Transdigm Group Incorporated

Ladies and gentlemen, thank you for standing by. Welcome to Transdime Group Incorporated's second quarter 2024 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 this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Jamie Seaman, Director of Investor Relations. Please go ahead.

Thank you, and welcome to TransDyme's fiscal 2024 second quarter earnings conference call. Presenting on the call this morning are TransDyme's President and Chief Executive Officer, Kevin Stein, Co-Chief Operating Officer Mike Listman and Chief Financial Officer Sarah Witt. 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 statement, 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.

Good morning, everyone. 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. To reiterate, we believe we are unique in the industry in both the consistency of our strategy in both good times and bad, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins and over any extended period have typically provided relative stability in the downturns. We follow a consistent long-term strategy specifically. 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 long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital. As you saw from our earnings release, we had a strong quarter. Our Q2 results ran ahead of our expectations, and we once again raised our guidance for the year. Commercial aerospace market trends remain favorable as the industry continues to recover and progress towards normalization. Global air traffic has surpassed pre-pandemic levels, and demand for travel remains robust. Airline demand for new aircraft also remains high, and the OEMs are working to increase aircraft production. However, OEM aircraft production rates remain well below pre-pandemic levels. There is still much progress to be made for OEM rates and our results to continue to be adversely affected in comparison to pre-pandemic production 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 and bookings also sequentially improved in all three of these market channels. Our EBITDA has defined margin of 53.2% in the quarter. Contributing to the strong Q2 margin is the continued strength in our commercial aftermarket, along with diligent focus on our operating strategy, which is allowing margin performance to expand across all segments. Additionally, we had strong operating cash flow generation in Q2 of close to $230 million and ended the quarter with almost $4.3 billion of cash. we expect to steadily generate significant additional cash throughout the remainder of 2024. Next, an update on our capital allocation activities and priorities. Regarding the current M&A activities and pipeline, we continue to expect a fiscal year 24 closure of the electron device business of communications and power industries, also known as CPI, which was announced on a prior earnings call. 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 see an expanding pipeline of potential M&A targets. This remains a busy time, and we are actively expanding our M&A team to address these opportunities. 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. Please see our 10Q for more detail on some smaller but nicely accretive acquisitions that we recently closed. 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 do still take this into consideration. We are continually evaluating all of our capital allocation options, but both M&A and capital markets are difficult to predict. As always, we continue to closely monitor the capital markets and remain opportunistic. As mentioned earlier, we ended the quarter with a sizable cash balance of almost $4.3 billion, which includes the $2 billion of cash from new debt issued during our first quarter of fiscal 24. That debt was proactively raised for the acquisition of CPI's Electron device business and general corporate purposes. We have significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Moving to our outlook for fiscal 24. As noted in our earnings release, we are increasing our full fiscal year 24 sales and EBITDAs defined guidance to reflect our strong second quarter results and our current expectations for the remainder of the year. At the midpoint, sales guidance was raised $75 million and EBITDA's defined guidance was raised $60 million. The guidance assumes no additional acquisitions or divestitures and is based on current expectations for continued performance in our primary commercial end markets throughout fiscal 24. Our current guidance for fiscal 2024 is as follows and can also be found on slide six in the presentation. Note that the pending acquisition of CPI's electron device business is excluded from this guidance until acquisition close. The midpoint of our fiscal 24 revenue guidance is now $7.74 billion, or up approximately 18%. In regards to the market channel growth rate assumptions that this revenue guidance is based on, for the defense market, We are updating the full year growth rate assumptions as a result of our strong second quarter results and current expectations for the remainder of the year. For defense, we now expect revenue growth in the mid-teens percentage range. This is an increase from our previous guidance of high single-digit to low double-digit percentage range. We are not updating the full year market channel growth rate assumptions for commercial OEM and commercial aftermarket as underlying market fundamentals have not meaningfully changed. Commercial OEM and commercial aftermarket revenue guidance is still based on our previously issued market channel growth rate assumptions. We expect commercial OEM revenue growth around 20% and commercial aftermarket revenue growth in the mid-teens percentage range. The midpoint of our EBITDA's defined guidance is now $4.045 billion, or approximately 19%, with an expected margin of around 52.3%. This guidance includes about 100 basis points of margin dilution from our recent CalSpan acquisition. The midpoint of our adjusted EPS is increasing primarily due to the higher EBITDA's defined guidance and is now anticipated to be $32.42 or up approximately 25% over prior year. 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 for the second half of fiscal 24. We'll 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 the recovery for the commercial aerospace industry. We remain focused on our value drivers, cost structure, and operational excellence. Let me hand it over to Mike Lisman, our Transdime Group co-COO, to review our recent performance and a few other items. Good morning, everyone.