TransDigm Group Incorporated (TDG) on Q1 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the TransDigm First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today’s call is being recorded. Jaimie Stemen: Thank you, and welcome to TransDigm’s fiscal 2021 first quarter earnings conference call. Presenting on the call this morning are TransDigm’s Executive Chairman, Nick Howley; President and Chief Executive Officer, Kevin Stein; and Chief Financial 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 reconciliation. I will now turn the call over to Nick. Nick Howley: Good morning. Thanks for calling in. As usual, I'll start with a quick overview of our consistent strategy, a few comments about the quarter, and then Kevin and Mike will expand and give more color. To reiterate, we are unique in the industry in both the consistency of our strategy in good and bad times as well as our steady focus on intrinsic shareholder value creation through all phases of the cycle. To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by proprietary products, and around three-quarters of our net sales come from products for which we believe we are the sole source provider. Most of our EBITDA comes from aftermarket revenues, which generally have significant higher margins and over any extended period of time have typically provided relative stability through the downturns. We follow a consistent long-term strategy. Specifically, 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 organization structure and a unique compensation system closely aligned with shareholders. Kevin Stein: Thanks, Nick. Today, I'll first provide my regular review of results by key market and profitability of the business for the quarter. I'll also comment on fiscal 2021 outlook and some COVID-19-related topics. Our Q1 fiscal 2021 was another challenging quarter, considering the continued slowdown across the commercial aerospace industry in a difficult global economy. In Q1, we continued to see a significant unfavorable impact on the business from the pandemic as demand for travel has remained depressed. Mike Lisman: Good morning, everyone. I'm going to quickly hit on a few additional financial matters. You can see all the detail on revenue, EBITDA and adjusted EPS in the press release and call slides for today. So I'm not going to rehash that in detail. For the quarter, organic growth was negative 24% driven by the commercial end market declines that Kevin mentioned. A quick note on taxes, the lower than expected GAAP tax rate for the quarter was driven by significant tax benefits arising from equity compensation deductions. This is just timing barring some deviations in the rates in this first quarter, our tax rate expectation for the full year is unchanged. That is, we still anticipate our GAAP cash and adjusted tax rates to all be in the 18% to 22% range. Moving to cash and liquidity, we had a nice quarter on free cash flow. Free cash flow which we traditionally define at TransDigm is EBITDA as defined less cash interest payments CapEx and cash taxes was roughly $200 million. We then saw an additional $70 million plus come out of our net working capital driven by accounts receivable collections. We ended the quarter with $4.9 billion of cash, up from $4.7 billion of cash at the end of last quarter. Note that this was prior to the acquisition of the Cobham Aero Connectivity business the majority of which closed on January 5. There is one remaining piece of that acquisition a Finland facility representing 2% of the purchase price that's going through regulatory approvals now and should close soon. Pro forma for the closing of this acquisition, our Q1 net debt to EBITDA ratio was a shade higher than 7.5 times. Assuming air travel remains depressed this ratio will continue ticking up through the end of Q2 of our fiscal 2021 when the last remaining pre-COVID quarter rolls out of the LTM EBITDA computation. Beyond Q2 of fiscal 2021, the ratio should stabilize with the potential for improvement should our commercial end markets start to rebound. From an overall cash liquidity and balance sheet standpoint, we think we remain in good position and well prepared to withstand the currently depressed commercial environment for quite some time. With that, I'll turn it back to the operator to kick off the Q&A. Operator: Our first question comes from Noah Poponak with Goldman Sachs. Your line is open. Noah Poponak: Nick, early in the downturn, you framed the business with very limited visibility into the end market. And top line, you framed the business in terms of how you were planning from the cost side. So you spoke to what you assumed for each end market to therefore, planned costs. And so I was wondering at this point, in lieu of official guidance and given the still limited visibility, is it possible to speak to, how you're planning the cost side, vis-à-vis the pace of end-market recovery on the aerospace side? Nick Howley: I think, Noah, I don’t because we don’t want to give guidance, I don't want to end up giving it piece-by-piece… Noah Poponak: Yes. Nick Howley: By the markets. Noah Poponak: Correct. Nick Howley: But I think for the cost, essentially, what we expect here is that, we basically will