Q2 2025 TransDigm Group Inc Earnings Call
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Speaker Change: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Jamie Stemen, Director of Investur Relations, please go ahead.
Thank you for watching!
Speaker Change: Thank you, and welcome to TransDigm's fiscal 2025 Second Quarter Earnings Conference call. Presenting on the call this morning are TransDigm's President and Chief Executive Officer Kevin Stein, Co-Chief Offerting Officer Mike Lisman and Chief Financial Officer Sarah Wynne.
Speaker Change: Also present for the call today is our co-chief, Chief Operating Officer, Joel Reiss.
Speaker Change: Please visit our website at TransDigm.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 [inaudible]
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 accomplish would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted that income and adjusted earnings per share, all of which are non-GAAP financial measure [inaudible]
Speaker Change: We've seen the tables and related footnotes in the earnings release where a presentation of the most directly comparable GAAP measures 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 a brief overview of our recent organizational announcement. Then a usual quick overview of our strategy, a few comments about the quarter and discuss our fiscal 25 outlook. Then Mike and Sarah will give additional color on the quarter.
Kevin Stein: As you may have seen, we announced this morning that I will retire at the end of TransDigm 2025 fiscal year.
Kevin Stein: Beyond that, I will continue to serve as an advisor to the company through March 31, 2026, to help facilitate the leadership transition. Additionally, I will continue to serve as a member of TransTime's Board of Directors
Kevin Stein: It has been a privilege to lead Transdime as CEO of these past seven years.
Kevin Stein: TransDigm is an exceptional company, and I immensely enjoyed the opportunity to see it grow and generate value for its shareholders. I look forward to finishing out my last few months as CEO and continuing my involvement with TransDigm's board member.
Kevin Stein: I will be leaving TransDigm at very good hands, as Mike Lisman has been elected by the Board of Directors to be our new CEO effective October 1st, 2025. At that time, Mike will become responsible for all operational and financial matters.
Kevin Stein: All are operating executives as well as the CFO will report to Mike.
Kevin Stein: This succession planning has been in the works for some time, and we were very excited to promote and internally develop long tenured employee into the position of CEO .
Kevin Stein: Michael served as TransDigm's COO since May of 2023. Prior to that, he held several positions across the company, including that of CFO and Executive Vice President, with direct operational oversight for a number of our operating units. [inaudible]
Kevin Stein: Mike also previously held role as the lead of TransDigm's M&A team and as a business business unit manager at our Arrow Fluid products operating unit.
Kevin Stein: Mike understands our unique culture and process and embraces our long-term value-generating strategy. He has contributed substantially to the value that TransDigm has created over his tenure.
Kevin Stein: Mike is an excellent choice to lead TransDigm I am confident he will do an outstanding job and continue to create the kind of value that has been the long term hallmark of TransDigm
Kevin Stein: Now moving on to the business of today. To reiterate, we believe we are unique in the industry in both the consistency of our strategy and both good times and bad, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycles.
Kevin Stein: to summarize here some of the reasons why we believe this. [inaudible]
Kevin Stein: About 90% of our net sales are generated by unique proprietary products. Most of our EBIT dot comes from aftermarket revenues which generally have significantly higher margins and over any extended period have typically provided relative stability in the downturns.
Kevin Stein: We follow a consistent long-term strategy specifically. First, we own and operate proprietary aerospace businesses with significant after-market content. Second, we utilize a simple, well-proven, valued-based operating methodology. [inaudible]
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 the strategy in where we see a clear path to PE-like returns. And lastly, our capital structure and allocation of our key part of our value creation methodology.
Kevin Stein: Our long-term goal is to give our shareholders private equity-like returns with a liquidity of a public market.
Kevin Stein: To do this, we stay focused on both the details of value creation as well as careful allocation of our capital.
Kevin Stein: Commercial OEM revenues this quarter were about flat with the prior year. Suppentially both revenues and bookings improved in all three of our major market champs.
Kevin Stein: Commercial aerospace market trends remain favorable. It's currently a very dynamic macroeconomic environment, but to this point, airline schedules continue to be fairly stable. [inaudible]
Kevin Stein: In the commercial OEM market, there is still much progress to be made for OEM rates and our results continue to be adversely affected by OEM performance. Airlines demands for new aircraft remains high and the OEM backlog remain considerable.
Kevin Stein: OEMs are working to increase aircraft production to meet this demand. Boeing aircraft production rates are still well below pre-pandemic levels.
Kevin Stein: So, and nearly two, the nearly two month long machina striped last fall further delayed the recovery. However, there has been steady progress in Boeing's production rates, which is a positive sign.
Kevin Stein: Our EBITDA's defined margin was 54% in the quarter, contributing to this strong Q2 margin is the continued strength in our commercial aftermarket, along with diligent focus on our operating strategy, which is allowing margin performance to expand across all seconds. [inaudible]
Kevin Stein: Additionally, we ended the quarter with a strong cash balance of over 2.4 billion. We expect to steadily generate significant additional cash throughout the remainder of 2025. Next, an update on our capital of allocation activities and priorities.
Kevin Stein: During Q2, we opportunistically deployed just over 50 million of capital via open market repurchases of our common stock.
Kevin Stein: Disequates to approximately 40,000 of our shares at an average price of $1,250 per share.
Kevin Stein: Additionally, after the quarter end, we deployed about 130 million of capital in early April to repurchase just over 100,000 of our shares at an average price of $1241 per share. We view these purchases like any other capital investment. Thank you very much.
Kevin Stein: and expect that they will meet where it's seed our long-term return objectives.
Regarding the current M&A activities and pipeline,
Kevin Stein: We continue to actively look for M&A opportunities that fit our model. 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 it in your term.
