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Transdigm Group Incorporated (TDG)

February 08, 2013 10:00 am ET

Executives

Gregory Rufus - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Secretary

W. Nicholas Howley - Chairman, Chief Executive Officer and Chairman of Executive Committee

Analysts

Hayes Smith

Jeff Cohen

Savi Alex

Curtis Bush

Operator

Good morning. My name is Marissa, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the TransDigm Public Lenders Conference Call. [Operator Instructions] Thank you. Mr. Smith, you may begin the conference.

Hayes Smith

Great. Thanks. Thank you, operator. Welcome, everyone, to the TransDigm Lender Call. I'll point you to Page 1, we have a forward-looking statement paragraph, and then on Page 2, we have a special note regarding non-GAAP information, so please review those. Going to the agenda, I will kick it off. I'm Hayes Smith, an MD at Credit Suisse.

With me we have Greg Rufus, EVP and CFO of TransDigm; Nick Howley, the Chairman and CEO of TransDigm; and then Jeff Cohen will wrap it up with the syndication overview and timetable, and then we'll have public Q&A.

Going to Page 5, the executive summary, I think most of you are familiar with TransDigm. It's a leading supplier of highly engineered aircraft components for use on nearly all commercial and military aircraft in service today. For the LTM period ended December 29, 2012, the company generated GAAP revenues and EBITDA as defined of $1.8 billion and $836 million, respectively, or 47% EBITDA margin. TransDigm is seeking to refinance its existing senior secured facility with a new $310 million 5-year revolver and a $2.2 billion 7-year term loan. So we're adding a little bit of incremental of $30 million, but leverage will stay the same. The pricing on this new term loan will be L plus 2.75% with a 0.75% LIBOR floor, and we'll add a 101 softcall repricing protection for 1 year.

We're also seeking some amendments to the existing facility in that revolver. This is the highlights. We’ll get to more specificity at the end here, but -- we're going to make unlimited RP basket if net leverage is below 5.75x, as long as the revolver is undrawn at that point and there's a minimum cash balance of $200 million. That will provide them about $310 million of liquidity -- or $510 million of liquidity at that time. The revolver covenant will be set to 6x net leverage and there will be no interest coverage ratio covenant. We're also going to put in an account receivable securitization basket of up to $250 million. There's really no intent to use at this time. It's just going to give the company some flexibility. From the timing standpoint, we're going to have lender consents and commitments due by -- on noon on February 13.

Going to the pro forma cap table on Page 7, you'll see this is a credit neutral event. We're taking a total senior secured leverage from $2.17 billion to $2.2 billion, again, leverage neutral. Net debt will stay at 4.5x and senior secured leverage will stay at 2.6x.

With that, Greg, do you want to take care of Page 9?

Gregory Rufus

We're just going to turn it right over to Nick.

W. Nicholas Howley

Good morning, everybody, and thanks for calling in here. I'll give just a quick overview on TransDigm and then Greg will go through some of the financial aspects. Just to remind everybody, TransDigm presently runs a revenue of $1.85 billion; our guidance for the year, a little under $2Billion. We just refreshed that guidance a couple of days ago. The EBITDA is just a hair under $900 million. One of the distinguishing characteristics of this business is a very high EBITDA margins. EBITDA margins typically run in the high-40s to 50%, they drop down a little bit as we make acquisitions, and then they slowly drift back up towards 50%.

When you think of TransDigm, there's some very distinguishing characteristics of this business. First, to remind everybody, we're in the aerospace business. Almost all our products are highly engineered and proprietary. And what that means is we own the intellectual property, which means we generally get the aftermarket, and it also means that in the majority of the cases, we're the sole source provider of the product.

In addition to that, we have a very large installed base of product, and this large installed base gives us an annuity-like stream of aftermarket spare parts and repairs. It's this aftermarket stream that contributes both to the high margins and also to the relative stability of the cash flow of TransDigm.

Another distinguishing characteristic is, when you take the high EBITDA margins, generally, approaching 50%, and combine them with a relatively low-capital intensity, where capital expenditures generally run below 2% of revenue, you get an unusually high free cash flow characteristic that gives us a lot of flexibility, both on our structuring of our balance sheet and acquisitions and the like.

