Q1 2020 Earnings Call
The first quarter 2020, Transdigm Group incorporated earnings Conference call. At this time, all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to asking questions. During this session you'll need to press star one on your telephone as a reminder, taste program is being record.
I would now like to introduce your host for today's program like that Sable Treasurer and director of Investor Relations. Please go ahead.
Thank you and welcome to transcend physical 2021st quarter earnings Conference call. Presenting this morning are transcends executive Chairman that Kelly, President and Chief Executive Officer, Kevin Stein, Chief Financial Officer, Mike Whitman. Please visit our website at transcend that concept paint a supplemental slide that and co.
HM.
Well, we began we like to remind you that statements made during this call which are not historic going faster forward looking statements.
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 FCC available through the Investor section of our website, where it actually see that though.
We also like to advise you that during the course of the call we won't be referring to EBITDA, specifically that the fine adjusted net income and adjusted earnings per share all of which are non-GAAP financial measures.
We see the tables and related footnote in the earnings release for presentation at the most directly comparable GAAP measures and applicable reconciliations well now turn the call over to Nick Good morning.
Thanks for calling in.
They have usual I'll start off with some summary comments are more consistent strategy.
A few comments on the operating performance and outlook in capital allocation, and then Kevin and Mike will expand and give more color reiterate for unique in the industry due to ballpark consistency and our ability to create intrinsic shareholder value through all phases of the cycle.
To summarize reasons why we believe this about 90% of our sales are generated by proprietary products and about three quarters of or sales come from products for which we believe we are the sole source right.
Most of our EBITDA comes from aftermarket revenues, which typically have significantly higher margins and provide relative stability in the downturns.
Our longstanding goal was to give our shareholders private equity like returns with a liquidity of a public market to do this we have to stay focused on both the details of value creation as wells the careful allocation of our capital.
We follow what consistent long term strategy, specifically, one we own and operate proprietary aerospace businesses with significant aftermarket content second we utilize a simple well proven value based operating methodology. So.
So we have agreed de centralized organization structure any unique sensation system closely aligned with our shareholders fourth we acquire businesses for the fifth this strategy and where we see a clear path the P.E. like returns and lastly, our capital structure It Alex.
Jason are significant portion of our value creation methodology.
As you saw from our press release, we're off to a good start in fiscal year 2020 was solid operating performance in the quarter revenues and EBITDA as defined dropped substantially of course much of this is due to the esterline acquisition, but organic revenue growth was also up nicely EBIT da margins.
<unk> versus the prior year as both the translation.
Based legacy and the acquired businesses all performed well, we continue to generate real intrinsic value for our investors.
For the way the largest portion of our revenue our worldwide commercial aerospace revenue was about 9% in Q1 versus the prior year.
[laughter] driven primarily by very strong commercial aftermarket growth.
Our smaller worldwide defense revenue was also up.
Defense bookings were down a little bit defense bookings can be lumpy.
At this time fiscal year 2020 continues to look like a good year for France, I'm, though we see possible clouds on the horizon. The commercial aftermarket was quite strong in Q1, however, given the uncertainty around the 737 program production rates possible attendant inventory ripples.
And then certainly in China related travel, we are leaving or full year guidance unchanged.
We have begun to trim or cost. However, this is a little more difficult unusual given the uncertainty and the 737 timing. We're watching this closely nor prepared to react more quickly if required.
Put the 737, Max Oh, we production program into perspective for Transdigm.
All production rate it makes up somewhere between three and 4% of our revenue and a smaller percentage of our EBITDA.
Kevin will discuss the quarter in the year in more detail with respect to M&A and capital allocation in the last six months, we closed them received payment on the sale of both the Soriano business for about 920 million and our E. T group of businesses for about 190 million as I said last call.
Order, we may still sell some smaller businesses with less proprietary aerospace and aftermarket content. If we do so as of today I don't expect that they would be significant in size.
With respect to capital allocation in the last six months, we paid both a 34 per share special dividend and a 30 to 50 per share special dividends. The combined special dividends of 60 250 per share or about three and a half billion is roughly 12.5% of the equity.
Value at the start of fiscal year 20. This is a pretty substantial payout due to the divestitures combined with a solid cash generation from our operating businesses, we're able to make these payments to our shareholders and still maintain substantial liquidity and firepower.
As usual, we will review our go forward capital allocation over the balance of the year and see where we stand towards the end of year.
