Loar Holdings Inc.

Ladies and gentlemen, thank you for your interest in Laura Holdings' conference call. Please continue to stand by. The presentation will begin momentarily. Thank you. Thank you. . . . Greetings, and welcome to the Lore Holdings Q1 2026 Earnings Call. At this time, all participants are in a listen-only mode. Question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ian McKillop, Director of Investor Relations. You may begin.

Thank you, Brock. Good morning, everyone, and welcome to the Lohr Holdings Q1 2026 Earnings Conference Call. Presenting on the call this morning are Lohr's Chief Executive Officer and Executive Co-Chairman, Dirksen Charles, Executive Co-Chairman, Brett Milgram, Treasurer and Chief Financial Officer, Glenn D'Alessandro, as well as myself, Ian McKillop, the Director of Investor Relations. Please visit our website at loregroup.com to obtain a slide deck and call replay information. But before we begin, we'd like to remind you that statements made during this call, which are not historical, in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to our website and latest filings with the SEC, available through the investor relations section of our website or at sec.gov. We'd also like to advise you that during the call, we will be referring to adjusted EBITDA margin, adjusted net income, and adjusted earnings per share, each of which is a non-GAAP financial measure. Please see the tables and related footnotes in the earnings presentation for the most directly comparable GAAP measures and applicable reconciliations. To begin today, I'll now turn the call over to Dirksen.

Thanks, Ian. Good morning, everyone. I'm Dirksen, founder, CEO, and executive co-chairman of Law. As you all know, Law was founded with the mission and vision to build an aerospace industrial cash compounder wrapped in a culture that all our mates can be proud of. Thirteen weeks ago, I shared with all of you how excited I was about what we would accomplish in 2026. I stated that we planned on achieving record financial results through consistent and resilient performance. The results for Q1 of 2026 are all quarterly records for sales, adjusted EBITDA, and adjusted EBITDA margins. More importantly, our cash conversion coverage to net income was 230%. Our strong Q1 provides a resilient foundation for 2026, positioning us to break all our annual records, strengthen orders from our customers, resulting in a book bill ratio of greater than 1 for 2 times, The tremendous progress we have made towards launching new business and continuing to successfully execute on our value drivers also strengthens our confidence in achieving a record-breaking 2026. But first, let's take a moment to check two of the boxes we shared with you during our IPO process two years ago. We said in a short period of time, we would achieve 40% adjusted EBITDA margins. In a word, check. We also stated that we had a balanced and resilient portfolio of products, platforms, and end markets, which would allow us to perform in spite of most headwinds in the industry. Again, check. During the first quarter, we had reduced sales in our defense end market, which we have always said can fluctuate unexpectedly. The year-over-year decline reflects a deviation from our customers' normal ordering pattern for the F-18 brakes and RC-135 auto trottles. These proprietary products supplied exclusively by us are shipped at the discretion of our customers and are significantly sensitive to the ebb and flow of the defense end market. Q1 highlighted reduced demand for these proprietary products. However, if history provides any indication, we expect our customers to return to the habitual, albeit somewhat unpredictable, ordering patterns for the remainder of 2026. I will emphasize that despite the Q1 decline in sales, our book-to-bill ratio in the defense end market was the highest of our end markets during Q1 of 2026, and we ended the quarter with record backlog for our defense products. With that said, the Q1 defense sales results were more than offset by the strength in our commercial OE and aftermarket end markets. This quarter allows us to demonstrate what we always say. We realize financial success in all the end markets we support. We do not take a razor razor blade approach in our business model and take into account the totality of all the sectors we supply. So during a quarter when our highest growth end market was commercial OE, we achieved record adjusted EBITDA margins. Once again, I love it when the numbers prove what we say. In addition, I'm happy to say that collaboration across our business units continues to drive increasing opportunities for top-line growth. As a result, our new business pipeline is at a record high of approximately $700 million. Today, Ian will take you behind the curtain of our new business pipeline so you can get a greater appreciation for why we believe we will grow our new business sales organically at the higher end of our long-term goals. of one to 3% each year for the next few years. With that said, Law is a family of companies with a simple approach to creating shareholder value. First, we believe that providing our business units with an entrepreneurial and collaborative environment to advance their brands, we will generate above market growth rates. Since our inception in 2012 to the end of calendar year 2025, we have grown sales and adjusted EBITDA at a compound annual growth rate that's over 30% and 40% respectively. Second, we execute along four value streams. We identify pain points within the aerospace industry and look to solve those problems through organically launching new products. In calendar year 2026, we expect that new product growth will be the number one driver of our organic growth as we qualify new parts in the first half of the year, fueling increased sales starting the second half of 2026. We focus on optimizing the way we manufacture, go to market, and manage our companies to enhance productivity. Each year we identify initiatives that allow us to continually improve our performance. Historically, we focus on one or two major efforts that expect us to expand margins. We continuously investigate ways to improve how we mine, collect, gather, and utilize data, enhancing our management, ERP, and other systems and processes which allows us to efficiently leverage such data and drive financial and operational efficiencies. Year over year, we achieve more price than our cost of inflation. Executing this strategy results in continuously improving margins on an annual basis, except for the occasional temporary dilution due to acquiring a business with diluted margins. Lastly, and more importantly than anything else, we are committed to developing and improving the talent of all our mates because our success is solely a result of their dedication and commitment. So thank you to all my mates. With that, let me turn it over to Brett to walk you through the key characteristics of our portfolio.

