The operator welcomes participants to the TransDigm Group Incorporated Second Quarter 2024 Earnings Conference Call. The call will include a presentation by the company's President and CEO, COO, and CFO, with additional COO present. The company reminds participants that statements made during the call may be forward-looking and refers them to their latest SEC filings for more information. They will also be discussing non-GAAP financial measures. The call is then turned over to the company's President and CEO.

The speaker begins by providing an overview of their company's strategy and discussing their fiscal 2024 outlook. They highlight their unique approach to creating shareholder value through consistent strategy, a focus on aftermarket revenues, and a decentralized organizational structure. They also mention their goal of providing private equity-like returns with the liquidity of a public market. The speaker then goes on to discuss their strong second quarter results and positive market trends in the commercial aerospace industry.

The demand for new aircraft remains high, but production rates are still below pre-pandemic levels. Despite this, the company saw growth in revenues and bookings in all three market channels. The company also had strong operating cash flow and is expected to generate more cash throughout the remainder of 2024. The company is actively looking for M&A opportunities and expects to close a deal in fiscal year 2024. They are also expanding their M&A team to address potential opportunities in the next 12-18 months. The company is confident in their ability to make acquisitions that fit their portfolio.

TransDigm's capital allocation priorities remain unchanged, with a focus on reinvesting in their businesses, making accretive acquisitions, and returning capital to shareholders. They ended the quarter with a large cash balance and are closely monitoring the capital markets for potential opportunities. They have increased their sales and EBITDA guidance for fiscal 2024 based on strong second quarter results and expectations for continued performance in their primary markets. The pending acquisition of CPI's Electron Device Business is not included in this guidance.

In the fifth paragraph, the company provides an update on their fiscal 2024 revenue guidance, with the mid-point now at $7.74 billion, representing an 18% increase. They also mention updating their growth rate assumptions for the defense market, now expecting revenue growth in the mid-teens percentage range. The guidance for commercial OEM and aftermarket remains unchanged. The mid-point of their EBITDA defined guidance is now $4.045 billion, with an expected margin of 52.3%, and adjusted EPS is expected to increase by 25%. The company remains focused on their value drivers, cost structure, and operational excellence.

Mike Lisman, TransDigm Group Co-COO, discussed the company's recent performance and provided commentary on a pro forma basis compared to the prior year period. He reported a 21% increase in total commercial OEM revenue and strong bookings in the quarter, supporting the company's guidance for 20% revenue growth in fiscal 2024. He also mentioned ongoing challenges in the supply chain and labor, particularly in relation to the expected 737 MAX production rate ramp. However, he expressed optimism that the company's operating units are well-positioned to support higher production rates.

In the second quarter, total commercial aftermarket revenue increased by 8%, with strong performance in the passenger and interior submarkets offset by declines in the freight and biz jet submarkets. The decline in freight was due to the return of belly capacity, while the decline in biz jet was a result of decreased flight activity. However, the company maintains a mid-teens growth outlook for the full year, supported by strong Q2 bookings and point of sales data. It should be noted that commercial aftermarket revenue can vary on a quarterly basis.

The company's projected mid-teens percentage growth in their total commercial aftermarket takes into account the negative impact from the cargo and biz jet markets. Recent data from IATA shows that global air traffic is slowly recovering, with domestic travel surpassing pre-pandemic levels and international travel making steady improvements. In the commercial aftermarket, there is growth in the passenger and interior submarkets, while the biz jet and freight submarkets are in line with current market trends. The defense market makes up about 35% of the company's total revenue.

The company's defense market revenue grew by 21% compared to the previous year, with similar growth in both OEM and aftermarket components. However, this high growth rate is not expected to continue for the rest of the year. Defense bookings were also up significantly, supporting the revised revenue growth guidance for the full year. The company's operational performance in the second quarter was strong, despite some lumpiness in the commercial aftermarket. The management team remains committed to their operating strategy and meeting the demand for their products.

In the second quarter, the company saw a 16.1% organic growth rate, with all market channels contributing. Free cash flow for the quarter was $290 million, and for the full fiscal year, the company expects to generate $2 billion in free cash flow. The company also expects annual investments in networking capital to decrease, but it is difficult to pinpoint an exact amount for fiscal 2024. The company ended the quarter with $4.3 billion in cash and a net debt to EBITDA ratio of 4.6x. $1.4 billion of the cash is reserved for the anticipated acquisition of CPI. The company is comfortable operating in the five to seven net debt to EBITDA ratio range and will continue to seek opportunities to provide value to shareholders through its leverage strategy.

The company has a comfortable cushion in their interest expense coverage ratio and completed financing objectives to push out debt maturity dates. This reduced interest expense for fiscal 2024 and they remain 75% hedged against any rise in rates. The company has increased their sales and EBITDA guidance, as well as their EBITDA margin and adjusted EPS guidance. They have good cash liquidity and flexibility for M&A or returning cash to shareholders. The operator then opens the floor for questions.

During the earnings call, Myles Walton from Wolfe Research asked Kevin Stein about the aftermarket growth rate in the quarter and the reacceleration implied in the back half of the year. Mike Lisman responded that they had a solid bookings quarter and significantly outpaced sales, setting them up for mid-teens percentage growth for the year. He also mentioned that the freight segment was down about 15%, which was expected, and that there has been a trend towards using the belly of passenger aircraft for cargo instead of full freighters. This trend has affected their freight segment, which makes up about 15% of their commercial aftermarket bucket.

