TransDigm Group Inc (TDG) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the TransDigm Group Incorporated Q2 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this call is being recorded.

I would like to turn the call over to Liza Sabol. You may begin.

Thank you. Welcome to TransDigm's fiscal 2016 second-quarter earnings conference call. With me on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley, Chief Operating Officer of our Power Group Kevin Stein, and Chief Financial Officer Terry Paradie.

A replay of today's broadcast will be available for the next two weeks. Details are contained in this morning's press release and 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 and 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 SEC available through the Investor section of our website or 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 net income and adjusted earnings per share to those measures.

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

Good morning and thanks to everybody for calling in. Today, as usual, I will start with some comments on the consistency of our strategy, an overview then of fiscal year 2016, both the second quarter and year-to-date performance. I will update the guidance for the year. Kevin is then going to update you on some operating items, and Terry will run through the financials for the quarter.

To restate, we believe our model is unique in the industry, both in its consistency and its ability to sustain and create intrinsic shareholder value through all phases of the aerospace cycle. About 90% of our sales are generated by proprietary products, that is products for which we own the intellectual property.

Over half our revenues and a much higher percent of our EBITDA comes from aftermarket sales. Aftermarket revenues have historically produced a higher gross margin and have provided relative stability through the cycles.

Because of our uniquely high EBITDA margin, TransDigm has year in and year out generated very strong free cash flow. This gives us lots of operating and financial flexibility.

We follow a consistent long-term strategy. We own and operate proprietary aerospace businesses with significant aftermarket content. We have a well proven, value-based operating strategy based on our three value driver concept. We maintain a decentralized organization structure and a unique compensation system that closely aligns the management with the shareholders. We acquire proprietary aerospace businesses with significant aftermarket content where we see a clear path to PE, or private equity-like returns. And lastly, we view our capital structure and capital allocation as a key part of our efforts to create shareholder value.

As you know, we regularly look closely at our choices for capital allocation. We basically have four -- first, invest in our existing businesses; second, make accretive acquisitions consistent with (technical difficulty) strategy. And these two are almost always our first choices. Third is to give extra money back to the shareholders either through a special dividend or a stock buyback. And lastly is to pay off the debt. So given the current low after-tax cost of debt, this is still likely our last choice.

Depending on the specific business and capital market conditions, we will allocate our capital and structure our balance sheet in a manner we think has the best chance to maximize the equity returns.

Now to update you on a few items from this quarter, the credit markets, at least as of today, have firmed up nicely in the last quarter. Our bonds and secured debt are trading roughly at par. We have adequate access to debt markets at rates roughly consistent with those we pay now.

In the first six months of the year, we bought back 1 million shares of TransDigm stock at an average price of $205 a share. Almost all of this occurred in the December through February time frame. We currently have an additional $340 million of repurchase authorized. This authorization does not imply anything of our buyback plans.

At 4-2-2016, which is the end of the quarter, based on current capital market conditions, we believe we have adequate capacity to make over $1.5 billion of acquisitions without issuing any additional equity and maintaining significant liquidity after we do that. This capacity grows as the year proceeds.

On a very positive note, the commercial aftermarket revenues and bookings picked up substantially this quarter. Quarterly bookings ran ahead of the strong shipments. Recoveries are often not straight upward lines and we could still see bumps, but it's good to see a strong quarter like this.

As I've said before, we see a number of factors that should contribute to continuing commercial transport aftermarket growth this year. Passenger traffic remains strong, slowdown in retirements and potential ends to the deferral or inventory cycle. On (technical difficulty) much smaller in our revenues, the business jet and freighter aftermarkets could be weakening.

Turning to Q2 fiscal year 2016 and year-to-date performance, and I remind you this is the second quarter for 2016. Our year started October 1. As I have said in the past, quarterly comparisons can be impacted by differences in mix, inventory fluctuation, seasonality and things like that.

Total Company GAAP revenues and EBITDA as defined, were strong, both for the Q2 and year-to-date. For Q2, the revenues are up [25%] versus the prior Q2 and 24% versus the prior year-to-date. EBITDA as defined was up about the same percent as the revenues.

Overall organic revenues were up in the 4% to 5% range versus the prior year. Commercial revenues were up a bit more while defense was modestly down. Defense bookings, on the other hand, ran well ahead of the shipments. EBITDA as defined, dollars and margin percent were both strong.

