TDG - Earnings call transcript Q2 2019 | TransDigm Group Incorporated

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Operator

Good day, ladies and gentlemen, and welcome to the Q2 TransDigm Group Inc. Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference Liza Sabol, Ma'am, you may begin.

Liza Sabol

Thank you, and welcome to TransDigm's Fiscal 2019 Second Quarter Earnings Conference Call. TransDigm's Kevin Nick Officer, Stein; are Chief President Mike morning Officer, Executive and this Executive Howley; Chairman, and Lisman. Presenting Chief Financial

that call, begin, made statements. in we we like forward-looking remind Before would fact are during are which you this not historical to statements

to differ in the the reconciliation latest of information adjusted further GAAP those like forward-looking of measures. EBITDA to the net measures. I the are earnings a see We'd refer the financial income company's call to net statements, with most measures during Nick. factors share, those the expressed now adjusted also and for cause and actual Defined, the that As be please As you EBITDA to non-GAAP For which from could income all per or a over filings course SEC. presentation earnings we and directly important adjusted the earnings call, release turn specifically results related comparable of the adjusted referring about that materially Defined, per footnotes advise EBITDA, implied in Please to tables EBITDA, will to of and will share

Nick Howley

quarter consistency industry, source will outlook model Kevin why items. business the proprietary quarters create are reiterate, its believe Mike through intrinsic I'll for by second we generated sales thanks and in. of its aerospace this. products in reasons and the comments believe shareholder consistent year-to-date, of three and our value To other then and for XXXX. To XX% on XXXX, About our Good summarize, ability morning and our unique sole – are the with of some Today, cycle. the fiscal year we provide start phases quick as all calling stability some to over usual, our comes few and which is relative off products typically provider. from in we in and strategy EBITDA deal Esterline believe comments few which of aftermarket on update and the sales summary for strategy. the downturns. on fiscal business review from come margins a the net revenues, performance Most the A the both our we our of higher have

is like consistent Our market. we longstanding our public liquidity as own with businesses our To a have specifically value goal and well as private aftermarket of do to of we long-term this give on strategies to significant focused shareholders equity careful of stay the allocation follow operate We returns aerospace details creation capital. content. both the with

a utilize value we methodology. based Second, operating well-proven simple

margins revenues, and ahead with were of well especially EBITDA year. continue TransDigm all major the Incoming shipments orders Adjusted commercial up As performance segments, and continues another of EBITDA good market all across XXXX over well strong and year. the we dollars year-to-date and balance where shareholders. organization capital are with structure have and we and capital structure Fourth, fit very that part with clear see methodology. of is return creation that of lastly, value to path a allocation our key a our very Third, PE like strategy based boding the quarter year prior aftermarket closely we nicely Fiscal the quarter, in compensation our system our decentralized strong, businesses acquire and aligned unique our for

the full-year contribution with base in will the XX of have as raise base guidance business near-term expand anticipated maintain As our now capital revised order flexibility. The year and acquisition an an XXXX of major all secured financial Esterline year from for to outlook. see, market you decision guidance. substantial TransDigm well $X weeks billion EBITDA in revenue quarter guidance increased in our is and EPS can completed senior Kevin as by to fiscal we notes includes on increase for markets. increase the impacted

acquisitions assuming or activity the is at no expect fiscal we strong cash liquidity end capital year. Our $X to market the of additional billion have of about

We room under additional also million revolver have over of X and to unused expect agreement. our some credit

to continue actively and We seek evaluate opportunities. M&A

transaction, We a of still M&A we possibilities. small in I mostly and this predict mid-March. A comments cannot for have midsize and we pipeline few steadily or business. as said open possible closings transaction before, the at still Again, comment on about we're decent are I but Esterline closed working

existed public paid As year was I XX billion this million the $X we billion EBITDA consensus We times based information fiscal XXXX anticipated. time, purchase for that multiple at about think you XXX fiscal of EBITDA estimate $X as EBITDA. consensus the about know, of the revenue, on year about roughly in XXXX

aftermarket As quarters we generally defense has revenue core somewhere think been We more the before, appears we misunderstood and make positions core source of The excess percent XX% of Esterline around a as three content or estimate similar its has of said the the makeup aerospace TransDigm. company, business. a businesses also of significant. revenue. in Its business core proprietary core and revenues of sole

about multiple look and or discussed more with half equity. the assume return value half then debt we a business in as get we Esterline to equity to on model know the acquisition, arbitrage. that and significant assumes businesses years an generally of LBO you We our and five we any without we As use sell finance about XX%

years. we know five ever rarely, if you after practical it’s a them As sell matter,

If this X% a to low-to-mid-XX you the do margin about EBITDA expansion. an solves Esterline, on or in the target math margin range

happen on first all working still year. won't timing but this are the in out likely it We the

more Esterline little detail. summary, a reason that XX thought. expectation for that it better purchase far good. and to see about think meet cannot Kevin least the days some our We so integration we these we at do than the appears perhaps we businesses time we owned at better. we see as discuss now And In and well have opportunity is in over originally may no indications will

exploring $X purchase our assets currently well whether of the we recover price our certain proceed pretax Esterline on view fit us a a actively with decide of We something the of focus. prices. actual billion to don't sale basis. when get could We'll These that are better around

We allocation of full alternatives. have flexibility range the the capital to consider

respect other at the will mentioned last XXXX capital of and decisions $XX request defer to on We the quarter the market And until million with approximate earning capital in in a environment business that It any allocation lastly reiterate XXXX substantially in publicly any either late assess and the or quarter IG third and as assertions fourth last the time. refund. with to of fiscal for form voluntary wrongdoing report that I discussed our call was in quarter. we posted same overall no

