Q3 2019 Earnings Call
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I would now like to turn the conference over to your host Mr. <unk> director of Investor Relations.
Thank you and welcome to Transdigm fiscal 2019 third quarter earnings Conference call.
Presenting on the call. This morning are Trans I'm executive Chairman, Nick how we <unk>, President and Chief Executive Officer, Kevin Stein, and Chief Financial Officer, Mike with me.
Please visit our website at Transbay metcom to obtain a supplemental slide that and call replay information.
Before we begin we'd like to remind you that statements made during this call which are not historical facts.
Our 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 FTC.
We'd 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 or presentation of the most directly comparable GAAP measures and a reconciliation of those non-GAAP metrics.
I will now turn the call over to Nick Good morning.
No thanks to everybody for calling in.
As usual today I'll start with some summary comments on our consistent strategy.
Few comments on our fiscal year 19 performance outlook and.
Then or capital allocation treat it already we are unique in the industry due to both our consistency and our ability to create intrinsic shareholder value through all phases of the aerospace cycle.
To summarize some of the reasons why we believe this about 90% of our net sales are generated by proprietary products and over three quarters of our net sales come from products for which we believe we are the sole source provider.
Most of our EBITDA comes from aftermarket revenues, which typically have higher margins and provide relative stability in the downturns.
Our longstanding goal is to give our shareholders private equity like returns with the liquidity of a public market to do this we have to stay focused on both the details of value creation as well as the careful allocation of our capital.
We follow a consistent long term strategy, specifically, 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 organization structure and a unique compensation system very closely aligned with our shareholders.
Fourth we acquire businesses would fit with our strategy and where we see a clear path to PE like returns and lastly, our capital allocation and capital structure or key part of our value creation methodology.
As you saw from our press release, we had a strong third quarter with both revenue EBITDA as defined in the earnings per share well ahead of consensus. This is in spite of the payment of a $16 million voluntary reaping the department of defense.
Our businesses are seeing strong demand in all major markets far and away the largest portion of our business our worldwide commercial aerospace market is quite strong.
The smaller worldwide Defense segment is also doing well.
Trains times legacy businesses performed well and the Esterline and acquired businesses exceeded our acquisition model and our prior guidance.
We have increased the full year guidance substantially to reflect both of these factors. We now expect the esterline businesses to run at an EBITDA margin in the mid 20% range for our six and a half months of ownership.
The long term opportunity in esterline is quite likely better than we modeled in our valuation and at this point esterline is improving faster than we originally modeled.
We do not intend to comment on the 2020 out worked at this time, we will do so during our November call.
With respect to M&A and capital allocation as I'm sure you saw we executed agreements to sell the SRIO business. The Eaton for 920 million. We expect this to close during the first quarter of our fiscal year 2020.
We currently anticipate that this will be the largest disposition of the esterline businesses. We do however expect to sell some other businesses Soriano.
And any other esterline businesses, we may sell have less proprietary errors less proprietary aerospace and aftermarket content and we target as such they don't fit well with our consistent long term strategy.
With respect to capital allocation as we have done a number of times in the past we've decided to pay a special dividend of about 30 Bucks a share or roughly 66% of the recent 30 day average share price. This will be paid on or about August 20 Threerd.
Given the recently announced sale of SRIO for 920 million.
The significant amount of cash currently available our solid operating performance and our ongoing expectations. We think this is appropriate at this time.
This still leaves the company with substantial liquidity and the financial flexibility to deal with any currently anticipated capital requirements or other opportunities that may come up in the readily foreseeable future.
After the special dividend pay out in late August we still anticipate adding about 1.3 billion of cash.
And about seven or $725 million, an unused unrestricted revolver as of the end of our fiscal year that is 930 19, we also.
Additional capacity under our credit agreement.
After closing the story of sale.
And assuming no further acquisitions or capital market activity, we expect our cash balance to be over $2 billion at the end of Q1 fiscal 2020.
We still expect to have borrowing capacity under our agreement and the revolver balance still available.
As always we will regularly evaluate our capital requirements and allocation decisions as we go forward.
We continue.
Tenure to actively evaluate and seek M&A opportunities, we have a decent pipeline of mostly small and mid sized possibilities I can't predict or comment on possible closings and there's like I said before we're still working steadily at M&A, We're open for business.
Now, let me hand, it over to Kevin to more fully review our performance outlook and a few other items.
Thanks, Nick.
Today I will review our results by key markets, then discuss the profitability of the business for the quarter.
Provide revised fiscal year guidance and review some other operational items.
As you have seen we had a very strong third quarter, including.
Another quarter of above average organic growth, Mike will provide more details on the financials, but our third quarter operations, specifically revenue and EBITDA as defined were up substantially over last year.
