Q4 2023 TransDigm Group Inc Earnings Call
Participants
Jaimie Stemen; Manager of Financial Reporting; TransDigm Group Incorporated
Joel Reiss; Co-COO; TransDigm Group Incorporated
Kevin M. Stein; President, CEO & Director; TransDigm Group Incorporated
Mike Lisman
Sarah Wynne; CFO; TransDigm Group Incorporated
David Egon Strauss; Research Analyst; Barclays Bank PLC, Research Division
Gautam J. Khanna; MD & Senior Analyst; TD Cowen, Research Division
Gavin Eric Parsons; Analyst; UBS Investment Bank, Research Division
Jason Michael Gursky; MD & Lead Analyst; Citigroup Inc., Research Division
Kenneth George Herbert; Analyst; RBC Capital Markets, Research Division
Kristine Liwag; Executive Director, Head of Aerospace & Defense Equity Research and Equity Analyst; Morgan Stanley, Research Division
Myles Alexander Walton; MD & Senior Analyst; Wolfe Research, LLC
Noah Poponak; Equity Analyst; Goldman Sachs Group, Inc., Research Division
Peter Osterland; Associate; Truist Securities, Inc., Research Division
Robert Alan Stallard; Partner; Vertical Research Partners, LLC
Ronald Jay Epstein; MD in Equity Research & Industry Analyst; BofA Securities, Research Division
Scott Deuschle; Research Analyst; Deutsche Bank AG, Research Division
Scott Mikus
Seth Michael Seifman; Senior Equity Research Analyst; JPMorgan Chase & Co, Research Division
Sheila Karin Kahyaoglu; Equity Analyst; Jefferies LLC, Research Division
Presentation
Operator
Good day, and thank you for standing by. Welcome to the TransDigm Group Incorporated Fourth Quarter 2023 Earnings Conference Call. (Operator Instructions)
Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Jaimie Stemen, Director of Investor Relations. Please go ahead.
Jaimie Stemen
Thank you, and welcome to TransDigm's Fiscal 2023 Fourth Quarter Earnings Conference Call.
Presenting on the call this morning are TransDigm's President and Chief Executive Officer, Kevin Stein; Co-Chief Operating Officer, Mike Lisman; and Chief Financial Officer, Sarah Wynne. Also present for the call today is our Co-Chief Operating Officer, Joel Reiss.
Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information.
Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC available through the Investors section of our website or at sec.gov.
The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliations.
I will now turn the call over to Kevin.
Kevin M. Stein
Good morning. Thanks for calling in today. First, I'll start off with the usual quick overview of our strategy. A few comments about the quarter and discuss our fiscal '24 outlook. Then Mike and Sarah will give additional color on the quarter.
As we previously announced on October 27, we had 2 directors retired from the TransDigm Board, Merv Dunn and John Staer. Merv has served on our Board since 2009 and John since 2012. We sincerely appreciate both Merv and John's dedication to TransDigm over the years. They each have done an outstanding job as directors and truly contributed to the long-term value creation of TransDigm. Considering these 2 director retirements, our Board is now comprised of 10 directors. For the near term, we feel our board size of 10 is appropriate and composed of highly qualified leaders with the appropriate skill sets to oversee and guide TransDigm. However, as we always do, we will continue to regularly assess the Board composition into the future.
Now moving on to the business of today. To reiterate, we believe we are unique in the industry in both the consistency of our strategy in good times and bad as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize, here are some of the reasons why we believe this. Our 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins, and over any extended period, have typically provided relative stability in the downturns.
We follow a consistent long-term strategy, specifically. First, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we utilize a simple, well-proven, value-based operating methodology. Third, we have a decentralized organizational structure and a unique compensation system closely aligned with shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to PE-like returns. And lastly, our capital structure and allocations are a key part of our value-creation methodology. Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market.
To do this, we stay focused on both the details of value creation as well as careful allocation of our capital. As you saw from our earnings release, we closed out the year with another good quarter. We had solid operating performance in Q4 with both total revenue and EBITDA as defined margin coming in strong. For the full year fiscal '23 revenue came in at the high end of our most recently published guidance and our fiscal '23 EBITDA as defined margin surpassed that guidance.
Commercial aerospace market trends remain favorable as the industry continues to recover and progress towards normalization. Global air traffic is still moving forward and demand for travel remains high. OEMs are making steady headway on aircraft production. However, total air travel remains slightly below pre-COVID levels and OEM aircraft production rates remain well below pre-pandemic levels. There is still progress to be made for the industry and our results continue to be adversely affected in comparison to pre-pandemic levels.
In our business, during the quarter, we saw a healthy growth in our revenues and bookings for all 3 of our major market channels, commercial OEM, commercial aftermarket and defense. Revenues also sequentially improved in all 3 of these market channels.
Our EBITDA as defined margin was 52% in the quarter, contributing to the strong margin is the continued recovery in our commercial aftermarket revenues, along with our strict operational focus and disciplined approach to cost structure management. Additionally, we had good operating cash flow generation in Q4 of over $460 million and ended the quarter with close to $3.5 billion of cash. We expect to steadily generate significant additional cash through 2024.
Next, an update on our capital allocation activities and priorities. As was mentioned in our press release, we've decided to pay a special dividend of $35 per share. The dividend will be paid on November 27. Sarah will address this more later. In aggregate, including Calspan acquisition completed this past May, and this dividend to be paid in late November, we have allocated over $2.7 billion of capital to our -- in the interest of our shareholders in under 7 months.
Also, we disclosed in our press release earlier today, we agreed to acquire the Electron Device Business of Communications & Power Industries, also known as CPI, for approximately $1.385 billion in cash. CPI's Electron Device business is a leading global manufacturer of electronic components and subsystems, primarily serving the aerospace and defense market. The products manufactured by this business are highly engineered proprietary components with significant aftermarket content and a strong presence across major aerospace and defense platforms.
CPI's electron device business generated approximately $300 million in revenue for its fiscal year ended September 30, 2023. The acquisition is currently expected to close by the end of the third quarter of our fiscal '24. As mentioned earlier, we are exiting fiscal '23 with a sizable cash balance of close to $3.5 billion. Pro forma for the dividend, our fiscal year end cash balance is over $1.4 billion and growing.
As always, we continue to closely monitor the credit markets and we'll be assessing opportunities to utilize leverage for the acquisition of CPI's Electron Devices business and general corporate purposes, which may include potential future acquisitions, share repurchases under our stock repurchase program and dividends.
