Q2 2024 TransDigm Group Inc Earnings Call
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Operator: Ladies and gentlemen, thank you for standing by. Welcome to TransDigm Group Incorporated's second 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 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again.
Ladies and gentlemen, thank you for standing by welcome sign.
Operator: <unk> group incorporated second quarter 'twenty 'twenty four 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.
Operator: Ask a question during this session you will need to press star one on your telephone you will then hear an automated message of biting your hand just raised.
Operator: I would draw your question. Please press star one again, please be advised that today's conference is being recorded.
Operator: I'd like now to turn the conference over to Jamie Steaming director of Investor Relations. Please go ahead.
Unknown Executive: Thank you, and welcome to TransDigm's Fiscal 2024 Second Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm President and Chief Executive Officer Kevin Stein, Co-Chief Operating Officer Mike Lisman, and Chief Financial Officer Sarah Wynne. Also present for the call today is our COO Joel Reiss.
Operator: Thank you and welcome to <unk> fiscal.
Unknown Executive: Fiscal 2024 second quarter earnings conference call.
Speaker Change: On the call. This morning are President and Chief Executive Officer, Kevin Stein Co Chief operating Officer, Mike <unk>, and Chief Financial Officer Darryl.
Unknown Executive: For the call today, and there are co chief operating officer jewelry.
Unknown Executive: Please visit our website at www.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 filings with the SEC, available through the investor section of our website or at sec.gov.
Unknown Executive: Visit our website <unk> dot.
Unknown Executive: To obtain a supplemental slide deck and call replay information.
Unknown Executive: 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.
Unknown Executive: For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward looking statements. Please refer to the company's latest filings with the SEC available through the investors section of our website or at SEC Gov.
Unknown Executive: 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. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable gap measure and applicable reconciliation. I will now turn the call over to Kevin.
Unknown Executive: 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 measure when you see the tables and related footnotes in the earnings release for a presentation of the most directly comparable.
Unknown Executive: GAAP measure applicable reconciliations I will now turn the call over to Kevin.
Kevin M. Stein: Good morning, everyone. Thanks for calling in today. First, I'll start off with the usual quick overview of our strategy, a few comments about the quarter, and discuss our fiscal 24 outlook. Then Mike and Sarah will give additional color on the quarter.
Kevin: Good morning, everyone and thanks for calling yesterday.
Kevin: First of all start off with the usual quick overview of our strategy a few comments about the quarter and discuss our fiscal 'twenty four outlook than Mike and Sarah will give additional color on the quarter.
Kevin M. Stein: To reiterate, we believe we are unique in the industry in both the consistency of our strategy in both 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. For example, 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.
Kevin: To reiterate we believe we are unique in the industry in both the consistency of our strategy in both good times and bad as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle.
Kevin M. Stein: To summarize here are some of the reasons why we believed us 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: We follow a consistent long-term strategy. Specifically, first, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we utilize a simple, well-proven, value-based operating methodology. Third, we have a decentralized organizational structure and unique compensation system closely aligned with shareable value. Fourth, we acquire businesses that fit this strategy and where we see a clear path to PE-like return. And lastly.
Kevin M. Stein: We follow a consistent long term strategy, specifically first we own and operate proprietary aerospace businesses with significant aftermarket content.
Kevin M. Stein: Second we utilize a simple well proven value based operating methodology.
Kevin M. Stein: Third we have a decentralized organizational structure and a unique compensation system closely aligned with shareholders.
Kevin M. Stein: Fourth we acquire businesses that fit the strategy and where we see a clear path to P you'd like returns.
Kevin M. Stein: 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. Transcripts provided by Transcription Outsourcing, LLC.
Kevin M. Stein: Lastly.
Kevin M. Stein: Our capital structure and allocations are key part of our value creation methodology.
Kevin M. Stein: Longstanding goal is to give our shareholders private equity like returns with the liquidity of a public market.
Kevin M. Stein: 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 Q2 results ran ahead of our expectations, and we once again raised our guidance for the year. Commercial aerospace market trends remain favorable as the industry continues to recover and progress towards normalization. Global air traffic has surpassed pre-pandemic levels, and demand for travel remains robust. Airline demand for new aircraft also remains high, and the OEMs are working to increase aircraft production. However, OEM aircraft production rates remain well below pre-pandemic levels.
Kevin M. Stein: As you saw from our earnings release, we had a strong quarter.
Kevin M. Stein: Our Q2 results ran ahead of our expectations and we once again raised our guidance for the year <unk>.
Kevin M. Stein: Commercial aerospace market trends remained favorable with the industry continues to recover and progress towards normalization.
Kevin M. Stein: Global Air traffic has surpassed pre pandemic levels and demand for travel remains robust.
Kevin M. Stein: Airline demand for newer aircraft also remains high and the <unk>.
Kevin M. Stein: Oems are working to increase aircraft production.
Kevin M. Stein: However, OEM aircraft production rates remained well below pre pandemic levels. There is still much progress to be made for OEM rates and our results to continue to be adversely affected in comparison to pre pandemic production levels.
Kevin M. Stein: There is still much progress to be made for OEM rates, and our results will continue to be adversely affected in comparison to pre-pandemic production levels. 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.
Kevin M. Stein: In our business during the quarter, we saw a healthy growth in our revenues and bookings for all three of our major market channels commercial OEM commercial aftermarket and defense revenues and bookings also sequentially improved in all three of these market channels.
Kevin M. Stein: Revenues and bookings also sequentially improved in all three of these market channels. Our EBITDA defined margin of 53.2% in the quarter, contributing to the strong Q2 margin, is the continued strength in our commercial aftermarket, along with diligent focus on our operating strategy, which is allowing margin performance to expand across all segments. Additionally, we had strong operating cash flow generation in Q2 of close to $230 million, and ended the quarter with almost $4.3 billion of cash.
Kevin M. Stein: Our EBITDA as defined margin of 53, 2% in the quarter contributing to the strong Q2 margin is the continued strength in our commercial aftermarket along with diligent focus on our operating strategy, which is allowing margin performance to expand across all segments.
Kevin M. Stein: Additionally, we had strong operating cash flow generation in Q2 of close to $230 million and.
Kevin M. Stein: And ended the quarter with almost four $3 billion of cash.
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. Regarding the current M&A activities and pipeline, we continue to expect a fiscal year 2024 closure of the electron device business of communications and power industries, also known as CPI, which was announced on a prior earnings call.
Kevin M. Stein: We expect to steadily generate significant additional cash throughout the remainder of 2020 for.
Kevin M. Stein: Next an update on our capital allocation activities and priorities.
Kevin M. Stein: Regarding the current M&A activities and pipeline, we continue to expect our fiscal year 'twenty foreclosure of the electron device business of communications and power industries also known as CPI.
Kevin M. Stein: Which was announced on our prior earnings call.
Kevin M. Stein: 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 an expanding pipeline of potential M&A targets. This remains a busy time, and we are actively expanding our M&A team to address these opportunities. As usual, the potential targets are mostly in the small and mid-sized range.
Kevin M. Stein: 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 an expanding pipeline of potential M&A targets. This remains a busy time and we are actively expanding our M&A team to address these opportunities as usual the potential targets.
Kevin M. Stein: Are mostly in the small and mid size for edge I cannot predict or comment on possible closings, but we remain confident that there is a long runway for acquisitions that fit our portfolio.
Kevin M. Stein: I cannot predict or comment on possible closings, but we remain confident that there is a long runway for acquisitions that fit our portfolio. Please see our 10Q for more detail on some smaller but nicely creative acquisitions that we recently closed. The capital allocation priorities at TransDigm are unchanged.
Kevin M. Stein: Please see our 10-Q for more detail on some smaller but nicely accretive acquisitions that we recently closed.
Kevin M. Stein: The capital allocation priorities of Trans dime are unchanged. Our first priority is to reinvest in our businesses second do accretive disciplined M&A and third return capital to our shareholders via share buybacks or dividends.
Kevin M. Stein: Our first priority is to reinvest in our business. Second, apply a creative discipline to 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.
Kevin M. Stein: Before the option paying down debt seems unlikely at this time, though we do still take this into consideration.
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 almost $4.3 billion, which includes the $2 billion of cash from new debt issued during our first quarter of fiscal 24. That debt was proactively raised for the acquisition of CPI's electron device business and general corporate purposes.
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.
Kevin M. Stein: As mentioned earlier, we ended the quarter with a sizable cash balance of almost $4 3 billion, which includes the $2 billion of cash from new debt issued during our first quarter of fiscal 'twenty four.
Kevin M. Stein: That debt was proactively raised for the acquisition of CPI as electron device business and general corporate purposes.
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 guidance to reflect our strong second quarter results and our current expectations for the remainder of the year. At the midpoint, sales guidance was raised $75 million, and EBITDA defined guidance was raised $60 million.
Kevin M. Stein: We have significant liquidity.
Kevin M. Stein: Financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future.
Kevin M. Stein: Moving to our outlook for fiscal 'twenty four.
Kevin M. Stein: 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 second quarter results and our current expectations for the remainder of the year.
Kevin M. Stein: At the midpoint sales guidance was raised $75 million and EBITDA as defined guidance was raised $60 million.
Kevin M. Stein: The guidance assumes no additional acquisitions or divestitures and is based on current expectations for continued performance in our primary, commercial, and markets throughout fiscal 24. Our current guidance for fiscal 2024 is as follows and can also be found on slide six in the presentation. Note that the pending acquisition of CPI's electron device business is excluded from this guidance until acquisition close.
Kevin M. Stein: The guidance assumes no additional acquisitions or divestitures and is based on current expectations for continued performance in our primary commercial end markets throughout fiscal 'twenty four.
Kevin M. Stein: Our current guidance for fiscal 2024 is as follows and can also be found on slide six in the presentation.
Kevin M. Stein: Note that the pending acquisition of Cpi's electron device business is excluded from this guidance until acquisition close.
Kevin M. Stein: The midpoint of our fiscal 24 revenue guidance is now $7.74 billion, or up approximately 18%, in relation 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 second quarter results and current expectations for the remainder of the year. For defense, we now expect revenue growth in the mid-teens percentage range.
Kevin M. Stein: The midpoint of our fiscal 'twenty for revenue guidance is now $7 $74 billion or up approximately 18%.
