Q1 2024 TransDigm Group Inc Earnings Call
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Good day, and thank you for standing by. Welcome to TransDigm Group Incorporated's first quarter 2024 earnings conference call. At this time, all participants are in a listen only mode.
Speaker Change: Good day and thank you for standing by welcome to Trans time Group incorporated first quarter 2024 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 this session you will need to press star one one on your telephone.
Operator: 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 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 Seaman, Director of Investor Relations. Please go ahead.
He will then hear an automated message it buys in your hand is raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded.
Speaker Change: I'd now like to hand, the conference over to your Speaker today, Jamie Siemon director of Investor Relations. Please go ahead.
Jamie Seaman: Thank you, and welcome to TransDigm's fiscal 2024 first quarter earnings conference call. Presenting on the call this morning are TransDigm President and Chief Executive Officer Kevin Stein, Co-Chief Operating Officer Joel Reese, and Chief Financial Officer Sarah Wynn. Also present for the call today is our Co-Chief Operating Officer, Mike Lisman. Please visit our website at TransDigm.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 filing with the SEC, available through the investor section of our website or at sec.gov.
Jamie Siemon: Thank you and welcome to the Trans Times fiscal 2024 first quarter earnings conference call presenting on the call. This morning are trend down as President and Chief Executive Officer, Kevin Stein Co Chief operating officer of jewelry, and Chief Financial Officer, Sarah Wynne.
Also present for the call today is our co Chief operating 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.
Jamie Seaman: The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income, and adjusted earnings per share, all of which are non-GAAP financial metrics. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable gap measures and applicable reconciliations. I will now turn the call over to Kevin.
Jamie Siemon: The company would also like to advise you that during the course of the call we will be referring to EBITDA, specifically EBITDA as defined adjusted net income and adjusted earnings per share all of which are non-GAAP financial measures.
It'd be the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliation I will now turn the call over to Kevin.
Kevin M. Stein: Thanks for joining us on the call today. First, I'll start off with the usual quick overview of our strategy, a few comments about the quarter, and discuss our fiscal 24 outlook. Then Joel and Sarah 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 well 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.
Kevin M. Stein: Good morning, Thanks for joining us on the call 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, then Joel and Sarah will give additional color on the quarter.
Kevin M. Stein: 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.
Speaker Change: To summarize here are some of the reasons why we believe this about 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins and over any extended period have typically provided relative stability in the downturns.
Kevin M. Stein: About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins and, over any extended period, have typically provided relative stability in the downturn. 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.
Speaker Change: We follow a consistent long term strategy specifically.
Speaker Change: First we own and operate proprietary aerospace businesses with significant aftermarket content.
Speaker Change: Second we utilize a simple well proven value based operating methodology.
Kevin M. Stein: Third, we have a decentralized organizational structure and unique compensation system closely aligned with our shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to PE-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 the careful allocation of our capital.
Speaker Change: Third we have a decentralized organizational structure and unique compensation system closely aligned with our shareholders fourth we acquire businesses that fit the strategy and where we see a clear path to P. Like returns and lastly, our capital.
Speaker Change: Structure and allocations are a key part of our value creation.
Speaker Change: Methodology, our long standing goal is to give our shareholders private equity like returns with the liquidity of a public market.
Speaker Change: To do this we stay focused on both the details of value creation as well as careful allocation of our capital.
Kevin M. Stein: As you saw from our earnings release, we had a strong quarter. Our Q1 results ran ahead of our expectations, and we have raised our sales and EBITDAs to provide guidance for the year. Commercial aerospace market trends remain favorable as the industry continues to recover and progress towards normalization. Global air traffic is closing in on pre-pandemic levels, and demand for travel remains high.
Speaker Change: As you saw from our earnings release, we had a strong quarter. Our Q1 results ran ahead of our expectations and we've raised our sales and EBITDA as defined guidance for the year.
Speaker Change: Commercial aerospace market trends remained favorable as the industry continues to recover and progress towards normalization.
Speaker Change: Global Air traffic is closing in on pre pandemic levels and demand for travel remains high.
Kevin M. Stein: Airline demand for new aircraft also remains high, and the OEMs are working to increase aircraft production. However, total air travel demand remains slightly below pre-COVID 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. However, in our business during the quarter, we saw healthy growth in our revenues and bookings for all three of our major market channels, commercial OEM, commercial aftermarket, and defense. Our EBITDA's defined margin was 51% in the quarter. Contributing to the strong Q1 margin was the continued recovery in our commercial aftermarket revenues, along with diligent focus on our operating strategy. Additionally, we had strong operating cash flow generation in Q1 of over $630 million and ended the quarter with over $4.1 billion of cash.
Speaker Change: Demand for new aircraft also remains high and the Oems are working to increase aircraft production. However, total air travel demand remains slightly below pre COVID-19 levels and OEM aircraft production rates remain well below pre pandemic levels.
Speaker Change: There is still progress to be made for the industry and our results continue to be adversely affected in comparison to pre pandemic levels.
Speaker Change: 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 our EBITDA as defined margin was 51% in the quarter contributing to the strong Q1 margin is the continued recovery in our commercial aftermarket revenues.
Speaker Change: Along with diligent focus on our operating strategy. Additionally.
Speaker Change: Additionally, we had strong operating cash flow generation in Q1 of over $630 million and ended the quarter with over $4 1 billion of cash we expect to steadily generate significant additional cash throughout the remainder of 2024.
Kevin M. Stein: We expect to steadily generate significant additional cash throughout the remainder of 2024. Next, an update on our capital allocation activities and priorities. As we discussed on our last earnings call, we agreed on November 9th 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 is a leading global manufacturer of electronic components and subsystems, primarily serving the aerospace and defense markets.
Speaker Change: Next an update on our capital allocation activities and priorities as we discussed on our last earnings call. We agreed on November 9th to acquire the electron device business of communications and power industries also known as CPI for approximately 1.385 billion in cash CPI as electron device business is a lead.
Speaker Change: Adding global manufacturer of electronic components, and sub systems, primarily serving the aerospace and defense market.
Kevin M. Stein: 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. Our team is working diligently through the approval process in the U.S. and U.K., and the acquisition is expected to close this fiscal year. We remain very excited about adding this proprietary business as one of our TransDigm operating units. 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 see a target-rich environment for our focused acquisition strategy. As usual, the potential targets are mostly in the small and midsize range. I cannot predict or comment on possible closings, but we remain confident there is a long runway for acquisitions that fit our portfolio. The capital allocation priorities at TransDigm are unchanged.
Speaker Change: 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.
Speaker Change: Our team is working diligently through the approval process in the U S and U K and the acquisition is expected to close this fiscal year. We remain very excited about adding this proprietary business as one of our trends I'm operating units.
Speaker Change: 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 months to 18 months, we continue to see a target rich environment for our focused acquisition strategy as usual the potential targets are mostly in the small and mid size range I cannot predict or <unk>.
Speaker Change: Comment on possible closings, but we remain confident there is a long runway for acquisitions that fit our portfolio.
Speaker Change: Our capital allocation priorities at Trans time are unchanged, our first priority is to reinvest in our business.
Kevin M. Stein: Our first priority is to reinvest in our business. Second, we do a creative, 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 do still take this into consideration.
Speaker Change: Do accretive disciplined M&A and third return capital to our shareholders via share buybacks or dividends.
Speaker Change: A fourth option paying down debt seems unlikely at this time, though we do still take this into consideration we are continually evaluating all of our capital allocation options, but both M&A and capital markets are difficult to predict as always we continue to closely monitor the capital markets and remain opportunistic.
Kevin M. Stein: We are continually evaluating all of our capital allocation options, but both M&A and capital markets are difficult to predict. As always, we continue to closely monitor the capital markets and remain opportunistic. As mentioned earlier, we ended the quarter with a sizable cash balance of over $4.1 billion, which includes the $2 billion of cash from the new debt issued during our first quarter. Sarah will comment on this in more detail later.
Speaker Change: As mentioned earlier, we ended the quarter with a sizable cash balance of over $4 1 billion, which includes the $2 billion of cash from the new debt issued during our first quarter Sarah will comment on this in more detail later, we have significant liquidity and financial flexibility to meet any likely range of capital required.
Kevin M. Stein: We have 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 24, as noted in our earnings release. We are increasing our full fiscal year 24 sales and EBITDA as defined guidance to reflect our strong first quarter results and our current expectations for the remainder of the year. At the midpoint, sales guidance was raised $85 million, and EBITDA as defined guidance was raised $45 million.
Speaker Change: <unk> or other opportunities in the readily foreseeable future.
Speaker Change: Moving to our outlook for fiscal 'twenty four.
Speaker Change: As noted in our earnings release, we are increasing our full fiscal year 2000, and for sales and EBITDA as defined guidance to reflect our strong first quarter results and our current expectations for the remainder of the year at the midpoint sales guidance was raised $85 million and EBITDA as defined guidance was.
Speaker Change: Raised $45 million.
Kevin M. Stein: The guidance assumes no additional acquisitions or divestitures and is based on current expectations for a continued recovery in our primary commercial end markets throughout fiscal year 24. Our current guidance for fiscal 24 is as follows and can also be found on slide 6 in the presentation. Note that the pending acquisition of CPI's electron device business is excluded from this guidance until the acquisition closes.
Speaker Change: The guidance assumes no additional acquisitions or divestitures and is based on current expectations for a continued recovery in our primary commercial end markets throughout fiscal year 'twenty four.
Speaker Change: Our current guidance for fiscal 'twenty four is as follows and can also be found on slide six in the presentation.
Speaker Change: Note that the pending acquisition of CPI as electron device business is excluded from this guidance until acquisition close.
Kevin M. Stein: The midpoint of our fiscal 24 revenue guidance is now $7.665 billion, or up approximately 16%. In regards to the market channel growth rate assumptions that this revenue guidance is based on, for the defense market, we are updating the full-year growth rate assumptions as a result of our strong first quarter results and current expectations for the remainder of the year. For defense, we now expect revenue growth in the high-single-digit to low-double-digit percentage range. This is an increase from our previous guidance of mid-to-high-single-digit percentage. We are not updating the full-year market channel growth rate assumptions for commercial OEM and commercial aftermarket, as underlying market fundamentals have not meaningfully changed.
Speaker Change: The midpoint of our fiscal 'twenty for revenue guidance is now 766, 5 billion or up approximately 16% and.
Speaker Change: In regards to the market channel growth rate assumptions that this revenue guidance is based on for the defense market. We are updating the full year growth rate assumptions as a result of our strong first quarter results and current expectations for the remainder of the year for.
Speaker Change: For defense, we now expect revenue growth in the high single digit to low double digit percentage range.
Speaker Change: This is an increase from our previous guidance of mid to high single digit percentage range.
Speaker Change: We are not updating the full year market channel growth rate assumptions for commercial OEM and commercial aftermarket as underlying market fundamentals have not meaningfully changed.
Kevin M. Stein: Commercial OEM and commercial aftermarket revenue guidance is still based on our previously issued market channel growth rate assumptions. We expect commercial OEM revenue growth around 20% and commercial aftermarket revenue growth in the mid-teens percentage range. The midpoint of our EBITDA defined guidance is now $3.985 billion, or up approximately 17 percent, with an expected margin of around 52 percent. This guidance includes about 100 basis points of margin dilution from our recent CALSPAN acquisition. We anticipate EBITDA margins will move up throughout the remainder of the year. However, the midpoint of our adjusted EPS is decreasing versus our prior guide, primarily due to the higher interest expense associated with the incremental debt we took on to fund CPI.
Speaker Change: Commercial OEM and commercial aftermarket revenue guidance is still based on our previously issued market channel growth rate assumptions, we expect commercial OEM revenue growth around 20% and commercial aftermarket revenue growth in the mid teens percentage range.
Speaker Change: The midpoint of our EBITDA as defined guidance is now $3 98, 5 billion or up approximately 17% with an expected margin of around 52%. This guidance includes about 100 basis points of margin dilution from our recent <unk> acquisition.
