acquisitions.
Okay.
And Kevin maybe I missed it but if you could speak to the profitability of <unk>, we can see the revenue multiple but what are the margins like where can you take them over time and then last one for me would just be if you could touch on <unk> for a minute just now that you've had it for a little bit longer.
That was a deal that did look a little different had some questions from the market.
Anything noteworthy there or just kind of what you thought you bought.
Yes, I think margins at CPI are well well below trends on margins I think there is opportunity to improve.
Of course, but this is very early on in the process, we don't own the business yet so too early for us to comment and we usually don't comment much on this but too early for us to have much granular.
Granularity or vision there.
Just know there.
Going to look to find opportunities to <unk>.
<unk> and grow that business on Cal span I think.
What I would say is we're very encouraged by the acquisition. It looks like it is running at or slightly ahead of our model and so we're very encouraged by that that business and the different aspects of that.
Market and the M&A that we did when we acquired <unk>.
Not a traditional component business. So the fact that the trans dime model still holds is very encouraging.
Okay. Thanks, very much all for joining.
At least as good as we thought it was when we set out to buy a probably a little better based on seven months of ownership herself.
Our next question will come from the line of Robert Stallard with vertical research.
Thanks, Scott and good morning.
Alright, one of them.
Just a couple from me festival on the.
The CPI business, you mentioned that it does have some sort of non aerospace defense exposure here are you intending to keep that within trends time or would you be looking to sell it on.
We would keep that within trans time, we have a non aerospace industrial section of the company now as pieces come along with M&A.
Absolutely encouraged by that part of the business I think the.
Medtronic medical device is a very interesting market and one that we wouldn't mind learning more about through exposure through this business.
Okay, and then on the aftermarket guidance for fiscal 'twenty four.
Mid teens roughly half.
Where you ended up for fiscal 'twenty three how do you expect that to progress as the year goes by and we can see perhaps step down here or is it going to be a gradual process and by the end of fiscal 'twenty four it below that to full year guidance.
Yes, we don't want to start giving anything that sounds too much like quarterly guidance, but a little bit of color on what we expect we would expect the gradual ramp up throughout the course of the year as you know Q1 for US just because of the way the working day step work out that is.
A lower percentage of the total years revenue forecast because of the 10% working days, but we expect the March up to sort of track the takeoffs and landings largely speaking over the course of next year.
An increase as the year.
It goes on with some sequential ramp ups throughout fiscal 'twenty four.
It doesn't always happen that way right could see some lumps here and there, but thats pretty much what we expect.
Consistent with prior years okay.
Okay. So the <unk>.
Actual number progressing through the year, but the percentage growth rate year on year will be coming down as the year progresses right.
That's fair.
That's a fair assumption.
Result of.
The math on the comps the way they work correct.
Okay. Thanks, so much.
Yes.
Okay.
Okay.
Our next question will come from the line of David Strauss with Barclays.
Thanks, Good morning.
Good morning.
Probably a question for Sarah I think you talked about $2 billion in.
Cash flow as you define it.
Should we assume from work.
In terms of working capital on top of that I think this past year, you had like a $400 million drag from working capital.
Yes on the working capital going forward I'd, probably assume about a neutral like you said you saw we we define working capital is accounts receivable inventory less payables and we added about $500 million. This year that was more than a peak to trough of the Covid downside, where we took out about $400 million.
Obviously, we also put some of that back in fiscal 'twenty. Two so I think now we're in pretty good shape and I would assume neutral going forward.
Okay.
And Kevin a question I guess to partner on the on the aftermarket.
Are your aftermarket volumes now back about in line with pre pandemic level. So that's the first question and then the second question in terms of the mid teens.
<unk> guidance is it fair to think about that being roughly half price half volume in terms of what youre thinking.
Yes, it's Mike I'll take I'll take that one first on the volume and where we stand now across our whole commercial aftermarket in FY2023.
Robley down and the volume space, something like 15% or so that varies by.
Submarket.
Passenger pieces down obviously 15.
Sorry, I should have highlighted that passengers down 15.
Interior stuff is probably off a little bit more.
Freight is up more from where it was.
