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Operator
Good day and thank you for standing by. Welcome to the Transdime Group Incorporated fourth quarter 2023 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'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jamie Steeman, Director of Investor Relations. Please go ahead.
Jamie Steeman
Thank you, and welcome to Transdynes Fiscal 2023 Fourth Quarter Earnings Conference Call. Presenting on the call this morning are Transdynes President and Chief Executive Officer Kevin Stein, Co-Chief Operating Officer Mike Lisman, and Chief Financial Officer Sarah Wynn. Also present for the call today is our Co-Chief Operating Officer, Joel Reese. 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 reconciliations. I will now turn the call over to Kevin.
Kevin Stein
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 24 outlook. Then Mike and Sarah will give additional color on the quarter. As we previously announced on October 27, we had two directors retire from the Transdime board, Merv Dunn and John Stare. Merv has served on our board since 2009 and John since 2012. We sincerely appreciate both Merv and John's dedication to Transdime over the years. They each have done an outstanding job as directors and truly contributed to the long-term value creation of Transdime. Considering these two director retirements, our board is now comprised of 10 directors. For the near term, we feel our board size of 10 is appropriate and composed of highly qualified leaders with the appropriate skill sets to oversee and guide Transdyn. However, as we always do, we will continue to regularly assess the board composition into the future. 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, 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. Our 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 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 closed out the year with another good quarter. We had solid operating performance in Q4 with both total revenue and EBITDA's defined margin coming in strong. For the full year, fiscal 23 revenue came in at the high end of our most recently published guidance, and our fiscal 23 EBITDA's defined margin surpassed that guidance. Commercial aerospace market trends remain favorable as the industry continues to recover and progress towards normalization. Global air traffic is still moving forward and demand for travel remains high. OEMs are making steady headway on aircraft production. However, total air travel remains slightly below pre-COVID levels and OEM aircraft production rates remain well below pre-pandemic 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 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. Our EBITDA's defined margin was 52% in the quarter. Contributing to this strong margin is the continued recovery in our commercial aftermarket revenues, along with our strict operational focus and disciplined approach to cost structure management. Additionally, we had good operating cash flow generation in Q4 of over $460 million and ended the quarter with close to $3.5 billion of cash. We expect to steadily generate significant additional cash through 2024. Next, an update on our capital allocation activities and priorities. As was mentioned in our press release, we've decided to pay a special dividend of $35 per share. The dividend will be paid on November 27th. Sarah will address this more later. In aggregate, including CalSpan acquisition completed this past May and this dividend to be paid in late November, we have allocated over $2.7 billion of capital in the interest of our shareholders in under seven months. Also, we disclosed in our press release earlier today, we agreed to acquire the Electron Device Business of Communications and Power Industries, also known as CPI. for approximately $1.385 billion in cash. CPI's electron device business is a leading global manufacturer of electronic components and subsystems, primarily serving the aerospace and defense market. The products manufactured by this business are highly engineered proprietary components with significant aftermarket content and a strong presence across major aerospace and defense platforms. CPI's Electron Device business generated approximately $300 million in revenue for its fiscal year ended September 30, 2023. The acquisition is currently expected to close by the end of the third quarter of our fiscal 2024. As mentioned earlier, we are exiting fiscal 23 with a sizable cash balance of close to $3.5 billion. Pro forma for the dividend, our fiscal year and cash balance is over $1.4 billion and growing. As always, we continue to closely monitor the credit markets and will be assessing opportunities to utilize leverage for the acquisition of CPI's Electron Devices business and general corporate purposes, which may include potential future acquisitions, share repurchases under our stock repurchase program, and dividends. Regarding the current M&A pipeline, 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 a slightly stronger than typical pipeline of potential targets and remain encouraged concerning deal flow. As usual, the potential targets are mostly in the small and midsize range. I cannot predict or comment on possible closings, but we remain confident that there is a long runway for acquisitions that fit our portfolio. As we move into our new fiscal year, the capital allocation priorities at Transdime are unchanged. Our first priority is to reinvest in our businesses. Second, do accretive discipline to 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 still do take this into consideration. Moving to our outlook for fiscal 2024, The guidance assumes no additional acquisitions or divestitures and is based on current expectations for a continued recovery in our primary commercial end markets through fiscal 24. Throughout fiscal 23, we were encouraged by the recovery seen in our commercial revenues and strong booking trends. Our strong bookings support the fiscal 24 commercial end market revenue guidance, which I will comment on shortly. Trends are positive across all three of our major market channels, commercial OEM, commercial aftermarket, and defense. We are cautiously optimistic that the prevailing conditions will continue to evolve favorably. We will watch this closely, as we always do, and we'll react as necessary, including taking any preemptive steps that might be warranted. Changes in market condition and the impact to our primary end markets could lead to revisions in our guidance for 2024. Our initial guidance for the fiscal 2024 continuing operations is as follows and can also be found on slide 7 in the presentation. The pending acquisition of CPI's Electron device business is excluded from this guidance. The midpoint of our fiscal 2024 revenue guidance of $7.58 billion or up approximately 15%. As a reminder and consistent with past years with roughly 10% less working days than the subsequent quarters, fiscal 2024 Q1 revenues EBITDA and EBITDA margins are anticipated to be lower than the other three quarters of 24. This revenue guidance is based on the following market channel growth rate assumptions. We expect commercial OEM revenue growth around 20%. commercial aftermarket revenue growth in the mid-teens percentage range, and defense revenue growth in the mid to high single-digit percentage range. The midpoint of fiscal 2024 EBITDA's defined guidance is $3.94 billion, or up approximately 16%, with an expected margin of around 52%. This guidance includes about 100 basis points of margin dilution from our recent CalSpan acquisition. We anticipate EBITDA margin will move up throughout the year with Q1 being the lowest and sequentially lower than Q4 of fiscal 2023. The midpoint of adjusted EPS is anticipated to be $31.97 or up approximately 24%. Sarah will discuss in more detail shortly the factors impacting EPS along with some other fiscal 24 financial assumptions and updates. We believe we are well positioned as we enter fiscal 24. As usual, 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 am very pleased with the company's performance this year and throughout the recovery for the commercial aerospace industry. We remain focused on our value drivers cost structure, and operational excellence. We look forward to fiscal 2024 and expect that our consistent strategy will continue to provide the value you have come to expect from us. Now let me hand it over to Mike Listman, our Transdime Group Co-COO, to review our recent performance and a few other items.
