Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2020 TransDigm Group Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s program is being recorded. I would now like to introduce your host for today's program Liza Sabol, Treasurer and Director of Investor Relations. Please go ahead.

Thank you and welcome to TransDigm's fiscal 2020 first quarter earnings conference call. Presenting this morning are TransDigm's Executive Chairman, Nick Howley; President and Chief Executive Officer, Kevin Stein; and Chief Financial Officer, Mike Lisman. Please visit our website at transdigm.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 Investors 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 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 reconciliation. 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 and 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 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 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 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 are off to a good start in fiscal year 2020 with solid operating performance in the quarter. Revenues and EBITDA as defined are up substantially. Of course, much of this is due to the Esterline…

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 EBITDA, as defined, were up substantially over last year due in part to good organic growth, as well as continued acquisition integration and performance. Q1 GAAP revenues were up approximately 48% versus prior year Q1 and EBITDA, as defined, was up 40% versus the prior year, with margins approaching 47% of revenue. Now, we will review our revenue by market category. For the remainder of the call, I will provide color commentary on a pro forma basis compared to the prior year period in 2019. That is assuming we own the same mix of businesses in both periods. Please note that beginning this quarter, this market analysis discussion now includes the results of the former Esterline businesses. In the commercial market, which makes up close to 70% of our revenue, we will split 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, bookings solidly outpaced Q1 sales in the current period by more than 15%. We did see minimal headwind from the impact of 737 MAX production halt this quarter. However, we believe any currently anticipated impact from the MAX issues should not have a material impact on our EBITDA for the full fiscal year. We…

Good morning, everyone. I'm going to very quickly elaborate on some of the financial results that Kevin just discussed. As a reminder and as mentioned on our last earnings call, the Esterline organization is 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 TransDigm. We're therefore not planning to give too much specific color or details around Esterline's performance separate from that of legacy TransDigm. So, for the consolidated TransDigm business, a few quick notes on how we ended the first quarter of FY 2020. And as a reminder, Esterline closed mid-March of last year. So, it's not included in any of the fiscal 2019 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 TransDigm 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 revolver. Now, a quick update on interest and taxes. Interest expense is expected to be about $1.02 billion in fiscal 2020 and this estimate's 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 GAAP, 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 2020, 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 TransDigm. And with that I'll turn it back to the operator to start the Q&A.

Certainly. [Operator Instructions] Our first question comes from the line of Noah Poponak from Goldman Sachs. Your question please.

Hey good morning everybody.

Good morning.

Nick I wanted to try to ask you if you could kind of take a step back and try to provide us some context for where the current fundamentals of the aerospace aftermarket are compared to your long history at the company. Because we've got the MAX situation, but then we've also got all the MRO facilities telling us there's a much longer wait than ever and we've got all these airplanes coming out of the warranty period. You just printed the number you printed. So, I'm just kind of curious 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. The – 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 who knows where that goes. The -- I guess the closest model would be the SARS situation whatever that was some number of years ago. And that for a quarter or two had a pretty significant impact. I think I – obviously, I come down the same place as Kevin. We're sort of -- we're going to change our view from the beginning of the year. So I have to say there's probably a wider band around it than there might have been six months ago.

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

Kevin do 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 of Robert Spingarn 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. Nick you've always had that chart about the life cycle of a TransDigm program. It's like 50 years these different colors and so forth. How long does a platform need to stay in service before you're MPV positive? When you get past the development costs and the zero to low-margin OE, how much of a run until you're in the black?

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

Okay. And then I just had one on Esterline. Now that you've got it, I think Kevin you said it's 10 months post deal. 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?

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 a 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 of Gautam Khanna from Cowen and Company. Your question, please.

Yes. Thanks. Good morning, guys.

Good morning.

I had two questions. First, I was wondering, have you noticed any continued or incremental hesitation by the defense department in placing orders, just given the whole overhang of the IG 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, DOA, IG and other important stakeholders in the process, to continue to communicate, to 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, DOA has been positive. We're 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 the quarter, anything you can comment on by region? I mean, have you seen any coronavirus impact in Asia-Pac and/or between the various channels, distributor versus non-distribution and what have you? If you can parse that out.

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're -- we don't have great data on individual consumption by country or airline or platform. So, no, we don't have that kind of visibility to offer you.

Okay. And any change -- any disconnect between the distribution channel in direct in the quarter? Any restocking?

No, no. We don't have a composite POS any longer that -- the flow-through sales from our distribution partners that we can comment on after the combination of Esterline into the TransDigm 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 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 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 flowing around the world, ultimately if those change, 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 Melius 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 if it's a temporary basis because of this MAX situation do you – would you have any intent on attacking productivity with those resources in the meantime? And could you end up coming on on the backside of this uncertainty with 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. We announced a 3% to 10% headcount reduction in the call so far. I think that's going to vary by business. We'll see the impact of that far out in the second half of the year. It'll vary by business depending on 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.

Great. And the only thing I'd add Kevin is I believe 3% to 10% is not just factory. It's across the headcount.

Yes. It's direct to indirect.

Yes.

Absolutely. And it will probably I don't know how it will 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 and 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 about 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.

Yes. 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.

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's a little bit less. But I don't -- I'm not looking at that or in front of me. But we have modeled that that would drop by I believe it's four units a month in early 2021. So, yes that's factored into our thoughts. Okay. And as I said the 3% or 4% on the 737 just to be clear that is more like at full production.

Yes, that's full production to your point.

Right. I know you don't want to get too much into separating out Esterline anymore, but you gave some -- you gave enough detail for us to back into kind of where their EBITDA margins are and approximately 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 maybe broad-based views of where the margins on underlying Esterline could go based on now having the company for approaching a year?

