Q4 2025 TransDigm Group Inc Earnings Call

Speaker #2: Good day and thank you for standing by . Welcome to the Q4 2025 TransDigm Group Incorporated Earnings Conference Call . At this time , all participants are in a listen only mode .

Speaker #2: After the speakers presentation , there will be a question and answer session . To ask a question during the session , you will need to one on your press star telephone .

Speaker #2: You will then hear an automated message advising your hand is raised withdraw your . To question , please press star one one again .

Speaker #2: Please be advised that today's conference is being recorded . I would now like to hand the conference over to your today , Jaimie Stemen speaker Investor Director of Relations .

Speaker #2: Please go ahead

Speaker #2: . Thank you .

Speaker #3: welcome And to TransDigm Group fiscal 2020 fourth quarter earnings conference on the call . Presenting morning are TransDigm Group President and Chief Executive Officer , Mike Lisman , Co-Chief Operating officer .

Speaker #3: Joel Reese . And Chief Financial officer . Sarah Wynn . Also present for the call today is our Co-Chief operating officer , Patrick Murphy .

Speaker #3: Please visit our website at TransDigm Group to obtain a supplemental slide deck and call replay information Before we begin , . the company would like remind you that to statements made during this call , which are not historical , in fact , are forward looking about further important statements .

Speaker #3: information For factors that could cause results to differ materially actual 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 .

Speaker #3: Gov . 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 .

Speaker #3: 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 .

Speaker #3: I will now turn the call over Mike to .

Speaker #4: Good morning and thanks for calling in today . First , I'll start off with the usual quick overview of our strategy . Second , make a few comments about the quarter .

Speaker #4: And third , discuss our fiscal 2026 outlook . Then Joel and Sarah will give additional color on the quarter to reiterate , we believe we are unique in the industry and both the consistency of our and both good strategy times and bad , as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle .

Speaker #4: To summarize , here are some of the reasons why we believe this . About 90% of our net sales are generated by unique proprietary products .

Speaker #4: 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 .

Speaker #4: First , we own and operate proprietary aerospace businesses with significant aftermarket content . Second , we utilize a simple well-proven value based operating methodology .

Speaker #4: Third , we have a we have a decentralized organizational structure and unique compensation system closely aligned with our shareholders . Fourth , we acquire businesses that fit this strategy and see a clear path to equity like returns where we private .

Speaker #4: And lastly , our capital structure and allocations are a key part of our value creation methodology . Our long standing goal is to give our shareholders private equity like returns with the liquidity public of a market .

Speaker #4: To do this , we stay focused on both the details value creation as well as careful allocation of our capital . As you saw from our earnings release , we closed out the year with a good quarter during the fourth quarter , we saw healthy growth in the channel and for our defense commercial market aftermarket revenue finally , as expected , our commercial OEM revenues return to a growth position following the brief destocking trends we saw last quarter For the full .

Speaker #4: Year, our fiscal 2025 revenue and EBITDA, as defined, margins our most recently published surpassed. Commercial Aerospace market trends remain favorable. Air traffic steadily progresses and continues to show that airline schedules remain fairly stable, with takeoffs and landings growing in the 3% to 4% ballpark year over year.

Speaker #4: In the commercial OEM market , there is still much progress to be made for OEM our rates , and results continue to be adversely affected by OEM performance .

Speaker #4: demand for Airline new aircraft remains high , and the OEMs have long backlogs . OEMs are working to increase aircraft meet production to this demand , recovery to but the date has been bumpy and will likely remain so .

Speaker #4: Our EBITDA is defined . Margin was 54.2% in the quarter , contributing to this solid Q4 margin as the continued growth in our commercial aftermarket , along with diligent focus on our operating strategy , which is allowing margin performance to expand across all segments .

Speaker #4: Additionally , we had strong operating cash flow generation in Q4 of and we over 500 million , ended the quarter with a cash balance of over 2.8 billion and over 2 billion .

Speaker #4: forma for the Simmons Pro acquisition , we expect to steadily generate significant additional cash throughout fiscal 2026 . Next , an update on our capital allocation activities and priorities During our full fiscal 25 and continuing into October , we .

Speaker #4: are pleased to have allocated approximately 7 billion of capital in the aggregate across M&A return of and capital to our shareholders . Specifically , these activities included the acquisitions of Servotronic , Simmons Precision Products and $300 million of other small tuck in acquisitions , as well as a special dividend of $90 per share and $600 million of share repurchases .

Speaker #4: The dividend of $90 per share was our largest to date . As you know , we are continuously assessing our capital allocation options and we were very pleased to return this capital to our shareholders .

Speaker #4: recent The share repurchases , including $100 million in October , are rooted in the same targeted returns math . We have consistently applied over the years .

Speaker #4: Regarding the current M&A activities and the pipeline , we continue to actively look for opportunities that fit our model . As usual , the potential targets are mostly in the small and mid-size range .

Speaker #4: As always , we will remain disciplined around our approach to M&A . Additionally , acquisitions are , by their nature , hard to predict , so consistently with past practice .

Speaker #4: I will not be saying too much on what is currently active in our funnel. The capital allocation priorities at TransDigm have changed.