Regarding the current M&A pipeline, we continue to actively look for M&A opportunities that fit our model. As we look out over the next 12 to 18 months, we continue to have a slightly stronger than typical pipeline of potential targets and remain encouraged concerning deal flow. As usual, the potential targets are mostly in the small and midsize range. I cannot predict or comment on possible closings, but we remain confident that there is a long runway for acquisitions that fit our portfolio.
As we move into our new fiscal year, the capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our businesses; second, do accretive disciplined M&A; and third, return capital to our shareholders via share buyback or dividends. A fourth option paying down debt seems unlikely at this time, though we still do take this into consideration.
Moving to our outlook for fiscal 2024. The guidance assumes no additional acquisitions or divestitures and is based on current expectations for a continued recovery in our primary commercial end markets through fiscal '24. Throughout fiscal '23, we were encouraged by the recovery seen in our commercial revenues and strong booking trends. Our strong bookings support the fiscal '24 commercial end market revenue guidance, which I will comment on shortly.
Trends are positive across all 3 of our major market channels, commercial OEM, commercial aftermarket and defense. We are cautiously optimistic that the prevailing conditions will continue to evolve favorably. We will watch this closely as we always do. And will react as necessary, including taking any preemptive steps that might be warranted. Changes in market condition and the impact to our primary end markets could lead to revisions in our guidance for 2024.
Our initial guidance for the fiscal 2024 continuing operations is as follows and can also be found on Slide 7 in the presentation. The pending acquisition of CPI's Electron Device business is excluded from this guidance. The midpoint of our fiscal '24 revenue guidance of $7.58 billion or up approximately 15%. As a reminder and consistent with past years, with roughly 10% less working days than the subsequent quarters, fiscal 2024 Q1 revenues, EBITDA and EBITDA margins are anticipated to be lower than the other 3 quarters of '24.
This revenue guidance is based on the following market channel growth rate assumptions. We expect commercial OEM revenue growth around 20%. Commercial aftermarket revenue growth in the mid-teens percentage range and defense revenue growth in the mid- to high single-digit percentage range.
The midpoint of fiscal 2024 EBITDA as defined guidance is $3.94 billion or up approximately 16% with an expected margin of around 52%. This guidance includes about 100 basis points of margin dilution from our recent Calspan acquisition. We anticipate EBITDA margin will move up throughout the year, with Q1 being the lowest and sequentially lower than Q4 of fiscal 2023.
The midpoint of adjusted EPS is anticipated to be $31.97 or up approximately 24%. Sarah will discuss in more detail shortly the factors impacting EPS along with some other fiscal '24 final assumptions and updates. We believe we are well positioned as we enter fiscal '24. As usual, we will continue to closely watch how the aerospace and capital markets continue to develop and react accordingly.
Let me conclude by stating that I am very pleased with the company's performance this year and throughout the recovery for the commercial aerospace industry. We remain focused on our value drivers, cost structure and operational excellence. We look forward to fiscal 2024 and expect that our consistent strategy will continue to provide the value you have come to expect from us.
Now let me hand it over to Mike Lisman, our TransDigm Group Co-COO, to review our recent performance and a few other items.
Mike Lisman
Good morning. I'll start with our typical review of results by key market category. For the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period in 2022, that is assuming we own the same mix of businesses in both periods. In the commercial market, which typically makes up close to 65% of our revenue, we will split our discussion into the OEM and aftermarket.
Our total commercial OEM revenue increased approximately 22% in Q4 and 24% for full fiscal year '23 compared with the prior year periods. Sequentially, total commercial OEM revenues grew by about 4% compared to Q3. Bookings in the quarter were strong compared to the same prior year period. This strong bookings throughout fiscal '23 supports the commercial OEM guidance for revenue growth of around 20% for fiscal '24.
OEM supply chain and labor challenges persist, but appear to be slowly progressing. We continue to be encouraged by the steadily increasing commercial OEM production rates at Boeing and Airbus and the strong airline demand for new aircraft. Supply chains remain in the bottleneck in this OEM production ramp-up. While risks remain towards achieving this ramp-up across the broader aerospace sector, we are optimistic that our operating units are well positioned to support the higher production targets.
Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 27% in Q4 and 31% for the full fiscal year '23 compared with the prior year periods. Growth in commercial aftermarket revenue was primarily driven by the continued strength in our passenger submarket, which is by far our largest submarket. We also saw growth in our interior and biz jet submarkets compared to prior year Q4. These increases were minimally offset by a slight decline in our freight submarket.
The post-COVID return to flying globally continues and is buoyed our primary commercial aftermarket submarkets, passenger, biz jet and interior, while the now sustained global softness and declines in global freight volumes, seen over the past year plus likely contributed to the minor decline in the freight submarket that we saw this quarter.
Sequentially, total commercial aftermarket revenues increased by approximately 2%. Commercial aftermarket bookings for this quarter were strong compared to the same prior year period. And in the full 2023 fiscal year, these commercial aftermarket bookings exceeded sales nicely. The strong bookings levels in commercial aftermarket over the past 12 months support our commercial aftermarket guide for revenue growth in the mid-teen percent range for fiscal '24.
As a reminder, when forecasting our commercial aftermarket, we always look at rolling historical 12-month average booking trends, never just the most recent quarter, due to some lumpiness that we can often see and have historically seen in this end market. This lumpiness is not quite as big as what we can see in the defense end market, but it is there nonetheless.
Turning to broader market dynamics and referencing the most recent IATA traffic data for September. Global revenue passenger miles still remain lower than pre-pandemic levels, but growth in air traffic over the past few months has continued to signal steady recovery momentum. Globally, a return to 2019 air traffic levels is still expected in 2024.
Domestic travel continues to surpass pre-pandemic levels. And the most recently reported traffic data for September, global domestic air traffic was up 5% compared to pre-pandemic. Domestic air travel in China continues to improve and was up 8% in September compared to pre-pandemic. This is a significant improvement from China being down 55% only 9 months ago in December. We did not expect such a steep ramp-up in China activity this past year, and it was a nice surprise.
Shifting over to the U.S. domestic air travel for September came in 6% above pre-pandemic traffic. International traffic has continued to make strides over the past few months. A quarter ago, at the end of June, international travel globally was depressed about 12% compared to pre-pandemic levels, but in the most recent data for September, this travel was only down about 7%.
Now some quick color on our commercial aftermarket submarkets, starting with the biz jet submarket. Business jet utilization is below the pandemic highs reached in 2021 and continues to temper. Overall, global business jet activity does remain above pre-pandemic levels by about 10% to 15% and time will tell how this normalizes over the upcoming months. Within our business jet submarket, our revenue was well above pre-COVID.