To review the revenues by market category, again, this is on a pro forma or same-store kind of a basis versus the prior year, and this is assuming we own the same mix of businesses in both periods. In the commercial aftermarket -- or the commercial market, which makes up about 70% of our revenue, total commercial OEM revenues were about flat for Q2 versus both the prior-year year-to-date and versus the prior-year Q2. Commercial transport OEM revenues, which make up the vast majority of our commercial OEM revenues, are up 2% versus the prior year-to-date. Q2 was flat versus a difficult comp in the prior year. We saw some modest inventory adjustments in certain commercial transport OEM Tier 1 accounts.

Year-to-date commercial transport bookings are running slightly ahead of revenues. The biz jet and helicopter OEM revenues are a much smaller percent of our business and are heavily biz jet weighted. In total, revenues in these markets were about flat versus the prior-year Q2 and, due to the weak Q1, down about 6% year-to-date.

Business jet bookings for Q2 were slightly ahead of shipments. The biz jet market in total seems a little weaker than we originally anticipated.

Total commercial aftermarket revenues were up about 13% for this quarter versus the prior year and are now up 7% on a year-to-date basis. On a year-to-date basis, the commercial transport aftermarket is now up a little more than the overall average, and the business jet helicopter and freighter markets are flat to slightly down.

For the quarter, total commercial aftermarket bookings were modestly above shipments. Commercial transport bookings were up 16% from Q2 versus the prior Q2. Biz jet helicopter and other bookings were modestly down in Q2 versus the prior-year Q2. But I would remind you again these other categories are far smaller than the commercial transport.

The defense aftermarket makes up about 30% of our revenue. Defense revenues for fiscal year 2016 Q2 were down 3% versus the prior Q2 and down about 1% on a year-to-date basis. The revenues by product lines were spotty with no clear patterns. However, as I said before, year-to-date bookings are running ahead of shipments. They are running about 11% ahead of shipments with a very strong quarter of bookings in Q2.

Moving on to profitability and on a reported basis, I'm going to talk primarily about our operating performance, or EBITDA, as defined. The as-defined adjustments in Q2 were non-cash compensation expense and acquisition related costs or amortizations. EBITDA as defined of about $396 million for Q2 is up 28% versus the prior quarter -- prior Q2, and $688 million or up 23% on a year-to-date basis.

The EBITDA as defined margin was 46.5% of the revenue for Q2 and 46% year-to-date. This is about the same margin percents as last year in spite of approximately 2% of margin dilution from the 2015 and 2016 acquisitions.

As we mentioned last quarter, we reduced our employment level in the range of 4% to 5% in Q1. This combined with our value drivers contributes to the strong margins.

With respect to acquisitions, we continue looking at opportunities. The pipeline of near-term possibilities strengthened from the last quarter and we are seeing more activity recently. Closings are difficult to predict, but we remain disciplined and focused on value creation opportunities that meet our tight criteria.

Turning now to the 2016 guidance, we continue to have some concern about the duration of the commercial transport OEM cycle. As I've said before, we are cautious with our spending and are ready to react quickly if necessary. We see increasing variability in various industry forecasts and by platform the news is somewhat mixed.

In the commercial aftermarket, air travel is holding up well, and as I mentioned, there are other factors that should positively impact demand. As I also said, the biz jet and freighter markets could be a little softer than we originally anticipated. Recoveries don't always run in a straight line, so we tend to be a little cautious. All in all, this is our best estimate for the full year.

Based on the above and assuming no additional acquisitions beyond Breeze in fiscal year 2016, the guidance is as follows. The midpoint of the 2016 revenue guidance is $3.17 billion. This is the same as our prior guidance. We've tightened the range up a little. It's up 17% on a GAAP basis year-over-year. The midpoint of the fiscal year 2016 EBITDA as defined guidance is $1.46 billion, an increase of about $25 million. This is up 18% year-over-year. The increase in guidance is driven by improvements in our EBITDA margin.

The base business, that is excluding the 2015 and 2016 acquisitions, is still anticipated to achieve an EBITDA margin of about 49%, or up around 2 points versus 2015 for the same mix of business -- businesses. The recent acquisition margins are running a bit ahead of our prior estimates.

