The operator introduces the Third Quarter 2024 TransDigm Group Inc. Earnings Conference Call and hands it over to the Director of Investor Relations. The company reminds listeners that statements made during the call may be forward-looking and refers them to the company's latest filings with the SEC. They also mention non-GAAP financial measures that will be discussed. The President and CEO then gives a brief overview of the company's strategy and discusses the quarter and fiscal '24 outlook, followed by additional commentary from the Co-Chief Operating Officer and Chief Financial Officer.

In summary, the company believes they are unique in their consistent strategy and focus on creating intrinsic shareholder value. They generate most of their sales from proprietary products and have a strong aftermarket presence. They follow a proven operating methodology, have a decentralized structure, and acquire businesses that fit their strategy. Their goal is to provide shareholders with private equity-like returns while maintaining liquidity. They had a strong quarter and raised their guidance for the year, as the commercial aerospace market continues to recover and demand for travel and new aircraft remains high. However, production rates for aircraft are still below pre-pandemic levels.

In the third quarter, the company saw growth in all three major market channels and a strong EBITDA margin. They also had strong cash flow and completed three acquisitions, deploying over $2.2 billion in capital. These acquisitions align with the company's long-term strategy and are expected to contribute significantly to revenue and margins.

TransDigm is actively seeking M&A opportunities and has a growing pipeline of potential targets. Their capital allocation priorities remain the same, with a focus on reinvesting in their businesses, making disciplined M&A, and returning capital to shareholders. They have a strong cash balance and are closely monitoring the capital markets for opportunities. They have increased their sales and EBITDA guidance for fiscal 2024, taking into account recent acquisitions.

The guidance for fiscal year 2024 assumes no additional acquisitions or divestitures and is based on current expectations for continued performance in primary commercial end markets. The midpoint of revenue guidance is $7.9 billion, with an expected growth rate of high teens for the defense market and around 20% for commercial OEM. EBITDA is expected to be $4.13 billion with a margin of 52.3%, and adjusted EPS is anticipated to be $33.02, a 28% increase over the previous year. The company is confident in their position for the remainder of fiscal year 2024.

In the sixth paragraph of the article, the speaker discusses the company's performance in the aerospace and capital markets and their plans for the future. They are pleased with their performance in the commercial aerospace industry and remain focused on their value drivers, cost structure, and operational excellence. The speaker then hands it over to another speaker who provides a review of their recent performance and discusses their revenue and bookings in the commercial market. They also mention challenges with supply chain and labor, as well as potential impacts from the expected 737 MAX production rate ramp.

The commercial OEM guidance given today includes a risk around the MAX production build rate for the rest of the fiscal year. The production rate ramp-up is expected to be slower than previously expected. In the commercial aftermarket business, there was an 11% increase in total revenue compared to the previous year. The passenger submarket had the highest growth at 16%, while the interior and business jet submarkets also saw increases. However, the freight submarket saw a decline of 8%. Business jet remains a concern due to temporary flight activity.

The decline in freight was due to the return of belly capacity. However, the sequential freight was up by 7%. The outlook for commercial aftermarket growth remains unchanged and strong Q3 bookings support this. The commercial aftermarket can be unpredictable on a quarterly basis. The global air traffic has surpassed pre-pandemic levels and is expected to continue to grow. Domestic air travel, especially in China, has seen significant growth compared to 2019 levels. In the US, domestic air travel in June was up by 6% from 2019 levels.

In June, international travel was slightly below pre-pandemic levels, an improvement from a year ago. The commercial aftermarket is experiencing strong growth in passenger and interior submarkets, while the freight submarket remains light. The defense market, which makes up about 35% of total revenue, saw a 13% increase in revenue compared to the previous year. Both the OEM and aftermarket components of the defense market saw similar rates of growth, with aftermarket slightly ahead. Defense bookings were also strong, supporting the revised guidance for the full year. The company expects high teens percent growth in the defense market for the year, reflecting stronger-than-expected sales and bookings in Q3. However, forecasting defense sales and bookings on a quarterly basis is difficult.

