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2/4/2025
Hello, welcome to TransDam Group, Inc. 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, 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. I would now like to turn the conference over to Jamie Steeman, Director of Investor Relations. You may begin.
Thank you, and welcome to TransDam's fiscal 2025 first quarter earnings conference call. Presenting on the call this morning are TransDam'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 transdarm.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 a 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 long-term. 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 long-standing 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 effects of last fall's nearly -month-long machine 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 defined margins was .9% in the quarter. Contributing to this strong Q1 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 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 by open market repurchases of our common stock. 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 mid-size 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 a creative 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 on 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 6 in the presentation, and I will reiterate it here. The midpoint of our Fiscal 25 revenue guidance is $8.85 billion or 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 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 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 in the quarter by the Boeing Machina strike, which affected 737 MAX, 767, and 777 production lines. In total, the strike and subsequent production restart lasted roughly 12 weeks. Specific to Trans9, since we shipped to RET, as well as through sub tiers on the effective platforms, the impact across our businesses is uneven and varied. Boeing's receiving docks were closed during the strike, while some sub tiers continue 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 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, account 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 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 versus prior year is primarily timing related, but we were also impacted by the four-week text-on 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 2024. 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 sub-markets, passenger, interior, freight, and business jet. This quarter, the growth across the four sub-markets was varied but not significantly disconnected from what we had anticipated. All four sub-markets' revenue increased versus Q1 of last year. Business jet was stronger and freight weaker than the total commercial aftermarket 9% growth rate. The passenger sub-market 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, Q1 point of sales data from our distribution partners increased well into double digits versus Q1 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 .4% above 2023 and is about .8% above pre-pandemic levels. RPKs in December were up .6% versus prior year, while ASKs were up .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 pre-pandemic levels. In the most recently reported traffic data, global domestic air traffic was up .7% compared to 2023 and .7% compared to 2019. Domestic air travel growth has been driven significantly by outsized growth in China, where air travel was up .2% compared to 2019. International traffic continues to 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 .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 is at a low level of revenue growth, which is both OEM and aftermarket revenues 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. Cori 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, Cori 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 Cori Electronics, we had solid awards during the quarter at Airborne Systems North America, Arm Tech, CalSpan, and Chulton Limited within the quarter. During the quarter, we saw our succession planning at work with one executive on EVP retirement and two EVP promotions. Pete Palmer, after an impressive 25-year career with Transdime, has retired. Pete began as a product line manager at A.Wiggins and evolved into a 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 extra line integration, and spearheading our Transdime 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 Marlott, 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 receive six operating units. Similarly, Chris Blackford, 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 2025, 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 financial officer, Sarah Lynn.