The midpoint of the EPS as adjusted is now anticipated to be $11.16 per share, or up $0.39 a share from our last guidance. This is up 24% versus prior year. The increase in guidance is due to two factors, improved margins and a modestly lower share count as a result of our buybacks. Terry will run through some of the details.

On a pro forma or same-store basis, this guidance is based on the following growth rate assumptions -- commercial aftermarket growth in the mid to high single digits. We are still somewhat cautious but obviously feel better than we did 90 days ago.

In the defense military revenue, growth in the low single-digit percent were slightly down year-to-date, but the strong year-to-date bookings and the strong Q2 bookings give us some confidence here.

Commercial OEM revenues, we see growth in the low to mid-single-digit percent range. We are still assuming commercial transport shipments will be slightly up, but we are concerned that the biz jet shipments for the year could be flat to modestly down. We also expect to see a modest decrease in freighter revenue for the year based on the announced 747 rate decrease.

Without any additional acquisitions or capital structure activity, we expect to have around $1.1 billion in cash and over $400 million in undrawn revolver at year-end 2016. Excuse me -- $500 million. We also have additional capacity under our credit agreement.

Assuming no acquisitions or other capital market activity, our net leverage is anticipated to be about 4.9 times EBITDA at the end of 2016, or down about 1 full turn.

In summary, Q2 was a good quarter. As we look to the balance of the year, the market conditions are still a little unclear and that makes us cautious. However, we think we still may have some modest margin upside to help offset any market variations. In any event, I'm confident, with our consistent value focused strategy and a strong mix of businesses, we can continue to create long-term intrinsic value for our shareholders.

And with that, let me turn this over to Kevin.

Thanks Nick. Good morning everyone. As Nick mentioned, in total, we had a good second quarter. As we've stated previously, we believe our planning processes, unique application of the TransDigm value drivers and our organizational focus on accretive acquisitions that meet our strategic vision are the keys to delivering shareholder value. And as you will see, we have made appreciable progress on each of these this past year.

For an update on our acquisition related value driver, let me give you an update on the last acquisitions we accomplished. To this point, let me once again provide some color to our acquisition strategy.

As we do with each acquisition, we follow a detailed and scripted integration plan. This includes an implementation of our value creation process and metrics, restructuring the Company into our business unit focus groups, focusing the engineering and business development efforts on winnable and profitable new business, and finally, we've tightened up the cost structure.

For Telair, this was a significant acquisition in early 2015 for TransDigm and focuses on the defense and commercial cargo markets. To date the acquisition is on track on its integration path and has delivered sales and EBITDA in excess of our model. In general, the defense market has performed well for us in this business, but the freight market may be beginning to soften. We remain confident that this is a fine business for TransDigm.

Additionally, we closed on Pexco in May of 2015, a custom plastics extrusion company located in Yakima, Washington which specializes in proprietary commercial aerospace interior products used in the galleys, lavatories, floors, ceilings and stowage bins of aircraft. Today, Pexco Aerospace is performing at our expectations across all key financial and growth metrics with a strong focus on our value generation strategy. The team successfully closed and completed the consolidation of the manufacturing facility in Huntington Beach with minimal customer disruption. While implementing a largely new management team at Pexco, we have realized better-than-expected productivity results with all of our manufacturing activities now under one roof. With performance on our value drivers ahead of plan, we currently are finding sales and EBITDA are additionally running ahead of plan. We are pleased with the overall performance of the team and have confidence that the acquisition will continue to run at expectations.

In August of 2015, we finalized the acquisition of PneuDraulics into the TransDigm family. PneuDraulics is located in Rancho Cucamonga, California, about 60 miles east of Los Angeles. PneuDraulics' highly engineered and proprietary products primarily are valves, actuators and subsystem components used in hydraulic and pneumatic applications. PneuDraulics serves all of the major markets in aerospace, including commercial, regional, business jet and defense markets.

We were confident when we acquired PneuDraulics that it was a solid business with an excellent management team. This has proven to be the case as the management team has proven to be fast adopters of the TransDigm value drivers culture. The integration of PneuDraulics is going according to plan. The Company's performance has met or beat expectations for the three value drivers of new business productivity and value-based pricing. Although we have experienced some softness in the business jet market, the commercial aerospace market is currently holding up well and our EBITDA driven by our value driver concept has exceeded our expectations. In general, we are pleased with the results and expect this business to be a solid acquisition and a good company for TransDigm in the future.

