Good day, ladies and gentlemen, and welcome to the First Quarter 2009 TransDigm Group Incorporated Earnings Conference Call. My name is Frenzine, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) I would like now to turn the presentation over to your host for today's call, Mr. Sean Maroney, Director of Corporate Accounting and Investor Relations. Please proceed, sir.

Thank you. I'd like to thank all of you that have called in today and welcome you to TransDigm's fiscal 2009 first quarter earnings conference call. With me on the line this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; our President and Chief Operating Officer, Ray Laubenthal; and our Executive Vice President and Chief Financial Officer, Greg Rufus. A replay of today's broadcast will be available for the next two weeks. Replay information is contained in this morning's press release and on our website at www.transdigm.com. Before we begin, the company would like to remind you that statements made during this call which are not historical in fact are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the information regarding forward-looking statements and risk factors included in the company's latest filings with the SEC. These filings are available through the Investors section of our website or through the SEC's website at www.sec.gov. The company would also like to advice you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined and adjusted net income, both of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measure and a reconciliation of EBITDA as defined and adjusted net income to that measure. With that, I will now turn the call over to, Nick.

Good morning. Thanks again to everyone for calling in, as in the past, I would like start off with some comments about both our consistent strategy as well as our current sense of the aerospace market, at least as it implies to our business. Just to reiterate we believe our business model is unique in the industry, in both its consistency and its ability to create intrinsic shareholder value through all phases of the cycle. To summarize again why we believe this or at least few of the reasons. About 95% of our sales are generated by proprietary products, about 80% of our sales come from products for which we are sole source provider, about 60% of our revenue and a much higher percent of our EBITDA comes from aftermarket sales, aftermarket revenues that historically produced a higher gross margin and provided relative stability in the downturns. Even in difficult market environments the annual worldwide growth in air travel rarely goes negative for any extended period. In fact, most reports I have seen forecast a modest decline in worldwide traffic in '09 in spite of very difficult economic situation with some possible recovery in the back end of the year. Because of our uniquely high EBITDA margins at 47% or more and relatively low capital expenditures, TransDigm has year-in and year-out generated strong free cash flow. We have significant liquidity and no near term debt issues. We have about $150 million in cash and approximately $200 million of un-drawn revolver in spite of making two acquisitions for about $140 million in the last four months and buying back some of our stock. We have a well proven value based operating strategy focused around what we refer to is our three value drivers. New business development, continual cost improvement and value…

Thanks Nick. As Nick mentioned in total we had a good first quarter. Our operating value drivers and acquisition integration continue to add solid value. Let me explain our first quarter operational value creation in a little more detail. We acquired GE, Unison and Aircraft Parts Corporation, APC on December 16th. APC designs and manufactures proprietary starter generators, generator controller units, and related components for turbine engines. The APC operation now reports to and is supported by our existing Avionic Instruments operations in Avenel, New Jersey. To date we have already revised some of the APC pricing and we presently have a team of Avionic Instruments personnel working to ensure a smooth transition. I would also like to report that the physical move of the Unison magneto business that we purchased from GE four months ago is on schedule and nearing completion. The physical move to our Champion Aerospace facility will be completed this quarter. And we should start to see consolidation savings during the second half of our fiscal 2009. Now let me turn the discussion to our other operating units and their value generation activities last quarter. Recall we enacted a 9% headcount driven cost reduction in our fiscal fourth quarter 2008. This action served us well in Q1 as the market softened. As Q1 progressed, we continue to modestly reduce head counts further. The disciplined cost actions help contribute to our favorable first quarter results. Going forward, we will continue to diligently fine tune our cost structure if the market demand fluctuates. Although the market has been softening our new business development continues to be quite active in Q1. We continue to invest in a broad range of engineered solutions for our customers. To give just a little color, I would like to give a few examples…

