TransDigm Group Inc (TDG) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2018 TransDigm Group Incorporated Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Liza, Investor Relations. Ma'am, you may begin.

Thank you, and welcome to TransDigm's Fiscal 2018 Fourth Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm's Executive Chairman, Nick Howley; President and Chief Executive Officer; Kevin Stein; and Chief Financial Officer, Mike Lisman.

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 or on our website at transdigm.com. It should also be noted that our Form 10-K will be filed this Friday.

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 through the Investors section on 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 a reconciliation of EBITDA, EBITDA As Defined, adjusted net income and adjusted earnings per share to those measures.

I will now call -- turn the call over to Nick.

Good morning, and thanks, everybody, for calling in. Today, as usual, I'll start with a few summary comments on our consistent strategy, then a little bit on '18, '19. I'll make a few comments on the Esterline deal that we recently announced. Kevin and Mike will review the business performance for '18 and the outlook for '19. I'd also like to point out that Mike Lisman here will be batting third today in his first big league start. So congratulate him.

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 in the cycle. To summarize why we believe that, about 90% of our net sales are generated by proprietary products, and over 3/4 of our net sales comes 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 through the cycles.

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; secondly, we utilize a simple, well-proven, value-based operating methodology; third, we maintain a decentralized organization structure and a unique compensation system closely aligned with shareholders; fourth, we acquire businesses that fit our strategy and where we see a clear path to PE-like returns; and lastly, our capital structure and allocation is a key part of our value-creation methodology.

Fiscal year '18 was another good year for TransDigm. Revenues were up 9% and EBITDA up about 10% versus the prior year, and EBITDA margins again were solid. Fiscal year '19 is shaping up as another good year. The growth in revenue and EBITDA As Defined are very similar to 2018. EPS will be negatively impacted by the nonrepeating tax benefit and somewhat higher interest expense.

In fiscal year 2018, we spent about $660 million on 3 acquisitions. All 3 are good, proprietary aerospace businesses that meet our strategic and return requirements. They are performing well and currently meet or exceed our acquisition models.

Our liquidity is strong. We closed the year with about $2.1 million of cash. And before closing Esterline or any other acquisitions or any other capital market activity in the next year, we'd expect to have about $3 billion in cash at fiscal year-end 2019. We also have close to $600 million of undrawn revolver capacity, and we have room under our credit agreement. The timing of the Esterline closure and the related financing could significantly impact the actual cash at fiscal year-end 2019.

As I said, we have significant cash and availability. We continue to evaluate and seek M&A opportunities. We have a decent pipeline of mostly small and midsized possibilities. I can't predict or comment on possible closings, but I can say we're still working steadily at the M&A part of our business, and we're open for business.

A few comments about our recent Esterline announcement. As I think you know, we are paying about $4 billion, or roughly $2 billion in revenue; and based on public consensus information, approximately $330 million in fiscal year '19 EBITDA. As we said before, we think Esterline has been a misunderstood company. Its core aerospace and defense business makes up about 3/4 or more of the revenue. This core business has proprietary content and sole-source positions quite similar as a percent of revenue to TransDigm.

The core aftermarket also appears significant. We estimate over 30% of the revenue. The platform positions are good, and they're fresh on the Boeing and Airbus platforms, on business and regional platforms and many military programs, including the Joint Strike Fighter. Closing could be 6 to 12 months after the signing timeframe. Could be sooner or it could be later, depending on the regulatory process, which sometimes is hard to predict. It does appear now that we will not require a Chinese antitrust filing. But we have not made any decisions on asset disposition at this time. I would not be surprised if within a year or so after the acquisition closes, we will have sold some of less-aligned assets. We don't have any specifics or dollar amounts at this time.

This was a competitive process, as you will see from the Esterline proxy, which will soon be filed. We decided that we wanted to own this, and we paid the price to win it. Though at roughly 12x the consensus EBITDA for fiscal year '19, it is well within the range of substantial aerospace acquisitions.

