Q4 2024 TransDigm Group Inc Earnings Call
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Speaker Change: Good day, and thank you for standing by walking through the fourth quarter 2020 for transplant Group earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session that U S Press Star one on your telephone you didn't hear an automated message advising how does race.
Speaker Change: To withdraw your question. Please press star one again, please be advised that today's conference is being recorded I will now.
Speaker Change: And the conference over to your Speaker today, Jamie Siemon director of Investor Relations. Please go ahead.
Jamie Siemon: Thank you and welcome to <unk> fiscal 2020 for fourth quarter earnings Conference call presenting on the call. This morning are president and Chief Executive Officer, Kevin <unk>.
Jamie Siemon: Co Chief operating officer, Mike with Matt and Chief financial officers, there with <unk>.
Speaker Change: Also prevent present for the call today is our co chief operating officer Joel.
Speaker Change: Please visit our website at <unk> dot 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 for further information about important factors that could cause actual results to differ materially from those expressed or implied in our forward looking statements. Please refer to the company's latest filings.
Speaker Change: But I think D I b.
Speaker Change: I'll go through the investors section of our website or at SEC Gov.
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. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP.
Speaker Change: Sure and applicable reconciliations I will now turn the call over to <unk>.
Speaker Change: Good morning, Thanks for calling in today first of all I'll start off with the usual quick overview of our strategy a few comments about the quarter and discuss our fiscal 'twenty five outlook than Mike and Sarah will give additional color on the quarter.
Speaker Change: To reiterate we believe we are unique in the industry in both the consistency of our strategy in both good times about as.
Speaker Change: As well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle.
Speaker Change: 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 has significantly higher margins and over any extended period typically provide relative stability in the downturns.
Speaker Change: We follow a consistent long term strategy specifically.
Speaker Change: We first own and operate proprietary aerospace businesses with significant aftermarket content.
Speaker Change: Second we utilize a simple well proven value based operating methodology third.
Speaker Change: We have a decentralized organization structure, a unique compensation system closely aligned with shareholders.
Speaker Change: As we acquire businesses that fit the strategy, where we see a clear path to p/e like returns.
Speaker Change: Lastly, our capital structure to allocations are a key part of our value creation methodology.
Speaker Change: Our longstanding goal is to give our shareholders private equity like returns with the liquidity of a public park.
Speaker Change: To do this we stay focused on both the details of value creation as well as careful allocation of our capital.
Speaker Change: As you saw from our earnings release, we closed out the year with another good quarter.
Speaker Change: Solid operating performance in Q4, with both total revenue and EBITDA as defined margin coming in strong.
Speaker Change: For the full year fiscal 'twenty four revenue came in above the high end of our most recently published guidance and our fiscal 2004 EBITDA as defined margin surpassed the guidance.
Speaker Change: Commercial aerospace market trends remained favorable with the industry the commercial aftermarket has normalized.
Speaker Change: As global Air traffic continues to surpass pre pandemic levels and demand for travel persists.
Speaker Change: In the commercial OEM market. There is still much progress to be made for OEM rates and our results continued to be adversely affected in comparison to pre pandemic.
Speaker Change: <unk> <unk>.
Speaker Change: Airlines demand for new aircraft remains high and the Oems are working to increase their aircraft production.
Speaker Change: However, OEM aircraft production rates remained well below pre pandemic levels as the struggles.
Speaker Change: The OEM supply chain persist.
Speaker Change: And the lingering effects of the recently resolved machinist strike at point likely pushes the OEM recovery further to the right.
Speaker Change: In our business during the quarter, we saw healthy growth in our revenues for all three of our major major market channels commercial OEM commercial aftermarket and defense.
Speaker Change: Our EBITDA as defined margin was 52, 6% in the quarter.
Speaker Change: Contributing to the strong Q4 margin is the continued strength in our commercial aftermarket.
Speaker Change: Along with diligent focus on our operating strategy.
Speaker Change: Which is allowing margin performance to expand across all segments.
Speaker Change: Additionally, we had strong operating cash flow generation in Q4 of over $570 million and ended the quarter with almost $6 3 billion of cash we expect to spend like generate significant additional cash through 2025.
Speaker Change: Next an update on our capital allocation activities and priorities.
Speaker Change: During fiscal 'twenty four.
Speaker Change: Pleased to have allocated approximately $6 5 billion of capital in the aggregate across M&A and return of capital to our shareholders specifically.
Speaker Change: These activities included the acquisition of Sci industries, CPI electron device business Raptor scientific among others and a special dividend of $75 per share.
Speaker Change: This dividend of $75 is our largest to date.
Speaker Change: As you know we are continuously assessing our capital allocation options and we are very pleased to return this capital to our shareholders.
Speaker Change: Regarding the current M&A activities or pipeline.
Speaker Change: We continue to actively look for M&A opportunities that fit our model.
Speaker Change: As we look out over the time horizon, we continue to see an expanding pipeline of potential M&A targets.
Speaker Change: As we demonstrated this year and we do not see this environment slowing in the near term.
Speaker Change: As usual the potential targets are mostly small and mid size range I cannot predict or comment on possible closings, but we remain confident.
Speaker Change: That there is a long runway for acquisitions that fit our portfolio.
Speaker Change: Our capital allocation priority to transact are unchanged, our first priority is to reinvest in our businesses.
Speaker Change: 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.
Speaker Change: So we do still take this into consideration.