Pre COVID-19 and Biz jet held up a bit too in the aggregate across all of commercial aftermarket in FY2023 we're not quite back to 100, if 100 was F 2019, but where we're close and then in FY 'twenty for what we expect to see on the volume side within passenger.
Go into that Submarket is basically to get back to pretty much close to 100, that's how our plans came in which is what you'd expect is consistent with where the takeoffs and landings and rpms are trending and then the freight in biz jet both.
Sort of trending along as well, but probably not as big as the.
<unk>.
Passenger sub segment and then in the aggregate what that means for FY 'twenty four across our whole commercial aftermarket bucket as that were probably up a little bit and the volume space.
Above a 100, if FY 19 is again defined as a as a 100.
The second part of your question on price and volume trends.
First on price in commercial aftermarket, we aim to as you guys know across our business get a.
Slightly positive amount of real price every year, so price a little bit ahead.
Ahead of inflation in this environment that sort of implies.
The direction you are heading.
On a 15% aftermarket guide roughly half and half.
Yes.
Miles off sort of Directionally accurate.
But the price.
We'll aim to get real price ahead of inflation, but youre not youre not too far off we don't give the exact amount of price and volume trends, but.
Directionally accurate.
Perfect. Thanks, Mike.
Our next question will come from the line of Ron Epstein with Bank of America.
Yes Hello.
Good morning.
Good morning.
One of the things we've been hearing is given the move in interest rates and what's going on in the financing world.
There's there's just less competition out there for deals from.
Sponsors in private equity and so on and so forth is that the case and does that is that giving you guys a tailwind and your potential entry.
I haven't found that to be the case, we see lots of competition in fact, CPI was a competitive deal.
I haven't seen anything that wasn't in a competitive process. So I have not noticed that I think in the aerospace and defense sector. There may be deeper pockets. So I'm not seeing that theres no one bidding on businesses I think if that was the case there wouldn't be many things coming.
To market. So we're seeing a lot of competitive processes.
Got it got it and then Kevin when you think about.
Directions to go.
I was helping you as outsiders looking in.
How should we think how should we think about that.
Vectors could you guys go down.
Yes.
I'm going to frame this.
You can actually answer it.
Broadly.
Is there an area in the portfolio.
Seems like Theres, a whole or is it.
Just kind of agnostic to just.
The model and kind of the end markets. If you just want to try to get a broader Barry how things go.
Yeah, we don't look at the market as there are holes in technology that we need to fill or products that we have to have.
We're agnostic about what what products and technologies that we have we're looking for things, though that are highly engineered proprietary.
They have a noted position in the marketplace they have aftermarket content.
<unk>.
Of sorts. So if you look at the.
The businesses that we continue to identify and find they fit.
This criteria.
And as long as we continue to find proprietary products like this highly engineered products.
We will continue to grow there is no reason for us to believe we're running out of these it's the nice thing about aerospace and defense is that there's so many technologies utilized across so many different products and applications with no commonality. There is still so many players.
As for us to grow.
I am not contemplating going outside of aerospace and defense I don't see a need for that we do love to learn about other markets and technologies.
Much like we will with CPI in the medical device side, and we'll see what we learn but right now I think the landscape is.
Very full for us on the aerospace and defense side and again, given our the value generation model that we have.
We don't need to acquire.
Hundreds and hundreds of millions of dollars of EBITDA every year, we target I'm not sure. All of you have heard me say this many times, if we acquire a $50 million to $100 million of EBITDA per year. That's all we need to feed this model and continue to do what we do larger acquisitions or better but as long as we continue to find those.
Opportunities to swing at.
And we will be fine and we will continue to grow quite nicely does that answer your question yes.
Yes.
Thanks, Kevin.
Our next question will come from the line of Sheila <unk> with Jefferies.
Good morning, guys how are you.
Good morning.
I wanted to ask on OE margin.
They're growing faster than the aftermarket Kevin you talked about Trump spam being 100 basis points dilutive. So how do we think about that OE versus aftermarket next on your EBITDA margin guidance.
Yes so.
Based on the guidance, we're giving the OE slightly outgrows the aftermarket right. We have the OA of around 20% aftermarket we called in the mid teens. There was a slight headwind. There. If you guys took some swag at the math, it's noise level type headwind right. We're talking a couple of tenths of a point on the margin. So nothing material that we won't be able to overcome.