hold our costs tight and about flat. Now, that's going to move one way or other, if we're wrong on the volume. I'd be hopeful that we are, that it gets better rather than worse. And we go in the other direction. But I think that's about as much as I want to say. The truth is we're just unclear on the rate of recovery. Noah Poponak: Yes. And I wasn't sure if you would answered that question or not, but you had taken a shot at it on the way down, and it proved reasonably accurate. So I thought I would check. The sequential increase in bookings in the aftermarket, can you quantify how much that picked up? Kevin Stein: It was like 76%, and the OEM was up 88%. So, a significant uptick. And like I said book-to-bill slightly ahead, modest over shipments. So we did a - we had a nice quarter on the commercial aftermarket side. And I think that's encouraging as is the OEM side to see such a snapback in bookings. Noah Poponak: I guess that's off very easy compares. Do you happen to know how far from the pre-pandemic level that order rate is? Kevin Stein: Yes. It's about half, right? Nick Howley: Yes. Noah Poponak: It's still about half. Okay. Nick Howley: It's about half of what it is. As I said in my comments, our Q1 bookings were in line with the fall and flight activity. Noah Poponak: Okay. Nick Howley: So we essentially were under-booking, and now we're kind of caught up. Noah Poponak: Yes. So it kind of went to nothing, and now it's matched up with revenue. Nick Howley: That's right. Noah Poponak: And then just last one quickly, the Cobham business. Can you just - I know you gave that margin range there, but what were the actual last margins right before you bought it? And is this a business that you can get to the TransDigm consolidated margin? Nick Howley: Yes. We didn't disclose the actual margins before we bought it, but we just gave you some kind of range. The range, of course, is because we don't exactly know how - we're only very short into the ownership. And the exact speed of which things change, we can't exactly calibrate yet. Can it get up to the TransDigm margins? We didn't model it that way. To get our return, it does not have to get that high. And we'll see. We'll see over time. But it's a good solid proprietary kind of aftermarket business, but you don't have to get to kind of TransDigm margins to get the return. And that's not how we model. We hope to model conservatively, as you know. Operator: Our next question comes from Carter Copeland with Melius Research. Your line is open. Carter Copeland: I'll be quick here. Just two short little clarification, then one, you just give us some color. On the interiors weaker piece in the aftermarket, can you give us a sense of just how much weaker that was? I mean, I assume it would be meaningfully weaker just given that that's where you get a lot more of the discretionary sort of stuff there. Any color there would be helpful. And then just with respect to the sales that are going to distribution, if you've seen any difference in customer behavior, buying patterns, anything of that to note just within that customer sub-segment? Thank you. Kevin Stein: Sure. On the interior side, I think what we are seeing is just, as you said, in general, a slowdown. That's the last place people are looking to do work. Although, recently, we've seen a nice uptick in activity, but it still is the lowest-performing sector of the aftermarket business. On disti sales, I have not seen, nor have I heard of, any difference in ordering or any difference in behavior by the customer base. Carter Copeland: Okay. And just to be clear, on the interior piece. I mean, are we talking - the whole thing is down 50, in the aftermarket. Are we talking down 80, 90? Or is it that magnitude? Or am I being too harsh? Kevin Stein: No. It's not that far. It's just slightly worse, than the rest of our business. It's not off so dramatically. Carter Copeland: Okay. All right. Thanks. I will let somebody else ask. Nick Howley: Just Kevin, that's offset some in the other direction by the freight business? Carter Copeland: Yes. Operator: Our next question comes from Myles Walton with UBS. Your line is open. Myles Walton: I just had a question on your incentive changes, that you had to, obviously, given the backdrop of how quickly the financials changed and wanting to align the performance. And you moved to EBITDA percentage as well as an absolute basis. And I know that there is historically, we can track sort of a 10% to 17.5% IRR, as your target. But I'm struggling, could you maybe fill in the blanks on, what the EBITDA percent margin range might look like? Is 44% at the midpoint, the low end or the high end of that performance metric? Mike Lisman: Yes. I don't think we want to go into too many specifics on the margin target. Obviously, the 44% is what we gave you all, so it's what we feel pretty good about for the year. And that's what we're - as you've been through the proxy details, it sounds like, Myles, that's what we're comped against here, for this year, given the challenging industry circumstances. Myles Walton: Okay, okay. Nick Howley: I might add, we would expect, Myles - assuming the world stabilizes, we would expect at the end of 2021 to reset, on