Speaker #4: Our first priority is to reinvest in our businesses . Second to accretive , disciplined M&A . And third return capital to our shareholders via buybacks or dividends .

Speaker #4: A fourth option paying down debt seems unlikely at this time , though we do still take this into consideration . We are continually evaluating all of our capital allocation options , but both M&A and the markets are difficult to predict .

Speaker #4: We exited fiscal 2025 with a sizable cash balance , and our recent capital allocation actions us with still leave significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities .

Speaker #4: In the readily foreseeable future moving on to our . Now , outlook for fiscal 2026 . This guidance incorporates the recently acquired Simmons Precision Products business , which we are very excited to now own , but which comes into the Transdigm fold at a profitability level below that of our typical acquisition .

Speaker #4: The guidance assumes no additional acquisitions or during divestitures the year . Our initial guidance for fiscal 2026 is in follows and can be found on slide seven .

Speaker #4: Today’s presentation. The midpoint of our fiscal 2026 revenue guidance is $9.85 billion, which is approximately 12% higher than the prior year.

Speaker #4: As a reminder , and consistent with past years , with about 10% or so fewer working days than the subsequent quarters , fiscal 26 Q1 revenues , EBITDA and EBITDA are anticipated to be margins than lower the other three quarters of 2026 .

Speaker #4: This revenue guidance is based on the following market channel growth rate assumptions . We expect commercial OEM revenue growth in the high single digit to percentage mid-teens range , which is highly dependent on the evolution of the production rates in the commercial OEM environment .

Speaker #4: Commercial aftermarket revenue growth is in the high expected to be single digit percentage range and defense revenue growth in the mid single digit to high single digit percentage range .

Speaker #4: The midpoint of our fiscal 2026 EBITDA, as defined in our guidance, is $5.15 billion, or up approximately 8%, with an expected margin of around 52.3%.

Speaker #4: This includes an additional 200 basis points of margin dilution from recent acquisitions compared to fiscal 2025. Additionally, some commercial OE and defense mix headwinds in the range of a half percentage point to a full percentage point are further reducing our margins versus fiscal 2025.

Speaker #4: Adjusting for these two dilutive factors , the margins would have increased more versus fiscal 25 , and in line with the margin improvement , we would typically expect on our base business .

Speaker #4: We anticipate EBITDA margins will move up throughout the year , with Q1 being the lowest and sequentially lower than Q4 of fiscal 25 .

Speaker #4: The midpoint of adjusted EPs is expected to be $37.51 . We believe we are well positioned as we enter our fiscal 26 will continue to closely watch how the aerospace and capital markets develop and react accordingly .

Speaker #4: We are pleased with company's the performance this year . In 2025 , our team successfully navigated the challenges of uneven demand and our commercial OEM market throughout the year to deliver a healthy EBITDA as defined margin .

Speaker #4: Looking to our new fiscal year, we remain focused on our value drivers, cost structure, and operational excellence. We look forward to fiscal 2026 and expect that our consistent strategy will continue to provide the value you've come to expect from us.

Speaker #4: Now , let me hand it over to Joel Reiss . Our TransDigm Group co-CEO , to review our recent performance and a few other items .

Speaker #4: Morning , everyone . I'll start with our typical review of our results by Key Market category for the remainder of the call , I'll provide commentary on a pro basis compared to the prior year period in 2024 .

Speaker #4: That is , assuming we own the same mix of businesses in both periods . The market discussion includes excludes the recent acquisition of Simmons Precision Products in the commercial market .

Speaker #4: We will split our discussion into OEM and aftermarket . Our total commercial OEM revenue increased 7% in Q4 and was down 1% for the full year .

Speaker #4: Fiscal 2025, compared with the prior year periods. As we anticipated, commercial OEM revenue in the fourth quarter returned to positive growth as we supported higher build rates.

Speaker #4: However , overall , the .

Speaker #5: OEM Commercial revenue performance for the full year was softer than we originally expected for fiscal 2025 , the year over year decline in commercial OEM revenue was primarily driven by the negative impact to OEM build rates that resulted from the Boeing strike and production ramp up challenges at Airbus bookings in the quarter were up compared to the same year prior period .

Speaker #5: Commercial transport bookings growth was up over 20% for the fourth quarter . The bookings levels for OEM commercial transport show that the market is recovering from the various disruptions seen over the past year or so , we have said but as before , this recovery could be a bit bumpy and uneven on a quarterly basis .

Speaker #5: As the OEMs and our tier one and tier two customers rightsized inventory levels .

Speaker #4: We .

Speaker #5: Are encouraged by the progress of the 737 Max production line , as well as the FAA's approval for Boeing to increase its production rate .

Speaker #5: Our operating units are well positioned to support the higher production rates as they occur . The commercial OEM guidance we are giving today contains what we believe is an of appropriate level risk around the production build rates for the 2026 fiscal year .

Speaker #5: Our fiscal 2026 commercial OEM revenue guidance range of high single digits to mid-teens percentage growth contemplates reasonable risks around the Boeing and Airbus rates, moving now on commercial to our aftermarket business discussion.

Speaker #5: commercial Total aftermarket revenue increased by approximately 11% in Q4 and 10% for the full year , compared with the prior year periods . Sequentially , total commercial aftermarket revenues were up 5% in Q4 this quarter .

