Kenneth Herbert: That’s helpful. And as you look at – and it sounds like a lot of the strength in 2024 is going to come from the passenger side. Are you seeing anything that would give you a little bit more concern around pushback from airlines in terms of spare part pricing? And is that maybe at all relative to the last couple of years, any reason to think about a different assumption on pricing into the aftermarket?
Mike Lisman: No. As we said earlier, we aim to get a little bit of real price ahead of inflation. That’s what we’ve achieved historically. That’s what we’ll try to do this year. Same playbook we’ve always had this year. No huge pushback. I think the airlines are happy to get the parts and keep their aircraft flying in the air generating revenue now.
Kenneth Herbert: Great. Thanks, Mike.
Mike Lisman: Sure.
Operator: Our next question will come from the line of Gautam Khanna with TD Cowen.
Gautam Khanna: Hey. Good morning, guys.
Kevin Stein: Good morning.
Gautam Khanna: I just wanted to follow-up on two things. One, in the aftermarket, are you guys seeing any change in scope or just purchasing behavior from the airline customers because we see a lot of these airline stocks are obviously down a lot. They’re under some pressure now, the companies. I don’t know if you’re seeing any evidence of destocking or just whatever buying less than they normally would in average order size. Anything of that nature perhaps?
Mike Lisman: Yes. We’re not seeing much of that. I mean, as you know, it’s hard to get exact intelligence into the inventory levels of the airlines. But generally, we’re not giving them volume discounts anyway. So they don’t tend to hold too much of our stuff. But no, we’re not seeing very much at all. I don’t think we’ve seen any of the dynamic you described there.
Gautam Khanna: Okay. Good. And then relatedly, any discernible differences between the distribution channel and direct to the airlines and MROs?
Mike Lisman: No. For the most part, the distribution channel for us into commercial aftermarket, which is about a quarter, rough justice ebbs and flows a bit of the total commercial aftermarket revenue dollars. That’s been tracking – the POS there has been pretty much tracking for this whole year, together with our commercial aftermarket growth pretty closely. So no meaningful disconnects because of distributor, inventory or anything. They’ve been moving not exactly unlocks that, right, because you do get little bit of noise here and there, but pretty much in the same direction consistently throughout the year.
Gautam Khanna: Great. Thanks so much.
Mike Lisman: Sure.
Operator: Our next question will come from the line of Jason Gursky with Citi.
Jason Gursky: Hello? Can you hear me?
Mike Lisman: Yes.
Jason Gursky: Oh, okay, great. Yes, suddenly went silent on me. Sorry about that. Hey. I just wanted to revisit the margin question that Sheila touched on earlier in your comment that the mix shift towards OE, the growth rate being a little higher there relative to aftermarket leads to a pretty modest headwind from a margin perspective that you think you can make up in productivity. As we look out further into the future and the potential for retirement is accelerating as the OE ramp goes higher. Can you just talk about how you all think internally about that potential outcome and some of the opportunities and risks to margins? Kind of curious to know whether, as retirements accelerate in certain aircraft whether you can actually get better price and so the margins of your business, have some upward bias to them?
And then on the OE side, is it a question of higher volumes allow you to expand margins as you get some OpEx leverage. I’m just kind of curious to know, longer term, how you think about a widening gap between OE growth and aftermarket growth over time and the impact that, that has on margins?
Mike Lisman: Sure. I’ll try to give a little bit of color that shed some light on how we think about the various factors here that obviously, given guidance out in FY2024 is tough enough, which is why we range-bounded to do a couple of years out after that is even tougher. But generally, as it pertains to retirements, we still make really good money on margins on the new aircraft that come into service. If you look now at the fleet age, I think something like the fleet is a little bit older than it’s been historically something like 80% of it out of the five-year warranty window versus a historical average of closer to 70%. That creates a really slight tailwind for us. Again, nothing tremendously material. But over time, as the OE production ramps up through the 2030 time period or so, you’d expect that to get probably closer to like the 70% historical average.
But again, we’ll still make very attractive commercial aftermarket margins on the newer stuff that’s flying as well. The other question we get a lot on the retirement, and I think this is where you were going, is there some impact from USM hurt you guys. We’ve not seen that historically. We monitor it real time, as you know, from the price points of our products and the way the dynamic works there with higher value engine content primarily targeted as well as avionics on the USM side. We just historically have not seen much negative impact from that. The retirements are really low. They’re like half of the historical average rate of 2.5% of the fleet. We don’t count on that dynamic being the same for us going forward, though. So it’s something we always monitor and look at real time, but we don’t expect a huge headwind there.
So generally, we think, obviously, the OE ramps up going forward, maybe a little bit of a margin headwind, but nothing insurmountable. And the aftermarket is going to continue growing here as well for a couple of years out. So we think we’re sitting in a good spot.
Jason Gursky: Okay. That’s helpful. Thank you. Appreciate it.
Operator: Our next question will come from the line of Kristine Liwag with Morgan Stanley.
Kristine Liwag: Hey. Good morning everyone.
Kevin Stein: Good morning.
Kristine Liwag: Maybe follow-up on – sorry, there was a delay there. Kevin, following up on your answer to Noah’s earlier question, I mean taking a step back, the enterprise is generating strong free cash flow. You’re able to digest a special dividend this year and the CPI acquisition and still have capacity and desire for significant capital deployment next year. So taking into consideration the current interest rate environment, what’s your target leverage for next year when you assess your next capital deployment event?
Kevin Stein: Yes. I think Sarah said this in her – we would like to be in the 5x to 7x. We’re comfortable in that range. And I think that’s where we would like to sit. We’ll see how the capital markets respond, where there are opportunities for M&A and all this will go into the mix. But as she said, 5x to 7x. We’re comfortable in that range. I can’t really give you a better forecast than that, that’s our historical comfort range.