Thanks, Joel. Good morning, everyone. I'll recap the financial highlights for the first quarter and then provide some more information on the guidance. First, on organic growth and liquidity. In the first quarter, our organic growth rate was .6% driven by a commercial aftermarket and defense market channel, as Kevin and Joel have just discussed. On cash and liquidity, free cash flow, which we traditionally define as EBITDA-less cash interest payments, CAPEX, and cash taxes was over $800 billion for the quarter. This is higher than our average free cash flow conversion due to the timing of our interest and tax payments. This will normalize throughout the year as our interest and tax payments will pick up next quarter. For the full fiscal year, our free cash flow guidance is unchanged. We continue to expect to generate free cash flow of approximately $2.3 billion in fiscal 2025. Below that free cash flow net working capital usage was neutral for the quarter. For the full year, we expect working capital to end roughly in line with historical levels as a percentage of sales. We ended the quarter with approximately $2.5 billion of cash on the balance sheet, and our net debt to EBITDA ratio was 5.3 times up from 4.5 times at the end of last quarter after paying out the $75 dividend earlier in Q1. While we don't target a specific amount of cash that we like to have on hand, we have sufficient capital available through both cash on hand as well as incremental debt capacity to support all potential M&A activity in the pipeline. As a reminder, we are comfortable operating in the 5 to 7 net debt EBITDA ratio range, and while we are currently sitting on the low end of this range, our go-forward strategy of capital deployment has not changed. Our EBITDA to interest expense covered ratio ended the quarter at 3.4 times, which provides us comfortable cushion versus our target of 2 to 3 times. Regarding our debt, our nearest term maturity is 2027, and we remain approximately 75% hedged on our total $25 billion gross debt balance through our fiscal 2027. This is achieved through a combination of fixed rate notes, interest rate caps, swaps, and colors. This provides us plenty protection at least in the immediate hour. As Kevin mentioned, during the quarter we opportunistically repurchased approximately 250,000 shares, deploying just over $300 million of cash. We continue to seek the best opportunities for providing value to our shareholders through our leverage strategy. On a go-forward basis, we expect to continue to both proactively and prudently manage our debt maturity stats, which for us means pushing out any near-term maturities well in advance of the final maturity date. With regard to guidance, as Kevin mentioned, we maintained our prior guidance for sales and EBITDA. Our adjusted EPS guidance is up slightly, now at $36.47 compared to the prior guidance of $36.32. The increase is due to the approximately 250,000 shares we repurchased during the quarter. As we sit here today, from an overall cash, liquidity, and balance sheet standpoint, we think we remain in good position with adequate flexibility to pursue M&A or return cash to our shareholders via dividends or share repurchases. With that, I'll turn it back to the operator to kick off the Q&A.
»» Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 1-1 on your telephone and then 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 comes from the line of Miles Walton with Wolf Research. Your line is open.
»»
Thanks. Good morning.
I think the first quarter margins were expected to be down sequentially. They were obviously up sequentially. I'm curious to see your comment on that. Also, the contract loss amortization was running pretty hot. What's causing that to go up in level and then what's the expectation for the full year?
»» Sure, Miles. This is Sarah. I'll take those. In Q1, the higher EVDA margin is primarily driven from the significant mix shift we had in the quarter from commercial OEM to commercial aftermarket. Also, we had good productivity projects, but the mix is the primary piece of that. On the last contract, I think you obviously saw that in the table there. These are some of those contracts that we purchased with Esterline. They're nothing else added to it, but that's what you see flowing out. There was just some timing on some of that in Q1 for this quarter, for this year.
»» Okay. Just a quick one. The gain on sale, what was sold in the quarter? »» We had a mass business. »» Oh, sorry. The
gain on sale.
We
sold a small piece called Mass Systems in the quarter. We bought it a few years ago. I managed to improve it and sold it as profit. »»
It came along with another acquisition very close to the Russian border and it made mass communication mass for troops on the ground. It really wasn't a business we wanted to be in.
»» Okay. Thank you.
»» Thank you. Please stand by for our next question. »» Our next question comes from the line of Noel Poppenack with Goldman Sachs. Your line is open.
»» Hey, good morning,
everyone.
Maybe just staying on the margins since they were up nicely year over year. I guess the guidance for the year at the midpoint would imply that that EBITDA margin is essentially flat through the rest of the year. I think you usually have some seasonality where it expands through the year. Your recently acquired revenue would become less recently acquired. What would drive the margin to be flat through the year?
»» Well, we have to factor in the acquisitions we made are certainly averaging us down. I think that mixes us down up to a percent about, you know, we saw a special situation in the first quarter with the strike at OEM being down quite surprisingly from where we forecast. But, you know, I think it's we aim to be conservative. So hopefully we're conservative and it might look like we are once again. But we don't try to get out over our skis too much on forecasting the future. We'll see how it unfolds.
»» Okay. And then, Kevin, just wanted to ask about the commercial transport aftermarket. I guess, are you surprised to have two quarters in a row of up seven seat miles are still growing a little faster than that? Seems like pricing is still nicely positive year over year. Can you talk about a little more about what you're seeing there? Is it just random or is it just the compares? I know the compares get a decent amount easier the rest of the year.
