Operator:

Welcome to the Third Quarter 2024 TransDigm Group Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I will hand the call over to the Director of Investor Relations, Jaimie Stemen.

Kevin Stein:

Good morning. Thanks for calling in today. First, I'll start off with the usual quick overview of our strategy, a few comments about the quarter and discuss our fiscal '24 outlook. Then Joel and Sarah will give additional color on the quarter. To reiterate, we believe we are unique in the industry in both the consistency of our strategy in both good times and bad, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins, and over any extended period, have typically provided relative stability in the downturns. We follow a consistent long-term strategy. Specifically, first, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we utilize a simple, well-proven, value-based operating methodology. Third, we have a decentralized organizational structure and a unique compensation system closely aligned with shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to PE-like returns. And lastly, our capital structure and allocations are a key part of our value creation methodology. Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital. As you saw from our earnings release, we had a strong quarter. Our Q3 results ran ahead and we once more raised our guidance for the year. Commercial aerospace market trends remain favorable as the industry continues to recover and progress towards normalization. Robust demand for travel persists and global air traffic continues to surpass pre-pandemic levels. Airline demand for new aircraft also remains high and the OEMs are working to increase aircraft production. However, OEM aircraft production rates remain well below pre-pandemic levels. There is still much progress to be made for OEM rates and our results continue to be adversely affected in comparison to pre-pandemic production. In our business, during the quarter, we saw a healthy growth in our revenues and bookings for all three of our major market channels, commercial OEM, commercial aftermarket and defense. Revenues also sequentially improved in all three of these market channels. Our EBITDA as defined margin of 53.3% in the quarter. Contributing to this strong Q3 margin is the continued strength in our commercial aftermarket, along with diligent focus on our operating strategy, which is allowing margin performance to expand across all segments. Additionally, we had strong operating cash flow generation in Q3 of over $600 million and ended the quarter with almost $3.4 billion of cash. We expect to continue generating additional cash in our final quarter of fiscal 2024. Next, an update on our capital allocation activities and priorities. This has been a busy and exciting quarter for M&A. During the quarter, we completed the acquisitions of SEI Industries and the Electron Device Business of communications and power industries. Subsequent to the quarter closed on July 31, we closed the acquisition of Raptor Scientific. Further details of each individual acquisition can be found in the previously published press releases on TransDigm's website. In the aggregate for these 3 acquisitions, we have deployed over $2.2 billion of capital in the past 3 months. The unique product and service offerings of each acquisition exhibit the earnings stability and growth potential that are consistent with our existing portfolio of businesses. These three acquisitions fit well with our long-standing strategy, and we expect each of these businesses to meet or exceed our long-term return objectives. We expect these three acquisitions in total to contribute about $125 million to our fiscal year '24 revenue and a combined margin approaching 30%. Regarding the current M&A activities and pipeline, we continue to actively look for M&A opportunities that fit our model. As we look out over the time horizon, we continue to see an expanding pipeline of potential M&A targets. As we demonstrated this year, we do not see this environment slowing in the near term. As usual, the potential targets are mostly in the small and midsize range, I cannot predict or comment on possible closings, but remain confident that there is a long runway for acquisitions that fit our portfolio. The capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our businesses. Second, do accretive, disciplined M&A and third, return capital to our shareholders via share buybacks or dividends. A fourth option paying down debt seems unlikely at this time, though we do still take this into consideration. 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. As mentioned earlier, we ended the quarter with a sizable cash balance of almost $3.4 billion. We have significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Moving to our outlook for fiscal 2024. As noted in our earnings release, we are increasing our full year '24 sales and EBITDA as defined guidance to reflect our strong third quarter results and our current expectations for the remainder of the year, as well as to include the recent acquisitions of SEI Industries, the CPI Electron Device Business and Raptor Scientific. Please note that each of these acquisitions closed recently. Our preliminary expectation for each business will be refined as necessary over the coming months. At the midpoint, sales guidance was raised $160 million, and EBITDA as defined guidance was raised $85 million. The guidance assumes no additional acquisitions or divestitures and is based on current expectations for continued performance in our primary commercial end markets throughout the remainder of fiscal 2024. Our current guidance for fiscal '24 is as follows and can also be found on Slide 6 in the presentation. The midpoint of our fiscal '24 revenue guidance is now $7.9 billion or approximately 20%. In regards to the market channel growth rate assumptions that this revenue guidance is based on, for the defense market, we are updating the full year growth rate assumptions as a result of our strong third quarter results and current expectations for the remainder of the year. For defense, we now expect revenue growth in the high teens percentage range. This is an increase from our previous guidance of mid-teens percentage range. We are not updating the full year market channel growth rate assumptions for commercial OEM and commercial aftermarket as underlying market fundamentals have not meaningfully changed. Commercial OEM and commercial aftermarket revenue guidance is still based on our previously issued market channel growth rate assumptions. We expect commercial OEM revenue growth of around 20% and commercial aftermarket revenue growth in the mid-teens percentage range. The midpoint of our EBITDA as defined guidance is now $4.13 billion or up approximately 22%, with an expected margin of 52.3%. This guidance includes slightly under 125 basis points of margin dilution from recent acquisitions. The midpoint of our adjusted EPS is increasing primarily due to the higher EBITDA as defined guidance and is now anticipated to be $33.02, or up approximately 28% over prior year. Sarah will discuss in more detail shortly the factors impacting EPS, along with some other fiscal '24 financial assumptions and updates. We believe we are well positioned for the last quarter of fiscal '24. We continue to closely watch how the aerospace and capital markets continue to develop, and we will react accordingly. Let me conclude by stating that I'm very pleased with the company's performance this quarter and throughout the recovery for the commercial aerospace industry. We remain focused on our value drivers, cost structure and operational excellence. Now let me hand it over to Joel Reiss, our TransDigm Group Co-COO, to review our recent performance and a few other items.

Sarah Wynne:

Thanks, Joel, and good morning, everyone. I'll recap the financial highlights for the third quarter and then provide some more information on the guidance update. First, on organic growth and liquidity. In the third quarter, our organic growth rate was 14.6% and all market channels contributed to this growth, as Kevin and Joel just discussed. On cash and liquidity, free cash flow, which we traditionally define as EBITDA less cash interest payments, CapEx and cash taxes was roughly $700 million for the quarter, coming in around $1.6 billion on a year-to-date basis. For the full fiscal year, we now expect to generate free cash flow slightly above $2 billion. Below that free cash flow line, net working capital consumed $84 million, and we continue to expect our annual dollars invested in net working capital to roughly align with historical levels as a percentage of sales. We ended the quarter with approximately $3.4 billion of cash on the balance sheet, and our net debt-to-EBITDA ratio was 4.7x, similar to last quarter, which was at 4.6x, as we paid approximately $1.5 billion for acquisitions in Q3, primarily for the CPI acquisition that we closed on June 6. In addition, we closed on the Raptor acquisition after the quarter on July 31 and deployed $655 million for that acquisition. Pro forma for the Raptor acquisition, the Q3 quarter end cash balance would have been approximately $2.7 billion. While we don't target a specific amount of cash that we'd like to have on hand, we are happy to have cash available to support M&A, especially given the timing of closing of some of these can be difficult to predict. We continue to be comfortable operating in the 5 to 7x net debt-to-EBITDA ratio range. And while we are currently sitting slightly below the low end of this range, our go-forward strategy, capital deployment has not changed, and we continue to seek the best opportunities for providing value to our shareholders through our leverage strategy. Our EBITDA to interest expense coverage ratio ended the quarter at 3.5x, which provides us with comfortable cushion right against that target range of 2 to 3x. We continue to closely monitor our debt stacks and repriced approximately $3.6 billion of our term loan debt to a more favorable rate, SOFR plus 2.5. Our capital allocation strategy is always to both proactively and prudently manage our debt maturities. Our nearest term maturity is November 2027, which gives us plenty of protection, at least in the short term. In addition, approximately 75% of our $22 billion gross debt balance is fixed through fiscal 2027. This is achieved through a combination of fixed rate notes, interest rate caps swaps and collars. This continues to provide us adequate cushion against any rising rates, at least in the immediate term. With regard to guidance, as Kevin mentioned, we increased our midpoint sales and EBITDA by $160 million and $85 million, respectively, given the strong quarter along with our current expectations for the year, including the newly closed acquisitions. Our adjusted EPS guidance is now $33.02 compared to the prior guidance of $32.42 in support of the higher EBITDA. As we sit here today, from an overall cash, liquidity and balance sheet standpoint, we think we remain in good position with adequate flexibility to continue pursuing M&A opportunities or return cash to our shareholders by dividend or repurchases. With that, I'll turn it back to the operator to kick off the Q&A.

Scott Mikus:

This is Scott Mikus on for Rob Spingarn. Kevin, Mike, Joel, Sarah, typically, you announced a capital allocation decision when you report fiscal fourth quarter results in November. So I'm curious, given that we might have a potential change in administration, and potentially an FTC that might be more open to M&A, does that change your thought process for capital deployment and maybe keeping a little extra dry powder on the balance sheet for M&A going into 2025?

Scott Mikus:

Okay. And then airlines have been flagging overcapacity in the passenger market, especially in the U.S., but at the same time, Boeing and Airbus are struggling to ramp up their deliveries. So for the commercial aftermarket products, you mentioned the strong orders from distributors, but have you seen any change in order flow directly from the airlines?

Operator:

And our next question is from the line of Robert Stallard with Vertical Research.

Joel Reiss:

I really think this is just driven from the change back to where we were back in 2019. In 2019, the vast majority of freight was through belly capacity. During the COVID time period, it was a big switch over to dedicated freighters. Obviously, with the international markets recovering, it has pretty quickly and dramatically swung back to belly capacity. So for us, this really impacts us with typically more lower-margin products. Things like the ULD type products. So although it impacts us more from a revenue standpoint, the actual EBITDA impact is significantly less than the way it shows up from a revenue standpoint. But it really is just the difference of the mix of products that you see on belly passenger freight capacity versus the dedicated freighters.

Sarah Wynne:

Yes. I mean we're -- as you know, and as I said, we're 75% hedged. We've done a lot of financing already this year. So we're already in a pretty good position, our next maturity date is until 2027. Because of all the recent refinancing, we've got some breakage fees that we'd have to pay if we wanted to try and reduce any of the rates on any of the stuff we've done recently. But then it just becomes a math exercise, right? If the rates drop substantially, we could go after some of those loans and refinance with the breakage fees and if the math makes sense. But obviously, as you know, we're always looking at this stuff opportunistically.

Ken Herbert:

Maybe for Joel or Kevin, can you explain the discrepancy between the strong growth you saw on the point-of-sale side in the aftermarket relative to the passenger growth up 16%?

Ken Herbert:

Okay. That's helpful. And if I could, on the interiors piece, some improvement there, it sounds like certainly sequentially, but are you seeing anything yet that gives you any confidence or any visibility on timing of when you might see more of these sort of the retrofit or upgrade beyond just sort of the repair sales starting to accelerate?

Operator:

Our next question is from the line of Ron Epstein with Bank of America Merrill Lynch.

Joel Reiss:

So what I would say today is we probably see more issues than we did back in 2019. Overall, it's improved significantly over the past 2 years. Today, it's probably the same caster characters you would hear from others, castings and electronic components are probably the final two areas. One of the great benefits of our highly decentralized structure is, we have 50 separate teams that work closely with their specific supply chain groups and stay close to them as needed. But overall, I think we've continued to see it improve quarter-over-quarter. And when it will get back to 2019 or before levels, I don't know. But I think we continue to see good progress.

Kevin Stein:

I think it's about what it was a couple of months ago. We see some good businesses possibly coming to the market next year. But between now and the end of the year, there's a good collection of stuff that we're evaluating. Again, it's difficult to predict when things meet the criteria, but we continue to work hard on it, looks the same. We're very busy. We're adding resources, as I commented on last quarter, and it continues the same and the at least near-term horizon, we remain very busy on the M&A front. And this year has been an unbelievable year for EBITDA acquired. This will be our second best M&A year on record. So it's been very encouraging.

Kevin Stein:

Yes. We usually don't get into parsing this out. I would say year-to-date, our book-to-bill was well above 1. The business is growing and expanding. The only area in the recent quarter that maybe wasn't as strong was commercial OEM, which I think everyone would expect given what we're reading about [indiscernible]. But yes, defense is running very strong, but so is commercial aftermarket and commercial OEM, we have strong book-to-bill and backlog that we've amassed throughout the year. It's been a very positive year on that front.

Scott Deuschle:

Kevin, does the aftermarket comp in the fourth quarter get any easier on the freight side? Or is that fairly consistent with what you saw this quarter?