the same kind of value-creation parameters that we historically have had. Just things got so disrupted, that it was very hard to do that right now. Myles Walton: Okay. No, that makes sense. And Kevin, could you just maybe unpack the aero aftermarket? What was cargo down? And remind me, how much cargo is of your transport aftermarket at this point? Or if your air transport at. Kevin Stein: 10% to 15%, we've said. All of the submarkets of 10% to 15%, except the cargo. And the freight has performed the best of any of the aftermarket segment. It's still down, but it's much closer to neutral performance. Operator: Our next question comes from Ken Herbert with Canaccord. Your line is open. Ken Herbert: Is it appropriate, Kevin, to think about your 5% sequential improvement in the commercial aftermarket bookings to continue through the next few quarters? And when does - when do sort of we see that kind of sequential improvement in sales? Kevin Stein: Yes. I don't know, if the 5% is going to continue and when that will translate to sales. Remember, we can put bookings in 18 to 24 months into the future. So this can be over a period of time. It's certainly a positive trend. Exactly, how it translates to revenue, we'll have to see. Ken Herbert: Okay. And if I run out sort of a mid-single-digit sequential improvement in sales for the next few quarters, and maybe that's ambitious. But it implies that you anniversary the easier comps in your third quarter, maybe 15%, 20%, 25% growth in that range. Is that - I know you're obviously not giving guidance, but can you talk about kind of opportunity you expect in the second half of the year as you start to anniversary the much easier comps and how much of a whipsaw effect, so to speak, could you expect to see? Kevin Stein: Yes I don't, I haven't looked at it in that way. What we've said and what we will continue to communicate is that we're expecting things to be somewhat flat up a little in the first half. And some modest improvement in the second half linked to vaccinations and travel activity. That's all that we've communicated and set on it and I think that hangs with what we're saying, a small increase in the second half, but that remains to be seen if that happens. Ken Herbert: Got it? And if I could… Kevin Stein: We are hopeful that we see a pickup in personal travel towards that - and many people forecast a substantial pickup. But yes, we have that’s right - we're just reticent to forecast that now because frankly it's been delayed a little from what we would have hoped for. Nick Howley: Yes, that's right. Ken Herbert: I guess on that point, just one final question. In the - first quarter, the calendar fourth quarter did you see relative to your fiscal fourth quarter, sort of any green shoots. I mean obviously, the bookings were up, but was there anything that you could point to as sort of tangible evidence of obviously what we hope to be a recovery in the second half of the year? Kevin Stein: Yes, the only green shoots I have or the bookings activity sequential bookings activity that we've commented on, that's the only green shoots, I can't comment on that I've seen. Operator: Our next question comes from Robert Spingarn with Credit Suisse. Your line is open. Robert Spingarn: I think I might end up beating the dead horse a little bit here. But just on this topic, Kevin or Nick can we identify whether or not Q2 commercial aftermarket is up or flat with Q1, is that something you can see at this point fiscal Q2. Kevin Stein: No, that's not something yet we can see. Robert Spingarn: And so going back to what you just said we can really all you're saying is at least in the second half you have enough pulp. I guess it is to see some drivers for a higher relative aftermarket, second half versus first if we get some recovery? Kevin Stein: Yes that's right, if we get some recovery. We have to follow people flying as Nick and I - both said and as I've read all of your analyst reports as well. This all depends on whether people are flying and that's still unknown. Nick Howley: And that's all I’d add Rob to that is, I mean I don't think it's a very complicated formula here. As more people start to fly we’ll start to sell more stuff into the aftermarket probably won't be . But until then, it's all it's just speculative. Robert Spingarn: Do you have any better insight into what's in the channel at this point, now that we're about a year end almost a year end of this thing? Kevin Stein: We don't really except for the small amount of our commercial aftermarket. Now its 20-ish percent that is goes through distribution partners. I can’t see what’s in the rest of the inventory levels of the rest of the aftermarket. Robert Spingarn: Okay. Kevin Stein: Clearly, there was an uptick in that means either there was destocking slowed or consumption increase and probably a little bit of both is true. Robert Spingarn: Okay and just quickly. Nick Howley: Yes it's hard to think that the consumption could be up as much as the bookings. Kevin Stein: That's right, I mean. Nick Howley: No change. Kevin Stein: Yes no change for that. Robert Spingarn: Okay, Mike I just had a quick one for you, just major moving cash flow pieces for this year? Mike Lisman: Sure. Robert Spingarn: Anything we should focused on? Mike Lisman: No, no nothing, nothing significant other than what we already discussed before the interest expense changed slightly because of the refi we did from prior guidance down to $1.07 billion, but no other - major cash flow items. Operator: Our next question comes from Greg Konrad with Jefferies. Your line is open. Greg Konrad: I’m going to not ask you about the aftermarket, but just to switch to the OE I mean you mentioned expected reduced commercial OE through fiscal year 2021. I mean, when you think about what you're seeing on bookings. Some of the destocking cadence and also some step down in wide-body rate? Is there another step down for OE or are you pretty in line with build rates? Mike Lisman: So I think we're probably in line with build rates were probably conservative to build rates in the way we look at the business. So yes, I feel good. We're looking at significant uptick in orders from Q4 to Q1 in commercial OEM that's encouraging. Greg Konrad: And then just, I think this was the at least the second quarter in a row on defense OE side is leading aftermarket. I mean is that a trend that you expect to continue or are there headwinds and aftermarket or does that eventually reverse? Kevin Stein: Yes in the defense, every time I think I understand what's going to happen. I'm surprised, it's very lumpy. It's hard to predict. There are many influencers in what gets spent on the defense side. So I don't know, I know we have a strong order book as we go forward and we know that defense orders and shipments can be lumpy. Nick Howley: And we still feel pretty comfortable than the original guidance. Kevin Stein: Yes, yes low to mid single-digits yes. Operator: Our next question comes from David Strauss with Barclays. Your line is open. David Strauss: Mike, want to follow-up on that cash flow question. So I guess your initial cash balance you were going to consume a fair amount of working capital this year. Obviously in Q1, it was a benefit. So was this just timing you expected to reverse and we're still - looking at around 40% conversion on adjusted EBITDA for free cash flow for the full year? Mike Lisman: The 40% is unchanged. We did better this quarter on working capital than I thought we would. Our internal models didn't have $75 million of additional cash coming out of - or $85 million coming out of accounts receivable. But the teams at the OP units drove collections, and they've been tough. The DSO days are down into the low 50s for us. Usually, it's high 50s. But they've done a good job of driving the collections. And that's really what drove the positive source of working capital this quarter. You'll see on the accounts receivable, about $400 million has come out of that from where we were 12 months ago, rough justice. And as we said on the last call, as the recovery starts and then depending on the pace at which it continues, roughly that amount of cash is going to have to go back into the accounts receivable. But it'll probably be, based on your forecast of a couple of year recovery; it's going to take a couple of years to go back in. David Strauss: I mean, as we look out over the next couple of years, would you expect, kind of net working capital as a percent of sales to settle back out where we were pre-pandemic? Or is anything structurally changed on working capital, and maybe it's a little bit better? Mike Lisman: No structural changes in the fullness of time, once we come out to and get all the way out of the recovery. We wouldn't expect the percentage of sales for net working capital to have changed from what we used to be at, in the low 30s, 30% area. David Strauss: Okay. Nick Howley: As Mike saying another way, the one that moves quickly is receivables. And I don't know if there's any reason to think the industry will pay any faster or slower this time. Mike Lisman: Yes, that's right. No structural changes. David Strauss: Yes okay. And then, I think the Cobham acquisition, you noted, a tax benefit as part of the deal. Can you tell us what exactly that is and how much of the purchase price had accounted for? Mike Lisman: Yes, we got a sizable tax benefit, depending on what discount rate you use, somewhere between $40 million and $60 million, $65 million. That obviously is included we paid for that, in the $965 million that we bought. But it reduces - that tax structure that arises from the deal will basically reduce the annual cash expenditures for taxes on the Cobham business. But it's roughly $40 million to $60 million of NPV, the way we sized it. Nick Howley: Spread over... Mike Lisman: Spread over about 10 years. David Strauss: Okay. That's the NPV of it? Mike Lisman: Yes. Operator: Our next question comes from Peter Arment with Baird. Your line is open. Peter Arment: Nick, it sounded encouraging with the back on offense on M&A, and Cobham seems like a good deal. Could you maybe just talk a little bit about, approaching commercial - more commercial aerospace deals in this environment? What you need to see to kind of enter the waters there, on that front? Nick Howley: Yes I mean, we're - we obviously would be interested, but - if it meets our model and our returns. But the fact is, you