»» Yeah, some of it probably is compares. We're up 33% from Q1 of FY23 in commercial transport. We're kind of seeing some very pieces. As I talked about in the sub market, our freight continues to be a bit of a drag although bookings were up significantly and we think that freight's kind of bottomed out at this point. Engine businesses we have are doing significantly better than what the overall numbers are. It's just right now kind of just the kind of mix of where we're at. It was slightly better than what we had anticipated when we were putting out the initial kind of look last quarter. So for us it's roughly aligned as part of the lumpiness of what we expect the commercial aftermarket to be.
»» Okay. Thank you.
»» Thank you. Please stand by for our next question. Our next question comes from the line of Robert Stollert with Vertical Research. Your line is open.
»» Thanks so much. Good morning. »» Good morning. »» Maybe I'll ask Noah's question a slightly different way. You've got the 1Q actuals here but if you look at these various sub components of the aerospace aftermarket, where do you expect there to be improvement that will get you to that low double digit number for the full year?
»» So we don't provide the specific guidance into the sub markets. Having said that, I think as we highlighted before, freight we think is kind of bottomed out and we expect that to continue to improve. The engine businesses continue, I would think, to continue to do well. Beyond that, I think we're going to see the, I think the way we look at it is all of the sectors continue to have the right kind of components behind it of good passenger traffic and an aging aircraft marketplace. So I think we'll continue to see kind of growth across all of the sub markets.
»» And then one for Kevin. Tariffs. I was wondering what sort of exposure Transdime might have with regard to tariffs that could be coming through on Europe. We've got the Canada and Mexico ones as well. And what sort of plans do you put in place as a contingency? Thank you.
»» So we've looked at this across our business. The good news is Transdime is a domestic manufacturer. We don't import a lot of products to manufacture. So that's to our advantage in this. We've analyzed, and I guess it depends on how you answer the question, where are the tariffs going to be implemented? It seems like Mexico and Canada are on a delay and China's being implemented. We don't do a lot in China any longer. We have, you know, I think relocated production out of China where possible and don't utilize that location a lot. So we think tariffs for us across the board will be de minimis to the corporation. Again, we're largely a domestic manufacturer.
»» Thank
you. Please stand by for our next question. Our next question comes from Yolana. Yolana is open.
»» Thanks. Good morning. Kevin, I think on the last call you had mentioned that Q1 would be the weakest aftermarket quarter. Did the aftermarket end up coming in a little bit better than you would have thought back then?
»» Yeah, I think it did come in a little bit stronger, which was a pleasant surprise to us. It's always difficult to forecast this, as Joel and Mike will always say, you know, aftermarket is book and ship largely. So it's difficult to forecast.
»» Okay. And on aftermarket volumes, can you give us, I know you've given us kind of a high level where you think it is relative to 2019. Can you give us any idea by the different submarkets where you think volumes are relative to 2019?
»» I think as we bring it out, everything is above pre-pandemic levels except for probably our interior businesses. Interior is driven a lot by the refurb market and refurb really has not come back to where it was back in 2018, 2019. I think as we've talked about this a few times in the last year or so, we keep thinking it's going to happen and it slides a little bit to the right. The refurb programs we've seen announced are generally smaller than what was then back happening in 2018, 2019. Freight had come back in 2020, 2020 during the pandemic, 2021 I think was a big year until this year. So above where it was pre-pandemic levels is the overall market. So I think as we look at it, really the only area that's lagging today is the interior space and exactly when that will come back. It's really just going to be dependent I think around when the refurb market comes back, when you see the larger OEM, the larger airlines refreshing their interior.
»» Okay. And Joel, can you remind us how much freight is of your total aftermarket?
»» It is about 15% or so, -20% range. It kind of varies, it bounces around, but that's a general range.
»» That's a total or a commercial?
»» A commercial. Oh, a commercial, sorry.
Yeah, a commercial. »» Thank you very much.
»» Thank you. Please stand by for our next question. Our next question comes from the line of Scott Micus with Lelius Research. Your line is open.
