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spk10: Good day and thank you for standing by. Welcome to the Q3 2023 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answers 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 that your hand is raised. To withdraw your question, please press star 1 1 again.
spk09: Please be Did you? Are you still there? Are you still there? There was a cutout.
spk06: Hello?
spk01: Thank you for standing by. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Jamie. Please go ahead.
spk14: Thank you, and welcome to Transdime's fiscal 2023 third quarter earnings conference call. Presenting on the call this morning are Transdime's President and Chief Executive Officer Kevin Stein, Co-Chief Operating Officer Joel Reese, and Chief Financial Officer Sarah Winn. Also present for the call today is our Co-Chief Operating Officer Mike Liffman. 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.
spk06: 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 discuss our fiscal 23 outlook. Then Joel and Sarah will give additional color on the quarter. As we previously announced on May 26, we made three significant organizational changes this quarter. George Valadares will retire at the end of Transdime's 2023 fiscal year. George has served as Transdime's COO for the past four years. His prior roles include co-COO, executive vice president, and president of three Transdime operating units. George will aid in the transition of his role to the new co-COOs Mike Listman and Joel Reese until his retirement date. George also joined Transdyn Board of Directors as of May 26. George has been with the company more than 25 years and has been an integral part of the long-term value creation of Transdyn and a key player in the cultural preservation of the company. George has done a truly outstanding job and we sincerely thank him for his dedication. We are happy to have George continue contributing to the growth of Transdime as a member of the company's board. Mike Listman and Joel Reese have assumed the roles of co-COOs. Mike served as Transdime's CFO for the past five years prior to becoming CFO. He worked at our Aerofluid Products operating unit and on the M&A team at Transdime. Joel is a long-time employee of Transdime, having joined the company in 2000. He was an executive vice president for the last eight years. Prior to that, Joel served as president at two different Transdime operating units, Hartwell and Skirka Aerospace. Before becoming a president, Joel was the director of operations at our Adams Wright operating unit. Sarah Wynn has assumed the role of CFO after having served as Transdime's chief accounting officer for the past five years. Sarah has been with the company for 20 years, And before becoming Transdime's chief accounting officer, she was a group controller overseeing the financial reporting of several operating units. Prior to that, Sarah was the controller at our Aerofluid Products operating unit and held various accounting positions in the Transdime corporate office. Mike, Joel, and Sarah bring a unique mix of experience in a broad range of aerospace businesses to their new roles. They are all experienced Transdime executives with proven track records. We are very excited to promote internally developed, long-tenured employees to each of these roles to perpetuate Transdime's unique culture. I'm confident that they will continue to create the kind of value that has been the long-term hallmark of Transdime. Now moving on to the business of today. To reiterate, we believe we are unique in the industry in both the consistency of our strategy in good times and bad times, 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. First, 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 organizational 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 PE-like returns. And lastly, our capital structure and allocations are a key part of our value creation methodology. 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 capitals. As you saw from our earnings release, we had a solid quarter. Our Q3 total revenue was strong and we had a robust EBITDA as defined margin for the quarter. Additionally, we once again raised our guidance for the year. We continue to see recovery in the commercial aerospace market and trends are still favorable as demand for travel remains high. Global domestic air traffic continues to lead the recovery and has surpassed pre-pandemic levels. International travel is also making progress and catching up to domestic travel. However, total air travel demand remains slightly below pre-COVID levels. There is still progress to be made for the industry, and our results continue to be adversely affected in comparison to pre-pandemic levels. In our business during the quarter, we saw a healthy growth in our revenues and bookings for all three of our major market channels, commercial OEM, commercial aftermarket, and defense. Revenues also sequentially improved in all three of these market channels. EBITDA's defined margin improved to 52.5% in the quarter. Contributing to this strong margin is the continued recovery in our commercial aftermarket revenues, along with diligent focus on our operating strategy. Additionally, we had good operating cash flow generation in Q3 of over $400 million, and ended the quarter with close to $3.1 billion of cash. We expect to continue generating additional cash in our final quarter of fiscal 2023. Next, an update on our capital allocation activities and priorities. Regarding the current M&A pipeline, we continue to actively look for M&A opportunities that fit our model.
spk09: As we look out over the next 12 to 18 months, As usual, the potential targets are mostly in the small and mid-sized.