Speaker Change: We are continuously 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 exited fiscal 'twenty four with a sizable cash balance of almost $6 3 billion.
Speaker Change: Pro forma for the special dividend paid in October we still have a sizable cash balance of around $2 billion.
Speaker Change: Our capital allocation actions still leave us with significant liquidity.
Speaker Change: And financial flexibility to meet any likely range of capital requirements.
Speaker Change: Or other opportunities in the readily foreseeable future.
Speaker Change: Moving to our outlook for fiscal 'twenty five.
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 fiscal 'twenty five.
Speaker Change: Our initial guidance for fiscal 'twenty five gives us follows and can also be found on slide seven in the presentation.
Speaker Change: The midpoint of our fiscal 'twenty five revenue guidance is $8 $85 billion are up approximately 11%.
Speaker Change: As a reminder, and consistent with past years with roughly 10% less working days than subsequent quarters.
Speaker Change: 25, Q1 revenues EBITDA and EBITDA margins are anticipated to be lower than the other three quarters of 2025.
Speaker Change: This revenue guidance is based on the following market channel growth rate assumptions, we expect commercial OEM revenue growth in the mid single digit percentage range, which is highly dependent on the evolution of the production rates in the commercial OE up environment.
Speaker Change: Commercial aftermarket revenue growth in the high single digit to low double digit percentage range.
Speaker Change: And defense revenue growth in the high single digit percent attraction.
Speaker Change: The midpoint of fiscal 2025, EBITDA as defined guidance is $4 65 billion.
Speaker Change: Or up approximately 12%.
Speaker Change: With an expected margin of around 52, 9%. This guidance includes about an additional 70 basis points margin dilution from recent acquisitions.
Speaker Change: We anticipate EBITDA margins will move up throughout the year with Q1 being the lowest and sequentially lower than Q4 of our fiscal 2024.
Speaker Change: The midpoint of adjusted EPS is anticipated to be $36.32 or up approximately 7% Sarah Sarah will discuss in more detail. Shortly the factors impacting EPS along with some other fiscal 'twenty five financial assumptions and updates.
Speaker Change: We believe we are well positioned as we enter fiscal 'twenty five.
Speaker Change: As usual, we continue to closely watch all of the aerospace and capital markets continue to develop and react accordingly, let.
Speaker Change: Let me conclude by stating that I am very pleased with the company's performance this year.
Speaker Change: We remain focused on our value drivers cost structure and operational excellence, we look forward to fiscal 2025 and expect that our consistent strategy will continue to provide the value you have come to expect from US now let me hand, it over to Mike Lisman, Our transplant group co COO to review our recent performance at a few.
Mike Lisman: Other items.
Mike Lisman: Good morning, I'll start with our typical review of results by key market category.
Speaker Change: 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. The market discussion includes the recent acquisition divest the our industry the CPI electron device business and wrap their scientific in both periods.
Speaker Change: In the commercial market, which typically makes up close to 65% of our revenue.
Speaker Change: Our discussion into OEM and aftermarket.
Speaker Change: Our total commercial OEM revenue increased approximately 13% in Q4 and 20% for full fiscal year 2024, compared with the prior year periods sequentially total commercial OEM revenues contracted by 4% in Q4.
Speaker Change: Bookings in the quarter were solid and without too much negative impact from the Boeing strike.
Speaker Change: It only the last 17 days of the quarter.
Speaker Change: We are happy to see that Boeing and the Iam have reached an agreement, but the OEM supplier landscape is now once again in a difficult position.
Speaker Change: Higher to the strike the challenges seen across the aerospace OEM OEM supplies back to these last few years, we're continuing to ease but that recovery remains somewhat fragile.
Speaker Change: Near eight week production line shutdown will likely exacerbate the situation time will tell how this plays out.
Speaker Change: Specific the trans time, since we ship to both Boeing as well as sub tiers on the affected platforms the impact across our business is on EBIT and varied.
Speaker Change: The commercial OEM guidance, we're giving today contains what we believe is an appropriate level of risk around the Max 767, and triple seven production build rates for the 2025 fiscal year as most of you know we are quite diversified across all commercial and defense platforms with the majority of <unk>.
Speaker Change: Revenue, even more so EBITDA derived from the aftermarket.
Speaker Change: Accurately predicting OEM build rates for 2025 as we sit here today is a difficult task now that agreement now that an agreement has been reached we expect the ramp up back to the previously targeted monthly production rates to be significantly delayed on the backside of prior strikes most recently 2008.
Speaker Change: Production rates have taken close to one year to recover to the to the pre strike monthly rates.
Speaker Change: It means a lower OEM production environment in our fiscal 2025, and we expected one quarter ago on our last earnings call.
Speaker Change: To prepare for this during recent weeks, we proactively initiated cost reduction initiatives across our operating units to rightsize our structure for this lower 2025 OEM production environment.
Speaker Change: These cost reduction initiatives span furloughs head count reductions timeline acceleration of productivity projects and a range of other actions aimed at reducing expenses.
Speaker Change: Now moving onto our commercial aftermarket business discussion.
Speaker Change: Total commercial aftermarket revenue increased by approximately 8% in Q4, and 12% and 12% for full fiscal year 2024, compared with the prior year periods sequentially total commercial aftermarket revenues were roughly flat in Q4.
Speaker Change: With regard to our commercial aftermarket rate of growth the 8% year over year increase we saw this quarter was a bit lighter than we previously expected.
