TransDigm Group (TDG) Q2 FY26 earnings call: guidance and Q&A

How would sustained high fuel prices affect the business beyond FY26, considering the lag effect?

Joel Reiss stated that about half of shipments occur in the same quarter, providing confidence for Q3. While the Middle East (6-10% of data) is impacted, other regions remain strong. The company is not providing FY27 guidance yet but has confidence in FY26. Mike Lisman added that historical disruptions are typically sharp but correct quickly without permanent demand destruction.

“As we look at it, the Middle East today is somewhere in the 6% to 10% range as you look at our series of data. And we haven't seen the impact yet. We know it will come in terms of the rest of the world.”

asked by Ken Herbert · answered by Joel Reiss

Is channel destocking complete, and what is the expected margin expansion trajectory for FY27/FY28, especially after integrating new acquisitions?

Joel Reiss indicated that inventory in the distribution space was up slightly but not significantly, with strong point-of-sale, suggesting destocking is largely behind them. Mike Lisman clarified that the strong CAM growth was driven by direct shipments. For margins, he expects 1-1.5 percentage points of year-over-year improvement on a same-store sales basis, excluding acquisition dilution, which is the historical framework.

“We expect sequential improvement on a same-store sales basis, apples-to-apples business mix of, call it, 1 percentage point to maybe 1 percentage point and half with margin improvement year-over-year.”

asked by Noah Poponak · answered by Michael Lisman

How does TransDigm expect to close the 5-6 point aftermarket growth lag compared to peers, attributed to distribution exposure and less engine exposure?

Mike Lisman explained that the lag was half from engine exposure and half from distribution channel noise. He noted that engine businesses are now growing nicely, and the distribution channel noise is mostly behind them, which should help close the gap.

“On the second piece with regard to the inventory and the channel position, most of that noise is behind us. That will go away going forward. So instead of it -- the headwind that presented in the past should be more of a tailwind.”

asked by David Strauss · answered by Michael Lisman

What is the current state of the supply chain, and are there any meaningful extensions in lead times for suppliers?

Joel Reiss stated that the supply chain has largely returned to pre-COVID levels. He noted that during recent business unit meetings, no core issues or significant lead time extensions were highlighted, and operating units are performing in the high 90% range for on-time delivery.

“I think right now, I think the supply chain has largely kind of returned to where it was pre-COVID... I don't think anybody highlighted a core issue or a supply chain was affecting our businesses.”

asked by Scott Deuschle · answered by Joel Reiss

How does TransDigm view its exposure to older aircraft and the potential impact of increased retirement rates due to higher fuel costs or new deliveries?

Mike Lisman stated that there hasn't been a spike in retirement rates, which are below historical averages. He reiterated that TransDigm historically sees little impact from retirements or USM due to the price points of its products, which are generally below what part-out shops target.

“We really don't see much of an impact here. We've not historically when the retirement rate has picked up. A lot of that is just because of the price points of our products.”

asked by Matthew Akers · answered by Michael Lisman

Is there evidence of slowing in the discretionary aftermarket, and is the M&A pipeline balanced between aerospace and defense?

Joel Reiss said there's no material shift observed in discretionary vs. non-discretionary aftermarket, with Q2 bookings being an all-time high for CAM. Mike Lisman noted a good mix of aerospace and defense opportunities in the M&A pipeline, with a bias towards commercial, and most targets are small to mid-sized.

“Q2 bookings were our all-time high in terms of CAM bookings, and we saw good solid growth across the board.”

asked by Gautam Khanna · answered by Joel Reiss