Kevin M. Stein: 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 second quarter results and current expectations for the remainder of the year for defense. We now expect revenue growth in the mid teens percentage.
Kevin M. Stein: Range. This is an increase from our previous guidance of high single digit to low double digit percentage range.
Kevin M. Stein: This is an increase from our previous guidance of high single-digit to low double-digit percentage rates. 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: 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 $4.045 billion, or approximately 19 percent, with an expected margin of around 52.3 percent. This guidance includes about 100 basis points of margin dilution from our recent CALSPAN acquisition.
Kevin M. Stein: Marshall OEM and commercial aftermarket revenue guidance 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.
Kevin M. Stein: The midpoint of our EBITDA as defined guidance is now $4 45 billion or up approximately 19% with an expected margin of around 52, 3%. This guidance includes about 100 basis points of margin dilution from our recent Cal spanned the acquisition.
Kevin M. Stein: The midpoint of our adjusted EPS is increasing primarily due to the higher EBITDA defined guidance and is now anticipated to be $32.42, or approximately 25% 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.
Kevin M. Stein: The midpoint of our adjusted EPS is increasing primarily due to the higher EBITDA as defined guidance and now and is now anticipated to be $32.42 or approximately 25% over prior year, Sarah will discuss in more detail shortly the factors impacting EPS.
Sarah: Along with some other fiscal 'twenty, four financial assumptions and updates.
Kevin M. Stein: We believe we are well-positioned for the second half of Fiscal 24. We'll continue to closely watch how the aerospace and capital markets continue to develop and react accordingly. Let me conclude by stating that I'm very pleased with the company's performance this quarter and throughout the recovery for the commercial aerospace industry. We remain focused on our value drivers, cost structure, and operations. Let me hand it over to Mike Lisman, our TransDigm Group co-COO, to review our recent performance and a few other items. Good morning, everyone.
Kevin M. Stein: We believe we are well positioned for the second half of fiscal 'twenty four.
Mike Lisman: We will continue to closely watch how the aerospace in capital markets continue to develop and react accordingly.
Kevin M. Stein: Let me conclude by stating that I'm very pleased with the company's performance this quarter and throughout the recovery for the commercial aerospace industry. We remain focused on our value drivers cost structure and operational excellence, let me hand, it over to Mike Lisman, Our transact group co COO.
Mike Lisman: Review, our recent performance and a few other items.
Mike Lisman: 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. 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 21% in Q2 compared with the prior year period.
Mike Lisman: Good morning, everyone I'll start with our typical review of results by key market category for.
Mike Lisman: 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.
Mike Lisman: In the commercial market, which typically makes up close to 65% of our revenue we will split our discussion into OEM and aftermarket.
Mike Lisman: Our total commercial OEM revenue increased approximately 21% in Q2 compared with the prior year period.
Mike Lisman: Sequentially, total commercial OEM revenues grew by about 12% compared to Q1. Bookings in the quarter were strong compared to the same prior year period. These booking levels continue to support the commercial OEM guidance for revenue growth of around 20 percent for fiscal 24. OEM supply chain and labor challenges persist but appear to be progressive. Broadly speaking, we continue to be encouraged by the elevated and healthy airline demand for new aircraft. However, supply chains remain the primary bottleneck in this OEM production ramp-up. As many of you know, concerns have recently arisen around the expected 737 max production rate ramp. Time will tell how this plays out.
Mike Lisman: Sequentially total commercial OEM revenues grew by about 12% compared to Q1.
Mike Lisman: Bookings in the quarter were strong compared to the same prior year period. These booking levels continue to support the commercial OEM guidance for revenue growth of around 20% for fiscal 'twenty four.
Mike Lisman: OEM supply chain and labor challenges persist that appear to be progressing.
Mike Lisman: <unk> speaking, we continue to be encouraged by the elevated and healthy airline demand for new aircraft supply chains remain the primary bottleneck in this OEM production ramp up.
Mike Lisman: As many of you know concerns have recently arisen around the expected 737, Max production rate ramp.
Mike Lisman: At this time, we remain cautious and are watching for a potential realignment of our current max order backlog to reflect the lower production rates. The commercial OEM guidance we are giving today contains an appropriate level of risk around the max production bill rate for the balance of our 24th fiscal year. While both the 737 MAX risk as well as other risks remain towards achieving the ramp-up across the broader aerospace sector, we're optimistic that our operating units are well positioned to support the higher production rates as they occur.
Mike Lisman: Time will tell how this plays out at this time, we remain cautious and are watching for potential realignment of our current Max order backlog to reflect the lower production rates.
Mike Lisman: The commercial OEM guidance, we are giving today contains an appropriately appropriate level of risk around the Max production build rate for the balance of 2000 and for fiscal year.
Mike Lisman: While both the 737 Max risks as well as other risks 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 rates as they occur.
Mike Lisman: Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 8% compared with the prior year period. I would like to provide a bit more color than is typical on our commercial aftermarket submarkets, as the variation in growth rates seen this quarter across those submarkets was much larger than usual. The 8% growth rate mentioned was primarily driven by the continued strength in our passenger submarket, which is by far our largest.
Mike Lisman: Now moving onto our commercial aftermarket business discussion.
Mike Lisman: Total commercial aftermarket revenue increased by approximately 8% compared with the prior year period.
Mike Lisman: I'd like to provide a bit more color than is typical on a commercial aftermarket submarkets as the variation in growth rates in this quarter across those sub markets is much larger than usual.
Mike Lisman: 8% growth rate mentioned was primarily driven by the continued strength in our passenger step market, which is which is by far our largest sub market.
Mike Lisman: Growth in our passenger sub-market was roughly 20% versus the prior year period, and this sub-market continues to perform exceptionally well. We also saw good growth in our interior submarket at about the same rate when compared to prior year Q2. These increases were offset by declines in our freight and BizJet submarkets. Freight was down roughly 15%, and BizJet was down in the 5% area. The freight decline was primarily a result of the continued return of belly capacity. Transcripts provided by Transcription Outsourcing, LLC.
Mike Lisman: Growth in our passenger Submarket was roughly 20% versus the prior year period and this sub market continues to perform exceptionally well.
Mike Lisman: Also saw good growth in our interior submarket of about the same rate when compared to prior year Q2.
Mike Lisman: These increases were offset by declines in our freight and Biz jet Submarkets freight was down roughly 15% and did jet was down in the 5% area.
Mike Lisman: The freight decline was primarily a result of the continued return of belly capacity consistent with what we discussed on our past few earnings calls the Biz jet decline is the result of temporary that jet flight activity, which has continued to come down from the pandemic costs.
Mike Lisman: The VizJet decline is a result of tempering VizJet flight activity, which has continued to come down from the pandemic high. For the full year, and as you saw in today's guidance, our outlook for commercial aftermarket growth in the mid-teens is unchanged. We saw a number of elements in our Q2 results that make us confident. Specifically, Q2 bookings in the commercial aftermarket were strong, running ahead of our expectations, significantly outpacing sales, and supporting the full year growth outlook.
Mike Lisman: For the full year and as you saw in today's guidance or outlook for commercial aftermarket growth in the mid teens is unchanged.
Mike Lisman: A number of elements in our Q2 results that make us confident.
Mike Lisman: Namely Q2 bookings in commercial aftermarket was strong running ahead of our expectations significantly outpacing sales and supporting the full year growth outlook.
Mike Lisman: Additionally, our Q2 point of sales data through our distribution partners, which can be a decent leading indicator, was up significantly, well into the double digits on a percentage basis. Finally, a reminder, the commercial aftermarket can be lumpy on a quarterly basis, both revenue and bookings. Not as lumpy as the defense aftermarket, but lumpy nonetheless.
Mike Lisman: Additionally, our Q2 point of sales data through our distribution partners, which can be a decent leading indicator was up significantly well into the double digits on a percentage basis.
Mike Lisman: Finally, a reminder, commercial aftermarket can be lumpy on a quarterly basis, both revenue and bookings not as lumpy as defense aftermarket lumpy Nonetheless.
Mike Lisman: Finally note that our guide for mid teens percentage growth across our total commercial aftermarket given today still incorporates our continued track from the cargo in Biz jet Submarkets for the balance of this fiscal year.
Mike Lisman: Finally, note that our guide for mid-teens percentage growth across our total commercial aftermarket given today still incorporates a continued drag from the cargo and bizjet submarkets for the balance of this fiscal year. Now, turning to broader market dynamics and referencing the most recent IANA traffic data from March, Global revenue passenger miles surpassed pre-pandemic levels for the first time in February 2024 and continued to do so in March. March 24 air traffic was about 1% above pre-pandemic levels, and IATA currently expects traffic to reach 104% of 2019 levels in 2024.
Mike Lisman: Now turning to broader market dynamics in referencing the most recent IATA traffic data for March.
Mike Lisman: Global revenue passenger mile surpassed pre pandemic levels for the first time in February 2024, and continued to do seven March March 'twenty for air traffic was about 1% above pre pandemic anionic currently expect traffic to reach 104% of 2019 levels in 2024.
Mike Lisman: Domestic travel continues to surpass pre-pandemic levels. In the most recently reported traffic data for March, global domestic air traffic was up 6% compared to pre-pandemic levels. Domestic air travel growth has been driven significantly by outsized growth in China, which was up 14% in March compared to pre-pandemic levels. This is a significant improvement from China being down 3% a year ago in March of 2023. Shifting over to the U.S. domestic market, domestic air travel for March was about 4% above pre-pandemic levels.
Mike Lisman: Domestic travel continues to surpass pre pandemic levels.
Mike Lisman: In the most recently reported traffic that remarks global domestic air traffic was up 6% compared to pre pandemic.
Mike Lisman: Domestic air travel growth has been driven significantly by outside outsized growth in China, which was up 14% in March compared to pre pandemic. This is a significant improvement from China being down 3% a year ago in March 2023.
Mike Lisman: Shifting over to the U S domestic market domestic air travel for March was about 4% above pre pandemic trap.
Mike Lisman: International traffic has continued to make steady improvement over the past, and it slightly surpassed pre-pandemic levels for the first time in February. And the most recently reported data for March, international travel was down just 2% compared to pre-pandemic levels.
Mike Lisman: International traffic has continued to make steady improvement over the past few months is slightly surpassed pre pandemic levels for the first time in February and.