We now expect to have over 3 billion of cash at the end of fiscal year 20. We also have significant additional borrowing capacity under our credit line and or credit agreement, we have the financial flexibility and capital market access to deal with any currently anticipated capital requirements.
Allocations or other opportunities in the readily foreseeable future.
We continue to actively evaluate and see M&A opportunities, we have a decent pipeline as usual mostly in the small to mid range I can't predict or comment on any possible closings, but as I said before we're still working steadily in M&A and their open for business and now let me hand this over to Kevin.
To review, our 2020 performance outlook and some other items.
Thanks, Nick [noise] today I'll review our results by key market, then discuss the profitability of the business for the quarter.
Well also comment on the fiscal year guidance and review some other operational items.
As you have seen we had a strong first quarter and a good start to the year, Mike will provide more details on the financials, but our first quarter operations, specifically revenue and EBITDA as defined we're up substantially over last year due in part to good organic growth as well as continued acquisition integration and performance.
Q1, GAAP revenues were up approximately 48% versus prior year Q1, and EBITDA as defined was up 40% versus the prior year with margins approaching 47% of revenue.
Now we will review our revenue by market category for the remainder of the call I will provide color commentary on a pro forma basis compared to the prior year period in 2019 that is assuming we own the same mix of businesses in both periods.
Please note that beginning this quarter. This market analysis discussion now includes the results of the former esterline businesses.
In the commercial market, which makes up close to 70% of our revenue, we will split or discussion into OEM and aftermarket.
Our total commercial OEM market revenue increased approximately 1% in Q1, when compared with Q1 fiscal year 2019.
Commercial transport OEM revenues, which make up the majority of our commercial OEM business were flat versus prior year Q1.
However, bookings solidly outpaced Q1 sales in the current period by more than 15%.
We did see minimal headwind from the impact of 737 Max production halt this quarter. However, we believe any currently anticipated impact from the Max issues should not have a material impact on our EBITDA for the full fiscal year.
We're very diversified across all platforms worldwide. So the impact of the 737, Max or any single program should not be material to transdigm in the aggregate.
Aside from isolated issues with a few aerospace platforms general industry consensus remains mostly favorable long term as significant OEM backlog remains across the industry.
We are currently assessing the near term impact of the 737 Max rate reduction as well as smaller cuts in production for other Boeing Airbus and business jet platforms.
As a result of the recent production rate changes and other evolving global concerns we are implementing a necessary, 3% to 10% reduction in direct and indirect head count.
The impact of which will be felt in the second half of the year and we'll certainly very by business unit.
Now moving onto our commercial aftermarket business discussion.
Total commercial aftermarket revenues grew by 17% over the prior year quarter with the commercial transport passenger market outperforming our expectations.
In the quarter growth in the commercial transport passenger and business jet markets.
We're significantly offset by very modest declines in the commercial transport freight and commercial transport interior markets.
Overall commercial transport fundamentals continue to remain relatively strong although a few items still bear watching.
Global revenue revenue passenger growth continues to decelerate, albeit growth is still near the long term average this might be impacted by weaker economic activity and multiple geopolitical disruptions worldwide.
Cargo demand is weaker as F. teekays have declined from reaching an all time high in 2017 and business jet utilization data is pointing to stagnant growth that crude create a headwind for the business jet aftermarket.
Finally, it is unclear how the 737 Mac situation has or will impact our commercial aftermarket.
But it may prove to be a net positive for transdigm as older aircraft are utilized more.
Now, let me speak about our defense market, which is just over 30% of our total revenue.
Defense market, which includes both OEM and aftermarket revenues was up approximately 9% over the prior year Q1.
As a reminder, we're lapping tougher prior year comparisons as our defense revenue accelerated in most of fiscal 2019.
Defense bookings declined slightly in the quarter, driven by robust defense OEM bookings growth and a not unexpected decline in defense aftermarket bookings given the recent restocking pace.
Now moving to profitability I'm going to talk primarily about our operating performance for EBITDA as defined.
EBITDA as defined of about 681 million for Q1 was up 40% versus prior Q1.
EBITDA as defined margin in the quarter of 46.5% was negatively impacted by acquisition dilution from esterline, excluding esterline margins in our legacy business were over 51% and improve both sequentially as well as over the prior year quarter.
Margin improvement progress is always important to us in indicates that our base business continues to drive and find opportunities for improvement by using our value drivers.
On Esterline, we're now over 10 months post close the integration continues to progress to date the acquisition is exceeding our expectations for growth in this largest of transdigm acquisitions.