Scott Deuschle:

Okay. And then Joel, do you get the sense that some business units are seeing OEM inventories of their product building up for platforms like the 87 or 37? Or do you feel like they're doing a good job of assuring that doesn't happen and matching their shipments to the actual OEM production rates?

Operator:

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

Kevin Stein:

Yes, it's a good question. We looked at it, and we always aim to be conservative. We just did a pile of acquisitions. We need to get in there and look at them in more detail. And also defense is where we're seeing more of the growth. We don't make quite as much money on the defense side. So it's a mixture of conservatism in what we think the markets look like. We're certainly not predicting a difficult Q4. We're just being somewhat conservative and practical in how we look at the year unfolding.

Kevin Stein:

I mean, I think it looks like our bookings. Our bookings are ahead of our shipments last quarter. I think we're in a good place. We're at mid-teens right now for the year. I think the way the bookings are unfolding, we shouldn't have any problem getting mid-teens for the year.

Kristine Liwag:

Kevin, maybe on M&A, since discussing the widening aperture of M&A at the Analyst Day, but clearly staying focused on A&D, can you discuss more of that pipeline of logistics of -- pipeline of targets? I mean as you wade into this slightly broader pool, how deep is it? Are you seeing kind of maybe 2x the opportunities you would have seen if you'd have stayed with your focus? Any sort of directional or magnitude of size would be helpful.

Kristine Liwag:

Okay. Yes. That's helpful. And if I could add another question on PMA. I mean there's more cost consciousness from airlines, especially in light of the recent profit cuts. At the same time, we're seeing more PMA players enter the industry seeing your success in commercial aerospace aftermarket and the success of PMA focused business models like HEICO. Your portfolio has historically been more defensible and very defensible against PMA players. And in fact, you do PMA yourself as well. Like are you seeing anything different this time in this cycle?

Operator:

Our next question comes from the line of Myles Walton with Wolfe Research.

Kevin Stein:

Yes. I think on the OEM side, we're always working on contracts with OEMs as they expire. But as we have always clearly stated, the lion's share of our profits come from the aftermarket. On the OEM side, I would say we're probably similar in profitability to where we have been historically. We have seen an awful lot of inflation that we need to account for in renegotiating of contracts and we're working on that right now, but no real update to provide. Yes.

Kevin Stein:

No. We don't -- Sarah is shaking her head at me. There's nothing that is nonbusiness related to that that we can quickly identify.

Noah Poponak:

Just going back to this topic of opening up the aperture or not on M&A, Kevin. I guess if I zoom out and if we're looking at your total funnel or I guess maybe the things in the funnel that are posted to the finish line than not, or if you define it as your likely next 5 to 10 acquisitions, are we still looking at the majority of your deals are going to be -- are likely to be the classic in your wheelhouse, airplane parts, aftermarket rich, sole and dual source, proprietary? Or could it be that the majority are in this category of opening the aperture?

Noah Poponak:

Okay. Great. And Sarah, do you have a number on how much acquisition margin dilution there is in the fourth quarter EBITDA margin?

Noah Poponak:

Okay. Great. And then just one other one for you is, if you got to $2 billion on the full year free cash, you'd be a little over 100% conversion. I can't recall where that stands in terms of being how it's defined with working capital. Is that including or excluding? And how much working capital use are you looking at for the full year now?

Noah Poponak:

And the $2 billion would be including that or excluding that head...

Operator:

Our next question comes from the line of Jason Gursky with Citi.

Joel Reiss:

Yes. So with our think and act like an owner, a highly decentralized structure, we like the idea that every one of our operating units is the ones that sit and have to negotiate the contract. They're the ones who have to live with them. There's really only a couple that are kind of larger, more corporate-driven, that we've obviously referred to Boeing in the past. Other than that, I mean, these are really contracts, OEM contracts that are negotiated operating unit by operating unit.

Joel Reiss:

Yes. I think we continue to see that improve. I think turnover has largely, for us, gone back to where we were back in to 2019 time frame. I think hiring has also significantly improved that the vast majority of our operating units and locations. And I think we've highlighted before, typically highly skilled engineers are harder than other positions. I don't know that that's changed materially so. But I think, overall, I think it's quite a bit better today than it was a couple of years ago.

Ellen Page:

Just going back to the dilution from M&A. It seems like it's 100 bps or so next year. How do we think about the puts and takes to profitability given mix might not be as favorable?

Ellen Page:

Sorry. Just going back to the dilution from M&A. As we think about fiscal '25, how do we think about the puts and takes to EBITDA margin given a 100 bps of dilution and potentially less favorable mix?

Sarah Wynne:

Yes, absolutely.

Rocco Barbara:

This is Rocco on for Seth. How should we start thinking about the commercial aftermarket growth in fiscal year '25, given the capacity growth is slowing and travel started to catch up to pre-COVID levels? Is the double-digit growth rate sustainable? Or should we start seeing some more headwinds?

Rocco Barbara:

Great. Yes. Understood. And then are there any specific programs or areas that are driving the strong growth in defense aftermarket this year?

Operator:

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

Joel Reiss:

Well, first, we always have some number of LTA contracts that are expiring, a typical OEM contracts are up in 3 to 5 years. I think one that Kevin had referred to was a Boeing one that we're currently negotiating. That expires at the end of this year. It reflects a certain group of our businesses, not all of them. Beyond that, there's always some number every single year of OEM contracts that come up for renewal or renegotiation.

Kevin Stein:

We know how to handle a lot of those renegotiations on the -- they involve all the sites as well as some coordination from the top. So all of our sites are involved in this process.

Joel Reiss:

The only thing I'd say is the engine shops, obviously, are well booked out. I think our engine businesses are doing extremely well. It's really much more varied after that. I was looking at that same data as there's some significant difference between discretionary versus non and there really is not. I think it's just probably the nature of how much inventory the OEMs -- the airlines are carrying and the specific needs on that one part, but there wasn't any significant difference when I looked at the data between discretionary and not.

Gavin Parsons:

Just wanted to pull a little bit on what strong bookings and aftermarket means given kind of the language has been strong with a pretty wide range of aftermarket growth rates. So just any comment on if that's bookings above revenue? I appreciate that can be lumpy.

Gavin Parsons:

Okay. That's helpful. And I don't know what typical is nowadays, but would you say you have more or less visibility into kind of next quarter's aftermarket growth than typical?

Operator:

And it's from the line of Michael Ciarmoli with Truist Securities.

Joel Reiss:

I don't think there's a significant change. Our lead times in the aftermarket are relatively short, certainly in comparison to the commercial loan we have for the defense side. And so we don't get a dramatic amount of visibility. A significant portion of the orders that we shipped in Q4 will book in Q4. So although the engine shops may be booked out several quarters or years, we don't get the same level of orders based on the volume of work they're doing. We may be able to use that to give us some level of guidance or comfort on what orders we may expect, but we don't get extra visibility.

Kevin Stein:

Yes. I don't see it as something new in the marketplace in terms of HSR review or anything. I think we've always tried to be smart about our M&A portfolio. So we're not opening the aperture because of trying to get deals through, it's a desire to consume more capital on M&A if there are good aerospace and defense-type businesses in that larger market that makes sense for us. So it's simply just taking advantage of what we're finding in the marketplace that we believe matches our very disciplined criteria. We still see a tremendous number of opportunities down the fairway in the traditional components of aerospace and defense. And there are so many parts that are on an airplane that we don't supply yet, there are still a vast number we can continue to look for in the marketplace. So as I look out, there's a lot of opportunity ahead of us still.

Peter Arment:

Kevin or Joel, maybe can you just comment on -- you called out the biz jet market is kind of a watch item. You've had really only 1 negative quarter of growth, and that was in Q2 and your aftermarket. Otherwise, the last kind of 4 quarters, you've had good growth, but you're calling it out. Just maybe you could just provide a little more color on what you're seeing there?

Operator:

One moment for our next question and it comes from the line of Peter Skibitski with Alembic Global.

Kevin Stein:

I think in general, our price point in the aftermarket is pretty low. We say a couple of thousand dollars per -- price points per part in the aftermarket. So it doesn't lend itself to maybe as much scrutiny at times. But we continue to operate -- deliver the highest quality, best delivery performance possible in the industry. If there's any slowdown, maybe as Joel commented on, in some of the discretionary aftermarket places. Are there any -- what airline activity is out there, we've certainly read and seen comments from many of you that the airlines are trying to manage inventory closely. We haven't necessarily seen any of that translate to our business, but it continues to be a watch item. And we're always looking for any changes. Things seem relatively business as usual.

Bert Subin:

Maybe just a follow-up, Joel, on the -- you've had a lot of questions on the sort of how commercial aftermarket is progressing. Is there any color you can provide just from a regional standpoint because we've seen a little bit of a divergence in capacity trends globally. Is that impacting sort of your geographic mix?

Bert Subin:

Sure. I was just asking from a geographic standpoint, we've seen capacity growth at least relative to 2019 levels, diverge a bit whether you're looking at the Middle East or Asia or North America or Europe. I'm curious if that's translated into sort of any change in your typical geographic mix of sales in the aftermarket?

Bert Subin:

Got it. And Kevin, just a follow-up for you. On the M&A side, a few of your recent deals have focused more on the testing equipment and services side. I'm just curious what's your postmortem is and how those deals are progressing and sort of what your interest is to continue building into those spaces?

Operator:

Thank you. And with that, I will conclude the Q&A session for today, and will turn the call back to Jaimie Stemen for closing remarks.

Operator:

And thank you all for participating in today's conference. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to TransDigm Group Inc. Second Quarter 2024 Earnings Conference Call. [Operator Instructions]

Jaimie Stemen:

Thank you, and welcome to TransDigm's Fiscal 2024 Second Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm's President and Chief Executive Officer, Kevin Stein; Co-Chief Operating Officer, Mike Lisman; and Chief Financial Officer, Sarah Wynne. Also present for the call today is our Co-Chief Operating Officer, Joel Reiss.

Kevin Stein:

Good morning, everyone. Thanks for calling in today. First, I'll start off with the usual quick overview of our strategy, a few comments about the quarter and discuss our fiscal '24 outlook. Then Mike and Sarah will give additional color on the quarter. To reiterate, we believe we are unique in the industry in both the consistency of our strategy in both good times and bad as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle.

Michael Lisman:

Good morning, everyone. I'll start with our typical review of results by key market category. For the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period in 2023. That is assuming we own the same mix of businesses in both periods. In the commercial market, which typically makes up close to 65% of our revenue, we will split our discussion into OEM and aftermarket.

Myles Walton:

Kevin, I was wondering if you could touch on the aftermarket growth rate in the quarter and the reacceleration implied in the back half of the year? And in particular, if you can parse out the freighter complement to that. I think GE on their call actually raised their freighter outlook for the year on aftermarket. So I'm not trying to align 2 different data points. But just what you're seeing overall? And I know you said that the guidance incorporates drag for the rest of the year, but is it fair to think that, that drag becomes less and less.

Operator:

The next question comes from Robert Spingarn with Melius Research.

Michael Lisman:

It's Mike again. We have not really seen much of that action. I think we've seen pretty good strength across all of our different products, both on engine and off engine across the commercial aftermarket at this point of the -- at this point in the fiscal year. But I would say we probably have lower exposure to engine aftermarket as a percentage of our business.

Kevin Stein:

I think you guys know we have an Analyst Day coming up in June, and we don't want to go ahead and give long-term guidance by submarket outside of this year. We do feel good about the mid-teens percentage growth range this year for defense. We're seeing that strength across the OEM and aftermarket. It's pretty broadly distributed across all of our op units. But Armtec, in particular, has had some good flare shipments this year as well as some [indiscernible] product out of their California facility, which is the 155-millimeter program that you mentioned.

Kenneth Herbert:

I wanted to see either Mike or Kevin, if you could drill down maybe somewhat on the defense commentary. I can appreciate the lumpiness, but is there anything in particular you saw in the first half, either things pulled to the left or sort of an acceleration in shipments that specifically gives you reason to be more cautious on the second half. I can appreciate the step-down in guide probably reflects some conservatism to get to the full year growth. But just wondering if there's anything you'd call out relative to just a track record of lumpiness and conservatism as you think about the second half of the year.

Kevin Stein:

I think defense aftermarket tends to be different than commercial aftermarket. It can be longer cycle, but there's still drop-ins that happen everywhere.

Josh Corn:

This is Josh Corn on for David. I wanted to ask in the guidance. Why would EBITDA margins in the second half drop from Q2 on what appears like it would be a similar mix to the second quarter?

Josh Corn:

Okay. And then I just wanted to follow up on the first question about sequential aftermarket in the second half, are you baking in any sequential improvement? Or is it just easier comps in Q3 and Q4?