Speaker Change: We anticipate EBITDA margins will move up throughout the remainder of the year.
Speaker Change: The midpoint of our adjusted EPS is decreasing versus our prior guidance, primarily due to the higher interest expense associated with the incremental debt we took on to fund CPI.
Kevin M. Stein: The midpoint of adjusted EPS is now expected to be $30.85, or up approximately 19% over the prior year. Sarah will discuss in more detail shortly the factors impacting EPS along with some other fiscal 24 financial assumptions and updates. We believe we are well positioned for the remainder of fiscal 24. We'll likely 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 quarter and throughout the recovery of the commercial aerospace industry. We remain focused on our value drivers, cost structure, and operational excellence. Now, let me hand it over to Joel Reese, our TransDigm Group co-COO, to review our recent performance and a few other items. Good morning.
Speaker Change: The midpoint of adjusted EPS is now expected to be $30 85, or up approximately 19% over prior year, Sarah will discuss in more detail. Shortly the factors impacting EPS along with some other fiscal 'twenty four financial assumptions and updates. We believe we are well positioned for the remainder.
Speaker Change: Fiscal 'twenty four we will likely continue to closely watch how the aerospace in capital markets continue to develop and react Accordingly, let me conclude by stating that I am very pleased with the company's performance this quarter and throughout the recovery of the commercial aerospace industry, we remain focused on our value drivers cost structure.
Speaker Change: <unk> and operational excellence now, let me hand, it over to Joel <unk>, Our Trans time group co CEO COO to review, our recent performance and a few other items.
Joel Reese: I'll start with our typical review of results by key market category. Then, for the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period in 2023, that is, assuming we own the same mix of businesses in both periods.
Joel: Good morning, I'll start with our typical review of results by key market category.
Joel: For the remainder of the call I'll provide commentary on a pro forma basis compared to the prior year period in 2023.
Joel: That is assuming we own the same mix of businesses in both periods.
Joel Reese: 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 Q1 compared with the prior year period. Bookings in the quarter were strong compared to the same prior year period.
Joel: 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 Q1 compared with the prior year period bookings.
Joel: Bookings in the quarter were strong compared to the same prior year period.
Joel Reese: Our strong bookings continue to support the commercial OEM guidance of revenue growth around 20% for fiscal 24. OEM supply chain and labor challenges persist but appear to be progressive. We continue to be encouraged by the steadily increasing commercial OEM production rates and strong airline demand for new aircraft. However, supply chains remain the primary bottleneck in this OEM production ramp-up. The FAA's recently announced production rate freeze at $38 per month for the Boeing 737 MAX will likely slow the expected MAX ramp, and time will tell how this plays out.
Joel: Strong bookings continued to support the commercial OEM guidance of revenue growth around 20% for fiscal 'twenty four.
Joel: <unk> supply chain and labor challenges persist, but appear to be progressing we continue to be encouraged by the steadily increasing commercial OEM production rates and strong airline demand for new aircraft supply chains remain the primary bottleneck in this OEM production ramp up.
Speaker Change: <unk> recently announced production rate freeze at 38 per month for the Boeing 737, Max will likely slow the expected Max ramp and time will tell how this plays out.
Speaker Change: The commercial OEM guidance, given today takes into account an appropriate level of continued risk around boeing's production build rate while risks such as this and others remained towards achieving the ramp up across the broader aerospace sector. We are up domestic that our operating units are well positioned to support the higher <unk>.
Joel Reese: The commercial OEM guidance given today takes into account an appropriate level of continued risk around Boeing's production build rate. While risks such as this and others remain towards achieving the ramp-up across the broader aerospace sector, we are optimistic that our operating units are well positioned to support the higher production targets as they occur. Now, moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 22% compared with the prior year period.
Speaker Change: Production targets as they occur.
Speaker Change: Now moving onto our commercial aftermarket business discussion total commercial aftermarket revenue increased by approximately 22% compared with the prior year period growth in commercial aftermarket revenue was primarily driven by the continued strength in our passenger submarket, which is by far.
Joel Reese: Growth in commercial aftermarket revenue was primarily driven by the continued strength in our passenger submarket, which is by far our largest submarket. We also saw good growth in our interior submarket compared to prior year Q1, and BizJet was up slightly year over year as well. These increases were very minimally offset by a very slight decline in our freight submarket, driven by the return of belly capacity and consistent with what we discussed on last quarter's earnings call. Commercial aftermarket bookings for this quarter were strong compared to the same prior year period.
Speaker Change: Our largest sub market. We also saw good growth in our interior submarket compared to prior year Q1, and Biz jet was up slightly year over year as well. These increases were very minimally offset by a very slight decline in our freight submarket driven by the return of belly capacity and consistent with what we discussed.
Speaker Change: On last quarter's earnings call commercial aftermarket bookings for this quarter were strong compared to the same prior year period. This strong bookings levels in commercial aftermarket continued to support our commercial aftermarket guide for revenue growth in the mid teens percent range for fiscal 'twenty four.
Speaker Change: As a reminder, when forecasting our commercial aftermarket we always look at a rolling historical 12 month average booking trend never just the most recent quarter due to lumpiness that we often see in this end market.
Joel Reese: The strong booking levels in commercial aftermarket continue to support our commercial aftermarket guide for revenue growth in the mid-teens percent range for fiscal 24. As a reminder, when forecasting our commercial aftermarket, we always look at a rolling historical 12-month average booking trend, never just the most recent quarter, due to the lumpiness that we often see in this end market. Turning to broader market dynamics and referencing the most recent IATA traffic data for December, global revenue passenger miles still remain lower than pre-pandemic levels, but only slightly.
Speaker Change: Turning to broader market dynamics in referencing.
Speaker Change: The most recent I added traffic data for December global revenue passenger miles still remained lower than pre pandemic levels, but only slightly.
Speaker Change: December 2023 air traffic was about two 5% below pre pandemic and full 2023 traffic was about 6% below globally have returned to 2019 air traffic levels as expected in 2024 and IATA currently expect traffic to reach 104% of 2019.
Joel Reese: December 2023 air traffic was about 2.5% below pre-pandemic levels, and full 2023 traffic was about 6% below. Globally, a return to 2019 air traffic levels is expected in 2024, and IATA currently expects traffic to reach 104% of 2019 levels in 2024. Domestic travel continues to surpass pre-pandemic levels. In the most recently reported traffic data for December, global domestic air traffic was up 2% compared to pre-pande
Speaker Change: <unk> levels in 2024.
Speaker Change: Domestic travel continues to surpass pre pandemic levels in the most recently reported traffic data for December global domestic air traffic was up 2% compared to pre pandemic domestic air travel in China also continues to improve and was up 8% in December compared to pre pandemic levels.
Speaker Change: This is a significant improvement from China being down 55% a year ago in December 2022.
Speaker Change: Shifting over to the U S domestic air travel for December came in about flat with pre pandemic traffic international.
Joel Reese: Domestic air travel in China also continues to improve and was up 8% in December compared to pre-pandemic levels. This is a significant improvement from China being down 55% a year ago in December 2022. Shifting over to the U.S., domestic air travel for December came in about flat with pre-pandemic traffic, while international traffic has continued to make steady improvement over the past few months. A quarter ago, at the end of September, international travel globally was depressed by about 7% compared to pre-pandemic levels, but in the most recently reported data for December, international travel was only down about 5%.
Speaker Change: Traffic has continued to make steady improvement over the past few months a quarter ago at the end of September International travel globally was depressed about 7% compared to pre pandemic levels, but in the most recently reported data for December International travel was only down about 5%. This is a <unk>.
Speaker Change: Significant improvement over being down 25% a year ago in December 2022.
Speaker Change: In summary for the commercial aftermarket we continue to see strong growth in our passenger in interior submarkets indicative of the continuing positive trends in the post COVID-19 passenger traffic recovery.
Speaker Change: Our biz jet and freight Submarkets are performing in line with their underlying markets and also in line with our expectations at this point in the year.
Joel Reese: This is a significant improvement over being down 25% a year ago in December 2022. In summary, for the commercial aftermarket, we continue to see strong growth in our passenger and interior submarkets, indicative of the continuing positive trends in the post-COVID passenger traffic recovery. Our bizjet and freight submarkets are performing in line with their underlying markets and also in line with our expectations at this point in the year. Moving 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 28% compared with the prior year period.
Speaker Change: Shifting to our defense market, which traditionally is at or below 35% of our total revenue the defense.
Speaker Change: Market revenue, which includes both OEM and aftermarket revenues grew by approximately 28% compared with the prior year period.
Speaker Change: Q1 defense revenue growth was well distributed across our businesses. However, bear in mind that the comparable prior year period was an easy comp we would not expect to see defense revenue growth rates at this level continuing throughout the balance of the year. We expect some moderation here as you can tell from the guidance.
Speaker Change: <unk> <unk>.
Speaker Change: Defense bookings are also up significantly this quarter compared to the same prior year period, while the defense revenue growth. This quarter was pretty broadly distributed across our customer base. We continue to see improvements in the U S government defense spending outlays. During Q1, we are hopeful we will continue to see steady.
Joel Reese: Q1 defense revenue growth was well-distributed across our businesses. However, bear in mind that the comparable prior year period was an easy comp. We would not expect to see defense revenue growth rates at this level continuing throughout the balance of the year. We expect some moderation here, as you can tell from the guidance. Defense bookings are also up significantly this quarter compared to the same prior year period. While the defense revenue growth this quarter was pretty broadly distributed across our customer base, we continue to see improvements in U.S. government defense spending outlays during Q1. 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 accuracy and precision is difficult.
Speaker Change: <unk>, 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 accuracy and precision as difficult as Kevin mentioned earlier, we now expect our defense market revenue growth for this year to be in the high single digit to low double digit <unk>.
Speaker Change: <unk> range. This updated guidance for defense, primarily reflects the stronger than expected Q1 defense sales as well as the good Q1 bookings in closing Q1 was a good start to the fiscal 2020 for fiscal year and I was pleased with our operational performance. We will remain focused on our consistent operating.
Speaker Change: Strategy in servicing the strong demand for our products as we continue throughout the balance of the year with that I would like to turn it over to our Chief Financial Officer, Sarah Wynne.
Joel Reese: As Kevin mentioned earlier, we now expect our defense market revenue growth for this year to be in the high single-digit to low double-digit percentage range. This updated guidance for defense primarily reflects the stronger-than-expected Q1 defense sales as well as the good Q1 bookings. In closing, Q1 was a good start to the fiscal 2024 fiscal year, and I was pleased with our operational performance.
Sarah Wynne: Thanks, Joe and good morning, everyone I'll recap the financial highlights for the first quarter and then provide some more information on the guidance estimate.
Sarah Wynne: Non organic growth in liquidity in the first quarter, our organic growth rate was 23, 5% and all market channels contributed to this growth Kevin and Joe just discussed.
Joel Reese: We will remain focused on our consistent operating strategy and servicing the strong demand for our products as we continue throughout the balance of the year. With that, I would like to turn it over to our Chief Financial Officer, Sarah Wynn. Thanks, Joel, and good morning, everyone. I'll recap the financial highlights for the first quarter and then provide some more information on the guidance update. First, on organic growth and liquidity. In the first quarter, our organic growth rate was 23.5%, and all market channels contributed to this growth, as Kevin and Joel have just discussed. On cash and liquidity, free cash flow, which we traditionally define as EBITDLF cash interest payments, CapEx, and cash taxes, was roughly $660 million for the quarter.
Speaker Change: Cash and liquidity free cash flow, which we traditionally defined as EBITDA less cash interest payments capex and cash taxes was roughly $660 million for the quarter. This is a higher than average free cash flow conversion for the quarter, primarily due to the timing of our interest and tax payments cash interest and tax payments will pick up.
Speaker Change: Again in the next quarter for the full fiscal year.
Speaker Change: Free cash flow guidance is unchanged, we expect to continue to generate free cash flow of close to $2 billion in fiscal 'twenty four.