As we've stated in the past, we will no longer refer to any esterline specific metrics as these businesses have now become part of the fabric of Transdigm.
Moving moving now to the 2020 guidance also found on slide seven in the presentation.
We're not changing our full you full year revenue EBITDA or adjusted EPS guidance at this time, although we saw strong first quarter results.
General market conditions have not meaningfully changed with the exception to the 737 Max grounding in production home.
This is an evolving situation that could make a challenging for us to achieve the high end of our previously issued revenue guidance. However, as previously mentioned, we believe any impact from the Max issues should not be material to our EBITDA This fiscal year.
There was also a potential upside for us in the commercial aftermarket, resulting from the 737 Max issues as older aircraft may be utilized more.
We will continue to closely monitor the 737 Mac situation and the expected impact on our business to be prepared to react as necessary, including any further preemptive steps that might be warranted.
After consideration of these items at this time, we have not are adjusting our full year revenue and EBITDA guidance as we still expect them to fall within the range previously issued we will update again as the situation crystallizes.
In addition, we are not changing our original market growth assumptions at this time, we do however, realize there could be some shifting between commercial OEM and aftermarket growth rates, but it is just to close the call with only one quarter of data.
I would also like to caution that although our EBITDA margin was strong in the first quarter margins can be lumpy and margins may fluctuate over the next few quarters. So let me conclude by stating that Q1 fiscal 2020 was another good quarter for Transdigm. We continue to be very pleased with the esterline acquisition integration as well as the strong API.
Regional performance in the quarter from our legacy businesses.
We look forward to the remote remainder of 2020 and expect that are consistent strategy will continue to provide the value you have come to expect from us.
With that I would now like to turn it over to our CFO, Mike listen good morning, everyone I'm going to very quickly elaborate on some of the financial results that Kevin just discussed.
As a reminder, and as mentioned on our last earnings call.
Esterline organization as it used to exists, including the corporate office or the most part now gone with the business units, which used to comprise esterline reporting independently into transdigm.
We're therefore, not planning to give too much specific color or details around esterline's performance separate from that of legacy Transdigm.
So for the consolidated Transdigm business a few quick notes on how we ended the first quarter of that's why 20.
And as a reminder, esterline closed mid March of last year. So it's not included in any of the fiscal 19 that I'm about to reference.
Thank you Kevin both mentioned first quarter net sales were up approximately 48% versus the prior year organic sales growth was strong at 8.7% and this figure still completely excludes esterline. So it's for the legacy Transdigm business only.
Yes on acquisition drove the remaining 39% of the increase.
On EBITDA as defined 681 million for the quarter that was up 40% versus last year and adjusted EPS at $4, a 93 cents was up 28%.
On cash and liquidity this gets a little messy due to the timing of the dividend we declared the $32 in 50 cents per share dividend in December, but then did not pay it until early January so I'm just going to give you the pro forma financial status and Thats what matters. So pro forma for that 32 dollar 50 dividend per.
Share it was paid on January seven our cash balance is 2.3 billion and net debt to EBITDA is now 6.1 times.
We also currently have access to about 720 million of our revolver.
Now a quick update on interest and taxes interest expense is expected to be about 1.02 billion in fiscal 20, and this estimate is unchanged from our prior guidance as some of you may have seen we're currently in the market with a repricing of our seven and a half billion of term loans. This reprice is still in the process is being finalized and we'll update.
Interest expense guidance next quarter once the repricing completes.
On taxes, our fiscal 2020, GAAP cash and adjusted rates are all still expected to be in the range of 20, 24% to 26%, which is unchanged from prior guidance.
With regard to liquidity and leverage at the end of fiscal 20, assuming no additional acquisitions or capital market transactions. We now expect to have over 3 billion of cash on hand at the end of the year. This is a slight reduction from previously from previous guidance just to account for the 1.9 billion dividend we paid in the first week of.
Sorry.
In closing the first quarter was a good start to the year for transcon and with that I'll turn it back to the operator to start acuity.
Certainly and as a reminder, ladies and gentlemen, if you have a question at this time. Please press Star then one on you touched on telephone. If your question has been a two then you'd like to move yourself from the Q. Please press the pound key our first question comes from the line of Noah Poponak from Goldman Sachs. Your question. Please.
Hey, good morning, everybody.
Good morning.
Nick I wanted to try to ask you if you could.
Kind of take a step back and.