Kevin purpose the this, with have asked and legislative is along DoD to As discuss and I Reform been possible a in some at to regulatory the testify mid-May. and individuals, Oversight follow-up other report on The House to or Committee pricing changes.

who Now let me and guidance. as this performance full over both XXXX will Kevin year the well discuss hand to as year-to-date QX

Kevin Stein

on Briefly the Thanks I for Nick. the provide Today quarter, and key finally an Esterline. update of results year discuss give fiscal by structure the revised will markets, our of integration org update guidance. profitability review business the our then

quarter. quarter including quarter the first our the details over of we revenues EBITDA were at year Defined operations, up of organic revenue. up As versus EBITDA XX% on nicely As the in XX% you've with prior were half Defined year prior GAAP last As a more QX XX% strong and for year had the specifically was second financials average will growth, above seen, QX revenue up over provide margins Mike and

by market revenues will Now category. our we review

the same remainder call, mix year own note For XXXX. Please will of market periods. I the compared a provide is of assuming That excludes basis the businesses prior in the this analysis pro color commentary Esterline. of on forma we to both period

we revenues We market acquisition will segmentation XX% QX full the revenue, market, growth. our with XX% from fiscal XXXX, of of from validated discussion up our have data the our close will low-to-mid approximately commercial shipping we which our to market expected to as into aftermarket. growth note mid-single-digits of OEM our once growth groundings our a we we due Esterline compared commercial guidance XX% split and continued this increased in are In different impact QX increased In OEM guidance XXX guidance Please of and revenue the digit and single makes revenue have our year-to-date process. strength begin previous when increasing to commercial includes year our OEM year include market, Max to booking OEM analysis delays.

and have We this should not grew issues by and to impact and global over our mile a financials on on potential nice commercial the and versus aircraft, passenger backdrop slower comps slowdown the confidence year. in Bookings In was freight the half commercial year-to-date in retirements improved the commercial continue of of us to revenue year provide conclude may aftermarket impact the the A fundamentals, future. strong growth by business analysis possibly transport of tough second and the Total commercial in transport discussion. submarket. older provide commercial coupled passenger revenues market in upside to our our fiscal have Max year in with material growth year-to-date, performance offset aftermarket prior of our done aftermarket a quarter, the the quarter X% dynamics. X% underlying provide continued revenue segue just a an

mid-to-high grow to single from our growth. our increasing guidance commercial are high digit We previous of guidance single-digits aftermarket

let The defense speak OEM bookings market we defense reported approximately which over our me is both into defense was seeing revenues quarter. that are Now year prior now which we revenue. up about sales. market, just of over aftermarket the our materialize strong Last includes total XX% year and XX%

expecting first full fiscal temper guidance defense revenue slowing single-digits high year-to-date previous year, growth, we our bookings. mid-to-high growth. to to from the our this higher-than-expected the year in guidance following of to are exceptionally growth defense of increasing revenue our Due second grow are we high However, growth sales gradually half single-digit half and sales

and XXXX. to Extant Esterline, quarter drivers. This quarter. XX find acquisitions X.X $XX As EBITDA of in us, under going Defined Kirkhill, and XX.X% fiscal I'm our versus margin profitability, the points excluding quarter it that X and just important Margin of of for points Esterline acquisition revenues, million value or XXXX is the As includes improvement improved margin improvement to over this the was QX in and contribution to from EBITDA Esterline to $XXX to our was approximately core acquisitions, XX% continue indicates operating about primarily EBITDA year Defined. Skandia. includes days drive performance up about base businesses ownership about XX% margin for progress within of XXXX year always fiscal of other the over QX dilution opportunities this the QX, Defined Moving talk As million prior in for our of

our of continue pursuit relentless value We generation.

XXXX to guidance. now Turning

We around X.X base billion, is an fiscal are ownership is at reflects balance of guidance this increasing base XXXX of of million our remainder margin business of for is excluding which business, an Esterline Esterline plus rate growth year our expected months $X.XX billion, margin the fiscal $X.XX guidance fiscal the midpoint half an TransDigm’s attributed year. about sales increase assumptions to expected revised incorporate the of now strong base year of to the Esterline, The XXXX with XX%. reflect is just As with for related of revenue to is inclusion The channel billion, ownership. now first the XX% guidance to EBITDA full and based we About increase EBITDA results midpoint of of revenue, on our discussed the Defined of our Esterline and be performance year increase $XXX this of business X.X to market for XX%. revenue guidance a months $X.XX around

are EPS midpoint of discuss share. shortly. We guidance in will $X.XX slightly $XX.XX more to increasing our by Mike per detail adjusted the

business. integration, speak TransDigm’s Power served our he’s briefly I and acquisition of been Jorge on wanted and Chief all Jorge responsible of to base before for with the recently Now over Officer now promoted XX TransDigm update for segment. COO you structure. most Esterline our I Operating to about has our TransDigm organization been as Valladares, who operations the Control has years

moving days our identified to have Esterline model. the integration Now been on differences date, TransDigm in progressing integration we XX to has ownership. no to Esterline To material plan the seen first acquisition expectations, of opportunity and over

calendar been carved executives, As group you in integration. engaged former has they TransDigm controllers day-to-day have full TransDigm team both of we Washington experienced this been responsibilities. corporate EVPs by have so end. know, The office or no This complete an time year in and closed. They Bellevue, should have out little

to assigned Bellevue our structure we aligned a in assigned the controllers phasing provide with eliminated TransDigm. disruptions financial have been the workforce the been of operating Each are to We support. organization units general, reporting group minimize have EVP. to TransDigm platform units and operating reductions And former Esterline risks. and In TransDigm to has these

process are the concept generation may owner opportunities going have We generation and value days. the acting and operating of the like units. the operating these no reviewing continue of now of units of President surprises where supports concepts. an we been seen staff through value the senior thinking in with press execution exist. determining our and early to the Again, This Culturally,

