TransDigm Group Q3 2024 Earnings Call Transcript

Good morning.

Sure. I'll take that one. Yes, I mean, I think last year, we did do something in November. Currently, as we sit here today, obviously, we're coming close to closing out fiscal 2024 here. We've got few billion dollars of cash. I think we'll look to make that decision as we close out 2024 but heading into the fiscal 2025, so sometime by the end of the calendar year.

I think for the quarter, we saw some changes, but nothing significant. As you said -- as we've noted, the POS from distribution partners was very strong for the quarter. And I think the -- we had solid book-to-bill in the quarter as well as we have for the full year within commercial. And I think overall, there has -- we have not seen any, what I would say, significant change in their patterns. And think that's set us up well for Q4.

Good morning.

I really think this is just driven from the change back to where we were back in 2019. In 2019, the vast majority of freight was through belly capacity. During the COVID time period, it was a big switch over to dedicated freighters. Obviously, with the international markets recovering, it has pretty quickly and dramatically swung back to belly capacity. So for us, this really impacts us with typically more lower-margin products. Things like the ULD type products. So although it impacts us more from a revenue standpoint, the actual EBITDA impact is significantly less than the way it shows up from a revenue standpoint. But it really is just the difference of the mix of products that you see on belly passenger freight capacity versus the dedicated freighters.

Yeah. I mean we're -- as you know, and as I said, we're 75% hedged. We've done a lot of financing already this year. So we're already in a pretty good position, our next maturity dates until 2027. Because of all the recent refinancing, we've got some breakage fees that would have to pay if we wanted to try and reduce any of the rates on any of the stuff we've done recently. But then it just becomes a math exercise, right? If the rates drop substantially, we could go after some of those loans and refinance with the break fees and if the math makes sense. But obviously, as you know, we're always looking at this stuff opportunistically.

There's a slightly different probably mix of products in terms where products are shipped out. I don't know that there's any dramatic difference. Obviously, our sales include sales to the distribution partners. There's probably some level of inventory destocking that happened as well, which would have impacted us a little bit in terms of how we sell product into the distribution piece. I don't know that there was anything dramatic. From a full year basis, we're up roughly 21% in the passenger submarket and the POS is up about that same amount. So some of it is a timing piece as well in terms of by quarter for point-of-sale versus when we're selling the product. I don't know if there's anything beyond that was really significant.

I think when we started fiscal '24, we were thinking we would start to see it this year. I think at this point, we don't know. We're seeing some smaller quantities of products now. I don't think we know. And obviously, as we're putting together the 2025 numbers, we'll know better as we put together the guidance for that. But at this point, it's probably wasn't as good as we had thought it would be this year and certainly has pushed to the right. Part of the challenge is, there's just not enough aircraft in that can be pulled out of service to do an entire interior refresh, any planes that you can pull out of service. And certainly, there's some level of impact from the fact the OEMs aren't delivering enough new aircraft for them the airline to be able to pull some number of planes out of service to do that work. So that certainly has an impact on us as well.

So what I would say today is we probably see more issues than we did back in 2019. Overall, it's improved significantly over the past two years. Today, it's probably the same caster characters you would hear from others, castings and electronic components are probably the final two areas. One of the great benefits of our highly decentralized structure is, we have 50 separate teams that work closely with their specific supply chain groups and stay close to them as needed. But overall, I think we've continued to see it improve quarter-over-quarter. And when it will get back to 2019 or before levels, I don't know. But I think we continue to see good progress.

I think it's about what it was a couple of months ago. We see some good businesses possibly coming to the market next year. But between now and the end of the year, there's a good collection of stuff that we're evaluating. Again, it's difficult to predict when things meet the criteria, but we continue to work hard on it, looks the same. We're very busy. We're adding resources, as I commented on last quarter, and it continues the same and at least near-term horizon, we remain very busy on the M&A front of this year has been an unbelievable year for EBITDA acquired. This will be our second best M&A year on record. So it's been very encouraging.

Yes. We usually don't get into parsing this out. I would say year-to-date, our book-to-bill was well above 1. The business is growing and expanding. The only area in the recent quarter that maybe wasn't as strong was commercial OEM, which I think everyone would expect given what we're reading about ink [Phonetic]. But yes, defense is running very strong, but so is commercial aftermarket and commercial OEM, we have strong book-to-bill and backlog that we've amassed throughout the year. It's been a very positive year on that front.

I think it's fairly consistent from what we saw this quarter. I don't -- I was just looking at the number, and it looks pretty similar.

