The operator introduces the TransDigm Group's Fourth Quarter 2023 Earnings Conference Call and announces that the call is being recorded. Jaimie Stemen, Director of Investor Relations, introduces the speakers and reminds listeners that statements made during the call are forward-looking. The speakers will discuss non-GAAP financial measures and provide a quick overview of the company's strategy.

The company had two Directors retire from the Board, leaving it with 10 highly qualified members. The company has a consistent strategy focused on creating value for shareholders through unique proprietary products and aftermarket revenues. They follow a value-based operating methodology and have a decentralized structure with a compensation system aligned with shareholders. They also acquire businesses that fit their strategy for potential high returns.

The company's capital structure and allocation strategy aim to provide shareholders with private equity-like returns while maintaining liquidity. The company had a strong Q4 with solid operating performance and surpassed their revenue and EBITDA guidance for the full year. The commercial aerospace market is recovering, but still below pre-pandemic levels. The company saw growth in all three major market channels and a strong EBITDA margin of 52% due to operational focus and cost management. The company also generated good operating cash flow and has a significant amount of cash on hand, with expectations for continued cash generation in the future.

The company has allocated over $2.7 billion in capital for the benefit of shareholders through a special dividend and the acquisition of CPI's Electron Device Business. The acquisition is expected to close by the end of the third quarter of fiscal 2024. The company has a cash balance of close to $3.5 billion and plans to utilize leverage for the acquisition and other purposes such as potential future acquisitions, share repurchases, and dividends. They are actively looking for M&A opportunities that align with their business model.

TransDigm has a strong pipeline of potential targets for acquisitions over the next 12 to 18 months, primarily in the small and midsize range. Their capital allocation priorities remain the same, with a focus on reinvesting in their businesses, doing disciplined M&A, and returning capital to shareholders. The company is optimistic about the recovery of their primary commercial end markets and has provided guidance for fiscal 2024, which may be subject to change depending on market conditions. The pending acquisition of CPI's Electron Device Business is not included in this guidance.

The midpoint of fiscal 2024 revenue guidance is expected to be $7.58 billion, representing a 15% increase. The first quarter of fiscal 2024 is expected to have lower revenues, EBITDA, and margins due to fewer working days. The revenue growth rate assumptions include 20% for commercial OEM, mid-teens for commercial aftermarket, and mid to high single-digit for defense. The midpoint of fiscal 2024 EBITDA guidance is $3.94 billion with an expected margin of 52%, including 100 basis points of margin dilution from the Calspan acquisition. Adjusted EPS is expected to be $31.97, a 24% increase. The company remains focused on value drivers, cost structure, and operational excellence. COO Mike Lisman will review recent performance and other items.

In this paragraph, the speaker discusses the financial performance of their company in the commercial market, specifically focusing on the OEM and aftermarket sectors. They note a 22% increase in total commercial OEM revenue in Q4 and a 24% increase for the full fiscal year compared to the prior year. Bookings were also strong in the quarter, supporting their guidance for a 20% revenue growth in fiscal 2024. Despite ongoing challenges with supply chain and labor, they are optimistic about the increasing production rates at Boeing and Airbus and the demand for new aircraft. In the commercial aftermarket, there was a 27% increase in revenue in Q4 and a 31% increase for the full fiscal year, driven by growth in the passenger submarket. There was also growth in the interior and biz jet submarkets, offset by a slight decline in the freight submarket.

Despite a slight decline in the freight submarket, the post-COVID return to flying globally is continuing, particularly in the passenger, biz jet, and interior aftermarket submarkets. Bookings for the commercial aftermarket have been strong over the past 12 months, supporting a mid-teen percent revenue growth forecast for fiscal 2024. Global air traffic is steadily recovering, with a return to pre-pandemic levels expected in 2024. Domestic travel has already surpassed pre-pandemic levels, particularly in China where it has improved significantly in the past 9 months. This was an unexpected and pleasant surprise.

In September, U.S. domestic air travel was 6% above pre-pandemic levels, while international travel has improved to only being down 7%. Business jet utilization has decreased from its peak in 2021, but remains 10-15% above pre-pandemic levels. Revenue in the biz jet submarket is also above pre-COVID levels. The cargo submarket has struggled, with 19 consecutive months of year-over-year declines, but has recently returned to flat or slightly positive growth. Cargo Ton-Kilometers are still below pre-pandemic levels and full freighter aircraft are being used less, leading to an increase in part rates. This has resulted in some booking softness in the freight submarket. The management team is closely monitoring these trends and their impact on the commercial aftermarket submarkets over the past four years.