spk06: Comment on possible closings, but we remain confident that there is a long runway for acquisitions that fit our portfolio. The capital allocation priorities at Transdime are unchanged. Our first priority is to reinvest in our business. Second, do a creative, disciplined M&A. And third, return capital to our shareholders via share buybacks or dividends. A fourth option, paying down debt, seems unlikely at this time, though we do still take this into consideration. We are continually evaluating all of our capital allocation options, but both M&A and capital markets are always difficult to predict. We continue to maintain significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Sarah will provide further commentary on our capital allocation during her prepared remarks. Moving to our outlook for fiscal 23. As noted in our earnings release, we are increasing our full fiscal year 23 sales and EBITDAs defined guidance to reflect our strong third quarter results and our current expectations for the remainder of the year. At the midpoint, sales guidance was raised 100 million and EBITDA's defined guidance was raised $105 million. The guidance assumes the continued recovery in our primary commercial end markets throughout the remainder of fiscal 23 and no additional acquisitions or divestitures. Our current year guidance is as follows and can also be found on slide six in the presentation. The midpoint of our revenue guidance is now $6.555 billion, or up approximately 21% versus fiscal 22. In regards to the market channel growth rate assumptions that this revenue guidance is based on, for the commercial aftermarket and defense market, we are updating the full year growth rate assumptions as a result of our strong third quarter results and current expectations for the remainder of the fiscal year. We now expect commercial aftermarket revenue growth for fiscal 23 to be in the low 30% range, which is an increase from our previous guidance range of 25 to 30%. The commercial aftermarket has been progressing well in our fiscal 23, and we plan for that to continue through Q4 and beyond. However, we aim to be conservative with this guidance as the commercial aftermarket is harder to predict, with many orders being booked and shipped and the advanced bookings only going out a few months or so into the future. For defense, we now expect revenue growth in the mid to high single digit percentage range. This is an increase from our previous guidance of low to mid single digit percentage range. Commercial OEM revenue guidance is still based on our previously issued market channel growth rate assumptions. We are not updating the full year market channel growth rate for commercial OEM, as underlying market fundamentals have not meaningfully changed. We continue to expect commercial OEM revenue growth in the 20% to 25% range. The midpoint of our EBITDA as defined guidance is now $3.365 billion, or up approximately 27%, with an expected margin of around 51.3%. This guidance includes about 50 basis points of margin dilution from the DART aerospace acquisition and about 50 basis points of margin dilution from the recent CALSPAN acquisition. The pro forma margin dilution from CALSPAN, meaning if we had owned CALSPAN for all of our fiscal year 23, is just over 100 basis points. The midpoint of our adjusted EPS is increasing primarily due to the higher EBITDA as defined guidance and now anticipated to be $25.15 or up approximately 47%. Sarah will discuss in more detail shortly some other fiscal 23 financial assumptions and updates. We believe we are well positioned for the last quarter of our fiscal 23. We will continue to closely watch how the aerospace and capital markets continue to develop and react accordingly. Let me conclude by stating that I'm very pleased with the company's performance this quarter and throughout this recovery of the commercial aerospace industry. We remain focused on our value drivers, cost structure, and operational excellence. Now let me hand it over to Joel to review our recent performance and a few other items. Thanks, Kevin, and good morning, everyone.
spk04: I'll start with our typical review of results by key market category. For the balance of the call, I'll provide commentary on a pro forma basis compared to the prior year period in 2022. That is, assuming we own the same mix of businesses in both periods. The May 2023 acquisition of Calspan Corporation is excluded from this market discussion. 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 25% in Q3 compared with the prior year period. Sequentially, total commercial OEM revenues grew by about 4% compared to Q2. Bookings in the quarter were robust. compared to the same prior year period and significantly outpaced sales. We are encouraged by the increasing commercial OEM production rates and airline demand for new aircraft. OEM supply chain and labor challenges still persist but appear to be making steady progress. While risks remain towards achieving the ramp up across the broader aerospace sector, we are cautiously optimistic. that our operating units are well positioned to support the higher production targets. Now, moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 32% in Q3 when compared with the prior year period. Growth in commercial aftermarket revenue was primarily driven by the continued strength in our passenger submarket which is our largest submarket, although all of our commercial aftermarket submarkets were up significantly compared to prior year Q3. Sequentially, total commercial aftermarket revenues increased by approximately 2%. Commercial aftermarket bookings for this quarter were strong compared to the same prior year period. Turning to broader market dynamics, global revenue passenger miles still remain lower than pre-pandemic levels, but growth in air traffic over the past few months has continued to signal steady recovery momentum. IATA recently commented they see a better demand outlook for 2023 air travel than they previously forecast and now expect total 2023 revenue passenger miles to reach 88% of 2019 levels. IATA also expects a return to 2019 air traffic levels in 2024. The recovery in domestic travel further progressed over the past few months and has surpassed pre-pandemic levels. In the most recently reported IATA traffic data for June, global domestic air traffic was up 5% compared to pre-pandemic levels. Domestic air travel in China continues to improve and was up 15% in June compared to pre-pandemic levels. This is a significant improvement from China being down 55% only six months ago in December. U.S. domestic air travel for June came in just slightly above pre-pandemic traffic, but year-to-date surpasses pre-pandemic levels by about 2%. International traffic has made strides over the past few months and is catching up to the domestic recovery. A quarter ago, at the end of