So integration. the far for good so

sell. not due beyond fiscal we we did to guidance, Although, in at we keep around our businesses or Esterline providing guidance are uncertainty what fiscal include year time, this XXXX this year may

the not sale guidance summary, we to Mike assets have look were our strategic to fiscal it our acquired With are As I Officer, of over are integration Financial reporting remain process to and exploring Esterline XXXX fit fundamentals Lisman. do excited year that, you enthusiastic the fiscal nick We second In mentioned, also to for now strong. our our assumes turn year underlying that about of future. no certain but in assets focus, sales. we will forward Chief as the half

Mike Lisman

quick Thanks, guidance of and financial the in give updated more a review detail. Kevin. I'll results the

following the TransDigm impact TransDigm on and EBITDA exclude the entity. plus then new the both deck. into ownership the XX second fell for I'm of Esterline comparisons and that First also base along, the for EPS X and quarter for following those of in financing. business today's And The Esterline Slide the days debt then sales

been organic XX% And prior EPS drove the would quarter. Second which second purchased of quarter have not of XX% average it's quarter been adjusted would been a net adjusted have so Esterline, second of the increase growth the versus would had share, what increased XX%. sales from were EPS year Defined above up majority per increase. XX% the EBITDA the prior have is for Again, $X.XX an that and our $X.XX year number. As theoretical we

implies $XX Esterline quarter which On not switching quite at about Esterline. QX. XX% Now on including months be shipments million gears fiscal of due EBITDA XXXX we over the revenue margin of cash average, This the an of to billion higher our Esterline of cash is to $XXX margin sheet. liquidity, million EBITDA contributed with and quarter last EBITDA level the and $X.X The and elevated than happens of end. six to our just is expected this unrestricted over high. ended the balance that

Our is that or under activities, more and $X acquisition Esterline dividends balance at assets, year billion of sales any forecasted just cash repurchases. end share excludes

rate us and to keep high relatively attractive an cash order debt senior the had at completed raising cash this We also we we the the balance quarter, deal, it available. a billion notes. we debt more significant raised secured opted and We the funding of to as the because than needed in During to came of fund $X the do already. to permitted

inclusion because the leverage? that raise, debt punchline With is TransDigm our the race. growth and adjusted the for this do and would larger debt do impact growth had much would ratio not the from year. net increased for you as leverage positive new business of Esterline EPS muddies debt X.X How to The higher EBITDA end EPS don't the elected And as confuses to debt have increase raise levels forma our of year-over-year second do EPS on growth times have what you see This comparisons. our to quarter been we leverage debt new for a higher times at the X.X the base pro entity. and change net

new with had incremental of for example, For have more guidance. the and on midpoint the been debt dollar adjusted of than would we financed taken full only than billion the billion $X $X fiscal EPS higher remaining XXXX cash, one

Now part XX% over from year we rates estimating about have XX% is rates fact new deduction cash guidance tax interest that's We're and the increased the to XX%. the our rates (XX:XX) the expected GAAP about tax limitation are the XX% of and prior rate to adjusted tax U.S. law. changes and now full to by that be to driven These XX% for year. to our federal of be the increase

Esterline any off kick over back Kevin As midpoint during of share With or Q&A. hand that, estimate sales business I'll earnings units mentioned, we it per to guidance and the doesn't year rest our Esterline be to assume the of Liza $XX.XX adjusted revised to the the the for EBITDA this of year.

Liza Sabol

to the Operator, Our to then just you. and remind going to re-enter for Mike. a want open keep Noah to we all are investors back question. of into two the first allow I Poponak, Thanks to ma'am. to our opportunity to is you, Thank yourself first, all an Thank questions But Sachs. now queue Goldman Instructions] ask [Operator ready come lines. from your question please

Your line now open. is

Noah Poponak

good Hey, morning everyone.

Kevin Stein

Good morning.

Nick Howley

morning. Good

Noah Poponak

in as of had take. million something How around that hangs Esterline standalone a of or zone give corporate, of with much you? the $XX

Mike Lisman

– about, everyone office talked think all date. we're we if Let of me Kevin we'd much hangs I a try there almost termination a Noah. away with corporate disrupt in it you of out a corporate don't everyone now we that goes the out But us because a in so, around everyone very When there How to or almost couple – – things year guess phasing, backfilled. want little. as almost it, the is comfortable scheduled I you until has feel look sort try ways, mean office

Kevin Stein

right. that’s Yes,

Noah Poponak

percentage out for business new comments, back then and in based consistent And defining be – (XX:XX) half XXXX your how in guidance. Is flat XX%. assuming year-over-year of strip organic you're margin of looks down Are looks something your actually It points you on like the that, you improvement, Esterline said Nick, on it. with the is in implied the if of the like might was zone year-over-year? kind I to it's that the of what it And down that Okay. the it?