Lastly, Breeze-Eastern was acquired by TransDigm on January 4, 2016. Breeze, which is located in Whippany, New Jersey, designs and manufactures mission-critical electromechanical systems. The main products consist of rescue hoists, cargo hooks and winches primarily for rescue helicopters and cargo aircraft. Approximately 75% of Breeze revenue comes from the defense sector and approximately 70% of it comes from the aftermarket.

In the first 90 days since the acquisition, we have established a new leadership team comprised of both existing Breeze-Eastern employees, as well as experienced TransDigm personnel. We have also taken productivity actions to better align the size of the organization with the level of business activity which will increase overall value, including the announcement of the consolidation of the Virginia facility into the main campus by late calendar year 2016. We are also realigning the business into our usual customer focused business unit teams to enhance operational performance and responsiveness. These changes will be completed during the second half of our fiscal year as we align the financial reports with these two business units and we physically co-locate the team personnel within the facility. These changes will support and accelerate new product development activities as the teams are beginning to focus on rapidly bringing advanced hoist and winch technologies to market.

To date, the Breeze-Eastern acquisition has delivered value as expected for TransDigm shareholders with revenue and EBITDA as expected.

To update on the recent progress of our new business value driver, let me bring your attention to three recent wins we have received in the aerospace market. AvtechTyee Recently was awarded significant bookings across multiple configurations of our recently upgraded sealed audio control panel used on the Boeing 737 next generation. The bulk of these orders were primarily to satisfy initial provisioning of spares by airlines with upcoming deliveries from Boeing.

The bookings also included upgraded sealed audio control panels with satellite communication functionality. This functionality enables the flight crew to directly dial and connect to any phone number around the world through existing satellite communication networks in areas where HF and VHF radio functions can be unreliable.

Next, at PneuDraulics, we were awarded components in four major hydraulic system areas by Textron Aviation for the Cessna Longitude Program. PneuDraulics was awarded hydraulic components for spoiler actuation, brake systems, landing gear and central hydraulic systems. Additionally, this represents the largest total shipset award for PneuDraulics to date. 24 discrete components were awarded per aircraft with a forecasted build rate of 36 aircraft per year at peak and a production launch in the next couple of years.

Lastly, Aero Fluid Products has won an exciting new program for the A320neo. The Painesville, Ohio-based team was awarded the oil control manifold for this new program. The OCM is an aluminum block mounted on the main engine gearbox that contains multiple valves, openings, and sensors that control the temperatures and pressures of the engine oil. This is a growth award as the team did not enjoy this business on the A320 legacy platform.

Finally, I wanted to bring your attention to one of our key business planning processes. Last time I updated all of you on our succession planning process. Given the time and fiscal year, I now wanted to update on our fiscal year 2017 planning process, which we have just kicked off. This process gives us an excellent glimpse of the aerospace market for commercial and defense applications. This process is a bottoms-up forecast done by each of our individual product lines rolling up to business units, then the entire Company with a focused emphasis on our TransDigm value drivers of productivity, value-based pricing and new business. This process, which is the foundation of our fiscal year guidance that we provide to the market each year, begins with a lot of hard work by each individual business unit, culminates with focused reviews of each of our 31 plus operating companies and about 80 business unit teams throughout the back end of our fourth quarter. We believe this granular bottoms-up databased review is the best way we know of to compile market intelligence and provide guidance to our shareholders. It has served us well and allowed us to generally be quite accurate in our annual guidance and internal planning.

With that, now let me hand it over to our CFO, Terry Paradie, who will review our financial results in more detail. Terry?

Thank you Kevin. I will now review (technical difficulty) second-quarter net sales were $797 million or approximately 29% greater than the prior year. The collective impact of the acquisitions, Telair, Pexco, PneuDraulics, Breeze and, frankly, was an increase of $150 million.

Organic sales were up approximately 4.5% driven by strong growth in the commercial aftermarket, partially offset by weaker commercial OEM and defense sales.