March, international travel globally was depressed about 18% compared to pre-pandemic levels, but in the most recently reported IATA traffic data for June, international travel was only down about 12%. International traffic in North America is 2% above pre-pandemic levels, and Europe is within 10%. Asia Pacific international travel was still down about 29%, but should hopefully continue to improve as the China reopening progresses. Global air cargo volumes in the most recent June IATA data continued to be lower year over year, and compared to pre-pandemic levels, but the contraction versus these prior year periods has moderated a bit. Going forward, improvements in inflation in major economies could potentially provide a tailwind to air cargo demand. However, with the continued growth in passenger flying, especially the wide-body recovery, there is more belly hole space available for cargo transport. It's too early to determine where our air cargo trend stabilizes, but we will continue to watch this closely. Business jet utilization is below the pre-pandemic highs in 2021 and continues to temper. Business jet activity does remain above pre-pandemic levels, but time will tell how this normalizes over the upcoming months. Shifting to 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 17% in Q3 when compared with the prior year period. Sequentially, total revenues grew by approximately 14%. Defense bookings are also up significantly this quarter compared to the same prior year period. This quarter, we began to see improvements in the US government defense spend outlays, which is reflected in our defense revenue performance this quarter. We are hopeful we will continue to see steady improvement, but as we have said many times before, defense sales and bookings can be lumpy. As Kevin mentioned earlier, we now expect our defense market revenue growth for this year to be in the mid to high single digit percentage range. Next, I will provide a quick update on our recent acquisition of Calspan Corporation. As discussed on our last earnings call, we completed the Calspan acquisition this past May for $725 million in cash. Calspan has established positions across a diverse range of aftermarket-focused aerospace and defense development and testing services, including a state-of-the-art transonic wind tunnel that it utilizes to perform testing for both the commercial and defense end markets. Calspan's unique service offerings exhibit the earning stability and growth potential that are consistent with our aerospace component center businesses. The Calspan acquisition integration is progressing well under the leadership of Executive Vice President Paula Wheeler. We have now owned CalSpan for three months and we are pleased with the acquisition thus far. Before concluding, I'd like to review one additional executive change that occurred during Q3. We recently promoted Kevin McHenry to the executive vice president role. Kevin has worked for Transdyn for over 20 years and was most recently the president of our Kirkhill operating unit for five years. Prior to that, Kevin was the Director of Sales at our Hartwell Airborne Systems and our Adams-Wright Aerospace Operating Units, and also served as President of Adams-Wright Aerospace. We continually work to improve our bench strength of promotable talent, and we are happy to have Kevin as our newest Executive Vice President. This promotion gives us the resources we need to oversee our business units, following my promotion to Co-COO. Lastly, I'd like to wrap up by stating how pleased I am by our operational performance in this third quarter of fiscal 2023. We remain focused on our value drivers and meeting increased customer demand for our products. With that, I would like to turn it over to our Chief Financial Officer, Sarah Wynn.
spk00: Thanks, Joel, and good morning, everyone. I'm going to provide an overview on a few financial matters for the quarter and expectations for the full fiscal year. First, on organic growth and liquidity. In the third quarter, our organic growth rate was 20.7%, driven by the continued rebound in our commercial OEM and aftermarket end markets. On cash and liquidity, free cash flow, which we traditionally define as EBITDA-less cash interest payments, CapEx, and cash taxes, was roughly $540 million for the quarter. For the full fiscal year, we continue to expect expect to generate free cash flow in excess of the $1.4 billion target previously provided. Below that free cash flow line, we saw net working capital consume approximately $180 million of cash during the quarter as we continue to build both accounts receivable and inventory to support the ongoing and continuing sales ramp up on both the OEM and aftermarket sides of the business. The OEM does tend to be slightly more intensive from a net working capital standpoint. We ended the quarter with approximately $3.1 billion of cash on the balance sheet, and our net debt to EBITDA ratio was 5.3 times, down from the 5.6 times at the end of last quarter. On a net debt to EBITDA basis, this puts us below the five-year pre-COVID average level of six times. Additionally, our cash interest coverage ratio, which is EBITDA to interest expenses at three times, which is right in line with where we've historically operated pre-COVID and been comfortable operating the business. As always, we continue to watch the higher interest rate environment and the current state of the debt markets closely. As a reminder, we did a fair bit of refinancing in the first half of the year, pushing out over $8 billion of our nearest term maturities due in 2025 out to 2028. We expect to continue both proactively and prudently managing our debt maturity stacks, which for us means pushing out any near-term maturities well in advance of the final maturity date. Our nearest term maturity is now 2026. Over 75% of our total 20 billion gross debt balance is fixed or hedged through our fiscal 2026. This is achieved through a combination of fixed rate notes, interest rate caps, swaps, and collars. This provides us adequate cushion against any rising rates, at least in the immediate term. As we sit here today, from an overall cash liquidity and balance sheet standpoint, we think we remain in a good position with adequate flexibility to pursue M&A or return cash to our shareholders via dividends or share repurchases. Regarding capital allocation, it is likely we make a decision by the end of the calendar year based on current market conditions. We have a sizable cash balance of close to $3.1 billion and consistent with history, when we have a significant amount of cash available, we aim to get the cash back to our shareholders in one form or another. All three capital allocation options, significant acquisitions, share buybacks, and dividends remain on the table. With that, I'll turn it back to the operator to kick off the Q&A.