Mike
Good morning. I'll start with our typical review of results by key market category. For the remainder 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. In the commercial market, which typically makes up close to 65% of our revenue, we will split our discussion into the OEM and aftermarket. Our total commercial OEM revenue increased approximately 22% in Q4 and 24% for full fiscal year 23, compared with the prior year periods. Sequentially, total commercial OEM revenues grew by about 4% compared to Q3. Bookings in the quarter were strong compared to the same prior year period. These strong bookings throughout fiscal 23 support the commercial OEM guidance for revenue growth of around 20% for fiscal 24. OEM supply chain and labor challenges persist but appear to be slowly progressing. We continue to be encouraged by the steadily increasing commercial OEM production rates at Boeing and Airbus and the strong airline demand for new aircraft. Supply chains remain the bottleneck in this OEM production ramp up. While risks remain towards achieving this ramp up across the broader aerospace sector, we are 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 27% in Q4 and 31% for the full fiscal year 23 compared with the prior year periods. Growth in commercial aftermarket revenue was primarily driven by the continued strength in our passenger sub market, which is by far our largest sub market. We also saw growth in our interior and bizjet sub markets compared to prior year Q4. These increases were minimally offset by a slight decline in our freight sub-market. The post-COVID return to flying globally continues and has buoyed our primary commercial aftermarket sub-markets, passenger, bizjet, and interior, while the now sustained global softness and declines in global freight volumes seen over the past year plus likely contributed to the minor decline in the freight sub-market that we saw this quarter. Sequentially, total commercial aftermarket revenues increased by approximately 2%. Commercial aftermarket bookings for this quarter were strong compared to the same prior year period. And in the full 2023 fiscal year, these commercial aftermarket bookings exceeded sales nicely. The strong bookings levels in commercial aftermarket over the past 12 months support our commercial aftermarket guide for revenue growth in the mid-teens percent range for fiscal 24. As a reminder, when forecasting our commercial aftermarket, we always look at rolling historical 12-month average booking trends, never just the most recent quarter due to some lumpiness that we can often see and have historically seen in this end market. This lumpiness is not quite as big as what we can see in the defense end market, but it is there nonetheless. Turning to broader market dynamics and referencing the most recent IATA traffic data for September, 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. Globally, a return to 2019 air traffic levels is still expected in 2024. Domestic travel continues to surpass pre-pandemic levels. In the most recently reported traffic data for September, global domestic air traffic was up 5% compared to pre-pandemic. Domestic air travel in China continues to improve and was up 8% in September compared to pre-pandemic. This is a significant improvement from China being down 55% only nine months ago in December. We did not expect such a steep ramp up in China activity this past year, and it was a nice surprise. Shifting over to the U.S., domestic air travel for September came in 6% above pre-pandemic traffic. International traffic has continued to make strides over the past few months. A quarter ago, at the end of June, international travel globally was depressed about 12% compared to pre-pandemic levels, but in the most recent data for September, This travel was only down about 7%. Now some quick color on our commercial aftermarket submarkets, starting with the BizJet submarket. Business jet utilization is below the pandemic highs reached in 2021 and continues to temper. Overall, global business jet activity does remain above pre-pandemic levels by about 10% to 15%, and time will tell how this normalizes over the upcoming months. Within our business jet sub-market, our revenue is well above pre-COVID levels. Next, on the cargo sub-market. As a reminder, this is one of our smaller sub-markets within the commercial aftermarket bucket. Global air cargo volumes have continued to struggle, and after 19 straight months of year-over-year declines, just returned to flattish to slightly positive growth these last two months. Cargo ton kilometers, CTKs, have been below pre-pandemic levels. Additionally, full freighter aircraft are being used less now and have seen an increase in parked rates due to the return of belly cargo capacity on the passenger side. As mentioned on our last earnings call, we've started to see some booking softness in the freight submarket of our commercial aftermarket, likely as a result of these sustained declines in CTKs and the full freighter market challenges that I referenced. One quick aside to summarize what is currently going on in our commercial aftermarket submarkets and how we as a management team think about it. If you take a step back and look at how things have trended from pre-COVID to the present over the past four years. At COVID's onset, we saw a precipitous drop at first in the passenger submarket, followed shortly thereafter by a big run-up in freight to levels well in excess of pre-COVID activity. After a few years of seeing these trends, these markets are now in various stages of returning back to their original trend lines. Passenger traffic continues to surge back, and with it, belly cargo, while full freighter cargo aircraft traffic is dropping back to trend. We are happy to see this dynamic. Passenger is by far our largest submarket within the commercial aftermarket, and we win on this tradeoff between full freighters and passenger. 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 15% in Q4 and 11% for the full fiscal year 23 compared with the prior year periods. This full year defense revenue growth exceeded our last guidance expectation of growth in the mid to high single digit range that we gave on the last call. Sequentially, total defense revenues grew by approximately 9%. Defense bookings are also up significantly this quarter compared to the same prior year period. We continue to see improvements in the U.S. government defense spend outlays, which is reflected in our defense revenue and bookings performance this quarter. We are hopeful we'll continue to see steady improvement, but as we have said many times before, defense sales and bookings can be lumpy. We know the bookings and sales will come, but forecasting them with accuracy and precision is difficult. Lastly, I'd like to finish by recognizing the strong efforts and accomplishments of our 49 op unit teams during fiscal 23. It was a good year, and we're pleased with the operating performance they delivered for our shareholders. As we enter our new fiscal year, Our management teams remain committed to our consistent operating strategy and servicing the now very strong demand for our products. With that, I'd like to turn it over to our CFO, Sarah Wynn.