Mike Lisman

don't No. down. I it's think

accurate, actually math prior that I up think I from your that's is think directionally year. but

Noah Poponak

zone was loaded the down I was the And that maybe of flat. is a disclosed, that would that a was looking guess, Yes. I'm why a lot you you here guys you that at some some I pretty I I appreciate pretty of XX.X% cost be know while back-end actions pretty will or, implement which and And take time, EBITDA take where I the integration much be thought have I'm very of margin. takes time. that going will upfront usually that's guess actions Okay. it at quick X.XX initial quickly. and assuming would margin, pricing there'd so I know actions, I in

just I initial something those So makes was actions slower? of that there's wondering about if some upfront different this

Kevin Stein

than contracts And that's or you does any I play always acquisitions. take to think for pricing we're not any before It different to can what initiatives. out time. the takes other communicate here. It time cost-reduction address trying

Nick Howley

I the of side the the comfortable – to ability get that with tend all operating we lean be could conservative on And until here I Noah, add, forecasting we guess we individual might units. also will more

Noah Poponak

Yes. given Makes its size. sense

opportunity compare set is opportunity is than and you you've Kirkhill? as no Kirkhill? mentioned much it, in thought the one the I'll to margin opportunity on total leave that found different Esterline Does have Just does initially. set which other then How question you as it

Nick Howley

started – negative. me Kirkhill Let

facetious, as can't the So just – be surely, surely mean be rate to change high. of I the

Noah Poponak

Yes.

just of it rate but Forget you took to. change, absolute level the

Nick Howley

unit. to one out operating I don't want cut individual

And a think, – it you think worse more thoughts Esterline. than I than I little our gave we we likely a what better it's that think you are hopefully, some a into as we're we thought. we on Noah, sense I gave about bit, little little

Noah Poponak

prepared details Thanks a lot. Okay. us you remarks. on gave the appreciate the Fair enough. I all

Operator

Thank you.

next Our Melius Research. from Copeland question Carter from comes

open. now is line Your

Carter Copeland

team. morning, good Hey,

Kevin Stein

Good morning.

Carter Copeland

was for Just in had I a XX%. Esterline respect the One, you talked pinned past, about of around that couple – to the you with that quick aftermarket ones. it think percent

you've the a at there we does that Now better number, between envision number all? of a maybe within change that how split bit should D? look, And gotten A and that then

Nick Howley

A B? What’s and

Kevin Stein

What’s A B? and

Carter Copeland

Between civil and military.

Sorry.

Kevin Stein

the number. know we aftermarket I our finalized split, Yes. don't and haven't

– XX% I there separated ex And split we good a number. a core that remember, say out commercial think don't well. a content is little dispositioned know the But is. just would that's business I what and defense, in know. don't just a little or it. that or more have the Not would less is avoiding fit just I the think less either little defense I'm total, we between after the don't probably I ones as TransDigm's. but it's not But say, a than exact in I the split a less. lot

Carter Copeland

Sorio That’s structure respect those cost And significant much that how the then assets whatever are, or European? helpful. number? with that that if remains a you structure, Okay. of is to – out is exclude cost what Is

Nick Howley

are European? how mean much of the businesses you Do

Carter Copeland

Yes. those based at much How about, Esterline, that is that's a… look structure since still Europe talking of we're when cost assets much of that in how clearly excluding you

Nick Howley

I and away. fair who taking that make number still in decent-sized one still to A – going a there's likelihood, to. we'd, There's on there's are don't it that of go some – slot. There's won't hang fair in and want businesses, sell. it out Europe we are to But businesses opine still on of aren't all

Carter Copeland

color ask. the somebody thanks let All guys. I’ll Okay. for right, else

Operator

Thank you.

Our Spingarn Suisse. next from Robert comes question from Credit

open. line is Your now

Robert Spingarn

Hey, good morning.

Nick Howley

morning. Good

Robert Spingarn

on separate you about divestitures' just give businesses. anything necessarily Nick, question. Can the not that magnitude, us targeted last

Nick Howley

have we think did everything with pre- billion, give that think we get – – queue. go $X I Well, of was dollar I value dollar about value tax, in if you the the you And might we back. a gave I we rough ahead

works we ahead we up sell around prices. if don't see $X and what billion. go until think, to and know about prices we we with like the whether may I we'll that the get it we if – But you somewhere Now figure can

Mike Lisman

That’s pre-tax.

Nick Howley

Pre-tax…

Robert Spingarn

with you then this talked regard you but don't be for to know, Mike, might I earlier, trending over time, think And EBITDA said Esterline I Okay. about mid-XXs.

said was the about cadence change the it latest on fact margin how that higher of at past, but of long do you there? to reasons, shipment heritage shipment we think timing. talked for two, probably the You've about don't bit You is has a takes Esterline, improvement it about and how than How get three quarter what think been basis? a in the rate we TransDigm margins, this year do the

Mike Lisman

I think Nick gave kind assumptions of the margin ramp on at the outset, internal the and used. we're pretty modeling conservative we've

didn't up was levels So It going to said. it one, several the as year years. in we over that Nick have outlined he more

Robert Spingarn

been Okay. the color us to Can Mike, a just around months? couple you now put you've any refresh of for that, that and business more in

Mike Lisman

Yes. with got of want to going and out commit potential We’ve parts couple lot a I moving to a got lot years. anything now, of divestitures, don't of

Nick Howley

much we And it, then. it'll next be the more we’ll Rob, When we’ll give specific give guidance, year the give –

Robert Spingarn

a then clarify. Okay. just And

You’ve been XX the per at running month on MAX.

at down all? You slowed haven't

Kevin Stein

slowed We down. have not

Robert Spingarn

Okay. Thank you.

Operator

you. Thank

next comes from question Our Robert from Vertical Research. Stallard

is line open. Your now

Robert Stallard

Thanks Good morning. so much.