Speaker Change: As we've said many times before our commercial aftermarket can be lumpy. So we always focus on 12 month trends not quarterly trends.
Speaker Change: Our commercial aftermarket is made up of four submarkets passenger interior freight and business jet.
Speaker Change: This quarter growth seen across the four submarkets were still vary but not quite as disconnected as at the firm.
Speaker Change: Three quarters of this year.
Speaker Change: All four sub markets increased versus Q4 of last year fitness, Jeff was a bit stronger and freight weaker than the total commercial aftermarket 8% growth rate for.
Speaker Change: The fourth quarter the passenger sub market performed in line with the overall commercial aftermarket rate of growth.
Speaker Change: Q4 point of sales data from our distribution partners increased well into the double digits approaching 20% versus Q4 of last year.
Speaker Change: For the full year, our passenger Submarket remains the strongest of the group and was up nicely exceeding our original expectations in particular within our passenger segment operating units with higher engine content posted very solid growth in excess of those but non engine content again above our.
Speaker Change: <unk> for the year.
Speaker Change: Laying on the full year theme freight biz jet and interior all underperformed versus our original expectations.
Speaker Change: Finally bookings nicely exceeded sales for the full year. These factors give us confidence we will achieve the commercial aftermarket growth rate guidance, which Kevin provided fiscal 'twenty five.
Speaker Change: With regard to how commercial aftermarket revenue was likely to progress throughout fiscal 2025, two quick notes.
Speaker Change: Q1 is expected to be the lowest quarter of the year on a sales dollar basis, owing to the 10% fewer working days in second Q1 of fiscal 'twenty five will also likely be the lowest quarter on a percentage growth basis, owing to some recent softness on bookings and timing that that dictates what falls into the quarter from a shipments.
Speaker Change: Standpoint.
Speaker Change: Now turning to broader market dynamics that are referencing the most recent IATA traffic data for September.
Speaker Change: Global revenue passenger miles continue to surpass pre pandemic levels since February 2024 <unk>.
Speaker Change: September 2024 air traffic was about 4% above pre pandemic.
Speaker Change: I am currently expect traffic to reach 104% of 2019 levels in 2024 and surpassed prior year traffic by 12%.
Speaker Change: Domestic travel continues to surpass pre pandemic levels and the most recently reported traffic data for September.
Speaker Change: Domestic air traffic was up 9% compared to 2019.
Speaker Change: Domestic air travel growth has been driven significantly by outsized growth in China, where air travel was up 16% in September compared to prepay debit chip.
Speaker Change: Shifting over to the U S domestic air travel for September was up 8% versus 2019 levels.
Speaker Change: International traffic is generally hovered slightly above or below pre pandemic levels for the past few months, but is up nicely from where it was one year ago and the most recently reported data for September international about 2% above pre pandemic levels and this has improved from being 93% of.
Speaker Change: 2019 levels, one year ago.
Speaker Change: In summary for the commercial aftermarket as we head into 2025 things continue to shape up nicely.
Speaker Change: As we stated on prior earnings calls now that passenger traffic has returned to pre pandemic levels and with it our volume which is now running slightly ahead of 2019 levels. The commercial aftermarket rate of growth would moderate a bit and you'll see this in our guidance for 2025.
Speaker Change: With regard to the Submarkets in 2025, we expect continued growth in our passenger in interior submarkets driven by the positive trends in passenger traffic aided slightly by older aircrafts continuing to fly for longer.
Speaker Change: Business jet is likely to continue to bounce around but should return to growth over the full year.
Speaker Change: Freight will start to lap easier comps in our fiscal 25, So we expect stronger performance, there and a return to positive growth trends.
Speaker Change: As you know on a quarterly basis commercial aftermarket can be lumpy. So we are sure that the path to the growth expectations I mentioned will be uneven over the course of the coming year.
Speaker Change: Now 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 16% Q4, 19% for the full fiscal year 2024, compared with the prior year periods.
Speaker Change: Q4 defense revenue growth was well distributed across our businesses and customer base.
Speaker Change: Additionally, we saw similar rates of growth in both the OEM and aftermarket components of our total defense market with OEM running slightly ahead of aftermarket.
Speaker Change: Defense bookings for the full year significantly surpassed the prior year and support the 2025 guidance for high single digit revenue growth.
Speaker Change: Additionally, we saw growth in U S government defense spend outlays during Q4.
Speaker Change: As you know defense sales and bookings can be lumpy the forecasting them with precision on a quarterly basis is difficult they can get bigger or smaller in size and collect or push right on timing.
Speaker Change: So similar to my commercial aftermarket commentary the defense growth rates could also be uneven over the individual quarters 2025.
Speaker Change: Lastly, I'd like to finish by recognizing the strong efforts and accomplishments of our 51 operating unit screens during fiscal 2024. It was a good year and we're pleased with the operating performance they delivered for our shareholders.
Speaker Change: As we enter into our new fiscal year, our management teams remain committed to our consistent operating strategy servicing strong demand for our products and shared our 2025 growth expectations proved too conservative but demand for our products coming in stronger than we've outlined here today. The operating unit teams will be ready to step up.
Speaker Change: Up and meet the higher demand.
Speaker Change: With that I would like to turn it over to our CFO Sarah with.
Sarah: Thanks, Mike Good morning, everyone. Thanks review, a few additional financial matters for fiscal 'twenty and then also our expectations for fiscal 'twenty five.
