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Operator
Good
Mike
day, ladies and gentlemen, and welcome to your Q1 2019 Transign Group, Inc. earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require operator assistance during the conference, please press star, then zero on your telephone keypad. As a reminder, today's conference will be recorded. I would now like to turn the call over to Liza Sables with Investor Relations. Ma'am, you may begin.
Liza Sables
Thank you, and welcome to Transign's fiscal 2019 first quarter earnings conference call. Presenting this morning are Transign's Executive Chairman, Nick Howley, President and Chief Executive Officer, Kevin Stein, and Chief Financial Officer, Mike Listman. A replay of today's broadcast will be available for the next week, and dial-in information can be found in this morning's press release and on our website at Transign.com. Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC, available on our website or at sec.gov. We would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA's defined, adjusted net income, and adjusted earnings per share, all of which are non-GAP financial measures. Please see the tables and related footnotes in earnings release for a presentation of the most directly comparable GAP measures and a reconciliation of EBITDA, EBITDA's defined, adjusted net income, and earnings per share to those measures. I will now turn the call over to Nick.
Nick Howley
Good morning, and thanks for calling in. Today, I'll start off with summary concepts, or comments as usual on our consistent strategy, a few comments on the fiscal year, first quarter of the fiscal year, a quick update on the Esterline deal and related issues, and a few comments on the status of the Inspector General on it. Kevin and Mike will review the business performance for the quarter and the outlook for the year. To reiterate, we believe our business model is unique in the industry, both in its consistency and its ability to create intrinsic shareholder value through all phases of the cycle. To summarize some of the reasons why we believe this, about 90% of our 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 downturn. Our long-standing 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 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 very decentralized organization structure and a unique compensation system closely aligned with our shareholders. Fourth, we acquire businesses that fit with our strategy and where we see a clear path to a PE-like return. And lastly, our capital structure and our capital allocation are a key part of our value creation methodology. Fiscal Year 19 is off to a good start. Q1 revenues, EBITDA has adjusted, and EBITDA margins were up nicely over the prior year. The incoming orders were strong and well ahead of shipments across all major market segments, boating well for the balance of the year. As you can see, we have increased our guidance for the year. The revised guidance excludes any contribution from the expected Esterline acquisition. Though we had a very nice booking quarter, one quarter does not make a trend. But if this continues, we could well increase the guidance again next quarter. Kevin will expand on both the quarter and the full year outlook. While liquidity is strong, we had $2.3 billion of cash at the end of fiscal year Q1. Based on our recently announced financing and assuming no additional acquisitions or capital market activity other than the Esterline transaction, we still expect to be somewhere in the range of $3 billion of cash at the end of the fiscal year. We also expect to have over $600 million of unused revolver and some additional room under our credit agreement. We continue 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, but we are still working steadily at M&A. As I said before, we're open for business. A few comments about the Esterline transaction status and some related issues. As I think you know, we're paying about $4 billion for roughly $2 billion in revenue. Based on the public consensus information of about $330 million of fiscal year 19 EBITDA, we estimate this is about a 12 times EBITDA multiple, again, times the consensus 19 EBITDA. With respect to regulatory clearance, that is antitrust and foreign investment approval, things are moving along well so far. In the United States, the HSR waiting period expired back in November, so we are clear to close with the FTC and the Department of Justice. All other required regulatory views are now complete with the exception of the European Commission antitrust review and the French foreign investment review. These are proceeding through smoothly and we expect to obtain approvals in a timely manner. As a reminder, we did not need to file for regulatory approval in China. In addition, Esterline has received shareholder approval for the transaction. Overall, the process is moving along well and at this time, we now hope to close in the March-April timeframe. That is sooner than the Q4 timeframe we originally estimated. However, it is not finished yet, so there is always some uncertainty until it is concluded. As we said before, we think Esterline has been a misunderstood company. Its core, aero and defense business make up three quarters or more of the revenues. This core business has proprietary content and sole source positions, quite similar as a percent of revenue to Transdine. The core aftermarket also appears significant. We estimate this at over 30% of revenue. Though we have not made any final decisions on asset disposition at this time, I do expect that we will be selling certain assets that don't fit well with our focus. We are still working on specifics and timing, so I don't have any more to share on this topic at this time. We have now arranged the financing for the Esterline transaction. Last week, we priced about $4 billion of secured notes with a fixed interest rate of .25% and a term of seven years. This is scheduled to fund on February 13. This new financing will result in an average weighted cash interest rate on our total debt of about 5.7%. This is very close to the rate that we gave for the year with our original 2019 guidance. Additionally, we decided to refinance the $550 million of our high-yield bonds that come due in 2020 in order to push the maturities out until 2027. Including the new debt and hedges and dollars, we will have approximately 80% of our debt fixed or hedged and will remain close to that level for the next five years. I don't expect that our net leverage at close will be out of line with our recent levels, and if market conditions hold, we should still have the adequate flexibility to consider the full range of capital allocation alternatives. We will likely defer any other 2019 decisions on capital allocation until after we close the Esterline transaction and assess the overall business and capital market environment at that time. Absent any other acquisition or capital market activity, we will still de-lever about one term a year. With respect to the Inspector General or IG audit, we and several Department of Defense contracting agencies, primarily the Defense Logistics Agency known as DLA, have now received the draft report. The DLA is the largest of the buying agencies that were audited in this report. There has been no allegation of any wrongdoing or illegality. As in the past, the Department of Defense buying agencies are requesting a voluntary refund of some profits. The sum of the various individual requests appears to total about $16 million. Again, this is a voluntary request, and there is no assertion that this is a financial obligation of the company. The government is a good customer, and like any good customer, we want to be responsive where practical. We're glad to have the IG report concluded. We understand that the report will be available to the public within a few months. Now let me hand this over to Kevin, who will discuss both the Q119 performance as well as the full year outlook.
