Hello. Welcome to TransDigm Group Incorporated. Q1 2025 Earnings Conference Call. At this time, all speakers are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Jaimie Stemen, Director of Investor Relations. You may begin.

Thank you, and welcome to TransDigm’s Fiscal 2025 First Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm’s President and Chief Executive Officer, Kevin Stein; Co-Chief Operating Officer, Joel Reiss; and Chief Financial Officer, Sarah Wynne. Also present for the call today is our Co-Chief Operating Officer, Mike Lisman. Please visit our website at transdigm.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 Investors 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 Kevin.

Good morning. Thanks for calling in today. First, I’ll start off with the usual quick overview of our strategy, a few comments about the quarter and discuss our fiscal 2025 outlook. Then Joel and Sarah will give additional color on the quarter. To reiterate, we believe we are unique in the industry in both the consistency of our strategy in 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, specifically. 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 a unique compensation system closely aligned with shareholders. Fourth, we acquire businesses that fit the strategy where we see a clear path to PE-like returns. And lastly, our capital structure and allocations are a key part of our value creation methodology. Our longstanding 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 had a strong start to our fiscal year. During the quarter, we saw a healthy growth in the revenues for both our commercial aftermarket and defense market channels. As expected, Commercial OEM revenues were modestly down this quarter compared to prior year,…

Good morning. I'll start with our typical review of results by key market category. For the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period in 2024. That is assuming we own the same mix of businesses in both periods. The market discussion includes the 2024 acquisitions in both periods. In the commercial market, which typically makes up close to 65% of our revenue, we will split our discussion into OEM and aftermarket. Our total commercial OEM revenue decreased approximately 4% in Q1 compared with the prior year period. Commercial transport OEM, this is largely Boeing and Airbus, was down 1%. Biz jet and helicopter OEM revenue was down 8%. Sequentially, total commercial OEM revenues contracted by 17% in Q1. Bookings in the quarter were solid, up both sequentially and against prior year Q1. Our commercial OEM business was impacted in the quarter by the Boeing machine of strike, which affected at 737 MAX, 767 and 777 production lines. In total, the strike and subsequent production restart lasted roughly 12 weeks, specific to TransDigm since we shipped direct as well as through sub-tiers on the affected platforms. The impact across our businesses is uneven and varied. Boeing's receiving docks were closed during the strike, while some sub-tiers continue to drive consistent demand. This will likely cause further commercial OEM impact into the balance of the year. It is too soon to determine, how much of an impact the strike will have, what is a fragile supply chain recovery, precisely predicting the ramp-up and the flow through to the supply chain is tough. However, the commercial OEM guidance we are reiterating today contains what we believe is an appropriate level of risk around the 737 MAX, 767 and 777 production build rates…

Thanks, Joel, and good morning, everyone. I'll recap the financial highlights for the first quarter and then provide some more information on the guidance. First, on organic growth and liquidity. In the first quarter, our organic growth rate was 6.6%, driven by our commercial aftermarket and defense market channels, as Kevin and Joel have just discussed. On cash and liquidity, free cash flow, which we traditionally defined as EBITDA less cash interest payments, CapEx and cash taxes was over $800 million for the quarter. This is higher than our average free cash flow conversion due to the timing of our interest and tax payments. This will normalize throughout the year as our interest and tax payments will pick up next quarter. For the full fiscal year, our free cash flow guidance is unchanged. We continue to expect to generate free cash flow of approximately $2.3 billion in fiscal 2025. Below the free cash flow line, net working capital usage was neutral for the quarter. For the full year, we expect working capital to end roughly in line with historical levels as a percentage of sales. We ended the quarter with approximately $2.5 million of cash on the balance sheet, and our net debt-to-EBITDA ratio was 5.3 times, up from 4.5 times at the end of last quarter after paying out the $75 dividend earlier in Q1. While we don't target a specific amount of cash that we like to have on hand, we have sufficient capital available through both cash on hand as well as incremental debt capacity to support all potential M&A activity in the pipeline. As a reminder, we are comfortable operating the 5% to 7% net debt-EBITDA ratio range. And while we are currently sitting on the low end of this range, our go-forward strategy, capital deployment…

Thank you. [Operator Instructions] Our first question comes from the line of Myles Walton with Wolf Research. Your line is open.

Thanks. Good morning. In the first quarter margins were expected to be down sequentially. They were, obviously, they were up sequentially. Curious if you can comment on that. And also the contract loss amortization was running pretty hot. What's causing that to go up in level? And then what's the expectation for the full year? Thanks.

