Transdigm Group Incorporated

Good day, ladies and gentlemen, and welcome to the Q2 Transdime Group Incorporated earnings call. At this time, all participants are on a listen-only mode. Later, we conduct a question-and-answer session. Instructions will follow at that time. If anyone should require operator assistance, please press star then the zero key on your touch-tone telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Liza Sable. Ma'am, you may begin.

Thank you, and welcome to TransTime's fiscal 2019 second quarter earnings conference call. Presenting this morning are TransTime's executive chairman, Nick Howley, president and chief executive officer, Kevin Stein, and chief financial officer, Mike Listman. 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 the company's latest filings with the SEC. We'd also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income, and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in earnings release for a presentation of the most directly comparable GAAP measures and a reconciliation of EBITDA, EBITDA as defined, adjusted net income, and adjusted earnings per share to those measures. I will now turn the call over to Nick.

Good morning, and thanks for calling in. Today, as usual, I'll start off with some summary comments on our strategy, our consistent strategy, a few comments on the second quarter and year-to-date fiscal 19, a quick update on the Esterline deal, and a few other items. Kevin and Mike will then review the business performance and the outlook for fiscal year 2019. 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 aerospace 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 downturns. 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 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 is very closely aligned with shareholders. Fourth, we acquire businesses that fit with our strategy and where we see a clear path to PE-like return. And lastly, our capital structure and allocation of our capital are a key part of our value creation methodology. Fiscal year 29 performance continues strong with another good quarter. Quarter and year-to-date revenues EBITDA has adjusted dollars, and Transdyn-based EBITDA margins were up nicely over the prior year. Incoming orders continue strong, especially in the commercial aftermarket, and well ahead of shipments across all major market segments, all boating well for the balance of the year. As you can see, we have increased our base business guidance for the year with an anticipated increase in all major markets. The revised guidance now includes 28 weeks of contribution from the completed Esterline acquisition, as well as an increase in base Transline revenue and EBITDA guidance. EPS for fiscal year 2019 is impacted by our capital market decision to raise $4 billion of senior secured notes in order to maintain substantial near-term financial flexibility. Kevin will expand on the quarter and full-year outlook. Our liquidity is strong. Assuming no additional acquisitions or capital market activity, we expect to have about $3 billion of cash at the end of the fiscal year. We also expect to have over $7 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-size possibilities. Again, I cannot predict or comment on possible closings, but as I said before, we are still working steadily at M&A and we're still open for business. A few comments about the Esterline transaction. We closed this transaction in mid-March. As I think you know, we paid about $4 billion for roughly $2 billion in revenue. Based on the public consensus information that existed at the time, About 330 million of fiscal year 19 EBITDA was anticipated. We estimate this is about 12 times EBITDA purchase multiple of the consensus fiscal year 19 EBITDA. As we said before, we think Esterline has been a misunderstood company. Its core aerospace and defense businesses make up around three-quarters or more of the revenue. This core business has proprietary content. and sole source positions generally similar as a percent of revenue trans dime. The core aftermarket also appears significant. We estimate somewhere in excess of 30% of revenues of the core business. As you know, and as we discussed with the esterline acquisition, we use an LBO model to value businesses that generally assumes we finance about half debt and about half equity. We then assume we sell the business in five years and look to get a return on our equity of 20% or more without any significant multiple arbitrage. As you know, as a practical matter, we rarely, if ever, sell them after five years. If you do the math on Esterline, this solves to a target EBITDA margin in the low to mid-20 range, or about an 8% margin expansion. We are still working out the timing on this, but it likely won't all happen in the first year. We have owned these businesses for about 55 days now, and we see no reason to think that we cannot meet our purchase expectation over time, and we see some indications that we may well do better. In summary, so far it appears the opportunity at Esterline is at least as good and perhaps better than we originally thought. Kevin will discuss the integration in a little more detail. We are currently actively exploring the sale of certain esterline assets that don't fit as well with our focus. These could recover something around a billion dollars of our purchase price on a pre-tax basis. We'll decide whether to proceed when we get a better view of the actual prices. We have the flexibility to consider the full range of capital allocation alternatives, We will defer any other 2019 decisions on capital allocation until either late in the third quarter or the fourth quarter of fiscal 19 and assess the overall business and capital market environment at that time. And lastly, with respect to the IG report that I mentioned last quarter, it was publicly posted in substantially the same form as we discussed in our last earning call to reiterate, with no assertions of any wrongdoing, and a request for a $16 million approximate voluntary refund. As a follow-up to this, Kevin and I, along with some other DOD individuals, have been asked to testify at the House Committee on Oversight and Reform in mid-May. The purpose is to discuss the report, pricing, and possible legislative or regulatory changes. Now let me hand this over to Kevin, who will discuss both the Q2 and year-to-date 2019 performance, as well as the full-year guidance.