Speaker #5: All submarkets within the commercial aftermarket experienced positive growth . Our commercial aftermarket , excluding our Bizjet submarket , was up 13% , driven by solid growth in freight interiors and engines .

Speaker #5: Bookings across all submarkets were up the prior compared to year period , and POS at our distributors grew in double digits on a percentage basis this quarter .

Speaker #5: For the full year , the 10% revenue commercial aftermarket was in line with our original expectations . Each of the submarkets performed about as expected , with strong performance from our interior submarket and from the operating units with higher engine content within the passenger submarket .

Speaker #5: Our operating units continue to monitor market share and competitive dynamics. We see no losses and no change in this space from either USM's or PMA's.

Speaker #5: As already mentioned , we expect 2026 commercial aftermarket revenue growth in the high single digit percentage range commercial regarding how aftermarket revenue is likely to progress throughout the fiscal 2026 .

Speaker #5: Q1 is expected to be the quarter of the year on a sales dollar basis , as there are roughly 10% fewer working days than in other quarters .

Speaker #5: Now , shifting to our defense market defense market revenue , which includes both OEM and aftermarket by revenues , grew approximately 16% in Q4 and 13% for full year fiscal 2025 , compared with the prior year periods .

Speaker #5: We have seen strong growth in defense , driven by new business wins and strong performance by our both teams in domestic and international markets .

Speaker #5: Defense Q4 revenue growth was well distributed across our businesses and customer base. Although we saw similar rates of growth in both the OEM and aftermarket segments of our total market.

Speaker #5: With aftermarket running slightly ahead of OEM defense bookings for the quarter and full year significantly surpassed the comparable prior year periods . And support our 2026 guidance for mid-single to high single digit revenue growth .

Speaker #5: this quarter , we Additionally , saw continued growth US government in the defense spend outlays . As we have said many times before sales , defense bookings can and be lumpy .

Speaker #5: We know the bookings and sales will come , but forecasting them with accuracy and precision , especially on a quarterly basis , difficult .

Speaker #5: We anticipate projects fiscal 2026 . spending cost payback for capital years . driven Typical couple of productivity about business and two thirds of our over 150 new automation projects planned for the year .

Speaker #5: We continue to see the cost of automation technology decrease year over year . We are a high mix , low volume manufacturer and continued success our taking on new automation tasks and assembly machining , polishing and painting is exciting .

Speaker #5: As a result of our continued focus on productivity in both the factory and offices , we anticipate our headcount will remain roughly flat despite the increase in commercial and defense OEM work content during the year .

Speaker #5: We also had good continued success , winning new business this year . I can't get into but several specifics , units have been awarded the content on F-47 and we believe this will be an excellent platform for us , hopefully in upcoming quarters , I'll be able to provide more specifics to highlight a few new business programs I can talk about in September .

Speaker #5: The US Army placed its first large production order for airborne systems glide modulation , canopy marking a major milestone following nearly two years of test and successful evaluation .

Speaker #5: The US Army placed its first large production order for airborne systems glide modulation , canopy marking a major milestone following nearly two years of test and successful evaluation . product represents This technological system the over the US current significant used by a and Air advancement Army Force .

Speaker #5: This new product allows jumpers to more precisely target landings in confined areas . The initial value order at $5 million begins the full transition to the new canopy .

Speaker #5: In all future procurements, Airborne will deliver the first canopies in February 2026 to the US Army Military Free-Fall School, where all new jumpers will be trained on this new upgraded system in August. Additionally, the UK Ministry of Defence awarded a $30 million contract to Urban DK for an advanced aerial delivery system.

Speaker #5: This new system , termed Freibad RAF's A400 a airdrop to RAF , enables the pole boat up aircraft rigid 40m long and weighing up to .

Speaker #5: 12 tons In addition , oxytocin reached an agreement with Rolls-Royce to supply its complete sensor suite on Trent XWB the 80 for enhanced performance engine for the A350 900 .

Speaker #5: This agreement encompasses OEM and the to ensuring that supply our operators , reliability of our sensors continues to contribute to the success of all engine variants .

Speaker #5: We are making good progress integrating our two most recent acquisitions , Servant and Simmons Precision . Both integrations are by being led EVPs experienced .

Speaker #5: We have augmented the teams existing season with individuals from other Transdigm operating units to accelerate their progress . It's still early , but our experience to date indicates that these are going to be two very good additions to Transdigm .

Speaker #5: Lastly , I'd like to finish by recognizing the strong efforts and accomplishments of our operating unit teams during fiscal 2025 . It was a good year and we are pleased with the operating performance they delivered for our as we shareholders enter our new fiscal year , our management teams remain committed to our consistent operating strategy and servicing the strong demand for our products .

Speaker #5: With that, I'd like to turn it over to our Chief Financial Officer, Sarah Wynne.

Speaker #6: Thanks , Jo , and good everyone . I'm going to review a additional few financial matters for fiscal 2025 . And then also our expectations for fiscal 26 .

Speaker #6: First , few additional fiscal 25 data points on organic growth , taxes and liquidity in the fourth quarter . Our organic growth rate was approximately market channels contributed to this 11% , and all growth .

