Transdigm Group Incorporated

Good day, and thank you for standing by. Welcome to the Transdime Group Incorporated second quarter 2026 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 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 now like to hand the conference over to your speaker today, Mary Hartman, Director of Investor Relations. Please go ahead.

Thank you, and welcome to TransDyn's Fiscal 2026 Second Quarter Earnings Conference Call. Presenting on the call this morning are TransDyn's President and Chief Executive Officer, Mike Lisman, Co-Chief Operating Officer, Joel Reese, and Chief Financial Officer, Sarah Nguyen. Also present for the call today is our Co-Chief Operating Officer, Patrick Murphy. 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 Mike.

Good morning. Thanks for calling in today. First, I'll start off with the usual quick overview of our strategy. Second, make a few comments about the quarter. And third, discuss our revised fiscal 26 outlook. Then Joel and Sarah will give some additional color on the quarter. To reiterate, we believe we are unique in the industry in both the consistency of our strategy and 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. 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 private equity-like returns. And lastly, our capital structure and allocation 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 delivered a good quarter. Our Q2 results ran ahead of our expectations, and we once again raised our guidance for the year. During the quarter, we saw solid growth in revenue, both sequentially and compared to the prior year in all three of our market channels, commercial OEM, commercial aftermarket, and defense. Bookings in the quarter also meaningfully surpassed shipments across all three of these market channels. Through February, commercial aerospace market trends have been favorable, with takeoffs and landings increasing in the 4% ballpark year over year, and RPM growth trending in the 4% to 7% range. In March and April, activity took a step back as a result of the conflict in the Middle East, with global RPM growth slowing to 2.1% for the month of March, and takeoffs and landing cycles dipping into slightly negative territories. However, excluding the Middle East, March RPM growth was 8%, highlighting strong demand in other regions of the world. I will tell how flight activity has impacted for the remainder of the fiscal year given the current dynamic market environment and evolving situation in the Middle East. To date, we have not seen a significant change in commercial aftermarket ordering activity relative to levels prior to the start of the conflict. including from the Middle Eastern Airlines, most directly impact. But we remain cautious here. Ultimately, the impact felt will depend upon the duration of the conflict. Note that we are increasing our commercial aftermarket guidance today despite this market uncertainty. This is to reflect the strong performance seen in our fiscal second quarter and our best guess at how we will finish the year as we sit here today. As mentioned, and as you saw in our results, commercial aftermarket growth rebounded in Q2 from prior recent quarter growth rates. It was good to see this stronger performance, and it is a reminder of the lumpiness we can at times see in this particular market channel. In the commercial OEM market, Boeing and Airbus are continuing to ramp production rates. Airline demand for new aircraft remains high, with backlogs increasing. The OEM production rate recovery to date has been bumpy. We are encouraged by the consistent improvements being made each quarter as well as our bookings pace. Additionally, our defense end market saw a double-digit revenue increase this quarter and also built a sizable amount of backlog that will drive continued growth as we head into the back half of our fiscal 2026 and into fiscal 2027. Our EBITDA as defined margin was 52.6% of the quarter, which includes slightly less than two full percentage points of dilution from recent acquisitions. Contributing to the solid Q2 margin performance is the growth in our commercial aftermarket, along with diligent focus on our operating strategy, which is allowing margin performance to expand across all segments. Additionally, improvements in operating margins in our recent acquisitions, Servotronics and Simmons are running slightly ahead. Next, an update on our capital allocation activities and priorities. Regarding the current M&A activities and pipeline, we continue to actively look for opportunities that fit our model. As usual, the potential targets are mostly in the small and midsize range. As always, we will remain disciplined around our approach to M&A. Additionally, acquisitions are by their nature hard to predict. So, consistent with past practice, I will not be saying too much on what is currently active in our M&A funnel. We are pleased to have closed the acquisitions of JetParts Engineering and Victor Sierra shortly after the quarter ended. We continue to work towards a closing on Stellent and look forward to owning this business in the not-too-distant future. The capital allocation priorities at Transdime are unchanged. Our first priority is to reinvest in our businesses. Second, do a creative, disciplined M&A. And third, return capital to our shareholders via 