The company provides an update on their recent acquisitions of SEI and the CPI Electron Device Business, stating that the integration is progressing well under the leadership of an experienced Executive Vice President. They are pleased with the acquisitions thus far and have split the CPI Electron Device Business into two operating units. The company's operational performance in the third quarter of fiscal 2024 was strong, with a 14.6% organic growth rate and strong liquidity. They expect to generate over $2 billion in free cash flow for the full fiscal year.

The company's free cash flow decreased by $84 million in the quarter, and they expect their annual net working capital investment to remain consistent with historical levels. They currently have $3.4 billion in cash on hand and a net debt-to-EBITDA ratio of 4.7x. They recently made two acquisitions, one in June and one in July, which used a significant portion of their cash. They are comfortable operating in a 5 to 7x net debt-to-EBITDA ratio range and have a comfortable EBITDA to interest expense coverage ratio. They have also repriced a portion of their term loan debt and have a manageable debt maturity schedule.

The company uses a combination of fixed rate notes, interest rate caps, swaps, and collars to protect against rising rates. They have increased their sales and EBITDA guidance due to a strong quarter and recent acquisitions. They will make a capital allocation decision at the end of fiscal year 2024, taking into consideration potential changes in the administration and FTC. They currently have a few billion dollars in cash and will make the decision by the end of the calendar year.

The airlines have been experiencing overcapacity in the passenger market, but Boeing and Airbus are struggling to increase their deliveries. There has been a strong demand for aftermarket products from distributors, but there hasn't been a significant change in order flow from airlines. The freight aftermarket has been affected by the shift back to belly capacity for freight, resulting in lower-margin products and a decrease in revenue but not a significant impact on EBITDA.

The speaker explains that the difference in products seen on belly passenger freight capacity versus dedicated freighters is the main reason for the difference in growth rates. Another speaker asks about opportunities for restructuring debt and reducing interest costs, to which the first speaker responds that they are already in a good position due to recent refinancing but will continue to assess opportunities. A question is then asked about the discrepancy between strong growth in point-of-sale aftermarket and passenger growth, and the speaker explains that there may be a mix of different products and inventory destocking that impacted sales.

The company has seen a 21% increase in the passenger submarket and point-of-sale, but some of it is due to timing. They were expecting to see more retrofit and upgrade sales in the interiors segment, but it has been pushed back due to a lack of available aircraft. They are keeping an eye on potential supply chain shortages and are seeing more issues now than in 2019.

The speaker discusses the improvement of the company's supply chain over the past two years, particularly in the areas of castings and electronic components. They credit their decentralized structure and close relationships with supply chain groups for this progress. When asked about the M&A environment, they state that it is about the same as a few months ago, with some potential opportunities for next year. They also mention that this year has been a successful one for EBITDA acquired. When asked about book-to-bill, the speaker declines to provide specific numbers but mentions that both commercial and defense sectors have been doing well.

The speaker states that the company's book-to-bill ratio is above 1 and the business is growing and expanding. The only area that was not as strong was commercial OEM, but defense, commercial aftermarket, and commercial OEM all have strong book-to-bill and backlog. The speaker also mentions that the aftermarket comp in the fourth quarter is similar to the current quarter and that the company works to negotiate with OEMs to avoid inventory buildup. The next question asks about OEM inventories and the speaker states that it varies among the 50 operating units, but they work to ship products in line with OEM delivery dates. The next question is about whether some business units are seeing OEM inventories building up for certain platforms, and the speaker states that they work to negotiate with OEMs to push out orders if necessary. The next question is about whether the aftermarket comp in the fourth quarter gets easier on the freight side, and the speaker states that it is consistent with the current quarter. The final question is about whether the company sees OEM inventories building up for platforms like the 87 or 37, and the speaker states that it varies among the 50 operating units and that they work to negotiate with OEMs to avoid inventory buildup.

David Strauss asks about the absolute and adjusted EBITDA guidance for the full year, and Kevin Stein explains that they are being conservative due to recent acquisitions and a mix of lower profit margins in the defense sector. He also mentions that they are on track to hit their mid-teens forecast for the aftermarket and have a strong pipeline of M&A opportunities in the A&D sector.