Speaker #6: As previously discussed by Mike and Joel on taxes , our GAAP and adjusted finished the tax rates year within a slightly better than their expected ranges .

Speaker #6: On cash and liquidity free cash flow , which we traditionally defined as EBITDA , less cash interest payments , CapEx and cash taxes was roughly $2.4 billion for the year , slightly above our expected estimate of $2.3 billion .

Speaker #6: Below that free cash flow line , investment of net working capital consumed approximately 330 million on a full year basis , and the final net working capital ended the year roughly in line with levels .

Speaker #6: Below that free cash flow line , investment of net working capital consumed approximately 330 million on a full year basis , and the final net working capital ended the year roughly in line with historical As a percentage of sales , we ended the year with approximately $2.8 billion of cash .

Speaker #6: On the balance sheet , or approximately 2 billion when pro for completion of the the Simmons acquisition at year end and net debt to EBITDA ratio end of shareholders quarter .

Speaker #6: last After 5.9 times at the 5.8 times was our from the a $90 per share up dividend don't we . target a While specific amount of cash that we like to have on hand , we have sufficient capital available through both cash on hand and as well as incremental debt capacity to all potential M&A in the pipeline over the course of fiscal 25 , we did a fair bit of proactive financing .

Speaker #6: We pushed out our nearest to maturity from 2027 to 2028 . Additionally , we reduced the interest rate on two of our loans .

Speaker #6: We also raised $5 billion to fund the aforementioned $90 dividend paid out in September. Our interest expense coverage ratio ended the quarter at 3.2 times, which provides us with a comfortable cushion versus our target range of 2 to 3 times.

Speaker #6: We continue to be comfortable operating in 5 to 7 net debt the EBITDA ratio range . A go forward strategy of capital deployment not has changed , and we continue to seek shareholders our is .

Speaker #6: We continue to be comfortable operating in 5 to 7 net debt the EBITDA ratio range . A go forward strategy of capital deployment not has changed , and we continue to seek shareholders our is strategy term leveraged proactively by approximately through our 75% of the opportunities for providing fixed , a far strategy value to to addition , fiscal 2029 .

Speaker #6: We continue to be comfortable operating in 5 to 7 net debt the EBITDA ratio range . A go forward strategy of capital deployment not has changed , and we continue to seek shareholders our is strategy term leveraged proactively by approximately through our 75% of the opportunities for providing fixed , a far strategy value to to addition , fiscal 2029 . and manage our $30 billion gross debt This is achieved through a combination of fixed rate swaps and collars .

Speaker #6: Next , on the fiscal 26 expectations , I'm going to give some more details on the financial assumptions around interest expense , taxes and share count .

Speaker #6: special note that all of A my comments and data include the here acquisition of Simmons net interest expense is expected to be about $1.9 billion in fiscal 26 , and this equates to a weighted average interest rate of approximately 6.3% .

Speaker #6: This estimate an average rate of sofr year on 3.8% for the full assumes Our fiscal 26 GAAP cash and adjusted rates are all tax anticipated to the range of 22 to 24% on the share count .

Speaker #6: We expect our weighted average shares outstanding to be 58.5 million shares in fiscal 26 , with regards to liquidity and leverage for fiscal 26 , as we would traditionally free cash flow define , our operations from at which Transdigm , again , is EBITDA as defined less cash interest payments , and cash taxes .

Speaker #6: We estimate this metric to be close to $2.4 billion . After paying for the Simmons acquisition and assuming no additional capital market acquisitions or transactions , we would end the year with around $4 billion of cash on the balance sheet , which would imply a net debt to EBITDA ratio of times at the end of approximately five fiscal 26 .

Speaker #6: We will continue to watch this ratio , along with the cash interest coverage ratio , as we actively pursue options for maximizing value to our our shareholders through capital allocation In strategy .

Speaker #6: think we remain in good position with adequate pursue flexibility to M&A or return cash to our shareholders via share buybacks and or additional dividends during the course of fiscal 26 , with that , I'll hand it back to Jamie , our Investor director of relations .

Speaker #3: Before we open the line for Q&A, I'd ask everyone in the queue to consider your fellow analysts and ask one question only so we can get to as many people as possible.

Speaker #3: Given that it is our Q4 call and there is a lot of cover material to today . Operator . Can you please open the line

Speaker #3: ?

Speaker #2: you . As a reminder to ask Thank question , a please press star one one on your telephone and wait name to be for your announced .

Speaker #2: To withdraw your question , please press star one one again . Please stand by while we compile the Q&A roster . And our first question comes from Scott Research .

Speaker #2: Melius Mikus of Your line is open .

Speaker #7: Good morning .

Speaker #4: Good morning, Scott. Good morning.

Speaker #7: Mike . When Kevin was CEO , the company opened up the M&A aperture by expanding into test and measurement businesses . Although they were still aerospace primarily related .

Speaker #7: still early You're in your career and could be leading Transdigm for quite a Is there a while . possibility that under your tenure , Transdigm takes a more look at acquisitions serious outside of aerospace and defense , where you're comfortable that still you can hit your 20% IRR target ?