Kevin
Thanks, Nick. Today I'll review our results by key market, then discuss the profitability of the business for the quarter, and finally provide revised guidance for the fiscal year. 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, revenue and EBITDA as defined, were up nicely over last year. Q1 gap revenues were up 17% versus prior year Q1, and EBITDA as defined was up 21% over the year, with strong margins at 49% of revenue. Bookings or incoming orders are the real story here, however, with pro forma Q1 bookings up 20% compared with the year ago period, a robust increase observed across all aerospace market segments. 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 year before. In the commercial market, which makes up close to 70% of our revenue, we will split our discussion to OEM and aftermarket. In our commercial OEM market, Q1 revenues have increased approximately 13% when compared with Q1 of fiscal year 2018. Commercial transport OEM revenues, which make up the majority of our commercial OEM business, were up 10% in Q1 when compared to the prior year period. Bookings in the quarter were strong and outpaced sales by a wide margin. For most of 2018, we commented that the softness we were experiencing in the OEM market was a transient as our shift set content had experienced no negative revisions. Now in Q1 of body form factors once again. As we said at the time, revenues can be lumpy due to a number of factors. Business jet and helicopter OEM revenues make up around 20% of our commercial OEM revenues. Revenues in this combined market were up over 20% compared to the same period in 2018. Bookings in this sub market outpaced sales in total with strong business jet bookings slightly offset by some weakness in helicopter bookings. Although business jet delivery forecasts continue to look positive for 2019, driven largely by larger cabin jets, the robust sales growth experience this quarter is not likely sustainable. In addition, the smaller revenue helicopter market may be a slight headwind going forward. Now moving on to our commercial aftermarket business. Total commercial aftermarket revenues grew by just over 6% in the quarter. Both the commercial transport and business jet helicopter aftermarket revenues were up close to the average of 6% over the prior year quarter. Bookings well outpaced sales in the quarter and year over year bookings growth came in at over 20% in this important market segment. The aftermarket freight segment continues to outperform our expectations within this composite. Time will tell if this continues as the freight market fundamentals have slowed. 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 15% over the prior year Q1. Revenue growth was well distributed across our business. For Q1 of fiscal year 19, defense aftermarket revenue growth also outpaced defense OEM growth. Total defense bookings continued the recent trend and were up significantly over prior year and have similarly outpaced sales by a nice margin. This is a similar narrative to fiscal year 18, but we are now seeing those bookings materialize into sales. Moving to profitability, I'm going to talk primarily about our operating performance or EBITDA as defined. EBITDA as defined of about $287 million for Q1 was up 21% versus prior Q1. EBITDA as defined margin in the quarter was 49% of revenues. This includes one margin point of dilution from the fiscal year 18 acquisitions of Kirkhill, Extint, and Scandia. Excluding the acquisitions, margins improved approximately two and a half points year over year for the same period. Margin improvement progress is always important to us and indicates that our base business continues to find opportunities to drive improvement within our value drivers. We are relentless in our approach to value generation. Turning now to 2019 guidance, we are modestly increasing our fiscal year 2019 full year sales and EBITDA guidance both by 20 million to reflect our strong first quarter results. However, until we see more data, we are not updating the full year market assumptions at this time as the underlying fundamentals do not seem to have meaningfully changed. The midpoint of our fiscal year 2019 revenue guidance is now $4.19 billion. The revenue guidance is still based on the following market channel growth rate assumptions. We expect commercial aftermarket revenue growth of mid to high single digit percent versus prior year. Commercial OEM revenue growth in the low to mid single digit percent range and defense military revenue growth of mid to high single digit percent versus prior year. The midpoint of fiscal year 2019 EBITDA as defined guidance is now $2.09 billion with an expected margin of around 50%. This includes approximately one margin point of dilution for the recent acquisitions purchased in fiscal year 18, implying our pre-fiscal year 18 core is now at about 51% margin. We are increasing the midpoint of our adjusted EPS 50 cents to $16.76 per share, primarily resulting from higher EBITDA guidance and slightly lower interest expense. Mike will discuss in more detail shortly. Finally, let me briefly speak to our organization structure. With the impending completion of the Esterline acquisition, the need for experienced leadership increases. To account for this, we have moved Jim Scalina, a long-term trans-dime operations executive and most recently our interim CFO, to lead the financial integration of Esterline and additionally added two seasoned executive vice presidents Joel Reese and Pete Palmer to also be part of the Esterline acquisition integration team reporting to Bob Henderson. To backfill this need, we have promoted Paula Wheeler to executive vice president. Paula has been with Trans-dime since 1995 and has served in a number of leadership roles. She was most recently president of Aerofluid Products for the past seven years. As a reminder, we promoted Rodrigo Rubiano and Alex File in early 2018 to build capacity in the EVP ranks for expected acquisitions. As always, we continue to focus on developing a deep bench of diverse culture carriers for future succession needs. With that, I would now like to turn it over to our new chief financial officer, Mike Wissler.