Thanks, Ray. Good morning, everyone. And again, thanks for calling in. Nick and Ray gave a very good update of our business, the market and what lies ahead of us. I will now focus on our GAAP results for the first quarter compared to the prior year first quarter commenting on the major line items with the little more detail. Our quarter one sales were $181.3 million up $18.2 million or 11.1% from the prior year. Organic sales growth was $4.5 million or 2.7% over the prior year. The organic sales growth is a mix story as Nick mentioned the defense business was up $7.3 million, commercial OEM revenue was up $2.2 million due to good year-over-year sales in the regional business jet market. That was partially offset by a decrease in sales to Boeing due to their strike. These two increases were offset by a $4.7 million decrease in commercial aftermarket sales, mostly due to a decrease in worldwide airline traffic, resulting from the weakening global economy. We also believe there may have been some reduction in end user inventories that contributed to decline in commercial aftermarket sales. The remaining $13.7 million of increased sales resulted from the acquisitions of CEF, which we acquired last May, the Unison magneto product line which we acquired in September and to a lesser extent, APC, which was just acquired on December 16. All of these acquisitions were not owned in the comparable quarter last year. Reported gross profit was $104.3 million or 57.5% of sales. This is a $16.2 million increase and is 18% greater than the prior year and it is also greater than our sales growth percentage of 11%. The reported gross profit margin increased three and one-half percentage points versus the prior year. This significant expansion in margin was…

Good morning.

Good morning, David.

Nick, did I hear you say the aftermarket was modestly lower in the first quarter?

Yeah, down 5%.

Okay and that's.

This is commercial aftermarket, le me be clear on that.

Right, so down 5% and I assume embedded in that is decent kind of price increase. So volumes were obviously down even more than that.

Correct.

Okay.

I think, as I said, David, we believe that it's hard to quantify. We think there is some restocking going on through the system.

Okay. But it's tough to quantify.

Yes, tough to quantify.

Okay. And then on the OE side, to your holding this flat, but the business shift side has deteriorated, I think, fairly significantly since your prior guidance, I think that's roughly about 15% of your sales.

Well, that’s business and regional, you got some regional in there.

Okay. Well, I guess on a business shift side, where you have concentrated?

I think, David, just to be a little clear on there, what we said for the year on the OEM is we think it may be weaker than the flat year-over-year comps we gave you 90 days ago.

Okay. Is that weaker forecast? Is that incorporated into the some big answer now?

Yes.

Okay.

Yes. I would say, we're very uncertain, I mean, who knows what we're going to see on these OEM rates. One of the big uncertainties in my mind is where are we going to see another shoe drop on these commercial transport rates?

And then, last one. The 9% headcount reduction that you have already undertaken, what does that size you for, I mean, are you probably aside at this point for Boeing production rates to come down or would you look at potential take an additional headcount out if that would happen?

David, it depends how much. We are appropriately sized for sort of the guidance we gave you. We look at this month-by-month now. This is a time in the market that needs just continual tension. We will keep trimming a little bit, each time we see softening across individual operating years. We did little of that in the first quarter, I suspect that's a tweaking we are going to be doing all year.

Okay great thanks guys, good quarter.

Thanks.

Our next question comes from the line of Carter Copeland of Barclays Capital. Please proceed.

Good morning guys.

Good morning Cart.

Really nice set of numbers guys. A quick question Nick, it sounds like in the plan, and in the guidance if we were to look at the margins and not sustaining the kind of 50% level seen in Q1. There is the implication that at least it sounds like to me that you are planning on having to cut in the back half on the commercial OE rates. Given the fact that Boeing was saying they want to keep them flat just last week. And we are already five, you are in your fifth month of the fiscal year. Is, am I missing something here or is it you just don't get as much sort of lead time from a sub system supplier who wants to take the rate down when Boeing tells them. Because it seems pretty clear that Boeing have not given the firing orders yet to take the rates down. So it just seems maybe the guidance is incorporating, a bit of down turn that could be a little bit early to me?

I hope so, I would like that to be true, I will tell you Carter you are clearly reflecting the fact that we are feeling very uncertain. About the OEM production rates, if Boeing would decide, if Airbus would decide if they are going to make a cut back in 2010. We are concerned that we could start to see sort of inventory fluctuation and tweaking in the system inventory before that. That can give sort of bounce around when you get into those transition points. So we are reflecting some of that, we are also reflecting the fact that I don't know that we have seen the bottom of this business yet turn down either. But I guess the main way I would answer question is I am simply unsure and being unsure we tend to be somewhat conservative. I would love to be back here next quarter saying things look better. But I just, I don’t have much confidence in this right now.

