Lantern Pharma Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 17 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to TransDigm Group, Inc. 2nd Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded.

Operator

I would like now to turn the conference over to Jamie Steeman, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, and welcome to TransDigm's fiscal 2024 Second Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm's President and Chief Executive Officer, Kevin Stein Co Chief Operating Officer, Mike Lisman and Chief Financial Officer, Sarah Wynne. Also present for the call today is our Co Chief Operating Officer, Joel Reiss. Please visit our website at transtime.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.

Speaker 1

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 dotgov. 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 reconciliations. I will now turn the call over to Kevin.

Speaker 2

Good morning, everyone. Thanks for calling in today. First, I'll start off with the usual quick overview of our strategy, a few comments about the quarter and discuss our fiscal 2024 outlook. Then Mike and Sarah will give additional color on the quarter. To reiterate, we believe we are unique in the industry in both the consistency of our strategy in both good times and bad, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle.

Speaker 2

To summarize here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins and over extended period have typically provided relative stability in the downturns. We follow a consistent long term strategy specifically, first, we own and operate proprietary aerospace businesses with significant aftermarket content. 2nd, we utilize a simple well proven value based operating methodology.

Speaker 2

3rd, we have a decentralized organizational organizational structure and unique compensation system closely aligned with shareholders. 4th, we acquire businesses that fit this strategy and where we see a clear path to PE like returns. And lastly, our capital structure and allocations are a key part of our value creation methodology. Our long standing goal is to give our shareholders private equity like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital.

Speaker 2

As you saw from our earnings release, we had a strong quarter. Our Q2 results ran ahead of our expectations and we once again raised our guidance for the year. Commercial Aerospace market trends remain favorable as the industry continues to recover and progress towards normalization. Global air traffic has surpassed pre pandemic levels and demand for travel remains robust. Airline demand for new aircraft also remains high and the OEMs are working to increase aircraft production.

Speaker 2

However, OEM aircraft production rates remain well below pre pandemic levels. There is still much progress to be made for OEM rates and our results to continue to be adversely affected in comparison to pre pandemic production levels. In our business during the quarter, we saw healthy growth in our revenues and bookings for all 3 of our major market channels, commercial OEM, commercial aftermarket and defense. Revenues and bookings also sequentially improved in all three of these market channels. Our EBITDA as defined margin of 53.2% in the quarter, contributing to the strong Q2 margin is the continued strength in our commercial aftermarket, along with diligent focus on our operating strategy, which is allowing margin performance to expand across all segments.

Speaker 2

Additionally, we had strong operating cash flow generation in Q2 of close to $230,000,000 and ended the quarter with almost $4,300,000,000 of cash. We expect to steadily generate significant additional cash throughout the remainder of 2024. Next, an update on our capital allocation activities and priorities. Regarding the current M and A activities and pipeline, we continue to expect a fiscal year 2020 4 closure of the electron device business of Communications and Power Industries also known as CPI, which was announced on a prior earnings call. We continue to actively look for M and A opportunities that fit our model.

Speaker 2

As we look out over the next 12 months to 18 months, we continue to see an expanding pipeline of potential M and A targets. This remains a busy time and we are actively expanding our M and A team to address these opportunities. As usual, the potential targets are mostly in the small and mid sized range. I cannot predict or comment on possible closings, but we remain confident that there is a long runway for acquisitions that fit our portfolio. Please see our 10 Q for more detail on some smaller but nicely accretive acquisitions that we recently closed.

Speaker 2

The capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our businesses. 2nd, do accretive discipline to M and A. And 3rd, return capital to our shareholders via share buybacks or dividends. Before the option paying down debt seems unlikely at this time, though we do still take this into consideration.

Speaker 2

We are continually evaluating all of our capital allocation options, but both M and A and capital markets are difficult to predict. As always, we continue to closely monitor the capital markets and remain opportunistic. As mentioned earlier, we ended the quarter with cash balance of almost $4,300,000,000 which includes the $2,000,000,000 of cash from new debt issued during our Q1 of fiscal 2024. That debt was proactively raised for the acquisition of CPI's Electron Device Business and general corporate purposes. We have significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future.

Speaker 2

Moving to our outlook for fiscal 2024. As noted in our earnings release, we are increasing our full fiscal year 2024 sales and EBITDA as defined guidance to reflect our strong second quarter results and our current expectations for the remainder of the year. At the midpoint, sales guidance was raised $75,000,000 and EBITDA as defined guidance was raised $60,000,000 The guidance assumes no additional acquisitions or divestitures and is based on current expectations for continued performance in our primary commercial end markets throughout fiscal 2024. Our current guidance for fiscal 2024 is as follows and can also be found on Slide 6 in the presentation. Note that the pending acquisition of CPI's Electron Device business is excluded from this guidance until acquisition close.

Speaker 2

The midpoint of our fiscal 2024 revenue guidance is now $7,740,000,000 or up approximately 18%. In regards to the market channel growth rate assumptions that this revenue guidance is based on, for the defense market, we are updating the full year growth rate assumptions as a result of our strong second quarter results and current expectations for the remainder of the year. For defense, we now expect revenue growth in the mid teens percentage range. This is an increase from our previous guidance of high single digit to low double digit percentage range. We are not updating the full year market channel growth rate assumptions for commercial OEM and commercial aftermarket as underlying market fundamentals have not meaningfully changed.

