Transdigm Group Incorporated

Ladies and gentlemen, thank you for standing by and welcome to the TransDyn first quarter earnings conference call. At this time, all participants are in listen-only mode. After the speaker's 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 call is being recorded. If you require additional assistance, you may press star then zero to reach an operator. I would like to hand the call over to Jamie Seaman, Director of Investor Relations. Please go ahead.

Thank you, and welcome to Transdime's fiscal 2021 first 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 Listman. Please visit our website at transdime.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 GAAP measures and applicable reconciliation. I will now turn the call over to Nick.

Good morning. Thanks for calling in. As usual, I'll start with a quick overview of our consistent strategy, a few comments about the quarter, and then Kevin and Mike will expand and give more color. 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 cycle. To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by proprietary products, and around 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 generally have significant higher margins and over any extended period of time have typically provided relative stability through the downturns. 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 unique compensation system closely aligned with shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to a PE-like return. And lastly, our capital structure and allocations are a key part of our value creation methodology. As you saw from our earnings release, we had a decent Q1 considering the environment, but we're still in a very tough commercial aerospace market. Our longstanding goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital. The commercial aftermarket revenue, typically the largest and most profitable portion of our business, dropped sharply in the second half of fiscal year 2020, as we expected, following the steep decline in air travel due to COVID. Sharp drops have happened during other severe shocks, though not to this magnitude and likely duration. At this point, there are some indications that Q3 of our fiscal year 2020 was the bottom. To the positive, we saw significant sequential increases in commercial aftermarket bookings in our fiscal year Q1. But the stalling of the air travel recovery concerns us with regards to timing. Our commercial aftermarket simply will recover as more people worldwide fly again, though not necessarily in lockstep. This is starting to happen slowly and somewhat erratically, but the timing of the recovery is still not clear. In addition to safety, the two most important items we continue to focus on are the things we can to some degree control. One, we are tightly managing our costs. Our revenues were down significantly in fiscal year 2021 Q1 versus the prior year Q1, but our costs are down about the same. The mixed impact of low commercial aftermarket revenues continues to impact our margins, but we have been able to mitigate part of this impact. Secondly, assuring liquidity. We raised an additional $1.5 billion at the beginning of our third quarter of fiscal year 2020, The money raised was an insurance policy for these uncertain times. It now seems unlikely that we will need it. We continued to generate cash in Q1 of 2021. We generated about $275 million of positive cash flow from operations and closed the quarter with almost $5 billion of cash. This is prior to the acquisition that we made in January. Absent some large additional dislocation or shutdown, we should come out of this with substantial firepower. We continue to look at possible M&A opportunities and are always attentive to our capital allocation. But the M&A and capital markets are always difficult to predict, but especially so in these uncertain times. In general, on capital allocation, we still tend to lean towards caution but we feel better now than we did six months ago for sure. M&A activity in this last quarter was more active. As I'm sure you saw, we made a good-size acquisition after the quarter ends. We bought the Cobham Air Connectivity business, which is an antenna and radio business, for a purchase price of $965 million. I must admit it does feel good to play some offense again. This is a good proprietary sole source business with high aftermarket content. We also like the customer diversity. As usual, we expect to get a PE-like return on this transaction. Though we are not giving overall guidance for Transdyn, for the little less than nine months that we will own the Cobham business in fiscal 21, we expect it to contribute roughly $160 million in revenue and with EBITDA as defined margins running in the 25 to 35% range. The revenue is impacted somewhat by the historical calendar year versus fiscal year shipment timing. We paid for the Cobham business with cash on hand, so but for the tax impacts, much of this will drop right through to earnings. We also sold two small non-proprietary former Esterline businesses that did not fit our model for about $30 million so far in 2021. The total revenues for these businesses in fiscal year 20 were roughly $35 million, and EBITDA was in the 10% revenue range. We continue to investigate the sale of a few other less proprietary defense businesses that don't fit as well with our consistent long-term strategy. At this point, it's too soon to know when or if we will sell these businesses. We still don't have sufficient clarity to give 2021 guidance. When the smoke clears enough for us to feel more confidence, we'll reinstate the guidance. In general, we are planning to keep tight control on expenses and hold our organization roughly flat until we see more clear signs of a pickup. We believe we are about as well positioned as we can be for right now. We'll watch the market develop and react accordingly. Now let me hand it over to Kevin. to review our recent performance and to give more information on Q1 and other thoughts.