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spk11: Thank you for standing by, and welcome to the Transtium Group Incorporated Fourth Quarter 2021 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'll need to press star 1 on your telephone. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Jamie Steeman, Director of Investor Relations. Please go ahead.
spk10: Thank you, and welcome to Transdime's fiscal 2021 fourth quarter earnings conference call. Presenting on the call this morning are Transdime's President and Chief Executive Officer, Kevin Stein, Chief Operating Officer, George Valadares, 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 Kevin.
spk03: Good morning. Thanks for calling in today. First, I'll start off with a quick overview of our strategy, a summary of a few significant items in the quarter, and discuss our fiscal 2022 outlook. Then George and Mike will give additional color on the quarter. George Valadares is joining our earnings call today and will do so going forward. George is currently our chief operating officer and has been in the role since 2019. Over the last 20 plus years with Transdime, George has had an unusually broad operating background. and has been a key culture carrier. He most recently served as our COO of Power and Control, where all of the power group businesses reported to George. Prior to this role, he served four years as an executive vice president and was president at two of our larger operating units, Avtech Taiyi and Adele Wiggins. George initially started at Adele Wiggins Group and held various positions of increasing responsibility in engineering, manufacturing, and sales as he worked his way up. We're excited to have him join the earnings call and offer his expertise. Now moving on to the business of today, 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. This should sound similar to what you have always heard from Trans9. 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 generally have significant higher margins and, over any extended period, 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. We utilize a simple, well-proven value-based operating methodology. We have a decentralized organization structure and unique compensation system closely aligned with shareholders. We acquire businesses that fit this strategy and where we see a clear path to private equity-like returns. Our capital structure and allocations 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 stay focused on both the details of value creation as well as careful allocation of our capital. As you saw from our earnings release, we had a good quarter considering the market environment. We continue to see recovery in the commercial aerospace market, and are encouraged by the trends in air traffic among other factors. Our current Q4 results continue to show positive growth in comparison as we are lapping another fiscal 2020 quarter fully impacted by the pandemic. However, our results continue to be unfavorably affected in comparison to pre-pandemic levels due to the reduced demand for air travel. On a more encouraging note, the commercial aerospace industry has continued to show signs of recovery with increasing air traffic and vaccination rates expanding. The recovery has remained primarily driven by domestic leisure travel, though we are optimistic for the recovery of international travel as more governments across the world soften travel restrictions. In our business, we saw another quarter of sequential improvement in commercial aftermarket revenues, with total commercial aftermarket revenues up 14% over Q3. I am also very pleased that even in this challenging commercial environment, we continue to sequentially expand our EBITDA as defined margin. Contributing to this increase is the continued recovery in our commercial aftermarket revenues, as well as the careful management of our cost structure and focus on our operating strategy. Additionally, we continued to generate significant cash in Q4. We had strong operating cash flow generation of almost $300 million and closed the quarter with approximately $4.8 billion of cash. We expect to steadily generate significant additional cash through 2022. We continue to look at possible M&A opportunities and are always attentive to our capital allocation. Both the M&A and capital markets are always difficult to predict, but especially so in these times. First, I'd like to address the Meggitt situation that occurred this quarter. We have long admired and studied the Meggitt business and believe that a combination between us and Meggitt could provide value to investors of both companies. However, based on the quite limited due diligence information that was made available and the resulting uncertainties, we could not conclude that moving forward with an offer of 900 pence per Meggitt share would meet our long-standing goals for value creation and investor returns. We put substantial time and effort into evaluating this potential transaction as we had communicated previously. However, as we have said many times before, we are very disciplined with our capital allocation, and when we make acquisitions, we need a reasonable degree of certainty for achieving our investment return goals, especially for a deal of this magnitude. The diligence made available to us was too limited to provide the assurance needed to move forward and our additional diligence requests were not met. These additional diligence requests were very similar to what was typically received in the almost 90 acquisitions we have done over the life of the company. It was a disappointment that we could not move forward, but it was the most prudent decision for the company and all of our stakeholders. In regard to the current M&A pipeline, we are still actively looking for M&A opportunities that fit our model. Acquisition opportunities in the last quarter was still slower than pre-COVID, but we are starting to see some pickup in activity. We remain confident that there is a long runway for acquisitions that fit our portfolio, primarily in the small to midsize opportunities, and look forward to continued M&A activity far into the future. At this time, We don't anticipate that we make any significant dividends or share buybacks for at least the next quarter, but we will keep watching and