Q1 2025 TransDigm Group Inc Earnings Call
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Speaker Change: Hello, welcome to TransDAM Group Incorporated Q1 2025 earnings conference call.
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At this time, all speakers are in a listen-only mode.
Speaker Change: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again.
Speaker Change: I would now like to turn the conference over to Jaimie Stemen, Director of Investor Relations. You may begin.
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Speaker Change: Thank you, and welcome to Trans-Dimes Fiscal 2025 First Quarter Earnings Conference Call. Presenting on the call this morning are Trans-Dimes 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.
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 statements.
Speaker Change: 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: 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 gap measure and applicable reconciliation. I will now turn the call over to Kevin.
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 25 outlook. Then Joel and Sarah will give additional color on the quarter.
Kevin Stein: To reiterate, we believe we are unique in the industry in both the consistency of our strategy in both good times and bad, as well as our steady focus on intrinsic shareholder value integration through all phases of the aerospace cycle.
Kevin Stein: To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique, proprietary products.
Kevin Stein: Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins, and over any extended period have typically provided relative stability in the downturns.
We follow a consistent long-term strategy, specifically
Kevin Stein: First, we own and operate proprietary aerospace businesses with significant aftermarket content. 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 shareholders.
Kevin Stein: Fourth, we acquire businesses that fit this strategy, 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.
Kevin Stein: 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 start to our fiscal year. During the quarter, we saw healthy growth in the revenues for both our commercial aftermarket and defense market channels.
Kevin Stein: As expected, commercial OEM revenues were modestly down this quarter compared to prior year, which Joel will discuss further in his market segment commentary. Bookings in Q1 expanded for all three of our major market channels.
Kevin Stein: Commercial aerospace market trends remain favorable. The commercial aftermarket has returned to normalization as global air traffic has surpassed pre-pandemic levels and robust demand for travel persists.
Kevin Stein: In the commercial OEM market, there is still much progress to be made for OEM rates.
Kevin Stein: And our results continue to be adversely affected by OEM performance.
Kevin Stein: Airline demand for new aircraft remains high, and the OEMs are working to increase aircraft production.
Kevin Stein: However, Boeing aircraft production rates remain well below pre-pandemic levels as the lingering effects of last fall's nearly two-month-long machinist strike and its ongoing impact to the supply chain continue to be felt.
Kevin Stein: The strike has pushed the OEM recovery further to the right and time will tell how this plays out.
Kevin Stein: Our EBITDA's defined margin was 52.9% in the quarter. Contributing to this strong Q1 margin is the continued strength in our commercial aftermarket, along with diligent focus on our operating strategy, which is allowing margin performance to expand across all segments.
Kevin Stein: Additionally, we had strong operating cash flow generation in Q1 of over $750 million and ended the quarter with almost $2.5 billion of cash.
Kevin Stein: We expect to steadily generate significant additional cash throughout the remainder of 2025.
Kevin Stein: During Q1, we opportunistically deployed just over $300 million of capital via open market repurchases of our common stock.
Kevin Stein: This equates to approximately 250,000 of our shares at an average price of $1,249 per share. We view these repurchases like any other capital investment and expect this will meet or exceed our long-term return objectives.
Kevin Stein: 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 immediate time horizon, we continue to see an expanding pipeline of potential M&A targets, and we do not see this environment slowing in the near term. As usual, the potential targets are mostly in the small and mid-sized range.
But larger deals may also be actionable.
Kevin Stein: I cannot predict or comment on possible closings, but we remain confident that there is a long runway for acquisitions that fit our portfolio.
Kevin Stein: The capital allocation priorities at Transdime are unchanged. Our first priority is to reinvest in our business. Second, do accretive discipline to M&A. And third, return capital to our shareholders via share buybacks or dividends.
Kevin Stein: A fourth option, paying down debt, seems unlikely at this time, though we do still take this into consideration.
Kevin Stein: We are continually evaluating all of our capital allocation options, but both M&A and capital markets are difficult to predict. As always, we continue to closely monitor the capital markets and remain opportunistic.
Kevin Stein: As mentioned earlier, we ended the quarter with a sizable cash balance of almost $2.5 billion. 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 25.
Kevin Stein: The guidance assumes no additional acquisitions or divestitures and is based on current expectations for continued performance in our primary commercial end markets throughout Fiscal 25.
Kevin Stein: Although we saw strong first quarter results, we are not changing our full year revenue in EBITDA as defined guidance for fiscal 2025 at this time.
Kevin Stein: We are also maintaining our previously issued full-year market channel growth rate assumptions for commercial OEM, commercial aftermarket, and defense, as underlying market fundamentals have not meaningfully changed for any of these markets.
Kevin Stein: Additionally, uncertainty remains around the commercial OEM production rate progression and supply chain impact as Boeing recovers from the machinist strike.
Kevin Stein: We will continue to closely monitor the situation and respond as needed. With commercial OEM production ramp uncertainty and only one quarter of data, it's too close to call on making changes to our primary and market guidance at this time.
Kevin Stein: Our guidance can be found on slide 6 in the presentation, and I will reiterate it here. The midpoint of our fiscal 25 revenue guidance is $8.85 billion, or up approximately 11 percent.
