Q3 2024 TransDigm Group Inc Earnings Call

Speaker Change: Good day everyone and thank you for standing by. Welcome to the third quarter 2024 TransDime Group Incorporated Earnings Conference Call.

Operator: 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 participate, you will need to press star-11 on your telephone. You will then hear a message advising that your hand is raised. To withdraw your question, simply press star-11 again. Please be advised that today's conference is being recorded. I will hand the call over to the CEO of TransDigm Group Inc. and the Director of Investor Relations, Jaimie Stemen.

Speaker Change: 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 participate, you will need to press star 11 on your telephone. You will then hear a message advising your hand is raised.

Speaker Change: To withdraw your question simply press star 11 again. Please be advised that today's conference is being recorded. I will hand the call over to the Director of Investor Relations, Jaimie Stemen.

Jaimie Stemen: Thank you, and welcome to TransDigm's Fiscal 2024 3rd Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm's President and Chief Executive Officer, Kevin Stein, Co-Chief Operating Officer, Joel Reiss, and Chief Financial Officer, Sarah Wynne. Also present for the call today is our COO, Mike Lisman.

Speaker Change: Thank you and welcome to TransDimes Fiscal 2024 3rd Quarter Earnings Conference Call. Presenting on the call this morning are TransDimes President and Chief Executive Officer Kevin Stein, Co-Chief Operating Officer Joel Reiss, and Chief Financial Officer Sarah Wynne.

Speaker Change: Also present for the call today is our Co-Chief Operating Officer, Mike Lisman.

Jaimie Stemen: 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.

Speaker Change: Please visit our website at transdime.com to obtain a supplemental slide deck and call replay information.

Speaker Change: 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.

Speaker Change: For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statement, please refer to the company's latest filings with the SEC available through the investor section of our website or at sec.gov.

Jaimie Stemen: 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 GAAP measures and applicable reconciliation. I will now turn the call over to Kevin. Good morning. Thanks.

Speaker Change: 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.

Speaker Change: Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliations.

Kevin Stein: Good morning. Thanks for calling in today. First, I'll start off with the usual quick overview of our strategy, a few comments about the quarter, and discuss our fiscal 24 outlook. Then Joel and Sarah will give additional color on the quarter. To reiterate, we believe we are unique in the industry in both the consistency of our strategy in 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.

Speaker Change: I will now turn the call over to Kevin.

Kevin: Then Joel and Sarah will give additional color on the quarter. To reiterate, we believe we are unique in the industry in both the consistency of our strategy in both good times and bad, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle.

Kevin Stein: About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins and, over any extended period, have typically provided relative stability in the downturn. We follow a consistent long-term strategy specifically. First, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we utilize a simple, well-proven, value-based operating methodology.

Kevin: To summarize, here are some of the reasons why we believe this.

Speaker Change: 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.

Speaker Change: We follow a consistent long-term strategy, specifically

Speaker Change: First, we own and operate proprietary aerospace businesses with significant aftermarket content.

Speaker Change: Second, we utilize a simple, well-proven, value-based operating methodology.

Kevin Stein: Third, we have a decentralized organizational structure and unique compensation system closely aligned with shareholder interests. Fourth, we acquire businesses that fit this strategy and where we see a clear path to PE-like return. And lastly, our capital structure and allocations are a key part of our value creation methodology. Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation as well as the careful allocation of our capital.

Speaker Change: Third, we have a decentralized organizational structure and unique compensation system closely aligned with shareholders.

Speaker Change: Fourth, we acquire businesses that fit this strategy and where we see a clear path to PE-like returns. And lastly, our capital structure and allocations are a key part of our value creation methodology.

Speaker Change: Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital.

Kevin Stein: As you saw from our earnings release, we had a strong quarter. Our Q3 results ran ahead, and we once more raised our guidance for the year. Commercial aerospace market trends remain favorable as the industry continues to recover and progress towards normalization. Robust demand for travel persists, and global air traffic continues to surpass pre-pandemic levels. 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.

Speaker Change: As you saw from our earnings release, we had a strong quarter. Our Q3 results ran ahead and we once more raised our guidance for the year.

Speaker Change: Commercial aerospace market trends remain favorable as the industry continues to recover and progress towards normalization. Robust demand for travel persists and global air traffic continues to surpass pre-pandemic levels.

Speaker Change: Airline demand for new aircraft also remains high.

Speaker Change: and the OEMs are working to increase aircraft production.

Speaker Change: However, OEM aircraft production rates remain well below pre-pandemic levels. There is still much progress to be made for OEM rates, and our results continue to be adversely affected in comparison to pre-pandemic production.

Kevin Stein: There is still much progress to be made for OEM rates, and our results continue to be adversely affected in comparison to pre-pandemic production. 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. Revenue is also sequentially improved in all three of these market chains. Our EBITDA is a fine margin of 53.3% in the quarter. Contributing to this strong Q3 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 sectors. Additionally, we had strong operating cash flow generation in Q3 of over 600 million and ended the quarter with almost 3.4 billion of cash.

Speaker Change: 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. Revenues also sequentially improved in all three of these market channels.

Speaker Change: Our EBITDA is the fine margin of 53.3% in the quarter. Contributing to this strong Q3 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.

Speaker Change: Additionally, we had strong operating cash flow generation in Q3 of over $600 million and ended the quarter with almost $3.4 billion of cash. We expect to continue generating additional cash in our final quarter of fiscal 2024.

Kevin Stein: We expect to continue generating additional cash in our final quarter of fiscal 2024. Next, an update on our capital allocation activities and priorities. This has been a busy and exciting quarter for M&A. During the quarter, we completed the acquisitions of SEI Industries and the electron device business of communications and power industry. Subsequent to the quarter close on July 31st, we closed the acquisition of Raptor Scientific.

Kevin Stein: Further details of each individual acquisition can be found in the previously published press releases on TransDigm's website. In the aggregate for these three acquisitions, we have deployed over $2.2 billion of capital in the past three months. The unique product and service offerings of each acquisition exhibit earning stability and growth potential that are consistent with our existing portfolio. These three acquisitions fit well with our long-standing strategy, and we expect each of these businesses to meet or exceed our long-term return objective.

Speaker Change: Next an update on our capital allocation activities and priorities. This has been a busy and exciting quarter for M&A. During the quarter, we completed the acquisitions of SEI Industries and the electron device business of Communications and Power Industries.

Speaker Change: Subsequent to the quarter close on July 31st, we closed the acquisition of Raptor Scientific.

Speaker Change: Further details of each individual acquisition can be found in the previously published press releases on Transdigm's website. In the aggregate for these three acquisitions, we have deployed over $2.2 billion of capital in the past three months.

Speaker Change: The unique product and service offerings of each acquisition exhibit the earning stability and growth potential that are consistent with our existing portfolio of businesses.

Speaker Change: These three acquisitions fit well with our longstanding strategy, and we expect each of these businesses to meet or exceed our long-term return objectives.

Kevin Stein: We expect these three acquisitions in total to contribute about $125 million to our fiscal year 2024 revenue and a combined margin approaching 30%. Regarding the current M&A activities and pipeline, we continue to actively look for M&A opportunities that fit our model.

Speaker Change: We expect these three acquisitions in total to contribute about $125 million to our fiscal year 2024 revenue and a combined margin approaching 30%.

Speaker Change: Regarding the current M&A activities and pipeline, we continue to actively look for M&A opportunities that fit our model.

Kevin Stein: As we look out over the time horizon, we continue to see an expanding pipeline of potential M&A targets. As we demonstrated this year, we do not see this environment slowing in the near term. As usual, the potential targets are mostly in the small and midsize range. I cannot predict or comment on possible closings but remain confident that there is a long runway for acquisitions that fit our portfolio. The capital allocation priorities at TransDigm are unchanged.

Speaker Change: As we look out over the time horizon, we continue to see an expanding pipeline of potential M&E targets. As we demonstrated this year, we do not see this environment slowing in the near term.

Speaker Change: As usual, the potential targets are mostly in the small and midsize range. I cannot predict or comment on possible closings, but remain confident that there is a long runway for acquisitions that fit our portfolio.

Kevin Stein: Our first priority is to reinvest in our businesses, and second, to do accretive, disciplined M&A. And third, return capital to our shareholders via share buybacks or dividends. A fourth option, paying down debt, seems unlikely at this time, though we do still take this into consideration. We are continually evaluating all of our capital allocation options, but both M&A and capital markets are difficult to predict. As always, we continue to closely monitor the capital markets and remain opportunistic. As mentioned earlier, we ended the quarter with a sizable cash balance of almost $3.4 billion.

Speaker Change: A fourth option, paying down debt, seems unlikely at this time, though we do still take this into consideration.

Speaker Change: 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.

Speaker Change: As mentioned earlier, we ended the quarter with a sizable cash balance of almost $3.4 billion.

Kevin 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 2024. As noted in our earnings release, we are increasing our full year 24 sales and EBITDA as defined guidelines to reflect our strong third quarter results and our current expectations for the remainder of the year, as well as to include the recent acquisitions of SEI Industries, the CPI Electron Device Business, and Raptor Scientific. Please note that each of these acquisitions closed recently; our preliminary expectations for each business will be refined as necessary over the coming month.

Speaker Change: We have significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future.

Kevin Stein: At the midpoint, sales guidance was raised $160 million, and EBITDA, as defined, was raised $85 million. The guidance assumes no additional acquisitions or divestitures and is based on current expectations for continued performance in our primary commercial end markets throughout the remainder of fiscal 2024. Our current guidance for fiscal 24 is as follows and can also be found on slide 6 in the presentation.

Speaker Change: Moving to our outlook for fiscal 2024. As noted in our earnings release, we are increasing our full year 24 sales and EBITDA as defined guidance.

Speaker Change: to reflect our strong third quarter results and our current expectations for the remainder of the year, as well as to include the recent acquisitions of SEI Industries, the CPI Electron device business and Raptor Scientific.

Speaker Change: Please note that each of these acquisitions closed recently. Our preliminary expectation for each business will be refined as necessary over the coming months.

Speaker Change: At the midpoint, sales guidance was raised $160 million, and EBITDA as defined guidance was raised $85 million.

Speaker Change: The guidance assumes no additional acquisitions or divestitures and is based on current expectations for continued performance in our primary commercial end markets throughout the remainder of fiscal 2024.

Speaker Change: Our current guidance for fiscal 24 is as follows and can also be found on slide 6 in the presentation. The midpoint of our fiscal 24 revenue guidance is now $7.9 billion or up approximately 20%.

Kevin Stein: The midpoint of our fiscal 24 revenue guidance is now $7.9 billion, or approximately 20%. 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 third-quarter results and current expectations for the remainder of the year. For defense, we now expect revenue growth in the high-teens percentage range. This is an increase from our previous guidance of the mid-teens percentage range. We are not updating the full-year market channel growth rate assumptions for commercial OEM and commercial aftermarket, as underlying market fundamentals have not meaningfully changed.