Q3, GAAP revenues were up 69% versus prior year Q3, and EBITDA as defined was up 42% over the prior year with margins at approximately 42% of revenue.
Now we will review our revenues 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, and 2018 that is assuming we own the same mix of businesses in both periods.
Please note this market analysis excludes esterline, we will begin to include the Esterline acquisition in our market analysis. Once we have validated the data as legacy Transdigm had a different market segmentation process.
In the commercial market, which makes up close to 70% of our revenue we will split our discussion into OEM and aftermarket.
In our commercial OEM market Q3 revenues increased approximately 10% when compared with Q3 of fiscal year 2018.
Due to our year to date revenue growth of 10% and continued booking strength, we are increasing our commercial OEM full year revenue guidance to mid to high single digit growth from our previous guidance of mid single digit growth.
Please note. This increased OEM guidance includes our expected impact from 737, Maxs groundings and shipping delays and assumes we expect to be shipping at 42 aircraft units per month.
We believe any impact from the Max issues should not have any material impact on our financials this fiscal year.
Now moving onto our commercial aftermarket business discussion.
Total commercial aftermarket revenues grew by 8% over the prior year quarter and grew sequentially.
In the quarter commercial transport passenger growth of 9% was offset by a slower growth in the commercial transport freight sub market and business jet.
Overall commercial transport fundamentals continue to remain relatively strong although a few items bear watching.
Global revenue passenger growth has decelerated slightly in the past few months, albeit growth is still near the long term average.
Additionally, cargo demand cargo demand is weaker as f. teekays have declined from reaching an all time high in 2017.
Business jet aftermarket growth has stagnated somewhat following a period of higher growth in 2018.
Although we feel good about the overall commercial aftermarket due to some of the items mentioned above we maintain our commercial aftermarket guidance for high single digit growth.
Now, let me speak about our defense market, which is just over 30% of our total revenue.
The defense market, which includes both OEM and aftermarket revenues was up approximately 19% over the prior year Q3, rather revenue growth was distributed across most of our business units.
Last year, we reported strong defense bookings that we're continuing to see materialize into sales in both defense OEM and defense aftermarket. However, we anticipate defense sales growth temper in the fourth quarter from the robust growth experienced year to date and tougher comps in the prior year Q4 period.
Due to higher than expected defense sales growth year to date, we are increasing our defense full year revenue guidance to grow in the low teens from our previous guidance of high single digit growth.
Now, let's move on to profitability.
I'm going to talk primarily about our operating performance or EBITDA as defined.
EBITDA as defined of about 691 million for Q3 was up 42% versus prior Q3. This includes 134 million of esterline contribution in the quarter.
EBITDA as defined margin in the quarter was approximately 42% of revenues EBITDA in the quarter negatively impacted by acquisition dilution primarily from esterline.
And the acquisitions purchased in fiscal year 18, as well as the payment of the 16 million dollar voluntary refund.
Excluding these items, our core margin was robust at 52.4% and improved both sequentially and over the prior year.
Margin improvement progress is always important to us and indicates that our base businesses continue to find opportunities to drive improvement within our value drivers. We continue our relentless pursuit of value generation.
Now, let's turn to 2019 guidance.
We are increasing our sales and EBITDA guidance to reflect the strong results of our legacy Transdigm business and better than originally modeled esterline integration performance.
The midpoint of our fiscal year 2019 revenue guidance is now 5.53 billion an increase of 85 million.
This revenue guidance is based on the revised market channel growth rate assumptions, we just discussed for Transdigm legacy business plus higher expectations for esterline revenue.
The midpoint of fiscal year 2019, EBITDA as defined guidance is now 2.44 billion, an increase of 90 million with an expected margin of around 44%.
If you add back the voluntary refunds about 40% of this increase is related to pursue for sorry related to performance of our legacy business with the remainder attributable to esterline.
Excluding esterline the full year margin is expected to be around 50%.
We are increasing the midpoint of our adjusted EPS, one dollar and 28 cents to 18 own nine per share primarily from the increased EBITDA guidance.
As Nick said earlier, we won't comment on 2020 guidance just yet.
The revised guidance for this full year assumes that we own all of the esterline business units for the remainder of fiscal year 19. So it includes the full fourth quarter contribution from Soria.
As mentioned in the press release announcing the sale of story out to eat and we do not expect these transactions to close until the fourth.
First quarter fiscal year 2020.
Now, let me give you an update on the esterline integration and expectations.
After six and a half months of ownership. The esterline integration is progressing well, we continue to wind down the former corporate office activities in Bellevue, Washington.
The phased workforce reductions there appear to be working well as we migrate corporate job functions by the end of the calendar year.