Kevin Stein: The revenue guidance is based on the following market channel growth rate assumptions. 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 OEM environment.
Kevin Stein: Commercial aftermarket revenue growth in the high single digit to low double digit percentage range and defense revenue growth in the high single digit percentage range.
The midpoint of fiscal 2025 EBITDA is the five guidance.
Kevin Stein: is $4.685 billion or up approximately 12% with an expected margin of around 52.9%.
Kevin Stein: This guidance includes about an additional 70 basis points of margin dilution from recent acquisitions compared to fiscal 24.
Kevin Stein: While we had a strong keep it down margin result in the first quarter of 25, margins can be lumpy and may fluctuate over the next few quarters.
Kevin Stein: The midpoint of adjusted EPS is increasing versus our prior guide to reflect the lower outstanding share count resulting from the share repurchases discussed earlier.
Speaker Change: The midpoint of adjusted EPS is now expected to be $36.47 or up approximately 7%. Sarah will discuss in more detail shortly the factors impacting EPS, along with some other Fiscal 25 financial assumptions and updates.
Speaker Change: We believe we are well positioned for the remainder of fiscal 25. As usual, we will continue to closely watch how the aerospace and capital markets continue to develop and react accordingly.
Speaker Change: Let me conclude by stating that I am very pleased with the company's performance this quarter. We remain focused on our value drivers, cost structure, and operational excellence.
Speaker Change: We look forward to the remainder of Fiscal 25 and providing the value you come to expect from us. Now let me hand it over to Joel Reiss, our Trans9 Group Co-COO, to review our recent performance and a few other items.
and Michael Lisman. Thank you. Thank you.
Joel Reiss: Good morning. I'll start with our typical review of results by key market category. For the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period in 2024. That is, assuming we own the same mix of businesses in both periods.
The market discussion includes the 2024 acquisitions and vote 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.
Joel Reiss: Our total commercial OEM revenue decreased approximately 4% in Q1 compared with the prior year period.
Joel Reiss: Commercial transport OEM, this is largely Boeing and Airbus, was down 1%. Fizjet and helicopter OEM revenue was down 8%. Sequentially, total commercial OEM revenues contracted by 17% in Q1.
Joel Reiss: Bookings in the quarter were solid, both sequentially and against prior year if you want.
Joel Reiss: Our commercial OEM business was impacted in the quarter by the Boeing Machinistrike, which affected at $737,000 max.
Joel Reiss: 767 and 777 production lines. In total, the strike and subsequent production restart lasted roughly 12 weeks.
Joel Reiss: specific to TransTime since we ship direct, as well as through sub-tiers on the affected platforms.
The impact across our businesses is uneven and varied.
Joel Reiss: Boeing's receiving docks were closed during the strike, while some sub-tiers continued to drive consistent demand. This will likely cause further commercial OEM impact into the balance of the year.
Joel Reiss: It is too soon to determine how much of an impact the strike will have in what is a fragile supply chain recovery.
Joel Reiss: Precisely predicting the ramp up and the flow through to the supply chain is tough.
Joel Reiss: However, the commercial OEM guidance we are reiterating today contains what we believe is an appropriate level of risk around the 737 max, 767, and 777 production build rates.
Joel Reiss: for the 2025 fiscal year. As we noted on our last earnings call, shortly after the strike began, we proactively initiated cost reduction initiatives across our operating units to right-size our structure to account for the lower 2025 OEM production environment.
Joel Reiss: These cost reduction initiatives span furloughs, headcount reduction, hiring freezes, acceleration of productivity projects, and a range of other actions aimed at reducing expenses.
Joel Reiss: These initiatives enabled us to beat our Q1 enacted productivity target and put us in a good position for the year. In addition, as is typical for us, we will add resources judiciously as we see the higher ramp rate materialize.
Joel Reiss: The business jet helicopter miss in quarter one, first prior year, is primarily timing-related, but we were also impacted by the four-week Textron strike. Bookings were up nicely in Q1 over the same period last year, which should set us up for growth in the balance of the year.
Now, moving on to our commercial aftermarket business discussion.
Joel Reiss: Total commercial aftermarket revenue increased by approximately 9% compared with the prior year period. Sequentially, total commercial aftermarket revenues grew by about 4% compared to Q4-24.
Joel Reiss: Commercial aftermarket bookings were solid compared to prior year. Bookings and shipments are running in line with our expectations.
Joel Reiss: and continue to support our unchanged 2025 commercial aftermarket guidance of high single-digit to low double-digit revenue growth.
Joel Reiss: As a reminder, and as we've said many times before, the commercial aftermarket can be lumpy, and when forecasting our commercial aftermarket, we always focus on 12-month trends, not quarterly trends.
Joel Reiss: Our commercial aftermarket is made up of four sub-markets, passenger, interior, freight, and business jet. This quarter, the growth across the four sub-markets was varied, but not significantly disconnected from what we had anticipated.
Joel Reiss: All four submarkets' revenue increased versus Q1 of last year. Business jet was stronger and freight weaker than the total commercial aftermarket 90% growth rate. The passenger submarket performed in line with the overall commercial aftermarket rate of growth.
Joel Reiss: Within our passenger segment, operating units with higher engine content posted very solid growth, well in excess of those with non-engine content.