see if our views change. Now moving to our outlook for 2022. While we are not providing full financial guidance at this time as a result of the continued disruption in our primary commercial end markets, we are providing guidance on select financial metrics for fiscal 2022, including EBITDA as defined margins, expected defense market revenue, growth, tax rates, and other key financial assumptions. We do continue to be encouraged by the recovery we have seen in both our commercial OEM and aftermarket revenues and bookings in fiscal 2021, but many unknowns remain for the pace and shape of the recovery. We will look to re-institute guidance when we have a clearer picture of the future. Currently, we expect COVID-19 to continue to have an adverse impact on our financial results compared to pre pandemic levels into fiscal 2022, under the assumption that both our commercial OEM and aftermarket customer demand will remain depressed due to lower worldwide air travel. Although recent positive trends in commercial air traffic could impact us favorably, given what we know today, our teams are planning for our commercial aftermarket revenue to grow in the 20 to 30 percent range, planning for our commercial aftermarket revenue to grow in the 20 to 30 percent range. We expect our commercial OEM revenue to grow significantly as well, but at a rate slightly less than the commercial aftermarket. As you know, we aim to be conservative and would be happy to have both of these end markets rebound more strongly. George will provide further detail on a few key points of consideration that will drive our ultimate commercial growth. As for the defense market, we expect defense revenue growth in the low single-digit percent range versus fiscal 2022. Now a bit more color on EBITDA as defined expectations for fiscal 2022. We expect full-year fiscal 2022 EBITDA margins to be roughly in the area of 47%, which could be higher or lower based on the rate of commercial aftermarket recovery. This guidance assumes a steady increase in commercial aftermarket revenue throughout fiscal 2022, with Q1 being the lowest. In similar fashion, we anticipated EBITDA margins will move up throughout fiscal 2022, with Q1 being the lowest and sequentially lower than Q4. As a final note, this margin guidance includes the unfavorable headwind of our recent Cobham acquisition of about 0.5%. As a reminder, and consistent with past years, with roughly 10% less working days than the subsequent quarters, fiscal year 2022 Q1 revenues, EBITDA margins, are anticipated to be lower than the other three quarters of fiscal year 2022. We believe we are well positioned as we enter fiscal 22. As usual, we'll closely watch the aerospace and capital markets development and react accordingly. Let me conclude by stating that I'm pleased with the company's performance in this challenging time for the commercial aerospace industry and with our commitment to driving value for our stakeholders. The commercial aerospace market recovery continues to progress and current trends are encouraging. There is still uncertainty about the pace of the recovery, but the team remains focused on controlling what we can control. We remain confident that in the fullness of time, the commercial aerospace market will return to pre-pandemic levels. We look forward to fiscal 22 and the opportunity to create value for our stakeholders through our consistent strategy. Now let me hand it over to George to review our recent performance and a few other items.
spk05: Good morning, everyone, and thanks for the kind introduction, Kevin. I'm glad to be speaking with all of you today and look forward to being on these calls in the future. I'll start with our typical review of results by key market category. For the remainder of the call, I'll provide color commentary on a pro forma basis compared to the prior year period in 2020. That is, assuming we own the same mix of businesses in both periods. This market discussion includes the acquisition of Cobham Aero Connectivity. We began to include Cobham in this market analysis discussion in the second quarter of fiscal 2021. This market discussion also removes the impact of any divestitures completed in fiscal 2021. In the commercial market, which typically makes up close to 65% of our revenue, we will split our discussion into OEM and aftermarket. Our total commercial OEM revenue increased approximately 1% in Q4 and declined approximately 25% for full-year fiscal 2021, compared with prior year periods. Bookings in the quarter were very strong compared to the same prior year period and solidly outpaced sales. Sequentially, both Q4 revenue and bookings improved approximately 5% compared to Q3. Although we expect demand for our commercial OEM products to continue to be reduced in the short term, we are encouraged by build rates gradually progressing at the commercial OEMs. Recent commentary from Airbus and Boeing reiterated anticipated rate ramps for their narrow-body platforms in the near future. Hopefully, this will play out as forecasted. Now, moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 41% in Q4 and declined approximately 18% for full-year fiscal 2021 to when compared with prior year periods. Growth in commercial aftermarket revenue was primarily driven by increased demand in our passenger submarket, although all of our commercial aftermarket submarkets were up significantly compared to prior year Q4. Sequentially, total commercial aftermarket revenues grew approximately 14%, and bookings grew more than 25%. Commercial aftermarket bookings are up significantly this quarter compared to the same prior year period, and Q4 bookings very solidly outpaced sales. To touch on a few points of consideration, global revenue passenger miles are still low but have been modestly improving throughout fiscal 2021. IATA recently forecast a 39% decrease in revenue passenger miles in calendar year 2022 compared to pre-pandemic levels. Within IATA's estimate is the expectation that domestic travel will be back to 93% of pre-pandemic levels in calendar year 2022. Though the pace of the recovery remains uncertain, we continue to believe there is pent-up demand for travel. As vaccine distribution expands and travel restrictions are rolled back, passenger demand across the globe will increase. The