Sarah Wynn
Thanks, Mike, and good morning, everyone. I'm going to review a few additional financial matters for fiscal 23 and then also our expectations for fiscal 24. First, a few additional fiscal 23 data points on organic growth, taxes, and liquidity. In the fourth quarter, our organic growth rate was 18.5%, driven by the continued rebound in our commercial OEM and aftermarket end markets. On taxes, our GAAP and adjusted tax rates finished the year within their expected ranges. Our fiscal 23 GAAP rate was 24%, and the adjusted rate was just under 25%. On cash and liquidity, free cash flow, which we traditionally define as either their less cash interest payments, capex, and cash taxes, was roughly $1.8 billion for the year, higher than the $1.4 billion we had originally expected, driven primarily by the good operating performance that Kevin and Mike mentioned. And the extra EBITDA we generated above our original guidance carries over to cash flow. As Kevin mentioned, we ended the year with approximately $3.5 billion of cash on the balance sheet, or over $1.4 billion when proformed for the $35 dividend. At year end, our net debt to EBITDA ratio was 4.8 times, down from the 5.3 times at the end of last quarter. Proforma for the $35 per share dividend announced this morning our net debt to EBITDA ratio is 5.4 times. The dividend payment date is expected to be November 27th. We continue to watch the rising interest rate environment closely. We remain 80% hedged on our total $20 billion gross debt balance through a combination of interest rate caps, swaps, and collars through 2025. This provides us adequate cushion against any rising rates, at least in the immediate term. EBITDA to interest expense coverage ratio, which as a reminder becomes more important in a higher interest rate environment and is a metric we actively monitor and take into consideration in these times of elevated interest rates, ended the year at 3.1 times on a pro forma basis. which sits comfortably in line with our pre-COVID average range of two to three times. We continue to be comfortable operating the business within these brackets. With regard to any potential changes to our long-term approach to using debt to boost our equity returns, we're actively watching the interest rate environment closely, but do not anticipate any big changes in our approach at this time. Next, On the fiscal 24 expectations, I'm going to give some more details on the financial assumptions around interest expense, taxes, and share count. Special note that all of my comments and data here include the payment of the $35 dividend, but exclude the acquisition of CPI's Electron device business entirely, which is still subject to regulator approval, and we expect to close by the end of our third quarter in fiscal 24. Net interest expense is expected to be about $1.25 billion in fiscal 24, and this equates to a weighted average cash interest rate of approximately 6.3%. This estimate assumes an average SOFA rate of 5.4% for the full year. On taxes, our fiscal 24 gap, cash, and adjusted tax rates are all anticipated to be in the range of 22% to 24%. The slight decrease in our tax rate versus the prior year is due mainly to the additional interest expense we're able to deduct for tax purposes given our higher expected EBIT for 24. On the share count, we expect our weighted average shares outstanding to be 57.8 million shares in 24. With regard to liquidity and leverage for fiscal 24, as we would traditionally define our free cash flow from operations at TransLine, which again, is EBITDA, as defined, less cash interest payments, capex, and cash taxes. We estimate this metric to be close to $2 billion in fiscal 24. With regard to the dividend, the $35 per share payment announced this morning represents a gross payout of just over $2 billion. The record date for the special dividend is November 20, and the payout date is expected to be November 27. After paying out the $35 per share dividend in cash, and assuming no additional acquisitions or capital market transactions, we would end the year with over $3 billion of cash on the balance sheet, which would imply a net debt to EBITDA ratio close to four times at the end of fiscal 24. However, this excludes the acquisition of CPI's electronic device business, which is still subject to regulator approval, and we expect to close by the end of our third quarter in fiscal 24. As Kevin mentioned at the outset, we are actively monitoring the capital markets and assessing opportunities to utilize leverage for this acquisition and general corporate purposes, which may include potential future acquisitions, share repurchases, or dividends. And as a reminder, there has been no change in our approach to how we think about capital allocation or leverage with our typical target in the five to seven net debt ratio range. We will continue to watch this ratio along with the cash interest coverage ratio of EBITDA to interest expense as we actively pursue options of maximizing value to our shareholders through our capital allocation strategy. So a final note on that, we think we remain in good position with adequate flexibility to pursue M&A or return cash to our shareholders via share buybacks and or additional dividends during the course of fiscal 24. With that, I'll turn it back to the operator to kick off the Q&A.
Operator
As a reminder, to ask a question, please press star 1 1 on your touchtone telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question will come from the line of Miles Walton with Wolf Research.
Miles Walton
Thanks. Good morning. I was hoping you could give us a little bit more color on the CPI business itself, understanding that you obviously haven't closed on it, but maybe just a little context of the nature of the aftermarket that it has. Maybe it looks a little bit more defense than commercial, so how does that flow? And then maybe just from a process perspective, is this something that's been on your watch list for a while or something that's more recently popped up?
Kevin Stein
Thanks, Miles. This is an acquisition that came through deal flow. It is a business we had looked at a number of times over the years. It is a company that makes vacuum tube type products, power generation products for high power applications in aerospace and defense. A lot of it flies, some of it doesn't. Big applications though tend to be a little more defense, but there is an industrial and medical product technology here. We look at this acquisition as right down the fairway for us. This is a component business, highly, highly engineered. With significant access to the aftermarket, these products need to be repaired and overhauled every three to four years at regular intervals. So we believe this provides the basic tenants that we look for.
Miles Walton
Okay. And then just one quick one on defense. The sales in the quarter, obviously, you're expecting it to be flat. It's up about 9%. Is that short cycle stuff coming through? Is the supply chain there improved? I see from the slide it still calls it out as a watch item, but Was the better sales a result of customer pull or supply performance?
Mike
It was both. We saw a bit of increased demand free up from all the main customers, a bit more on the aftermarket side and stuff we were able to get out this quarter. The bookings also ticked up, which sets us up well heading into next year. The supply chain side, That is starting to ease a little bit. With regard to getting the stuff we need in to build our components and ship them out the door, we're probably in a better spot than we were, say, 12 or 18 months ago. But the supply chain, our supply chain, is still not back to where it was pre-COVID in terms of hitting on-time deliveries and getting stuff to us perfectly on time. So heading in the right direction, but probably still a bit more work to do there, and definitely not as much of a headwind as it was, say, 12 months ago. Okay.
Noah Popanek
Thank you.
Operator
Our next question will come from the line of Noah Popanek with Goldman Sachs.
Noah Popanek
Hello. Can you hear me? Yes.
spk14
Good morning.
Noah
Hi. Nope. Yeah, I was hoping we could pick apart the exact aftermarket bookings by month in the quarter.
Noah Popanek
Just kidding.
Kevin Stein
We don't pull apart bookings like that. I was kidding.
Noah
You were kidding, Kevin.
Kevin Stein
All right. My blood pressure was starting to go up there. Sorry, Noah.
Noah
As you know, we don't even give the quarter. Right, as you shouldn't. Hey, so when you just went through all that math on the balance sheet after all this capital deployment, and you mentioned ending the year at four turns of net debt to EBITDA, I'm recognizing that's pre-CPI close. But even once you close that, the balance sheet leverage, that won't change the leverage that much once you add the EBITDA and then keep generating cash flow. So I guess as you sized the special dividend balance, Was that with an eye towards the acquisition pipeline, and should we read that to mean that you still see a lot out there to maybe go after, and therefore you wanted to leave that firepower on the balance sheet?