spk10: Thank you. We will now conduct the question and answer session. As a reminder, to please ask a question, you'll press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, you'll press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of David Strauss of Barclays. Go ahead.
spk13: Thanks. Good morning. Good morning. Kevin, I don't know if it was for everyone or just me, but your comments around the M&A pipeline cut out, at least for me. So would you mind repeating kind of where you are from a pipeline standpoint? I think you had some interest in the Raytheon property and maybe what happened there.
spk06: Well, we can't comment, as you know, the process. We can't comment on deals due to NDAs that you put in place. So whether we were interested or not, we don't comment. The M&A pipeline, though, is, I said, I'll reread my words. We continue to actively look for M&A opportunities that fit our model. As we look out over the next 12 to 18 months, we continue to have slightly stronger than typical pipeline of potential targets As usual, we can't comment, yada, yada. It's similar to what I said last quarter. We are seeing a pretty interesting time right now. A lot of properties that we have been closely following for a long time are becoming available and, you know, difficult to predict which, if any of them, will close. Again, we are extremely disciplined in our M&A approach.
spk13: Okay, thanks. A quick, quick follow up. So in prior quarters, your comments, you know, your comment on the slide around bookings was that, you know, bookings were outpacing shipments. And this quarter, you just went to a, you know, things are strong. What do we read anything to that? I mean, relative to kind of the the bookings rate, maybe on a on a sequential basis, both for the aftermarket and the new equipment side?
spk06: Well, I think across the business, we built backlog. So book to bill for the company was still positive. It is true that, you know, some things can be lumpy. We saw strength in OEM and defense. Aftermarket was a little bit, the rate of change of expansion of the order book slowed a little bit, but still have a positive book to bill there for the year.
spk13: All right, thanks very much.
spk09: Thank you.
spk10: Our next question comes from a line of Kristen Lee Wang from Morgan Stanley. Go ahead, Christine.
spk08: Hey, good morning, guys. How are you doing? Good morning.
spk04: Good morning.
spk08: Good morning. So, you know, with a strong growth in aftermarket, we're hearing that MRO facilities are fully booked this year and slots are even difficult to come by by next year or even the year after that. Can you provide any color in terms of how much of your aftermarket parts are linked to heavy maintenance versus the normal wear and tear? And does the limited MRO shop availability essentially limit the volume of parts you can sell to the aftermarket? How should we think about that dynamic?
spk04: Yeah, I don't think we have the specific data around the MRO and what the implications are. I think we continue to see the commercial aftermarket growth in all of our sub markets, and I think we continue to see the positive momentum as revenue passenger miles continue to move up year to date. We're now down to just 10% below pre pandemic levels. and continue to see the, expect to see trends continue as long as the people continue to fly.
spk08: Great, thanks. And I'm wondering if I can do another follow-up. You know, what we're hearing from the supply chain is that in commercial OE terms, there have been improving pricing for new airplane parts on the OE side. So does that mean that when OE volume starts coming back for you guys, could you also get some of that pricing benefit And could that alleviate some of the mixed headwind you could experience should the ramp materialize sooner than expected?
spk06: I think, you know, we don't usually comment on margins and increases across the board. It is fair to say that our, you know, as we always state, our aftermarket is more profitable. You know, our goal in pricing is to pass along inflation. So we have seen a very inflationary environment That's probably all we can comment on on that. You know, we definitely make more money in the aftermarket.
spk08: Great. Thanks, guys.
spk09: Thank you. Our next question comes from the line of Miles Walton.