emergence and spread of COVID variants and other future evolutions may further complicate this picture, but for now, trends remain positive. We see evidence of the pent-up demand through the recovery in domestic travel. Domestic air traffic trended upward throughout fiscal 2021. Airlines also continue to see strengthened bookings and strong demand for domestic travel, especially in the U.S., with Europe catching up. China is currently a watch point with its recent drop off in air traffic. The pace of the international air traffic recovery has been slow and international revenue passenger miles have only slightly recovered. However, vaccinations continue to increase globally and governments across the world are starting to reduce travel restrictions, which provides for optimism on the international air traffic recovery. Cargo demand has recovered more quickly than commercial travel, due to the loss of passenger belly cargo and the pickup in e-commerce. Global cargo volumes continue to surpass pre-COVID levels, and it is generally expected that air freight demand will likely remain robust into 2022. Business jet utilization in certain regions rebounded to pre-pandemic or better levels earlier this year and remained strong. Commentary from business jet OEMs and operators has been encouraging with these higher levels of business jet activity may be here to stay, though time will tell. Now let me speak about our defense market, which traditionally is at or below 35% of our total revenue. The defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 2% in Q4 and approximately 5% from Q3. FULL YEAR FISCAL 2020 WHEN COMPARED WITH PRIOR YEAR PERIODS. THIS WAS IN LINE WITH THE EXPECTED REVENUE GROWTH EXPECTATIONS WE PROVIDED FOR FISCAL 2021 OF MID SINGLE DIGIT PERCENT RANGE GROWTH. WE CONTINUE TO EXPECT OUR DEFENSE BUSINESS TO EXPAND DUE TO THE STRENGTH OF OUR CURRENT ORDER BOOK. AS KEVIN MENTIONED EARLIER As Kevin mentioned earlier, we expect low single-digit percentage range growth in fiscal 2022 for our defense market revenues. Lastly, I'd like to wrap up by stating how extremely pleased I am by our operational performance throughout this fiscal year that continued to be heavily impacted by the pandemic. Our management and their teams remain diligent and focused on our value drivers and will continue to do so in this new fiscal year. We are ready to meet the demand as it returns. With that, I would like to turn it over to our Chief Financial Officer, Mike Lisman.
spk04: Morning, everyone. I'm going to first quickly hit on profitability trends for the business, then address a few additional financial matters for Fiscal 21, and finally, I'll provide some more detail on expectations for Fiscal 22. First, in regard to profitability for Fiscal 21, EBITDA is defined of about $636 million for Q4 was up 28% versus prior year Q4. On a full year basis, EBITDA as defined was about $2.19 billion, down 4% from the prior year. EBITDA as defined margin in the quarter was approximately 49.7%. This represents sequential improvement in our EBITDA as defined margin of almost 400 basis points versus Q3 of 21. Moving on, a few quick notes on the full 21 fiscal year. I want to provide one quick M&A related data point that you might find helpful for your financial models as we head into FY22. As you know, we divested several businesses during 2021, all of which were sold out of continuing operations. As a result of the accounting treatment applied, roughly $130 million of revenue and $25 to $30 million of EBITDA as defined from these divested operating units remains in our FY21 results. This revenue in EBITDA will obviously not carry over into FY22. On cash and liquidity, we ended the year with approximately $4.8 billion of cash on the balance sheet, and our net debt to EBITDA ratio was seven times. In the early days of October, we repaid the $200 million revolver drawdown that we made at the onset of COVID back in April of 2020. This was done out of an abundance of caution at the time, and we don't need the cash, so we've repaid it. Pro forma for the revolver pay down, our cash balance is $4.6 billion. Next, on the FY22 expectations. We aren't giving full guidance, as Kevin mentioned, but we are providing guidance on select financial metrics, including the following. Interest expense is expected to be about $1.08 billion in FY22. On taxes, our fiscal 22 gap in cash rates are anticipated to be in the range of 21% to 24%. and the adjusted tax rate will be a few points higher and in the range of 26 to 28%. On the share count, we expect our weighted average shares outstanding will increase by about 800,000 shares to 59.2 million in FY22, and that assumes no buybacks occur during the fiscal year. Similar to prior years, the increase in shares outstanding is due to employee stock options that bested at the end of our FY21. With regard to liquidity, We expect to continue running free cash flow positive throughout FY22. As we traditionally define our free cash flow from operations at Transdime, which as a reminder is our epitaph defined, less debt interest payments, less capex, less cash taxes, we expect this metric to be in the $1 billion area, maybe a little better in fiscal 22. Assuming no M&A, no dividends or share repurchases, and no additional debt capital markets activities, This free cash flow generation, together with a higher EBITDA figure, should the COVID rebound continue, will likely reduce our net debt to EBITDA ratio to something more like six times at the end of fiscal 22 versus the current seven times level. Finally, one last note on the DOD Inspector General Audit. As we mentioned previously, we've been actively engaged with the IG office with some ebbs and flows, and this engagement is now complete. In our best assessment, and based upon what we saw, this audit appeared to be similar in scope to prior audits. While it's difficult to know exactly when a final report will be issued publicly, we expect that this could happen any day now, very likely during the first quarter of our fiscal 22. With that, I'll turn it back to the operator to kick off the Q&A.
spk11: Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes in the line of Noah Poppenack from Goldman Sachs. Your question, please. Hi. Good morning, everybody.
spk05: Good morning, Noah. Good morning.