Sarah: A few additional fiscal 'twenty four data points on organic growth taxes on liquidity in the fourth quarter, our organic growth rate was 12, 2% in one market channels contributed to this growth to Kevin and Mike just discussed on taxes, our GAAP and adjusted tax rate finished the year within their expected ranges.
Sarah: Fiscal 'twenty GAAP tax rate 22.6, and the adjusted rate was 2012 up to them.
Sarah: Our cash and liquidity free cash flow, which we traditionally defined as EBITDA less cash interest payments Capex and cash taxes was roughly $2 3 billion study yet.
Sarah: So that free cash flow line net working capital consumed approximately $200 million and the final net working capital ended the year roughly in line with historical levels as a percentage of sales.
Speaker Change: Kevin mentioned, we ended the year with approximately $6 3 billion of cash on the balance sheet.
Sarah: <unk> 3 billion pro forma for the $75 dividend paid out on October 18th at yearend net debt to EBITDA ratio was four four times down from the four six at the end of last quarter pro forma for the $75 a share dividend our net debt to EBITDA ratio is five four times.
Sarah: Okay.
Sarah: While we don't target a specific amount of cash that we'd like to have on hand, we have sufficient capital available through both cash on hand, as well as incremental debt capacity to support all potential M&A in the pipeline.
Speaker Change: Over the course of fiscal 'twenty, Paul we did a fair bit of financing, we raised $5 billion of capital 2 billion to fund the acquisition with CPI <unk>.
Speaker Change: In the year of $3 billion in support of the $4 3 billion return of cash to our shareholders in the form at the 75 to all the dividend.
Speaker Change: We continue to be comfortable operating in the 5% to seven net debt EBITDA ratio range. Our go forward strategy or capital deployment have not changed and we continue to seek the best opportunities for providing value to our shareholders through our leverage strategy.
Speaker Change: In addition, we refinanced various tranches about debt stack, our capital allocation strategy is always to both proactively and prudently manage our debt maturity stacks. Our nearest term maturity of November 2027, which gives us plenty of protection at least in the short term.
Speaker Change: In addition, approximately 75% about 25 billion gross debt balance.
Speaker Change: Fixed through fiscal 2020. This was achieved through a combination of fixed rate notes interest rate caps swaps and collars.
Speaker Change: Next on the fiscal 'twenty five expectations I'd like to give some more details on the financial assumptions around interest expense taxes and share count.
Speaker Change: A special note all of my comments and data here include the payment of the 75 dividend in fiscal 2025.
Speaker Change: Net interest expense is expected to be about one 5 billion for fiscal 'twenty five and that's it.
Speaker Change: Equates to a weighted average interest rate of approximately six.
Speaker Change: 1%.
Speaker Change: This estimate assumes an average sulfur rate of four four for the full year.
Speaker Change: On taxes, our fiscal 'twenty, but that bench.
Speaker Change: And adjusted tax rates are all anticipated to be in the range of 22% to 24%.
Speaker Change: On the share count we expect our weighted average shares outstanding to be 58 4 million shares in fiscal 'twenty five.
Speaker Change: With regards to liquidity and leverage for fiscal 'twenty five as we were traditionally define free cash flow from operations at Transcon, which again EBITDA is defined as cash interest payments capex and cash taxes.
Speaker Change: Debate this metric to be around $2 3 billion.
Speaker Change: After paying out 75 per share dividend and assuming no additional acquisitions or capital market transactions. We would end the year with around 4 billion of cash on the balance sheet, which would imply a net debt to EBITDA ratio close to four times at the end of fiscal 'twenty five.
Speaker Change: And as a reminder, there's been no.
Speaker Change: And our approach to how we think about capital allocation all leverage without typical target.
Speaker Change: 5% to seven net debt ratio range, we will continue to watch this ratio along with the cash interest coverage ratio of EBITDA to interest expense as we actively pursue options of maximizing value to our shareholders through our capital allocation strategy.
Speaker Change: So on a final note on that we think will remain in good position with adequate flexibility to pursue M&A or returning cash to our shareholders.
Speaker Change: By buybacks or additional dividend during the course of fiscal 'twenty five.
Speaker Change: I'll turn it back to the operator.
Speaker Change: To kick off the queue.
Speaker Change: Thank you.
Speaker Change: And as a reminder to ask a question you press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.
Speaker Change: <unk> bylaws for part of the Q&A roster one moment for our first question.
Speaker Change: Our first question comes from the line of.
Sheila: Sheila yes.
Sheila: <unk> from Jefferies. Your line is open.
Speaker Change: Good morning, guys and everyone. Thank you for the time, so maybe Kevin.
Speaker Change: Folks are picking on the commercial aftermarket number when we think about 8% organic growth in the quarter is pretty good but you have an acceleration baked into fiscal 'twenty. Five I know you mentioned you want to look at 12 months in terms of the performance can you maybe talk about the growth in each of your core markets that you expect next year, how youre thinking about passenger performance what was it in fiscal 'twenty one.
Speaker Change: How does it perform in 'twenty, five and why Im carriers accelerate with 25.
Speaker Change: Sure Sheila it's Mike I will take that one first we feel good about the guidance, we're giving this morning as we sit here as you guys know who covered us for a while this is a bottoms up based approach op unit by Op unit as part of our annual plan process, where the assumptions that feed into the commercial aftermarket growth are based on dialogue with.
