We always put a little bit level of conservatism around the number. And I think we think our guidance is pretty well set around what we’re hearing Airbus and Boeing are doing.
Matt Akers: Great. Thank you.
Operator: Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is open.
Sheila Kahyaoglu: Good morning everyone. Thank you.
Kevin Stein: Good morning.
Sheila Kahyaoglu: Good morning. I wanted to ask about margins. First with Calspan, it looks like for the first quarter, you guys had owned it, it was about 20% margins, and now you’re at 28% for this quarter. So, you’re still guiding to it to be 100 basis points dilutive, which obviously is conservative, because it would imply you’re going to end the year at 16% margins for that business. So, I guess, what did you guys do to raise margins 700 bps in the last quarter? And where can this business be organically?
Joel Reiss: Well, I’m not sure I know where it’s going to go long-term. Our goal is to implement our value generation strategy. We think it’s a good business. We’ll continue to work to maximize the value in terms of any other guidance beyond that. I mean we — I think we’ve highlighted. We think it’s dilutive, obviously, at the level that it’s at in comparison to overall TransDigm, and we’ll continue to work to improve the value over a long ownership.
Sheila Kahyaoglu: Okay. And then I wanted to ask about defense aftermarket. Again, our defense, just given than often you see it outperform commercial aftermarket. You mentioned Armtec. What percentage of your business is maybe more short cycle weapons oriented? And where do we think about defense relative to commercial OE margins perhaps?
Joel Reiss: Defense margins are — comparable defense margins are lower than their kind of equivalent commercial markets. We typically offer a discount to the defense world. In terms of weapon systems, there is not, I don’t have any good detailed split for what that looks like. In some ways, as I said, the lumpiness of the orders in the defense world is not so different than the commercial aftermarket and the standpoint that we don’t get a lot of visibility of an order coming in. We’ll get a solicitation, we work to respond. And when outlays are good, that generally helps us out. But beyond that, I’m not sure if there’s any more kind of color I have on that.
Sheila Kahyaoglu: Okay. Thank you.
Operator: Our next question comes from the line of Ken Herbert with RBC Capital Markets. Your line is open.
Ken Herbert: Yes. hi, good morning. Thank you. Kevin, in the past, you’ve talked about the business organically supporting about 100 basis points of margin expansion each year across the cycle. As we think about maybe aftermarket mixing down over the next couple of years relative to defense or commercial OE and just with where margins are today. Is that still the right framework as we think about organically for the business?
Kevin Stein: I think it still is. I don’t think it’s going to change. I know that there’s math involved here, and you got to work your way through it. But what I always say is 100 to 150 basis points of improvement and we’ve been running 150. Yes, it may be back down at 100, but it’s still, I believe, going to sequentially expand.
Ken Herbert: Okay, that’s great. And as you look at the business today, just to that point, obviously, you’ve always run a pretty lean ship and kept costs pretty tight. Operationally, as you look across the business, are there still significant areas where you see opportunities for improvement? Or can execution be maybe a bigger piece of the mix moving forward relative to maybe relative to volume or price?
Joel Reiss: Well, for productivity, this is again one of our three value-generating strategies. Our teams are challenged themselves to work to offset inflation over the entire cost of the business. And so automation continues to come down in price in that we would have looked at two or three years ago, but didn’t make sense. The capability wasn’t there. Those come across. We continue to look at opportunities to how we resource materials where possible. So, I think we continue to believe there’s a lot of opportunity for us in productivity. I’m always encouraged when I can see a long-term TransDigm business 10, 15, 20 years since we acquired it, and they are still achieving as good or better at times level of productivity. That’s partly because things that they looked at before weren’t there.
We also won a sizable amount of new business. And one of the great things about new business, it continues to give you an opportunity to find new ways to reduce the cost of those new products as well. So, I think we think all three value drivers are where we want to focus.
Ken Herbert: Great. Thanks Joel.
Operator: Our next question comes from the line of Jason Gursky with Citi. Your line is open
Jason Gursky: Hey, good morning, everybody.
Kevin Stein: Good morning.
Jason Gursky: Just a quick question on working capital moving forward. I’m just kind of curious what kind of contractual terms do you have with some of your commercial OEM customers on the need to hold inventory? One of the things you’ve got potentially going on with Boeing is them asking the supply chain to continue producing it, but they’re going to be producing as something to the master schedule, actually above their production rates, and that inventory has got to go somewhere. So, I’m just kind of curious, where that inventory might land from a contractual perspective, might some of the land on your balance sheet? Just kind of curious how it all works?
