TransDigm: Foundations with Nick Howley [50X, EP.1]

Today we are dropping a special episode in the Invest Like the Best feed. You will hear the first episode of 50X – a new series from Will Thorndike and the team at Compounding Labs, in partnership with Colossus. Will’s book, The Outsiders, is one of the best business and investing books you will find. Now you will hear him continuing his work in the hosting chair as he looks in detail at investments that have appreciated at least 50-fold. First up is TransDigm, an aerospace components manufacturer that has returned over 1,750X since its inception nearly three decades earlier. In this episode, Will is joined by Nick Howley, TransDigm’s long-time CEO and Chairman. Make sure to subscribe to 50X in your preferred podcast player. For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Tegus. The team at Tegus has built a full company intelligence platform aimed at streamlining the investment research process. In preparation for the 50X series, we actively used Tegus to gain qualitative insights beyond traditional reported data. To learn more and enjoy a free trial, visit tegus.co/50x. ----- 50X is a podcast that dissects the anatomy of extraordinary long-term investments. The show is hosted by Will Thorndike and the team at Compounding Labs, and brought to you in partnership with Colossus. In each episode of 50X, we look in detail at an investment that has appreciated at least 50-fold. From the seat of the professional investor and occasionally the CEO, we explore its origins, evolution, and eventual outcome, studying key themes around long-term value creation ranging from operations, capital allocation, and culture to pivotal buy and sell decisions. To enhance the quality and depth of our interviews, we rigorously study each asset in advance, diving into all available public and private resources. Learn more and dive into our research at 50xpodcast.com Follow us on Twitter: @50Xpodcast and @joincolossus Show Notes [00:00:00] – 50X Introduction [00:02:00] – Sponsorship: Tegus [00:07:04] – Episode Introduction [00:09:05] – Nick’s Background pre-TransDigm [00:11:56] – Original Acquisition from Imo Industries in 1993 [00:15:33] – Thesis and Performance under Kelso & Co.’s Ownership [00:18:42] – Genesis of Three Key Value Drivers: Price, Productivity, and New Business [00:21:07] – Building the Management Team [00:24:05] – Early Lessons on Value Drivers [00:27:53] – Capital Allocation under Kelso & Co. [00:28:51] – Sale to Odyssey Investment Partners in 1998 [00:30:26] – Strategy under Odyssey’s Ownership [00:31:51] – Early Acquisitions and Integration Playbook [00:37:26] – Early External Crises [00:41:13] – Snapshot at Conclusion of Odyssey’s Ownership in 2003 [00:43:19] – Building a Decentralized Culture [00:46:23] – Differentiated Approach to Compensation [00:52:12] – Sale to Warburg Pincus in 2003 [00:55:51] – Shift to Inorganic Growth under Warburg’s Ownership [00:58:08] – Evolution of M&A Process [01:05:37] – Post-Acquisition Expectations and Post-Mortem Process [01:09:48] – Divesting Acquired Assets to Maintain Focus [01:11:29] – Embedding Value-Generative Culture via Hiring and Training [01:13:54] – Quarterly Product Line Reviews [01:20:43] – Recap of Private Investment Returns and Snapshot pre-IPO

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

  I know firsthand how complex the tech stack is for asset management firms. And seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount and more risk. RidgeLine offers a better way forward. One unified platform that automates away the complexity across portfolio accounting, reconciliation, reporting, trading, compliance and more, all at scale. RidgeLine is revolutionizing investment management, helping ambitious firms scale faster, operate smarter and stay ahead of the curve. See what RidgeLine can unlock for your firm. Schedule a demo at ridgeline.ai. Today, we're dropping a special episode in the Invest Like the Best feed. You will hear the first episode of 50X, a new series from Will Thorndike and the team at Compounding Labs. Will's book, The Outsiders, is one of the best business and investing books that you'll

• 0:45Patrick O'Shaughnessy?

  find. Now you will hear him continuing his work in the hosting chair as he looks in detail at investments that have appreciated at least 50-fold. First up is TransDigm. Colossus was excited to partner with Will as he sits down with management and investors behind these legendary investments. Make sure to subscribe in your preferred podcast player.

• 1:14Speaker 01

  Welcome to 50X. I'm your host, Will Thorndike, author of The Outsiders and a co-founder at Compounding Labs. 50X aims to dissect the anatomy of investments that have appreciated at least 50-fold. We dive into each investment's origins, evolution and eventual outcome, exploring key themes around long-term value creation, ranging from operations, capital allocation and culture to pivotal buy and sell decisions. We track the often circuitous route to exceptional long-term returns and study how that rarest of investment commodities, conviction, gets created, maintained, threatened and sometimes lost. To access proprietary research and exclusive materials, please visit 50Xpodcast.com.

• 1:55Speaker 01

  50X is produced by Compounding Labs in collaboration with Colossus. Compounding Labs is a partnership of long-term business builders that invests in elite recurring revenue companies in niche markets. We are defined by a uniquely long-term capital base, a multi-decade time horizon and a highly entrepreneurial ethos. To learn more, please visit compoundinglabs.com.

• 2:18Speaker 02

  All opinions expressed by hosts and podcast guests are solely their own opinions. Hosts and podcast guests may maintain positions and the securities discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

• 2:33Speaker 01

  Before we jump in, this episode is brought to you by Tegus. The team at Tegus has built a full company intelligence platform aimed at streamlining the investment research process. In preparation for the 50X series, we actively use Tegus to gain qualitative insights beyond traditional reported data. Today, we're speaking with Alex Wolf, an investor at the Investment Group of Santa Barbara, also known as IGSB. Alex is both a user and an investor in Tegus, which makes him a particularly insightful guest in discussing the business. In the first part of our conversation, you will hear about Alex's investing background and the role primary research plays in his investment process. Why don't we start, would you mind just talking a little bit about your current role

• 3:16Speaker 01

  at IGSB and a little bit about your arc?

• 3:21Speaker 03

  Yeah, so I am a partner at the Investment Group of Santa Barbara. For those of you who don't know us, we are a totally principal investment firm, meaning 100% of the capital belongs to the partners of the firm. We have no outside investors. We never have, and I don't believe we ever will. And our focus is owning a very small number of the best businesses that we can find in the world with the same approach that anyone would do with their own money, which is find great businesses and ride them for as long as they can. I joined IGSB eight years ago as a partner and really set out to focus on how we could

• 4:02Speaker 03

  lengthen the duration of assets that we owned and really started focusing more and more on our early-stage investing efforts, trying to find businesses early on, but in particular entrepreneurs early on, that we could partner with that were similarly aligned around building value for the very long term. Our focus has really been Almost exclusively on B2B software, not because any of us are technologists by trade, but more because when we look around the world, it's a very cheesy and overused term at this point, but we really believe we're still at the early stages of digital transformation. We truly believe in 20 or 30 years, every single business will be a software-enabled business.

• 4:46Speaker 03

  So we believe the tailwinds and the opportunities behind this industry are huge. And obviously, that's a really critical part of owning a business for multi-decade periods is the business actually has to have the market tailwinds and the business model to sustain over those periods. And that's one of the many reasons why we've chosen to focus on B2B SaaS.

• 5:05Speaker 01

  What role does primary research play in your investing process?

• 5:10Speaker 03

  Yeah, so primary research is for us really the entire place where we find value add. It's worth going back and thinking about how the history of fundamental analysis has changed over the last 50 years. You know, you take for granted today that you can get essentially every piece of financial or quantitative information instantaneously at your fingertips. But before Michael Bloomberg was fired from Solomon Brothers and started Bloomberg, that was not true. I think anybody who's over the age of 30 and did investment banking at some point in their career

• 5:48Speaker 03

  remembers having to spread comps, which is the very tedious process of getting the physical copy of a company's filings, pulling out all the relevant information for that company and all of its peers, and putting together a table of historical revenue, historical profitability, forward revenue, forward profitability, and looking at all of the relevant multiples and growth rates, et cetera. Now you click two buttons in Bloomberg or CAP IQ or FactSet, and all that's instantaneously available. And the reason I go through all that is because 30 or 40 years ago, you could get a lot of edge just knowing the numbers better than anybody else did.

• 6:27Speaker 03

  And if you look, I think every high-quality fundamental investor today really leverages qualitative information as the cornerstone of their process. So it's about getting out and talking to customers or former employees or partners and understanding, "Help me understand the dynamic of this business in the context of their industry. Help me understand the unit economics of how this business works." And you can get out and speak to folks who maybe used to run a particular division, or you're looking at a restaurant chain, ran an individual box, and who can give you insight into that, or talking to folks who maybe are choosing between multiple competitors in a space,

• 7:12Speaker 03

  and you can kind of get on-the-ground insights into why they're making a decision that they're making. And I think that helps give you insights into how might certain businesses perform into the future.

• 7:23Speaker 01

  Excellent, Alex. Thank you. Listeners can learn more about Tegus and enjoy a free trial by visiting tegus.com/50x. Now, onto my conversation with Nick Howley.

• 7:36Speaker 01

  We are delighted to be here today with Nick Howley, who has been the driving force at TransDigm since the outset. And the company celebrated its 28th anniversary, September of this past year, 2021. And the return profile over that period of time is both extraordinary and unique. So the IRR for original dollar invested in September 93 in the original predecessor transaction at TransDigm has grown at a compound annual rate of 37% for 28 years. So to frame that, if you put $100,000 into that original transaction, it would today be

• 8:17Speaker 01

  worth $175 million. So sort of otherworldly shareholder value creation. And it's interesting because it's very evenly distributed across two periods. So over the 28 years, the first 13 years, the company was owned by three private equity buyers, Kelso, and Odyssey, and Warburg Pincus. And the IRR over that period of time was 37% and the company went public in an IPO in March of 2006 and the IRR over the 15 and a half years since the IPO, since the company went public is 35%. So remarkably evenly distributed at remarkably high numbers.