Speaker 2

Commercial OEM and commercial aftermarket revenue guidance is still based on our previously issued market channel growth rate assumptions. We expect commercial OEM revenue growth around 20% and commercial aftermarket revenue growth in the mid teens percentage range. The midpoint of our EBITDA as defined guidance is now $4,045,000,000 or up approximately 19% with an expected margin of around 52.3%. This guidance includes about 100 basis points of margin dilution from our recent CalSpan acquisition. The midpoint of our adjusted EPS is increasing primarily due to the higher EBITDA defined guidance and is now anticipated to be $32.42 or up approximately 25% over prior year.

Speaker 2

Sarah will discuss in more detail shortly the factors impacting EPS along with some other fiscal 2024 financial assumptions and updates. We believe we are well positioned for the second half of fiscal twenty twenty four. We'll continue to closely watch how the aerospace and capital markets continue to develop and react accordingly. Let me conclude by stating that I'm very pleased with the company's performance this quarter and throughout the recovery for the commercial aerospace industry. We remain focused on our value drivers, cost structure and operational excellence.

Speaker 2

Let me hand it over to Mike Lisman, our TransDigm Group Co COO to review our recent performance and a few other items.

Speaker 3

Good morning, everyone. I'll start with our typical review of results by key market category. For the remainder of the call, I'll provide commentary on a pro form a basis compared to the prior year period in 2023. That is assuming we own the same mix of businesses in both periods. In the commercial market, which typically makes up close to 65% of our revenue, we will split our discussion into OEM and aftermarket.

Speaker 3

Our total commercial OEM revenue increased approximately 21% in Q2 compared with the prior year period. Sequentially, total commercial OEM revenues grew by about 12% compared to Q1. Bookings in the quarter were strong compared to the same prior year period. These booking levels continue to support the commercial OEM guidance for revenue growth of around 20% for fiscal 2024. OEM supply chain and labor challenges persist, but appear to be progressing.

Speaker 3

Broadly speaking, we continue to be encouraged by the elevated and healthy airline demand for new aircraft. Supply chains remain the primary bottleneck in this OEM production ramp up. As many of you know, concerns have recently arisen around the expected 7 37 MAX production rate ramp. Time will tell how this plays out. At this time, we remain cautious and are watching for a potential realignment of our current MAX order backlog to reflect the lower production rates.

Speaker 3

The commercial OEM guidance we are giving today contains an appropriate level of risk around the MAX production build rate for the balance of our 2024 fiscal year. While both the 7 37 MAX risk as well as other risks remain towards achieving the ramp up across the broader aerospace sector, we're optimistic that our operating units are well positioned to support the higher production rates as they occur. Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 8% compared with the prior year period. I would like to provide a bit more color than is typical on our commercial aftermarket submarkets as the variation in growth rates seen this quarter across those submarkets was much larger than usual.

Speaker 3

The 8% growth rate mentioned was primarily driven by the continued strength in our passenger submarket, which is by far our largest submarket. Growth in our passenger submarket was roughly 20% versus the prior year period and this submarket continues to perform exceptionally well. We also saw good growth in our interior submarket of about the same rate when compared to prior year Q2. These increases were offset by declines in our freight and bid jet submarkets. Freight was down roughly 15% and bid jet was down in the 5% area.

Speaker 3

The freight decline was primarily a result of the continued return of belly capacity, consistent with what we discussed on our past few earnings calls. The BitJet decline is a result of tempering BitJet flight activity, which has continued to come down from the pandemic cost. For the full year and as you saw in today's guidance, our outlook for commercial aftermarket growth in the mid teens is unchanged. We saw a number of elements in our Q2 results that make us confident. Namely, Q2 bookings in commercial aftermarket were strong, running ahead of our expectations, significantly outpacing sales and supporting the full year growth outlook.

Speaker 3

Additionally, our Q2 point of sales data through our distribution partners, which can be a decent leading indicator was up significantly, well into the double digits on a percentage basis. Finally, a reminder, commercial aftermarket can be lumpy on a quarterly basis, both revenue and the bookings, not as lumpy as defense aftermarket, but lumpy nonetheless. Finally, note that our guide for mid teens percentage growth across our total commercial aftermarket given today still incorporates a continued drag from the cargo and bizjet submarkets for the balance of this fiscal year. Now turning to broader market dynamics and referencing the most recent IATA traffic data for March. Global revenue passenger miles surpassed pre pandemic levels for the first time in February 2024 and continued to do so in March.

Speaker 3

March 24 air traffic was about 1% above pre pandemic and IATA currently expects traffic to reach 104% of 2019 levels in 2024. Domestic travel continues to surpass pre pandemic levels. In the most recently reported traffic data for March, global domestic air traffic was up 6% compared to pre pandemic. Domestic air travel growth has been driven significantly by outsized growth in China, which was up 14% in March compared to pre pandemic. This is a significant improvement from China being down 3% a year ago in March of 2023.

