Transdigm Group Incorporated

Good morning, ladies and gentlemen, and welcome to the fourth quarter 2020 Trent Stein Group Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star and zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would like to turn the conference over to your host, Janice Tiemann, Manager, Investor Relations. You may begin.

Thank you, and welcome to Transdime's Fiscal 2020 Fourth Quarter Earnings Conference Call. Presenting on the call this morning are Transdime's Executive Chairman, Nick Howley, President and Chief Executive Officer, Kevin Stein, and Chief Financial Officer, Mike Lisman. please visit our website at transime.com to obtain a supplemental slide deck and call replay information. 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 through the investor section of our website or at sec.gov. The company would 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 gap measures and applicable reconciliation. I will now turn the call over to Nick.

Good morning, and thanks to everyone for calling in. As usual, I'll start off with a quick overview of our strategy, then a summary of a few significant items in the quarter and next year, and then Kevin and Mike will expand and give a little more color. First, I'd like to start here with a short tribute to my original and long-term business partner at Transdime and long-term friend, Doug Peacock. Doug passed away this quarter at 83 years old. We worked together for 30 years with various business roles between us as boss, mentor, partner, advisor, and long-term friends. We formed the plan for Transdime in Doug's basement outside of Princeton, New Jersey in 1992. Doug was involved until almost the end and a participant in almost every major decision along the way. It's been one hell of a ride and continues to be. Doug lived a good full life and we'll miss his advice and guidance. He's been a key part of our consistent strategy, so it's only right that we jump into that next. Note the remarkable consistency over the last 20 years. Doug has been a key part of that. To reiterate, We are 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 focused on both the details of value creation as well as careful allocation of our capital. To summarize, here are 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. The commercial aftermarket revenue, typically the largest and most profitable portion of our business, dropped sharply in Q3, as we expected due to the steep decline in air travel. And though the commercial aftermarket picked up some in Q4, it's still off substantially. Sharp drops have occurred in the past during severe shocks, though not to this magnitude and likely duration. Simply stated, our commercial aftermarket will recover as people worldwide start to fly more, though not necessarily in lockstep. This is starting to happen slowly, but the rate of recovery has been slowed down by the recent resurgence in COVID infections, and the timing of the recovery is far from clear. We follow a 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 shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to PE-like returns. And five, our capital structure and allocation are a key part of our value creation methodology. As you saw from our earnings release, we had a decent performance in Q4, but are still in a very tough commercial aerospace market environment. On the positive side, our revenue and EBITDA as defined were up sequentially, that is versus Q3, about 15% and 17% respectively. with puts and takes roughly in line with the planning scenario we used for sizing. Obviously, due to the COVID impact on flying, both are down substantially versus the prior year Q4. To roughly frame the Q3 and Q4 revenues combined versus our planning assumptions, the commercial aftermarket wasn't quite as bad, the commercial OEM was a little worse, and our defense business was not quite as strong due to some Q3 timing issues. Defense businesses, however, were up substantially sequentially, that is versus Q3, and up about 7% versus the prior year Q4. Defense bookings were ahead of shipments for the year. In addition to safety, the two most important items we focused on continued to be reducing and managing our costs, As I have said before, Kevin and his team did an outstanding job of reducing the cost quickly. Our revenues were down in the second half about 30% versus the prior year. Second half, with some additional cost reductions in Q4, our run rate costs are now also down by about the same amount. The mixed impact of low commercial aftermarket revenues continues to impact our margin and but we have been able to mitigate part of this impact. Second, assuring liquidity. We raised an additional $1.5 billion at the beginning of the third quarter. The money was an insurance policy for uncertain times. It's unlikely we will need it, but heading into a storm, we filled our fuel tanks as full as we could at a reasonable price. We continue to generate cash in Q4. We've generated over $200 million of positive cash flow, and closed the quarter with over $4.7 billion in cash. Mike will give more detail here. Absent some large additional dislocations or shutdowns, we should come out of this with very substantial firepower. We continue to look at possible M&A opportunities and are always attentive to our allocation. Both the M&A and capital markets are always difficult to predict, but especially so in uncertain times like these. Acquisition opportunities in the last quarter were still slow, but we did start to see some modest pickup in activity. We are still actively looking for opportunities to fit our model. In general, with respect to our capital allocation, we still tend to lean towards caution, but we feel a little more optimistic than we did in Q3. We continue to review the esterline portfolio of businesses. We are investigating the sale of a few less proprietary defense businesses that don't fit as well with our consistent long-term strategy. If they are all sold, the go-forward revenue might decrease by roughly 250 to 300 million. The EBITDA margins on these businesses are significantly lower than our average, so the EBITDA impact would not be proportional. At this point, I can't speculate if we will sell all these businesses or not, but we are actively considering the possibility. Heading into our new fiscal year, we will not give 2021 guidance at this time. When the smoke clears enough for us to feel more confidence, we'll reinstate the guidance. We are hopeful that we have bottomed out. There is still just too much uncertainty around commercial air travel, the recent increases in COVID-19, infection rates, timing of vaccine, political situation, and various related issues. In general, we are planning to keep a very tight control on expenses and hold our organization roughly flat, but it's just too unclear to know exactly at this point. A few clarifications on some of the 2021 set points. The EBITDA margin as defined for next year is dependent on the rate of recovery in the commercial aftermarket revenue, among other factors. For planning purposes, we are assuming a pickup in the second half of the year. Given the recent surge in COVID cases and the uncertainties I mentioned above, we hope and intend to be cautious in our planning, but we just don't know. Secondly, operating cash flow, that is EBITDA minus CapEx and interest and cash taxes, as we traditionally define it, is more in the range of 40% plus a little of the EBITDA as adjusted. This is partially offset by some other conservative assumptions that Mike will review in more detail. We believe we are about as well positioned as we can be for right now. We'll watch the market develop and react accordingly. And now let me hand this over to Kevin to review our recent performance and to talk a little more about 2021. Thank you.