spk10: Hold on one second. Go ahead, Miles.
spk19: Thanks so much. Kevin, the margins in the quarter were particularly strong given what I would think would have been a little bit more adverse mix with CalSpan folding in. Aftermarket as a percent of sales is actually lower sequentially. Can you comment on the dynamics that would help do that in the quarter sequentially? And then also, I guess, why they're going to go down 100 basis points sequentially into 4Q?
spk06: Well, I hope we forecast conservatively as we look at the future. That's a conservative look at what might happen. Given that aftermarket is such a significant driver for the business and that some of it isn't booked yet for the quarter, it makes it prudent for us to be a little more conservative as we forecast the quarter. We'll see how it plays out. I'll tell you on the margins line, it's a pleasant situation. TAB, Mark McIntyre, outcome that we continue to see the progress in cost reductions across the business. TAB, Mark McIntyre, Even selective new business programs have been successful for us there were not any significant one time accounting adjustments or anything in these numbers, so this was real performance of the business.
spk19: Got it. Thanks. And just a quick follow-up. As you go into next year, given EBITDA is higher, your net interest expense is coming lower, the tax rate I know kicked up because of the EBITDA rule of interest deductibility. Is the tax rate now going to kick back down a couple hundred basis points? Thanks.
spk06: I think we'll give guidance. That's really a question for Sarah, but we'll give guidance on 24 next quarter when we get into it, and we'll have a detailed look at the interest and tax rates and all the pieces. So if you can hold your question until then. Is that fair, Sarah?
spk00: Yes, that's right. We haven't gone through the planning process yet.
spk09: Okay. Thanks, Kim. Thank you.
spk10: Our next question comes from the line of Kevin Herbert from RBC Capital Markets. Please go ahead.
spk18: Hey, good morning. Kevin, maybe just to stick on the aftermarket, I think you've raised guidance for aftermarket growth each quarter this year. You're going to likely end the year sort of 2x the initial guidance in terms of the growth. And I'm just wondering if there's anything in particular you could call out as you've gone through fiscal 23 that's been a particular source of upside that was maybe unexpected or where you think you know, that significant sort of outperformance relative to the initial expectations, where should we come from?
spk06: I think China was the big player. We initially had our look at the business. That was the unclear point that we didn't see in our planning. So I think a lot of what we're seeing today for upside and the revisions favorably have been due to that expanding market. And really the a better recovery than I think any of us anticipated when we initially planned the year.
spk18: Is there any concern that you've seen some of the elevated activity, any of the sales in the aftermarket pulled into 23 that could be a potential headwind in 24? Or just how do you think about sort of the booking strength and the initial outlook into 24 relative to the 23 strength? Joel?
spk04: Well, obviously, we're not going to provide any guidance towards 2024, but look, our order book continues to evolve. Flight activity continues to increase. You said the traffic in Asia Pacific has increased significantly, but even there, it's still about 20% below 2019 levels. Global air traffic is still below the pre-pandemic level. I think we're all realistic that the rate of change has to slow at some point as you get closer and closer back to the pre-pandemic levels, but I don't think we see anything else beyond that changing. Great. Thank you.
spk10: Thank you. Our next question comes from the line of Robert Stallard from Vertical Research Group. Please go ahead.
spk17: Thanks so much. Good morning.
spk10: Morning.
spk17: Kevin, first of all, on the M&A pipeline, as you said, your comments sound pretty similar to what you said three months ago, that things are looking quite interesting out there. But I'm worried that everyone else is saying the same thing, and this is starting to bid some of these asset prices up too high.
spk06: You know, in fullness of time, I don't think you can overpay for good assets that meet our criteria. So I'm not worried about more competition. if businesses meet our criteria, we will, you know, rise to meet the challenge.
spk17: Okay. And then secondly, on the aftermarket price, I thought it was quite interesting that they had to have pulled forward their price increase by another two months this year. Is this something that some of your businesses are doing, or are you still on a fairly standard sort of 12-month increase?
spk06: Could you repeat your question? You broke up a bit, and I couldn't hear some of the details.
spk17: Yes, sorry, Kerry. It was a hard thing that CFM had pulled forward their price increase by another two months, and I was wondering if it's something that Transdime businesses are doing, or are you sticking to your usual 12-month catalog price increases?
spk06: I think we do regular catalog price increases, but in a high inflationary environment, dynamic pricing becomes more of the norm. So I don't think our businesses necessarily are augured into, you know, only once a year. It really depends on the inflationary inputs that they're seeing.
spk17: Okay. That's great. Thank you.
spk09: Thank you. Our next question.
spk10: comes from a line of Robert Spengard from Mellius Research. Please go ahead.
