Ronald Epstein: Got it. And then, Kevin, when you think about directions to go, help me as outsiders kind of looking in, I mean, how should we think about that? I mean what vectors could you guys go down? I mean, how can I frame this, that you can actually answer it. Broadly, is there an area in the portfolio that seems like there’s a hole? Or you’re just kind of agnostic to just what could fit the model and kind of fit the end markets? If we just want to try to get a broader understanding of how things could go?
Kevin Stein: Yes. We don’t look at the market as there are holes in technology that we need to fill or products that we have to have. We’re agnostic about what products and technologies we have. We’re looking for things, though, that are highly engineered, proprietary. They have a noted position in the marketplace. They have aftermarket content and of sorts. So if you look at the businesses that we continue to identify and find. They fit this criteria. And as long as we continue to find proprietary products like this, highly engineered products, we will continue to grow. There’s no reason for us to believe we’re running out of these. It’s the nice thing about aerospace and defense is that there’s so many technologies utilized across so many different products and applications with no commonality.
There is still so many places for us to grow. I am not contemplating going outside of aerospace and defense. I don’t see a need for that. We do love to learn about other markets and technologies, much like we will with CPI in the medical device side, and we’ll see what we learn. But right now, I think the landscape is very full for us on the aerospace and defense side. And again, given our the value generation model that we have, we don’t need to acquire hundreds and hundreds of millions of dollars of EBITDA every year. We target and I’m sure all of you have heard me say this many times, if we acquire $50 million to $100 million of EBITDA per year, that’s all we need to feed this model and continue to do what we do. Larger acquisitions are better.
But as long as we continue to find those opportunities to swing at and we’ll be fine, and we’ll continue to grow quite nicely. Does that answer your question?
Ronald Epstein: Yes, it does. Thanks, Kevin.
Operator: Our next question will come from the line of Sheila Kahyaoglu with Jefferies.
Sheila Kahyaoglu: Good morning guys. How are you? Thank you.
Kevin Stein: Good morning.
Sheila Kahyaoglu: I wanted to ask on OE margins. They’re growing faster than the aftermarket. Kevin, you talked about Calspan being 100 basis points dilutive. So how do we think about that OE versus aftermarket mix on your EBITDA margin guidance?
Mike Lisman: Yes. So based on the guidance we’re giving the OE slightly outgrows the aftermarket, right? We have the OE of around 20% the aftermarket we called in the mid-teens. There’s a slight headwind there. If you guys took some swag at the math. I mean, it’s noise level type headwind, right? We’re talking a couple of tenths of a point on the margin. So nothing material that we won’t be able to overcome with productivity. The big one that swings us year-over-year downward is obviously just Calspan. And as Kevin said in his comments, that’s like a full point of EBITDA margin dilution downwards. So not to too much headwind from the OE ramp up, but a little bit a couple of tenths.
Sheila Kahyaoglu: Okay. Got it. And you mentioned CPI is not in the guidance, but obviously well below TransDigm on the margins, it’s a very wide range. Can you give us an idea of how below TransDigm margins they are? And then on aftermarket, I just wanted to ask if there’s any impact from higher AOGs incorporated into your expectations?
Kevin Stein: I’ll let Mike answer the last one. But on CPI, the question, I don’t…
Mike Lisman: I think you were trying to get at the margin, Sheila. And just…
Kevin Stein: We don’t own it yet. It’s too early for us to comment on that. It’s well, well below TransDigm averages. Where do we see it getting to – it’s probably too early for us to even comment on that. We haven’t been in the door. So we need some time to unpack that, and then we’ll be able to update you.
Mike Lisman: And then on the second half of your question, Sheila, I think you asked about AOG, and I assume you’re trying to get it gear turbofan issues and some of the aircraft grounding that created across the fleet. It’s nothing material when it comes to our guidance as far as that racks up. We’re so diversified and market-weighted across all the platforms out there that there’s not a big uptick we expect from that. But that said, given that those aircraft are newer and grounded, older stuff has to fly and some of the airlines are probably going to a lesser fleet to keep those older aircraft flying. It’s probably about a little bit of a tailwind, but it’s not material and more noise level. And it’s not something that we factored a huge upside into our plan from.
Sheila Kahyaoglu: Okay. Thank you.
Operator: Our next question will come from the line of Ken Herbert with RBC Capital Markets.
Kenneth Herbert: Yes. Hey, good morning. Good morning everybody. Maybe Kevin or Mike, when you think about aftermarket, it sounds like in 2023, China was maybe relative to initial expectations, the biggest source of upside. As you look at fiscal 2024 and the mid-teens guide either geographically or maybe in other parts of the market, where could we see some of the maybe biggest potential of upside as you think about the guidance and the market dynamics today?
Mike Lisman: Yes. So I guess two things. First, if the market grows more quickly, as you saw from our guide this year, we’ll be ready to supply the demand if it’s there. I think our original commercial aftermarket guidance for last year was 15%. We finished it a little bit more than double that, right? So we were conservative with the guide when we went out and the China surge back is a big contributor to what carried us up as well as the pocket of strength elsewhere. We’d look to do the same thing this year as well, provided that, that occurs. Who knows where it comes from, right? The international stuff is probably a bit more depressed still specifically in Asia Pacific, that’s down the most. It could rally back. That’s still down double-digit percentage versus where it was pre-COVID.
Hard to forecast that, though, right? And we didn’t get out over our skis when we or do we think our op units did when we came up with expectations for FY2024. I think the biggest source of upside, not just in FY2024, but as you look out a couple of years, is when you take a step back, in most prior downturns, 9/11, the financial crisis stuff that went on, you sort of got back to that original trend line after a couple of years. And now in FY2024, we’re just getting back to FY2019, right? But there’s still a bit of pent-up demand there potentially because you guys know what drives RPMs, right? It’s GDP growth and rising middle class and all that stuff. And we’ve got four years now where we’ve sort of been below that past trend line, where we’ve not seen the 5% RPM growth per year that, that trend line was sort of on and where we were heading.
And that sort of pent-up demand, who knows how this recovery goes. But FY2024, we’ll get back to where we were in FY2019. But based on the underlying demand for global air travel, you would think there’s still quite a bit of pent-up demand there that should be a good tailwind for us as well as others in the sector out beyond FY2024. And who knows if you get back to the original trend line. And prior downturns, you sort of did, and we’ll see. But it should be a bit of a tailwind as we continue out past this coming year.