Thanks, Dirksen. As you can see on slide six, a key driver of our consistent performance is Moore's diverse portfolio of products that cover essentially all end markets, platforms, and customers, and is also balanced across the OE aftermarket spectrum. Said another way, we have content on virtually anything that flies today, and that is by design, as opposed to relying on any particular platform and market or type of product that may produce short or intermediate-term benefits at the expense of the long-term consistency and growth we strive to produce. Our portfolio is designed to be balanced, resilient, and have wide exposure across a very large, and overall growing aerospace and defense market. Our performance really starts with the proprietary nature of our products, which creates high barriers to entry and attractive margins, in addition to forming embedded customer relationships that foster cross-selling opportunities and other revenue synergies for both new businesses we acquire as well as our organic new business pipeline. Effectively, proprietary products not only produce great margins, as you can see by our results, but they position us to capture the 20, 30, 40, or even 50-year annuity that any one particular platform may provide, whether that is a commercial aircraft, military aircraft, or general aviation aircraft, and whether that aircraft is coming off the production line or well into its aftermarket cycle. Our proprietary product portfolio is not only growing as a percentage of our total portfolio, but it's also growing in the aggregate. as we have a demonstrated 14-year history now of supplementing our organic growth with M&A activity. I will repeat something I mentioned last time, which is that we continue to have a large pipeline of opportunities, but it's still an M&A market that requires an appropriate amount of discipline to ensure we continue adding high-quality proprietary products that meet the return thresholds we seek from the businesses we acquire. That discipline is something we continue to be very focused on and is evident in our two most recent acquisitions, LMB and Harper Engineering, both of which exemplify the types of businesses we like and both of which are off to a great start. From looking at this chart on page seven and from past experience in the aerospace and defense market, I do also want to add that we think we have created a very powerful, very differentiated and unique business model that will generate and sustain exceptional financial performance over the long term. Adding to that, we will remain an active acquirer of assets and given the market size and opportunity set, have very high confidence that our cadence of one to two deals a year over the past 14 years will continue for the upcoming decade and beyond and continue to expand our breadth of capabilities and generate the outsized and consistent long-term returns we have seen in our first 14 years.

We include this slide each quarter because it captures the breadth of lore. More than 25,000 unique part numbers across the group. But the real key takeaway here isn't any one single product. It's the set of capabilities behind them. We're not simply a collection of businesses that manufacture a wide range of components. We're an integrated platform that combines engineering, design, qualification, and production expertise across disciplines to deliver tailored, customer-specific solutions. Those capabilities show up most clearly in our organic new business pipeline. Before we get into the specific opportunities, let me define for you what we mean by new business at Lohr. We see it coming through two primary channels. First, new products or technologies for new or existing customers. Think clean sheet designs and meaningful product enhancements. Second, existing products expanded to new customers. Think market share gains and new platform wins. Across the group, our organic pipeline now totals approximately $700 million of revenue potential, expected to convert over the next five years, up roughly $100 million from what we shared with you in February. As the chart shows, slightly more than half of these opportunities are tied to the commercial end market, with general aviation and defense each representing roughly a quarter. The slide includes examples of the product families that we're pursuing today, but our development and growth efforts extend well beyond what is shown. Simply, every lore business is actively engaged in capturing new organic opportunities. We expect this pipeline to continue to expand as we add capabilities, broaden customer relationships, and support additional platforms. And importantly, it does not take a large capture rate for this to be meaningful. Converting less than 15% of the current pipeline over time would be sufficient to support our targeted 3% annual growth from new business. I'll now pass it over to Glenn.