Next, on the cargo submarket. As a reminder, this is one of our smaller submarkets within the commercial aftermarket bucket. Global air cargo volumes have continued to struggle and after 19 straight months of year-over-year declines, just returned to flattish to slightly positive growth these last 2 months. Cargo ton-kilometers, CTKs, have been below pre-pandemic levels. Additionally, full freighter aircraft are being used less now and have seen an increase in parked rates due to the return of belly cargo capacity on the passenger side.
As mentioned on our last earnings call, we've started to see some booking softness in the freight submarket of our commercial aftermarket, likely as a result of the sustained declines in CTKs and the full freighter market challenges that I referenced.
One quick aside to summarize what is currently going on in our commercial aftermarket submarkets and how we, as a management team, think about it. If you take a step back and look at how things have trended from pre-COVID to the present over the past 4 years. At COVID's onset, we saw a precipitous drop at first in the passenger submarket, followed shortly thereafter by a big run-up in freight to levels well in excess of pre-COVID activity.
After a few years of seeing these trends, these markets are now in various stages of returning back to their original trend lines. Passenger traffic continues to surge back and with it, belly cargo. While full freighter cargo aircraft traffic is dropping back to trend. We are happy to see this dynamic. Passenger is by far our largest submarket within the commercial aftermarket and we win on this trade-off between full freighters and passenger.
Shifting to our defense market, which traditionally is at or below 35% of our total revenue. The defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 15% in Q4 and 11% for the full fiscal year '23 compared with the prior year periods. This full year defense revenue growth exceeded our last guidance expectation of growth in the mid- to high single-digit range that we gave on the last call. Sequentially, total defense revenues grew by approximately 9%.
Defense bookings are also up significantly this quarter compared to the same prior year period. We continue to see improvements in the U.S. government defense spend outlays which is reflected in our defense revenue and bookings performance this quarter. We are hopeful we'll continue to see steady improvement. But as we have said many times before, defense sales and bookings can be lumpy. We know the bookings and sales will come, but forecasting them with accuracy and precision is difficult.
Lastly, I'd like to finish by recognizing the strong efforts and accomplishments of our 49 Op Unit teams during fiscal '23. It was a good year, and we're pleased with the operating performance they delivered for our shareholders. As we enter our new fiscal year, our management teams remain committed to our consistent operating strategy and servicing the now very strong demand for our products.
With that, I'd like to turn it over to our CFO, Sarah Wynne.
Sarah Wynne
Thanks, Mike, and good morning, everyone. I'm going to review a few additional financial matters for fiscal '23 and then also our expectations for fiscal '24. First, a few additional fiscal '23 data points on organic growth, taxes and liquidity. In the fourth quarter, our organic growth rate was 18.5%, driven by the continued rebound in our commercial OEM and aftermarket end markets.
On taxes, our GAAP and adjusted tax rate finished the year within their expected ranges. Our fiscal '23 GAAP rate was 24% and the adjusted rate was just under 25%. On cash and liquidity, free cash flow, which we traditionally defined as EBITDA less cash interest payments, CapEx and cash taxes was roughly $1.8 billion for the year, higher than the $1.4 billion we had originally expected, driven primarily by the good operating performance that Kevin and Mike mentioned, and the extra EBITDA we generated above our original guidance carries over to cash flow.
As Kevin mentioned, we ended the year with approximately $3.5 billion of cash on the balance sheet or over $1.4 billion when pro forma for the $35 dividend. At year-end, our net debt-to-EBITDA ratio was 4.8x, down from the 5.3x at the end of last quarter. Pro forma for the $35 per share dividend announced this morning, our net debt-to-EBITDA ratio is 5.4x. The dividend payment date is expected to be November 27.
We continue to watch the rising interest rate environment closely. We remain 80% hedged on our total $20 billion gross debt balance through a combination of interest rate caps, swaps and collars through 2025. This provides us adequate cushion against any rising rates, at least in the immediate term.
Our EBITDA to interest expense coverage ratio, which, as a reminder, becomes more important in a higher interest rate environment and is a metric we actively monitor and take into consideration in these times of elevated interest rates ended the year at 3.1x on a pro forma basis, which sits comfortably in line with our pre-COVID average range of 2 to 3x.
We continue to be comfortable operating the business within these brackets. With regard to any potential changes to our long-term approach to using debt to boost our equity returns, we're actively watching the interest rate environment closely, but do not anticipate any big changes in our approach at this time.
Next, on the fiscal '24 expectations, I'm going to give some more details on the financial assumptions around interest expense, taxes and share count. Special note that all of my comments and data here include the payment of the $35 dividend, but exclude the acquisition of CPI's Electron Device business entirely, which is still subject to regulator approval, and we expect to close by the end of our third quarter in fiscal '24.
Net interest expense is expected to be about $1.25 billion in fiscal '24. And this equates to a weighted average cash interest rate of approximately 6.3%. This estimate assumes an average rate of 5.4% for the full year.
On taxes, our fiscal '24 GAAP, cash and adjusted tax rates are all anticipated to be in the range of 22% to 24%. The slight decrease in our tax rate versus the prior year is due mainly to the additional interest expense we're able to deduct for tax purposes, given our higher expected EBIT for '24. On the share count, we expect our weighted average shares outstanding to be 57.8 million shares in '24.
With regard to liquidity and leverage for fiscal '24, as we would traditionally define our free cash flow from operations at TransDigm, which again, is EBITDA as defined less cash interest payments, CapEx and cash taxes, we estimate this metric to be close to $2 billion in fiscal '24. With regard to the dividend, the $35 per share payment announced this morning represents a gross payout of just over $2 billion. The record date for the special dividend is November 20, and the payout date is expected to be November 27.
After paying out the $35 per share dividend in cash and assuming no additional acquisitions or capital market transactions, we would end the year with over $3 billion of cash on the balance sheet, which would imply a net debt-to-EBITDA ratio close to 4x at the end of fiscal '24. However, this excludes the acquisition of CPI's Electron Device business which is still subject to regulator approval, and we expect to close by the end of our third quarter in fiscal '24.
As Kevin mentioned at the outset, we are actively monitoring the capital markets and assessing opportunities to utilize leverage for this acquisition and general corporate purposes, which may include potential future acquisitions, share repurchases or dividends. And as a reminder, there has been no change in our approach to how we think about capital allocation or leverage with our typical target in the 5% to 7% net debt ratio range.