Speaker #4: So we did two branches outside of the core legacy aerospace hardware business under Kevin Calspan and Raptor , both it's but it early innings , seems far so good .

Speaker #4: So, looking for additional things potentially in that space, as the experience to date generally been a positive one. Over time. Well, let's focus on today as we sit here today in terms of what our M&A group, what I'm spending time on from an M&A standpoint.

Speaker #4: It's not branched out materially from anything that you'd expect to see , which is leg is the similar to what we've always targeted in the past .

Speaker #4: Aerospace and defense components businesses . That's where the vast majority of the focus is in the time . Could of fullness you potentially branch out and look at things under the umbrella , but similar to test and measurement that aren't right down traditionally fairway , that could be the case .

Speaker #4: not But we're there yet . As we sit here today , the focus is where it's always .

Speaker #7: Okay . And then you talked about the strength in orders in the aftermarket . Were there any noticeable trends among the four submarkets there , whether it's freight , interior , Bizjet helicopter or passenger , just any of strength or pockets of weakness you saw .

Speaker #5: This is I'll take . that I don't think we've seen any any dramatic as we change get out of the quarter . Certainly refurb business for interiors picked up more this year .

Speaker #5: It kind of lagged before the year, as we highlighted in the comments. The engine has been strong for us all year, as it was last year.

Speaker #5: And I freight , think which year struggled the also before , was pretty solid for us this year .

Speaker #7: All you right . Thank .

Speaker #2: you Thank . And our next question comes from Robert Stallard of Vertical Your line is Research . open .

Speaker #8: Thanks so much . Good morning .

Speaker #4: morning Good .

Speaker #8: Just a couple from me on 2026 guidance . the First of all , on defense , that's a big slowdown . For 26 versus what you've recently experienced for 2025 .

Speaker #8: So if you could give some more clarity on that and the aerospace aftermarket , are you assuming a normal level of transdigm pricing as you move into 26 ?

Speaker #8: Thank you .

Speaker #5: So on the defense side , I'm hopeful we're being conservative on it . We had good solid bookings last year and good growth across the the various aspects of the company .

Speaker #5: Defense is lucky for us. And so, unlike the commercial aftermarket, which has relatively quick book and ship, it's a little bit less predictable on the defense side.

Speaker #5: So we're going to generally be a little bit more conservative . There . We've had two solid growth years in a row in defense , and I think we like where we're sitting today on the commercial aftermarket side , I don't think we're planning to make change any in how we approach pricing .

Speaker #5: Our goal is to offset the inflationary increases that we see and put a bit of real price on top of that. I'm not going to sure we're just similar to what we've done in past years, not looking to make any change.

Speaker #8: great . Okay . That's Thank you very much .

Speaker #2: Thank you . And our next question comes from Ken Herbert of Rbcm . Your line is open .

Speaker #9: Yes . Hi . Good morning . Hey , Mike and Sarah . Appreciate the comments on the margin dilution from the recent acquisitions .

Speaker #9: Two questions really . First , how do we think about the ability to get the recent acquisitions up to sort of transdigm margins ?

Speaker #9: Do they have that capability ? And and what's the time frame to think And then about that ? second , just wanted to confirm excluding those , I think you've typically talked about sort of 50 to 100 basis points of , of annual margin expansion .

Speaker #9: what we would normally Is that expect ? Obviously , aside from the dilution of of the acquisitions ?

Speaker #4: Yeah . Ken , it's Mike I'll lead off on that . Sarah can chime in if I miss anything . If you exclude the two dilutive factors , the acquisitions and also the OEM mix shift , you do get at an underlying margin improvement trend for our base businesses .

Speaker #4: That is squarely between the brackets of what you guys would expect of the percent , percent and a half kind range of when you adjust those two things out .

Speaker #4: we are So seeing . Exactly the kind of margin margin improvement year over year . We've come to expect . And you've come to expect with regard to the two acquisitions , Simmons and Servotronic , the margins came into the fold at a low level , but these are great products .

Speaker #4: We're very excited to own both businesses in the of fullness time . We see nothing fundamentally different at about different about these versus what two businesses we've acquired in the past .

Speaker #4: That should prevent us from being able march to the margins upward . The exact timeline which over that happens is varied , and obviously it doesn't happen overnight .

Speaker #4: But there is nothing different about these businesses that should prevent us in the fullness of time from getting the margins up to where we like them to be .

Speaker #9: Great. Thanks, Mike.

Speaker #2: Thank you .

Speaker #5: Sure .

Speaker #2: And our next question comes from Christine Liwag of Morgan Stanley. Your line is open.

Speaker #10: Hey , good morning everyone . You know , you guys touched on your contract award for the F-47 . I was wondering , can you give more color on your content in this program ?

Speaker #10: And how does this compare to your content on other fighter programs like the F-18, F-22, and F-35?

Speaker #5: I'm not Look , sure that we can comment how on successful the programs will be . Ultimately , the DoD awarded Boeing the fighter as the jet next generation fighter .

Speaker #5: We take it seriously , and our teams have been actively working to win good content on the planes . How successful will be ?

Speaker #5: I'm hopeful . It'll be great exactly where it's going to end up . We have no idea .

Speaker #10: Well , great .