Speaker Change: 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 third quarter results and current expectations for the remainder of the year.

Speaker Change: For defense, we now expect revenue growth in the high-teens percentage range. This is an increase from our previous guidance of mid-teens percentage range.

Speaker Change: We are not updating the full-year market channel growth rate assumptions for commercial OEM and commercial aftermarket, as underlying market fundamentals have not meaningfully changed.

Kevin 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 of around twenty percent and commercial aftermarket revenue growth in the mid-teens percentage range. The midpoint of our EBITDA defined guidance is now $4.13 billion, or up approximately 22%, with an expected margin of 52.3%. This guidance includes slightly under 125 basis points of margin dilution from recent acquisitions. The midpoint of our adjusted EPS is increasing primarily due to the higher EBITDA defined guidance and is now anticipated to be $33.02, or up approximately 28% over prior years. Sarah will discuss in more detail shortly the factors impacting EPS along with some other fiscal 24 financial assumptions and updates.

Speaker Change: Commercial OEM and commercial aftermarket revenue guidance is still based on our previously issued market channel growth rate assumptions. We expect commercial OEM revenue growth of around 20% and commercial aftermarket revenue growth in the mid-teens percentage range.

Speaker Change: The midpoint of our EBITDA's defined guidance is now $4.13 billion or up approximately 22%, with an expected margin of 52.3%. This guidance includes slightly under 125 basis points of margin dilution from recent acquisitions.

Speaker Change: The midpoint of our adjusted EPS is increasing primarily due to the higher EBITDA defined guidance and is now anticipated to be $33.02.

Speaker Change: or up approximately 28% over prior year.

Speaker Change: Sarah will discuss in more detail shortly the factors impacting EPS, along with some other fiscal 24 financial assumptions and updates.

Kevin Stein: We believe we are well positioned for the last quarter of fiscal 24. We continue to closely watch how the aerospace and capital markets continue to develop, and we will 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 operational excellence. Now, let me hand it over to Joel Reiss, our TransDigm Group Co-COO, to review our recent performance and a few other items. Thanks, Kevin. And good morning.

Sarah: We believe we are well positioned for the last quarter of fiscal 24. We continue to closely watch how the aerospace and capital markets continue to develop, and we will react accordingly.

Speaker Change: 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.

Joel Reiss: Now let me hand it over to Joel Reiss, our Transdime Group Co-COO, to review our recent performance and a few other items.

Joel Reiss: I'll start with our typical review of results by key market categories. For the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period in 2023, that is, assuming we own the same mix of businesses in both periods.

Joel Reiss: Thanks, Kevin, and good morning. I'll start with our typical review of results by key market category.

Joel Reiss: For the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period in 2023. That is assuming we own the same mix of businesses in both periods.

Joel Reiss: 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 23% in Q3 compared with the prior year period. Sequentially, total commercial OEM revenues grew by about 7% compared to Q2. Bookings in the quarter were healthy compared to the same prior year period, and these booking levels continue to support the commercial OEM guidance for revenue growth of around 20% for fiscal 24.

Joel Reiss: In the commercial market, which typically makes up close to 65% of our revenue, we will split our discussion into OEM and aftermarket.

Joel Reiss: Our total commercial OEM revenue increased approximately 23% in Q3 compared with the prior year period. Sequentially, total commercial OEM revenues grew by about 7% compared to Q2.

Joel Reiss: Bookings in the quarter were healthy compared to the same prior year period, and these booking levels continue to support the commercial OEM guidance for revenue growth of around 20% for fiscal 24.

Joel Reiss: OEM supply chain and labor challenges persist but appear to be improving. As many of you know, concerns have arisen over the past few months around the expected 737 max production rate ramp. Time will tell how this plays out. As we shift to both Boeing and their sub-tiers, the impact across our businesses is somewhat varied. In general, we are seeing monthly build rates as low as 20 and as high as 42 for parts with extended lead times.

Joel Reiss: OEM supply chain and labor challenges persist but appear to be improving.

Speaker Change: As many of you know, concerns have arisen over the past few months around the expected 737 max production rate ramp. Time will tell how this plays out. As we shift to both Boeing, as well as their sub-tiers, the impact across our businesses is somewhat varied.

Speaker Change: In general, we are seeing monthly build rates as low as 20 and as high as 42 for parts with extended lead times. Overall, we would estimate an average build rate at the end of Q3 of about 25 aircraft per month.

Joel Reiss: Overall, we would estimate an average build rate at the end of Q3 of about 25 aircraft per month. The commercial OEM guidance we are giving today contains an appropriate level of risk around the maximum production build rate for the balance of our fiscal year.

Speaker Change: The commercial OEM guidance we are giving today contains an appropriate level of risk around the max production build rate for the balance of our fiscal year. We do expect the OEM challenges will have an impact on how quickly they ramp up to their target rates.

Joel Reiss: We do expect the OEM challenges will have an impact on how quickly they ramp up to their target rate. While we are not yet providing guidance for 2025, we do expect their production rate ramp-up will be slower than we had previously expected. Now, moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 11% compared with the prior year period. sequentially, total commercial aftermarket revenues grew by about 5% compared to Q2. As a reminder, our commercial aftermarket is made up of four submarkets, passenger, interior, freight, and business jet. I would like to provide a bit more color than is historically typical in commercial aftermarket submarkets.

Speaker Change: While we are not yet providing guidance for 2025, we do expect their production rate ramp-up will be slower than we had previously expected.

Speaker Change: Now, moving on to our commercial aftermarket business discussion.

Speaker Change: Total commercial aftermarket revenue increased by approximately 11% compared with the prior year period.

Speaker Change: Sequentially, total commercial aftermarket revenues grew by about 5% compared to Q2.

Speaker Change: As a reminder, our commercial aftermarket is made up of four submarkets, passenger, interior, freight, and business jet. I would like to provide a bit more color than is historically typical on our commercial aftermarket submarkets.

Joel Reiss: Growth in our passenger sub market, which is our largest, was up about 16% versus the prior year period. This sub market continues to perform exceptionally well. Year to date, as of our June quarter end, passenger sub market revenues were up 21% over the comparable prior year period. This compares favorably to the latest IATF passenger traffic data, which shows a year over year growth in June of 9.1%. For fiscal Q3, our interior sub market increased roughly 8% when compared to the prior year period.

Speaker Change: Growth in our passenger sub-market, which is our largest, was up about 16% versus the prior year period. This sub-market continues to perform exceptionally well. Year-to-date, as of our June quarter end,

Speaker Change: Passenger sub-market revenues were up 21% over the comparable prior year period. This compares favorably to the latest IATF passenger traffic data, which shows a year-over-year growth in June of 9.1%.

Speaker Change: For fiscal Q3, our interior sub-market increased roughly 8% when compared to the prior year period. This is primarily driven by repair sales, as interior refurbishments have not yet returned to 2019 levels.

Joel Reiss: This is primarily driven by repair sales as interior refurbishments have not yet returned to 2019 levels. For fiscal Q3, our business jet submarket increased roughly 10% when compared to the prior year period and reverses the lower number we saw in Q2, highlighting the lumpiness of our commercial aftermarket in any one period. BusinessJet does remain a watch item due to the tempering businessJet flight activity. However, these increases were partially offset by declines in our freight submarket, which was down roughly eight percent.

Speaker Change: For Fiscal Q3, our business jet sub-market increased roughly 10% when compared to the prior year period and reverses the lower number we saw in Q2, highlighting the lumpiness of our commercial aftermarket in any one period.

Speaker Change: BusinessJet does remain a watch item due to the temporary BusinessJet flight activity.

Speaker Change: These increases were partially offset by declines in our freight submarket, which was down roughly 8%.

Joel Reiss: The freight decline was primarily a result of the continued return of belly capacity consistent with what we have discussed on our past few earnings calls. On a sequential basis, freight was up seven percent. 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 Q3 results that make us confident here. mainly, Q3 bookings in the commercial aftermarket were strong, running in line with our expectations and outpacing sales, and supporting the full-year growth outlook.

Speaker Change: The freight decline was primarily a result of the continued return of belly capacity consistent with what we have discussed on our past few earnings calls. On a sequential basis, freight was up 7%.

Speaker Change: For the full year, and as you saw in today's guidance, our outlook for commercial aftermarket growth in the mid-teens is unchanged.

Speaker Change: We saw a number of elements in our Q3 results that make us confident here.

Speaker Change: Mainly, Q3 bookings and commercial aftermarket were strong, running in line with our expectations and outpacing sales.

Joel Reiss: Additionally, our Q3 point-of-sales data through our distribution partners was up roughly 25% from the same period last year. Finally, a reminder, the commercial aftermarket can be lumpy on a quarterly basis, both revenue and bookings. We do expect that as passenger traffic has returned to pre-pandemic levels, the commercial aftermarket rate of growth will continue to moderate. However, note that our guide for mid-teens growth across our total commercial aftermarket still incorporates a continued drag from both cargo and the business jet submarkets for the balance of the year.

Speaker Change: and supporting the full year growth outlook. Additionally, our Q3 point of sales data through our distribution partners was up roughly 25% from the same period last year.

Speaker Change: Finally, a reminder, commercial aftermarket can be lumpy on a quarterly basis, both revenue and bookings. We do expect that as passenger traffic has returned to pre-pandemic levels, the commercial aftermarket rate of growth will continue to moderate.

Speaker Change: Note that our guide for mid-teens growth across our total commercial aftermarket still incorporates a continued drag from both cargo and the business jet submarkets for the balance of the year.

Joel Reiss: Turning to broader market dynamics and referencing the most recent IATA traffic data for June, global revenue passenger miles have continued to surpass pre-pandemic levels since February 2024. In June 2024, air traffic was up 3% above 2019 levels. IATA currently expects traffic to reach 104% of 2019 levels this year and to surpass prior year traffic by 12%. Domestic travel also continues to surpass 2019 levels. In the most recently reported traffic data for June, global domestic air traffic was up 10% compared to pre-pandemic levels.

Speaker Change: Turning to broader market dynamics and referencing the most recent IATA traffic data for June, global revenue passenger miles have continued to surpass pre-pandemic levels since February 2024.

Speaker Change: June 2024 air traffic was up 3% above 2019 levels. IATA currently expects traffic to reach 104% of 2019 levels this year and to surpass prior year traffic by 12%.

Speaker Change: Domestic travel also continues to surpass 2019 levels.

Speaker Change: In the most recently reported traffic data for June, global domestic air traffic was up 10% compared to pre-pandemic levels. Domestic air travel growth has been driven significantly by outsized growth in China, which was up 22% in June compared to 2019.

