Transdigm Group Incorporated

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.

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.

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.