spk13: Could you spend a little bit more time on the 47% EBITDA's defined margin target for next year? You know, how do we bridge from the 49.7 exit rate of this year? I know there's a little bit of seasonality, but if I look at all the data historically, it's not that seasonal, and it looks like you'll be mixing up based on your end market growth rate comments.
spk03: You know, it's possible, Noah, that we could mix up. It's possible that we're being conservative. I think there were some good news that happened in Q4 in terms of market mix and our performance. We're trying to be... reasonable and transparent in what we see. There's a lot of unknowns that have to come to pass in terms of the commercial aftermarket bookings for this to all play out. So that's the angle we took in what we rolled up from our teams and think that it makes sense for us right now. If it's conservative, that'll be great. We would love to beat that.
spk13: Okay, sensible. And then, Mike, on the cash flow inputs for next year, you had the working capital headwind this year. Maybe just help us out with how that changes next year. And then CapEx, that number as a percentage of revenue is fairly high relative to where you've been historically. What's behind that?
spk04: Sure. So first on the working capital, you'll see when we publish that 10K later today. I don't think you have the full cash flow detail yet, but AR did tick up a bit this quarter. About $100 million went back into accounts receivable. We knew that was going to happen. As a reminder, from peak to trough, about $400 million came out of accounts receivable during COVID. So that's going to have to go in as we go back in, as we go through the rebound here. It did tick up this year over the past couple quarters. As you know, this last quarter was $100 million. That's going to continue. into FY22. Ultimately, how much goes back into AR and the pace at which that happens depends on the pace of the recovery, but we do expect it to be a use of cash on the order of at least $100 million during our FY22, potentially more. That would be a good problem to have, by the way. I mean, if the commercial markets rebound and we have to invest more in AR, we're happy to do that. We certainly have the cash. And then, sorry, Noah, your second question was on CapEx, I think. We put out a range of 135 to 155 today. It is slightly higher on a percentage basis. It's tied to some one-time projects at some of our op units. As you know, our first use of cash is to go and deploy it into our own businesses to help them grow, and we're just doing some of that with some large one-time projects at select op units.
spk13: Thank you.
spk11: Thank you. Our next question comes from the line of Robert Stellard from vertical research. Your question, please.
spk01: Thanks so much and good morning.
spk03: Good morning.
spk01: Kevin, first question. Have you seen any supply chain issues or labor issues this quarter?
spk05: George, you want to take that one? Sure. So we've started to see some of the pushing out of lead times from the supply chain primarily focused on electronic components. It's been spotty, nothing too significant at this point, but in all likelihood, this will get worse before it gets better.
spk01: And just a quick follow-up on that, maybe. As you look at how this could pan out in 2022, have you built some sort of contingency for these issues into that EBITDA margin guidance?
spk03: I don't think we have, but this is part of the I guess, conservatism. So we try to be conservative as we forecast going forward. We haven't specifically allotted anything to supply chain disruption, but I think it is part of our belief that this could be an issue for us as we go forward. As George mentioned, specifically on electronic components and those types of parts, we're seeing some supply difficulties. You know, in terms of inflationary pressures, I think we'd all agree that we will look to pass those along, as we always have. We don't eat inflation in that regard.
spk01: Okay, that's great. Thank you very much.
spk11: Thank you. Our next question comes from the line of Miles Walton from UBS. Your question, please.
spk06: Thanks. Maybe just a margin question again for a second. Mike, I think you mentioned the divestiture issue. still in the 21 guidance that you'd be anniversarying in 22. It looks like that alone is, I don't know, 70 basis points of assistance on EBITDA margins. So, I mean, not to beat a dead horse here, but it sounds like there's a healthy amount of conservatism in the 47% unless you want to.
spk04: Well, on the margin guide, remember we also bought Cobham too, which kind of counteracts the divestitures the other way and cancels it out. So I think that kind of negates some of the impact that you mentioned. Yeah, I think I said it was what, a half a percent drag to it? Yeah.
spk06: Now, was that a half percent for the quarter or for the year?
spk04: That's in half by 22 versus what it would have been had we not bought the Cabo Mero connectivity business. Got it.
spk06: And what was it in the quarter?
spk04: In the quarter, I think it was about close to a percent, just below a percent, a couple tenths below.
spk06: Okay, perfect. And then within the aftermarket growth rate range, the 20 to 30 percent, Kevin, is there a figure of merit that you're using to ballpark that? Is that a sequential growth that's underlying? Is that a traffic growth?
spk03: Well, I think it's traffic growth related. And I think we're counting on that largely being, you know, U.S., Europe related. We'll have to see how it unpacks around the globe. As you guys all know, we don't have geographical information yet. along those lines. But, you know, we will continue to monitor this closely. If the traffic patterns, you know, come along like we believe they might, then, yeah, the 20 to 30 percent planning, and I emphasize planning, it's difficult to, you know, issue that as guidance when As you know, aftermarket bookings tend to be book and ship. You don't have as much visibility. So this is for planning purposes. And, you know, every business will have a slightly different plan along those lines. But we tried to give you a roll-up of the range that will be based, I think, largely on takeoff and landing activity.