Speaker #4: I think , you know , we've historically not not disclosed which specific OP units , won , which content and that level of detail , but it seems like it's going to be a really good program for us .

Speaker #4: As Joel said in his prepared comments .

Speaker #10: Great . Well , thank you . I the guess , like , you know , origin of that question really is just know understanding , you , with the focus on your contracting styles and defense .

Speaker #10: You know , it's it's a positive surprise to know that you've been winning more contracts like , like for , for something like the F-47 .

Speaker #10: it's really So more just understand what , what your conversation with customers are like , you know , and kind of confirm that , you know , you're not in a no fly zone type environment for , for new defense contracts .

Speaker #4: No . Absolutely not .

Speaker #5: Yeah, I actually think that across the company, we had more new business in the defense market last year than we did on the commercial side.

Speaker #5: We developed good solutions . I mean , I think the key is this is customers come to us because we can generate a product for them that solves the problem that they can't solve , or we solve better than someone else .

Speaker #5: These are competitive awards and I think we like where we stand . The work to come up great , with good , good solutions that generate value for our customers .

Speaker #10: Great . Thank you very much .

Speaker #2: Thank you . And our next question comes from Myles Walton of Wolfe Research . Your line is open .

Speaker #11: Thanks . Good morning . I was wondering if we could chat about the CapEx and headcount comments . You made the CapEx looks like it's set to double just over the last couple of years .

Speaker #11: And you mentioned some of the automation investment , but I guess how much of that is automation to facilitate better productivity versus higher output ?

Speaker #11: it more military or commercial ? And the And is headcount , clarify , are you saying can you just . Flat head count inclusive of .

Speaker #11: The additional Simmons , heads from which closed after the quarter ?

Speaker #5: I think So the latter part . Yeah . So we look at everything in this case on a pro forma basis , adding the headcount in from as we Simmons look out at the growth , we see expect to for commercial and defense OEM during the year , we we'll don't think add have to .

Speaker #5: not And so that . that's It's no one but relatively few people across the company . And still handle the the volume growth .

Speaker #5: The high single digit to mid-teen growth within commercial OEM and on the defense side , when it comes to the CapEx question , I don't know specifically which is defense and which is commercial .

Speaker #5: Our units look to operate on projects depending on need and where we can get an excellent return. It ends up being a combination.

Speaker #5: Sometimes it's to handle more capacity , sometimes it's a way to basically drive out cost . If it's just though , we're capacity , typically not thinking of that as as productivity .

Speaker #5: We ultimately should be able to do the work we're doing today . But with , with , with fewer people , with higher yields than we have today , we're to insource work that being done on the potentially is outside .

Speaker #11: Okay . And just one quick follow up on on cash flow . What is the working capital investment or source that you're expecting in 26 .

Speaker #6: Yeah . For 26 I'd expect similar to prior years , which is as a percentage of sales , you know , around two , two and a half , 3% somewhere around there for next year .

Speaker #11: Okay . Thank you .

Speaker #2: Thank you. And our next question comes from Sheila Kahyaoglu of Jefferies. Your line is open.

Speaker #3: Good Guys , and

Speaker #3: morning .

Speaker #12: thank you . Maybe if I could ask on the commercial aftermarket . Mike , if you want commercial aftermarket 11% in the quarter accelerated from the six in Q3 .

Speaker #12: So how much of that was an engine hold up ? Whether it was at distributors or whatnot ? And as we think about 26 , how do we think about passenger versus freight engines and interiors ?

Speaker #5: So , you know , we do a bottoms up , you forecast each of our OP units same kind of approach . We've used in the past .

Speaker #5: Our operating units , you know , look at this on a customer by customer basis . They try to get information around inventory and demand .

Speaker #5: And that basically builds up what becomes the guidance that we that we provide . You know , if I was looking at the takeaways , not the guidance that we give them , but kind of the takeaways back on the freight side , I think we continue to expect to see good , steady growth , kind of what we saw saw this year .

Speaker #5: The available cargo tons were in the up 3 to 4% year over year . I think most folks are thinking that's going to be the same .

Speaker #5: mentioned I interiors , interiors . We saw Refurbs kind of kick in on the US regionals . I think the with continue , but Asia and the Middle East becoming bigger piece of a refurbs , engines have had two solid years of growth .

Speaker #5: think our I teams are optimistic , but probably a bit conservative around how that's going to continue to to go on the passenger side .

Speaker #5: We had a strong 24 and obviously a bit weaker 25 . We think that'll rebound . A lot of that was on the avionics side and don't see a reason that won't continue .

Speaker #5: And Bizjet , I think we expect kind of of the more same .

Speaker #12: Awesome . Thank you Okay . very much .

Speaker #2: Thank you . And our next question comes from Gavin Parsons of UBS . Your line is open .

Speaker #13: Hey thanks guys . Good morning

Speaker #13: .

Speaker #5: .

Speaker #14: Morning Good .

Speaker #13: If you look at your OEM kind of underlying volume , you know , the organic basis revenues up kind of 15 to 20% from 2019 .

Speaker #13: But do you feel like on volume basis you're pretty aligned with OEMs at this point ?