Kevin Stein
Yeah, I think we're always ambitious and casting nets wide to find opportunities that fit our criteria best. You know, we want to be aerospace. You'd love to be more commercial than defense because you can make more money, better returns on the commercial side. But no, I think we will need to do something on the capital allocation side next year. Even with the CPI debt we will look to take on possibly, we will need to do something towards the end of the year. And whether that's a buyback or a dividend or other acquisitions, we'll have to see how the market unfolds. You know, we're pretty encouraged by deal flow in general. We're seeing a lot of things on the M&A side, and we need to stay disciplined, and that's what we will do. And when we find a deal and we go forward with it, it's with the knowledge that we're going to hit trans-dime-like returns on these acquisitions.
Noah Popanek
Okay.
Noah
And Kevin, maybe I missed it, but if you could speak to the profitability of CPI, just we can see the revenue multiple, but what are the margins like? Where can you take them over time? And then last one for me would just be if you could touch on CalSpan for a minute, just now that you've had it for a little bit longer, you know, that was a deal that did look a little different, had some questions from the market. Anything noteworthy there or just kind of what you thought you bought? Thanks.
Kevin Stein
Yeah, I think margins at CPI are well, well below trans dime margins. I think there is opportunity to improve, of course, but this is very early on in the process. We don't own the business yet, so too early for us to comment, and we usually don't comment much on this, but too early for us to have much granularity or vision there. we just know we're going to look to find opportunities to expand and grow that business. On CalSpan, I think what I would say is we're very encouraged by the acquisition. It looks like it is running at or slightly ahead of our model, and so we're very encouraged by that business and the different aspects of that business market and the M&A that we did when we acquired CalSpan, it's not a traditional component business. So the fact that the TransDyn model still holds is very encouraging.
Noah
Okay. Thanks very much.
Mike
I appreciate it. But at least as good as we thought it was when we set out to buy it, probably a little better based on seven months of ownership or so.
Noah
Okay. Thank you.
Operator
Our next question will come from the line of Robert Stallard with Vertical Research.
Robert Stallard
Thanks so much. Good morning.
Operator
Good morning.
Robert Stallard
Just a couple from me. First of all, on the CPI business, you mentioned that it does have some sort of non-aerospace defense exposure here. Are you intending to keep that within Transdime, or would you be looking to sell it on?
Kevin Stein
We would keep that within Transdime. We have a non-aerospace industrial section of the company now as pieces come along with M&A. Absolutely encouraged by that part of the business. I think the Medtronic medical device is a very interesting market and one that we wouldn't mind learning more about through exposure through this business.
Robert Stallard
Okay. And then on the aftermarket guidance for fiscal 24 in the mid-teens, that's roughly half where you ended up for fiscal 23. How do you expect that to progress as the year goes by? Are we going to see an abrupt step down here or is it going to be a sort of gradual process and by the end of fiscal 24 below that to full year guidance?
Mike
Yes, we don't want to start giving anything that sounds too much like quarterly guidance, but a little bit of color on what we expect. We'd expect the gradual ramp up throughout the course of the year. As you know, Q1 for us, just because of the way the working days work out, that is, you know, a lower percentage of the total year's revenue forecast because of the 10% working days. But we expect the march up to sort of track the takeoffs and landings, largely speaking, over the course of next year. an increase as the year goes on with some sequential ramp-ups throughout fiscal 24. It doesn't always happen that way, right? Could see some lumps here and there, but that's pretty much what we expect and consistent with prior years.
Robert Stallard
Okay, so the actual number progresses through the year, but the percentage growth rate year-on-year will be coming down as the year progresses, right?
Mike
That's fair. That's a fair assumption and obvious proof. you know, result of the math and the comps the way they work. Correct.
Robert Stallard
Okay. Thanks so much.
Operator
Our next question will come from the line of David Strauss with Barclays.
David Strauss
Thanks. Good morning. Morning. Probably a question for Sarah. I think you talked about $2 billion in cash flow as you define it. What should we assume in terms of working capital on top of that? I think this past year you had like a $400 million drag from working capital.
Sarah Wynn
Yeah, on the working capital going forward, I'd probably assume about a neutral. Like you said, you saw we defined working capital as the accounts receivable inventory, less payables, and we added about $500 million this year. That was more than our peak to trough of the COVID downside, where we took out about $400 million, and obviously we also put some of that back in fiscal 22. So I think now we're in pretty good shape, and I would assume neutral going forward.
David Strauss
Okay. And, Kevin, a question, I guess, two-parter on the aftermarket. your aftermarket volumes now back about in line with pre-pandemic levels that's the first question and the second question in terms of the mid-teens growth guidance is it fair to think about that being roughly half price half volume in terms of what you're thinking thanks yeah it's mike i'll take uh i'll take that one first on the volume and where we stand now across our whole commercial aftermarket in fy 23
Mike
we're probably down in the volume space, something like 15% or so. That varies by, you know, sub-market. The passenger piece is down, obviously, 15. Sorry, I should have highlighted that. Passenger's down 15. You know, the interior stuff is probably off a little bit more. Freight is up more from where it was pre-COVID, and big jet helis up a bit, too, in the aggregate across you know, all of commercial aftermarket in FY23. We're not quite back to 100 if 100 was FY19, but we're close. And then in FY24, what we expect to see on the volume side within passenger going to that sub-market is basically to get back to pretty much close to 100. That's how our plans came in, which is what you'd expect consistent with where the takeoffs and landings and RPMs are trending. And then, you know, the freight and biz jet both uh sort of trending along as well but probably not up as big as uh the um the passenger sub segment and then in the aggregate what that means for fy24 across our whole commercial aftermarket bucket is that we're probably up a little bit in the volume space um above 100 if fy19 is again defined as a as a hundred the second part of your question on price and volume trends you know First on price and commercial aftermarket. We aim to, as you guys know, across our business, get a slightly positive amount of real price every year. So price a little bit, um, ahead of inflation. And then this environment that sort of implies, you know, uh, the direction you were heading that, um, you know, on a 15% aftermarket guide, you know, roughly half and half, um, you know, that's, uh, not miles off sort of directionally accurate. but the price, you know, we'll aim to get real price ahead of inflation, but you're not too far off. We don't give the exact amount of price and volume trends, but it's directionally accurate.