Thank you, Ian. Good morning, everyone. Let me start by discussing sales by our end markets. This comparison will be on a pro forma basis as if each of our businesses were owned as of the first day of the earliest period presented. This market discussion includes the acquisition of Beadlight in Q3 25, LMB Fans and Motors in Q4 25, and Harper Engineering in Q1 2026. We achieved record sales during the quarter of 26, In total, our sales increased to 156 million, which is an 11% increase as compared to the prior year. This increase was driven by strong performances in commercial OEM and commercial aftermarket, partially offset by a slightly lower defense sales. Our commercial aftermarket sales saw an increase of 11% in Q126 versus Q125. This is primarily driven by the continued strength in demand for commercial air travel and an aging commercial fleet. Our total commercial OEM sales saw an increase of 18% in Q126 versus Q125. This increase was driven by higher sales across a significant portion of the platforms we supply, along with a continuing improvement in the production environment for commercial OEMs. Defense sales saw a decrease of 2% in Q1 26 as compared to the prior year. As Dirksen said in so many words, defense sales are lumpy given the nature of the ordering patterns of our end customers for our products. Let me recap our financial highlights for the first quarter of 26. Our net organic sales increased by 11% of the prior year quarter. Our gross profit margin for Q6 Q126 decreased by 130 basis points as compared to the prior year. This decrease was primarily due to the higher non-cash amortization of acquired intangible assets and the non-recurring non-cash recognition of an inventory step-up adjustment, both related to the LMB and Harper engineering acquisitions. The total of these two non-cash items was $11 million. Excluding these two adjustments, our gross profit would have increased to 57.6% as a result of our operating leverage, the execution of our strategic value drivers, as well as a favorable sales mix. Our decrease in net income of $4 million in Q126 is primarily due to higher interest, as well as the two non-cash items discussed above. We've added a new metric this quarter. Adjusted net income. Adjusted net income excludes the non-cash amortization of acquired intangible assets and certain other non-recurring charges. We believe this metric provides a more consistent view of our earnings. Adjusted net income increased 5 million or 20% in Q1 26. This increase is due to our strong financial performance during the quarter, partially offset by higher interest expense. Adjusted EBITDA was up 20 million in Q126 versus the prior year quarter. This is primarily due to our operating leverage and the execution of our strategic value drivers. Again, Q126, we achieved a record 40.5% EBITDA margins. This is an increase of 290 basis points from Q125. From 2020 through 2026, we will have increased our EBITDA margins by 910 basis points. We've achieved this growth through operating leverage, winning new profitable business, executing on productivity initiatives, value-based pricing, all this while fully absorbing the negative impact, of course, related to Sarbanes-Oxley compliance and additional organizational expenses to support being a public company. Let me now turn the call back over to Dirksen to share our revised outlook for 26.