Our first-quarter gross profit was $426 million, an increase of 25% over the prior year. Our reported gross profit margin of 53.4% was almost 2 margin points lower than the prior year. This quarter's decline in the margin was due to the dilutive impact from acquisition mix and higher acquisition related costs which accounted for a decrease of over 3 margin points. Excluding all acquisition activity, our gross profit margins in the remaining business versus the prior-year quarter improved about 1.5 margin points due to the strength of our proprietary products, continually improving our cost structure as well as favorable mix from strong commercial aftermarket sales. Additionally, gross profit margins improved over 0.5 point sequentially, excluding all acquisition activity.

Our selling and administrative expenses were 11.9% of sales for the current quarter compared to 12% in the prior year. Excluding the acquisition related expenses and non-cash stock compensation, SG&A was about 9.7% of sales compared to 10.2% of sales a year ago.

We had an increase in interest expense of approximately $11 million versus the prior-year quarter. This was the result of the an increase to our outstanding borrowings of $900 million in the current quarter versus the prior year. The increase in outstanding borrowings was to fund acquisitions we did in fiscal 2015.

Our effective tax rate was 31% in the current quarter compared to 29.2% in the prior year. The higher effective rate in the quarter was primarily due to a favorable discrete adjustment in the prior year related to finalizing IRS audits related to fiscal 2012 and 2013. Our expected full-year estimated tax rate is still to be -- expected to be 31%. We now expect our cash taxes to be around $210 million for fiscal 2016.

Our net income for the quarter increased $28 million, or 25%, to $139 million, which is 17.4% of sales. This compares to net income of $111 million, or 17.9% of net sales, in the prior year. The increase in net income primarily reflects the increase in net sales partially offset by higher interest expense and acquisition related costs versus the prior period.

GAAP EPS was $2.47 per share in the current quarter compared to $1.96 per share last year. Our adjusted EPS was $2.86 per share, an increase of 35.5% compared to $2.11 per share last year. Please refer to Table 3 in this morning's press release, which compares and reconciles GAAP EPS to adjusted EPS.

Now, switching gears to cash and liquidity, we ended the quarter with $612 million of cash. I want to remind you that, during the quarter, we paid $146 million for the Breeze acquisition, net of $31 million of cash acquired. We also spent $137 million to purchase approximately 692,000 shares in the quarter. As Nick mentioned, in total this year, we have purchased just over 1 million shares at a total cost of $208 million. We now expect our full-year weighted average shares to be $56.2 million.

The Company's net leverage ratio at quarter end was 5.6 times our pro forma EBITDA as defined. And the gross leverage was six times pro forma EBITDA as defined. We estimate our net leverage at September 30, 2016 will be 4.9 times, assuming no acquisitions for capital market transactions.

With regards to our guidance, we now estimate the midpoint of our GAAP earnings per share at $10.01. And as Nick previously mentioned, we estimate the midpoint of our adjusted EPS to be $11.16. The $1.15 of adjustments to bridge GAAP to adjusted EPS includes the following assumptions -- $0.05 from dividend equivalent payments, $0.57 from non-cash stock option expense, and $0.53 of acquisition related expenses.

Now I will hand it back to Liza to kick off the Q&A.

Thanks Terry. Operator, we are now ready to open the lines for questions.

(Operator Instructions). Carter Copeland, Barclays.

Good morning guys. Just a quick clarification, Nick, on the OEM revision. Should we just assume that it's just inventory destock associated with the rate cut on the 777, 47, the publicly announced ones, and maybe some of the business jets? Is that really what you are seeing there? Is this (multiple speakers) inventory?

Yes, there's a little bit of inventory movement, and I would say we are a little -- and the other is the freighter rate cut, but everyone knows about that. And we are probably -- we are less bullish or maybe more bearish is a better way to put it on the biz jet market.

So when you say you are less or bearish, does that mean you're looking to the end of the year and keeping some cushion for potential summer furlough kind of lower production activity?

You're talking about the biz jet now, Carter?

On biz jet, yes.

I think what you'll probably see, what you are seeing is the numbers have been less exciting than we hoped. We had sort of anticipated a year that was flat to slightly up in business jet. As we see our numbers partway through the year in our bookings, that is starting to look a little us likely to us. Could there be a little upside to that? Possibly there could.

Okay. Great. Thanks. I'll let somebody else ask.

Ken Herbert, Canaccord.

Good morning. (technical difficulty)

I can barely hear you. You are breaking up.