Sure, Myles, this is Sarah. I'll take those. So in Q1, the higher EBITDA margin, obviously, is primarily driven from the significant mix shift we had in the quarter for commercial OEM to commercial aftermarket. And then also, we have good productivity projects, but the mix is the primary piece of that. On the lost contracts, I think you obviously saw that in the table there. These are some of those contracts that we purchased with Esterline. So they're still lumpy as they flow out. There's been no new bus nothing else added to it, but that's what you see flowing out and there was just some timing on some of that in Q1 for this quarter, for this year.

Okay. And just a quick one. The gain on sale, what was sold in the quarter?

We had a Mass business…

Sorry, on the gain on sale, yes. We sold a small piece called Mass Systems in the quarter. We bought it a few years ago, much to improve it and sold at a profit.

It came along with…

Carbon [ph].

Yeah, another acquisition, very close to the Russian border and it made mass -- communication mass for troops on the ground, and it really wasn't a business we wanted to be in.

Got it. Okay. Thank you.

Thank you. Please standby for our next question. Our next question comes from the line of Noah Poponak with Goldman Sachs. Your line is open.

Hey, good morning, everyone.

Good morning.

Maybe just staying on the margins since they were up nicely year-over-year. I guess, the guidance for the year at the midpoint would imply that, that EBITDA margin is essentially flat through the rest of the year. And I think you usually have some seasonality where it expands through the year. Your recently acquired revenue would become less recently acquired. What would drive the margin to be flat through the year?

We have to factor in the acquisitions we made are certainly averaging us down. I think that mixes us down up to 1% about -- we saw a special situation in the first quarter with the strike and OEM being down quite surprisingly from where we forecast. But I think it's -- we aim to be conservative. So hopefully, we're conservative and it might look like we are once again. But we don't try to get out over our skis too much on forecasting the future. We'll see how it unfolds.

Okay. And then, Kevin, just wanted to ask about the commercial transport aftermarket. I guess, are you surprised to have two quarters in a row of up seven seat miles are still growing a little faster than that. It seems like pricing is still nicely positive year-over-year. Can you talk about a little more about what you're seeing there? Is it just random? Or is it just the compares? I know, the compares get a decent amount easier for the rest of year?

Yes, some of it probably is comparison we're up 33% from Q1 of FY 2023 in commercial transport. We're kind of seeing some very pieces. As I talked about in the submarket, our freight continues to be a bit of a drag, although bookings were up significantly, and we think the freight's kind of bottomed out at this point. Our engine businesses we have are doing significantly better than what the kind of the overall numbers. It's just right now kind of just the kind of mix of where we're at. It was slightly better than what we had anticipated when we were putting out the initial kind of look last quarter. So for us, it's roughly in line. It's part of the lumpiness of what we expect the commercial aftermarket to be.

Okay. Thank you.

Thank you. Please standby for our next question. Our next question comes from the line of Robert Stallard with Vertical Research. Your line is open.

Thanks very much. Good morning.

Good morning.

Maybe I'll ask Noah's question in a slightly different way. You got the 1Q actuals here. But if you look at these various subcomponents of the aerospace aftermarket, where do you expect there to be improvement that would get you to that low double-digit number for the full year?

So we don't provide the specific guidance into the submarkets. Having said that, I think as we've highlighted before, freight, we think, is kind of bottomed out and expect that to continue to improve. The interim business has continued. I would think, to continue to do well. Beyond that, I think we're going to see the -- I think the way we look at it as all of the sectors continue to have the right kind of components behind it of good passenger traffic and an aging aircraft marketplace, so I think we'll continue to see the growth across all of the submarkets.

And then one for Kevin, tariffs. I was wondering what, sort of, exposure trends that I might have with regards to tariff that could be through Europe, we got the Canada and Mexico ones as well. And what plans do you put in place as a contingency? Thank you.

So we've looked at this across our business. The good news is TransDigm is a domestic manufacturer. We don't import a lot of products to manufacture. So that's to our advantage in this. We've analyzed and I guess it depends on how you answer the question where the tariff is going to be implemented. It seems like Mexico and Canada are on a delay. And China is being implemented. We don't do a lot in China any longer. We have, I think, relocated production out of China where possible and don't utilize that location a lot. So we think tariffs for us across the board will be de minimis to the corporation. Again, we're largely a domestic manufacturer.

Thanks so much.

Thank you. Please standby for our next question. Our next question comes from the line of David Strauss with Barclays. Your line is open.

Thanks. Good morning.

Good morning.

