TransDigm Group - Q1 2023

Transcript

Operator (participant)

Thank you for standing by. Welcome to the TransDigm Group's 2023 1st quarter results call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. I would now like to hand the call over to Jaimie Stemen, Director of Investor Relations. Please go ahead.

Jaimie Stemen (Director of Investor Relations)

Thank you. Welcome to TransDigm's fiscal 2023 first quarter earnings conference call. Presenting on the call this morning are TransDigm's President and Chief Executive Officer, Kevin Stein, Chief Operating Officer, Jorge Valladares, and Chief Financial Officer, Mike Lisman. Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information. 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 company's latest filings with the SEC available through the investor section of our website or at sec.gov.

The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA As Defined, Adjusted Net Income and Adjusted Earnings Per Share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings call for a presentation of the most directly comparable GAAP measures and applicable reconciliation. I will now turn the call over to Kevin.

Kevin Stein (President and CEO)

Good morning. Thanks for calling in today. First, I'll start off with the usual quick overview of our strategy, a few comments about the quarter, and discuss our fiscal '23 outlook. Jorge and Mike will give additional color on the quarter. To reiterate, we are unique in the industry in both the consistency of our strategy in good times and bad, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins, and over any extended period have typically provided relative stability in the downturns. We follow a consistent long-term strategy. Specifically, we own and operate proprietary aerospace businesses with significant aftermarket content.

We utilize a simple, well-proven, value-based operating methodology. We have a decentralized organizational structure and unique compensation system closely aligned with shareholders. We acquire businesses that fit this strategy and where we see a clear path to PE-like returns. Lastly, our capital structure and allocations are a key part of our value creation methodology. Our longstanding goal is to give our shareholders private equity-like re-returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital. As you saw from our earnings release, we had a good start to FY '23 and increased our guidance for the year. We continue to see recovery in the commercial aerospace market. Our Q1 results show positive growth in comparison to the same prior year period.

We are encouraged by the progression of the commercial aerospace market recovery to date, and trends in the commercial aerospace market remain favorable as demand for travel remains robust. International air traffic is closing in on the domestic travel recovery, and China reopened its air travel in January with the lifting of its pandemic restrictions. However, there is still progress to be made for the industry as our results to continue to be adversely affected in comparison to pre-pandemic levels since the demand for air travel is still depressed. In our business, we saw another quarter of very healthy growth in our total commercial revenues and bookings. Bookings also outpaced revenues in all three of our major market channels: commercial OEM, commercial aftermarket, and defense. We also attained an EBITDA As Defined margin of 50% in the quarter.

Contributing to this strong margin is the continued recovery in our commercial aftermarket revenues, along with diligent focus on our operating strategy. We had strong operating cash flow generation in Q1 of almost $380 million and ended the quarter with close to $3.3 billion of cash. We expect to steadily generate significant additional cash throughout the remainder of 2023. An update on our capital allocation activities and priorities. The capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our businesses, second, to do accretive M&A, and third, return capital to our shareholders via share buybacks or dividends. A fourth option, paying down debt, seems unlikely at this time, though we do still take this into consideration. We are continually evaluating all of our capital allocation options.

As mentioned earlier, we ended the quarter with a sizable cash balance of close to $3.3 billion, which leaves us with significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Regarding the current M&A pipeline, we are actively looking for M&A opportunities that fit our model. Acquisition opportunity activity continues, and we have a decent pipeline of possibilities as usual, mostly in the small and mid-size range. I cannot predict or comment on possible closings, but we remain confident that there is a long runway for acquisitions that fit our portfolio. Both the M&A and capital markets are always difficult to predict, but especially so in these times. Now moving to our outlook for fiscal 2023.