Try to provide some context for.
<unk>, where the current fundamentals of aerospace aftermarket our compared to your your long history of the company.
Because we've got we've got the Mac situation, but then we've also got.
The MRO facility is telling us theirs.
Much longer weight than ever and we've got all these airplanes coming out of the warranty period, you just printed.
The number you printed so I'm just kind of curious if as this is good as you've ever seen it is in line with your average good time or is it something else would love to hear from you on that.
Yes.
I don't know that I have any great insight for you there no I mean I see all those all those up puts and takes too.
I would have to put it on the.
On the better rather than worst side of the of the ledger, though you know the slowing RPM always.
I always get your attention little bit as you know that can be that can be sort of a leading indicator sometimes.
The.
The situation in China.
Who knows where that goes you know the this I guess the closest model would be the Sars situation whenever that was some number of years ago that for quarter, two had a pretty significant impact.
I think I, obviously I come down the same places Kevin you know, we're sort of we don't change your view from the beginning of the year I'd have to say theres, probably a wider band around this and there might have been six months ago.
Okay, and just looking at the margin performance.
In the quarter.
I think the framework from you for a little while has been 100 basis points a year in the core not recently acquired business is that still the right framework and your continued to do that even from a higher level.
Kevin you Wouldnt take that yes, I think thats still the right magnitude and I think we can continue to do that.
Okay. Thanks, so much.
Thank you. Our next question comes from a lot Robert Spingarn from Credit Suisse. Your question. Please.
Good morning.
Good morning.
Nick or Kevin.
I've a question for you when it relates to the Max but it's higher level, Nick you've always had that chart about the lifecycle of the Trans nine program lines like 50 years uses different colors and so forth.
How long does a platform need to stand service before Youre MPV positive.
When you get passed the development costs and the zero to low margin are we.
You know how how much of a run until you're in the black.
I don't.
I don't think I think given number we got so many different part numbers now in so many different.
Economic situations you know some are significant.
Initially upfront and some aren't much I don't think I can give yet.
Very good number on that Rob I would say.
If you look in a program.
It's going to have a development that goes on pick your number you know 34567 years, depending on the situation.
You're not going to make much money to get through the first four or five year period, because either you're on warranty worried if it's not a warranty as a practical matter things won't break much or you don't get much in the first four or five years. So your surely out.
For five years after production before you're starting to see any any significant.
I'd say positive positive net.
Beyond that I, just it's just too dependent on the specific part and program.
Okay, and then I just had one on on Esterline.
What now that you've got it I think Kevin you said, it's 10 months post deal.
No.
Have you found anything either.
More positive or negative under the hood in that business being a publicly traded company versus the private companies you bought anything specific there that would be interesting to us.
As we've talked about you get limited due diligence upfront. So we went in not sure Oh, all that we would find I think.
In general we found that things have been better than we.
Assumed upfronts and so there hasn't really been yet anything that is.
A bad news anything that we didn't anticipate or expect.
It's certainly.
Emboldens us for the future to continue to look at a acquisitions like us.
Okay. It was there anything different about their aftermarket pricing dynamic because they were public.
Versus the the smaller private companies that you bought the past no no no not that we have seen no.
Okay. Thank you.
Sure.
The Q. Our next question comes from the line of some kind enough from Cowen and company. Your question. Please.
Yes, thanks, good morning, guys.
Good morning.
I had two questions first I was wondering have you noticed any continued or incremental hesitation by the defense.
Department in placing orders just given the whole overhang of the eyes you investigation.
That explain anything in terms of.
Lumpiness of bookings or.
Anything you know we see there.
So to answer that one first off we.
We have initially we saw some slowdown.
We have been meeting frequently with the Deo de deal a I'd GE and other important stakeholders in the process to continue to communicate answer questions.
Once we started doing that I think some of the.
Pent up demand started to flow a little bit.
So I'm not believing that have slowed down to get to the point I think that you're driving out a slowdown in defense aftermarket bookings is anything more than a filling of the bins occur around the ranch. That's still what we believe we have seen that our interaction.
With the Deo deal a has been positive we're communicating spending time going through the issues and it's a it's positive.
Okay. That's helpful. And then just on the commercial air transport aftermarket in the quarter, maybe subsequent to the quarter.
Anything you can comment on by region. I mean have you seen any corona virus impact in Asia, Pac and or between the various channels.
Distributor versus non distribution.
No we what have you anything.
So.