With.
With productivity, the big one that swings us year over year.
Downward it obviously, just <unk> band and as Kevin said in his comments, that's like a full point of <unk>.
EBITDA margin dilution downwards, so not too too much headwind from the OE ramp up but little bit couple of tenths.
Okay got it.
You mentioned CPI is not in the guidance, but obviously well below trans dime on the margins with a very wide range can you give us an idea of how below transcend margins. They are and then an aftermarket I just wanted to ask if there is any impact from higher alg's incorporated into your expectations.
I'll, let Mike answer the answer the last one but on the.
CPI has a question.
I think you were trying to get at the margin we do.
Don't own it yet it's too early for us to comment on that.
Well well below trans dime averages, where do we see it getting too it's probably too early for us to even comment on that.
We haven't been in the door.
So we need some time to unpack that and then we'll be able to update you.
And then on the second half of your question Sheila I think you asked about EOG and I assume you are trying to get at.
Geared turbofan issue.
Yes, my aircraft grounded that created it across the fleet.
It's nothing material.
When it comes to our guidance as far as that ramps up or so diversified end market weighted across all the platforms out there that there's not a big uptick we expect from that but.
That said <unk>.
Given that those aircraft are newer and grounded.
Or stuff has to fly in some of the airlines are probably go into the lessor fleet to keep those older aircraft flying it's probably about a little bit of a tailwind, but it's not material and more noise level.
And it's not something that we factored a huge upside into our our plan from them.
Okay. Thank you.
Our next question will come from the line of Ken Herbert with RBC capital markets.
Yeah, Hey, good morning, everyone.
Morning, everybody, Hey, maybe Kevin or Mike, maybe Kevin or Mike when you think about aftermarket it sounds like in 'twenty three China was maybe relative to initial expectation is the biggest source of upside as you look at fiscal 'twenty four in the mid teens guide either geographically or maybe in other parts of the market where could we see some of the.
Maybe the biggest potential of upside as you think about the guidance and the market dynamics today.
Yes, so I guess to two things.
If the market grows more quickly as you saw from our guide this year, we will be ready to supply the demand difference there I think our original commercial aftermarket guidance for last year was 15%. We finished at a little bit more than double that right. So we were conservative with the guide when we went out and the China surge surge back is a big contributor to what.
Carried us up as well as the pockets of strength elsewhere wed look to do the same thing this year as well provided that.
That occurs.
Knows where it comes from the international stuff is probably a bit more depressed still specifically in Asia Pacific That's down the most it could rally back that's still down double digit percentage versus where it was pre COVID-19 hard to forecast that though right we didn't get out over our skis when we.
Nor do we think our op units when they came up with expectations for FY 'twenty four.
I think the biggest source of upside not just FY 'twenty four but as you look out a couple of years is when you take a step back.
Most prior downturns 911 <unk>.
Financial crisis stuff that went on.
You sort of got back to that original trend line. After a couple of years and.
And now in FY 'twenty four we're just getting back to FY 19, right, but theres still a bit of pent up demand there potentially because you guys know what drives rpms right its GDP growth and rising middle class and all that stuff and we've got four years, now where we've sort of been below that.
Past trend line.
Where we've.
Not seen the 5% RPM growth per year, but that trend line was sort of on and where we were headed and that sort of pent up demand that who knows how this recovery goes but FY 'twenty four and we'll get back to where we were in FY 19, but based on the underlying demand for global Air travel you would think there is still quite a bit of pent up demand there that should be a good <unk>.
<unk> for us as well as others in the sector out beyond FY 'twenty, four and who knows if you get back to the original trend line in prior downturns you sort of did.
And we will see but it should be a bit of a tailwind as we continue.
Continue out past this coming year.
Okay. That's helpful and as you look at it and it sounds like a lot of the you know.
Strength in 'twenty four is going to come from the passenger side are you seeing anything that would give you a little bit more concern around pushback from airlines in terms of spare part pricing and is that maybe at all relative to the last couple of years.
Any reason to think about a different assumption on pricing into the aftermarket.
No.
As we said earlier, we aim to get a little bit of real price ahead of inflation. That's what we've achieved historically, that's what we'll try to do this year same playbook. We've always had this year no no huge pushback I think the airlines are happy to get the parts and keep their aircraft flying in the air generating revenue now.