Joel Reiss: Domestic air travel growth has been driven significantly by outsized growth in China, which was up 22% in June compared to 2019, shifting over to the US, where domestic travel for June was up about 6% from the 2019 level. International traffic has generally hovered slightly above or below pre-pandemic levels for the past few months. In the most recently reported data for June, international travel was just slightly below pre-pandemic levels, but this is a significant improvement from the 88% of 2019 levels one year ago.

Speaker Change: Shifting over to the U.S., domestic travel for June was up about 6% from 2019 air traffic levels.

Speaker Change: International traffic has generally hovered slightly above or below pre-pandemic levels for the past few months.

Speaker Change: In the most recently reported data for June, international travel was just slightly below pre-pandemic levels. This is a significant improvement from the 88% of 2019 levels one year ago.

Joel Reiss: In summary, for the commercial aftermarket, we continue to see strong growth in our passenger and interior submarkets indicative of the continuing positive trends in passenger traffic. We expect our freight market to remain light in year-over-year comparisons based on current trends and the underlying market. Business jet remains a watch item and may continue to bounce around.

Speaker Change: In summary, for the commercial aftermarket, we continue to see strong growth in our passenger and interior submarkets indicative of the continuing positive trends in passenger traffic.

Speaker Change: We expect our freight submarket to remain light in year-over-year comparisons based on current trends in the underlying market. Business jet remains a watch item and may continue to bounce around.

Joel Reiss: Shifting to our defense market, which traditionally is at or below 35% of our total revenue, the defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 13% compared with the prior year period and is up 20% year to date versus the prior year period. Tier 3 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.

Speaker Change: Shifting to our defense market, which traditionally is at or below 35% of our total revenue.

Speaker Change: The defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 13% compared with prior year period and is up 20% year-to-date versus the prior year period.

Speaker Change: Q3 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 aftermarket running slightly ahead of OEM.

Speaker Change: Defense bookings in the quarter were also strong compared to the same prior year period supporting the revised defense revenue guidance for the full year.

Joel Reiss: Defense bookings in the quarter were also strong compared to the same prior year period, supporting the revised defense revenue guidance for the full year. Additionally, we saw growth in U.S. government defense spending outlays during Q3. We are hopeful we will continue to see steady growth here, but as we have said many times before, defense sales and bookings can be lumpy, so forecasting them with accuracy and precision on a quarterly basis is difficult.

Speaker Change: Additionally, we saw growth in the U.S. government defense spending outlays during Q3.

Speaker Change: We are hopeful we will continue to see steady growth here, but as we have said many times before, defense sales and bookings can be lumpy. Forecasting them with accuracy and precision on a quarterly basis is difficult.

Joel Reiss: As Kevin mentioned earlier, we now expect our defense market revenue growth for this year to be in the high teens percent range. This updated guidance for defense primarily reflects the stronger than expected Q3 defense sales, as well as the good Q3 bookings. Next, I will provide a quick update on our recent acquisitions of SEI and CPI Electron Device Business. The SEI and CPI Electron Device Business acquisition integrations are both progressing well under the leadership of one of our experienced Executive Vice Presidents, Patrick Murphy.

Speaker Change: As Kevin mentioned earlier, we now expect our defense market revenue growth for this year to be in the high teens percent range. This updated guidance for defense primarily reflects the stronger than expected Q3 defense sales, as well as the good Q3 bookings.

Joel Reiss: We have owned SEI and the CPI Electron Device Businesses for a little over two months now, and we are pleased with each acquisition thus far. SEI has been bolted onto one of our existing operating units, Dart Aerospace. We have split the CPI Electron Device Business into two operating units, Microwave Power Products, located in Palo Alto and Woodland, California, and CPI Electron Devices, located in Beverly, Massachusetts and Middlesex, UK.

Sarah Wynne: Although it is very early in our ownership of these businesses, we are pleased by what we are seeing in the business. In closing, I'd like to express how pleased I am with our operational performance in the third quarter of Fiscal 2024. Our management teams remain committed to our consistent operating strategy and servicing the robust demand for our products as we continue through the remainder of the year. With that, I would like to turn it over to our Chief Financial Officer, Sarah Wynne.

Speaker Change: Although very early in our ownership of these businesses, we are pleased by what we are seeing in the businesses.

Sarah Wynne: Thanks Joel, and good morning everyone. I'll recap the financial highlights of the third quarter and then provide some more information on the guidance on Friday. First, on organic growth and liquidity. In the third quarter, our organic growth rate was 14.6%, and all market channels contributed to this growth, as Kevin and Joel just discussed. On cash and liquidity, free cash flow, which we traditionally define as EBITDA-led cash interest payments, CapEx, and cash taxes, was roughly $700 million for the quarter, coming in around $1.6 billion on a year-to-date basis. For the full fiscal year, we now expect to generate free cash flow of slightly above $2 billion.

Speaker Change: First, on organic growth and liquidity. In the third quarter, our organic growth rate was 14.6%, and all market channels contributed to this growth, as Kevin and Joel just discussed.

Sarah Wynne: Below that free cash flow line, networking capital consumed $84 million, and we continue to expect our annual dollars invested in networking capital to roughly align with historical levels as a percentage of sales. We ended the quarter with approximately $3.4 billion of cash on the balance sheet, and our net debt to EBITDA ratio was 4.7 times, similar to last quarter, which was at 4.6 times, as we paid approximately $1.5 billion for acquisitions in Q3, primarily for the CPI acquisition that we closed on June 6. In addition, we closed on the Raptor acquisition after the quarter, on July 31st, and deployed $655 million for that acquisition. If performed for the Raptor acquisition, the Q3 quarter-end cash balance would have been approximately $2.7 billion.

Speaker Change: Below that free cash flow line, Networking Capital consumed $84 million, and we continue to expect our annual dollars invested in Networking Capital to roughly align with historical levels as a percentage of sales.

Speaker Change: We ended the quarter with approximately $3.4 billion of cash on the balance sheet and our net debt to EBITDA ratio was 4.7 times.

Sarah Wynne: While we don't target a specific amount of cash that we like to have on hand, we are happy to have cash available to support M&A, especially given the timing of closing of some of these can be difficult to predict. We continue to be comfortable operating in the five to seven times net debt EBITDA ratio range. And while we are currently sitting slightly below the low end of this range, our go forward strategy capital deployment has not changed.

Sarah Wynne: And we continue to seek the best opportunity for providing value to our shareholders through our leverage strategy. Our EBITDA to interest expense coverage ratio ended the quarter at three and a half times, which provides us with a comfortable cushion right against that target range of two to three times. We continue to closely monitor our debt stacks and reprice approximately $3.6 billion of our term loan debt to a more favorable rate, so plus two and a half.

Speaker Change: Our EBITDA to interest expense coverage ratio ended the quarter at three and a half times, which provides us with comfortable cushion.

Speaker Change: Right, I guess that target range of two to three times.

Speaker Change: We continue to closely monitor our debt stacks and reprice approximately $3.6 billion of our term loan debt to a more favorable rate, so for plus two and a half.

Sarah Wynne: Our capital allocation strategy is always to both proactively and prudently manage our debt maturity stacks. Our nearest term maturity is November 2027, which gives us plenty of protection, at least in the short term. In addition, approximately 75% of our $23 billion growth debt balance is fixed through fiscal 2027. This is achieved through a combination of fixed rate notes, interest rate caps, swaps, and collars.

Speaker Change: A capital allocation strategy is always to both proactively and prudently manage their debt maturity stacks. Transcribed by https://otter.ai

Speaker Change: And nearest term maturity is November 2027, which gives us plenty of protection, at least in the short-term. In addition, approximately 75% of our $23 billion growth debt balance is fixed through fiscal 2027.

Speaker Change: This is achieved through a combination of fixed rate notes, interest rate caps, swaps, and collars. This continues to provide us adequate cushion against any rising rate, at least in the immediate term.

Sarah Wynne: This continues to provide us adequate cushion against any rising rate, at least in the immediate term. With regard to guidance, as Kevin mentioned, we increased our midpoint sales and EBITDA by $160 million and $85 million, respectively, given the strong quarter along with our current expectations for the year, including the newly closed acquisition. Our adjusted EPS guidance is now $33.02 compared to the prior guidance of $32.42, in support of the higher EBITDA.

Speaker Change: With regard to guidance, as Kevin mentioned, we increased our midpoint sales in EBITDA by $160 million and $85 million, respectively, given the strong quarter along with our current expectations for the year, including the newly closed acquisitions.

Kevin: Our adjusted EPS guidance is now $33.02 compared to the prior guidance of $32.42 in support of the higher EBITDA.

Sarah Wynne: 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 continue pursuing M&A opportunities or return cash to our shareholders via dividends or repurchases. With that, I'll turn it back to the operator to kick off the Q&A.

Speaker Change: As we sit here today, from an overall cash, liquidity, and balance sheet standpoint, we think we remain in good position, with adequate flexibility to continue pursuing M&A opportunities or return cash to our shareholders via dividends or repurchases.

Operator: Thank you. And as a reminder, press star 1-1 and wait for your name to be announced. To remove yourself from the queue, press star 1-1 again.

Speaker Change: With that, I'll turn it back to the operator to kick off the Q&A.

Speaker Change: Thank you and as a reminder press star 1-1 and wait for your name to be announced. To remove yourself from the queue press star 1-1 again. One moment for our first question.

Operator: One moment for our first question, and it comes from the line of Robert Spingarn with Emilius Research. Please proceed. Good morning.

Speaker Change: and he comes from the line of Robert Spingarn with Emilius Research. Please proceed.

Scott Mikus: Good morning, this is Scott Mikus on for Rob Spingarn. Good morning. Kevin, Mike, Joel, Sarah, typically, you announce a capital allocation decision when you report fiscal fourth-quarter results in November. So I'm curious, given that we might have a potential change in administration and potentially an FTC that might be more open to M&A, does that change your thought process for capital deployment and maybe keeping a little extra dry powder on the balance sheet for M&A going into 2025?

Speaker Change: Good morning, this is Scott Magason for Rob Spingarn.

Speaker Change: [inaudible]

Speaker Change: Kevin, Mike, Joel, Sarah, typically you announce a capital allocation decision when you report fiscal fourth quarter results in November.

Speaker Change: So I'm curious, given that we might have a potential change in administration and potentially an FTC that might be more open to M&A, does that change your thought process for capital deployment and maybe keeping a little extra dry powder on the balance sheet for M&A going into 2025?

Kevin Stein: Sure, I'll take that one. Yeah, I mean, I think last year we did something in November. Currently, as we sit here today, you know, obviously, we're coming close to closing out fiscal 24 here. We've got a few billion dollars of cash. I think we'll look to make that decision as we close out fiscal 24 but head into fiscal 25, so sometime by the end of the calendar year.

Speaker Change: Sure, I'll take that one. Yeah, I mean, I think last year we did do something in November. Currently, as we sit here today...

Speaker Change: Obviously, we're coming close to closing out fiscal 24 here. We've got

Speaker Change: I think we'll look to make that decision as we as we close out 24 but heading into the fiscal 25. So sometime by the end of the calendar year.