Thanks, Glenn. Based on what we have said today, it should come as no surprise that in spite of the temporary, and again I say temporary, uncertainty that may be created by the geopolitical challenges the world is facing today, that we are increasing our guidance for 2026. But before I share the details, let's take a moment to remind everyone that we operate with the tailwinds of a secular growth industry which captures the increasing human need to travel, move products from point A to point B, and to defend our American liberties driving secular demand. These things have been proven to be true since the beginning of aviation and will continue to be so for the foreseeable future. As a result, law will continue to grow at an above-average industry rate. Here's what we are currently experiencing by end market in 2026. Demand in the commercial aftermarket remains strong as reflected by a book to bill of greater than one in Q1 of 2026. Today, our customers have maintained moderate reaction to the temporary impact of higher fuel costs. In fact, our challenge is ensuring that we continue to increase our capacity to keep up with the secular growth in this end market. We do recognize that airlines are rationalizing their capacity given the elevated cost of fuel, which will result in a temporary reduction in unit demand. However, that rationalization typically takes a few quarters before it will impact any of the demand for our products. Given our portfolio, proprietary products, and execution of our value drivers, we fully expect to mitigate any financial impact and anticipate continued growth of 10-plus percent organically for the foreseeable future, as we continue to expect the age of the active fleet not to peak until the end of the decade. Looking at the commercial original equipment end market, our customers continue to report significant backlog supporting multi-year deliveries. Both Airbus and Boeing have approximately 9,000 and 7,000 aircraft in backlog, respectively. This represents over 10 years of production at today's stated rates. As the supply chain continues to improve capacity and quality, we expect sales for our proprietary products that align fit on these aircraft to generate increased sales for us as production ramps. This is clearly reflected in the growth in this end market in Q1 of approximately 18%. The defense market has been heavily influenced by the current geopolitical environment. As I've stated before, European nations have increased their military spending, to the highest percentage of GDP in decades. In addition, the US defense budget has seen considerable growth. While the timing of orders and sales can fluctuate significantly over the long term, we are well positioned to benefit from these upward trends going forward. Given our balanced portfolio of 50%, only 50% aftermarket, the broad spectrum of our products across all end markets, combined with executing all our value drivers, let me say it again. We expect to continue to grow sales at 10% plus organically and adjusted EBITDA at 15% plus annually into the foreseeable future. Now, we're excited to share our upward revision to our 2026 outlook. As each of our end markets are experiencing strong demand tailwinds, our focus is on executing our value drivers to continue to position lower to at least triple adjusted EBITDA every five years including acquisitions, as we have done consistently since our inception, except during COVID. As always, our view is on a performer basis, assuming we owned all of our business units since the beginning of 2025. With that said, we still expect commercial OE and aftermarket growth will be low double digits in 2026, for all the reasons I highlighted earlier, while our defense and market sales will be up mid-single digits in 2026, driven by a record backlog of orders at the end of Q1. These market assumptions, along with the strong performance of our two most recent additions to our family of companies, LMB and Harper, and our continued execution of our value drivers, allows us to increase our guidance by 5 million sales and 4 million of adjusted EBITDA. And of course, we expect to meet or exceed this increased guidance for calendar year 2026. Our increased range for net sales is now between $645 and $655 million. Adjusted EBITDA between $257 and $262 million, with adjusted EBITDA margin of approximately 40%. GAAP net income will be in the range of $53 to $57 million, reflecting the non-cash acquisition related charges that Glenn referred to earlier. Adjusted EBS will be between $1.26 and $1.30 per share. In addition, capital expenditures to be in line with our historical rate of 3% at around 19 million. There's no change to our full year interest expense, effective tax rate, depreciating or fully diluted share count. Amortization is up 5 million to reflect non-cash acquisition related charges, while non-cash stock-based compensation is up a million to 18 million dollars. Please note that all the amounts I've just outlined to you relating to calendar year 26 performance assume no additional acquisitions. However, as we've noted, and as Brad has said just earlier, our drumbeat is to complete one or two acquisitions each year. We just cannot predict the timing of such acquisitions. With that, Brock, let's turn it open for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. Confirmation tone will indicate your line is in the question queue. Press star two if you would like to remove your question from the queue. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question today comes from Christine LeWag of Morgan Stanley. Please proceed with your question.

Hey, good morning, Dirksen, Glenn, and Ian. I just wanted to follow up on your discussion of the $700 million revenue potential over the next five years up from $100 million from February. I guess first I want to recognize that you tend to be very conservative, but it seems like a 15% conversion over this timeline seems too conservative and fairly reasonable for you to hit your 3% targeted annual growth from new business. But when you look at your capabilities, can you share with us, you know, what's a reasonable conversion of this opportunity? How much of these existing opportunity do you have line of sight on regarding the customer wanting you as a supplier, like some sort of like pull mechanism? And, you know, is 50% a reasonable number? Any color you could provide there would be helpful.