Speaker Change: Hello that free cash flow line net working capital consumed a smaller amount of cash than in prior years coming in close to flat for the past two years, we saw a large influx of cash into our working capital and our primary commercial end markets experienced strong rebound post COVID-19. We were obviously very happy to support this increase.
Sarah Wynn: This is a higher-than-average free cash flow conversion for the quarter, primarily due to the timing of our interest and tax payments. Cash interest and tax payments will pick up again in the next quarter, and for the full fiscal year, our free cash flow guidance is unchanged. We expect to continue to generate free cash flow of close to $2 billion in fiscal 24. Below that free cash flow line, net working capital consumed a smaller amount of cash than in prior years, coming in close to flat.
Speaker Change: Going forward, we expect our annual dollars invested in net working capital to moderate from the elevated levels seen over the prior two years.
Speaker Change: Ah pinpointing, an exact dollar amount of investments in fiscal 'twenty four is difficult as you know the rebound of the OEM market gentlemen, does impact our accounts receivable at customers in that bucket typically have slightly longer payment terms.
Speaker Change: We ended the quarter with approximately $4 1 billion of cash on the balance sheet and a net debt to EBITDA ratio was five times down from five four at the end of last quarter when trade format for the $75 dividend. As a reminder, we are comfortable operating in the 5% to seven net debt EBITDA ratio range and while we are.
Sarah Wynn: For the past two years, we saw a large influx of cash into our working capital as our primary commercial and markets experienced strong rebounds post-COVID. We were obviously very happy to support this increase. Going forward, we expect our annual dollars invested in net working capital to moderate from the elevated levels seen over the prior two years, but pinpointing an exact dollar amount of investment for fiscal 24 is difficult. As you know, the rebound in the OEM market channel does impact our accounts receivable as customers in that bucket typically have slightly longer payment terms. We ended the quarter with approximately $4.1 billion of cash on the balance sheet, and our net debt to EBITDA ratio is five times, down from $5.4 at the end of last quarter when adjusted for the $35 dividend.
Speaker Change: Currently sitting on the low end of this range. Our go forward strategy of capital deployment has not changed.
Speaker Change: <unk> interest expense coverage ratio ended the quarter at three three times on a pro forma basis, which provides us with comfort question, but does that target range of two to three time.
Speaker Change: During the first quarter, we went to the market and proactively right $2 billion of debt for the acquisition CPI electron device business, which is still subject to regulatory approval with the rest going towards general corporate purposes. As a result of the additional debt our interest expense estimate for fiscal 'twenty four increased by $130 million as you can see in to date.
Speaker Change: Updating our interest expense guidance regarding our debt, we expect to continue both proactively and prudently managing our maturity deck stack, which for us means pushing out any near term maturities well in advance with a final maturity date.
Sarah Wynn: As a reminder, we are comfortable operating in the five to seven net debt EBITDA ratio range, and while we are currently sitting on the low end of this range, our go-forward strategy of capital deployment has not changed. EBITDA to interest expense coverage ratio ended the quarter at 3.3 times on a pro forma basis, which provides us with a comfortable cushion versus our target range of two to three times. During the first quarter, we went to the markets and proactively raised $2 billion of debt for the acquisition of CPI's electron device business, which is still subject to regulatory approval, with the rest going towards general corporate purposes. As a result of the additional debt, our interest expense estimate for fiscal 24 increased by $130 million, as you can see in today's updated interest expense guidance.
Speaker Change: As Tom maturity is now 2026, and we remain approximately 75% hedged on our totaled 22 billion gross debt balance through fiscal 2026. This is achieved through a combination of fixed rate notes interest rate caps and swaps and call. It. This provides us adequate cushion against any rise in.
Speaker Change: The rate at least in the immediate term.
Speaker Change: With regards to guidance as Kevin mentioned, we increased our midpoint sales and EBITDA by $85 million of $45 million, respectively, given the strong quarter and current expectations for the year.
Speaker Change: <unk> guidance is now $30 85 compared to prior guidance of $1 97.
Speaker Change: Reduction is due to additional interest expense without that it would be such a $2 57.
Speaker Change: 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 dividend or share repurchases with that I'll turn it back to the operator to kick off the Q&A.
Sarah Wynn: Regarding our debt, we expect to continue both proactively and prudently managing our maturity debt, which for us means pushing out any near-term maturities well in advance of the final maturity date. Our nearest term maturity is now 2026, and we remain approximately 75% hedged on our total $22 billion gross debt balance through fiscal 2026. This is achieved through a combination of fixed rate notes, interest rate caps, swaps, and collars.
Speaker Change: As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Speaker Change: Yeah.
Speaker Change: And our first question comes from David Strauss with Barclays. Your line is open.
David Strauss: Great. Thanks, good morning, everyone.
Sarah Wynn: This provides us with adequate cushion against any rise in rates, at least in the immediate term. With regard to guidance, as Kevin mentioned, we increased our midpoint sales in EBITDA by $85 million and $45 million, respectively, given the strong quarter and current expectations for the year. Our EPS guidance is now $30.85 compared to prior guidance of $31.97. The reduction is due to the additional interest expense.
David Strauss: Good morning.
David Strauss: Kevin could.
David Strauss: Could you talk about maybe what you saw in terms of the aftermarket growth on a on a sequential basis Q4 versus Q1 and then it looks.
David Strauss: Very tough aftermarket comping in Q2, any any brains on kind of how we should calibrate.
David Strauss: Aftermarket growth in the in Q2.
Speaker Change: I think.
Speaker Change: We're forecasting mid teens percentage.
Speaker Change: It might revise up we'll have to see how the year unfolds.
Sarah Wynn: Without that, it would be $32.57. As we sit here today, from an overall cash, liquidity, and balance sheet standpoint, we think we remain in a good position with adequate flexibility to pursue M&A or return cash to our shareholders via dividends or share repurchases. 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 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Speaker Change: It was it was.
David Strauss: Strong quarter in Q1, the bookings are there we saw a sequential increase in shipments in Q1, and we anticipate that that will continue.
Speaker Change: Okay. A quick follow up is there any has there been any change in the timing around closing on the on the CPI deal. I think previously you had said by the end of Q3, I think now you're saying before the year end there was meaningful a meaningful change there at all.
Speaker Change: Yes, we are still incredibly positive on the CPI acquisition, there is zero overlap with anything we do.
Operator: Please stand by while we compile the Q&A roster. And our first question comes from David Strauss of Barclays. Your line is open. Great. Thanks. Good morning, everyone.
Speaker Change: Right now, it's going through the approval process and.
Speaker Change: We're very positive about it happening, it's just difficult to predict timing as you know things are taking a little bit longer.
Kevin M. Stein: Good morning, Kevin. Could you talk about maybe what you saw in terms of aftermarket growth on a sequential basis, Q4 versus Q1, and then it looks, you know, you have a very tough aftermarket comp in Q2, any range on kind of how we should calibrate, you know, aftermarket growth in Q2? I, you know, I think, you know, we're forecasting a mid-teens percentage. It might, it might revise up. We'll have to see how the year unfolds. It was, you know, a strong quarter in Q1. The bookings are there.
Speaker Change: But we anticipate this fiscal year.
Speaker Change: Great. Thanks very much.
Speaker Change: Our next question comes from the line.
Speaker Change: Noah <unk> with Goldman Sachs. Your line is open.
Noah: Hey, good morning, everyone.
Noah: Good morning.
Noah: Maybe you could elaborate on how the M&A pipeline looks an ability there are opportunities to deploy capital after CPI because.
Noah: You mentioned being at the low end of the target Levered balance sheet leverage range in.
Noah: Youre basically going to generate the CPI cost over the remaining quarters of the year and free cash so that's not.
Noah: Actually going to raise your leverage so.
Noah: How are you looking at managing that and how much more opportunity is there to deploy capital in the near term.
Noah: I think we'll look at deploying capital.
Kevin M. Stein: We saw a sequential increase in shipments in Q1, and we anticipate that that will continue. Okay, quick follow up. Has there been any change in the timing around closing on the CPI deal? I think previously you said by the end of Q3, and I think now you're saying before the year end. I don't know if there was a meaningful, you know, a meaningful change there at all. Thanks.
Noah: During the fiscal year, probably closer to the end of the fiscal year as we sort out the M&A pipeline. The M&A pipeline is theres a lot going on there's a lot of targets much like usual.
Noah: Of names that we didn't see coming.
Noah: We continue to evaluate I think.
Noah: The point about Trans name is we're incredibly disciplined in our M&A.
Kevin M. Stein: Yeah, we were still incredibly positive about the CPI acquisition; there's zero overlap with anything we do. Right now, it's going through the approval process, and yeah, we're very positive about it happening. It's just difficult to predict timing.
Noah: We're not going to acquire something that doesn't match our criteria of highly engineered products in aerospace and with access to the aftermarket I mean, that's something we're going to continue to stay disciplined on and it's extremely encouraging that there is so many targets on the list now.
Kevin M. Stein: As you know, things are taking a little bit longer, but we anticipate this fiscal year, Great, thanks very much. Our next question comes from the line of Noah Poponak with Goldman Sachs. Your line is open. Hey, good morning, everyone.
Noah: There's a lot of small and medium size targets those are the.
Noah: Easiest ones for us too.
Noah: Exercises.
Noah: Okay.
Noah: In the aerospace aftermarket has there been any deceleration in the.
Kevin M. Stein: Morning. Could you elaborate on how the M&A pipeline looks and the ability or opportunities to deploy capital after CPI? You mentioned being at the low end of the target balance sheet leverage range, and you're basically going to generate the CPI cost over the remaining quarters of the year in free cash, so that's not actually going to raise your leverage. So how are you looking at managing that, and how much more opportunity is there to deploy capital in the near term? You know, I think we'll look at deploying capital during the fiscal year, probably closer to the end of the fiscal year as we sort out the M&A pipeline. The M&A pipeline is full; there's a lot going on.
Noah: The rate of increase in price as broader inflation has decelerated or has that rate of change.
Noah: And despite that DSO.
Speaker Change: There's really been no change to our overall philosophy and approach we continue to look to market based value the product and to offset the inflationary pressures that are.
Speaker Change: The site C. Obviously, not all operating units see the same level of inflationary pressures.
Speaker Change: But thats generally what they are trying to do is to offset that.
Speaker Change: Okay.
Speaker Change: Is there a window of time here, though or the cost side of it.
Speaker Change: Decelerating with the pricing is not or are they pretty.
Kevin M. Stein: There are a lot of targets, much like usual, a ton of names that, you know, we didn't see coming, and we continue to evaluate. I think the point about TransDigm is we're incredibly disciplined in our M&A. We're not going to acquire anything that doesn't match our criteria of highly engineered products in aerospace and with access to the aftermarket. I mean, that's something we're going to continue to stay disciplined on, and it's extremely encouraging that there are so many targets on the list. Now, there are a lot of small and medium-sized targets. Those are the easiest ones for us to deploy, you know, practice.
Noah: Markets to each other.
Noah: Pretty quickly yes.
Noah: I think they are generally going to be pretty close to one. Another obviously our teams are focused on driving productivity at the same team or teams are trying to make sure that we've priced the product appropriately.
Speaker Change: Okay. Appreciate it thank you.
Speaker Change: Our next question comes from the line of.
Noah: Robert Spingarn with Melius Research your line is open.
Robert Spingarn: Hi, good morning.
Robert Spingarn: Good morning.
Robert Spingarn: As a follow up on that last answer on Noah's question on inflation, we think about commercial OE and defense.
Kevin M. Stein: OK. In the aerospace aftermarket, has there been any deceleration in the rate of increase in price as broader inflation has decelerated? Or has that rate of change held in despite that deceleration?
Robert Spingarn: I would think would be different than commercial aftermarket, where you can price in real time, how much of that revenue base is tied to long term agreements that may have some sale pricing.