• 8:59Speaker 01

  If you just look at the public piece of that, TransDigm has outperformed the S and P by 15 fold, kind of extraordinary, and its peer group by ninefold. And this podcast is called 50x and the math is sort of fun because the total X here is 1,750, which is exactly 35 times 50x. So we're going to try to go down into the engine room and unpack how all that value was created over a very long period of time. And again, we're delighted to have Nick here with us. So Nick, thank you very much for joining us.

• 9:32Speaker 04

  Glad to.

• 9:33Speaker 01

  Let's start at the beginning. So maybe if you don't mind, tell us a little bit about your background pre-TransDigm.

• 9:38Speaker 04

  I would tell you, my goal for much of my life was to own some kind of niche manufacturing business. You know, my dad had a machine shop that he ran for a lot of years and I have to say I worked in that some. That was likely the best on the ground, practical business experience that I received in my life. I had various other entrepreneurial activities, which I would say worked so-so, not great. I worked for Raytheon for a little while, an engineering management job. I then worked for Imo Industries. Imo Industries was a large public spinoff from Transamerica that owned a lot of niche manufacturing businesses.

• 10:21Speaker 04

  And it borrowed and bought. That's how I first got my exposure at M&A until essentially it exploded and had to start selling things off. They had some strategic garble about it, but essentially you had a, the old joke, you know, they had to sell the furniture to pay the rent this month and then next month you sell one of the cars and all that sort of thing. They had four small aerospace businesses, total about 55 million in revenue and maybe nine million in EBITDA, that were decent businesses, but they were in a bad patch of the market. They decided that was something they can sell. I moved out to Cleveland from right outside of Princeton to polish them up and sell them. As a practical matter,

• 11:04Speaker 04

  I wouldn't move my family out there to polish up and sell businesses for somebody else. My intention was to buy them.

• 11:11Speaker 01

  Just out of curiosity, when you worked in your dad's business, what did you do?

• 11:14Speaker 04

  All kinds of things. Did it through high school and in college. I worked the machine some. They had a heat treat section. I worked in that. I was a supervisor. I was what they call a section manager in manufacturing. And also I did some financial work. It's a business like that. You're in the real nuts and bolts of cost management and value creation and what's working capital really mean. It has a way of stripping out a lot of the just strategic bullshit you deal with in some situations. And it was very illuminating to me.

• 11:46Speaker 01

  Did your brothers work in the business with you?

• 11:48Speaker 04

  One did for a little while, but it really wasn't big enough to support people over multiple generations. There was another family and his partners and that got complicated as time went on.

• 11:59Speaker 01

  On the education piece, Nick, the engineering background, is there?

• 12:03Speaker 04

  Engineering background, I went to Drexel, which is, by the way, one of the reasons I worked a fair amount. Drexel's a co-op school. It takes five years to graduate. You work half the time. I was a mechanical engineer there and I played football.

• 12:15Speaker 01

  What position?

• 12:16Speaker 04

  I played linebacker, linebacker, and I graduated stunningly as a pretty high GPA as an engineering major, which is almost unheard of if you play football. I then worked for a couple of years and then I got into Harvard Business School, but I get in two years out in the future. So I had to go find a job for a couple of years, which I did in a farm machinery business in upstate New York. And then I went to Harvard Business School.

• 12:40Speaker 01

  So let's go back maybe and talk a little bit about that first deal, the purchase from IMO of the components businesses. How did all that come together? How'd you get connected to the investor group, the original investor group and so forth?

• 12:52Speaker 04

  As I said, the company decided to sell them. I went out to run them, polish them up and try and sell it with, as I said again, no intention of selling it. It was a little, a little dicey in that the company said they didn't want to sell to the management for obvious reasons. They thought there was too much conflict, which there clearly is too much conflict. But myself and it was then my boss, Doug Peacock, who became my partner, decided we were going to buy it. We put a story together. The company hired Morgan Stanley to sell it and we had people introduce us to people that we knew in the private equity business. I knew some of them from school. Frankly, the first one we took it to was Berkshire Partners. I don't know if Rob was even there yet, but it was Brad Bloom.

• 13:37Speaker 04

  They turned us down. Now ultimately, they ended up over a 28-year period, probably being the biggest moneymaker other than management on it, but they turned it down the first time and didn't buy it. We managed to find Kelso and get their interest, but it was a marginal-sized deal. It was going to be a $50, $55 million deal with $25 million or so of equity. We got them interested in the potential. Interestingly enough, or it wasn't for him at the time, the chairman and CEO of the company fired my partner Doug Peacock in the middle of the process because he thought he was colluding, trying to buy it, which he completely was. And he kept threatening to fire me for the same purpose, but it's tough. Once I'm already engaged with the buyers and they've already said what a wonderful

• 14:20Speaker 04

  management team we have, it's tough to fire him right in the middle of the process. Essentially, he would just call me and harangue me all the time about it. You're not talking to any of them, are you? I thought it was somewhat naive for a very smart guy, otherwise, to think he had any sway over me anymore. He'd already decided to overboard me. Why would I care what he said? But it got fairly tense. Again, what I did learn is if you're bidding against management, if the management's at any competency, it's tough to be a practical buyer. There was another PE buyer and a couple other strategic buyers, but the reality was they weren't going to get there. Unless they did it themselves, that's for sure. They weren't going to get much help from me.

• 15:03Speaker 04

  So that's how we got going. It was tense. I moved out with my wife and we had three small kids, but what money we had in it. And we moved on the bet that we could get it done. My wife stopped her job, which she wasn't going to get back. Research kind of job and horticulture that you'll never replace once you leave, like almost like a college kind of job. And it was tense, but it worked and we got it done.

• 15:26Speaker 01

  And Kelso was the original partner?

• 15:28Speaker 04

  Kelso was the original partner and they were good partners. They were good guys to work with and they were good partners.

• 15:34Speaker 01

  So let's do a snapshot of that original transaction. Can you just frame roughly what you guys paid for it? What the capital structure was with the EBITDA? What the businesses sort of looked like day one?

• 15:44Speaker 04

  EBITDA was somewhere between nine and 10 million. The purchase price, and I say nine or 10 is you have this normal, is it last year, look forward or LTM or whatever? Either one got you somewhere in the nine or 10 range. The price was 55 million. It was about 25 of equity and 30 of debt. Maybe there was another million bucks or I'm sure there was a few fees floating around there that I'm forgetting, but that was roughly in the range of it. It was four small businesses and about seven different manufacturing facilities.

• 16:17Speaker 01

  That first period under Kelso, the focus was mostly on optimizing those initial businesses.

• 16:23Speaker 04

  That's right. I would say if you said, what's the thesis for the first turn? The thesis, in my view, was very simple. Thesis item number one is get it closed. Best plan in the world didn't have much chance of working without a business. So that was number one. The business thesis was it was a poor time in the market. Both the commercial market and the defense market were down and the businesses were roughly two thirds, one third, not that much different than they are now. But it's unusual. They both cycled down at the same time.

• 16:51Speaker 01

  What was driving that, Nick? Sorry to interrupt. What was driving the cycling down?

• 16:55Speaker 04

  The commercial business, I would say, was just a normal cycle. I mean, every 10 or 15 years, it tends to cycle down for one reason or another. I don't remember what the precipitating incident was. The defense business was what they called many years ago at the time the defense dividend kind of piece was breaking out all over the, you know, Russia was falling apart, Eastern Europe was falling apart, and they cut down on defense spending.

• 17:17Speaker 01

  Which is usually the sort of anchor to Windward.

• 17:20Speaker 04

  That's right. That's usually stabler than the commercial business and they rarely cycle together, but by good or bad luck, they happen to cycle together here. The previous owner had not been very attentive to the cost adjustments and takeouts. Now, you might say, I was partly there too, but maybe I wasn't that anxious to get in as ship shape as possible. But the thesis was primarily get the cost in line, get the things stabilized, shut down many of the operations. There were too many of them. I think there were seven facilities. I think we shut down four of them or four or five of them. It was a difficult, detailed job. Step up the management wasn't very impressive. And frankly, it cups a little bit of new business as the market recovered and let the

• 18:05Speaker 04

  market recover. And what that should do is it should move the margin up because you've got a better cost structure as the margin recovers and then sell it. And my thought at the time was I do that for four or five years, make some money, put enough money in the bank to, I don't know, buy a house at the shore and pay for kids' college and have a little left and go seek fame and fortune elsewhere.

• 18:26Speaker 01

  So over the Kelso ownership periods, again, snapshot after the effect of those changes, what did the business look like three or four years later? Again, super roughly.

• 18:37Speaker 04

  I want to say, and I'm saying this a little bit from memory, but they bought in at about nine or 10 million of EBITDA and they sold the business to Odyssey, who was the next buyer, at about 45 million of EBITDA, all organic. In other words, no acquisitions along that period. It was the combination of substantial cost takeout, the market pickup, and frankly, we got the rest of our value drivers developed. We got the value pricing concept moving, which was a big contributor, and we got a pretty good new business development machine moving along too.

• 19:12Speaker 01

  Fivefold growth in cash flow over four years.