Great. Thanks, Mike.
Sure.
Our next question will come from the line of Gautam Khanna with TD Cowen.
Hey, good morning, guys.
Good morning morning.
I just wanted to follow up on two things one in the aftermarket are you guys seen any change in scope or.
Just purchasing behavior.
From the airline customers because we see a lot of these airlines stocks are obviously down a lot.
They are under some pressure now the companies I don't know if youre seeing any evidence of.
Yeah.
Destocking or whatever but by buying less than they normally would and average order size anything yes.
Sure.
Yes.
We're not seeing much of that I mean, as you know it's hard to get exact intelligence into the inventory levels of the airlines, but generally were not giving them volume discounts anyway. So they don't tend to hold too much of our our stuff, but no. We're not seeing very much at all I don't think we've seen any of the dynamic you described there.
Okay.
Got it and then.
<unk>.
Discernible differences between the distribution channel and direct to the airlines and MRO.
No for the most part D. The distribution channel for us into the commercial aftermarket which is about.
Our quarter rough Justice ebbs and flows a bit of the total commercial aftermarket revenue dollars that's been tracking.
POS there it's been pretty much tracking for this whole year.
Together with our commercial aftermarket growth pretty pretty closely so no meaningful disconnect because of distributor inventory or anything they've been moving not exactly in lock step right because you do get.
Little bit of noise here, and there, but pretty much in the same direction consistently throughout the year.
Great. Thanks, so much.
Sure.
Our next question will come from the line of Jason Gursky with Citi.
Hello can you hear me.
Yes.
Okay, Great. Yes suddenly went silent on me sorry about that okay. I just wanted to revisit the <unk>.
Margin question, but Sheila touched on earlier.
On your comment that.
The mix shift towards the growth rate being a little higher there relative to aftermarket leads to pretty modest headwind from margin perspective that you think you can make up in productivity.
As we look out.
Further into the future.
Potential for.
Retirement is accelerating as the OE ramp goes higher.
Can you just talk about how you all think internally.
About.
That potential outcome in some of the opportunities and risks to margins.
Curious to know whether it's retirement accelerate in certain aircrafts, whether you can actually get better price and so the margins of your business.
You have some upward bias to them and then on the OE side is it a question of higher volumes allow you to expand margins as you get some opex leverage.
Curious to know longer term, how you think about that.
The widening gap between OE growth in aftermarket growth over time, and the impact that that has on margins.
Sure I'll try to give a little bit of color that.
Shed some light on how we think about the various factors here, though obviously.
Guidance out.
FY 'twenty four is tough enough, which is why we range bound it to do a couple of years out after that is even even tougher but generally.
As it pertains to retirements.
We still make really good money and margins on the new aircraft that come into service. If you look now with the fleet age I think something like.
The fleet is a little bit older than it's been historically something like 80% of it is out of the five year warranty window versus the historical average of closer to 70% that creates a really slight tailwind for us again, nothing tremendously material, but over time as the OE production ramps up through the 2030 time.
Period, or so you'd expect that to get probably closer to like the 70% historical average, but again, we will still make very attractive commercial aftermarket margins on the newer stuff.
That's fine as well.
The other question, we get a lot on the retirements and I think this is where you were going is there some impact from U S. M. Hurt you guys. We've not seen that historically, we monitor it real time as you know from the price points of our products and the way the dynamic works there.
With higher value engine content, primarily targeted as well as avionics on the <unk> side. We just historically have not seen much negative impact from that the retirements are really low there like half of the historical average rate of two 5% of the fleet, we don't count on that dynamic and the same for us going forward, though so it's something we always.
Monitor.
And look at real time, but we don't expect the huge headwind there.
So generally we think obviously the OE ramps up going forward, maybe a little bit of a margin headwind, but nothing insurmountable and the aftermarket is going to continue grow in here as well for a couple of years out.
So we think we're sitting in a good spot.
Okay. That's helpful. Thank you I appreciate it.
Our next question will come from the line of Kristine <unk> with Morgan Stanley.
Yeah.
Hey, good morning, everyone.
Good morning hang up on him.
Sorry, there was a delay there.
Kevin following up on your answer to <unk> earlier question, I mean, taking a step back.