Again, when you have 50 operating units, I think this is somewhat varied. Part of the key you have to ship to the OEM delivery date. And so if we see that they're trying order more than we think is needed or getting inventory, but we do work to negotiate if we can, to have them push out the orders, so we don't end up kind of in this significant rise in fall level. Ultimately, the OEM is not willing to make the change, then you still have to ship the product in line with what that is. But we do work hard to deal with that when we can.

Yes, it's a good question. We looked at it, and we always aim to be conservative. We just did a pile of acquisitions. We need to get in there and look at them in more detail. And also defense is where we're seeing more of the growth. We don't make quite as much money on the defense side. So it's a mixture of conservatism in what we think the markets look like. We're certainly not predicting a difficult Q4, we're just being somewhat conservative and practical in how we look at the year unfolding.

I mean, I think it looks like our bookings. Our bookings are ahead of our shipments last quarter. I think we're in a good place. We're at mid-teens right now for the year. I think the way the bookings are unfolding, we shouldn't have any problem getting mid-teens for the year.

Yes. I don't think that it is creating another TransDigm out there in some of these other markets like helicopter accessories that we've been successful in recently and the testing certification and instrumentation area of aerospace and defense. We want to stay in aerospace and defense, this will only ever so slightly broadens our aperture. We're looking for other solid places in aerospace and defense to put capital to work. And we think these are great areas. They're not going to double the market of TransDigm, however, but provide nice additional acquisition opportunities for us. So..

I don't think so. We continue to monitor this. Obviously, used material is not a player in the aftermarket because of limited claims being scrapped out. As far as PMA goes, we monitor it constantly. The very -- the massive lion's share of our products are very complicated products that don't tend to lend themselves PMA nor do they have the volumes necessary in many of these cases to lend themselves to PMA. Like I've said, like our team has said many times and we said at our Investor Day, we continue to monitor this closely. The FAA publishes a -- all of the PMAs approved and we can follow it very closely. And to-date, haven't seen anything that causes -- that gives us concern.

Good morning.

Yeah. I think on the OEM side, we're always working on contracts with OEMs as they expire. But as we have always clearly stated the lion's share of our profits come from the aftermarket. On the OEM side, I would say we're probably similar in profitability to where we have been historically. We have seen an awful lot of inflation that we need to account for in renegotiating of contracts and we're working on that right now, but no real update to provide yet.

No. We don't -- Sarah, is shaking her head at me. There's nothing that is non-business related to that, that we can quickly identify.

Good morning.

The vast majority will always be as we would say, right down the fairway components, aftermarket content, what we've historically done, and that's what the bulk -- the absolute lion's share of everything that we're looking at for the future. The -- that's why I don't want to oversell the opening of the aperture, but it's just smart other places to put money work, but the bulk of our M&A activity will still be in the component business that you've seen us acquire around for our history.

Yeah, three new ones. It would be just over 100 basis points.

Yeah. For the full year working capital, I think we're like about $200 million full year, so we've got just another quarter to go. So maybe you throw a bit more there, but I think we're generally trying to track it as a percent of sales.

No, no, sorry. That would be excluding it.

Yes. So with our think and act like an owner, a highly decentralized structure, we like the idea that every one of our operating units is the ones that sit and have to negotiate the contract. They're the ones who have to live with them. There's really only a couple that are kind of larger, more corporate-driven, that we've obviously referred to Boeing in the past. Other than that, I mean, these are really contracts, OEM contracts that are negotiated operating unit by operating unit.

Yes. I think we continue to see that improve. I think turnover has largely, for us, gone back to where we were back in to 2019 time frame. I think hiring has also significantly improved that the vast majority of our operating units and locations. And I think we've highlighted before, typically highly skilled engineers are harder than other positions. I don't know that that's changed materially so. But think, overall, I think it's quite a bit better today than it was a couple of years ago.

Could you repeat that question? You broke up.

Yes. We don't want to get into our '25 forecast just yet. We'll cover that on the next quarter call. Our teams, as you know, we practice bottoms-up forecasting and then we roll that out to you. So our teams are going through that process right now. Obviously, a lot depends on future acquisitions and the dilution that we will see. Right now, it's 125 basis points of dilution -- yes, for 2024. That will wind down into 2025, but also depends on the acquisitions that we complete. So difficult to forecast. You agree with that, Sarah?

Yes, absolutely.

Thanks.

We don't want to get into -- and I know that's what -- there's a lot of interest in what will next year look like. And we'll offer that to you guys next quarter. We're still unpacking that ourselves as we look forward. Obviously, it's still a growing and exciting markets, we'll give you more of that flavor on our next call.

No, it's actually been pretty widespread across almost every one of our defense businesses. There's a couple that have had some larger bookings. But across when we look at it from a revenue standpoint, there isn't really any one significant program that's driven the number.