We see a clear path to our PE-like return. As I said before, the EBITDA ramp-up may be a little slower. We are not modeling this to get to TD levels -- TDG levels of EBITDA margin. This is due to a number of factors, including our hopefully conservative forecasting, since in a public process, we don't get as much on-the-ground detail as we might like, some contractual situations, and the level of non-U. S. employment. We do think the EPS-as-adjusted impact will be accretive in the first 12 months after acquisitions.

Though the revenues have been flat in the last few years, assuming the market and economic conditions hold, we anticipate that a number of factors should contribute for a modestly more positive trend going forward. These include the stabilization of the wide-body market and Esterline's strong positions on new wide-body platforms; the business jet and regional markets, where they have good positions, appear to be improving; certain significant defense program declines seem to have bottomed out; and when combined with good, solid content on the Joint Strike Fighter, the trend here looks encouraging. And lastly, the oil and gas markets seem to have bottomed out.

We have a good, experienced team already started on the integration planning and discussions with Esterline. This is headed by Bob Henderson, our Vice Chairman, a long-time senior executive with TransDigm. We have committed financing of $3.7 billion, which is close to the full purchase price. Depending on the timing of the closing, exactly how much of this $3.7 billion financing commitment we will use versus the roughly $3 billion in cash we may have at that time will still have to be determined, and we'll decide as we get closer. In any event, I do not expect that our net leverage at close will be out of line with our recent levels. Absent any other acquisitions or capital market activities, we should still delever about 1 turn a year thereafter.

Now let me hand this over to Kevin, who will discuss both the '18 performance as well as the '19 guidance.

Thanks, Nick. As you have seen, we had a strong fourth quarter to end another good year. Mike will provide more details on the financials, but our fourth quarter and year-to-date operations revenue and EBITDA As Defined were up nicely over last year. Q4 GAAP revenues were up 14% versus prior year Q4 and up 9% versus prior year-to-date. EBITDA As Defined margin ran close to 50% of revenue in both periods.

Now let's review our revenues by market category. For the remainder of the call, I will provide color commentary on a pro forma basis compared to the prior year period in 2018, that is assuming we own the same mix of businesses in both periods. Please note, this analysis excludes the recent acquisition of Kirkhill, which will be included going forward in 2019 for comparison purposes.

In the commercial aftermarket, which makes up close to 70% of our revenue, we will split our discussion into OEM and aftermarket.

In our commercial OEM market, Q4 revenues increased approximately 6% when compared with Q4 fiscal year 2017, and were up 1% for the full year. Commercial transport OEM revenues, which make up the majority of our commercial OEM business, were up slightly in Q4 when compared to the prior year period. Bookings in the quarter were encouraging and make us cautiously optimistic. Hopefully, we will have turned the corner and the softness we have experienced this year in the commercial OEM space, primarily due to wide-body weakness, is behind us. As we have previously stated, commercial transport OEM sales can fluctuate from time to time. But at its core, our shipset content remains robust, so any softness is simply timing-related.

Business jet and helicopter OEM revenues make up around 20% of our commercial OEM revenues. In total, year-to-date revenues in this market grew in the mid-teens percentage range compared to the same period in 2017. Year-to-date bookings versus shipments were up in a similar percentage range as revenue growth. We were happy to see growth driven from both the business jet and helicopter segments as both markets picked up nicely in the second half of our fiscal year.

Now moving on to our commercial aftermarket business. Total commercial aftermarket revenues grew by approximately 6% in the quarter and brought the full year to 9% growth. In total, 9% growth for the full year was at the high end of our original expectations. It is important to remember, the aftermarket can be lumpy. As we have previously communicated, we think we ran a little hot in the first half of our fiscal year, thus driving the second half to be a little lighter.

Commercial transport aftermarket, which makes up about 85% of our total commercial aftermarket, revenues in the quarter were up approximately 5% over the prior quarter, and full year revenues grew 9%.

