Transdigm Group Incorporated

Good day, everyone, and thank you for standing by. Welcome to the third quarter 2024 TransTime Group Incorporated 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 participate, you will need to press star 1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 1-1 again. Please be advised that today's conference is being recorded. I will hand the call over to the Director of Investor Relations, Jamie Stammen.

Thank you, and welcome to TransDyme's Fiscal 2024 Third Quarter Earnings Conference Call. Presenting on the call this morning are TransDyme's President and Chief Executive Officer, Kevin Stein, Co-Chief Operating Officer, Joel Reese, and Chief Financial Officer, Sarah Wynn. Also present for the call today is our Co-Chief Operating Officer, Mike Listman. 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. 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 Joel 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 longstanding goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital. As you saw from our earnings release, we had a strong quarter. Our Q3 results ran ahead and we once more raised our guidance for the year. Commercial aerospace market trends remain favorable as the industry continues to recover and progress towards normalization. Robust demand for travel persists and global air traffic continues to surpass pre-pandemic levels. 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 continue to be adversely affected in comparison to pre-pandemic production. 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. Revenue has also sequentially improved in all three of these market champs. Our EBITDA has defined margin of 53.3% in the quarter. Contributing to this strong Q3 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 Q3 of over $600 million and ended the quarter with almost $3.4 billion of cash. We expect to continue generating additional cash in our final quarter of fiscal 2024. Next, an update on our capital allocation activities and priorities. This has been a busy and exciting quarter for M&A. During the quarter, we completed the acquisitions of SEI Industries, and the Electron Device Business of Communications and Power Industries. Subsequent to the quarter close on July 31st, we closed the acquisition of Raptor Scientific. Further details of each individual acquisition can be found in the previously published press releases on TransLime's website. In the aggregate for these three acquisitions, we have deployed over $2.2 billion of capital in the past three months. The unique product and service offerings of each acquisition exhibit the earning stability and growth potential that are consistent with our existing portfolio of businesses. These three acquisitions fit well with our longstanding strategy, and we expect each of these businesses to meet or exceed our long-term return objectives. We expect these three acquisitions in total to contribute about $125 million to our fiscal year 24 revenue and a combined margin approaching 30%. Regarding the current M&A activities and pipeline, we continue to actively look for M&A opportunities that fit our model. As we look out over the time horizon, we continue to see an expanding pipeline of potential M&A targets. As we demonstrated this year, we do not see this environment slowing in the near term. As usual, the potential targets are mostly in the small and midsize range. I cannot predict or comment on possible closings, but remain confident that there is a long runway for acquisitions that fit our portfolio. The capital allocation priorities at Transdyn are unchanged. Our first priority is to reinvest in our businesses. Second, do accretive, 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 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 $3.4 billion. 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 2024. As noted in our earnings release, we are increasing our full year 24 sales and EBITDA as defined guidance. to reflect our strong third quarter results and our current expectations for the remainder of the year, as well as to include the recent acquisitions of SEI Industries, the CPI Electron Device Business, and Raptor Scientific. Please note that each of these acquisitions closed recently. Our preliminary expectation for each business will be refined as necessary over the coming months. At the midpoint, sales guidance was raised 160 million and EBITDA as defined guidance was raised 85 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 the remainder of fiscal 2024. Our current guidance for fiscal 24 is as follows and can also be found on slide six of the presentation. The midpoint of our fiscal 24 revenue guidance is now $7.9 billion, or approximately 20%. 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 third quarter results and current expectations for the remainder of the year. For defense, we now expect revenue growth in the high teens percentage range. This is an increase from our previous guidance of mid-teens 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 of around 20% and commercial aftermarket revenue growth in the mid-teens percentage range. The midpoint of our EBITDA's defined guidance is now $4.13 billion, or up approximately 22%, with an expected margin of 52.3%. This guidance includes slightly under 125 basis points of margin dilution from recent acquisitions. The midpoint of our adjusted EPS is increasing primarily due to the higher EBITDA defined guidance and is now anticipated to be $33.02 or up approximately 28% 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 last quarter of fiscal 24. We continue to closely watch how the aerospace and capital markets continue to develop, and we will 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. Now let me hand it over to Joel Reese, our Transdyn Group Co-COO, to review our recent performance and a few other items.