Speaker Change: The specific customers by our 51 op unit teams. The same approach we've used going back a while we feel good about it. It's produced good results accurate results for us in.
Speaker Change: In the past with regard to what's coming in next 12 months.
Speaker Change: So we feel good about the guidance as we look at the high single digit to low double digit for commercial aftermarket total as we head into next year. We obviously took a bit of headwind this year from freight and Biz jet, which we mentioned in the comments were.
Speaker Change: A little bit weaker than we expected a year ago. When we gave the guidance for FY 'twenty four we don't expect that continued to continue on a percentage basis as we head into FY 'twenty five we expect both to return to revenue growth passenger which is our largest.
Speaker Change: Sub market within the commercial aftermarket should grow up nicely as well together with the takeoffs and landings that are forecast that as we head into FY 'twenty five so all in all things are shaping up well specific to interiors.
Speaker Change: That came in a little bit short of expectations in FY 'twenty for FY 'twenty five we'll see we still have aspirations for growth. There I think we've seen a little bit of a slowdown in terms of the airlines being willing to take some aircraft out of service and do the work just because they need to be deployed out there that can be pulled in to do some of the <unk>.
Speaker Change: Syria Reefers.
Speaker Change: We expect good growth in the interiors market as well 2025.
Speaker Change: Mike is there any way you could tell us what passenger was in 'twenty four and how you think about it in 25 does it stay the same or decelerate.
Mike Lisman: So passenger was up nicely.
Speaker Change: 2020 for close to 20% 17, 18% sort of ballpark for the passenger segment and then obviously the others were below that in terms of the submarkets it'll decelerate a bit heading into next year, just coming down with the takeoffs and landings the increase versus prior year.
Speaker Change: But still be nicely positive.
Speaker Change: Great. Thank you.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of.
Speaker Change: David Strauss from Barclays. Your line is open.
David Strauss: Great. Thanks, good morning.
Speaker Change: Alright.
Speaker Change: Good morning, just just following up on that last set of questions. What what are you assuming in your in your aftermarket forecast I know you've got bids for a passenger all of that.
Speaker Change: What are you assuming just commercial airline revenue passenger miles or ASM flight hours. However, you want to cut it what are you assuming that grows that over the course of the next 12 months.
Speaker Change: When we build the forecast its done at the op unit level. So we don't issue a top down either to the op units and say Hey, guys. Here is what RPM growth is going to be in the coming year and I'll go through your forecast based on this.
Speaker Change: Again, it's a bottoms up approach customer by customer partner for a very detailed at the op unit levels.
Speaker Change: And again, that's produced for us.
Speaker Change: A more accurate forecast going out the next 12 months, we took that same approach. This year. So we don't give them a baked it's.
Speaker Change: RPM assumptions behind it.
Speaker Change: Okay got it and.
Speaker Change: I wanted to dig in on the EBITDA margin forecast a little bit.
Speaker Change: So this past quarter, you had 52 six.
Speaker Change: Which include a fair amount of dilution from your recent acquisitions notches degree mix on the aftermarket side, you're talking about you're typically partner target around 150 bps per year of <unk>.
Speaker Change: Margin improvement and I would think you know why you are not forecasting a ton of aftermarket growth the mix looks a bit better with relatively weak OE next year I would assume the underlying acquisition margins get a bit better why why are you forecasting a bit more on the way.
Speaker Change: Margin expansion next year.
Speaker Change: I think it has to do with acquisition.
Speaker Change: Lucia that as we go into the new year. When you full DNA about full percentage points, maybe a little more of dilution that's that gets us to our.
Speaker Change: 100, 150 basis points of expansion per year that we'd like to target.
Speaker Change: Okay, Yes.
Speaker Change: Just taking you had the hit from acquisitions in this quarter you were 52, six and you're forecasting about 30 bps of improvement off of that at the midpoint for next year. So that's kind of what I was getting at.
Speaker Change: Yes, I agree, but when you.
Speaker Change: Most of the acquisitions close that would be closer to the end of the year. So you've got a full year of impact of that dilution in our $25 forecast or guidance.
Speaker Change: Okay, alright, thanks very much.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Glenn Tom Cana from TD Cowen Your line is open.
Speaker Change: Hey, good morning, guys.
Speaker Change: Good morning, good morning.
Speaker Change: Wanted to ask.
Speaker Change: About the status of that OEM contract renegotiation renewal.
Speaker Change: Which if I recall, the terms kind of expired on the old contract at the end of this calendar year.
Speaker Change: And given there was a strike.
Speaker Change: And what have you just wondering.
Speaker Change: What happens does that just get pushed out.
Speaker Change: When would we expect to see.
Speaker Change: Final terms on the new contract and is that baked into your forecast.
Speaker Change: For the fiscal 'twenty five.
Speaker Change: A couple.
Speaker Change: Thanks, Bert correct on the timing we are actively working it on the negotiating front, we don't comment too much on the active negotiations with our customers, but it is continuing to move along and we have factored into the guidance.
Speaker Change: Some of the.
Speaker Change: Impact of those negotiations as it comes out.
Speaker Change: How many months they proceed and get to a final resolution.
Speaker Change: And what happens if it's not done by December 31, due to the old term supplier what happens.
Speaker Change: Boeing is an important customer we continue to work with them actively to resolve this on a timeline and the near term.
Speaker Change: Perfect. Thanks, guys.
Speaker Change: One moment for our next question.