Finally, for the business jet/helicopter aftermarket, which accounts for the final 15% of revenue in our total commercial aftermarket, year-to-date, sales growth was up in the low teens percentage range. This end market performed better than we originally anticipated after an extended period of softness.

In total, our commercial aftermarket performed better than our original expectations. Last November, we also provided guidance for the aftermarket submarkets, which make up our commercial aftermarket business.

Here in fiscal year '18, we saw our commercial transport passenger segment come in line with guidance, and freight, discretionary interiors and business jet/helo all perform ahead of expectations.

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 12% over the prior year Q4 and up 5% for the full year. Once again, strong defense aftermarket revenue growth was slightly tempered by slower defense OEM shipments, although OEM revenue was strong in the quarter and sequentially up.

Total defense bookings continue to be up nicely over prior year and have similarly outpaced sales. This expansion is characterized by modest OEM bookings growth and stronger aftermarket performance -- bookings performance.

Full year total defense market sales and bookings are well distributed and appear to be coming from most businesses that support defense-related platforms.

We believe we started to see some of the strong defense bookings materialize into sales this quarter. However, defense orders can be booked as far out as 2 years, so the timing of related shipments can be difficult to predict as actual shipment dates can be delayed based upon a number of factors.

Now moving to profitability. I'm going to talk primarily about our operating performance or EBITDA As Defined. EBITDA As Defined of about $525 million for Q4 was up 14% versus prior Q4 and $1.88 billion or up 10% on a year-to-date basis. Full year 2018 EBITDA As Defined margin was 49.2% of revenues. This includes over half a margin point of dilution from the recent acquisitions of Kirkhill, Extant and Skandia. Excluding these acquisitions, margins improved almost 1 percentage point 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.

Now turning to our 2019 guidance, also found on Slide 6 in the presentation. In general, continued robust global revenue passenger mile growth, a generally positive economic environment, and favorable defense conditions, seem to provide a backdrop of accommodating market conditions. Certainly, global trade dynamics, fuel inflation, or other exogenous events could have a negative impact on market conditions for TransDigm. We will watch this situation closely, as we always do, and we'll react as necessary.

Based on this, and assuming no acquisitions in fiscal year 2019, our initial guidance is as follows: The midpoint of our fiscal year 2019 revenue guidance is $4.17 billion, or up approximately 9.5%. Organic growth is estimated at approximately 6%.

As in the past years, with roughly 10% less working days, fiscal year 2019 Q1 revenues, EBITDA and EBITDA margin are anticipated to be lower than the other 3/4 of fiscal year '18, roughly in proportion to lower working days. This revenue guidance is 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 revenues 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 midpoints of fiscal year 2018 EBITDA As Defined guidance -- I'm sorry, 2019, is $2.07 billion, with an expected margin of 49.7%. This includes approximately 1 margin point dilution for the recent acquisitions purchased in fiscal year '18. Again, we anticipate EBITDA margin will move up throughout the year, as we have seen in previous years, with Q1 being the lowest and sequentially lower than Q4. The midpoint of adjusted EPS is anticipated to be $16.26, and Mike will discuss this in more detail shortly.

So let me conclude by stating fiscal 2018 was another good year for TransDigm. We look forward to 2019 and expect that our strict focus on consistent strategy will continue to provide the value creation you have come to expect from us.

With that, I would now like to turn it over to our new Chief Financial Officer, Mike Lisman.

Thanks, Kevin. I'll recap the financial highlights for the fourth quarter, the full year and then also our 2019 guidance.

Fourth quarter net sales were $1.05 billion, up about 14% from the prior year. Organic sales were up 7.7%. The balance of the sales increase came from the 3 acquisition that Kevin discussed.

Gross profit margin of 56.9% was strong despite the dilutive impact from acquisition mix and higher acquisition-related costs. Our GAAP EPS from continuing operations was $4.14 per share in the current quarter compared to $2.21 per share last year.