Kevin Stein: As usual, the potential targets are mostly in the small and mid-size range, and TransDigm remains disciplined in our approach to M&A. 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 of TransDigm are unchanged. Our first priority is to reinvest in our businesses. Second, do accretive discipline to M&A. And third, return capital to our shareholders via share purchases or dividends.
Kevin Stein: A fourth option paying down debt seems unlikely at this time, though we do still take this in 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 of the sizable cash balance of over 2.4 billion. We have significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Thank you very much for your time.
Moving to our Outlook for Fiscal 25 .
Kevin Stein: The guidance assumes no additional acquisitions or divestitures and is based on current expectations
Kevin Stein: for continued performance in our primary commercial and markets throughout fiscal 25. Although we saw strong second quarter results, we are not changing our full year financial guidance for fiscal 2025 at this time. This may be conservative in time and time.
Kevin Stein: The guidance incorporates the impact of recently enacted U.S. and non-U.S. tariffs. Based upon what we know today, we do not anticipate a material headwind from tariffs that we are unable to mitigate. As you know, Transdime is largely a domestic manufacturer with limited exposure to low-cost country sources.
Thank you for watching!
Kevin Stein: The full-year guidance assumes no significant macroeconomic impacts or other factors such as an economic recession that could affect our business.
Kevin Stein: Additionally, we do not know what the indirect impact of tariffs could have on other parts of the aerospace supply chain including OEM production rates.
Kevin Stein: Our guidance can be found on slide six in the presentation and I will also discuss here.
Kevin Stein: The midpoint of our fiscal 25 revenue guidance is $8.85 billion for up-approximately 11%.
Kevin Stein: In regards to the market channel growth rate assumptions that this revenue guidance is based on, for the commercial OEM market and defense market, we are updating the full year growth rate assumptions to reflect second quarter results and current expectations for the remainder of fiscal 25. Bye.
Kevin Stein: For commercial OEM, we now expect revenue growth in the low single digit to mid single digit percentage range. The previous commercial OEM revenue guidance was mid single digit percentage range. [inaudible]
Kevin Stein: For defense, we now expect revenue to go growth in the high single digit to low double digit percentage range.
The previous defense revenue guidance was high single digit percentage range.
Kevin Stein: We are not updating the full-year market chain growth rate assumptions for commercial aftermarket as underlying market fundamentals have not meaning fully changed. [inaudible]
Kevin Stein: Commercial Aftermarket Revenue Guidance is still based on a previously issued market channel of growth rate assumption of revenue growth in the high single digit to low double digit percentage range.
Kevin Stein: The mid-point fiscal 2025 EBITDA's Defined Guidance is $4.68 $5 billion or up approximately 12%
Kevin Stein: with an expected margin of around 52.9%. This guidance includes about an additional 70 basis points of margin delusion for recent acquisitions compared to fiscal 24.
Kevin Stein: While we had a strong EBITDA Margin Result, the second quarter, fiscal year 25, margins can be lumped and made fluctuated over the next couple of quarters. Again, this could be conservative. The midpoint of our adjusted EPS is expected to be 36.
point four seven dollars or up approximately seven percent.
Kevin Stein: Sarah will discuss in more detail shortly the factors impacting EPS along with some other fiscal 25 financial assumptions and updates.
Kevin Stein: As the current environment is very dynamic, we will continue to evaluate our guidance and closely monitor our primary end markets as the European breasts . . . . . . . . . . . .
Kevin Stein: We believe we are as well positioned as we can be 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
Kevin Stein: Let me conclude by stating that I'm 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 second half of fiscal 25 and providing the value you have come to expect from us. Now let me hand it over to Mike Lisman, our TransDigm Group co-COO to review our recent requirements and a few other items. [inaudible]
Mike Lisman: Good morning, everyone. I'll start with our typical review of results by key market category.
Mike Lisman: 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
Thank you for watching!
Mike Lisman: And the commercial market, which typically makes up close to 65% of our revenue, will split our discussion into OEM and aftermarket of OEM and the commercial market, the commercial market, the commercial market,
Mike Lisman: Our total commercial OEM revenue was about flat and Q2 compared with the prior year period. [inaudible]
Mike Lisman: Subwantially, Total Commercial OEM revenues grew by about 17% compared to Q1.
Mike Lisman: Bookings in the Florida were just slightly down compared to the same prior year period with the softness driven by our Biz Jet and Halicons or Submarx
Thank you for watching!
Mike Lisman: The bookings levels for OEM commercial transport were roughly in line with our expectations prior to the Boeing strike, with a growth rate in the new single digits for the quarter, giving us confidence that the commercial OEM market is recovering from the disruptions of approximately two quarters ago. The bookings levels for OEM commercial transport were roughly in line with the
Thank you for watching!
Mike Lisman: OEM supply chain and labor challenges persist but continue to improve. Despite government actions regarding tariffs and concerns around a potentially weakening economic environment, fair production backlogs are large enough that at this time supply chains remain the primary bottleneck in the OEM production ramp up.
Mike Lisman: We remain encouraged by the progress of the 737 Max production line.
Mike Lisman: As in prior quarters, the commercial OEM guidance we're giving here today contains an appropriate level of risk around the Max production build rate for the balance of the 25 fiscal year.
Mike Lisman: We remain optimistic that our operating units are well positioned to support the higher production raise as they incurred.
Thank you for watching!
Now moving on to our commercial aftermarket business discussion.
Mike Lisman: Film Commercial Aftermarket revenue increased by approximately 13% compared with the prior year period. This quarter, all submarkets within commercial aftermarket experience positive groups. [inaudible]
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Mike Lisman: The growth across the four submarkets was varied, but not significantly disconnected from what we had anticipated.
Mike Lisman: Business chat, freight, and interior were each stronger than the total commercial aftermarket 13% growth rate, whereas the passenger submarket performed slightly below the overall commercial aftermarket rate growth.