Speaker #4: You're talking about the commercial OEM market or realigned with their build rates . So no more inventory . Destock is that the fundamental issue you're trying to get at ?

Speaker #4: Gavin ?

Speaker #13: Yeah , thanks .

Speaker #4: Okay . I think as we sit here today , Joel can chime in . don't see We much headwind coming in the way of further inventory .

Speaker #4: Destock as we said last quarter , we expected this to be a temporary phenomenon that lasted for quarter or two . We saw the blip last quarter .

Speaker #4: We don't expect much more of a headwind coming into this year . So the growth rate and commercial OEM side should be sort of what we gave in the guidance .

Speaker #4: High single digit to mid double digit . We put a probably a wider bracket around that than you typically would do . Mainly just because of the way the ramp up has been challenged so far to date .

Speaker #4: We always try to be appropriately conservative and we've been stung a bit in the last two years by unforeseen events , and we don't want to get out over our skis here on the commercial OEM side , this year .

Speaker #13: On the 200 basis points of M&A dilution, maybe you can correct my math here, but it seems like you're assuming very little margin from M&A contribution.

Speaker #4: What do you mean by margin contribution from M&A?

Speaker #6: You're talking .

Speaker #13: About to get to 200 basis points. Yeah.

Speaker #6: Yeah yeah we are we are expecting very low lower than lower than our average acquisition margins coming in for those two .

Speaker #13: Okay . Appreciate it .

Speaker #4: Yeah I think that's where Gavin there just they're each coming into the as we said in the prepared remarks that probably a lower margin than typically see of the average you'd Transdigm acquisition .

Speaker #4: But in the fullness of time, we think these businesses have great potential, and that's going to improve and ramp up significantly.

Speaker #13: Got it . Thank you .

Speaker #2: Thank you . Our next question comes from Seth Simon of J.P. Morgan . Your line is open .

Speaker #15: Hey , thanks very much . And good morning . I morning , I guess following up on the the issue of underlying margin expansion and , you the mix headwinds , you talked about for this year that that limit the underlying margin expansion given increasing production rates for over the next several years , it seems like that's a the headwind to underlying margin expansion that's going to persist or potentially accelerate .

Speaker #15: And

Speaker #15: it is this year .

Speaker #4: I wouldn't be surprised how things go with the OEM ramp-up here and how that compares to future commercial aftermarket growth, as well as what happens on the defense side.

Speaker #4: say it's limited . I still think we get expect to year over year margin improvement if historically we've kind of bounded it in the percent , percent and a half range , we'll see where

Speaker #4: But the margin should continue to improve year over year . Going forward , depending on the OEM , if it continues to outgrow aftermarket and defense , you could see a bit of a headwind .

Speaker #4: But we're talking about something that usually amounts to a couple tenths of a point. It's not something that swings you negatively, materially.

Speaker #4: So much so that year-over-year margin improvement is not seen. We should still see it to be crystal clear.

Speaker #15: Great . Great . Thanks . And just a quick clarification . I think you mentioned in the earlier call 300 million of other small tuck in M&A .

Speaker #15: Is that extant stuff that that remains organic . Or there an is inorganic component of the sales that's that's coming in 26 from that additional M&A ?

Speaker #4: It's the mix across a range of our op units . It's really a mixed bag of different op units that are doing small tuck in , bolt on acquisitions for their specific businesses .

Speaker #4: Some extant are at, but several of them are not. And these we basically fold in as part of our planning process.

Speaker #4: They execute the deals during the year .

Speaker #15: Okay . Very good . Thanks very much .

Speaker #2: Thank you . And our next question comes from Scott Horsley of Deutsche Bank . Your line is open .

Speaker #16: Hey good morning Mike . Can you share any detail on the average contract duration at Simmons ? Just trying to get a sense for the timing future at which pricing actions layer into results .

Speaker #14: Yeah , I .

Speaker #5: I still think we're in the early innings of what this is. I think they've got the kind of typical range of contracts that you'd expect to see over the bulk of our business, which includes some relatively short contracts and some life-of-program contracts.

Speaker #5: I don't think this is , when you look at it , it looks dramatically different from what we'd expect to see from any acquisition we do .

Speaker #16: Okay . And , Joel , just to follow up on Miles's question , should we expect this decoupling of sales growth from headcount growth to continue beyond 26 ?

Speaker #16: As you make additional automation investments ? Or should those realign more closely as we exit 26 ? Thank you .

Speaker #5: I think we're hopeful that if we continue to drive automation projects , we're still in the early days of doing artificial intelligence within our within the office side .

Speaker #5: I think we're optimistic that we can hold headcount. Certainly, well below the rate that our sales increase goes, how successful we are.

Speaker #5: I mean , our operating unit teams focus on , you know , productivity is one of our three value drivers , and they work hard to drive our sales per employee higher each year .

Speaker #5: And so they certainly are focused on how to best do that .

Speaker #16: Thank you .

Speaker #2: Thank you . And our next question comes from Gautam Khanna of TD Kao . And your line is open .

Speaker #15: Yeah . Thanks . Good morning guys .

Speaker #4: Good morning .

Speaker #15: I just had two quick ones . One I was curious if you could give us an update on the sell in versus sell through , you know , through the how the distributors that you can you own what they saw in aftermarket .