Mike Lisman: In the most recently reported data for March International travel was down just 2% compared to the pre pandemic levels and this marks a significant improvement from being down about 18% one year ago.
Mike Lisman: And this marks a significant improvement from being down about 18% one year ago. In summary, for the commercial aftermarket, we continue to see growth in our passenger and interior submarkets indicative of the continuing positive trends in the post-COVID passenger traffic recovery. Our bid, jet, and trade submarkets are as we'd expect in light of the current trends in their underlying markets. Now, shifting to our defense market, which traditionally is at or below 35% of our total revenue.
Mike Lisman: In summary for the commercial aftermarket we continue to see growth in our passenger interior submarkets indicative of the continuing positive trends in the post COVID-19.
Mike Lisman: Singer traffic recovery.
Mike Lisman: Our biz jet and freighter Submarkets are as we'd expect in light of the current trends in our underlying markets.
Mike Lisman: The defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 21% compared with the prior year period. Q2 defense revenue growth was well distributed across our businesses and customer base. Additionally, we saw similar rates of growth in both the OEM and aftermarket components of our total defense market, with the aftermarket running slightly ahead of the OEM. We do not expect to see defense revenue growth rates at this 20% plus level continuing for the balance of the year, and we expect some moderation or tempering here, as you can tell from the guidance given today.
Mike Lisman: Now shifting to our defense market, which traditionally is at or below 35% of our total revenue.
Mike Lisman: The defense market revenue, which includes both OEM and aftermarket revenues grew by approximately 21% compared with the prior year period.
Mike Lisman: Q2 defense revenue growth was well distributed across our businesses and customer base.
Mike Lisman: Additionally, we saw similar rates of growth in both the OEM and aftermarket components of our total defense market with aftermarket running slightly ahead of the Oems.
Mike Lisman: We do not expect to see defense revenue growth rates at this 20% level at this 20% plus level continuing for the balance of the year and we expect some moderation or temporary here that you can tell from the guidance given today.
Mike Lisman: Defense bookings were up significantly this quarter compared to the same prior year period and support the revised defense revenue growth guidance for the full year. Additionally, this quarter, we saw growth in U.S. government defense spending outlays, and we're hopeful we'll continue to see steady growth here. 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, especially on a quarterly basis, is difficult.
Mike Lisman: Defense bookings were up significantly this quarter compared to the same prior year period and support the revised defense revenue growth guidance for the full year.
Mike Lisman: Additionally, this quarter, we saw growth in U S government defense spend outlays or hopeful we'll continue to see steady growth here, but as we've said many times before the bed sales and bookings can be lumpy, we know the bookings and sales will come but forecasting them with accuracy and precision, especially on a quarterly basis is.
Mike Lisman: As Kevin mentioned earlier, we now expect our defense market revenue growth for this year to be in the mid-teens percentage range. This updated guidance for defense primarily reflects stronger than expected Q2 defense sales, as well as good Q2 bookings. Lastly, I'd like to wrap up by expressing how pleased I am with our operational performance in the second quarter of fiscal 24. Even though we saw some lumpiness in our most profitable end market commercial aftermarket, our operating unit teams did an exceptional job of executing on our value drivers that generated strong results this quarter.
Mike Lisman: Paul.
Mike Lisman: As Kevin mentioned earlier, we now expect our defense market revenue growth for this year to be in the mid teens percentage range.
Mike Lisman: This updated guidance for defense, primarily reflects stronger than expected Q2 defense sales as well as the good Q2 bookings.
Mike Lisman: Lastly, I'd like to wrap up by expressing how pleased I am by our operational performance in the second quarter of fiscal 'twenty four.
Mike Lisman: Even though we saw some lumpiness in our most profitable end market commercial aftermarkets, our operating unit teams did an exceptional job of executing on our value drivers are generating strong results delivered this quarter.
Mike Lisman: Our management teams remain committed to our consistent operating strategy and servicing the robust demand for our products as we continue through the balance of the year. With that, I'd like to turn it over to our CFO, Sarah Wynne. Thanks, Mike.
Mike Lisman: Our management teams remain committed to our consistent operating strategy and servicing the robust demand for our products as we continue through the balance of the year.
Sarah Louise Wynne: With that I'd like to turn it over to our CFO <unk> <unk>.
Sarah Louise Wynne: Thanks Mike, and good morning everyone. I'll recap the financial highlights for the second quarter and then provide some more information on the guidance update. First, on organic growth and liquidity. In the second quarter, our organic growth rate was 16.1%, and all market channels contributed to this growth, as Mike and Kevin have just discussed. Fiscal 2024. Below that free cash flow line, Networking Capital consumed $82 million, driven by AR with the highest sales in the quarter and inventory as we supported the second half of our year.
Sarah Louise Wynne: Thanks, Mike and good morning, everyone I'll recap the financial highlights for the second quarter, and then provide some more information on the guidance update.
Sarah Louise Wynne: Just on organic growth and liquidity.
Sarah Louise Wynne: Second quarter organic growth rate of 16, 1% in all market channels contributed to this growth Mike Kevin just discussed our cash liquidity free cash flow, which we traditionally defined as EBITDA less cash interest payments capex cash taxes with rush Lake 290 million per quarter.
Sarah Louise Wynne: In around 950 million on a year to date basis.
Sarah Louise Wynne: As a reminder, fiscal Q1 free cash flow was higher than average due to the timing of our interest and tax payments and our full fiscal year. Our free cash flow guidance is unchanged. We continue to expect to generate free cash flow of approximately 2 billion in fiscal 2024.
Sarah Louise Wynne: Hello that free cash flow line net working capital.
Sarah Louise Wynne: $82 million driven by a all with the highest sales quarter and inventories we support second half about yet we continue to expect our annual dollars invested in that working capital to moderate from the elevated levels with CNS right. You did about 10 points in an exact dollar amount of investments for fiscal 'twenty.
Sarah Louise Wynne: We continue to expect our annual dollars invested in Networking Capital to moderate from the elevated levels we've seen over the prior two years, but pinpointing an exact dollar amount of investment for Fiscal 24 is difficult. We ended the quarter with approximately $4.3 billion of cash on the balance sheet, and our net set to EBITDA ratio is 4.6 times, down from five times at the end of last quarter. As a reminder, approximately $1.4 billion of this cash is reserved for the anticipated closing of the CPI acquisition.
Sarah Louise Wynne: Difficult we ended the quarter with approximately $4 3 billion of cash on the balance sheet.
Sarah Louise Wynne: Net debt to EBITDA ratio was four six times down from five times at the end of last quarter. As a reminder, approximately $1 4 billion of this cash is reserve to anticipate the closing of the CPI acquisition.
Sarah Louise Wynne: We continue to be comfortable operating in the five to seven net debt EBITDA ratio range, and while we are currently sitting slightly below the low end of this range, our go forward strategy of capital deployment has not changed. And we continue to seek the best opportunities for providing value to our shareholders through our leverage strategy. The EBITDA to interest expense coverage ratio ended the quarter at 3.4 times on a pro forma basis, which provides us with a comfortable cushion versus our target range of two to three times.
Sarah Louise Wynne: I need to be comfortable operating in the five to seven net debt EBITDA ratio range and while we are currently sitting slightly below the low end of this range. Our go forward strategy or capital deployment has not changed and we continue to seek the best opportunities for providing value to our shareholders through our leverage strategy, even if the interim.
Sarah Louise Wynne: <unk> expense coverage ratio ended the quarter at three four times on a pro forma basis, which provides us with comfortable cushion versus our target range of two to three times during.
Sarah Louise Wynne: During the quarter, we completed a few financing objectives, including pushing out a near-return debt stack and repricing approximately $6 billion of our term loan debt from SOFR plus three and a quarter to SOFR plus two and three quarters. This financing activity effectively pushes out our nearest term maturity date by two fiscal years, so fiscal 2028. Our capital allocation strategy is always to both proactively and prudently manage our debt maturity stack, and these actions accomplish that.
Sarah Louise Wynne: During the quarter, we completed a few financial objectives, including pushing out nearer term debt stacks, along with repricing approximately $6 billion of our term loan debt from sofa, plus three in a quarter to six.
Sarah Louise Wynne: It was two or three quarters. This final two activity effectively pushes out our nearest term maturity date by two fiscal yet to fiscal 2028, our capital allocation strategy is always to both proactively and prudently manage our debt maturity stack and these actions accomplished that.
Sarah Louise Wynne: The financing activities slightly reduced our interest expense for Fiscal 2024, reducing the expense by $12 million or $25 million on an annualized basis. However, as you'll note, our guidance for the interest expense has decreased by $60 million, primarily driven by the interest income we received yesterday and project for 2024. We remain approximately 75% hedged on our total $22 billion gross net balance through. This is achieved through a combination of fixed rate notes, interest rate caps, swaps, and collars.
Sarah Louise Wynne: Financing activities slightly reduced our interest expense for fiscal 'twenty for reduced <unk> expense by $12 million or $25 million on an annualized basis. However, as youll note that guidance for the interest expense decreased by $60 million, primarily driven by the interest income we received yesterday a project.
Speaker Change: <unk> Paul.
Sarah Louise Wynne: Remain approximately 75% hedged on that totaled 22 billion Bruce.
Sarah Louise Wynne: Throughout fiscal 'twenty six this is achieved through a combination of fixed rate notes interest rate caps and swaps and collars. This continues to provide us adequate cushion against any rise in rates at least in the immediate term.
Sarah Louise Wynne: This continues to provide us 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 $75 million and $60 million, respectively, given the strong quarter and current expectations for the year, along with increasing our EBITDA margin guidance from 52% to 52.3%. Our adjusted EPS guidance is now $32.42 compared to the prior guidance of $30.85. 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. Thank you.
Sarah Louise Wynne: With regard to guidance as Kevin mentioned, we increased our midpoint sales and EBITDA by $75 million $60 million, respectively, given the strong quarter or an expectation for the year, along with increasing our EBITDA margin guidance from 52% to 52, 3% our adjusted EPS guidance is now <unk>.
Sarah Louise Wynne: To $2 42 compared to the prior guidance that $2 85.