• 19:16Speaker 04

  And I'd say, Will, we pretty quickly developed sort of the value driver concept that became our operating mantra for the next 28 years.

• 19:26Speaker 01

  So let's maybe talk about that, Nick. Maybe take those different value drivers and talk a little bit about how they began to evolve in that first chapter.

• 19:33Speaker 04

  I was immediately and completely focused on what I'd call equity value creation. It was pretty obvious to me, and had been previously, that much of what you do in many large organizations has little to do with value creation. The question was, how can you find a simple way to explain that to people? And get them all focused around that. Between Doug and I, we're able to distill that down to what I think is sort of the essence. The only thing that you can do to change the intrinsic value in one of these businesses, and this is true in most industrial businesses, you can get the price up, you can get the cost down, and you can generate new business. Almost anything else is tertiary at best.

• 20:18Speaker 04

  I know some things have to be done. What we liked about it, to some degree, they are self-regulating. If you don't deliver well-engineered, high-quality products to your customers on time and service them, you can't get new business and you can't get the price up. And if you cut the cost down far enough that you can't do that, then you're not going to get the others. So you're forced to strike a balance. And we were able to get that concept through because it's simple. It's a pretty simple thing to explain to people, and it's almost everybody. It became a very powerful message that worked. It worked when we had 350 people, and it's worked when we had 20,000 people. Because it's been a simple thing that we can drive into the culture and teach people.

• 21:03Speaker 04

  What we would continuously say, and we say it because I believe it. You can't fix the market. It's going to be what it's going to be. You can't fix the valuation multiples. Maybe theoretically you can, but as a practical matter, you can't change them a lot. But what you can do is you can work on your value drivers in up and down markets. And if you stay focused on them, someone will pay you eventually. The capital structure is important, but all that can really do is amplify the intrinsic value that you create otherwise. And frankly, what I would say, and I say all the time to other people is that's mine to foul up or not foul up.

• 21:44Speaker 04

  What you can do is you can create the real intrinsic value. I can just try and multiply it a little bit.

• 21:51Speaker 01

  You mentioned something about talent that you inherited and needing to bring some people in and upgrade there. Can you talk a little bit about that piece of it again, in this first chapter, the Kelso period?

• 22:03Speaker 04

  I was pretty lucky there. Interestingly, within about a year of buying the company, we got in most of the people that ended up the senior managers 20, 25 years later. They were all sort of had a common characteristic. They were too young for their job by most people's standards. They hadn't had a job like this before. They bought in and understood the value creation thing, worked hard and they wanted to make money. And if I looked back, within a year, Ray Labenthal, who was the long-term COO was there.

• 22:35Speaker 01

  How old were these? They were about 40 at the time, right?

• 22:38Speaker 04

  Yeah, I was 40. I would guess Ray was 32. Bob Henderson, who's vice chairman now and has been president and executive vice president of many, many different businesses we've had through the years. Bob was probably 37. Jim Scalina, executive VP of ours and president of many companies and CFO for a period of time. He was probably 33 or 34. Bernie Iverson, who had many, many operating roles along with an EVP and headed our M and A for the probably the last 12 or 15 years. Bernie was probably 31. George Valderez, who's the current COO, was probably 23 or 24. Jim Riley, who was a president EVP for many, many years, though retired,

• 23:20Speaker 04

  left about six or seven years ago. Jim was probably 26. To some degree, we were lucky. You know, we managed to get guys that were believers early on and I think did a pretty good job. We didn't hit everyone, or some we brought in didn't work, but I think we did a pretty good job of getting the ones that didn't fit out fast and moving the ones that did up. Will, I suspect you've seen this. It's by and large, in my view, people over emphasize experience at the expense of a smart, young and energetic.

• 23:50Speaker 01

  Absolutely been my experience, Nick. It's very interesting. So what was it like at corporate headquarters in the very, very early days?

• 23:57Speaker 04

  There wasn't any, essentially. We had four businesses, which we quickly collapsed down to two. We had a CFO, which is a practical matter. I did a fair amount of it. But we had a CFO. We had my partner Doug Peacock was the CEO and I was president, but I also ran one of the two businesses. And that was it. Then there was an assistant and we ran that way for probably first five, six years.

• 24:21Speaker 01

  Physically, what was the office like? Where was the office?

• 24:24Speaker 04

  The offices were in Cleveland. Both Doug and I moved out to Cleveland. As I said, I moved out first. We both lived outside of Princeton, New Jersey. I mean, essentially, we had all our money in this and we said, we got to be at these businesses. We were both out in Jersey. They were connected to the manufacturing facility. They had some extra space and we carved it off and called that the corporate office. Didn't matter to me because I was running one of the businesses.

• 24:49Speaker 01

  Going back to the value drivers, and maybe it's worth just quickly ticking through the three of them and what you learned about each of them in that first sort of four years or so.

• 24:58Speaker 04

  Again, three value drivers we focus everybody on: price, cost and new business. Now, I'll say again, you obviously have to take care of your existing accounts. They all require same kind of care and feeding. In pricing, our goal was to price the product not to the cost, but to price it to what we thought the value we provided to the customer, which is a mix of what do you provide and what's the switching cost? Sometimes you can calculate that pretty closely, but frequently it's a little bit of a trial and error to get there. I found in this business, and I subsequently found it in almost every business we bought, Most niche engineered product type of businesses

• 25:43Speaker 04

  underpriced their product. And then this business, particularly in the aerospace, you're not going to make a lot of money selling to the OEMs, but you don't have to lose money, which a lot of people do. And they almost always underestimate the strength of their franchise in the aftermarket, which means they don't adequately understand the value and the switching cost. So we had to educate people a lot to that. And frankly, we are pretty intense on that. We expect somebody that's running a business of ours, a president, to be intimately involved in the pricing. We don't think that's something he can delegate down. He has to have pretty clear rules that elevate the thing quickly right to the top. We don't want there to be any confusion.

• 26:28Speaker 04

  If we're not getting the price, who's not getting the price? And we want to clearly understand why we're not getting the price. We have different kinds of techniques to monitor that, watch it, and slice and dice the customer base so that we don't foul it up. One of the things we would say over and over again, rather than worry forever about what you're going to try, pick a subset that you can afford to either lose or and figure out how you're going to back off if it doesn't work, rather than wring your hands before you try it. It generally has been workable. In cost, our goal in cost control has always been, and I say this over and over again, we don't understand fix from variable. We're not going to try and get into that argument.

• 27:11Speaker 04

  We're just going to say our cost base is your revenue minus your EBITDA. And our goal there is to at least offset inflation every year with savings. Simple way to think about that is if you want to give everybody a 3% raise and your business is flat, you got to take 3% of the people out. Now, you know, when the business grows, you got to do other adjustments for that. But the simple goal is offset inflation. It's easy to do for a year or two. It's very hard to do over time. And the other trick is you have to count all your costs. Otherwise, what happens is it just becomes a gaming exercise of what can I call fixed? And what can I exclude? And what is really not addressable? So that we're pretty rough with that.

• 27:56Speaker 04

  On new business, it's just the detailed tracking. Everybody has to be out all over it, business by business by business. We want to analyze them, not just can we get the business? And not just what the volume is, but are you ever going to make any money? It's a very common thing we see in acquisitions. Hundreds of engineering projects going on, chewing up all kinds of expenses. You could probably throw half of them out almost the day you walk in. Either your chance of winning them isn't very good. Or their price such that if you win them, it isn't worth winning them. So we try and do a pretty good job gating upfront on that. But tracking it, and it's a key part of your job is to keep that pipeline full.

• 28:37Speaker 01

  We're the first of the three private equity chapters for the IPO. So just poking our head up for a minute on capital allocation in that chapter. Can you talk a little bit about how you ran the balance sheet? How levered you were and you weren't doing acquisitions? Did you make any dividend type distribution?

• 28:57Speaker 04

  We did not make any dividend distributions. The first time we just ran the business, paid down the debt. Mostly, we just paid down the debt. And I would say within about three and a half years, it was pretty clear we were selling here in the next year or so. So that's what we did. I would say I was marginally attentive to it, but not mostly. I was running the businesses and there was plenty of runway there. I mean, I got the idea. I was running the largest business, but I was, it's a practical matter. I was the CFO too, so I was fairly involved when there was money getting raised. We really did much. We borrowed the money to buy it and then we just paid it down, sold it.

• 29:35Speaker 01

  So end of that period, you've got 45 million in EBITDA. You take it to market. Can you talk a little bit about that process and leading into the next chapter under the next owner?

• 29:46Speaker 04

  I do a joke with Kelso. I'd say, I'm horrified. I thought you were my girlfriend forever and here you are dumping me, you know? I was getting a payday, so actually I was pretty happy to get dumped. So we hired, I think it was Goldman Sachs at the time, and we were through a normal process. We got PE bidders, we got strategic sniffing around it, but this happened really every time. We never really got a serious strategic bidder. The bidders, as I recall, were the three finalists were Oak Hill, Joseph Littlejohn and Levy at the time, they've changed their name a couple of times, and Odyssey. And they were right on the price. And also, they were decent guys. They did the right thing. They said, see where you're comfortable

• 30:29Speaker 04

  and pick the ones you think you can live with. And that's what we did. Now, this one had a little bit of a bump in the road. It ended up with Kelso having to roll a little money back in. The bond market in 1998, you probably don't remember, but there were these Russian defaults and the whole market completely froze up.

• 30:46Speaker 01

  I remember.