Scott Mikus: Okay, and then airlines have been flagging overcapacity in the passenger market, especially in the US. But at the same time, Boeing and Airbus are struggling to ramp up their deliveries. So for the commercial aftermarket products, you mentioned the strong orders from distributors. But have you seen any change in order flow directly from the airlines?

Speaker Change: Okay, and then airlines have been flagging over capacity in the passenger market, especially in the US, but at the same time, Boeing and Airbus are struggling to ramp up their deliveries. So, for the commercial aftermarket products, you mentioned the strong orders from distributors, but have you seen any change in order flow directly from the airlines?

Kevin Stein: I think for the quarter, we saw some TransDigm Group Inc.

Speaker Change: changes, but not nothing significant. As you said, as we noted, the POS from distribution partners was very strong for the quarter.

Speaker Change: and I think we had a solid book to build in the quarter as well as we have for the full year within commercialized.

Speaker Change: I think overall we have not seen any, what I would say, significant change in their patterns and I think that's set us up well for Q4.

Scott Mikus: Okay, I'll stop there. Thanks for taking the questions.

Speaker Change: Okay, I'll stop there. Thanks for taking the questions.

Operator: Thank you. One moment for our next question, please. And our next question is from the line of Robert Stallard with Vertical Research. Please proceed. Thanks so much. Good morning.

Speaker Change: Thank you. One moment for our next question, please.

Speaker Change: And our next question is from the line of Robert Stollard with Vertical Research. Please proceed.

Robert Stollard: Thanks so much. Good morning.

Speaker Change: Morning.

Robert Stollard: It's probably for Kevin or Joel. I was wondering if you could dig a little bit more into the freight aftermarket and whether there are any specific customers that are perhaps moving things around here as they retire older planes or anything and whether that's having an impact on your aftermarket bookings and revenues.

Robert Stallard: I really think this is just driven from the change back to where we were back in 2019 and in 2019, when the vast majority of freight was through belly capacity. During the COVID time period, there was a big switch over to dedicated freighters. Obviously, with the international markets recovering, it has, you know, pretty quickly and dramatically swung back to belly capacity. So for us, this really impacts us with typically lower margin products, things like the ULD type products. So although it impacts us more from a revenue standpoint, the actual EBITDA impact is significant.

Speaker Change: I really think this is just driven from the change back to where we were back in 2019. And in 2019,

Speaker Change: The vast majority of freight was through belly capacity. During the COVID time period, it was a big switch over to dedicated freighters.

Speaker Change: Obviously, with the international markets recovering, it has pretty quickly and dramatically swung back to belly capacity. So for us, you know, this really impacts us with typically more lower margin products.

Speaker Change: things like the ULD type products. So although it impacts us more from a revenue standpoint, the actual EBITDA impact is significantly less than the way it shows up from a revenue standpoint.

Speaker Change: It really is just the difference of the mix of products that you see on belly passenger freight capacity versus dedicated freighters.

Speaker Change: Right. And then there's a follow-up, one for Sarah. In your language, you said you're trying to cushion against rate rises, but looking at this the other way, it looks like rates could be coming down. What sort of opportunity do you see going forward to restructure the debt and reduce your interest costs if the Fed does start to move?

Robert Stallard: Yeah, I mean, we're, as you know, and as I said, we're 75% hedged, we've done a lot of financing already this year. So we're already in a pretty good position. You know, our next maturity date is until 2027. Because of all the recent refinancing, we've got some breakage fees that we'd have to pay if we wanted to try and reduce any of the rates on any of the stuff we've done recently. But then it just becomes a math exercise, right? If the rates drop substantially, we could go after some of those loans and refinance with the breakage fees if the math makes sense.

Sarah: Yeah, I mean, we're, as you know, and as I said, we're 75% hedge, we've done a lot of financing already this year.

Sarah: So we're, we're already in a pretty good.

Sarah: position. You know, our next maturity date is until 2027. Because of all the recent refinancing, you know, we've got some breakage fees that we'd have to, we'd have to pay if we wanted to try and reduce any of the rates.

Sarah: on any of the stuff we've done recently. But then it just becomes a math exercise, right? If the rates drop substantially, we could go after some of those loans and refinance with the breached fees and if the math makes sense. But obviously, as you know, we're always looking at this stuff opportunistically.

Robert Stallard: But obviously, as you know, we're always looking at this stuff opportunistically. Yeah, that's great. Thanks so much. Thank you. One moment for our next question, which comes from the line Ken.

Operator: One moment for our next question, which comes from the line of Ken Herbert with RBC Capital Markets.

Speaker Change: Yeah, that's great. Thanks so much, guys.

Speaker Change: Thank you.

Speaker Change: One moment for our next question. That comes from the line of Ken Herbert with RBC Capital Markets.

Ken Herbert: Yeah, hi, good morning. Maybe for Joel or Kevin, can you explain the discrepancy between the strong growth you saw on the point of sale side and the aftermarket relative to the passenger growth up 16%?

Kenneth Herbert: And there's probably a slightly different mix of products in terms of where products are shipped out. I don't know that there's any dramatic difference. Obviously, our sales include sales to the distribution partners. There's probably some level of inventory destocking that that happened as well, which would have impacted us a little bit in terms of how we sell product into the distribution piece. But I don't know that there was anything dramatic.

Speaker Change: There's a slightly different, you know, probably mix of products in terms of where products are shipped out. I don't know that there's any dramatic difference. Obviously, our

Speaker Change: Sales include sales to the distribution partners. There's probably some level of inventory destocking that that happened as well Which would which would have impacted us a little bit in terms of how we?

Kenneth Herbert: You know, on a full year basis, we're up roughly 21% in the passenger sub market, and the POS is up about that same amount. So some of it is a timing piece as well, in terms of the buy quarter for point of sale versus when we're selling the product. I don't know if there's anything beyond that that was really significant. Okay, that's helpful.

Speaker Change: Sell product into the distribution piece. I don't know that there was anything dramatic.

Speaker Change: you know, from a full year basis, we're up roughly 21% in the passenger sub market, and the POS is up about that same amount. So some of it is a timing piece as well in terms of

Speaker Change: The buy quarter for Point of Sale vs. when we're selling the product. I don't know there's anything beyond it that was really significant.

Kenneth Herbert: And if I could, on the interiors piece, some improvement there, it sounds like certainly sequentially, but are you seeing anything yet that gives you any confidence or any visibility on timing of when you might see more of the sort of the retrofit or upgrade beyond just sort of the repair sales starting to accelerate? I think when we started fiscal 24, we were thinking we would start to see it this year. I think at this point, we don't know.

Speaker Change: Okay, that's helpful. And if I could, on the interiors piece, some improvement there, it sounds like, certainly sequentially, but

Speaker Change: Are you seeing anything yet that gives you any confidence or any visibility on timing of when you might see more of the sort of the retrofit or upgrade beyond just sort of the repair sales starting to accelerate?

Speaker Change: I think when we started fiscal 24, we were thinking we would start to see it, see it this year. I think at this point, we don't know. We're seeing some smaller quantities of products now.

Kenneth Herbert: We're seeing some smaller quantities of products now. I don't think we know, and obviously, as we're putting together the 2025 numbers, we'll know better as we put together the guidance for that. But at this point, it probably wasn't as good as we had thought it would be this year and certainly has pushed to the right.

Speaker Change: I don't think we know. And obviously, as we're putting together the 2025 numbers, we'll know better as we put together the guidance for that. But at this point, it's probably wasn't as good as we had thought it would be this year and certainly has pushed to the right.

Kenneth Herbert: Part of the challenge is there's just not enough aircraft that can be pulled out of service to do an entire interior refresh, any planes that you can pull out of service. And certainly, there's some level of impact from the fact the OEMs aren't delivering enough new aircraft for them, the airline, to be able to pull some number of planes out of service to do that work. So that certainly has an impact on us as well.

Speaker Change: Part of the challenge is there's just not enough aircraft that can be pulled out of service to do an entire interior.

Speaker Change: refresh any planes that you can pull out of service and certainly there's some level of impact from

Speaker Change: The fact the OEMs aren't delivering enough new aircraft for them, for them, the airline to be able to pull some number of planes out of service to do that work. So that certainly has an impact on us as well.

Joel Reiss: Thanks, Joel.

Operator: Our next question is from the line of Ron Epstein with Bank of America. Please proceed.

Speaker Change: Thank you. Our next question.

Speaker Change: is from the line of Ron Epstein with Bank of America. Please proceed.

Ronald Epstein: Yeah, good morning, guys. Wait, are there any watch areas in your own supply chain that you're keeping an eye on in terms of, you know, areas where there could be shortages, where you want to deploy some of your own people to help out suppliers, that kind of thing?

Ron Epstein: Good morning, guys. Are there any watch areas in your own supply chain that you're keeping an eye on in terms of areas where there could be shortages, where you want to deploy some of your own people to help out suppliers, that kind of thing?

Kevin Stein: So what I would say today is we probably see more issues than we did back in 2019, but overall, it's improved significantly over the past two years. Today, it's probably the same cast of characters you would, you know, hear from others. Castings and electronic components are probably the final two areas. One of the great benefits of our highly decentralized structure is that we have 50 separate teams that work closely with their specific supply chain groups and stay close to them as needed.

Speaker Change: So what I would say today is we probably see more issues than we did back in 2019. Overall, it's improved significantly over the past two years.

Speaker Change: Today it's probably the same, you know, cast of characters you would, you know, hear from others. Castings and electronic components are probably the final two areas.

Speaker Change: One of the great benefits of our highly decentralized structure is we have 50 separate teams that work closely with their specific supply chain groups and stay close to them as needed.

Kevin Stein: But overall, I think we've continued to see it improve quarter over quarter, and when it will get back to 2019 or before levels, I don't know, but I think we continue to see good progress.

Speaker Change: But overall, I think we've continued to see it improve quarter over quarter and, you know, when it will get back to.

Ronald Epstein: Good. And then maybe just one follow-up.

Speaker Change: 2019 or before levels, I don't know, but I think we continue to see good progress.

Ronald Epstein: When you... Look at, you know, the M&A environment now. And, you know, we just had that here yesterday, not too long ago. Has there been much of a change? I mean, is there more stuff out there? Are there more opportunities out there? Or is it about how it was just a couple months ago?

Speaker Change: And then maybe just one follow-up, when you

Speaker Change: Look at the M&A environment now, and we just had that year of yesterday not too long ago. Has there been much of a change? I mean, is there more stuff out there? Are there more opportunities out there? Or is it about how it was just a couple months ago?

Kevin Stein: I think it's about what it was a couple months ago. We see some good businesses possibly coming to the market next year, but between now and the end of the year, there's a good collection of stuff that we're evaluating. Again, it's difficult to predict when things meet the criteria, but we continue to work hard, and it looks the same. We're adding resources, as I commented last quarter, and it continues to look the same.