Sorry about that. Is that any better? Sorry. I just wanted to follow up on the commercial aftermarket. Great numbers in the quarter. Was there anything -- I know obviously you were flat in last quarter. Did you get a sense that there was anything that maybe pushed from the first to the second quarter, or anything unusual or one-time in nature in the up 13% or really just sort of a culmination of what we started to hear about in terms of increased spending by the airlines on some of the older aircraft?

I think you're starting to see -- you know, you have a situation where it ran low too long. I don't think you can count on 13% as a -- I don't think you can count on 13% growth quarter-over-quarter in perpetuity by any means. I'd probably look at it more like the first half the year, it's up 7% to 8% and maybe it was a little too light in the first quarter and a little heated in the second quarter. But I think the best way to look at it is sort of on a year-to-date basis.

Okay. That's reasonable. And obviously you've maintained the full-year guidance, even though your comparisons now start to anniversary with certainly the weaker back half of fiscal 2015. Is that really, like you talked about, just reflecting obviously this recovery could be lumpy and visibility is probably a little more challenged now, or is there anything else that is maybe holding you back a little bit on this, on the outlook?

No, I think we had a judgment in the beginning of the year, and we are at about the same place still.

Okay. Perfect. Thank you very much, and nice quarter.

Gautam Khanna, Cowen.

Thanks. This is Bill Ledley on for Gautam as he is (technical difficulty) Boeing. I have a question for you on if any of your proprietary products have been sole-sourced, the sole-sourced products, have they been awarded to any competitors or second sourced from the OEMs?

I presume you mean recently, not in the history of our whole (multiple speakers)

Yes, recently.

Not that we know of. Not that we know of. And I don't mean to be evasive there, but I think we would know of them, but we don't know any.

Okay, thanks. And then, on the M&A pipeline, you mentioned some better strength at least relative to what you saw at the end of Q1. Can you talk about if there's any strength in any one particular area?

We clearly see more activity. I don't know that I can say it's one more than another. And as you know, we don't -- as we've said, it is very difficult to predict closings. Last quarter I said it didn't look very good and this quarter things are getting active again. For some reason we see more. I'd like to -- I wish I knew a good reason for it, but I'm not sure I do.

Okay. Thanks very much.

David Strauss, UBS.

Good morning. It's actually Matt on for David.

We are feeling bad about everybody heading out to the Boeing meeting.

A quick one on your guidance. It looks like you're expecting margins about the same in the back half as the first half. Is there any reason why that shouldn't sort of grow a little bit just on higher volumes?

It's (multiple speakers) I thought we moved the margins up a little (multiple speakers)

They will be up higher in the second half than they were year-to-date.

I'm sort of disconnecting on that. I thought the second half was up a little, not a lot, but a little.

(technical difficulty) high second quarter aftermarket mix, so (multiple speakers). Let me just look at the numbers here.

Not a lot but it's up maybe 0.5 point in the second half.

If you back into it.

And as I said, we could have a little room there too.

Yes, okay. And then I guess one other one, going back to your acquisition pipeline, it sounds like things are accelerating a little bit there. I guess, as you get bigger, does it get any more difficult to find deals that are big enough to move the needle there, or is that not an issue?

We think there's still plenty of stuff. Obviously, just mathematically, the bigger you get, the average size acquisition doesn't move the needle as much. (technical difficulty) move the needle as much. But I think, at least so far, we still see an adequate number of businesses. The question is getting them to sell or not (inaudible) or not. And we feel better about, as I said, the rate of activity right now.

Okay, thanks.

Myles Walton, Deutsche Bank.

Thanks. Good morning. It's actually Myles in for Myles. I'm already in Seattle. I came in early just to be on your call, Nick.

This is actually Harry speaking for Nick. (laughter).

So the first one is on the EBITDA margin increase. So I think, Kevin, you said it was from the acquisitions, maybe it was Nick who said it was from the acquisitions in the core was still running at 49%. That's a pretty high increase for the acquired margins in terms of versus what you were otherwise planning. I think, if you could back into it, it's maybe a 500 basis point plus increase to your underlying acquired margins in the kind of planning period. So was that cost? Is it price? Is it volume? Can you just elaborate a little bit?

The answer is in total I don't know the answer. I know it business by business but I don't know the answer in total. But they are I think -- I'm going to give you a guesstimate here to some degree. I don't think -- it's not -- the volumes are not -- net-net the volumes are not way up, which means it's primarily the other pieces of margin, which is cost and price. I know, in total, in total their revenues aren't way up.

