TransDigm (TDG) 7 Feb 232023 Q1 Earnings call transcript

Thank you for standing by, and welcome to the TransDigm Group's 2023 First Quarter Results Call. [Operator Instructions]. I would now like to hand the call over to Jaimie Stemen, Director of Investor Relations. Please go ahead.

Thank you, and welcome to TransDigm's Fiscal 2023 First Quarter Earnings Conference Call. this Stein; TransDigm's Valladares; Chief Financial Mike call Executive and and the Officer, Kevin Officer, Operating Lisman. on morning President are Chief Chief Presenting Officer, Jorge slide transdigm.com obtain at information. website our call replay visit a Please supplemental deck and to

company are Before which remind you this historical in fact, like that we would to made statements begin, during statements. the not call, are forward-looking

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

I defined, financial footnotes related The and share, of you are most tables directly measures. we comparable a adjusted call in the that and company adjusted reconciliations. the all advise now to the call, like Please measures will of presentation would non-GAAP to call during for be of over the as to the EBITDA, will and which GAAP net Kevin. earnings also turn income per course the see referring EBITDA earnings specifically applicable

Thanks morning. for today. calling Good in

focus as phases steady consistency strategy all in our aerospace our cycle. of intrinsic discuss Then few additional good First, with creation in the bad our fiscal a quick quarter the the quarter. comments we both on color Jorge unique outlook. and as in the our and about are overview well I'll industry strategy, 'XX and Mike the the give of shareholder of times through usual off start on will value reiterate, To

margins a some proprietary aftermarket our We consistent sales this. of with EBITDA strategy products. period are operate aftermarket are generally extended content. higher aerospace provided of generated and from We methodology. reasons the operating We To believe of unique why net which businesses significantly proprietary typically comes well-proven, downturns. About significant long-term value-based own simple, specifically. any Most our have follow by the utilize stability revenues, have XX% summarize, relative in a we here and over

a clear aligned We this shareholders. PE-like a and acquire structure have a path We decentralized compensation that organizational where to businesses with see fit returns. system strategy we unique and closely

capital are a key And and creation our structure methodology. our value lastly, of allocations part

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

'XX for from saw you earnings fiscal the had our increased we to our As year. guidance good and release, start a

to aerospace We in recovery commercial continue see the market.

Our QX results show in comparison prior to positive period. same growth the year

by aerospace We are the of date, the travel market and aerospace remains market for recovery robust. trends progression remain the favorable commercial in demand as encouraged to commercial

domestic its on pandemic restrictions. is closing International and travel lifting January with the China air the in reopened air traffic in recovery travel of its

growth However, healthy commercial to air of be revenues defense. depressed. the is levels and our saw demand of pre-pandemic adversely aftermarket in progress affected market bookings. in be comparison our the our business, also major revenues commercial OEM, travel since to still results industry In to there to as for still continue is in made for X commercial very Bookings we our another channels, quarter and outpaced total all

the We with revenues, to continued Contributing margin focus attained aftermarket on strong operating strategy. along in the defined the also EBITDA quarter. commercial an in XX% diligent our of as our recovery is margin

the close of $XXX flow had we quarter in and Additionally, operating billion ended $X.X strong million cash. generation to of with QX cash almost

We expect significant cash steadily XXXX. to remainder generate the additional of throughout

unchanged. allocation priorities and activities TransDigm at on update an priorities. Next, allocation capital are our capital The

paying share buybacks down in third, debt first our into fourth Our option return capital to do take though still at shareholders dividends. is reinvest this businesses; M&A; accretive unlikely and consideration. we our seems priority this via time, to A to do second, or

options. evaluating our allocation capital of are all We continually

ended As sizable and any requirements of readily us meet the a or future. likely flexibility range mentioned other to financial earlier, in leaves of quarter significant cash $X.X with we the with balance liquidity billion, close which capital to opportunities foreseeable

these Regarding the M&A possibilities in pipeline is for in the we capital looking there but have pipeline, or current and our our cannot closings, fit predict, range. acquisitions are we fit opportunities the for predict usual, model. I we difficult a so confident possible comment runway M&A that remain midsize activity continues portfolio. decent to especially mostly and on actively but markets Acquisition a Both opportunity small M&A of times. that that and long as always are