»» Good morning. Kevin, Joel, Sarah, Boeing's laid out a fairly aggressive production ramp post-strike, at least their targets. They and Airbus both have a track record of not hitting their stated production rates. So I'm just curious, are your operating units receiving orders from Boeing that support a ramp to 38 per month or higher in the back half of this year on the 737?
»» So we're typically not getting orders out for what would be the back end of the year yet. Our lead times are typically shorter than that. We're certainly optimistic that Boeing's going to get back up to the rate of 38. Today we're probably seeing about half of that and we're optimistic that, as I said, the number will move up during the year and we're prepared to do that. We'll add people as necessary and, yeah, so we're hopeful they can hit their numbers.
»» Okay. And then you mentioned the M&A pipeline remains active, but in the quarter you bought back $316 million of stock. So just curious, valuations for acquisition targets just too elevated relative to the quality of the assets? Or did you think that your stock was just trading at a very attractive price?
»» Yeah, we're always looking to opportunistically return capital to our shareholders. There was a lot of turmoil in the market. Stock fell. We took it opportunistically to buy back some shares. That's really all there is to it. It doesn't say anything about the M&A market and it wasn't a lot of cash that we used. It was just an opportunity to quickly return cash to or capital to the shareholders.
»» Thanks for taking questions.
»» Thank you. Our next question comes from the John.
»» Hi, good morning. Can you remind us what percent of aftermarket engine represents and maybe how much over the up nine was the engine in the first quarter?
»» So it bounces around for us. It's not immaterial. It was up significantly more than the 9%.
»» Okay. Obviously as we think about that, we think about champion Jason's business, but is it fair to say that your engine exposure is market weighted or are you disproportionately higher content on any engine types?
»» We think we're market weighted across the board.
»» Great. Are you seeing any incremental pressure on pricing across any of the markets within the aftermarket relative to maybe where you were three months ago?
»» I don't think I'm hearing anything specific different from pricing. Our typical approach to pricing is unchanged. We're basically looking to cover our inflationary costs and then a little bit more. I don't know that we've seen anything significantly different than that.
»» Perfect. Thanks, Joel. »»
Thank you.
»» Please stand by for our next question. Our next question comes from the line of Scott Doshel with Dutch ReBank. Your line is open.
»» Hey, good morning.
»» Good morning.
»» Kevin, did the OEM contract renegotiation you've spoken about in the recent past conclude or is that contract still being negotiated?
»» Yes, we successfully closed out the contract. Patrick Murphy, one of our EVPs led the negotiation and we were able to close it out, I think it was in December.
»» Okay. Were there any retroactive elements to that negotiation that would have helped OE pricing in the quarter just concluded?
»» No, the contract, it was expiring at the end of December. So the new contract started January 1st. So there was no retroactive aspect to it.
»» Okay. And then just to clarify, is the duration of the new contract the same as the duration of the contract that it's replacing or did you move to something shorter term in nature?
»» Yeah, it was the same. »»
Okay. Thank you.
»» Thank you. Please stand by for our next question. Our next question comes from the line of Sheila with Jeffries. Your line is open.
»» Hey, good morning, guys. Maybe just on that last question, Joel, I think it was you or Kevin. How do you think about profitability overall, just the flattening out? Is it OE coming back up from down four to mid-single digits? And does the new contract have any changes in your profitability profile?
»» Yeah, I think the contract and OEM business is already in our forecast. So there's not going to be any incremental improvements or anything. Anything else to share on that, Joel? »» No.
»» Okay. And then maybe if I could ask one on the aftermarket. I think the aftermarket is the only subsegment below 2019 levels. How can we think about what's driving that when you expect that to improve? Does it come in a wave or should we see it just a gradual improvement?
»» I'm not sure that I could give you any great extra insight. It really will be as when you see the airline start announcing a refurb program. I mean, it's not a typical level. There are several programs we're hearing about. The question will be, is what will drive the numbers of multiple programs for us hit at the same time, as opposed to if it's just sort of a slow wave of what that looks like. But the lead times will be long. I'm sure we'll be seeing that coming and we'll be able to provide some color as that's coming back. I don't know that we see that it's within the next quarter or two. »» I think it's also difficult to take planes out of service to refurbish interiors when you don't have enough plane deliveries from the OEM. So I think all these things kind of work complicated. You know, it's sort of a complicated relationship.