We don't look at our business like that from a geography and it's also the way that our products are distributed and sold you can sell to one region and that's where the distributors based and it goes all over the world. So you know were.
We don't have great data on individual consumption by country or airline or platform. So no. We don't have that kind of visibility to offer you.
Okay and any change any disconnect between the distribution channel in direct.
In the quarter any read so no we.
We don't have a composite Pos any longer that though the the flow through sales from our distribution partners that we can.
Comment on after the combination of esterline into the Transdigm businesses, because they tend to use different distributors. It made the the metric not as useful for us so far so I don't have any good comment on.
Oh Pos in distribution by region.
I know, what you're driving at and we keep looking for that as well to see if theres a pickup in 737 Max related to the aftermarket in specific regions are there any slowdown.
But we don't have that kind of granularity to be able to give you that commentary.
I mean anything I'd add thing is we're pretty well distributed across the fleet somebody if you look at where the fleet is around the world and you look where the miles are flowing around the world ultimately if those change in those the weighted impact to that will reflect on our on demand at some point.
Thank you.
Thank you. Our next question comes from the line of Carter Copeland from Melius Research. Your question. Please.
Hey, good morning, everyone.
Good morning card.
Kevin or Nick.
Just.
I wondered if I've learned anything about you guys over the last decade, and plus it's that you don't let resources sit around idle so.
To the extent you've got folks in your factories that are perhaps overstaffed, even if it's a temporary basis because of this Mac situation do you. What do you have any intent on attacking productivity with those resources in the meantime, and could could you end up coming out on the back side of this uncertainty with.
You know some some some better efficiency in your factories, how are you thinking about using that.
Of course, we look at all of these are opportunities to drive productivity a productivity is an important part of our value driver mindset.
No we announced a three to 10 percents, a head count reduction in a in the call. So far I think that is Oh thats going to vary by business, we'll see the impact of that far out.
In the second half of the year it'll vary by business, depending on the impact and what they're seeing and what the order book looks like so you know we're looking at this as you know the right thing to do to drive productivity.
Is it opportunistic and will we see better productivity out the.
Out the other end I don't know, we certainly aimed to be very efficient and the way we run our businesses not let.
Extra labor sit around not to.
Go after pet programs or other projects, we're already working productivity aggressively. So there is maybe nothing additional to be gains by putting more people on productivity.
But we want to manage our head count efficiently and all of our resources.
Correct way.
Great.
Go ahead of that Kevin is I believe in 3% to 10% not just factory.
So it's across the headcount, yes, it's a direct and indirect absolutely and it'll probably yeah I don't know how it will split out on that and the reason why I'm, giving you a ranges because we're still early in this process of implementing I think most people have already been notified.
But given our decentralized nature and thus the actions happen at the plants. They don't happen at corporate so I'm still waiting to hear back on all of that.
But just thinking through the history, I mean, I think without Nick in the past there was a sort of a measurable impact on the back end. If memory serves me right is that correct.
I would hope so.
As we would expect that would be the case I mean.
Our our hope is Carter to be out ahead of this not behind it.
Yep.
Understood. Thanks, guys.
Sure.
Thank you. Our next question comes from the line of David Strauss from Barclays. Your question. Please.
Thanks, Good morning, everyone.
Good morning wanted.
Nick you talked about the Max being 3% to 4% of revenues less on an EBIT.
Basis.
It is a 70 similar 77 similar in magnitude.
I think the 77 is a little bit less but I don't I'm not looking at that rate in front of me, but a you know we have modeled that that would drop by I believe its four units a month in early 2021.
So yeah, that's that's factored into our thoughts.
Okay.
And I said, the three or 4% on the 737 just to be clear that is more like in full production. Yeah. That's Fulbright right three point right right.
I know you don't want to get too much in that separating out esterline anymore, but you you gave some you gave enough detail for us the.
Back ended it kind of where their their EBITDA margins are and no approximately where they're EBIT margins are can you just talk I mean, obviously a bit away from from the corporate average, but can you just talk about.
Maybe broad based use of where where the margins on underlying esterline could go based on now having the company for for approaching a year.
Yeah. That's obviously, we don't know, but in the fullness of time it should continue to move in the direction. The Transdigm is that whether it gets all the way they're not remains to be seen but in the fullness of time, we don't see that this is a business that hampered in any way fundamentally.
Okay, and Mike on free cash flow looks like.
Backing into everything Youre looking on one two to one 3 billion this year roughly.
