Transdigm Group Incorporated

Thank you for standing by and welcome to the Q3 2021 Transdime Group 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 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your host, Director of Investor Relations, Jamie Steeman. Please go ahead.

Thank you, and welcome to Transdime's Fiscal 2021 Third Quarter Earnings Conference Call. Presenting on the call this morning are Transdime's Chairman, Nick Howley, President and Chief Executive Officer, Kevin Stein, and Chief Financial Officer, Mike Lisman. 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, and thanks to everybody for calling in. As usual, I'll provide a quick overview of our strategy, then a few comments about the organizational change we announced, and Kevin and Mike will give a color on the quarter and the performance. 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. To summarize... Some of the reasons we believe this are about 90% of our net sales are generated by proprietary product, 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 generally have significantly higher margins and over any extended period of time have typically provided relative stability in 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 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 fifth, our capital structure and capital allocation are a key part of our value creation methodology. 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. As you saw from our earning release, we had a good quarter. especially considering the market environment. We are still seeing some recovery in the commercial aerospace markets. We continue to generate significant cash. We have a little over $4.5 billion as of this quarter, as of the end of this quarter. Absent any capital market activity or other disruptions, we should have about $4.8 million cash by the end of September fiscal year, and we expect to steadily increase generate significant additional cash through fiscal year 2022. We continue to look at possible M&A opportunities and are always attentive to our capital allocation. Both the M&A and the capital markets are always difficult to predict, but especially so in these times. On the divestiture front, during Q3, we completed the sale of three less proprietary businesses for about $240 million. At this time, we have decided not to sell the one remaining primarily defense business that we were previously considering for sale. For now, our esterline-related divestitures are about done. At this time, I don't anticipate that we will make any significant dividend or share buyback for the next two quarters. We'll keep watching and see if our views change. We believe we are pretty well positioned. As usual, we'll closely watch the aerospace and the capital markets develop and react accordingly. I'd like to address the executive chairman to chairman change that we announced today. Just to be very clear, there is no change in the duration of my commitment to Transdyn. My contract had a term that ran through 2024. And this modification anticipates a term through 2024 and likely beyond if the Board and shareholders believe I continue to add value. Going forward as Chairman of the Board and Chairman of the Executive Committee, I will be particularly focused on mergers and acquisition, capital allocation, and major strategic issues. I will, of course, work with Kevin to keep the underlying value of Transline moving forward. Both Kevin and I believe that now is a good time to move into the next phase in the transition. The board and I believe that Kevin has done a fine job over the last three years as CEO and come up to speed very well. The last three years have been eventful. For the first roughly 18 months, Kevin and his team successfully integrated Esterline Technologies, by far the largest and most complicated acquisition in our history. For the second roughly 18 months, Kevin and his team dealt with the unprecedented COVID-19 generated downturn in our largest market, the commercial aerospace market. They responded quickly and effectively. Additionally, they kept our base business running as smoothly as possible during this tough period and began to integrate another decent size acquisition. No easy task given this level of market disruption. All in all, a real baptism of fire. Though there is more value to create, the heavy lifting in the Esther line integration and related portfolio adjustments are about complete. We believe that we are now starting to see some light at the end of the tunnel on the COVID-related market dislocation, so the time seems appropriate. The company also saves a little money by this. As a personal asset test, asset test, I remain a sizable investor in Trans9 and feel very confident that Kevin will continue to create Substantial value for us all.