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Mike Lisman: Within our passenger segment, operating units with higher engine content posted very solid growth, well in excess of those with non-engine content, and also considerably ahead of the 13% overall growth rate in our commercial aftermarket revenue.
Mike Lisman: For the full year, and as you saw on today's guides, our outlook for commercial aftermarket growth of high single digit to low double digit growth is unchanged.
Mike Lisman: We are watching the economic environment closely. Several airlines have announced potential capacity reductions for the 25th calendar year, and in some instances pooled our financial guidance.
Mike Lisman: At this time, despite these announcements and growing economic concerns, we are seeing no material weakness, our commercial aftermarket order book versus prior expectations.
Mike Lisman: The bookings are coming in at about the pace we thought they'd be so we are therefore not changing our guides [inaudible] we are therefore not changing our guides,
Mike Lisman: Additionally, a few points of note. Q2 bookings in commercial aftermarket were strong, running ahead of our expectations, significant reoutpacing sales, and supporting the full year growth outlook.
Thank you for watching!
Mike Lisman: Additionally, our Q2 point of sale data through our distribution partners which can be a decent leading indicator without significantly well into the double digits on a percentage basis.
Mike Lisman: As mentioned, we're monitoring our commercial aftermarket bookings rates closely, and should these booking rates decline from what we are seeing in present, as a result of economic softening and ensuing airline schedule reductions, we will revise our guidance accordingly on future earnings costs.
Mike Lisman: Now turning to broader market dynamics and referencing the most recent Ayodotrophic data for March.
and Michael Wynne. Thank you. Thank you.
Mike Lisman: Global revenue passenger miles have continued to surpass pre-pandemic levels since February of 2024. RPKs in March were up 3.3% versus prior year [inaudible]
Mike Lisman: The growth rate improves slightly versus what was seen in February . [inaudible]
Mike Lisman: ASK's were up 5.3% and the passenger load factor for March came in at about 81%.
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Mike Lisman: I currently expect traffic to reach 113% of 2019 levels in 2025, and to surpass prior your traffic by 8%
Mike Lisman: Time will tell if the Ion forecast is too aggressive, as a few other forecastes, forecasters are predicting a group's rate couple of points lower. Regardless of the exact growth rate, we remain ready to move to demand.
Mike Lisman: Domestic travel also continues to surpass pre-pandemic levels, the March post and marginal growth compared to the prior year, and the most recently reported traffic data, global domestic air traffic was up about 1% compared to 2024, and up about 8% compared to 2019
Mike Lisman: Domestic Character Avalon March was on favorably impacted by declines in both the US and Australia.
Mike Lisman: International traffic continues to trend upwards. It has been above-treat pandemic levels for the past several months.
Mike Lisman: And the most recently reported data for March, international travel was up 4.9% compared to 2024, and about 3% above pre-pandemic lows [inaudible]
Mike Lisman: In March, most international markets saw growth, though it was slower growth than prior months.
Thank you for watching!
Mike Lisman: Now shifting to our defense market, which traditionally is at or below 35% of our total revenue.
Mike Lisman: The defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 9% compared with the prior year period. [inaudible]
Mike Lisman: Q2 Defense Revenue Growth was well distributed across our businesses and customer base. Additionally, we saw similar rates of growth in both the OEM and aftermarket components of our total defense market, with OEM running slightly ahead of the aftermarket. The OEM was well distributed across our businesses and customer base. The OEM was well distributed across our businesses and customer base.
Mike Lisman: Defense bookings for the quarter- and year-to-date significantly outpaced sales and support the full-year guidance for defense revenue groups
Mike Lisman: Additionally, this quarter, we saw continued growth in U.S. government defense spend outreach.
Mike Lisman: As we've said many times before, defense sales and bookings can be lumping. We know the bookings and sales will come, forecasting them with accuracy and precision, especially on a quarterly basis, is quite difficult . . . . . . .
Kevin Stein: As Kevin mentioned earlier, we are revising defense expectations upward and now expect revenue growth for this year to be in the high single-digit to low double-digit percentage range.
Kevin Stein: Lastly, I'd like to wrap up by expressing how pleased I am by our operational performance in the second quarter of fiscal 2025. Our operating unit teams did an exceptional job, executing on our value drivers and this generated the strong results delivered in the second quarter. [inaudible]
Kevin Stein: Our band is my team's remain committed to our consistent operating strategy and servicing the growing demand for our products as we continue through the balance of the year.
Speaker Change: With that, I'd like to turn it over to our CFO, Sarah Wynne.
Sarah Wynne: Thanks Mike, good morning everyone. I'll recap the financial highlights for the second quarter and then provide some more information on the current guidance.
Speaker Change: First, on organic growth and liquidity. In the second quarter, our organic growth rate was 7% driven by a commercial aftermarket and defense market channel, as Kevin and Mike just discussed.
Speaker Change: On cash from the liquidity, free cash flow, which we traditionally defined that EBITDA, less cash interest payments, cash taxes, was close to 314 million for the quarter.
Speaker Change: This is lower than our normal courtly free cash flow conversion due to the timing of the interest and tax payments we anticipate at this debt. As you may recall our fast-forwarder free cash flow came in higher but over $800 million. $800 million.
Speaker Change: For the full fiscal year, a free cash flow guide with this phone changed. We continue to expect to generate free cash flow of approximately $2.3 billion in fiscal 2025.
Speaker Change: Below that free cash flow line, an investment in networking capital consumed about 190 million dollars for the quarter due to the higher AR for our second quarter shipment.
Speaker Change: and higher inventory and planning for the back half of the year. For the full year we expect working capital to end roughly in line with historical levels as a percentage of sales.
Speaker Change: We ended the quarter with approximately 2.4 billion hours of cash on the balance sheet and our net debt even a ratio was 5.1 down from 5.3 at the end of the last quarter.