spk05: Hey, good morning. Morning. Kevin, on margins, just as OE mix increases, assuming that OE growth overtakes aftermarket growth at some point here, can you mitigate the headwind to margins from that, just from productivity and pricing, perhaps on the other side in aftermarkets?
spk06: I think there will be challenges to doing that, but that would certainly be one of our aspirational goals as we go forward to continue to drive cost improvements and improvements in general to our business to drive that. It will be difficult as we have very strong aftermarket growth, but we're seeing the OEM growth somewhat muted as they are slower to ramp up, meaning there's more pressure in the aftermarket. I think that we continue to enjoy this for a while into the future. Maybe not the wild recovery we've seen over the last two years, but still, I think that the market conditions really in all of our market segments set up very favorably for us, even in the aftermarket in the future.
spk05: Thanks so much.
spk09: Thank you. One second for the next question. Our next question comes from Pierre Armit from Baird.
spk10: Please go ahead.
spk07: Yeah, thanks. Good morning, everyone. Kevin, maybe if you could just give a broader comment on the wide-body side of things. We're really starting to see kind of an uptick really across the board. And I know last quarter you made some comments that your interiors business has been recovering nicely. Just any further color there would be helpful. Thanks.
spk04: Yeah, I'd say on the interior, this is Joel. I'd say on the interior side, I think we're seeing a similar trend as we are in the overall commercial aftermarket, a good increase year over year and continuing the positive trend we've seen for several quarters now. To date, it's primarily being driven by the repair side, but we're seeing a nice recovery. Obviously, as they continue to utilize the existing fleet, it'll be beneficial for us in the future for modifications and refurbishments.
spk07: I appreciate that, Colin. And then just as a follow-up quickly, Kevin, I know last quarter there was a comment that made about aftermarket volumes still being 10% to 15% light. Is that still how you see kind of the year shaking out, or is that starting to improve? Thanks.
spk06: Well, I think it improves every quarter, but I still see 10 plus percent opportunity. You know, RPMs are still 12% below takeoff and landings in certain regions, still below where they were pre-pandemic. I still see opportunity and suppressed demand, which I have every belief will return.
spk17: Appreciate it. Thanks, Evan.
spk06: Yeah.
spk10: Thank you. Our next question comes from a line of Jason Gertzky of Citibank. Please go ahead.
spk02: Hey, good morning, everybody. I can't believe I'm going to be the first to congratulate everybody on their respective promotions and retirements, but congrats to all.
spk06: Thank you for doing that. It's always good to hear. Sometimes we're just the machine that keeps moving and people forget that.
spk02: I appreciate all the hard work for sure that goes into achieving that level of success. Just a quick question for you related to the situation at Pratt with the GTF. They're talking about bringing in 130, 140 engines here in the near term and then 1,200 over the next year or so. I'm just curious curious what you're hearing from some of your customers about how they're going to deal with that. Do you think there's an opportunity for more planes to kind of come out of the desert here? Do you think there will be more expansive work that gets done when some of these engines and perhaps aircraft get grounded that might accelerate some work for you all that would have maybe come later if the engines had come in under normal course. I'm just trying to get a sense of how this GTF engine issue might impact TransDyn.
spk06: Yeah, I think I'll kick that one to Joel for comment. He's very close to the customers and businesses.
spk04: Yeah, I don't think we think it has any significant change, engines coming in sooner. means one set of components get replaced earlier because they're going to do maintenance on the engine, but then there's another set of components that you really want to have them flying, and the starts and stops or what, their takeoffs and landings, what makes the big difference. I think we're not hearing anything that makes a significant change of what we're seeing today.
spk02: Okay, great. I'll leave it with one. Thanks, guys. Thanks.
spk10: Thank you. Our next question comes from the line of Noah Popanak of Goldman Sachs. Go ahead, Noah.
spk09: Hey, good morning, everyone.
spk11: Morning. Was the book to bill greater than 1.0 in all three end markets?
spk06: For the quarter or year to date? I guess we don't really give that kind of granularity usually. It was up across the company for aftermarket. It was slightly off, but year to date still positive.
spk11: Okay.
spk06: Does that clear it up for you?
spk11: Yeah, that clears it up. Yeah. And then on the defense side, I mean, can you spend another minute on what happened there? You referenced... how outlays are trailing authorization, and that has started to catch up. What are you seeing and hearing from your customer there? You'll have easy compares, and that outlay gap is pretty wide. Can these higher growth rates sustain for a period of time?
spk04: Well, I think we're seeing steady improvement in the outlays. The outlays are still a little bit slow in terms of – solicitations converting into orders compared to historical levels. But as Kevin just mentioned, bookings were stronger than shipments. So I think we continue to anticipate some runway there.