Now for fiscal outlook our moving XXXX. to

recovery release, are our markets sales through both commercial in expectations no we our year remainder the for fiscal our divestitures. guidance, as EBITDA million As noted assumes acquisitions continued to quarter and $XX end increasing 'XX primary year. The reflect first additional by fiscal or full guidance the earnings our 'XX the in results current and strong and of defined

current guidance Our presentation. billion X and now also The year is the on be Slide found $X.XXX midpoint up approximately or follows is guidance of can XX%. in as our revenue

commercial growth OEM result percentage our range. results In we the quarter for fundamentals underlying aftermarket percentage an as this assumptions for strong which the changed. meaningfully full previous high rate assumptions teens market we regards of guidance expectations commercial defense commercial growth of current remainder increase growth rate growth of channel expect year. a channel not and in that our are mid-teens rate have as first not to full for the is revenue the are We guidance and now market based the year updating this revenue the is time, market from aftermarket, on, At range, assumptions updating the year

or still we the growth OEM channel revenue where commercial and range. our guidance on percentage to assumptions based range defense up of around midpoint XX% Commercial defense of margin The mid-teens is XX.X%. OEM issued approximately defined expected growth as with EBITDA an previously billion and guidance the rate mid-single-digit revenue expect now in revenue market in $X.XX our percentage low growth is

our basis due to about of year. adjusted margin anticipated now Aerospace points XX%. be up XX EBITDA of includes We This anticipate to $XX.XX guidance recent will The EPS or acquisition. the is increasing move of higher the dilution primarily midpoint from is remainder and guidance throughout as our continue the margins DART EBITDA approximately defined up to

some fiscal in will financial more assumptions updates. Mike and shortly discuss other detail 'XX

'XX see and progresses, fiscal positioned are further develop the to remainder We'll we well we expansion aerospace continue, how the revisions fiscal in for trends could react upward XXXX. aerospace market to in believe We the the the favorable our accordingly. of China, capital markets As continue flight guidance. watch to activity including commercial recovery should continue of our and closely

from Associate Warren great of TransDigm. her critical robust the position this been and Secretary. announce to part organization an I integral of as XXXX Jes of Halle fill before Counsel side, to role dedication your team Chief Thank the for and our Halle retirement counsel Officer and On General counsel. part as promoted to long has all has succession Martin, as General you, since process. wanted our Compliance our Counsel, of outside been Halle, planning

focused this and the very operational company's structure Let on the commercial value excellence. with me performance recovery conclude and throughout cost stating by pleased our quarter that We the aerospace of I'm drivers, remain industry.

to review few current and performance our me other Let it our to items. hand -- over recent Jorge a

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

businesses year into the of pro prior basis which period discussion 'XX. makes in our the the fiscal XXXX both the of DART is, on compared market DART both quarter to in That commercial market balance typically commentary May in in the mix periods. own The this close a For of third provide been discussion forma acquisition up the of Aerospace revenue, assuming XX% we'll periods. we call, OEM same I'll and included XXXX. includes market, our has split aftermarket. to In of analysis discussion since the

with XX% outpaced year revenue the Our quarter solidly XX% period. period increased Sequentially, prior were approximately Bookings compared strong in prior year in same improved OEM sales. almost bookings QX. QX to and compared to the commercial the compared total the

be and to OEMs We rates encouraged progressing commercial aircraft. demand strong the build continue at the by new for steadily

and chain risks challenges to across OEM the broader labor rates. sector present aerospace production supply instability achieving ongoing However,