Much better but it would be fair to say though that if Boeing or airbus weren't to make up their mind about new firing orders until say the third calendar year quarter. Your fiscal fourth quarter then there would be some upside to your guidance. I mean it starts the time line given the lack of visibility, but it would seem that this is being pushed further off than you were originally anticipating?

I would hope so Carter but I honestly would not want to say that today the guidance we give is the guidance we give. We are trying to capture our best assessment in there.

That is totally fair, totally fair. On unrelated topic I wondered if you might provide some commentary on what you are seeing in terms of the credit market and whether or not the ability to do acquisitions is opening up anything more than the last. The last quarter, when things were pretty closed up?

I know what I would you are right, the strong portions of the credit markets specifically the high yield bond market and probably opened up something in the last I would say in the last two or three weeks anyway and I do not know if the bank markets opened up a lot of late. I can't say we have seen any impact on acquisitions, honestly I do not, there is no acquisitions in the last 6 or 12 months that we passed on, because we did not have the money to buy them.

But are there acquisitions that will suddenly become available once you can finance them?

I don't know, that depends on the seller, I don’t, I guess the point I am trying to make Carter as we haven’t been, we have not yet been capital constrained on our side. It's the people have not been selling as much as we might have hopped, we will see if this changes it.

Great, thanks a lot guys.

Our next question comes from the line of Robert Spingarn of Credit Suisse. Please proceed.

Hey, guys.

Hey, Rob.

Good morning Rob.

Couple of different questions, one thing is you are obviously your margins were just very impressive and maybe you can walk through Greg, you talked about the different components of the strength. But maybe we can get a little bit more color especially on that gross margin which what was in the 350 basis point increase. In terms of productivity versus pricing, how should we think about the various components how would we size those relatively?

Rob, given the mathematical reconciliation to our EBITDA margin, I do not have all that data right in front of me now but again its when we talk about our value drivers, we leave them and I think this was pretty good proof. We got good productivity, we laid off 7% of or 9% of our headcount, in the fourth quarter and obviously that's coming through because the volume has not followed in total, we do not disclose the price details in granularity, it's just a confirmation of what we have been telling everybody all along with our value drivers and you are seeing that we had a good quarter where we hit on these things, plus we got some good mix.

Let me ask you this way then Greg, how was the price increases relative to where they might have been six months or year ago, in terms of percentage terms, you are doing the same things that you have been doing or is that become a little bit more difficult?

As in holding our prices, well, there has not been any change in our pricing ability, Rob. But, I guess, may be let me take another crack at that. The biggest two impacts of the margin expansion are cost cuts in the fourth quarter and the pricing.

Okay.

Those are far and away the biggest cracks.

You're still getting an increase.

You can almost do the math, Rob. You take out 9%, which is close to a couple of hundred people, and take your guess of that, and what those people cost. And the volume did not come down. The pricing help a smaller impact, but what's contributing is we shipped, than you owe nothing to Boeing in the quarter and that's the lowest margin stuff, usually.

That’s true. But when you said --

And then, with the mix sort of within the mix, within the segments was pretty good. But those are secondary effects. The primary effect is the productivity and pricing.

Now, you said, pricing held. Does that mean it doesn't rise or it is isn't enough this hold.

Rob, what I mean, hold is the same kind of a patterns you've seen in the past. And there was our process, our results have not changed significantly.

Okay. And if we go back to --

Now, the market has not hurt it.

Right. And Carter was asking you about the flow and timing and I would agree that if the airliners see some kind of production cut that may not happen till the back end of this calendar year, may not even happen until your fiscal first quarter, next year. How about on the business jet side? Though you've touched on business jet earlier, do you have the same relationship in OE to aftermarket at business, regional and commercial, should we think about it that way? Sort of 25% OE, 75% aftermarket in each of those segments?

25% OE, 75%, let me just think about that, regional its probably not a lot different, because they are in, they are flying commercial transport kind of hours.

Okay.

On business jet it is less so because the business jet on average only flies, pick your number 3-400 hours a year.

Right.

So the relationship between the aftermarket and the OEM is not as pronounced just because there is not as much flying hours.

And should I assume you are going to see a recovery, or your plan expects recovery in biz jet aftermarket before OE?

I don't know that I can speak to that, I don't expect that this year. And that would be something out in the future. So I don't know if I can comment on that yet.

Okay.

You are just asking business jets only?