As noted before we have equipped the esterline integration team with senior Transdigm legacy Vps, who are teaching our culture and operating model around value trend duration to all new business units.
We are making progress here, but as you know culture change can be slow and requires constant reinforcement.
Although we do not share many specific details on a business unit I believe we can use the considerable operations performance improvement occur kill to illustrate how we are addressing the opportunity provided.
During our time of Kirkwall ownership, we have followed our integration model focused the team on the value drivers invested capital well above historical levels drove accountability and bias for action within our team and organize the business along business unit structures.
Hercule provides a series of mission critical seals for the joint strike Fighter program and prior to Transdigm ownership. The CRE kill contribution to the F. 35 program was failing our OEM and dealer de partners and Curt fuel as a whole was losing significant money.
Today, we have turned the company around now making a solid profit we have increased the F 35 output by almost 400% and have decreased our overdues by greater than 75% for this critical program all within a short period of time.
This is the true value, we provide to our shareholders and customers our operations deliver highly engineered quality products on time as expected.
Finally during the second quarter as Nick mentioned in the last earnings call. The Inspector General report on the sample of our aftermarket parts was completed with no allegation of any wrongdoing.
Though the high level of profitability was question. The report requested a 16 million dollar voluntary refunds.
As you may be aware the company decided to make a $16 million voluntary payment spread around various department of defense agencies and this was included in our results this quarter.
This was not an obligation of the company it was not characterized as such.
And was clearly specified specified is not any admission of wrongdoing. However in the interest of dealing with a good and important customer. We thought this was in the best interest of the company.
We have also been informed that there will be an additional inspector general audit at this time, we are unable to assess the timing or the exact scope of the audit as in the past we will not publicly comment on this audit along the way unless there is some substantial reason to do so.
As a reminder, direct sales to the U.S. government makeup in the range of 6% to 8% of our annual revenues, depending on the year and whether you include distributors or not.
Of the 6% to 8% typically about a quarter, we estimate to be competitive product and roughly another 10% isn't contracts over 2 million covered by Tina truth in negotiations regulations that require certified cost data.
Many if not most of our remaining direct military sales, we believe fall under commercial designation as expected given our commercial product develop development pedigree.
So in summary, we are pleased with the Esterline acquisition, thus far and with our strong operational performance both in the quarter and year to date.
With that I would now like to turn it over to our Chief Financial Officer, Mike listen.
Thanks, Kevin It wasn't good third quarter I'll quickly review the financial results and revised full year guidance in more detail.
First for the legacy Transdigm business, and then second for Esterline.
So for the legacy Transdigm business third quarter net sales were just over 1.1 billion, which is up approximately 13% versus the prior year.
Organic sales growth was above average at 11.8% and drove the majority of the increase.
EBITDA as defined increased 14% from the prior year to $557 million.
Excluding the non operating 16 million voluntary refund paid to the U.S. government.
EBITDA as defined would've been 573 million, implying a margin of 51.4% versus the 49.7% from last years third quarter.
Now switching gears over to Esterline, esterline generated $545 million of revenue and 134 million of EBITDA, and our Q3, which implies an EBITDA margin of 24.6%.
As Nick and Kevin mentioned this margin is ahead of our expectations and beats the rough EBITDA margin guidance, we provided on last quarter's call.
Now for the consolidated entity, so, including both legacy Transdigm and Esterline adjusted EPS for the quarter was 495, which is up 23% from the same quarter last year.
If you were to exclude the 16 million non operating charge for the voluntary refund and then also a 10 million onetime tax charge that we took during the quarter. Adjusted EPS would have been $5.35 per share, which is an increase of 33% from last years third quarter.
Quick update on taxes, we're still expecting our GAAP and cash tax rate to be about 24%, 25% for the year and we are expecting an adjusted tax rate of roughly 26.5%.
Our cash and liquidity we ended the quarter with just over 2.7 billion of cash on the balance sheet and a net debt to EBITDA ratio of 5.8 times.
Pro forma for the dividend that was just announced our net debt to EBITDA ratio will increase to approximately 6.3 times as of the date of the dividend payment, which is about August 20 Threerd.
One final note on financial disclosure going forward.
In our comments on today's call as well as on the call slides, we've given some additional info on esterline's financial performance for the first full quarter under Transdigm ownership.
Going forward so on the November earnings call and after we do not intend to disclose this information.
As Kevin mentioned, the Esterline organization as it used to exist is largely now gone and the 20 business units that use to comprise Esterline report independently into transdigm within our power airframe and non aviation segments.
I would also quickly caution everyone not to expect the 130 million plus of EBITDA from the former line former Esterline business units going forward as this figure for our Q3 includes certain units that are likely to be divested.