Now QX when largest significantly aftermarket to in approximately to business year was with submarkets commercial all compared primarily our strength although QX. submarket, commercial submarket, aftermarket increased revenue is moving compared discussion. prior up our period. XX% which on by Total Growth continued of driven year in commercial aftermarket the aftermarket revenue prior were our passenger our by commercial in

period were compared and XX%. robust approximately aftermarket Sequentially, and to X% same by bookings prior the year revenues aftermarket total outpaced bookings Commercial significantly commercial quarter this bookings sales. grew more QX than grew

IATA the season. currently than passenger be travel is in passenger pre-pandemic broader miles traffic Global few continued steadily market dynamics. throughout to upwards continues be to traffic travel, pre-pandemic. levels, have 'XX lower but strong XX% although over months. about within than demand calendar catching past to and air stronger domestic forecast holiday international will the year remained fall The recovery Turning of up. Airline international revenue remained trend

IATA reported only pre-pandemic. down most air was data the compared traffic global In XX% traffic December, for to recently domestic

regions down XX% pre-pandemic major was travel U.S., about Domestic was the other pre-pandemic. in compared lag in December China For travel within levels. of to XX% traffic to domestic continued air and

data the and restrictions of about to down to for recently bodes globally air about reopening international Roughly depressed the in was international COVID well IATA was travel most traffic a of China lifting international the but levels. XX% only ago, traffic compared year travel However, travelers pre-pandemic growth. reported December, for XX%,

and International respectively. and Europe pre-pandemic, traffic in within X% America of were North XX%

reopening still to air to should Global of few back has improve continued Asia over pull the about the January Pacific but travel International past was subsequent China. XX%, months. cargo demand down

could early which it's As easing data, were pre-pandemic showed but decline pandemic-related restrictions China cargo in volumes of to levels. air recent for air determine. The and another month below in IATA's cargo December be most of favorable too 'XX, in recent year-over-year was

come months. handful and continued pandemic jet the Business down has over highs from temper has utilization past to of

pre-pandemic still OEMs the is due the optimism forecast how is and activity tell Time out business as there environment. the in softening jet and to market operators uncertainty will for above term. macro business and this within jet the strong current demand near However, financial levels plays

at X% market this XX% the revenue, with or traditionally defense compared market, are the year spend in defense future Impacting market quarter outpaced our OEM defense the both below our period. outlays. grew activity. is by same of QX to year which includes aftermarket defense revenues, total bodes significantly our in order are up government compared strongly defense U.S. period bookings sales, prior and ongoing QX the revenues well to revenue, for delays the and bookings prior which which when Defense Shifting approximately

improving, levels. While slowly delays longer than appear these historical to be average do they remain

teams the steadily continues progress focus are component chain, face with supply of to challenges. teams. Our making primary to for be our availability The the lack electronic continue but

earlier, Kevin year for low range revenues. As we growth market defense this mentioned to continue percent to expect mid-single-digit our

by up Mike am products. first With increased We meeting Lastly, customer on in of by demand Chief I'd how that, I'd drivers Lisman. to focused our value like stating I over like it operational remain Financial performance to our in pleased 'XX. to wrap Officer, fiscal this our our turn quarter for

Good additional financial and year. fiscal quarter on the quickly the few expectations morning, then to everyone. for for going a I'm full hit matters

for cash taxes exactly of our the the markets. First, In million approximately $XXX flow X.Xx from down and payments, as end growth interest we quarter. liquidity. sheet, on cash CapEx with organic net cash $X.X liquidity, on OEM the continued roughly ended first at and EBITDA, commercial and last our by driven ratio aftermarket cash quarter. was of end was and On organic less quarter free which cash our rate define the billion the quarter, traditionally the and We in XX%, debt-to-EBITDA balance Xx, rebound was growth

basis, On this X-year us right level. average a net puts pre-COVID debt-to-EBITDA at the

comfortable such and rate are here the given hedges debt a that line interest currently fixed of where as were the lower interest operated coverage benefit We we've to interest in rate expense historically feel our in instruments business. ratios, entered interest rate with into Additionally, our EBITDA cash environment.

