Transdigm Group Incorporated

Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2020 TransDime Group Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker today, Ms. Liza Sable. Treasurer and Director of IR. Thank you. Please go ahead.

Thank you and welcome to TransTime's Fiscal 2020 Third 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 Lisman. Please visit our website at transtime.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 results to differ materially from those expressed or implied in those forward-looking statements, please refer to the company's latest filings with the SEC available through the investor section of 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 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 the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliations. I'll now turn the call over to Nick.

Good morning, and thanks for calling in. As usual, I'll start with a quick overview of our strategy, a summary of a few significant items in the quarter, and then Kevin and Mike will expand and give more color. To reiterate, we're unique in the industry in both the consistency of our strategy in good and bad times, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. Our longstanding goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we must stay very focused on both the details of value creation as well as careful allocation of our capital. To summarize, here are some of the reasons 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 margin and over any extended period of time provide relative stability in the downturns. The commercial aftermarket revenues, the largest and most profitable portion of our aftermarket, dropped sharply, as we expected, due to the steep decline in air travel. This has happened during other severe shocks. However, in this unique situation, it will likely take longer to recover. Simply stated, our commercial aftermarket will recover as people worldwide start to fly again, though not necessarily in lockstep. There are indications of this starting to happen, but the rate of improvement is spotty and far from clear. 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 decentralized organization structure and a unique compensation system closely aligned with our shareholders. Fourth, we acquire businesses that fit that 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 decent performance in a very tough quarter. Revenue and EBITDA, as defined, were down substantially, with puts and takes but roughly in line with the planning scenario we used for sizing. To roughly frame the Q3 revenues versus our planning assumptions, the commercial aftermarket wasn't down quite as badly. The commercial OEM was a little worse. and our defense business was not quite as strong due to backlog timing, tough comps, and two operating unit-specific situations. Fortunately, the year-to-date defense bookings are running well ahead of shipments, which continues to bode well, and the defense backlog available to ship in Q4 is strong. In addition to safety, the two most important items we focused on for the last quarter were, first, reducing our costs as quickly as possible. Kevin and his team did an outstanding job of reducing these costs very quickly. Our revenues were down roughly a third from the previous run rate, and we got our costs down almost ratably very quickly. We expect to get some further cost reduction in the fourth quarter. Second priority was to assure substantial liquidity. We raised an additional $1.5 billion at the beginning of the quarter. This new money raise is an insurance policy for these uncertain times. It's unlikely that we will need it. This is a great company with outstanding products and market positions. The only way you get in serious trouble due to this market condition is if the situation becomes much worse than anyone expects and you run out of fuel or cash. We filled our tanks as full as we could at a reasonable price. The actual liquidity in Q3 was pretty good. We generated almost $400 million of positive cash flow and closed the quarter with a little under $4.6 billion in cash. Absent some large additional dislocation or shutdown, we should come out of this with substantial amounts of firepower. We continue to look at possible M&A opportunities and are always attentive to our capital allocations. Both the M&A and the capital markets are always difficult to predict, but especially so today. Acquisition opportunities in the last quarter were minimal. This isn't unexpected. We are looking for good proprietary aerospace businesses. They tend not to sell in bad times. We are still actively looking for M&A opportunities that fit our model. In general, on capital allocation, we will tend to be cautious. until the recovery picture comes into focus a little more clearly. Hopefully, this won't be too much longer. We continue to suspend guidance. There is still just too much uncertainty. We will reinstitute the guidance when we feel we have a clearer picture. We do expect that absent any large additional dislocation or shutdown, Q4 revenues should be better than Q3. We also expect some additional cost reductions in Q4. Depending on the exact shipping mix, this could result in modest margin expansions in the next quarter. We believe we are about as well positioned as we can be right now. We'll watch the market and react accordingly. And now let me hand it over to Kevin to review our present performance and expand on our assumptions and COVID-related activities.