Kevin, I think you had -- on the last call, you had mentioned that Q1 would be the weakest aftermarket quarter, did the aftermarket end up coming in a little bit better than you would have thought back then?

Yeah. I think it did come in a little bit stronger, which was a pleasant surprise to us. It's always difficult to forecast this as Joel and Mike will always say aftermarket is book and ship largely. So it's difficult to forecast.

Okay. And on aftermarket volumes, can you give us -- I know you've given us at a high level where you think it is relative to 2019. Can you give us any idea by the different submarkets where you think volumes are relative to 2019?

I think as everything is above pre-pandemic levels, except for probably our interior businesses. Interiors is driven a lot by the refurb market and refurb really has not come back to where it was back in 2018, 2019. I think as we've talked about this a few times in the last year or so, we keep thinking it's going to happen that it slides a little bit to the right. The refurb programs we've seen announced are generally smaller than what was then back happening in 2018, 2019. Freight had come back in 2020 during the pandemic. 2021, I think, was a peak year until this year. So I think freight is doing well. BizJet is well above where it was pre-pandemic levels as the overall market. So I think as we look at it, really the only area that's lagging today is the interior ease and exactly when that will come back, it's real, just going to be dependent, I think, around when the refurb market comes back when you see the larger OEM -- the larger airlines refreshing their interior.

Okay. And Joel, can you remind us how much freight is of your total aftermarket?

It is about 15% or so, 15%, 20% range. It kind of varies and bounces around, but that's the general range.

That's a total or commercial?

Commercial, sorry. Yes, commercial.

Thank you very much.

Thank you. Please standby for our next question. Our next question comes from the line of Scott Mikus with Melius Research. Your line is open.

Good morning, Kevin, Joel, Sarah. Boeing has laid out a fairly aggressive production ramp post strike at least the targets day and Airbus both have a track record of not hitting their stated production rate. So I'm just curious, are your operating units receiving orders from Boeing that support a ramp to 38 per month or higher in the back half of this year on the 737?

So we're typically not getting orders out for what would be the back end of the year yet or lead times are typically shorter than that. We're certainly optimistic that Boeing is going to get back up to the rate of 38%. Today, we're probably seeing about half of that we're optimistic that, as I said, the number will move up during the year, and we're prepared to do that. We'll add people as necessary. Yes, and since we're hopeful they can hit their numbers.

Okay. And then you mentioned the M&A pipeline remains active. But in the quarter, you bought back $316 million of stock. So just curious, are valuations for acquisition targets just too elevated relative to the quality of the assets? Or do you think that your stock is trading at a very attractive price?

Yes. We're always looking to opportunistically return capital to our shareholders. There was a lot of turmoil in the market, stock fell. We took it opportunistically to buy back some shares. That's really all there is to it. It doesn't say anything about the M&A market, and it wasn't a lot of cash that we used. It was just an opportunity to quickly return cash -- or capital to the shareholders.

Thanks for the questions.

Thank you. Our next question comes from the line of Ken Herbert with RBC Capital Markets. Your line is open.

Hi. Good morning.

Good morning.

Can you remind us what percent of aftermarket engine represents? And maybe how much over the up nine was the engine in the first quarter?

So it bounces around for us. It's not immaterial. It was up significantly more than the 9%.

Okay. And obviously, as we think about that, we think about Champion Jason's business, but is it fair to say that your engine exposure is market weighted? Or are you disproportionately have disproportionately higher content on any engine types?

No, we think we're market weighted across the board.

Great. And are you seeing any incremental pressure in -- on pricing across any of the submarkets within the aftermarket relative to maybe where you were three months ago?

I don't think hearing anything specific different from pricing. Our typical approach to pricing is unchanged. We're basically looking to cover our inflationary costs and then a little bit more. And I don't know that we've seen anything significantly different than that.

Perfect. Thanks, Joel.

Yeah. Thank you.

Please standby for our next question. Our next question comes from the line of Scott Deuschle with Deutsche Bank. Your line is open.

Hey good morning.

Good morning.

Kevin, did the OEM contract renegotiation you've spoken about in the recent past conclude, or is that contract still being negotiated?

Yes. We successfully closed out the contract Patrick Murphy, one of our EVP has led the negotiation and we were able to close it out. I think was in December.

Okay. And were there any retroactive developments to that negotiation that would have helped OE pricing in the quarter just concluded?

No, the contract, it was expiring at the end of December. So the new contracts started January 1st. So there was no retroactive aspect to it.

Okay. And then just to clarify, is the duration of the new contract the same as the duration of the contract that it's replacing? Or did you move to something shorter term in nature?

Yeah, it was the same.