TransDigm is not looking to expand outside of the aerospace and defense industry, but they are interested in areas within the industry where they can put their capital to work. They believe that these areas, such as helicopter accessories and testing and instrumentation, will provide good acquisition opportunities, but will not significantly increase their market share. When asked about the impact of PMA players in the industry, TransDigm stated that they continue to monitor the situation closely, but do not see any cause for concern at this time. They believe that their product portfolio is defensible against PMA players, as the majority of their products are complex and not suitable for PMA.

Myles Walton asked TransDigm's Kevin Stein about their OEM margins and the impact of OEM pricing negotiations on their profitability. Stein stated that they are similar to historical levels and are working on renegotiating contracts due to inflation. He also clarified that there were no nonbusiness-related factors in their EBITDA raise. Noah Poponak asked about the potential for TransDigm to expand their M&A focus beyond their traditional wheelhouse of aftermarket-rich, sole and dual source, proprietary deals. Stein did not provide a clear answer, but it seems that the majority of their future acquisitions will still fall into their typical category.

Kevin Stein discusses the majority of the company's future M&A activity, stating that it will still be focused on the component business. Sarah Wynne provides a number for the acquisition margin dilution in the fourth quarter and mentions that the company is tracking working capital as a percent of sales. Jason Gursky asks about the negotiations with OEM customers and whether they are done individually or as a whole.

The speaker asks about the timing and shape of margin expansion for the company, which was discussed at the Investor Day. The speaker also asks about the hiring trends and the impact of M&A on profitability. The response includes information about the decentralized structure of the company and the negotiation of contracts at the operating unit level. The speaker also notes that turnover and hiring have improved, but hiring highly skilled engineers can still be challenging. The dilution from M&A is expected to be around 100 bps next year, but profitability may be impacted by mix.

The speaker asks a question about the potential dilution of EBITDA margin in fiscal year '25 due to M&A activity. The speaker responds by stating that the company does not want to disclose their forecast for that year yet and that it will depend on future acquisitions. The next question asks about the sustainability of double-digit growth in the commercial aftermarket in fiscal year '25, to which the speaker responds that they will provide more information on the next call. The questioner also asks about specific programs driving growth in the defense aftermarket, to which the speaker responds that it has been widespread across all defense businesses with a few larger bookings.

The speaker discusses the lack of a significant program driving the company's revenue and mentions upcoming renegotiations of OEM contracts. They clarify that these contracts typically expire every 3-5 years and involve all of the company's sites. In regards to the commercial aero aftermarket, they note that engine businesses are performing well, but there is not a significant difference between discretionary and non-discretionary products.

The speaker discusses the strong aftermarket bookings and growth rates for the company, stating that bookings were ahead of shipments in the current quarter and year-to-date. They also mention that aftermarket is a lumpy business and they have no visibility into orders until they show up. The speaker also notes that capacity is tight in the marketplace and airlines are not receiving new planes.

The speaker is discussing the visibility and potential challenges in the aftermarket and M&A market for the company. They do not believe there has been a significant change in visibility, and their lead times are relatively short. They also talk about their approach to M&A and how they are always looking for good aerospace and defense businesses that match their criteria.

The speaker believes that there are still many opportunities in the traditional aerospace and defense industries, as there are many components that they do not yet supply. The biz jet market is a watch item, as there has been a slowdown in takeoffs and landings, which could result in lower shipments. The growing global airline traffic may be facing some pricing pressure, which could lead to airlines tightening their belts and potentially impacting discretionary spending. The speaker is unsure of the impact on their aftermarket, as it is unclear how much of their business is considered discretionary versus mandatory.

The company's aftermarket price points are relatively low and don't usually attract much scrutiny from airlines. They continue to deliver high quality and have not seen any slowdown in business due to airlines managing inventory. There has been no change in the company's geographic mix of sales in the aftermarket due to diverging capacity trends globally.

During the Q&A session, the speaker discusses the lack of data on inventory and demand by region and states that there is no significant difference between regions. The speaker also mentions the success of recent acquisitions in the testing equipment and services space and states that the company will continue to focus on traditional component businesses for aftermarket content. The conference call is then concluded.

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