spk06: Okay. All right. Thank you.
spk11: Thank you. Our next question comes to the line of Ken Herbert from RBC, your question, please.
spk07: Yeah, hi. Good morning. I wanted to follow up, Kevin, on the discussion on the commercial aftermarket. I know your sequential growth has been a little lumpy over the last three quarters, but considering your comment on sort of book and ship and the bookings pace, how should we think about the sequential growth here into the fiscal first quarter of 2022?
spk03: Well, I think we're concerned about the first quarter only, I guess, concerned, too strong of a word. You know, we always see a normal dip in, you know, sequential from Q4 to Q1, given the less days. So I think we're always concerned that the market doesn't, you know, accurately predict that. You know, to give you some, you know, reason to you know, believe in what we're saying. You know, the bookings came out for Q4 very strong. And, you know, we booked ahead of shipments. That's as encouraging for us, clearly, and means that we're setting ourselves up for a strong position into 22. But Q1 is always a little bit weaker because of seasonal performance.
spk07: Okay. Okay. That's helpful. And again, as we think about the up, call it 25% for your planning purposes for the aftermarket for the year, what are your assumptions on travel, say, and takeoffs and landings in Asia or in international markets? I know you don't have great visibility internationally, but are you anticipating a significant recovery in these numbers in international? I'm just trying to get at some of the puts and takes in that 20% to 30% planning range.
spk03: Well, and you've really zeroed in on why we struggle to give guidance on these numbers, because I don't have that visibility. I don't understand where it's going to come from. This comes as a roll-up from all of our teams who tell us what they think they see happening in the marketplace based on what the customers are telling them. It's not so easy for me to predict by region, by platform. So we don't, and that's why I'm giving you some you know, planning guidance that what we're planning on should happen, but how it actually gets to us, we don't, it's not so clear where the orders are and where the shipments are, and therefore what traffic needs to look like. And, you know, is the recovery in China, does that happen? What we're counting on is a, you know, consistent, steady recovery like what we've seen. and that should give us these kinds of after-market improvement numbers.
spk07: Great. Well, thank you very much.
spk11: Sure. Thank you. Our next question comes from the line of Christine Lewong from Morgan Stanley. Your question, please.
spk00: Hey, good morning, guys.
spk11: Good morning. Good morning.
spk00: Kevin, Mike, the business was free cash flow positive even at the depths of COVID-19. And considering the defensibility of the business model, how are you thinking about maximum leverage that the balance sheet can support versus what you would have thought pre-COVID? And can you discuss your appetite for large versus small deals?
spk04: Sure. On leverage, we don't anticipate any kind of change. If you went back to the pre-COVID two-year period and averaged the quarterly average net debt to EBITDA levels, you get about 6.0 times almost exactly. We're comfortable operating at that level. Some of the, you know, debt incurrence tests and other things in our credit agreement are, you know, based off operating at that level and we're comfortable with it. If anything, this pandemic, as you said, has kind of proven that The business is very durable from a free cash flow standpoint and could probably sustain more leverage than the historical level we've run it at. But we do want to keep some firepower for M&A at all times, including large deals. Moving on to the second part of your question, large deals, as Kevin mentioned, we're more active now on the M&A side at the small to midsize range. But there are also obviously some large potential transactions that we track from time to time. both on the strategic side, but then also big divestitures that could maybe come out of some of the peers of ours in the aerospace industry. So we're always looking and always on the hunt, as you know, whether it's large or small. We're targeting M&A of all sizes from kind of the really low TEV range, below $100 million, up to a couple billion.
spk00: I see. And if I could do a follow-up, I mean, looking at the Esterline deal, You found some jewels in there, and you also divested some businesses that may not have necessarily fit the TransDyne model. When you think about the opportunities for large deals, what kind of threshold are you looking at in terms of what you want to keep versus what you want to divest in terms of your appetite for pursuing some of these large deals that may not be 100% TransDyne-y?
spk04: Yeah, it's hard to put an exact percentage on something like that. Ultimately, it depends on the on-sale risk, right? If there was something where it was maybe 50-50 and you had someone who wanted to buy the other, you know, 50%, that's a different situation than, you know, Esterline where we sold roughly a quarter of it. So it's hard to answer that question, but, you know, obviously the Esterline transaction proved to us that we can go and buy something that's, you not 100% fit the day we own it, but then execute on M&A in the year or two post-deal close to shape it down to the portfolio that we want to own forever and long-term. So we do look at M&A situations like that going forward.
spk00: Thanks for the color.
spk11: Thank you. Our next question comes from the line of David Strauss from Barclays. Your question, please. Hello?
spk14: David, phone on mute. Sorry about that. Can you hear me now?
spk17: Yes.
spk14: Okay. Great. Thanks. So, Kevin, I appreciate the color there on MEGIT. Just wanted to ask you about the fact that you were willing to entertain the idea of potentially getting involved in MEGIT given what appears to be pretty high valuations. What does that say about kind of the pipeline, the ability to find large aero deals for you guys from here?