Yes, that's -- obviously, we don't know. But in the fullness of time, it should continue to move in the direction that TransDigm 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 backing into everything you're looking at $1.2 billion 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 from the line of Robert Stallard from Vertical Research. Your question please.

Thanks so much. Good morning.

Good morning.

Kevin I think you mentioned that the biz jet 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.

Yes, I wish I had some better -- it's surprising to us as well. Given the take-offs 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, our -- what we're seeing here is a little bit of a surprise I'll have to say and I don't know how long it will last. Certainly, the fundamentals of the 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. What we see across this business given the aftermarket nature whether its defense, it's commercial, it's bizjet is that aftermarket orders can be lumpy and that's part of what we're seeing I think.

Yes. And then on the whole MAX issue, have you actually taken -- I know you're making lots of different products. I mean 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 to heal?

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 it will gradually build out based on what Boeing is communicating to us, which 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 Myles Walton from UBS. Your question please.

Thanks. Good morning.

Good morning.

I was wondering Kevin maybe you can clarify a little bit on the cost action you're taking. Is the cost action effect to 2020 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 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.

Okay.

But there's no reason to think the adjustments could be negative.

I'm just not -- I don't want to give you an idea that it's going to be one way or the other.

Yes.

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

Myles are you talking about severance charges?

Yeah exactly.

We don't expect those to be too material. No.

Okay.

But yeah they'll -- but still they would hit us earlier.

They hit us earlier next quarter.

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

Yeah. My primary activity is here of course. As you probably know I'm a Chairman there. I'm 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 Canaccord. Your question please.

Hi, good morning.

Good morning.

Kevin I just – sorry, but I just wanted to follow-up one more time on the commercial aftermarket 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 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 one-time beyond just fundamental growth in the quarter?

No. We look for it. It was a surprise that it was a solid strong as it was. I will say that that's -- the 17 in the quarter isn't just an artifact of the acquisition. TransDigm legacy, although I said I wouldn't refer to this I wanted to give you some reassurance that the TransDigm legacy business would have still been 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, you – as you talked about, you're almost a year into closing Esterline. As you think about your acquisition pipeline and as you think about opportunities moving forward, can you just talk a little bit about maybe what you'll do differently moving forward on acquisitions, or some of the lessons learned 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 modeling. So that's good. It's good for all of us. Good for you. I think we've learned that we can go after a significant business multifaceted, many moving pieces. And with our model and the way we handle the integration that we can tackle them and so do a nice job of bringing them into the fold, into the fabric of TransDigm. That's what I think I've learned and from what I've seen on the operational side. And also the folks in the acquired company are very interested in being on a winning team and it's amazing, the 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 TransDigm would.

Yeah. I guess, I'd say a couple of things. I think, our organizational method of keeping it separate for the first 12 months or so, I think, was a plus and that there's – 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 it's a model we probably think to repeat again if we bought something like that. I think we also had a combination of, what I'll call, good luck 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 we – you don't get as much information as you usually get. And when you buy something and good luck category is there, didn't turn out to be a big bump 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 Ciarmoli 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, knowing that you're not going to parse it out? But was it just more general end market strength that you're seeing across 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? Maybe just if you can give some color there.

Yes. I'll take a stab at it and then Mike has some more maybe insight. I think productivity and the value-based pricing I think we've seen great opportunities in both on the – specifically on the commercial side. It's encouraging what we've seen. Beyond that 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 were some capitalization issues that need to be addressed. I think we've approached this on an operational front to drive the Esterline business much like we focus, the TransDigm legacy business on being the best operations performers they can be having the best quality, the best on-time delivery, being an organization that you can really count on. That's really been our focus here. And we've seen opportunities. We've said in the past equally split on productivity and price and winning new business. I think that still holds. Mike do you have any?

Yes. I think that's right. In addition to some of the productivity and all the points, Kevin made, the Esterline business has seen good growth. So for the TransDigm 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 Is or crossing Ts with Is to finish it this week. It should wrap up this Thursday and we'll issue an 8-K, but we expect the rate to tick down slightly on the term loans. Now we also got that package of amendments.

Got it. Thanks, guys.

Thank you. Our next question comes from the line of Greg Konrad 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?

Yes. I would say not much of it. Aftermarket is built on the same lines as the OEM products for the largest extent. So 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 have to take a riff or 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?

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

Thank you.

Thank you. Our next question comes from the line of Hunter Keay from Wolfe Research. Your question please.

Hi, this is actually Mike on for -- Mike Maugeri for Hunter. So, you mentioned some cuts to some big 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 business jet side and we're seeing bookings come in. We're seeing shipments on that. On the aftermarket side, I think pleasantly surprised that the aftermarket and the biz jet sector is holding up so well given the takeoff and landing cycles have been anemic. That's what we said. It's -- yes, business jet is a tougher market to understand. It's a small part of our business now as we've grown other sectors faster, but it has been difficult to predict over the last I think even a couple of years.

That helps. Thank you. And then one for Mike. How are you thinking about taxes? And I'm thinking like over the next three to five years. So, how are you thinking about changes to tax code beyond 2021 or 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 from the line of Seth Seifman from JPMorgan. Your question please.

Thanks very much and 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 just trying to be very cautious amid MAX 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 caution in there. There's 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 a sequential decline in the margin from Q1 to Q2.

It'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?

No. 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. 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 the -- either the whole period or what they want to buy or sell for good businesses. Now, I would say for non-proprietary businesses that are 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 Sabol 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.