Speaker Change: 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.
Speaker Change: As a reminder, we are comfortable operating in the five to seven times net that even a ratio range, and while we're currently sitting on the low end of this range, a go-forward strategy of capital deployment has not changed.
Speaker Change: which provides us with comfortable cushioned verses on target range of 2-3.
Speaker Change: Regarding assets and nearest termaturity is over two years out due in November of 2027.
Speaker Change: and we remain approximately 75% hedged on our total 25 billion brose debt balance.
Speaker Change: through fiscal 2027. 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 task.
Speaker Change: As Kevin mentioned, during the quarter, we opportunistically repurchased approximately 40,000 shares along with an additional 100,000 shares during the first week of April during the depressed stock price
Speaker Change: This totals 500 million in deployed capital for repurchases on a year-to-date basis when combined with the first quarter repurchases [inaudible]
Speaker Change: We continue to seek the best opportunities for providing value to our shareholders through our leverage strategy to change.
Speaker Change: On a go for basis, we expect to continue both proactively and prudently managing our debt maturity stacks, which for us means pushing out any near-term maturity as well in advance of the final maturity date.
A quick note on the evolving terrorist environment.
Speaker Change: As Kevin mentioned, TransDigm is largely a domestic manufacturer with limited exposure to low cost country sourcing. From an operations perspective, a 51 operating unit teams are driving their own actions to alleviate the majority of any negative headwinds.
Speaker Change: We believe we remain in a good position from an overall cash, the quality and balance sheet standpoint, with adequate flexibility to pursue M&A, will continue to return cash to our shareholders via dividends or share repurchases [inaudible]
Speaker Change: With that, I'll turn it back to the operator to kick off the Q&A.
Speaker Change: As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Please stand by when we compile the Q&A roster. Thank you, Peter.
Speaker Change: Our first question comes from the line of Robert Stallard from Vertical Research
Thank you.
Thanks for our good morning.
Morning.
Mike Lisman: First of all, I'm not sure if you're going to be able to answer this, Kevin. There's been some talk in the press that you are interested in purchasing Jefferson from Boeing and obviously didn't, so I was wondering if you could comment on that situation. [inaudible]
Yeah, you know, we look at all aerospace
Targets that come along.
Mike Lisman: and our approaches, we look for aerospace businesses that have high aftermarket content and our proprietary products, as we've always discussed.
Mike Lisman: and the Jefferson Business tick those boxes without a doubt highly engineered product, very important to the aerospace world.
Mike Lisman: So, we were very serious in it, but also in our approach is a very disciplined process. We don't and we can't overvalue and
Mike Lisman: You know, pay up. I don't want to comment too much on, you know, the process or, you know, what happens specifically with Jefferson or the bid.
Mike Lisman: But, you know, we must stay disciplined in our approach to ensure we continue to drive the returns our shareholders have expected from us. And that means sometimes you have to say no to deals. [inaudible]
Mike Lisman: Yeah, and then just quickly on the tariff situation, you've come into seracombs about some of the mitigation actions you're taking but you didn't mention price. Do you think you'll be in a situation where you won't need to pass on digital costs to customers?
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Mike Lisman: Yeah, I don't know if that, you know, is going to be the case all value drivers are always in play.
But you know, we're...
Mike Lisman: We have a very small, you know, insignificant, really impact from the tariffs today, so we're not spending a lot of time ringing our hands over the impact transplant. Thank you for your time.
Okay, that's great, thanks so much [inaudible]
Thank you for watching!
Thank you. One moment for our next question. Thank you.
Scott Mekas: Our next question comes from the line of Scott Mikus, from Mealius Research
Good morning.
Speaker Change: Kevin, I wanted to ask on the capital deployment. So are we getting to the point with the amount of cash that this business is generating?
Scott Mekas: that share repos or special dividends are going to be a regular part of capital allocation going forward in addition to M&A.
Thank you for watching!
Scott Mekas: Well, I think it's always been part of our capital allocation strategy. In my prepared comments, I went through our basic priorities. First invest. And then invest.
Scott Mekas: You know, our own businesses and make sure we're funding all of the productivity and new product projects that aren't available, then looking at a creative M&A that meets our discipline criteria. And then, yeah, looking for opportunities to return through either special dividends.
Scott Mekas: or Repurchases. And, you know, we always look at all of those, you know, options when it's time to return capital. I look at it as it belongs to the share of holders and it's. [inaudible]
Scott Mekas: in our job to get it back to you as quickly as possible.
Scott Mekas: Recently, we saw a disruption in the share price and we opportunistically capitalized on that to put some money to work on the shareholder's behalf of the shareholder's behalf.
Scott Mekas: We still believe that special dividends and sharing purchases are the right way to get capital back if there's not immediate and sizable M&A opportunities on the horizon, or that we have more coverage than we need for what we see coming.
Thank you for watching!
Speaker Change: Okay, and then in the opening remarks, you mentioned that you're operating units with higher engine content.
Scott Mekas: We're seeing better pull through in the commercial aftermarket. So I'm just curious, is there any meaningful margin differential in commercial aftermarket sales to the engine supply chain versus the air frame side?
No, no meaningful difference on engine, verse 9 engine.
Thank you for watching!
Okay, thanks for taking questions.
Thank you for watching!
Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Christine Liwag for Morgan Stanley Stanley.
Speaker Change: Hey, Mike Kevin, with EBITDA guidance and change for the full year, there's an implied step down in margin from 2Q for the second half of the year. Can you discuss what items could potentially pressure margin or how much conservatism is baked in?
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Speaker Change: Except there's definitely conservatism baked in because we don't know how...
Speaker Change: The world always unfolds and we don't want to get out over our skis too far. We're comfortable with what we've...