Kevin Stein

morning. Good

Robert Stallard

A couple business. of core on questions the

First defense. of all,

the in half very and this to half? the half. outsized the what's changed you you're that think a down expecting You half, second second sorry, year? the – growth what's What second. has changing the first caused had in And of do strong slow And first in

Kevin Stein

that's think now Yes. our saw both in strong shipments. the OEM I growth coming in in and And out year. We – order aftermarket last

and other don't inventory in We programs know both We Maybe are slowdown. orderbook timing. the of OEM it's seeing defense. or just any slowdown any

slowdown orderbook look would of chain view. in both supply going we from is inventory and normally the forward say an at So that the in But point as for OEM we that. adjustments aftermarket

Robert Stallard

aftermarket. the Okay. And on then to moving

about XX% adjusting buying year-over-year. or or I you based like airline up on anything of that seen Have or think customers oil the your patterns any oil the spares their price utilization price? high XX% is their

Kevin Stein

seeing we of in or buying any or are because patterns We adjustments fuel not not. activity that high noticed have

any We change. haven't seen pattern

Robert Stallard

aircraft the utilized, right? still you're So seeing heavily older

Kevin Stein

they've up the definitely ramped on NG that usage. reports The Absolutely. are

Robert Stallard

Great. Thanks, guys.

Operator

you. Thank

from Our next Barclays. question comes from David Strauss

is line sir. Your open, now

David Strauss

Thanks for question. taking the

low this, what you I think outlined. Rob's to that going So is that's that think to you couple over hit target need rate of kind you get question return? Were margins Or EBITDA to on of that years. back achievable saying the your of you entire that's Nick, the the to, next to mid-XX%

Nick Howley

Yes. easily, can the It was we can what That's of as sort value business. use you That's and back running I'm you you easily sure that what the into we – have, use. of enough.

assumptions use. business You back or somewhere XX-ish running you'd know get EBITDA. our the the that's XX%. And XX% to was around if XX% through all we look And saying. I reason if we saying. to doable, not better. solved you think what we're we That's feel, if little and we're to And math, as at it, said, today, And see we that's no anything, a

David Strauss

Yes.

billion. cash dilution proceeds about How using talked And that could about there these think do the selling offset the potentially $X dilution in to you the you bring selling assets? assets – then Okay. potentially from and

Nick Howley

come when We of that cross we really yet. haven't decided to bridge sort We'll it.

we of start decide get amount before would to And there. want just they're counting don't hatched. when We have and fair cash a make that we'll chickens even I more. the this now,

David Strauss

Okay.

which embedded You think at get to currently multiple these assets at can you are kind the your multiple? of current

Nick Howley

think I can, we the depending businesses. on

them of may attractive. be the Some most not

can think we guidance. when using the multiple up, – public the you doubt get all way I the get weight XXXX think by can it I'm close. that, of we And there. I I get all can we

David Strauss

it. Got

much. you Thank Okay. All very right.

Operator

you. Thank

come from going question Myles to next Our from Walton UBS. is

Your open. line now is

Myles Walton

Thanks, morning. good

owned if trending look First the are one, periods, Esterline terms had there? growth seeing of new the And what Esterline in if as you you in you'd versus of organically how in the implying guidance both just inclusive? that's business, you are bookings core kind at it

Kevin Stein

any guidance. have organic comment don't the the part I of on growth

strong. now looks as a right as looks base. orderbook as the does TransDigm It think I good

the we're well. strong growth on bookings Esterline So seeing side as

Nick Howley

in until think we yet, I analysis get them feel the segments, of you better out comfortable don't that. a breaking Kevin, yet,

Kevin Stein

to us and to important used a We're calculate aftermarket, methodology they Because that understand. process those now. right different to differences going through are

Myles Walton

from it's fair? growing the TransDigm price, a mid-single-digit, on as is of Okay. it same the yet But the of now. about benefit that sounds right organically like doesn't have Probably it standpoint units

Kevin Stein

think, get crossed start to I ours want reporting it TransDigm, the do at way we until we until up guys, this that we their right. same metrics get don't on we

Myles Walton

Okay. And on All the… right. Mike

Nick Howley

think – reason There on There's That we no think is nothing that the… concerns – to to see us. reason there's

Kevin Stein

That’s right.

Nick Howley

That or… flawed business the something, is

Myles Walton

Is XX% to from the And going is the Mike, deductibility an basis? half. forward that tax for perspective, that a Okay. given tripped this implied on use line the second then, rate, rate on tax – adjusted you've fair

Mike Lisman

little As a should But the we it is EBITDA had it plug into tax growth have you model, through fair, we delever, on as how law think U.S. works. XX%, hopefully, probably tick but a bit something based I just comes to XX% delever, to down if down.

Myles Walton

Thanks. right. All

Operator

Thank you.

from Ken comes question from next Our Canaccord. Herbert

Your now open. line is

Ken Herbert

Hi, good everybody. morning,

Nick Howley

morning. Good

Ken Herbert

what is about the to aftermarket. I you we up sort of Kevin, base about that the business Can to business, relative but the into I growth half year-to-date. off you know what in that sales just – TransDigm just associate the this strong relative on much book-and-ship, you've captured versus And should for the remind of would XXXX beyond? bookings commercial XX the wanted bookings, past, the percent sort to second start how XXXX on year-to-date and talked think how of and spills in as of

Kevin Stein

within aftermarket it is business advance, the is in of majority is we of gets book-and-ship. even There it booked quarter. the out bulk think of the but some – that I book-and-ship

the So gave high that the market commercial and on segments – for the we raised digits revised guidance to aftermarket. we single

see So that’s we what coming out.

