TransDigm Group INC Q1 FY2025 earnings call

• Strategy: Unique in the industry with 90% of net sales from unique proprietary products, significant aftermarket content, consistent long-term strategy including owning proprietary aerospace businesses, value-based operating methodology, decentralized structure, strategic acquisitions, and capital allocation for private equity-like returns. • Quarter performance: Strong start to fiscal year, healthy growth in commercial aftermarket and defense market revenues; Commercial OEM revenues modestly down due to Boeing machinist strike; Bookings expanded for all major market channels. • Capital allocation: Deployed over $300 million via open market repurchases of common stock; Continues to look for M&A opportunities fitting the strategy. • Operational highlights: Initiated cost reduction initiatives in response to lower OEM production; Succession planning with executive retirement and promotions; Good new business awards in both commercial and defense markets.

The commercial market typically makes up close to 65% of revenue. Total commercial OEM revenue decreased approximately 4% in Q1 compared with the prior year period. Commercial transport OEM (largely Boeing and Airbus) was down 1%, while biz jet and helicopter OEM revenue was down 8%. Sequentially, total commercial OEM revenues contracted by 17% in Q1. Commercial aftermarket revenue increased by approximately 9% compared with the prior year period. Defense market revenue grew by approximately 11% compared with the prior year period. Commercial aftermarket bookings were solid, and defense bookings were healthy compared to prior year.

• Maintained full year revenue and EBITDA as defined guidance for fiscal 2025. • Midpoint of fiscal 2025 revenue guidance is $8.85 billion (up ~11%). • Midpoint of fiscal 2025 EBITDA as defined guidance is $4.685 billion (up ~12%) with an expected margin of around 52.9%. • Adjusted EPS midpoint increased to $36.47 due to share repurchases, up from prior guidance. • Guidance includes about 70 basis points of margin dilution from recent acquisitions compared to fiscal 2024. • Maintained market channel growth rate assumptions for commercial OEM (mid-single-digit), commercial aftermarket (high single-digit to low double-digit), and defense (high single-digit).

• Uncertainty around commercial OEM production rate progression and supply chain impact from Boeing machinist strike. • Tariff exposure, though TransDigm is largely a domestic manufacturer with de minimis impact expected. • Lumpiness in aftermarket performance, making precise quarterly forecasting challenging. • Supply chain inventory visibility and management uncertainties.

Q: In the first quarter margins were expected to be down sequentially but were up sequentially. Curious if you can comment on that and the contract loss amortization.

A: Higher EBITDA margin in Q1 was primarily due to mix shift from commercial OEM to commercial aftermarket; lost contracts amortization was from Esterline acquisitions, lumpy as they flow out.

Q: What was sold in the quarter for the gain on sale?

A: Sold a small piece called Mass Systems, bought a few years ago, improved and sold at a profit.

Q: Boeing has laid out a fairly aggressive production ramp post strike. 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?

A: Typically not getting orders for back end of year yet, but optimistic Boeing will get back to rate, prepared to add people as necessary.

Q: If you were ever to make an acquisition from one of your customers, would there ever be an opportunity to pay for that acquisition in the form of pricing rather than cash?

A: Certainly hasn't ever come up, not our usual process.

Q: How do you think about profitability overall and the flattening out?

A: Contract and OEM business already in forecast, no incremental improvements from new contract.

Q: Interiors are the only sub-segment below 2019 levels. How can we think about what's driving that and when it might improve?

A: Driven by refurb market, will improve when airlines start announcing refurb programs, lead times long.

Q: On the M&A pipeline, what is the mix of aerospace and defense companies versus other industrials?

A: All M&A opportunities are in aerospace and defense, looking outside but mostly in aerospace and defense, pipeline busy with potential for PE-like returns.

Q: On inventory in the supply chain, what are your channel checks saying?

A: Don't have much visibility to inventory in supply chain, only see distribution partners on aftermarket side, orders received from customers are what drive fulfillment.

Q: Thoughts on the new administration and DOGE?

A: DOGE is an opportunity to improve government DoD procurement, engaging with DoD to improve forecasting, inventory management, and buying practices, sees it as an opportunity for both TransDigm and the government.