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Joel Reiss: Additionally, quarter one point of sales data from our distribution partners increased well into double digits first quarter one of last year. These factors give us confidence we will achieve the commercial aftermarket growth rate guidance for fiscal 2025.
Joel Reiss: Turning to broader market dynamics and referencing the most recent IATA traffic data for December.
Joel Reiss: Global revenue passenger miles have continued to surpass pre-pandemic levels since February of 2024.
Joel Reiss: 2024 air traffic increased 10.4% above 2023 and is about 3.8% above pre-pandemic levels.
Joel Reiss: RPKs in December were up 8.6% versus prior year while ASKs were up 5.6% as passenger load factor is at near record highs of 84% driving the additional upside.
Joel Reiss: IATA currently expects traffic to reach 113% of 2019 levels in 2025 and to surpass prior year traffic by 8%.
Domestic travel also continues to surpass pre-pandemic levels.
Joel Reiss: In the most recently reported traffic data, global domestic air traffic was up 5.7% compared to 2023 and 9.7% compared to 2019.
Joel Reiss: Domestic air travel growth has been driven significantly by outsized growth in China, where air travel was up 20.2% compared to 2019.
Joel Reiss: International traffic continues to trend upwards and has been above pre-pandemic levels for the past few months. In the most recently reported data for 2024, international travel was about 0.5% above 2019 levels.
Joel Reiss: Most international markets saw stable growth with Asia-Pacific the major driver of the increase.
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Joel Reiss: Shifting to our defense market, which is traditionally is at or below 35% of our total revenue. The defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 11% compared with the prior year period.
Joel Reiss: Q1 defense revenue growth was well distributed across our businesses and customer base. We saw similar growth in both the OEM and aftermarket components of our total defense market.
with the aftermarket running slightly ahead of OEM.
Joel Reiss: Defense bookings for the quarter were healthy compared to the prior year and continue to support our unchanged 2025 defense guidance of high single-digit revenue growth.
Joel Reiss: However, as you know, defense sales and bookings can be lumpy, and forecasting them with precision on a quarterly basis is difficult. Similar to my commercial aftermarket commentary, the defense growth rates could also be uneven over the individual quarters of 2025.
Joel Reiss: In addition, we continue to see steady improvements in on-time delivery and other key customer performance metrics, which are now approaching 2019 levels. With improving supply chain performance, we are on track to surpass those levels later this year.
Joel Reiss: We also saw good new business awards and bookings in the quarter in both commercial and defense markets.
Joel Reiss: Gore Electronics was selected by a major OEM as the provider of
Joel Reiss: a flight deck control panel systems for a new derivative platform. As the incumbent on other platforms with this customer, Corey was well positioned to be responsive to their timeline, providing the right technology, customization, and capability required in an exceptionally short period of time.
Joel Reiss: In addition to Corey Electronics, we had solid awards during the quarter at Airborne Systems North America, Armtek, Calspan, and Chelten Limited within the quarter.
Joel Reiss: During the quarter we saw our succession planning at work with one executive...
Joel Reiss: His contributions span multiple areas, including mergers and acquisitions, serving as president of several business units.
Joel Reiss: We extend our heartfelt thanks to Pete for his dedication and wish him a well-deserved relaxing retirement.
Joel Reiss: With Pete's retirement and the acquisitions made in 2024, we promoted two accomplished leaders to Executive Vice President roles.
Joel Reiss: Jason Marlick, who joined us in 2008, has accumulated 17 years of experience across several TransZyme operating units. His most recent role was as President of Champion Aerospace in Liberty, South Carolina.
Joel Reiss: Jason was promoted in October and now will oversee six operating units.
Speaker Change: Similarly, Chris Blackford, who has served with Transdyne for 11 years, was promoted in November. Chris has held leadership roles across multiple units, including his most recent position as President of Airborne Systems North America.
Speaker Change: Like Jason, Chris will be responsible for overseeing six operating units.
Speaker Change: We are confident that both Jason and Chris will continue driving operational excellence and value creation across the organization.
Speaker Change: Lastly, I'd like to wrap up by expressing how pleased I am by our operational performance in the first quarter. It was a very good start to our fiscal 2025.
Speaker Change: As we progress further into Fiscal 25, our management teams remain focused on our consistent operating strategy and servicing the strong demand for our products. With that, I would like to turn it over to our Chief Financial Officer, Sarah Wynne.
Sarah Wynne: Thanks Joel and good morning everyone. I'll recap the financial highlights for the first quarter and then provide some more information on the guidance.
Sarah Wynne: First, on organic growth and liquidity. In the first quarter, our organic growth rate was 6.6 percent, driven by our commercial aftermarket and defense market channels, as Kevin and Joel have just discussed.
Sarah Wynne: On cash and liquidity, free cash flow, which we traditionally define as EBITDA-less cash interest payments, CapEx, and cash taxes, is over $800 billion for the quarter. This is higher than our average free cash flow conversion due to the timing of our interest and tax payments.
Sarah Wynne: This will normalize throughout the year as our interest and tax payments will pick up next quarter. For the full fiscal year, our free cash flow guidance is unchanged. We continue to expect to generate free cash flow of approximately $2.3 billion in Fiscal 25.