got to deal with what you see, and we're still not seeing a lot of commercial deals. Some, but not - it's depressed, the commercial. People aren't selling - or most people aren't selling commercial aerospace businesses right now, if they can help it. Operator: Our next question comes from Robert Stallard with Vertical Research. Your line is open. Robert Stallard: Nick or Kevin probably, on the Cobham kind of business, can you give us an idea of what percentage of sales are that, say, defense versus aerospace, particularly your sort of pro forma pre-pandemic. That would be helpful. Thanks. Nick Howley: It's predominantly a defense business, as we've said before in the press release. We did not disclose an exact percentage for it. But it's predominantly defense with some select commercial applications as well for those products. Kevin Stein: But significant international... Nick Howley: Significant for defense. About close to 60% of the revenue goes international. Robert Stallard: Okay. And given that international percentage is that, saying that, you're selling on, what you might call commercial terms, so you'll be able to rebase the aftermarket, like on other acquisitions? Nick Howley: Yes. I don't think we want to comment too much on... Mike Lisman: Yes. We're in the early days of owning it. Kevin Stein: Very early Nick Howley: Sorting through and getting more familiar with the business. So hard to make any statement about ways you'll be able to price it yet. Robert Stallard: Okay. And then just finally, on the sequential improvement in the OEM bookings, can you give us some idea if there was any specific programs that that's related to? Kevin Stein: It was nicely across the board. There really weren't any large one-time items in there. Robert Stallard: So it's not linked to the A320 rate increase or anything like that? Kevin Stein: No. Operator: Our next question comes from Kristine Liwag with Morgan Stanley. Your line is open. Kristine Liwag: With all the focus on COVID recovery, I wanted to switch topics and ask about Esterline. Looking back in the transaction, can you give us an idea in terms of where you are in the cost takeout that you've done with Esterline? And then also, where else we could go from here? And in addition to that, with your 44% margin outlook for the year, how much incremental cost takeout is embedded in that outlook? Nick Howley: So, on Esterline, the first part of the question, again, repeat that. Kristine Liwag: Sorry. For Esterline, just give us an update in terms of what you've accomplished with cost takeout with that business versus what you have initially… Nick Howley: So on cost takeouts; I think we've made progress, obviously, on cost takeout. Our cost takeout continues. As we've communicated in prior quarters, some of our reductions and then COVID reductions have come out in time. But I think that business has more than lived up to the model and expectations than we had going in. I think that headcount reductions and those kinds of cost-management activities might be somewhat reduced or over for Esterline, and now its continuous improvement activities that will drive productivity as we go forward. I think we initially communicated that Esterline may struggle to get to TransDigm margins right out of the chute and that may be in the longer fullness of time, it would get closer. We still believe that, and it still has been a fantastic acquisition for the company. Kristine Liwag: Great. And then for the second part of the question, which is more on your margin outlook for the year, that 44% EBITDA margin expectation, how much incremental cost takeout is embedded in that outlook? Nick Howley: Nothing significantly more. We continue to manage costs, and we continue to look at this as we go forward. And there will be some continued cost takeout because of timing with unions and European businesses. As we're all aware, it takes - you still get them done, but it takes a little bit longer. So there is still some gradual takeout. But I think, as Nick said earlier, we're looking at level costs, with some uptick in activity in the second half. Kevin Stein: I think it's safe to say that the, sort of, extraordinary step-down stuff we did for COVID is about behind us. Nick Howley: Yes. It’s about behind us. Kevin Stein: About behind us. And then we'll see. We'll see what happens to the revenue. Operator: Our next question comes from Hunter Keay with Wolfe Research. Your line is open. Hunter Keay: A couple for me. Kevin, can you give us a little more color on the uptick in interiors? What's driving that? And as you think about the interiors market, specifically over the next few years, where do you think about the ability to drive some innovation, maybe some things you guys had had in the past for maybe new priorities for your airline customers around the world? What are you guys working on? Kevin Stein: So, uptick in interiors, I may have miscommunicated that. We did not see an uptick in interiors. Interiors is our lowest-performing parts of the commercial aftermarket. Trying to give you a little color, it seemed like things were - in some of our interiors businesses, we're starting to do a little bit better, but it still is the worst performer, I