Good morning, Christine, and thanks for the question. Look, so I'll say this, because I've been called all kinds of things. Conservative, yes, yes, yes. No, we accept that, all four of us here. Look, we have line of sight on all 700 million. All 700 million, I would describe it as more pull than push, right? Because we have a customer attached to it. We have plans to either certify the part or the part's already certified. and have had conversations, not just with the engineering team, but operations, in terms of how we operationalize, design, whatever it is, those typical products. So clear, clear line of sight. The reason that we say 15%, right, because we guide to one to 3%, that would take us to the 3%, should we do better? I'll say this, just between you and I, we should, right? But with that said, here's what happens in this industry. things just move to the right for no other reason than just timing. It could be because the FAA is shut down, which they've done twice since we've been public, and slow down the certification of some of our products, which has happened twice now, and things can move to the right. But what will not change is the opportunity set, right? So could we win 50%? Eh, why not? But it may not happen immediately. As we have protected over the next five years, it could take six, seven, whatever it is to move it, move to the right. So conservative, sure. Oh, and one other thing I should add. The great news about the pipeline, it's a living, breathing entity, and it continues to grow. So 600 to 700 to whatever into the future, that's probably the most powerful news. Sorry to interrupt you.

Go ahead. No, super helpful, Dirksen. I just wanted to follow up then. So in terms of the milestone to watch, the gating factor for the $700 million opportunity, is it then the FAA approval of your offering or is it some sort of contracting mechanism from the customer? I guess just want to understand, you know, what the next step would be for getting that. And then also, if you get that approval, when, you know, let's say you unlock, you know, a portion of this, is that a run rate for the following year that you would get? Or is that an immediate kind of a number? Or is that an overtime kind of number? Just want to understand a little bit more the timing and then also the duration of how that kind of flows through.

I understand the question. Great question. So I'll give you a couple of examples, kind of give everyone a sense as to what we deal with. So I'll take the FAA since I did bring it up first, shut it down a couple of times. So let's take breaks. We have 11 platforms that we're looking to certify. That's how we started our mission. We've done seven. There's another four that we expect to complete within the next 12 to 18 months. So I'll share. The available market for those 11 platforms is hundreds of millions of dollars, right? We won't win all of that, right? So when I think about, is that a gating item? For breaks, it is, okay? We are collaborating across the second example. We're collaborating across five of our business units for an opportunity that one of our customers brought us because it's a big pain point for them. We have the capability across the five business units that are collaborating to solve this thing that no one else has. Everyone else would have to go out to a vendor, a supplier to support them with the capability. That is something that we've been working on for the last three months. I will tell you that our customer would tell us we want to have it done by the end of the year. I will tell you that for whatever reason, and I can name a plethora of them, it typically moves to the right. It has nothing to do with certifications. It's just the drumbeat of how slow this industry moves, especially engineers, right? So there's a number of reasons that it can move to the right. So the way to measure how successful we are is by measuring our organic growth. Organic growth, as I said before, over the next couple of years, the biggest driver will be coming from this new business. So as we get into the second half of the year, we get into 2027 and beyond, we would expect organic growth to rank second and a half into the future. That's, I think, how you would be able to judge it.

Great. Super helpful. Thank you, guys.

Thanks for the question, Mr. Steve.

The next question is from John Godden of Citi. Please proceed with your question.

Hey, guys. Thanks for taking my question. What I wanted to ask about was just the portfolio mix and kind of give you an opportunity to kind of speak through the mix a bit. There's a concern out there, as you guys very well know, that some of the higher margin aftermarket companies are over-earning. you know, and perhaps that that margin profile is at risk, even if there's a slight shock to aftermarket demand and traffic growth. I know that you guys, you know, don't hold that view, but I wanted to just sort of, you know, use the opportunity to address that question.

Yeah, no, John, thanks for the question. And yeah, we get that question a lot. Look, I think as I said in my remarks, we don't take a razor razor blade approach to any of our product lines, any of our products. How many do we have, 25,000? None of them do we take that approach with. Okay, so let's start with that. Two, I believe, we believe that we should get paid for what we supply. You can call it OE, you can call it aftermarket, you can call it military, whatever you like, right? All of our parts, We make good money. Some we make better than good, but we make good money across all of them. And I hope this quarter helps people get a better sense of that, given the fact that OE Commercial was our largest growth sector and we have record margins. So I'll say this way. I personally don't care where the growth comes from. I know everybody's focused on aftermarket, which we love, and it's half of our business, but I don't care if it's defense, I don't care if it's OE commercial. We're going to make good money. And margins, in spite of which one grows faster, it's going to continue to grow. Operating leverage, price over inflation, focus on the right parts, pricing things right, it's going to continue to grow. So, John, hopefully I answered your question there.