the rising in watch we state current always, the to continue debt markets closely. environment the of rate very interest As

maturity mid-XXXX extension term our nearest Pro quarter, is forma we date an loan term for the our first from pushing XXXX. this XXXX. of maturity During maturity the out into refinancing, now nearest completed

rate total estimate As a $XX against this can fixed gross at of as balance billion of expense XXXX. interest term. rise our combination This in a result through see immediate cushion least today's expense guidance. in Over debt and swaps ticked and rate FY notes any fixed interest updated a at 'XX for is very refi, you the rates us caps through of in up interest our provides rate XX% adequate slightly,

and expect to of Going Practically and the pushing debt to our lock in advance then any we out forward, for continue us, stacks. utilizing can maturity this prudently in final where interest also well both costs. order near-term hedging date instruments cash maturity in proactively means the managing we maturities

cash today operator With and balance it overall fiscal sit think that, we pursue in standpoint, liquidity share As shareholders the our dividends here off from I'll good flexibility an to kick via or to M&A position remain to Q&A. cash we adequate we 'XX. or return with sheet the buybacks to back during turn

[Operator Instructions].

Noah of Goldman Our first Poponak the of question line Sachs. comes from

revenue compared through to the sequentially quarter? first are aftermarket you progress to commercial anticipating aerospace year How the the

flight upwards. out. That's keep expectation. see it I plays expect much would We'll trending like that should activity our if that

And Do quantification that? ahead the have Okay. you of of shipments bookings you across mentioned board. any

for historically given healthy Noah, on We've revised not markets, supports growth revenue guidance today. the pretty it's the book-to-bills that I but across think end

and hitting good that healthy across and end markets. the book-to-bill feel about ratios we positive growth really So healthy outperformance

Okay. the at And revision one. The midpoint. is last just as EBITDA guidance same the revenue

implies simple. walk additional guidance the not But able it's the EBITDA as it revenue. how in know on incremental So I can that the just be revenue same the to me you revision? XXX% the is through a

Yes.

we aftermarket slightly seeing space, right? not some on our separately, getting is better X. mainly the better XXX% You're you're profitable you're cost what market most the point, performance, then but that's seeing end there. which upsides of expected, Noah, in but the is what think, commercial are to the just I drop than And cost doing there we typically your

you. Thank

comes question Robert line of Vertical next Stallard Our the of from Partners.

interest active. the impact is that of to these financial still sign M&A appetite the Kevin, looking pipeline rates was any mentioned of if you higher seeing pretty wondering I you're buyers? starting

Yes.

I over so. last the think we've some seen or impact months X

in lack that different see been evaluating of you busy think a although I general we've activity, targets.

next think some we there to in that think seems should as though, changing, change. the X to properties market I or see coming important I this months be so,

at So you always. remain we're But I future. the we indication think optimistic gives what in relatively that looking some as of

related in And one for Mike actually. topic

in there's debt XXXX. some mentioned You due

rate what that would If to pay today, you were to refinance sort you expect of that? on interest

like interest what a XXX December the ticked little or on bit and a move markets something XXX, rate. got we the better say, debt what's to LIBOR that are December we plus come from refi, X.X% to since hard inflation It's rate by on just month did X given out rate plus SOFR The about Fed ago. and up

bit it's little that's So but maybe than a that, say you do a hard just guess. better to

the from comes Credit question Suisse. of next Scott Our line of Deuschle

do on with we thoughts your were you expect get could And to should see you outside outside something to Or do? something to that ever wanted you I you'd if M&A A&D, something small? start we bigger? start A&D. of Kevin, Is of

like we speculate to don't that. Well, on

that studied aerospace keep like the to coming -- of We number opportunities M&A it Like it's A&D, in to think on next months but on stay us I outside something what aerospace. and There still focused X would the we a focused them have said, of are acquire look so many very and up. great pure-play best defense. of

them aerospace desire reasons enough may none areas, For and have keep growing overshadow distant in defense. but to appeared we one look also future, interesting and the to to we in at do intellectual our have day do because other of

on really good leverage for That's then really Mike, helpful. this quarter. you showed Great. SG&A some And

sales down. but think was XX%, up SG&A were I your actually

we could bit So outline curious what efforts and year? how as SG&A mitigation move might if that you the throughout then a running there the cost are you're trend

the maybe just versus EBITDA Yes. specifically defined for And because line SG&A for quarterly SG&A gave not We to better balance good about profit forecasting or feel back We've really at we trends the go today. a on accounting hard commented ratio and than there. at And where slightly the and comment hitting the historically. as as for gross EBITDA puts specifically we year, guidance the really takes think about look of the of looked year basis. gone the it's XX.X% and look on we could and