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. Our recent capital allocation actions still leave us with significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Pro forma for the announced acquisitions, we have significant M&A firepower and capacity remaining, in excess of $10 billion. Moving over to our outlook for fiscal 2026. As noted in our earnings release, we are increasing our full year 26 sales and EBITDA as 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 $420 million and EBITDA as defined guidance was raised $210 million. The guidance assumes no additional acquisitions or divestitures and is based on current expectations for continued performance and our primary commercial end markets throughout fiscal 2026. Note that the large majority of this guidance increase is coming from the solid and better than expected performance in our base business, with a much smaller portion of the total guidance increase coming from our inclusion of JetParts and Victor Sierra, now that we officially own both businesses. Our current guidance for fiscal 2026 is as follows and can also be found on slide six in the presentation for today. Note that the pending acquisition of Stellar is excluded from this guidance until the acquisition closes. The midpoint of our fiscal 26 revenue guidance is now $10.36 billion, or up approximately 17% over the prior year. In regard to the market channel growth rate assumptions that this revenue guidance is based on, we are now updating the full-year market channel assumptions for our three primary end marks. commercial OEM, commercial aftermarket, and defense to account for the better than originally forecasted results in our first half and current expectations for the second half of our fiscal year. The updated revenue guidance provided today is based on the following market channel growth rate assumptions. We expect commercial OEM revenue growth in the low double digit to mid-teens percentage range. The growth seen here remains dependent on the evolution of the production rates in the commercial OEM environment. We expect commercial aftermarket revenue growth to be in the high single digit to low double digit percentage range, with this growth dependent upon the dynamic and evolving situation in the Middle East. And lastly, we expect defense revenue growth in the high single digit percentage range. The midpoint of fiscal 2026 EBITDA's defined guidance is now $5.42 billion. We're up approximately 14%, with an expected margin of around 52.3%. We are very pleased with our margin performance in the year-to-date period, and we are running ahead of where we thought we'd be. Adjusting for the two diluted factors we discussed last quarter, the margins in our base businesses steadily improved in our second quarter, more than we had expected. As a reminder, the diluted factors are approximately 200 basis points of margin dilution from our recent acquisitions and about half a percentage point to one full percentage point from commercial OEM and defense mixed headwinds. While the margin dilution for the full year from recent acquisitions increased due to the inclusion of Jetfarts and Victor Sierra, the overall dilution remains in the 2% area, plus or minus, due to the slightly better than planned performance at Servitronics and Simmons, each of which we've now owned for more than six months. The midpoint of adjusted EPS is now expected to be $39.52. We believe we are well positioned for the second half of our fiscal 26. We'll continue to closely watch how the aerospace and capital markets develop and react accordingly. We're pleased with the company's performance this quarter, and our teams remain focused on our value drivers, cost structure, and operational excellence. While the current market backdrop as we sit here this morning is quite a bit less certain, more unpredictable than usual, We'll continue to control what we can control and expect that our disciplined, consistent strategy will deliver the value you have come to expect from us. We look forward to the second half of our fiscal 2026. Before handing the call over to Joel, I'm excited to share two recent promotions to EVP. Eric Hilliard has been promoted to EVP of M&A and is now leading our efforts on the acquisition front. Eric has been with Transdime for over a decade and held leadership roles at two of our largest operating units. Most recently, he served as president of our Extend Aerospace business, overseeing many product line acquisitions. M&A remains a key pillar of growth for Transdime, and Eric will continue to fuel this important pipeline. The second promotion to EVP is Mike Carney. Mike joined TransDyme going on 15 years ago and has worked at five different TransDyme operating units, including serving as president at two, Adams Wright Aerospace and Electromech Technologies. Mike's proven record championing TransDyme's culture and driving value in the organization makes him a great fit for this role. We are always excited to promote from within our organization, demonstrating our commitment to internal talent development and thoughtful succession planning. These are well-earned promotions, and we look forward to Eric and Mike carrying the Transdime culture going forward. With that, I'll now hand it over to Joel Reese, our Transdime Group Co-COO, to review our recent performance and a few other items. Good morning.