Sarah Louise Wynne: As we sit here today from an overall cash liquidity and balance sheet standpoint, I think we remain good tissue with adequate flexibility to do M&A or return cash to shareholders via dividends or share repurchases with that ill turn it back to the operator to kick off the Q&A.
Operator: Thank you. 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. Please stand by while we compile the Q&A roster. The first question comes from Myles Walton with Wolf Research. Your line is open. Thanks, good morning.
Speaker Change: Thank you as a reminder to ask a question. Please press star one 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.
Operator: The first question comes from Myles Walton with Wolfe Research Your line is open.
Myles Alexander Walton: Thanks, Good morning.
Myles Alexander Walton: Kevin I was wondering if you could touch on the aftermarket growth rate in the quarter and the reacceleration implied in the back half of the year and in particular, if you can parse out the freighter complement to that I think GE on their call actually raised their freight or outlook for the year on aftermarket.
Myles Alexander Walton: So I'm not trying to align to different data points, but just what youre seeing overall and I know you said that the guidance incorporates drag for the rest of the year, but is it fair to think that that drag becomes less and less.
Mike Lisman: Sure, Myles, it's Mike. I'll take that one. Overall, with regard to commercial aftermarket, we had a very solid bookings quarter; we significantly outpaced sales in the segment commercial aftermarket overall, which sets us up well nicely for the back half and the mid-teens percentage growth for the year that we mentioned. Passenger and interior were both ahead of our expectations, although a bit more color on the freight point. And to address some of your questions there, we were down about 15%. That was about what, you know, we expected, maybe a little bit worse than we had foreshadowed on the last two calls.
Operator: Sure Myles, it's Mike I'll take that one.
Mike Lisman: Overall with regard to commercial aftermarket we had a very solid bookings quarter, we significantly outpaced sales in the segment commercial aftermarket overall, which sets us up well nicely for the back half in the mid teens percentage growth for the year that we mentioned passenger an interior were both up ahead of our expectations.
Mike Lisman: More color on the freight point and.
Mike Lisman: To address some of your questions. There we were down about 15% that was up about what we expected maybe a little bit worse than we had foreshadowed that I think on the last two calls.
Mike Lisman: Did you guys know we have about three op units that fall into that.
Mike Lisman: I think, as you guys know, we have about three operational units that fall into that freight bucket and facilitate the movement of freight on aircraft both passing full freighters as well as the belly cargo system. And that sub market, it's about, you know, plus or minus, depending on the quarter 15% or so of our commercial aftermarket bucket; we weigh a bit more towards freighter in that bucket. And I think, as you guys know, within the freight market, there's been a trend away from freight being carried within full freighters and more towards the belly of the passenger capacity that's coming back into the market on passenger aircraft, the belly systems.
Mike Lisman: Freight bucket and facilitate the movement of freight on aircraft, both past and for full freighters as well as the belly cargo systems.
Mike Lisman: And that Submarket, it's about plus or minus depending on the quarter, 15% or so of our commercial aftermarket bucket.
Mike Lisman: We wait a bit more towards freighter.
Mike Lisman: In that bucket and I think as you guys know within.
Mike Lisman: The freight market theres been a trend away from freight being carried.
Mike Lisman: Within full freighters and more towards the belly of the passenger capacity that's coming back into the market on passenger aircraft Abella systems.
Mike Lisman: And specifically, we've got a couple of units that, as I said, they're a bit more freighter weighted. And as that market has trended off, and we've seen a shift more towards belly, they've seen a bit of a decline in some of their product sales. It tends to be stuff that's slightly lower margin for us across our commercial aftermarket than the rest of that bucket, so there's not too much of a margin drag or impact as a result of it.
Mike Lisman: And we specifically we've got a couple of op units as I said they are bit more freighter weighted in at that.
Mike Lisman: Market has trended off and we've seen a shift more towards belly <unk> seen a bit of a decline in some of their product sales it tends to be stuff.
Mike Lisman: The slightly lower margin for us.
Mike Lisman: Our commercial aftermarket and the rest of of that bucket, so theres not too much.
Mike Lisman: Margin drag or impact as a result of it but you see the sales decline and Thats part of what drove that.
Mike Lisman: But you see the sales decline, and that's part of what drove the 15% drop. For the balance of the year, we do see that continuing in the back half. We factored that into our guidance, and we feel good about the whole mid-teens percentage rate of rate growth given the strength we've had in bookings. But on the freight side, we do expect to see some continued headwinds here in the back half of fiscal 24.
Mike Lisman: The 15% drop for the balance of the year, we do see that continuing.
Mike Lisman: In the back half, we factored that into our guidance.
Mike Lisman: And we feel good about the mid teens percentage rate growth given the strength, we've had in the bookings, but on the freight side, we do expect to see some continued headwinds here in the back half of the fiscal 2040 here.
Speaker Change: Thanks for the color.
Operator: One moment for the next question. The next question comes from Robert Spingarn with Milius Research. Your line is open. Thanks.
Speaker Change: One moment for the next question.
Operator: The next question comes from Robert Spingarn with Melius Research Your line is open.
Scott Stephen Mikus: Thank you. Hi, this is Scott Mikus on behalf of Rob Spingarn. Kevin, to follow up on Myles' question, airlines have been flagging elevated turnaround times in MRO shops, particularly for engines. So I'm just wondering, are any of your operating units getting the sense that volume growth on components for engines isn't as high as they would expect, just because throughput at the MRO shops isn't as fast as it was pre-
Scott Stephen Mikus: Hi, This is Scott on for Rob Spingarn, Kevin to follow up on miles question Eric.
Scott Stephen Mikus: Airlines have been flagging elevated turnaround times, and MRO shops, particularly for engines.
Scott Stephen Mikus: I'm just wondering are any of your operating units getting the sense that volume growth on components for engines isn't as high as they would expect just because throughput at the MRO shops isn't as fast as it was pre COVID-19.
Mike Lisman: It's Mike again. We have not really seen much of that. Actually, I think we've seen pretty good strength across all of our different products, both on engine and off engine across the commercial aftermarket at this point in the fiscal year. But I would say we probably have lower exposure to the engine aftermarket as a percentage of our
Scott Stephen Mikus: Hi, It's Mike again, we have not really seen much of that actually I think we've seen pretty good strength across all of our different products. Both on engine and off engine across the commercial aftermarket at this point of the.
Mike Lisman: At this point of the fiscal year.
Mike Lisman: I would say, we probably have lower exposure to jet aftermarket.
Mike Lisman: As a percentage of our business.
Mike Lisman: Okay, got it. And then on the defense and market, historically, you've characterized it as a low single-digit organic grower. Armtek has seen some large awards and contracts related to munitions and artillery. The Army wants to increase 155 millimeter artillery production to 100,000 shells per month by late 2025. So how should we be thinking about the long-term growth trajectory for your defense sales going forward?
Speaker Change: Okay got it and then on the defense end market historically, you've characterized it as a low single digit organic grower Armtec Armtec has seen some large awards and contracts related to munitions and artillery Army wants to increase 155 millimeter artillery production to 100000 shells per.
Mike Lisman: Month by late 2025, so how should we be thinking about the long term growth trajectory for your defense sales going forward.
Mike Lisman: I think you guys know we have an analyst day coming up in June, and we don't want to go ahead and give long-term guidance by some market outside of this year. But we do feel good about the mid-teens percentage growth range this year for defense. We're seeing that strength across the OEM and aftermarket. It's pretty broadly distributed across all of our operational units. But Arm Tech, in particular, has had some good flare shipments this year, as well as some ordnance products out of their California facility, which is the 155 millimeter program that you mentioned. That growth should continue for a couple of years. You might have seen in the some of the Department of Defense budget documents for the next two years or so.
Mike Lisman: I think you guys know we have an analyst day coming up in June and we don't want to go ahead and give long term guidance by Submarket outside of this year, we could feel good about the mid teens percentage growth range.
Mike Lisman: This year for defense, we're seeing that strength across the OEM and aftermarket it's pretty broadly distributed across all of our op units.
Mike Lisman: But our tech in particular has had some good flare shipments this year as well as the board Thats project product out of their California facility.
Mike Lisman: Is the 155 millimeter program that you mentioned that growth should continue for a couple of years you might have seen in the some of the department of defense budget documents for the next two years or so.
Mike Lisman: So, we remain optimistic about the growth outlook there, but it's not really driven by just one or two operating units. It's been pretty evenly distributed across our full group. As we said, we don't expect the defense growth of 20% or so that we've seen in the first half of this year to continue. There's just got to be some moderation there. This is always lumpy. You know, fortunately for us in the first half of this year, it's been lumpy to our benefit, probably a bit better than we expected. But we do expect some moderation in the long term. It's not going to grow anywhere close to 20 percent.
Mike Lisman: So we remain optimistic about the growth outlook, there, but it's not really driven by just one or two operating units, it's been pretty evenly distributed across our our full group. If we said we don't expect.
Mike Lisman: Defense growth of 20% or so that we've seen in the first half of this year to continue there just got to be sub moderation. There. This is always lumpy.
Mike Lisman: Fortunately for us in the first half of this year, it's been lumpy to work to our benefit probably a bit better than we expected, but we do expect some moderation of long term, it's not going to grow anywhere close to 20%.
Operator: Thanks for taking the question.
Kenneth George Herbert: One moment for the next question. The next question comes from Ken Herbert with RBC Capital Markets. Your line is open.
Speaker Change: Thanks for taking the questions.
Speaker Change: One moment for the next question.
Kenneth George Herbert: Next question comes from Ken Herbert with RBC capital markets. Your line is open.
Kevin M. Stein: Yeah, hey, everybody. I want to see either Mike or Kevin, if you could drill down maybe somewhat on the defense commentary. I can appreciate the lumpiness, but is there anything in particular you saw in the first half, either things pulled to the left or sort of an acceleration in shipments that specifically gives you reason to be more cautious in the second half? I can appreciate the step down and guide probably reflects some conservatism to get to full year growth. But just wondering if there's anything you'd call out relative to just a track record of lumpiness and conservatism as you think about the second half of the year? Unknown Speaker
Kenneth George Herbert: Okay.
Kenneth George Herbert: Yeah, Hey, good morning, everybody.
Speaker Change: Good morning.
Kevin M. Stein: I wanted to see either either Mike or Kevin if you could drill down maybe somewhat on the defense commentary I can appreciate the lumpiness, but is there anything in particular you saw in the first half either things pulled to the left or sort of an acceleration in shipments specifically gives you reason to be more cautious on the second.