No, that's very helpful. And if we could spend an additional moment on military aviation, what's going on in defense and the outlook there, obviously there's a lot of activity, you know, in the Middle East. And I'm just kind of curious to maybe get a little bit more color on the outlook and if you're seeing clear signs of that kind of picking up and what that might mean for the portfolio if this activity continues or if the activity stops altogether.

Yeah, I would say this, John. It's interesting. So you're marrying up demand, right? Because we see the same thing you're seeing. There's a lot of conflict. A lot of airplanes are flying, that kind of thing. And then with inventory levels and our ability to meet that demand over time, I would say this, right? Clearly, the operations that are happening in the Middle East and on a global scale will drive demand for our parts. The trouble we always have is saying, hey, is that going to hit Q1, Q2, Q3, Q4, whenever. It's just really challenging. You know, Dirksen highlighted the F-18 breaks were, you know, didn't have recurring revenue this year that they had last year, and that's a product where the military buys a lot in bulk, and then they burn it down, and then they'll come back, and they have to come back to us. So I would say this. Conflict breeds demand, but the timing of when we support it is going to be varied.

And if I can add to that, to what Ian just said, I can share this with you, John. I know that we are currently working on a number, a number of opportunities on the military side. It's not in our backlog yet. That gives us great comfort that as we think about beyond 2026 and beyond, that the military and market is going to be super strong.

Okay. Okay. I mean, we'll look forward to that. That's good color. And if I could just ask one more, a little bit kind of splitting hairs, but you guys have BizJet and general aviation exposure. You also have commercial aftermarket exposure. Is there anything kind of tea leaf reading, anything to point out between the two exposures? just in the context of kind of evolving and a little bit of kind of macro volatility out there. I'm just curious if they're zigging and zagging kind of any different ways or if the demand signals are different.

No. I mean, we're all looking at each other, shaking our heads. No, nothing zigging or zagging. I guess – I would say this. I mean, as you know, the general aviation market is going to be the most sensitive to the economy, right? But it has remained fairly strong for the parts that we are shipping. So don't see a significant amount of weakness in terms of backlog. So no, no zigging or zagging that we see.

Excellent. Thanks for the update, guys.

Thanks, John. The next question is from Noah Popovic of Goldman Sachs Asset Management. Please proceed with your question.

Hey, good morning, everyone.

Hey, Noah.

Guys, can we talk more about these margins? You know, it's a pretty big year-over-year lift, sequential lift. That's despite just folding in some newly acquired revenue, although I guess we know LMB is pretty high margin. Maybe that's part of it. But if you could just discuss a little more How you got the margins there? Is there anything kind of favorable in the quarter? The guidance for the rest of the year would imply you're kind of flat, maybe even down a little bit the rest of the year. Is that right? And then beyond this year, Dirksen, you talked about the algorithm of top line organic 10, EBITDA organic 15. I think that implies from where your margins are today, something close to 200 basis points of annual expansion. You've done that in the past, but, you know, it's not what the consensus has. I just wanted to make sure I understood that. Thank you.