David Strauss
Perfect. Thanks, Mike.
Operator
Our next question will come from the line of Ron Epstein with Bank of America.
Ron Epstein
Yeah, hello. Hey, good morning. One of the things we've been hearing is given the move in kind of interest rates and what's going on in the financing world, that there's just less competition out there for deals from financial sponsors and private equity and so on and so forth. Is that the case? And is that giving you guys a tailwind in potential things you could do?
Kevin Stein
I haven't found that to be the case. We see lots of, In fact, CPI was a competitive deal. I haven't seen anything that wasn't in a competitive process. So I have not noticed that. I think in the aerospace and defense sector, there may be deeper pockets. So I'm not seeing that there's no one bidding on businesses. I think if that was the case, there wouldn't be many things coming to market. So we're seeing a lot of competitive processes.
Ron Epstein
Got it. Got it. And then, Kevin, when you think about, you know, directions to go, as outsiders kind of looking in, I mean, how should we think about that? I mean, you know, what vectors could you guys go down? I mean, how can I frame this that, you know, that you can actually answer it? You know, broadly, is there an area in the portfolio that seems like there's a hole or is it you're just kind of agnostic to just, you know, what could fit the model and kind of fits the end markets. If we just want to try to get a broader understanding of how things could go, you know?
Kevin Stein
Yeah. We don't look at the market as there are holes in technology that we need to fill or products that we have to have. Uh, we're agnostic about what, uh, what products and technologies we have. We're looking for things, though, that are highly engineered, proprietary. They have a noted position in the marketplace. They have aftermarket content and, you know, of sorts. So if you look at the businesses that we continue to identify and find, they fit this criteria. And as long as we continue to find, you know, proprietary products like this, highly engineered products, we will continue to grow. There's no reason for us to believe we're running out of these. It's the nice thing about aerospace and defense is that there's so many technologies utilized across so many different products and applications with no commonality. There is still so many places for us to grow. I am not contemplating going outside of aerospace and defense. I don't see a need for that. We do love to learn about other markets and technologies, much like we will with CPI in the medical device side, and we'll see what we learn. But right now, I think the landscape is very full for us on the aerospace and defense side. And again, given the value generation model that we have, we don't need to acquire hundreds and hundreds of millions of dollars of EBITDA every year We target, and I'm sure all of you have heard me say this many times, you know, if we acquire $50 to $100 million of EBITDA per year, that's all we need to feed this model and continue to do what we do. Larger acquisitions are better, but, you know, as long as we continue to find those opportunities to swing at, and we will be fine and we'll continue to grow quite nicely. Does that answer your question?
Noah Popanek
Yeah, it does. Yeah, thanks, Kevin. Yeah.
Operator
Our next question will come from the line of Sheila Caillou with Jefferies. Good morning, guys. How are you?
Jamie Steeman
Thank you. I wanted to ask on OE margins. They're going faster than the aftermarket. Kevin, you talked about CalSPAN being 100 basis points dilutive. So how do we think about that OE versus aftermarket mix on your EBITDA margin guidance?
Mike
Yeah, so based on the guidance we're given, the OE slightly outgrows the aftermarket, right? We have the OE of around 20%, the aftermarket we call it in the mid-teens. There's a slight headwind there. You know, if you guys took some swag at the math, I mean, it's noise-level type headwind, right? We're talking a couple tenths of a point on the margin, so nothing material that we won't be able to overcome with productivity. The big one that swings us year over year is, Downward is obviously just CalSpan. And as Kevin said in his comments, that's like a full point of EBITDA margin dilution downward. So not too, too much headwind from the OE ramp up, but a little bit, a couple tenths.
Jamie Steeman
Okay, got it. And you mentioned CPI is not in the guidance, but obviously well below trans-time on the margins is a very wide range. Can you give us an idea of how below trans-time margins they are? And then on aftermarket, I just wanted to ask if there's any impact from higher AOGs incorporated into your expectations?
Kevin Stein
I'll let Mike answer the last one, but on CPI, the question, I don't... I think you were trying to get at the margins, Kayla, and just... Sure. We don't own it yet. It's too early for us to comment on that. It's well, well below trans-time averages. You know, where do we see it getting to? It's probably too early for us to even comment on that. We haven't been in the door, so we need some time to unpack that, and then we'll be able to update you.
Mike
And then on the second half of your question, Sheila, I think you asked about AOG, and I assume you're trying to get at the pure turbofan issue and some of the aircraft grounding that created across the fleet. You know, it's nothing material. when it comes to our guidance as far as that racks up. We're so diversified and market-weighted across all the platforms out there that there's not a big uptick we expect from that. But, you know, that said, given that those aircraft are newer and grounded, older stuff has to fly, and some of the airlines are probably going to the lesser fleet to keep those older aircraft flying. It's probably about, you know, a little bit of a tailwind, but it's not material and more noise level and it's not something that we factored a huge upside into our our plan from okay thank you our next question will come from the line of ken herbert with rbc capital markets yeah hey good morning um good morning everybody hey maybe kevin or mike
Sheila
Maybe Kevin or Mike, when you think about aftermarket, it sounds like in 23, China was maybe relative to initial expectations the biggest source of upside. As you look at fiscal 24 in the mid-teens guide, either geographically or maybe in other parts of the market, where could we see some of the maybe biggest potential of upside as you think about the guidance in the market dynamics today?
Mike
Yeah, so I guess two things. Two things. First, you know, if the market grows more quickly, as you saw from our guide this year, we'll be ready to supply the demand if it's there. I think our original commercial aftermarket guidance for last year was 15%. We finished it a little bit more than double that, right? So we were conservative with the guide when we went out, and the China surge back is a big contributor to what carried us up as well as the pockets of strength elsewhere. We'd look to do the same thing this year as well, provided that... that occurs. Who knows where it comes from, right? The international stuff is probably a bit more depressed still, specifically in Asia Pacific. That's down the most. It could rally back. That's still down double-digit percentage versus where it was pre-COVID. Hard to forecast that, though, right? And we didn't get out over our skis when we, nor do we think our op units did when we came up with expectations for FY24. I think the biggest source of upside, not just in FY24, but as you look out a couple years is when you take a step back, you know, in most prior downturns, 9-11, you know, the financial crisis stuff that went on, you sort of got back to that original trend line after a couple years. And now in FY24, we're just getting back to FY19, right? But there's still a bit of, you know, pent-up demand there potentially because you guys know what drives RPMs, right? It's GDP growth and rising middle class and all that stuff. we've got four years now where we've sort of been below that past trend line where we've, you know, not seen the 5% RPM growth per year that that trend line was sort of on and where we were heading. And that's sort of pent up demand that who knows how this recovery goes. But FY24, we'll get back to where we were in FY19. But based on the underlying demands for global air travel, you would think there's still quite a bit of pent up demand there that should be a good tailwind for us as well as others in the sector out beyond FY24. And who knows if you get back to the original trend line. And prior downturns, you sort of did. And we'll see. But it should be a bit of a tailwind as we continue out past this coming year.