Okay. And the only clarification, on the 13%, so when you give the organic, which would exclude the acquisitions for both periods, would the aftermarket growth be materially different than that 13% we saw reported on a pro forma basis?

It's not materially different. It's not materially different.

Okay, great. And the last one, Nick, so you talked about the normalization in the debt markets. Is there any inclination to tap when the well is running healthy and maybe take advantage of open markets and healthy markets if they are giving you the same rates you currently have and just being more proactive than not?

That's -- as you know, we are always looking at that. We are always looking at that in conjunction with the acquisition pipeline. And that's when we will sort of decide as things clarify for us.

Okay. But you don't feel like the trends are kind of a cloud break before more clouds return? You think it's kind of just become more of what it was and it was anomalous earlier in the year?

I think it's -- as I said before, I kind of feel like it's a loser's game to speculate on the capital markets. To some degree, we have our sort of view of what we like and what we don't like, and we've got to make a decision when the time comes. As I said, for the last five years, we've consistently lost money on interest rate hedges, but that hasn't changed our view. We'll just keep pouring money down the rat hole.

Yes, you make more than enough money in other places, Nick.

Yes, right.

All right, thanks. Good quarter.

Robert Spingarn, Credit Suisse.

Hey guys. Can you hear me all right? I'm here in Seattle as well. They do have phones here. So given that, I just want to get back to where Myles was going. The 13% aftermarket in fiscal second quarter versus this flat performance in fiscal first, I want to make sure I understood. Were you alluding to that being more pricing driven rather than volume, or is it equal?

No. All I meant to say is that I'd probably look at it as a year-to-date number rather than get too hung up on what the first and second quarter were. If I implied it was mostly price -- if I implied it was 13%, price was the big driver, I didn't mean to say that. If I did, that was a mistake.

No, okay. I Just wanted to make sure. I want to get a sense from a destocking or activity perspective what's really creating this volatility, and then how we can get comfortable, if we can get comfortable, with what the second half looks like, which begs a follow-on question, which is what is the embedded organic growth in your guidance? So we've had minus -- let's say we've had 1.7% for six months organic growth. What is in the guidance?

I think we gave you the guidance. It's mid to high single digits. That's the guidance for the year, which happens to be about where we are halfway through the year.

Hold on, I'm talking about your organic growth, 4.4% in the quarter, minus 1.1% in the first quarter, so 1.7% positive for the first half of the year, okay, organic revenue growth.

Oh, total company? I thought you were talking about (multiple speakers)

No, no, no, I'm sorry, I switched gears there.

Yes, I lost you. I thought you were talking about the commercial aftermarket.

So, I know that you divided it by segment in the slide, so I'm talking about the overall companies (multiple speakers)

Got you, got you, got you. I'm not looking at the number here, but I want to say it's about 4%. It's about 4% is the organic growth year-over-year in our guidance.

So the second half would be marginally better than the first half?

Yes.

Okay. And then from an employment perspective, the obviously raised your margins. You've streamline -- Kevin talked about this. But again, I know you're looking at the volumes from a six-month perspective. If you're going to have a little bit better growth here in the back end of the year, how do you -- do you have the capacity as is? Do you have to add some people?

We have capacity. Whether we have to add a few here and there, I don't know the exact number, but there's no problem with capacity.

Okay. That's it for me. Thanks Nick.

Within a reasonable range, you know, within the reasonable range variation you can see in six months.

Seth Seifman, JPMorgan.

Thanks very much. Good morning and good quarter. In the aftermarket, there's been a disconnect recently in the level of organic growth for the Power & Control pieces versus the Airframe. I wonder if you could talk about what that was in the quarter and maybe a little bit about why you think that disconnect emerged.

I don't think there's any particular reason for that. It is primarily just the mix of the businesses. I would say the one probably has a little more defense business in it than the other, and that may have it down a little lower. There's no systematic parts between them.

And you'll see the numbers in the 10-Q when we file that tomorrow.

(multiple speakers) the results are primarily just different (technical difficulty) what the aftermarket content is in one versus the other, what the defense versus commercial (technical difficulty) is in one versus the other. It will make them move around a little.

Okay. And then I guess of the let's say 7% to 8% year-to-date pro forma aftermarket growth that we've seen of the 30 or so business units that you referenced, about how many of those would you say were above average, and how many were average?

