Transdigm Group Incorporated

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2020 TransDime Group Incorporated Earnings Conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 on your telephone. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Liza Thabel. Treasurer and Director of Investor Relations. Please go ahead.

Thank you and welcome to Transim's Fiscal 2020 First Quarter Earnings Conference Call. Presenting this morning are Transim's Executive Chairman, Nick Howley, President and Chief Executive Officer, Kevin Stein, and Chief Financial Officer, Mike Lisman. Please visit our website at transim.com to obtain a supplemental slide deck and call replay information. Before we begin, we'd like to remind you that statements made during this call, which are not historical, in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC available through the investor section of our website or at sec.gov. 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 for a presentation of the most directly comparable GAAP measures and applicable reconciliations. I'll now turn the call over to Nick.

Good morning, and thanks again for calling in. Today, as usual, I'll start off with some summary comments on our consistent strategy, a few comments on the operating performance and outlook in capital allocation, and then Kevin and Mike will expand and give more color. To reiterate, we're unique in the industry due to both our consistency and our ability to create intrinsic shareholder value through all phases of the cycle. To summarize the reasons why we believe this, About 90% of our sales are generated by proprietary products, and about three-quarters of our 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 significantly 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, one, 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 this strategy and where we see a clear path to PE-like returns. And lastly, our capital structure and allocation are a significant portion of our value creation methodology. As you saw from our press release, we were off to a good start in fiscal year 2020 with solid operating performance in the quarter. Revenues in EBITDA as defined are up substantially. Of course, much of this is due to the Esterline acquisition, but organic revenue growth was also up nicely. EBITDA margins were up versus the prior year as both the Trans9-based legacy and the acquired businesses all performed well. we continue to generate real intrinsic value for our investors. Far and away, the largest portion of our revenue, our worldwide commercial aerospace revenue, was up about 9% in Q1 versus the prior year, driven primarily by a very strong commercial aftermarket growth. Our smaller worldwide defense revenue was also up. Defense bookings were down a little, but defense bookings can be lumpy. At this time, fiscal year 2020 continues to look like a good year for TransLine, though we see possible clouds on the horizon. The commercial aftermarket was quite strong in Q1. However, given the uncertainty around the 737 program production rates, possible attendant inventory ripples, and uncertainty in China-related travel, we are leaving our full-year guidance unchanged. We have begun to trim our costs, However, this is a little more difficult than usual given the uncertainty in the 737 timing. We're watching this closely and are prepared to react more quickly if required. To put the 737 MAX OE production program into perspective for Transdyn, at full production rate, it makes up somewhere between 3% and 4% of our revenue and a smaller percent of our EBITDA. Kevin will discuss the quarter and the year in more detail. With respect to M&A and capital allocation, in the last six months, we closed and received payment on the sale of both the SORIO business for about $920 million and our EIT group of businesses for about $190 million. As I said last quarter, we may still sell some smaller businesses with less proprietary aerospace and aftermarket content. If we do so, As of today, I don't expect that they would be significant in size. With respect to capital allocation, in the last six months, we paid both a $30 per share special dividend and a $32.50 per share special dividend. The combined special dividends of $62.50 per share, or about $3.5 billion, is roughly 12.5% of the equity value at the start of fiscal year 2020. This is a pretty substantial payout. Due to the divestitures combined with the solid cash generation from our operating businesses, we're able to make these payments to our shareholders and still maintain substantial liquidity and firepower. As usual, we will review our go-forward capital allocation over the balance of the year and see where we stand towards the end of the year. We now expect to have over $3 billion of cash at the end of fiscal year 20. We also have significant additional borrowing capacity under our credit line and our credit agreement. We have the financial flexibility and capital market access to deal with any currently anticipated capital requirements, allocations, or other opportunities in the readily foreseeable future. We continue to actively evaluate and seek M&A opportunities We have a decent pipeline, as usual, mostly in the small to mid-range. I can't predict or comment on any possible closings, but as I said before, we're still working steadily at M&A and are open for business. And now let me hand this over to Kevin to review our 2020 performance outlook and some other items. Thanks, Nick. Today I'll review our results by key market, then discuss the profitability of the business for the quarter. I'll also comment on the fiscal year guidance and review some other operational items. As you have seen, we had a strong first quarter and a good start to the year. Mike will provide more details on the financials, but our first quarter operations, specifically revenue and EBITDAs defined, were up substantially over last year, due in part to good organic growth as well as continued acquisition, integration, and performance. Q1 gap revenues were up approximately 48% versus prior year Q1, and EBITDA as defined was up 40% versus the prior year, with margins approaching 47% of revenue. Now we will review our revenue by market category. For the remainder of the call, I will provide color commentary on a pro forma basis compared to the prior year period in 2019. That is assuming we own the same mix of businesses in both periods. Please note that beginning this quarter, This market analysis discussion now includes the results of the former Esterline businesses. In the commercial market, which makes up close to 70% of our revenue, we will split our discussion into OEM and aftermarket. Our total commercial OEM market revenue increased approximately 1% in Q1 when compared with Q1 of fiscal year 2019. Commercial transport OEM revenues, which make up the majority of our commercial OEM business, were flat versus prior year Q1. However, booking solidly outpaced Q1 sales in the current period by more than 15%. We did see minimal headwind from the impact of 737 max production halt this quarter. However, we believe any currently anticipated impact from the max issues should not have a material impact on our EBITDA for the full fiscal year. We are very diversified across all platforms worldwide. so the impact of the 737 MAX or any single program should not be material to Transdyn in the aggregate. Aside from isolated issues with a few aerospace platforms, general industry consensus remains mostly favorable long-term as significant OEM backlog remains across the industry. We are currently assessing the near-term impact of the 737 MAX rate reduction as well as smaller cuts in production for other Boeing, Airbus, and business jet platforms. As a result of the recent production rate changes and other evolving global concerns, we are implementing a necessary 3% to 10% reduction in direct and indirect headcounts, the impact of which will be felt in the second half of the year and will certainly vary by business unit. Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenues grew by 17% over the prior year quarter, with the commercial transport passenger market outperforming our expectations. In the quarter, growth in the commercial transport passenger and business jet markets were significantly offset by very modest declines in the commercial transport freight and commercial transport interior markets. Overall commercial transport fundamentals continue to remain relatively strong, although a few items still bear watching. Global revenue passenger growth continues to decelerate, albeit growth is still near the long-term average. This might be impacted by weaker economic activity and multiple geopolitical disruptions worldwide. Cargo demand is weaker as FTKs have declined from reaching an all-time high in 2017 to and business jet utilization data is pointing to stagnant growth that could create a headwind for the business jet aftermarket. Finally, it is unclear how the 737 MAX situation has or will impact our commercial aftermarket, but it may prove to be a net positive for Transdyn as older aircraft are utilized more. 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 9% over the prior year Q1. As a reminder, we are lapping tougher prior year comparisons as our defense revenue accelerated in most of fiscal 2019. Defense bookings declined slightly in the quarter, driven by robust defense OEM bookings growth and a not unexpected decline in defense aftermarket bookings given the recent restocking pace. Now moving to profitability, I'm going to talk primarily about our operating performance or EBITDAs defined. EBITDAs defined of about $681 million for Q1 was up 40% versus prior Q1. EBITDAs defined margin in the quarter of 46.5% was negatively impacted by acquisition dilution from Esterline. Excluding Esterline, margins in our legacy business were over 51%. and improved both sequentially as well as over the prior year quarter. Margin improvement progress is always important to us and indicates that our base business continues to drive and find opportunities for improvement by using our value drivers. On Esterline, we are now over 10 months post-close. The integration continues to progress. To date, the acquisition is exceeding our expectations for growth in this largest of Transdime acquisitions. As we have stated in the past, we will now no longer refer to any ESSER line specific metrics as these businesses have now become part of the fabric of Transdyn. Moving now to the 2020 guidance also found on slide seven in the presentation. We are not changing our full year revenue EBITDA or adjusted EPS guidance at this time, although we saw strong first quarter results. General market conditions have not meaningfully changed with the exception of the 737 MAX grounding and production hall. This is an evolving situation that could make it challenging for us to achieve the high end of our previously issued revenue guidance. However, as previously mentioned, we believe any impact from the MAX issues should not be material to our EBITDA this fiscal year. There's also a potential upside for us in the commercial aftermarket resulting from the 737 MAX issues as older aircraft may be utilized more. We will continue to closely monitor the 737 MAX situation and the expected impact on our business to be prepared to react as necessary, including any further preemptive steps that might be warranted. After consideration of these items at this time, we are not adjusting our full-year revenue and EBITDA guidance, as we still expect them to fall within the range previously issued. We will update again as this situation crystallizes. In addition, we are not changing our original market growth assumptions at this time. We do, however, realize there could be some shifting between commercial OEM and aftermarket growth rates, but it is just too close to call with only one quarter of data. I would also like to caution that although our EBITDA margin was strong in the first quarter, margins can be lumpy and margins may fluctuate over the next few quarters. So let me conclude by stating that Q1, of fiscal 2020 was another good quarter for Transdyn. We continue to be very pleased with the Estherline acquisition integration as well as the strong operational performance in the quarter from our legacy businesses. We look forward to the remainder of 2020 and expect that our consistent strategy will continue to provide the value you have come to expect from us. With that, I would now like to turn it over to our CFO, Mike Listman. Morning, everyone. I'm going to very quickly elaborate on some of the financial results that Kevin just discussed. As a reminder and as mentioned on our last earnings call, the Esterline organization as it used to exist, including the corporate office, is for the most part now gone, with the business units which used to comprise Esterline reporting independently into TransDOT. We're therefore not planning to give too much specific color or details around Esterline's performance. separate from that of legacy TransDyn. So for the consolidated TransDyn business, a few quick notes on how we ended the first quarter of FY20. And as a reminder, Esterline closed mid-March of last year, so it's not included in any of the fiscal 19 stats that I'm about to reference. As Nick and Kevin both mentioned, first quarter net sales were up approximately 48% versus the prior year. Organic sales growth was strong at 8.7%, and this figure still completely excludes Esterline, so it's for the legacy TransDyn business only. The Esterline acquisition drove the remaining 39% of the increase. On EBITDA as defined, $681 million for the quarter. That was up 40% versus last year, and adjusted EPS of $4.93 was up 28%. On cash and liquidity, this gets a little messy due to the timing of the dividend. We declared the $32.50 per share dividend in December, but then did not pay it until early January. So I'm just going to give you the pro forma financial stats, since that's what matters. So pro forma for that $32.50 dividend per share that was paid on January 7th, our cash balance is $2.3 billion, and net debt to EBITDA is now 6.1 times. We also currently have access to about $720 million of our revolts. Now a quick update on interest and taxes. Interest expense is expected to be about $1.02 billion in fiscal 20, and this estimate is unchanged from our prior guidance. As some of you may have seen, we're currently in the market with a repricing of our $7.5 billion of term loans. This reprice is still in the process of being finalized, and we'll update the interest expense guidance next quarter once the repricing completes. On taxes, our fiscal 2020 gap, cash, and adjusted rates are all still expected to be in the range of 24% to 26%, which is unchanged from prior guidance. With regard to liquidity and leverage at the end of fiscal 20, assuming no additional acquisitions or capital market transactions, we now expect to have over $3 billion of cash on hand at the end of the year. This is a slight reduction from previous guidance just to account for the $1.9 billion dividend we paid in the first week of January. In closing, the first quarter was a good start to the year for TransDime, and with that, I'll turn it back to the operator to start the Q&A.