As Nick stated.
With that I'll hand, it back over to the operator to kick off the joint Ed.
Ladies and gentlemen, if you have a question at this time please press the star and the number one key on your Touchtone telephone.
If your question has been answered and you wish to remove yourself from the queue. Please press the pound key.
And your first question comes from Ronald Epstein with Bank of America Merrill Lynch.
Hey, good morning, guys.
Good morning.
Now that you've owned esterline for a while.
Really what surprised you the most to positively and negatively.
Positively I think the the amount of opportunity, we're finding I think the.
The way that the teams are.
Identifying that with us and aggressively going after it I think.
That has been.
Just a breath of fresh air how much opportunity there is.
Both fun.
Improving the operations themselves and in.
Productivity and other items split really in improving the operations. There is a tremendous amount of opportunity, but that's also the the negative is that.
Finding.
Businesses that I think are.
In times need some more capital injection.
Need to.
Redo their operations to drive accountability, I think it all fits well with the trends on model.
I also think some of the morale was maybe a little lower than it could have been so.
I think the teams are responding very well to our leadership and the assistance we're providing.
So the only thing I might add is on the downside Kevin I don't.
I don't know that we've seen any significant downsizing, we didnt know and when we went into it yes.
Now hopefully that continues to be the case.
No I mean, one of the questions are from the back of everybody's mind. So if I can articulate as well is there any way you can maybe do.
Rob.
Quantification of that opportunity because as you know those people build their models and I think about this.
How can we think about it anymore quantified fashion.
Yes, thats difficult so we will give.
Guidance for 2020 next year, it's difficult for us as we are still unpacking. This to give you a lot of guidance on that so can we give 2020 guidance next earnings call.
I know that it's difficult to model right now, but we're still trying to unpack and learn this as we go as well.
Great and then just one last follow on on that.
I think the guidance you gave for this year implies that the margins at esterline might slow down a bit in the second half, but historically that was usually the better.
Margin period for Astral I mean would there be any reason why we would expect that historical precedent to change.
I think it's in general conservatism on our part so that's what we're stressing right now as I again, we're learning and unpacking. The esterline businesses, we haven't seen anything as Nick said that.
Alarms us, but we just don't want to get any one ahead of our performance just yet.
All right. Thank you very much.
Your next question comes from David Strauss with Barclays.
Thanks, Thanks for taking my question.
Morning wanted to ask about.
Free cash flow it looks like based on your year end target for the for the balance sheet, you're forecasting about a billion media billion won in free cash flow. This year is that correct and if so it looks like thats, implying like a 40% conversion we are low 40% conversion of EBITDA and I think you've targeted closer to the 50. If you could just talk about that a little bit. Thanks.
I think that the stats you gave a directionally accurate we had some one time cash charges on the Esterline acquisition.
If you were to take a stab at backing those out I think you would get closer to the 45% to 50% range on EBITDA conversion that we've had historically.
And that's true for the quarter and the full year.
And Mike So that's a that's a good way to think about.
Modeling free cash flow conversion looking ahead from here 45 to 50 on EBITDA it.
And obviously you know as you get.
The higher leverage points in the cycle Youre.
What the interest payment it'll be slightly towards the lower end, but it won't be in that kind of range as we've been historically.
Okay and then on the.
Ceria sale anyway, we should how should we think about the the adjusted EPS dilution associated with that as we as we think about modeling 2020.
We havent, it's basically in the guidance is we said we havent given specific.
Quantified in the past exactly what business units are contributing to our guidance and we don't want to start doing that now, but we expect that basically and then the guidance for the year, there's a chance it could move into discontinued operations. During the next quarter and I think you've probably seen from the some of the press releases that are out there roughly what it could be contributing on revenue and EBITDA.
Okay. Thanks very much.
Your next question comes from Carter Copeland Melius research.
Good morning, Hey, good morning, guys.
Just a couple of quick ones one the.
Commentary that you made around.
Cargo freight and and business jet just that sort of stagnation and the comment around ft case.
Are you seeing anything in the bookings.
And the four bookings that that.
It is really driving any sort of material cause for concern. There. It's just a guess something you wanted to note.
I think it's something we want to know we have seen a little softness or slowing down and maybe some of the business jet side, but just wanted to comment on that but that was dragging down the total number and certainly on the F. teekays side, the cargo metrics have become more important.
To us because of acquisitions, we've made over the years.
And just wanted to draw that to everyone's attention that that's an important piece for us and has performed not unexpectedly as a little bit of a drag on our aftermarket number.
So, it's it's down but our bookings running below shipments even beyond that in the freights.