Sheila
Yeah, that's helpful. And as you look at, and it sounds like a lot of the strength in 24 is going to come from the passenger side. Are you seeing anything that would give you a little bit more concern around pushback from airlines in terms of spare part pricing? And is that maybe at all relative to the last couple of years? Any reason to think about a different assumption on pricing into the aftermarket?
Mike
No, we, you know, as we said earlier, we aim to get a little bit of real price ahead of inflation. That's what we've achieved historically. That's what we'll try to do this year. Same playbook we've always had this year. No huge pushback. I think the airlines are happy to get the parts and keep their aircraft flying in the air, generating revenue now.
Miles Walton
Great. Thanks, Mike. Sure.
Operator
Our next question will come from the line of Gultam Khanna with TD Cowan.
Gultam Khanna
Hey, good morning, guys.
Jason Gursky
Good morning.
Gultam Khanna
I just wanted to follow up on two things. In the aftermarket, are you guys seeing any change in scope or just purchasing behavior from the airline customers? Because we see a lot of these airline stocks are obviously down a lot. They're under some pressure now, the companies. I don't know if you're seeing any evidence of, you know, destocking or just whatever, buying less than they normally would in average order size.
Mike
Anything of that nature, perhaps? We're not seeing much of that. I mean, as you know, it's hard to get exact intelligence into the inventory levels of the airlines, but generally we're not giving them volume discounts anyway, so they don't tend to hold too much of our stuff. But no, we're not seeing very much at all. I don't think we've seen any of the dynamic you described there.
Gultam Khanna
Okay. Good. And then, relatedly, any discernible differences between the distribution channel and direct to the airlines and MROs?
Mike
No. For the most part, the distribution channel for us into commercial aftermarket, which is about a quarter, rough justice, ebbs and flows a bit of the total commercial aftermarket revenue dollars, that's been tracking. The POS there has been pretty much tracking for this whole year. together with our commercial aftermarket growth, pretty closely. So no meaningful disconnects because of distributor inventory or anything. They've been moving, you know, not exactly in lockstep, right, because you do get a little bit of noise here and there, but pretty much in the same direction consistently throughout the year.
Gultam Khanna
Great. Thanks so much.
Mike
Sure.
Operator
Our next question will come from the line of Jason Gursky. With Citi.
Jason Gursky
Hello, can you hear me? Yes.
spk11
Oh, okay, great. Yeah, suddenly went silent on me. Sorry about that. Hey, I just wanted to revisit the margin question that Sheila touched on earlier in your comment that the mix shift towards OE, the growth rate being a little higher there relative to after markets, leads to a pretty modest headwind from a margin perspective that you think it can make up in productivity. As we look out, you know, further into the future and the potential for, you know, retirements accelerating as the OE ramp goes higher, can you talk about how you all think internally about that potential outcome and some of the opportunities and risks some margins. I'd be kind of curious to know whether, you know, as retirements accelerate in certain aircraft, whether you can actually get better price. And so the margins of your business, you know, have some upward bias to them. And then on the OE side, is it a question of higher volumes allow you to expand margins as you get some OPEX leverage? I'm just kind of curious to know longer term how you think about, you know, a widening gap between OE growth and aftermarket growth over time and the impact that that has on margins.
Mike
Sure. I'll try to give a little bit of color that sheds some light on how we think about the various factors here. Though, obviously, you know, given guidance out, an FY24 is tough enough, which is why we range-bound it. To do, you know, a couple years out after that is even tougher. But, you know, generally, you know, as it pertains to retirements, You know, we still make really good money and margins on the new aircraft that come into service. If you look now at the fleet age, I think something like, you know, the fleet is a little bit older than it's been historically. Something like 80% of it is out of the five-year warranty window versus a historical average of closer to 70%. That creates a really, you know, slight tailwind for us. Again, nothing tremendously material, but Over time, as the OE production ramps up through the 20, 30 time period or so, you'd expect that to get probably closer to like the 70% historical average. But again, we'll still make very attractive commercial aftermarket margins on the newer stuff that's flying as well. The other question we get a lot on the retirements, and I think this is where you were going, is does some impact from USM hurt you guys? We've not seen that historically. We monitor it real time. As you know from the price points of our products and the way the dynamic works there with higher value engine content primarily targeted as well as avionics on the USM side, we just historically have not seen much negative impact from that. The retirements are really low. They're like half of the historical average rate of you know, 2.5% of the fleet. We don't count on that dynamic being the same for us going forward, though, so it's something we always monitor and look at real time, but we don't expect a huge headwind there. So generally, you know, we think obviously the OE ramps up going forward, maybe a little bit of a margin headwind, but nothing insurmountable, and the aftermarket's going to continue growing here as well for a couple years out. So we think we're sitting in a good spot.
Jason Gursky
Okay, that's helpful. Thank you. Appreciate it.
Operator
Our next question will come from the line of Christine Lewag with Morgan Stanley.
Christine Lewag
Hey, good morning, everyone. And maybe following up on, sorry, there was a delay there. You know, Kevin, following up on your answer to Noah's earlier question, I mean, taking a step back, The enterprise is generating strong free cash flow. You're able to digest a special dividend this year and a CPI acquisition and still have capacity and desire for significant capital deployment next year. So taking into consideration the current interest rate environment, what's your target leverage for next year when you assess your next capital deployment event?
Kevin Stein
Yeah, I think Sarah said this in her You know, we would like to be in the five to seven times. We're comfortable in that range. And I think that's where we would like to sit. We'll see how the capital markets respond, where there are opportunities for M&A. And, you know, all this will go into the mix. But as she said, five to seven times, we're comfortable in that range. I can't really give you a better forecast than that. That's our historical comfort range.