Sarah Wynne: Below that free cash flow line, net working capital usage was neutral for the quarter. For the full year, we expect working capital to end roughly in line with historical levels as a percentage of sales.
Sarah Wynne: up from 4.5 times at the end of last quarter after paying out the $75 dividend earlier in Q1.
Sarah Wynne: While we don't target a specific amount of cash that we 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 activity in the pipeline.
Sarah Wynne: Our Evener to Interest Expense Coverage Ratio ended the quarter at 3.4 times, which provides us comfortable cushions versus our target of 2 to 3 times.
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Regarding our debt, our nearest term maturity is 2027.
Sarah Wynne: and we remain approximately 75% hedged on our total $25 billion gross debt balance through our fiscal 2027.
Sarah Wynne: This is achieved through a combination of fixed rate notes, interest rate caps, swaps, and collars. This provides us plenty of protection, at least in the immediate term.
Sarah Wynne: As Kevin mentioned, during the quarter we opportunistically repurchased approximately 250,000 shares, deploying just over $300 million of cash. We continue to seek the best opportunities for providing value to our shareholders through our leverage strategy.
with regard to guidance as Kevin mentioned.
Sarah Wynne: We maintained our prior guidance for sales and EBITDA. Our adjusted EPS guidance is up slightly now at $36.47 compared to the prior guidance of $36.32. The increase is due to the approximately 250,000 shares we repurchased during the quarter.
Sarah Wynne: As we sit here today, from an overall cash, liquidity and balance sheet standpoint, we think we remain in good position, with adequate flexibility to pursue M&A or return cash to our shareholders via dividends or share repurchases.
Sarah Wynne: With that, I'll turn it back to the operators to kick off the Q&A.
Speaker Change: Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 11 on your telephone and then wait for your name to be announced.
To withdraw your question, please press star 1 again.
Please stand by while we compile the Q&A roster.
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Speaker Change: Our first question comes from the line of Miles Walton with Wolf Research. Your line is open.
Thanks, good morning.
Speaker Change: I think the first quarter margins were expected to be down sequentially. They were obviously up sequentially. Curious if you can comment on that. And also the contract loss amortization was running pretty high. What's causing that to sort of go up in level? And then what's the expectation for the full year? Thanks.
Speaker Change: Jomel, this is Sarah. I'll take those. So in Q1, the higher EBITDA margin is primarily driven from the significant mix shift we had in the quarter from commercial OEM to commercial aftermarkets.
Speaker Change: And then also we have good productivity projects, but the mix is the primary piece of that. On the last contract, I think you actually saw that in the table there.
Speaker Change: These are some of those contracts that we purchased with Estaline, so they're still lumpy as they flow out. There's been no new boss contracts, nothing else added to it. But that's what you see flowing out, and there was just some timing on some of that in Q1 for this year.
Speaker Change: Okay, and just a quick one, that sale, the gain on sale, what was sold in the quarter?
Speaker Change: We had a mass business in... Oh, sorry, I'm getting on the cell, yeah. We sold a small piece called Mass Systems in the quarter. We bought it a few years ago, managed to improve it and sold it at a profit. It came along with... Carbon. Yeah, another acquisition.
Speaker Change: very close to the Russian border and it made communication masks for troops on the ground and it really wasn't a business we wanted to be in.
Got it. Okay. Thank you.
Thank you.
Please stand by for our next question.
Speaker Change: Our next question comes from the line of Noel Poppenack with Goldman Sachs. Your line is open.
Hey, good morning, everyone.
Thank you for joining us.
Speaker Change: Maybe just staying on the margins since they were up nicely year over year. I guess the guidance for the year at the midpoint would imply that that EBITDA margin is essentially flat through the rest of the year.
Speaker Change: And, you know, I think you usually have some seasonality where it expands through the year. Your recently acquired revenue would become less recently acquired. What would drive the margin to be flat through the year?
But we have to factor in the...
Speaker Change: with the strike at OEM being down quite surprisingly you know from where we forecast.
Speaker Change: but you know I think it's we aim to be conservative so hopefully we're conservative and it might look like we are once again but we don't try to get out over our skis too much on forecasting
The future, we'll see how it unfolds.
Speaker Change: Okay. And then, Kevin, just wanted to ask about the commercial transport aftermarket. I guess...
Speaker Change: Are you surprised to have two quarters in a row of up seven seat miles are still growing a little faster than that? Seems like pricing is still nicely positive year over year
Speaker Change: Can you talk a little more about what you're seeing there? Is it just random or is it just the compares? I know the compares get a decent amount easier the rest of the year.
Speaker Change: So we're kind of seeing some varied pieces as we, you know, as I talked about in the sub-market, our freight continues to be a bit of a drag, although bookings were up significantly and we think that freight's kind of bottomed out at this point.
Speaker Change: Our engine businesses we have are doing significantly better than what the kind of the overall numbers are. It's just right now kind of just the kind of mix of where we're at.
Speaker Change: It was slightly better than what we had anticipated when we were putting out the initial kind of look last quarter. So, for us, it's roughly in line as part of the lumpiness of what we expect the commercial aftermarket to be.
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Okay, thank you.
Thank you.
Please stand by for our next question.
Speaker Change: Our next question comes from the line of Robert Stollert with Vertical Research. Your line is open.
Thanks very much. Good morning.