As noted in our earnings release, we are increasing our full fiscal year 2023 sales and EBITDA As Defined guidance, both by $65 million, to reflect our strong first quarter results and current expectations for the remainder of the year. The guidance assumes the continued recovery in our primary commercial end markets through fiscal 2023 and no additional acquisitions or divestitures. Our current year guidance is as follows, and it can also be found on slide 6 in the presentation. The midpoint of our re-revenue guidance is now $6.155 billion or up approximately 13%. In regards to the market channel growth rate assumptions that this revenue guidance is based on, for the commercial aftermarket, we are updating the full year growth rate assumptions as a result of our strong first quarter results and current expectations for the remainder of the year.

We now expect commercial aftermarket revenue growth in the high teens % range, which is an increase from our previous guidance of mid-teens % range. At this time, we are not updating the full year market channel growth rate assumptions for commercial OEM and defense, as underlying market fundamentals have not meaningfully changed. Commercial OEM and defense revenue guidance is still based on our previously issued market channel growth rate assumptions, where we expect commercial OEM revenue growth in the mid-teens % range and defense revenue growth in the low to mid-single digit % range. The midpoint of our EBITDA as defined guidance is now $3.11 billion or up approximately 18% with an expected margin of around 50.5%. This guidance includes about 50 basis points of margin dilution from our recent DART Aerospace acquisition.

We anticipate EBITDA margins will continue to move up throughout the remainder of the year. The midpoint of our adjusted EPS is increasing primarily due to the higher EBITDA As Defined guidance and is now anticipated to be $22.17 or up approximately 29%. Mike will discuss in more detail shortly some other fiscal 2023 financial assumptions and updates. As our fiscal 2023 progresses, should the favorable trends in the commercial aerospace market recovery continue, including the expansion of flight activity in China, we could see further upward revisions to our guidance. We believe we are well positioned for the remainder of fiscal 2023. We'll continue to closely watch how the aerospace and capital markets continue to develop and react accordingly. On the organization side, I wanted to announce the retirement of Halle Martin, our General Counsel, Chief Compliance Officer, and Secretary.

Halle has been an integral part of our team since 2012 and long before as outside counsel. Jessica Warren has been promoted from her position as Associate General Counsel to fill this critical role as part of our robust succession planning process. Thank you, Halle, for all of your great counsel and dedication to TransDigm. Let me conclude by stating that I am very pleased with the company's performance this quarter and throughout the recovery of the commercial aerospace industry. We remain focused on our value drivers, cost structure, and operational excellence. Let me hand it over to George to review our recent performance and a few other items.

Jorge Valladares (COO)

Thanks, Kevin. Good morning, everyone. I'll start with our typical review of results by key market category. For the balance of the call, I'll provide commentary on a pro forma basis compared to the prior year period in 2022. That is assuming we own the same mix of businesses in both periods. The market discussion includes the May 2022 acquisition of DART Aerospace in both periods. DART has been included in this market analysis discussion since the third quarter of fiscal 2022. In the commercial market, which typically makes up close to 65% of our revenue, we'll split our discussion into OEM and aftermarket. Our total commercial OEM revenue increased approximately 20% in Q1 compared with the prior year period. Bookings in the quarter were strong compared to the same prior year period and solidly outpaced sales.

Sequentially, the bookings improved almost 15% compared to Q4. We continue to be encouraged by build rates steadily progressing at the commercial OEMs and the strong demand for new aircraft. Ongoing labor instability and supply chain challenges across the broader aerospace sector present risks to achieving OEM production rates. Moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 31% in Q1 when compared with the prior year period. Growth in commercial aftermarket revenue was primarily driven by continued strength in our passenger sub-market, which is our largest sub-market, although all of our commercial aftermarket sub-markets were up significantly compared to prior year Q1. Sequentially, total commercial aftermarket revenues grew by approximately 7% and bookings grew more than 25%.

Commercial aftermarket bookings were robust this quarter compared to the same prior year period. Q1 bookings significantly outpaced sales. Turning to broader market dynamics, global Revenue Passenger Miles remain lower than pre-pandemic levels, have continued to steadily trend towards upwards over the past few months. Airline passenger demand remained strong throughout the fall and holiday season. IATA currently forecasts calendar year 2023 air traffic will be within about 15% of pre-pandemic. The recovery in domestic travel continues to be stronger than international travel, although international traffic is catching up. In the most recently reported IATA traffic data for December, global domestic air traffic was only down 20% compared to pre-pandemic. For the U.S., domestic travel in December was within 10% of pre-pandemic levels. Domestic travel in China continued to lag other major air traffic regions and was down about 55% compared to pre-pandemic.