Good morning.

Well, first, we always have some number of LTA contracts that are expiring, a typical OEM contracts are up in three to five years. I think one that Kevin had referred to was a Boeing one that we're currently negotiating. That expires at the end of this year. It reflects a certain group of our businesses, not all of them, Beyond that, there's always some number every single year of OEM contracts that come up for renewal or renegotiation.

To handle a lot of those renegotiations on the -- they involve all the sites as well as some coordination from the top. So all of our sites are involved in this process.

The only thing I'd say is the engine shops, obviously, are well booked out. I think range of businesses are doing extremely well. It's really much more varied after that. I was looking at that same data as there's some significant difference between discretionary versus non and there really is not. I think it's just probably the nature of how much inventory, the OEM the F the airlines are carrying and the specific needs on that one part, but there wasn't any significant difference when I looked at the data between discretionary and not.

Good morning.

Yeah. We've booked basically, I think, certainly on a full year basis in this quarter, CAM bookings were ahead of shipments. I don't remember if that was true every quarter this year, but certainly was true this quarter and any year-to-date. And actually, from a year-to-date basis, even in our freight market, we've booked better that we have shipped out.

I think what we've said before is our aftermarket is lumpy. We -- this is a highly booked to ship business. And I don't know that there's a dramatic change in terms of what percentage books in the quarter and shifts out. It's actually remained somewhat the same. But we have no visibility to what orders are going to show up that quarter until they do. It's why we always talk about the lumpiness of the booking and shipment number.

Good morning.

I don't think there's a significant change. Our lead times in the aftermarket are relatively short, certainly in comparison to the commercial loan we have for the defense side. And so we don't get a dramatic amount of visibility. A significant portion of the orders that we shipped in Q4 will book in Q4. So although the engine shops may be booked out several quarters or years, we don't get the same level of orders based on the volume of work they're doing. We may be able to use that to give us some level of guidance or comfort on what orders we may expect, but we don't get extra visibility.

Yeah. I don't see it as something new in the marketplace in terms of HSR review or anything. I think we've always tried to be smart about our M&A portfolio. So we're not opening the aperture because of trying to get deals through, it's a desire to consume more capital on M&A if there are good aerospace and defense-type businesses, in that larger market that makes sense for us. So it's simply just taking advantage of what we're finding in the marketplace that we believe matches our very disciplined criteria. We still see a tremendous number of opportunities down the fairway in the traditional components of aerospace and defense. And there are so many parts that are on an airplane that we don't supply yet, there are still a fast number, but we can continue to look for in the marketplace. So as I look out, there's a lot of opportunity ahead of us still.

I think it's just being driven by the larger kind of data pool we see the data comes out every month from the FAA in terms of takeoffs and landings and it had picked up. I think it was at one point like 120% of 2019 levels, and it's kind of modulated now closer to like 103%, 104% or something like that. So I just think we're seeing an overall slowing in the takeoffs and landings. And so I think we generally think when you see that moderating or slowing or decreasing, it's going to translate into us into lower shipments. I think that's the reason we've kind of called it out as a watch item.

I think in general, our price point in the aftermarket is pretty low. We say a couple of thousand dollars per price points per part in the aftermarket. So it doesn't lend itself to maybe as much scrutiny at times. But we continue to operate -- deliver the highest quality, best delivery performance possible in the industry. If there's any slowdown, maybe as Joel commented on, in some of the discretionary aftermarket places. Are there any -- what airline activity is out there we've certainly read and seen comments from many of you that the airlines are trying to manage inventory closely. We haven't necessarily seen any of that translate to our business, but it continues to be a watch item. And we're always looking for any changes. Things seem relatively business as usual.

Sorry, I missed the middle part of your question, if you could just repeat it again, sorry.

No. I mean, first, we don't get great data by region for inventory and demand as it goes through distributors or through OEMs that tie here to the airlines. So I don't know if we've looked at it a few times to try to figure that out. I don't know that we're seeing anything significantly different one region to the next that I would try to call it out and note as material.

Those -- the acquisitions, Calspan, was our first foray into that. And I would say that Calspan is running at or ahead of our acquisition model. So it's a successful acquisition to-date. And we would continue to look favorably on testing, certification, instrumentation businesses. And that's why we looked at Raptor and why we will continue to look at that space. But our core is still components for -- that have aftermarket content, much like CPI, the largest acquisition we've done in the year was a traditional component business. And that will continue to be our focus. Some of these other pieces are interesting, and we spent time explaining them so that you understand how it fits into our disciplined acquisition strategy, which these other businesses clearly do.

Thanks all joining us today. This concludes the call. We appreciate your time. And have a good rest of your day. Thank you.