Order.
Speaker Change: Maybe I'll ask Noah's question in a slightly different way. You've got the 1Q actuals here, but if you look at these various sub-components of the aerospace aftermarket, where do you expect there to be improvement that will get you to that low double-digit number for the full year?
Bye.
Thanks for watching!
Speaker Change: So we we don't provide the specific guidance into the sub markets having said that I think this as we highlighted before
Speaker Change: Freight, I think, has kind of bottomed down and expect that to continue to improve. The engine business has continued, I would think, to continue to do well. Beyond that, I think we're going to see the, I think the way we look at it is all of the sectors continue to have the right.
Speaker Change: kind of components behind it of, you know, good passenger traffic and an aging aircraft marketplace. So I think we'll continue to see kind of growth across all of the submarkets.
Speaker Change: And then one for Kevin. Tariffs. I was wondering what sort of exposure Transdyn might have with regard to tariffs that could be coming through on Europe. We've got the Canada and Mexico ones as well. And what sort of plans you've put in place as a contingency. Thank you.
So, we've looked at this across our business.
The good news is Transdime is a domestic manufacturer.
Speaker Change: We don't import a lot of products to manufacture, so that's to our advantage in this. We've analyzed, and I guess it depends on how you answer the question, where are the tariffs going to be implemented.
Speaker Change: It seems like Mexico and Canada are on a delay and China is being implemented. We don't do a lot in China any longer. We have, you know, I think
Speaker Change: relocated production out of China where possible and don't utilize that location a lot.
Speaker Change: So we think tariffs for us across the board will be de minimis to the corporation. Again, we're largely a domestic manufacturer.
Thanks so much.
Thank you. Please stand by for our next question.
Speaker Change: Our next question comes from the line of David Strauss with Barclays. Your line is open.
Thanks, Maureen.
Morning.
Speaker Change: Kevin, I think on the last call you had mentioned that Q1 would be the weakest aftermarket quarter. Did the aftermarket end up coming in a little bit better than you would have thought back then?
Speaker Change: Yeah, I think it did come in a little bit stronger, which was a pleasant surprise to us. So it's difficult to forecast this, as Joel and Mike will always say, you know, aftermarket is book and ship largely. So it's difficult to forecast.
http://www.youtube.com or the link in the description below.
Speaker Change: Okay, and on aftermarket volumes, can you give us, I know you've given us kind of at a high level where you think it is relative to 2019. Can you give us any idea by the different submarkets where you think volumes are relative to 2019?
Speaker Change: I think, as of right now, everything is above pre-pandemic levels, except for probably our interior businesses. Interiors is driven a lot by the refurb market, and refurb really has not come back to where it was back in 2018, 2019.
Speaker Change: I think as we've talked about this a few times in the last year or so, we keep thinking it's going to happen and it slides a little bit to the right. The REFER programs we've seen announced are generally smaller than what was then back happening in 2018-2019.
Speaker Change: Freight had come back in 2020, you know, 2020 during the pandemic, 2021 I think was the peak year until this year, so I think freight's doing well. BizJet is well above where it was pre-pandemic levels, just the overall market.
and Michael Lisman. Thank you. Thank you.
Speaker Change: Okay, and Joel, can you remind us how much grade is of your total aftermarket?
It is about...
Speaker Change: 15% or so, 15-20% range. It kind of varies, it bounces around, but that's the general range.
That's a total or a commercial?
And...
on commercial, oh on commercial, sorry, yeah, commercial, yeah.
Thank you very much.
Thank you. Please stand by for our next question.
Speaker Change: Our next question comes from the line of Scott Micas with Lelius Research. Your line is open.
Good morning.
Kevin, Joel, Sarah, Boeing's laid out a fairly aggressive
Speaker Change: production ramp post-strike, at least their targets. They and Airbus both have a track record of not hitting their stated production rates.
Speaker Change: So I'm just curious, are your operating units receiving orders from Boeing that support a ramp to 38 per month or higher in the back half of this year on the 737?
So we're typically not getting orders out.
Speaker Change: for what would be the back end of the year, yet our leap times are typically
Speaker Change: shorter than that. We're certainly optimistic that Boeing's going to get back up to the rate of 38. Today we're probably seeing about half of that and we're optimistic that, as I said, that the number will move up during the year.
Speaker Change: And we're prepared to do that. We'll ask people if necessary, and yeah, since we're hopeful they can hit their numbers.
Thanks for watching!
Speaker Change: Okay, and then you mentioned the M&A pipeline remains active, but in the quarter you bought back $316 million of stock. So, just curious, are valuations for acquisition targets just too elevated relative to the quality of the assets, or did you think that your stock was just trading at a very attractive price?
Speaker Change: You know we're always looking to opportunistically return capital to our shareholders. There was a lot of
Speaker Change: You know, turmoil in the market. Stock fell. We took it opportunistically to buy back some shares.
Speaker Change: That's really all there is to it. It doesn't say anything about the M&A market, and it wasn't a lot of cash that we used. It was just an opportunity to quickly return cash to, or capital to the shareholders.
Thanks for taking the questions.
Thank you.
Operator: Our next question comes from the line of Ken Herbert with RBC Capital Markets. Your line is open.
Thank you. Thank you. Thank you.