I don't have that split out in front of me. So I don't I can't comment on that I think.
In general it's a better lines is giving me the foams up so it's a it's generally getting better in that.
In our cargo space.
Okay. Okay. Okay.
Sums up as officials I will take that and then just one quick follow up on.
The.
Thought process around the sizing of the dividend the leverage ratio that you will be left with there I think you said it was 6.3.
You've obviously had some comfort having that be a bit higher.
Either on deals or dividends in the past and so I wondered if that implied anything about the M&A pipeline and our flexibility you're leaving yourself if any any comments you can make there would be helpful. Thank you yeah I know.
I.
No I wouldn't take a lot from that Carter this is Nick.
Seen put the whole thing in the picture it seemed like a.
It seemed like a reasonable number two.
To go with right now.
As you can see we continue to.
We continue to build off both the cash and the and financial flexibility. So, we'll make that call sort of quarter by quarter.
Okay.
Hi, Thanks, guys.
Your next question comes from Gautam Khanna with Cowen and company.
Yes, Thank you sorry for the noise in the background.
I was wondering after you've looked at Esterline now do you still are you still comfortable that about 30% of the.
Aerospace and defense oriented revenue is aftermarket as you guys would define it or has that.
Changed at all.
Yes, I think it's too early to tell on this we certainly feel good about the ex the acquisition, it's exceeding our expectations. So far but it's too early as we haven't completed our market segmentation work.
Esterline, we both did things a little differently and we need to go through this accurately and it's on a.
Part number by part number basis. So it takes some time so we're still going through this but I wouldn't think we feel any reason to think into any worse than we thought yes, I think in general the acquisition look better but beyond that I don't know.
Okay and just.
So in terms of kind of reassessing the pricing strategy Thats still early innings, I presume that a fair assumption.
Absolutely.
Thank you very much guys.
Sure.
Your next question comes from Michael CMR Lee with Suntrust.
Hey, good morning, guys. Thanks for taking the questions. Your next for solar energy.
Kevin can you give a little bit more get more granular on on where esterline.
Exactly outperforming your expectations I mean is it on the cost side are you seeing.
Better revenue growth in certain product lines are you are you getting better pricing I mean can you just give us some tangible examples of maybe where and how it's exceeding your expectations.
Yes, I think it's really across the board not the cop out on you but.
Operationally, we are getting more volume through the facilities.
We've done some selective hiring in a few places so operationally productivity, we're getting more out of the same milestones and we're able to do it at lower cost, we're finding some pricing opportunities certainly there's some.
Loss contract reserves that Mike has discussed that are put into there that we will have to resolve.
Out into the future, but it's it's really on all legs of our value generation school. Its productivity is price its value generation, it's driving more volume.
Across the milestones and it's also winning new business as we go forward. So I can't point to any one area.
I tried to give some evidence of our operational progress that is significant.
On the Kirk Hill side to give you some evidence of the.
The problem or the opportunity that we're facing and what we're doing about it.
Got it and then just as it relates to.
The beauty and the Inspector General I mean.
It sounds like on a go forward basis.
They put out a government wide request requesting pricing details from all your subsidiaries what if anything do you guys have to change internally about regarding your processes going forward maybe.
How you show cost data I mean can you just give us a sense as to what might have to take place on your own is doing but still very early in the process. We still have I mean, there are two issues that you've raised one is the.
There is a secondary IBG audit and then there's this view de pricing menu memo as far as the AG audit goes Uh huh.
It's unclear to us how long this audit will take.
We assume that given the results of the last audit that it took a while.
The idea is looking at a slightly larger pool of contracts, but we don't have.
We don't believe that there will be anything different in this process than in the last we also believe the results will be the same as the last AG audit.
But we are cooperating with that and we'll provide.
Information as requested we assume that any exposure here is voluntary and.
Also de Minimis to the Corporation.
Given the size of the military business that we have direct to the government to the deep as far as the deal de pricing memo goes.
As best we understand that memo reflects the wording of the applicable fars or those federal acquisition regulations.
The contracting officers could always request costs or pricing data and of course, we always comply with the Fars.
We all know were highly decentralized so our operating units or handling any cost or pricing data request locally as they always have when they come up on a case by case basis.
We're trying to be co-operative here.
Some awards could be delayed, but it's hard to estimate how much of this.
We still see our defense business moving forward.
And we're supplying costs on the necessary basis as requested so we are attempting to work together, we recognize that the deals are.
Valuable customer to us and we want to work together to.
Come to a workable solution on us.
Does that answer your question.
That does that thats helpful ill jump back in the queue. Thanks, guys.
Your next question comes from Myles Walton would you be.
Thanks, Good morning.
I want to follow up maybe on on.