Kevin M. Stein: There's really been no change to our overall philosophy and approach. We continue to look at market-based value, the product, and to offset the inflationary pressures that the sites see. Obviously, not all operating units see the same level of inflationary pressures, but that's generally what they're trying to do is to offset that. OK. Is there a window of time here, though, where the cost side is decelerating while the pricing is not? Or are they pretty, you know, marked to each other?
Robert Spingarn: Still don't work through and can be renegotiated, let's say over the next year or two so what I'm asking is if there is upside in those two groups because of Lta's.
Robert Spingarn: Yes, I would say the bulk of our OEM businesses on LTA is and those continue to roll off and be renegotiated. So thats really a constant thing throughout the space. So yes, there is opportunity to improve claw back.
Robert Spingarn: The inflation that you haven't been able to over and you had to eat for a couple of years. So yes that is always a possibility.
Kevin M. Stein: pretty quickly. Yeah, I think we're generally going to be pretty close to one another. Obviously, our teams are focused on driving productivity at the same time; our teams are trying to make sure that we've priced the product appropriately. Okay. Appreciate it.
Speaker Change: Okay, and Kevin just high level question.
Kevin M. Stein: On your workforce.
Kevin M. Stein: You guys are just.
Kevin M. Stein: Consistently executing the margins are where we'd be where we would expect or better but for everyone else in the industry that our workforce issues and recovering workforce labor from Covid getting people trained and so on is it fair to characterize.
Kevin M. Stein: Thank you. Our next question comes from the line of Robert Spingarn with Melius Research. Your line is open. Hi, good morning.
Joel Reese: Morning. As a follow-up on that last answer to Noah's question on inflation, we think about commercial OE and defense, which I would think would be different than commercial aftermarket, where you can price in real time. How much of that revenue base is tied to long-term agreements that may have some stale pricing still to work through and can be renegotiated, let's say over the next year or two? So what I'm asking you is if there's upside in those two groups because of LTAs. Yeah, I would say the bulk of our OEM businesses are on LTAs, and those continue to roll off and be renegotiated. So that's really a constant thing throughout the space.
Kevin M. Stein: Those folks is different than trans time or are there things that we can't see.
Speaker Change: Yes, I think people.
Speaker Change: There is a different business models, I think our ability to pass along inflation.
Speaker Change: It means that we ought to be able to respond to labor in the marketplace and make sure that we always have the best people and adequate resources to drive our business, but let's not forget that.
Speaker Change: <unk> is also an incredible operations excellence machine and we drive.
Speaker Change: Productivity every day in our businesses and were constantly investing in that anything else to add to that Joe.
Joel Reese: So yeah, there's opportunity to improve clawback inflation that you haven't been able to overcome, and you had to eat for a couple of years. So yeah, that is always a possibility. Okay, and Kevin, just a high-level question on your workforce. You guys are just, you know, consistently executing the margins or, you know, where we'd be, where we would expect or better. But for everyone else in the industry, there are workforce issues and recovering, you know, workforce or labor from COVID, getting people trained and so on. Is it fair to characterize those folks as different than TransDigm, or are there things that we can't see?
Joe: The other thing.
Joe: Add to Kevin's sentiment Fortunately I think the labor markets continued to improve which is certainly helpful and we had some.
Joe: Locations, where we saw higher turnover a couple years ago, I think that's really kind of gone.
Speaker Change: <unk> gone back to more normal levels, but we put a lot of time and effort into training our folks and as Kevin said, we've worked over the last few years to put more and more automation in place, which certainly mitigates the impact of that is and so I think we are.
Speaker Change: We're well positioned going forward.
Speaker Change: Thank you both for the color.
Speaker Change: Our next question.
Speaker Change: Comes from the line of Louis Raffetto with Wolfe Research Your line is open.
Kevin M. Stein: Yeah, I think people, you know, there are different business models. I think our ability to pass along inflation means that we ought to be able to respond to labor in the marketplace and make sure that we always have the best people and adequate resources to drive our business. But let's not forget that, you know, TransDigm is also an incredible operations excellence machine. And we drive productivity every day in our businesses, and we're constantly investing in. Anything else to add to that, Joel? Yeah, the only thing I'd add to what Kevin said.
Louis Raffetto: Hey, good morning, Thank you.
Louis Raffetto: Good morning.
Louis Raffetto: So I know within defense, you said aftermarket growth outpaced OE. Just curious was that magnitude is different there or just pretty similar.
Louis Raffetto: Defense aftermarket was up more.
Louis Raffetto: It was not significant but defense aftermarket did outpace defense OEM.
Louis Raffetto: And was there anything sort of I won't say, one time, but that stood out that drove that growth I know you said the easy comp to some extent, but anything else in there. Yes. So first we just have the normal kind of lumpiness within the defense sector similar to commercial aftermarket.
Joel Reese: I mean, fortunately, I think the labor markets continue to improve, which is certainly helpful. And we had some, you know, locations where we saw higher turnover a couple years ago. I think that's really kind of gone back to more normal levels, but we put a lot of time and effort into training our folks. And as Kevin said, we've worked over the last few years to put more and more automation in place, which certainly mitigates the impact of that. And so I think we're. We're well positioned going forward. Thank you both for the color.
Louis Raffetto: Obviously, as we mentioned kind of easier comp.
Louis Raffetto: It was pretty broad.
Louis Raffetto: Pretty broad across.
Louis Raffetto: Our business is I mean, the vast majority of our business is actually saw a pretty good increase.
Louis Raffetto: Year over year for Q1 versus Q1, so I was kind of calling out one business and it wasn't a one time set of work was armtec.
Louis Raffetto: Our flair countermeasures business had a really solid Q1 shipments.
Joel Reese: Our next question comes from the line of Lewis Raffetto with Wolf Research. Your line is open. Hey, good morning. Thank you. Good morning.
Louis Raffetto: Coming in certainly in comparison to where they were a year ago at the same time.
Speaker Change: Alright, that's great. Thank you.
Louis Raffetto: Okay.
Louis Raffetto: Our next question comes from the line of Rob.
Joel Reese: Um, so within defense, you said aftermarket growth outpaced OE. Just curious, was it like magnitudes different there or just pretty... Defense aftermarket was up more. It was not significant, but defense aftermarket did outpace defense OEM. And was there anything sort of, I don't want to say one time, but that stood out and that drove that growth? I know you said easy comp to some extent, but anything else in there?
Louis Raffetto: Robert Stallard with vertical research your line is open.
Rob: Thanks, so much good morning.
Rob: Good morning.
Rob: As part of your question Ms. Sara.
Rob: On the debt issuance I was wondering if you could comment on why you did it now given it could be still some time until the electron devices acquisition closes.
Sara: Yes, I mean, we're always going to be proactive and having cash ready appendant acquisition, we want to be opportunistic on that front.
Sara: We don't want to be obviously, you're up against any timeline is that to the market.
Louis Raffetto: Sure.
Speaker Change: Okay, and then as a follow up.
Speaker Change: Probably in a changing interest rate environment and rates could be coming down over the next 12 months. How do you think youre going to be adjusting the balance sheet and the interest rate derivatives you have in place to try and make the most of that.
Joel Reese: Yeah. So, you know, first there's the normal kind of lumpiness within the defense sector, similar to the commercial aftermarket. Obviously, as we mentioned, the kind of easier comp was pretty broad, pretty broad across all of our businesses. I mean, the vast majority of our businesses actually saw a pretty good increase year over year for Q1 versus Q1. If I was kind of calling out one business, and it wasn't a one-time set of work, it was Armtek.
Speaker Change: Yes, obviously, we're always looking at the markets and trying to be opportunistic with that structure.
Speaker Change: We do have the benefit of hedges so from that perspective.
Speaker Change: With functions out 75% hedged.
Speaker Change: Some stuff come in and we'll continue to look and be opportunistic as and when we can without debt going forward.
Speaker Change: Okay. Thanks, so much.
Speaker Change: Our next question comes from the line of Gautam Khanna with TD Cowen Your line is open.
Joel Reese: Our flare countermeasures business had really solid Q1 shipments coming in, certainly in comparison to where they were a year ago at the same time. All right, that's great. Our next question comes from the line of... Robert Stallard with Vertical Research. Your line is open. Thanks so much.
Gautam Khanna: Hey, good morning, guys.
Speaker Change: Morning.
Gautam Khanna: I was wondering if you could talk a little bit about the things in the M&A pipeline you mentioned small to mid size is there.
Gautam Khanna: Is it still kind of skewed to hardware oriented stuff or.
Gautam Khanna: Are you also entertaining some of these service assets and maybe if you could just give us an update on how Cal span has.
Joel Reese: Good morning. Good morning. There's probably a question for Sarah.
Gautam Khanna: Has done relative to what you guys were thinking originally.
Sarah Wynn: On the debt issuance, I was wondering if you could comment on why you did it now. Transcribed by https://otter.ai. Yeah, I mean, we're always going to be proactive at having cash ready for pendant acquisitions. We want to be opportunistic on that front, and we don't want to be obviously up against any timeline if ever the markets weren't open. And then as a follow-up, you know, we're probably in a changing interest rate environment; rates could be coming down over the next 12 months. How do you think you're going to be adjusting the balance sheet and the interest rate derivatives you have in place to try and make? Yeah, obviously, we're always looking at the markets and trying to be opportunistic with our debt structure. However, we do have the benefit of hedges.
Gautam Khanna: Yes.
Gautam Khanna: Yes.
Gautam Khanna: On the M&A pipeline.
Gautam Khanna: Small medium sized businesses.
Gautam Khanna: Mostly in hardware although were.
Gautam Khanna: Looking also at.
Gautam Khanna: Some services businesses, if they would meet our criteria.
Gautam Khanna: It's not always clear that some of those do but we're.
Gautam Khanna: Open as long as it's within aerospace and defense.
Gautam Khanna: I think we see the need of going outside of aerospace and defense not four.
Gautam Khanna: While there is still so many great targets to go after in this business on <unk> I'll, let Joel comment, Yes, I think we're encouraged by where we're at at this point in the integration we've got our our leadership team in place we've put our business unit team structure in place, we're going through the value generation.
Sarah Wynn: So from that perspective, we're fortunate they're over 75% hedged. You know, we've got some stuff coming up, and we'll continue to look for opportunities as and when we can with our debt going forward. Thanks so much.
Gautam Khanna: Our strategy that we employ.
Joel: As of right now I think we're running a bit ahead of the model and.
Gautam Khanna: We're encouraged by what we're seeing.
Speaker Change: And just as a follow up.
Speaker Change: M&A hardware pipeline is that mostly.
Sarah Wynn: Our next question comes from the line of Gautam Khanna with TD Cowan. Your line is open. Hey, good morning, guys. Good morning.
Speaker Change: Defense oriented stuff.
Speaker Change: Is there any.
Speaker Change: It is a nice blend of.
Speaker Change: Commercial and defense assets, it's not only just defense.
Kevin M. Stein: I was wondering if you could talk a little bit about the things in the M&A pipeline, you mentioned small to midsize. Is there, um, is it still kind of skewed to hardware-oriented stuff or are you also entertaining some of these service assets? And maybe if you could just give us an update on how CALSPAN has done, you know, relative to what you guys were thinking originally. I've given it.
Speaker Change: It's hard to control you you can't.
Speaker Change: Really dictate what pitches will be thrown at you. So you just have to react to them when they come along right.
Speaker Change: Right now, we see a nice balance that isn't always the case, but today it is.
Speaker Change: Okay, and just my last one.
Speaker Change: Commercial aero aftermarket any discernible differences between.
Speaker Change: The growth rates in the distributor to the distribution channel versus direct.
Kevin M. Stein: Yeah, okay. I'm in the M&A pipeline, small, medium-sized businesses, mostly in hardware, although we're looking also at, you know, some services businesses if they meet our criteria. It's not always clear that some of those do, but we're open as long as it's within aerospace and defense. I don't think we see the need to go outside of aerospace and defense, not for a while. There are still so many great targets to go after in this business. On Calspan, I'll let Joel comment.