The lifting of COVID restrictions and the reopening of China to international travelers bodes well for air traffic growth. Roughly a year ago, international travel globally was depressed about 60%. In the most recently reported IATA traffic data for December, international travel was only down about 25% compared to pre-pandemic levels. International traffic in North America and Europe were within 5% and 15% of pre-pandemic respectively. Asia-Pacific international travel was still down about 50%, but should improve subsequent to the January reopening of China. Global air cargo demand has continued to pull back over the past few months. As of IATA's most recent data, December was another month in which air cargo volumes showed year-over-year decline and were below pre-pandemic levels.

The recent easing of pandemic-related restrictions in China could be favorable for air cargo in 2023, but it's too early to determine. Business jet utilization has come down from pandemic highs and has continued to temper over the past handful of months. However, activity is still above pre-pandemic levels, and business jet OEMs and operators forecast strong demand in the near term. Time will tell how this plays out, as there is softening optimism for the business jet market due to the uncertainty within the current macro and financial environment. Shifting to our defense market, which traditionally is at or below 35% of our total revenue, the defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 3% in Q1 when compared with the prior year period.

Defense bookings are up significantly this quarter compared to the same prior year period, and Q1 bookings strongly outpaced sales, which bodes well for future defense order activity. Impacting our defense market revenues are the ongoing delays in the U.S. government defense spend outlays. While these delays appear to be slowly improving, they do remain longer than historical average levels. Our teams are steadily making progress with the supply chain but continue to face challenges. The lack of electronic component availability continues to be the primary focus for our teams. As Kevin mentioned earlier, we continue to expect low to mid-single digit % range growth this year for our defense market revenues. Lastly, I'd like to wrap up by stating how pleased I am by our operational performance in this first quarter of fiscal '23. We remain focused on our value drivers in meeting increased customer demand for our products.

With that, I'd like to turn it over to our Chief Financial Officer, Mike Lisman.

Mike Lisman (CFO)

Morning, everyone. I'm going to quickly hit on a few additional financial matters for the quarter and then expectations for the full fiscal year. First, on organic growth and liquidity. In the first quarter, our organic growth rate was 15%, driven by the continued rebound in our commercial OEM and aftermarket end markets. On cash and liquidity, free cash flow, which we traditionally define as EBITDA less cash interest payments, CapEx, and cash taxes, was roughly $400 million for the quarter. We ended the quarter with approximately $3.3 billion of cash on the balance sheet, and our net debt-to-EBITDA ratio was exactly six times, down from 6.4 times at the end of last quarter. On a net debt-to-EBITDA basis, this puts us right at the five-year pre-COVID average level.

Additionally, our cash interest coverage ratios, such as EBITDA to interest expense, are currently in line with where we've historically operated the business. We feel comfortable here given the benefit of our interest rate hedges and fixed rate debt instruments that were entered into in a lower interest rate environment. As always, we continue to watch the rising interest rate environment and the current state of the debt markets very closely. During the first quarter, we completed an extension of our nearest maturity term loan, pushing the maturity date from mid-2024 out into 2027. Pro forma for this refinancing, our nearest term maturity is now 2025. As a result of this refi, our interest expense estimate for FY '23 ticked up very slightly, as you can see in today's updated interest expense guidance.

Over 75% of our total $20 billion gross debt balance is at a fixed rate through a combination of fixed rate notes and interest rate caps and swaps through 2025. This provides us adequate cushion against any rise in rates, at least in the immediate term. Going forward, we expect to continue both proactively and prudently managing our debt maturity stacks. Practically for us, this means pushing out any near-term maturities well in advance of the final maturity date, also utilizing hedging instruments where we can in order to lock in the cash interest costs. As we sit here today from an overall cash liquidity and balance sheet standpoint, we think we remain in good position with adequate flexibility to pursue M&A or return cash to our shareholders via share buybacks or dividends during fiscal 2023.