guess, of our commercial aftermarket submarkets. What are we looking at new and unusual for the future? We've talked about some of these in the past. But materials, antiviral materials are important for flooring, seat surrounds and the like. We also have a host of touch-free options for bathrooms and overhead bins as well as antiviral webbing for our seat belt. So, there's some real interest and activity. We'll see if any of it is booked into orders. But yes, there's more activity in interiors and from regions of the world that we usually don't see activity from that now are focusing on improving their interiors. But this will be a long march for the interior side as it is the most discretionary of our business. Hunter Keay: And then you mentioned that on - biz jets were being used for more personal and leisure travel. Is there an embedded comment in there on pricing? Or is that just sort of the observation that you're making? Kevin Stein: No, it's just an observation. Hunter Keay: Okay. Kevin Stein: If we want to see growth in business jet usage, takeoff and landings, I think business travel is going to have to eventually get involved. I don't think the world can afford to just do leisure travel and drive the same level of activity. So, it's just that eventually, we're going to have to see business travel take off. Operator: Our next question comes from Pete Skibitski with Alembic Global. Your line is open. Pete Skibitski: Just one question back on the defense side just kind of on the structure of your defense business I'm wondering if you have any thoughts with regard to - if we see some big budget shifts in the defense budget, maybe away from Army towards Navy, towards Air Force or space. How would you expect that to impact your business, positive or negative? Just was interested in your thoughts? Kevin Stein: Well, I think the scenario you just predicted of - from Army to Air Force and Navy and space, those are all good for us. As we move to more technology, more drones, more remote observation monitoring, that's all good for us. We are heavily engaged in those platforms, and our products are really focused on that technology side of the aerospace world. Operator: Our next question comes from Seth Seifman with JPMorgan. Your line is open. Seth Seifman: One thing just kind of conceptually that I've kind of wondered, if we think about coming out of the downside of the pandemic and the situation where demand starts to run fairly hot on the other side. When you guys are sole-sourced, as you are in a lot of your portfolio, and demand is really strong? Are you under a certain obligation to provide parts or if there are shortages, there are shortages, and that's it? Kevin Stein: Yes, if there are shortages, there are shortages. I mean we take it personally if we can't ship a part. And that's why we focus so much on our fill rates and on-time delivery and quality of our products, so that we're so responsive. Seth Seifman: Right, but there is no like contractual obligation at all? Kevin Stein: No, no. Seth Seifman: Right, okay… Kevin Stein: Well, there's the whole range of defense rules. I mean they - well they are what they are. Nick Howley: And I guess I should say, we do - there are some contractual items with Boeing that we have to have certain delivery performance, now that I'm thinking about it. But, it's not a huge limitation or assignment across the business. Kevin Stein: I think it's safe to say that we have very adequate capacity and competitive . Historically, we've never had an issue with the capacity step-up when we needed it, particularly in the aftermarket. Nick Howley: Yes, that's right. Seth Seifman: Okay, cool. And then, just as far as the outlook for the back half of the year, I know aero was out with the release last week, really highlighting what they pointed to as a fair amount of downside to their traffic forecast for 2021. And so and then you guys are running three months ahead of - calendar 2021 in your fiscal year? And so, if we saw a situation where for the entire year, AFKs were only up, I don't know, 10% to 20% or something like that. Would that cause you guys to have to work a little harder? Maybe dig in a little bit more on the cost side to get to the 44%? Kevin Stein: I guess I don't know is the answer. We will always dig in on the cost side that maybe the case, I'd have to think about it some more. Seth Seifman: Right, okay. And then final one, just on the Cobham deal. The margin target that you gave, is that before the application of the value drivers? Mike Lisman: Yes. Kevin Stein: Yes, that's about what we'd expect to see this year. Mike Lisman: Yes that’s right. Kevin Stein: And it's hard - as we sit here today, we can't exactly sort of crank in the timing of improvements and the like in the first six or nine months. Operator: Our next question comes from Michael Ciarmoli with Truist Securities. Your line is open. Michael Ciarmoli: Thanks for taking the questions here. Nick or Kevin, I'm trying to get a sense how big of a component is wide-body versus narrow-body? And could you parse out maybe what you're seeing on the booking side there? And I guess I'm getting at, do we need to see a real material in international travel for