Speaker 3

Shifting over to the U. S. Domestic market, domestic air travel for March was about 4% above pre pandemic traffic. International traffic has continued to make steady improvement over the past few months. It slightly surpassed pre pandemic levels for the first time in February.

Speaker 3

In the most recently reported data for March, international travel was down just 2% compared to the pre pandemic levels. And this marks a significant improvement from being down about 18% 1 year ago. In summary, for the commercial aftermarket, we continue to see growth in our passenger and interior submarkets indicative of the continuing positive trends COVID passenger traffic recovery. Our bid jet and freight submarkets are as we'd expect in light of the current trends in their underlying markets. Now shifting to our defense market, which traditionally is at or below 35% of our total revenue.

Speaker 3

The defense market revenue, which includes both OEM and aftermarket revenues grew by approximately 21% compared with the prior year period. Q2 defense revenue growth was well distributed across our businesses and customer base. Additionally, we saw similar rates of growth in both the OEM and aftermarket components of our total defense market with aftermarket running slightly ahead of the OEM. We do not expect to see defense revenue growth rates at this 20% level at this 20% plus level continuing for the balance of the year and we expect some moderation or temporary here as you can tell from the guidance given today. Defense bookings were up significantly this quarter compared to the same prior year period and support the revised defense revenue growth guidance for the full year.

Speaker 3

Additionally, this quarter we saw growth in U. S. Government defense spend outlays and we're hopeful we'll continue to see steady growth here. But as we have said many times before, the Fed sales and bookings can be lumpy. We know the bookings and sales will come, but forecasting them with accuracy and precision, especially on a quarterly basis is difficult.

Speaker 3

As Kevin mentioned earlier, we now expect our defense market revenue growth for this year to be in the mid teens percentage range. This updated guidance for defense primarily reflects stronger than expected Q2 defense sales as well as the good Q2 bookings. Lastly, I'd like to wrap up by expressing how pleased I am by our operational performance in the Q2 of fiscal 2024. Even though we saw some lumpiness in our most profitable end market commercial aftermarkets, our operating unit teams did an exceptional job of executing on our value drivers that generated strong results delivered this quarter. Our management teams remain committed to our consistent operating strategy and servicing the robust demand for our products as we continue through the balance of the year.

Speaker 3

With that, I'd like to turn it over to our CFO, Sarah Wynne.

Speaker 4

Thanks, Mike, and good morning, everyone. I'll recap the financial highlights for the Q2 and then provide some more information on the guidance update. 1st, on organic growth and liquidity. In the Q2, our organic growth rate was 16.1% and all market channels contributed to this growth as Mike and Kevin have just discussed. On cash and liquidity, free cash flow, which we traditionally define as EBITDA less cash interest payments, CapEx and cash taxes was roughly $290,000,000 for the quarter, coming in around $950,000,000 on a year to date basis.

Speaker 4

As a reminder, our fiscal Q1 free cash flow was higher than average due to the timing of our interest and tax payments. For the full fiscal year, our free cash flow guidance is unchanged. We continue to expect to generate free cash flow of approximately 2,000,000,000

Speaker 5

dollars in fiscal 2024.

Speaker 4

Below that free cash flow line, net working capital consumed 82,000,000 dollars driven by AR with the highest sales in the quarter and inventory as we support the second half of our year. We continue to expect our annual dollars invested in net working capital to moderate from the elevated levels we've seen over the prior 2 years, but pinpointing an exact dollar amount of investment for fiscal 2024 is difficult. We ended the quarter with approximately $4,300,000,000 of cash on the balance sheet and our net debt to EBITDA ratio was 4.6 times, down from 5 times at the end of last quarter. As a reminder, approximately $1,400,000,000 of cash is reserved for the anticipated closing of the CPI acquisition. We continue to be comfortable operating in the 5 to 7 net debt EBITDA ratio range.

Speaker 4

And while we are currently sitting slightly below the low end of this range, our go forward strategy of capital deployment has not changed. And we continue to seek the best opportunities for providing value to our shareholders through our leverage strategy. Our EBITDA interest expense coverage ratio ended the quarter at 3.4 times on a pro form a basis, which provides us with comfortable cushion versus our target range of 2 to 3 times. During the quarter, we completed a few financing objectives, including pushing out our nearer term debt stacks along with repricing approximately $6,000,000,000 of our term loan debt from SOFA plus 3.25 to SOFA plus 2.75. This financing activity effectively pushes out our nearest term maturity date by 2 fiscal years, for fiscal 2028.

Speaker 4

Our capital allocation strategy is always to both proactively and prudently manage our debt maturity set and these actions accomplish that. The financing activities slightly reduced our interest expense for fiscal 2024, reducing expense by $12,000,000 or $25,000,000 on an annualized basis. However, as you'll note, our guidance for the interest expense has decreased by $60,000,000 primarily driven by the interest income we received year to date and project for 2024. We remain approximately 75% hedged on our total $22,000,000,000 gross net balance throughout fiscal 20 26. This is achieved through a combination of fixed rate notes, interest rate caps, swaps and collars.

