TransDigm Group Incorporated's CEO Discusses Q3 2012 Results - Earnings Call Transcript

TransDigm Group Incorporated (TDG)

Q3 2012 Results Earnings Call

August 7, 2012 11:00 AM ET

Executives

Nick Howley – Chairman and CEO

Greg Rufus – EVP and CFO

Ray Laubenthal – President and COO

Liza Sabol – IR

Analysts

Carter Copeland – Barclays Capital

Myles Walton – Deutsche Bank

David Strauss – UBS

Robert Spingarn – Credit Suisse

Joe Nadol – JPMorgan

Rama Bondada – Royal Bank of Canada

Noah Poponak – Goldman Sachs

Gautam Khanna - Cowen and Company

Carter Leake – BB&T Capital Markets

Michael Ciarmoli – KeyBanc Capital Markets

J. B. Groh – D.A. Davidson & Co.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Three TransDigm Group Incorporated Earnings Conference Call. My name is Kelly, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

Now I would like to turn the call over to Liza Sabol. Please proceed, Lisa.

Liza Sabol

Thank you. I would like to thank all for calling in today, and welcome to TransDigm's fiscal 2012 third 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.

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 Securities and Exchange Commission. These filings are available through the Investors section of our website or through the SEC's website.

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 related to 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 net 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 to everybody for calling in to hear about our company. Before I begin with the quarterly results, I would like to just talk about one tragic event that occurred in Q3. Al Rodriguez our Head of M&A, passed away suddenly at 51 years old. Al was a significant contributor to the company since the formation of TransDigm. We lost a business partner and a good friend here.

But moving on, Bernie Iversen, another long term member of our senior management team, who has also been with us since the formation of the company has taken over the M&A position. Bernie has had a broad range of operating positions at TransDigm at a number of different locations. He was most recently a Group Vice President, a Group Executive Vice President in charge of a number of our operating units. Bernie has been involved with many of our acquisitions, which will facilitate a smooth transition in his role. Bernie hits the ground pretty well running here.

Now with that behind me, I'd like to review our consistent strategy, our current sense of the status in the aerospace market, as it applies to us and a few miscellaneous items.

To reiterate, we believe our business model is unique in the industry, both in its consistency, and in its ability to sustain and create intrinsic shareholder value through all phases of the aerospace cycle.

To summarize some of the reasons why we believe this, and that these are highlighted on page 4 of the slides. About 90% of the net sales are generated by proprietary products and around three quarters of our net sales come from products, for which we are the sole source provider. About 60% of our revenue, and a much higher percentage of EBITDA comes from aftermarket sales. Aftermarket revenues have starkly produced a higher gross margin, and have provided relative stability in the cyclical downturns.

Because of our uniquely high EBITDA margins, typically in the range of 50% of revenue, and relatively low capital expenditure requirements, typically less than 2% of the revenue, TransDigm has year in, year out, generated strong free cash flow. We pay close attention to our capital structure, and we 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 when we either see good opportunities, or view our leverage as suboptimum for value creation.

We typically begin to deleverage pretty quickly. Based on the credit markets, our near term cash needs, and potential near term acquisition candidates, we address our liquidity and capital structure regularly.

We have a well proven value based operating strategy, focused around what we refer to as our three value drivers; new business development, continual 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 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 improve proprietary aerospace businesses through all phases of the cycle.

Through our consistent focus on our operating value drivers, a clear acquisition strategy, and close attention to our capital structure, we have been able to create intrinsic value for our investors for many years, through up and down markets.

The just completed quarter was active, with some cleanup divestiture issues relating to the AmSafe acquisition, we now have agreements to sell two small non-core businesses, with 2011 EBITDA of about $3 million to $4 million in total. It appears at this time, that the market price is not sufficient for us to sell the AmSafe Ground Transportation business, to remind you that 2011 EBITDA was about $5 million from this business. We believe we can improve this business, and over the year or so, possibly remarket it.

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