Speaker Change: I think it's about what it was a couple of months ago. We see some

Speaker Change: you know, good businesses.

Speaker Change: possibly coming to the market next year. But between now and the end of the year, there's a good collection of stuff that we're evaluating.

Speaker Change: Again, it's difficult to predict when

Speaker Change: Unknown Executive, Michael Lisman, Jaimie Stemen, Sarah Wynne, Mike Lisman, Jaimie Stemen, Jaimie Stemen, Sarah Wynne, Mike Lisman, Jaimie Stemen, Sarah Wynne, Jaimie Stemen, Jaimie

Kevin Stein: At least in the near term, we remain very busy on the M&A front. This year has been an unbelievable year for EBITDA Acquired. This will be our second best M&A year on record, so it's been very encouraging.

Speaker Change: and it continues the same in the least near-term horizon we remain very busy on the M&A front and this year has been an unbelievable year for EBITDA acquired this will be our second best M&A year on record so it's been very encouraging.

Ronald Epstein: Got it, got it. And then, maybe just one last one.

Kevin Stein: How do you guys think about book to bill? I mean, if you were to give sort of a sense broadly for the whole company, what is the book to bill for the company? And what does that look like for commercial versus defense? Because defense has been doing quite well, as well. Yeah, we usually don't get in.

Speaker Change: Got it, got it. And then maybe just one last one.

Speaker Change: How do you guys think about book to bill? I mean, if you were to give sort of a sense broadly for the whole company, what is the book to bill for the company? And what's that look like for commercial versus defense? Because defense has been doing quite well as well.

Kevin Stein: Yeah, we usually don't get into parsing this out. I would say, year to date, our book to bill is well above one, and the business is growing and expanding. The only area in the recent quarter that maybe wasn't as strong was commercial OEM, which I think everyone would expect given what we're reading about. But yeah, defense is running very strong, but so is the commercial aftermarket and commercial OEM. We have a strong book to bill and backlog that we've amassed throughout the year. It's been a very positive year on that front.

Speaker Change: Yeah, we usually don't get into parsing this out. I would say year to date, our hope to build well above one, the business is growing and expanding.

Speaker Change: The only area in the recent quarter that maybe wasn't as strong was

Speaker Change: Commercial OEM, which I think everyone would expect given what we're reading about.

Speaker Change: But yeah, defense is running very strong, but so is commercial aftermarket and commercial OEM. We have strong book to bill and backlog that we've amassed throughout the year. It's been a very positive year on that front.

Ronald Epstein: Got it. Thank you. Thank you.

Speaker Change: Got it. Thank you.

Operator: One moment for our next question, and it comes from the line of Scott Deuschle with Deutsche Bank. Please proceed. Hey, good morning.

Speaker Change: Thank you.

Speaker Change: One moment for our next question.

Speaker Change: and it comes from the line of Scott Doechli with Deutsche Bank. Please proceed.

Scott Deuschle: Kevin, does the aftermarket comp in the fourth quarter get any easier on the freight side? Or is that fairly consistent with what you saw this quarter?

Scott Doechli: Hey, good morning. Kevin, does the aftermarket comp in the fourth quarter get any easier on the freight side, or is that fairly consistent with what you saw this quarter?

Scott Deuschle: I think it's fairly consistent with what we saw this quarter. I don't, I was just looking at the numbers, and it looks pretty similar. Okay. Okay.

Kevin: I think it's fairly consistent for what we saw this quarter. I don't, I was just looking at the number and it looks pretty similar.

Joel Reiss: And then Joel, do you get the sense that some business units are seeing OEM inventories of their product building up for, you know, platforms like the 87 or 37? Or do you feel like they're doing a good job of ensuring that doesn't happen and matching their shipments to the actual OEM production? Um, again, when you have 50 operating units, I think this is somewhat varied. You know, part of the key is that you have to ship to the OEM.

Kevin: Okay.

Joel Reiss: And then, Joel, do you get the sense that some business units are seeing OEM inventories of their product building up for, you know, platforms like the 8.7 or 3.7, or do you feel like they're doing a good job of ensuring that doesn't happen and matching their shipments to the actual OEM production rates?

Joel Reiss: Again, when you have 50 operating units, I think this is somewhat varied. Part of the key is you have to ship to the OEM.

Joel Reiss: delivery date. And so if we see that they're trying to order more than we think is needed, or you're getting inventory, but we do work to negotiate, if we can, to have them push out the order so we don't end up kind of in this, you know, significant rise and fall level. Ultimately, if the OEM is not willing to make the change, then you still have to ship the product in line with what that is. But we do work hard to deal with that when we can. Thank you.

Speaker Change: delivery date. And so if we see that they're trying to order more than we think is needed, or you're getting inventory, but we do work to

Speaker Change: Negotiate if we can to have them push out the order so we don't end up kind of

Speaker Change: In this, you know, significant rise in fall level, ultimately, if the OEM is not willing to make the change, then you still have to ship the product in line with what that is. But we do work hard to, to, to, to deal with that when we can.

Operator: Our next question comes from the line of David Strauss with Barclays.

Speaker Change: Thank you.

Speaker Change: Thank you. Our next question comes from the line of David Strauss with Barclays.

David Strauss: The absolute EBITDA, just the EBITDA guidance for the full year, if I just take what you've done year to day, would seem to imply very little sequential improvement in the fourth quarter, even though, you know, I would assume you're going to pick up 20-30 million in acquired EBITDA relative to Q2, or relative to Q3. So I guess, what am I missing in that math?

David Strauss: Thanks, good morning.

David Strauss: [inaudible]

David Strauss: The absolute EBITDA, just the EBITDA guidance for the full year, if I just take what you've done year-to-day, would seem to imply very little sequential improvement in the fourth quarter, even though I would assume you're going to pick up $20 million, $30 million in

Speaker Change: acquired EBITDA relative to Q2 or relative to Q3 so I guess what am I missing in that math?

Kevin Stein: We looked at it, and, you know, we always aim to be conservative. We just did a pile of acquisitions. We need to, you know, get in there and look at them in more detail.

Speaker Change: It's a good question. We looked at it and we would aim to be conservative. We just did a pile of acquisitions.

David Strauss: And also, defense is where we're seeing more of the growth. We don't make quite as much money on the defense side. So it's a mixture of conservatism and what we think the markets look like. We're certainly not predicting a difficult Q4. We're just being somewhat conservative and practical in how we look at the year unfolding.

Speaker Change: We need to, you know, get in there and look at them in more detail. And also defense is where we're seeing more of the growth. We don't make quite as much money on the defense side. So it's a mixture of conservatism and what we think the markets look like.

Speaker Change: We're certainly not predicting a difficult Q4. We're just being somewhat conservative and practical in how we look at the year unfolding.

David Strauss: Okay, got it. And hit your mid teams, forecast for the aftermarket for the full year. How much sequential aftermarket growth do you need in the fourth quarter relative to Q3?

Speaker Change: Okay, got it. And.

Speaker Change: Hit the mid-teens forecast for the aftermarket for the full year. How much sequential aftermarket growth do you need in the fourth quarter relative to Q3?

Kevin Stein: I mean, I think it looks like our bookings, you know, our bookings are ahead of our shipments last quarter. I think we're in a good place. We're at mid-teens right now for the year. I think the way the bookings are unfolding, we shouldn't have any problem hitting mid-teens for the year.

Kevin Stein: I mean, I think it looks like ours

Speaker Change: I mean, I think it looks like our bookings, you know, our bookings are ahead of our shipments last quarter. I think we're in a good place. We're at mid-teens right now for the year. I think the way the bookings are unfolding, we shouldn't have any problem hitting mid-teens for the year.

Speaker Change: Okay, thanks very much.

Operator: Our next question comes from the line of Gabby Kristine Liwag with Morgan Stanley.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of Gabby Christine LeWood with Morgan Stanley.

Kristine Liwag: Hey, good morning. Kevin, maybe on M&A, since discussing the widening aperture of M&A at Analyst Day but clearly staying focused on A&D, can you discuss more of that pipeline of logistics or pipeline of targets? I mean, as you wade into this slightly broader pool, how deep is it? Are you seeing kind of maybe 2x the opportunities you would have seen if you had stayed with your focus?

Speaker Change: Hey, good morning.

Speaker Change: Kevin, maybe on M&A, you know, since discussing the widening aperture of M&A at the Analyst Day, but clearly staying focused on A&D, can you discuss more of that pipeline of logistics or of pipeline of targets? I mean, as you wade into this slightly broader pool,

Kevin Stein: Any sort of direction or magnitude of size would be helpful.

Speaker Change: How deep is it? Are you seeing kind of maybe 2x the opportunities you would have seen if you would have stayed with your focus? Any sort of directional or magnitude of size would be helpful.

Kristine Liwag: Yeah, I don't think that it is creating another TransDigm out there in some of these other markets, like helicopter accessories that we've been successful in recently, and the testing certification and instrumentation area of aerospace and defense. We want to stay in aerospace and defense. This only so slightly broadens our aperture. We're looking for other solid places in aerospace and defense to put capital to work. And we think these are great areas. They're not going to double the market for TransDigm, however, but they will provide nice additional acquisition opportunities for us.

Kevin: Yeah, I don't think that it is creating another trans dime out there in some of these other markets like helicopter accessories that we've been successful in recently and the testing certification and instrumentation area of aerospace and defense

Speaker Change: We want to stay in aerospace and defense. This only ever so slightly broadens our aperture. We're looking for other solid places in aerospace and defense to put capital to work.

Speaker Change: And we think these are great areas. They're not going to double the market of Tram Time, however, but provide nice additional acquisition opportunities for us.

Kristine Liwag: Thanks, that's helpful. Okay, yeah, thanks. That's helpful.

Kevin Stein: And if I could add another question on PMA, I mean, there's more cost consciousness from airlines, especially in light of the recent profit cuts. At the same time, we're seeing more PMA players enter the industry, seeing your success in the commercial aerospace aftermarket, and the success of PMA-focused business models like Hyco. You know, your portfolio has historically been more defensible and very defensible against PMA players. And, in fact, you do PMA yourself as well. Like, are you seeing anything different this time in this cycle?

Speaker Change: Thanks, that's help.

Speaker Change: Okay, yeah, thanks. That's helpful. And if I could add another question on PMA, I mean, there's more cost consciousness from airlines, especially in light of the recent profit cuts.

Speaker Change: At the same time, we're seeing more PMA players enter the industry.

Speaker Change: Seeing your success in commercial aerospace aftermarket.

Speaker Change: and the success of PMA focused business models like Heiko.

Speaker Change: You know, your portfolio has historically been more defensible and very defensible against PMA players. And in fact, you do PMA yourself as well. Like, are you seeing anything different this time in this cycle?