Hi, good morning.
Order.
Speaker Change: Hey, can you remind us what percent of aftermarket engine represents and maybe how much over the up nine was the engine in the first quarter?
Speaker Change: So it bounces around for us. It's not immaterial. It was up significantly more than the 9%.
Speaker Change: Okay and obviously as we think about that we think about you know champion Jason's business but is it fair to say that your engine exposure is is market weighted or are you disproportionately you know have disproportionately higher content than any engine types?
We think we're market blended across the board.
Thank you for watching!
Speaker Change: Great. And are you seeing any incremental pressure on pricing across any of the submarkets within the aftermarket relative to maybe where you were three months ago?
Speaker Change: I don't think I'm hearing anything specific different from pricing. Our typical approach to pricing is unchanged and we're basically looking to cover our inflationary costs and then a little bit more and I don't know that we've seen anything significantly different than that.
Thanks for watching!
Perfect. Thanks, Joel.
Yep, thank you.
Please stand by for our next question.
Speaker Change: Our next question comes from the line of Scott Doshall with Dutch Rebite. Your line is open.
Hey, good morning.
Morning.
Speaker Change: Kevin, did the OEM contract renegotiation you've spoken about in the recent past conclude or is that contract still being negotiated?
Thank you for watching!
Speaker Change: Yes, we successfully closed out the contract. Patrick Murphy, one of our EVPs, led the negotiation and we were able to close it out, I think it was in December.
Thank you. Thank you. Thank you.
Speaker Change: Okay and were there any retroactive elements to that negotiation that would have helped OE pricing in the quarter just concluded?
Speaker Change: No, the contract, it was expiring at the end of December. So the new contract started January 1st. So there was no retroactive aspect to it.
Speaker Change: Okay, and then just to clarify, is the duration of the new contract the same as the duration of the contract that it's replacing, or did he move to something shorter term in nature?
Yeah, it was the same.
Okay, thank you.
Thank you.
Please stand by for our next question.
Thank you for watching!
Speaker Change: Our next question comes from the line of Sheila with Jeffries. Your line is open.
Sheila: Hey, good morning guys. Maybe just on that last question, Joel, I think it was you or Kevin, if we just, how do we think about profitability overall, just the flattening out? Is it OE coming back up from down four to mid-single digits? And does the new contract have any changes in your profitability profile?
Sheila: I think the contract and OEM business is already in our forecast, so there's not going to be any incremental improvements or anything.
Speaker Change: and anything else to share on that Joel? No, that's great.
Speaker Change: Okay, and then maybe if I could ask one on the aftermarket. Interiors, I think that's the only subsegment below 2019 levels. How can we think about what's driving that when you expect that to improve? Does it come in a wave or should we see it just a gradual improvement?
Thank you for watching!
Speaker Change: I'm not sure that I could give you any great extra insight. Really, it will be as when you see the airline start announcing a refurb program. I mean, it's not that refurb isn't zero. It's well below the kind of typical levels. There are several programs we're hearing about.
Thank you.
Speaker Change: The question will be, is what will drive the numbers if multiple programs for us hit at the same time, as opposed to if it's just sort of a slow wave of what that looks like. But the lead times will be long. I'm sure we'll be, we'll have seen that coming and we'll be able to provide some color as that's coming back. I don't know that today we see that it's within the next quarter or two.
Speaker Change: I think it's also difficult to take planes out of service to refurbish interiors when you don't have enough plane deliveries from the OEM. So, I think all these things kind of work complicated, you know, it's sort of a complicated relationship.
Sure, makes sense. Thank you.
Thank you.
Please stand by for our next question.
Speaker Change: Our next question comes from the line of Seth Seidman with JP Morgan. Your line is open.
Thanks very much and good morning everyone.
Speaker Change: Morning. Just maybe go back a little bit to the aftermarket point we touched on a little earlier, things being a little stronger.
Speaker Change: In the first quarter, I think you talked about the first quarter being the lowest of the year, and the comps, particularly in the fourth quarter, start to get easier. Did anything change in your view of the rest of the year, or should we still think that there's no reason why we wouldn't see...
Speaker Change: growth below There's no reason we should see growth below what we saw in the in the first quarter and growth should ascend from here
Speaker Change: I don't think we have anything to kind of change from the guidance we've provided you before. What we say all the time is the aftermarket's lumpy. I mean, the vast majority...
of our orders booking ship in the same quarter.
Speaker Change: So we try to look at what the trends are and there's nothing in the market dynamics today that make us think there's a significant change from what we're seeing today.
Okay.
Speaker Change: Okay. And then, I guess, if you were ever to make an acquisition from one of your customers,
Speaker Change: Would there ever be an opportunity to pay for that acquisition, pay for a portion of that acquisition in the form of pricing rather than cash?
Speaker Change: certainly hasn't ever come up before. We're opportunistic in everything we do, but that's not our usual process.
Thank you.
Thank you.
Speaker Change: Our next question comes from the line of Ron Epstein with Bank of America. Your line is open.
Hello everyone, this is Mariana for RUN Today.
Ron Epstein: So, in the previous remarks, you talk about the M&A pipeline and how you have a mix of like SMIT cap names and also some large opportunities, like, do you mind discussing what is the mix of like our space and defense companies versus other industrials and where are you really seeing opportunities on M&A?