With that, I'll turn it back to the operator to kick off the Q&A.

Operator (participant)

As a reminder to ask a question, please press star one one in your telephone. That's star one one on your telephone to ask a question. Our first question comes from the line of Noah Poponak of Goldman Sachs. Your line is open, Noah.

Noah Poponak (Managing Director of Aerospace and Defense Equity Research)

Hey, good morning, everyone.

Mike Lisman (CFO)

Good morning, Noah.

Kevin Stein (President and CEO)

Good morning.

Noah Poponak (Managing Director of Aerospace and Defense Equity Research)

How are you anticipating the commercial aerospace aftermarket revenue to progress sequentially through the year compared to the first quarter?

Kevin Stein (President and CEO)

I would expect much like flight activity that it should keep trending upwards. That's our expectation. We'll see if that plays out.

Noah Poponak (Managing Director of Aerospace and Defense Equity Research)

Okay. You mentioned bookings ahead of shipments across the board. Do you have any quantification of that?

Mike Lisman (CFO)

We've historically not given book-to-bill across the end markets, Noah, I think it's pretty healthy growth that supports the revised guidance on revenue for today. We feel good about hitting that. You know, healthy growth and healthy outperformance and really positive book-to-bill ratios across the end markets.

Noah Poponak (Managing Director of Aerospace and Defense Equity Research)

Okay. Just last one, the EBITDA guidance revision is the same as revenue at the midpoint, you know, it implies a 100% incremental on the additional revenue. I know it's not that simple, but can you just walk me through how the EBITDA is able to be the same as the revenue on the guidance revision?

Mike Lisman (CFO)

Yeah, I think, Noah, what you're seeing there is just the upsides mainly in the commercial aftermarket space, which is, you know, our most profitable end market of the three. Separately, some better cost performance, right? You're not typically getting 100% drop through to your point, we are doing slightly better on the cost than we expected. That's what you're seeing there.

Noah Poponak (Managing Director of Aerospace and Defense Equity Research)

Okay. Appreciate the time. Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Robert Stallard of Vertical Partners. Your line is open, Robert.

Robert Stallard (Partner)

Thanks so much. Good morning.

Mike Lisman (CFO)

Morning.

Kevin Stein (President and CEO)

Good morning.

Robert Stallard (Partner)

Kevin, you mentioned that the M&A pipeline is still looking pretty active. I was wondering if you're seeing any sign of these higher interest rates starting to impact the appetite of financial buyers?

Kevin Stein (President and CEO)

I think we've seen some impact over the last six months or so. I think you see that in a general lack of activity, although we've been busy evaluating different targets. I think we see that changing though as there seems to be some important properties coming to market in the next six months or so. I think this should change. We remain relatively optimistic as always. I think that, you know, gives you some indication of what we're looking at in the future.

Robert Stallard (Partner)

One for Mike, in related topic actually. You mentioned there's some debt due in 2025. If you were to refinance that today, what sort of interest rate would you be expecting to pay on that?

Mike Lisman (CFO)

It's hard to say. Something like what we got on the December refi we just did a month or two ago. You know, the interest rate ticked up by about 1.0% from LIBOR plus 225 to SOFR plus 325. Debt markets are a little bit better given what's come out on inflation and the Fed rate move since that December raise. Maybe you do a little bit better than that, but it's, you know, it's hard to say. That's just a guess.

Robert Stallard (Partner)

Yeah. That's great. Thanks so much.

Operator (participant)

Thank you. Our next question comes from the line of Scott Deuschle of Credit Suisse. Your line is open, Scott.

Scott Deuschle (VP of A and D Equity Research)

Hey, good morning. Kevin, I wanted to.

Kevin Stein (President and CEO)

Morning

Scott Deuschle (VP of A and D Equity Research)

Your thoughts on M&A outside of A&D. Is that something you'd ever do? If you were to do something outside of A&D, should we expect you to start small, or could we see you start with something bigger? Thank you.