your aftermarket revenues to sort of - I don't want to say to get back to prior peak? But I'm just thinking about the weakness we're seeing in international in the wide-bodies and the sense that the wide-body fleet is now much younger, so under warranty. But any color you can kind of give us there or maybe parse out the bookings or how that might play into the recovery? Kevin Stein: So, we've said in the past, and it continues to hold today, that we're market-weighted. So there isn't a lot of wide-body activity. We're market-weighted in our activity levels. So it's clear, wide-body is slower. I do not have granularity of orders to be able to say, are we seeing more wide-body work or not. It's true to get back to - prior to COVID levels, we will need a strong international performance. That is an important part of RPMs and activity on the wide-body side. But I've been very encouraged by the rate of activity that we have today on what is really just a narrow-body market today. And we've performed very well in that. So again, it gives me the reassurance that we are market-weighted, and that is the way you should look at wide-body versus narrow-body. Michael Ciarmoli: Got it. Kevin Stein: It's a smaller portion of the business of the larger aerospace business. Michael Ciarmoli: Got it. And then just thinking second half - even the recovery on your margins and I'm assuming you have your own OE forecast. We all have ROE forecasts. But you're obviously as the aftermarket recovers here, you're mixing more in favor of your higher-margin business? Should we think that your EBITDA margins have the potential to sort of recover to those pre-pandemic, 46%, 47% levels faster if the OE stays depressed and you get this aftermarket snapback, just given that margin differential? Kevin Stein: I think it's possible, but I certainly don't know. And I hate speculating on the future on that. We'll have to see the way the mix comes in. Nick Howley: I mean, it's simply a relative rate of change calculation. One changes faster than the other, it could move one way or the other. Operator: There are no further questions. I'd like to turn the call back over to Jaimie Stemen for any closing remarks. Jaimie Stemen: Thank you all for joining today's call. This concludes today's call. We will be available to address your follow-up questions throughout the day. Thanks again for joining. Operator: Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.TDG Ratings Summary
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Barclays Upgrades TransDigm Group to Overweight with a New Price Target
- Barclays upgraded TransDigm Group Incorporated to Overweight from Hold and increased the price target to $1,500 from $1,250.
- The Aerospace sector, where TransDigm operates, is ranked #2 in the Zacks Sector Rank, indicating strong performance potential.
- TransDigm's stock price reached a peak of $1,330.82, demonstrating significant growth from its 52-week low of $768.05.
On Monday, May 13, 2024, Barclays upgraded its rating on TransDigm Group Incorporated (NYSE:TDG) to Overweight from a previous hold position, setting a new price target of $1,500, up from $1,250. This significant adjustment reflects Barclays' increased confidence in TransDigm's future performance, as reported by TheFly. The aerospace company's stock was trading at around $1,310.49 at the time of the announcement, indicating Barclays' bullish outlook on its growth potential.
TransDigm Group, a key player in the Aerospace sector, has been recognized for its strong performance among its peers. According to Zacks Equity Research, the Aerospace sector is ranked #2 in the Zacks Sector Rank, which evaluates the strength of different sector groups based on the average Zacks Rank of the stocks within them. The Zacks Rank is a model designed to identify stocks that are expected to outperform the market, focusing on earnings estimates and revisions. Although specific performance metrics were not detailed, TransDigm's inclusion in this highly ranked sector suggests it is a significant contender, likely contributing to Barclays' optimistic rating.
The Aerospace sector's high ranking and TransDigm's position within it highlight the company's potential for growth and its attractiveness to investors. This context provides a backdrop for Barclays' decision to upgrade TDG's rating and increase its price target. The company's stock price movement, with a recent slight decrease to $1,310.49, does not detract from its year-to-date achievements, including reaching a peak price of $1,330.82. This peak represents a significant increase from its 52-week low of $768.05, underscoring the stock's volatility and growth potential.
TransDigm's market capitalization of approximately $73.33 billion, combined with a trading volume of 212,403 shares, further illustrates its substantial presence in the market. This financial stature, coupled with its performance within a highly ranked sector, supports Barclays' positive outlook. The upgrade to an Overweight rating and the raised price target to $1,500 by Barclays reflect an anticipation of continued growth and success for TransDigm in the Aerospace industry, making it a stock to watch for investors interested in this sector.