Okay. Thank you.

Thank you. Please standby for our next question. Our next question comes from the line of Sheila with Jefferies. Your line is open.

Hey, good morning guys. Maybe just on that last question, Joel. I think it was you or Kevin. If we -- just how do we think about profitability overall, just the flattening out? Is it OE coming back up from down four to mid-single digits? And does the new contract have any changes in your profitability profile?

Yeah. I think the contract and OEM business is already in our forecast. So I don't -- there's not going to be any incremental improvements or anything. Anything else to share on that, Joel.

No, that's right.

Okay. And then maybe if I could ask one on the aftermarket. Interiors, I think that's the only sub-segment below 2019 levels. How can we think about what's driving that when you expect that to improve? Does it come in a wave, or should we see it just a gradual improvement?

I'm not sure that I could give you any great extra insight really it’s what it will be is when you see the airlines start announcing a refurb program. I mean, it's not the refurb business is zero. It's well-below the kind of typical levels. There are several programs we're hearing about. The question will be is what will drive the numbers of multiple programs for us at the same time as opposed to this is sort of a slow wave of what that looks like. But the lead times will be long, I'm sure we'll be -- we'll have seen that coming, and we'll be able to provide some color as that's coming back. I don't know that that today, we see it's within the next quarter or two.

I think it's also difficult to take planes out of service to refurbish interiors when you don't have enough claim deliveries from the OEMs. So I think all these things were complicated. Yeah, that's sort of a complicated relationship.

Sure. Make sense. Thank you.

Thank you. Please standby for our next question. Our next question comes from the line of Seth Seifman with JPMorgan. Your line is open.

Hey, thanks very much, and good morning everyone. Just maybe go back a little bit to the aftermarket point we touched on a little earlier, things being a little stronger in the first half. In the first quarter, I think you talked about the first quarter being the lowest of the year and the comps particularly in the fourth quarter start to get easier. Does anything change in your view of the rest of year? Or should we still think that there's no reason why we wouldn't see growth below, there's no reason we should see growth below what we saw in the first quarter and growth should ascend from here?

I don't think we have anything to kind of change from the guidance we provided to you before. But what we say all the time is the aftermarket is lumpy. I mean the vast majority of our orders book and ship in the same quarter. So we try to look at what the trends are, and there's nothing in the market dynamics today that make us think there's a significant change from what we're seeing today.

Okay. Okay. And then I guess if you were ever to make an acquisition from one of your customers, would there ever be an opportunity to pay for that acquisition, pay for a portion of that acquisition in the form of pricing rather than cash?

Certainly hasn't ever come up four. We're opportunistic in everything we do, but that's not our usual process.

Got it. Thank you.

Thank you. Our next question comes from the line of Ron Epstein with Bank of America. Your line is open.

Hello, everyone. This is Mariana on for Ron today. So in the prepared remarks, you talked about the M&A pipeline and how you have a mix of like Smith cap names and also some large opportunities. Like could you mind discussing, what is the mix of like our space and defense companies versus other industrials? And where are you really seeing opportunities in M&A?

This is all aerospace and defense. We are looking outside of aerospace and defense. So small, medium and large opportunities come along, a lot less on the large side. If something is in the market on the aerospace and defense side, we're going to look at it quite seriously. And that's all I can probably comment on the M&A pipeline there. It's very busy, much like last year. There's probably even more EBITDA in the pipeline this year than last year, but you just can't predict how things are going to close.

Thank you. And then after the OE slow down this quarter, and with your more like aggressive or not aggressive, but like you have a good view and outlook for the year on OE, what are your channel checks saying you about like inventories in the supply chain? Like how do you address that uncertainty about like item-by-item inventories in the supply chain?

We don't get -- we've never had much visibility to inventory in the supply chain. The only thing we see is our distribution partners on the aftermarket side. The OEM partners, they don't give us much inventory visibility. So we're simply guessing, listening to people, getting feedback. It does seem like there's been some inventory buildup over time that is working its way through in certain pieces, and we're just going to have to see how this plays out. We don't have any additional visibility except the orders that we received from our customers. We fulfill them quickly. We're a reliable supplier, high quality, high delivery accuracy. So our customers know they can count on us.

Great. Thank you very much

Thank you. Please stand-by for our next question. Our next question comes from the line of Jason Gursky with Citi. Your line is open.

Hi, good morning, everybody.

Good morning.