Guided in the market segmentation that we're providing. [inaudible]
Speaker Change: So, hopefully it turns out to be conservative, but that's the way we tend to forecast and communicate what we're looking at in the future.
Thank you for watching!
Speaker Change: I think I was remiss to start off with saying congratulations to both of you, Kevin and Mike. Kevin will miss you and Mike.
Speaker Change: Welcome to your new role. Very excited for this change. I guess, you know, one of the questions I'm getting from investors is as you transition to the new CEO role, Mike, are there priorities that are different than what Kevin had previously looked at and how do we think about this transition? Thank you very much.
Thanks for watching!
Speaker Change: Thanks, Kristine. First off, I don't think any meaningful changes are coming. Obviously, Kevin and I have been on the same page for the last...
Speaker Change: many years, I've worked for Kevin directly for seven or eight years, so I think we'll continue to run the same playbook here on the value drivers at TransDigm operationally, and then no material changes in terms of capital deployment action, so I think it will be.
Speaker Change: A lot of the same going forward that you've seen in the prior years, TransDigm . . . .
Thank you for watching!
Great, thank you!
Thank You. One moment for our next question.
Speaker Change: Our next question comes from the line of David Strauss from Barclays. [inaudible]
Speaker Change: Hi, good morning, and congratulations. This is Josh Corn on for David.
Thank you for watching!
So all four performed well in this quarter as we said.
experiencing significant growth, and we're pretty across all four.
Speaker Change: for the most part above where we were pre-pandemic. The one exception to that would be the interior side of the business where it's not rebounded to peak volume levels that were seen pre-COVID at the peak of the airline retrofit cycle. But all the others are above where they were previously. [inaudible]
[inaudible]
Speaker Change: Okay, thanks. And then want to ask about defense where you raised the outlook. Is there any specific domain or area where you're seeing especially strong bookings that gave you confidence? Thanks.
Speaker Change: No, I would say it's pretty uniform across all of our businesses. We've continued to see good strength on the defense side and- [inaudible]
Speaker Change: It's evenly spread across both the OEM and the aftermarket. It's not been weighted to just one or the other, so it's been...
Speaker Change: Quite uniform, and we remain optimistic on where that's heading going forward, just based on what we've seen coming on the booking side . . . .
[inaudible]
Okay, thank you for taking the questions. [inaudible]
Thank you, one moment for our next question.
Speaker Change: Our next question comes from the line of Sheila Kahyaoglu from Jeffries.
Good morning guys and congrats, Kevin and Mike. [inaudible]
Speaker Change: So maybe just falling up on the margins of that's okay 54% margins in the first in Q2 just pretty strong implies that the second half is around 52% so 200 basis points. [inaudible]
Down in the second half, but...
If we assume OEM margins are around 20% EBITDA margin. [inaudible]
Speaker Change: That only makes up for about half of it. So just wondering, like, what your factoring in to the conservativeness, is it tariffs, is it, are we really picking up? Is it aftermarket flowing? If you could comment on that. [inaudible]
Speaker Change: Yeah, I think it's my Sheila. I think as Kevin said earlier, it's mainly conservatism. There's no tariff headwind or anything to that sort. And then...
Speaker Change: The other factor that plays in here is obviously just a bit of a makeshift in the second half versus the first half [inaudible]
Speaker Change: because you have the commercial OEM picking up, which as you pointed out comes in in lower margin. So we'll see a bit of that in the second half, but hopefully it proves conservative as things play out here over the next five months.
Speaker Change: Great, and then maybe on the aftermarket with 13% in the second quarter, how do we think about the puts and takes within the four submarkets as we head into the second half of the year? What are you guys seeing with the booking momentum?
Speaker Change: All four were up nicely, as I mentioned, across the force of markets. [inaudible]
Speaker Change: The engine continues to be the strong out performer, and we expect to see continued growth across the four in the back half as we sit here today and look at what we're hearing from our customers on the commercial after-organization.
Thanks for watching!
Awesome, thank you [inaudible]
Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Ken Herbert from RBC Capital Markets
Yeah, hi, good morning, congratulations, Kevin and Mike. [inaudible]
Thanks, Seth.
Speaker Change: Maybe on the aftermarket, first question, was there any, either in the calendar first quarter or fiscal second quarter?
Speaker Change: Or in the month of April , did you see me pre-bi activity with any airlines around the world just looking to get ahead of sort of this tariff risk perhaps and anything unusual that you may have seen through any of the channels in the year so far? Yeah.
Speaker Change: We did not see anything unusual. Can we all get great insight into this, obviously, through the distributors and airlines on why they're placing orders, but we didn't see any, you know, if you're any meaningful pre-buy to get ahead of any tariffs or anything of that sort.
Thank you for watching!
Mike Lisman: Okay, that's helpful. And obviously, you know, you did a lot of work around Jefferson and I'm just curious Mike, maybe as you go forward
Speaker Change: How do you think about maybe M&A and more software related businesses? Because this obviously would have been a material step change for you, but I think in ice...
sort of representation or logical step in the evolution of trans side. But are you maybe more open now to doing? Yeah, I think so.
Speaker Change: Les, traditional acquisitions, do you feel like you've had a better understanding of opportunities? Maybe help us understand how you're thinking about sort of within aerospace broadening now the M&A approach after obviously going through this process? Yes.
Thank you for watching!
Speaker Change: Well, I don't want to say too much to comment on other deals that were active in the market, but generally as Kevin said, we look at all aerospace deals, whether it's hardware, software, and generally what we're looking for is...
Speaker Change: and Eva Dostryne that had the attributes like our base components business and if we find that on the software side [inaudible]
Speaker Change: It's not necessarily something we would shy away from doing and venturing into, but we always look at, and as we've always done, we stress a five year model where we target a certain return and
Speaker Change: If we don't see a high likelihood of achieving that on certain opportunities, we'll always be disciplined.