And lastly, when you think of TransDigm, you want to think of a private equity-like model being run in the public market. This is somewhat unique for industrial companies in the New York Stock Exchange, but it's -- if you don't understand that, it's difficult to understand how we operate.

I'm on Page 10 now. We make a very broad range of engineered niche products. We have some pictures of them here. The common characteristic, again, is proprietary, aerospace businesses with significant aftermarket content. If you look at Page 11, you'll see we have a consistent record of growth and margin expansion over the 20 -- approaching 20-year history of the company now. Our revenues have grown a little over 20% compounded annual year, that's roughly half acquired, half organic, maybe a hair more acquired, but not much. But I'd focus you over on the EBITDA. You'll notice the EBITDA has grown at about 26% a year over that 20-year period, which is another way of saying that we don't buy businesses with these high-EBITDA margins, but we buy them lower and we're able to improve them significantly after we owned them.

On Page 12, you'll see TransDigm has some pretty attractive credit characteristics. I'm not going to go through them all, but we have good, solid, many time sole source market positions in niche markets. We have an operating strategy that's worked well for many, many years, and has proven in the management team that's been able to execute it. And lastly, there's multiple paths here to make money and to generate cash.

I look at Page 13. This is a distribution of our revenues, and I'll point out a couple of things, I'm on the left now, the revenues rather than the EBITDA. You'll see almost 60% of our revenues come from the aftermarket. We like that. That's not by chance. We like the high margins, we like the predictability and demand. And frankly, we like the pricing power we have in the aftermarket. As a result, if you move to the EBITDA, though this is just a directional, this chart, the vast majority of our cash flow and the vast majority of our EBITDA comes from the aftermarket.

On Page 14. About 90% of our revenues are proprietary. That means we own the intellectual property, which means more often than not, we get the aftermarket. And also about 75% of our revenue is done on a sole-source basis. And when I say sole source, what I mean is we're the only provider of the part in the world. I don't mean that we just happen to have the one that has a contract for the next couple of years.

And that was the summary, I'm going to pass on to Greg to run through the financials.

Gregory Rufus

Just a detailed historical look of our P&L, point out a few things and then just remind you, we filed our first quarter Q, so that's available for review also. Just to point out some big numbers. If you go under GP, you'll see amortization pops up in '11 and in '12 with the refinancing costs in '11, entirely due to the acquisitions we made. We made our largest acquisition, McKechnie, in fiscal '11 and then we made AmSafe after that. So it's purchase price-type amortization that drives those numbers. What I'd like to focus on the schedule though, and as Nick alluded to, is the EBITDA as defined less CapEx. You can see that that's consistently in the high-40% range, and this gives us the stability of cash flow and the ability to carry debt.

When you look at Page 16, you can see that we're very comfortable operating in a leveraged environment. This schedule goes back to 2000, but 3x we have had a gross debt leverage at 6x. The key to this schedule though, it shows the event that happened but more importantly, how rapidly we delever after we lever up. And so we have a proven track record of being able to operate in a leveraged environment and delever quickly throughout the history of our company.

So with that, I'll turn it over to Jeff to go over the timetable.

Jeff Cohen

Thanks, Greg. Good morning, everyone. It's Jeff Cohen with Credit Suisse's loan capital markets group. On Page 18, you can see the transaction timeline. We are asking for commitments on Wednesday, February 13. The required lender consents are only for our revolver lenders. This is a new transaction for term loan investors, and we expect to close and fund on Tuesday, the 19th.

On the following page, Page 19, we have the summary term sheet. You'll see that we are at a $2.2 billion term loan facility and a $310 million revolver. The revolver is 5 years in tenor; the term loan will be 7 years. The launch pricing is LIBOR plus 2.75% issued at par with the 75 basis point LIBOR floor. The term loan amortization is 1% per year. There will be 101 repricing protection for 12 months. The guarantor and security package will remain the same as the existing deal. The affirmative covenants will remain the same as well. Negative covenants very substantially similar and financial covenants the same.