Operator:

The next question comes from Scott Deuschle with Deutsche Bank.

Kevin Stein:

I'm optimistic about the future. It's difficult for me to unpack it into quarterly buckets. I remain optimistic about what the future holds for M&A. And our M&A tracker that I follow constantly, it has the most names. It's the busiest we've probably ever been in M&A. Again, it doesn't tell you what's going to close. We remain very picky in the businesses that we choose and we will continue to do that.

Scott Deuschle:

Great. And then Mike, you're seeing really good leverage on gross margins, but SG&A has been growing. It looks like a bit faster than sales, at least over the last few quarters. So I'm curious if you could talk a bit about what's driving that SG&A expense growth to outstrip sales? And then when we should expect to see better operating leverage on that line specifically?

Operator:

The next question comes from Gautam Khanna with TD Cowen.

Kevin Stein:

The 2 don't always perfectly correlate in terms of what we see through our POS with our distributors and then what we do directly. What goes through distribution now, it bounces around a little bit, but it's about 20% to 25% or so of our CAM sales. And it's a decent leading indicator usually of future orders that will come, obviously, because the distributors sell out their inventory that they hold on our behalf so that we can get product quickly to customers, then we've got to replenish it.

Gautam Khanna:

And can you comment on biz jet [indiscernible] and freighter specifically? Do you think we're in the early innings of that business declining? Or what's your expectation for when that might actually turn positive again in the aftermarket?

Operator:

The next question comes from Peter Arment with Baird.

Joel Reiss:

We don't get great split-outs by region when it comes to our commercial aftermarket sales. A lot of the IATA data, we referenced basically supports the highest growth rates being in China and Asia. A lot of that would go via our distributors. We don't get great visibility into it. We're, of course, benefiting from it. I think we've seen that in the bookings strength we have, but we don't get great data by region.

Kevin Stein:

I'd say it continues to get better, not back to where it was in 2019 yet, but better than where it was 12 months ago, 24 months ago, continue to have issues with items like certain electronics, castings, certain chemicals or materials, but continued progress.

Robert Stallard:

This might be for Kevin. Your comments on the Boeing situation on commercial OEM that [indiscernible] what you said 3 months ago. I was wondering if you did actually reduce your Boeing expectations this quarter? And if you did, only being offset or it must be offset by something else, right?

Robert Stallard:

Yes. And then just as a follow-up, Kevin, on your comment on your M&A tracker and it being as busy as you can remember. What do you think is driving that? And is there any sort of change given the amount of target or any change to the pricing that you're seeing being discussed?

Noah Poponak:

I was curious if you could help me better understand if you are assuming that freight is a drag inside of the aerospace aftermarket in the back half. How does the total aftermarket growth rate accelerate in the back half, is biz jet and helicopter and the passenger side, faster growth in the back half? Or is it just the compares or something else?

Kevin Stein:

I think that's right. Yes.

Kevin Stein:

Not appreciably, no. I think we always, as you guys know, we seek the price slightly ahead of inflation. And that's unchanged. This quarter, same expectation as we always have for our operating units and what the teams look to execute on.

Noah Poponak:

Yes, you can definitely see that in the margins. Okay. Kevin, you mentioned adding people to the M&A team. Can you quantify that? Like how many people relative to the base or what kind of percentage increase you're making? Just curious there.

Operator:

The next question comes from Sheila Kahyaoglu with Jefferies.

Kevin Stein:

I think on a quarterly basis, you can always see a little bit of lumpiness as we said here before. I'm not sure how exactly to follow the math on the 2% drag. But as we said today, we saw really strong bookings across our whole business, that can be lumpy. We feel really good about the outlook for the full year with the mid-teens percentage growth there.

Sheila Kahyaoglu:

Okay. Great. And then Kevin, I had to buy myself some time to do that math on the headcount productivity you just gave us. So I think head count is 15% below 2019 levels, while sales are up significantly above 2019. So with that productivity benefit in mind, how do we think about EBITDA margins decelerating 100 bps half over half in the second half?

Kristine Liwag:

Kevin, in previous Investor Days, you've talked about how TransDigm had about 400,000 -- excuse me, 400,000 PMA SKUs. And I think there was a point in time you were averaging something like 20,000 SKUs per year. I guess this has been a few years ago since you've disclosed this. I was wondering if you could size PMA today as a percent of your portfolio and also in an environment where the supply chain is still struggling and you're clearly able to produce parts. Can you provide more color on where that is, that market and how attractive you think it is?

Sarah Wynne:

Yes. I mean, obviously, we look at both of those, obviously, the first and foremost is to invest the capital in our businesses and do M&A, and then we look at those 2, and we look at them all the time. And obviously, we're sitting on plenty of cash, as you know. So at some point in the future, we look to make a decision on which one makes sense and what best to do with the cash.

Operator:

One moment for the next question. The next question comes from Michael Leshock with KeyBanc.

Michael Lisman:

Sorry, is the question about whether 2025 commercial aftermarket volume growth will continue?

Michael Lisman:

I think, generally, as you look at the forecast from IATA, the investment bank forecasts that are out there, generally folks are expecting RPMs and takeoffs and landings to continue to tick up next year. That said, it's at a moderating pace relative to what it's been in the past couple of years as we come out of COVID. So there's still growth but maybe not quite as high as it was in, say, 2022. We've already seen some of that moderation.

Michael Leshock:

And then just on capital allocation on your priority of reinvesting in the business. Could you talk to what areas of the business you expect to invest the most or anything you're targeting, whether it be bottlenecks or just any way to frame the organic investments you're making?

Operator:

The next question comes from Pete Osterland with Truist Securities.

Michael Lisman:

I think it varies a lot op unit by op unit based on the demand they're seeing from their customers. Obviously, sometimes that subtiers, as we said. So it's hard to go and back calculate into some kind of rate, I'd expect that something around 38, maybe a little bit less, but it's hard to say there's some kind of averaging exactly what it is across their ranch.

Unknown Executive:

No. Continued good strength that supports the guidance on both.

Jaimie Stemen:

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

Operator:

Good day and thank you for standing by. Welcome to the TransDigm Group Incorporated First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jaimie Stemen, Director of Investor Relations. Please go ahead.

Kevin Stein:

Good morning. Thanks for joining us on the call today. First, I'll start off with the usual quick overview of our strategy, a few comments about the quarter, and discuss our fiscal 2024 outlook. Then Joel and Sarah will give additional color on the quarter. To reiterate, we believe we are unique in the industry in both the consistency of our strategy in good times and bad, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins, and over any extended period, have typically provided relative stability in the downturns. We follow a consistent long-term strategy, specifically; first, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we utilize a simple, well-proven, value-based operating methodology. Third, we have a decentralized organizational structure and unique compensation system closely aligned with our shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to PE-like returns. And lastly, our capital structure and allocation 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 of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital. As you saw from our earnings release, we had a strong quarter. Our Q1 results ran ahead of our expectations. And we have raised our sales and EBITDA as defined guidance for the year. Commercial aerospace market trends remain favorable as the industry continues to recover and progress towards normalization. Global air traffic is closing in on pre-pandemic levels and demand for travel remains high. Airline demand for new aircraft also remains high and the OEMs are working to increase aircraft production. However, total air travel demand remains slightly below pre-COVID levels and OEM aircraft production rates remain well below pre-pandemic levels. There is still progress to be made for the industry and our results continue to be adversely affected in comparison to pre-pandemic levels. In our business, during the quarter, we saw a healthy growth in our revenues and bookings for all three of our major market channels; commercial OEM, commercial aftermarket, and defense. Our EBITDA as defined margin was 51% in the quarter, contributing to the strong Q1 margin and the continued recovery in our commercial aftermarket revenues, along with diligent focus on our operating strategy. Additionally, we had strong operating cash flow generation in Q1 of over $630 million and ended the quarter with over $4.1 billion of cash. We expect to steadily generate significant additional cash throughout the remainder of 2024. Next, an update on our capital allocation activities and priorities. As we discussed on our last earnings call, we agreed on November 9th to acquire the Electron Device Business of Communications & Power Industries, also known as CPI, for approximately $1.385 billion in cash. CPI's Electron Device Business is a leading global manufacturer of electronic components and subsystems, primarily serving the aerospace and defense market. The products manufactured by this business are highly engineered proprietary components with significant aftermarket content and a strong presence across major aerospace and defense platforms. Our team is working diligently through the approval process in the US and UK, and the acquisition is expected to close this fiscal year. We remain very excited about adding this proprietary business as one of our TransDigm operating units. Regarding the current M&A pipeline, we continue to actively look for M&A opportunities that fit our model. As we look out over the next 12 months to 18 months, we continue to see a target-rich environment for our focused acquisition strategy. As usual, the potential targets are mostly in the small and midsize range. I cannot predict or comment on possible closings, but we remain confident there is a long runway for acquisitions that fit our portfolio. The capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our business; second, do accretive disciplined M&A; and third, return capital to our shareholders via share buybacks or dividends. A fourth option paying down debt, seems unlikely at this time, though we do still take this into consideration. 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. As mentioned earlier, we ended the quarter with a sizable cash balance of over $4.1 billion, which includes the $2 billion of cash from the new debt issued during our first quarter. Sarah will comment on this in more detail later. We have significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Moving to our outlook for fiscal 2024. As noted in our earnings release, we are increasing our full fiscal year 2024 sales and EBITDA as defined guidance to reflect our strong first quarter results and our current expectations for the remainder of the year. At the midpoint, sales guidance was raised $85 million and EBITDA as defined guidance was raised $45 million. The guidance assumes no additional acquisitions or divestitures and is based on current expectations for a continued recovery in our primary commercial end markets throughout fiscal year 2024. Our current guidance for fiscal 2024 is as follows, and can also be found on slide 6 in the presentation. Note that, the pending acquisition of CPI's Electron Device Business is excluded from this guidance, until acquisition closed. The midpoint of our fiscal 2024 revenue guidance is now $7.665 billion, or up approximately 16%. In regards to the market channel growth rate assumptions that this revenue guidance is based on, for the defense market, we are updating the full year growth rate assumptions as a result of our strong first quarter results and current expectations for the remainder of the year. For Defense, we now expect revenue growth in the high single-digit to low double-digit percentage range. This is an increase from our previous guidance of mid to high single-digit percentage range. We are not updating the full year market channel growth rate assumptions for commercial OEM and commercial aftermarket, as underlying market fundamentals have not meaningfully changed. Commercial OEM and commercial aftermarket revenue guidance is still based on our previously issued market channel growth rate assumptions. We expect commercial OEM revenue growth around 20% and commercial aftermarket revenue growth in the mid-teens percentage range. The midpoint of our EBITDA as defined guidance is now $3.985 billion, or up approximately 17% with an expected margin of around 52%. This guidance includes about 100 basis points of margin dilution and from our recent Calspan acquisition. We anticipate EBITDA margins will move up throughout the remainder of the year. The midpoint of our adjusted EPS is decreasing versus our prior guide, primarily due to the higher interest expense associated with the incremental debt we took on to fund CPI. The midpoint of adjusted EPS is now expected to be $30.85 or up approximately 19% over prior year. Sarah will discuss in more detail shortly the factors impacting EPS, along with some other fiscal 2024 financial assumptions and updates. We believe we are well-positioned for the remainder of fiscal 2024. We'll likely continue to closely watch how the aerospace and capital markets continue to develop and react accordingly. Let me conclude by stating that I am very pleased with the company's performance this quarter and throughout the recovery of the commercial aerospace industry. We remain focused on our value drivers, cost structure and operational excellence. Now, let me hand it over to Joel Reiss, our TransDigm, Group Co-COO, to review our recent performance and a few other items.