The COVID-19 pandemic initially caused a decrease in passenger traffic and an increase in freight traffic, but now both markets are returning to their pre-COVID levels. The passenger market is the company's largest submarket and is currently performing well. In the defense market, revenue and bookings have seen significant growth, exceeding previous expectations. The company is hopeful for continued improvement in defense sales, but acknowledges that they can be unpredictable. The company recognizes the hard work and success of their teams during the fiscal year.

In the new fiscal year, the company's management team is committed to their operating strategy and meeting the strong demand for their products. The CFO, Sarah Wynne, provided additional financial information for fiscal 2023, including organic growth, taxes, and liquidity. The company's free cash flow was higher than expected, and they ended the year with a strong cash balance. The net debt-to-EBITDA ratio improved and the company remains 80% hedged against rising interest rates. A $35 per share dividend will be paid in November.

The company's EBITDA to interest expense coverage ratio remains stable and within their preferred range. They are monitoring the interest rate environment closely but do not anticipate any changes in their approach to using debt to boost equity returns. The company expects net interest expense to be $1.25 billion in fiscal 2024 with a weighted average cash interest rate of 6.3%. Their GAAP, cash, and adjusted tax rates are all expected to be in the range of 22% to 24% in 2024. The share count is expected to be 57.8 million shares in 2024.

The company expects to have a free cash flow of $2 billion in fiscal 2024, with a special dividend payout of $35 per share. After paying the dividend, the company will have over $3 billion in cash on the balance sheet, resulting in a net debt-to-EBITDA ratio close to 4x. They are actively monitoring the capital markets for potential acquisitions, share repurchases, or dividends, and their target net debt ratio remains at 5-7%. They believe they have flexibility to pursue M&A or return cash to shareholders during fiscal 2024.

The operator introduces Myles Walton from Wolfe Research and asks for his first question. Myles asks about the CPI business, which the company has recently acquired. He asks for more information about the aftermarket and whether it is more focused on defense or commercial. He also asks about the process of acquiring the business. Kevin Stein, the company's representative, explains that the business makes vacuum tube products for aerospace and defense, with some industrial and medical applications. He also mentions that the company had considered acquiring it in the past. Myles also asks about the 9% increase in defense sales and whether it was due to customer demand or improved supply chain performance. The company's representatives attribute it to both factors.

The company's bookings have increased and the supply chain is starting to ease, but it is still not back to pre-COVID levels. The company's balance sheet is strong and they plan to use it for potential acquisitions in the future.

The speaker discusses the company's preference for commercial over defense aerospace, their plans for capital allocation, and their disciplined approach to M&A. They also mention the profitability and potential for growth at CPI and express satisfaction with the performance of their acquisition of Calspan.

TransDigm's business model is not traditional, but it has been successful. They plan to keep the CPI business, which has some non-aerospace defense exposure. The aftermarket guidance for fiscal 2024 is expected to gradually ramp up throughout the year, with the first quarter being lower due to fewer working days.

The company expects the March up to follow the trend of takeoffs and landings throughout the year, with sequential increases in fiscal 2024. There may be some fluctuations, but overall it will be consistent with previous years. The growth rate will decrease as the year progresses due to mass and comparisons. The company anticipates $2 billion in cash flow and neutral working capital going forward. In terms of the aftermarket, volumes are back to pre-pandemic levels and the mid-teens growth guidance is expected to be split between price and volume.

The speaker, Mike, answers a question about the volume and price trends in the commercial aftermarket for FY2023 and FY2024. He explains that the volume is down by 15% in FY2023, with passenger and interior segments being the most affected. However, freight and Biz Jet segments are up. In FY2024, the volume is expected to be close to 100, with passenger segment returning to pre-COVID levels. The speaker also mentions that the company aims to have a slightly positive real price every year, with the current environment implying a 15% aftermarket guide.

Kevin Stein and Ronald Epstein discuss the current competition in the financial world and how it may affect potential deals for their company. Kevin Stein says they have not noticed a decrease in competition and have still seen many competitive processes. When asked about future directions for the company, Stein says they are agnostic about specific products or technologies and instead look for highly engineered and proprietary products with a strong position in the market and aftermarket content. As long as they continue to find these types of products, they will continue to grow.

The company does not believe they are running out of technologies in the aerospace and defense industry, and they do not see a need to expand outside of this market. They are open to learning about other markets and technologies, but their focus remains on aerospace and defense. The company expects OE margins to slightly outgrow aftermarket margins, with a small headwind due to the dilutive impact of the Calspan acquisition. Overall, this is not expected to have a significant impact on the company's EBITDA margin guidance.