The modifications in this credit agreement versus the existing -- we are setting the revolving credit facility net leverage ratio covenant to 6x, no step downs. The RP basket will be loosened to permit RPs subject to a net leverage ratio test of 5.75x and no drawn amount under the revolver and a minimum pro forma cash balance of $200 million. There's an allowance for an accounts receivable securitization of up to $250 million. We will allow the company to designate non-core assets at the time of a permitted acquisition that can be sold later -- sold at a later date subject to the paydown provision or reinvestment rights. And will allow required lenders the ability to reject mandatory prepayments associated with asset sales and excess cash flow repayments. And will allow the company to enter into joint ventures of up to $1 billion in total and allow for the ability to repurchase loans below par value. The revolving credit facility and first lien term loan will be governed under a single credit agreement, as opposed to the 2 side-by-side credit agreements that we have now.

So with that, why don't we open it up for questions on the phone?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Joseph Cicilleni [ph] with Raymond James Bank.

Unknown Analyst

Two questions. One, will we be getting new financial projections with this term loan and refinancing? Second question, when will you post the actual amendment documentation for the existing lenders?

Jeff Cohen

Yes. I know we're working on the amendment documentation now, I don’t have an ETA. But we'd expect it to be posted either today or over the weekend. I'm sorry, what was your second question?

Unknown Analyst

Are we getting new financial projections on this?

Jeff Cohen

Yes. For the commercial banks, we are providing financial projections. If you -- we can send those to you.

Unknown Analyst

Okay. And so you'll -- they'll be posted to syntrack or we should just contact our sales representatives?

Jeff Cohen

Contact your sales representative since we don't have a private site up.

Operator

[Operator Instructions] Your next question comes from the line of Alex Savi (sic) [Savi Alex] with Highbridge.

Savi Alex

Just a couple of questions, please. Nick or Greg, what does your -- just remind me, what does your guidance assume with respect to the 787?

W. Nicholas Howley

Yes. What our guidance assumes is an average shipment rate over the next 2 years of about 75 airplanes a year, which is generally lower than most people forecast. Remember, that's average over 2 years, because we typically are going to be shipping ahead of the production rates. I also add that there's a fair amount of inventory overhang still in the system on 787, so that the production rates on 787 aren't going to make a big -- a whole lot of difference in our EBITDA or cash flow for the next year or so.

Savi Alex

Okay. So if production is delayed...

W. Nicholas Howley

And in the beginning of a program, it's not terribly profitable, so it doesn't make a big difference whether it's 10 or 15 planes one way or the other.

Savi Alex

Okay. And the second question is, as airlines start to cannibalize all the aircrafts for parts, how do you see that affecting you aftermarket business?

W. Nicholas Howley

Generally not much. The -- our parts tend to be parts that are relatively low in dollar value, when compared to other parts in the airlines. And generally, they're not -- they don’t' get cannibalized. It's the higher dollar value things that tend to get taken off the old airplane and sold into the secondary market.

Savi Alex

Okay. Perfect. And then a couple of structuring questions. The $1 billion joint venture investment, will the equity interest be pledged as collateral?

Gregory Rufus

Well, we're still going through amendment documents. So we'll post that, and we can address it at that time once the amended docs are final.

Savi Alex

Okay. And then lastly, I will just ask you to consider the unlimited RP basket to be tied to gross firstly leverage ratio and not a net leverage ratio.

Operator

Your next question comes from the line of Curtis Bush with CIFC Asset Management.

Curtis Bush

Just a question for Credit Suisse here. Is this -- will there be a cash roll option?

Jeff Cohen

I believe we will be able to accommodate that for a limited number of investors, yes.

W. Nicholas Howley

Will you repeat that? We missed it here.

Jeff Cohen

That's a cashless roll option where they can roll directly from one loan to another to simplify closing.

Operator

There are no further questions at this time.

Jeff Cohen

Well, thank you, everyone for joining. If you have any follow-up questions. Please feel free to follow-up with the Credit Suisse deal team. Thanks again.

W. Nicholas Howley

Thanks everybody.

Operator

This concludes today's conference. You may now disconnect.

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