That's right that's right. It was stronger this quarter than it will be next quarter, just because of the timing of interest and tax payments we have.
Fewer payment this quarter and next quarter, our fiscal Q2 double payments on interest in Texas, So, it's a little bit less.
But that's right for the year alright, thanks, guys.
Thank you. Our next question comes in the line of Robert Stone from vertical research. Your question. Please.
Thanks, Ross good morning.
Good morning.
Kevin I think you mentioned the Bizjet aftermarket was strong and of course that but underlying effing activity still flat I'm wondering if maybe you could perhaps explain that disconnect. There, perhaps why the number with some strong this quarter.
Yeah, I wish I had some better of it's surprising to us as well given the takeoffs and landings. After you know a few years of strength still not back to the pre 2008 levels, but we just haven't seen anything and recently, it's gone negative so our.
What we're seeing here is a little bit of a surprise I'll have to say and I don't know how long it will last certainly the fundamentals of the the industry don't appear to be good, but we're still seeing solid demand. So we will continue to ships, but I wish I had a.
Better explanation for you on why or where it's coming from what we see across this business given the aftermarket nature.
Whether its defense its commercial it's biz jet is that aftermarket orders can be lumpy and that's part of what we're seeing I think.
Yes, and then on the whole mix issue.
She taken on are you, making also different products and then you have you taken your rate came to zero or you still running something of products at some sort of right. So you can keep the supply chain to handle.
Yeah I, we we have had some communication with Boeing on what this will look like we have taken our rates down to zero more or less where we are right now.
And you know it will gradually build out based on what Boeing is communicating to US which you know again. This is early days in the communication process.
So we're following their their guidance on this I'm not hedging it further.
That's great. Thank you.
Thank you. Our next question comes from the line of Myles Walton from you'd be ask your question. Please.
Thanks, Good morning.
It was the only thing.
Kevin maybe you can clarify a little bit on the cost actions, you're taking is the the cost action effect to 2020.
Net neutral positive or negative to to EBITDA.
I think it's too early to tell right now we are still figuring out you know the downside of some of the headwinds we're talking about balancing this out I think I need a little more time to comment on that on whether it's neutral or will add anything to the.
The EBITDA for the year, so I just be a little more time on that it's too early in the year to change that.
No reason to think the adjustments could be negative.
Yes.
I'm just not I don't want to give you an idea that it's going to be one way or the other yes, yes, sorry, I meant is there a cost to achieve that will be front loaded to the second quarter third quarter that we should.
To be mindful forward you catch up in the benefiting in the back half a year. That's all you miles are you talking about severance charges, yeah exactly to expect those to be too material.
Okay, and then but yes, bill, but still they would hit us earlier they hit us earlier.
Next quarter Okay.
And then Nick I'm, a little bit off topic, but I think still relevant your role at ever arc Im just curious as you look at your dividing your time between here and as that business matures I can you just talk about how you do you think your roles may stay the same or or change over time. Thanks, Yeah. My My you know my primary activity.
Here of course.
As you issue as you probably know I'm chairman, they're not an active.
On an active manager.
As an investor.
Okay. So no anticipation of any any role changes at all.
Okay, great. Thanks.
[noise]. They do you aren't next question comes from a line of Ken Herbert from Canaccord. Your question. Please.
Hi, good morning.
Good morning, Kevin I, just sorry, but I just wanted to follow up one more time on the commercial aftermarket in the up 17 in the quarter.
I mean, it sounds like there wasn't anything unusual but I just wanted to confirm that you didnt see anything in terms of maybe airline budget dumping around end of the calendar year or any of the recent distribution agreements or anything else you signed that could have been sort of onetime beyond just fundamental growth in the quarter.
No we look for it it was see a surprise that it was as solid strong as it was.
I will say that that's a the 17 in the quarter.
Isn't just an artifact of the acquisition.
Transdigm legacy, although I said I wouldn't refer to this I wanted to give you some reassurance that.
The Transdigm legacy business would have still been.
Highlights a headline number that everyone would have reacted to so we're seeing strength across the board it's not due to a program it's not due to a single.
Business units and it really wasn't any one timers that we saw in there.
That's helpful and if I could just bigger picture I mean, your as you talked about your almost a year into shoe closing esterline as you think about your acquisition pipeline and as you think about opportunities moving forward can you just talk a little bit about maybe what you'll do differently moving forward on acquisitions or some of the lessons learned.