<unk> is generating strong free cash flow youre able to digest the special dividend. This year at a CPI acquisition and still have capacity and desire for significant capital deployment next year.
Taking into consideration the current interest rate environment, what's your target leverage.
For next year when you assess your next.
Capital deployment event.
Yes, I think Sarah said this in her.
We would like to be in the five to seven times, we're comfortable in that range.
And I think that's where we would like to sit we will see how the capital markets respond where there are opportunities for M&A and all of this will go into the mix, but as she said five to seven times, we're comfortable in that range I can't really give you a better forecast than that that's our.
Oracle comfort range.
Great and if I could add one on defense I mean, the pricing model regarding defense had been under the microscope with a series of investigations over the past 15 years.
Thanks.
With the strength and margin whats been underestimated is still operating strength of trends time, so looking at the businesses that you've acquired and defense how much more margin expansion is there on production efficiencies and as the employee trends on best practices. In manufacturing is this something that you could see a few hundred basis points.
And margin expansion.
Across all our businesses we target.
If we continue to execute our playbook on cost reductions getting a little bit of real price every year and growing new business, we target sort of close to a percentage point of EBITDA margin improvement per year, that's true across.
All parts of our business as you know most of them have a little bit of defense.
And we look to drive that kind of performance there as well.
I see no reason that wood.
Change going forward.
Through a mix of obviously the whole playbook, all three value drivers, new business stuff driving productivity and getting costs out.
And then also a little bit of real price ahead of inflation.
Great. Thank you.
Our next question will come from the line of Gavin Parsons with UBS.
Hey, Thanks, very much good morning.
Okay.
20% growth on OE organically, I think implies you're back above pre COVID-19 levels in 2024.
I assume a decent amount of that is business jet, but just wanted to ask kind of where you are on transport and where do you think the <unk>.
Build rates go in the year.
Okay, I think thats about right.
A little bit below I think the.
The past OEM peak, if you went all the way back to 8%.
703, Macs issue happened and obviously that sort of makes 19, the not the best time point. So I think you need to go back to 18, and I think on the OEM side with Boeing and Airbus were actually quite a bit below I don't have the exact stats in front of me but.
We've looked at him recently and I think we are down Biz jet. So that's the commercial transport side down a bit.
Biz jet.
Obviously, we're back I think you guys read the next they all the same headlines we do in terms of book to bills across the Big Biz jet Oems and those guys are doing.
Quite well and volumes production volumes.
Are up quite a bit.
Transport side narrow bodies are often and doing well in the wide bodies are still quite a bit down I think if you go and look at wide body forecast, it's hard to find and we look at your guys' estimates, it's hard to find as well as others. It's hard to find someone who is projecting wide body production volume that gets back to the prior peak.
<unk> in the projected period and some of you guys go all the way out to 2028 2029 2030.
Theres just been <unk>.
Shifting the airlines for more narrow body. So it seems thats, where the backlogs become more heavily weighted and therefore, where the production will be.
Got it and then obviously, we can see kind of overall inflation trends, but maybe it seems like there's some pressure on wages in the aerospace and defense industry.
Do you guys feel like your past kind of peak inflation on the cost side.
Hard to say, we're not macroeconomic forecasters and I don't think anybody inside your respective shops, who due to the macroeconomic forecasting saw this one coming we look at past periods, where inflation has spiked to the current kind of levels of debt and if you go back 80 years, usually it goes up to this kind of level.
It's a 45 year phenomenon. So we don't count on it necessarily coming down the hope for the best but certainly plan for the worst that's the way we put together the plan for this year.
If it goes down will be.
Good to see that obviously, but we certainly don't don't count on it in terms of inflation pressures on our business I think we mentioned on a couple of prior earnings calls. When this question was asked what are we seeing on materials and labor and that kind of stuff and it's been sort of in the five ish percent area.
Maybe a little bit higher than I would say that dynamic doesn't seem to have changed very much in the past few months I know the CPI readings have come down that they publish here in the U S. Europe still high we haven't seen any kind of coming off of the prior levels really across our business.
Got it thanks guys.
Our next question will come from the line of Pete Osterlund with Trust Securities.
Hey, good morning, I'm on for much more this morning, thanks for taking more inventory.