Michael It's Jeff on Defense I think last quarter, you said you were expecting.
You kind of flattening sales as the bookings were flattening.
But obviously you put up a really good number here in the quarter. So I'm. Just curious can you make a comment on where bookings are trending year to date.
In defence similar to what you did in the commercial business.
Bookings are still we're still booking were still booking ahead of.
Of sales, but at a slower rate I think our.
Total bookings for the year versus 18.
Are only up modestly year over year.
We still see strengthen OEM I think our aftermarket defense aftermarket has slowed a bit on the booking side. So that's our commentary on bookings. That's why we anticipate this will be flattening out it just hasn't happened yet it's difficult to predict when some of the bookings are due to ship.
Just trying to flag.
What we see as some weakness in our business looking forward, but.
It's a smaller piece for us, but just looking to be fully transparent again, yes, no appreciate it.
Yes, yes, yes.
And then on Esterline specifically.
If you can comment on their booking strength I mean, it looks like they did about 9% organic sales growth this quarter, which is an acceleration from last quarter and just kind of curious if you can make any comment around customer receptivity and how that's flowing through to the bookings trends.
I don't have any bookings trends in front of me on Esterline and I.
There is nothing to comment on right now on that and I don't want to get into the specifics of this business so that business, but.
I think in general we are happy with and the acquisition appears to be exceeding our expectations. So that includes.
There is good demand out there.
Okay, and Mike just a clarification 100 million transaction cost how much of that is cash for the year.
The exact cash for the year I don't have the year in front of me 60 for the 60 is cash for the quarter and the bulk of it fell into this quarter.
Okay. Thanks again.
Your next question comes from Robert Spingarn with Credit Suisse.
Hey, good morning.
Wondering if you could at least speak to.
Kirk Hill as a proxy for the rest of Astral and you mentioned its a pretty good example, youve on that now for I guess about five quarters.
And so while you're not ready to predict where the rest of esterline can go how does Kirk Cohen for me in terms of the timing and the magnitude of the margin improvement.
Interesting question that was certainly what I wanted to illustrate and including them.
As in terms of the amount of time, where where it can get to.
I think what it tells US is there is a lot of operational improvements that we have to go through in our facilities.
It's not just a.
You know.
Yes, there is a lot of work to be done here as we look at the facilities I think theres, there's cost to remove there's a improvements to make I think hercule sits as an example, because it was.
Undercapitalized on some key areas and so was sort of in a.
Difficult, maybe even losing morale that has been the parts to turn around and drive with our culture.
I think that it's going to take time.
Operations improvements you don't come in and just wave a magic wand and they happen, but clearly across the board. There is a lot of work to be done here too.
Get these businesses to delivering on time with the quality necessary appropriate quality. So there's a lot of work to be done. So it will take time on the order of several years to get this where we need it to be and where our customers need it to be I think thats. All I can comment on you know again, we're still unpacking, the esterline businesses and each one is a bit of a snowflake each one needs.
Different structural improvements some need hiring some need engineering injection.
Each one requires a different business plan to get it turned around but what we provide is that intimate transparent contact with our MVP is in the business units in a forum that is all about.
Not about blame, but about finding the solution and driving it quickly.
Okay. So based on that it sounds like you're not through curtail yet either that's probably several more.
No no orders, we have a couple of years to get through all of Hercules thing Ethan.
We've made okay, you heard 400%.
Output improvement on T. seals that we were struggling on before Overdues down, but that's just on one yes. That's on the F 35 cell itself, there's still a lot more work to be done throughout the rest of the plant.
So just last question on this in general at Esterline, you talked about getting more volume through and you just mentioned the productivity side of that so were they simply under producing or not producing quickly enough or were there are there examples across esterline, where they were also under selling and is that an opportunity.
I difficult to comment on under selling I think again, it's going to take us time to unpack. This.
So difficult for me to know I think theres been a strong response from customers.
I think the aerospace environment knows what Transdigm does when it takes over a company about fixing them, making them better investing.
Driving operations improvements and I think that that positive attitude has certainly come forward from our customer base, but beyond that difficult to comment.
Okay. Thanks, guys.
Your next question comes from Noah Poponak with Goldman Sachs.
Hey, good morning, everyone.
Good morning.
Can you specify what the esterline margin in the remaining quarter of the year.
Guidance is that rolls into the full year guidance.
We aren't guiding individually on esterline versus legacy Transdigm, We're just basically doing it now as the for the consolidated company going forward and that's how we're going to do it in future quarters as well.
Okay, I only ask that because I mean, we know a lot of the inputs into the algebra, but not all of them, but it looks like.
The guidance implies kind of like almost like a mid teens margin for us right in the fourth quarter versus the.