Speaker Change: stand out. So, you know, we're not going to launch down some path where it's we're certainly moving into software or anything of that sort, but as always we'll always look at the. [inaudible]
Speaker Change: Everything in the aerospace world, whether it's hardware or software and see if there's a path on a, you know, sticky enough earning stream to generate a PE like return.
Thank you for watching!
Great, thank you.
For more information, visit www.FEMA.gov
Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Myles Walton from Wolf Research
Miles Wolton: Thanks, good morning. I was wondering if you could comment on the OEM growth rate change and was it more on the business shed and helicopters or bookings, it almost sounded like you were more confident in what you were seeing at Boeing, so if you just add color to that.
Miles Wolton: Yeah, that's right, Myles. We nudged it down slightly versus prior quarter as you saw on the guidance for this morning, and it was mainly driven by...
Miles Wolton: The Healy weakness that we saw, the commercial transport side, if we mentioned in the, in the prepared comments, actually did quite well on the booking side of the score. So, first he had good progress on that front and what really not stood down was...
Miles Wolton: and more of the submarkets that sit within that bucket that are non-tourishing transport.
Thank you for watching!
Speaker Change: And then just one other one. If you look at the guidance, this is the second quarter you've reiterated, I think the longest stretch without a raise in a while, was there something about this year where you're seeing more incoming headwinds absorbing contingency or was there maybe a little less contingency in the 25 guidance looking up? Thank you.
Thank you for watching!
Speaker Change: On the guidance, overall, across the sub-markets, or just commercial OEM specifically? There are a men across the EBITDA of the company.
Thank you for watching!
Speaker Change: Oh, generally I think we always build in a decent amount of... [inaudible]
Thank you for watching!
Speaker Change: Servatism and try to obviously modify it as we go through the course of the year by sub-marking on the revenue guide and we made some slight tweaks this quarter that netted to...
Speaker Change: You know, kind of a push on the impact towards the overall guidance, but I don't think we did anything differently this year that we've done in prior years in terms of, you know, the amount of the amount of air band around the revenue growth estimates by sub-market. Thank you very much.
Alright, congrats again.
Thanks
Thank you, one moment for our next question.
Speaker Change: Our next question comes from the line of Peter Arment from Beard [inaudible]
Peter Armand: Yeah, thanks. Again, congrats, Kevin and Mike. Mike, I think last quarter you kind of gave us a snapshot of how the order rates were doing. I think purchase orders were running about 50% of the rate 38 target at Boeing. Maybe you could just give us an update if you don't want comments specifically on that. Just maybe in general how OE purchase orders are going. Thanks.
Yes, I would say it's um...
It's varied across our op units, I think. [inaudible]
Peter Armand: Just based on the type of component they have and where Boeing is with the inventory position and I think Boeing is set as much publicly just with regard to how they're approaching the supply base.
Peter Armand: It's very component specific, but generally, we're in and around sort of that...
Peter Armand: 30 rate per month ballpark on the max that you would expect. We are at, but there are some puts and takes across our 51 op units around that rate, and it varies a bit, but when you put it all together, that's about what we're seeing. Thank you very much.
Thank you for watching!
Appreciate that, I'll leave it alone, thanks guys.
Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Seth Seifman from JP Morgan .
Thanks very much and congratulations to Kevin and Mike.
I want to ask first about the M&A environment.
Speaker Change: We're definitely in a much more volatile financial market environment. We made to some degree be headed into a more volatile macro environment. [inaudible]
Speaker Change: In terms of your own, you know, the way you run your LBO models and, you know, the expectations that you think that potential sellers might have, you know, how is this environment that we've seen over the past?
Speaker Change: a couple months, sort of affecting that environment and specifically your thoughts about how you model that [inaudible]
Thank you for watching!
I'll answer and Mike can jump in. I... [inaudible]
The one change I've seen over the last…
Speaker Change: I don't know, a couple of years is just willing this for people to pay up for targets. We've seen some...
Seeing the market and are now...
in the space, but...
Speaker Change: You know, that hasn't changed our approach. You know, we're swinging at and looking at everything that comes along in the aerospace world and...
Speaker Change: Comfortable that we can continue to meet our EBITDA acquired needs on a yearly basis, going forward, don't see any change to that approach. Thank you very much.
Thank you for watching!
Speaker Change: Okay, great. And then just as a follow-up in the aftermarket, which is a place obviously where investors are focused on potential risks given what Samarro Alliance has been saying about capacity, if we thought about this kind of high single low double paste.
Speaker Change: that you have, and we think about the kind of distinct risks that are out there, whether it's-
Speaker Change: You know, U.S. carriers talking about reducing their capacity growth expectations. Maybe it's some disruption and sales to China. You know, how do you kind of order? [inaudible]
Speaker Change: Those risks and the types of capacity cut they've been talking about in the U.S. How much of a headwind does that represent to that kind of eye single low double kind of kind of pace that that you're running out really consistently now? [inaudible]
and Michael Lisman. Thank you. Thank you.
Speaker Change: Well, as we sit here today based on the order book, we're not seeing any change in our commercial aftermarket bookings, we're seeing continued strengths, actually, of those bookings, into April , which is good to see, like you guys, we read the news headlines.
Speaker Change: And even though we're not seeing it today, if it were to come about through some kind of change in the economic conditions overall that there was going to be a... [inaudible]
Speaker Change: A downturn or a blip of a bit. We want to go and be very nimble and quick just in terms of how we react to it in going after our own cost structure. But as we sit here today, we're not seeing that. Thank you very much.
Thank you for watching!
May I help you? Thank you.
Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Noah Poponak from Goldman Sachs [inaudible]
Hey, good morning, everyone.
Morning. Morning. Morning.
Thank you for watching!