Mike Wissler
Mike Wissler, Chief Financial Officer, Trans-dime & Esterline. Thanks, Kevin. I'll recap the financial highlights for the first quarter and then provide some more info on the guidance update. First quarter net sales were $993 million, up 17 percent from the prior year. Organic sales growth for the quarter was 11.6 percent and the balance of the sales increase was from our three fiscal 18 acquisitions, Kirkhill, Extant, and Scandia. Our first quarter gross profit increased 18 percent to $564 million and was 56.8 percent of sales compared to 56.2 percent in the first quarter of the prior year. As called out on the slide comments, we had 1.5 points of margin headwind from the new acquisitions but still netted to over one-half point of gross improvement from the execution of our value drivers on the base business. Moving on to taxes, the -over-year comparisons get slightly confusing here due to the one-time impact of tax reform last year. This also muddies the -over-year EPS comparisons. For the first quarter, our effective gap income tax rate was a provision of 21.5 percent compared to a benefit of 63.4 percent in last year's first quarter. To remind you, last year our tax rates were significantly reduced due to the enactment of tax reform in the U.S. and we recorded a one-time net benefit of $147 million. There is no update to our full-year effective tax rate assumptions at this time, so excluding Esterline, we're still anticipating the gap cash and adjusted rates to be in the range of 21 to 23 percent. Moving on to EPS, I want to first point out that the decrease in both the current quarter gap and adjusted EPS was due to the previously mentioned enactment of tax reform. If you remove the one-time benefit of $147 million, which equates to $2.65 per share so that you can do an -to-apples comparison of the 18 to 19 growth rates, you get Q1 FY18 gap EPS of $1.95. The current quarter gap EPS of $3.05 per share then represents an increase of 56 percent over this prior year figure. Similarly, excluding the one-time impact of tax reform, Q1 FY18 adjusted EPS would be $2.93 per share. Our current quarter adjusted EPS of $3.85 is then up 31 percent over this prior year figure. Table three in this morning's press release reconciles gap EPS to adjusted EPS, so you can look for more detail there. Switching gears to cash and liquidity, we generated almost $330 million of cash from operating activities and ended the quarter with over $2.3 billion of cash on the balance sheet. Our net debt leverage ratio at quarter end was 5.4 times pro forma EBITDA is defined and gross leverage was 6.6 times. Excluding Esterline, we still estimate that our cash will grow steadily throughout the year to around $3 billion, and our net leverage at September 30, 2019 will be around 4.8 times our EBITDA is defined. With regards to our guidance, we now estimate the midpoint of our gap earnings per share to be $15.10 and we estimate the midpoint of our adjusted earnings per share to be $16.76. The primary reasons for the increase in both gap and adjusted EPS were the increase in our EBITDA guidance and also lower expected interest expense. However, the increase to the gap EPS was partially offset by higher expected acquisition related costs related to Esterline. Excluding any new debt from the Esterline acquisition, we're now expecting that interest expense to be $725 million for the full year, a decrease from our previous expectation of $745 million. The lower expected interest expense is primarily due to a slight decline in the projected LIBOR rate for the year and higher interest income both in Q1 compared to a conservative forecast. This $725 million completely excludes any interest expense from the $4 billion of new debt we'll be incurring to complete the Esterline acquisition. Slide nine shows a bridge detailing the $1.66 of adjustments between gap to adjusted earnings per share. In summary, Q1 was a solid start to fiscal 2019. Finally, a quick organizational update. During the quarter, Sarah Winn became our Chief Accounting Officer. Sarah has worked at Transdime and various accounting functions for the past 15 years, both as a group controller and prior to that as the controller at Aerofluid Products. Sarah has a solid financial background, is a strong promoter of the Transdime culture, and has already settled into her new role. With that, I'll turn it back over to Eliza.
Liza Sables
Thanks, Mike. Before we open the lines, we'd like to ask you to just keep your questions to two per caller and then reinsert yourself into the queue to allow everyone to have an opportunity to ask questions. Operator, please open the line.
Mike
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask you please place your line on mute once your question has been stated. And our first question comes from the line of Carter Copeland with Mellius Research. Your line is now open.