Our adjusted EPS for the quarter rose 28% to $4.44 per share. Adjusted earnings per share in the quarter includes $0.69 of favorable impact from the enactment of tax reform. Excluding the favorable tax impact, current earnings per share of $3.75 would be an increase of 8% over the prior year.

Since this is our fiscal year-end, let me take a minute to quickly summarize some significant financial items for the 2018 fiscal year. Net sales increased 9% to end the year at $3.8 billion in total revenue. Organic sales were up 5.5%. Reported gross profit increased 10% to $2.18 billion and was 57.1% of sales compared to 56.6% in the prior year. As called out on the slide comments, we netted to 0.5 point of gross margin improvement for the year despite approximately 1 full point of margin dilution from acquisition-related impacts.

Interest expense increased by approximately $60 million, up 10% versus the prior year. During the year, we added $1.2 billion of incremental debt, $700 million in term loans and $500 million of subnotes, and the higher interest expense reflects this new debt. Our weighted average cash interest expense was 5.1%, and the average LIBOR rate for the period was approximately 1.8%.

Next, I'd like to quickly clarify some tax matters that Nick mentioned at the outset, specifically our lower tax rate for FY '18 and then the go-forward rate for FY '19.

As you know, the U.S. enacted the Tax Cuts and Jobs Act in December of 2017. The shift onto this new tax regime significantly reduced our expected effective tax rate for fiscal '18. Our full year '18 GAAP effective rate is 2.4% compared to 24.9% in fiscal 2017. We do not expect the low 2.4% GAAP effective rate for 2018 to carry into the future. The onetime low rate is primarily the result of remeasuring the U.S. deferred tax liability on our balance sheet to reflect the new U.S. corporate tax rate of 21% from the old rate of 35%. For those who want more detail, the remeasurement of this U.S. deferred tax balance led to a $176 million benefit, and then it was slightly offset by a $30 million expense on deemed repatriated earnings of our non-U. S. subs.

For fiscal 2018, cash taxes came in at $129 million or a cash tax rate of about 13%. Adjusted EPS was $17.83 per share this year, which is up 44% from $12.38 in 2017. Excluding the impact from tax reform of $4.48, the current year adjusted EPS is $13.35, which is up about 8% over last year.

As we look forward to FY '19, we estimate the midpoint of our GAAP earnings per share to be about $14.90, as Kevin mentioned previously, and we estimate the midpoint of our adjusted earnings per share to be $16.26.

One critical point on the FY '18 and '19 EPS midpoint comparison that I want to make crystal clear for everyone and overemphasize a bit, the decrease at the midpoint of GAAP EPS from FY '18 to '19 is due to the enactment of tax reform in prior year FY '18. Just like we did on the '17 to '18 comparisons, we can remove these onetime benefits so that you can do an apples-to-apples comparison of '18 to '19. Doing so gets you to '18 GAAP EPS of about $13.65 if you exclude the one-time tax impact of $146 million or $2.63 per share. The midpoint of our FY '19 GAAP EPS of $14.90 would then be a 9.2% increase over this prior year figure of $13.65.

Tax reform is having a similar impact on adjusted EPS growth, and if you exclude the one-time tax impact of tax reform, 2018 adjusted EPS would be $15.20. The midpoint of FY '19 of $16.26 would then be 7% higher than this FY '18 figure after adjusting for the one-time tax reform impact.

Moving to the 2019 outlook, here are some additional details on some of our 2019 assumptions.

G&A expense is expected to be approximately $144 million compared to $130 million in FY '18. Interest expense is expected to be about $745 million in FY '19. This includes both cash interest, plus approximately $27 million of amortization of debt issuance costs and fees. We used an average LIBOR rate of 2.75% for the full year, which yields a weighted average cash interest rate of about 5.55%. This is based on current consensus rate expectations going forward, which, as you know, could be wrong, so we also put an interest rate sensitivity in the appendix for today's deck.

The punchline of the sensitivity is that for each full quarter point increase above the 2.75% expected average LIBOR rate, results in about $8 million to $9 million of additional interest expense.