spk03: Well, at the end of the day, the market says what a property is worth, and it's up to us to follow what the market says we have to pay. We are looking for highly engineered proprietary aerospace products that have aftermarket access. The size of those businesses doesn't matter as much as we want to identify those and get them into the fold. We believe that we can invest in those businesses and make them stronger. We're not looking for bigger and bigger deals. Our target is to acquire $50 to $100 million a year. That's what works in our model and allows us to keep generating the kinds of value returns that we do. We're not getting overly fixated on doing a large deal, but when they come along, we certainly look at them, we evaluate them, and in the ones that we've proceeded with, I think we've done pretty well. The market looks, it's definitely picking up in activity, and it's always hard to predict when a close will happen, but we're seeing some interesting activity right now And it's encouraging.
spk14: Okay. Thanks for that. And, you know, as a follow-up, can you talk about where you are today from a headcount perspective? How much do you think you've taken out kind of in structural costs through this? And where do you think you ultimately need to take headcount back to, you know, kind of assuming we get back to pre-pandemic levels for your business and, you know, call it 2023, right?
spk03: Yeah, I don't have the numbers in front of me. George can comment on that. But I think we are very disciplined in our approach to adding back. And that is one of the hallmarks of our operations discipline.
spk05: George, you want to expand on that? Yeah, I would add, you know, the teams have done a lot of heavy lifting in terms of restructuring and productivity focus. The last 12 months, we're pretty comfortable with the resource level that we currently have. I think as most of you know, as the commercial aftermarket rebounds, that's not as heavy in terms of labor requirements or resource requirements. So, you know, I think I'm pretty comfortable of where the teams are at. They've done a great job. And now we just need the market to recover here.
spk14: All right. Thanks very much.
spk11: Operator? Thank you. Thank you. As a reminder, ladies and gentlemen, if you have a question at this time, please press star then 1. Our next question comes from the line of Steph Safeman from J.P. Morgan. Your question, please.
spk18: Thanks very much. Good morning. Good morning. I was wondering, in the OE end market, I heard the comment about the expectations for this coming year and kind of certainly expect the growth to pick up there. But just in terms of thinking about the phasing of growth at TransDiamond, you know, how that relates to where we are in the build cycle. You know, we've started to see at some other companies some OE growth kind of happening already as Boeing and Airbus have picked up, especially on the narrow body rates kind of ahead of that growth. And then certainly on kind of the, you know, on the business jet side. And, you know, it looked like you guys were kind of low single digit or flattish on both of those guys, both sides of that. So how do you think about the, you know, the trajectory there and how you're going to sort of relate to the progress in build rates?
spk05: Yeah. In general, we found that the OEMs and the Tier 1s were a little bit slow to respond in mid-year 2020 as the pandemic was ramping up, so we believe there's some natural inventory destocking continuing to go on. The orders are starting to come in. As I mentioned, the bookings were up in the commercial OE in Q4, so that's a positive indicator. I don't have the details in terms of how it lays in across fiscal year 2022, but we don't think there's any significant issue there. It's just the timing and the lag of the OEM shutting off the valve, if you will, on the supply in 2020, and now as they continue to ramp up in production.
spk18: Great. Thanks. And then just as a quick follow-up in the defense and market, I think last year you guys ended up toward the higher end of the initial range that you gave. Is there anything to be aware of for this year that might determine either on the plus side or the minus side where things end up in defense?
spk05: No, I think the guidance that we provided is reasonable. As you guys might know and remember, the defense markets in general have been very strong over the past two to three years. They can be lumpy in nature in terms of the bookings. So I think the guidance that we're providing is within a reasonable range.
spk18: Great. Thanks very much.
spk11: Thank you. Our next question comes from the line of Peter Austin from True Securities. Your question, please.
spk16: Hey, good morning. This is Pete. I'm for Mike Trimoli. Thanks for taking our questions. First, I had a question on the aftermarket. Have there been any product categories that have been particularly strong or weak? And I'm just wondering what you've been seeing on airline spending priorities and then also what you're seeing in the pricing environment in aftermarket.
spk05: Yeah, I think in general, you know, our passenger submarket, which is our largest submarket, has been strong, as well as the cargo, as I noted, in Q4 and sequentially ramped up across 2021. I don't think we have any data that would point it to a specific type of product or application yet. Generally, the airlines are starting to increase their flight schedules, which is positive, and they're ordering spares based on needs.
spk16: Thank you. And then just to follow up on financial guidance, just wondering what are the key improvements or catalysts that you might be looking for in the coming periods in the overall market if you'd have the confidence and the visibility to provide full financial guidance?
spk03: I think it's... It's market recovery, you know, international markets, people flying again on an international scale and continued domestic travel. We know that business travel isn't a huge percentage of overall flights, but still very important to airlines in how they gear up their fleets and capacitize. So this is what we'd be looking at is, you know, acceptance and continued international flight activity, more domestic recovery in other pockets around the world to look more similar to where the U.S. is, which is very close within, you know, 10 to 20 percent of what it was pre-COVID. So I think those are the things we're looking at. And there's still a lot of unknowns. You see the China's traffic activity bounce around quite a bit. Every couple of months, they're shutting down and then coming back. These are the things that don't give us the confidence to give guidance, but we know that the market continues to improve and move forward at a steady rate. Does that answer your question?