Certainly, and as a reminder, ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchstone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Noah Popanek from Goldman Sachs. Your question, please.

Hey, good morning, everybody. Good morning. Nick, I wanted to try to ask you if you could kind of take a step back and try to provide us some context for where the current fundamentals of the aerospace aftermarket are compared to your long history at the company. Because, you know, we've got the MAX situation, but then we've also got, you know, all the MRO facilities telling us there's, you know, much longer wait than ever, and we've got all these airplanes coming out of the warranty period. You just printed, you know, the number you printed. So I'm just kind of curious, is this as good as you've ever seen it? Is it in line with your average good time, or is it something else? Would love to hear from you on that.

Yeah, I don't know that I have any great insight for you there. No, I mean, I see all those puts and takes, too. I mean, I'd have to put it on the better rather than worse side of the ledger, though the slowing RPM always gets your attention a little bit. As you know, that can be sort of a leading indicator sometimes. The situation in China... You know, who knows where that goes. You know, I guess the closest model would be the SARS situation, whatever that was, some number of years ago. You know, and that, for a quarter or two, had a pretty significant impact. You know, I think, obviously, I come down the same place as Kevin. You know, we're sort of, we don't change our view from the beginning of the year, but I'd have to say there's probably a wider band around it than there might have been six months ago.