second place we're half. translate on year, confidence especially for we'll And in orderbook it Directionally where on the handle at that pieces, have the going. that here complexity with understand give we're on guidance of segmentation next time want is year pull trying to as the to data the a We least? that. It'll bit of that but possibly the that on Esterline. Does have the will take into for a of your to some together, some of next at it's sure good that answer We market time we ready question? when looking make the first little

Ken Herbert

patterns I that’s bookings inventory? a very part getting I you of building Okay. get sense that Are any change the just that seeing inventory? in destocking That’s or guidance they've of of there's raise that. some there marketplace with do are guess, profitability saw Yes, their buying do what sort key steady? they a airlines helpful. at you the from at the see that airlines, Or may a inventory reversed and terms you levels are sort Yes, been sense airlines you in you directionally of helpful. what and mean have the I any the were the and course

Kevin Stein

what must seen again, than anticipated. The perplexing. up larger and are destocking you We some always pick as buying They quarter-to-quarter. down go have seeing up patterns we're have might orders

up is ranch So somewhat flat. stocking. there company. must TransDigm for base stocking have not get been on the That POS at airline do not But some out I reports see up. there. XX% do That's I – reports about regular is levels the across distribution.

So appear levels can the out it. for aftermarket. that booking intelligence some the been the in That's that it seeing destocking we're there about addressed I on extent the there's provide would of

Ken Herbert

That’s helpful. you. stop there. Thank I’ll Great,

Kevin Stein

Sure.

Operator

Thank you.

Khanna from from comes Our next Gautam Cowen. question

line Your now is open.

Gautam Khanna

thank you. Yes,

Kevin Stein

Good morning.

Gautam Khanna

SG&A a prevents is the being to you've of Like, standalone – over a being structurally, at that percentage Esterline could was legacy on XX%-ish percentage down when XXs. get – good owned Esterline, was sales? actually R&D, closer now plus level? curious, it XX%, that TransDigm's just it as sales, morning, plus the Is their business, that Regarding level anything low what you I to look SG&A there R&D to that as of their

Nick Howley

percent focus you. give best EBITDA the the is to thing we think on I

versus take If costs the the out versus accounting isn't R&D, manufacturing pieces you between SG&A start consistent of to companies. of always method

So then present on that you if answers that you look with as end sales know a funny getting start way. I everything. EBITDA at to captured them you you can focus up of

Gautam Khanna

you've on you if don't I side, large Fair quarter kind in of… the just kind defense another mind, any And enough, and of the the big or products that it. just called – big were one, in sometimes appreciate order then a out past lumpy there

Nick Howley

side. parachute you're any could I find defense pulled orders. and orders, we I the orders Yes, looked those, right. have missile on large not out onetime, for Yes, large

were – some weren't there. yes, fact, In they just

a of nicely was it certain So business. for spread across a program. onetimes big Not lot the

Gautam Khanna

guys. much very you Thank

Operator

Thank you.

Sheila Our next comes question from from Jefferies. Kahyaoglu

now is line Your open.

Sheila Kahyaoglu

guys. you Thank

So I to a wanted which XX% IRR, target means… Esterline. been you've Nick, you to clear go back pretty

Nick Howley

I can't hear you very well, Sheila.

Sheila Kahyaoglu

Can you better? hear me

Nick Howley

Okay. But you’re…

Sheila Kahyaoglu

Okay…

Nick Howley

very – faint, faint It’s yeah…

Sheila Kahyaoglu

I promise I'm yelling.

but So still margins and you this EBITDA means I XXX it which in XXXX EBITDA terms margins. XXX I strip to of you've it corporate out from mean Esterline, days. only basis I year-over-year. just the I'm basis QX parsing and going XX apologize up get XX% for it, points apart, you to points returns, target guys are back XX% owned

changed asset? outside you've perhaps, this what's since of really corporate, owned So

Nick Howley

math. I just Sheila, follow the don’t

I – can't. So I don't

Sheila Kahyaoglu

it – the days, for and owned are only you XX asset owned margins for up… only you guess still I

Mike Lisman

Sheila, the ownership the you're of I margin elevated quarter end. an days think, towards XX seeing in shipment was

it – longer because getting margin horizon a you're So time would at of than higher EBITDA seeing you're you over elevated… the

Sheila Kahyaoglu

Yes.

the then get… that So of it's and just lumpiness you

Mike Lisman

Exactly…

Nick Howley

would that use we it, XX.X-ish… base. was I XX, as when a bought EBITDA wouldn't it I which around use Yeah, the running was somewhere that

Sheila Kahyaoglu

of Okay. business think versus the the And the for we second How the pretty half up then you. on do business core strongly. jet year? transport just commercial with Thank about OE

Nick Howley

OE I think seem on both strong the commercial reasonably side.

are business seeing transport. both in decent both So bookings jet and commercial sales

Sheila Kahyaoglu

broad one specific think, Is there the, that's XX% driving platform or biz jet I based? in growth

Nick Howley

you I that. don’t that. can get I have

it’s… think I

Sheila Kahyaoglu

worries. No

Nick Howley

across business business a board. think jet, of jet really, But large out I indicative I as call we've strength anything of small. seen the It’s platforms on it's industry the in didn't as whole. on kind the

the guess and industry I surprising, cycles. of takeoff the landing given dynamics Somewhat

in. are and platforms, So on jet remain coming cautious business the but orders the

Sheila Kahyaoglu

Okay, you. well, thank

Nick Howley

Sure.

Operator

Thank you.