spk06: Yeah, I think really in all three of our market segments, including commercial aftermarket, although maybe bookings slowed ever so slightly this quarter. Remember, bookings can be lumpy quarter to quarter. And, you know, all three of our commercial OEM, commercial aftermarket, and defense all look favorable into the future. I can't stress that enough.
spk11: Okay.
spk06: Thanks, guys. Appreciate it. Yeah.
spk10: Thank you. Our next question comes from the line of Ron Epstein from Bank of America.
spk09: Please go ahead. Please go ahead, Ron. Ron's on mute.
spk16: Oh, sorry about that. I was on mute. Yep. Just trying to, yeah. Yeah. Hey, so just a quick one. Um, a lot of stuff, good stuff's been asked, but Kevin, what's your, your mood for a fixer upper? I mean, as you, as you look at stuff out there, um, is, is kind of M and a, you want to do fixer upper style or stuff that just kind of fits right in with, uh, you know, the trans-time model.
spk06: I guess it's where do we see the likelihood of, you know, upper quartile private equity-like returns? You know, we've always talked about the 20% IRR threshold for M&A activities. I'm not against fixer-uppers. Generally speaking, though, we acquire good business as we heavily invest in them and we make them much better. Um, a fixer upper might fit that as your listing. Uh, but you know, we usually don't look for those per se. Um, and everything must stand on its own and generate the return. Got it.
spk16: Got it. Got it. I'm just trying to get a sense. I think a lot of people are, what are you not interested in? Um, I mean, do you think you need to open the aperture?
spk09: Look ahead.
spk06: Yeah, I mean, do you think you've got to look ahead? Sorry. We don't think we need to open the aperture per se. I think there's still plenty of activity in the aerospace world for accretive M&A. It's just important for us to stay disciplined. Historically, we do one, two deals a year. Some years you get a bunch more. But it's important for us to stay very disciplined in our approach. So we're still seeing a lot of activity in core M&A that fits our model. What we look for is that 20% IRR. We're still seeing those opportunities, quite a few of them right now. But I think what's critical for us is to be disciplined in this process. If we continue to be disciplined, then we'll continue to find the great businesses that we look for. And there's certainly a lot of interesting properties available as we look over the next 12 to 18 months, as I alluded to in my comments. Does that help you better understand what we're seeing?
spk16: Yeah, I think it does. And if I may, just one last quick one. Gross margins in the quarter were really quite good at 59%. Should we expect that to continue?
spk06: You know, our goal is to always drive margins up. So our track record, I think, in that speaks for itself.
spk09: Got it. All right. Thank you very much. Thank you.
spk10: Our next question comes from a line of Seth Seifman of J.P. Morgan. Please go ahead.
spk15: Hey, thanks very much, and good morning. Good morning. Just going back to the question of capital deployment, I think you said the majority of M&A opportunities, you know, kind of naturally are in the small and midsize category. And so, you know, given the capacity that you'll have by year end, unless something really significant shakes loose, You know, should investors be thinking about, you know, if there is something in that small and mid-sized category that there is, you know, plenty of opportunity for capital return as well?
spk00: Yeah, I mean, our capital allocation priorities remain unchanged. So we'll continue to evaluate our options over the course of the calendar year. We'll see how the market conditions look. But ultimately, you know, we operate a disciplined approach and we'll continue to do so.
spk15: Okay. Okay. Thank you. And then just as a quick follow-up, I know maybe not the part of the business that gets focused on most, but the bizjet and helicopter aftermarket has been up kind of 20% the past couple of quarters. And we generally think about aftermarket revenues kind of tracking flight hours plus some price. And business jet flight hours in the U.S. at least have been pretty flat year to date. And so is there something you point to that accounts for the continued strong growth there, given that it seems like the underlying end market just isn't really growing that much right now?
spk04: I think some of it's the timing of bookings and shipments. So the biz jet market expanded pretty significantly during the pandemic and has really only slowly reduced each quarter. It's something we'll continue to monitor, as I said in my opening remarks.
spk15: Great. Thanks very much.
spk09: Thank you.
spk10: Our next question comes from a line of Michael Ciamoli from Chewet.
spk20: Hey, good morning, guys. Thanks for taking the questions, and congrats. Kevin, just maybe back to margins. Obviously, I think Rob brought up the OE ramping and the mix, but you guys are always trying to execute and drive margins higher, but have you been at that margins peak? And then I guess as we think about OEM ramping, does your commentary around dynamic pricing apply to some of your OEM, commercial OEM sales?