Thanks for the question, Noah. First of all, I'm never going to disagree with you, Matt. If you say 200, it's 200, just to say that out loud. But here's what I would say about margins and where they came from. So, yes, you're right. We highlighted that L&B – started out with very, very good margins that were accretive to our margin. But I will tell you this, because we haven't said this out loud, that Harper was significantly in the opposite direction in terms of it being significantly dilutive. So where's the margin growth coming from? It's coming from price over inflation. It's coming from operating leverage, because look, we have, what's the number today? 38 people on the corporate team. And when we're twice the size, guys, stick with this, we will have maybe 45, right? So we look at costs very seriously in terms of how we think about adding. You've got to add value, right? So the operating leverage, the way we approach it, especially around productivity, all the initiatives that we have going on, it's a continually drive margin. I will tell you that one of the first things that a business that joins our family learns to speak is our language. And our language is price over inflation, productivity, and productivity we define as follows, which is the improvement in margin when you take away price and inflation. So everything else, margin has to go up. So you can't tell me that you're working on some project that's going to reduce variable costs by X. If I don't see it in the margin, I don't believe you. So I think it goes to our culture and the focus on how we think about margins. And the last thing I would add, Noah, because I think sometimes some people get this wrong, 90% of what we do is proprietary, which is why I said on the call earlier that given the visibility we'll have because airlines are reducing capacity, we can flex, I'll say it that way, we can flex any of our leverage points in terms of value drivers to make sure that we continually grow the business 10% top line, 15% EBITDA organically. So highly, highly confident that margins are only going up from here. I'm not going to commit to 200 basis points a year though.

Okay. Yeah. We try to get the math right, but you know, a lot of times it's on the fly. I appreciate all that Dirksen. And then just, you know, you've alluded to it right there and you spoke to it earlier, but It'd just be great to have you elaborate a little bit more on what you're hearing from your customers vis-a-vis geopolitics and higher crude. It sounds like from the industry and from you that the changes the airlines are making thus far are pretty small. I'd love if you could just talk about, you know, why do you think that is? I mean, it's actually a little surprising they haven't changed a little more. And what's the threshold for them to take further action?

So the conversations we're having with customers have been pretty rational, I guess is the term I would use, right? Everybody is rubbing their crystal ball to decide how long this conflict is going to go on. Right now the crystal ball says it should not be months, right? It's going to be a shorter period of time. So everybody is reacting in that manner. I'll share a little bit. Approximately 2.5% of our revenues comes from the area where the conflict is, if I can say it that way. In the first quarter, we saw no impact of that in sales or orders, okay? So I think that goes to how people are thinking about it at this moment in time. Now, 13 weeks from now, if we wake up and we're still in this malaise, I may have a slightly different answer, but... That answer will be followed up by the following. We have proprietary products that our customers need, and we have the ability to flex in terms of any of our value drivers to make sure that we're going to grow 10% top line, 15% to eat it up. Can I end there?

That's a good ending. Thank you very much.

All right. Thank you.

The next question is from Sheila Kahayu of Jefferies. Please proceed with your question.

This is Jack Ewell on for Sheila.

Hey, Jack.

Hey. Just following up on Noah's question, in a higher for longer fuel environment where we do potentially see a lagged aftermarket volume headwind, you're noting that you'll be able to offset any of that through price. Can you just talk about what's driving lower pricing power, whether that's through contracts or elsewhere?

So, Jack, I didn't say price. I said we flex our value drivers, but let's go with that. So what drives that? I'll give you an example. So the F18 brakes that we referred to that we had orders last year and we shifted, you know, we haven't seen them this year. I'll describe what we do for that brake, right? So we do the needling and the heat treat for the brakes that doesn't have our name on it, okay? And that process, if we took that piece of equipment and moved it across the street, our customer would have to re-certify that brake on that particular aircraft. So when we say proprietary, we mean there's nowhere else for you to go, right? Especially in a 12-month period, right? We will flex, I'm going to use my terminology, our value drivers to offset any reduction. Now, the reduction that probably people are talking about at this moment in time is low single digits, because that's what we've seen with people reducing capacity. Where we may have a greater flex, I'll admit this, is probably at a distributor or two who may decide to reduce inventory for cash flow reasons in the interim, but all that would mean, Jack, is that When they do decide to order, they'll be ordering at a higher price. I will use the term that. And so to us, it's just noise. Every 13 weeks to us is noise. Five years from now, it will be a much bigger, better business with greater proprietary content, driving a lot more new business, et cetera, et cetera. And that's kind of how we think about it. Hopefully somewhere in there, I answered your question.

No, absolutely. That was very helpful. And I think just for a quick follow-up, you guys employ a very disciplined M&A approach, targeting one or two acquisitions a year and looking for high IP suppliers that can double EBITDA within a three- to five-year time range. Could you just talk about the M&A pipeline now and, you know, Laura's appetite in the medium term?