Okay. Okay. And just looking at the margin performance in the quarter, I think the framework from you for a little while has been 100 basis points a year in the core, not recently acquired business. Is that still the right framework? Can you continue to do that even from a higher level?

Kevin, you want to take that? Yeah, I think that's still the right magnitude, and I think we can continue to do that.

Okay. Thanks so much. Thank you. Our next question comes from the line. Robert Spingard from Credit Suisse. Your question, please.

Good morning.

Good morning.

Nick or Kevin, I have a question for you, and it relates to the MAX, but it's higher level. You know, Nick, you've always had that chart about the life cycle of a Trans9 program. It's like 50 years, and there's different colors and so forth. How long does a platform need to stay in service before you're MPV positive? You know, when you get past the development costs and the zero to low margin OE, you know, how much of a run until you're in the black?

I don't, you know, I don't think I can give a number. You know, we have so many different part numbers now and so many different, you know, economic situations. You know, some are significant problems. essentially up front, some aren't much. I don't think I can give you a very good number on that, Rob. I would say, you know, if you look at a program, you know, it's going to have a development, you know, that goes on, pick your number, you know, three, four, five, six, seven years, depending on the situation. You know, you're not going to make much money until you get through the first four or five-year period because either you're on warranty or even if it's not a warranty, it's a practical matter, things don't break much. or you don't get much in the first four or five years. So you're surely out, you know, four or five years after production before you're starting to see any, you know, significant, I'd say, positive net on the whole thing. Beyond that, it's just too dependent on the specific part and program.

Okay. And then I just had one on Esterline. Now that you've got it, I think, Kevin, you said it's ten months post-deal, you know, Have you found anything either more positive or more negative under the hood in that business, being a publicly traded company versus the private companies you've bought? Anything specific there that would be interesting to us?

You know, as we've talked about, you get limited due diligence up front. So we went in not sure all that we would find. I think In general, we've found that things have been better than we assumed up front, and there hasn't really been yet anything that is bad news, anything that we didn't anticipate or expect. It certainly emboldens us for the future to continue to look at acquisitions like this.

Okay, was there anything different about their aftermarket pricing dynamic because they were public versus the smaller private companies that you've bought in the past?

No, no, not that we have seen, no. Okay, thank you.

Sure. Thank you. Our next question comes from the line from Calinate Company. Your question, please.

Yes, thanks. Good morning, guys.

Good morning.

I had two questions. First, I was wondering, have you noticed any continued or incremental hesitation by the Defense Department in placing orders, just given the whole overhang of the IGU investigation? Does that explain anything in terms of lumpiness of bookings or anything you can point to there?

So to answer that one, first off, we have initially we saw some slowdown. We have been meeting frequently with the DOD, DLA, IG, and other important stakeholders in the process to continue to communicate, answer questions. Once we started doing that, I think some of the pent-up demand started to flow a little bit. So I'm not believing that a slowdown, to get to the point I think that you're driving at, a slowdown in defense aftermarket bookings is anything more than a filling of the bins up around the ranch. That's still what we believe. We have seen that our interaction with the DOD DLA has been positive. communicating, spending time going through the issues, and it's positive.

Okay, that's helpful. And then just on the commercial air transport aftermarket in the quarter and maybe subsequent to that quarter, anything you can comment on by region? I mean, have you seen any coronavirus impact in AsiaPAC and or, you know, between the various channels, distributor versus non-distribution and

No, we don't look at our business like that from a geography, and it's also the way that our products are distributed and sold. You can sell to one region, and that's where the distributor is based, and it goes all over the world. So we don't have great data on individual consumption by country or airline or platform. So, no, we don't have that kind of visibility to offer you.

Okay, and any disconnect between the distribution channel and direct in the quarter? Any restocking?