Kevin Stein: I don't think so. You know, we continue to monitor this. Obviously, used material is not, you know, a player in the aftermarket because of limited planes being scrapped out. As far as PMA goes, we monitor it constantly. The massive lion's share of our products are very complicated products that don't tend to lend themselves to PMA, nor do they have the volumes necessary in many of these cases to lend themselves to PMA.

Speaker Change: I don't think so. You know, we continue to monitor this. Obviously, used material is not, you know, a player in the aftermarket because of limited planes being scrapped out. As far as PMA goes, we monitor it constantly. The

Speaker Change: Very, the massive lion's share of our products are very complicated products that don't tend to lend themselves to PMA, nor do they have the volumes necessary in many of these cases to lend themselves to PMA.

Kevin Stein: Like I've said, like our team has said many times, and we said at our investor day, we continue to monitor this closely. The FAA publishes all of the PMAs approved, and we can follow it very closely. And to date, we haven't seen anything that pauses that gives us concern.

Speaker Change: Like I've said, like our team has said many times and we said at our investor day, we continue to monitor this closely. The FAA publishes a, you know, all of the PMAs approved and we can follow it very closely. And to date haven't seen anything that pauses

Kristine Liwag: Great, thanks for the color.

Speaker Change: [inaudible]

Operator: Thank you. Our next question comes from the line of Myles Walton with Wolf of Research.

Speaker Change: Great, thanks for the color.

Speaker Change: Thank you. Our next question comes from the line of Miles Walton with Wolf of Research.

Myles Walton: Thanks, good morning. Kevin, in your comments, you mentioned that lower OEM production continued to weigh on TransDigm's results, which I think is a statement of obvious weakness on sales, but I'm curious, are your OEM margins also below pre-pandemic levels? And maybe if you could comment on the benefit of some OEM pricing negotiations into year end and what that might do for you to help if OEM is faster growing in 2025 than aftermarket?

Miles Walton: Thanks, good morning.

Kevin: Kevin, in your comments you mentioned that lower OEM production continued to weigh on transatm's results, which

Miles Walton: I think it was a statement of obvious on sales, but I'm curious.

Miles Walton: pre-pandemic levels. And maybe if you can comment on the benefit of some OEM pricing negotiations into year-end and what that might do for you to help if OEM is faster growing in 25 than aftermarket. Thanks.

Kevin Stein: Yeah, I think on the OEM side. You know, we're always working on contracts with OEMs as they expire. But as we have always clearly stated, you know, the lion's share of our profits come from the aftermarket on the OEM side, I would say we're probably, you know, similar in profitability to where we have been historically. We have seen an awful lot of inflation that we need to account for in, you know, the renegotiating of contracts. And, you know, we're working on that right now, but I have no real update to provide.

Speaker Change: Yeah, I think on the OEM side, we

Speaker Change: You know, we're always working on contracts with OEMs as they expire.

Speaker Change: But as we have always clearly stated, you know, the

Speaker Change: The lion's share of our profits come from the aftermarket.

Speaker Change: On the OEM side, I would say we're probably

Speaker Change: Unknown Executive, Michael Lisman, Jaimie Stemen, Sarah Wynne, Mike Lisman, Jaimie Stemen,

Speaker Change: We have seen an awful lot of inflation that we need to account for in, you know, renegotiating of contracts. And, you know, we're working on that right now, but no real update to provide yet.

Myles Walton: And then one detail follow up, if I could the EBITDA raise, I think implies organically was 50 million on 35 million in sales. Is there something in other income or other areas that helped make that 100% greater than 100% incremental margin?

Speaker Change: And then one detail, follow up if I could, the EBITDA raise I think implies organically was $50 million on $35 million in sales. Is there something in other income or other areas that helped make that 100%, greater than 100% in criminal margins?

Kevin Stein: No, we don't. Sarah's shaking her head at me. There's nothing that is non-business related to that that we can quickly identify. Okay, thanks.

Kevin Stein: No, we don't.

Speaker Change: No, we don't. Sarah's shaking her head at me. There's nothing that is non-business related to that that we can quickly identify.

Operator: Our next question comes from the line of Noah Poponak with Goldman Sachs.

Speaker Change: Okay, thanks.

Speaker Change: Thanks.

Speaker Change: Our next question comes from the line of Noah Poponac with Goldman Sachs.

Noah Poponak: Morning. Just coming back to this topic of opening up the aperture or not on M&A. Kevin, I guess if I zoom out and, you know, if we're looking at your total funnel, or I guess maybe the things in the funnel that are closer to the finish line than not, or if you defined it as, you know, your likely next five to 10 acquisitions, are we still looking at the majority of your deals are going to be, are likely to be the classic in your wheelhouse airplane part? Aftermarket Rich. Sole and Dual Source, Proprietary, or could it be that the majority are in this category of opening the aperture?

Noah Poponac: Hey, good morning.

Noah Poponac: Morning.

Speaker Change: Just coming back to this topic of opening up the aperture or not on M&A.

Kevin: Kevin, I guess if I zoom out and, you know, if we're looking at your total funnel, or I guess maybe the things in the funnel that are closer to the finish line than not, or if you defined it as, you know, your likely next five to ten acquisitions.

Kevin: Are we still looking at the majority of your deals are going to be, are likely to be the classic in your wheelhouse, airplane parts, aftermarket rich?

Speaker Change: sole and dual source, proprietary, or could it be that the majority are in this category of opening the aperture?

Kevin Stein: The vast majority will always be, as we would say, right down the fairway, components, aftermarket content, what we've historically done, and that's the bulk, the absolute lion's share of everything that we're looking at for the future. That's why I don't want to oversell the opening of the Aperture, but it's just smart other places to put money to work. But the bulk of our M&A activity will still be in the component business that you've seen us choir around for our history.

Kevin: The vast majority will always be, as we would say right down the fairway, components, aftermarket content, what we've historically done, and that's what the bulk, the absolute lion's share of everything that we're looking at for the future.

Kevin: That's why I don't want to oversell the opening of the Aperture, but it's just smart other places to put money to work. But the bulk of our M&A activity will still be in the component business that you've seen us choir around for our history.

Operator: Transcribed by https://otter.ai

Sarah Wynne: And Sarah, do you have a number on how much acquisition margin dilution there is in the fourth quarter EBITDA margin?

Speaker Change: Okay, great.

Speaker Change: And Sarah, do you have a number on how much acquisition margin dilution there is in the fourth quarter EBITDA margin?

Operator: Transcribed by https://otter.ai

Sarah Wynne: Thank you. Thank you.

Sarah Wynne: Yeah, for the three new ones, it would be just over 100 basis points.

Operator: Okay, great. And then just one other one for you.

Operator: If you got to $2 billion in free cash, you'd be a little over 100% conversion. I can't recall where that stands in terms of how it's defined with working capital. Is that including or excluding? And how much working capital use are you looking at for the full year now?

Speaker Change #100: Okay, great. And then just one other one for you is.

Speaker Change #101: If you got to two billion on the full year free cash, you'd be a little over 100% conversion. I can't recall where that stands in terms of being, how it's defined with working capital is that.

Speaker Change #102: including or excluding and how much working capital use are you looking at for the full year now?

Sarah Wynne: Yeah, for the full year of working capital, I think we're at about 200 full years, so we've got just another quarter to go. So maybe you throw in a bit more there, but I think we're generally trying to track it to a percent to save.

Speaker Change #103: Yeah, for the full year of working capital, I think we're at like about 200 full year, so we've got just another quarter to go. So maybe you throw in a bit more there, but I think we're generally trying to track it to percent sales.

Sarah Wynne: And the $2 billion would be including that or excluding that headline? No, no, sorry. That would be excluding it.

Speaker Change #104: And the $2 billion would be including that or excluding that headline? No, no, sorry. That would be excluding it.

Operator: Okay. I got it. Thank you.

Speaker Change #104: Okay.

Jason Gursky: Our next question comes from the line of Jason Gursky with Citi.

Speaker Change #105: Got it. Thank you.

Speaker Change #106: Thank you.

Speaker Change #107: Our next question comes from the line of Jason Gursky with Citi.

Kevin Stein: Hey, good morning, everybody. And Kevin, I was wondering if you would mind going back to Myles' question about the negotiations that you have going on with some of your OEM customers. Just curious, in the context of, you know, so many disparate operations that you have going on, do you go one by one through each contract at every single one of your business units? Or is there a kind of bigger bang, you know, broader negotiation that's going on here?

Jason Gursky: Hey, good morning, everybody. And Kevin, I was wondering if you wouldn't mind going back to Miles' question about

Jason Gursky: The negotiations that you have going on with some of your OEM customers.

Jason Gursky: Just curious, in the context of so many disparate operations that you have going on, do you go one-by-one through each contract at every single one of your...

Speaker Change #109: business units or is there a kind of a bigger bang, you know, broader negotiation that's going on here? I know you just suggested you don't want to get out ahead of your skis on the timing of things. But I think just understanding what the shape of that might look like.

Kevin Stein: I know you just suggested you don't want to get out ahead of your skis on the timing of things. But I think just understanding what the shape of that might look like for all of us because that's, I think, an important part of your margin story and your ability to increase margins going forward by 100, 150 basis points, and you talked about renegotiations at investor day as being kind of a key tenet to making sure that continues to happen. Thanks.

Speaker Change #110: for all of us, because that's, I think, an important part of your, your margin story and your ability to, to increase margins going forward that 100, 150 basis points, and you talked about renegotiations at the investor day as being kind of a kind of a key tenet to making sure that continues to happen. Thanks.

Jason Gursky: Yeah, so you know, with our think and act like an owner highly decentralized structure, we like the idea that every one of our operating units is the ones that sit and have to negotiate the contract; they're the ones who have to live with them. There's really only a couple that are kind of larger, more corporate driven. So we've obviously referred to Boeing in the past. Other than that, I mean, these are really contracts, but we have contracts that are negotiated operating unit by operating unit.

Speaker Change #111: Yeah, so, you know, with our think and act like an owner, highly decentralized structure, we like the idea that every one of our operating units is the ones that sit and have to negotiate the contract. They're the ones who have to live with them.

Speaker Change #111: There's really only a couple that are kind of larger, more corporate-driven, that we've obviously referred to Boeing in the past. Other than that, I mean these are really contracts, OEM contracts that are negotiated operating unit by operating unit.

Kevin Stein: Okay, great. And then, if you don't mind, I'm just kind of curious what you're seeing on the hiring side of things and your ability to get the right people in the right places and what the trend line has been there recently. Thanks.

Speaker Change #111: Okay, great.

Speaker Change #112: And then just as a quick follow-up, if you don't mind, I'm just kind of curious what you're seeing on the hiring side of things and your ability to get the right people in the right places and what the trend line has been there here recently. Thanks.