We will continue to watch this ratio along with the cash interest coverage ratio of EBITDA to interest expense as we actively pursue options of maximizing value to our shareholders through our capital allocation strategy. So a final note on that, we think we remain in good position with adequate flexibility to pursue M&A or return cash to our shareholders via share buybacks and/or additional dividends during the course of fiscal '24.
With that, I'll turn it back to the operator to kick off the Q&A.
Question and Answer Session
Operator
(Operator Instructions)
Our first question will come from the line of Myles Walton with Wolfe Research.
Myles Alexander Walton
I was hoping you can give us a little bit more color on the CPI business itself, understanding that you obviously haven't closed on it, but maybe just a little context of the nature of the aftermarket that it has, maybe it looks a little bit more defense than commercial. So how does that flow? And then maybe just from a process perspective, is this something that's been on your watch list for a while or something that's more recently popped up?
Kevin M. Stein
Thanks, Myles. This is an acquisition that came through deal flow. It is a business we had looked at a number of times over the years. It is a company that makes vacuum tube type products, power generation products for high-power applications in aerospace and defense. A lot of it flies. Some of it doesn't. Big applications, though are -- tend to be a little more defense, but there is an industrial and medical products technology here.
We look at this acquisition as right down the fairway for us. This is a component business, highly, highly engineered with significant access to the aftermarket, these products need to be repaired and overhauled every 3 to 4 years at regular intervals. So we believe this provides the basic tenants that we look for.
Myles Alexander Walton
Okay. And then just one quick one on defense. The sales in the quarter. Obviously, you're expecting it to be -- is up about 9%. Is that short-cycle stuff coming through? Is the supply chain there improved? I see from the slide, it still calls it out as a watch item, but was the better sales result of customer pull or supply performance?
Mike Lisman
It was both. We saw a bit of increased demand free up from all the main customers, a bit more on the aftermarket side and stuff we were able to get out this quarter. The bookings also picked up, which sets us up well heading into next year. The supply chain side, that is starting to ease a little bit it's with regard to getting the stuff we need in to build our components and ship them out the door, we're probably in a better spot than we were, say, 12 or 18 months ago, but the supply chain, our supply chain is still not back to where it was pre-COVID in terms of hitting on-time deliveries and getting stuff to us perfectly on time. So heading in the right direction, but probably still a bit more work to do there and definitely not as much of a headwind as it was, say, 12 months ago.
Operator
Our next question will come from the line of Noah Poponak with Goldman Sachs.
Noah Poponak
I was hoping we could pick apart the exact aftermarket bookings by month in the quarter?
Kevin M. Stein
We don't pull apart bookings like that.
Noah Poponak
So when you just went through all that math on the balance sheet, after all this capital deployment and you mentioned ending the year at 4 turns of net debt-to-EBITDA, recognizing that's pre-CPI close. But even once you close that, the balance sheet -- that won't change the leverage that much once you add the EBITDA and then keep generating cash flow. So I guess as you sized the special dividend, was that with an eye towards the acquisition pipeline? And should we read that to mean that you still see a lot out there to maybe go after and therefore, you wanted to leave that firepower on the balance sheet?
Kevin M. Stein
Yes, I think we're always ambitious and casting nets wide to find opportunities that fit our criteria. We want to be aerospace, you'd love to be more commercial than defense because you can make more money, better returns on the commercial side. But no, I think we see -- we will need to do something on the capital allocation side next year.
Even with the CPI debt, we will look to take on possibly we will need to do something towards the end of the year and whether that's a buyback or a dividend or other acquisitions, we'll have to see how the market unfolds. We're pretty encouraged by deal flow in general. We're seeing a lot of things on the M&A side. And we need to stay disciplined, and that's what we will do. And when we find a deal and we go forward with it, it's with the knowledge that we're going to hit TransDigm-like returns on these acquisitions.
Noah Poponak
Okay. And Kevin, maybe I missed it, but if you could speak to the profitability of CPI. Just we can see the revenue multiple, but what are the margins like? Where can you take them over time? And then last one for me would just be if you could touch on Calspan for a minute. Just now that you've had it for a little bit longer, that was a deal that did look a little different, had some questions from the market. Anything noteworthy there? Or just kind of what you thought you bought?
Kevin M. Stein
Yes. I think margins at CPI are well, well below TransDigm margins. I think there is opportunity to improve, of course, but this is very early on in the process. We don't own the business yet. So too early for us to comment. And we usually don't comment much on this, but too early for us to have much granularity or vision there. We just know there -- we're going to look to find opportunities to expand and grow that business.
On Calspan, I think what I would say is -- we're very encouraged by the acquisition. It looks like it is running at or slightly ahead of our model. And we're very encouraged by that business and the different aspects of that market and the M&A that we did when we acquired Calspan. It's not a traditional component business. So the fact that the TransDigm model still holds is very encouraging.
Mike Lisman
At least as good as we thought it was when we set out to buy it probably a little better based on 7 months of ownership or so.
Operator
Our next question will come from the line of Robert Stallard with Vertical Research.
Robert Alan Stallard
Just a couple from me. First of all, on the CPI business. You mentioned that it does have some sort of non-aerospace defense exposure here. Are you intending to keep that within TransDigm? Or would you be looking to sell it on?
Kevin M. Stein
We would keep that within TransDigm. We have a non-aerospace industrial section of the company now as pieces come along with M&A. Absolutely encouraged by that part of the business. I think the Medtronic medical device is a very interesting market, and one that we wouldn't mind learning more about through exposure through this business.
Robert Alan Stallard
Okay. And then on the aftermarket guidance for fiscal '24 in the mid-teens, that's roughly half where you ended up for fiscal '23. How do you expect that to progress as the year goes by? Are we going to see an abrupt of step down here? Or is it going to be a sort of gradual process and by the end of fiscal '24 below that to full year guidance?
Mike Lisman
Yes. We don't want to start giving anything that sounds too much like quarterly guidance, but a little bit of color on what we expect. We'd expect the gradual ramp up throughout the course of the year. As you know, Q1 for us just because of the way the working day step work out. That is a lower percentage of the total year's revenue forecast because of the 10% working days.
But we expect the March up to sort of track the takeoffs and landings, largely speaking, over the course of next year. It increase as the year goes on with some sequential ramp ups throughout fiscal '24. It doesn't always happen that way, right? I could see some lumps here and there, but that's pretty much what we expect and consistent with prior years.
Robert Alan Stallard
Okay. So the actual number progresses through the year, but the percentage growth rate year-on-year will be coming down as the year progresses, right?
Mike Lisman
That's fair. That's a fair assumption and obvious result of the mass and the comps the way they work. Correct.
Operator
Our next question will come from the line of David Strauss with Barclays.