Further on the interest expense forecasting topic, we've noticed that several analyst models and EPS estimates have us paying down debt over the course of the coming fiscal year and into the future. As we've mentioned previously on prior calls, this is unlikely.

For fiscal 2019, our GAAP cash and adjusted tax rates are all anticipated to be in the range of 21% to 23%. We expect that our -- we expect our weighted average shares outstanding will increase to 56.25 million shares from 55.6 million shares in FY '18, assuming no buybacks occur during the year. The increase is due to employee stock options that are invested at the end of FY '18.

As of our 2018 year-end, our net leverage ratio, so net debt to pro forma EBITDA As Defined, was 5.8x and gross leverage was 6.9x. We have ample liquidity with over $2 billion on the balance sheet and access to almost all of our $600 million revolver. For our 2019 fiscal year, excluding Esterline, and assuming no additional acquisitions or capital market activities, we expect to have about $3 billion of cash on hand at year-end. This includes an estimate for CapEx of approximately 2% of sales.

We estimate our net leverage will be around 4.8x EBITDA As Defined at September 30, 2019, excluding Esterline. And this implies, as Nick said, that we'll delever by about a full turn during the course of the year.

Lastly, a quick note regarding the implementation of revenue recognition standards under ASC 606. This change is having an impact on some of our peers in the A&D industry, so we wanted to touch on it briefly.

We've completed an evaluation of this rule change and don't anticipate any material impact on TransDigm's financials at this time.

With that, in closing, we expect our fiscal 2019 to be a good year for TransDigm, and I'll turn it back over to Liza.

Thanks. (Operator Instructions) Operator, we are now ready for Q&A.

(Operator Instructions) Our first question comes from Myles Walton with UBS.

Just wondering -- maybe, Mike, to start off on the interest, is there interest income that's embedded in that assumption of $745 million? You're carrying an unusually larger, or presumably carrying an unusually large balance of cash through the course of the year.

That's right. We have embedded a small amount of interest income in that calculation.

And Nick, how should we think about your capital deployment strategy over the next 6 to 12 months as Esterline has gone through the system? It's obviously a big deal out there in the horizon. Should we insist that you're doing relatively de minimis capital deployment over that period of time?

Yes. I don't want to answer for the next 6 to 12 months because I don't know what's going to develop there. I would say, for the next few months, we still have a reasonably active M&A process. We still see a fair amount of deals, mostly small to medium. I think we'll just evaluate this as the year goes on. I mean, we're -- because we're also going to have to decide how much of the $3.7 million committed financing to draw and how much of our cash to use. And I think we'll let the clock run a little bit before we make those calls. But as you know, if we decide we have extra cash, we're not going to sit on it very long.

Our next question comes from Robert Spingarn with Crédit Suisse.

So Mike, with the figures you just gave us, it looks like adjusted EBITDA '19 growth is around 10%, if I have that right. And I wanted to get a sense, I don't know if this for you or for Nick, how you think Esterline maps against that on a longer-term basis.

Yes. I don't -- I think we -- we don't know this yet, Rob, and I think we're not going to make a forecast there. I think you know what the '18 numbers are. You -- I think we told you -- you have a rough idea of what we're paying and a rough idea of how we're going to finance it. So when you know that we look for a PE-like return, so you can sort of fall back into something there. I will say it probably ramps up a little slower than we might see in other situations.

Okay. And then -- and just separate question then, Nick, on the portfolio. There's been a lot of defense awards. Your numbers were quite strong here in the quarter on defense. So first, if you could touch just again on the volatility in that number and the strength at the back-end of the year, is that timing? And then on some of these new awards, I'm speaking about the trainer, the new helicopter, the MQ-25. How does TransDigm look positioned on those various programs? And again, on Esterline, if you can, how are they positioned?

Nick, you want to take the...

I'll take the Esterline one. I think this is -- I know it has, they've said it publicly. The trainer, they have a pretty good position on that. The Joint Strike Fighter, they have a pretty good position. I don't know the answer on the other ones, so I can't answer it.