• 30:46Speaker 04

  So essentially, we had to push the thing out for probably six months and then couldn't finance it and had to rejigger it. Price didn't change much, but Kelso had to roll some more over, which ended up being a very good thing for them, but it's not what they wanted at the time.

• 31:02Speaker 01

  And ballpark valuation?

• 31:03Speaker 04

  I want to say 450.

• 31:05Speaker 01

  10 or 11 times.

• 31:06Speaker 04

  Which was a big step up right there, which is why they got such a big return.

• 31:10Speaker 01

  All right. So let's talk about that next phase under Odyssey's ownership. How was it different than that first phase?

• 31:16Speaker 04

  First, the Odyssey guys were good guys to work with, too. They're a little more high strung than the Kelso guys. They're more sort of an old line, private equity firms. They were great to work with, but the Odyssey guys are more high strung. I liked them all. I stayed quite friendly with them through the years. We continued this very focused value creation concept because it was just driven deep into the culture, but we started to step up. And this was at their, some of it was their pressing, some of it was me, but some was theirs, clearly, the acquisition activity. And they were very supportive of that, very helpful at, very much encouraging in it. I don't remember the exact how many businesses we bought, but I

• 31:57Speaker 04

  would guess on their four or five year hold, we maybe bought eight or nine businesses, something like that. Made me feel quite comfortable with our ability to scale and the fact that our thesis worked. In other words, we didn't just by dumb luck hit a place it worked once. If we stuck with our criteria, which was fairly straightforward, proprietary aerospace businesses with significant aftermarket content, where we could see a clear path to private equity like return. If the business hit the aerospace aftermarket proprietary, we could run this play over and over again. During that, it started to become apparent to me.

• 32:34Speaker 01

  So maybe it's worth talking about a couple of those early acquisitions, Nick?

• 32:38Speaker 04

  Yep.

• 32:39Speaker 01

  How they confirmed a thesis and that focus for you guys?

• 32:42Speaker 04

  First one we made with Marathon, and that was a little tougher. Frankly, we misjudged the ship set content. We didn't do enough work on it. So it didn't have natural organic growth. In retrospective, like many things, two years after we owned it, I knew that, but I didn't know it a month before as well as I showed up. We got good returns on there primarily because we frankly had to strip the cost down further and had to hit price harder. And that wasn't a great model. The next one we bought was Adams Right. Adams Right was the largest manufacturer in the world of faucets for airplanes. Now, that wasn't a very big company. It was about five million of EBITDA

• 33:22Speaker 04

  on about 40 million of sales, which I now see made no sense. And I didn't think it made any sense then that you should be making that kind of money. That was a meaningful investment for us, 40 million. I went out and I did this for probably the first seven or eight. I went out and lived in a Californian, ran it for the first six months. And we started the playbook there. We probably took 20% of the cost out in about a 60 day period. And that's mostly people. You can get cost out of the other things, but they take a while. The quick move is too many people and not like most places, not people doing nothing, just doing things that didn't matter. They weren't value creative.

• 34:03Speaker 04

  The other thing is, we went in a lot of detail as we did in the acquisition, but we knew it even more. Once we got there, we went through all the products and did a whole slice and dice on the pricing structure. How much was old? What was low quantity? What had any chance of replacing? What had no chance of replacing? And we very substantially increased the prices in the aftermarket. And we also had to deal with two or three big LTA's and we took a harder line on them.

• 34:31Speaker 01

  What's an LTA?

• 34:32Speaker 04

  A long-term agreement with the OEM. That's a Boeing contract. We took a harder line with them and said, you know, you've been getting fixed prices here for seven or eight years. You're going to have to at least catch up for seven or eight years of inflation. Then we can start to talk about a real price increase. That got a little testy for a while, but ultimately the good guys won. And the aftermarket went way up. That margin probably moved from 12% and I would say within probably 18 months, it was 25%. And within three years, it was 40 or 45%. It was the drill. Price, cost out, new business. We ran that over and over again as we bought other things.

• 35:12Speaker 01

  Because that became the playbook, as you said.

• 35:14Speaker 04

  Yes.

• 35:15Speaker 01

  And so another early one that was pretty substantial was Champion.

• 35:19Speaker 04

  Yes. Champion's an interesting story. Champion was a big buy for us at the time. It's a percent of our enterprise value. And I was a bit nervous about it. We had a lever up again to buy it. We had sort of drifted down a little. We had lever up some to buy it. I'll tell you something that happened that proved our thesis is we bought it and within about 90 days, 9/11 hit. So not only did we lever up, but the market went to hell. It was in South Carolina. We bought it from Federal Mogul. They kept the automotive business. We bought the aerospace business. Significant issue there was can we keep ourselves free of the bankruptcy? Because it's clear to everyone they're going to go bankrupt.

• 36:01Speaker 04

  Anyway, we did a lot of work and we managed to convince ourselves that we could keep clear of it. And we did manage to. We did the same thing. I went down and lived, it's right outside of Greenville, South Carolina. It's in Liberty. I went down and lived there for about six months. Came home on the weekends. It was a big buy. Same drill. We replaced most of the management within 90 days. We brought Bernie Iverson, who ended up being one of the big guys in TransDigm, in to be head of sales and marketing. Fair step up for him. I was the acting president of it. Same drill, probably took 20, 25% of the cost out. Substantial adjustment in the prices. This is probably, like, we did some of it Adams right. The review of the new business, we were getting better and better at.

• 36:46Speaker 04

  So we went through and probably knocked out half of the engineering projects. Took out 15 or 20% of the engineering cost and the new business development picked up substantially. Because we worked on stuff we could win.

• 37:00Speaker 01

  So on the new business piece, you inherit a group of projects that the prior ownership was focused on trying to sell?

• 37:06Speaker 04

  Yes.

• 37:07Speaker 01

  And you look at them and you realize some of them are harder, lower probability projects. So the idea is to eliminate those and focus on the highest probability best business.

• 37:19Speaker 04

  Two things, Will. Some of them are low probability of winning and others are priced so poorly or they've given away already much of the upside frequently in intellectual property or aftermarket rights. You're going to lose even if you win. So if we don't think there's a probability of restructuring the contract such that you could win someday, we just move on. And that's been a winning formula. As a practical matter, we have typically increased the rate of arrival of new business after we bought something. And clearly increased the rate of arrival of profitable new business.

• 37:54Speaker 01

  And rate of arrival, meaning pace of growth. New business landed, new revenue landed, bookings.

• 38:00Speaker 04

  Bookings. No credit for emotional wins or anecdotal wins. What do you mean? A purchase order in the door.

• 38:10Speaker 01

  So 9/11 is the first external shock.

• 38:13Speaker 04

  Let me back up. We had one that happened in 96. There was a plane crash and 60 Minutes decided to make us the poster child for killing the 300 people.

• 38:24Speaker 01

  Really?

• 38:25Speaker 04

  They held the parts up and this is what we think is responsible. That turned out to be bullshit, but their goal is not necessarily be truthful. It's to make shocking statements. Couple of things we did on that. We didn't win the denial on it. We quickly ramped up the legal activity. What are we going to do? How are we going to defend ourselves? And we quickly ramped up a bunch of university types to go analyze the situation and come up with the reasons this couldn't be true, which we didn't think was true. It took a lot of effort and generated a lot of angst. In fact, we were able to fight it off, but it was a existential kind of threat. So that was our first one. Turned out to not be a big deal, but it was a little scary when it came up. The next one was 9/11. 9/11, the situation there was that we had just bought Champion.

• 39:09Speaker 04

  As I said, we levered up again. We made one of our bigger buys. 9/11 came along and the aerospace industry essentially just stopped. Now, in retrospect, it's nowhere near as bad as COVID, but for about 60 days, it just stopped. People just stopped flying all over the world and it very slowly started to creep back up.

• 39:27Speaker 01

  I remember that period.

• 39:28Speaker 04

  And no one knew where the bottom was. That was the scary thing. Is this going to keep going forever? It was pretty clear to us this was a problem. And it was interesting because our customers were still trying to get us to ramp up production on things. But we were saying, oh, this makes no sense. As I like to say, something bit the dinosaur on the ass and it takes them six months to turn around and see you got bit.

• 39:52Speaker 04

  Once again, we thought no sense going into denial here. And there's really only a few things we can do. We pushed the cost down as fast as we could. We probably took across the whole company, which we think we were running pretty leanly anyway. We probably took 20% of the cost out and the people out of it. And we just turned the rates down, even though we were still getting squeezed by the customers to keep delivering. We just kept telling them, this can't be true. You can't stop producing airplanes. People stopped flying and you need these high delivery rates. We reduced down, got the cost down very substantially. We also, interestingly,

• 40:30Speaker 04

  Picked up the new business development in this. We saw a very big opportunity for cockpit security systems. We were the first one to come up with a cockpit security system, which we sold across the whole industry. And it gave us a pop of revenue in a very badly needed time, making these security systems, and we got our costs down quickly. And we saw it through. As a practical matter, it didn't last as long as we feared. By probably four months, five months afterwards, air travel was about back up to where it was at the time of the 9/11 event. And we went on from there. But it looked pretty scary at the time.

• 41:07Speaker 01

  I do remember that time. It was very scary, very unclear how long it was going to last.

• 41:11Speaker 04

  I would say we went through this same drill as we did before. We had a different set of players now with more operating units, but the same argument, your costs are your revenue minus your EBITDA, that's your cost. We're not going to get into this fixed variable argument. And if the revenue is coming down 20%, someone's taking the cost down 20%. If it's not you, it'll be the next guy. But someone's doing it.

