Transdigm Group Incorporated

Good day, ladies and gentlemen, and welcome to your Q1 2019 Transigned Group Incorporated earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If anyone should require operator assistance during the conference, please press star, then zero on your telephone keypad. As a reminder, today's conference will be recorded. I would now like to turn the call over to Liza Stables with Investor Relations. Ma'am, you may begin.

Thank you, and welcome to TransFind's fiscal 2019 first quarter earnings conference call. Presenting this morning are TransFind's Executive Chairman, Nick Howley, President and Chief Executive Officer, Kevin Stein, and Chief Financial Officer, Mike Listman. A replay of today's broadcast will be available for the next week, and dial-in information can be found in this morning's press release and on our website at TransLine.com. Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC available on our website or at sec.gov. We'd also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDAs defined, adjusted net income, and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and a reconciliation of EBITDA, EBITDA is defined, adjusted net income, and earnings per share to those measures. I will now turn the call over to Nick.

Good morning, and thanks for calling in. Today I'll start off with summary concepts, or comments, as usual, on our consistent strategy. A few comments on the fiscal year, first quarter of the fiscal year. A quick update on the Esther Line deal and related issues. and a few comments on the status of the Inspector General on it. Kevin and Mike will review the business performance for the quarter and the outlook for the year. To reiterate, we believe our business model is unique in the industry, both in its consistency and its ability to create intrinsic shareholder value through all phases of the cycle. To summarize some of the reasons why we believe this, about 90% of our sales are generated by proprietary products and over three-quarters of our net sales come from products for which we believe we are the sole source provider. Most of our EBITDA comes from aftermarket revenues, which typically have higher margins and provide relative stability in the downturn. Our longstanding goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we have to stay focused on both the details of value creation and as well as careful allocation of our capital. We follow a consistent long-term strategy. Specifically, 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 very decentralized organization structure and a unique compensation system that closely aligned with our shareholders. Fourth, we acquire businesses that fit with our strategy and where we see a clear path to a PE-like return. And lastly, our capital structure and our capital allocation are a key part of our value creation methodology. Fiscal year 19 is off to a good start. Q1 revenues, EBITDA has adjusted and EBITDA margins were up nicely over the prior year. The incoming orders were strong and well ahead of shipments across all major market segments, voting well for the balance of the year. As you can see, we have increased our guidance for the year. The revised guidance excludes any contribution from the expected esterline acquisition. Though we had a very nice booking quarter, one quarter does not make a trend. But if this continues, we could well increase the guidance again next quarter. Kevin will expand on both the quarter and the full-year outlook. While liquidity is strong, we had $2.3 billion of cash at the end of fiscal year Q1. Based on our recently announced financing and assuming no additional acquisitions or capital market activity other than the esterline transaction, we still expect to be somewhere in the range of $3 billion of cash at the end of the fiscal year. We also expect expect to have over $600 million of unused revolver and some additional room under our credit agreement. We continue to actively evaluate and seek M&A opportunities. We have a decent pipeline of mostly small and mid-sized possibilities. I can't predict or comment on possible closings, but we are still working steadily at M&A. As I said before, we're open for business. A few comments about the afterline transaction status and some related issues. As I think you know, we're paying about $4 billion for roughly $2 billion in revenue. Based on the public consensus information of about $330 million of fiscal year 19 EBITDA, we estimate this is about a 12 times EBITDA multiple, again, times the consensus 19 EBITDA. With respect to regulatory clearance, That is antitrust and foreign investment approval. Things are moving along well so far. In the United States, the HSR waiting period expired back in November, so we are clear to close with the FTC and the Department of Justice. All other required regulatory views are now complete, with the exception of the European Commission antitrust review and the French foreign investment review. These are proceeding through smoothly. and we expect to obtain approvals in a timely manner. As a reminder, we did not need to file for regulatory approval in China. In addition, Esterline has received shareholder approval for the transaction. Overall, the process is moving along well, and at this time, we now hope to close in the March-April timeframe. That is sooner than the Q4 timeframe we originally estimated. However, it's not finished yet, So there's always some uncertainty until it's concluded. As we said before, we think Esterline has been a misunderstood company. Its core aero and defense business make up three-quarters or more of the revenues. This core business has proprietary content and sole source positions quite similar as a percent of revenue to Transdyn. The core aftermarket also appears significant. We estimate this at over 30% of revenues. Though we have not made any final decisions on asset disposition at this time, I do expect that we will be selling certain assets that don't fit well with our focus. We are still working on specifics and timing, so I don't have any more to share on this topic at this time. We have now arranged the financing for the Esterline transaction. Last week, we priced about $4 billion of secured notes with a fixed interest rate of 6.25%. and a term of seven years. This is scheduled to fund on February 13th. This new financing will result in an average weighted cash interest rate on our total debt of about 5.7%. This is very close to the rate that we gave for the year with our original 2019 guidance. Additionally, we decided to refinance the $550 million of our high-yield bonds that come due in 2020. in order to push the maturities out until 2027. Including the new debt and the hedges and collars, we will have approximately 80% of our debt fixed or hedged and will remain close to that level for the next five years. I don't expect that our net leverage at close will be out of line with our recent levels. And if market conditions hold, we should still have the adequate flexibility to consider the full range of capital allocation alternatives. We will likely defer any other 2019 decisions on capital allocation until after we close the Esterline transaction and assess the overall business and capital market environment at that time. Absent any other acquisition or capital market activity, we will still de-lever about one turn a year. With respect to the Inspector General, or IG, on it, We and several Department of Defense contracting agencies, primarily the Defense Logistics Agency, known as DLA, have now received the draft report. The DLA is the largest of the buying agencies that were audited in this report. There has been no allegation of any wrongdoing or illegality. As in the past, the Department of Defense buying agencies are requesting a voluntary refund of some profits. The sum of the various individual requests appears to total about 16 million. Again, this is a voluntary request, and there is no assertion that this is a financial obligation of the company. The government's a good customer, and like any good customer, we want to be responsive where practical. We're glad to have the IG report concluded. We understand that the report will be available to the public within a few months. Now let me hand this over to Kevin, who will discuss both the Q1 2019 performance as well as the full year outlook.