Kevin Stein (President and CEO)

Well, we don't like to speculate on that. We have studied what it would look like to acquire something outside of M&A, but of A&D, but we think it's best to stay focused on aerospace. There are still so many great opportunities and a number of them coming up, like I said, in the next six months that, you know, keep us very focused on the pure play aerospace and defense. For intellectual reasons and also because we may have to one day in a distant future, we do look at other areas, but none of them have appeared interesting enough to overshadow our desire to keep growing in aerospace and defense.

Scott Deuschle (VP of A and D Equity Research)

Great. That's really helpful. For Mike, you know, you showed some really good leverage on SG&A this quarter. I think your sales were up 17%, but SG&A was actually down. Curious if you could outline a bit what the cost mitigation efforts are that you're running there, and then how SG&A might trend as we move throughout the year. Thanks.

Mike Lisman (CFO)

Yeah. We really look at the EBITDA line. Historically, we've not gone back and looked and commented specifically on gross profit versus SG&A trends just because of the accounting puts and takes there. As we think about forecasting for the year, we really look at EBITDA As Defined ratio and feel good about hitting the, you know, 50.5% or maybe slightly better that we gave the guidance for today. It's hard to comment specifically where SG&A could go for the balance of the year on a quarterly basis.

Kevin Stein (President and CEO)

Yeah, I would just add, you know, I think in general, as we've had and we've performed in past downturns in the uptick, you know, we did a lot of heavy lifting with restructuring as a result of the COVID pandemic, and the teams have done a nice job managing to the lower cost structure and supporting the additional demand. I think we'll continue to do so throughout the year.

Scott Deuschle (VP of A and D Equity Research)

Great. Thanks, guys.

Operator (participant)

Thank you. Our next question comes from the line of David Strauss of Barclays. Your question, please, David.

Speaker 13

Hi, good morning. This is Josh Corin on for David Strauss. Working capital was fairly neutral in Q1. Do you still see the $150 million drag for the year? Thanks.

Jorge Valladares (COO)

We do. I mean, as we come back to pre-COVID levels, that's gonna go in over the course of the year. It's kind of lumpy in how it happens and the progression and forecasting it's tough, but we do expect that amount to go back in.

Speaker 13

Thanks. It looks like, overall aftermarket revenues were back pretty much to pre-pandemic levels. Can you give us a sense of where volumes are?

Jorge Valladares (COO)

I think we're still 20 to maybe 30% off in volumes. There's still a lot of regions, as Jorge reviewed, that have not fully come back.

Operator (participant)

Thank you. Our next question comes from the line of Peter Arment of Baird. Please go ahead, Peter.

Peter Arment (Managing Director)

Okay, thanks. Thanks. Good morning, everyone. nice results.

Kevin Stein (President and CEO)

Good morning.

Peter Arment (Managing Director)

Hey, good morning. Hey, and I'm sorry if you missed your opening remarks, but just on China, just kind of assumptions around what you expect there, just as, you know, we get the reopening traffic picking up pretty materially, hopefully wide body activity comes back. Just remind us kind of the mix that we should be thinking about with China and just how you kind of incorporate that in your forecast. Thanks, Kevin.

Jorge Valladares (COO)

Sure. I'll take that one. You know, from our perspective, we're still in the early innings of China opening up, obviously, this past month. Our teams, as they always do a bottoms-up analysis and planning process as we enter any fiscal year. You know, there was some recovery expected, baked into our forecast and our plan. We'll see how it plays out. Generally, you know, we don't have and we don't track specific regions, we think we're fleet weighted, and obviously it's a big market, so hopefully that will be helpful as we progress throughout the year.

Peter Arment (Managing Director)

I guess it's just a follow-up quickly. On just the wide body activity, could you make a comment, Jorge, just on what you're seeing, regarding some of the airlines behavior on the wide body? Thanks.