Ron Epstein: This is all aerospace and defense. We aren't looking outside of aerospace and defense.
Ron Epstein: Small, medium, and large opportunities come along, a lot less on the large side. If something is in the market on the aerospace and defense side, we're going to look at it quite seriously.
Ron Epstein: And that's all I can probably comment on the M&A pipeline there. It's very busy, much like last year. There's probably even more EBITDA in the pipeline this year than last year, but you just can't predict how things are going to close.
Thanks for watching!
Speaker Change: Thank you. And then after the OE slowed down this quarter and with your more like aggressive, or not aggressive, but like you have a good view and outlook for the year on OE.
Speaker Change: Were your channel checks saying you about like inventories in the supply chain? Like how do you address that uncertainty about like item by item inventories in the supply chain?
Speaker Change: You know, we don't get, we've never had much visibility to inventory and supply chain.
Speaker Change: The only thing we see is our distribution partners on the aftermarket side. The OEM partners, they don't give us much inventory visibility. So we're simply guessing, listening to people, getting feedback.
You know, it does seem like there's been some
Speaker Change: You know inventory builds up over time that is working its way through in certain pieces
Speaker Change: And we're just going to have to see how this plays out. We don't have any additional visibility except the orders that we receive from our customers. We fulfill them quickly. We're a reliable supplier, high quality, high delivery accuracy.
So, our customers know they can count on us.
Thank you for watching!
Great, thank you very much.
Thanks for watching!
Thank you. Please stand by for our next question.
Speaker Change: Our next question comes from the line of Jason Jersky with Citi. Your line is open.
Hey, good morning, everybody.
Speaker Change: Kevin and others, just a quick question on the refurbishment work to put a finer point on this. I don't want to put words in your mouth but I would maybe want to get you to comment.
Speaker Change: on the cycle there. So it does seem like it is going to be tied to airlines getting more consistent supply from their OEM partners so that they can do some fleet planning and maybe take some aircraft out of service to go do this.
Speaker Change: refurbishment work. I just want to confirm that that's what you're thinking and then how big is this for you all? Is this going to be a meaningful contributor to your aftermarket growth once the cycle actually picks up?
Speaker Change: So, I think, yes, the first thing to answer your question, the beginning part, certainly the airline's ability to take planes out of service is a key aspect to it. If you can't pull a plane out to do the work as you'd rather have it flying.
Thank you.
Speaker Change: I think it's a, you'll see the interior percentage jump up significantly, but in terms of total for our business, I don't think this is a significant.
Speaker Change: piece to the total. It's just the one piece remaining of our commercial aftermarket that just kind of continues to lag below the 2019 levels.
Thank you.
Speaker Change: Okay, got it. And then, look, I know you're saying that you don't track inventory levels with, you know, a great level of detail and specificity, but your comment about, you know, you're shipping into Boeing at
Speaker Change: production rates that are half where they are today. They talk about the need to wind down inventory. They're carrying too much given the fact that they ingested so much last year and weren't shipping out.
Speaker Change: nearly as much as they were ingesting. You just went through a big contract negotiation with them.
Speaker Change: I'm wondering if you just can't give us a little bit more insight on, you know, what you're hearing from your major customers on Inventory Unwinds, because they've been pretty public about it, and how long, you know, that might last and impact you all.
Speaker Change: I would just start to answer, I mean, this is why, you know, our
Commercial OEM forecast, please.
lower at mid-single digits than maybe some would have expected.
Speaker Change: is, you know, this has all led to this, you know, somewhat confusion in the supply chain.
I don't think we're getting as direct and clear.
input from some of the OEM suppliers.
Speaker Change: of each product they have that goes on a plane. And so they work to build up a bottoms-up forecast.
Speaker Change: based on what we believe the OEM bill rate will be. And so they're trying to take into account if they've been overshipping last year, if they were overshipping in this quarter, what it looks like over the balance of years. So we don't have a top-down piece, but each of our op units works to pull that together. And that's what ultimately drove our guidance for the balance of years, Kevin said.
Okay, fair enough. Thanks guys.
Thank you.
Speaker Change: Ladies and gentlemen, due to the interest of time, our final question will come from the line of Katam Ghana with T.D. Cohen. Your line is open.
Thanks. Good morning, guys.
Good morning.
Speaker Change: I was wondering if you could comment, as you have in prior quarters, about what you're seeing in the distribution channel into the aftermarket, you know, point-of-sale data relative to what you guys were experiencing on the manufacturing side.
They're running ahead Joel
Speaker Change: Yeah, it's currently running ahead. It's a different mix, you know, we looked at the mix of trans time commercial aftermarket versus the mix of our distribution. They're not
Speaker Change: quite the same. As we look at it into each of the subset markets, it's roughly in line with what we would expect it to be, but it is in total running above what our overall commercial market is. As I said in the opening remarks, it's running into the double digits versus our 9%.
Speaker Change: Got you. And that's a couple quarters now, right, where it's been running ahead?
Speaker Change: And that's more of an indicator. Several quarters, so we think of it as a, it should be a good leading indicator. It's where we have visibility on inventory and POS sales granular. So yeah, it should be a good indicator of future.