David Egon Strauss
Probably a question for Sarah. I think you talked about $2 billion in cash flow as you define it. What should we assume from in terms of working capital on top of that? I think this past year, you had like a $400 million drag from working capital.
Sarah Wynne
Yes. On the working capital going forward, I'd probably assume about a neutral. Like you said, you saw we defined working capital as accounts receivable inventory less payables, and we added about $500 million this year. That was more than our peak to trough of the COVID downside where we took out about $400 million. And obviously, we also put some of that back in fiscal '22. So I think now we're in pretty good shape, and I would assume neutral going forward.
David Egon Strauss
Okay. And Kevin, a question, I guess, two-parter on the aftermarket. Are your aftermarket volumes now back about in line with pre-pandemic levels? That's the first question. And then the second question, in terms of the mid-teens growth guidance. Is it fair to think of that being roughly half price, half volume in terms of what you're thinking?
Mike Lisman
It's Mike. I'll take that one. First, on the volume and where we stand now across our whole commercial aftermarket in FY '23, we're probably down in the volume space, something like 15% or so. That varies by submarket. The passenger piece is down, obviously, 15 -- sorry, I should have highlighted that, passengers down 15%. The interior stuff is probably off a little bit more. Freight is up more from where it was pre-COVID and biz jet heli is up a bit too in the aggregate across all commercial aftermarket in FY '23.
We're not quite back to 100, if 100 was FY '19, but we're close. And then in FY '24, what we expect to see on the volume side within passenger going to that submarket is basically to get back to pretty much close to 100. That's how our plans came in, which is what you'd expect, consistent with where the takeoffs and landings and RPMs are trending.
And then the freight and biz jet both sort of trending along as well, but probably not up as big as the passenger subsegment. And then in the aggregate, what that means for FY '24 across our whole commercial aftermarket bucket is that we're probably up a little bit in the volume space, above 100 if FY '19 is, again, defined as 100.
The second part of your question on price and volume trends, first on price and commercial aftermarket, we aim to, as you guys know, across our business, get a slightly positive amount of real price every year. So price is a little bit ahead of inflation. And in this environment, that sort of implies the direction you were heading on a 15% aftermarket guide, roughly half and half. That's not miles off, sort of directionally accurate, but the price will aim to get real price ahead of inflation, but you're not too far off. We don't give the exact amount of price and volume trends, but it's directionally accurate.
Operator
Our next question will come from the line of Ron Epstein with Bank of America.
Ronald Jay Epstein
So one of the things we've been hearing is given the move in kind of interest rates and what's going on in the financing world, that there's just less competition out there for deals from financial sponsors and private equity and so on and so forth. Is that the case? And is that giving you guys a tail end in your potential things you...
Kevin M. Stein
I don't -- I haven't found that to be the case. We see lots of competition. In fact, CPI was a competitive deal. I haven't seen anything that wasn't in a competitive process. So I have not noticed that. I think in the aerospace and defense sector, there may be deeper pockets. So I'm not seeing that there's no one bidding on businesses. I think if that was the case, there wouldn't be many things coming to market. So we're seeing a lot of competitive processes.
Ronald Jay Epstein
Got it. Got it. And then, Kevin, when you think about directions to go, help me as outsider kind of looking in, I mean, how should we think about that? I mean what vectors could you guys go down? I mean how to frame this, that you can actually answer it. Broadly, is there an area in the portfolio that seems like there's a hole? Or you're just kind of agnostic to just what could fit the model and kind of fits the end markets? If we just want to try to get a broader understanding of how things could go?
Kevin M. Stein
Yes. We don't look at the market as there are holes in technology that we need to fill or products that we have to have. We're agnostic about what products and technologies we have. We're looking for things, though, that are highly engineered, proprietary. They have a noted position in the marketplace. They have aftermarket content and -- of sorts. So if you look at the businesses that we continue to identify and find. They fit this criteria.
And as long as we continue to find proprietary products like this, highly engineered products, we will continue to grow. There's no reason for us to believe we're running out of these. It's the nice thing about aerospace and defense is that there's so many technologies utilized across so many different products and applications with no commonality. There is still so many places for us to grow.
I am not contemplating going outside of aerospace and defense. I don't see a need for that. We do love to learn about other markets and technologies, much like we will with CPI in the medical device side, and we'll see what we learn. But right now, I think the landscape is very full for us on the aerospace and defense side. And again, given our -- the value generation model that we have, we don't need to acquire hundreds and hundreds of millions of dollars of EBITDA every year.
We target -- and I'm sure all of you have heard me say this many times, if we acquire $50 million to $100 million of EBITDA per year, that's all we need to feed this model and continue to do what we do. Larger acquisitions are better. But as long as we continue to find those opportunities to swing at and we'll be fine, and we'll continue to grow quite nicely. Does that answer your question?
Ronald Jay Epstein
Yes, it does.
Operator
Our next question will come from the line of Sheila Kahyaoglu with Jefferies.
Sheila Karin Kahyaoglu
I wanted to ask on OE margins. They're growing faster than the aftermarket. Kevin, you talked about Calspan being 100 basis points dilutive. So how do we think about that OE versus aftermarket mix on your EBITDA margin guidance?
Mike Lisman
Yes. So based on the guidance where given the OE slightly outgrows the aftermarket, right? We have the OE of around 20% the aftermarket we called in the mid-teens. There's a slight headwind there. If you guys took some swag at the math. I mean, it's noise level type headwind, right? We're talking a couple of tenths of a point on the margin. So nothing material that we won't be able to overcome with productivity.
The big one that swings us year-over-year downward is obviously just Calspan. And as Kevin said in his comments, that's like a full point of EBITDA margin dilution downwards. So not too much headwind from the OE ramp up, but a little bit a couple of tenths.
Sheila Karin Kahyaoglu
Okay. Got it. And you mentioned CPI is not in the guidance, but obviously well below TransDigm on the margins, it's a very wide range. Can you give us an idea of how below TransDigm margins they are? And then on aftermarket, I just wanted to ask if there's any impact from higher AOGs incorporated into your expectations?
Kevin M. Stein
I'll let Mike answer the last one. But on CPI, the question, I don't...
Mike Lisman
I think you were trying to get at the margin, Sheila. And just...
Kevin M. Stein
We don't own it yet. It's too early for us to comment on that. It's well, well below TransDigm averages. Where do we see it getting to -- it's probably too early for us to even comment on that. We haven't been in the door. So we need some time to unpack that, and then we'll be able to update you.