And Kevin, I should have asked you as well.

Yes, and the TransDigm -- why don't you take the TransDigm question...

For TransDigm, I think we are involved in the helicopter replacement programs for military, for commercial, the trainer programs around the world. We're involved in these. I can't comment on how significantly one way or the other. But we are involved. We continue to focus on this segment and continue to try to win more than our fair share.

Our next question comes from Carter Copeland with Melius Research.

Two quick ones from me. Kevin, on the comments around the defense strength, I'm not sure if you can answer this, but do you have any insight or color on whether or not those are spares being used, or if you're seeing inventory stocks kind of build back up. I don't if you can tell by where you ship or what the orders look like if you're seeing any of a restocking impact there. And the second one, I just sort of wondered if you had any tariff impacts to speak of on any of the subcomponent purchases you guys do for any of the businesses.

So first off, I'll comment on the tariff piece. We've looked at this across the ranch, and we really haven't seen anything material as of yet on tariffs, imports. And quite frankly, we don't have anything material included in our fiscal year 2019 plan as we go forward. So on the tariff side of it, I think we have that covered today. What was the first question again? Can your repeat that?

Are you seeing in the military, strength? Can you tease out of the numbers that there's any sort of inventory restocking there?

I cannot. I would assume there's something going on there, but it's just an assumption. I can't tell by locations. We are seeing strength in defense aftermarket, as I commented on, and some movement on the defense OEM side. But certainly, more growth on aftermarket. But where it's actually going, is it going on the shelf? Is it being placed for inventory for usage later? Is it going to repairs today? I can't really comment. I don't know.

Yes, I get it. It's a tough characterization. I just wanted to see if you had any insight, but no problem.

Our next question comes from Gautam Khanna with Cowen and Company.

I was wondering if you could give us any sort of in-the-weeds color on the commercial aftermarket maybe by geography or -- I know you gave it to us by biz jet versus commercial aero. But anything distribution versus direct to airline MRO or any differences by region that you've noticed? Any potential slowdown in China?

I don't look at commercial aftermarket by region as a first slice. We gave the submarkets and the pieces that make up the commercial aftermarket. I know that there is concern about a slowdown in the second half there. I think we ran -- as we stated, we ran pretty hot in the first half. We were happy that as the year closed out, we ran ahead of our initial guidance of mid-single digits and ended up high single digits. Beyond that, I don't know what else to offer except across the ranch, we're booking okay in the aftermarket segment. So we are still optimistic as we look forward.

Okay. And as my follow-up, I was wondering if you could give us sort of an early read postmortem on the Kirkhill integration. And I know that was part of the reason you had confidence in the ESL acquisition. So if you could talk about some of the improvements you guys have brought to Kirkhill since you've owned it.

Our focus at Kirkhill has been operational in improving on-time delivery and customer satisfaction. So that's been our overwhelming focus with the business. We have seen headcount come down. We have seen improvement in the business. We don't get into the specifics of that, but to say that we've been encouraged and it's performing well against our acquisition model and indeed keep us or make us more interested in the Esterline move that we made. So beyond that, I think that's all I can comment on.

Our next question comes from Robert Stallard with Vertical Research.

Kevin, you mentioned a couple of risk to your aftermarket forecast in 2019; FX and oil specifically. Have you seen these issues having any impact on your airline customer, and say, the utilization of older aircraft as yet?

No. In fact, you've seen from the numbers that retirements are down, so I haven't seen that. I'm just commenting that these things could creep in, in the future and have an impact. But as of yet, tariffs, nothing material. Fuel cost increases at airlines haven't seen anything material in changes to performance or behavior.

Okay. And then on another topic, on the Esterline -- proposed Esterline acquisition, have you had any public feedback from your customers as to what they think of this deal?

It's gone through the regulatory process, and I just don't want to comment on that. We have reached out and talked to our customers, and by and large, what we get back is positive. But it's going through a process.