»» Sure. Makes sense. Thank you. »» Thank you. Please stand by for our next question. »» Our next question comes from the line of Seth Seidman with JP Morgan. Your line is open.
»» Hey, thanks very much. And good morning, everyone. Just to maybe go back a little bit to the aftermarket point we touched on a little earlier, things being a little stronger in the first half or in the first quarter. I think you talked about the first quarter being the lowest of the year and the comps, particularly in the fourth quarter, start to get easier. Did anything change in your view of the rest of the year or should we still think that there's no reason why we wouldn't see growth below – there's no reason we should see growth below what we saw in the first quarter and growth should ascend from here?
»» I don't think we have anything to kind of change the guidance we provided you before. What we say all the time is the aftermarket is lumpy. I mean, the vast majority of our orders book and ship in the same quarter. So we try to look at what the trends are and there's nothing in the market dynamics today that make us think there's a significant change from what we're seeing today.
»» Okay. Okay. And then I guess if you were ever to make an acquisition from one of your customers, would there ever be an opportunity to pay for that acquisition or pay for a portion of that acquisition in the form of pricing rather than cash?
»» Certainly hasn't ever come up before. We're opportunistic in everything we do, but that's not our usual process.
»» Thank you.
»» Thank you. Our next question comes from a line of Ron Epstein with Bank of America. The line is open. »» Hello, everyone.
This is Mariana. I'm for Ron today. So in the previous remarks, you talk about the M&A pipeline and how you have a mix of like cab names and also some large opportunities. Like, would you mind discussing what is the mix of like our space and defense companies versus other industrials and where are you really seeing opportunities on M&A?
»» This is all aerospace and defense. We aren't looking outside of aerospace and defense. So small, medium and large opportunities come along, a lot less on the large side. If something is in the market on the aerospace and defense side, we're going to look at it quite seriously. And that's all I can probably comment on the M&A pipeline there. It's very busy, much like last year. There's probably even more EBITDA in the pipeline this year than last year, but you just can't predict how things are going to close.
»» Thank you. And then after the OE slowed down this quarter and with your more like aggressive, or not aggressive, but like you have a good view and outlook for the year on OE, what are your channel checks saying to you about like inventories in the supply chain? Like, how do you address that uncertainty about like item by item inventories in the supply chain?
»» You know, we don't get, we've never had much visibility to inventory in the supply chain. The only thing we see is our distribution partners on the aftermarket side. The OEM partners, they don't give us much inventory visibility. So we're simply guessing, listening to people, getting feedback. You know, it does seem like there's been some, you know, inventory buildup over time that is working its way through in certain pieces. And we're just going to have to see how this plays out. We don't have any additional visibility except the orders that we've received from our customers. We fulfill them quickly. We're a reliable supplier, high quality, high delivery accuracy. So our customers know they can count up.
»» Thank you very much. »» Thank you. Please stand by for our next question. Our next question comes from the line of Jason Dersky with Citi. Your line is open.
»» Hey, good morning, everybody. Morning, Kevin and others. Just a quick question on the refurbishment work to put a finer point on this. Can you, I don't want to put words in your mouth, but I would maybe want to get you to comment on the cycle there. So it does seem like it is going to be tied to airlines getting more consistent supply from their OEM partners so that they can do some fleet planning and maybe take some aircraft out of service to go do this refurbishment work. I just want to confirm that that's what you're thinking. And then how big is this for you all? Is this going to be a meaningful contributor to your aftermarket growth once the cycle actually picks up?
»» So I think yes. First, your question, beginning part, certainly the airline's ability to take planes out of service is a key aspect to it. If you can't pull a plane out to do the work, you'd rather have it flying. I think you'll see the tier percentage jump up significantly. But in terms of total for our business, I don't think this is a significant piece to the total. It's just the one piece remaining of our commercial aftermarket that just kind of continues to lag below the 2019 levels.