Speaker 4

This continues to provide us adequate cushion against any rise in rates at least in the immediate term. With regard to guidance, as Kevin mentioned, we increased our midpoint sales and EBITDA by $75,000,000 $60,000,000 respectively, given the strong quarter and current expectations for the year, along with increasing our EBITDA margin guidance from 52% to 52.3%. Our adjusted EPS guidance is now $32.42 compared to the prior guidance of $30.85 As we sit here today from an overall cash, liquidity and balance sheet standpoint, we think we remain in good position with adequate flexibility to pursue M and A or return cash to our shareholders via dividends or share repurchases. With that, I'll turn it back to the operator to kick off the Q and A.

Operator

Thank you. The first question comes from Myles Walton with Wolfe Research. Your line is open.

Speaker 5

Thanks. Good morning. Kevin, I was wondering if you could touch on the aftermarket growth rate in the quarter and the reacceleration implied in the back half of the year. And in particular, if you can parse out the freighter complement to that. I think GE on their call actually raised their freighter outlook for the year on aftermarket.

Speaker 5

So I'm not trying to align 2 different data points, but just what you're seeing overall. And I know you said that the guidance incorporates drag for the rest of the year, but is it fair to think that that drag becomes less and less?

Speaker 3

Sure, Myles. It's Mike. I'll take that one. Overall, with regard to commercial aftermarket, we had a very solid bookings quarter. We significantly outpaced sales in the segment commercial aftermarket overall, which sets us up well nicely for the back half and the mid teens percentage growth for the year.

Speaker 3

As we mentioned, passenger and interior were both up ahead of our expectations. A bit more color on the freight point and to address some of your questions there. We were down about 15%. That was about what we expected maybe a little bit worse than we had foreshadowed it, I think, on the last two calls. I think as you guys know, we have about 3 op units that fall into that freight bucket and facilitate the movement of freight on aircraft, both passing full freighters as well as the belly cargo systems.

Speaker 3

And that submarket, it's about plus or minus depending on the quarter 15% or so of our commercial aftermarket bucket. We wait a bit more towards freighter in that bucket. And I think as you guys know, within the freight market, there's been a trend away from freight being carried within full freighters and more towards the belly of the passenger capacity that's coming back into the market on passenger aircraft, the belly systems. And we specifically, we've got a couple of OP units that as I said, they're a bit more freighter weighted. And as that market has trended off and we've seen a shift more towards belly, they've seen a bit of a decline in some of their product sales.

Speaker 3

It tends to be stuff that's slightly lower margin for us across our commercial aftermarket than the rest of that bucket. So there's not too much of a margin drag or impact as a result of it, but you see the sales decline and that's part of what drove the 15% drop. For the balance of the year, we do see that continuing in the back half. We factored that into our guidance and we feel good about the whole mid teens percentage rate growth given the strength we've had in the bookings. But on the freight side, we do expect to see some continued headwinds here in the back half of the fiscal twenty twenty four year.

Speaker 5

Thanks for the color.

Operator

One moment for the next question. The next question comes from Robert Spingarn with Melius Research. Your line is open.

Speaker 6

Thank you. Hi, this is Scott Micas on for Rob Spingarn. Kevin, to follow-up on Myles' question, airlines have been flagging elevated turnaround times in MRO shops, particularly for engines. So I'm just wondering, are any of your operating units getting the sense that volume growth on components for engines isn't as high as they would expect, just because throughput at the MRO shops isn't as fast as it was pre COVID?

Speaker 3

It's Mike again. We have not really seen much of that action. I think we've seen pretty good strength across all of our different products both on engine and off engine across the commercial aftermarket at this point of the fiscal year.

Speaker 2

But I would say we probably have lower exposure to engine aftermarket as a percentage of our business.

Speaker 6

Okay, got it. And then on the defense end market, historically, you've characterized it as a low single digit organic grower. ArmTek has seen some large awards and contracts related to munitions and artillery. Army wants to increase 155 millimeter artillery production to 100,000 shells per month by late 2025. So how should we be thinking about the long term growth trajectory for your defense sales going forward?

Speaker 3

I think you guys know we have an Analyst Day coming up in June and we don't want to go ahead and give long term guidance by submarket outside of this year. We do feel good about the mid teens percentage growth range this year for defense. We're seeing that strength across the OEM and aftermarket. It's pretty broadly distributed across all of our op units. But ArmTek, in particular, has had some good flare shipments this year, as well as the Mordents project product out of their California facility, which is the 155 millimeter program that you mentioned.

Speaker 3

That growth should continue for a couple of years. You might have seen in the some of the Department of Defense budget documents for the next 2 years or so. So we remain optimistic about the growth outlook there, but it's not really driven by just 1 or 2 operating units. It's been pretty evenly distributed across our full group. As we said, we don't expect the defense growth of 20% or so that we've seen in the first half of this year to continue.

Speaker 3

There's just got to be some moderation there. This is always lumpy. Fortunately for us in the first half of this year, it's been lumpy to our benefit, probably a bit better than we expected, but we do expect some moderation as long term. It's not going to grow anywhere close to 20%.