• 41:33Speaker 01

  It was the beginning of a template that you've rolled out in subsequent crises. And what did you guys do with your comp during that period?

• 41:40Speaker 04

  Not a lot. Our cash comp was never a big deal. It was always the equity and the options. And to some degree, they self-regulated. The EBITDA went down, their value went down. We may have missed a year or two of vesting. I don't remember. I don't remember whether we did. Whatever it is, it all caught up.

• 41:57Speaker 01

  Okay, returning to Champion briefly, can you just give a quick snapshot of what it was when you bought it? And then maybe at the end of the Odyssey hold, revenue margins, cash flow, super roughly?

• 42:09Speaker 04

  I would say Champion was probably 15 or 20 million when we bought it. And I would guess it was 60 when we sold it the next time.

• 42:20Speaker 01

  4X growth, pretty great.

• 42:22Speaker 04

  And organic.

• 42:23Speaker 01

  If you looked at the company when Odyssey bought it, 40 to 45 million of cash flow, of EBITDA, what was the size of the company when you guys went to sell it to that next P E owner?

• 42:34Speaker 04

  I want to say 120-ish when it sold the next time.

• 42:39Speaker 01

  And on the capital allocation side, how levered were you in those days?

• 42:43Speaker 04

  I would guess the leverage was probably running four to six times. When it sold, I don't remember where it was in that cycle. Probably went up to six or a little higher when we bought Champion. Drifted down, but nine 11 kind of threw a little monkey wrench in it for a year or so. So I just can't remember what rate it drifted down.

• 43:01Speaker 01

  But you guys would run it in that band of four to six times. And typically there'd be some re-levelering as you did acquisitions.

• 43:07Speaker 04

  That's right.

• 43:08Speaker 01

  If we take corporate headquarters, what did it look like in that second phase?

• 43:12Speaker 04

  It was Doug and I still, we had enough businesses that I didn't have a day job of running business. I was more in full-time harassment mode of different people. We replaced the CFO at the beginning of the Odyssey turn, which was a significant upgrade. He stuck with us for a number of years, Greg Rufus. So I think it was Doug, myself, a CFO, another accountant to help with consolidation. And we had two administrators. So maybe it was seven people at this point.

• 43:43Speaker 01

  And were you still in that adjunct to the manufacturing facility?

• 43:47Speaker 04

  The Cleveland business had to move the offices. They outgrew the manufacturing facilities. They had to move to an office about two blocks away and we moved to the same thing.

• 43:56Speaker 01

  And what was that office like? Just the physical.

• 43:59Speaker 04

  Same thing, you know, very austere, simple office.

• 44:02Speaker 01

  So through those first two buyers, it's almost exactly 10 years. So 93 to 2003. And so talk a little bit maybe about decentralization and culture. How you built those two things so deeply into the organization across those first two PE investor owners?

• 44:21Speaker 04

  I would say the decentralization was almost a religious belief by Doug and I. We both felt very strongly that if you want people to act like owners, you have to treat them like owners and pay them like owners and give them a fair amount of autonomy. That was just a very strong belief the two of us had. We had also had experience in different large organizations. And my experience and Doug's, and by the way, this has been nothing but reinforced in subsequent acquisitions I've made, is that corporate structure and the corporate staff in the main contribute very little, if any, value. At least to niche engineering businesses, what I know.

• 45:04Speaker 04

  I mean, there's some functions that need to be performed. You gotta pay taxes and you gotta borrow money. But most of the others are value detractors. They generate non-value-added work. They crank out programs that the local operating management doesn't believe in, so they don't do them. They just fill the forms out, pay us back. And we thought the more that we could cut out of that, the better. And we'd have a much better chance of attracting the kind of people that we wanted to attract. I would say one of the things that helped me get comfortable with it is that we were lucky attracting this core of eight or 10 relatively young guys that were believers and we trusted. So they ultimately became

• 45:45Speaker 04

  the seeds for the first acquisitions we were making. And as we got bigger, they became the executive vice presidents, which is sort of the culture carrier as we buy things. You have to be, again, one, you have to believe it, because you have to pass up at times apparent cost savings on the belief that the loss of entrepreneurial spirit and ownership will more than overcome what you might save by having a common account receivable department or something like that, or a common sales force. You just have to believe that. You'll do a lot better if you lived it for a while and had to deal in a corporate environment where it just stifled people like that. And the other thing you gotta do is you gotta

• 46:27Speaker 04

  get rid of people fast that don't fit. Everyone says they want to be autonomous and run a decentralized business. Fact of the matter is, what they really mean is they want to be responsible when things are going well, but not responsible when things are... I'm president of the good stuff. No, no, you're president of all the stuff. You gotta be quick to fire when somebody doesn't fit in culturally. Somebody's trying, they get the culture, they're trying their best, they're in a bump in the road, or they need some training, but they're smart enough, energetic enough. Those people you should live with for a while. But if somebody fundamentally doesn't buy into it, or they're a politician, or they're not truthful, you gotta get them out quick.

• 47:07Speaker 01

  Maybe it's a good time, Nick, to talk about compensation. You guys have a highly differentiated approach to compensation. And maybe talk a little bit about how it evolved and the very specific model that you guys have developed.

• 47:22Speaker 04

  I would say during our time in the private ownership, I don't think the compensation system was particularly unique. Compensation looked like PE compensation. My experience is, and now I have a lot of experience in other PE ones, is they, they almost all look the same. The amount of equity differs depending on the size of the deal and the sophistication of the management, but typically the vesting methodology and that sort of stuff are usually pretty similar. Our question was, how can you do that? How can you mirror that in the public world? Because I don't know of any public companies to do that. At least I couldn't find any then, and I haven't been able to find that now. So we were looking to try and mirror that.

• 48:05Speaker 04

  We wanted to underpay people in cash compensation. We wanted to over-actuate them, but we wanted to pay them when they generate intrinsic value. But in the public world, there isn't a terminal event, which makes it just a little tougher to figure out. So we ended up with a lot of thought and hand wringing with a concept that ties itself to what I'll call generation of intrinsic value. What we do is you take the EBITDA at the start of the period, whatever that period is, and the multiple at the start of that period, and you can calculate a total enterprise value, take off the debt, and that gives you a equity value divided by the number of shares, and you got a dollar per share. As we move forward each year,

• 48:49Speaker 04

  we hold the multiple constant because we don't want the management either getting a windfall or not getting their options vested because of swings in the public perception. So we hold it constant. So the next year, you take EBITDA from the next year, you multiply it times the multiple, you subtract the then debt, which is where you capture all the cash generation. You get a new equity value. You divide it by the number of shares, including the dilutions from the vested options, and you have a new intrinsic dollar per share. That has to grow 10% before you vest anything.

• 49:26Speaker 01

  The intrinsic value per share has to grow.

• 49:29Speaker 04

  Has to grow 10% before you vest anything.

• 49:33Speaker 04

  And in the beginning, 20% before you fully vest and ratably in between. And that runs for a five-year period and then we re-up it. That's how we started it. And it's worked quite well. It was a little hard to explain to public shareholders, but frankly, once they got it, the ones that put the time into it really like it.

• 49:54Speaker 01

  It's all performance-based.

• 49:57Speaker 04

  All performance-based. And the management, the senior management and the operating unit presidents, which are like portfolio presidents in a PE, we pay below the market. Say we pay 25 to 35 percentile in cash pay. But if you take the value of your equity over any four or five-year period, you're probably at three, four times what someone else makes doing a comparable job. As the company got bigger, we dropped that from 20% to 17.5%.

• 50:27Speaker 01

  Which is where it is today.

• 50:28Speaker 04

  Which where it is today.

• 50:29Speaker 01

  The top end to fully vest is 17.5%.

• 50:32Speaker 04

  With my argument, we now had PE partners on the board, Rob, Mike Graff and David Barr. I was telling them, what are you guys getting consistently year in, year out on your?

• 50:43Speaker 04

  I may be wrong, but I'm thinking it's not 20%.

• 50:45Speaker 01

  I bet that was a lively conversation.

• 50:48Speaker 04

  Much different situation. Exactly why? Because we call ourselves a private equity firm in the public market. Why is it different?

• 50:56Speaker 01

  All right. So if you run a business unit for TransDigm, you're on this program.

• 51:00Speaker 04

  Yes.

• 51:00Speaker 01

  So everyone from the business unit GM up has got some variation.

• 51:05Speaker 04

  The business unit, think of them like a portfolio company in a PE world, because you could clip the liar, most of them and sell them the next day. We pay what we call the leadership team. We pay the president, head of sales and marketing, head of operations, head of finance, and possibly the head of engineering. Though sometimes we combine that, we'd like to combine that with the sales and marketing guy when we can, but those are who gets on the option plan.

• 51:29Speaker 01

  And it's focused on the EBITDA of their business unit, what they control.

• 51:33Speaker 04

  No, their annual bonus is based on that, but that's not real big. Their overall option investing is the company, the overall company performance. We like that for a couple of reasons. I have played around with the sort of the phantom stock, different operating units. And we've done that once or twice. It gets complicated. We tend to train people and move them through our succession program and move them between units. And that gets even more complicated. You gotta try and figure out how to keep them whole and what they gave up on the growth of the other one. So we tied it to the company. It also, I think, promotes an esprit de corps, stops a lot of the infighting, you know, who did well and who did poorly. We're all tied to the same kite here.