Carter
Hey, good morning, all. Morning. Just two quick ones. One, Kevin or Nick, I wondered if you could comment on what looked like pretty strong quarter of performance out of Esterline. I mean, I know you've obviously haven't closed and whatnot, but just looking at that set of results, it sort of stood out. And I wondered if you might give us some color on what you, from the outside in, what you thought may have driven that and how you feel about it. And secondly, just with respect to the recent news flow around the A380 and the potential closure of that line and into that product, what you think the risks may be? I mean, obviously when we close a product line, there's destocking and stuff that happens that can be somewhat abrupt. And I just wondered if you could maybe walk us through your thoughts on that. Thanks.
Nick Howley
Yeah, let me address the first and Kevin will take the second question. Carter, we just don't want to comment on the first quarter, you know, public filing by Esterline. You know, we don't own it yet. And I just, I don't think it's our place to elaborate on the, it's not our place yet to elaborate on the public filing. So I'm just going to have to pass on that.
Kevin
Okay. And Carter, on the A380, Red V, the same announcements and news, you know, we're starting to study what, if any real impact that would be the A380 rates have come down quite a bit over the last little while. So effective and real. So, you know, the contribution in our numbers is not huge. So we need to study that more and have a better answer in the future.
Carter
Do you sense Kevin, that there's a decent amount of inventory in the system?
Kevin
I do not have a sense for that, to be honest. I think that it's been held pretty closely. So I don't have a better insight there. All right. Thanks guys.
Mike
Thank you. Our next question comes from Robert Bingarn with Credit Suisse. Your line is now open.
Robert Bingarn
Good morning.
Mike
Good morning.
Robert Bingarn
I wanted to talk about the margin a little bit. It was quite strong, notwithstanding, I guess, some of that dilution from acquisitions at the gross margin. I think both in the fourth quarter, the fourth fiscal quarter, and in this quarter, are as good as I've seen in a while. You know, Kevin, could you delve into that a little bit? And to what extent is that operating leverage, productivity, you know, pricing? What are we looking at here?
Kevin
I think we're looking at all of our value drivers coming into play. It's all of contributions, whether it's, you know, we're driving value pricing or productivity, we're winning new business. So it's really everything. I can't comment that one is, you know, more successful than the other in the current quarter.
Robert Bingarn
Okay. And then just for, you know, just a quick one, you mentioned the higher acquisition expenses for Estreland. I guess Mike did. Is there anything specific to that? No.
Mike Wissler
It's banker fees and legal fees for the most part that you see rippling through what's in there today.
Robert Bingarn
And just higher than expected. I mean, is that typical in what you've seen in the past, or is there anything notable?
Mike Wissler
Given the size of this acquisition, those dollar amounts are higher than would typically be.
Nick Howley
Given the size of the acquisition, but I don't think the fees are any different than we thought. No, the fees are what we thought they'd be. We're patient.
Robert Bingarn
Okay. Thanks guys.
Mike
Thank you. Our following question comes from Miles Walton with UBS. Your line is now open.
Miles Walton
Thanks. Good morning. Hey, Nick, I was wondering if you could, or Kevin, comment on the integration that's going to be required. Obviously it sounds like you've hired and, promoted a few people to add to the Bob's integration team for Estreland. I'm curious, you have 3 billion pro forma cash on the balance at your end. Would you enter enough acquisitions to satisfy that amount, or do you almost feel a little overwhelmed with Estreland integration? How do you balance the availability of your cash versus the availability of your talent to integrate?
Nick Howley
Yeah. I mean, let me say you're right. We have a lot of cash we're building up, and we borrowed a lot of money to make, and we borrowed and we're maintaining that. I don't know, Miles, what we'll do with that. I would say we would be reticent to take on right now an acquisition, you know, of the size of Estreland again. So we swallow that for a little bit. It would have to be a hugely compelling value for us to look at that. But the normal range of acquisitions, I would think we're fine for. And I think your follow-up question is, what are you going to do with all the cash? And the answer to that is we'll decide after we buy. You know, we'll take a look after we get this acquisition closed. We'll see what the range of opportunities look like, and we'll make a decision.
Kevin
Okay. Yeah. I don't have much to add there, but to say that, you know, succession planning has been an important part of this company's process for quite a long time, and we've been focused on adding talent, developing talent for quite a while. So I do not think we're tapped out organizationally on what we can take on. As Nick said, you know, we would probably wait a little while to bite off another Estreland-sized acquisition if that came along today. But the general course of business flow, we continue to stay in the acquisition market and believe we're not tapped out on bandwidth. It really has a lot to do with the way we integrate businesses, and our decentralized control allows us to have more bandwidth to take on acquisitions.
Miles Walton
Got
Kevin
it.
Miles Walton
And just one clarification. The size of your aftermarket for defense versus OE defense at this point is what relative base?
Kevin
We don't comment on the individual pieces, do we? Yeah. They're about the same, but we don't comment on the exact magnitude. All right. Thanks.