Speaker 6

Thanks for taking the questions.

Operator

One moment for the next question. Next question comes from Ken Herbert with RBC Capital Markets. Your line is open.

Speaker 7

Yes. Hey, good morning, everybody.

Speaker 8

Good morning.

Speaker 7

I wanted to see either Mike or Kevin, if you could drill down maybe somewhat on the defense commentary. I can appreciate the lumpiness, but is there anything in particular you saw in the first half, either things pull to the left or sort of an acceleration in shipments that specifically gives you reason to be more cautious on the second half. I can appreciate the step down in guide probably reflects some conservatism to get to the full year growth. But just wondering if there's anything you'd call out relative to just a track record of lumpiness and conservatism as you think about second half of the

Speaker 2

year? I think we always strive to be conservative in our guidance. We did bring obviously our guidance up. So for the year, but I take your point that on a quarter basis that would imply we're going back down. It's difficult to predict.

Speaker 2

I think what we're seeing is finally the backlog, the demand that is clearly in the defense market space coming out, they're finally placing the orders for this product. We would anticipate that this will be a good tailwind for us, but it's hard, given the lack of visibility at times in the defense industry to predict it so accurately. So we don't want to get out over our skis on really any of our submarkets. We choose to be a little bit more conservative as we break things up.

Speaker 7

Appreciate that. And if I could then Kevin, maybe one other way to think about it is how much of your defense aftermarket in particular would you classify as short as short cycle versus sort of backlog driven?

Speaker 2

I think defense aftermarket tends to be different than commercial aftermarket. It can be longer cycle. But there's still drop ins that happen everywhere.

Speaker 7

Perfect. Thanks for the color. Nice quarter.

Operator

Thank you. One moment for the next question. Next question comes from David Strauss with Barclays. Your line is open.

Speaker 9

Hi, good morning. This is Josh Korn on for David. I wanted to ask in the guidance, why would EBITDA margins in the second half drop from Q2 on what appears like it would be a similar mix to the Q2? Thanks.

Speaker 2

I think we're comfortable. We don't want to get into giving quarterly guidance on these things. We're comfortable for the year at where we sit. Yes, business can be lumpy. We were pleasantly surprised by the EBITDA this quarter.

Speaker 2

We're not positive how the future quarters will unfold. But again, our goal is to be conservative. So that is our forecast for now that we're sticking with.

Speaker 9

Okay, thanks. And then I just wanted to follow-up on the first question about sequential aftermarket in the second half. Are you baking in any sequential improvement or is it just easier comps in Q3 and Q4?

Speaker 3

I think we don't tend to give quarterly guidance by end market, but I think as you guys know, if you look at how we did in the first half in commercial aftermarket, what's implied for the second half, you'd expect probably Q4 to be the highest and some ramp up as we proceed through the balance of the year on the commercial aftermarket.

Operator

Okay. Thank you. One moment for the next question. The next question comes from Scott Doisel with Deutsche Bank. Your line is open.

Speaker 10

Hey, good morning.

Speaker 8

Good morning.

Speaker 10

Kevin, just on M and A, is your optimism on the pipeline more about the next 12 to 18 months? Or are you still optimistic about the pipeline for the second half of this year specifically?

Speaker 2

I'm optimistic about the future. It's difficult for me to unpack it into quarterly buckets. I remain optimistic about what the future holds for M and A. Our M and A tracker that I follow constantly, it has the most names. It's the busiest we've probably ever been in the M and A.

Speaker 2

Again, it doesn't tell you what's going to close. We remain very picky in the businesses that we choose and we will continue to do that. We have a lot of activity in the small and medium size. We announced 2 in our 10 Q today that our smaller sized businesses, but nicely accretive as I said in my opening comments. Yes, there's a lot going on out there.

Speaker 2

We're very busy.

Speaker 10

Great. Thank you. And then Mike, you're seeing really good leverage on gross margins, but SG and A has been growing. It looks like a bit faster than sales, at least

Speaker 11

over the last few quarters. So I'm curious if you could talk

Speaker 10

a bit about what's driving that SG and A expense growth to outstrip sales? And then when we should expect to see better operating leverage on that line specifically? Thanks.

Speaker 4

Yes, I can speak to that one. A large portion of what you see is some of that increase on the noncash.com that plays into it. When you look at that, actually just the raw sales, which you'll see in the quarterly, when it's published later today, you'll see that actually the spend is going down.

Speaker 10

Great. Thank you.

Operator

Please standby for the next question. The next question comes from Gautam Hanna with TD Cohen. Your line is open.

Speaker 5

Hey, good morning guys.

Speaker 3

Good morning.

Speaker 2

I was wondering if

Speaker 12

you could expand upon your comments in the prepared remarks about differences in the distribution channel versus what you're seeing direct. So maybe if you could just tell us a little more where you're seeing better sell through and if that's flying to the freighter market or not yet, etcetera?

Speaker 3

The 2 don't always perfectly correlate in terms of what we see through our POS with our distributors and then what we do directly. What goes through distribution now, it bounces around a little bit, but it's about 20% to 25% or so of our CAM sales.