• 52:19Speaker 04

  You get some interesting dynamics. We have these product line reviews that we do quarterly and we ask most of the operating unit presidents to come. They also tend to self-select. And if people are not performing, you get everyone complaining. Why are they still here? Why are you keeping them?

• 52:35Speaker 01

  And just retention wise, Nick?

• 52:37Speaker 04

  We almost never lose anyone that we don't want to lose once they get in the equity plan. Now, that's not to say we don't lose people, but we lose them because they can't perform, because they can't function in this kind of environment. But I can't think of a situation where we lost someone that we didn't want to lose once we got them in the equity plan.

• 52:55Speaker 01

  So you, first time, you were thinking, hey, I'm gonna do this for four or five years. We'll sell it. By the time you get to that next sale event, were you still in sort of deal by deal mindset? Or were you beginning to view this as something you could do for a longer time period? You personally?

• 53:09Speaker 04

  I think I was in the mindset that I could do this for a long period of time. This clearly had legs to it. I liked it. I could see where it was going. You know, it was accumulating significant net worth here doing it. And I liked it. I liked the people and I liked the job. And I was too young not to have a job.

• 53:26Speaker 01

  Okay, so the Odyssey team takes it to market. It's got 120-ish of yay. And the third chapter begins.

• 53:35Speaker 04

  So we did the same thing. I think Morgan Stanley sold it this time. Went through the same kind of drill. Now we were, you know, you probably needed 500 million of equity to do it this time. I think the cost was about a billion four. So if you did the math on the leverage and all that, you needed about 500 million of equity. So you were starting to sort of outgrow the PE world. If you use your rough rules of thumb, you'd say somebody needed $5 billion. You know, there weren't that many $5 billion funds. If you said, how many $5 billion funds are there that want to buy an industrial businesses? You had even less, but as I like to say, you don't need a lot. You just need two to get yourself a decent price. Once again, we didn't really get strategic interest.

• 54:19Speaker 04

  We got a few sniff around, but nowhere near the price. There was an interesting common denominator about them. And we got this from United Technologies and a couple others. They would come in and mostly they'd focus on why the EBITDA was not sustainable and why it was a trick. Because, you know, they had an obvious issue. Why are these guys selling the same thing we're selling, making 40% EBITDA and we're making 18? So they all would have some bunch of diligence questions. It all went around. You're liquidating the business, you know, you're not doing it right. Some kind of accounting scam. And then they'd convince themselves and go away.

• 54:59Speaker 04

  The three finalists then were Warburg Pincus, Berkshire and TH Lee. And we ended up with Warburg Pincus. Berkshire, I knew the guys at this point. This is, I think, when I met Rob. I may have met him in the 98 process, but I know that he was very involved in the 2002, 2003 process. And I knew Brad Bloom. He was like my section at Harvard Business School. They were very hot and heavy for. And they were disappointed and they were right about on the price. Our concern there was they couldn't speak for 500 million, they had to bring in partners. And at this point in some other situations, I'd had some experience with clubbed up deals.

• 55:40Speaker 04

  But I think, as you know, Will, if you club up a deal, the dumbest guy controls the speed of everything.

• 55:46Speaker 01

  Yep.

• 55:47Speaker 04

  So that concerned us. And Warburg Pinkish did a good job of selling. They did a good job of selling the management team, not that Berkshire didn't, but Warburg did a good job. TH Lee, not so good.

• 55:56Speaker 01

  And before we talk about that last pre-IPO chapter, if you went back and you looked at the original IMO businesses, what would they have been at the time of the Warburg transaction, sort of 10 years in? I guess they were sort of, as you said, 40 to 45 million when Odyssey bought it. What might they have been at the time? Are they continuing to grow?

• 56:18Speaker 04

  Yes, they're continuing to grow. But I'd say if they were 40-ish going in, they were probably 60-ish, something like that coming out. They were continuing to grind out price, margin and cost reduction. Their core margins were still moving probably a point a year.

• 56:35Speaker 01

  So in the Warburg Pinkish chapter, talk a little bit about how that unfolded. Organic versus inorganic growth under their ownership.

• 56:43Speaker 04

  We clearly started to ramp up the acquisitions even more. But as a general rule, the way you should usually think about that is this market grows 4% to 5% real a year, depending where you are in the OEM cycle, we'll get at least that in pricing on top of that, 9%, 10%. That has been the organic growth rate of almost everything we've bought through the whole period of time. And then the rest of its acquisitions.

• 57:10Speaker 01

  And so inorganically, how many deals did you do super roughly during the Warburg period?

• 57:16Speaker 04

  It was ramping up. We had the playbook. We had hit our stride then. Generally, if a business meets our criteria, we're not going to lose it on price. In all probability, we're going to see them and they're going to be at 15, 20% kind of EBITDA margins. And if it meets our criteria, we're going to be able to get it to 40 or higher than 40. And very few strategics are going to buy something like that. First, they're usually not that sexy and they don't fit with their overall picture. And that's going to scare PE buyers off. As you know, they can't bet on that kind of margin expansion.

• 57:50Speaker 01

  One of the things that's interesting under Warburg's ownership is you sort of moved towards more of a capital allocation focus as a CEO versus an operations focus. Could you talk a little bit about that transition in your role and time allocation? How all that evolved?

• 58:07Speaker 04

  Private equity guys are very involved in capital allocation through their hold. Now, this was my third turn here, so I was pretty familiar, increasingly involved in that as we went forward. But as Warburg got in, it became clear that they were going to be transitioning out sooner rather than later with the public world. And it became an increasing part of my responsibility. Fortunately, we had a pretty strong operating team under me because many of these guys have been with me since the beginning. It both allowed me to back off a little bit of that and focus more on the capital allocation and get ready to drift into the investor relations and still not have to let any gas off on the operating activity.

• 58:52Speaker 01

  And so within that, the primary capital allocation channel that you guys grew and expanded under Warburg's ownership was the M and A activity. Could you talk a little bit about how your approach to M and A evolved over time? How you sort of developed it, created the template, the approach?

• 59:14Speaker 04

  Our template for analysis was pretty well developed fairly early, and I'm willing to explain that some. I would say the organization that we used stepped up very substantially sometime towards the end of the Odyssey, beginning of the Warburg process. We began to look at the M and A much more as almost like a sales activity. In other words, we believed before that most things in our space we saw. As a practical matter, that wasn't true until we really ramped it up. And we did this a couple of ways. One, we established a clear M and A function, which was much was me before this. We took a couple or one of the key guys who's an operating guy with a lot of industry experience

• 59:59Speaker 04

  and market experience and made him in charge of that. First one was Al Rodriguez, who was with me since the beginning. And then he died young and untimely and Bernie Iverson took it over. The advantage there was they understood the business. They understood the value creation. They had enough stake in the game that we could quickly assess whether these things fit. And as importantly, do we think we could squeeze the value out of them and either decide to hit or hold very quickly? Under them, we put one or two analysts, depending on where we are in the process. And we retained two brokers that were modest retainer, mostly paid on a pain on success. Small ones, one in California, because there's a ton of work out in the West and one in UK.

• 1:00:42Speaker 04

  And it turned into a functioning organization that frankly, I track like a sales force. You know, how many contacts we're making, how many letters we're putting out, how many dinners we're doing, all that sort of thing. It became a much more professionally analytically run kind of a process. Now, the way by which we evaluated acquisitions really didn't change a lot. Perhaps we got the templates a little more formal, but they conceptually didn't change. Essentially, we were looking for the same thing. Proprietary aerospace businesses with significant aftermarket where we could see a clear path to a private equity like return. We looked at each business by itself as a standalone PE buy.

• 1:01:25Speaker 04

  As I say, no credit for some vague concept of strategic fit. You had to see a clear path to a more than 20% IRR on a five-year hold. We assumed that we buy and sell at the same multiple. In other words, no arbitrage or even arbitrage down a little if we think we had over pie. We typically assumed we were going to capitalize the business generally the same way as the parent was capitalized, roughly half that, half equity.

• 1:01:53Speaker 01

  So that 20% Nick was a levered IRR?

• 1:01:56Speaker 04

  Levered IRR. Now, we reset it each year, but it usually ended up somewhere around 50/50. So we would go through the business. First, we had to figure out, is it proprietary? Is it aerospace? And is it sole source? And there's your significant aftermarket. Hopefully, we could figure the aerospace out, but sometimes the proprietary and aftermarket isn't so clear. As you may suspect, everyone says they're proprietary and usually they're not. So that takes a little sorting out, but we got pretty good at figuring that out. And sometimes, surprisingly, the aftermarket isn't very clear. Many people just simply don't track it. They lose track of it once they sell it. But we usually can get through that pretty quickly. We then divide a business into its shipset content.

• 1:02:38Speaker 01

  What is shipset content?

• 1:02:39Speaker 04

  There are relatively few number of airplane designs in the world. So almost everything sold can be tracked back to some airplane design, and there aren't that many of them, either in production or out in the field being used. Often, particularly smaller companies don't exactly know that, so sometimes you have to make some estimates on it. But once you can break things into its shipset component, I'll say estimate or guesstimate it, you can make a pretty good guess of what the future is going to look like. Now, you'll be wrong when you miss an economic cycle, but you can pretty well guess the miles flown, which will drive the aftermarket, and the production rates, if it's still in production,

• 1:03:20Speaker 04

  that will drive that. So, once we get that laid out, we can forecast the business with some reasonable predictability. And that gives us a revenue and an EBITDA flow. We assume there's going to be no increase in the EBITDA margins unless we do something. And there's only a few things we can really do. We can move the price, we can move the cost, or we can generate new business. We usually give very little credit to new business because it's very hard to assess from the outside looking in. So it usually becomes, can we price the product differently as the management fully recognize the value they provide? And we go through account by account on that, at least as best we can in diligence period.