I don't know the exact number, but it was a good quarter. And it was not -- everyone is not, but generally, as a general rule, it was a good quarter for most businesses.

Okay. Thank you very much.

Michael Ciarmoli, KeyBanc.

Good morning guys. Thanks for taking my questions. Nick, can you talk -- there have certainly been a lot of structural changes in the aftermarket. You've got the battle tested model with pricing maybe coming under pressure, more OEMs getting involved, (technical difficulty) do you guys (technical difficulty) anything differently or can the model continue to sustain without any changes?

We think the model is fine. We will keep watching. I don't quite know that we are as bought into the structural changes, but our -- and how much of it is just a normal cycle, but we keep watching them. We don't see any reason that our fundamental model doesn't continue to work, at least in the foreseeable future. I can't tell what 20 years from now does, but in the foreseeable future, I don't see anything that structurally changes the fundamentals here.

Okay. Can you walk me -- we keep hearing some suppliers talk about going after product lines that are maybe at a premium. And maybe just educate me on this, if there is sole-source proprietary product, can it actually be recompeted? Can it be certified? It seems like there is some mixed messaging out there. Do you guys still feel like those product lines that are sole-source proprietary that you own the IP, are those still bulletproof or can they be recertified, redesigned or endorsed?

Anything -- ultimately, as I like to say, if TransDigm went bankrupt and died and all the plants caught on fire, obviously the airline industry would find a way to survive. So it's not that there's no other way to get around it. It is -- there is a significant entry barrier. There are significant costs. There is significant qualification. There's also the issue that we own the IP so you've got to find a way around that. It's a substantive barrier that we, frankly, have not seen any material change in. Now, is it impossible? If you don't care about cost, you can always find a way around most anything. I don't see any fundamental change in the switching cost characteristics here.

Okay. Just the last one for me, defense. It looks like it got a little worse sequentially. You're still guiding for up low single digit for the year. How good do you feel about that? How good is your visibility? I know you talk about the bookings running (multiple speakers)

It's not good through the whole year, but it's good -- it's getting good through more of the year obviously each month. And we've had -- the bookings have been strong. So we feel reasonably good about our guidance. Though I would say we feel quite good about our guidance in total. I don't -- we could be off 1 point here and there in the segment, and we think we've given you our best judgment.

Okay. I'll jump back in the queue. Nice quarter guys.

Hunter Keay, Wolfe Research.

Thank you. Sorry for cell phone. Can you hear me okay? Thanks. A little more on commercial aftermarket. When everything was melting down earlier in the year, with the benefit of hindsight, Nick, can you -- are your customers maybe a little more fragile than you thought they were? And if so, which areas of the business might be a little bit more soft or discretionary that maybe you didn't anticipate? And conversely, which areas might be a little bit less discretionary and maybe hung in a little bit better relative to some of the other parts as things were really, really hairy there earlier in the year?

First, let me peck at the word "fragile". The vast majority of our aftermarket is sole-source proprietary stuff, so it's not that it's going somewhere else. It's that the customer either has decided to defer something or draw down their inventory ultimately over time. And that's a very customer-by-customer situation, so it's hard to make any generic comment on that.

As far as our outlook for the year, I guess the way I would answer that is we started off the year saying that our outlook was for mid to high single digits growth, and we are still in the same place. So, I would say, if I look at this halfway through the year, we are about where we thought we would be.

Right. Okay. Maybe let me ask the question a different way as a follow-up. Again, when things were really, really dicey there a few months ago, I know you guys were worried, you thought you were going to be all in it, but does it change the way you maybe think about certain segments of the aftermarket in terms of how you pursue M&A, or do you look at just those prior couple of months there as sort of a one-off anomaly and not so much sort of like a thesis-altering type of approach in how you would think about pursuing acquisitions going forward.

It certainly doesn't change the way we do acquisitions. We are looking for proprietary aerospace businesses with significant aftermarket content. And I would say we don't find a quarter or a couple of quarters -- that would be nothing that would change our fundamental strategy, nor has it.

Thank you very much.

There are no further questions at this time. I'd like to turn the call back over to Liza Sabol for any closing remarks.

Thank you all for participating on our call this morning, and please look for our 10-Q, which we expect to file sometime tomorrow.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.