Speaker 11

And it's

Speaker 3

a decent leading indicator usually of future orders that will come obviously because the distributors sell out their inventory that they hold on our behalf so that we can get product quickly to customers and we got to replenish it. So the sales come eventually to replenish the sales they see, but they on a quarterly basis don't always move exactly in the right direction. But over time, POS tends to be a pretty decent leading indicator of where the full commercial aftermarket is heading and that's what gives us, as we said in the remarks, some confidence today as we look out where commercial aftermarket

Speaker 9

is likely to go for

Speaker 3

the balance of the year.

Speaker 12

And can you comment on BizJet, Hilo and freighter specifically? Do you think we're in the early innings of that business declining or what's your expectation for when that might actually turn positive again in the

Speaker 3

to say. I think it's hard to say. It depends where the freighter market goes. But generally, with the belly capacity having come back, you'd expect 2024 to be the year where we take it most of the decline on the full freighter business. We had saw a great run up during COVID on the freighters and now the market's just sort of correcting back to the 2019 levels in terms of what goes via full freighter and what goes via belly.

Speaker 3

So 2024 is going to be probably the biggest year where that correction curves.

Speaker 12

Thanks guys.

Operator

One moment for the next question. The next question comes from Peter Arment with Baird. Your line is open. Yes.

Speaker 13

Good morning, everyone. Nice results.

Speaker 5

Good morning. Hey, I wanted to

Speaker 13

circle back on Joel, you gave some comments about just some of the how some of the passenger travel markets are doing. You talked about China. Could you maybe talk about maybe just if you could call out if what you're seeing from an aftermarket perspective on a regional basis or any color that international versus domestic if you're seeing any big differences?

Speaker 3

We don't get great split outs by region when it comes to our commercial aftermarket sales. A lot of the IATA data we referenced basically supports the highest growth rates being in China and Asia. A lot of that would go via our distributors. We don't get great visibility into it. We're of course benefiting from it.

Speaker 3

I think you see that in the bookings strength we have, but we don't get great data by region.

Speaker 14

Okay. That's helpful. Just was curious.

Speaker 13

And then just could you give us an update just on what you're seeing in the supply chain? Obviously, it's been something that has slowly improved, but it's always whack a mole, I assume. And just any color on

Speaker 7

what you're seeing in the latest in the supply chain?

Speaker 3

I'd say it continues to get better, not back to where it was in 2019 yet, but better than where it was 12 months ago, 24 months ago, continue to have issues with items like certain electronics, castings, certain chemicals or materials, but continued progress.

Speaker 13

Appreciate the color. Thanks guys. I'll stick to one.

Operator

One moment for the next question. The next question comes from Robert Stallard with Vertical Research. Your line is open.

Speaker 15

Thanks so much. Good morning.

Speaker 8

Good morning. Good morning.

Speaker 15

This might be for Kevin. Your comments on the Boeing situation on commercial OEM. Let's say, given what you said 3 months ago, I was wondering if you did actually reduce your Boeing expectations this quarter. And if you did, are they being offset or must be offset by something else, right?

Speaker 3

I'll take that one, Rob. I think in the commercial OEM, our first half ran a little bit better than the full year guidance. It's something like plus 23%. I think we're cautious on the outlook here in commercial OEM overall and the OEM forecast incorporates an appropriate level of risk around a potential Boeing rate change. Our forecast is a reminder and I think as you know, it's a bottoms up forecast from our off units based on what they're seeing, what they're hearing from their off units.

Speaker 3

It's not a corporate top down mandate on, hey, the build rate should assume for MAX is say 38 or so. It's a bottomed up build based on what they're seeing at their specific off unit. And as a reminder, we a lot of our content on those aircraft, it doesn't go direct to Boeing. It often goes into sub tiers just given the nature of the components we're selling, who could be taking actions independently based on what they're seeing, hearing as well. But in a nutshell, we feel good about the guide for the year of around 20% and any potential reductions we've baked into the guidance we're given today for the year.

Speaker 15

Okay. And then as a follow-up I think

Speaker 2

it's also fair to say that Airbus is continuing to do better. So that's going to continue to backfill some of the possible hole created by Boeing in the short term. Term.

Speaker 15

Yes. And then just as a follow-up, Kevin, on your comment on your M and A tracker and it behaves to be as a member. What do you think is driving that? And is there any sort of change given the amount of target or any change to the pricing that you're seeing being discussed?

Speaker 2

Yes. I wish I knew that. It would help me when things slow down to better understand. It just seems to be a busy time right now, whether that's expectations around the market segment. I don't know and it's difficult for me to speculate.

Speaker 2

It's just a busier time. We haven't changed our standards or our expectations at all. We still view businesses the same way we have since the beginning. So you can only swing at the pitches that get thrown as Nick used to say years ago and that's still true today.

Speaker 15

Okay. That's great. Thank you.

Operator

The next question comes from Noah Poponak with Goldman Sachs. Your line is open.

Speaker 7

Hey, good morning, everyone.