• 1:04:03Speaker 04

  And the answer is usually get it up, down or the same. And if the answer is down, we're probably not buying the company. And frankly, if the answer is the same, we're probably not buying the company. There, we typically see people underestimate the strength of their franchise in the aftermarket over and over and over again. And they also overestimate how much they have to give away that gets best buy in upfront for the OEM. You're not going to be rich, but you don't have to lose money doing that. So we lay out our best guess at the pricing over the next four or five years by account or by segment. We then go to the cost structure and we say, again, we go through in a fair amount of detail,

• 1:04:48Speaker 04

  where do we think we can get the cost out? And much of it is frequently in headcount. We can usually do something with the outside buys, but that's sort of a slower change. But we go through department by department and we've done enough of these that we got 10 accountants, you probably only need seven and you got 12 inside salespeople. And we go through and lay that out and that gives you another cash stream. So we take that to the EBITDA that we generated from the organic growth. We add it, gives us another EBITDA stream. We take off the debt, take off the capital expenditures, give us a cash flow, sort of reduces the debt as we go forward and we sell it at the end of five years. Now, as a practical matter, we don't sell them. That's the math we go through.

• 1:05:29Speaker 01

  Again, exit multiple equals entry multiple.

• 1:05:32Speaker 04

  Or less if we think we got bid up a little.

• 1:05:34Speaker 01

  So sometimes you model multiple contraction, but you still hold the hurdle rate target at 20%.

• 1:05:40Speaker 04

  That's right. And usually we don't have to even get that tight to 20. Sometimes we do, but usually we don't. And the reason for that is, I believe, is that we have more conviction in our ability to expand the margin typically than, than say a PE bidder or many strategic bidders will.

• 1:05:59Speaker 01

  Was it always 20%? Has that evolved at all over time as you guys have gotten bigger? Just that general framework?

• 1:06:06Speaker 04

  We started it off at 20%. If something got too close to 20%, we got nervous. This is a practice reality. Most of them were probably 25, 26, 27, or we get nervous. Now, as things got bigger, they got closer to 20, frankly, in the models.

• 1:06:21Speaker 01

  And so it's super roughly, Nick, let's say you paid 10 times trailing EBITDA for a business.

• 1:06:27Speaker 04

  Yep.

• 1:06:28Speaker 01

  And you sort of do the work you just described. Within 24 months, what would you hope the multiple was at? The purchase price you paid versus the run rate EBITDA, say 24 months out, super roughly. Do you guys have rules of thumb around that?

• 1:06:43Speaker 04

  Yeah, the way we look at them is five years. Well, typically you have to cut it in half to make the math work. 10 has to go to 5 over the five years. Now, I would say we usually significantly exceed that. So we're probably there in three years or something like that. We're always run ahead of it. We purposely are doing that. We want to be conservative in the models.

• 1:07:06Speaker 01

  What's the process of review post-acquisition? Do you do sort of a systematic post-mortem? How does that process work internally? Once you've made an acquisition, how do you track results to that plan?

• 1:07:18Speaker 04

  First, we typically have a team that's on the diligence in the acquisition and they become very involved in the integration process. I mean, we have a detailed plan. We have a plan for price. We have a plan for cost takeout. We have a plan for an organization change. We are usually going to change the organizations to look like our organizations, which are going to be very clear and simple. There'll be typically a president, head of sales and marketing, head of operation, head of finance, maybe engineering, unless we can get it into the sales and marketing, and then these product line structures. So we'll do that almost immediately. It is unusual when most of the existing management survives. Typically, we are going to put our own person in either as president

• 1:08:02Speaker 04

  or the sales and marketing person, because the pricing and customer portion of it's going to be a significant value generation upfront. If we have difficulty with the cost restructuring, we may replace the operating manager quickly, but usually we can get by that. And then we track it each quarter. How are you doing? How are you doing against the price? How are you doing this segment? How's the cost getting out? And how, most importantly, how are we doing against the margin expansion?

• 1:08:26Speaker 01

  Against that base case plan?

• 1:08:28Speaker 04

  Against that base case. If we're not meeting that, we're pretty, I would say, rough on why not? We believed we bought it conservatively. So if we're not meeting it, that means either we're not getting cooperation or we made a mistake. And if we made a mistake, we got to figure out how did we make a mistake? And now we're going to fix it.

• 1:08:48Speaker 01

  Am I right, Nick, that your loss ratio on acquisitions? You've made 52 acquisitions of more business units, I think, by ballpark in that ZIP code. Is it accurate that your loss ratio on those 52 is zero? Was there any capital impairment across any of those?

• 1:09:04Speaker 04

  No, I don't think we have any where we didn't get close to a PE return. Now, some of it hasn't got there the way we hoped. It's been a rougher road, but.

• 1:09:14Speaker 01

  Just want to punctuate that. If you sort of looked more broadly at corporate America, record on value creation with acquisition depends on what study you look at, but somewhere between half and three quarters of all acquisitions destroy shareholder value.

• 1:09:29Speaker 04

  That has been my observation.

• 1:09:30Speaker 01

  Kind of extraordinary.

• 1:09:31Speaker 04

  And I would say, Will, the way we look at it, we bought more like 80. When we buy a holding company, we unpack the holding company. We say the holding company has no value. We just blow it away and say, we really bought five businesses.

• 1:09:43Speaker 01

  Would that loss ratio apply to the 80 versus the 50?

• 1:09:46Speaker 04

  Same, same.

• 1:09:47Speaker 01

  Pretty remarkable.

• 1:09:48Speaker 04

  Well, we have had some where the road's been rockier.

• 1:09:51Speaker 01

  Yeah, of course.

• 1:09:52Speaker 04

  We didn't plan to close it and move it in with something else or that sort of thing.

• 1:09:56Speaker 01

  Two quick follow on. So inherited management teams, would you say that 90% of the time ish, you're putting, as you said, someone from TransDigm in one of those two roles?

• 1:10:09Speaker 04

  Yes, if you define it as one of the key roles, I would say yes. Unless we are closing the business. Sometimes we buy a business, our plan is to close it, move it into another business. And we've maybe done that 25 times. So you ought to exclude those from the calculation. If it's going to be a standalone business, we almost never don't put a Transline person in there somewhere.

• 1:10:32Speaker 01

  One of the keys to your approach, as you said at the outset, is purity of focus on proprietary sole source aftermarket. And as part of that, you've had to, in a couple of cases, in a couple of the larger acquisitions, you've had to divest pretty meaningful percentages of the holdco's that you bought to get down to the sort of essence of crown jewel assets.

• 1:10:54Speaker 04

  That's right.

• 1:10:55Speaker 01

  Can you just talk a little bit about that? I mean, you did that with both McKetchney and Esterline, so two of the larger ones.

• 1:11:00Speaker 04

  That's right.

• 1:11:01Speaker 01

  Quickly, could you talk a little bit about how you, how you thought about that? How you evolved that approach?

• 1:11:05Speaker 04

  Again, a key portion of our diligence is to figure out what's proprietary, what's sole source, what has the significant aftermarket content. And, you know, when we see some of it doesn't, the question is, is there enough in there to be worth it? Usually, sometimes we've been lucky, but usually when we look at them, we're going to lose on the trade. It's going to sell as a proprietary business. We're going to unload some of them as non-proprietary. We basically just put that into the cash flow. We assume we're going to buy it at 10 and sell it at 7. You could look at it as increase in purchase price. We just build it into the cash flow and then say it works. So essentially you're paying more for the businesses you want. So it has to work. You have to be able to improve them enough to carry that.

• 1:11:47Speaker 04

  What we've tried not to do, and I wouldn't say it's perfect, but we're pretty good at it. You know, you can always play the game that in the public world, I'm getting value at a higher multiple. So if I stick a couple of stinkers in there, nobody will notice, they'll still get, that's okay for a little while, till you start to put, if you do too much of it, the good stuff isn't getting valued at the good multiple. Unless we have a very good reason, we've tried very hard not to do that.

• 1:12:12Speaker 01

  Shifting topics quickly to culture, and it relates to your sort of evolution from operations to a capital allocation focus, but I'm curious how.

• 1:12:23Speaker 01

  Consciously, did you embed the decentralized organizational structure and the related culture over time at Transom? How did you go about doing that? Because by the time you guys go public, those are very much in place. It's part of the thesis.

• 1:12:40Speaker 04

  I would say first and foremost, you have to hire people or bring people up that believe and can work in that culture. They get the value generation. They're invested in it and believe enough that they can carry it. There, you have to be very diligent. If someone doesn't get the value creation concept and how you make money and that you're in this to create equity value, you gotta either convert them fast or get them out quick. Because you can't have somebody in the key position that doesn't buy into it. I mean, it doesn't mean they're a bad person, it just means they aren't going to fit in this culture. And I would say if I made any mistakes earlier, it was I would stick with them too long. As practical reality, it's obvious pretty quick and you just gotta get them

• 1:13:25Speaker 04

  out. I start with that. The presidents of each portfolio company have to be a culture carrier. I would say the roles of our EVP, which again, six or eight businesses report to each one of them, they are primary culture carriers. If I had to say, other than dealing with normal business problems that come up, they typically have an integration going on, a key part of their job is to just keep reinforcing this culture, sorting people out that don't fit it. We run a lot of training courses. We run them on just culture, we run them on autonomy, we run them on pricing, we run them on cost reduction. I would say

• 1:14:04Speaker 04

  we probably have three to five standard cultural value creation training pieces that we cycle a lot of people through every year. It's hard work. You have to keep at it. It can slip out on you quick if you're not careful.