Speaker Change: Congrats on the new roles, and Kevin, thanks for all the time we've spent with all of us over the last few years.
Speaker Change: Of course. I guess more than a few, but thank you. I want I want to just stay on M&A because
Speaker Change: You guys have referenced a very busy pipeline for a while now, and you've done some deals, some nice deals last year, but
Speaker Change: You know, it's kind of a, it's been, you know, not a particularly toured pace and a lot of things in the small to, to the most out of medium category as opposed to larger.
Speaker Change: You just referenced what's happening with valuation, you know, we all saw the Jefferson multiple.
Are you just looking at a lot of assets? Yes, that's it.
Speaker Change: Late in the process, the multiple is just too high, or are there other reasons things are falling out earlier in the funnel? To try to square up or has what you've done lined up with your definition of a very busy pipeline. [inaudible]
Speaker Change: I think it has lined up with a very busy pipeline. We have looked at a tremendous number of large targets, public companies, large privates, things that have gone for
Speaker Change: You know, upwards of $10 billion or more. We've looked at them all, but again, our approach is to stay disciplined. We've been very busy, we've screened a tremendous number of businesses.
Speaker Change: And if things fall out for certain reasons, so be it, we must stay disciplined in our approach. That's what's led to the quality of returns over a very long many year run.
Speaker Change: And I don't want to change that approach and I don't like doesn't either so we're not desperate to do deals. We are rather busy and continue to evaluate. [inaudible]
Speaker Change: Last year was an incredible year, the second best EBITDA acquired year we've ever had [inaudible]
Unfortunately, we haven't closed on a few things that...
Speaker Change: Have come along, but the year is not over yet, and we remain very optimistic . . . .
and we're very busy, just as busy today.
Speaker Change: It's a very active time. And, you know, to a first approximation, I don't worry about what it costs to acquire a business, if it means our criteria, then we should be bidding on it.
Speaker Change: but we remain very active and valuating a lot of targets.
Thank you for watching!
Speaker Change: Okay, I appreciate all that detail. And just as one follow-up, Sarah, can you just square me up on free cash flow? I think for a few years you've talked about it in absolute terms but also then excluding a work in capital build.
Speaker Change: What are you expecting for the full year on pre-catchment and income conversion? And is it now the same number whether we're including or excluding working capital or where's there still a working capital ahead when this year? [inaudible]
Speaker Change: I think it's still the same as we thought at the beginning of the guys as you obviously saw the the networking council change for this quarter which was high but if you look at it on a year-to-date basis
Speaker Change: We're kind of in line as a percentage of sales as we'd expect to be, so no change for the end of the year we expect to and the year which is over 2.2.3 billion with networking capital after that free cash flow number in line as a percentage of sales. [inaudible]
Thank you for watching!
and Michael Reiss. Thank you. Thank you.
Okay, thank you very much.
Thank you for watching!
Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Gautam Khanna from TD Securities [inaudible]
Good morning and congrats Mike and Kevin. Good morning and congrats
Good morning, good morning, Gautam. [inaudible]
Speaker Change: So I wanted to ask just, you mentioned the delta between the engine aftermarket and the non-engine. Have you seen any change in behavior of late with respect to discretionary aftermarket, you know, that? Yeah, yeah, yeah, yeah.
Speaker Change: Presumably with all the capacity cuts and you're hearing some of the U.S. airlines talk about good tailing maintenance and is that where you're seeing
Speaker Change: Some changing customer behavior or week or orders, or maybe you could elaborate on.
Speaker Change: kind of the order of magnitude, not just for the quarter, but since the quarter. [inaudible]
Yep.
Golem, it's Mike, no way up, first we've not seen any...
Speaker Change: Behavioral difference between what's discretionary versus non discretionary. Our biggest discretionary bucket within commercial aftermarket is probably our interior's business, but to date that's continued to perform. Thank you very much.
Speaker Change: Quite well, with no signs of slowing down or pulling back. So we remain optimistic on the growth outlook for the balance of the year in our tea and any weakness.
David Strauss, David Strauss, David Strauss, David Strauss, David Strauss, Michael
Okay, that's purging. Just cruise on... I'm...
Speaker Change: You know, just pricing dynamics, given tariffs, I'm just curious, like, what the...
Speaker Change: Are you seeing any incremental elasticity, you know, on this part, do you expect to?
Speaker Change: It's presumably you're going to have to, on the margin, raise prices a little bit more than you otherwise would.
Speaker Change: I don't want to put words in your mouth, but is that what we should expect a little bit?
Thank you. Thank you.
Steeper pricing, I think overall, off-set the chairs. [inaudible]
Yeah, I think overall is um...
Speaker Change: Sarah and Kevin said in the prepared remarks, we're largely domestic manufacturer, we don't expect some kind of material headwind from the tariffs here and we're pursuing a lot of cost savings and other actions internally to make sure there's no net impact on the EBITDA line.
Speaker Change: Okay, and then the last one on the M&A pipeline, which you did talk about. Just anything kind of of in though, later stages at this point, so you can point to, Oh, we can't, but a promise is not.
Speaker Change: We can't comment on that. We can't comment on things that are in the process. We're evaluating a bunch of companies right now. That's constantly the case every day, but we can't comment on where things are in the process.
Speaker Change: It's just a... I appreciate it. It's gonna close, and that's the only thing that matters at the end of the day.
Thank you for watching!
[inaudible]
Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Ronald Epstein from Bank of America [inaudible]
Thank you. Bye bye. Bye bye. Bye bye. Bye bye.
Speaker Change: Hey, good morning, guys. Yeah, maybe circling up on a topic. I don't think anybody's really kind of hit yet. So, what do you guys see in kind of a, what's the pulse on like freight and cargo, you know, we've heard like the shipborne cargo is way down, right? Did you see anything and those end markets given, you know, what's going on with the tariffs? [inaudible]
Bye!
and Michael Reiss. Thank you. Thank you.