Speaker 8

Good morning.

Speaker 14

I was curious if you could help me better understand if you are assuming that freight is a drag inside of the aerospace aftermarket in the back half, How does the total aftermarket growth rate accelerate in the back half? Is bizjet and helicopter in the passenger side faster growth in the back half? Or is it just the compares or something else?

Speaker 3

I think we're I'll take a stab at it, Noah, and hopefully it addresses what you're trying to get at. We've seen really strong growth in the passenger and we see that continuing based on bookings in the back half of the year. Free, we've continued to see a bit of softness on the booking side there, which is how we know in the second half

Speaker 2

that we're likely to see

Speaker 3

some continued slight decline there. BizJet thus far this year was up a bit I think in Q1, Q2 was down a bit for the year, it's about flattish. We expect to see something like that maybe a little bit better in the back half, but really what's driving the commercial aftermarket overall is the continued strength in passenger and interior. That is the vast majority when you lump those 2 buckets together of that commercial aftermarket bucket and we're seeing really good strength there. That's covering up some of the weakness elsewhere as we look out for the last 6 months.

Speaker 14

Okay. Yes, I guess it sounds like you're qualitatively directionally saying you expect passenger and freight to do something similar in 3Q and 4Q as they did in 2Q. But for the aggregate segment or end market growth rate to accelerate, somewhat significantly. But I guess if passenger is a little better, freight is a little better and the compares are easier, that maybe that gets you there?

Speaker 3

I think that's right. Yes.

Speaker 14

Okay. Okay. Did the rate of change in price change very much in the aftermarket in the second quarter?

Speaker 3

Not appreciably, no. I think we always as you guys know, we seek to price slightly ahead of inflation And that's unchanged this quarter, same expectation as we always have for our operating units and what the teams look to execute on.

Speaker 5

Well, I think we don't

Speaker 2

spend enough time talking about or emphasizing the gains we've made in productivity. We are down thousands of heads compared to where we were at very much comparable volumes or approaching comparable volumes. That's a real productivity as we have been reluctant to add back and driving engineering productivity projects in our facilities. That is clearly having an impact on our EBITDA.

Speaker 14

Yes, you can definitely see that in the margins. Okay. Kevin, you mentioned adding people to the M and A team. Can you quantify that? Like how many people relative to the base or what kind of percentage increase you're making?

Speaker 14

Just curious there.

Speaker 2

Yes. I don't we're looking to add 1 or 2 more folks to our M and A team. We are seeing a lot of really interesting smaller sized deals and small deals take as much time to go through as bigger ones. So we need some more help to go through that. So hopefully this will produce some more opportunity for us as we're seeing things come across our desks that we haven't seen before.

Speaker 2

Okay. Thank you.

Operator

One moment for the next question. The next question comes from Sheila Kahyaoglu with Jefferies. Your line is open.

Speaker 1

Good morning, guys, and thank you. First, I wanted to speed up another aftermarket question. It's been asked several ways, but up 8, If we take out freight, which is 15% of your aftermarket, just an assumption there, that's 2 points of that headwind. How do we think about where peers were averaging about 15% on the quarter and you guys at 10%, and you having more price power, how do we think about what held aftermarket back outside of freight and bizjet?

Speaker 3

Yet? I think on a quarterly basis, you can always see a little bit of lumpiness as we said here before. I'm not sure exactly to follow the math on the 2% drag. But as we said today, we saw really strong bookings across our whole business that can be lumpy. We feel really good about the outlook for the full year with the mid teens percentage growth there.

Speaker 2

Yes. I mean, we sequentially booked more in aftermarket. We're seeing robust bookings in aftermarket on the commercial side. I think we feel optimistic, right? That's right.

Speaker 1

Okay, great. And then Kevin, I had to buy myself some time to do that math on the headcount productivity you just gave us. So I think headcount is 15% below 2019 levels, while sales are up significantly above 2019. So with that productivity benefit in mind, how do we think about EBITDA margins decelerating 100 bps half over half in the second half?

Speaker 2

Yes. I take your points. Again, we hopefully aim to be conservative in our forecasting. We're trying to stick to our yearly forecast on EBITDA. We had a very strong Q2.

Speaker 2

We'll see how the back half of the year unfolds. We certainly don't have any large negatives that we're aware of. So I think it's just our standard conservatism. We don't have any concerning trends that we're trying to peanut butter over here or anything. This is a strong bookings across all of our segments and really a good tailwind both on the OEM, commercial OEM, commercial aftermarket and clearly on the defense side.

Speaker 2

We remain optimistic.

Speaker 1

Great. Thank you.

Operator

One moment for the next question. Next question comes from Kristine Liwag with Morgan Stanley. Your line is open.

Speaker 16

Hey, morning, everyone. Kevin, in previous Investor Days, you've talked about how TransAlme had about 400,000 PMA SKUs. And I think there was a point in time you were averaging something like 20,000 new SKUs per year. I guess this has been a few years ago since you've disclosed this. I was wondering if you could size PMA today as a percent of your portfolio.

Speaker 16

And also in an environment where the supply chain is still struggling and you're clearly able to produce parts. Can you provide more color on where that is that market and how attractive you think it is?