No, we don't have a composite POS any longer that, you know, the flow-through sales from our distribution partners that we can – comment on. After the combination of Esterline into the Transdyn businesses, because they tended to use different distributors, it made the metric not as useful for us so far. So I don't have any good comment on POS in distribution by region. I know what you're driving at, and we keep looking for that as well to see if there's a pickup in you know, 737 MAX related to the aftermarket in specific regions? Are there any slowdown? But we don't have that kind of granularity to be able to give you that commentary. I mean, the only thing I'd add is, you know, we're pretty well distributed across the fleet. So, I mean, if you look at where the fleet is around the world and you look at where the miles are flown around the world, ultimately if those change, you know, the weighted impact of that will reflect on our demand at some point.

Thank you. Thank you. Our next question comes from the line of Carter Copeland from Milius Research. Your question, please.

Hey, good morning, everyone. Good morning, Carter. Kevin or Nick, just wondered, I mean, if I've learned anything about you guys over the last decade or plus, it's that you don't let resources sit around idle. So to the extent you've got folks in your factories that are perhaps overstaffed even, you know, if it's a temporary basis because of this max situation. Do you, you know, would you have any intent on attacking productivity with those resources in the, you know, in the meantime? And could you end up coming out on the backside of this uncertainty with, you know, some better efficiency in your factories? How are you thinking about using that?

Of course we look at all of these are opportunities to drive productivity productivity is an important part of our value driver mindset. You know, we announced a 3% to 10% headcount reduction in the call so far. I think that is, you know, that's going to vary by business. We'll see the impact of that far out, you know, in the second half of the year. It will vary by business depending on impact and what they're seeing and what the order book looks like. So we're looking at this as the right thing to do to drive productivity. Is it opportunistic, and will we see better productivity out the other end? I don't know. We certainly aim to be very efficient in the way we run our businesses, not let extra labor sit around, not go after pet programs or other projects. We're already working productivity aggressively, so there's maybe nothing additional to be gained by putting more people on productivity. But we want to manage our headcount efficiently in all of our resources the correct way. The only thing I'd add, Kevin, is I believe the 3% to 10% is not just factory. It's across the headcount. Yes, it's direct and indirect, absolutely. And, you know, it'll probably – I don't know how it'll split out on that. And the reason why I'm giving you a range is because we're still early in this process of implementing. I think most people have already been notified, but given our decentralized nature in this, the actions happen at the plants. They don't happen at corporate. So I'm still waiting to hear back on all of that.

But just thinking through the history, I mean, I think without Nick in the past, there was a sort of a measurable impact on the back end, if memory serves me right. Is that correct?

I would hope so. We would expect that would be the case. I mean, our hope is, Carter, to be out ahead of this, not behind it.

Yep. Understood. Thanks, guys.

Sure. Thank you. Our next question comes from the line of David Strauss from Barclays. Your question, please.

Thanks. Good morning, everyone. Good morning. Nick, you talked about the max being 3% to 4% of revenues, less on an EBIT basis. Is the 787 similar in magnitude?

I think the 787 is a little bit less. But, you know, I'm not looking at that right in front of me. But, you know, we have modeled that that would drop by – I believe it's four units a month in early 2021. So, yeah, that's factored into our thoughts.

Okay.

And I'll just add the 3% or 4% on the 737, just to be clear, that is more like its full production.

Yeah, that's full production rate.

Great point.

Right. Right. I know you don't want to get too much into separating out esterline anymore, but you gave enough detail for us to back into kind of where their EBITDA margins are and approximate where their EBIT margins are. Can you just talk, I mean, obviously a bit away from the corporate average, but can you just talk about – you know, maybe broad-based views of where the margins on underlying esterline could go based on, you know, now having the company for approaching a year?

Yeah, that's obviously we don't know. But in the fullness of time, it should continue to move in the direction that Trans9 is at. Whether it gets all the way there or not remains to be seen. But in the fullness of time, we don't see that this is a business that hampered in any way fundamentally.

Okay. And, Mike, on free cash flow, it looks like, you know, backing into everything, you know, you're looking at $1.2 to $1.3 billion this year, roughly.

That's right. That's right. It was stronger this quarter than it will be next quarter just because of the timing of interest and tax payments. We have fewer payments this quarter and next quarter our fiscal Q2 double payments on interest and taxes, so it's a little bit less. But that's right for the year. All right.

Thanks, guys. Thank you. Our next question comes in the line of Robert Starley from Vertical Research. Your question, please.