Kevin Stein: Yeah, I think we continue to see that improve. I think turnover has largely gone back to where we were back in the 2019 timeframe. I think hiring has also significantly improved at the vast majority of our operating units and locations. And as we've highlighted before, you know, typically highly skilled engineers are harder than other positions. I don't know that that's changed materially, but I think overall, I think it's quite a bit better today than it was a couple of years ago. Great, thank you. Thank you. Our next question comes from the line of Ellen Page.

Speaker Change #113: Yeah, I think we continue to see that improve. I think turnover has largely, for us, gone back to where we were back in

Speaker Change #113: [inaudible]

Operator: Thank you. Our next question comes from the line of Ellen Page with Jeffries. Please go ahead. Hi guys, thanks for the question. Um, just going back to the dilution from M&A, it seems like

Operator: Could you repeat that question you broke up? Sorry, um, just going back to the dilution from M&A, as we think about fiscal 25, how do we think about the puts and takes to EBITDA margins given 100 bps of dilution and potentially less favorable mix? Yeah, we don't want to get into our 25 forecast just yet. We'll cover that on the next quarterly call. Our teams, as you know, practice bottom-up forecasting, and then we roll that out to you.

Operator: So our teams are going through that process right now. You know, obviously, a lot depends on future acquisitions and the dilution that we will see. Right now, it's 125 basis points of dilution. Yeah, for 24, that will wind down into 25, but it also depends on the acquisitions that we complete. So, difficult to forecast.

Speaker Change #114: You know, obviously a lot depends on future acquisitions and the dilution that we will see. Right now it's 125 basis points of dilution.

Operator: You agree with that, Sarah? Yeah, absolutely. Okay, thanks. I'll leave it at that. Thank you. One moment for our next question, please.

Operator: and it's from the line of Seth Seifman with JP Morgan. Hi, this is Rocco and Bricef. How should we start?

Speaker Change #115: Hi, this is Rocco and Bricef. How should we start thinking about the commercial aftermarket growth in fiscal year 25, given the capacity growth is slowing and travel started to catch up to pre-COVID levels? Is the double-digit growth rate sustainable or should we start seeing some more headwinds?

Operator: We don't want to get into that, and I know that's what there's a lot of interest in what next year will look like. And we'll offer that to you guys next quarter.

Speaker Change #116: We don't want to get into, and I know there's a lot of interest in what will next year look like.

Speaker Change #117: and we'll offer that to you guys next quarter. We're still unpacking that ourselves as we look forward. Obviously, it's still a growing and exciting markets and we'll give you more of that flavor on our next call. Unknown Speaker

Operator: We're still unpacking that ourselves as we look forward. Obviously, it's still a growing and exciting market, and we'll give you more of that flavor on our next call. Great, yep, understood.

Operator: And then are there any specific programs or areas that are driving the strong growth in the defense aftermarket this year? No, it's actually been pretty widespread across almost every one of our defense businesses. You know, there's a couple that have had some larger bookings. But when I look at it from a revenue standpoint, there isn't really any one significant program that's driving it.

Speaker Change #118: Great, yeah, understood. And then are there any specific programs or areas that are driving the strong growth in defense aftermarket this year?

Speaker Change #119: No, it's actually been pretty widespread across almost every one of our defense businesses. You know, there's a couple that have had some larger bookings, but across when I look at it from a revenue standpoint, there isn't really any one significant program that's that's driven.

Operator: Our next question comes from the line of Gautam Khanna with TD Cowan.

Speaker Change #120: Thank you. Our next question comes from the line of Gautam Khanna with TD Cowan.

Gautam Khanna: I have two questions. One, I was curious about The OEM, you know, contract renegotiations, and renewals. When does... When did some of those big contracts actually expire? Is that at the end of this year? So that's sort of the timeframe? Or I'm just curious, like, how much? How much time do we have before we know the outcomes of those?

Gautam Khanna: Hey, good morning, guys.

Gautam Khanna: [inaudible]

Gautam Khanna: I have two questions. One, I was curious on

Speaker Change #122: the OEM, you know, contract renegotiations, renewals. When does, when do some of those big contracts actually expire? Is that at the end of this year? So that's sort of the time frame? Or I'm just curious, like, how much, how much time do we have before we know the outcomes of those?

Joel Reiss: Well, first, we always have some number of LTA contracts that are expiring; the typical OEM contracts are up for three to five years. I think one that you know Kevin referred to was a bowling one that we're currently negotiating that expires at the end of this year. It reflects a certain group of our businesses, not all of them. Beyond that, there's always some number every single year of OEM contracts that come up for renewal or renegotiation.

Speaker Change #123: Well, first, we always have some number of LTA contracts that are expiring. Typical OEM contracts are up.

Speaker Change #124: three to five years. I think one that you know, Kevin had referred to was

Kevin: a Boeing one that we're currently negotiating that expires at the end of this year. It reflects a certain group of our businesses, not all of them.

Kevin: Beyond that, there's always some number every single year of OEM contracts that come up for renewal or renegotiation.

Gautam Khanna: Okay, that's probably a lot of those renegotiations, you know; they involve all the sites as well as some coordination from the top. So all of our sites are involved in this process. Gotcha, that's helpful. I also want to just ask about the commercial arrow aftermarket, is there any thematic thing you're seeing within the data on types of products, whether they're discretionary, non-discretionary, however you want to characterize it, where you're seeing relative strength?

Speaker Change #125: We try to handle a lot of those renegotiations. They involve all the sites as well as some coordination from the top. So all of our sites are involved in this process.

Speaker Change #126: Gotcha, that's helpful. I also want to just ask on the commercial arrow aftermarket, is there any thematic thing you're seeing within the data on types of products, whether they're discretionary, non-discretionary, however you want to characterize it?

Speaker Change #127: where you're seeing relative strength.

Gautam Khanna: The only thing I'd say is the engine shops are obviously well booked out. I think our engine businesses are doing extremely well.

Speaker Change #127: [inaudible]

Speaker Change #128: The only thing I'd say is the engine shops obviously are well booked out. I think our engine businesses are doing extremely well. It's really much more varied after that. I was looking at that same data. There's some significant difference between discretionary versus not, and there really is not. I think it's just...

Joel Reiss: It's really much more varied after that. I was looking at that same data. Is there some significant difference between discretionary versus not? And there really isn't. I think it's just the nature of how much inventory the OEM the F the airlines are carrying and the specific needs on that one part, but there wasn't any significant difference when I looked at it.

Speaker Change #128: Probably the nature of how much inventory the airlines are carrying and the specific needs on that one part, but there wasn't any significant difference when I looked at the data between discretionary and not.

Speaker Change #129: Great. Thank you, guys.

Speaker Change #130: Thank you. One moment for our next question.

Speaker Change #130: And it's from the line of Gavin Parsons with UBS.

Gavin Parsons: Hey, thanks guys. Good morning.

Gavin Parsons: Morning.

Gavin Parsons: Just want to pull a little bit on what strong bookings and aftermarket means, given the language has been strong with a pretty wide range of aftermarket growth rates. So just any comment on if that's bookings above revenue. Appreciate it. It can be lumpy.

Speaker Change #132: Yeah, we've been we've booked basically I think

Speaker Change #133: Certainly on a full-year basis in this quarter, CAM bookings were ahead of shipments. I don't remember if that was true of every quarter of this year but certainly was true this quarter and in any year to date and actually from a year-to-date basis even in our freight market we've booked better than we have have shipped out.

Speaker Change #134: Okay, that's helpful. Yeah, and I mean, I don't know what typical is nowadays, but would you say you have more or less visibility into kind of next quarter's aftermarket growth than typical?

Speaker Change #135: I think what we've said before is our aftermarket is lumpy, you know, we, this is a highly booked to ship

Speaker Change #135: And I don't know that there's a dramatic change in terms of what percentage books in the quarter and shifts out.

Speaker Change #135: actually remain somewhat the same. But, you know, we have no visibility to what orders are going to show up that quarter until they do. It's why we always talk about the lumpiness of the booking and shipment number.

Gautam Khanna: Thank you. One moment for our next question, and it's from the line of Gavin Parsons with AUBS.

Speaker Change #159: Okay, thank you

Speaker Change #136: Thank you. One moment for our next question.

Operator: Yeah, we've booked basically, I think, certainly on a full year basis in this quarter, CAM, bookings were ahead of shipments. I don't remember if that was true of every quarter of this year, but certainly was true this quarter and year to date. And actually, from a year to date basis, even in our freight market, we've booked better than we have shipped out. Okay, that's helpful.

Speaker Change #136: and he's from the line of Michael Carmoly with Tourist Securities.

Michael Carmoly: Hey, good morning, guys. Thanks for taking the questions.

Speaker Change #138: Joel, maybe just to stay on that topic, I mean, and even kind of going back to Ron's question on the on the book to bill, I mean, there's capacities tight in the marketplace, engine shops are scheduled out, you know, the airlines aren't getting

Speaker Change #139: new planes. I mean, would you say as you close out this year, and I can appreciate all the short cycle commentary, but do you think visibility is

Gavin Parsons: Yeah. And I don't know what typical is nowadays. But would you say you have more or less visibility into kind of next quarter's aftermarket growth than you do now? I think what we've said before is our aftermarket is lumpy. You know, we are a highly booked to ship business. And I don't know that there's been a dramatic change in terms of what percentage books in the quarter and ships out. It's actually remained somewhat the same. But, you know, we have no visibility of what orders are going to show up that quarter until they do. It's why we always talk about the lumpiness of the booking and shipment numbers.

Operator: Thank you. One moment for our next question, and it's from the line of Michael Ciarmoli with Tourist Securities.

Speaker Change #139: better than normal, just kind of given what's going on on the OE kind of supply chain challenges and, you know, the extended nature of some of these shop visits that are really scheduled way out.

Michael Ciarmoli: Hey, good morning, guys. Thanks for taking the questions.

Joel Reiss: Joel, maybe just to stay on that topic, I mean, and even kind of going back to Ron's question on the book to bill, I mean, there's capacities tight in the marketplace, engine shops are scheduled out, you know, the airlines aren't getting new planes. I mean, would you say, as you close out this year, and I can appreciate all the short cycle commentary, but do you think visibility is better than normal? Just kind of given what's going on with the OE kind of supply chain challenges and, you know, the extended nature of some of these shop visits that are really scheduled way out.

Speaker Change #140: I don't think there's a significant change. Our lead times in the aftermarket are relatively short, certainly in comparison to the commercial loan we have or the defense side. And so

Michael Ciarmoli: I don't think there's been a significant change. Our lead times in the aftermarket are relatively short, certainly in comparison to the commercial loans we have or the defense side. And so if we don't get a dramatic amount of visibility, a significant portion of the orders that we ship in Q4 will be booked in Q4. So although the engine shops may be booked out several quarters or years, we don't get the same level of orders based on the volume of work they're doing. They may be able to use that to give us some level of guidance or comfort on what orders we may expect, but we don't get extra visibility.