Kevin M. Stein: Have I can appreciate.
Kevin M. Stein: The step down in guide probably reflects some conservatism to get to the full year growth, but just wondering if there's anything you'd call out relative to just a track record of Lumpiness of conservatism as you think about the second half of the year.
Kevin M. Stein: I think we always strive to be conservative in our guidance. We did obviously raise our guidance up for the year, but I take your point that on a quarterly basis, that would imply we're going back down. It's difficult to predict. I think what we're seeing is finally the backlog, the demand that is clearly in the defense market space coming out, they're finally placing orders for this product. We would anticipate that this will be a good tailwind for us, but it's hard, given the lack of visibility at times in the defense industry, to predict it so accurately. So we don't want to get out over our skis on really any of our submarkets. We choose to be a little bit more conservative as we break things up.
Speaker Change: I think we always strive to be conservative in our guidance, we did bring obviously our guidance up so.
Kevin M. Stein: For the year, but I take your point that on a quarter basis that would imply we're going back down it's difficult to predict I think what we're seeing is.
Kevin M. Stein: Finally.
Kevin M. Stein: The backlog.
Kevin M. Stein: The demand that is clearly in the defense market space.
Kevin M. Stein: Coming out there finally, placing the orders for this product we would anticipate that this will be a good <unk>.
Kevin M. Stein: Tailwind for us, but it is hard.
Kevin M. Stein: Given the lack of visibility at times in the defense industry to predicted so accurately so we don't want to get out over our skis on really any of our sub markets, we choose to be a little bit more conservative as we break picks up.
Kevin M. Stein: Appreciate that. And if I could then, Kevin, maybe one other way to think about it is how much of your defense aftermarket, in particular, would you classify as short cycle versus sort of backlog driven?
Speaker Change: I appreciate that and if I could thank Kevin maybe one other way to think about it is how much of your defense aftermarket in particular would you classify your short cycle versus sort of backlog driven.
Kevin M. Stein: I think the defense aftermarket tends to be different than the commercial aftermarket. It can be a longer cycle, but there's still drop-ins that happen everywhere.
Kevin M. Stein: I think defense aftermarket tends to be different than commercial aftermarket it can be a longer cycle.
Kevin M. Stein: But.
Kevin M. Stein: Theres still drop ins that happened everywhere.
Operator: Perfect. Thanks for the call. Nice quarter.
Kevin: Perfect. Thanks for the color nice quarter.
David Egon Strauss: Thank you. One moment for the next question. The next question comes from David Strauss with Barclays. Your line is open. Hi, good morning. This is Josh Korn on behalf of David.
Speaker Change: Thank you.
Speaker Change: One moment for the next question.
Kevin M. Stein: I wanted to ask in the guidance, why would
Josh Korn: Next question comes from David Strauss with Barclays. Your line is open.
Josh Korn: Hi, Good morning, this is Josh <unk> on for David.
Josh Korn: Wanted to ask in the guidance why would EBITDA margins in the second half drop from from Q2 on what appears like it would be a similar mix to add to the second quarter. Thanks.
Kevin M. Stein: I think we're comfortable, you know; we don't want to get into giving quarterly guidance on these things, you know; we're comfortable for the year at where we sit. Yeah, business can be lumpy. We were pleasantly surprised by the EBITDA this quarter. We're not positive about how the future quarters will unfold. But again, our goal is to be conservative.
Josh Korn: I think we're comfortable we don't want to get into giving quarterly guidance on these things you know we're comfortable for the year at where we sit.
Kevin M. Stein: Yeah business can be lumpy, we were pleasantly surprised by the.
Kevin M. Stein: The EBITDA this quarter.
Kevin M. Stein: We're not a positive.
Kevin M. Stein: Future quarters will unfolds, but again our goal is to be conservative. So that is our forecast for now that we're sticking with.
Operator: So that is our forecast for now that we're sticking with. Okay, thanks. And then I just wanted to follow up on the first question about the sequential aftermarket in the second half. Are you baking in any sequential improvement? Or is it just easier comps in Q3 and Q4? I think we, you know, we don't tend to give quarterly guidance by end market. But I think, as you guys know, if you look at how we did in the first half of the commercial aftermarket, what's implied for the second half, you'd expect probably Q4 to be the highest and some ramp-up as we proceed through the balance of the year in the commercial aftermarket. Okay.
Speaker Change: Okay. Thanks, and then I just wanted to follow up on the first question about.
Operator: Sequential after market in the second half are you baking in any sequential improvement or is it just easier comps in Q3 and Q4.
Speaker Change: I think we do.
Operator: And to give quarterly guidance by end market, but I think as you guys know if you look at how we did in the first half in commercial aftermarket what's implied for the second half you would expect probably Q4 to be the highest in some ramp up as we proceed through the balance of the year on the commercial aftermarket.
Speaker Change: Okay. Thank you.
Speaker Change: One moment for the next question.
Scott Deuschle: One moment for the next question. The next question comes from Scott Deuschle with Dorche Bank. Your line is open. Hey, good morning. Kevin, just on M&A, is your optimism on the pipeline more about the next 12 to 18 months? Or are you still optimistic?
Operator: The next question comes from Scott <unk> with Deutsche Bank. Your line is open.
Scott Deuschle: Hey, good morning.
Scott Deuschle: Okay.
Scott Deuschle: Kevin just on M&A is there optimism on the pipeline more about the next 12 to 18 months or are you still optimistic about the pipeline for the second half of this year specifically.
Kevin M. Stein: I'm optimistic about the future, but it's difficult for me to unpack it into quarterly buckets.
Scott Deuschle: I'm off.
Scott Deuschle: Domestic about the future it's difficult for me to unpack it into quarterly buckets.
Kevin M. Stein: I remain optimistic about what the future holds for M&A. Our M&A tracker, which I follow constantly, has the most names, and it's the busiest we've probably ever been in M&A. Again, it doesn't tell you what's going to close.
Scott Deuschle: I remain optimistic about what the future holds for M&A.
Kevin M. Stein: Our M&A tracker that I follow.
Kevin M. Stein: Constantly it's has the most names it's the busiest we've probably ever been in the M&A again. It doesn't tell you whats going to close we remain very picky and the businesses that we choose and we will continue to do that.
Kevin M. Stein: We remain very picky in the businesses that we choose, and we will continue to do that. We have a lot of activity in the small and medium-sized businesses. We announced two in our 10Q today that are smaller-sized businesses but nicely accretive, as I said in my opening comments. Yeah, there's a lot going on out there. We're very busy. Great, thank you.
Kevin M. Stein: We have a lot of activity in the small and medium size, we announced to our 10-Q today.
Kevin M. Stein: Our smaller sized businesses, but nicely accretive as I said in my opening comments.
Kevin M. Stein: Yeah, there is a lot going on out there we're very busy.
Speaker Change: Great. Thank you and then Mike you are seeing really good leverage on gross margins, but SG&A, it's been growing it looks like at the faster than sales.
Kevin M. Stein: Just over the last few quarters. So I'm curious if you could talk a bit about what's driving that SG&A expense growth to outstrip sales and then when we should expect to see better operating leverage on that line specifically thanks.
Sarah Louise Wynne: Yeah, I can speak to that one. A large portion of what you see is some of that increase on non-cash.com that plays into it. When you look at that, it's actually just the raw sales, which you'll see in the quarterly. When it's published later today, you'll see that actually the percent is going down.
Kevin M. Stein: I can speak to that one a large portion of that you see some of that increase on the non cash stock comp plays into it when you look at that to me just the raw sales, but youll see it accordingly.
Sarah Louise Wynne: Obviously today, it's just that simple.
Speaker Change: Got that.
Speaker Change: Great. Thank you.
Operator: Please stand by for the next question. The next question comes from Gautam Khanna with TV Co., and your line is open. Hey, good morning, guys. Good morning. I was wondering if you could expand upon your comments in the
Speaker Change: Please standby for the next question.
Operator: The next question comes from Gautam Khanna with TD Cowen Your line is open.
Gautam J. Khanna: Hey, good morning, guys.
Gautam J. Khanna: Good morning.
Gautam J. Khanna: I was wondering if you could expand upon your comments in the prepared remarks.
Gautam J. Khanna: About differences in the distribution channel versus.
Gautam J. Khanna: What you are seeing direct so.
Gautam J. Khanna: If you could just.
Gautam J. Khanna: Tell us a little more where you are seeing better sell through.
Gautam J. Khanna: That's fine to the freighter market are not yet et cetera.
Gautam J. Khanna: The two don't always perfectly correlate in terms of what we see through our POS with our distributors and then what we do directly. What goes through distribution now bounces around a little bit, but it's about 20 to 25% or so of our CAM sales, and it's a decent leading indicator usually of future orders that will come, obviously, because the distributors sell out their inventory that they hold on our behalf so that we can get product quickly to customers, and then we've got to replenish it.
Gautam J. Khanna: The two don't always perfectly correlate in terms of what we see through our Pos with our distributors and then what we do directly.
Gautam J. Khanna: Through distribution now it bounces around a little bit, but that's about 20% to 25% or so of our cam sales and it's a decent leading indicator usually of future orders that will come obviously, because the distributors sell out their inventory that they hold on our behalf. So that we can get product quickly to customers that we got to replenish it.
Gautam J. Khanna: So, the sales eventually come to replenish the sales they see, but they, on a quarterly basis, don't always move exactly in the right direction. But over time, POS tends to be a pretty decent leading indicator of where the whole commercial aftermarket's heading, and that's what gives us, as we said in the remarks, some confidence today as we look out where the commercial aftermarket's likely to go for the balance of the year. And can you comment on BizJet, Hilo, and Freighter specifically?
Gautam J. Khanna: So the sales kind of eventually to replenish the sales they see but on a quarterly basis don't always move.
Gautam J. Khanna: Lastly, in the right direction, but overtime.
Gautam J. Khanna: Pos tends to be a pretty decent leading indicator of where the bulk commercial aftermarket is heading and thats what gives us.
Gautam J. Khanna: Send the remarks of confidence today, as we look out look out where commercial aftermarkets likely to go for the balance of the year.
Gautam J. Khanna: And can you comment on Biz jet and.