The company has experienced a decline in sales due to a shift towards belly freight and lower margin products, but they are still expecting mid-teens growth thanks to strong bookings. They have not seen any slowdown in engine component volume due to longer turnaround times in MRO shops. The defense market has historically been a low-single-digit organic grower.

Armtec has seen significant growth in their defense sales, particularly in munitions and artillery contracts. The Army plans to increase production of 155 millimeter shells, which will contribute to continued growth for a few years. The company expects mid-teens percentage growth in defense sales this year, with strength across all operating units. However, they do not anticipate the 20% growth seen in the first half of the year to continue long-term. The growth is not solely driven by one or two units, but is evenly distributed. The company expects some moderation in the long-term.

The analyst is curious about the company's cautious outlook for the second half of the year, given the recent growth in shipments and lumpiness in the first half. The company's CFO explains that they always strive to be conservative in their guidance and that the defense market demand is finally picking up, but it's difficult to predict accurately. The analyst also asks about the mix of short cycle and backlog-driven sales in the defense aftermarket. Another analyst asks about the drop in EBITDA margins in the second half compared to the second quarter, and the CFO explains that it's due to their conservative approach and the unpredictable nature of the defense market.

Kevin Stein is the CEO of a company and is discussing their financial outlook for the year. He mentions that they are comfortable with their current position and do not want to give quarterly guidance. They were pleasantly surprised by their EBITDA this quarter, but are unsure how future quarters will unfold. Their goal is to be conservative. When asked about sequential aftermarket in the second half, they do not give specific guidance but imply that Q4 will be the strongest. They are optimistic about their M&A pipeline for the future, but remain picky in the businesses they choose. They have recently announced two smaller acquisitions that are accretive.

The speaker addresses a question about the increase in SG&A expenses compared to sales, stating that a large portion of this increase is due to non-cash expenses. They then move on to discuss differences between sales through distribution channels and direct sales, noting that while they don't always correlate, sales through distribution can be a leading indicator of future orders. They also mention that distribution sales account for about 20-25% of their total sales.

The speaker discusses the current state of the commercial aftermarket and mentions that they are confident about its future. They also mention that the biz jet, helo, and freighter markets may decline, but it is hard to predict when they will turn positive again. They also mention that China and Asia are seeing the highest growth rates in the industry, but they do not have specific data for different regions.

The company is seeing improvement in the supply chain, but it is not yet back to pre-pandemic levels. There are still issues with certain items, but overall progress is being made. The company is cautious about the outlook for commercial OEM, and their forecast takes into account the potential for a Boeing rate change. The forecast is based on input from op units, not a top-down mandate. A lot of the company's content on Boeing aircraft does not go directly to Boeing.

In the paragraph, the speaker discusses the potential for a 20% growth in the company's guide for the year and the impact of potential reductions on that figure. They also mention the resilience of Airbus and the busy M&A market. In response to a question about the acceleration of total aftermarket growth in the back half, the speaker explains that it could be driven by factors such as stronger growth in biz jets and helicopters, better compares, or other unknown factors.

The company has seen strong growth in passenger bookings and expects this to continue in the second half of the year. Freight bookings have been soft, leading to a slight decline in that segment, but the company expects to see some improvement in the back half of the year. The commercial aftermarket is mainly driven by strength in passenger and interior bookings, with pricing remaining stable. The company has also made gains in productivity, reducing headcount while maintaining comparable volumes.

During a Q&A session with analysts, the CEO and CFO of an aerospace company discuss the impact of productivity projects on EBITDA and plans to add more people to the M&A team. They also address questions about the company's aftermarket performance, attributing any decline to factors such as freight costs and business jet sales. Overall, they express confidence in the company's strong aftermarket bookings and outlook for the full year.

Kevin Stein and Sheila Kahyaoglu discuss TransDigm's headcount productivity and EBITDA margins in the second half of the year. Kristine Liwag asks about TransDigm's PMA SKUs, which were previously disclosed to be around 400,000 with an average of 20,000 new SKUs per year. Kevin Stein mentions that they will provide more updates on this topic at their upcoming Investor Day and that PMAs are not a significant impact on their business.

The company sells around 500,000 part numbers across commercial and defense. They monitor this regularly and are the largest creator of PMA parts in their space. They see opportunities to replace struggling suppliers and PMA and used/serviceable materials have a small impact on their business. They are investing in their M&A team and are considering options for their excess cash, including special dividends and share buybacks. They expect volume growth in the aftermarket in 2025 and beyond.

The speaker is discussing the expected growth in commercial aftermarket volume and the company's plans for capital allocation. They expect continued growth in the aftermarket due to an increase in RPMs and takeoffs and landings. The company's main focus for investment is on automation projects to increase productivity, and they have not added back costs as they come out of COVID.

The company's operating unit teams have successfully implemented automation projects, resulting in better margins. The CEO also discussed the company's production expectations for Boeing and stated that there has been no significant impact on bookings due to the uncertainty surrounding OEM production. The call has now concluded.

The operator ends the conference call and thanks everyone for participating, giving them permission to disconnect from the call.

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