Can apply which would make would already was from the outside a very good process potentially even better.
I'll I'll start on it and I'll, let Mike and Nick jump in I I don't know if there is.
So much that we learned except that may be were a little conservative in some of our modeling.
So that's good thats good for all of US good for you.
I think we've learned that a weekend.
You know a go after a significant business multifaceted, many moving pieces and with our model and the way we.
You know handle the integration that we can tackle them and so you know do a nice job of bringing them into the fold into the fabric of transdigm.
That's what I think I've learned.
And from what I've seen on the operational side.
And also the.
Folks in the acquired company are very interested in being on a winning team and it's amazing the.
The attitude the morale the the real positive perspective that to the employees have as they're now part of this team is is really incredible and it's why I think we're accomplishing some pretty heavy lifting so quickly.
Guys anything.
I think thats right one thing I'd add too is just on the aftermarket point, we looked at esterline from the outside in three years.
Before the acquisition finally happened and looked at the aftermarket and couldn't make sense of the low 10% to 12% rate it was.
That was published and I think from an M&A due diligence standpoint, one thing going forward as.
We might put less based on what a company tells us just because they might not be tracking it the way Transdigm would.
Yes, I guess I'd say, a couple things I think our organizational method of keeping it separately for the first 12 months or so I think was.
It was a plus in that Theres, you buy something without many operating units and there's a lot of heavy lifting to be done in the first the in the first year, so keeping that so with didnt confusion leak over into our base business. I think was good call for us and I think Thats a model, we probably think to repeat again, if we bought something like that.
I think we also had a combination of what I'll call. Good luck in good management.
Oh by the good management I'd say, we're we're in this space no pretty well. So we can make judgments even when some of the numbers don't make sense and I think our operating methodology is works well proven over and over I'd say in the good luck category I'd say, we were conservative in the forecast because.
We you don't get as much information as you usually get get when you buy something in.
Good luck category is there didn't turn out to be a to be big bomb in there somewhere.
So that's the comments either.
That's very helpful. Thank you very much.
Thank you. Our next question comes from the line of Michael Ciarmoli from Suntrust. Your question. Please.
Hey, good morning, guys. Thanks for taking the question, Nick or Ah, Kevin I think you mentioned in the prepared remarks that that the esterline growth was was tracking ahead of expectations can you just maybe give a little bit more color there knowing that you're not going to parse it out but it was it just more general end market strength that you're seeing.
You know across all of your product line was it a little bit of pricing better execution. I mean as there are you seeing that aftermarket capture that maybe esterline didn't execute on than past, maybe just if you can give some color there.
Yeah, I'll I'll take a stab at it then Mike has some more maybe insight to I think productivity and the value based pricing.
I think we've we've seen great opportunities.
Both.
On the specifically on the commercial side I know, it's encouraging what we've what we've seen.
You know I haven't beyond that.
We have seen certainly productivity improvements, we've seen opportunities to inject cash to.
Get delinquencies down a there were some significant delinquencies in parts of the business.
There was some capitalization issues that needs to be addressed I think we've approached this on an operational fronts to drive the esterline business much like we.
Focus the Transdigm legacy business on being the best operations performers they can be.
Having the best quality the best on time delivery being an organization that you can really count on.
That's really been our focus here and we've seen opportunities.
We've said in the past equally split on productivity and price and winning new business.
I think that's still holds like you have any yes, I think thats right. In addition to some of the productivity and off point, Kevin made esterline business is.
Good growth so for the Transdigm legacy business, we reference the 8.7% organic growth that the esterline business is growing in that same.
At a ballpark some pretty strong revenue growth and it's from a mix of both price and volume.
Got it that's helpful and then maybe Mike just one last one.
The full year interest expense, I think 1.02 billion or any color as to how the debt repricing might or might impact that that expense as you sit here today and go through the process.
Yes, we're croston I's and crossing T's and dotting I's finish at this week it should wrap up this Thursday, and we'll issue an 8-K, we expect the rate ticked down slightly on the term loans.
We also got thank you packages of amendment.
Got it thanks guys.
Thank you. Our next question comes on line of Greg Konrad from Jefferies. Your question. Please.
Good morning.
Good morning.
Just to go back to the Max fairly quickly just a clarification question you said it was 3% to 4% of sales and you had some head count reductions later on this year I mean, how much of that Max capacity is fungible and can be reallocated to aftermarket our OE programs versus just idle capacity today.