Jorge Valladares (COO)

Yeah. I don't think we've seen much shift. The opening for China international travel is pretty new. You would logically expect the wide body usage to improve, given those types of routes. We're still, again, in the early innings of this.

Peter Arment (Managing Director)

Appreciate the color. Thanks so much.

Jorge Valladares (COO)

Sure.

Operator (participant)

Thank you. Our next question comes from the line of Gautam Khanna of Cowen. Your line is open, Gautam.

Gautam Khanna (Analyst)

Hey, guys. Good morning.

Jorge Valladares (COO)

Good morning.

Mike Lisman (CFO)

Morning.

Gautam Khanna (Analyst)

In the past, you've sometimes given color on discretionary versus non-discretionary aftermarket demand. Any color there, or by channel distribution versus direct?

Jorge Valladares (COO)

Yeah. I think most of our revenues are on direct sales. In general, we're seeing good strength and good recovery across all of the individual submarkets.

Mike Lisman (CFO)

On the discretionary versus non-discretionary point, we think consistent with what we said in the past, we're mostly non-discretionary when it comes to the commercial aftermarket, bucket.

Gautam Khanna (Analyst)

That's where you're seeing kind of the incremental strength is in the non-discretionary.

Mike Lisman (CFO)

Yeah.

Gautam Khanna (Analyst)

I'm just curious, like-

Mike Lisman (CFO)

It's, like, hard to break it out today.

Jorge Valladares (COO)

I think it's across all.

Mike Lisman (CFO)

I think.

Jorge Valladares (COO)

I would reiterate, I think we're seeing strength across the board in all of the submarkets.

Gautam Khanna (Analyst)

Okay. Just curious what you're seeing in terms of inflation this year from your suppliers. You know, do you have a dollar value you could give to us and, you know, what you're doing to offset it with pricing?

Jorge Valladares (COO)

Yeah, I don't have a specific dollar value to give you. you know, in general, we really focus on productivity. We are seeing inflationary pressures from the supply chains. We've got all of our teams have individual decentralized procurement organizations that are doing a nice job working with the supply chain, trying to minimize the level of inflation. We continue to work the productivity to offset that, and you're seeing that flow through in terms of the lower cost structures.

Gautam Khanna (Analyst)

Thanks, guys.

Jorge Valladares (COO)

Sure.

Operator (participant)

Thank you. Our next question comes from the line of Matt Akers of Wells Fargo. Your question please, Matt.

Matt Akers (Aerospace and Defense Research Analyst)

Yeah. Hi, thanks. Good morning. I wonder if you can elaborate.

Mike Lisman (CFO)

Good morning.

Matt Akers (Aerospace and Defense Research Analyst)

You know, there's the comment we could see a further upward revision in the guidance as we go through the year. How much of that kind of uncertainty is China versus kinda OE build rates or sort of, I don't know if you can kinda quantify what the biggest buckets of that uncertainty could be.

Kevin Stein (President and CEO)

I think it's probably a big piece from China. Clearly OEM is not performing at where it was prior to the COVID outbreak. There's room really in all of the market segments for improvement.

Matt Akers (Aerospace and Defense Research Analyst)

Okay, got it. Then I guess on your cash balance, you know, it's kinda come down from where it was during COVID, but still higher than what we saw, you know, a few years ago. Is, you know, how much higher should we expect you to kinda leave that just so you have kind of the optionality, you know, in case a deal comes through or something like that?

Mike Lisman (CFO)

Yeah, we're, you know, obviously we're sitting on more than we've had historically, to your point. We feel good about, you know, the M&A pipeline, as Kevin said, and what's coming. We do have, you know, far more than we need to operationally run the business, but it's something we think about quite a bit just in terms of, you know, the capital allocation priorities that Kevin provided and wanna make sure we have enough firepower for potential M&A in the current environment.

Matt Akers (Aerospace and Defense Research Analyst)

Got it. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Seth Seifman of JP Morgan. Please go ahead, Seth.

Speaker 14

Good morning. This is Rocco Barbaro on for Seth.

Kevin Stein (President and CEO)

Morning.

