Transdigm Group Incorporated

Good day, and thank you for standing by. Welcome to the Transdime Q3 Fiscal 2022 Earnings Conference Call. At this time, all participants are in a 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. Oh, now I'd like to hand the conference over to your speaker today, Jamie Steeman, Director of Investor Relations. Please go ahead.

Thank you, and welcome to Transdime's fiscal 2022 third 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 Listman. please visit our website at transdimes.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 the usual quick overview of our strategy, a few comments about the quarter, and discussion of our outlook for the remainder of fiscal 2022. Then George and Mike will give additional color on the quarter. To reiterate, we are unique in the industry in both the consistency of our strategy in good times and bad, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly 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 organizational structure and unique compensation system closely aligned with shareholders. We acquire businesses that fit this strategy and where we see a clear path to PE-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 another good quarter considering the market environment. We remain encouraged by the positive trends in air traffic and the recovery we continue to see in the commercial aerospace market. Our Q3 results show positive growth in comparison to the same period in 2021 as we are lapping the third fiscal quarter of 21, which was heavily impacted by the pandemic. Although our results have improved over the prior year quarter, they continue to be unfavorably affected in comparison to pre-pandemic levels as the demand for air travel remains depressed. However, we are happy to see the continued steady improvement in global air traffic. Domestic air traffic remains the leader in the air traffic recovery, and international air traffic improved these past few months as more passengers returned to long-haul travel. With softened or fully lifted travel restrictions in majority of countries and the summer travel season upon us, passenger travel demand has been strong. China domestic air traffic remains low but is making progress from its most recent sharp drop off due to strict zero COVID policies limiting travel. International traffic in China is finally starting to improve off of COVID lows. In our business, we saw another quarter of robust growth in our commercial aftermarket revenues and bookings. I am very pleased that despite the challenging commercial environment, our EBITDA as defined margin was 49.8% in the quarter. Contributing to this strong margin 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 had good operating cash flow generation in Q3 of over $300 million and closed the quarter with a little over $3.8 billion of cash. We expect to continue generating additional cash in our final quarter of fiscal 2022. Next, an update on our busy quarter for capital allocation activities. I am happy to report that during Q3, we opportunistically deployed $245 million of capital via open market repurchases of our common stock. This equates to approximately $444,000 of our shares at an average price of $554 per share. Although the price remained attractive, we were limited this quarter on the quantum we could purchase after the completion of the DART acquisition. These repurchases are in addition to the approximately 1 million shares we repurchased in our Q2 for a total of over 900 million deployed this year on share repurchases. We view these repurchases like any other capital investment and expect this will meet or exceed our long-term objectives. Also with respect to capital allocation, and as we mentioned in our press release, we've decided to pay a special dividend of $18.50 per share The dividend will be paid on August 26. Mike will address this and our buybacks more later. As for acquisitions during the quarter, we completed the DART aerospace acquisition for approximately $360 million in cash. DART is a leading provider of highly engineered unique helicopter solutions that mainly service civilian aircraft and fits well with our proprietary and aftermarket focused value generation strategy. Although we are not providing formal revenue guidance we expect the DART acquisition to contribute approximately $30 million to our FY22 revenue. Regarding the current M&A pipeline, we are actively looking for M&A opportunities that fit our model. Acquisition opportunities continue, and we have a decent pipeline of possibilities as usual, mostly in the small and midsize range. Although I cannot predict or comment on possible closings, we remain confident that there is a long runway for acquisitions that fit our portfolio. In aggregate, we have allocated about $2.4 billion of capital this year for value-generating activities. Pro forma for the special dividend payout in late August, we still expect to have a sizable cash balance of close to $3 billion. These capital allocation actions will still leave us with significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Now moving to our outlook for the remainder of 2022. Consistent with our commentary on the last earnings call, at this time we expect to reinitiate guidance on the November 2022 earnings call for our new fiscal year. Assuming prevailing conditions continue to evolve. We remain encouraged by the recovery we have seen in our commercial OEM and aftermarket revenues and the strong bookings received for both thus far in fiscal 2022. We continue to expect COVID-19 to have an adverse impact on our financial results compared to pre-pandemic levels in our final quarter of 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. As for the defense market, we're revising our defense revenue growth to flat for fiscal 2022 versus prior year. We have lowered our defense revenue expectations for fiscal 2022 primarily due to shipment delays as a result of limited supply chain shortages and delays in U.S. government defense spending outlays. As you know, bookings and shipments in this end market can often be quite lumpy. George will provide more color on this topic in his section. We expect full-year fiscal 2022 EBITDA margin to now surpass 48% due to the rate of commercial aftermarket recovery. As a final note, this margin guidance includes the unfavorable headwind of our Cobham acquisition and DART acquisition of about one-half of a percent this year. We believe we are well positioned for the last quarter of our fiscal 2022. As usual, we'll closely watch how the aerospace and capital markets develop and we'll react accordingly. Mike will provide details on other fiscal 2022 financial assumptions and updates. Let me conclude by stating that I'm pleased with the company's performance in this period of recovery for the commercial aerospace industry. We remain focused on executing our operating strategy and managing our cost structure. Now let me hand it over to George to review our recent performance and a few other items.