Yes. COVID I with the the a lifting would as lot just downturns do the to have we'll year. managing performed to had I in think We did of so and uptick. structure as restructuring cost and supporting pandemic a demand. lower in done of the result add, continue I we've additional think, the a in and teams heavy general, the And we've job past throughout nice

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

fairly drag This you capital in was on QX. for is for Corn the Working year? see still David. Do Josh million neutral $XXX the

we mean, I and lumpy in it that the we over progression how It's expect to go going the happens pre-COVID amount of of as to forecasting back go year. and in but levels, do. kind back We that's course tough, in. come to do is the

are? And Can revenues like a sense it give where pre-pandemic to volumes of us levels. looks overall pretty back were much you aftermarket

still think still There not off a to as maybe lot of reviewed, volumes. I Jorge regions, XX% fully in that is we're have come XX% back.

of line of the Peter from comes question next Our Arment Baird.

just opening comes get up around results, hopefully, picking as I'm assumptions and reopening sorry you what of on just traffic just remarks, you Nice China, but activity we if back. materially, there pretty missed kind your expect the wide-body

should kind thinking that with how your that and of kind just mix we the Just you of about forecast? remind China us in be incorporated

innings early this the up, in of still we're perspective, our From month. one. China past that take obviously, I'll opening Sure.

and some year. plan. there recovery enter how and out. as track our into do, as Our it analysis don't forecast any we expected And regions. We'll think we're market. specific We see they we planning it's bottoms-up obviously, fleet a was process don't big and baked do always have Generally, we And plays teams, a fiscal our weighted.

helpful the So that progress throughout year. we will hopefully, be as

quickly. make seeing could you airlines a a the on I regarding wide-body On guess just behavior Jorge, just follow-up you're some activity, the on wide-body? the comment, of just what

shift. is think don't international opening new. seen pretty we've China much for I travel Yes. the Again,

this. of expect innings logically would those in to You improve given types we're wide-body still, of the But the again, usage early routes.

Gautam next Our of the comes line question from of Khanna Cowen.

In color or demand. distribution there by channel versus discretionary you've color on given direct? versus the nondiscretionary aftermarket Any past, sometimes

Yes.

I on think In good most across of of submarkets. strength our revenues we're seeing all sales. individual are recovery direct and general, the good

And mostly on we're we've what commercial the aftermarket to in discretionary consistent versus nondiscretionary nondiscretionary we comes said point, think when it past, the with the bucket.

kind you're nondiscretionary. incremental curious is just like... And the strength that's where seeing I'm of in the

like It's break out... it to hard

seeing board across I strength think in all we're submarkets. the the of

your Okay. in offset give could you inflation you -- value terms And with What suppliers? dollar just how what from us this pricing? curious to if seeing it you're year -- do have doing to you're what of a and

have don't I a really give value you. focus on to In productivity. we specific Yes. general, dollar

pressures supply the the the in to seeing of through a that that supply offset the structures. trying you're to and We inflation, nice decentralized We've are terms from to we lower continue and individual chains. flow work cost chain, seeing the of inflationary teams doing are of with organizations got working have that, procurement productivity minimize job all our level

question line Akers comes Wells of of Our from next Fargo. the Matt

of versus of know could the comment, upward -- that the uncertainty, see of a elaborate you buckets don't further rates of kind build of what biggest through could we or is that you can revision uncertainty go if the How you as much quantify could the sort kind if OE guidance China I be? year. in of wonder kind I

from think clearly, the COVID China. performing OEM where probably I big it's a was But is not it piece to outbreak. prior

improvement. there room all is market for really So in of segments the

have a it. from like in you your leave comes of but balance, higher kind still should where kind down was that How saw COVID, it Got Okay. you so something or ago. kind few during I of much just of guess the on to what optionality case And it's we cash expect deal then higher we years a through than come that?