Mike
Thank you. Our next question comes from Robert Stallard with Vertigo Research. Your line is now open.
Robert Stallard
Thanks so much. Good morning. Good morning. Nick or Kevin, the big debt insurance you did last week, one of the rating agencies downgraded your debt rating as a result of that. I was wondering if you could comment what their beef was with this situation, whether this might have an impact on the cost of debt going forward?
Mike Wissler
Mike,
Robert Stallard
you might... I don't
Mike Wissler
think they downgraded it. Sorry, guys. I think the corporate rating remained B1, B plus with negative outlook from each.
Nick Howley
Right. And they almost always get... When you're going to do a big issue and they hold the rating, they almost always give a negative outlook, which just says we're going to evaluate it as we go forward.
Robert Stallard
I
Nick Howley
was wondering if the outlook is
Robert Stallard
it...
Nick Howley
Yes. The outlook, I think that's right, Mike. That's a little... It's a little... It's just change. Sorry.
Mike Wissler
It's still B1, B plus. Yeah. That's the same thing I saw last week.
Robert Stallard
Okay. And then on the defense side, you also had a very good result in the first quarter. You commented that the bookings were also strong. I was wondering if you could maybe characterize what you think is driving that? Is it more shorter cycle demand that's coming through, which makes it a little bit less than to raise the guidance for the year, or is this something that's slightly longer term, more visible that could have legs?
Kevin
Yeah. I think that the defense aftermarket business would fall into your shorter term horizon bucket. We are seeing stronger performance there in terms of bookings growth. Yeah. I think we're looking at the guidance, as I said in the prepared comments. One quarter, it's hard to develop a trend from that. I need to see some more data points to evaluate the market segments. Certainly, it's encouraging so far, and maybe we're just being conservative.
Robert Stallard
Okay. Thanks, Ken.
Mike
Thank you. And our next question comes from Ken Herbert with Can't Accord. Your line is now open.
Ken Herbert
Hi. Good morning. Either Kevin or Nick, I just wanted to see if you could provide a little more detail on the commercial aftermarket. I mean, you highlighted that broadly you had very strong bookings across the business, and I think you said commercial aftermarket bookings up over 20%. But you also commented, Kevin, that you really didn't see any meaningful change, I guess, across the businesses with the strength that continued here. On the commercial aftermarket, in particular, can you just remind us again how much of that business would you estimate is sort of book and ship? And then maybe what else would you like to see there to get a little bit more comfortable with perhaps upside to the full year guide in terms of that market?
Kevin
I think what I would say is we're just being cautious. We're one quarter in and would like to see some more. The bookings were strong in the quarter as we commented up 20%. I did comment that maybe some of the freight fundamentals were not as strong. We've seen some going forward, maybe that that will ease a bit in growth in the future. Maybe I was just trying to provide some color for the future that it may not be as rosy as the bookings might indicate. The interiors market, discretionary interiors, a little soft to start the year, but that's anticipated to come back strong in the second half. So I mean, I think we feel comfortable with our mid to high single digits guidance around the commercial aftermarket segment. If we continue to see strong bookings, the bulk of which are still book and ship in the quarter, then we'll look to evaluate that in the future. But one quarter does not a
Nick Howley
trend make yet. I think there's a couple of things. One, we don't we don't mean to indicate any negative view on that. No, just that we're always wary when the fundamental of the underlying demand hasn't, you know, still looks good. It looks about the same as the beginning of the year. We'd like to see more than one or two one data point before we before we change the trend.
Ken Herbert
No, that makes sense. I can appreciate that. Specifically on the freighter markets, I know 2018 was a really big year for conversions. And I know some of the freight traffic seems to have been slowing on the margin. I think it probably was a pretty good year for you last year. Can you just quantify maybe how much you think that could be down this year? And I know it's not a big piece of the business overall, but is that a material headwind that we should really watch that could soften or how should we think about freighter markets in particular? It
Kevin
isn't yet. I just I see the same fundamentals that you see in FTK's cooling, slowing down, maybe some concerns about the macro economic trade environment. I don't know. So I'm just cautious there that I was we I think we're all surprised that freight was as strong as it was in the quarter. Just commenting that that strength may not continue. But I don't have any indication to say that it's cooling except the fundamentals of the market.
Ken Herbert
Perfect. Thank you very much.
Mike
Thank you. Our following question comes from David Strauss with Barclays. Your line is now open.
David Strauss
Good morning. Morning. So I guess Nick or Kevin, the you know, I thought with the announcement with you know, when you announced Esther Line that you know, you were considering using some of the cash on the balance sheet. What made you decide to, you know, finance the entire entire deal? Was it the pipe M&A pipeline that you see out there? Was it just solely the attractive of the capital markets and where you could do the deal?
Nick Howley
Yeah, I think David, we were pretty vague about how we would finance it. We announced that we I think what we said is we had a fair amount of cash. I don't think we went much further than that. I think the credit markets looked quite good to us. And, and we, I we don't have anything specific on the horizon, just credit markets look good to us. It looked like a very attractive source of capital. So we decided to go a little bigger.