Mike Lisman
And then on the second half of your question, Sheila, I think you asked about AOG, and I assume you're trying to get to gear turbofan issues and some of the aircraft grounding that created across the fleet. This -- it's nothing material when it comes to our guidance as far as that racks up. We're so diversified and market-weighted across all the platforms out there that there's not a big uptick we expect from that.
But that said, given that those aircraft are newer and grounded, older stuff has to fly and some of the airlines are probably going through a lesser fleet to keep those older aircraft flying. It's probably about a little bit of a tailwind, but it's not material and more noise level. And it's not something that we factored a huge upside into our plan from.
Operator
Our next question will come from the line of Ken Herbert with RBC Capital Markets.
Kenneth George Herbert
Maybe Kevin or Mike, when you think about aftermarket, it sounds like in '23, China was maybe relative to initial expectations, the biggest source of upside. As you look at fiscal '24 and the mid-teens guide either geographically or maybe in other parts of the market, where could we see some of the maybe biggest potential of upside as you think about the guidance and the market dynamics today?
Mike Lisman
Yes. So I guess two things. First, if the market grows more quickly, as you saw from our guide this year, we'll be ready to supply the demand if it's there. I think our original commercial aftermarket guidance for last year was 15%. We finished it a little bit more than double that, right? So we were conservative with the guide when we went out and the China surge back is a big contributor to what carried us up as well as the pockets of strength elsewhere.
We'd look to do the same thing this year as well, provided that, that occurs. Who knows where it comes from, right? The international stuff is probably a bit more depressed still, specifically in Asia Pacific, that's down the most. It could rally back. That's still down double-digit percentage versus where it was pre-COVID. Hard to forecast that, though, right? And we didn't get out over our skis when we -- nor do we think our Op Units did when they came up with expectations for FY '24.
I think the biggest source of upside, not just in FY '24, but as you look out a couple of years, is when you take a step back, in most prior downturns, 9/11, the financial crisis stuff that went on, you sort of got back to that original trend line after a couple of years. And now in FY '24, we're just getting back to FY '19, right? But there's still a bit of pent-up demand there potentially because you guys know what drives RPMs, right?
It's GDP growth and rising middle class and all that stuff. And we've got 4 years now where we've sort of been below that past trend line, where we've not seen the 5% RPM growth per year that, that trend line was sort of on and where we were heading. And that sort of pent-up demand, who knows how this recovery goes. But FY '24, we'll get back to where we were in FY '19. But based on the underlying demand for global air travel, you would think there's still quite a bit of pent-up demand there that should be a good tailwind for us as well as others in the sector out beyond FY '24. And who knows if you get back to the original trend line. And prior downturns, you sort of did, and we'll see. But it should be a bit of a tailwind as we continue out past this coming year.
Kenneth George Herbert
That's helpful. And as you look at -- and it sounds like a lot of the strength in '24 is going to come from the passenger side. Are you seeing anything that would give you a little bit more concern around pushback from airlines in terms of spare part pricing? And is that maybe at all relative to the last couple of years, any reason to think about a different assumption on pricing into the market?
Mike Lisman
No. As we said earlier, we aim to get a little bit of real price ahead of inflation. That's what we've achieved historically. That's what we'll try to do this year. Same playbook, we've always had this year. No huge pushback. I think the airlines are happy to get the parts and keep their aircraft flying in the air generating revenue now.
Operator
Our next question will come from the line of Gautam Khanna with TD Cowen.
Gautam J. Khanna
I just wanted to follow up on two things. One, in the aftermarket, are you guys seeing any change in scope or just purchasing behavior from the airline customers because we see a lot of these airline stocks are obviously down a lot. They're under some pressure now, the companies. I don't know if you're seeing any evidence of destocking or just whatever buying less than they normally would in average order size. Anything of that nature...
Mike Lisman
Yes. We're not seeing much of that. I mean, as you know, it's hard to get exact intelligence into the inventory levels of the airlines. But generally, we're not giving them volume discounts anyway. So they don't tend to hold too much of our stuff. But no, we're not seeing very much at all. I don't think we've seen any of the dynamic you described there.
Gautam J. Khanna
Okay. Good. And then relatedly, any discernible differences between the distribution channel and direct to the airlines and MROs?
Mike Lisman
No. For the most part, the distribution channel for us into commercial aftermarket, which is about a quarter, rough justice ebbs and flows a bit of the total commercial aftermarket revenue dollars. That's been tracking, the POS there has been pretty much tracking for this whole year, together with our commercial aftermarket growth pretty closely. So no meaningful disconnects because of distributor, inventory or anything. They've been moving not exactly unlocks that, right, because you do get little bit of noise here and there, but pretty much in the same direction consistently throughout the year.
Operator
Our next question will come from the line of Jason Gursky with Citi.
Jason Michael Gursky
I just wanted to revisit the margin question that Sheila touched on earlier in your comment that the mix shift towards OE, the growth rate being a little higher there relative to aftermarket leads to a pretty modest headwind from a margin perspective that you think you can make up in productivity. As we look out further into the future and the potential for -- retirements accelerating as the OE ramp goes higher.
Can you just talk about how you all think internally about that potential outcome and some of the opportunities and risks to margins? Kind of curious to know whether, as retirements accelerate in certain aircraft whether you can actually get better price and so the margins of your business have some upward bias to them?
And then on the OE side, is it a question of higher volumes allow you to expand margins as you get some OpEx leverage. I'm just kind of curious to know, longer term, how you think about a widening gap between OE growth and aftermarket growth over time and the impact that, that has on margins?
Mike Lisman
Sure. I'll try to give a little bit of color that shed some light on how we think about the various factors here that obviously, given guidance out in FY '24 is tough enough, which is why we range-bounded to do a couple of years out after that is even tougher. But generally, as it pertains to retirements, we still make really good money on margins on the new aircraft that come into service. If you look now at the fleet age, I think something like the fleet is a little bit older than it's been historically something like 80% of it is out of the 5-year warranty window versus a historical average of closer to 70%.
That creates a really slight tailwind for us. Again, nothing tremendously material. But overtime, as the OE production ramps up through the 2030 time period or so, you'd expect that to get probably closer to like the 70% historical average. But again, we'll still make very attractive commercial aftermarket margins on the newer stuff that's flying as well.
The other question we get a lot on the retirements, and I think this is where you were going is, there is some impact from USM hurt you guys. We've not seen that historically. We monitor it real time, as you know, from the price points of our products and the way the dynamic works there with higher value engine content primarily targeted as well as Avionics on the USM side. We just historically have not seen much negative impact from that. The retirements are really low. They're like half of the historical average rate of 2.5% of the fleet.