Christine Lewag
Great. And if I could add one on defense, I mean, the pricing model regarding defense had been under the microscope with a series of IG investigations over the past 15 years. But I think with the strength in margin, what's been underestimated is the operating strength of Transdyn. So looking at the businesses that you've acquired in defense, how much more margin expansion is there on production efficiencies and as you employ Transdyn best practices in manufacturing? Is this something that you could see a few hundred basis points in margin expansion?
Mike
You know, across all our businesses, we target, you know, if we continue to execute our playbook on cost reductions, getting a little bit of real price every year and growing new business, we target sort of close to a percentage point of EBITDA margin improvement per year. That's true across, you know, all parts of our businesses. You know, most of them have a little bit of defense. And we look to drive that kind of performance there as well. I see no reason that would change going forward. And that's through a mix of obviously, you know, the whole playbook, all three value drivers, new business stuff, driving productivity and getting costs out. And then also, you know, a little bit of real price ahead of inflation.
Christine Lewag
Great. Thank you.
Operator
Our next question will come from a line of Gavin Parsons with UBS.
max
Hey, thanks very much. Good morning. Good morning. 20% growth on OE organically, I think, implies you're back above pre-COVID levels in 2024, and I assume a decent amount of that is business jet, but just wanted to ask kind of where you are on transport and where you think the build rates go in the year.
Mike
Hi. I think that's about right. Maybe a little bit below, I think, the past OEM peak, if you went all the way back to 18 before the 7.3 max issue happened, and obviously that sort of makes 19 not the best comp point, so I think you need to go back to 18. And I think on the OEM side with Boeing and Airbus, we're actually quite a bit below. I don't have the exact stats in front of me, but... We've looked at them recently, and I think we are down. Bizjet, so that's the commercial transport side, down a bit. Bizjet, you know, obviously we're back. I think you guys read all the same headlines we do in terms of book-to-bills across the big Bizjet OEMs, and those guys are doing, you know, quite well in volumes, production volumes are up. are up quite a bit. The transport side, narrowbodies are up and doing well, and the widebodies are still quite a bit down. I think if you go and look at widebody forecasts, it's hard to find, and we look at your guys' estimates, it's hard to find, as well as others, it's hard to find someone who's projecting widebody production volume that gets back to the prior peak in the projected period. Some of you guys go all the way out to 2028, 2029, 2030. You know, there's just been a shift at the airlines for more narrow body. So it seems that's where the backlogs become more heavily weighted and therefore where the production will be.
max
Got it. And obviously we can see kind of overall inflation trends, but maybe it seems like there's some pressure on wages in the aerospace and defense industry. Do you guys feel like you're past kind of peak inflation on the cost side?
Mike
Hard to say. We're not macroeconomic forecasters, and I don't think anybody inside your respective shops who do the macroeconomic forecasting saw this one coming. We look at past periods where inflation has spiked to the current kind of levels at that, and if you go back 80 years, usually it goes up to this kind of level, and it's a four or five-year phenomenon. So we don't count on it necessarily coming down. We hope for the best, but certainly plan for the worst. That's the way we pulled together the plan for this year. And if it goes down, we'll be, you know, good to see that, obviously, but we certainly don't count on it. In terms of inflation pressures on our business, I think we mentioned on a couple prior earnings calls when this question was asked, what are we seeing on materials and labor and that kind of stuff? And it's been sort of in the, you know, 5-ish percent area, maybe a little bit higher. And I would say that dynamic doesn't seem to have changed very much in the You know, the past few months, I know the CPI readings have come down that they publish here in the U.S., Europe's still high. We haven't seen any kind of coming off of the prior levels yet, really, across our business.
Jason Gursky
Got it. Thanks, guys.
Operator
Our next question will come from the line of Pete Osterlund with Truist Securities.
Pete Osterlund
Hey, good morning. I'm on for much more this morning. Thanks for taking notes. Morning. Just wanted to parse out what's driving your growth expectations in fiscal 24 in the defense market. So just maybe any color on how that growth could be impacted by the budget environment, and then anything you can give us on pricing dynamics with the DOD and your expectations there.
Mike
Thank you. Yeah, we've, you know, when we pull together the guidance, obviously we think about and take into consideration things like continuing resolutions or some potential slow shutdown for a short period of time. All that stuff mainly generates for us a little bit of timing impact. The demand eventually comes. Just given the state of the world now, we did think about that a little bit as we pulled together the guidance and made sure that we have some leeway there. So it's sort of incorporated into what you guys are provided today. And then on the pricing side, I think we – You know, we continue to target kind of, you know, the same pricing dynamic we described, which is a little bit of pricing, real pricing ahead of inflation and no major change there.
Pete Osterlund
All right, thanks. And then as a follow-up, just maybe an update on labor market conditions you're seeing, you know, is productivity or attrition still a significant headwind? Just given your strong margin performance, it seems like maybe it hasn't been significant, but just wondering if there's potential for additional upside there, if labor-related headwinds are something you're experiencing.
Mike
Yeah, we haven't seen a ton of significant headwinds. I think you guys know a small percentage of our overall workforce is unionized. We've had several successful headwinds. negotiations around wages when the renewals came up during the past 12 or 18 months in this high inflation environment with no issues. And our op unit teams have worked through it quite well, but no major issues.
spk04
I would just add, I mean, we've spent the last few years really working on automation projects and working to improve our processes within our factories to make us less susceptible to that.
Jason Gursky
Great, thanks a lot.
Operator
Our next question comes from the line of Scott Deutschley with Deutsche Bank.
Noah Popanek
Scott, your line is now open.
Operator
Our next question will come from the line of Robert Spingarn with Milius Research.
Robert Spingarn
Hi, Scott Mikus on for Rob Spingarn. Kevin, I wanted to ask you, in the past, you've talked about Transdime not eating inflation. I know you have caps and swaps in place, but does the rising cost of capital also factor into your pricing strategy? What I'm trying to get at is, are you going to pass on higher interest expense to your customers via price so you can still convert free cash at 50% of EBITDA?
Kevin Stein
That's not the way we look at it, so it doesn't factor in. It is part of costs and inflationary pressures in general. That's not the way we analyze pricing and inflationary measures.
Robert Spingarn
Okay. And then I also wanted to ask, are your operating units noticing any meaningful uptick in their parts being PMA'd at all?