Thanks so much. Good morning. Good morning. Kevin, I think you mentioned that the Bizjet aftermarket was strong in the quarter, but underlying FAA activity is still flat. I was wondering if maybe you could perhaps explain that disconnect there, perhaps why the number was so strong this quarter.

Yeah, I wish I had some better. It's surprising to us as well. Given the takeoffs and landings after a few years of strength, still not back to the pre-2008 levels, but we just haven't seen anything, and recently it's gone negative. So what we're seeing here is a little bit of a surprise, I'll have to say, and I don't know how long it will last. Certainly the fundamentals of the industry don't appear to be good, but we're still seeing solid demand. So we will continue to ship it, but I wish I had a better explanation for you on why or where it's coming from. You know, what we see across this business, given the aftermarket nature, whether it's defense, it's commercial, it's biz jet, is that aftermarket orders can be lumpy. And that's part of what we're seeing, I think.

Yeah. And then on the whole max issue, Have you actually taken – I know you're making lots of different products. Have you taken your rate down to zero, or are you still running some of your products at some sort of rate so you can keep your supply chain ticking along?

Yeah, we have had some communication with Boeing on what this will look like. We have taken our rates down to zero, more or less, where we are right now. And, you know, it'll gradually build out based on, you know, what Boeing is communicating to us, which – You know, again, this is early days in the communication process. So we're following their guidance on this. I'm not hedging it further.

That's great. Thank you. Thank you. Our next question comes from the line of Miles Walton from UBS. Your question, please.

Thanks. Good morning. One thing, Kevin, maybe you can clarify a little bit on the cost action you're taking. Is the cost action effect to 2020 significant? net neutral positive or negative to EBITDA?

I think it's too early to tell right now. We are still figuring out the downside of some of the headwinds we're talking about and balancing this out. I think I need a little more time to comment on that, on whether it's neutral or will add anything to the EBITDA for the year. So I just need a little more time on that. It's too early in the year to change that. But there's no reason to think the adjustments could be negative. I don't want to give you an idea that it's going to be one way or the other.

Yes. Sorry, I meant is there a cost to achieve that will be front-loaded to the second quarter or third quarter that we should kind of be mindful for and you catch up on the benefit in the back half of the year, that's all?

Yes. Miles, are you talking about severance charges? Yeah, exactly. We wouldn't expect those to be too material. Okay. But still, they would hit us earlier. They'd hit us earlier next quarter.

Okay. And then, Nick, a little bit off topic, but I think still relevant, your role at EverArk. I'm just curious, as you look at you dividing your time between here and as that business matures, can you just talk about how you think your role is? may stay the same or change over time?

Thanks. My primary activity is here, of course. As you probably know, I'm chairman there, not an active manager and an investor.

Okay, so no anticipation of any role changes at all?

No. Okay, great. Thanks. Thank you. Our next question comes from the line of Ken Herbert from Ken Accord. Your question, please.

Hi. Good morning. Good morning. Kevin, I just – sorry, but I just wanted to follow up one more time on the commercial aftermarket and the up 17 in the quarter. I mean, it sounds like there wasn't anything unusual, but I just wanted to confirm that you didn't see anything in terms of, you know, maybe airline budget dumping around end of the calendar year or any of the recent distribution agreements or anything else you've signed that could have been sort of one time beyond just fundamental growth in the quarter?

No, we looked for it. It was a surprise that it was as solid and strong as it was. I will say that that's the 17 in the quarter isn't just an artifact of the acquisition. Transdime Legacy, although I said I wouldn't refer to this, I wanted to give you some reassurance that the Transdime Legacy business would have still been a a highlight, a headline number that everyone would have reacted to. So we're seeing strength across the board. It's not due to a program. It's not due to a single business unit. And it really wasn't any one-timers that we saw in there.

That's helpful. And if I could, just bigger picture. I mean, as you talked about, you're almost a year into closing EstraVine. As you think about your acquisition pipeline and as you think about opportunities moving forward, Can you just talk a little bit about maybe what you'll do differently moving forward on acquisitions or some of the lessons learned that you can apply which would make what already was from the outside a very good process potentially even better?