Kevin and others, just a quick question on the refurbishment work to put a finer point on this. Can you -- I don't want to put words in your mouth, but I would maybe want to get you to comment on the cycle there. So it does seem like it is going to be tied to airlines getting more consistent supply from their OEM partners, so that they can do some fleet planning and maybe take some aircraft out of service to go do this refurbishment work. I just want to confirm that, that's what you're thinking. And then how big is this for you all? Is this going to be a meaningful contributor to your aftermarket growth once the cycle actually picks up?

So I think yes, to answer your question, the beginning part, certainly, the airline's ability to take planes out of service is a key aspect to it, and you can't pull cleanout to do the work as you'd rather have it flying. I think it's -- you'll see the interior percentage jump up significantly. But in terms of total for our business, don't this is a significant piece to the total. It's just the one piece remaining of our commercial aftermarket that just kind of continues to lag below the 2019 levels.

Okay. Got it. And then, look, I know you're saying that you don't track inventory levels with a great level of detail and specificity, but your comment about you're shipping into Boeing at production rates that are half where they are today. They talk about the need to wind down inventory. They're carrying too much given the fact that they ingested so much last year and weren't sitting out nearly as much as they were ingesting. You just went through a big contract negotiation with them. I'm wondering if you just can't give us a little bit more insight on what you're hearing from your major customers on inventory unwinds, because they've been pretty public about it. And how long that might last and impact you all?

I would just start to answer. I mean, this is why our commercial OEM forecast was lower at mid single digits than maybe some would have expected as this has all led to this somewhat confusion in the supply chain. I don't think we're getting as directed clear input from some of the OEM suppliers as some in the market would think there's not a lot of clear communication. They're working through a lot of challenges right now.

Yes. What I was going to add is, our operating units at a detailed level, roughly know how many units of each product they have that goes on a plane. And so they work to build up a bottoms-up forecast based on what we believe the OEM build rate will be and so they're trying to take into account if they've been over shipping last year. They were over shipping in this quarter, what it looks like over the balance of the year. So we don't have a top-down piece, but each of our units works to pull that together, and that's what ultimately drove our guidance for the balance of the year, as Kevin said.

Okay. Fair enough. Thanks guys.

Thank you. Ladies and gentlemen, due to the interest of time, our final question will come from the line of Gautam Khanna with TD Cowen. Your line is open.

Yes. Thanks. Good morning guys.

Good morning.

I was wondering if you could comment as you have in prior quarters about what you're seeing in the distribution channel into the aftermarket point-of-sale data relative to what you guys were experiencing on the manufacturing side?

It's running ahead. Joel, you want to...

Yeah. It's currently running ahead. It's a different mix. We looked at the mix of TransDigm commercial aftermarket versus the mix of our distribution. They're not quite the same as we look at it into each of the submarkets; it's roughly in line with what we would expect it to be. But it is in total running above what our overall commercial market is. As I said in the opening remarks, it's running into the double-digits versus our 9%.

Got you. And that's a couple of quarters now, right, where it's been running ahead. And that's more of a leading indicator.

Several quarters. So we think of it as a -- it should be a good leading indicator. It's where we have visibility on inventory and POS sales granular. So yes, it should be a good indicator of future.

Great. And then my last one, just on the new administration and how is TransDigm kind of working constructively with them and your thoughts on DOGE, and I'll just leave it open ended, but...

That's a great question. I anticipated this earlier, I think, in the Q&A. DOGE is -- it's a great opportunity for the US to improve and streamline what they're doing, specifically with government DoD, DLA procurement. We think this is a really good thing. We've been engaging with the DoD over the past several years and have suggested a number of improved forecasting inventory management and improved buying practices that would save the government money and save us time and energy and production. So we invite all inquiry and assistance. I've met with some of the DOGE folks in D.C. It's important to remember that TransDigm is a very small supplier. I think we're 0.3% of the DLA budgets and this amounts to less than 1% or somewhere around 1% of our revenue, are these types of products that would fall under a concern of DOGE. We see this only as an opportunity for TransDigm, the government, the DoD to improve what we're doing together. So we warrant any and all inquiries and work together to come up with a stronger solution in the future. So that's really where we're at. It's a small part of our business is supplying spare parts to the government. The bulk of what we do is either falls under Tenet today, which is fully cost disclosed? Or is commercial of the type or competitive that's bulk of our business falls under those three categories. So we invite the work that we need to do together to improve how we work together with the government. So that's, I guess, our answer.

Thank you, guys.

Thank you. I would now like to turn the call back to Jamie for closing remarks.

Thank you all for joining us today. This concludes today's call. We appreciate your time. Have a good rest of your day.

That concludes today's conference. Thank you for your participation. You may now disconnect.