Morning.
Just wanted to parse out what's driving your growth expectations in fiscal 'twenty four and the defense market. So just maybe any color on how that growth will be impacted by the budget environments and then anything you can give us on pricing dynamics.
Yes.
When we put together the guidance, obviously, we think about and take into consideration things like continuing resolutions or some potential slow shut shut down for a short period of time all of that stuff, mainly generates for us a little bit of timing impact.
The demand eventually comes.
Just given the state of the World now we didn't think about that a little bit as we pulled together the guidance and made sure that we are.
We have some leeway there so it's sort of <unk>.
Incorporated into what you guys are provided today and then on the.
The pricing side I think we.
We continue to target kind of.
The same pricing dynamic, we described which is a little bit of pricing real pricing ahead of.
Inflation.
And no major change there.
Alright, Thanks, and then as a follow up just maybe an update on labor market conditions, you're seeing.
Productivity or attrition is still a significant headwind.
Just given your strong margin performance it seems like maybe it hasn't been significant but just wondering if there is potential for additional upside there.
Labor related headwinds are something you are experiencing.
Yes, we haven't seen a ton of significant headwinds we've gone I think you guys know a small percentage of our overall workforce is unionized. We've had several successful negotiations around wages when the renewals came up during the past 12, or 18 months and this high inflation environment with no issues in our op unit.
<unk> have worked through it.
Quite well.
But no major issues.
As Joel I, just add I mean, we've spent the last few years really working on automation projects and working to improve.
Our processes within our factories to to make us less susceptible to that.
Yeah.
Our next question comes from the line of Scott <unk> with Deutsche Bank.
Scott Your line is now open.
Okay.
Our next question will come from the line of Robert Spingarn with Melius research.
Hi, Scott <unk> on for Rob Spingarn.
Kevin I wanted to ask you in the past you've talked about trans time, not eating inflation I know you have caps and swaps in place, but just the rising cost of capital will also factor into your pricing strategy, but I'm trying to get at is are you going to pass on higher interest expense to your customers via price.
So you can still convert free cash at 50% of EBITDA.
That's not the way we look at it.
So it's not it doesn't factor in it as part of cost and inflationary pressures in general.
The way, we analyze pricing.
And inflationary measures.
Okay, and then I also wanted to ask are your operating units notice noticing any meaningful uptick in their parks being PMA at all.
No no I mean, we're always actively monitoring that.
Looking for threats there.
No meaningful uptick from prior levels of kind of low activity I think we put a slide on this in the June investor deck that we put out you might find helpful, but no no meaningful uptick.
Got it thank you.
Our next question comes from the line of Noah <unk> with Goldman Sachs.
Hey, guys.
Wanted to get your perspective on the Max original equipment ramp.
Because you guys have been pretty clear eyed on the overall OE ramp.
It felt like you had gone from kind of skeptical to cautiously optimistic in the middle of the year.
And then now the industry has faced this situation where.
Some other supply chain issues have held up Max deliveries and so I'm curious your perspective.
Did the underlying total supply chain keep moving along to the medium term Boeing master schedule there.
Or are the recent supply chain issue is going to hold that ramped back by some.
Meaningful period of time more than more than a handful of months.
I think we can only comment on what we see I don't know about the larger supply chain and Mike and Joel can jump in but.
That the ramp has been slow enough that I don't know if the larger supply chain will be hampered as it tries to continue to ramp up.
That is of course, assuming that the various quality issues and other things that have hampered.
Delivery get resolved.
Yes, I think Thats right, we obviously see boeing's target to I think get the Max rate back towards 38 or so.
We're ready to support them.
If they can get their across all our op units. We opened happened obviously in our interest to see them in the rest of the supply chain fully recover and get.
Ill pass this we don't necessarily count on when we put our forecast together for the year, though hitting those targets, which again still seem maybe a bit aspirational to us on the air and I think that's a good word aspirational.
Yeah.
Okay I appreciate it thank you.
Thanks.
Our next question comes from the line of Scott <unk> with Deutsche Bank.
Are you here I'm.
Yeah, I'm here, sorry about that guys good afternoon.
Sir just on the $692 million contract that Armtec, one are able to offer any detail on how much that might contribute to the defense growth in 'twenty four it seems like potentially a lot there, but curious if you could put a finer point on that if possible. Thanks.