Speaker #15: I may have missed it and then secondly , I just wanted to get your broader thoughts on the war Secretary's acquisition reform . You know , speech that he gave last week .

Speaker #15: know , You how , if at all , do you think it would impact Transdigm ? Thank you .

Speaker #5: Yeah . So on the distribution point of sale , it was up more than our underlying commercial aftermarket a couple of reasons within our point of sale , a distribution .

Speaker #5: It weighed a little bit more due to the engine than base TransDigm. So if you kind of reset it, the numbers would look about the same.

Speaker #5: It's just the mix of what the products are . We also had allowed inventory to bit drop a within the distribution channel . At the end , we finished the about year with a half a year less of of inventory .

Speaker #5: In terms of half a month, sorry, of less inventory at the channel at the end of September than where we were the previous year.

Speaker #5: That was probably a 1 or 2 point impact to Cam last year . When it comes to the Secretary's comments , I think we're optimistic .

Speaker #5: You know , we approach defense . You know , as a commercial manufacturer . We we invest the time and effort , the money to develop new products to qualify products .

Speaker #5: We bid firm them as , fixed priced contracts . We we take the risk of something goes on . So I think we think we're we're positioned and hopeful well , similar to what we've year with other done this defense wins .

Speaker #5: We have the ability to develop good solutions for customers and generate real value.

Speaker #4: I think , as you guys know , we're not big cost plus work here . We're fast , nimble at the unit level , easy to work with and mostly selling commercial type solutions .

Speaker #15: Yeah , appreciate the Thank you very answer . much guys .

Speaker #4: Thanks .

Speaker #2: Thank you . And our next question comes from Ronald Epstein of Bank of line is America . Your open .

Speaker #17: Hey . Yeah . Thanks , guys . Two A follow up . The first one . Yeah , just following up on the last question .

Speaker #17: Gothams question . And also Christine's , I think trying to get at . So if you can say so at 47 is the first major new program we've seen in a while was if you can answer this was your experience bidding for the work on it any different than it was on any previous programs ?

Speaker #17: I mean , I think the fear out there is , you probably understand this , that somehow that the DoD things that is doing are going to make things somehow less profitable or something like that .

Speaker #17: I mean, was the bidding process sort of how you would expect it, or was it somehow different than it was in the past?

Speaker #4: I think the way our obviously we have a multitude of OP units who are all participating in awards like this and frequently interact primes with the and others on the defense side and the process was similar to what we've seen in the past and didn't play out with any big changes versus what we'd expect .

Speaker #17: I good to know , good to know . And then and then maybe just as a follow on and , you know , people have been talking about this , you know , there is a case out there that , you know , somehow that , you know , Transdigm just won't grow their aftermarket business .

Speaker #17: Like maybe some peers will because don't have enough engine exposure that somehow you're too big to do M&A it be and have meaningful .

Speaker #17: How would you respond to that ? I mean , if someone confronted you with that and said , hey , you know what ?

Speaker #17: Your guys are just getting too big and you know , nothing's really going to move the needle . And that is sort of the bear case .

Speaker #17: What how would you respond to that ?

Speaker #4: I think we're the type who just puts our heads down and goes out and finds ways to create value, and that's it.

Speaker #4: The proof's in the pudding . The results we drive here as a team and not hand waving responses . We'll just put our heads down and go to work .

Speaker #17: Got it , got it . And if I may , is it safe to infer from that ? if Like an environment you got into that something just wasn't working , you'd make some changes , right ?

Speaker #4: Well , we're always we're going to do we're going to operate the business to go and create value and do what we can to drive prudent , long term value for our shareholders with whom we're closely aligned .

Speaker #17: Got it . Cool . All right . Thank you very much .

Speaker #2: Thank you . And our last question comes from Jonathan Siegman of Stifel . Your line is open .

Speaker #15: Hey .

Speaker #18: Good morning . Thanks fitting me for in . Just just on defense . On defense . Just a lot of talk about new missile programs and drones .

Speaker #18: You guys have highlighted your your your good positions on the predator and the Patriot . Just , you know , where do you fit on some of these newer , lower cost programs ?

Speaker #18: Is that an opportunity for Transdigm recognizing you're not going to be on the lowest , smallest end , but how about some of these new programs on the medium size and cost range ?

Speaker #18: Thank you very much .

Speaker #5: don't want Yeah , I to provide any specifics because I don't know what we can or can't say on some of these similar the F-47 we've got some really solid wins on some of the the programs you're referring to .

Speaker #5: Again , they're looking for good , highly engineered products that solve problems that provide features that other folks can't . Or we have a lot of engineers .

Speaker #5: I mean , roughly what , 15% of our entire corporation are on the designing and developing products . engineering side , So yeah , I think we've got some really solid wins that hopefully we'll be able to talk to in upcoming quarters and some of the the programs you're referring to .

Speaker #5: So I think we like opportunities our

Speaker #18: Thank . you .

Speaker #2: This concludes our Q&A Thank you . I would like to now turn it back to Jamie Stephens for closing remarks .

Speaker #3: all for joining us Thank you today . This concludes the call . We appreciate your time rest of your and enjoy the day .