Mike
No, no. I mean, we're always actively monitoring that and looking for threats there. No meaningful uptick from prior levels of kind of low activity. I think, you know, we put a slide on this in the June investor deck that we put out. You might find helpful, but no, no meaningful uptick.
Robert Spingarn
Got it. Thank you.
Operator
Our next question comes from the line of Noah Poppenack with Goldman Sachs.
Noah
Hey, guys. Wanted to get your perspective on the MAX original equipment ramp because you guys have been pretty clear-eyed on the overall OE ramp. And it felt like you had gone from kind of skeptical to cautiously optimistic in the middle of the year. And then now the industry has faced this situation where some other supply chain issues have held up max deliveries. And so I'm curious, your perspective, did the underlying total supply chain keep moving along to the medium-term Boeing master schedule there? Or are the recent supply chain issues going to hold that ramp back by some meaningful period of time, more than a handful of months?
Kevin Stein
I think we can only comment on what we see. I don't know about the larger supply chain, and Mike and Joel can jump in, but I think that the ramp has been slow enough that I don't know if the larger supply chain will be hampered as it tries to continue to ramp up. That is, of course, assuming that the various quality issues and other things that have hampered delivery get resolved.
Mike
Yeah, I think that's right. And they, you know, we obviously see Boeing's target to, I think, get the max rate back towards 38 or so. You know, we're ready to support them if they can get there across all our op units. We hope it happens. It's obviously in our interest to see them and the rest of the supply chain fully recover and get out past this. We don't necessarily count on when we pull our forecast together for the year, though, hitting those targets, which again, still seem maybe a bit aspirational to us on the air.
Kevin Stein
I think that's a good word, aspirational.
Noah
Okay. Appreciate it. Thank you.
Operator
Thanks. Our next question comes from the line of Scott Deutchley with Deutsche Bank.
Scott Deutchley
Are you here? Yeah, I'm here. Sorry about that, guys. Good afternoon. Sarah, just on this $692 million contract that Armtech won, Are you able to offer any detail on how much that might contribute to defense growth in 24? It seems like potentially a lot, but I'd be curious if you could put a finer point on that, if possible. Thanks.
Mike
Hi, guys. It's Mike. I'll take that one. It's a bit off-unit related. Given the ramp on that program, it's one of the biggest awards in Transdynes history, obviously, but given the expected ramp rate, We'll actually, under that contract, go to a third shift at the facility, build up some new capacity, including a new building to support the government on the important 155-millimeter program. That's gotten a lot of attention. We provide with this contract, obviously, one of the critical parts that goes into supporting it. Government's a super important customer for us. On the year... Given the way the production ramps up, a lot of the focus out of the gate will be on getting the capacity where it needs to be with the expansion. And the revenue upside is not hugely significant. It's more of an FY25 into FY26 kind of matter. If we get things going a little bit earlier and ahead of schedule, it could be a bit of an upside in FY24. We didn't count on that as we pulled together the forecast for the year, though. I think, as you guys know, we aim to be a bit conservative with the guidance we give.
Scott Deutchley
Okay, great. And that CapEx is funded by the government on this project, right? It is. Got it. And then last question, Mike, for Mike as well. Are you seeing much aftermarket parts demand on newer platforms like 787 and A220 yet, or is that still yet to come as these fleets age? Thanks.
Mike
I think we're seeing about historically what we've seen. And we're sort of market weighted on the aftermarket side based on takeoffs and landings by platform. We're seeing about what we'd expect to see at the platform level. No big deviations by op unit or deviations versus the takeoffs and landings that you're seeing across the fleet.
Noah Popanek
All right. Thanks, guys.
Operator
Our next question comes from the line of Seth Seifman with JP Morgan.
Seth Seifman
Hey, good morning, everyone. Morning.
Operator
Morning.
Seth Seifman
Morning. Cool. So one quick question about the margin. I think when you guys initially acquired CalSpan, the expectation was that that would be about, on an annualized basis, that would be about 100 basis points of margin pressure. And then, you know, in 2024, for a partial year, it seems like it's still about 100 basis points of margin pressure. But it sounded like things are going at least, you know, according to plan, if not better. And so, is there anything else that's changed with regard to CALSPAN expectations? Or maybe is there just some, you know, some conservatism embedded in that guidance?
Mike
I think it's conservatism and noise level deviations. We round a bit when we give you guys those things of about a percentage point. It's not exactly a percentage point. I think it's a little bit ahead of that. The business is performing well, though. You know, as Kevin said, it's at least as good as we thought it was when we bought it, maybe based on, you know, five months of ownership a little bit better. But you don't really, as you guys know with M&A, you know, you've Once you own something two full years or so, you really know it and understand it and will know where it's headed. But based on what we see so far, it's looking good. And then those, you know, the dilution amounts, it's a bit of rounding here and there, but it's noise level stuff. And it was, I think, a little bit above, you know, the 1.0 percentage point mark, which is what's generating the 1.0 percentage dilution coming this year in FY24. Right.
Seth Seifman
Right. Okay. Cool. And then maybe, Kevin, on the CPI deal, kind of, you know, it seems consistent with some other stuff that, you know, you guys have done in the past. But I think that kind of since the pandemic, you know, you've talked a little bit more about being focused on, you know, commercial acquisitions and, you know, not necessarily looking to increase the defense portion of the pie through M&A. You know, this deal doesn't really change the pie that much in terms of its size. But would you say that you're more agnostic now in terms of whether commercial or defense?
Kevin Stein
No, I think we would still prefer commercial businesses over defense. Commercial businesses aren't as lumpy. Defense businesses can have, it's difficult to forecast the revenue So we would still prefer commercial. You can make a better return on a commercial business. There's more revenue growth, on and on. But you can only swing at the pitches that get thrown at you or thrown to you. So this was the business that was available. And when you find them that meet your criteria, again, proprietary products, highly engineered, access to aftermarket, in this case significant, 70% aftermarket, phenomenal. You love those businesses, and they're important for us to acquire. So, yeah, we would still rather find great commercial businesses, but defense businesses can also meet the criteria.
Seth Seifman
Great. Thanks very much. Appreciate it.
Operator
That concludes today's question and answer session. I'd like to turn the call back to Jamie Steeman for closing remarks.
Jamie Steeman
Thank you all for joining today's call. We appreciate it. This concludes the call. We appreciate your time and have a good day.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
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