HEICO Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 29, 2023

There are 8 speakers on the call.

Operator

Welcome to the HEICO Corporation Third Quarter Fiscal 2023 Financial Results Call. My name is Samara, and I'll be today's operator. Certain statements in this conference call will constitute forward looking statements, which are subject to risks, uncertainties and contingencies. IQOS actual results may differ materially from those expressed in or implied by those forward looking statements as a result of factors including, but not limited to, the severity, magnitude and duration of public health threats, such as the COVID-nineteen pandemic or health emergencies, HEICO's liquidity and the amount and timing of cash generation, Lower commercial air travel caused by health emergencies and their aftermath, airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services product specification costs and requirements, which could cause an increase to our costs to complete contracts, governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U. S.

Operator

And or foreign customers or competition from existing and new competitors, which could reduce our sales our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales our ability to make acquisitions, including obtaining any applicable domestic and or foreign governmental approvals and achieve operating synergies from acquired businesses, customer credit risk, interest, foreign currency exchange and income tax rates, economic conditions, including the effects of inflation within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues and defense spending or budget cuts, which could reduce our defense related revenue. Parties listening to this call are encouraged to review all of HEICO's filings with the Securities and with the Exchange Commission, including but not limited to, filings on Form 10 ks, Form 10 Q and Form 8 ks. We undertake no obligation to publicly update or revise any forward looking statement whether as a result of new information, future events or otherwise, except to the extent required by applicable law. I now turn the call over to Lawrence Mendelson, HEICO's Chairman and Chief Executive Officer.

Speaker 1

Thank you very much, and good morning to everyone on the call. We thank you for joining us, And we welcome you to this HEICO 3rd quarter fiscal 'twenty three earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation. And I'm joined here this morning by Eric Mendelson, HEICO's Co President and President of HEICO's Flight Support Group Vikram Mendelson, HEICO's Co President and President of HEICO's Electronic Technologies Group and Carlos Macau, our Executive Vice President and CFO. Before reviewing our operating Results in detail, I'd like to take a moment to thank all of HEICO's dedicated and talented team members who are responsible for another strong quarter of excellent results.

Speaker 1

They continue to produce the highest quality products and services for our customers, while maintaining our unique Entrepreneurial corporate culture that has delivered excellent returns to shareholders. I'd like to extend a warm welcome To the approximate 1,000 HEICO WENCOR group team members Who recently joined the HEICO family. We look forward to our collective journey of exceeding customer expectations And winning in the marketplace. I personally have never been more optimistic about the future for HEICO. I'd like to now summarize the highlights of our 3rd quarter fiscal record results.

Speaker 1

Consolidated Q3 fiscal 'twenty three net sales represent record results for HEICO, driven principally by record net sales within Flight Support Group, mainly arising from continued strong demand for our commercial aerospace products and services and the contributions from our fiscal 'twenty as compared to the Q3 of fiscal 2022. These results mainly reflect A 12% quarterly consolidated organic net sales growth and the impact from acquisitions. I'd like to note an important item. HEICO incurred acquisition costs from the Wincor acquisition during the Q3 of fiscal 'twenty 3, And this decreased our net income by approximately $3,500,000 Or $0.03 per diluted share. The way management looks at our operations, We were able to report $0.74 a share earnings in the 3rd quarter After deducting this unusual $0.03 per share, so management considers Our earnings in the 3rd quarter as actually 0 point 77 dollars Recognizing this, our operating margins, especially before Wincor related nonrecurring deal That's what I was talking about, dollars 3,500,000 or $0.03 remain strong and are consistent with the expectation We previously communicated in investor calls and events.

Speaker 1

These margins are very healthy margins even though our Consolidated net income attributable to HEICO increased 24% to $102,000,000 or $0.74 per diluted share, of course, again, after deducting $0.03 in Those special WinCor expenses in the Q3 of fiscal 'twenty three, and that was up from $82,500,000

Speaker 2

or $0.60

Speaker 1

per diluted share In the Q3 of fiscal 2022. In connection with the Wencour acquisition, our net debt to EBITDA ratio was 0.75 times as of July 31, 2023, and that compared to 0 point 25 times as of October 31, 'twenty two. Our net debt to EBITDA ratio increased in the 1st 9 months of fiscal 'twenty 3 due to our successful offering Of $600,000,000 of 5.5 percent senior unsecured notes due August 1, 28, And $600,000,000 of 5.35 percent senior unsecured notes due August 3. We use the net proceeds from the sale of these notes To repay the outstanding borrowings under our revolving credit facility and to fund a portion of the Wincor acquisition purchase price. Cash flow provided by operating activities Was very strong at $145,900,000 in the Q3 of fiscal 'twenty 3, and that compared to $149,200,000 in the Q3 of fiscal 'twenty 2.

Speaker 1

Cash flow provided by operating activities in the Q3 of fiscal 'twenty three reflect an increase in working capital principally driven by an increase in inventories to support Increased consolidated backlog. We continue to forecast strong cash flow from operations for fiscal 'twenty three. In June, we were honored to announce that I will The prestigious 44th Annual Howard Hughes Memorial Award from the Aero Club of Southern California on Wednesday, September 6. The Howard Hughes Memorial Award honors exceptional leaders Who have advanced field of aviation or aerospace technology. Upon receipt of the award, I will join 43 aviation and aerospace pioneers, including last year's honoree Harrison Ford As well as prior honorees, General Chuck Yeager, Bob Hoover, Neil Armstrong, General Jimmy Dolittle, Elon Musk, Jim Lovell, Marilyn Houston And Captain Sully Sullenberger and many others.