Speaker Change: Our freight business continued to perform well on the second quarter. The rate of growth within freight actually exceeded the 13% overall for the commercial aftermarket. You guys follow the data points as much as we do.
CTKs are up kind of in the low single digit. [inaudible]
kind of ballpark through the first calendar quarter.
Speaker Change: So, growth continues despite some of the macroeconomic concerns that we read about in the news headlines, but our business...
Speaker Change: as far as commercial aftermarket goes, and that submarket actually performed pretty nicely ahead of what CTKs are doing in the broader market. We've seen some lumpiness in orders there before, but it was good to see the strength of this past quarter. [inaudible]
Thank you for watching!
Okay, got it. And then maybe as a as a as a follow on.
There's been a lot of talk lately about software enabled hardware [inaudible]
Speaker Change: As you guys are kind of more interested in looking into that as an end market for you all
where I know a lot of what you do.
Speaker Change: I just suffer wouldn't be really relevant for it, but I guess there's some stuff that would be, and the BOD has been pushing in that direction and we're seeing that more problem in commercial markets. Is there something off for something there for you all to do and kind of suffer driven hardware? [inaudible]
Speaker Change: I think we as far as the M&A landscape goes, we evaluate deals as we always have. We look in target for a 20% IRR and
Speaker Change: That hasn't changed and is not going to change going forward and if we find companies that tick the boxes in terms of the characteristics that we want them to have and we have cleared see a clear path to generating that kind of return, we're going to go after it.
Thank you for watching!
Got it, all right, thank you very much [inaudible]
Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Jason Gursky from cities
Speaker Change: Hey, good morning, everybody, Mike Kevin, congrats for me as well. Mike look forward to working more closely with you.
Speaker Change: I wanted to bring up a topic, I've been trying to cover with everybody this quarter. You know, obviously there is a change of foot.
Speaker Change: at DOD in particular. We've seen some executive orders come down on a whole litany of things, but the one that kind of has peaked my interest is on
Thank you.
Speaker Change: and a rewriting of Federal Acquisition Regulation and DeFarrs on the Defense.
Side As
Speaker Change: Well, and I would love to just get your big picture of thoughts here on what you understand to date on what's changing.
Speaker Change: and secondly, how that might impact the business over the longer term, and what are the risks and opportunities to this change in regulatory environment that it looks like we're about to go through on the defense side. Thanks.
Speaker Change: Yeah, I guess I'm not I'm not sure how significant changes will be in the regulatory environment done [inaudible]
Speaker Change: DOD acquisition, DLA acquisition. We continue to work very closely with the DOD, DLA through working groups where we meet at senior levels.
Speaker Change: We tend to not speculate on what might come but rather stay informed and react when it does, so I don't have any comment beyond that necessarily. I'm not trying to be unhelpful. [inaudible]
Speaker Change: Yeah, Fair enough, so early days it sounds like. Yeah, understood, I will be watching this one I think for a while. Maybe just a quick follow up then. I'm just wondering, you know, from a competitive perspective. Thank you.
Speaker Change: What you're seeing out there in the market, as far as PMAs, and whether there's been any change in either your approach to PMA parts or whether you've seen a noticeable difference in and pick up an investment from others in that in the market. [inaudible]
Thank you for watching!
We have not seen a meaningful uptick in PMAs across
Speaker Change: Our business is in terms of others trying to BMA our product. It's always something we've come on the path. We're not a huge target on that front, just given the nature of our products and we haven't seen any increase in the most recent months for quarters. [inaudible]
Thank you.
Thanks for watching!
So that's a great aid, no.
Yeah, understood. Thank you very much
Thank you.
Thank you. One moment for our next question.
[inaudible]
Speaker Change: Our next question comes from the line of Michael Ciarmoli from Truest Securities [inaudible]
Michael Charmoly: Hey, morning or afternoon guys, thanks for squeezing me in, congrats Kevin Mike.
Michael Charmoly: and Michael Lisman, you can look him up and see that for yourself.
Speaker Change: Maybe just back to Seth's line of questioning on the African market in the order book, the order book is strong, but what would you guys say is a typical lead time that you have, you know, we're seeing the carriers make changes to capacity, cutting routes.
Speaker Change: You know, that order book, you know, do you start to see any changes or weakening post-capacity cuts? Is it three months? Is it six months? Just trying to gauge sort of the visibility I have there and I'll just keep it to that one question.
Sure, so
Speaker Change: That's Mike, as I mentioned, we've seen continued strengths over the last couple of weeks and months, so no change coming in. But it is something that books and ship as we've sent many times before on a tighter timeline than say the OEM parts of our business.
Speaker Change: A larger percentage of the commercial aftermarket bookings that come in every quarter ship out within that same quarter than you would find on the OEM side. I don't think we've provided an exact percentage in the past. [inaudible]
Speaker Change: But it's a meaningful percentage of the bookings that are received that end up shipping out. So that's why we look at it and monitor it so closely on the booking side but again we're continuing to see bookings growth at this point.
Speaker Change: Okay, and your proxy, I mean, is it capacity? Is it traffic? Is it takes off in landings? I mean, what are you guys monitoring most closely? That's that you think correlates and drives? That aftermarket business? Yeah.
Speaker Change: We look at all of them, and the fact of the matter is they're all pretty tightly correlated at this point in time, but the best gauge is probably takeoffs and landings. We look at all of them.
Okay, thanks Jeff.
Thank you.
Thank you [inaudible]
Speaker Change: That concludes today's presentation. I would now like to turn the conference back over to Jamie Stemen for closing remarks for a few more remarks.
Jaimie Stemen: You all are joining us today, this concludes the call. We appreciate your time and have a good rest of your day. Thank you very much.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.