The over 20 are running at and they are now.
Yes.
Higher than that and closer to something more like what we did this quarter.
What we said is that.
We expect it to run in the mid Twentys for the six and a half months ownership.
Right.
But yeah, Nick that's why I was asking because it didnt square with our comment.
Yes, so maybe we're being a little concerned maybe somehow or some piece recent we're conservative on that.
I can also follow up on my math with you guys. After the call there.
Kevin. The example, you gave on the F 35.
Kirk Hill.
Is that is that.
Variants in.
On time and to specification.
Is that something you find maybe not quite to that degree, but but is that something you find and pretty much everything your car.
We frequently finance operations that aren't performing at the level that they need to.
For what their customers expect so in if that is specifically what you're asking yes, we do see Oh, I guess I'm asking last on operations broadly, which I think I'll think of those just sort of.
You know.
Price cost and margin performance.
I'm asking more specifically on the delivery.
Specification to their customer because I.
Sense that that's something that's sort of under rated in your business relative to all the things we think about that go into the business and so I'm curious if that was very yes, I think you're right.
Lined in general that businesses that we acquire.
Need to have some part of their operation fix they make great products that are great engineers.
But operationally they.
Run a little laxer than they need to on delivery performance and other key attributes. So yeah that means that many of them if not most our improvement projects when we get them and I think you're hitting on the point that I've been trying to drive on that.
There is more to us were excellent operators and we fundamentally improved businesses by investment.
By structure by empowering the teams to make a difference and it absolutely works.
Tax rate is there any change to the recurring beyond 19 medium term tax rate.
No no change.
Okay.
Thank you.
Your next question comes from Robert Stallard with vertical research.
Hi, Thanks, so much good morning.
Good morning.
First question is it boring I'm afraid on SGN, a obviously some one off items here in this quarter, but if you look at the underlying numbers do you think there's an opportunity to bring that down over time.
We basically we run the business as Rob towards more and look more at EBITDA margin overtime. If you were to.
Look historically as well as at this quarter. It has trended down a little bit by a couple of tenths of a percentage point and we expect to see continued improvement like that going forward.
If we're looking at absolute numbers in east, Japan that DMD refund and stuff.
Its probably tough to actually bring the that not the absolute number down right going forward.
The absolute dollars, you're saying rather than on a percentage basis.
Yes.
Yes, I'm not sure.
It depends too because.
Welcome to the SDMA versus gross profit and as we work that out.
I would suggest as Mike says that you.
Focus on the EBITDA margin.
And I would I would.
In total.
With Esterline included I would expect we should see that continue to move up.
Hard to say.
I don't know exactly which comes out.
Right.
And then secondly on the guidance this may be conservative, but you'll focus.
Aerospace OEM seems to suggest quite a big slowdown in the fourth quarter and I was wondering if there's anything specific business wise that drives that.
No there is not.
There is nothing that stands out as the Oh, the slowdown a its conservatism. There is some some unknowns that we talked about with Max and other pieces that we've tried to include but I think it's just conservatism given the market.
Okay, maybe just one final one a couple of other supplies have noticed noted add to that has been slower than expected initial provisioning on the seven to seven Max is that something you've seen in the last two quarters.
We don't do a lot of initial provisioning, but I think given that.
They're slowing down shipments that would if seven three southern Persian provisioning was in a significant piece for you that would make sense.
It's not a significant piece for us. So we don't we're we've been building at anywhere from 42 to full rate depending on what our customers want from us so its kind of different business by business, but our forecast going forward assume a 42 build right.
Okay Thats great. Thank you very much.
[noise].
Your next question comes from Ken Herbert with Canaccord.
Hi, good morning.
Good morning.
Hi, I first wanted to ask on your defense business.
Similar question I'm, assuming its conservatism just with sort of the full year up 17, but the guide.
Well, a lower teens is there anything specific you'd point to besides just just caution in the outlook.
Just caution in the outlook Theres nothing that were pointing to.
Okay. That's helpful. And then can you provide any more color either around the third quarter results for aftermarket or OEM on the defense side, any relatively doing better or any specific.
Programs or opportunities you would specifically point to that where you saw notable strength in the quarter.
No I think F 35 is a leading program for us I comment on that that that continues to do well and continue to grow and expand for us many of our businesses our.
On that platform, but I think we looked for that I anticipated that question. We all did and we went looking for are there any one timers, it's nicely spread across the business.
If you look for platforms that takes us a little bit longer to diagnose but.
F 35, as importantly for hundreds important you know theres a lot of important platforms. The same ones that you would expect.
But the the OEM strength is really nicely across so many businesses for us.