The company expects to overcome any challenges with productivity, including a decrease in EBITDA margin due to Calspan. They do not have specific information on CPI yet, but it is expected to have lower margins than TransDigm. The company does not anticipate a significant impact from AOGs on their guidance, but it may provide a slight boost due to older aircraft being used more.

The speaker, Ken Herbert, asks a question about the aftermarket and potential sources of upside for fiscal year 2024. Mike Lisman responds by stating that they will be ready to supply demand if the market grows more quickly, as seen in their conservative guidance for the previous year. He also mentions that international markets, particularly Asia Pacific, are still down and it is difficult to forecast where potential upside may come from. He suggests that there may be pent-up demand due to the slow recovery from the pandemic.

The company has not seen the expected growth in GDP and middle class income in the past four years, but believes that there is still pent-up demand for global air travel that will benefit the company and the sector in the future. They expect to get back to pre-pandemic levels by FY2024 and are not concerned about pushback from airlines on spare part pricing. They plan to continue their strategy of getting a little bit of real price ahead of inflation.

The speaker is discussing the aftermarket for airlines and whether there has been any changes in purchasing behavior due to the current state of the market. They mention that they have not seen much evidence of destocking or reduced order size from airline customers. They also mention that there have not been any noticeable differences between distribution channels and direct sales to airlines and MROs.

The speaker is revisiting the question of margins and how the mix shift towards OE and potential retirements could impact them. They mention that while retirements may create a slight tailwind, it is not a significant factor in margins. The speaker also discusses the potential for higher volumes to lead to margin expansion on the OE side. However, it is difficult to predict margins beyond FY2024.

Kevin Stein, responding to a question about the company's capital deployment plans, stated that the company is generating strong free cash flow and is able to accommodate a special dividend and the CPI acquisition while still having capacity for significant capital deployment next year. He also mentioned that the company would like to maintain a leverage range of 5x to 7x.

The speaker discusses their company's target range for M&A opportunities and their historical comfort range. They also mention the strength of their defense business and their target for EBITDA margin improvement. The speaker sees no reason for this target to change in the future. The next question is about the company's 20% growth in OE organically, which suggests they will surpass pre-COVID levels by 2024, with a significant portion of this growth coming from business jets. The speaker is then asked about their progress in the transportation sector.

Mike Lisman, a speaker, believes that the build rates for 2021 will be slightly lower than the past OEM peak in 2018. He notes that the commercial transport side is down, while the Biz Jet side is doing well. He also mentions that there is pressure on wages in the aerospace and defense industry, but it is difficult to predict if they have reached peak inflation.

The company is cautiously optimistic about future growth, but is prepared for potential challenges. In the defense market, they expect growth in fiscal 2024 despite potential budget constraints and pricing dynamics. They have taken these factors into consideration when setting their guidance for the future.

The speaker discusses the company's pricing strategy and labor market conditions. They mention successful negotiations around wages and efforts to improve automation to reduce susceptibility to labor-related issues. The speaker also clarifies that the company does not consider the rising cost of capital when determining pricing and their focus is on converting free cash at 50% of EBITDA.

The company is not factoring in the current supply chain issues into their pricing and inflationary measures. There has been no meaningful uptick in PM8 parts being ordered. The company is cautiously optimistic about the MAX original equipment ramp, but it is unclear if the recent supply chain issues will impact the ramp. The company is ready to support Boeing if they are able to get the MAX rate back to 38.

The $692 million contract at Armtec One is expected to contribute to defense growth in 2024, but the exact amount is uncertain. The ramp-up of the program will require a third shift and the construction of a new building, with the potential for some revenue upside in 2024 but more significant growth in 2025 and 2026. The forecast for the year does not include this revenue.

The speaker discusses the company's conservative approach to giving guidance and mentions that the recent acquisition of Calspan is performing well and meeting expectations, with a slight margin improvement. The speaker attributes any discrepancies to rounding and noise level deviations.

The speaker discusses the company's recent M&A activity and states that they prefer commercial businesses over defense ones due to their potential for higher returns. However, they acquired a defense business that met their criteria, including proprietary products and access to aftermarket. The speaker concludes by saying that they can only acquire businesses that are available to them.

Jaimie Stemen thanks everyone for joining the call and concludes with a closing remark. The operator then ends the call.

This summary was generated with AI and may contain some inaccuracies.