Sarah Wynne:

Thanks, Joel, and good morning, everyone. I'll recap the financial highlights for the first quarter and then provide some more information on the guidance update. First, on organic growth and liquidity. In the first quarter, our organic growth rate was 23.5%, and all market channels contributed to this growth as Kevin and Joel have just discussed. On cash and liquidity, free cash flow, which we traditionally define as EBITDA less cash interest payments, CapEx and cash taxes, was roughly $660 million for the quarter. This is a higher than average free cash flow conversion for the quarter, primarily due to the timing of our interest and tax payments. Cash interest and tax payments will pick up again in the next quarter and for the full fiscal year, our free cash flow guidance is unchanged. We expect to continue to generate free cash flow of close to $2 billion in fiscal 2024. Below that free cash flow line, net working capital consumed a smaller amount of cash than in prior years coming in close to flat. For the past few years, we saw a large influx of cash into our working capital as our primary commercial end markets experienced strong rebound post COVID. We were obviously very happy to support this increase. Going forward, we expect our annual dollars invested in net working capital to moderate from the elevated levels seen over the prior two years, but pinpointing the exact amount of investments for fiscal 2024 is difficult. As you know, the rebound of the OEM market channel does impact our accounts receivable as customers in that bucket typically have slightly longer payment terms. We ended the quarter with approximately $4.1 billion of cash on the balance sheet, and our net debt-to-EBITDA ratio was five times, down from 5.4 at the end of last quarter when pro forma was $35 dividend. As a reminder, we are comfortable operating in the 5 to 7 net debt-EBITDA ratio range. And while we are currently sitting on the low end of this range, a go-forward strategy of capital deployment has not changed. Our EBITDA to interest expense coverage ratio ended the quarter at 3.3 times on a pro forma basis, which provides us with comfortable cushion versus our target range of two to three times. During the first quarter, we went to the market and proactively raised $2 billion of debt, the acquisition of CPI's Electron Device Business, which is still subject to regulatory approval with the rest going towards general corporate purposes. As a result of the additional debt, our interest expense estimate for fiscal 2024 increased by $130 million, as you can see in today's updated interest expense guidance. Regarding our debt, we expect to continue both proactively and prudently managing our maturity deck stack, which for us means pushing out any near-term maturities well in advance of the final maturity date. Out near-term debt maturity is now 2026, and we remain appropriately 75% hedged on a total $22 billion gross debt balance through our fiscal 2026. This is achieved through a combination of fixed rate notes, interest rate caps, swaps and collars. This provides us adequate cushion against any rise in rates at least in the immediate term. With regard to guidance, as Kevin mentioned, we increased our midpoint sales and EBITDA by $85 million or $45 million, respectively, given the strong quarter and current expectations for the year. Our EPS guidance is now $30.85 compared to prior guidance of $31.97. The reduction is due to additional interest expense. Without that, it would be $32.57. As we sit here today from an overall cash liquidity and balance sheet standpoint, we think we remain in good position with adequate flexibility to pursue M&A or return cash to our shareholders via dividends or share repurchases. With that, I'll turn it back to the operator to kick off the Q&A.

David Strauss:

Great. Thanks. Good morning, everyone.

David Strauss:

Kevin, could you talk about maybe what you saw in terms of the aftermarket growth on a sequential basis Q4 versus Q1? And then, it looks you have a very tough aftermarket comp in Q2. Any range on kind of how we should calibrate aftermarket growth in Q2?

David Strauss:

Okay. A quick follow-up. Is there any -- has there been any change in the timing around closing on the CPI deal, I think previously you said by the end of Q3, I think now you're seeing before the year-end, I don't know if there was a meaningful change there at all? Thanks.

David Strauss:

Great. Thanks very much.

Noah Poponak:

Hi. Good morning, everyone.

Noah Poponak:

Maybe you could elaborate on how the M&A pipeline looks and ability or opportunities to deploy capital after CPI? Because you mentioned being at the low end of the target balance sheet leverage range and you're basically going to generate the CPI cost over the remaining quarters of the year in free cash. So that's not actually going to raise your leverage. So how are you looking at managing that? And how much more opportunity is there to deploy capital in the near-term?

Noah Poponak:

Okay. In the aerospace aftermarket has there been any deceleration in the rate of increase in price as broader inflation has decelerated? Or has that rate of change held in despite that decel?

Noah Poponak:

Okay. Is there a window of time here though, where the cost side is decelerating with the pricing is not? Or are they pretty marked to each other pretty quickly?

Noah Poponak:

Okay. Appreciate it. Thank you.

Robert Spingarn:

Hi. Good morning.

Robert Spingarn:

As a follow-up on that last answer, on Noah's question on inflation, we think about commercial OE and defense, which I would think would be different than commercial aftermarket where you can price in real time. How much of that revenue base is tied to long-term agreements that may have some stale pricing still to work through and can be renegotiated, let's say, over the next year or two? So what I'm asking is if there's upside in those two groups because of LTAs?

Robert Spingarn:

Okay. And Kevin, just high-level question on your workforce, you guys are just consistently executing the margins where we would expect or better. But for everyone else in the industry there are workforce issues. And recovering workforce or labor from COVID, getting people trained and so on. Is it fair to characterize those folks is different than TransDigm? Or are there things that we can't see?

Joel Reiss:

Yeah. And the other thing I'd add to what Kevin said, I mean, fortunately, I think the labor markets continue to improve, which is certainly helpful. And we had some locations where we saw higher turnover a couple of years ago. I think that's really gone back to more normal levels, but we've put a lot of time and effort into training our folks. And as Kevin said, we've worked over the last few years to put more and more automation in place, which certainly mitigates what the impact of that is. And so I think we're well-positioned going forward.

Operator:

Our next question comes from the line of Louis Raffetto with Wolfe Research. Your line is open.

Kevin Stein:

Good morning.

Joel Reiss:

Defense aftermarket was up more, it was not significant, but defense aftermarket did outpace defense OEM.

Kevin Stein:

Yeah. So first, there's -- we just have the normal kind of lumpiness within the defense sector similar to commercial aftermarket. Obviously, as we mentioned, the easier comp. It was pretty broad across the -- our businesses. I mean, the vast majority of our businesses actually saw a pretty good increase year-over-year for Q1 versus Q1. I was kind of calling out one business and it wasn't a onetime set of work was Armtec, our flare countermeasures business had a really solid Q1 shipments coming and certainly in comparison to where they were a year ago at the same time.

Operator:

Our next question comes from the line of Robert Stallard with Vertical Research. Your line is open.

A – Kevin Stein:

Good morning.

A – Sarah Wynne:

Yeah. I mean we're always going to be proactive at having cash ready for pending acquisitions. We want to be opportunistic on that front. And we don't want to be obviously up against any time line except the markets weren't open.

A – Sarah Wynne:

Obviously, we're always looking at the market and trying to be opportunistic with that debt structure. We do have the benefit of hedges. So from that perspective, we've fortunate enough to have 75% hedged. We've got some stuff coming up, and we'll continue to look and be opportunistic as long we can with our debt comes forward.

Operator:

Our next question comes from the line of Gautam Khanna with TD Cowen. Your line is open.

A – Kevin Stein:

Good morning.

A – Kevin Stein:

Yeah. In pipeline of small, medium-sized businesses mostly in hardware, although we're looking also at some services businesses, if they would meet our criteria. It's not always clear that some of those do. But we're open as long as it's within aerospace and defense. I don't think we see the need of going outside of aerospace and defense, not for a while. There's still so many great targets to go after in this business. On Calspan, I'll let Joel comment.

Q – Gautam Khanna:

Just as a follow-up in the M&A hardware pipeline, is it mostly defense-oriented stuff? Is it -- I mean, just is there any skews or...

Q – Gautam Khanna:

Okay. And just my last one. In the commercial aero aftermarket, any discernible differences between growth rates into the distribution channel versus direct to customer? Thank you.

Q – Gautam Khanna:

Thank you, guys.

Q – Kristine Liwag:

Hey, good morning everyone.

A – Mike Lisman:

Good morning.

A – Kevin Stein:

Yes. It's interesting question and gets me into speculation. I don't know if there's a certain percentage that would kick a deal out. We want to be in aerospace and defense. If there are non-aerospace and defense products or business, that's okay. We don't thumb our nose at it, but we look at a business in its totality, can it achieve our 20% plus internal rate of return for that acquisition. Yes, we don't look scantily at those businesses, but we don't want to go after anything that industrial only. So I would guess it has to be, predominantly aerospace.

Joel Reiss:

I don't think we have any real meaningful way to understand that. The vast majority of our commercial aftermarket orders are booked to ship. They come in over the trends of they're typically not advanced bookings. And we don't get a color in terms of why they're buying. We try to watch and make sure there's no inventory significant moves, but hard to get that kind of level of granularity.

Operator:

Our next question comes from the line of Matt Akers with Wells Fargo. Your line is open.

A – Kevin Stein:

Good morning.

A – Kevin Stein:

Yeah. It's -- do they meet our disciplined criteria. We want to see aftermarket content. We want it to be, aerospace and defense. We prefer Commercial over defense, but the biggest reason is whether they really have IP, whether they're highly engineered intellectual property, that's the key. So that's what we look for. And that's what we screen against. And when deals fall apart, it's because things aren't as proprietary as we would like them to be. And so we walk away from -- we're not interested in being in the me-too product space like everyone else. I mean, we're not trying to build the print business. We want high IP, high engineering content in aerospace and defense that has access to the aftermarket.

Joel Reiss:

Yes. So, it's not specific for us the comments around the supply chain. I think that's just what we're generally hearing from others. I think our supply chain team has done a really solid job of working through the challenges that have persisted for the last couple of years. Last year, we were talking about castings and then electronic components. I think largely, those have gone away. I do think we're in some level of a new normal where there's more kind of issues that pop-up randomly in comparison to where we were from a pre-pandemic level. I think that too is getting better, but likely that's going to persist for the next couple of years. I don't think any of that's material. I think right now, our assumption is based not so far off of what Boeing's current stated rate is in terms of what the FAs numbers are. We always put a little bit level of conservatism around the number. And I think we think our guidance is pretty well set around what we're hearing Airbus and Boeing are doing.

Operator:

Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is open.

Kevin Stein:

Good morning.

Joel Reiss:

Well, I'm not sure I know where it's going to go long-term. Our goal is to implement our value generation strategy. We think it's a good business. We'll continue to work to maximize the value in terms of any other guidance beyond that. I mean we -- I think we've highlighted. We think it's dilutive, obviously, at the level that it's at in comparison to overall TransDigm, and we'll continue to work to improve the value over a long ownership.

Joel Reiss:

Defense margins are -- comparable defense margins are lower than their kind of equivalent commercial markets. We typically offer a discount to the defense world. In terms of weapon systems, there is not, I don't have any good detailed split for what that looks like. In some ways, as I said, the lumpiness of the orders in the defense world is not so different than the commercial aftermarket and the standpoint that we don't get a lot of visibility of an order coming in. We'll get a solicitation, we work to respond. And when outlays are good, that generally helps us out. But beyond that, I'm not sure if there's any more kind of color I have on that.

Operator:

Our next question comes from the line of Ken Herbert with RBC Capital Markets. Your line is open.

Kevin Stein:

I think it still is. I don't think it's going to change. I know that there's math involved here, and you got to work your way through it. But what I always say is 100 to 150 basis points of improvement and we've been running 150. Yes, it may be back down at 100, but it's still, I believe, going to sequentially expand.

Joel Reiss:

Well, for productivity, this is again one of our three value-generating strategies. Our teams are challenged themselves to work to offset inflation over the entire cost of the business. And so automation continues to come down in price in that we would have looked at two or three years ago, but didn't make sense. The capability wasn't there. Those come across. We continue to look at opportunities to how we resource materials where possible. So, I think we continue to believe there's a lot of opportunity for us in productivity. I'm always encouraged when I can see a long-term TransDigm business 10, 15, 20 years since we acquired it, and they are still achieving as good or better at times level of productivity. That's partly because things that they looked at before weren't there. We also won a sizable amount of new business. And one of the great things about new business, it continues to give you an opportunity to find new ways to reduce the cost of those new products as well. So, I think we think all three value drivers are where we want to focus.

Operator:

Our next question comes from the line of Jason Gursky with Citi. Your line is open

Kevin Stein:

Good morning.

Sarah Wynn:

Yes, I don't think we have any of that. For Boeing, it would be small, very noise level. And especially if you're asking from a bigger picture perspective, with working capital as a whole, we project future net working capital needs and we use model fairly flat for that as a percent of sales as we go forward through the year with that being noise level, if anything.

Joel Reiss:

Yeah. We've tried to take a look at it. We think it probably has a slight tailwind for the business. For a few of our businesses, it's helping out, obviously, those platforms that were older planes are flying more. This is helpful. But we're also getting fewer hours on the GTF engine. So some other sites that would start to see some benefit of longer flight hours and those that are kind of missing out. I think net for net, as we've looked at it, we think it's a slight tailwind for the business.

Operator:

Our next question comes from the line of Mariana Perez Mora with Bank of America. Your line is open.

Kevin Stein:

Good morning.

Kevin Stein:

We don't comment on price and volume and split that out. It's kind of difficult for us to assess that anyway. So, yeah, we don't give that kind of color. For volume, what we can offer is looking at takeoff and landings, RPMs, clearly, volume is going to continue to grow and expand. And I believe we all gave you in our prepared comments that we think volumes are going to return in 2024 here, and we may actually then see growth ahead of where we were pre-COVID, but we don't get into parsing out how much is price and how much is volume.

Kevin Stein:

I think that our focus on operational excellence and performance means that the pricing part of the conversation is often quite simpler because you can provide products on time to their needs.