JPMorgan. from next Our comes Seifman question Seth from

open. Your line is now

Seth Seifman

Thanks very morning. much good and

Nick Howley

Good morning.

Seth Seifman

EBITDA touch just It year. base for acceleration the I much And second rate seem up you're half the increase, it's and the really wanted the put business looking the quarter. versus to doesn't just rate what improved the on like – given the you second in for EBITDA of quarterly in aftermarket. commercial

if address might upside on potential could whether weighing sequential there's that or and you Just wondering what improvement. for that be

Nick Howley

I being think we're conservative.

don't little say I orderbook the know to nodding conservative segment that. what think Mike pieces. his The is beyond me. raised a else there. head at strong. I is We bit

Mike, The anything second have in. to on? half you do will come else add

Mike Lisman

could It be it. hit Kevin think, conservative. I Yeah,

Liza Sabol

to… you have And that we expect also bench

Mike Lisman

The that’s – commented, right. correct. Yeah, have defense we Liza's

we're defense But that subtle. the expecting impact, commented second that'll have where have the mix came half. business the we an that's so with We up to moderate for margin slightly so

Seth Seifman

got in loss-making if And accounting, Mike, if you Sure. long-term up purchase adjustments? follow-up, Esterline did those how do And so, those contracts? a for then and as stepped have earnings account

Mike Lisman

Yes, under purchase nine price to accounting outpost basically that rules, sort we months have acquisition.

So we're that through now. working stuff

Seth Seifman

adjusting you out? do it but anticipate Right,

Mike Lisman

We don’t yet. know

it. through working We’re

Seth Seifman

Well, thank Okay. you.

Operator

Thank you.

next question comes Spingarn Suisse. from from Credit Robert Our

now open. line is Your

Robert Spingarn

guys. Can me? Hey, you hear

Nick Howley

Yes.

Robert Spingarn

to comments us Could on direct made the that to investigation, on wanted understanding so of an just this? go just channels cetera. business and the defense just the et context military you earlier exposure Okay, back can your or the have indirect that we remind for you of

Nick Howley

Yes.

that's and through total And Our a direct the on the X% our between combination year, revenue. of U.S. distributors. sales to our direct depending or somewhere of X% government – run

the So middle for ground. let's of say seven kind

five direct distributors. took – roughly If through it's I seven, two it's and say want you to

Robert Spingarn

clarification. Okay. Thanks the for

Nick Howley

it's did a we the half after same. year about – – was and lot the it when what a talked this ago. That's when close to pretty about it's a Yes, we

Robert Spingarn

of be of to elaborate how – that’s how could brought know business and maybe can are I wanted don't much and impact? understand on if this you it any Well, there some of just changes that. I to to the going up business is I it some conducted because if

Nick Howley

there no to idea. processes… speculate ability, on lengthy are, that the have those you So if or Rob, any be have tended to think I What changes I

Robert Spingarn

Understood...

Mike Lisman

Yes, I think that's the key. It's a lengthy process.

Robert Spingarn

guys. Right, thanks

Operator

you. Thank

Rodgers from from comes question Review. Lakes Great next Jason Our

is open. now line Your

Jason Rodgers

interiors some you in rebound you discuss that last think softness the I condition wondering discretionary if market. market the just the and saw Yes, mentioned growth I'm quarter there. in

Kevin Stein

light did did say glowing In but Still, doing not interior in general just the quarter, we little transport bit. – okay. the it's transport, well. a side just Yeah, commercial bright okay. doing I submarket It's our us, a was would is for

for slowdown think in to I though. low the And X% that Interiors, X%. said market anticipated. somewhat little while. freight a the was composite I down seen That's Freight whole. okay. the brought for the the what was one, We've

anticipated it things there. would somewhat we off So was start back see to that

Jason Rodgers

XXXX? possible what the for And fiscal a provide intangible to you is think an amortization range for or expense estimate it be may

Mike Lisman

we've think put slide our a guess chart of best the I today. in for deck

subject that’s change due And XX. purchase accounting. price to Page to its think I

Jason Rodgers

you, Okay, thank got it.

Operator

follow-up we Sachs. from Thank from you. Noah Poponak question a have And Goldman

line Your open. now is

Noah Poponak

XX you defense business over bookings Hey, same commercial the the have quantified you OEM, in the growth way year-to-date in commercial the the did aftermarket?

Mike Lisman

think Yes, we haven't I said that. we haven’t –

Noah Poponak

number? that have you Do

Mike Lisman

we haven’t No… No, said that.

Nick Howley

that one ate can't it. though, find cat The we

Kevin Stein

we year-over-year we the seen I slightly And the have we're quarter. the down think in – bookings flat come in quarter, better in second now. defense than

side. little not where So but the was quarter, were which little book bookings a they a down have cooled definitely up come the first has on order off flat defense just the up were definitely from bit, bit, high-teens in now

Noah Poponak

the organic XXXX? not for year mid-teens single how the being I first high think half, sustainable So beyond saying in back and the the sustainable half clearly or should not about you're

Kevin Stein

mean? growth Hi, you for sorry. organic the No, high-single-digit whole business,

Noah Poponak

Yes, business. defense for the

Kevin Stein

you Can repeat No. your question?