Speaker Change: And specifically do you think.
Gautam J. Khanna: In the early innings of that business.
Mike Lisman: Do you think we're in the early innings of that business, or declining? Or you know, what's your expectation for when that might actually turn positive again? It's hard to say. I think it's hard to say.
Gautam J. Khanna: Declining.
Mike Lisman: What's your expectation for when that might actually turn positive again.
Mike Lisman: It's hard to say I think it's hard to say it depends where the freighter market goes but generally.
Mike Lisman: It depends where the freighter market goes. But generally, you know, with the belly capacity having come back, you'd expect 24 to be the year we take it. Most of the clients declined on the full freighter business, but we saw a great run-up during COVID on the freighters. And now the market's just sort of correcting back to the 19 levels in terms of what goes via full freighter and what goes via belly. So 24 is going to be probably the biggest year where that correction occurs. Thanks.
Mike Lisman: With the belly capacity haven't come back.
Mike Lisman: We would expect 24 to be the year, where we take it.
Mike Lisman: Most of the decline on the full trader business, we had some great brought up during COVID-19 on the freighters and now the market's just sort of correcting back to the 19 levels in terms of what goes via full freighter and what goes via belly.
Mike Lisman: So 24 is going to be probably the biggest year.
Mike Lisman: Where that correction kirsch.
Speaker Change: Thanks, guys.
Speaker Change: One moment for the next question.
Operator: One moment for the next question. The next question comes from Peter Arment with Baird. Your line is open.
Mike Lisman: The next question comes from Peter Arment with Baird. Your line is open.
Peter J. Arment: Good morning everyone, nice results. I wanted to circle back on, Joel, you gave some comments about just some of the, how some of the passenger travel markets are doing; you talked about China. Could you maybe talk about, maybe just if you could call out what you're seeing from an aftermarket perspective on a regional basis or any color that, you know, international versus domestic, if you're seeing any.
Peter J. Arment: Yes, good morning, everyone nice results.
Peter J. Arment: I wanted to circle back on.
Peter J. Arment: Joe You gave some comments about just some of the some of the passenger travel markets were doing you talked about China could.
Peter J. Arment: Could you maybe talk about maybe just if you could call out if what you're seeing from an aftermarket perspective on a regional basis or any color that you know international versus domestic or are you seeing any any any big differences.
Mike Lisman: We don't get great split-outs by region when it comes to our commercial aftermarket sales. As a lot of you know, the IATA data we referenced basically supports the highest growth rates being in China and Asia. A lot of that would go via our distributors; we don't get great visibility into it, but we're, of course, benefiting from it. I think you see the strength of the bookings strength we have, but we don't get great data by region.
Speaker Change: We don't get great split out by region when it comes to our commercial aftermarket sales.
Mike Lisman: A lot of the IATA data, we referenced basically.
Mike Lisman: Supports the highest growth rates being in China and Asia.
Mike Lisman: A lot of that would go via our distributors, we don't get great visibility into it.
Mike Lisman: We are of course benefiting from it I think you see that the bookings strength, we have but we don't get great data by region.
Mike Lisman: Okay, that's helpful. Just was curious. And then, could you give us an update on, you know, what you're seeing in the supply chain? Obviously, it's been, you know, something that has slowly improved, but it's always whack-a-mole, I assume, and any color on what you're seeing in the latest.
Mike Lisman: Okay.
Mike Lisman: I'll phone just just just was curious and then just could you give us an update just on.
Mike Lisman: What youre seeing in the supply chain, obviously, it's been something that has slowly improve but thats always.
Mike Lisman: Whack, a mole I assume and just any color on what youre seeing in the latest in the supply chain.
Mike Lisman: I'd say it continues to get better, not back to where it was in 2019 yet, but better than where it was 12 months ago, 24 months ago. It continues to have issues with items like certain electronics, casting, certain chemicals, or materials, but continued progress.
Mike Lisman: I'd say it continues to get better not back to where it was in 2019, yet but better than where it was 12 months ago 24 months ago continue to have issues with items like electronics castings, certain chemicals or materials, but continued progress.
Mike Lisman: I appreciate the color. Thanks, guys. I'll stick with it.
Speaker Change: I appreciate the color thanks, guys I'll stick to one.
Operator: One moment for the next question. The next question comes from Robert Stallard with Vertical Research. Your line is open. Thanks.
Speaker Change: One moment for the next question.
Operator: The next question comes from Robert Stallard with vertical research your line is open.
Robert Alan Stallard: Thanks, so much good morning.
Robert Alan Stallard: This might be for Kevin. Your comments on...
Operator: Alright.
Robert Alan Stallard: And this might be for Kevin.
Robert Alan Stallard: Your comments on the Boeing situation.
Robert Alan Stallard: On commercial OEM.
Robert Alan Stallard: What we said three months ago I was wondering if you did I think we keep steel piling expectations this quarter and if you did.
Robert Alan Stallard: Maybe offset mostly offset by somebody else for them.
Mike Lisman: I'll take that one, Rob. I think, you know, in the commercial OEM business, our first half ran a little bit better than the full year guidance. It's something like plus twenty-three percent. I think we're cautious on the outlook here and for commercial OEM overall, and the OEM forecast incorporates an appropriate level of risk around a potential Boeing rate change. Our forecast is a reminder, and I think, as you know, it's a bottoms-up forecast from our operational units based on what they're seeing and what they're hearing from their operational units.
Kevin: I'll take that one Rob I think the commercial OEM, our first half ran a little bit better than the full year guidance is something like plus 23% I think we're cautious on the outlook here in commercial OEM overall, and the OEM forecast incorporates an appropriate level of risk around a.
Mike Lisman: Boeing rate change our forecast as a reminder, and I think as you know, it's a bottoms up forecast from our units based on what they're seeing what they're hearing from their op units, it's not a corporate top down mandate on hey, the Bill Great you should assume for Max It's a 38 or so.
Mike Lisman: It's not a corporate top-down mandate on, hey, the build rate you should assume for max is, say, thirty eight or so. It's a bottoms up build based on what they're seeing at their specific operation unit. And as a reminder, we have a lot of content on those aircraft that doesn't go direct to Boeing. It often goes into sub-tiers just given the nature of the proponents we're selling who could be taking actions independently based on what they're seeing and hearing as well.
Mike Lisman: Based on what they are they're seeing at their specific op unit and.
Mike Lisman: As a reminder, we a lot of our content on those aircrafts that doesn't go direct to Boeing and often goes into sub tiers, just given the nature of the components, we're selling who could be taking actions independently based on what they're seeing hearing as.
Mike Lisman: But in a nutshell, we feel good about the guide for the year of around twenty percent and any potential reductions we've baked into the guidance we're given today for the year. I think it's also fair to say that Airbus is continuing to do better, so that's going to continue to backfill some of the possible hole created by Boeing in the short term.
Mike Lisman: As well, but in a nutshell, we feel good about the <unk>.
Mike Lisman: For the year of around 20% and any potential reductions with baked into the guidance, we're giving today for the year.
Speaker Change: Okay and then.
Mike Lisman: Is it fair to say.
Mike Lisman: I think it's also fair to say that Airbus is continuing to do better. So that's going to continue to backfill some of the possible hole created by Boeing in the short term.
Kevin M. Stein: And then just as a follow-up, Kevin, on your comment on your M&A tracker and it being as busy as you can remember, what do you think is driving that? And is there any sort of change, given the number of targets, any change to the pricing that you're seeing being discussed? Yeah, I wish.
Kevin M. Stein: And then just as a follow up Ken.
Kevin M. Stein: Kevin on your comment on your M&A track and a base to be a dead because of that but.
Kevin M. Stein: What do you think is driving that and is there any sort of change given the amount of targets or any change to the pricing discussion.
Kevin M. Stein: Yeah, I wish I knew that it would help me when things slow down to better understand. It just seems to be a busy time right now, whether that's, you know, expectations around the market segment. I don't, I don't know. And it's difficult for me to speculate. It's just a busier time. We haven't changed our standards or our expectations at all. We still view businesses the way we have since the beginning.
Kevin: Yeah, I wish I knew that it would help me when things slow down to better understand it.
Kevin M. Stein: It just seems to be a busy time right now whether that's expectations around the market segment that I don't I don't.
Kevin M. Stein: No and it's difficult for me to speculate it's just a busier time, we haven't changed our standards or our expectations at all we still view businesses. The same way we have since the beginning.
Kevin M. Stein: So you.
Kevin M. Stein: You can only swing at the pitches that get thrown as Nick used to say years ago, and that's still true today.
Operator: Thank you.
Speaker Change: Okay. That's great. Thank you.
Noah Poponak: One moment for the next question. The next question comes from Noah Poponak with Goldman Sachs. Your line is open.
Speaker Change: One moment for the next question.
Noah Poponak: Yeah.
Noah Poponak: The next question comes from Noah <unk> with Goldman Sachs. Your line is open.
Noah Poponak: Hey, good morning, everyone.
Noah Poponak: Alright perfect.
Mike Lisman: I was curious if you could help me better understand if Uh, freight is a drag inside of the aerospace aftermarket in the back half. How does the total aftermarket growth rate accelerate in the back half? Are BizJet and Helicopter on the passenger side faster growing in the back half, or is it just the comparisons or something?
Noah Poponak: I was curious if you could help me better understand if you are assuming that.
Mike Lisman: Freight is a drag inside of the aerospace aftermarket in the back half.
Mike Lisman: Sure.
Mike Lisman: How does the total aftermarket growth rate accelerate in the back half.
Mike Lisman: It's biz jet and helicopter and the passenger side faster growth in the back half or is it just the compares or something else.
Mike Lisman: I think we'll all take a stab at it, and hopefully, it addresses what you're trying to get at.
Speaker Change: I think I'll take a stab at it and hopefully that addresses what youre trying to get at.
Mike Lisman: We've seen really strong growth in the passenger and we see that continuing based on bookings in the back half of the year trade.
Mike Lisman: We've seen really strong growth in passenger numbers, and we see that continuing based on bookings in the back half of the year. We've continued to see a bit of softness on the booking side there, which is how we know in the second half that we're likely to see some continued, Transcribed by https://otter.ai commercial aftermarket overall is the continued strength and passenger and interior. That is the best majority when you lump those two buckets together in the commercial aftermarket bucket, and we're seeing really good strength there that's covering up some of the weakness elsewhere as we look out for the last six Okay, yeah. I guess.