David Strauss
Okay, fair enough. Kirk Hill, how how is that progressing?
Kevin
Kirk Hill continues to perform well. We've seen some some improvements since ownership. You know, we don't comment on the margins or the individual details, but we've seen gradual improvement there as we plan. So I think Nick or I or we've all talked about Kirk Hill was a nice lab experiment for Esther Line and it continues to perform well. So we're happy with what we've got there and the way it's performing.
David Strauss
Okay, and last one, the Esther Line in tangible amortization that you would expect to run through your adjusted numbers. Do you have an estimate for that at this point?
Mike Wissler
I think you probably looked at the pro forma financials that were filed with the bond documents and it's 20 million and that could change as we work through the the final accounting.
David Strauss
Okay, great. Thanks, Mike.
Mike
Thank you. Our next question comes from Hunter Key with Wolf Research. Your line is now open.
Mike
Hi, good morning, everybody.
Mike
Good
Mike Wissler
morning.
Mike
I just wanted to just flesh out a comment. I think you guys you said, oh, we, Bizjet and Helo's top line growth of over 20 percent. But you said it was hard to sustain that. But you also said bookings were up over 20 percent. Did I hear that correctly? And can you just flesh that out a little bit more,
Kevin
please? Yeah, let me read the exact quote here back just so I'm not confusing myself. I said, business jet and helicopter oil revenues make up 20 percent. Revenues in this combined market were up over 20 percent compared to the same period. Bookings in this sub market outpaced sales in total with strong business jet bookings, but weaker helicopter bookings. So that's what I said. What was the question again about that?
Mike
Well, yeah, I think you also noted some questions around the sustainability of that growth rate. I'm just going to tie that to the booking commentary you gave as well.
Kevin
Well, we see strong bookings. They're largely or they are in the business jet sector and it's large format cabins mostly. That's what we're seeing. We're seeing some slowness in orders on the helicopter side. So that's the bookings are strong. Sales are up, but we do see some weakness there. Again, I'm trying to comment, provide a little color on the fundamentals of the business jet. We do see growing OEM demand, large form factor, of course, but we just look for the stability in the market and the takeoff and landing cycles has not been robust. We're not seeing a tremendous amount of growth there. So we're cautious and I'm just trying to highlight much like in the freight market, some caution around the future.
Mike
Okay, that makes sense. Thanks. And then question for Mike. Mike, I'm kind of curious to hear your personal views on leverage, how they've evolved maybe over the course of your career before you got to Transdime and how your time at Transdime has maybe evolved your own views on balance sheet maintenance and leverage. Thanks.
Mike Wissler
My background is in the private equity industry. So I think I'm more familiar with seeing companies that operate at Transdime's type leverage ratios. I think going forward, as we've shared with you guys previously, we kind of intend to continue to keep relatively high leverage ratios relative to the rest of our A&D peers. But I don't think my thinking or background has evolved a ton over time and hasn't changed a ton since coming to Transdime
Nick Howley
either. Obviously, Mike's, I would add there, that obviously Mike's significant background in private equity was a very attractive attribute to us.
Mike
Yeah, absolutely. Thanks, both. Appreciate it.
Mike
Thank you. Our next question comes from Michael Sirmoli with SunTrust. Your line is now open.
Michael Sirmoli
Hey, good morning, guys. Thanks for taking the question. Good morning. Nick or Kevin, just, you know, I can understand and appreciate the observatism, especially in some of the shorter cycle markets, but you know, you had the real strong commercial OE growth in the current quarter. I mean, I would think just given the rate increases, the visibility there, you'd have a little bit more comfort in that market channel, maybe, you know, A380 aside. But anything, you know, that you're seeing in the OE side of the market that would give you reason for pause on the commercial side?
Kevin
No, nothing is giving us pause. We are just the same concerns about, you know, raising guidance. One data point does not align make. So, you know, if it continues this way and we see future quarters, we would look to revise. But right now, yeah, maybe it's just conservative, but we're leaving it as is for
Michael Sirmoli
Okay, that's fair. And then just on the on the overall kind of revenue front, you know, organic growth, I know it seems, you know, maybe two years ago, there was there was speculation, you guys couldn't really grow organically anymore. And here you put up one of the best organic growth rates, you know, in quite some time. I mean, can you give any color, you know, you know, what really drove that, you know, volume versus price? I mean, did you see volume, material volume increases in all markets? Or was there, you know, more price in certain markets, any kind of color, if you could parse out that growth, just just it was such a good rate that we haven't really seen in quite some time.
Kevin
I think it's important in this business to recognize that revenues can at times be lumpy, they can be really strong and unexpectedly strong at times, one quarter to the next. It's a lumpy business, it has to do with, you know, managing of inventories in the supply chain and and other factors. So yeah, we, again, want to be appropriately conservative in the way we look at this, not seeing concerns in the future, but just want to be appropriately conservative, you know, without getting ourselves ahead.