Noah Poponak

here still had supportive specific rate double is, is a pieces quarters to row I'm what growth looks in business more business, the that were they've of in the you've of market and three organically total outpacing guess are faster like I defense orders it end wondering a Yes, end a multiple slowed, than market growing digit the the pretty your end-market. but the that, are

So business, thoughts sustainability that I'm of beyond that growing XXXX. annually high-single-digits into on trying to of triangulate all

Kevin Stein

forward. in. think that given I pace that continue than longer next book out. time bookings It how a talked down, to comes might, still see out. I guidance in the haven't anticipated that's, other years to to the that the standard term defense take carrying difficult some defense the bookings be tend folks But but observation would segments think I the probably to look about that, We that yet. I that difficult high-single-digit of long think through to tends percentage growth a of to for business be But, next that that's to business. year. over I as We've took be year have It to cycles. our grow forward, will have. that go bookings at But a think order last very going defense into that a The past, couple would we formulated we than saw can rest in going thoughts think year's time come the slow come I longer

Mike Lisman

much from be tend I little add can which bounce the more bookings. I booking all and a indicative. might I basis to quarterly think a you a don't a on on They just place, be draw might defense think, would over little longer-term the year-to-date the in world. number

of continue the book shipments. We ahead to

Noah Poponak

Okay. Yes,

Mike Lisman

think That's another it. way about – another way to

Noah Poponak

for long-term I the guess, the your sense I isn't market. in sustainable could maybe thought see market, we around have a in that what defense very pricing is single, process how but

than So looks that. the units like would compounding low-to-mid single in and high single be faster are much outlays

update cash in in on numbers? now Esterline you the in quantified earlier year, the the was with EBITDA there past that conversion, a number cash you of have genesis flow, free But the So an question. the gave on the think even since I any in

Kevin Stein

I change much. think it doesn't

in reason payments timing that this because probably payments. was the is, interest the double lower quarter the for and notice and quarters, we of had You tax double

Noah Poponak

Okay.

interpretation saying? is that, with added by kind flow year, Esterline that you're bringing offset in, things cash the of associated it's right of the what So is but non-recurring to there is Esterline

Nick Howley

You about billion, is are that $X talking getting to the right?

Noah Poponak

about XXXX I'm flow updated the full-year talking forecast. cash just

Kevin Stein

to I'm sorry, the to from in business think of the year-end. expecting get billion basically XXX if at cash the I'm about it, your balance it's I I'm combined $X understanding back year half you back we're to sure the into million – not question, generate

Noah Poponak

Okay.

Kevin Stein

the EBITDA rest for And that's to XX% the year. of of close

Noah Poponak

in you quarter… conversion for items It like full the mentioned sub-XX Great. bring would the the that it But that of sounds just though. some year

Kevin Stein

is much. much. Esterline gone the not expect I much XX% and XX%, we convert doesn't and you change forward. if to Yes. XX% very that to rack math up Yes. between change going historically, as But going this and don't It think,

Noah Poponak

Okay. Alright. Thanks a lot.

Operator

you. Thank

from Keay Wolfe comes next question from Research. Hunter Our

open. now is line Your

Unidentified Analyst

you than for Hi, this flexibility. compare does some quarter? pipeline last on other capital year? is or the mentioned half to You deal relative more of Will back for more does this debt deployment seeing suggest needed prospects greater in the better or the Hunter. How Are strategies taking

Mike Lisman

that you I'm can repeat sorry, question?

Unidentified Analyst

Sure.

of prospects how does prospects this you the strategies pipeline mentioned debt or more So out deal or Are on taking more to year? compared quarter, deployment Esterline capital in half other seeing there you the second better to finance for last great some flexibility. suggest does

Kevin Stein

I of don't as know just We'll things. more still different, the that kind and it's decide year, I later said business mean, in we're substantially yet. made we for open I a that said, determination haven't as I

Unidentified Analyst

acquisitions. how And other by the margins Okay. the Esterline much includes mentioned points basis slide one XXX that deck then acquisitions just underlying in one, but excluding other TransDigm improved you exclude all year-over-year gross the a we improve if

Mike Lisman

think … I gave you Kevin

Kevin Stein

I gave ….

Mike Lisman

X.X%

Unidentified Analyst

I think XXX you was that mentioned EBITDA. but points basis

Liza Sabol

gave. we that's EBITDA. was Yes, It what

Kevin Stein

EBITDA. gave we Yes,

Unidentified Analyst

Do margins? gross that for have Okay. you

Liza Sabol

when the see gross Q, file find on we you'll So profit. can more you the detail

Kevin Stein

file Which right? we'll today,

Operator

you. Thank

Our next question from comes Strauss Barclays. David from

open. now is line Your

David Strauss

to disclose separately expect Do Thanks. to you continue from here? Esterline

Kevin Stein

and air non and power No, have roll into the frame to control, aerospace. that it We're we no. going segmentation

David Strauss

quarter, quarter sequentially? I then more versus look And bit not, like Did don't what or this like but your know I looked did, did about talk comparison what you little sequentially? aftermarket you this you if Okay. the apologize. mentioned aftermarket a know the if I difficult was last

Mike Lisman

It was up.

Kevin Stein

It was up.

Mike Lisman

were bookings the up. And

Kevin Stein

and It up. booking the were was up

David Strauss

percentage of it sort is basis Any up? Okay.

Kevin Stein

don't that. give We

David Strauss

Okay.

Kevin Stein

We that clarity. don’t give

David Strauss

Alright, but it sequentially. was up

very Thanks much. Okay.

Operator

would questions. call to for back like now Thank the I'm further remark. over no Sabol turn to Liza you. And the I showing

Liza Sabol

concludes for you all like to thank for today. We'd That calling call this our morning. in

Operator

gentlemen, participating does Everyone, in day. today's for today’s you all may Ladies disconnect. you a and conference. conclude This program, great have thank

TransDigm (TDG) 7 May 192019 Q2 Earnings call transcript