Our next question comes from Seth Seifman with JPMorgan.

Just wanted to touch on the aftermarket forecast for '19 and kind of the level of confidence you have versus the past. It seemed like last year, you tried to take a little more conservative tact. And this year, certainly, we see underlying strength in the end market. But right now, it looks like organic aftermarket is running kind of mid-single-digit on mid-single-digit comps. And then we go into the first half, and we've got kind of -- it seems like we should be accelerating on higher comps. And so I guess, do you have visibility into the first half that allows you to see that? Or should we expect the growth rate to be second half-weighted?

I -- obviously, we gave guidance that said we would be in the mid- to high single digits for commercial aftermarket. We have confidence in that because that's what our teams roll up to us. We do a bottoms-up rollup for the planning process and see how that fits into the different market segments. So I have the confidence that my teams believe this as well as that's what we see in our orderbook going forward. So I think we're confident, otherwise, we wouldn't have put it out there. And that's what our teams believe we will see in the coming year. And I would say teams are generally directionally correct. Things may move one bucket to another, but we have a track record, I think internally, of hitting what we say we're going to do. So I have the confidence in the teams, and that's where it comes from, that we come with a mid- to high single-digit guidance around commercial aftermarket growth for '19.

Great. And then the follow-up -- just following up on some of Rob's last question. OEMs have been fairly vocal in the past about the contractual remedies they have to move work in the case of acquisitions. Are you taking some of that into account as you do your forecast for Esterline?

You mean the people [pull work away]?

Yes, exactly.

We wouldn't expect that to happen. I could never predict the future, but we wouldn't expect that to happen. And there aren't any consents required to close this either.

Our next question comes from David Strauss with Barclays.

Wanted -- we can come pretty close to backing into it, but I guess I just want to ask about the implied free cash flow growth in '19. Are you looking roughly in line with the 10% adjusted EBITDA growth, given that free cash flow grew well ahead of adjusted EBITDA in '18?

I think on the free cash flow forecast for the year, we hope we're being slightly conservative as we were last year. But as we said in the comments, we hope to generate about $1 billion of cash on the balance sheet during the course of the year.

Okay. So roughly, Mike, right around $1 billion in free cash flow?

That's right.

Okay, all right. And then on Esterline, just to try and put a little bit finer point on it. I think Rob had asked about the adjusted EBITDA or the EBITDA growth you're expecting. When you model these things, I think, Nick, you've talked about growing -- you model -- typically modeled to hit your IRR EBITDA doubling over a 5-year period. Is that roughly what you're looking at here for Esterline?

Well, I think there's a couple. One, as you know, David, I don't want to comment on that. I've probably said as much as I can say. And it also wouldn't surprise me if we had some asset dispositions along the way. So it's not as straight a shot. And I think that's about as much as I can say. We feel, for the price we pay, you can pretty well sort of assign a typical kind of leverage we use to it to get the equity, solve it back with a constant -- without any arbitrage, and get an EBITDA that solves you back to a PE kind of return, and I think you get a pretty good idea of what that is.

So yes, somewhere in the 20%-plus kind of IRR range, that's what you're looking for.

That's as much as I want to talk about.

Our next question comes from Sheila Kahyaoglu with Jefferies.

Nick, just to elaborate on Seth's question a little bit more, you mentioned contractual situations in your prepared remarks and level of U.S. employment. I was wondering if you could expand upon those, if at all.

Sheila, I lost you in the middle. You kind of faded out, Sheila.

I always fade out on these calls, and I'm yelling, trust me. You mentioned contractual situations and U.S. employment in your prepared remarks. Can you just elaborate on that?

Yes. I'll take them in inverse order. There's a fairly high percent of non-U. S. employment. And our view is that's probably going to be a little tougher to get the productivity out of than typically in the U.S. businesses. So that tends to make us a little -- pretty conservative on that. Hopefully, we're quite conservative. Time will tell. On the contracts, there are -- there is some number of, what I call TINA contracts, that's government price-controlled contracts, or price controlled. And there's not a terrible, high amount of them. But there's also some LTAs in there with different customers that are less attractive than we'd like to see, and we just got to live with them. They'll burn off, but it might be 4, 5 years before they do.