»» Okay, got it. And then, look, I know you're saying you don't track inventory levels with a great level of detail and specificity, but your comment about you shipping into Boeing at production rates that are half where they are today, they talk about the need to wind down inventory. They're caring too much given the fact that they ingested so much last year and weren't shipping out nearly as much as they were ingesting. You just went through a big contract negotiation with them. I'm wondering if you just can't give us a little bit more insight on what you're hearing from your major customers on inventory unwinds, because they've been pretty public about it, and how long that might last and impact you on.
»» Well, I would just start to answer. I mean, this is why our commercial Hullian forecast was lower at mid-single digits than maybe some would have expected. This has all led to this somewhat confusion in the supply chain. I don't think we're getting as direct and clear input from some of the OEM suppliers as some in the market would think. There's not a lot of clear communication. They're working through a lot of challenges right now. »» What I was going to add is our operating units at a detail level roughly know how many units of each product they have that goes on a plane. They work to build up a bottoms-up forecast based on what we believe the OEM build rate will be. They're trying to take into account if they've been overshipping last year, if they were overshipping in this quarter, what it looks like over the balance of the year. We don't have a top-down piece, but each of our operating units works to pull that together. That's what ultimately drove our guidance for the balance of the year, as Kevin said.
»» Okay. Fair enough. Thanks, guys.
»» Thank you. Ladies and gentlemen, due to the interest of time, our final question will come from the line of Katam Kana with TD Cohen. Your line is open.
»» Thanks. Good morning, guys.
»» Good morning.
»» I was wondering if you could comment, as you have in prior quarters, about what you're seeing in the distribution channel into the aftermarket -of-sale data relative to what you guys were experiencing on the manufacturing side.
»» I think it's running ahead, Joel. »» Yeah, it's currently running ahead. It's a different mix. We looked at the mix of trans-time commercial aftermarket versus the mix of our distribution. They're not quite the same as we each of the sub-set markets. It's roughly in line with what we would expect it to be, but it is in total running above what our overall commercial market is. As I said in the opening remarks, it's running into the double digits versus our 9%.
»» Gotcha. That's a couple quarters now, right? Where it's been running ahead. And that's more of a leading indicator.
»» Several quarters. We think of it as a, it should be a good leading indicator. It's where we have visibility on inventory and POS sales granular. So, yeah, it should be a good indicator of future.
»» Great. And then my last one, just on the new administration and how is trans-time working constructively with them? And your thoughts on DOGE? I'll just leave it open-ended.
»» That's a great question. I anticipated this earlier, I think, in the Q&A. DOGE is, it's a great opportunity for the U.S. to improve and streamline what they're doing, specifically with government DOD, DLA procurement. We think this is a really good thing. We've been engaging with the DOD over the past several years and have suggested a number of improved forecasting, inventory management, and improved buying practices that would save the government money and save us time and energy and production. So, we invite all inquiry and assistance. I've met with some of the folks in D.C. It's important to remember that trans-time is a very small supplier. I think we're .3% of the DLA budget and this amounts to less than 1% or somewhere around 1% of our revenue. Are these types of products that would fall under the concern of DOGE? We see this only as opportunity for trans-time, the government, the DOD to improve what we're doing together. We warrant any and all inquiries and work together to come up with a stronger solution in the future. That's really where we're at. It's a small part of our business is supplying spare parts to the bulk of what we do is either falls under Tina today, which is fully cost disclosed, or is commercial of a type or competitive. That's the bulk of our business falls under those three categories. So, we invite the work that we need to do together to improve how we work together with government. That's our answer.
Thank you,
guys. Thank you. I would now like to turn the call back to Jamie for closing remarks.
Thank you all for joining us today. This concludes today's call. We appreciate your time. Have a good rest of your day.
That concludes today's conference. Thank you for your participation. You may now disconnect.