spk16: Yes, it does. Thank you for taking the question. Sure.
spk11: Thank you. Our next question comes in the line of Sheila Kailalu from Jefferies. Your question, please.
spk09: Good morning, guys, and thanks for the time. Maybe I'll start off on EBITDA profitability going forward, just in the absence of any major M&A and pretty good performance in the quarter. How do we think about medium-term EBITDA profitability levels? Is 50% the new level? And then if you could just comment on expectations for free cash flow conversion?
spk04: Yeah, I don't think we want to get and go and provide any long-term guidance. I think, you know, generally just from our analyst day, and if we execute on the value drivers, EBITDA margins at trans time should improve by about one percentage point per year. If we come out of COVID, there's a potential that that gets kind of mixed up a bit, and maybe you'd do better if you mix more towards commercial aftermarket. But over a long span of several years, it should continue to improve for the base business, apps and M&A, by about a percentage point per year. Okay, cool.
spk09: And then I wanted to follow up on a defense question earlier. You mentioned the IG report came to a close, which is a big accomplishment. Was there any impact to defense during that time? And then as your peers have had softer defense volumes, are there certain areas that you're watching just as cautionary as in defense?
spk04: I think there's a potential for some disruption on the IG side as the report comes out, just with the government purchasing maybe slowing down a little bit. We did see some of that in the past. But remember of the defense bucket, the direct-to-government isn't all that significant, right? We also sell more product internationally into Tier 1s, so it doesn't comprise all of that bucket. But we do potentially expect some slowdown as the report comes out here. Yeah, it's possible.
spk03: But we anticipate, you know, a similar process to, you know, or similar conclusions to last time. We'll see as we're still in the dark on the report and some of its details. We've had a very cooperative, I think, work process going on with the IG and the DOD, and I think we're in a good place. But, you know, we're anxious to get the report issued and move on with business.
spk09: Okay, thank you.
spk11: Thank you. Our next question comes in line of Matt Akers from Wells Fargo. Your question, please.
spk02: Yeah, hey, good morning. Thanks for the question. On a commercial aftermarket, do you think that there's still sort of a pent-up demand there for maintenance like this? airlines that sort of defer stuff during COVID and now, you know, we've got to catch up or are we sort of, is that sort of behind us at this point?
spk05: Yeah, I mean, I think there's been speculation out there in terms of the airlines trying to prioritize certain maintenance activities. You know, it's hard for us to know. We don't get visibility on the inventory levels at the airlines. I think just the general improvement in the marketplace is and more planes flying have led to some of the improvements we've seen across, you know, the whole fiscal year of 2021. And as Kevin and Mike noted, we, again, expect some sequential improvement from quarter to quarter as we go through fiscal year 2022. Got it.
spk02: Okay. And I guess, I mean, the higher fuel prices, I mean, are your customers talking about that as a You know, they sort of have this large parked fleet, and as they decide, you know, whether they want to keep flying those, is that higher fuel price factor in that decision that you've heard, or has that not really come up?
spk05: I don't think we've heard anything specific to decisions the airlines might be making regarding the higher fuel costs. I haven't heard anything from our teams. Got it. Okay, thanks.
spk11: Thank you. Our next question comes from the line, is a follow-up from Noah Poponek from Goldman Sachs. Your question, please.
spk13: Kevin, your comment that we should not be looking for share repurchase or special dividend in the next quarter, can we interpret that to mean you see a reasonable likelihood of acquisition activity in that period of time? And then if that doesn't play out, how quickly do you start to consider share repurchase or special dividend?
spk03: We can't speculate on when acquisitions will happen. You know, we always, and this goes back to what I said earlier in the uses of capital, you know, fund your own internal investment and payback, you know, look for acquisitions, and then, of course, you know, look to get that cash back. We will look to do that, of course, in the appropriate process that we always go through. we can't speculate on when acquisitions might come along or not. We just know that right now from paying out a dividend or buying back shares, we're still in a little bit of a wait until, you know, next quarter.
spk13: Okay.
spk03: Does that make sense?
spk13: Yeah, yeah. I just wasn't sure how specific that was versus taking it quarter by quarter.
spk03: Okay. Yeah, I think next quarter is a decision point for us.
spk13: Okay. Makes sense. And then the commentary on bookings ahead of shipments by end market, do you happen to have the numbers on exactly where the book-to-bill is by end market in the quarter and year?
spk05: No, I don't have the exact numbers.
spk11: Okay. No problem. Thank you. Thank you. Our next question comes from the line of Gantam Kanao from Cowan & Company. Your question, please.
spk17: Hey, yes.