Speaker Change: Customer. Thank you so district distribution represents about 20% to 25% of our commercial aftermarket shipments as we look at at the point of sale that our distribution partners are seeing in comparable markets is pretty close to one another there is no significant difference.
Speaker Change: Thank you guys.
Speaker Change: Our next question comes from the line of Kristine <unk> with Morgan Stanley. Your line is open.
Joel Reese: Yes, I think we're encouraged by where we are at this point in the integration. We've got our leadership team in place. We've put our business unit team structure in place. We're going through the value generation strategy that we employ. And as of right now, I think we're running a bit ahead of the model. And we're encouraged by what we're saying.
Kristine: Hey, good morning, everyone.
Speaker Change: Yeah.
Kristine: Kevin another question on the pipeline.
Kristine: You've mentioned a target rich environment and assets are coming up that weren't available before.
Kristine: In the past you had mentioned that you are open to doing deals that have some industrial exposure can.
Joel Reese: Just as a follow-up, in the M&A hardware pipeline, is it mostly defense-oriented stuff? Is it, I mean, just, is there any skew to what you're... No, it's actually, it has a nice blend of commercial and defense assets. It's not only just defense. You know, it's hard to control. You know, you can't really dictate what pitches will be thrown at you, so you just have to react to them when they come along.
Speaker Change: Can you update us on your current thinking and you know what.
Speaker Change: What.
Speaker Change: Portion maximum industrial would you be willing to entertain at this point based on what's available.
Speaker Change: Interesting question and gets me into speculation I don't know if there is a certain percentage that would kick a deal out we want to be in aerospace and defense. If there are non aerospace and defense.
Speaker Change: Products or business.
Kevin M. Stein: Right now, we see a nice balance. That isn't always the case, but today it is. Okay, and just my last one in the after commercial arrow aftermarket, any discernible differences between the growth rates in the distribution to the distribution channel versus direct? Thank you. So distribution, you know, represents about 20 to 25 percent of our commercial aftermarket shipments. As we look at it, the point of sale that our distribution partners are seeing in comparable markets is pretty close to one another. There's no significant difference.
Speaker Change: That's okay, we don't thumb our nose at it.
Speaker Change: But we look at our business in its totality cannot achieve our 20% plus internal rate of return for that acquisition.
Speaker Change: Yes, we don't.
Speaker Change: Look scantily at those businesses, but we don't want to go after anything Thats industrial only.
Speaker Change: So I would guess it has to be predominantly aerospace.
Speaker Change: Great. Thanks for the color and maybe on the aftermarket if I could have a follow up question.
Speaker Change: With customer behavior, I mean, there's clearer scarcity of aircraft assets out there how much of the volume that youre seeing are coming from an AD hoc break and fix type thing versus airlines potentially proactively purchasing product.
Joel Reese: Thank you. Our next question comes from the line of Kristine Liwag with Morgan Stanley. Your line is open. Hey, good morning, everyone.
Kevin M. Stein: Good morning. You know, Kevin, another question on the pipeline. You mentioned the target-rich environment, and assets are coming up that weren't available before. You know, in the past, you've mentioned that you're open to doing deals that have some industrial exposure. Can you update us on your current thinking? And you know, what proportion maximum industrial would you be willing to entertain at this point based on what's available? An interesting question that gets me into speculation.
Speaker Change: I don't think we have any.
Speaker Change: Real meaningful way to understand that the vast majority of our commercial aftermarket orders or book to ship.
Speaker Change: They come in over the transom theyre typically not advanced bookings and we don't get the color in terms of why they are buying we try to watch to make sure theres no inventory significant moves, but hard to get that kind of level of granularity.
Speaker Change: Great. Thank you guys.
Speaker Change: Our next question comes from the line of Matt Akers with Wells Fargo. Your line is open.
Kevin M. Stein: I don't know if there's a certain percentage that would kick a deal out. We want to be in aerospace and defense. If there are non-aerospace and defense products or businesses, that's okay. We don't thumb our noses at it.
Matt Akers: Hey, guys. Good morning, Thanks for the question good morning.
Matt Akers: I guess, the M&A deals that you've looked at that haven't closed what's the main thing preventing the evaluation of the strategic.
Kevin M. Stein: But we look at a business in its totality. Can it achieve our 20% plus internal rate of return for that acquisition? Yeah, we don't look scantily at those businesses, but we don't want to go after anything that's just industrial. So I would guess it has to be predominantly aerospace. Great, thanks for the color.
Matt Akers: Strategic pick it hasnt been there because it seems like if you look at the deals that you get the balance sheet to do more.
Matt Akers: Yes.
Speaker Change: Do they meet our disciplined criteria, we want to see aftermarket content, we want it to be aerospace and defense.
Speaker Change: We prefer commercial over defense.
Kevin M. Stein: And maybe an aftermarket if I could have a follow-up question. With customer behavior, I mean, there's a clear scarcity of aircraft assets out there. How much of the volume that you're seeing is coming from, you know, an ad hoc break and fix type thing versus airlines potentially proactively purchasing product? I don't think we have any meaningful way to understand that, you know, the vast majority of our commercial aftermarket orders are booked to ship. They come in over the transom.
Speaker Change: But the biggest reason is whether they really have IP.
Speaker Change: Whether they're highly engineered intellectual property.
Speaker Change: That's the key so that's what we look for and that's what we screen against.
Speaker Change: When deals fall apart, it's because things arent as proprietary.
Speaker Change: As we would like them to be and so we walk away from we're not interested in being in.
Speaker Change: In the me too product space like everyone else I mean, we're not trying to do build to print business we want.
Kevin M. Stein: They're typically not, you know, advanced bookings, and we don't get the color in terms of why they're buying. We try to watch to make sure there are no significant inventory moves, but it's hard to get that kind of level of granularity. Great, thank you guys. Our next question comes from the line of Matt Akers with Wells Fargo. Your line is open.
Speaker Change: Hi, IP high engineering content in aerospace and defense that has access to the aftermarket.
Speaker Change: Got it.
Speaker Change: And then I guess back to your comments on.
Speaker Change: Some of the aerospace OE supply chain issues is that.
Kevin M. Stein: Hey guys, good morning. Thanks for the question. I guess the M&A deals that you've looked at that haven't closed. What's the main thing preventing it?
Speaker Change: Yes, more around your supply chain. Your suppliers are more just sort of Boeing and Airbus in general slowing down and is it possible to comment.
Speaker Change: Kind of what Youre, assuming for 737 Max for this year.
Kevin M. Stein: Is it devaluation? Is it, you know, strategic. Has it been there? Because, you know, it seems like you're looking at the deals, and you get the balance sheet to do more. Yeah, it's do they meet our disciplines' criteria? We want to see aftermarket content; we want it to be aerospace and defense. We prefer commercial over defense. But the biggest reason is whether they really have IP.
Speaker Change: Yes, so it's not specific for us the comments around the supply chain I think thats as but we are generally hearing.
Speaker Change: From others, I think our supply chain team has done a really solid job of working through the challenges that have persisted for the last couple of years. You know last year, we were talking about castings and then electronic components I think largely those have have gone away.
Kevin M. Stein: Whether they're highly engineered intellectual property, that's the key. So that's what we look for, and that's what we screen against. And when deals fall apart, it's because things aren't as proprietary as we would like them to be, and so we walk away. We're not interested in being in the Me Too product space like everyone else. I mean, you know, we're not trying to build the print business.
Speaker Change: I do think we are in some level of a new normal where there's more kind of issues that pop up randomly.
Speaker Change: In comparison to where we were.
Speaker Change: From a pre pandemic level. So I think that too is getting better but likely thats going to persist for the next couple of years I don't think any of that material.
Kevin M. Stein: We want high IP, high engineering content in aerospace and defense that has access to the aftermath. Got it. And then I guess, you know, back to your comments on some of the aerospace OE supply chain issues. Is that more around your supply chain, your suppliers, or more just sort of Boeing and Airbus in general slowing down? And is it possible to comment kind of on what you're assuming for the 737 MAX for this year?
Speaker Change: I think right now our our assumption is based not so far off of what Boeing's current stated rate is in terms of what the phase numbers are we always put a little bit of level of conservatism around the number and I think we we think our guidance is pretty well set around what we're hearing Airbus and Boeing are doing.
Joel Reese: Yeah, so it's not specific for us, the comments around the supply chain. I think that's just what we're generally hearing from others. I think our supply chain teams have done a really solid job of working through the challenges that have persisted for the last couple years. You know, last year, we were talking about castings, and then electronic components; I think largely those have gone away. I do think we're in some level of a new normal, where there are more kind of issues that pop up randomly, in comparison to where we were from a pre-pandemic level, though I think that, too, is getting better, but likely, that's going to persist for the next couple years. I don't think any of that's material.
Speaker Change: Great. Thank you.
Speaker Change: Our.
Speaker Change: Next question comes from the line of.
Speaker Change: Sheila <unk> with Jefferies. Your line is open.
Sheila: Good morning, everyone. Thank you.
Sheila: Morning, Good morning, I wanted to ask about margins Firstly caf ban.
Sheila: It looks like for the first quarter you guys had owned it it was about 20% margins and now youre at 28% for this quarter.
Jefferies: Still guiding to it to be a 100 basis points dilutive.
Jefferies: All of which obviously is conservative because it would imply you're going to end the year at 16% margins for that business. So.
Jefferies: What did you guys did raise margins 700 bps in the last quarter.
And where can this business organically.
Joel Reese: I think right now our assumption is based not so far off of what Boeing's current stated rate is in terms of what the FAA's numbers are. We always put a little bit of a level of conservatism around the numbers, and I think we think our guidance is pretty well set around what we're hearing Airbus and Boeing are doing. Great, thank you. Our next question comes from the line of Sheila Kahyaoglu with Jeffries. Your line is open. Good morning, everyone.
Jefferies: Well I'm not sure I know, where it's going to go long term our goal is to implement our value generation strategy. We think it's a good business, we will continue to work to maximize the value.
Sarah Wynn: In terms of any other guidance beyond that.
Lewis Raffetto: We've highlighted we think it is dilutive obviously at the level that it's at and comparison to overall trans time and will continue to work to improve the value over a long long ownership.
Joel Reese: Thank you. Morning. Morning. I wanted to ask about margins, first with CalSPAN.
Jefferies: Okay.
Jefferies: And then I wanted to ask about defense after market again, our defense just given it's not often you see it outperformed commercial aftermarket you mentioned <unk> what percentage of your business, maybe more short cycle weapons oriented and where do we think about the pattern relative to commercial OE margins perhaps.
Joel Reese: It looks like for the first quarter that you guys owned it, it was about 20% margins, and now you're at 28% for this quarter. So you're still guiding it to be 100 basis points dilutive, which is obviously conservative because it would imply that you're going to end the year at 16% margins for that business. So I guess, what did you guys do to raise margins 700 bits in the last quarter? And, you know, where can this business be organically?
Jefferies: Defence margins are.
Jefferies: Comparable defence margins are lower than they were kind of equivalent commercial markets. We typically offer a discount to the defense world.
Jefferies: In terms of weapon systems versus not I don't have any good detail split.
Jefferies: For what that.
Jefferies: What that looks like.
Joel Reese: Well, I'm not sure I know where it's going to go long term. Our goal is to implement our value generation strategy. You know, we think it's a good business. We'll continue to work to maximize the value in terms of any other guidance beyond that. I mean, we think we've got highly dilutive, obviously, at the level that it's at in comparison to overall TransDigm.
Joel Reese: In some ways as I said, the lumpiness of the orders in the defense World is not so different than the commercial aftermarket in the standpoint that we don't get a lot of visibility of an order coming in we will get a solicitation we worked to respond and.
Joel Reese: When outlays are good that generally helps us out but beyond that I'm not sure. There's any more color I have on that.
Speaker Change: Okay. Thank you.
Speaker Change: Our next question comes from the line of Ken Herbert with RBC capital markets. Your line is open.