Yeah, I am focused on business jet because clearly that seems to be from a traffic perspective the hardest hit right now, maybe the most discretionary portion of the flying that's out there. And we have actually seen production rate decreases announced by several manufactures. But we've yet to see that from a airliner the commercial airliner manufacturers?

That's right. I would say, I can't put an exact number on it, but I would say again to repeat myself. The relationship between the aftermarket and the OEM and the business jet is no where near as pronounced, a commercial transport or defense business or regional business.

Okay. And another way of saying that is the biz jet OE maybe more important than on our OEM basis.

Yeah, that's right. And then again the simple fact is they don't fly as many hours.

And then on Boeing you talked a bit of the strike effect in the three months, are they, are you delivering to Boeing at the pre strike levels at this point?

Ray, you have the we are close, I don’t have.

Up there or not.

First off, we not only delivered a Boeing but we also delivered Honeywell and others that supply to Boeing. And you get a little bit muddiness or murkiness and exactly the flow of things since their inventories fluctuate. But we are about their contract I would say, we saw some fluctuations in the first quarter or push outs of orders and even push out the deliveries. We also saw some customers they keep shifting to us we don't want to disrupt any supply during the strike or not. So, some of those inventories will come out perhaps. As the year goes out in the net muddy the picture because some orders will pickup that point place during the first quarters. So it's a tougher thing to quantify but we think it's getting back on track.

So, Rob just to clarify on that little bit. I think the three month impact we will see over the year it is probably we saw the majority of that maybe two-thirds of it or so in the first quarter. Rest of its going to kind of dribble out through the year but people would not sit here inventory bills and things like that.

Okay. And then just finally 787 are we are done with design changes there?

We hope but it's not done yet. The bulk of our 787 spending this year as I mentioned is lower than last year where the bulk of the work was being done, but there is still some work to be completed. We're hoping to contain that and if there is scope creep going forward we will work to get our fair share.

We believe it's captured in our guidance, so we pick the numbers Rob, our balance we expected going into the year.

While we’re topic, when does A350 ramp from an R&D perspective?

I am trying to remember.

Well, 2012 I believe is their first flight target but if A380 and 787 are any predictor we might want to add a year or two on to the first dates. So no significant impact in 2009, I doubt there is a big impact in 2010, Rob but we honestly; I am not sure of that yet.

Thanks guys, very impressive quarter.

Thank you.

Our next question comes from the line of Fred Buonocore of CJS Securities, please proceed.

Yes, good morning gentlemen, excellent quarter.

Hi, Fred.

I just wanted to clarify Nick, and I know David and Carter touched on this is well. So if you look at your top line guidance and you strip out the contribution from APC. It appears that your revenue guidance is actually down from your original guidance, is that entirely comprised of your expectations on OEM are there other drivers of that?

I guess, I would say Fred, it is sort of capturing our whole concern about the marketplace, I think if you do that math, ends up short of what $10 million or something like that, is that? First I would say that it is not a very big number on $800 million. And I would say, what you are seeing there, is our uncertainty, we are unsure about the OEM we are not feeling terribly confident about the commercial aftermarket we don’t think there is a big downside there and the question is there enough defense upside, to offset those risks. And we are concerned.

Got it, and as you mentioned on the defense side being stronger than anticipated and you expect that at least through the first half of the year, what would make it weaken, is there any reason to think that it should not continue at this level?

Now I will give you a wise guidance, Fred. If it weaken then please stop buying.

That’s very helpful

I told you that you'll find that helpful.

I laughed right into it.

We are essentially, in this uncertain time, we have a transition of administration. They're buying at a very high level, higher than we would have expected. They bought it at a higher level, frankly that we even would have expected last year. We see no indication yet that that's softening.

And is this replacement equipment for aircraft that are being just chewed up in the Middle East or --

It's almost across the board. It's repairing overhaul of cycled-out stuff, its upgrades of products, it's ground equipment where the gun motors are getting re-worked, spare parts. I can't, its still sort of a rising tide is picking up all the ships.

Got it. And then on the cargo side of things, do you have any sense for what your exposure to the cargo aircraft market is, just, given the huge drops that markets have seen in the last couple of quarters?