We don't count on that dynamic being the same for us going forward, though. So it's something we always monitor and look at real time, but we don't expect a huge headwind there. So generally, we think, obviously, the OE ramps up going forward, maybe a little bit of a margin headwind, but nothing insurmountable. And the aftermarket is going to continue growing here as well for a couple of years out. So we think we're sitting in a good spot.
Operator
Our next question will come from the line of Kristine Liwag with Morgan Stanley.
Kristine Liwag
Maybe following up on -- sorry, there was a delay there. Kevin, following up on your answer to Noah's earlier question, I mean taking a step back, the enterprise is generating strong free cash flow. You're able to digest a special dividend this year and the CPI acquisition and still have capacity and desire for significant capital deployment next year. So taking into consideration the current interest rate environment, what's your target leverage for next year when you assess your next capital deployment event?
Kevin M. Stein
Yes. I think Sarah said this in her -- we would like to be in the 5 to 7x. We're comfortable in that range. And I think that's where we would like to sit. We'll see how the capital markets respond, where there are opportunities for M&A and all this will go into the mix. But as she said, 5 to 7x. We're comfortable in that range. I can't really give you a better forecast than that, that's our historical comfort range.
Kristine Liwag
Great. And if I could add one on Defense. I mean the pricing model regarding defense had been under the microscope with a series of IG investigations over the past 15 years. But I think with the strength in margin, what's been underestimated is the operating strength of TransDigm. So looking at the businesses that you've acquired in defense, how much more margin expansion is there on production efficiencies? And as employee TransDigm best practices in manufacturing, is this something that you could see a few hundred basis points in margin expansion?
Mike Lisman
Across all our businesses, we target -- if we continue to execute our playbook on cost reductions, getting a little bit of real price every year and growing new business, we target sort of close to a percentage point of EBITDA margin improvement per year. That's true across all parts of our businesses. Most of them have a little bit of defense, and we look to drive that kind of performance there as well. I see no reason that would change going forward. And that's through a mix of, obviously, the whole playbook, all 3 value drivers. New business stuff driving productivity and getting costs out and then also a little bit of real price ahead of inflation.
Operator
Our next question will come from the line of Gavin Parsons with UBS.
Gavin Eric Parsons
20% growth on OE organically, I think, implies you're back above pre-COVID levels in 2024. And I assume a decent amount of that is business jet, but just wanted to ask kind of where you are on transport? And where you think the build rates go in the year?
Mike Lisman
I think that's about right, maybe a little bit below. I think the past OEM peak, if you went all the way back to '18 before the 73 MAX issue happened, then obviously that sort of makes '19 the not the best comp point. So I think you need to go back to '18. And I think on the OEM side with Boeing and Airbus, we're actually quite a bit below. I don't have the exact stats in front of me, but we've looked at them recently. And I think we are down.
Biz jet, so that's the commercial transport side down a bit. Biz jet, obviously, we're back. I think you guys read the next -- all the same headlines we do in terms of book-to-bills across the big biz jet OEMs. And those guys are doing quite well and volumes -- production volumes are up quite a bit. The transport side, narrow-bodies are up and doing well, and the widebodies are still quite a bit down. I think if you go and look at widebody forecasts, it's hard to find, and we look at your guys' estimates.
It's hard to find as well as others. It's hard to find someone who's projecting widebody production volume that gets back to the prior peak in the projected period. And some of you guys go all the way out to 2028, 2029, 2030, there's just been a shift at the airlines for more narrow body. So it seems that's where the backlog has become more heavily weighted and therefore, where the production will be.
Gavin Eric Parsons
Got it. And obviously, we can see kind of overall inflation trends, but maybe it seems like there's some pressure on wages in the aerospace and defense industry. Do you guys feel like you're past kind of peak inflation on the cost side?
Mike Lisman
Hard to say. We're not macroeconomic forecasters, and I don't think anybody inside your respective shops do the macroeconomic forecasting, saw this one coming. We look at past periods where inflation has spiked to the current kind of levels of that. And if you go back 80 years, usually, it goes up to this kind of level, and it's a 4-, 5-year phenomenon. So we don't count on it necessarily coming down, hope for the best, but certainly plan for the worst. That's the way we pull together the plan for this year.
And if it goes down, we'll be -- good to see that, obviously, but we certainly don't count on it. In terms of inflation pressures on our business, I think we mentioned on a couple of prior earnings calls when this question was asked, what are we seeing on materials and labor and that kind of stuff, and it's been sort of in a 5-ish percent area, maybe a little bit higher. And I would say that dynamic doesn't seem to have changed very much in the past few months. I know the CPI readings have come down that they publish here in the U.S. Europe is still high. We haven't seen any kind of coming off of the prior levels really across our business.
Operator
Our next question will come from the line of Pete Osterland with Truist Securities.
Peter Osterland
I'm on for Mike Ciarmoli this morning. Just wanted to parse out what's driving your growth expectations in fiscal '24 in the defense market. So just maybe any color on how that growth could be impacted by the budget environment? And then anything you can give us on pricing dynamics with the DoD and your expectations there?
Mike Lisman
Yes. We -- when we pull together the guidance, obviously, we think about and take into consideration things like continuing resolutions or some potential shutdown for a short period of time. All that stuff mainly generates for us a little bit of timing impact. The demand eventually comes just given the state of the world now, we did think about that a little bit as we pulled together the guidance and made sure that we have some leeway there.
So it's sort of incorporated into what you guys are providing today. And then on the pricing side, I think we continue to target kind of the same pricing dynamic we described, which is a little bit of pricing, real pricing ahead of inflation and no major change there.
Peter Osterland
Right. And then as a follow-up, just maybe an update on labor market conditions you're seeing, productivity or attrition still a significant headwind? Just given your strong margin performance, it seems like maybe it hasn't been significant, but just wondering if there's potential for additional upside there if labor-related headwinds are something you're experiencing?
Mike Lisman
Yes. We haven't seen a ton of significant headwinds. We've gone -- I think you guys know a small percentage of our overall workforce is unionized. We've had several successful negotiations around wages when the renewals came up during the past 12 or 18 months in this high inflation environment with no issues, and our Op Unit teams have worked through it quite well, but no major issues.
Joel Reiss
This is Jorge. I'll just add. I mean we've spent the last few years really working on automation projects and working to improve the -- our processes within our factories to make us less susceptible to that.
Operator
Our next question comes from the line of Scott Deuschle with Deutsche Bank.
Our next question will come from the line of Robert Spingarn with Melius Research.