Joel Reese: And we'll continue to work to improve the value over a long, long ownership. Okay, and then I want to ask about the defense aftermarket again, or defense, just given how often you see it outperform commercial aftermarket, you mentioned arm tech. What percentage of your business is maybe more short cycle weapons oriented? And where do we think about defense relative to commercial OE margins, perhaps? Comparable defense margins are lower than their kind of equivalent commercial markets. We typically offer a discount to the defense world. In terms of weapon systems versus not, I don't have any good detail split for what that looks like.
Speaker Change: Yes, hi, good morning, Thank you.
Joel Reese: Hey, Kevin in the past you've talked about the business organically supporting about 100 basis points of margin expansion each year across the cycle as we think about maybe aftermarket mixing down over the next couple of years relative to defense or commercial OE.
Speaker Change: And just with where margins are today is that still the right framework as we think about organically for the business.
Joel Reese: I think it still is I don't think it's going to change I know that.
Speaker Change: There is math involved here in <unk>.
Speaker Change: <unk> got to work your way through it but.
Speaker Change: What I always say is 100 to 150 basis points of improvement.
Joel Reese: In some ways, as I said, the lumpiness of the orders in the defense world is not so different from the commercial aftermarket in the standpoint that we don't get a lot of visibility of an order coming in. We'll get a solicitation, we work to respond, and when outlays are good, that generally helps us out, but beyond that, I'm not sure there's any more kind of color I have on that. Okay, thank you. Our next question comes from the line of Ken Herbert with RBC Capital Markets. Your line is open.
Ken Herbert: We've been running at 150.
Ken Herbert: Yes, it may be back down at a 100, but it's still I believe going to.
Ken Herbert: Sequentially expand.
Speaker Change: Okay, that's great and as you look at the business today just to that point.
Speaker Change: Obviously, you have always run a pretty lean ship and kept costs pretty tight.
Ken Herbert: Operationally as you as you look across the business are there still significant areas, where you see opportunities for improvement or or Ken execution be may be a bigger piece of the mix moving forward relative to may.
Kevin M. Stein: Yeah, good morning. Thank you. Um, Kevin, in the past, you've talked about the business organically supporting about 100 basis points of margin expansion each year across the cycle. As we think about maybe, you know, aftermarket mixing down over the next couple of years relative to defense or commercial OE, and just with where margins are today, is that still the right framework as we think about organically for the business? You know, I think it still is.
Kevin M. Stein: Maybe relative to volume or price.
Kevin M. Stein: Well for productivity. This is again one of our three value generating strategies. Our teams are challenged themselves to work to offset inflation over the entire cost structure of the business and so.
Kevin M. Stein: Automation continues to come down in price things that we would have looked at two and three years ago that didn't make sense or the capability wasn't there.
Speaker Change: Come across we continue to look at opportunities to how we resource materials that were possible. So I think we continue to believe there is a lot of opportunity for us and productivity I'm always encouraged when I can see a long term trends dime business 10, 15, 20 years since we acquired it and they are still achieving as good or better at <unk>.
Kevin M. Stein: I don't think it's going to change. I know that there's math involved here and, you know, you've got to work your way through it. But, you know, what I always say is 100 to 150 basis points of improvement. And, you know, we've been running higher than 150. Yeah, it may be back down at 100, but it's still, I believe, going to, sequentially expand. Okay, that's
Sarah Wynn: The level of productivity is that partially because things that they looked at before werent. There. We also win a sizable amount of new business and one of the great things about new business. It continues to give you an opportunity to find new ways to reduce the cost of those new products as well. So I think we think all three value drivers are where we want to focus.
Joel Reese: And as you look at the business today, just to that point, obviously, you've always run a pretty lean ship and kept costs pretty tight. Operationally, as you look across the business, are there still significant areas where you see opportunities for improvement, or can execution be maybe a bigger piece of the mix moving forward relative to, you know, maybe relative to volume or price? Well, for productivity, you know, this is, again, one of our three value-generating strategies. Our teams have, you know, challenged themselves to work to offset inflation over the entire cost structure of the business. And so, automation continues to come down in price. Things that we would have looked at two and three years ago that didn't make sense or the capability wasn't there, those come across. We continue to look at opportunities to improve how we resource materials if we were possible.
Speaker Change: Great. Thanks, Joe.
Joel Reese: Our next question comes from the line of Jason Gursky with Citi. Your line is open.
Speaker Change: Hey, good morning, everybody.
Speaker Change: Hi, good morning.
Speaker Change: Just a quick question on working capital moving forward I'm, just kind of curious what kind of contractual terms do you have with some of your commercial OEM plus.
Joel Reese: Customers on the need to hold inventory.
Joel Reese: One of the things you've got potentially going on here with Boeing is asking.
Speaker Change: Asking the.
Joel Reese: The supply chain to continue producing at rate, but theyre going to be producing something.
Joel Reese: The master schedule that might be actually above their production rates.
Joel Reese: And that inventory is going to go somewhere so just kind of curious.
Speaker Change: Where that inventory might land and from a contractual perspective might some of it may have on your balance sheet, just kind of curious how it all works.
Joel Reese: So I think we continue to believe there's a lot of opportunity for us in productivity. I'm always encouraged when I can see a long-term TransDigm business, 10, 15, 20 years since we acquired it, and they are still achieving as good, or better, at times, levels of productivity. Is that partially because things that they looked at before weren't there?
Joel Reese: Yes.
Joel Reese: I think we have any of that for Boeing it would be small very noise level from and especially if you are asking from a bigger picture perspective.
Joel Reese: With working capital as a hull.
Joel Reese: <unk> future net working capital needs and I would just model fairly flat as a percent of sales as we go forward through the year without the noise level if any of them.
Joel Reese: We also want a sizable amount of new business. And one of the great things about new business is that it continues to give you an opportunity to find new ways to reduce the cost of those new products as well. So I think we think all three value drivers are where we want to focus. Great. Thanks, Joel. Our next question comes from the line of Jason Gursky with Citi. Your line is open. Hey, good morning, everybody.
Jason Gursky: Right. Okay. That's helpful and then just.
Jason Gursky: Just a quick follow up on the aftermarket side and the strong bookings that you saw.
Jason Gursky: In the quarter I you suggests it's hard to know exactly where all of that demand is coming from whether it's spring fix or kind of planned.
Jason Gursky: Stocking by the airlines, but I just kind of curious if you've gotten kind of any feedback from your airline customers on how they are kind of grappling with what's going on with the GTS in the plant.
Operator: Morning. Just a quick question on working capital. Moving forward. I'm just kind of curious about what kind of contractual terms you have with some of your commercial OEM customers on the need to hold inventory. You know, one of the things we've got potentially going on here with Boeing, them asking the supply chain to continue producing at the rate that they're going to be producing is something on the master schedule that might be actually above their production rate, and that inventory's got to go somewhere, so I'm just kind of curious where that inventory might land and, from a contractual perspective, might some of it land on your balance sheet. Just kind of curious how it all
Operator: Oag's that we're likely to see here.
Operator: This calendar year going into.
Operator: 'twenty 'twenty four is that.
Operator: From your perspective.
Operator: Helping.
Operator: Your aftermarket bookings here in the near terms that kind of what we're seeing and the strength that you've seen here recently and Kevin you mentioned the potential for upward pressure on the guidance for the year, just kind of curious if thats whats.
Operator: Driving that statement that you made there.
Speaker Change: Yes, we've tried to take a look at it we think it probably has a slight tailwind for the business.
Operator: For a few of our business. It is helping out obviously those platforms that were older planes are flying more this is helpful. But we're also getting fewer hours in the GTS engine. So some other sites that would start to see some benefit of longer flight hours on those are kind of missing out I think net for net as we've looked at it we think it's a slight tailwind for the business.
Sarah Wynn: Yeah, I don't think we have any of that for Boeing. It would be small, very noise level, and especially if you're asking from a bigger picture perspective, with working capital as a whole, we project future net working capital needs, and I would just model fairly flat for that as a percent of sales as we go forward through the year. With that being noise level, if anything.
Speaker Change: Okay, Great I'll leave it there.
Speaker Change: Our next question comes from the line of Mariana Perez Mora with Bank of America. Your line is open.
Kevin M. Stein: Right. Okay, that's helpful. And then just a quick follow-up on the aftermarket side and the strong bookings that you saw in the quarter. I think you suggested it's hard to know exactly where all of that demand is coming from, whether it's break-fix or, you know, kind of planned stocking by the airlines. But I am kind of curious if you've gotten any feedback from your airline customers on how they're kind of grappling with what's going on with the GTF and the planned, you know, OIGs that we're likely to see here this calendar year going into 2024. Is that?
Speaker Change: Thank you very much good morning, everyone.
Kevin M. Stein: Good morning, My question is I'd like to kill the Ani and a little bit on the commercial after market on this mid teens guidance that you have how much of that is driven by volumes, how much is pricing and that pricing how much is passing through inflation and labor costs from these like supply chain disruption. Thanks.
Kevin M. Stein: Just actually being able to price this excess demand environment in the aftermarket.
Kevin M. Stein: We don't comment on price and volume in that and split that out it's kind of difficult for us to assess that anyway.
Speaker Change: So, yes, we don't give that kind of color.
Kevin M. Stein: For volume.
Kevin M. Stein: We can offer is looking at takeoff and landings Rpms clearly volume is going to continue to grow and expand and I believe we all gave you in our prepared comments that we think volumes are going to return in.
Kevin M. Stein: From your perspective, you know, helping your aftermarket bookings here in the near term, the kind of what we're seeing in the strength that you've seen here recently and Kevin mentioned, you know, the potential for upward pressure on the guidance for the year. Just kind of curious if that's what's driving that statement that you made there. Thanks. Yeah, we've tried to take a look at it. We think it probably has a slight tailwind for the business. For a few in our business, it's helping out. Obviously, those platforms that were older planes are flying more, this is helpful. But we're also getting fewer hours on the GTF engine. So some other sites that would start to see some benefit from longer flight hours on those are kind of missing out.
Kevin M. Stein: 2024 here and we May actually then see growth ahead of where we were pre COVID-19.
Kevin M. Stein: We don't get into parsing out how much is price and how much is volume.
Speaker Change: And are you able to discuss how open our customers to have price increase conversations I believe.
Kevin M. Stein: I think that.
Kevin M. Stein: Our focus on operational excellence and performance.
Kevin M. Stein: <unk> that the pricing part of the conversation is often quite simpler because you can provide products on time to their needs.
Speaker Change: Thank you and my second question, if I may on the money.
Kevin M. Stein: I think net for net, as we've looked at it, we think it's a slight tailwind for the business. Okay, great. I'll leave it there. Our next question comes from the line of Mariana Perez Mora with Bank of America. Your line is open. Thank you very much. Good morning, everyone.
Speaker Change: Why are so many M&A deals available right now has something changed.
Speaker Change: I don't know if anything has changed I think it just comes in waves sort of a sine wave you have periods of time, where it's up and periods of time, where it's lower.
Kevin M. Stein: Good morning. My question is, I like to kill the onion a little bit on the commercial aftermarket. On this mid-teens guidance that you have, how much of that is driven by volumes? How much is pricing? And in that pricing, how much is like passing through inflation and labor costs and these like supply chain disruption things? And how much is actually being able to price this excess demand environment in the aftermarket? We don't comment on price and volume and split that out. It's kind of difficult for us to assess that anyway. So, yeah, we don't give them that kind of color.
Speaker Change: It's been an encouraging time over the last.
Kevin M. Stein: I think year or so we've seen some good deals. Unfortunately, we've seen some things not work out and we have to pass on.
Kevin M. Stein: I'm not aware of any.
Kevin M. Stein: Outside forces.
Kevin M. Stein: Moving more deals to the table.
Kevin M. Stein: It's just the way it is.
Speaker Change: Great. Thanks, so much.
Kevin M. Stein: Sure.