Okay, understood. That's helpful. And then, Kevin, if I may. You mentioned helicopter and biz jet OE, I think, were up mid-teens. If it's 20% of the commercial OE business, kind of how do you -- it implies that the current -- transport or commercial OE business was down slightly in the year. Kind of what improves in 2019 in your assumptions? And how sustainable is the helicopter and biz jet strength?

Yes. Good question. I look at the market segment the same way you do. We have strong bookings as we look out into the future on the OEM side. And we had strong booking growth. But I, as well as you, am cautious about business jet/helicopter because I think some of the fundamentals are still not yet as strong. But I will shift the orders as they come in, but I don't have any more guidance beyond it. We have decent orderbook going into next year, and that's the guidance we've given on the helicopter biz jet. But again, market fundamentals don't seem like they're so much better. Do you get what I mean there? I mean, we're not seeing taking off and landings cycles in biz jet really growing. It seems to have stalled out at 1% growth a year. Yes, it's growing, but it's not as exciting. So as I look forward, that we have confidence in 2019, but it wouldn't surprise me if some things moved around there.

Our next question comes from Michael Ciarmoli with SunTrust.

Maybe Kevin, just to stay on the commercial OE. If I'm looking at the outlook for next year, low to mid-single digits, you've got a lot of rate increases on the narrow-bodies, the 87, the 350. Some of the pressure on the wide-bodies abate. And obviously, you just talked maybe the fundamentals aren't as strong as you think on helicopters and biz jet. I would have thought the growth rate would have been higher with some of those larger platforms not seeing as many declines and the narrows ramping. Is there -- is it more just conservatism on the biz jet and helicopters? Or was there a lot of product in the channel for the rest of the commercial OE transport side?

Well, I think we hope we're conservative in our guidance here. I don't have anything additional on the split. We saw some commercial transport OEM growth. In commercial transport sector, we saw some growth when you factor out biz jet helicopter on OEM. So second half of the year, it started to pick up on the bookings side on OEM. I think we're comfortable with low to mid-single digit percentage up. And if the wide-bodies continue to turn around, we might prove to be conservative here. Again, our shipset content has not changed. We're still continuing to expand our shipset content as we go through the years. So we've not seen any departure here, so it has to be timing-related. And it will come out as the orders come to us. I don't have any additional visibility than you have, except to say that in the second half of the year, our bookings on commercial transport OEM picked up quite a bit in the second half of the year. Does that answer your question?

Got it. That's helpful. That does. That's helpful. And then maybe just a follow-up to where David was going on Esterline, if we look at that EBITDA that they have, 330 million, as you guys sit here today, it sounds like you've got a lot of lessons learned from Kirkhill. Does more of the EBITDA growth come from cost cutting and productivity? Or is there an equal opportunity on pricing and maybe expanding their positions in the marketplace?

I would -- a couple of things. One, the 330, by the way, just to be clear, that's the consensus, that's the public consensus '19 EBITDA. That's not what we're endorsing or not endorsing. I would say it's -- the improvement comes from the whole cross-section activities we understand when we buy a business. I think I told you a little bit in the prepared script why even though they've been flat for the last 3 years, we think the next few years, just on a sort of an organic basis, looks a little better. I think I gave you the reasons why we think that. I think the other aspects, some comes from the things we always do. We're a little -- in all parts of that, I'm hopeful we're conservative. I'll say again, in a public buy, you don't get as much detailed diligence as you do in a private buy. And that tends to make you more conservative in your assumptions.

This concludes today's Q&A session. I would now like to turn the call back over to Liza for closing remarks.

Thank you all for calling into our call this morning. And we'd like to remind you one more time to please look for our 10-K to be filed on Friday.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, you may all disconnect. Everyone, have a great day.