Scott Mikus
Scott Mikus on for Rob Spingarn. Kevin, I wanted to ask you, in the past, you've talked about TransDigm not eating inflation. I know you have cap and swaps in place, but does the rising cost of capital also factoring your pricing strategy? What I'm trying to get at is are you going to pass on higher interest expense to your customers via price. So you can still convert free cash at 50% of EBITDA?
Kevin M. Stein
That's not the way we look at it. So it doesn't factor in. It is part of costs and inflationary pressures in general -- the way we analyze pricing and inflationary measures.
Scott Mikus
Okay. And then I also wanted to ask, are your operating units, noticing any meaningful uptick in their parts being PMA-ed at all?
Mike Lisman
No, no. I mean we're always actively monitoring that and looking for threats there. No meaningful uptick from prior levels of kind of low activity. I think we put a slide on this in the June investor deck that we put out, you might find helpful, but no, no meaningful uptick.
Operator
Our next question comes from the line of Noah Poponak with Goldman Sachs.
Noah Poponak
I wanted to get your perspective on the MAX original equipment ramp because you guys have been pretty clear eyed on the overall OE ramp. And it felt like you had gone from kind of skeptical to cautiously optimistic in the middle of the year. And then now the industry has faced this situation where some other supply chain issues have held up MAX deliveries.
And so I'm curious on your perspective, did the underlying total supply chain keep moving along to the medium-term Boeing master schedule there? Or are the recent supply chain issues going to hold that ramp back by some meaningful period of time more than a handful of months?
Kevin M. Stein
I think we can only comment on what we see. I don't know about the larger supply chain. And Mike and Joel can jump in. But I think that the ramp has been slow enough that I don't know if the larger supply chain will be hampered as it tries to continue to ramp up. But that is, of course, assuming that the various quality issues and other things that have hampered delivery get resolved.
Mike Lisman
Yes. I think that's right. And we obviously see Boeing's target to, I think, get the MAX rate back towards 38 or so. We're ready to support them. if they can get there across all our Op Units, we hope it happens. It's obviously in our interest to see them and the rest of the supply chain fully recover and get out past this. We don't necessarily count on when we pull our forecast together for the year, though, hitting those targets, which, again, still seem maybe a bit aspirational to us on the year.
Kevin M. Stein
And I think that's a good word aspirational.
Operator
Our next question comes from the line of Scott Deuschle with Deutsche Bank.
Scott Deuschle
Sarah, just on the $692 million contract at Armtec one, are you able to offer any detail on how much that might contribute to defense growth in '24? It seems like potentially a lot, but bit curious if you could put a finer point on that, if possible.
Mike Lisman
It's Mike. I'll take that one. It's a bit Op Unit related. Given the ramp on that program, it's one of the biggest awards in TransDigm's history, obviously. But given the expected ramp rate, we've got a -- we'll go -- we'll actually, under that contract, go to a third shift at the facility, build up some new capacity, including a new building to support the government on the important 155-millimeter program. That's gotten a lot of attention. We provide with this contract, obviously, one of the critical parts that goes into supporting it.
Government is a super important customer for us. On the year, given the production ramps up. A lot of the focus out of the gate will be on getting the capacity where it needs to be with the expansion. And the revenue upside is not hugely significant. It's more of an FY '25 into FY '26 kind of matter. If we get things going a little bit earlier and ahead of schedule, could be a bit of upside in FY '24. We didn't count on that as we pulled together the forecast for the year, though. And I think as you guys know, we aim to be a bit conservative with the guidance we give.
Scott Deuschle
Okay. Great. And that CapEx is funded by the government on this project, right?
Mike Lisman
It is.
Scott Deuschle
Got it. And then last question, Mike -- for Mike as well. Are you seeing much aftermarket parts demand on newer platforms like 787 and A220 yet? Or is that still yet to come as these fleets age?
Mike Lisman
I think we're seeing about historically what we've seen, and we're sort of market weighted on the aftermarket side based on takeoffs and landings by platform. we're seeing about what we'd expect to see at the platform level. No big deviations by Op Unit or deviations versus the takeoffs and landings that you're seeing across the fleet.
Operator
Our next question comes from the line of Seth Seifman with JPMorgan.
Seth Michael Seifman
So one quick question about the margin. I think when you guys initially acquired Calspan. The expectation was that, that would be about -- on an annualized basis, that would be about 100 basis points of margin pressure. And then in 2024, for a partial year, it seems like it's still about 100 basis points of margin pressure, but it sounded like things are going at least according to plan, if not better. And so is there anything else that's changed with regard to Calspan's expectations? Or maybe is there just some conservatism embedded in that guidance?
Mike Lisman
I think it's conservatism and noise level deviations. We round a bit when we give you guys those things of about a percentage point. It's not exactly a percentage point. I think it's a little bit ahead of that. The business is performing well, though. As Kevin said, it's at least as good as we thought it was when we bought it, maybe based on 5 months of ownership a little bit better.
But you don't really -- as you guys know, with M&A, once you own something 2 full years or so, you really know it and understand it, and know where it's headed. But based on what we see so far, it's looking good. And then those -- the dilution amounts, it's a bit of rounding here and there, but it's noise-level stuff, and it was, I think, a little bit above the 1.0 percentage point mark, which is what's generating the 1.0 percentage dilution coming this year in FY '24.
Seth Michael Seifman
Right. Right. Okay. Cool. And then maybe, Kevin, on the CPI deal, kind of it seems consistent with some other stuff that you guys have done in the past. But I think that kind of -- since the pandemic, you've talked a little bit more about being focused on commercial acquisitions. And not necessarily looking to increase the defense portion of the pie through M&A. This deal doesn't really change the pie that much in terms of its size. But are you -- would you say that you're more agnostic now in terms of...
Kevin M. Stein
No. I think we would still prefer -- we would still prefer commercial businesses over defense. Commercial businesses aren't as lumpy. Defense businesses can have -- it's difficult to forecast the revenue. So we would still prefer commercial. You can make a better return on a commercial business. There's more revenue growth on and on.
But you can only swing at the pitches that gets thrown at you or thrown to you. So this was the business that was available. And when you find them that meet your criteria, again, proprietary products, highly engineered, access to aftermarket, in this case, significant 70% aftermarket, phenomenal. You love those businesses, and they're important for us to acquire. So yes, we would still rather find great commercial businesses, but defense businesses can also meet the criteria.
Operator
That concludes today's question-and-answer session. I'd like to turn the call back to Jaimie Stemen for closing remarks.
Jaimie Stemen
Thank you all for joining today's call. We appreciate it. This concludes the call. We appreciate your time, and have a good day.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
