TransDigm Group CEO Discusses F4Q2011 Results - Earnings Call Transcript

TransDigm Group Incorporated ( TDG)

F4Q2011 Earnings Conference Call

November 17, 2011 11:00 AM ET

Executives

Liza Sabol – IR

Nick Howley – Chairman and CEO

Ray Laubenthal – President and COO

Greg Rufus – EVP and CFO

Analysts

Carter Copeland – Barclays Capital

Robert Spingarn – Credit Suisse

Joe Nadol – JPMorgan

Michael Ciarmoli – KeyBanc Capital Markets

Amit Mehrotra – Deutsche Bank

Carter Leake – BB&T Capital Markets

Eric Hugel – Stephens Incorporated

Errol Rudman – Rudman Capital

Ken Herbert – Wedbush Securities

Greg Halter – Great Lakes Review

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 TransDigm Group Incorporated earnings conference call. My name is Virginia, and I will be your conference operator for today. At this time, all participants are in a listen-only mode. Later, we will be conducting a question-and-answer session. (Operator instructions)

Today’s event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Liza Sabol with Investor Relations. Please go ahead, Ms. Sabol.

Liza Sabol

Thank you. I would like to thank all of you that have called in today and welcome you to TransDigm's Fiscal 2011 Fourth Quarter Earnings Conference Call. With me on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; President and Chief Operating Officer, Ray Laubenthal; and our Executive Vice President and Chief Financial Officer, Greg Rufus.

A replay of today's broadcast will be available for the next two weeks. Replay information is contained in this morning's press release and on our Website at transdigm.com. We also note that our Form 10-K will be filed tomorrow and also will be found on our Website.

Before we begin, the company would like to remind you that statements made during the call, which are not historical in facts 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 Securities and Exchange Commission. These filings are available through the Investors section of our Website or through the SEC Commission’s Website 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 a reconciliation of EBITDA and EBITDA As Defined, adjusted income and adjusted earnings per share to those measures.

With that, let me now turn the call over to Nick.

Nick Howley

Good morning, and thanks for calling in today to hear about our company. I will start off as usual with some comments about our consistent strategy. I will then given an overview of a busy fiscal year ’11, then a summary of our financial and market performance in ’11 and lastly some initial guidance for 2012.

So, we have a fair amount to cover here today. To restate, we believe our business model is unique in the industry, both in its consistency and its ability, staying and create intrinsic shareholder value through all phases in the aerospace cycle. To summarize some of the reasons we believe this, and you can look at Page 4 of the slides now, about 90% of our net sales were generated by proprietary products, around three-quarters of our sales come from products for which we believe we are the sole source provider, about 55% of our revenue and a much higher percent of our EBITDA comes from aftermarket sales. Aftermarket revenues have historically produced a much higher gross margin and have provided relative stability in the downtimes.

Because of our uniquely high EBITDA margins, running around 50% of revenue, and relatively low capital expenditure requirements, typically 2% or less of revenue, TransDigm has year-in and year-out generated very strong free cash flow. We pay close attention to our capital structure and view it as another means to create shareholder value.

As you know we have in the past and continue to be willing to lever up opportunities or view our leverage as sub-optimum equity value creation. We typically begin to delever pretty quickly. We have a well-proven value-based operating strategy focused around what we refer to as our three value drivers

new business development; continue cost improvement; and value-based pricing.

We stick to these concepts as the core of our operating management methodologies. This consistent approach has worked for us through up and down markets and has allowed us to continuously improve and increase the intrinsic value of our businesses, while steadily investing in new business and platform positions.

We have also been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace businesses with significant aftermarket content. We have been able to acquire and approve aerospace businesses through all phases of the cycle. In fiscal year ’11 just ended, we acquired three businesses making up nine operating units for a total price of about $1.6 billion. Additionally about two weeks ago, we announced an agreement to acquire Harco Laboratories for about $84 million, this is subject still to HSR Antitrust Review.

Through our consistent focus on our operating value drivers, a very clear acquisition strategy, and close attention to our capital structure, we have been able to create intrinsic value for our shareholders for many years in up and down markets. To summarize 2011 just quickly, it was a busy, hectic, but a good year. We created a lot of shareholder value and this was far and away our most active year for acquisitions.

Now, I will give a little more color. In the first half of the year, we acquired the McKechnie business for $1.27 billion, our largest acquisition to date. McKechnie was a holding company with seven operating units. We raised $3.1 billion to both refinance our existing debt and pay for the McKechnie acquisition. We then acquired Talley Actuator business from Teleflex for about $93 million. We again refinanced the senior debt portion of our earlier financing, that was about $1.6 billion of our debt in order to drop the interest rate and to eliminate certain maintenance covenants. And lastly, we began to integrate the four major McKechnie units and the Talley businesses into TransDigm. We also have initiated three plant relocation consolidations and we sold the McKechnie Fastener businesses to Alcoa for more than we paid for them.

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