Kevin Stein:

I don't know if anything's changed. I think it just comes in waves sort of a sign wave. You have periods of time where it's up and periods of time where it's lower. It's been an encouraging time over the last, I think, a year or so. We've seen some good deals. Unfortunately, we've seen some things not work out, and we had to pass on. But I'm not aware of any outside forces moving more deals to the table. It's just the way it is.

Operator:

Our next question comes from the line of Peter Arment with Baird. Your line is open.

Kevin Stein:

Yeah, we do have international defense exposure. We provide products to our allies and we also have manufacturing facilities in Europe that provide products directly to European defense contractors.

Kevin Stein:

Have you seen any, Joel?

Kevin Stein:

Clearly, I think international defense is improving, whether it is improving faster than the US rate, I'm skeptical.

Joel Reiss:

When you're saying suppliers as in like -- because we obviously sell to the airframers as well as…

Joel Reiss:

Our suppliers to us, I don't think that there's anything significant. I mean we're still well -- as Kevin put in his opening remarks, we're still well-below the peak we were at pre-COVID. 787, I think was running at 14 aircraft per month. And so I don't think, from that standpoint, our suppliers have that issue. I think it's just been very sporadic. We can't get a certain component in, they've got to ramp it up. I don't know that there's anything specific material, but I think we believe right now we're well-positioned for the -- where we are and can support a higher ramp-up rate.

Operator:

Our next question comes from the line of Michael Ciarmoli with Truist Securities. Your line is open.

Kevin Stein:

Good morning.

Kevin Stein:

I think on the interior side, we're really just in the early innings of refurbishment. We're starting to see a few of those programs. Again, I think we're anticipating seeing more of that likely as we get to the end of this year and into early next year. A few of them we originally thought might have happened earlier have slid to the right. In terms of passenger, I don't know if we have any specific data to tell you, single-aisle versus wide-body. Certainly, we're encouraged by the continuing improving trends in the international market. So that still lags the single-aisle market, but continues to be on a good rate of growth. I don't know that we have any specific data, I mean with the number of part numbers we sell is it's too difficult to try to come back to some specific around single-aisle wide-body, unfortunately, at that level of granularity.

Kevin Stein:

Yes, probably somewhere around $1 billion plus. But not $4 billion that becomes big for us. So, hopefully, that gives you some -- there's no science here.

Kevin Stein:

Sure.

Gavin Parsons:

Thanks, guys.

Gavin Parsons:

Maybe on CapEx, what's driving the big step up this year?

Kevin Stein:

Yes. Our process, it comes -- these requests come from the sites. So our goal is to keep them fully funded. And if they see great productivity projects, that's where the bulk of our CapEx goes to. But I would also say one thing that's different from years past is, we're now doing more solar types of programs that we wouldn't have done in the past. They have great payback, but that has been an added need for us on the CapEx side.

Joel Reiss:

I don't know that we have any specific numbers, as I kind of highlighted it, if I was -- you’re asking the same question five years ago, I probably have a very different answer. I continue to be impressed by the ways that we've been able to incorporate. I was one of our businesses in the U.K. last month, and they've automated painting operations, polishing operations, brazing operations. So, I think we continue to be optimistic that that as automation costs come down, as the cobots prices comes down is that it becomes easier and easier for us to incorporate it. and our challenges were a low-mix -- sorry, high-mix, low-volume manufacturer. And so, the challenge is to be able to do automation, but be able to do it for many, many part numbers, not just one very small subset of parts. And I think we believe there's still a lot of opportunity for that.

Kevin Stein:

I think we're still in the early innings for that. Labor costs, I think, are probably starting to, as you see in the overall market, but I don't know that there's anything significant at this point. It's really too early in the fiscal year for us to have seen something dramatically different than planned.

Operator:

Our next question comes from the line of Seth Seifman with JPMorgan. Your line is open.

Kevin Steinans:

Good morning, Seth.

Sarah Wynne:

Yeah. We're not anchored into a specific amount, as you could obviously say. We're happy to keep cash on the balance sheet. And like you pointed out, we have $2 billion of pending CPI acquisition, which is obviously more than we need to run the business, but we're happy to have that cash on hand to support any other opportunities, M&A or any other investments that popup for us.

Joel Reiss:

I think our teams have worked hard over the last three, four years to continue to find good productivity projects. And so I if I -- I don't have any specific numbers in front of me, but I would think that we're probably trending better than what we would have anticipated, if we were looking at the same thing three, four years ago. We had some learning curves I said, with turnover a couple of years ago, but I think the good news is with the lower rates that we've had, we've had a good opportunity to get those folks up to speed. So I think we think we're positioned well going forward.

Operator:

Our next question comes from the line of Scott Deuschle with Deutsche Bank. Your line is open.

Kevin Steinans:

Good afternoon.

Scott Deuschle:

Joel, is F-35 aftermarket a significant portion of defense aftermarket revenue at this point? And then can you comment at all on how quickly that's been growing recently?

Scott Deuschle:

Yeah.

Scott Deuschle:

Okay. And then, Sarah, sort of following up on Jason's question, can you clarify what the outlook is on working capital this year? It was a pretty big headwind last year. You had a strong first quarter here. I was just curious where things go from here on? Thanks.

Scott Mikus:

Okay. And then last question, Kevin. It's been a while since the last Investor Day. Any plans for another one sometime soon? Thanks.

Sarah Wynne:

Expected.

Scott Mikus:

All right. Great. We could finally meet in person. Sounds good.

Operator:

And our next question comes from the line of Bert Subin with Stifel. Your line is open

Kevin Stein:

Yes, it’s now afternoon, isn’t it?

Joel Reiss:

I don't think we've seen any material change year. USM is typically not a big factor for us. USM is typically for systems that are going for $25,000 and more, which really is a very, very small percentage of what our products are. And I don't think we've -- I've heard of any specific kind of changes in the PMA world from what we have seen in the past.

Joel Reiss:

So, I'm not sure to give you specifics. I mean the passenger for us, I mean, belly cargo obviously, was a big thing that popped up during the year. Over all of the last year, the traffic within the cargo market was down a little bit from 2023. I think most folks anticipate that moving back up a little bit in 2024, and we think we're going to follow the underlying market.

Operator:

And I'm showing no further questions at this time. I would now like to turn the conference back to Jaimie Stemen for closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Good day, and thank you for standing by. Welcome to the TransDigm Group Incorporated Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jaimie Stemen, Director of Investor Relations. Please go ahead.

Kevin Stein:

Good morning. Thanks for calling in today. First, I'll start off with the usual quick overview of our strategy. A few comments about the quarter and discuss our fiscal 2024 outlook. Then Mike and Sarah will give additional color on the quarter. As we previously announced on October 27, we had two Directors retired from the TransDigm Board, Merv Dunn and John Staer. Merv has served on our Board since 2009 and John since 2012. We sincerely appreciate both Merv and John's dedication to TransDigm over the years. They each have done an outstanding job as Directors and truly contributed to the long-term value creation of TransDigm. Considering these two Director retirements, our Board is now comprised of 10 Directors. For the near-term, we feel our Board size of 10 is appropriate and composed of highly qualified leaders with the appropriate skill sets to oversee and guide TransDigm. However, as we always do, we will continue to regularly assess the Board composition into the future. 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 in good times and bad as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize here are some of the reasons why we believe this. Our 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins, and over any extended period, have typically provided relative stability in the downturns. We follow a consistent long-term strategy, specifically. First, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we utilize a simple, well-proven, value-based operating methodology. Third, we have a decentralized organizational structure and a unique compensation system closely aligned with shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to PE-like returns. And lastly, our capital structure and allocation 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 of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital. As you saw from our earnings release, we closed out the year with another good quarter. We had solid operating performance in Q4 with both total revenue and EBITDA as defined margin coming in strong. For the full-year fiscal 2023 revenue came in at the high end of our most recently published guidance and our fiscal 2023 EBITDA as defined margin surpassed that guidance. Commercial aerospace market trends remain favorable as the industry continues to recover and progress towards normalization. Global air traffic is still moving forward and demand for travel remains high. OEMs are making steady headway on aircraft production. However, total air travel remains slightly below pre-COVID levels and OEM aircraft production rates remain well below pre-pandemic levels. There is still progress to be made for the industry and our results continue to be adversely affected in comparison to pre-pandemic levels. In our business, during the quarter, we saw a healthy growth in our revenues and bookings for all three of our major market channels, commercial OEM, commercial aftermarket and defense. Revenues also sequentially improved in all three of these market channels. Our EBITDA as defined margin was 52% in the quarter. Contributing to the strong margin is the continued recovery in our commercial aftermarket revenues along with our strict operational focus and disciplined approach to cost structure management. Additionally, we had good operating cash flow generation in Q4 of over $460 million and ended the quarter with close to $3.5 billion of cash. We expect to steadily generate significant additional cash through 2024. Next, an update on our capital allocation activities and priorities. As was mentioned in our press release, we've decided to pay a special dividend of $35 per share. The dividend will be paid on November 27. Sarah will address this more later. In aggregate, including Calspan acquisition completed this past May, and this dividend to be paid in late November, we have allocated over $2.7 billion of capital in the interest of our shareholders in under seven months. Also, we disclosed in our press release earlier today, we agreed to acquire the Electron Device Business of communications and power industries, also known as CPI, for approximately $1.385 billion in cash. CPI's Electron Device Business is a leading global manufacturer of electronic components and subsystems primarily serving the aerospace and defense market. The products manufactured by this business are highly engineered proprietary components with significant aftermarket content and a strong presence across major aerospace and defense platforms. CPI's Electron Device Business generated approximately $300 million in revenue for its fiscal year ended September 30, 2023. The acquisition is currently expected to close by the end of the third quarter of our fiscal 2024. As mentioned earlier, we are exiting fiscal 2023 with a sizable cash balance of close to $3.5 billion. Pro forma for the dividend, our fiscal year end cash balance is over $1.4 billion and growing. As always, we continue to closely monitor the credit markets and we will be assessing opportunities to utilize leverage for the acquisition of CPI's Electron Device Business and general corporate purposes, which may include potential future acquisitions, share repurchases under our stock repurchase program and dividends. Regarding the current M&A pipeline, we continue to actively look for M&A opportunities that fit our model. As we look out over the next 12 to 18 months, we continue to have a slightly stronger than typical pipeline of potential targets and remain encouraged concerning deal flow. As usual, the potential targets are mostly in the small and midsize range. I cannot predict or comment on possible closings, but we remain confident that there is a long runway for acquisitions that fit our portfolio. As we move into our new fiscal year, the capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our businesses; second, do accretive disciplined M&A; and third, return capital to our shareholders via share buyback or dividends. A fourth option paying down debt seems unlikely at this time, though we still do take this into consideration. Moving to our outlook for fiscal 2024. The guidance assumes no additional acquisitions or divestitures and is based on current expectations for a continued recovery in our primary commercial end markets through fiscal 2024. Throughout fiscal 2023, we were encouraged by the recovery seen in our commercial revenues and strong booking trends. Our strong bookings support the fiscal 2024 commercial end market revenue guidance, which I will comment on shortly. Trends are positive across all three of our major market channels, commercial OEM, commercial aftermarket and defense. We are cautiously optimistic that the prevailing conditions will continue to evolve favorably. We will watch this closely as we always do. And will react as necessary, including taking any preemptive steps that might be warranted. Changes in market condition and the impact to our primary end markets could lead to revisions in our guidance for 2024. Our initial guidance for the fiscal 2024 continuing operations is as follows and can also be found on Slide 7 in the presentation. The pending acquisition of CPI's Electron Device Business is excluded from this guidance. The midpoint of our fiscal 2024 revenue guidance of $7.58 billion or up approximately 15%. As a reminder and consistent with past years, with roughly 10% less working days than the subsequent quarters, fiscal 2024 Q1 revenues, EBITDA and EBITDA margins are anticipated to be lower than the other three quarters of 2024. This revenue guidance is based on the following market channel growth rate assumptions. We expect commercial OEM revenue growth around 20%. Commercial aftermarket revenue growth in the mid-teens percentage range and defense revenue growth in the mid to high single-digit percentage range. The midpoint of fiscal 2024 EBITDA as defined guidance is $3.94 billion or up approximately 16% with an expected margin of around 52%. This guidance includes about 100 basis points of margin dilution from our recent Calspan acquisition. We anticipate EBITDA margin will move up throughout the year, with Q1 being the lowest and sequentially lower than Q4 of fiscal 2023. The midpoint of adjusted EPS is anticipated to be $31.97 or up approximately 24%. Sarah will discuss in more detail shortly the factors impacting EPS along with some other fiscal 2024 final assumptions and updates. We believe we are well positioned as we enter fiscal 2024. As usual, we will continue to closely watch how the aerospace and capital markets continue to develop and react accordingly. Let me conclude by stating that I am very pleased with the company's performance this year and throughout the recovery for the commercial aerospace industry. We remain focused on our value drivers, cost structure and operational excellence. We look forward to fiscal 2024 and expect that our consistent strategy will continue to provide the value you have come to expect from us. Now let me hand it over to Mike Lisman, our TransDigm Group Co-COO, to review our recent performance and a few other items.