Yeah, I would say in you know not much of its aftermarket is built on the same lines as the OEM products for.
The largest extent so you know the volume occurs on the OEM side, you can't make it up in aftermarket you can't move people around necessarily they're trained on certain pieces of equipment or processes. So I would say, it's not that fungible that you can so easily move people around a we certainly try to do that first and.
Where there are needs we try to certainly move people. Its you know you have to take or a refer reduction when you don't see those opportunities out there.
Thanks, and then I know, it's small, but you mentioned a modest decline in anterior aftermarket I think last quarter, you talked about some international wins kind of converting to sales as we move forward, but are you seeing in that particular end market.
Yeah, the for the quarter for Q1, it was a little soft so I think I commented that we saw some negative growth there and then the freight side.
The freight side it made sense, we've seen slowing of teekays for a while on the interiors. I noted previously we were starting to see some orders some interest here that would turn things around and that's I think the case when I look at the bookings for the future and our interior side of the business. They are starting to grow again.
So that may be an indication that future quarters will be better on the interior side of the aftermarket.
Thank you.
They do you. Our next question comes from the line of Hunter Keay from Wolfe Research. Your question. Please.
Hi, This is actually Mike on for Mike month, Jerry on for Hunter.
So you mentioned some cuts to some biz jet programs are those production cuts due to end market weakness product transitions or is that a large cabin multiple market segments any color would help.
I don't think I said that we were seeing any cuts in and Bizjet I think.
What we're seeing on the OEM side is new programs. We're on all of the important new programs here on the business jet side, and we're seeing bookings come in we're seeing shipments on that on the aftermarket side.
I think pleasantly surprised that to the aftermarket in the Bizjets sector is holding up so well given the takeoff and landing cycles have been anemic.
That's what we said it's yeah business jet is a tougher market to understand it's a small part of our business now as we've grown other sectors faster.
But it has been difficult to predict over the last I think even couple of years.
Okay that helps thank you and then.
One for Mike.
How are you thinking about taxes.
And I'm thinking like over the next three to five year. So how are you thinking about changes to tax code beyond 2021 are there any things that we need to be thinking about there. Thank you I don't think so the long term guidance on across all three rates still 24% to 26% and if you were looking for something the plug into a model I'd encourage you to do.
Just stick in that range at this point.
Yes.
Your next question comes the line of settlement from JP Morgan Your question. Please.
Thanks, very much and good morning, everyone.
Good morning.
With regard to the margin guide.
The seasonal pattern as to see improvement off the Q1, and Q1 was relatively strong versus the guidance.
Appreciate the idea of having some caution in the guidance given all the on no ones out there for this year, but given that the severance is not supposed to be that material.
Is there anything else that we should be aware of that would keep that kind of sequential margin improvement from happening other than.
Just trying to be very cautious amid max trying to virus whatever else is happening in the world.
I think the guidance just reflects our best judgment, and we're hopefully being a little bit cautious and conservative to your margin point I completely agree with that it's is caution in there a there's a you know a lot of information isn't known and we don't want to send the wrong signals and have to.
Do you know change them or modify them, we'd rather be cautious on us.
Oh, I remind you, though that the aftermarket grew out of what we expected for Q1, and so that they're very well could be sequential decline in the margin from Q1 to keep things good point.
Okay, great. Thanks, and then as a quick follow up Nick just when you think about the impact that the Max situation might have on on M&A opportunities over time do you have any initial thoughts on that maybe suppliers.
Who might be more apt to be.
Looking looking to sell now.
No.
Did I know of I think it wouldn't surprise me if it had much impact.
As you know, we buy proprietary aerospace stuff with a decent aftermarket numbers, we buy good businesses.
People, we usually don't sell good businesses in times of temporary down cycle.
Huh.
Now he told me this was going to drop down like Iraq, and one for a long period of time, I'd say that might stress and people, but given the situation that exist today I'd be surprised if it changes anyone's view of the either the whole period or what they want to buy or sell for good businesses now.
I would say for non proprietary businesses that are that are very heavily weighted towards OEM are particularly the 737. It could stretch the hell out of them, but that's not kind of stuff that we typically buy.
Great. Thank you very much.
Thank you and this does conclude be question and answer session of today's program I'd like to hand that program back to life a stable for any further remarks.
We just like to thank you all for calling in this morning and that concludes our call. Thank you.
Thank you when thank you ladies and gentlemen for your participation in todays conference. This does conclude the program you may now disconnect good deck.
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