spk06: Yeah, it doesn't. Commercial OEM tends to be longer, you know, more like a year or two to, you know, address any inflationary pressures. But, yeah, generally speaking, a little different on the OEM side, but still, you can find a way to pass along inflation, and that's, again, what we strive to do. What was the first part of your question?
spk20: Just EBITDA margins. I mean, you know, record level in the quarter.
spk06: Have they peaked? That's right. No, they haven't peaked. You know, there's still room to grow and expand, and that's how we look at it. We're still looking for those opportunities and I don't see any reason why there isn't room to continue to improve. That's our goal, is steady, consistent, disciplined improvement, M&A, capital allocation, to continue to allow the machine to operate. Got it.
spk20: Helpful. I'll leave it at that. Thanks, guys.
spk09: Thank you.
spk10: Our next question comes from a line of Gautam Khanna of TD Cohen. Please go ahead.
spk03: Hey, good morning, guys, and congrats to everyone. Good morning. Let's change roles. Good morning. Hey, I wanted to ask just quickly on whether you're seeing any discernible difference in demand patterns through your distribution uh channels versus direct and and just how shortening lead times if if they have have impacted ordering patterns by customers is there less of a queuing effect you know because they don't have to place an order as far in advance is that something that might be impacting the bookings as well thanks yeah so when we look at the point of sale information from our distribution partners it matches pretty well with what we're seeing as we go direct
spk04: to customers, so I don't think we're seeing anything significant there. You know, when it comes to lead times, every operating unit sets their own unique set of lead times for products and customers. They're often not the same. You know, given the recovery we've seen in the aftermarket, we've invested in the inventory to be able to support the customer base. I think that's helped out a little bit. But no real significant change, at least from what I'm seeing from either the distribution point of sale or what we're seeing direct, and no significant change due to lead time.
spk03: Thanks. And then just a quick follow-up on CalSpan, because it's a little bit of a different profile, more service-oriented. I'm just curious, any surprises, anything new? that we should think about that will be different with respect to its integration or its margin potential over time relative to the hardware businesses?
spk04: I don't think so. I think as George said last quarter, our view of value creation is a three-pronged approach. We focus on value-based pricing of our products, managing our cost structure, and providing innovative solutions. We've only recently closed on it. But we're looking to leverage all three. We think it's a great business. That's been well run. And our goal is to optimize it similar to what we've done in past acquisitions. We've got a, as I mentioned in my opening remarks, we've got a seasoned executive in Paula Wheeler leading the integration. And I think we think it'll fit well into the Transdyn formula.
spk03: And just last one, sorry, with respect to service-oriented businesses, is that something that you're also kind of seeing more of in your M&A pipeline? Is that stuff you're more interested in?
spk06: No, I think we've always seen a few of them, just nothing as compelling as CalSpan was to us. I mean, at the end of the day, we're looking for businesses that we can identify that upper quartile private equity-like return 20% plus. That's what we're looking for. We believe today that CalSpan will absolutely deliver that for us.
spk03: Thanks a lot, guys. Appreciate it.
spk09: Thank you. Our next question comes from a line of Sheila Kyoglu from Jefferies.
spk10: Go ahead, Sheila.
spk12: Thank you. Good morning, guys. Thank you for the time. Good quarter, and congrats to all the promotions. When you put up 34% aftermarket growth and 50% margins, you're going to get two negatively biased questions, so bear with me here. Are you seeing any negative signs in the aftermarket, whether it's inflation cooling, cargo weakness, or low-cost carriers seeing yield softness?
spk06: I think cargo and... maybe some business jet softening in the aftermarket. Joel, do you have anything to add to that?
spk04: Yeah. I think the, you know, on the cargo side, the yields are down for them significantly. They've obviously increased the significant amount of belly capacity in the last several months as international travel has kicked up. And, you know, we'll have to see how that all shakes out. But We think it has had some impact this quarter. We'll see how it shakes out going forward.
spk12: Thank you for that. And then just on EBITDA margins, 52%, I think the all-time high, they expanded 120 BIPs sequentially, despite CASPAN being, I think, 70 basis points dilutive, given 25% margin. So are we just wrong on CASPAN margins, or what drove the margin expansion in the quarter?
spk06: I think it was strong performance in Q3, the results, the market mix, and we didn't own CalSpan for all of the quarter. I think that will impact us a little bit more as we go forward. But it was just a strong all-around quarter, good performance in the aftermarket and OEM side of the house.
spk12: Great. Thank you.
spk10: Thank you. I am showing no further questions at this time. I would now like to turn the conference back to Jamie Steeman for closing remarks.
spk14: Thank you all for joining us today. This concludes the call. We appreciate your time and have a good rest of your day.
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