Sarah Wynne:

Thanks, Mike, and good morning, everyone. I'm going to review a few additional financial matters for fiscal 2023 and then also our expectations for fiscal 2024. First, a few additional fiscal 2023 data points on organic growth, taxes and liquidity. In the fourth quarter, our organic growth rate was 18.5%, driven by the continued rebound in our commercial OEM and aftermarket end markets. On taxes, our GAAP and adjusted tax rate finished the year within their expected ranges. Our fiscal 2023 GAAP rate was 24% and the adjusted rate was just under 25%. On cash and liquidity, free cash flow, which we traditionally defined as EBITDA less cash interest payments, CapEx and cash taxes was roughly $1.8 billion for the year, higher than the $1.4 billion we had originally expected, driven primarily by the good operating performance that Kevin and Mike mentioned, and the extra EBITDA we generated above our original guidance carries over to cash flow. As Kevin mentioned, we ended the year with approximately $3.5 billion of cash on the balance sheet or over $1.4 billion when pro forma for the $35 dividend. At year-end, our net debt-to-EBITDA ratio was 4.8x, down from the 5.3x at the end of last quarter. Pro forma for the $35 per share dividend announced this morning, our net debt-to-EBITDA ratio is 5.4x. The dividend payment date is expected to be November 27. We continue to watch the rising interest rate environment closely. We remain 80% hedged on our total $20 billion gross debt balance through a combination of interest rate caps, swaps and collars through 2025. This provides us adequate cushion against any rising rates, at least in the immediate term. Our EBITDA to interest expense coverage ratio, which, as a reminder, becomes more important in a higher interest rate environment and is a metric we actively monitor and take into consideration in these times of elevated interest rates ended the year at 3.1x on a pro forma basis, which sits comfortably in line with our pre-COVID average range of 2x to 3x. We continue to be comfortable operating the business within these brackets. With regard to any potential changes to our long-term approach to using debt to boost our equity returns, we are actively watching the interest rate environment closely, but do not anticipate any big changes in our approach at this time. Next, on the fiscal 2024 expectations, I'm going to give some more details on the financial assumptions around interest expense, taxes and share count. Special note that all of my comments and data here include the payment of the $35 dividend, but exclude the acquisition of CPI's Electron Device Business entirely, which is still subject to regulator approval, and we expect to close by the end of our third quarter in fiscal 2024. Net interest expense is expected to be about $1.25 billion in fiscal 2024. And this equates to a weighted average cash interest rate of approximately 6.3%. This estimate assumes an average SOFR rate of 5.4% for the full-year. On taxes, our fiscal 2024 GAAP, cash and adjusted tax rates are all anticipated to be in the range of 22% to 24%. The slight decrease in our tax rate versus the prior year is due mainly to the additional interest expense we are able to deduct for tax purposes, given our higher expected EBIT for 2024. On the share count, we expect our weighted average shares outstanding to be 57.8 million shares in 2024. With regard to liquidity and leverage for fiscal 2024, as we would traditionally define our free cash flow from operations at TransDigm, which again, is EBITDA as defined less cash interest payments, CapEx and cash taxes, we estimate this metric to be close to $2 billion in fiscal 2024. With regard to the dividend, the $35 per share payment announced this morning represents a gross payout of just over $2 billion. The record date for the special dividend is November 20, and the payout date is expected to be November 27. After paying out the $35 per share dividend in cash and assuming no additional acquisitions or capital market transactions, we would end the year with over $3 billion of cash on the balance sheet, which would imply a net debt-to-EBITDA ratio close to 4x at the end of fiscal 2024. However, this excludes the acquisition of CPI's Electron Device Business which is still subject to regulator approval, and we expect to close by the end of our third quarter in fiscal 2024. As Kevin mentioned at the outset, we are actively monitoring the capital markets and assessing opportunities to utilize leverage for this acquisition and general corporate purposes, which may include potential future acquisitions, share repurchases or dividends. And as a reminder, there has been no change in our approach to how we think about capital allocation or leverage with our typical target in the 5% to 7% net debt ratio range. We will continue to watch this ratio along with the cash interest coverage ratio of EBITDA to interest expense as we actively pursue options of maximizing value to our shareholders through our capital allocation strategy. So a final note on that, we think we remain in good position with adequate flexibility to pursue M&A or return cash to our shareholders via share buybacks and/or additional dividends during the course of fiscal 2024. With that, I'll turn it back to the operator to kick off the Q&A.

Myles Walton:

Thanks. Good morning.

Myles Walton:

I was hoping you can give us a little bit more color on the CPI business itself, understanding that you obviously haven't closed on it, but maybe just a little context of the nature of the aftermarket that it has, maybe it looks a little bit more defense than commercial. So how does that flow? And then maybe just from a process perspective, is this something that's been on your watch list for a while or something that's more recently popped up?

Myles Walton:

Okay. And then just one quick one on defense. The sales in the quarter. Obviously, you're expecting it to be flat, is up about 9%. Is that short-cycle stuff coming through? Is the supply chain there improved? I see from the slide, it's still called it out as a watch item, but was it the better sales result of customer pull or supply performance?

Myles Walton:

Okay. Thanks, guys.

Noah Poponak:

Hello. Can you hear me?

Sarah Wynne:

Good morning.

Kevin Stein:

We don't pull apart bookings like that.

Kevin Stein:

My blood pressure was starting to go up there. Sorry, Noah.

Noah Poponak:

Right, as you shouldn't. Hey. So when you just went through all that math on the balance sheet, after all this capital deployment and you mentioned ending the year at four turns of net debt-to-EBITDA, recognizing that's pre-CPI close. But even once you close that, the balance sheet – that won't change the leverage that much once you add the EBITDA and then keep generating cash flow. So I guess as you sized the special dividend, was that with an eye towards the acquisition pipeline? And should we read that to mean that you still see a lot out there to maybe go after and therefore, you wanted to leave that firepower on the balance sheet?

Noah Poponak:

Okay. And Kevin, maybe I missed it, but if you could speak to the profitability of CPI. Just we can see the revenue multiple, but what are the margins like? Where can you take them over time? And then last one for me would just be if you could touch on Calspan for a minute. Just now that you've had it for a little bit longer, that was a deal that did look a little different, had some questions from the market. Anything noteworthy there? Or just kind of what you thought you bought? Thanks.

Noah Poponak:

Okay. Thanks very much. I appreciate it.

Noah Poponak:

Okay. Thank you.

Robert Stallard:

Thanks so much good morning.

Sarah Wynne:

Good morning.

Kevin Stein:

We would keep that within TransDigm. We have a non-aerospace industrial section of the company now as pieces come along with M&A. Absolutely encouraged by that part of the business. I think the Medtronic medical device is a very interesting market, and one that we wouldn't mind learning more about through exposure through this business.

Mike Lisman:

Yes. We don't want to start giving anything that sounds too much like quarterly guidance, but a little bit of color on what we expect. We'd expect the gradual ramp up throughout the course of the year. As you know, Q1 for us just because of the way the working day step work out. That is a lower percentage of the total year's revenue forecast because of the 10% working days. But we expect the March up to sort of track the takeoffs and landings, largely speaking, over the course of next year. It increases the year goes on with some sequential ramp ups throughout fiscal 2024. It doesn't always happen that way, right? I could see some lumps here and there, but that's pretty much what we expect and consistent with prior years.

Mike Lisman:

That's fair. That's a fair assumption and obvious result of the mass and the comps the way they work. Correct.

Operator:

Our next question will come from the line of David Strauss with Barclays.

Kevin Stein:

Good morning.

Sarah Wynne:

Yes. On the working capital going forward, I'd probably assume about a neutral. Like you said, you saw we defined working capital as accounts receivable inventory less payables, and we added about $500 million this year. That was more than our peak to trough of the COVID downside where we took out about $400 million. And obviously, we also put some of that back in fiscal 2022. I think now we're in pretty good shape, and I would assume neutral going forward.

Mike Lisman:

It's Mike. I'll take that one. First, on the volume and where we stand now across our whole commercial aftermarket in FY2023, we're probably down in the volume space, something like 15% or so. That varies by submarket. The passenger piece is down, obviously, 15%, sorry, I should have highlighted that, passengers down 15%. The interior stuff is probably off a little bit more. Freight is up more from where it was pre-COVID and Biz Jet, Heli is up a bit too in the aggregate across all commercial aftermarket in FY 2023. We're not quite back to 100, if 100 was FY2019, but we're close. And then in FY2024, what we expect to see on the volume side within passenger going to that submarket is basically to get back to pretty much close to 100. That's how our plans came in, which is what you'd expect, consistent with where the takeoffs and landings and RPMs are trending. And then the freight and Biz Jet both sort of trending along as well, but probably not up as big as the passenger subsegment. And then in the aggregate, what that means for FY2024 across our whole commercial aftermarket bucket is that we're probably up a little bit in the volume space, above 100 if FY2019 is, again, defined as 100. The second part of your question on price and volume trends, first on price and commercial aftermarket, we aim to, as you guys know, across our business, get a slightly positive amount of real price every year. So price a little bit ahead of inflation. In this environment, that sort of implies the direction you were heading on a 15% aftermarket guide, roughly half and half. That's not miles off, sort of directionally accurate, but the price will aim to get real price ahead of inflation, but you're not too far off. We don't give the exact amount of price and volume trends, but it's directionally accurate.

Operator:

Our next question will come from the line of Ron Epstein with Bank of America.

Kevin Stein:

Good morning.

Kevin Stein:

I don't – I haven't found that to be the case. We see lots of competition. In fact, CPI was a competitive deal. I haven't seen anything that wasn't in a competitive process. So I have not noticed that. I think in the aerospace and defense sector, there may be deeper pockets. So I'm not seeing that there's no one bidding on businesses. I think if that was the case, there wouldn't be many things coming to market. So we're seeing a lot of competitive processes.

Kevin Stein:

Yes. We don't look at the market as there are holes in technology that we need to fill or products that we have to have. We're agnostic about what products and technologies we have. We're looking for things, though, that are highly engineered, proprietary. They have a noted position in the marketplace. They have aftermarket content and of sorts. So if you look at the businesses that we continue to identify and find. They fit this criteria. And as long as we continue to find proprietary products like this, highly engineered products, we will continue to grow. There's no reason for us to believe we're running out of these. It's the nice thing about aerospace and defense is that there's so many technologies utilized across so many different products and applications with no commonality. There is still so many places for us to grow. I am not contemplating going outside of aerospace and defense. I don't see a need for that. We do love to learn about other markets and technologies, much like we will with CPI in the medical device side, and we'll see what we learn. But right now, I think the landscape is very full for us on the aerospace and defense side. And again, given our the value generation model that we have, we don't need to acquire hundreds and hundreds of millions of dollars of EBITDA every year. We target and I'm sure all of you have heard me say this many times, if we acquire $50 million to $100 million of EBITDA per year, that's all we need to feed this model and continue to do what we do. Larger acquisitions are better. But as long as we continue to find those opportunities to swing at and we'll be fine, and we'll continue to grow quite nicely. Does that answer your question?

Operator:

Our next question will come from the line of Sheila Kahyaoglu with Jefferies.

Kevin Stein:

Good morning.

Mike Lisman:

Yes. So based on the guidance we're giving the OE slightly outgrows the aftermarket, right? We have the OE of around 20% the aftermarket we called in the mid-teens. There's a slight headwind there. If you guys took some swag at the math. I mean, it's noise level type headwind, right? We're talking a couple of tenths of a point on the margin. So nothing material that we won't be able to overcome with productivity. The big one that swings us year-over-year downward is obviously just Calspan. And as Kevin said in his comments, that's like a full point of EBITDA margin dilution downwards. So not to too much headwind from the OE ramp up, but a little bit a couple of tenths.

Kevin Stein:

I'll let Mike answer the last one. But on CPI, the question, I don't…

Kevin Stein:

We don't own it yet. It's too early for us to comment on that. It's well, well below TransDigm averages. Where do we see it getting to – it's probably too early for us to even comment on that. We haven't been in the door. So we need some time to unpack that, and then we'll be able to update you.

Sheila Kahyaoglu:

Okay. Thank you.

