Transdigm Group Incorporated

Hello. Welcome to Transdam Group Incorporated Q1 2025 Earnings Conference Call. At this time, all speakers are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the 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. I would now like to turn the conference over to Jamie Steeman, Director of Investor Relations. You may begin.

Thank you, and welcome to Transdimes Fiscal 2025 First Quarter Earnings Conference Call. Presenting on the call this morning are Transdimes 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 Lisman. 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.

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 25 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 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 life 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 start to our fiscal year. During the quarter, we saw healthy growth in the revenues for both our commercial aftermarket and defense market channels. As expected, Commercial OEM revenues were modestly down this quarter compared to prior year, which Joel will discuss further in his market segment commentary. Bookings in Q1 expanded for all three of our major market channels. Commercial aerospace market trends remain favorable. The commercial aftermarket has returned to normalization as global air traffic has surpassed pre-pandemic levels and robust demand for travel persists. In the commercial OEM market, there is still much progress to be made for OEM rates, and our results continue to be adversely affected by OEM performance. Airline demand for new aircraft remains high, and the OEMs are working to increase aircraft production. However, Boeing aircraft production rates remain well below pre-pandemic levels as the lingering effects of last fall's nearly two-month-long machinist strike and its ongoing impact to the supply chain continue to be felt. The strike has pushed the OEM recovery further to the right, and time will tell how this plays out. Our EBITDA's defined margin was 52.9% in the quarter, contributing to this strong Q1 margin as 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 Q1 of over $750 million and ended the quarter with almost $2.5 billion of cash. We expect to steadily generate significant additional cash throughout the remainder of 2025. Next, an update on our capital allocation activities and priorities. During Q1, we opportunistically deployed just over $300 million of capital via open market repurchases of our common stocks. This equates to approximately 250,000 of our shares at an average price of $1,249 per share. We view these repurchases like any other capital investment and expect this will meet or exceed our long-term return objectives. 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 immediate time horizon, we continue to see an expanding pipeline of potential M&A targets, and we do not see this environment slowing in the near term. As usual, the potential targets are mostly in the small and midsize range, but larger deals may also be actionable. I cannot predict or 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 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 $2.5 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 25. 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 25. Although we saw strong first quarter results, we are not changing our full year revenue and EBITDA as defined guidance for fiscal 2025 at this time. We are also maintaining our previously issued full year market channel growth rate assumptions for commercial OEM, commercial aftermarket and defense as underlying market fundamentals have not meaningfully changed for any of these markets. Additionally, uncertainty remains around the commercial OEM production rate progression and supply chain impact as Boeing recovers from the machinist strike. We will continue to closely monitor the situation and respond as needed. With commercial OEM production ramp uncertainty and only one quarter of data, it's too close to call on making changes to our primary end market guidance at this time. Our guidance can be found on slide six in the presentation, and I will reiterate it here. The midpoint of our fiscal 25 revenue guidance is $8.85 billion, or up approximately 11%. The revenue guidance is based on the following market channel growth rate assumptions. commercial OEM revenue growth in the mid-single-digit percentage range, which is highly dependent on the evolution of the production rates in the commercial OEM environment, commercial aftermarket revenue growth in the high single-digit to low double-digit percentage range, and defense revenue growth in the high single-digit percentage range. The midpoint of fiscal 2025 EBITDA's defined guidance is $4.685 billion or up approximately 12% with an expected margin of around 52.9%. This guidance includes about an additional 70 basis points of margin dilution from recent acquisitions compared to fiscal 24. While we had a strong EBITDA margin result in the first quarter of 25, margins can be lumpy and may fluctuate over the next few quarters. The midpoint of adjusted EPS is increasing versus our prior guide to reflect the lower outstanding share count resulting from the share repurchases discussed earlier. The midpoint of adjusted EPS is now expected to be $36.47 or up approximately 7%. Sarah will discuss in more detail shortly the factors impacting EPS along with some other fiscal 25 financial assumptions and updates. We believe we are well positioned for the remainder of fiscal 25. 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 quarter. We remain focused on our value drivers, cost structure, and operational excellence. We look forward to the remainder of fiscal 25 and providing the value you come to expect from us. Now let me hand it over to Joel Reese, our Trans9 Group Co-COO. to review our recent performance and a few other items. 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 2024. That is, assuming we own the same mix of businesses in both periods. The market discussion includes the 2024 acquisitions in both periods. 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 decreased approximately 4% in Q1 compared with the prior year period. Commercial transport OEM, this is largely Boeing and Airbus, was down 1%. Fizz jet and helicopter OEM revenue was down 8%. Sequentially, total commercial OEM revenues contracted by 17% in Q1. Bookings in the quarter were solid, up both sequentially and against prior year Q1. Our commercial OEM business was impacted subsequent production restart lasted roughly 12 weeks. Specific to TransDyne, since we shipped direct as well as through sub-tiers on the affected platforms, the impact across our businesses is uneven and varied. Boeing's receiving docks were closed during the strike, while some sub-tiers continued to drive consistent demand. This will likely cause further commercial OEM impact into the balance of the year. It is too soon to determine how much of an impact the strike will have in what is a fragile supply chain recovery. Precisely predicting the ramp up and the flow through to the supply chain is tough. However, the commercial OEM guidance we are reiterating today contains what we believe is an appropriate level of risk around the 737 max, 767, and 777 production build rates for the 2025 fiscal