• 1:14:19Speaker 01

  And if someone's had those courses, do they take them again over some cycle?

• 1:14:23Speaker 04

  Yeah, typically that's maybe six courses and we typically work them through, probably once through. And then we reinforce each quarter. We do these product line reviews. There's typically an hour in the middle of that where we pick something and reinforce it.

• 1:14:37Speaker 01

  Explain that cycle of product reviews. How does that work? You got 50-ish business units, is that right?

• 1:14:42Speaker 04

  Yep, and they're divided into three-ish, say, on average, product lines. So that's 150 product lines. My number might be a little more, a little less. And we do product line reviews every quarter. We used to do them all in two days before the board meeting. Then they got too big and we couldn't do that. Now we move them around the country a little bit. The two days before a board meeting, we do them. We do another two days somewhere else, sometimes in Europe, sometimes on the West Coast. The presidents attend for whatever companies are doing that return. The product line manager, typically the sales and marketing manager, we rotate other people through. Each product line gets up. Product line manager has a fairly standard format. How's he doing against his plan?

• 1:15:26Speaker 04

  The obvious stuff, booking, sales, profitability. How's he doing against his cost goals? How's he doing against his price by market segment? What are the things going on in his industry? What's his new product development? And they're about 15 or 20 minutes long and they're fairly intense. It keeps everybody up to date on the business. Pretty quickly can start to assess what product line managers are upwardly mobile. And frankly, who's hiring good people and who's not? It's a reasonable time commitment, but I think it's probably the best integrative mechanism we have in the company.

• 1:16:00Speaker 01

  And who's in the room, Nick, for those reviews?

• 1:16:03Speaker 04

  For many years, when we were smaller, it was me and all of them. It's always the EVP. It's always the presidents. So let's say we have four sessions a quarter, maybe. Two days in Cleveland, two days somewhere else. So if there's 50 companies, that's 12 businesses in each one. So there's 12 presidents, 36 product line managers, 12 sales and marketing managers. And we probably rotate the other people. The operating guy, the controller, the others, they kind of rotate through them. More often, the COO is always there. As we get bigger, he frankly, just than he and Kevin, the CEO, they can't be at all of them. They have to stagger them some. But typically, the CFO is there. They're pretty intense.

• 1:16:44Speaker 01

  Like this Reagan era idea on arms control, in a decentralized organization, sort of trust and verify.

• 1:16:50Speaker 04

  Exactly. We're pretty rough on sloppy thinking. I mean, the fact that things go bad, okay, everybody knows that. Things go bad sometimes. But there's no excuse to have sloppy numbers and complete things. You can't explain something. We're pretty tough on that. With the logic, if we're taking our time to sit here for 20 minutes, we expect you to be prepared.

• 1:17:10Speaker 01

  I've been struck by the power of the simple messaging and related philosophy you guys have put in place, specifically sort of the three Ps approach. And I'm curious about the journey to that simplicity. So across the years, how long did it take the three Ps to emerge?

• 1:17:29Speaker 04

  Not very long. I can state the issue probably more clearly now than I could before. But I would say within probably two years of owning TransDigm, that was starting to become the mantra. We got more elaborate. We got better training, developed more training materials. Our pitch got better. But I would say it was the fundamental story within a couple of years, by 1995.

• 1:17:53Speaker 01

  So Rob Small has characterized the culture of TransDigm as GSD, get shit done.

• 1:17:59Speaker 04

  Right. As I always say, you can pretty quickly tell whether someone's going to buy into this. And one of the sayings that I always use with this is smooth, we don't have a lot of time for. The line in my business experience between smooth and duplicitous is very, very thin.

• 1:18:20Speaker 04

  It's very nuts and bolts. You know, you're going to get your profit margin up, you're going to sell more stuff, you're going to get the price up, the cost down and develop new products. I don't know what else you'd be working on.

• 1:18:31Speaker 01

  Right. And so it's those reviews are clearly a time to help embed that.

• 1:18:36Speaker 04

  That's right. If you looked at the standard slides they have, again, there's the income statement, and there's the bookings by segment and the shipments by market segment. There's always one on pricing, and we typically divide the pricing. It's always, if a business is unique, they might have an extra bar, but it's always a graph that shows commercial OEM against plan, defense OEM against plan, commercial aftermarket, defense aftermarket, other, excuse me, the private breakout business jet to say, oh, my plan in the aftermarket maybe was to get 6% and I've gotten 5.8 or 6.3 OEM, the plan might be 1.5% because you're locked into contracts. And that's okay. As long as we know that you're getting it. And everyone goes through and explains it every quarter.

• 1:19:22Speaker 04

  Now, it has a therapeutic effect that if we're doing a lot of these. So if you are servicing the same market as somebody else is, and they're consistently getting 4.5% increase, you have similar product and you're getting 3. Why? And this is the benefit of sort of the ownership culture. If someone is consistently underperforming, the system starts to reject them. Hold it. This is my company too. We're partners. What's happening here? So it isn't just Kevin or George or the EVP. The rest of the place is starting to, what's going on here? We're all partners here. So that's the price. On the cost, they all have projects and you have some target for productivity that was established in the plan and it's X out of these materials and Y out of this, and they run through them.

• 1:20:07Speaker 04

  We're going to get, you know, 11 people out and we got nine, or we're going to get so much out of the aluminum and we got this. You run through them with explanation. Same thing. It's clarifying to have to face your issue once a quarter. Same thing with new business. Here's the programs. Here's where I thought I would get. Here's where they're going, good, bad, indifferent. We tend to use on productivity in new business, we tend to use a rule, there's no great magic to it and it's worked. We need twice as many prospects as you're sure you're going to close on your list when we go into the year. And same thing on cost takeouts. You gotta get 100 out, we need at least 200 things you're pretty sure of.

• 1:20:43Speaker 01

  Product line size varies from what to what, super roughly?

• 1:20:47Speaker 04

  I would say it varies from 20 to 70.

• 1:20:50Speaker 01

  Yeah, that's clearly a super powerful culture enforcer.

• 1:20:54Speaker 04

  And it gets it very finite. In other words, you're not, it's not big grand statements. You're dealing with it with very finite slices. My partner Doug Peacock used to say, if you want to confuse, you conglomerate. If you want to illuminate these aggregate things.

• 1:21:12Speaker 01

  Yeah, the best disinfectant is sunlight.

• 1:21:14Speaker 04

  Yeah, right.

• 1:21:15Speaker 01

  As we wrap up the private phase ahead of TransDigm's IPO in 2006, I just want to poke our heads up for a minute and check in on returns. And in doing that, I think it's useful to highlight the distinction between primary and secondary capital and relatedly returns. So, primary capital is our focus in this podcast, and that's the returns to the original equity investment. So in TransDigm's case, that's the original $25 million of equity invested by Kelso in 1993. And the reality is, the company has never required any additional primary equity. It's been able to finance all of its growth over the last 28-plus years now with internally generated cash flow and related debt capacity.

• 1:21:59Speaker 01

  The returns there are pretty spectacular, and we'll discuss those in a minute here. There's another level of return, however, which is also relevant, which is the returns to the individual private equity buyers. So for the latter two buyers, the lion's share of the capital was being used to purchase ownership from prior owners and relied heavily on leverage. So the returns don't perfectly foot between primary and secondary equity.

• 1:22:24Speaker 01

  But just to tick through those, and by the way, no matter how you look at the returns here, they're like Babe Ruth's statistics from the 1920s. They're just unbelievable. So the returns to Kelso's original $25 million of equity in 1993 were 14x MOIC with a 58% IRR over roughly a 10-year holding period. They pulled the bulk of their capital out in the sale to Odyssey in 1998, but as you mentioned earlier, Nick, left a slug in there through 2003. Odyssey's returns were exactly 5X with an IRR of 42% over a four and a half year holding period. And Warburg's returns up to the IPO were 3X and a 35% IRR, which

• 1:23:09Speaker 01

  includes TransDigm's first dividend recap in 2005. So again, pretty fantastic. And then if you go back to the primary returns, so again, that's the returns to that original Kelso equity check. If held all the way through to the IPO, that's a 47x multiple of invested capital and a 37% IRR. So I think it's fair to say that the private phase was pretty great for all the owners and not coincidentally, the management team. And with that, let's take a quick snapshot of what the company looked like at IPO. So the enterprise value was $1.8 billion, which was a tick higher than 10x $170 million of trailing EBITDA.

• 1:23:53Speaker 01

  Leverage at the IPO was 4.5x enterprise value to EBITDA. So the company had actually gone through some deleveraging in the last phase of private equity ownership to get its balance sheet into a relatively unlevered position ahead of the IPO. Corporate headquarters was around 18 people at the time, managing a total of about 1,400 employees.

• 1:24:15Speaker 01

  So the ratio there, just to sort of highlight the point about decentralization, was about 80 employees for every person at corporate. And I believe the corporate headquarters was still cohabitating at the original manufacturing facility.

• 1:24:28Speaker 04

  With our Aero Control X office, which was separated by this time from their manufacturing.

• 1:24:32Speaker 01

  Okay, so not in the manufacturing facility, but still cohabitating with one of the operating units. Nick, I think this is actually a great place to stop before we jump into the public chapter. So thanks very much for your time.