Mike Lisman: We've continued to see a bit of softness on the bookings side, there, which is how we know in the second half that we're likely to see some continued.
Mike Lisman: Slight decline there biz jet thus far this year was up a bit I think in Q1 Q2 was down a bit for the year it's about.
Mike Lisman: Flattish.
Mike Lisman: We expect to see something like that maybe a little bit better.
Mike Lisman: In the back half, but really what's driving the.
Mike Lisman: The commercial aftermarket overall is the continued strength in passenger and interior of that is the vast majority when you lump those two buckets together of that commercial aftermarket bucket and we're seeing really good strength there that's covering up some of the weakness elsewhere as we look out for the last six months.
Mike Lisman: Okay. Yeah, I guess it sounds like you're qualitatively directionally saying you expect passenger and freight to do something similar in 3Q and 4Q as they did in 2Q, but for the aggregate segment or end market growth rate to accelerate. Somewhat significantly, but I guess if passengers are a little better, freight is a little better, and the comparisons are easier, that maybe that gets. I think that's right.
Speaker Change: Okay, Yeah, I guess, it sounds like you're qualitatively Directionally, saying, you expect passenger and freight.
Mike Lisman: To do something similar in <unk> and <unk> as they did in <unk>, but but for the aggregate segment or end market growth rate to accelerate.
Mike Lisman: Somewhat significantly but.
Mike Lisman: Yes, if passengers a little better if rates are little better and the compares are easier.
Mike Lisman: Maybe that gets you there.
Speaker Change: I think thats right.
Mike Lisman: Yes.
Mike Lisman: Yes. Okay. Okay. Did the rate of change in price change very much in the aftermarket in the second quarter?
Mike Lisman: Okay.
Mike Lisman: Okay.
Mike Lisman: Did did the rate of change in price change very much in the aftermarket in the second quarter.
Kevin M. Stein: Unappreciably, no, I think we always, as you guys know, we seek to price slightly ahead of inflation. And that's unchanged this quarter. The same expectations as we always have for our operating units and what the teams look to execute on. But I think we don't spend enough time talking about or emphasizing the gains we've made in productivity. You know, we are down thousands of heads compared to where we were at very much comparable volumes or approaching comparable volumes. That's real productivity, as we have been reluctant to add back and drive engineering productivity projects in our facilities. That is clearly having an impact on our EBITDA.
Speaker Change: Appreciably no I think we always as you guys know we seek to price slightly ahead of inflation.
Kevin M. Stein: And Thats unchanged this quarter same expectation as we always have for our operating units and what the teams look to execute on.
Kevin M. Stein: But I think we spend enough time talking about are emphasizing the gains we've made in productivity.
Kevin M. Stein:
Kevin M. Stein: We are down thousands of heads compared to where we were at very much comparable volumes are approaching comparable volumes. That's a real productivity as we have been reluctant to add back and driving engineering productivity projects in our facilities that is clearly having an <unk>.
Kevin M. Stein: Impact on our EBITDA.
Kevin M. Stein: Yeah, you can definitely see that in the margins. Okay, Kevin, you mentioned adding people to the M&A team. Can you quantify that? Like how many people relative to the base or what kind of percentage increase you're making? Just curious there.
Kevin M. Stein: Yes, you can definitely see that in the margins.
Kevin M. Stein: Okay, Kevin you mentioned, adding people to the M&A team can you quantify that like how many people relative to the base or what kind of percentage increase you are making just curious there.
Kevin M. Stein: We're looking to add one or two more folks to our M&A team. We are seeing a lot of really interesting smaller-sized deals, and small deals take as much time to go through as bigger ones, so we need some more help to go through that. So, you know, hopefully, this will produce some more opportunities for us as we're seeing things come across our desks that we haven't seen before.
Kevin: Yeah, we're looking to add one or two more folks to our M&A team.
Kevin M. Stein: We are seeing a lot of really interesting smaller sized deals and small deals take as much time to go through as bigger ones. So we need some more help to go through that.
Kevin M. Stein: So hopefully this will produce some more opportunity for us as well.
Kevin M. Stein: We're seeing things come across.
Kevin M. Stein: Our desks that we haven't seen before.
Speaker Change: Okay. Thank you.
Operator: One moment for the next question. The next question comes from Sheila Kahyaoglu with Jeffreys. Your line is open. Good morning, guys.
Speaker Change: One moment for the next question.
Sheila Karin Kahyaoglu: The next question comes from Sheila <unk> with Jefferies. Your line is open.
Sheila Karin Kahyaoglu: Good morning, guys, and thank you. First, I wanted to bring up another aftermarket question. It's been asked several ways, but up eight, if we take out freight, which is 15% of your aftermarket, just an assumption there, that's two points of a headwind. How do we think about, you know, where peers were averaging about 15% on the quarter and you guys at 10, you know, and you having more price power, you know, how do we think about what held the aftermarket back outside of freight and bizjet?
Sheila Karin Kahyaoglu: Morning, guys and thank you.
Sheila Karin Kahyaoglu: First I wanted to beat up another aftermarket question.
Sheila Karin Kahyaoglu: Several ways, but up eight.
Sheila Karin Kahyaoglu: If we take out rate, which is 15% of your aftermarket just an assumption there that's two points of a headwind how do we think about you know where our peers were averaging about 15% on the quarter and you guys that 10.
Sheila Karin Kahyaoglu: And you have more pricing power.
Sheila Karin Kahyaoglu: Do we think about what held aftermarket back outside of <unk>.
Mike Lisman: You know, I think on a quarterly basis, you can always see a little bit of lumpiness, as we said here before. I'm not sure I exactly follow the math on the 2% drag.
Sheila Karin Kahyaoglu: I think on a quarterly basis, you can always see a little bit of Lumpiness. If we stood here before.
Mike Lisman: Not sure I exactly to follow follow the math on the 2%.
Mike Lisman: Drag but.
Mike Lisman: As we said today, we saw really strong bookings across our whole business. It can be lumpy, we feel really good about the outlook for the full year.
Mike Lisman: With the mid teens percentage growth there.
Mike Lisman: But, you know, as we said today, we saw really strong bookings across our whole business, which can be lumpy. We feel really good about the outlook for the full year with the mid-teens percentage growth there. Yeah, I mean, we sequentially booked more in aftermarket, and we're seeing robust bookings in aftermarket on the commercial side. I think we feel optimistic, right? That's right.
Speaker Change: Yes, I mean, we sequentially booked more in aftermarket, we're seeing robust bookings and aftermarket on the commercial side I think we feel optimistic right that's right yes.
Sheila Karin Kahyaoglu: Okay, great. And then Kevin, I had to buy myself some time to do that math on the headcount productivity you just gave us. So I think headcount is 15% below 2019 levels, while sales are up significantly above 2019.
Speaker Change: Okay, Great and then Kevin I had to buy myself, some time to do that math on the head count productivity just gave us. So I think head count is 15% below 2019 levels. While sales are up significantly above 2019, so with that productivity benefit in mind, how do we think about.
Sheila Karin Kahyaoglu: EBITA margin decelerating 100 deaths half over half in the second half.
Kevin M. Stein: Yeah, I take your point. But again, we hopefully aim to be conservative in our forecasting. You know, we're trying to stick to our yearly forecast on EBITDA. We had a very strong Q2. We'll see how the back half of the year unfolds. We certainly don't have any large negatives that we're aware of. So I think it's just our standard conservatism. We don't have any concerning trends that we're trying to, you know, peanut butter over here or anything. This is a list.
Sheila Karin Kahyaoglu: Yeah.
Kevin M. Stein: Take your points again, we hopefully aimed to be conservative in our forecasting.
Kevin M. Stein: Trying to stick to our yearly forecast on EBITDA, we had a very strong Q2.
Kevin M. Stein: We will see how the back half of the year unfolds. We certainly don't have any large negatives that we're aware of so I think it's just our standard conservatism. We don't have any concerning trends that we're trying to you know.
Kevin M. Stein: Peanut butter over here or anything this is.
Kevin M. Stein: Our strong bookings across all of our segments and really a good tailwind both on the OEM commercial OEM commercial aftermarket and clearly on the defense side, we remain optimistic.
Speaker Change: Great. Thank you.
Operator: One moment for the next question. The next question comes from Kristine Liwag with Morgan Stanley. Your line is open.
Speaker Change: One moment for the next question.
Kristine Tan Liwag: Next question comes from Kristine <unk> with Morgan Stanley. Your line is open hey, good morning.
Kristine Tan Liwag: Hey, morning, everyone. Kevin, you know, in previous investor days, you've talked about how TransDigm had about 400,000, excuse me, 400,000 PMA SKUs. And I think there was a point in time you were averaging something like 20,000 new SKUs per year. I guess, you know, this has been a few years since you disclosed this. I was wondering if you could size PMA today as a percent of your portfolio, and also in an environment where the supply chain is still struggling, and you're clearly able to produce parts. Can you provide more color on where that market is and how attractive you think it is?
Kristine Tan Liwag: Everyone, Kevin in previous Investor days, you've talked about how genzyme had about 400000 excuse me.
Kristine Tan Liwag: 400000, PMA Skus and I think there was a point in time, you were averaging something like 20000, new <unk> per year.
Kristine Tan Liwag: Yes, you know this has been a few years ago since you've disclosed. This I was wondering if you could size PMA today as a percent of your portfolio and also in an environment, where the supply chain is still struggling and youre clearly able to produce parts can you provide more color on you know.
Kristine Tan Liwag: That is that market and how attractive you think it is.
Kevin M. Stein: I think we can give more updates and color on this topic at our investor day coming up at the end of June. But just from a top level, we don't consider PMAs to be a significant impactor of our business. We have somewhere around 500,000 part numbers that we sell across commercial and defense. We do monitor it regularly.
Kristine Tan Liwag: So I think we can give more update and color on this topic at our Investor day coming up at the end of June.
Kevin M. Stein: But just from a top level, we don't consider PMA is to be a significant impact or of our business. We have somewhere around 500000 part numbers that we sell across commercial and defense.