year. As we noted on our last earnings call, shortly after the strike began, we proactively initiated cost reduction initiatives across our operating units to right-size our structure to account for the lower 2025 OEM production environment. These cost reduction initiatives span furloughs, headcount reduction, hiring freezes, acceleration of productivity projects, and a range of other actions aimed at reducing expenses. These initiatives enable us to beat our Q1 enacted productivity target, and it put us in a good position for the year. In addition, as is typical for us, we will add resources judiciously as we see the higher ramp rate materialize. The business jet helicopter miss in quarter one, first prior year, is primarily timing related, but we were also impacted by the four-week textron strike. Bookings were up nicely in Q1 over the same period last year, which should set us up for growth in the balance of the year. Now, moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 9% compared with the prior year period. Sequentially, total commercial aftermarket revenues grew by about 4% compared to Q4 of 24. commercial aftermarket bookings were solid compared to prior year. Bookings and shipments are running in line with our expectations and continue to support our unchanged 2025 commercial aftermarket guidance of high single digit to low double digit revenue growth. As a reminder, and as we've said many times before, the commercial aftermarket can be lumpy, and when forecasting our commercial aftermarket, we always focus on 12-month trends, not quarterly trends. Our commercial aftermarket is made up of four submarkets, passenger, interior, freight, and business jet. This quarter, the growth across the four submarkets was varied but not significantly disconnected from what we had anticipated. All four submarkets' revenue increased versus Q1 of last year. Business jet was stronger and freight weaker than the total commercial aftermarket 9% growth rate. the passenger submarket performed in line with the overall commercial aftermarket rate of growth. Within our passenger segment, operating units with higher engine content posted very solid growth, well in excess of those with non-engine content. Additionally, quarter one point of sales data from our distribution partners increased well into double digits versus quarter one of last year. These factors give us confidence we will achieve the commercial aftermarket growth rate guidance for fiscal 2025. Turning to broader market dynamics and referencing the most recent IATA traffic data for December, global revenue passenger miles have continued to surpass pre-pandemic levels since February of 2024. 2024 air traffic increased 10.4% above 2023 and is about 3.8% above pre-pandemic levels. RPKs in December were up 8.6% for its prior year, while ASKs were up 5.6% as passenger load factor is at near record highs of 84%, driving the additional upside. IATA currently expects traffic to reach 113% of 2019 levels in 2025 and to surpass prior year traffic by 8%. Domestic travel also continues to surpass Most recently reported traffic data, global domestic air traffic was up 5.7% compared to 2023 and 9.7 compared to 2019. Domestic air travel growth has been driven significantly by outsized growth in China, where air travel was up 20.2% compared to 2019. International traffic continues to trend upwards and has been above pre-pandemic levels for the past few months. In the most recently reported data for 2024, international travel was about 0.5% above 2019 levels. Most international markets saw stable growth with Asia Pacific the major driver of the increase. Shifting to our defense market, which is traditionally is at or below 35% of our total revenue. The defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 11% compared with the prior year period. Q1 defense revenue growth was well distributed across our businesses and customer base. We saw similar growth in both the OEM and aftermarket components of our total defense market, with the aftermarket running slightly ahead of OEM. Defense bookings for the quarter were healthy compared to the prior year and continue to support our unchanged 2025 defense guidance of high single-digit revenue growth. However, as you know, defense sales and bookings can be lumpy, and forecasting them with precision on a quarterly basis is difficult. Similar to my commercial aftermarket commentary, the defense growth rates could also be uneven over the individual quarters of 2025. In addition, we continue to see steady improvements in on-time delivery and other key customer performance metrics, which are now approaching 2019 levels. With improving supply chain performance, we are on track to surpass those levels later this year. We also saw good new business awards and bookings in the quarter in both commercial and defense markets. Corey Electronics was selected by a major OEM as the provider of a flight deck control panel systems for a new derivative platform as the incumbent on other platforms with this customer corey was well positioned to be responsive to their timeline providing the right technology customization and capability required in an exceptionally short period of time in addition to corey electronics we had solid awards during the quarter at airborne systems north america arm tech cal span and cheltenham limited within the quarter During the quarter, we saw our succession planning at work with one executive return, one EVP retirement, and two EVP promotions. Pete Palmer, after an impressive 25-year career with Transline, has retired. Pete began as a product line manager at Edo Wiggins and evolved into a key leader within our organization. His contributions span multiple areas, including mergers and acquisitions, serving as president of several business units, playing a pivotal role in the Estraline integration and spearheading our TransLine University Leadership Development Program in partnership with the University of Southern California. We extend our heartfelt thanks to Pete for his dedication and wish him a well-deserved, relaxing retirement. With Pete's retirement and the acquisitions made in 2024, we promoted two accomplished leaders to executive vice president roles. Jason Marlick, who joined us in 2008 has accumulated 17 years of experience across several Transdime operating units. His most recent role was as president of Champion Aerospace in Liberty, South Carolina. Jason was promoted in October and now will oversee six operating units. Similarly, Chris Blaffer, who has served with Transdime for 11 years, was promoted in November. Chris has held leadership roles across multiple units, including his most recent position as President of Airborne Systems North America. Like Jason, Chris will be responsible for overseeing six operating units. We are confident that both Jason and Chris will continue driving operational excellence and value creation across the organization. Lastly, I'd like to wrap up by expressing how pleased I am by our operational performance in the first quarter. It was a very good start to our fiscal 2025. As we progress further into fiscal 25, our management teams remain focused on our consistent operating strategy and servicing the strong demand for our products. With that, I would like to turn it over to our Chief Financial Officer, Sarah Lynn.