I'll start on it, and I'll let Mike and Nick jump in. I don't know if there's so much that we learned except that maybe we're a little conservative in some of our modelings. So that's good. That's good for all of us, good for you. I think we've learned that we can, you know, go after a significant business, multifaceted, many moving pieces, and with our model and the way we, you know, handle the integration that we can tackle them and, you know, do a nice job of bringing them into the fold, into the fabric of Trans9. That's what I think I've learned from what I've seen on the operational side. Also, the folks in the acquired company are very interested in being on a winning team. It's amazing the attitude, the morale, the real positive perspective that the employees have as they're now part of this team is really incredible, and it's why I think we're accomplishing some pretty heavy lifting so quickly. Guys, anything? I think that's right. One thing I'd add, too, is just on the aftermarket point. We looked at Esterline from the outside in for years before the acquisition finally happened and looked at the aftermarket and couldn't make sense of the low 10% to 12% rate that was published. And I think from an M&A due diligence standpoint, one thing going forward is – We might put less faith on what a company tells us just because they might not be tracking it the way TransDyn would. Yeah, I guess I'd say a couple of things. I think our organizational method of keeping it separate for the first, you know, 12 months or so I think was a plus in that there's, you know, you buy something with that many operating units and there's a lot of heavy lifting to be done in the first year. So keeping that so it didn't confuse and leak over into our base business I think was a good call for us, and I think that's a model we'd probably think to repeat again if we bought something like that. I think we also had a combination of what I'll call good luck and good management. By the good management, I'd say we're in a space we know pretty well, so we can make judgments even when some of the numbers don't make sense. And I think our operating methodology is – works well and proven over and over. I'd say in the good luck category, I'd say we were conservative in the forecast because you don't get as much information as you usually get when you buy something. And the good luck category is there didn't turn out to be a big bomb in there somewhere. So that's the comments I have.

That's very helpful. Thank you very much.

Thank you. Our next question comes from the line of Michael Termoli from SunTrust. Your question, please.

Hey, good morning, guys. Thanks for taking the questions. Nick or Kevin, I think you mentioned in the prepared remarks that the esterline growth was tracking ahead of expectations. Can you just maybe... give a little bit more color there, you know, knowing that you're not going to parse it out, but was it just more general end market strength that you're seeing, you know, across, you know, all of your product line? Was it a little bit of pricing, better execution? I mean, is there – are you seeing that aftermarket capture that maybe Esterline didn't execute on in the past? You know, maybe just if you can give some color there.

Yeah, I'll take a stab at it, and then Mike has some more maybe insight. You know, I think productivity and value-based pricing, you know, I think we've seen great opportunities in both, specifically on the commercial side. You know, it's encouraging what we've seen, you know, Beyond that, you know, we have seen certainly productivity improvements. We've seen opportunities to inject cash, to get delinquencies down. There were some significant delinquencies in parts of the business. There was some capitalization issues that needed to be addressed. You know, I think we've approached this on an operational front to drive the focus the Transdime legacy business on being the best operations performers they can be, having the best quality, the best on-time delivery, being an organization that you can really count on. That's really been our focus here. And we've seen opportunities. We've said in the past equally split on productivity and price and winning new business. I think that still holds. Mike, do you have any? Yeah, I think that's right. In addition to some of the productivity and ops points Kevin made, the Esterline business you see is good growth. So for the TransLine legacy business, we referenced the 8.7% organic growth that the Esterline business is growing in that same sort of ballpark. So pretty strong revenue growth, and it's from a mix of both price and volume.

Got it. That's helpful. And then maybe, Mike, just one last one. The full-year interest expense, I think $1.02 billion, any color as to how the debt repricing might impact that expense as you sit here today and go through the process?

Yes. We're crossing T's and dotting I's to finish it this week. It should wrap up this Thursday, and we'll issue an 8K. We expect the rate to tick down slightly on the term loans. And we also got the package of amendments.

Got it. Thanks, guys. Thank you. Our next question comes to the line of Greg Conrad from Jefferies. Your question, please.

Good morning. Good morning. Just to go back to the max really quickly, just a clarification question. You said it was 3% to 4% of sales, and you had some headcount reductions later on this year. I mean, how much of that max capacity is fungible and can be reallocated to aftermarket or OE programs versus... just idle capacity today?