Kenneth Herbert:

Yes. Hey, good morning. Good morning everybody. Maybe Kevin or Mike, when you think about aftermarket, it sounds like in 2023, China was maybe relative to initial expectations, the biggest source of upside. As you look at fiscal 2024 and the mid-teens guide either geographically or maybe in other parts of the market, where could we see some of the maybe biggest potential of upside as you think about the guidance and the market dynamics today?

Kenneth Herbert:

That's helpful. And as you look at – and it sounds like a lot of the strength in 2024 is going to come from the passenger side. Are you seeing anything that would give you a little bit more concern around pushback from airlines in terms of spare part pricing? And is that maybe at all relative to the last couple of years, any reason to think about a different assumption on pricing into the aftermarket?

Kenneth Herbert:

Great. Thanks, Mike.

Operator:

Our next question will come from the line of Gautam Khanna with TD Cowen.

Kevin Stein:

Good morning.

Mike Lisman:

Yes. We're not seeing much of that. I mean, as you know, it's hard to get exact intelligence into the inventory levels of the airlines. But generally, we're not giving them volume discounts anyway. So they don't tend to hold too much of our stuff. But no, we're not seeing very much at all. I don't think we've seen any of the dynamic you described there.

Mike Lisman:

No. For the most part, the distribution channel for us into commercial aftermarket, which is about a quarter, rough justice ebbs and flows a bit of the total commercial aftermarket revenue dollars. That's been tracking – the POS there has been pretty much tracking for this whole year, together with our commercial aftermarket growth pretty closely. So no meaningful disconnects because of distributor, inventory or anything. They've been moving not exactly unlocks that, right, because you do get little bit of noise here and there, but pretty much in the same direction consistently throughout the year.

Mike Lisman:

Sure.

Jason Gursky:

Hello? Can you hear me?

Jason Gursky:

Oh, okay, great. Yes, suddenly went silent on me. Sorry about that. Hey. I just wanted to revisit the margin question that Sheila touched on earlier in your comment that the mix shift towards OE, the growth rate being a little higher there relative to aftermarket leads to a pretty modest headwind from a margin perspective that you think you can make up in productivity. As we look out further into the future and the potential for retirement is accelerating as the OE ramp goes higher. Can you just talk about how you all think internally about that potential outcome and some of the opportunities and risks to margins? Kind of curious to know whether, as retirements accelerate in certain aircraft whether you can actually get better price and so the margins of your business, have some upward bias to them? And then on the OE side, is it a question of higher volumes allow you to expand margins as you get some OpEx leverage. I'm just kind of curious to know, longer term, how you think about a widening gap between OE growth and aftermarket growth over time and the impact that, that has on margins?

Jason Gursky:

Okay. That's helpful. Thank you. Appreciate it.

Kristine Liwag:

Hey. Good morning everyone.

Kristine Liwag:

Maybe follow-up on – sorry, there was a delay there. Kevin, following up on your answer to Noah's earlier question, I mean taking a step back, the enterprise is generating strong free cash flow. You're able to digest a special dividend this year and the CPI acquisition and still have capacity and desire for significant capital deployment next year. So taking into consideration the current interest rate environment, what's your target leverage for next year when you assess your next capital deployment event?

Kristine Liwag:

Great. And if I could add one on defense. I mean the pricing model regarding defense had been under the microscope with a series of IG investigations over the past 15 years. But I think with the strength in margin, what's been underestimated is the operating strength of TransDigm. So looking at the businesses that you've acquired in defense, how much more margin expansion is there on production efficiencies? And as the employee TransDigm best practices in manufacturing, is this something that you could see a few 100 basis points in margin expansion?

Kristine Liwag:

Great. Thank you.

Gavin Parsons:

Hey. Thanks very much. Good morning.

Gavin Parsons:

20% growth on OE organically, I think, implies you're back above pre-COVID levels in 2024. And I assume a decent amount of that is business jet, but just wanted to ask kind of where you are on transport? And where you think the build rates go in the year?

Gavin Parsons:

Got it. And obviously, we can see kind of overall inflation trends, but maybe it seems like there's some pressure on wages in the aerospace and defense industry. Do you guys feel like your past kind of peak inflation on the cost side?

Gavin Parsons:

Got it. Thanks guys.

Peter Osterland:

Hey. Good morning. I'm on for Mike Ciarmoli this morning. Thanks for taking our questions.

Peter Osterland:

Just wanted to parse out what's driving your growth expectations in fiscal 2024 in the defense market. So just maybe any color on how that growth could be impacted by the budget environment? And then anything you can give us on pricing dynamics with the DoD and your expectations there?

Peter Osterland:

Right. Thanks. And then as a follow-up, just maybe an update on labor market conditions you're seeing productivity or attrition still a significant headwind. Just given your strong margin performance, it seems like maybe it hasn't been significant, but just wondering if there's potential for additional upside there if labor-related headwinds are something you're experiencing?

Joel Reiss:

This is Joel. I'll just add. I mean we've spent the last few years really working on automation projects and working to improve the – our processes within our factories to make us less susceptible to that.

Operator:

Our next question comes from the line of Scott Deuschle with Deutsche Bank. Scott, your line is now open. Our next question will come from the line of Robert Spingarn with Melius Research.

Kevin Stein:

That's not the way we look at it. So it doesn't factor in. It is part of costs and inflationary pressures in general – the way we analyze pricing and inflationary measures.

Mike Lisman:

No, no. I mean we're always actively monitoring that and looking for threats there. No meaningful uptick from prior levels of kind of low activity. I think we put a slide on this in the June investor deck that we put out, you might find helpful, but no, no meaningful uptick.

Operator:

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

Kevin Stein:

I think we can only comment on what we see. I don't know about the larger supply chain. And Mike, Joel can jump in. But I think that the ramp has been slow enough that I don't know if the larger supply chain will be hampered as it tries to continue to ramp up. But that is, of course, assuming that the various quality issues and other things that have hampered delivery get resolved.

Kevin Stein:

And I think that's a good word aspirational.

Kevin Stein:

Thanks.

Kevin Stein:

Are you here?

Mike Lisman:

Hi, guys. It's Mike. I'll take that one. It's a bit off unit related. Given the ramp on that program, it's one of the biggest awards in TransDigm’s history obviously. But given the expected ramp rate, we've got a – we'll go – we'll actually under that contract go to a third shift at the facility, build up some new capacity, including a new building to support the government on the important 155-millimeter program. That's gotten a lot of attention. We provide with this contract, obviously, one of the critical parts that goes into supporting it. Government is a super important customer for us. On the year, given the way the production ramp ramps up. A lot of the focus out of the gate will be on getting the capacity where it needs to be with the expansion. And the revenue upside is not hugely significant. It's more of an FY2025 into FY2026 kind of matter. If we get things going a little bit earlier and ahead of schedule, could be a bit of upside in FY2024. We didn't count on that as we pulled together the forecast for the year, though. And I think as you guys know, we aim to be a bit conservative with the guidance we give.

Mike Lisman:

It is.

Mike Lisman:

I think we're seeing about historically what we've seen, and we're sort of market weighted on the aftermarket side based on takeoffs and landings by platform. We're seeing about what we'd expect to see at the platform level. No big deviations by op unit or deviations versus the takeoffs and landings that you're seeing across the fleet.

Operator:

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

Sarah Wynne:

Good morning.

Mike Lisman:

I think it's conservatism and noise level deviations. We round a bit when we give you guys those things of about a percentage point. It's not exactly a percentage point. I think it's a little bit ahead of that. The business is performing well, though. As Kevin said, it's at least as good as we thought it was when we bought it, maybe based on five months of ownership a little bit better. But you don't really – as you guys know, with M&A, once you own something two full years or so, you really know it and understand it, and we'll know where it's headed. But based on what we see so far, it's looking good. And then those – the dilution amounts, it's a bit of rounding here and there, but it's noise-level stuff, and it was, I think, a little bit above the 1.0 percentage point mark, which is what's generating the 1.0 percentage dilution coming this year in FY2024.

Kevin Stein:

No. I think we would still prefer – we would still prefer commercial businesses over defense. Commercial businesses aren't as lumpy defense businesses can have. It's difficult to forecast the revenue. So we would still prefer commercial. You can make a better return on a commercial business. There's more revenue growth on and on. But you can only swing at the pitches that get thrown at you or thrown to you. So this was the business that was available. And when you find them that meet your criteria, again, proprietary products, highly engineered, access to aftermarket, in this case, significant 70% aftermarket phenomenal. You love those businesses, and they're important for us to acquire. So yes, we would still rather find great commercial businesses, but defense businesses can also meet the criteria.

Operator:

That concludes today's question-and-answer session. I'd like to turn the call back to Jaimie Stemen for closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Good day! And thank you for standing by. Welcome to the TransDigm Group Incorporated Q3 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jaimie. Please go ahead.

Kevin Stein:

Good morning. Thanks for calling in today. First I'll start off with the usual quick overview of our strategy, a few comments about the quarter and discuss our fiscal ‘23 outlook. Then Jorge and Sarah will give additional color on quarter. As we previously announced on May 26, we made three significant organizational changes this quarter. Jorge Valladares will retire at the end of TransDigm's 2023 fiscal year. Jorge has served as TransDigm COO for the past four years. His prior roles include co-COO, Executive Vice President, and President of three TransDigm operating units. Jorge will aid in the transition of his role to the new co-COO's Mike Lisman and Joel Reiss until his retirement date. Jorge also joined TransDigm Board of Directors as of May of May 26. Jorge has been with the company more than 25 years and has been an integral part of the long-term value creation of TransDigm and a key player in the cultural preservation of the company. Jorge has done a truly outstanding job and we sincerely thank him for his dedication. We are happy to have Jorge continue contributing to the growth of TransDigm as a member of the company's board. Mike Lisman and Joel Reiss have assumed the roles of co-COO's. Mike served as TransDigm CFO for the past five years prior to becoming CFO. He worked at our Aerofluid Products Operating Unit and on the M&A team at TransDigm. Joel is a long-time employee of TransDigm having joined the company in 2000. He was an executive vice president for the last eight years. Prior to that Joel served as president at two different TransDigm operating units, Hartwell and Skirka Aerospace. Before becoming a president Joel was the director of operations at our Adams Wright Operating Unit. Sarah Wynne has assumed the role of CFO after having served as TransDigm's chief accounting officer for the past five years. Sarah has been with the company for 20 years and before becoming TransDigm's chief accounting officer she was a group controller overseeing the financial reporting of several operating units. Prior to that Sarah was the controller at our Aerofluid Products Operating Unit and held various accounting positions in the TransDigm Corporate Office. Mike, Joel and Sarah bring a unique mix of experience and a broad range of aerospace businesses to their new roles. They are all experienced TransDigm executives with proven track records. We are very excited to promote internally developed long-tenured employees to each of these roles to perpetuate TransDigm's unique culture. I'm confident that they will continue to create the kind of value that has been the long-term hallmark of TransDigm. 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 in good times and bad as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues which generally have significantly higher margins and over any extended period have typically provided relative stability in the downturns. We follow a consistent long-term strategy specifically. First we own and operate proprietary aerospace businesses with significant aftermarket content. Second we utilize a simple well proven value-based operating methodology. Third we have a decentralized organizational structure and unique compensation system closely aligned with shareholders. Fourth we acquire businesses that fit this strategy and where we see a clear path to PE like returns. And lastly our capital structure and allocations are a key part of our value creation methodology. Our shareholders private equity like returns with the liquidity of a public market. To do this we stay focused on both the details of value creation as well as careful allocation of our capital. As you saw from our earnings release we had a solid quarter. Our Q3 total revenue was strong and we had a robust EBITDA as defined margin for the quarter. Additionally we once again raised our guidance for the year. We continue to see recovery in the commercial aerospace market and trends are still favorable as demand for travel remains high. Global domestic air traffic continues to lead the recovery and has surpassed pre-pandemic levels. International travel is also making progress and catching up to domestic travel. However, total air travel demand remains slightly below pre-COVID levels. There is still progress to be made for the industry and our results continue to be adversely affected in comparison to pre-pandemic levels. In our business during the quarter we saw a healthy growth in our revenues and bookings for all three of our major market channels. Commercial OEM, commercial aftermarket and defense. Revenues also sequentially improved in all three of these market channels. EBITDA has defined margin improved to 52.5% in the quarter. Contributing to this strong margin is the continued recovery in our commercial aftermarket revenues along with diligent focus on our operating strategy. Additionally we had good operating cash flow generation in Q3 of over $400 million and ended the quarter with close to $3.1 billion of cash. We expect to continue generating additional cash in our final quarter of fiscal 2023. Next an update on our capital allocation activities and priorities. Regarding the current M&A pipeline we continue to actively look for M&A opportunities that fit our model. As we look out over the next 12 to 18 months as usual the potential targets are mostly in the small and mid-sized. Comment on possible closings but we remain confident that there is a long runway for acquisitions that fit our portfolio. The capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our business, second do a creative disciplined M&A and third return capital to our shareholders via share buybacks or dividends. A fourth option paying down debt seems unlikely at this time though we do still take this into consideration. We are continually evaluating all of our capital allocation options but both M&A and capital markets are always difficult to predict. We continue to maintain significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Sarah will provide further commentary on our capital allocation during her prepared remarks. Moving to our outlook for fiscal 2023. As noted in our earnings release we are increasing our full fiscal year ‘23 sales in EBITDA's defined guidance to reflect our strong third quarter results and our current expectations for the remainder of the year. At the midpoint sales guidance was raised $100 million and EBITDA's defined guidance was raised $105 million. The guidance assumes the continued recovery in our primary commercial end markets throughout the remainder of fiscal '23 and no additional acquisitions or divestitures. Our current year guidance is as follows and can also be found on Slide 6 in the presentation. The midpoint of our revenue guidance is now $6.555 billion or up approximately 21% versus fiscal ‘22. In regards to the market channel growth rate assumptions that this revenue guidance is based on for the commercial aftermarket and defense market we are updating the full year growth rate assumptions as a result of our strong third quarter results and current expectations for the remainder of the fiscal year. We now expect commercial aftermarket revenue growth for fiscal '23 to be in the low 30% range which is an increase from our previous guidance range of 25% to 30%. The commercial aftermarket has been progressing well in our fiscal 23 and we plan for that to continue through Q4 and beyond. However, we aim to be conservative with this guidance as the commercial aftermarket is harder to predict with many orders being book and ship and the advanced bookings only going out a few months or so into the future. For defense we now expect revenue growth in the mid to high single digit percentage range. This is an increase from our previous guidance of low to mid single digit percentage range. Commercial OEM revenue guidance is still based on our previously issued market channel growth rate assumptions. We are not updating the full year market channel growth rate for commercial OEM as underlying market fundamentals have not meaningfully changed. We continue to expect commercial OEM revenue growth in the 20% to 25% range. The midpoint of our EBITDA as defined guidance is now $3.365 billion or up approximately 27% with an expected margin of around 51.3%. This guidance includes about 50 basis points of margin dilution from the Dart aerospace acquisition and about 50 basis points of margin dilution from the recent CalSpan acquisition. The pro forma margin dilution from CalSpan meaning if we had owned CalSpan for all of our fiscal year '23 is just over 100 basis points. The midpoint of our adjusted EPS is increasing primarily due to the higher EBITDA as defined guidance and now anticipated to be $25.15 or up approximately 47%. Sarah will discuss in more detail shortly some other fiscal '23 financial assumptions and updates. We believe we are well positioned for the last quarter of our fiscal '23. We will continue to closely watch how the aerospace and capital markets continue to develop and react accordingly. Let me conclude by stating that I'm very pleased with the company's performance this quarter and throughout this recovery of the commercial aerospace industry. We remain focused on our value drivers cost structure and operational excellence. Now let me hand it over to Joel to review our recent performance and a few other items.