Sarah Wynn: Yes, I don’t think we have any of that. For Boeing, it would be small, very noise level. And especially if you’re asking from a bigger picture perspective, with working capital as a whole, we project future net working capital needs and we use model fairly flat for that as a percent of sales as we go forward through the year with that being noise level, if anything.
Jason Gursky: Right. Okay. That’s helpful. And then just a quick follow-up on the aftermarket side and the strong bookings that you saw. In the quarter, you suggest it’s hard to know exactly where all of that demand is coming from, whether it’s rate fix or planned stocking by the airlines. But I’m curious if you’ve gotten any feedback from your airline customers on how they’re grappling with what’s going on with the GTF and the plans, OEGs that we’re likely to see here this calendar year going into 2024. Is that, from your perspective, helping your aftermarket bookings here in the near term, that’s what we’re seeing in the strike that you’ve seen here recently and Kevin, as you mentioned the potential for upward pressure on the guidance? Just curious, if that’s what’s driving that statement that you made there? Thanks.
Joel Reiss: Yeah. We’ve tried to take a look at it. We think it probably has a slight tailwind for the business. For a few of our businesses, it’s helping out, obviously, those platforms that were older planes are flying more. This is helpful. But we’re also getting fewer hours on the GTF engine. So some other sites that would start to see some benefit of longer flight hours and those that are kind of missing out. I think net for net, as we’ve looked at it, we think it’s a slight tailwind for the business.
Jason Gursky: Okay. Great. I will leave it there.
Operator: Our next question comes from the line of Mariana Perez Mora with Bank of America. Your line is open.
Mariana Perez Mora: Thank you very much. Good morning, everyone.
Kevin Stein: Good morning.
Mariana Perez Mora: My question is, I’d like to peel the onion a little bit on the commercial aftermarket. On this mid-teens guidance that you have, how much of that is driven by volumes, how much is pricing? And in that pricing, how much is like passing through inflation and labor costs and just like supply chain disruption things? And how much is actually being able to price this excess demand environment in the aftermarket?
Kevin Stein: We don’t comment on price and volume and split that out. It’s kind of difficult for us to assess that anyway. So, yeah, we don’t give that kind of color. For volume, what we can offer is looking at takeoff and landings, RPMs, clearly, volume is going to continue to grow and expand. And I believe we all gave you in our prepared comments that we think volumes are going to return in 2024 here, and we may actually then see growth ahead of where we were pre-COVID, but we don’t get into parsing out how much is price and how much is volume.
Mariana Perez Mora: And are you able to discuss how open are customers to have price increase conversations at least?
Kevin Stein: I think that our focus on operational excellence and performance means that the pricing part of the conversation is often quite simpler because you can provide products on time to their needs.
Mariana Perez Mora: Thank you. And my second question, if I may, on M&A. Why are so many M&A deals available right now? Has something changed?
Kevin Stein: I don’t know if anything’s changed. I think it just comes in waves sort of a sign wave. You have periods of time where it’s up and periods of time where it’s lower. It’s been an encouraging time over the last, I think, a year or so. We’ve seen some good deals. Unfortunately, we’ve seen some things not work out, and we had to pass on. But I’m not aware of any outside forces moving more deals to the table. It’s just the way it is.
Mariana Perez Mora: Great. Thanks so much.
Operator: Our next question comes from the line of Peter Arment with Baird. Your line is open.
Peter Arment: Hey, good morning, everyone. Nice results. Hey, Kevin, maybe just a quick one on Defense, I know it’s about 30% of your mix. Do you have much exposure from international defense and if you do, just kind of what you’re seeing there?
Kevin Stein: Yeah, we do have international defense exposure. We provide products to our allies and we also have manufacturing facilities in Europe that provide products directly to European defense contractors.
Peter Arment: Any rate of change differences there or just still at normalized rates?
Kevin Stein: Have you seen any, Joel?
Joel Reiss: I don’t know if there’s anything significant versus the US. I mean, the US in many cases, is buying foreign military and they’re supporting the same. So it ends up to some level of co-mingled and hard to separate one versus the other.
Kevin Stein: Clearly, I think international defense is improving, whether it is improving faster than the US rate, I’m skeptical.
Peter Arment: Okay. That’s helpful. Joel, just a quick follow-up. When you gave the color on kind of the MAX rates and just in general, I was wondering if you could provide a little more color like what you’re seeing on your suppliers. Is everyone seemed to be synced up and just broadly on the OEM kind of published rates? Are you seeing any kind of suppliers that are still behind, and this is an opportunity to catch up?