Well, the appetite is high, and the pipeline continues to be large and very active and Look, I mentioned it in my discussion around the slides that although it's a very large pipeline and it's very active, it's one that requires discipline. And I say that because certainly in the last year or two, there's been a lot of capital markets activity around aerospace. That falls to the ears of everybody in the supply chain. particularly those who are thinking about selling their businesses. And we have seen a greater array of businesses with a more disparate range of quality, if I can call it that, such that you have to be very careful around making sure that the businesses you buy can generate the returns that you just mentioned, have the proprietary content that we like, and have all the requisite dynamics to generate the type of growth and financial performance that you've seen, I'll say it again, over the last 14 years from us. And so that's really the challenge in the market. It's not a dearth of opportunities. There's actually too many opportunities where we have to prioritize the things that we like, the things that we think are a good fit, and maybe most importantly, the things that we can execute on.

Thank you very much.

Thanks, Jack.

The next question is from Ken Hebert of RBC Capital Markets. Please proceed with your question.

Yeah, hey, good morning, Dirksen and team. Maybe just to level set us, Dirksen, as we think about the aerospace aftermarket, how much of your business is backlog driven versus book and ship? Like as you head into the second or the third quarter, how much visibility do you have and maybe what percentage of the mix is basically book and ship as you think about aftermarket in particular on the aerospace side?

That's a great question. So look, for aftermarket products, we'll typically enter a month with half of it in backlog, the other half of it book and ship. But we are really good at forecasting what that book and ship looks like, again, because we're proprietary. I'll say this word, exclusives. I didn't say sole source, guys. Exclusive provider. So we have pretty good visibility. So we can start a quarter and know, yeah, pretty close to where we're going to be. Now, that's aftermarket. OE, defense, longer lead time. We have quarters in front of us in terms of visibility, how we think about things. About 50% typically in backlog when we start a month.

Thanks, Dirksen. That's helpful. And I just wanted to maybe push a little bit on the new business opportunity. I know this has been an important part of the story for several quarters now. It seems a little bit maybe like your estimates could be conservative as we think about some of the wins you've had and the $700 million opportunity you talk about. How do we think about that phasing in maybe this year versus what could be sort of incremental upside in 27 and 28, sort of the near term on that versus the mid to longer term?

Yeah. So what we're comfortable sharing at this moment in time, Ken, is what we've said, which is we expect new business to be 1% to 3% and over the next few years closer to 3%. But as I tell people, the number 4 is closer to 3 than 1%. So could it be three plus? Yeah, I could see that. So it's a percentage growth year over year. The beauty of it is, I don't think Ian mentioned this, but two-thirds of that $700 million is OE. One-third is aftermarket. So let's put the aftermarket aside because I think everybody gets that. You get aftermarket, it's going to be high margins, it's going to be beautiful business, all that stuff. What I'm most excited about is the two-thirds that are OE because what it means is repetitive future aftermarket sales for decades to come. So I think someone asked this question earlier. Maybe I didn't answer it properly. But when I think about winning that new business, we're talking about uplifting the whole company in terms of revenues going forward. So it's not win, ship, and that's it. It's win, ship, and then replace and repair and have recurring revenues, the annuity stream that we're looking for. So when we talk about looking for acquisitions and looking for the types of business we love, it's also the same discipline we have when we think about the products that we have in the new business pipeline. Because we have choice, right? We're looking for the things where we're going to get great margins, where we can continue to grow it, where we can position ourselves with a customer and be their supplier of choice, exclusive, whatever, however you want to call it, going forward. So conservative, okay. Second time I've been called out today, I accept it. We are being conservative in how we think about it. But for us, the conservatives... Conservatism comes from the fact that the timing, just like acquisitions, is the hardest thing to predict, right? So I'll stick with a one to three, closer to three at this moment in time.

Thanks, Dirksen.

There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

So look, Look, thank you everyone for taking the time to hear our story again today. Hopefully we've been able to clarify some of the things that's been on your mind. We are excited about what we're gonna accomplish in 2026 and beyond, because look, we're building that aerospace and defense cash compound that we dreamed of 14 years ago. And I'll say this, I'm looking forward to speaking to you guys in 13 weeks. So with that said, thank you, and we'll chat in 13 weeks.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.