Transdigm Group Incorporated

Signing by and welcome to the TransDyn Second Quarter Earnings Conference Call. At this time all participants' lines are in a listen only mode. After this speaker's presentation there will be a question and answer session. To ask a question during the session you will need to press star 1 on your telephone keypad. Please be advised that today's comment has been recorded. If you require any further assistance please press star 0. I would now like to hear the comments of your speakers today. Please go ahead.

Good morning. Thank you and welcome to TransSign's fiscal 2020 earnings conference call. Presenting this morning are TransSign's Executive Chairman Nick Howley, President and Chief Executive Officer Kevin Stein, and Chief Financial Officer Mike Listman. Please visit our website at TransSign.com to obtain a supplemental slide deck and call replay information. 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, available through the investor section of our website at sec.gov. We would also like to advise you that during the course of our 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 table and related footnotes in the earnings release for a presentation of the most directly comparable gap measures and applicable reconciliations. With that, I will now turn the call over to Nick.

Good morning, and thanks to everyone for calling in. Today I'll start off with some comments, as usual, about our consistent strategy. Then quickly a little on the last quarter, an overview of our efforts with respect to the COVID-19 and the related market deterioration. and some short comments on capital allocation. Kevin and Mike will then expand on most of these. To reiterate, we believe we are unique in the industry in both the consistency of our strategy in good and bad times, as well as our ability to create and protect intrinsic shareholder value through all phases of the aerospace cycle. To summarize some of the reasons why we believe this, about 90% of our net 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 significantly higher margins and over any extended period of time provide relative stability in the downturn. In the commercial aftermarket, the largest and most profitable portion of our aftermarket is demand appears likely to drop very sharply. This has happened during other severe shocks. However, in this unique circumstance, it could likely take longer to recover. Simply stated, our commercial aftermarket won't start to recover much until people start to fly again. Our long-standing 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. We utilize a simple, well-proven, value-based operating methodology. In the current situation, we had to move fast to adjust our costs while maintaining the other aspects of our value creation methodology. We have a decentralized organization structure and a unique compensation system closely aligned with the shareholders. We acquire businesses that fit with our 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. As you saw from our press release, We had a solid performance in both the second quarter and the first half of fiscal year 2020. Revenues and EBITDA as defined were up substantially. We continued to generate real intrinsic value for our investors. Unfortunately, this all happened in a different environment than that which has been thrust upon us in the last 60 days. Last quarter, we expressed concerns about both the durability of the commercial aerospace production cycle and the early signs of Pacific Rim air travel slowing. As a result, we began to adjust our cost structure down in January and February of this year. In March, it became clear that the COVID-19 situation and the related government actions around the world will substantially and negatively impact the worldwide commercial aerospace business. Exactly how badly, we just can't yet know for sure. However, we also can't wait for perfect information. We got moving fast, and we will adjust as the situation clarifies. In addition to safety, the two most important items we focused on immediately were, one, reduce our costs as quickly as possible, and two, assure substantial liquidity that things get worse than might be expected. To address these, first the cost reduction. We have significant experience in dealing with severe downturns. Our process is pretty consistent. We make the best estimate we can for a six-month run rate. We then try our best to get our costs down enough to hold the EBITDA as defined margin at that estimated run rate. This is perhaps more difficult than usual now in this situation. In order to size the organization and our cost structure, we made certain assumptions regarding our major market segments. These are not meant as revenue guidance. We just don't know enough, but only a means to size our cost-cutting efforts. The only thing I know for sure is that we won't be exactly right, and we'll have to adjust up or down. In aggregate, I am hopeful that we are appropriately conservative. Kevin will explain this in some more detail. We quickly reduced our cost structure in line with these assumptions. Most of these actions are in place already. To remind everyone, these costs are in addition to the cost cuts we made earlier in the second quarter. We believe we can get costs out ratably with our reduced revenue sizing estimates. We define cost as revenue minus EBITDA as defined. However, there will likely be a significant next headwind if the short drop in the highly profitable commercial aftermarket continues for the full six months. This will make holding the run rate EBITDA has defined margin in the mid-40s range tough. We think we can come reasonably close to this. It'll be hard to get all the way there. With respect to liquidity, the liquidity appears to be fine. Based on any of the market forecasts we've seen, we expect to run cash positive over any extended period, including covering all required principal and interest payments. However, given the substantial market uncertainty, we decided to raise additional money and borrowed $1.5 billion in April. This new debt has no maintenance covenants and no maturities until 2025. This new money is an insurance policy for these uncertain times. It's quite unlikely we need it. This is a great company with outstanding products and market positions. The only way you get in trouble here is if the situation becomes much worse than anyone expects and you run out of fuel or cash. We're filling our tanks as full as we can at a reasonable price. Pro forma for the new debt, our cash balance is $4.2 billion as of 3-28-20. Again, I doubt we will need this money, but better safe than sorry in this environment. We hope to come out of this with a lot of firepower. We continue to look at possible M&A opportunities and are always attentive to our capital allocation. Both the M&A world and the capital market world are always difficult to predict, especially today. As a general rule, we will tend to be fairly cautious until the smoke clears a little bit. We have withdrawn our 2020 guidance. There's just too much uncertainty. We'll reinstitute our guidance when we feel we have a clearer picture. Our fiscal year 2020 started off strong. The first half was good, but the second half will be pretty rocky. We believe we are about as well positioned as we can be for right now. We'll watch how the situation develops and react accordingly. Now let me hand this over to Kevin to review our recent performance. and expand on our assumptions and COVID related activities.