Speaker Change: Our next question will come from the line of Ron Epstein from Bank of America. Your line is open.
Ron Epstein: Hey, good morning, guys.
Speaker Change: Good morning.
Ron Epstein: So.
Speaker Change: M&A is an important part of this great alright, so with the new administration and maybe some changes do you expect the M&A environment to change.
Ron Epstein: Or would there be maybe bigger opportunities different opportunities you guys going forward.
Speaker Change: Sure.
Speaker Change: Yes, I don't really like to speculate on those things that are somewhat outside of my.
Speaker Change: Control and understanding.
Speaker Change: So I'm not anticipating it will get worse.
Speaker Change: We are very diligent in how we approach deals and disciplined in the way we analyze them.
Speaker Change: No we're not.
Speaker Change: Pushing any envelope here we.
Speaker Change: Tend to be pretty conservative and disciplined and I don't see that changing and I don't see the administration impacting that.
Speaker Change: It didn't hurt us this last year, we came off of what really is a record year in terms of number of transactions and the like only behavior.
Speaker Change: The astral at closing so a phenomenal year.
Speaker Change: I don't see that slowly.
Speaker Change: Got it got it got it got it and then maybe another one along the same lines.
Speaker Change: You can answer.
Speaker Change: Good morning has suggested that they're going to sell some stuff.
Speaker Change: Is there anything in that pile of stuff that might be attractive to you.
Speaker Change: Yes, I don't like to speculate.
Speaker Change: Public company assets.
Speaker Change: Good day.
Speaker Change: We're just like I think all of you are aware that there are some larger assets.
Speaker Change: That look possibly attractive.
Speaker Change: But we'll have to see it's pretty early on in that.
Speaker Change: Beyond that I can't comment.
Speaker Change: Got it alright, thank you.
Speaker Change: Thank you one moment our next question.
Speaker Change: Our next question comes from the line of Robert Stallard from vertical research. Your line is open.
Robert Stallard: Thanks, so much good morning.
Speaker Change: Good morning, good morning.
Speaker Change: Kevin I think you mentioned that.
Speaker Change: Q4 comment a little bit below some of your expectations on the aerospace aftermarket and also the bookings in the quarter hadn't perhaps been as strong as he thought that can have an impact in Q1 I'm wondering if you can elaborate on what might be the causes behind that.
Speaker Change: It's hard to say exactly Rob we've anecdotally heard a little bit about.
Speaker Change: Airlines pulling back on inventory and those kind of things.
Speaker Change: We've not seen too much of it directly at our op units, but there could have been some of an impact there in Q4 with regard to the growth outlook as we head into next year. When you look at the forecast that takeoffs and landings schedule, we feel good about the guidance as we.
Speaker Change: Sitting here today, but as I mentioned in my comments, we did see.
Speaker Change: Just timing bit of booking softness in Q4 that will impact some of the quarterly phasing for next year with Q1 potentially being at the lowest on a percentage basis, but for the full year feel really good about it in the high single digit to low double digit commercial aftermarket guidance because.
Speaker Change: It's just following the market, we look at what the market's doing and we know our product positions and we know we should generally follow that performed well.
Speaker Change: And then this might be for you as well.
Speaker Change: On that.
Speaker Change: Aftermarket guidance for 2025, I know you wont give a specific number but have you assumed normal levels of trends time price increases in coming to that forecast.
Speaker Change: We always aim to slot price likely ahead of inflation and that's the same approach were taking this year.
Speaker Change: Alright, okay. Thank you.
Speaker Change: Thank you one moment our next question.
Speaker Change: Our next question comes from the line of Robert Spingarn from Melius Research. Your line is open.
Speaker Change: Hi, This is Scott on for Rob Spingarn.
Speaker Change: Kevin Mike Sarah if you end the year at four turns of net leverage to get back towards six turns by the end of the year, you would need to deploy more than $7 billion of capital.
Speaker Change: Is that the right way to think about it and is there any thoughts on what might be used for M&A versus share repos or special dividends over the next 12 months.
Speaker Change: I'll start on that and then Sarah can finish it up I think it is directionally in the right way to look at it we have plenty of dry powder for any of these.
Speaker Change: M&A deals that we're looking at including.
Speaker Change: The larger things that were commented on earlier if anything comes to pass so I think we're in a great position.
Speaker Change: I give you the priorities of.
Speaker Change: Our capital and that is we want to invest in our businesses first you've seen.
Speaker Change: From Us historically and then of course, we are looking for disciplined M&A is the second and then third we look at returning that to shareholders.
Speaker Change: We have plenty of available.
Speaker Change: Leverage capacity here to go after anything that we see coming along in the marketplace.
Speaker Change: Yes, so just to confirm youre tied into the math the same way we did shale.
Speaker Change: Alright, thanks for taking the question.
Speaker Change: One moment our next question.
Speaker Change: Our next question will come from the line of Myles Walton from Wolfe Research. Your line is open.
Speaker Change: Thanks. Good morning, I think you mentioned that the distribution and aftermarket channel had close to 20% growth in the fourth quarter and I guess that implies a 3% to 4% growth in your non distribution channels have you ever had that kind of skew and is distribution tending to be a lead lag or oncor.
Speaker Change: Related indicator.
Speaker Change: It's hard to say I would generally say, it's uncorrelated these things sometimes get noisy on a quarterly basis.
Speaker Change: POS data can disconnect from what the total commercial aftermarket posts.