Sarah Wynne:

Thanks Joel and good morning everyone. I'm going to provide an overview on a few financial matters for the quarter and expectations for the full fiscal year. First on organic growth and liquidity. In the third quarter our organic growth rate was 20.7% driven by the continued rebound in our commercial OEM and aftermarket end markets. On cash and liquidity free cash flow which we traditionally define as EBITDA less cash interest payments, CapEx and cash taxes was roughly $540 million for the quarter. For the full fiscal year we continue to expect to generate free cash flow in excess of the $1.4 billion target previously provided. Below that free cash flow line we saw networking capital consume approximately $180 million of cash during the quarter. As we continue to build both accounts receivable and inventory to support the ongoing and continuing sales ramp up on both the OEM and aftermarket sides of the business. The OEM does tend to be slightly more intensive from a networking capital standpoint. We ended the quarter with approximately $3.1 billion of cash on the balance sheet and our net debt to EBITDA ratio was 5.3 times down from the 5.6 times at the end of last quarter. On a net debt to EBITDA basis this puts us below the 5 year pre-COVID average level of 6 times. Additionally a cash interest covered ratio such as EBITDA to interest expenses at 3 times which is right in line with where we've historically operated pre-COVID and been comfortable operating the business. As always we continue to watch the higher interest rate environment and the current state of the debt markets closely. As a reminder we did a fair bit of refinancing in the first half of the year pushing out over the last quarter. In the first half of the year, pushing out over $8 billion of our nearest term maturities due in 2025 out to 2028. We expect to continue both proactively and prudently managing our debt maturity stacks, which for us means pushing out any near term maturities well in advance of the final maturity date. Our nearest term maturity is now 2026. Over 75% of our total 20 billion gross debt balance is fixed or hedged through our fiscal 2026. This is achieved through a combination of fixed rate notes, interest rate caps, swaps and collars. This provides us adequate cushion against any rising rates, at least in the immediate term. As we sit here today from an overall cash liquidity and balance sheet standpoint, we think we'll remain in a good position with adequate flexibility to pursue M&A or return cash to our shareholders via dividends or share repurchases. Regarding capital allocation, it is likely we make a decision by the end of the calendar year based on current market conditions. We have a sizable cash balance of close to $3.1 billion and consistent with history when we have a significant amount of cash available, we aim to get the cash back to our shareholders in one form or another. All three capital allocation options, significant acquisitions, share buybacks and dividends remain on the table. With that, I'll turn it back to the operator to kick off the Q&A.

David Strauss:

Thanks. Good morning.

David Strauss:

Kevin, I don't know if it was for everyone or just me, but your comments around the M&A pipeline cut out at least for me. So would you mind repeating kind of where you are from a pipeline standpoint? I think you had some interest in the Raytheon property and maybe what happened there.

David Strauss:

Okay. Thanks. A quick follow-up. So in prior quarters, your comment on the slide around bookings was that bookings were outpacing shipments. In this quarter, you just went to, things are strong. Do we read anything to that and be relative to kind of the bookings rate maybe on a sequential basis both for the aftermarket and the new equipment side?

David Strauss:

All right. Thanks very much.

Kristine Liwag:

Hey, good morning, guys. How are you doing?

Kristine Liwag:

So with a strong growth in aftermarket, we're hearing that MRO facilities are fully booked this year and slots are even difficult to come by next year or even the year after that. Can you provide any color in terms of how much of your aftermarket parts are linked to heavy maintenance versus the normal wear and tear? And does the limited MRO shop availability essentially limit the volume of parts you could sell to the aftermarket? How should we think about that dynamic?

Kristine Liwag:

Great. Thanks. And one, if I could do another follow-up. What we're hearing from the supply chain is that in commercial OE terms, there have been improving pricing for new airplane parts and OE side. So does that mean that when OE volume starts coming back for you guys, could you also get some of that pricing benefit and could that alleviate some of the mixed headwind you could experience should the ramp materialize sooner than expected?

Kristine Liwag:

Great. Thanks, guys.

Myles Walton:

Thank you so much. Kevin, the margins in the quarter were particularly strong, given what I would think would have been a little bit more adverse mix with CalSpan folding in. Aftermarket as a percent of sales is actually lower sequentially. Can you comment on the dynamics that would help do that in the quarter sequentially, and then also, I guess, why they're going to go down a 100 basis points sequentially into 4Q?

Myles Walton:

Kevin, thanks, and just a quick follow-up. As you go into next year, given EBITDA's higher net interest expenses coming lower, the tax rate, I know kicked up because of the EBITDA rule of interest availability, is the tax rate now going to kick back down a couple hundred basis points? Thanks.

Sarah Wynne:

Yes, that's right. I haven't gone through the planning process yet.

Operator:

Thank you. Our next question comes from the line of Ken Herbert from RBC Capital Markets. Please go ahead.

Kevin Stein:

Good morning.

Kevin Stein:

I think China was the big player. We initially had our look at the business. That was the unclear point that we didn't see in our planning. So I think a lot of what we're seeing today for upside and the revisions favorably have been due to that expanding market and really a better recovery than I think any of us anticipated when we initially planned the year.

Kevin Stein:

Joel?

Ken Herbert:

Great. Thank you.

Robert Stallard:

Thanks so much. Good morning.

Kevin Stein:

Good morning.

Kevin Stein:

In fullness of time, I don't think you can overpay for good assets that meet our criteria. So I'm not worried about more competition. If businesses meet our criteria, we will rise to meet the challenge.

Kevin Stein:

Could you repeat your question? You broke up a bit, and I couldn't hear some of the details.

Kevin Stein:

I think we do regular catalog price increases, but in a high inflationary environment, dynamic pricing becomes more of the norm. So I don't think our businesses necessarily are augured into, only once a year. It really depends on the inflationary inputs that they're seeing.

Operator:

Thank you. Our next question comes from a line of Robert Spingarn from Melius Research. Please go ahead.

Kevin Stein:

Good morning.

Robert Spingarn:

Kevin, on margins, just as OEMix increases, assuming that OE growth overtakes aftermarket growth at some point here, can you mitigate the headwind to margins from that, just from productivity and pricing, perhaps on the other side, in aftermarket?

Robert Spingarn:

Thanks so much.

Peter Arment:

Yes, thanks. Good morning, everyone. Kevin, maybe if you could just give a broader comment on the wide-body side of things. We're really starting to see kind of an uptick really across the board, and I know last quarter you made some comments that your interior's business has been recovering nicely. Just any further color there would be helpful. Thanks.

Peter Arment:

I appreciate that, Joel. And then just as a follow-up quickly, Kevin, I know last quarter there was a comment that made about aftermarket volumes still being 10% to 15% light. Is that still how you see kind of the year shaking out, or is that starting to improve? Thanks.

Peter Arment:

Appreciate it. Thanks Kevin.

Operator:

Thank you. Next question comes from a line of Jason Gursky of Citibank. Please go ahead.

Joel Reiss:

Morning.

Joel Reiss:

Thank you for doing that. It's always good to hear. Sometimes we're just the machine that keeps moving and people forget that.

Kevin Stein:

Yes, I think I'll kick that one to Joel for comment. He's very close to the customers and businesses.

Jason Gursky:

Okay, great. I'll leave it with one. Thanks, guys.

Operator:

Thanks. Our next question comes from a line of Noah Poponak of Goldman Sachs. Go ahead, Noah.

Kevin Stein:

Morning.

Kevin Stein:

For the quarter or year-to-date? I guess we don't really give that kind of granularity usually. It was up across the company for aftermarket. It was slightly off, but year to date still positive.

Kevin Stein:

Does that clear it up for him?

Joel Reiss:

Well, I think we're seeing steady improvement in the outlays. The outlays are still a little bit slow in terms of solicitations converting into orders compared to historical levels, but as Kevin just mentioned, bookings were stronger than shipment, so I think we continue to anticipate some runway there.

Noah Poponak:

Okay. Thanks, guys. Appreciate it.

Operator:

Thank you. Our next question comes from a line of Ron Epstein from Bank of America. Please go ahead. Please go ahead, Ron.

Ron Epstein:

Oh, sorry about that. I was on mute. Yes. Just trying to...

Ron Epstein:

Yes. Just a quick one, long stuff, good stuff has been asked but Kevin, what's your mood for a fixer upper? I mean, as you look at stuff out there, is kind of M&A you want to do fixer upper style or stuff that just kind of fits right in with the, the TransDigm?

Ron Epstein:

Got it. Got it. Got it. Got it. Got it. I mean, what -- I'm just trying to just get a sense. I think a lot of people are what are you not interested in? I mean, do you think you need to open the --

Ron Epstein:

The GAAP –yes look.

Ron Epstein:

Yes. Yes, I think it does. And if I may, just one last quick one. Gross margins in the quarter were really quite good at 59%. Should we expect that to continue?

Ron Epstein:

Got it. All right. Thank you very much.

Seth Seifman:

Thanks very much and good morning.

Seth Seifman:

Good morning. Just going back to the question of capital deployment, I think you said the majority of M&A opportunities kind of naturally are in the small and midsize category. And so given the capacity that you'll have by year end, unless something really significant shakes loose, should investors be thinking about if there is something in that small and midsize category that there is plenty of opportunity for capital return as well?

Seth Seifman:

All right. Okay. Okay. Thank you. And then just as a quick follow-up, I know maybe not the most, the part of the business that gets focused on most, but the Bizjet and helicopter aftermarket, it's been up kind of 20% the past couple of quarters. And we generally think about aftermarket revenues kind of tracking flight hours plus some price. And business jet flight hours in the U.S. at least have been pretty flat year-to-date. And so is there something you point to that accounts for the continued strong growth there, given that it seems like, the underlying end market just isn't really growing that much right now?