Okay. That's helpful and just finally I know you typically don't talk about operating segments much but as I think about some of your businesses like like Telair and DTC and others that have significant defense exposure I guess is it fair to assume you're seeing similar trends either across businesses were geographically as I think about your European defense exposure relative to the United States.
I have not diagnose European defense versus us defense, So I can't comment on that.
Okay, I assume theres strength, because I'm not seeing it as regionally weak.
I assume that its solid across but I can't comment for sure.
Okay I'll leave it there. Thank you very much sure.
Your next question comes from our diesel Ahwahnee from Morgan Stanley .
Hi, gentlemen, its actually Jonathan on for Steve.
Just a quick one on the Max are you seeing any uplift on because of the grounding on commercial aftermarket I realize you guys.
I've talked about how it's it's not a material impact for the year, but just wondering if there's any older aircraft coming online.
On the afternoon, helping on the aftermarket side.
Yeah, I can't point to you know that gave us a X amount of uplift in the quarter, it's in the noise or the other or other legacy planes were already flying there simply flying them, a little bit harder than they were before so we haven't seen anything noticeable and I think that is similar to what others have commented on in the industry. So far.
Got it thanks.
Sure.
Your next question comes from Greg Konrad from Jefferies.
Hi, good morning.
Good morning, Jeff.
I wanted to follow up I think on the last call you had talked about recovering maybe a billion dollars of the purchase price from Esterline from divestitures I think you said sorry, as the largest part of that at 920, but it seems like maybe there's upside is there any way to think about you know the percentage of the business that kind of fits your proprietary strategy versus maybe things that are non core.
Yes, I think we gave this is Nick I think we gave you when we first talked about the acquisition some sense of what we thought was a core kind of businesses and what Didnt now and I think that number was somewhere in the 20% to 25%.
The now that's not a lot of that's not all severable because some of its sort of embedded in the other businesses are I think the guidance. We gave you on a about $1 billion or more of asset sales I.
As you see we got 920 on the first one a and I don't think were finished so I think that's pretty safe conservative guidance or you know as long as things goes we as we anticipate.
Thank you that's helpful. And then just one follow up I mean, you talked about freight and business jet aftermarket, maybe being a little bit concerning but the commercial aftermarket has stayed strong you know as air traffic has decelerated a lot of suppliers have talked about you know some pent up demand I mean is there a portion of that business that maybe concerns you in terms of tied to slower traffic growth.
No I think it bears constant watching to see if it changes, but so far.
It's not so we are a 9% a year over year growth in the large commercial transport aftermarket that's a robust number so I feel good about it yes, freights, a little weaker we've been flagging that for a little while business jet Weve also been flagging as not really understanding the fundamentals behind that market and why is predicted to go up so much but beyond that.
We're seeing a little bit softer afraid a little bit softer in business jet, but our large transport again robust at a plus 9%.
Thank you.
Your next question comes from Seth Seifman with Jpmorgan.
Hi, Thanks, very much good morning, and good morning, Greg.
Mike I think we spoke on last call, but I wanted to see about following up where their write ups of loss, making contracts at at Esterline, App and how that how much did those contribute to to EBITDA.
There was a.
There was a reserve during the quarter impact EBITDA was about $12 million for our Q3.
Okay, Okay and is that sort of a sort of like a go forward number.
Were finalizing our calculation our rough estimate is we expect an amount like that to run out over three to four years as the contracts complete.
Okay, great. Thanks, and then.
As a follow up Nick you mentioned are open for business again for acquisitions.
As you look out at the landscape.
Do you expect any more scrutiny on potential acquisitions with significant de content like a like a DTC or an accident.
[noise] I don't know the truth of the matter is I don't know Oh I'm not.
I think we go through the normal.
You know and I Trust Shack, ER and you know I'd expect that we would get the same kind of results, but its just frankly I just don't know.
We havent seen any indication of that yet.
Or do we anticipate.
Thanks very much.
Your next question comes from Hunter Keay with Wolfe Research.
Good morning. This is well 400 going back to selling administrative costs, what was that as a percentage of sales, excluding all acquisition related costs and noncash comp this quarter.
Sorry can you repeat that.
So if we think about the selling administrative cost well this as a percentage of sales if you exclude all acquisition related costs and noncash comp.
I think the detail for you to run that computation will be in the Q that we released this week. So I would just point you towards that when it comes out okay, but so was it excluding the $16 million refundable was roughly flattish directionally, how should we think about it.
I think you I'd point you towards the keel.
Okay. Thanks.
And at this time you have no further questions I will turn the call back over to Mr. table for closing remarks.
That concludes our call for today, we'd like to thank you again for calling in and again I'm looking for the Q later this week.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.