Speaker Change: I think as everyone knows what goes through distribution is about bounces around 20% to 25% of our total commercial aftermarket. So it's a meaty chunk, but not.
Speaker Change: North of 50% of it and we'd look at it generally at probably a bit of a leading indicator because that once those.
Speaker Change: Sales happened from the distributors. They then need to replenish what's been sold out to the market.
Speaker Change: Okay, and then Mike I think you mentioned the expectation for prior strikes was.
Speaker Change: Taking a year to get back to production rates.
Speaker Change: So just as you're looking to build up your guidance does that mean, you've assumed roughly flat Boeing output from you guys year on year with some price.
Speaker Change: And then Airbus growth to get to the mid single digit growth.
Speaker Change: It's hard to say and comment on macro build rate assumptions like that because we built it up at the op unit level and they do it based on their specific dialogue with the customer and they know what their inventory is so they can factor all of that is when we give the OEM guidance.
Speaker Change: Aimed to be conservative.
Speaker Change: And.
Speaker Change: We do that obviously for reasons that I think you guys understand that if the demand should come in stronger than we anticipate we can add in the resources, we need to step up and hit the demand that keep Boeing and Airbus, both happy and get the parts they need.
Speaker Change: But I think just given the fragile state of the supply chain as we said in the commentary and where we stand how messy prior strikes have been to clean up I think we're probably a bit more conservative here.
Speaker Change: Others, and hopefully were surprise to the upside as the year evolves.
Speaker Change: Alright, thank you.
Speaker Change: Thank you one moment our next question.
Speaker Change: Next question comes from the line of Scott.
Speaker Change: <unk> from Deutsche Bank. Your line is your line is open.
Speaker Change: Hey, good morning, Joel can you give us a sense for how transplants commercial aftermarket revenue breaks down between airframe and the engine and I'm asking because you mentioned that engine is outpacing our frame from a growth perspective. This year. So just curious to get some sense for how that aftermarket revenue bifurcate between those two channels.
Speaker Change: Thanks.
Speaker Change: As we look at it we're generally about market weighted in terms of the OEM and spare parts spend based on how we sized up the market no different we don't really overweight more towards the engine or the airframe, but we did see across our businesses that are more into focus this quarter.
Speaker Change: Arcos <unk>, Charles doing engine sensors, and a few other folks providing.
Speaker Change: Send it around that vicinity of the aircraft there were.
Speaker Change: Pockets of strength, there that were significantly above those teed up the airframe side of the business, but we're about we're about market weighted.
Speaker Change: Okay and would you expect engines outpaced airframe next year as well just given the pent up demand in existing backlog at the engine MRO shops.
Speaker Change: Based on what we see across the MRO shops, and just all the slots being still what you guys read about right about we probably expect up at similar as we head into next year, just given the high demand there is around the engine side of MRO World right now.
Speaker Change: Thank you.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question will come from the line of Gavin Parsons from UBS. Your line is open.
Gavin Parsons: Thanks, Good morning, guys.
Speaker Change: Good morning.
Speaker Change: Kind of broader supply chain health relative to the work stoppage in Seattle I mean have you guys exited as any buffer between kind of Boeing and your smaller tier suppliers to prevent the whipsaw from going all the way to zero is there any aspect of that that might keep your own suppliers healthier.
Speaker Change: We always size up our supply landscape and we never want to stress the mom and pop shops to box retail our op units to go out obviously factor that stuff in so I suspect some of that is potentially gone on.
Speaker Change: We will be ready to meet the demand as we said in the commentary with Airbus and Boeing build rates come in higher than we forecasted here today I think our op units will be ready and prepared and that the inventory step up and hit the targets.
Speaker Change: Okay, Great and then on freight I think it looks like dedicated freight flows returned to growth a couple of months ago give a sense of roughly how long that tends to take to translate into revenue resuming growth.
Speaker Change: It's hard to say I think it's good to see that market stabilized first of all because its been coming down from the Covid peak as we've seen as the transition more towards belly to belly cargo has continued and hopefully as we head into next year, we see things turned the corner and transitioned to posit.
Speaker Change: <unk> growth, that's what we expect as we rolled up the internal forecast here hard to put a timeline on it though I suspect a couple of quarters and editors.
Speaker Change: Got it thank you.
Speaker Change: One moment for our next question.
Speaker Change: Okay.
Speaker Change: Our next question comes from the line of Ken Herbert from RBC Capital markets. Your line is open.
Ken Herbert: Yes, hi, good morning.
Ken Herbert: I wanted to ask.
Speaker Change: I wanted to ask Kevin or Mike on the defense side, you outperformed 24 by over 10% relative to the initial guide and I can appreciate diminished conservatism in the guide, but as you look into look at 24, and then this year, where did you really see the upside in defense was it sort of op tempo activity in areas where there.
Speaker Change: Things that kicked in that you really didn't expect and where do you maybe see potential upside as we think about 25 on the defense market.
Speaker Change: When you saw the strength pretty uniformly across all of our op units, a couple or a little bit stronger than others.
Speaker Change: Shelton Armtec just based on specific work Theyre doing on the defense side of their business businesses, but it was really pretty uniform across the landscape across the ranch here in terms of the defense growth as you guys know the outlays have been positive now in that kind of 8% to 12% ballpark for many quarters in a row. So I think.
Speaker Change: That kind of consistent growth on that front is probably aided us and the threat landscape I'm sure has got a bit of delay in terms of.