Speaker 2

I think we can give more update and color on this topic at our Investor Day coming up at the end of June. But just from a top level, we don't consider PMAs to be a significant impactor of our business. We have somewhere around 500,000 part numbers that we sell across commercial and defense. We do monitor it regularly. We are the largest creator of PMA parts in our space that we sell into on our products.

Speaker 2

That's how you sell into the aftermarket. So I think the it's much similar situation to what we've seen in the past. Opportunities exist for us to replace other struggling suppliers. We certainly see that. We again PMA and used and serviceable materials aren't a significant impact or to our business on a regular day to day basis.

Speaker 2

It doesn't mean that there aren't some parts that are more impacted, but on a go forward basis, it's a very, very small, leak in our business, if you will.

Speaker 16

Thanks, Kevin. And Sarah, if I could follow-up on leverage. I mean, you guys are clearly investing in your M and A team with the headcount add. If there are no incremental deals to fund in the near and medium term, how do you think about the split between paying a special dividend versus doing more share

Speaker 1

buybacks? Yes.

Speaker 4

I mean, obviously, we look at both of those. Obviously, 1st and foremost is to invest the capital in our businesses and do M and A. And then we look at those 2, and we look at them all the time. And obviously, we're sitting on plenty of cash, as you know. So at some point in the future, we'll look to make a decision on which one makes sense of what best to do with the cash.

Speaker 2

I think we to add to that, I think we just we paid a dividend in Q1. I think we'll be able to make a decision in Q4 probably this year about our plans.

Speaker 1

Great. Thank you very much guys. Sure.

Operator

Thanks. One moment for the next question. The next question comes from Michael Leshock with KeyBanc. Your line is now open.

Speaker 8

Hey, good morning. Good morning. I think you had previously alluded to volume growth within aftermarket in 2025. If we look ahead a bit further, is that still your view? And is there anything you could call out that needs to happen to meet the strong demand within aftermarket that we're seeing and continue to grow volumes just given some of the constraints that we're seeing out there right now?

Speaker 3

Sorry, it's the question about whether 2025 commercial aftermarket volume growth will continue?

Speaker 8

Yes, that's right.

Speaker 3

I think generally as you look at the forecast from IATA, the investment bank forecasts that are out there, generally folks are expecting RPMs and takeoffs and landings to continue to tick up next year. That said, it's at a moderating pace relative to what it's been in the past couple of years as we've come out of COVID. So there's still growth, but maybe not quite as high as it was in say 2022. We've already seen some of that moderation. But yes, of course, if you look at IATA forecasts, other forecasts, the world's flying a lot.

Speaker 3

People continue to fly. That's reflected in takeoffs and landings and expected RPM growth. So we very much expect as a result of that continued volume growth in commercial aftermarket.

Speaker 8

And then just on capital allocation on your priority of reinvesting in the business, could you talk to what areas of the business you expect to invest the most or anything you're targeting, whether it be bottlenecks or just any way to frame the organic investments you're making? Thanks.

Speaker 3

Yes. The biggest investment in use of our capital has been to the productivity comment Kevin made earlier, it's automation projects. We have said as we said before, when we were in the depths of COVID, we'll not add costs back ratably as we come out of it and we haven't done that. That's reflected in the headcount we have today. And the operating unit teams have done an exceptional job of finding good automation projects, whether it's cobots or material movers or new machining centers, to basically increase the amount of automation in their facilities and reduce the headcount, reduce the cost footprint.

Speaker 3

That's why you're seeing the better margins that we delivered this quarter.

Speaker 8

Thanks guys.

Operator

Please standby for the next question. The next question comes from Pete Osterline with Truist Securities. Your line is open.

Speaker 11

Hey, good morning. I'm on for Mike Ciarmoli. Thanks for taking our questions. I just had a follow-up on the question on Boeing production expectations. I appreciate the color you gave on the bottoms up approach to your forecast.

Speaker 11

But could you share any specifics on what monthly rate you would estimate you are currently producing to for the MAX on average? And just directionally, what assumptions are embedded in your guidance there for the balance of the year?

Speaker 3

I think it varies a lot off unit by off unit based on the demand they're seeing from their customers. Obviously, sometimes that's sub tiers as we said. So it's hard to go and back calculate into some kind of rate. I'd expect that something around 38, maybe a little bit less, but it's hard to say there's some kind of averaging exactly what it is across the ranch.

Speaker 11

Okay, understood. And then I just have a follow-up. Has the uncertainty around OEM production and some of the delayed deliveries that we've heard about showed up in any meaningful way in your bookings? Have you seen any shift in the bookings environment between commercial OEM and aftermarket?

Speaker 3

No. Continue with strength that supports the guidance on both.

Speaker 11

Yes. Appreciate it. Thank you.

Operator

I show no further questions at this time. I would now like to turn the call back over to Jamie for closing remarks.

Speaker 1

Thank you all for joining us today. This concludes the call. We appreciate your time and have a good rest of your day.

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Earnings Conference Call
Lantern Pharma Q2 2024
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