Michael Sirmoli
Got it. Well, was there anything in the quarter? I mean, any big chunky kind of deliveries or, you know, positive? No, actually,
Kevin
actually, there weren't any, you know, on the OEM side, commercial OEM, we did see a return of wide bodies that we had seen some related softness to last year. I think I was a little surprised that the amount of narrow body orders that came in as well. So I think, you know, orders and sales are both pointing to better wide body and narrow body performance.
Nick Howley
Got it. I think in the overall, you know, the fundamental market conditions seem like what we thought they were a year ago. And as Kevin says, you know, we're always careful that one data point doesn't make a line.
Michael Sirmoli
Got it. Nick, just one last one on Estrelion, you're probably going to punt on this, but I'll try and ask it. Can you give us a sense of what you guys might be targeting for cost synergies? I mean, just knowing the Estrelion model, knowing that you had Kirk Hill as the lab experiment, I mean, do you have a ballpark synergy target just on the cost side of what you realistically think you can kind of immediately take out of that business?
Nick Howley
I'd like to comment on it, except they snapped the ball over my head. So I guess I missed the point. I think we've kind of given you as much guidance as we can on that. You know, we've told you, you know, we expect the private equity like we turn based on the certain capital structure that we've given you as an assumption. And I think that's about the most specificity I can give.
Michael Sirmoli
Got it. Got it. Next time I'll give you a better snap. Thanks, Gus.
Nick Howley
Okay.
Mike
Thank you. Our following question comes from Gutam Khanna with Cohen. Your line is now open.
Gutam Khanna
Yeah. Thank you guys. Appreciate the disclosure. Hey, I wanted to ask you, just if you could comment on the interiors kind of market within the commercial airspace after market and if you're seeing any change in trend there, positive or negative.
Kevin
On the discretionary interiors, that's our Schneller and Pexville business, we have seen the year begin a little slower than we had liked or than we anticipated. But the order book for the second half of the year seems to indicate that that'll be a transient softness. So we're looking at the year before the year.
Gutam Khanna
Okay. And Nick, maybe just for you, if you could talk about, you know, what level of leverage would you actually be comfortable taking the balance sheet up to in this type of credit and economic environment for the right transaction recognizing?
Nick Howley
Yeah, I wouldn't want to, you know, I just wouldn't want to comment on that. I think, you know, you've seen a number of your history of our leverage. You know, if I was trying to figure out what we're going to do, that's probably not a bad idea to look at what the history has been. But, and I think that's around where we feel comfortable. But I wouldn't want to comment on what we might do if the situation was right, you know, on some interim basis. We have no plans right now, but I'm very reticent to comment on what you do in a capital market condition before it exists.
Gutam Khanna
I hear you. I guess what I'm asking is, generally you feel pretty strong about macro, if you can like, I mean, even though we're late into a cycle. How about the macro and the head of the arrow market and the like?
Nick Howley
Yeah, we feel, you know, we don't have any, we don't have any unique insight other than anybody else does. You know, we see all the, you know, we saw all the market data and, you know, we know what our numbers look like and we still feel pretty good. I get it that we're getting late in the cycle. But we try, you know, we try to be pretty consistent with the way we run the businesses and the way we capitalize them.
Gutam Khanna
Well, congratulations. Appreciate it.
Nick Howley
Thanks.
Mike
Thank you. Our next question comes from Sheila Kajuglu with Jefferies. Your line is now open.
Sheila Kajuglu
Good morning, guys. Good morning, Sheila. Kevin, Nick, you talked about a few organizational changes and promotions. Just going back to Miles's question a bit more, can you give us how you're going to tackle this deal versus other deals just given the relative size? Any qualitative color would be helpful?
Kevin
I actually don't think we're going to approach it really all that different. We are going to have a focused team to work on it. We're putting some dedicated resources on it. But we're going to use the same integration playbook that we always use. And we have some resources to apply to it, both in finance, as you've heard. There's obviously other folks that we're able to dedicate to the Esterline integration team, senior group controllers and the like that will help round out the team. We've been, I think, planning for, you know, something significant for a while and putting resources in place, stretching folks, getting our EVPs ready. We have another wave of potential folks ready, depending on what's needed. So the succession planning and people development as a way of business is really what we've been working on for a very long time. So I don't feel I'm not as concerned on the the resource side. I think we will have the people to put on the Esterline integration team to make it successful.
Sheila Kajuglu
Great. Thanks, Kevin. And then just one follow-up on commercial aftermarket. I know it could be lumpy. And you guys had tough comps last year. But just looking at the passenger side of the business, it seems to have grown at about a 6% rate. You know, you look at air traffic at that rate. So it's growing slightly below that if you exclude price. Any color you could give, what you saw in the quarter on maybe repairs versus ad hoc or replacement business?
Kevin
You know, I don't have a lot of additional color to offer on that. It tends to come out in time. I think the repair and overhaul market has been solid for us. You're directionally correct in your passenger segments of the commercial transport. You know, it was a strong quarter for us. And we continue to see good opportunity both on MRO repairs, overhaul and spare parts. The outside, you know, the look-through sales for the distribution sales, the POS for them remains very strong as well.