Hi, guys its Mike I'll take that one.
A bit op unit related.
Given the ramp on that program at one of the biggest awards and Trans Times' history, obviously, but given the expected ramp rate.
We've got a we'll go we'll actually under that contract.
Go to a third shift at the facility build up some new capacity, including a new building to support the government on the important 155 millimeter program. That's gotten a lot of attention we provide with this contract obviously one of the critical parts that goes into supporting it.
Governments are super important customer for us on the year given the way the production ramp ramps up a lot of the focus out of the gate will be on getting the capacity where it needs to be with the expansion and the revenue upside is not.
Hugely significant it's more of an FY 'twenty five in FY 'twenty six kind of matter.
We get things going a little bit earlier and ahead of schedule could be a bit of upside in FY 'twenty four we didn't count on that as we pulled together the forecast for the year, though.
As you guys know, we aim to be a bit conservative.
With the guidance we gave.
Okay, great and that Capex is funded by the government on this project right.
It is.
Got it and then last question Mike for Mike as well are you seeing much aftermarket parts demand on newer platforms like 7%, 7% eight years 'twenty, yet or is that still yet to come as these fleets H. Thanks.
I think we're seeing about historically, what we've seen and we're sort of market weighted on the aftermarket side based on takeoffs and landings by platform.
We're seeing about what we would expect to see at the platform level No big deviations Bye Bye op unit or deviations versus the takeoffs and landings that youre seeing across the fleet.
Okay.
Alright, thanks, guys.
Our next question comes from the line of Seth Sigman with J P. Morgan.
Hey, good morning, everyone.
Good morning, Good morning, good morning, Paul.
So.
One quick question about the margin I think when on when you guys initially acquired <unk> band.
The XP.
The expectation was that that would be about on an annualized basis that would be about 100 basis points of margin pressure.
And then in 2024 for a partial year. It seems like it's still about 100 basis points.
Margin pressure, but it sounded like things are going at least according to plan if not better and so is there anything else that's changed with regards to <unk> expectations or maybe is there just some.
Some conservatism embedded in that in that guidance I think it's conservatism and noise level deviations, we round a bit when we give you guys those things of about a percentage point, it's not exactly a percentage point I think it's a little bit ahead of that.
The business is performing well, though as Kevin said.
It's at least as good as we thought it was when we bought it maybe based on five months of ownership a little bit better, but you don't really as you guys know with M&A.
Once you own something two full years or so you really know and understand it and we'll know where it's headed but based on what we see so far it's looking good.
And then those the dilution amounts.
It's a bit of rounding here and there, but it's noise level stuff and it was I think a little bit above.
<unk>, one percentage point Mark.
Which is whats generate.
The 1.1 percentage.
Dilution coming this year in FY 'twenty four.
Alright, great Okay.
And then.
Maybe Kevin on the on the CPI deal kind of it seems consistent with some other stuff.
You guys have done in the past, but I think that kind of since the since the pandemic.
You've talked a little bit more about being focused on commercial.
Acquisitions.
And not necessarily looking to increase the defense portion of the pie through M&A.
<unk> doesn't really change the pike that much in terms of its size, but are you would you say that you are more agnostic now in terms of no I think we would still prefer commercial businesses over defense.
Commercial businesses arent as lumpy.
The defense businesses can have of you it's difficult to forecast the revenue.
So we would still prefer commercial you can make a better return on our commercial business Theres more revenue growth on and on but you can only swing at the pitches that gets thrown at you or thrown to you. So this was the business that was available and when you find them.
<unk> meet your criteria again proprietary products are highly engineered access to aftermarket in this case significant 70% aftermarket.
<unk> nominal.
You are.
Love those businesses and they are important for us to acquire so yes, we would still rather find great commercial businesses, but defer.
Defense businesses can also meet the criteria.
Great. Thanks, very much I appreciate it.
That concludes today's question and answer session I would like to turn the call back to Jamie Stephen for closing remarks.
Thank you all for joining today's call and we appreciate it.
<unk> the call. We appreciate your time and have a good day.
Yes.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
[music].
Okay.
Okay.
Uh huh.
Okay.
Okay.