Yeah, I would say, you know, not much of it. Aftermarket's built on the same lines as the OEM products for, you know, the largest extent. So, you know, the volume occurs on the OEM side. You can't make it up in aftermarket. You can't move people around necessarily. They're trained on certain pieces of equipment or processes. So I would say it's not that fungible that you can so easily move people around. We certainly try to do that first. And where there are needs, we try to certainly move people. It's, you know, you have to take a riff or a reduction when you don't see those opportunities out there.

Thanks. And then I know it's small, but you mentioned a modest decline in the interior aftermarket. I think last quarter you talked about some international wins kind of converting to sales as we move forward. What are you seeing in that particular end market?

Yeah, for the quarter, for Q1, it was a little soft. I think I commented that we saw some negative growth there, and then the freight side. The freight side, it made sense. We've seen slowing FTKs for a while. On the interiors, I noted previously that we were starting to see some orders, some interest here that would turn things around, and that's, I think, the case when I look at the bookings for the future and our interior side of the business, they're starting to grow again. So that may be an indication that, you know, future quarters will be better on the interior side of the aftermarket.

Thank you.

Thank you. Our next question comes from the line of Hunter Keefe from Wolf Research. Your question, please.

Hi. This is actually Mike Montarion for Hunter. So you mentioned some cuts to some business dev programs. Are those production cuts due to end market weakness, product transitions, or is it large cabin, multiple market segments, any color would help?

I don't think I said that we were seeing any cuts in BizJet. I think what we're seeing on the OEM side is new programs. We're on all of the important new programs here on the BusinessJet side, and we're seeing Bookings come in. We're seeing shipments on that. On the aftermarket side, I think pleasantly surprised that the aftermarket and the BizJet sector is holding up so well, given the takeoff and landing cycles have been anemic. That's what we said. Yeah, BizJet is a tougher market, you understand. It's a small part of our business now, as we've grown other sectors faster. But it has been difficult to predict over the last, I think, even couple of years.

That helps. Thank you. And then one from Mike. How are you thinking about taxes? And I'm thinking like over the next three to five years. So how are you thinking about changes to tax code beyond 2021? Are there any things that we need to be thinking about there? Thank you.

I don't think so. The long-term guidance, on across all three rates is still 24 to 26%. And if you were looking for something to plug into a model, I'd encourage you to just stick in that range at this point.

Thank you. Our next question comes to the line. That's from JP Morgan. Your question, please.

Thanks very much. Good morning, everyone. Good morning. With regard to the margin guide, The seasonal pattern is to see improvement off of Q1, and Q1 was relatively strong versus the guidance. I appreciate the idea of having some caution in the guidance given all the unknowns out there for this year, but given that the severance is not supposed to be that material, is there anything else that we should be aware of that would keep that kind of sequential margin improvement from happening other than you know, just trying to be very cautious amid mass coronavirus, whatever else is happening in the world.

I think that the guidance just reflects our best judgment, and we're hopefully being a little bit cautious and conservative, to your margin point. I completely agree with that. It's, you know, there's caution in there. There's a, you know, a lot of information isn't known, and we don't want to send the wrong signals and have to change them or modify them. We'd rather be cautious on this.

But also to remind you, though, that the aftermarket grew ahead of what we expected for Q1, and so that there very well could be sequential decline in the margin from Q1 to Q2. That's a good point.

Okay, great. Thanks. And then as a quick follow-up, Nick, just when you think about the impact that the max situation might have on M&A opportunities over time, Do you have any initial thoughts on that? Maybe suppliers who might be more apt to be looking to sell now?

Not that I know of. It would surprise me if it had much impact. As you know, we buy proprietary aerospace stuff with a decent aftermarket. In other words, we buy good businesses. People usually don't sell good businesses in times of temporary down cycle. You know, now, if you told me this was going to drop down like a rock and go on for a long period of time, I'd say that might stress some people. But given the situation that exists today, I'd be surprised if it changes anyone's view of either the hold period or what they want to buy or sell for good businesses. Now, I would say for non-proprietary businesses that are very heavily weighted towards OEM or particularly the 737, it could stress the hell out of them, but that's not the kind of stuff that we typically buy.

Great. Thank you very much.

Thank you. And this does conclude the question and answer session of today's program. I'd like to hand the program back to Liza Sable for any further remarks.

We'd just like to thank you all for calling in this morning, and that concludes our call. Thank you.

Thank you, and thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.