Kevin M. Stein: Our next question comes from the line of Peter Arment with Baird. Your line is open.
Speaker Change: Hey, good morning, everyone Nice results, Kevin maybe just a quick one on defense I know, it's about 30% of your mix do you have much exposure from international Defense and if you do just kind of what youre seeing there.
Kevin M. Stein: You know, for volume, what we can offer is, you know, looking at takeoffs and landings, RPMs. Clearly, volume is going to continue to grow and expand. And I believe we all gave you in our prepared comments that we think, you know, volumes are going to return in 2024 here, and we may actually then see growth ahead of where we were pre-COVID.
Kevin M. Stein: Yes, we do have international defense exposure.
Kevin M. Stein: We.
Kevin M. Stein: Provide products.
Kevin M. Stein: To our allies and.
Kevin M. Stein: We also have manufacturing facilities in in Europe that provide products directly to European defense contractors.
Kevin M. Stein: Any any rate of change differences, there or just kind of still at normalized rates have you seen any tool.
Kevin M. Stein: I'm not sure there's anything significant versus the U S. The U S. In many cases is buying foreign military in there supporting the same so it ends up to some level of kind of co mingled and hard to separate.
Kevin M. Stein: But we don't get into parsing out how much is price and how much is volume. And are you able to discuss how open our customers are to having price increase conversations? Um, you know, I think that our focus on operational excellence and performance means that, you know, the pricing part of the conversation is often quite simpler because you can provide products on time to meet their needs. Thank you.
Kevin M. Stein: One versus the other.
Kevin M. Stein: That's clearly I think international defense is improving.
Kevin M. Stein: Whether it is improving faster than the U S rate I'm skeptical.
Speaker Change: Okay. That's helpful. Joel and just a quick follow up when you gave the color on the kind of the Max rates in just in general I was wondering if you could provide a little more kind of like what youre seeing on your suppliers as everyone seemed to be synced up and just broadly on the OEM kind of published rates are you seeing any kind of suppliers that are still behind and this is an opportunity to catch up.
Kevin M. Stein: And my second question, if I may, is on M&A. Why are so many M&A deals available right now? Has something changed? I don't know if anything's changed. I think it just comes in waves, sort of a sine wave.
Kevin M. Stein: You have periods of time where it's up and periods of time where it's lower. It's been an encouraging time over the last, I think, year or so. We've seen some good deals. Unfortunately, we've seen some things not work out, and we have to pass on. But I'm not aware of any outside forces moving more deals to the table. It's just the way it is.
Kevin M. Stein: When youre, saying youre seeing suppliers isn't like because we obviously sell to the air framers as well as tier supply fire, yes, yes, yes.
Speaker Change: Yes, well our suppliers to us.
Kevin M. Stein: Yes, I don't think Theres anything significant I mean, we're still well as Kevin put in his opening remarks, we're still well below the peak we were at.
Kevin M. Stein: Great. Thanks so much. Our next question comes from the line of Peter Arment with Baird. Your line is open. Good morning everyone, nice results. Hey Kevin, maybe just a quick one on defense. I know it's about 38% of your mix.
Peter J. Arment: Pre Covid 787, I think it was running at 14 aircraft per month and so.
Kevin M. Stein: Do you have much exposure to international defense? TransDigm Group Inc. Yeah, we do have international defense exposure. You know, we provide products to our allies. And we also have manufacturing facilities in, in Europe that provide products directly to European defense countries. Any rate of change differences there? Kenneth Stallard.
Peter J. Arment: I don't think from that standpoint, our suppliers have that issue.
Kevin M. Stein: It has been very sporadic they can't get a certain component in they've got a ramp it up.
Robert Stallard: I don't know that Theres anything specific material, but I think we believe right now we're well positioned for the where we are and can support a higher ramp up rate.
Speaker Change: I appreciate the details thanks guys.
Kevin M. Stein: Okay.
Kevin M. Stein: Our next question comes from the line of Michael <unk> with <unk> Securities. Your line is open.
Joel Reese: Have you seen any, Joel? I'm not sure there's anything significant versus the U.S., I mean, the U.S., in many cases, is buying foreign military equipment, and they're supporting the same, so it ends up at some level of kind of commingled and hard to separate one versus the other. Clearly, I think international defense is improving. But whether it is improving faster than the U.S. rate, I'm skeptical. That's helpful. Joel, and just a quick follow-up: when you gave the color on kind of the max rate.
Joel Reese: Hey, good morning, guys nice results and thanks for taking the question.
Joel Reese: Kevin maybe just back to the Aero the commercial aftermarket anything you could parse out from demand trends or actual bookings sales wide body narrow body airframe and gene I know you've flagged interiors.
Joel Reese: Just in general, I was wondering if you could provide a little more color, like what you're seeing with your suppliers. Does everyone seem to be synced up and just broadly on the OEM kind of published rates? Are you seeing any kind of suppliers that are still behind, and this is an opportunity? When you say you're saying suppliers as in, like, because we obviously sell to the air framers as well as your suppliers. Yeah. Oh, our suppliers to us. Um, yeah, I don't think that there's anything significant. I mean, we're still well below the peak we were at pre-COVID, you know; 787, I think was running at 14 aircraft per month. And so I don't think, from that standpoint, our suppliers have that issue. I think it's just been very sporadic. They can't get a certain component in; they've got to ramp it up.
Joel Reese: Is that maybe a function of just more retrofit activity or any any noticeable trends.
Joel Reese: I think on the interior side, we're really just in the early innings of refurbishment, we're starting to see a few of those programs.
Joel Reese: Again, I think we're anticipating seeing more of that likely as we get to the end of this year and into early next year a few of them. We originally thought it might have happened to earlier have slid.
Joel Reese: Slid to the right.
Joel Reese: In terms of passenger I don't know we have any specific data to tell you the single aisle versus wide body.
Joel Reese: Certainly we're encouraged by the continuing improving trends in the international market. So thats still lags the single aisle.
Joel Reese: Market, but.
Joel Reese: Continues to be on a good rate of growth.
Joel Reese: I don't know that we have any specific data with the number of part numbers, we sell it's too difficult to try to come back to some specific around single aisle wide body.
Joel Reese: Um, I don't know that there's anything specific, but I think we believe right now where we are and can support a higher ramp-up rate. We appreciate the details. Our next question comes from the line of Michael Ciarmoli with Truist Securities. Your line is open. Hey, good morning, guys.
Michael Ciarmoli: Unfortunate that level of granularity.
Michael Ciarmoli: Got it got it.
Michael Ciarmoli: And then maybe Kevin just just one last one on M&A.
Michael Ciarmoli: You keep talking about the small and medium sized pipeline what is sort of your definition I mean, CPI I guess 300 million.
Kevin M. Stein: Nice result. Thanks for taking the question. Kevin, maybe just back to the aero, the commercial aftermarket, anything you could parse out, you know, from, you know, demand trends or, or actual booking sales, wide body, narrow body, airframe engine, I know you flagged interiors. You know, is that maybe a function of just more retrofit activity or any noticeable trend? I think on the interior side, we're really just in the early innings of refurbishment. We're starting to see a few of those programs. Again, I think we're anticipating seeing more of that likely as we get to the end of this year and into early next year. A few of them we originally thought might have happened earlier have slid to the right. In terms of passengers, I don't know if we have any specific data to tell you about single aisle versus wide body.
Kevin M. Stein: How big is the sort of the upper range of our medium sized transaction.
Kevin M. Stein:
Speaker Change: Yes, probably somewhere around $1 billion plus but.
Kevin M. Stein: Not 4 billion that becomes be okay for us so hopefully that gives you some.
Kevin M. Stein: There is no science here.
Kevin M. Stein: Yes.
Speaker Change: Got it alright, perfect. Thanks, guys.
Kevin M. Stein: Sure.
Speaker Change: Our next question comes from the line of.
Kevin M. Stein: Gavin Parsons with UBS. Your line is open is open.
Speaker Change: Thanks, guys.
Kevin M. Stein: Yes.
Speaker Change: Maybe on Capex, what's driving the big step up this year.
Kevin: Yeah on the Capex, obviously, we'll always looking to add in.
Kevin M. Stein: Stretch into our op units.
Joel Reese: Currently, we're encouraged by the continuing improving trends in the international market. That still lags behind the single aisle market, but it continues to be on a good rate of growth. I don't know that we have any specific data. With the number of part numbers we sell, it's too difficult to try to come back to some specifics around single aisle wide body, unfortunately, at that level of granularity. Got it, got it. And then maybe Kevin, just, just one last one on M&A.
Kevin M. Stein: Provide cash for productivity improvements as much like what Joe just mentioned with machinery and other efficiencies.
Kevin: To help drive value drivers.
Joel Reese: Nothing specific I think one thing in that.
Joel Reese: Just the usual capex that we provide to the op units based on their needs and driving the value.
Kevin: Yes, our process. It comes these requests come from the sites. So our goal is to keep them fully funded and if they see great productivity projects, that's where the bulk of our Capex goes to but I would also say one thing thats different from years past is we're now doing more solar types of programs.
Kevin M. Stein: You know, you keep talking about the small and kind of medium sized pipeline, you know, what is your definition? I mean, CPI, I guess 300 million. How big is the sort of the upper range of a medium sized transaction? Yeah, probably somewhere around a billion plus. But, you know, not four billion that becomes big for us. So hopefully, that gives you some idea. There's not really any science here.
Kevin M. Stein: That we wouldn't have done in the past.
Kevin M. Stein: They have great payback, but that has been added.
Kevin M. Stein: The need for us on the Capex side.
Kevin M. Stein: Yeah. Got it. All right. Perfect. Thanks, guys.
Speaker Change: Interesting I appreciate that detail and I know a lot of lot of aerospace where it needs to be manual, but how much automation do you think you can get in the business over time.
Sarah Wynn: Sure. Our next question comes from the line of... Gavin Parsons with UBS. Your line is open.
Gavin Parsons: I don't know that we have any specific number as I kind of highlighted if.
Gavin Parsons: Thanks, guys. Yeah. Um, maybe on CapEx, what's driving the big step up this year? Yeah, on CapEx, obviously, we're always looking to add infrastructure to our operational units and provide cash for productivity improvements, much like what Joel just mentioned, with machinery and other efficiencies in the operational units to help drive the value drivers. Nothing specific; there's no big thing in there. It's just the usual CapEx that we provide to the operational units based on their needs and driving value. Yeah, our process comes comes these requests come from the site.
Gavin Parsons: Youre asking me the same question five years ago, I, probably would have a very different answer I continue to be impressed by the ways that we've been able to incorporate I was one of our businesses in the UK.
Gavin Parsons: Last month, and they've automated painting operations polishing operations brazing operation. So I think we continue to be optimistic that as automation Claus come down as the co bots.
Gavin Parsons: Prices comes down is that it becomes easier and easier for us to incorporate it in our challenges were a low mix sorry high mix low volume manufacturer and so the challenge is to be able to do automation, but be able to do it for many many part numbers not just one very small subset of part.
Sarah Wynn: So our goal is to keep them fully funded, and if they see great productivity projects, that's where the bulk of our capex goes. But I would also say one thing that's different from years past is we're now doing more solar types of programs that we wouldn't have done in the past. They have great payback, but that has been an added need for us on the capex side. Interesting. I appreciate that detail. And I know a lot of aerospace work needs to be manual, but how much automation do you think you can get in the business over time?
Speaker Change: And I think we believe there is still a lot of opportunity for that.
Speaker Change: Got it and I think Noah asked about kind of the.
Sarah Wynn: Price cost spread have you guys senior input costs, starting to ease or not yet.
Joel Reese: I don't know that we have any specific number, as I kind of highlighted it. If I were you asking me the same question five years ago, I probably would have a very different answer. I continue to be impressed by the ways that we've been able to innovate. I visited one of our businesses in the UK last month, and you know, they've automated painting operations, polishing operations, and brazing operations.
Joel Reese: I think we're still in the early innings for that.