For more information visit www.fema.gov
Speaker Change: Great. And then my last one, just on the new administration and
you know how
How is Transdime kind of working constructively with them?
your thoughts on Doge, and I'll just leave it open-ended.
Speaker Change: That's a great question. I anticipated this earlier, I think, in the Q&A.
Speaker Change: Doge is a great opportunity for the U.S. to improve and streamline what they're doing, specifically with government DOD DLA procurement.
Speaker Change: You know, we think this is a really good thing. We've been engaging with the DoD over the past several years and have
Speaker Change: suggested a number of, you know, improved forecasting, inventory management, and improved buying practices that would save the government money and save us time and energy in production.
I've met with some of the DOJ folks in D.C.
It's important to remember
Speaker Change: I think we're 0.3% of the DLA budget, and this amounts to less than 1%, or somewhere around 1% of our revenue.
are these types of products that...
you know, would fall under the concern of DOJ.
We see this only as an opportunity for trans time.
the government, the DOD to approve.
Speaker Change: what we're doing together. So we warrant any and all inquiries and, you know, work together to come up with a stronger solution in the future. So, you know, that's really where we're at. It's a small part of our business, is
Speaker Change: supplying spare parts to the government. The bulk of what we do is either falls under TINA today, which is fully cost disclosed, or it is commercial of a type or competitive.
Speaker Change: that's the bulk of our business falls under those three categories. So you know we invite the the work that we need to do together to improve how we work together with the government. So that's I guess our answer.
Thank you guys.
Thank you.
Jaimie Stemen: I would now like to turn the call back to Jaimie for closing remarks.
Thank you for watching!
Jaimie Stemen: Thank you all for joining us today. This concludes today's call. We appreciate your time. Have a good rest of your day.
Jaimie Stemen: That concludes today's conference. Thank you for your participation. You may now disconnect.
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Speaker Change: Hello, welcome to TransDam Group, Incorporated Q1 2025 Earnings Conference Call.
Thanks for watching!
At this time, all speakers are in a listen-only mode.
Speaker Change: After the speaker's presentation, there will be a question and answer session.
Speaker Change: To ask a question during the session, you will need to press star, 1-1 on your telephone. You will then hear an automated message advising your hand is raised.
To withdraw your question, please press star 11 again.
Speaker Change: I would now like to turn the conference over to Jaimie Stemen, Director of Investor Relations. You may begin.
Speaker Change: Thank you, and welcome to TransDimes Fiscal 2025 First 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.
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 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: 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 reconciliations. I will now turn the call over to Kevin.
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 25 outlook. Then Joel and Sarah will give additional color on the quarter.
Kevin Stein: To reiterate, we believe we are unique in the industry in both the consistency of our strategy in both good times and bad, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle.
Kevin Stein: To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique, proprietary products.
Kevin Stein: Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins, and over any extended period have typically provided relative stability in the downturns.
We follow a consistent long-term strategy, specifically
Kevin Stein: First, we own and operate proprietary aerospace businesses with significant aftermarket content. 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 shareholders.
Kevin Stein: Fourth, we acquire businesses that fit this strategy, 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.
Kevin Stein: 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 start to our fiscal year. During the quarter, we saw healthy growth in the revenues for both our commercial aftermarket and defense market channels.
Kevin Stein: As expected, commercial OEM revenues were modestly down this quarter compared to prior year, which Joel will discuss further in his market segment commentary. Bookings in Q1 expanded for all three of our major market channels.
Kevin Stein: Commercial aerospace market trends remain favorable. The commercial aftermarket has returned to normalization as global air traffic has surpassed pre-pandemic levels and robust demand for travel persists.
Kevin Stein: In the commercial OEM market, there is still much progress to be made for OEM rates.
Kevin Stein: And our results continue to be adversely affected by OEM performance. Airline demand for new aircraft remains high, and the OEMs are working to increase aircraft production.
Kevin Stein: However, Boeing aircraft production rates remain well below pre-pandemic levels as the lingering effects of last fall's nearly two-month-long machinist strike and its ongoing impact to the supply chain continue to be felt.
Kevin Stein: The strike has pushed the OEM recovery further to the right and time will tell how this plays out.
Kevin Stein: Our EBITDA's defined margin was 52.9% in the quarter. Contributing to this strong Q1 margin is the continued strength in our commercial aftermarket, along with diligent focus on our operating strategy, which is allowing margin performance to expand across all segments.
Kevin Stein: Additionally, we had strong operating cash flow generation in Q1 of over $750 million and ended the quarter with almost $2.5 billion of cash.
Next, an update on our capital allocation activities and priorities.
Kevin Stein: During Q1, we opportunistically deployed just over $300 million of capital via open market repurchases of our common stock.
Kevin Stein: This equates to approximately $250,000 of our shares at an average price of $1,249 per share. We view these repurchases like any other capital investment and expect this will meet or exceed our long-term return objectives.
Kevin Stein: 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 immediate time horizon, we continue to see an expanding pipeline of potential M&A targets, and we do not see this environment slowing in the near term. As usual, the potential targets are mostly in the small and mid-sized range.
but larger deals may also be actionable.
Kevin Stein: I cannot predict or comment on possible closings, but we remain confident that there is a long runway for acquisitions that fit our portfolio.