spk12: Thank you. Just to follow up on a couple questions, Noah's last one. On the book to bill, in the aftermarket, it looks like for three quarters, we've had bookings ahead of shipments. And so I have two questions related to that. One, are all shipments at some point booked? Therefore... book to bill is actually a relevant metric and second what's going on there it looks like um you know you've been creating backlog i'm just curious like is that what's happening you're seeing orders for delivery customers want the product but not immediately is that like is there a duration stretch to the backlog that you're seeing in the aftermarket that's what i think you know aftermarket orders
spk03: for more immediate shipments. But that doesn't mean they're all due tomorrow. So there is still a little bit of a range over when these things are due. That's why it bleeds over quarter to quarter. In general, I think we're optimistic because we see bookings continue to improve. And that means growth in aftermarket as we go forward and why we're planning on 20% to 30% possible aftermarket growth.
spk12: Fair enough. And just to that point, so you're actually probably seeing some visibility beyond the December quarter in terms of shipments at this point in the aftermarket. And is that unusual to see out?
spk05: That's a fair comment. I don't think it's unusual. You know, in a steady state, we have airlines and distribution partners that will book some near-term, and they'll also give us and the team some visibility on mid- and longer-term needs.
spk12: Okay. But every shipment ultimately had a bookie, correct?
spk17: Yes, that is correct.
spk12: Okay. Just want to make sure on the nomenclature. And then the other thing, just to follow up on the earlier questions, Supply chain, did it actually impede your ability to deliver some sales? Did you leave some sales on the table? Are there delinquencies? And if so, can you quantify how much of a catch-up opportunity that might be in fiscal 22?
spk05: Yeah, I would say there was nothing material in terms of what was left at the dock, if you will. You know, there's some noise here and there at a couple of operating units. But I don't think it provides a big tailwind as we go into FY22.
spk12: Okay. And last one, I'm sorry. I think, George, you may have mentioned the ending next year at a roughly at six times net debt to EBITDA with a billion of free cash. So the math is somewhere around 2.4-ish billion of adjusted EBITDA on that basis. Is that what you were trying to convey or? Are we just talking round numbers here?
spk04: No, we're not giving guidance on the denominator there. We're simply trying to give you a rough sense for the deleveraging by about a turn per year. But if you're trying to dial in and back into the EBITDA guide or something, don't do it because you're not going to get the right stat.
spk03: You know, the way we look at this is when the orders come in, deliver them quicker and more reliably than anyone else. and we will generate the returns and value generation we're used to, you're used to. There's no company you can count on to do that more reliably than us. Yeah, we're just trying to communicate that there's always puts and takes and lumps in this business.
spk12: I appreciate it, guys. Thank you.
spk11: Thank you. Our next question comes to the line of Hunter K. from Wolf Research. Your question, please.
spk15: Hey, thanks. Just a couple quick ones for you, Mike. The first one is, how much are you budgeting internally for Trans9 business travel spend next year relative to pre-COVID?
spk04: We're stepping up a little bit, but not quite to pre-COVID levels. I don't have the exact stats in front of me. It's not quite back to 19 levels, but it's more than 20. For the most part, all of our folks here are back to traveling, whether it's M&A people pounding the pavement looking for deals or internal audit folks going out to op units, um, to do their work. We're not holding back at all here. It's pretty much, um, um, full go where we typically be, but it's slightly reduced headcount levels.
spk03: Yeah. Business as usual, but, uh, you know, some of our customers maybe aren't yet receiving us, but certainly within the company, we are back to normal. Yeah. Yeah.
spk15: Okay. All right. Thanks. And then, um, you mentioned a couple, uh, A couple of projects on the CapEx line driving a little bit of higher spend. What are they? What business lines? Is this defense? Is this interiors? Is it around freight? I mean, I'm just not going to give too much away, but what are the nature of these projects? Thanks.
spk05: Yeah, I mean, generally we don't give that kind of detail. I could say... You know, as we continued to adjust our resource levels, you know, that puts additional pressures on increasing production rates. So we've got a few teams investing in new technologies for automation projects and then a handful of other projects across the ranch.
spk03: But the lion's share of this is productivity and new business related. It is not, you know, infrastructure, nice-to-haves kind of stuff. Right. We're investing for payback and return. And that, at the end of the day, is the most important part of what we evaluate is what returns are we expecting as we invest a little more or less. We have to make sure we're still capturing those returns.
spk15: Okay, thank you very much.
spk11: Thank you. Our next question comes from Elizabeth Grenfell from Bank of America. Your question, please.
spk08: Hi, good morning. Good morning. Good morning. As we think about your comments and your expectations for aftermarket next year, how are you thinking about retirements with regards to that expectation?
spk05: We're not, as the teams put together their individual plans, you know, we're not projecting a significant impact as a result of retirements in 2022.
spk03: Yeah, as you know, retirements have been very slow. And I think that has something to do with the stability of OEM supply and, you know, a ramp up in demand that doesn't allow retirements. You know, yeah, I think that answers the question.
spk08: Okay, great. Thank you very much.
spk11: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Jimmy Stevenson for any further remarks.
spk10: Thank you all for joining us today. This concludes today's call. We appreciate your time. Have a good day.
spk11: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
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