Speaker Change #140: We don't get a dramatic amount of visibility, a significant.

Speaker Change #140: portion of the orders that we ship in Q4, we'll book in Q4.

Speaker Change #140: So although the engine shops may be booked out several quarters or years, we don't get the same level of

Speaker Change #140: orders based on the volume of work they're doing. You may be able to use that to give us some level of guidance or comfort on what orders we may expect but we don't get extra visibility.

Kevin Stein: Got it, got it. And then just Kevin, one more back to M&A on this, this opening of the aperture. I mean, you've got, you said it a couple of times, 50 different operating units, you've got a lot of scale. Are you thinking or finding that it may be more challenging to stay in that middle of the fairway on airline parts? You know, just given what kind of antitrust or regulatory issues might crop up, and you're, you're kind of opening up the aperture to kind of steer clear of some of those issues.

Speaker Change #140: Got it, got it. And then just, Kevin, one more back to M&A on this opening of the Aperture. I mean, you've got, you said it a couple times, 50 different operating units. You've got a lot of scale. Are you...

Speaker Change #141: thinking or finding that it may be more challenging to stay in that middle of the fairway on airline parts, you know, just given what kind of antitrust or regulatory issues might crop up and you're you're kind of opening up the aperture to kind of steer clear of some of those issues.

Michael Ciarmoli: Yeah, I don't see it as something new in the marketplace. Transcribed by https://otter.ai of, you know, trying to get deals through.

Speaker Change #142: Yeah, I don't see it as something new in the marketplace.

Speaker Change #143: In terms of, you know, HSR review or anything. I think we've always tried to be smart about our M&A portfolio. So we're not opening the aperture because of

Kevin Stein: It's a desire to consume more capital on M&A if there are good aerospace and defense type businesses in that larger market that make sense for us. So it's simply just taking advantage of what we're finding in the marketplace that we believe matches our very disciplined criteria. We still see a tremendous number of opportunities down the fairway in the traditional components of aerospace and defense. And there are so many parts that are on an airplane that we don't supply yet. There are still a vast number that, you know, we can continue to look for in the marketplace. So as I see it, there's a lot of opportunity ahead of us still.

Speaker Change #143: You know, trying to get deals through. It's a desire to

Speaker Change #143: consume more capital on M&A if there are good aerospace and defense type businesses.

Speaker Change #143: in that larger market that makes sense for us. So it's simply just taking advantage of what we're finding in the marketplace that we believe matches our very disciplined criteria. We still see a tremendous number of opportunities down the fairway.

Speaker Change #143: and the traditional components of aerospace and defense. And there are so many parts that are on an airplane.

Speaker Change #143: that we don't supply yet. There are still a vast number that we can continue to look for in the marketplace. So as I look out, there's a lot of opportunity ahead of us still.

Operator: Okay, sure. Thanks, guys. Thank you. One moment for our next question, and this is from the line of Peter Arment with Baird. Yeah, good morning. Thanks. Thanks. Thanks for squeezing me in.

Operator: Thank you. One moment for our next question, and this is from the line of Peter Arment with Baird.

Speaker Change #144: Okay, sure. Thanks, guys.

Speaker Change #145: Thank you. One moment for our next question.

Speaker Change #145: and is from the line of Peter Arment with Baird.

Peter Arment: Yeah, good morning. Thanks, thanks, thanks for squeezing me in. Kevin or Joel, maybe you just comment on, you called out the BizJet market as kind of a watch item. You've had

Peter Arment: really only one negative quarter of growth. And that was in Q2 in your aftermarket. Otherwise the last kind of, you know, four quarters, you've had good growth, but you're calling it out. Just maybe you could just provide a little more color on what you're seeing there. Thanks.

Peter Arment: I think it's just being driven by the larger kind of data pool we see, you know, the data comes out every month from the FAA in terms of takeoffs and landings, and it picked up, I think it was at one point, like 120% of 2019 levels, and it's kind of modulated now closer to like 103, 104%, or something like that. So I just think we're seeing an overall slowing in takeoffs and landings.

Speaker Change #147: I think it's just being driven by the larger kind of data pool. We see, you know, the data comes out every month from the FAA in terms of takeoffs and landings and

Speaker Change #148: It had picked up, I think it was at one point like 120% of

Speaker Change #149: Unknown Executive, Michael Lisman, Jaimie Stemen, Sarah Wynne, Mike Lisman, Jaimie Stemen,

Peter Arment: And so I think we generally think when you see that moderating, or slowing, or decreasing, it's going to translate into us and lower shipments. I think that's the reason we've kind of called it out as a watch item.

Speaker Change #148: and overall slowing in the takeoffs and landings. And so I think we generally think when you see that moderating or slowing or decreasing, it's going to translate into us into

Speaker Change #148: to lower shipments. I think that's the reason we've kind of called it out as a watch item.

Operator: Thank you. One moment for our next question, and it comes from the line of Pitski-Pitski with Alembic Global.

Speaker Change #150: I appreciate the call. I'll leave it at one. Thanks, guys.

Speaker Change #150: Thank you. One moment for our next question.

Operator: Thanks. Good morning.

Speaker Change #150: And it comes from the line of Pete Skibitsky with Alembic Global.

Pete Skibitsky: Thanks. Good morning. I just want to return to this topic of growing global airline traffic, but some pricing pressure at the airlines.

Operator: I just want to return to this topic of growing global airline traffic but some pricing pressure at the airlines. Just was wondering if you guys touched on it earlier, but just was wondering if you're seeing any, you know, trend of airlines tightening their belts, maybe with discretionary spend. And I don't know if you could bifurcate for us on the aftermarket; you're, you're, you know, sort of discretionary exposure versus more mandatory.

Pete Skibitsky: Just was wondering if you guys are, you touched on it earlier, but just was wondering if you're seeing any, any, you know, trend of airlines tightening their belts, maybe with discretionary spend. And I don't know if you could, you could bifurcate for us on the aftermarket, you're, you're, you know, sort of discretionary exposure versus more mandatory.

Speaker Change #152: Or, you know, should we think of it that your price points tend to be kind of low enough that it's kind of not an area, you know, your products are not an area where an airline would look to tighten its belt. Thanks.

Operator: Or, you know, should we think of it as your price points tend to be kind of low enough that it's kind of not an area, your products are not an area where an airline would look to tighten its belt? Thanks.

Kevin Stein: You know, I think in general, our price point in the aftermarket is pretty low. We say, you know, a couple thousand dollars per price point per part in the aftermarket. So it doesn't lend itself to, you know, maybe as much scrutiny at times, but we continue to, you know, operate, and deliver the highest quality and best delivery performance possible in the industry. If there's any, you know, slowdown, maybe, as Joel commented on in some of the discretionary aftermarket places, are there any, you know, what airline activity is out there?

Speaker Change #153: You know, I think in general our price point in the aftermarket is pretty low.

Speaker Change #153: We say, you know, a couple thousand dollars per, you know, price point per part in the aftermarket. So it doesn't lend itself to, you know, maybe as much scrutiny at times.

Speaker Change #153: But we continue to, you know, operate, you know, deliver the highest quality, best delivery performance.

Speaker Change #153: possible in the industry. If there's any, you know, slow down, maybe as Joel commented on in some of the discretionary aftermarket places.

Speaker Change #154: Are there any, you know, what airline activity is out there? We've certainly read and seen comment from many of you that the airlines are, you know, trying to manage inventory closely.

Kevin Stein: We've certainly read and seen comments from many of you that the airlines are, you know, trying to manage inventory closely. We haven't necessarily seen any of that translate to our business, but it continues to be a watch item. And we're always looking for any changes. Things seem relatively, you know, business as usual.

Speaker Change #155: We haven't necessarily seen any of that translate to our business, but it continues to be a watch item, and we're always looking for any changes. Things seem relatively, you know, business as usual.

Operator: Thank you. One moment for our last question, and it comes from the line of Bert Subin with Stiefel. Please proceed. Hi, hey, good afternoon.

Speaker Change #156: Appreciate it. Thank you.

Speaker Change #157: Thank you. One moment for our last question.

Speaker Change #157: And it comes from the line of Bert Subin with Stifel. Please proceed.

Bert Subin: Maybe just to follow up, Joel, on the, you know, you've had a lot of questions on the sort of how the commercial aftermarket is progressing. Is there any... Transcription by Trans-Expert at Fiverr.com

Bert Subin: Hi, hey, good afternoon. Maybe just to follow up, Joel, on the, you know, you've had a lot of questions on the sort of the how commercial aftermarket is progressing. Is there any

Bert Subin: color you can provide just from a regional standpoint, because we've seen a little bit of a divergence in capacity trends globally. Is that impacting sort of your geographic mix?

Operator: So I'm sorry; I missed the middle part of your question. You could just repeat it again, sorry.

Bert Subin: Sure, I was just asking, from a geographic standpoint, we've seen capacity growth, at least relative to 2019 levels, diverge a bit, you know, whether you're looking at the Middle East or Asia or North America or Europe. I'm curious if that's translated into sort of any change in your typical geographic mix of sales in the aftermarket.

Joel Reiss: No, I mean, first of all, we don't get great data by region for inventory and demand as it goes through distributors or through OEMs at times here to the airlines. So I don't know. We've looked at it a few times to try to figure that out. I don't know that we're seeing anything significantly different one region to the next that I would try to call out and note it as material.

Joel Reiss: No, I mean, first, we don't we don't get great data by region for inventory and demand as it goes through distributors or through OEMs at times here to the airlines.

Bert Subin: Got it. And Kevin, just to follow up for you, on the M&A side, you know, a few of your recent deals have focused more on the testing equipment and services side. I'm just curious, you know, what your postmortem is, how those deals are progressing, and sort of what your interest is to continue building into those spaces.

Kevin Stein: You know, the acquisitions; CalSpan was our first foray into that, and I would say that CalSpan is running at or ahead of our acquisition model, so it's a successful acquisition to date, and we would, you know, continue to look favorably on testing, certification, and instrumentation businesses, and that's why we looked at Raptor and why we will continue to look at that space. But our core is still, you know, components that have aftermarket content, much like CPI. The largest acquisition we've done in a year was a traditional component business, and that will continue to be our focus.

Joel Reiss: And it's why we looked at Raptor and why we will continue to look at that space.

Joel Reiss: and that will continue to be our focus. Some of these other pieces are interesting and we spend time explaining them so that you understand how it fits into our disciplined acquisition strategy, which these other businesses clearly do.

Operator: Thank you. And with that, I will conclude the Q&A session for today and will turn the call back to Jaimie Stemen for closing remarks.

Joel Reiss: Thank you.

Joel Reiss: Thank you. And with that, I will conclude the Q&A session for today and will turn the call back to Jaimie Stemen for closing remarks.

Jaimie Stemen: Thank you all for joining us today. This concludes the call. We appreciate your time and have