Sheila Kajuglu
Great. Thank you.
Mike
Thank you. Our next question comes from Peter Arment with Baird. Your line is now open.
Baird
Yes. Good morning, Mick, Kevin. Very nice results. Kevin, maybe just a quick one for you. You know, given the all this growth that you're seeing, are you seeing any, you know, stretch out and lead times within the supply chain or anything that is a watch item for you, you know, just given the strength that you mentioned across all your own markets?
Kevin
Thanks. We have seen some limited supply hiccups. Generally speaking, we try to cover that with inventory buffers and our own work in progress to ensure that we can survive that. But yeah, we've had, we've seen some limited. I don't want to say that we've seen none of that. I think it's isolated to a few areas, mostly around chemical processing, outside processing, not fundamental across the business. So we've seen a little bit of that, but so far we're handling it.
Baird
Appreciate the color. I'll leave it at one. Thanks, guys.
Mike
Thank you. Our next question comes from Jason Rogers with Great Lakes Review. Your line is now open.
Jason Rogers
Yes. Morning. Morning. What is the pro forma net leverage ratio, including Astrolign?
Mike Wissler
As of 3 31, it's going to pick up slightly to just over six times, but obviously that, that assumes no kind of cash payout or anything. Just to footnote that.
Jason Rogers
And are you planning on,
Mike Wissler
sorry.
Jason Rogers
The next question was, are you planning on providing updated guidance once the acquisition closes or are you planning on waiting for the order?
Mike Wissler
Once the acquisition closes, we'll update our guidance and assumptions. Well, I
Nick Howley
think I'd say once acquisition closes and we feel comfortable with it. It may not be immediate. I wouldn't expect something today after we close.
Jason Rogers
And then finally, as far as your fiscal 19 forecast, not including Astrolign, what is the organic growth rate and tariff impacts you have embedded in that guidance? We
Kevin
don't have any tariff impact in our guidance at all. And so far we haven't seen anything significant. I just
Mike Wissler
don't think I
Kevin
know what the
Mike Wissler
organic.
Kevin
It's whatever we gave at the beginning of the year. It's whatever we
Nick Howley
gave at the beginning of the year plus the bump.
David Strauss
Yeah. All right. Thank you.
Mike
Thank you. Our next question comes from Seth Seisman with JPMorgan. Your line is now open.
Seth Seisman
Thanks very much. Good morning, everyone. Good morning. I was wondering if you could talk, you know, you guys have always managed costs pretty tightly. Margins were very impressive in the quarter. Were there any headcount actions or specific cost actions you took in either the September or December quarter that, you know, supported the profitability in the quarter?
Kevin
No, nothing other than our normal, you know, approach to driving productivity on a daily basis, daily, weekly, monthly. It's a constant process other than, you know, our normal approach, nothing specific that we can call out. So we're always looking to drive productivity and contain costs across our businesses.
Seth Seisman
All right. And then just to follow up on that real quick, you know, to what extent did you view the strong growth in commercial OE and, you know, that becoming a bigger part of the profitability that, you know, needed to be overcome in the quarter to put up the kind of margins you did or was that not really an issue?
Kevin
That was not an issue. I did not know that ahead of time that we would have such strong OE and, you know, you'd have to overcome that. There was no special one-timers in the quarter that helped our profitability. So, yeah, there was none of that. The commercial OE, you know, helped deliver what it did. We saw the increases on the defense side and on the defense aftermarket side. Those all contributed, including commercial OE, to our profitability. Great. And it is
Seth Seisman
still fair to think, though, about commercial OE as, you know, fairly well below average margin.
Kevin
That's right. Yes. And it also takes more headcounts. There's
spk17
a doubling impact associated with that. You talked about the $16 million voluntary refund. I'm assuming that's one time in nature. So just trying to get a sense of, are there any pricing concessions going forward, any changes in business practice that you have to assume such that you may impact margins or revenues?
Nick Howley
I think
spk17
that's what I'm getting at.
Nick Howley
Nothing that we know. Yes, you're right. It would be a one-time. And we're not suggesting we concur with that, by the way, just to be clear. And we don't know of any impact going forward. I just repeat, there's no allegations of any illegality or wrongdoing or anything like that.
spk17
And then, Kevin, this may be for you. In terms of just your dialogue with the OEMs over the last couple of quarters, has there been maybe a change in tone in terms of how they're trying to work with you, specifically pushing more for royalties on some of your revenues? Any color you can provide would be great.
Kevin
Yeah, we've not seen any change in approach from OEMs asking for anything different than the approach that we always see. Nothing new.
spk17
Okay. Thank you,
Mike
guys. Thank you. And I am showing no further questions at this time. I would now like to turn the call back to Liza Sable for any closing remarks.
Liza Sables
Thank you. That concludes our call for today. We'd like to thank you all for calling in this morning.
Mike
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.
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