Speaker Change: Bringing those numbers force it causes up to to come about as we head into next year, we have really good bookings this year in FY 'twenty four on the defense side of our business. So it gives us confidence that we're going to hit that high single digit target for for next year.
Speaker Change: And can you just frame up now exiting 'twenty for the mix of defense between.
Speaker Change: Maybe it even at a high level aftermarket versus OE.
Speaker Change: Okay.
Speaker Change: It's not very different from the commercial side of our business it tends to bounce around roughly half and half and the two parts grew somewhat closely this year, we saw both consistent growth on both the OEM and aftermarket sides, not all that different and disconnected, but it's about half and half.
Speaker Change: It bounces around a bit.
Speaker Change: Quarter by quarter and year by year.
Speaker Change: Perfect. Thanks, Mike.
Speaker Change: One moment for our next question.
Speaker Change: Our next question will come from the line of Jason Gursky from Citi. Your line is open.
Jason Gursky: Hey, good morning, everybody.
Jason Gursky: I just wanted to circle back on that.
Jason Gursky: The channel.
Jason Gursky: Sales and.
Speaker Change: Distribution and whether you could just kind of talk through what youre seeing from an inventory perspective, and whether there has been.
Speaker Change: Any interesting.
Speaker Change: Movement.
Speaker Change: Any inventory here, maybe just the trends over the last three or four quarters and kind of what you expect.
Speaker Change: Going forward.
Speaker Change: Inventory in the channel.
Speaker Change: So.
Speaker Change: Couple of things, we don't get great inventory data from the airlines, it's not for lack of trying.
Speaker Change: But you just don't get that kind of detail from that from our op units in terms of what they are they are holding in stock.
Speaker Change: So it's hard to say and we've never gotten great until on that front in terms of exactly what the airlines have as it pertains to the distribution, they're holding as we sit here today about where they should be the terms of months of hand on supply.
Speaker Change: It might oscillate this way or that way a month or so by the time, but we're about where we should be and we expect as we head into FY 'twenty five that will continue we always wanted to have the parts on hand.
Speaker Change: Distributors have the parts on hand to supply to the end user as they need them. So we look forward to maintain similar months on and as we head into next year.
Speaker Change: Okay, Great and then Kevin you mentioned.
Speaker Change: And maybe your prepared remarks, and some of the Q&A that youre going to remain disciplined on M&A.
Speaker Change: I'm wondering if you can't just maybe do.
Speaker Change: A walk through history and talk about.
Speaker Change: Valuation multiples and where we are today relative to where we were maybe pre pandemic 18 19 timeframe.
Speaker Change: I'm just kind of curious if disciplined as a relative terms.
Speaker Change: <unk> remained disciplined relative to what you've always done or is it relative to what is currently going on in the market.
Speaker Change: It's disciplined in terms of what we target to acquire.
Speaker Change: <unk> businesses that are very high IP.
Speaker Change: Fully more commercial or.
Speaker Change: All commercial businesses, we've tick these things off so many times of what we look for that's what I mean about disciplined.
Speaker Change: Multiples are up there's no doubt about it we're having to pay more today than we did a few years ago.
Speaker Change: But that just goes into the math of the acquisition, we haven't changed our targets, we still look for 20% IRR on every deal that we model before we would pull the trigger on it. So that's what I mean about the discipline, we're paying a little more but.
Speaker Change: If something matches your criteria.
Speaker Change: And you model it you can often.
Speaker Change: Not worry as much about the price you have to pay us.
Speaker Change: As long as the business.
Speaker Change: And a disciplined approach meets our criteria.
Speaker Change: Great. Thank you.
Speaker Change: Thank you one moment our next question.
Speaker Change: Our next question will come from the line of Peter Arment from Baird. Your line is open.
Peter Arment: Yeah. Thanks, Good morning, everyone nice results.
Speaker Change: Just maybe a quick one on capex.
Speaker Change: It seems like the guide implies.
Speaker Change: Is going to be closer to 3% of sales and maybe if you could just highlight some of the investments youre, making because I think historically you've been closer to 2% just curious the bigger dynamics going on there.
Speaker Change: Sure.
Speaker Change: We're increasing on the Capex guidance for next year, we've done a lot of M&A and we want to continue to make sure that one a new operating units have got the infrastructure to take but we have a lot of really good new productivity projects that were heavily investing in.
Speaker Change: I can let Mike and Kevin elaborate on some of this but some of the stuff. We've talked about this I think on prior calls where we're seeing projects.
Speaker Change: One necessarily available.
Speaker Change: And years ago, certainly a price point that now becoming available cobalt survived so spending more time and money to invest in that and help with that productivity what about that in China.
Speaker Change: Arris point Youll see that in some of the margin benefits too that's what gets us.
Speaker Change: Percentage margin point of growth plus a bit from there that Kevin mentioned is just good capex investments. That's the majority of the Capex spend is good productivity projects that help it will help us on the cost structure side.
Speaker Change: I appreciate the color. Thanks, I'll leave it at one thanks.
Speaker Change: Thank you.
Speaker Change: And this concludes the question and answer session I would now like to turn it back over to Jamie for closing remarks.
Jamie Siemon: Thank you all for joining US today. This concludes the call I appreciate your time and have a good rest of your day.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect everyone have a great day.
Jamie Siemon: Okay.
Jamie Siemon: [music].
Jamie Siemon: Okay.
Speaker Change: [music].