Speaker 14

Now that leverage is in the six times range that has been stated in the past to be the general ballpark range for the company, how do you think about new acquisitions and/or capital deployment moving forward? Where would you consider returning cash again?

Mike Lisman (CFO)

It's, yeah, it's hard to say exactly. Like I just mentioned, we're always looking at the capital deployment options, right? We're doing that today. We do it quite a bit, obviously monthly, and we wanna be strategic with our capital and make sure we have enough at all times for M&A if it comes. Also it's the, it's the shareholders' capital, so we wanna be efficient with it, and if we don't find a use for it, give it back. With regard to the leverage ratio, we are at about six times, which is historically where we were in a lower interest rate environment. I think, you know, as I mentioned, we feel comfortable where we are today at the six times level and given the benefit of the hedges.

It's hard to say if we tick up from here, if we went and found a good acquisition candidate, you know, and use a little bit of debt, you could always do that, though you'd then be adding EBITDA. I think it's safe to say going forward, given that we have the hedges and also that our interest rate hasn't moved much, because of those, you know, it's probably likely that we stay sort of at the six times ballpark with the, you know, some movement this way or that way, consistent with the last five years of history or so. No real material change with the approach to leverage expected.

Speaker 14

Great. Thank you. As a quick follow-up, you had mentioned earlier that you expect EBITDA As Defined margin to kind of expand as we go through this year. Should we be expecting that expansion to continue in the out years, or are we approaching a range where the margin will begin to plateau?

Kevin Stein (President and CEO)

You know, we are still navigating 2023. We'll give guidance on 2024 and beyond when it's appropriate. Obviously, our model is to keep expanding, keep improving our business.

Speaker 14

Great. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Ronald Epstein of Bank of America. Your line is open, Andre.

Ronald Epstein (Senior Equity Analyst)

Hi, everyone. Thanks for the time. Good morning. I kinda wanted to take a look back at the supply chain. Obviously, there's a lot of financial stress in the lower tiers. Do you guys see that as a room for opportunity when it comes to M&A? Just kinda wanted to gauge your outlook on that.

Kevin Stein (President and CEO)

Not really. We don't look to vertically integrate. We look to acquire phenomenal aerospace and defense businesses that we can further improve. You know, buying up parts of the supply chain, vertically integrating, usually doesn't meet our criteria for highly engineered, unique aerospace components with aftermarket content, and we like to stay very disciplined on that approach. That's been the secret to our success, I think, in our M&A culture.

Ronald Epstein (Senior Equity Analyst)

All right, that's helpful. I'll keep it at one. Thanks.

Operator (participant)

Thank you. Once again, to ask a question, please press star one one on your telephone. Again, that's star one one on your telephone to ask a question. Our next question comes from the line of Pete Osterlin of Truist. Your line is open, Pete.

Peter Skibitskiy (Analyst)

Very much lower this morning. Thanks for taking our question. Just wanted to ask, how are you managing through the current labor market environment? Has attrition been manageable? Do you need additional hires to meet the growth you're anticipating this year, or have there been any challenges related to productivity?

Mike Lisman (CFO)

Yeah, I'll take that. I think generally the teams have done a really nice job. We continue to focus on CapEx and productivity. Over the last couple of years, we've been able to invest in the business and find different automation opportunities to take labor out of the process here and there. I think in general, the labor market conditions have been improving over the last couple of months. Most teams have plans in place to support potential OE production rate increases, as we're all hoping will occur. I don't see any significant issues, and I'd say in general terms, it's probably improved a little bit the last couple of months.

Peter Skibitskiy (Analyst)

All right, I'll leave it at one. Thank you.

Mike Lisman (CFO)

Thanks.

Kevin Stein (President and CEO)

Thanks.

Operator (participant)

Thank you. At this time, I'd like to turn the call back over to Jaimie Stemen for closing remarks. Madam?

Jaimie Stemen (Director of Investor Relations)

Thank you all for joining us today. This concludes today's call. We appreciate your time, and have a good rest of your day.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.