Joel Reese: Labor costs, I think are probably starting to as you see in the overall market, but I don't know that theres anything significant at this point, it's really too early in the fiscal year for us to have seen something dramatically different than planned.
Speaker Change: Makes sense. Thank you.
Joel Reese: Our next question comes from the line of Seth Sigman with J P. Morgan Your line is open.
Joel Reese: So I think we continue to be optimistic that as automation costs come down as the cobots prices come down, it will become easier and easier for us to incorporate it. And our challenges were a low mix, sorry, high mix, low volume manufacturer. And so the challenge is to be able to do automation but to do it for many, many part numbers, not just one very small subset of parts.
Speaker Change: Okay, Thanks, very much and good morning, everyone.
Speaker Change: Good morning.
Joel Reese: I wanted to ask about I may be misremembering here, but if we go back to sort of the pre COVID-19 days, maybe even pre esterline days I think kind of the cash balance to think about was something in the 750 range a lot of stuff has changed since then.
Joel Reese: I think if we pro forma for the pending acquisition probably at about $2 billion.
Joel Reese: And I think we believe there's still a lot of opportunity for that. And I think Noah asked about, you know, kind of the price cost spread. Have you guys seen your input costs starting to ease, or not yet? I think we're still in the early innings for that. Labor costs, I think, are probably starting to rise, as you see in the overall market, but I don't know that there's anything significant at this point. It's really too early in the fiscal year for us to have seen something dramatically different than planned.
Joel Reese: Right now how do we think about what's the appropriate cash balance now and going forward.
Joel Reese: Yes, we're not and get into a specific amount unless you can obviously say, we're happy to keep cash on the balance sheet.
Joel Reese: Like you pointed out with <unk> 2 billion after the pending CPI acquisition, which is obviously more than we need to run the business, but we're happy to have that cash on hand to support any other opportunities M&A or any other investments that pop up for us.
Speaker Change: Okay. Okay. Okay, great and then maybe just a quick follow up I thought that that last.
Joel Reese: Thank you. Our next question comes from the line of Seth Seifman with J.P. Morgan. Your line is open. Hey, thanks very much. And good morning, everyone.
Seth Seifman: Answer to Kevin's question, what's interesting when you think about I think when we hit the pandemic.
Seth Seifman: All the rates came down.
Seth Seifman: Most of the the more labor intensive part of your business is in is in the commercial OE piece and so there is probably an expectation that as rates came up you'd be adding.
Seth Seifman: I wanted to ask you something, I may be misremembering here, but if we go back to sort of the pre-COVID days, maybe even pre-Esterline days, I think the cash balance to think about was something in the 750 range. A lot of stuff has changed since then.
Seth Seifman: Plays and so we're certainly far from fully back up, but we've kind of come off the bottom.
Seth Seifman: Has the amount of labor that you've added off the bottom.
Sarah Wynn: I think if we do a pro forma for the pending acquisition, probably at about 2 billion. Right now, how do we think about what's the appropriate cash balance now and going forward? Yeah, we're not anchored to a specific amount. As you can obviously see, we're happy to keep cash on the balance sheet. And, like you pointed out, we would have $2 billion after the pending CPI acquisition, which is obviously more than we need to run the business. But we're happy to have that cash on hand to support any other opportunities, M&A, or any other investments that pop up for us. Okay, okay, great. And then, maybe just a quick follow up. I thought that the last answer to Gavin's question was interesting.
Seth Seifman: Has it has it been kind of consistent with what you might have expected.
Sarah Wynn: <unk> or more.
Sarah Wynn: Hi.
Sarah Wynn: Well I think our teams have worked hard over the last three or four years too.
Sarah Wynn: Continue to find good productivity projects.
Sarah Wynn: And so if.
Sarah Wynn: I don't have any specific numbers in front of me, but I would think that we're probably trending better than what we would have anticipated. If we were looking at the same thing three or four years ago.
Sarah Wynn: Had some learning curves I said would turn over a couple of years ago, but I think the good news with the lower rates that we've had we've had a good opportunity to get those folks up to speed. So I think we think we're positioned well going forward.
Speaker Change: Okay. Okay very good thank you.
Sarah Wynn: Our next question comes from the line of Scott <unk> with Deutsche Bank. Your line is open.
Sarah Wynn: I mean, think about it. I think when we hit the pandemic, and you know, all the rates came down, most of the more labor-intensive part of your business is in the commercial OE piece. And so there was probably an expectation that as rates came up, you'd be adding employees. And so, you know, we're certainly far from fully back up, but we've kind of come off the bottom. Has the amount of labor that you've added come off the bottom? Has it been kind of consistent with what you might have expected, you know, less or more? And why?
Speaker Change: Hey, good afternoon.
Speaker Change: Good afternoon.
Sarah Wynn: Joel is F 35 aftermarket a significant portion of defense aftermarket revenue at this point and then can you comment at all on how quickly thats been growing recently.
Speaker Change: I don't have any specifics around any platform.
Sarah Wynn: To give you.
Sarah Wynn: I think as we said the defense aftermarket was was a good solid quarter for us I think considering the number of business. It was distributed I think we saw.
Joel Reese: I think our teams have worked hard over the last three, four years to continue to find good productivity projects, so I don't have any specific numbers in front of me. But I would think that we're probably trending better than we would have anticipated if we were looking at the same thing three, four years ago. We had some learning curves, as I said, with turnover a couple years ago. But I think the good news is that with the lower rates that we've had, we've had a good opportunity to get those folks up to speed. So I think we think we're positioned well going forward. Okay, very good. Thank you. Our next question comes from the line of Scott Digital with Deutsche Bank. Your line is open. Hey, good afternoon.
Sarah Wynn: Many menu platform is benefiting from it in the quarter not just a single one.
Scott Digital: Certainly as F 35 continues to fly that's beneficial for us.
Scott Digital: We're on effectively every platform and so certainly the more things or use the more that is good for us in general.
Scott Digital: Okay, and then Sarah sort of following up on Jason's question and can you clarify what the outlook is on working capital this year.
Scott Digital: The big headwind last year, you had a strong first quarter here. So just curious where things go from here on.
Scott Digital: Yes, you're right we had an influx of that I think is $500 million last year. So we think we're now in a good position going forward.
Scott Digital: Wed expect Lockheed.
Scott Digital: <unk> capital to follow the revenue as a percent of sales fairly flat revenue as revenue goes up as a percentage.
Joel Reese: Joel, is the F-35 aftermarket a significant portion of defense aftermarket revenue at this point? And then can you comment at all on how quickly that's been growing recently? I don't have any specifics on any platform to give you.
Scott Digital: Okay, and then last question, Kevin it's been a while since the last Investor day any plans for another one sometime soon thanks.
Scott Digital: This summer.
Joel Reese: Yes.
Scott Digital: Sure than expect it we're planning on it so I think it's really.
Scott Digital: Not officially announced but sometime soon this summer we will have another one.
Joel Reese: I think, as we said, the defense aftermarket was a good, solid quarter for us. I think, considering the number of businesses it was distributed to, I think we saw many, many platforms benefiting from it in the quarter, not just a single one. Certainly, as the F-35 continues to fly, that's beneficial for us. We're on effectively every platform, and so certainly, the more things are used, the more that's just good for us in general. Okay, and then Sarah, sort of following up on Jason's question, can you clarify what the outlook is on working capital this year? It was a pretty big headwind last year.
Speaker Change: Stay tuned it will be announced shortly.
Speaker Change: Alright, great. We can finally meet in person it sounds good.
Speaker Change: That'd be nice.
Sarah Wynn: You can always come to Cleveland, though.
Joel Reese: Yes.
Joel Reese: And our next question comes from the line of Bert Susan with Stifel. Your line is open.
Speaker Change: Hey, good morning, and thank you for the question.
Speaker Change: I guess good afternoon, sorry.
Sarah Wynn: Yes, it's now afternoon isn't it.
Speaker Change: Tracking it.
Sarah Wynn: So I guess my first question Airlines had been calling on maintenance related expenses as headwinds theyre trying to get down this year just broader unit cost.
Sarah Wynn: You had a strong first quarter here. Just curious where things go from here on. Thanks. Yeah, you're right. We had an influx of about, I think it was $500 million last year. So we think we're now in a good position so that, going forward, we'd expect working capital to follow the revenue. It's a percent of sales staying fairly flat as the revenue goes up as a percentage.
Speaker Change: Fleeting there are you seeing any impact from competition be it <unk> or PMA as they seek to do that or is that not really shown up on your radar just given those markets are smaller.
Sarah Wynn: I don't think we've seen any material changes as your USF is typically not a big factor for us <unk> typically for systems that are going for $25000 and more which really is a very very small percentage of what our.
Sarah Wynn: Okay, and then last question, Kevin. It's been a while since the last Investor Day. Any plans for another one sometime soon?
Sarah Wynn: Our products are.
Speaker Change: And I don't think we've I've heard of any specific kind of changes in the PMA world from what we have seen in the past.
Kevin M. Stein: Thanks. Yeah, this summer. Yeah, we more than expect it.
Kevin M. Stein: We're planning it. So I think it's not officially announced, but sometime soon, this summer, we will have another one. Stay tuned. It will be announced shortly. All right, great. We can finally meet in person. Sounds good. Oh, that would be nice. You can always come to Cleveland.
Kevin M. Stein: Got it okay, and just as a follow up I know.
Kevin M. Stein: Cargo is a small part of what you guys do but it sounded like the increase in belly space, it's been a little bit of a drag.
Kevin M. Stein: What's your view toward cargo as you go through the balance of FY 'twenty four are you expecting that to improve at all.
Operator: And our next question comes from the line of Bert Subin with Seifel. Your line is open. Hey, good morning, and thank you for the question. I guess it's good afternoon now, isn't it?
Bert Subin: So much share to give any specifics I mean, the passenger for us I mean belly cargo, obviously was a big thing that popped up during the year overall the last year.
Bert Subin: Traffic within the cargo market was down a little bit from 2023, I think most folks anticipate that moving back up a little bit in 2024, and we think we're going to follow the underlying market.
Joel Reese: I know, tracking it. So I guess my first question is, you know, airlines have been calling out maintenance-related expenses as headwinds. They're trying to get down this year, just, you know, broader unit costs have been inflationary there. Are you seeing any impact from competition, be it USM or PMA, as they seek to do that? Or is that not really showing up on your radar, just given that those markets are smaller? I don't think we've seen any material changes here. USM is typically not a big factor for us. USM is typically for systems that are going for $25,000 or more, which really is a very, very small percentage of what our products are.
Speaker Change: Great well, thanks, so much for the color.
Joel Reese: And Im showing no further questions at this time I would now like to turn the conference back to Jamie Friedman for closing remarks.
Speaker Change: Thank you all for joining US today. This concludes the call. We appreciate your time and have a good rest of your day.
Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.
Joel Reese: [music].
Joel Reese: Okay.
Joel Reese: And I don't think I've heard of any specific kind of changes in the PMA world from what we have seen in the past. Okay. And just as a follow-up, I know cargo is a small part of what you guys do, but it sounded like the increase in belly space had been a little bit of a drag. What's your view toward cargo as you go through the balance of FY24? Are you expecting that to improve at all? So I'm sure to give you the specifics. I mean, the passenger for us, I mean, belt, belly, cargo, obviously, was a big thing that popped up during the year.
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Joel Reese: Okay.
Overall, throughout the last year, the traffic within the cargo market was down a little bit from 2023. I think most folks anticipate that moving back up a little bit in 2024. And we think we're going to follow the underlying market. Great. Well, thanks so much for the color. I'm showing no further questions at this time. I would now like to turn the conference back to Jamie Seaman for her closing remarks. Thank you all for joining us today. This concludes the call. We appreciate your time, and have a good rest of your day. This concludes today's conference call. Thank you for participating. You may now disconnect: www.transdigmgroupinc.com www.transdigmgroupinc.com www.transdigmgroupinc.com www.transdigmgroupinc.com www.transdigmgroupinc.com
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