Kevin M. Stein: We are the largest creator of PMA parts in our space that we sell into on our products. That's how you sell into the aftermarket. So I think it's a much similar situation to what we've seen in the past. Opportunities exist for us to replace other struggling suppliers. We certainly see that. Again, PMA and used and serviceable materials aren't a significant impactor on our business on a regular day-to-day basis. It doesn't mean that there aren't some parts that are more impacted, but on a go-forward basis, it's a very, very small leak in our business, if you will.
Kevin M. Stein: We do monitor it regularly we are the largest creator of PMA parts.
Kevin M. Stein: <unk>.
Kevin M. Stein: A space that we sell into.
Kevin M. Stein: Our products, that's how you sell into the aftermarket so I think the.
Kevin M. Stein: It's much similar situation to what we've seen in the past.
Kevin M. Stein: Yes, so the opportunities exist for us too.
Kevin M. Stein: Replace other struggling suppliers, we certainly see that.
Kevin M. Stein: We are.
Kevin M. Stein: Again PMA.
Kevin M. Stein: The serviceable materials arent a significant.
Kevin M. Stein: Impacts to our business on a regular day to day basis. So it doesn't mean that there aren't some parts that are more impacted but on a go forward basis, it's a very very small.
Kevin M. Stein: Leak in our business if you will.
Sarah Louise Wynne: Thanks, Kevin. And Sarah, if I could follow up on leverage, I mean, you guys are clearly investing in your M&A team with the headcount ad. But if there are no incremental deals to fund in the near and medium term, how do you think about the split between paying a special dividend versus doing more share buybacks?
Speaker Change: Thanks, Kevin and Sir if I could a follow up on leverage I mean, you guys are clearly investing in your M&A team with the head count add but if there are no incremental deals to fund in the near and medium term. How do you think about the split between paying a special dividend versus doing more share buybacks.
Sarah Louise Wynne: Yeah, I mean, obviously, we look at both of those. Obviously, the first and foremost is to invest capital in our businesses and do M&A. And then we look at those two, and we look at them all the time. And obviously, we're sitting on plenty of cash, as you know. So at some point in the future, we'll look to make a decision on which one makes sense and what is best to do with the cash. You know, I think we should
Sarah: Yes, I mean, obviously, we look at both of those uptake plastic format to invest the capital in our businesses through M&A and then we'll look at those two and we look at them all the time and obviously, we're sitting on plenty of cash as you know so at some point in the future to make a decision on which one makes sense well that's to do with the cash.
Kevin M. Stein: You know, I think we, to add to that, I think we just, you know, we paid a dividend in Q1. I think we'll be able to make a decision in Q4, probably this year, about, you know, our plan.
Speaker Change: I think we to add to that I think we just we paid a dividend in Q1.
Kevin M. Stein: I think we will be.
Kevin M. Stein: Be able to make a decision in Q4.
Kevin M. Stein: Probably this year.
Kevin M. Stein: <unk>.
Kevin M. Stein: Our plants.
Operator: Great. Thank you very much, guys.
Speaker Change: Great. Thank you very much guys.
Michael J. Lisman: Sure, thanks. One moment for the next question. The next question comes from Michael Leshock with KeyBank. Your line is now open.
Speaker Change: Sure one moment for the next question.
Michael J. Lisman: The next question comes from Michael Lewis Shock with Keybanc. Your line is now open.
Mike Lisman: Morning. I think you had previously alluded to volume growth within the aftermarket in 2025. If we look ahead a bit further, is that still your view? And is there anything you could call out that needs to happen to meet the strong demand within the aftermarket that we're seeing and continue to grow volumes, just given some of the constraints that we're seeing out there right now?
Michael J. Lisman: Hey, good morning.
Michael J. Lisman: Morning.
Mike Lisman: I think you had previously alluded to volume growth within aftermarket in 2025.
Mike Lisman: If we look ahead a bit further.
Mike Lisman: Is that still your view and is there anything you could call out that needs to happen to meet the strong demand within aftermarket that we're seeing and continue to grow volumes just given some of the constraints that we're seeing out there right now.
Mike Lisman: Sorry, the question about whether 2025 commercial aftermarket volume growth will continue. Yep, that's right.
Mike Lisman: Sorry is the question about whether 2025 commercial aftermarket volume growth will continue.
Speaker Change: Yes, that's right.
Mike Lisman: I think generally, if you look at the forecast from IATA, the investment bank forecasts that are out there, generally, folks are expecting RPMs and takeoffs and landings to continue to pick up next year. That said, it's at a moderating pace relative to what it has been in the past couple of years as we've come out of COVID, so there's still growth, but maybe not quite as high as it was in, say, 2022.
Mike Lisman: I think generally as you look at.
Mike Lisman: The forecast from IATA the investment bank forecasts that are out there generally folks are expecting rpms and takeoffs and landings to continue to tick up next year that said, it's at a moderating pace relative to what it's been in the past couple of years as we come out of Covid, So theres still growth, but maybe not.
Mike Lisman: Not quite as high as it was in say 2022, we've already seen some of that moderation, but yes of course, if you look at IATA forecasts other forecast the world's flying a lot people continue to fly that's reflected and takeoffs and landings unexpected RPM growth. So we'd very much expect as a result of that continued volume growth in commercial.
Mike Lisman: We've already seen some of that moderation, but yes, of course, if you look at IATA forecasts, other forecasts, the world is flying a lot. People continue to fly. That's reflected in takeoffs and landings and expected RPM growth. So we would very much expect, as a result of that continued volume growth in the commercial aftermarket.
Mike Lisman: Aftermarket.
Mike Lisman: And then just on capital allocation and your priority of reinvesting in the business. Could you talk about what areas of the business you expect to invest the most or anything you're targeting, whether it be bottlenecks, or just any way to frame the organic investments you're making? Thanks. Yeah, the biggest investment and use of our capital has been
Mike Lisman: And then just on capital allocation on your priority of reinvesting in the business.
Mike Lisman: Could you talk to what areas of the business you expect to invest the most or anything you're targeting whether it be bottlenecks or just any way to frame the organic investments youre, making thanks, yes, the biggest investment and use of our capital has been.
Mike Lisman: Yeah, the biggest investment and use of our capital has been To the productivity comment Kevin made earlier, it's automation projects. We have said, as we said before, when we were in the depths of COVID, we'll not add costs back radically as we come out of it. And we haven't done that. That's reflected in the headcount we have today. And the operating unit teams have done an exceptional job of finding good automation projects, whether it's co-bots or material movers or new machining centers to basically increase the amount of automation in their facilities and reduce the headcount, and reduce the cost footprint. That's why you're seeing the better margins that we delivered this quarter.
Mike Lisman: So the productivity comment Kevin made earlier, it's automation projects we have.
Mike Lisman: As we said before when we were in the depths of Covid.
Mike Lisman: We will not add cost back ratably as we come out of it and we haven't done that that's reflected in the head count we have today and the operating unit teams have done an exceptional job of finding good automation projects, whether it's co bots or material movers are new machining centers.
Mike Lisman: So basically increased the amount of automation in their facilities and reduce the head count reduced the cost footprint Thats why youre seeing the better margins that we delivered this quarter.
Speaker Change: Thanks, guys.
Operator: Please stand by for the next question. The next question comes from Pete Osterland with Truist Securities. Your line is open.
Speaker Change: Please standby for the next question.
Peter Osterland: The next question comes from Pete Australian with true with Securities. Your line is open.
Peter Osterland: Hey, good morning. I'm on for Mike Ciaramoli.
Peter Osterland: Hey, good morning, I'm on for Mike <unk>, Thanks for taking our questions.
Operator: Thanks for taking our questions. I just had a follow-up on the question on Boeing production expectations. I appreciate the color you gave on the bottoms-up approach to your forecast, but could you share any specifics on what monthly rate you would estimate you are currently producing to for the max on average, and just directionally, what assumptions are embedded in your guidance there for the balance of the year?
Operator: I just had a follow up on the question on <unk>.
Operator: Boeing production expectations I appreciate the color you gave on the bottoms up approach to your forecast.
Operator: Could you share any specifics on what monthly rate you would estimate you are currently producing too for the Max on average and just Directionally what assumptions are embedded in your guidance there for the balance of the year.
Mike Lisman: I think it varies a lot from unit by unit based on the demand they're seeing from their customers. Obviously, sometimes it sub-tiers, as we said, so it's hard to go back and calculate into some kind of rate. You know, I'd expect that something around 38, maybe a little bit less, but it's hard to say. Some kind of averaging to see exactly what it is across the ranch.
Operator: I think it varies a lot op unit by Op unit based on the demand they're seeing from their customers, obviously, sometimes that sub tiers. As we said so it's hard to go in back calculated to some kind of rate.
Mike Lisman: I would expect that something around 38, maybe a little bit less but it's hard to say.
Mike Lisman: There is some kind of averaging exactly what it is across the ranch.
Mike Lisman: Okay, understood. And then, just as a follow-up, has the uncertainty around OEM production and some of the delayed deliveries we've heard about shown up in any meaningful way in your bookings? Have you seen any shift in the bookings environment between commercial OEM and aftermarket?
Speaker Change: Okay understood and then just as a follow up.
Mike Lisman: Has the uncertainty around OEM production and some of the delayed deliveries that we've heard about showed up in any meaningful way in your bookings have you seen any shift in the bookings environment between commercial OEM and aftermarket.
Mike Lisman: Now, continue with strength that supports the guidance on both sides.
Speaker Change: No continue.
Mike Lisman: With strength that supports the guidance on both.
Operator: I appreciate it. Thank you.
Speaker Change: I appreciate it thank you.
Jaimie Stemen: I have no further questions at this time. I would now like to turn the call back over to Jaimie for closing remarks.
Operator: I show no further questions at this time I would now like to turn the call back over to Jamie for closing remarks.
Jaimie Stemen: Thank you all for joining us today. This concludes the call. We appreciate your time, and have a good rest of your day.
Jaimie Stemen: Thank you all for joining us today.
Jaimie Stemen: <unk> the call. We appreciate your time and with the rest of your day.
Operator: This does conclude today's conference call. Thank you for participating. You may now disconnect.
Speaker Change: This does conclude today's conference call. Thank you for participating you may now disconnect.
Operator: [music].
Operator: Okay.
Operator: Okay.
Operator: Okay.
Operator: [music].