I would say, it is less than the install base of cargo aircraft which is relatively low, and percentage of the total base, I can't remember the exact number. But we don't have any disproportionate exposure. If any cargo is probably a little less because you don't have a lot of the passenger related spare parts in there.

Okay. And then, just finally, I bet you touched on this a little bit in your prepared remarks, inventory in the channel. So, this is what your kind of saying that you think that the airline inventories may be kind of in a better shape or maybe they are more right sized at this point than may be they were 90 days ago?

I guess there is two ways to look at, two areas of inventory to look at. In the distribution channel we think it was roughly flat over the quarter.

Right.

And as we've told before they have contractual levels of inventory. Now if the demand continues to drop, that will be impacted, but it was roughly flat over the quarter. It's tough to get a number on the system wide airline inventory. But our general sense is there was some de-stocking over the quarter. And I don't, again Fred I don't have real good I don’t have good numbers on this. But just as history repeats itself I suspect that's not done. There is probably some more of that to come.

Okay got it.

And we would hope, I would hope it can't go on through the air. And it would start to bottom out, somewhere mid year for us.

Okay well thanks very much and great quarter.

(Operator Instructions). Our next question comes from the line of Karl Oehlschlaeger of Macquarie Capital. Please proceed.

Hey guys good morning.

Good morning.

Congratulations for the quarter. In terms of your margin, it's the real strong margin. We saw in the quarter, you talked a little bit about different things that were impacting it. One of them being mix and obviously the Boeing strike that lower margin business there was less. But can you talk about the impact, in sort of, in terms of numbers in basis points so what that was on the quarter. And then beyond that there was favorable mix sort of in general maybe give little bit more color around what that favorable mix was a result of?

Karl, to do detailed reconciliation would I think cause confusion. But again as Nick said, the big numbers for the quarter were the impact of the rift that we had in the fourth quarter and we had strong pricing. By far those were the two biggest items that improved our margin for the quarter of the EBITDA line. If I start throwing numbers around, it would just confuse a lot of people with detailed reconciliations over a phone call.

Okay. With in terms of just sort of the favorable mix can you talk just qualitatively where is that outlook, what sort of products are generating higher margin time? When you say favorable mix are you talking OEM versus aftermarket or you are talking specific products versus or --?

What I would say is the favorable mix is made up of two things. One, we didn't shift pretty much to Boeing, and that's the lowest margin stock to be shifted typically. So that is just not doing that tends to give you little mix up. And I would say just sort of when I call the mix within the mix sort of the selection of parts and items that's sold through the quarter, were a little better than usual. But what I wanted to keep emphasizing here Karl is that, that's the tail kind of, that's the small number. The big number in the margin, in the better margin is cost reduction. This cost reduction carrying in terms of prior quarter and our normal pricing activity.

Alright, great, thanks.

Our next question comes from the line [Jack Wegner with MVX Asset Management]. Please proceed.

Good morning. Could you just share with us breakdown of the backlog between defense and the commercial?

No, we do not disclose that.

Okay. And is there any flexibility regarding the backlog of customers canceling contracts or orders?

You mean can they go away?

Yes.

Well, I mean, they can always the commercial transport guys can always reschedule, in other words if they are producing 100 planes a year we are selling them a 100 parts a year, they dropped the rate down to 60 planes a year they can drop their consumption rate down to 60.

Okay.

We can not keep giving them 100 parts when they are going to produce only 60 airplanes. They can not cancel although they can stretch them out for sure, Defense Department always has the right to reject the contracts as long as they pay you for any cost incurred.

Okay, and regarding seasonality, can you share with us on your seasonality that you have experienced during the year, if there is any?

I would say there isn't heck of lot of seasonality in revenues usually and this can vary particularly when you are in a market transition point. These rules can get knocked out whether in a steady state, usually our first quarter is a little lower because there is less production days primarily not because there is a big change in intrinsic demand.

Okay, thank you. Also lastly, you purchased some stock in the last quarter, do you plan on continue to buyback stock, or is there any plans to pay down debt?

We approved $50 million stock buyback, with the rate whether will do that or the rate in which we do it is something we don't disclose and we just kind of play that as we look at the value and move forward each day-by-day.

Okay. Thank you.

You have no further questions.

Okay. Thanks everyone for calling in and participating in today's call this morning. And one last thing is you could expect to see our 10-Q files in the next day or so. Thanks again.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.