firepower We're business, to priorities more of than sitting in Yes. operationally coming, do for bit we We had historically terms said, something environment. allocation about as want point. in good M&A need that what's more think current -- make run your provided Kevin obviously, feel have Kevin a it's far the the the quite to we to about sure than pipeline, we've but we and and M&A on enough just the we we're potential capital have

line next Our comes Seifman of Seth of question from the JPMorgan.

is for on This Rocco Barbara Seth.

been think the company, Also in acquisitions Xx deployment Now do about cash stated you forward? to past be would range returning new for that that the in has ballpark where again? leverage the moving the range consider and/or is capital you general how

strategic I quite Yes. mentioned, we It's Like shareholders' enough for want capital all monthly, just it today. sure and then times capital. comes. it be we're always it's if and looking hard that to options, right? We M&A to say do at exactly. And have make also, deployment capital our doing a the We're bit, at the with we obviously,

a it, with So it we back. if be want we to give find And it. use efficient for don't

leverage the to lower interest which about where are historically at is Xx rate a we ratio, were regard With in environment. we

mentioned, do hard tick -- good acquisition given and where comfortable little we're up EBITDA. and as I went always hedges. we you'd if level if of and feel we you from be found are a to at the then use debt, that, could Xx today though a say think benefit bit the adding It's we here I we of candidate the

no leverage way last so. Xx with approach way, this ballpark real material the we some we with given change the likely probably forward, sort at that those, consistent interest with that much of movement is stay So because and But rate think the hedges to or X have to years also expected. that it's or our going moved safe hasn't of that history the I of say it's

quick follow-up. a as Then Great.

kind we in You earlier expansion are of that to defined you expect Or begin the a expand margin EBITDA that as years? expecting go through range this out where margin Should to mentioned approaching we be the as year. we had to will plateau? continue

give keep improving XXXX. still navigating keep, business. when is are keep to on beyond model expanding, 'XX We guidance We'll our obviously, appropriate. it's But and our

Our next the from question comes of Andre of of line Bank Madrid America.

I kind wanted it to a supply Obviously, to at M&A? gauge look financial of there's lot that on stress room your to guys that. lower chain. in back tiers. see you wanted as of a take Do the the a of when kind comes for Just outlook opportunity

criteria to and engineered, in stay our content, success, for approach. like unique I don't culture. integrate. vertically chain That's and we supply been disciplined We look of phenomenal doesn't our further Buying with really. We the Not acquire to aerospace can look highly that secret in parts usually the vertically aftermarket businesses to improve. very we our that meet to components defense integrating M&A think, aerospace

[Operator Instructions].

from question Osterland of the Pete Our comes Truist. next line of

through you current you're there anticipating been are any labor wanted you challenges to additional manageable? market need growth year? the how Just meet to related this to productivity? been ask, attrition hires managing the Do Has Or have environment?

that. take I'll Yes,

a nice job. the really I generally, teams think have done

continue productivity. We focus CapEx on to and

to Over different invest there. and and been we've business, of in out able opportunities of automation here the the years, last process labor find couple the take to

support increases OE hoping couple last plans all rate I think in Most place have improving months. to we're as in production occur. teams labor conditions of will general, the the potential over been market have

last issues. improved probably So general say, And see of I the significant don't in terms, any couple bit a little I'd it's months.

to you. the At remarks. Stemen closing this turn Thank Madam? call time, over like back for I'd to Jaimie

and all call. your time you us joining good your This have appreciate a rest today's for Thank concludes today. day. We of

concludes this conference you call. Thank today's And participating. for

may disconnect. You now