TransDigm Group Incorporated (TDG) Earnings

Management highlights

- Strategy overview: Believe unique in industry with consistent strategy, 90% of net sales from unique proprietary products, most EBITDA from aftermarket with higher margins, follow consistent long-term strategy including owning proprietary aerospace businesses, simple operating methodology, decentralized structure, M&A of fitting businesses, and capital structure allocation. - Q2 results: Revenue grew sequentially and year over year in all three market channels, bookings surpassed shipments in all channels, commercial aftermarket growth rebounded, commercial OEM production rates ramping, defense had double-digit revenue increase and built backlog. - EBITDA margin: 52.6% of the quarter, including dilution from recent acquisitions, margin performance expanding across segments due to commercial aftermarket growth and operating strategy focus, improvements in recent acquisitions' operating margins. - Capital allocation: Actively look for M&A opportunities, closed acquisitions of JetParts Engineering and Victor Sierra, working towards closing Stellent, capital allocation priorities are reinvest in businesses, disciplined M&A, return capital to shareholders, and evaluate options, with significant liquidity and financial flexibility. - Market channel highlights: Commercial OEM: Boeing and Airbus ramping production, airline demand high, backlogs increasing; Commercial aftermarket: All submarkets grew, Q2 bookings strong; Defense: Double-digit revenue increase, built backlog; Space: Contributed to Artemis II mission with various products from operating units; New business wins: Airborne Systems and DDC awarded contracts.

Guidance

Increased full year 2026 sales and EBITDA as defined guidance. Midpoint of sales guidance is now $10.36 billion, up approximately 17% over prior year, with commercial OEM expected low double-digit to mid-teens growth, commercial aftermarket high single-digit to low double-digit growth dependent on Middle East situation, defense high single-digit growth. Midpoint of EBITDA's defined guidance is now $5.42 billion, up approximately 14%, with expected margin of around 52.3%. Midpoint of adjusted EPS is now expected to be $39.52. Believe well positioned for second half of fiscal 2026.

Segment performance

Commercial OEM: Boeing and Airbus continue to ramp production rates, airline demand for new aircraft remains high with backlogs increasing, though OEM production rate recovery has been bumpy but encouraged by consistent improvements and bookings pace. Commercial aftermarket: Grew in Q2 from prior recent quarter growth rates, rebounded, all submarkets within commercial aftermarket experienced positive growth, and despite Middle East conflict, guidance is increased. Defense: Revenue grew by approximately 11% compared with the prior year period, saw double-digit revenue increase this quarter and built a sizable amount of backlog that will drive continued growth.

Risks & headwinds

- Middle East conflict may impact commercial aftermarket, with uncertainty in the broader market adding risk to the second half. - Market environment uncertainty poses risks to the company's performance and guidance.

Analyst Q&A

• Q: Ken Herbert with RBC asked about flow through of higher fuel prices to business and potential downside into 27.

  A: Joel responded that about half of camp shipments ship in the same quarter, not seeing significant impact in April, confidence in Q3, and won't talk about 27 until next year's guidance.

• Q: Scott Mekas with Mellius Research asked about strong sales in commercial aftermarket submarkets.

  A: Joel said engine and passenger submarkets were strong, no significant rebounding, and no headwind from destocking as before.

• Q: Noah Popenak with Goldman Sachs asked about channel D-stock and margin beyond 2026.

  A: Joel said roughly 75% of camp shipments go direct, not hearing significant D-stocking, and Mike said expect sequential margin improvement of 1-1.5 percentage points year over year on same store sales basis, with acquisition dilution noise but historical framework holds for margin improvement.

• Q: David Strauss with Wells Fargo asked about closing the gap in aftermarket USMEs.

  A: Mike said hard to say exactly, engine businesses growing nicely, most noise from inventory and channel position behind us, so headwind should be tailwind going forward.

• Q: Scott Dortchell with Deutsche Bank asked about supply chain performance.

  A: Joel said supply chain has largely returned to pre-COVID levels, business unit meetings didn't highlight core supply chain issues affecting businesses, with high performance in CAM space.

• Q: Sheila Kayoglu with Jefferies asked about aftermarket 2027 assumptions.

  A: Mike said do bottoms-up forecast with operating units looking at their positions, engine businesses confident, passenger businesses doing better, guidance based on operating units' confidence and good bookings; Joel added disruptions of this type are sharp and correct quickly on the other side.

• Q: Miles Walton with Wolf Research asked about EBITDA raise from PMA acquisitions and margin change.

  A: Mike said large majority of EBITDA raise came from better performance in base businesses, smaller amount from JetParts and Victor Sierra, and margin change in Q2 was due to better commercial aftermarket, some noise from commercial OEM and others, but still saw improvement.

• Q: Michael Goldie with BMO Capital Markets asked about customer conversations and geography during war.

  A: Mike said didn't hear dramatic differences, Middle East carriers impacted but not from other airlines outside Middle East.

• Q: Peter Arment with Baird asked about freight in commercial aftermarket.

  A: Joel said freight is smaller submarket, still had double-digit growth, distributor partners had higher bookings than previous quarter, tracking as expected but not at same level as engine and passenger submarkets.

• Q: Matt Akers with BMP Paribas asked about aircraft retirement and business performance.

  A: Mike said no big spike in retirements rate yet, historically not seen much impact from retirements on USM due to product price points, but will see how it develops.

• Q: Sebastian Rivera with Stifel asked about combined Profile for JPVSA in 2026.

  A: Mike said JetParts and Victor Sierra are great businesses, in early innings, operate in PMA space with good growth trend, excited to own them and expand their footprint.

• Q: Gautam Khanna with TD Cal Securities asked about discretionary aftermarket slowing and M&A pipeline mix.

  A: Mike said no material shift in discretionary non-discretionary, Q2 bookings all time high; on M&A, seeing good mix of both aerospace and defense oriented firms, mostly small to mid-size range.