Speaker 1

I'm profoundly honored to receive such a prestigious award From such a prestigious organization, though I believe it really belongs to all of HEICO's team members because it results from all of their remarkable work and success over several decades. The Aero Club of Southern California is recognized as one of the leading aviation and aerospace organizations in the world, And the idea that they would bestow this award upon me leaves me deeply humbled and very grateful. Lastly, we announced that our 3 d Plus and Excellia subsidiaries Supplied mission critical electronic components on India's Sandrayaan-three spacecraft, We successfully executed a soft landing on the Moon South Pole. We offer our congratulations to the Indian Space Research Organization, and we are honored to be a trusted supplier on this remarkable and historic mission. The level of sophisticated engineering Quality and precision demonstrated by our subsidiaries on this project was outstanding and commendable.

Speaker 1

I'd like to now discuss our recent acquisition activity. Earlier this month, we completed the acquisition of Wencor for $1,900,000,000 in cash and approximately 1,100,000 shares of HEICO Class A common stock with an assigned value of $150,000,000 in the merger agreement or a total of $2,050,000,000 in the aggregate. The transaction was HEICO's largest ever in terms of purchase price as well as revenue and income acquired. We believe Wencore is a Perfect and highly complementary fit with HEICO. And we expect the combination will be transformative, providing a unique and growing portfolio of proprietary cost saving solutions for our Airline and OEM customers, we continue to anticipate this highly synergistic acquisition to be accretive to our earnings within the year following closing.

Speaker 1

In addition, HEICO anticipates that it will continue to achieve its often articulated growth objective in the year subsequent to the closing. Immediately following the closing, we forecast The pro form a net debt to EBITDA leverage ratio will be approximately 3:one and will return to historically low levels within roughly 1 year to 18 months after acquisition, excluding the impact of future acquisition or possible capital deployment activities. At this time, I would like to now introduce Eric Mendelson, Co President of HEICO and President of HEICO's Flight Support Group, and he will discuss the 3rd quarter results of the Flight Support Group. Eric? Thank you very much.

Speaker 1

First of all, I would like to welcome our new 1,000 Wancor team members into the new HEICO And Wincor family. This combination has been something that we've dreamed of doing for literally the past 20 years, And we could not be more excited and more overjoyed that this finally has come to fruition. Over the last number of weeks, I've been visiting Wencore facilities around the United States and have a very busy Schedule plan for the next couple of months as I go out and meet all of the OneCore team members. I've been particularly impressed With the quality and the outstanding character and ability and DNA of the WinCor team members, You never know what is going to happen down the road and you never know Exactly what it's like to work with people who have been in the same space, but you haven't gotten to know very well over many years. And I can tell you that Our hopes and dreams have been completely fulfilled.

Speaker 1

As I've gotten to know the WinCor team members and their DNA, It is remarkably similar to HEICO's style and DNA, and it is something that I think is going to yield Tremendous results for many, many years to come. So again, welcome to all of our new team members from WinCorp. Going into the results, the Flight Support Group's net sales increased 23% to a record $405,000,000 in the Q3 of fiscal 'twenty three, up from $330,300,000 in the Q3 of fiscal 2022. The net sales increase in the Q3 of fiscal 2023 reflects robust 19% organic growth as well as the impact from our profitable fiscal 2022 acquisition. The organic growth mainly reflects increased demand for the majority of our commercial aerospace products and services, resulting from continued global commercial air travel growth as compared to the Q3 of fiscal 2022.

Speaker 1

The Flight Support Group has now achieved 12 consecutive quarters of growth in net sales and these numbers don't yet include the positive We expect from the Wancor acquisition, which will further transform our business as the world's leading independent aftermarket supply. The Flight Support Group's operating income increased 26 percent to $89,200,000 in the Q3 of fiscal 2023, up from $70,800,000 in the Q3 of fiscal 2022. The operating income increase in the Q3 of fiscal 'twenty three principally reflects the previously mentioned net sales growth and an improved gross profit margin, partially offset by an increase in the previously mentioned acquisition costs related to the Wencor acquisition. The improved gross profit margin in the Q3 of fiscal 2023 principally reflects higher net sales and a favorable product mix across all of our product lines. The Flight Support Group's operating margin improved to 22.0% in the Q3 of fiscal 2023, up from 21.4% in the Q3 of fiscal 2022.

Speaker 1

The operating margin increase In the Q3 of fiscal 'twenty three principally reflects the previously mentioned improved gross profit margin, partially offset by the previously mentioned acquisition costs, which reduced our operating margin by approximately 81 basis Our Q2 of fiscal 2023 margin of 25.5 percent included a one time benefit of 2.3%, yielding a 23.2% Net operating margin on a continuing basis. Our Q3 of fiscal 'twenty three margin was 22.8% before the unique costs related to the Wincor acquisition. We're very proud of these excellent operating margins, which have increased approximately 300 basis points from our then record 2019 and increased 400 basis points from our then record 2018. Now I would like to introduce Victor Mendelson, Co President of HEICO and President of HEICO's Electronics Technologies Group to discuss the Q3 results of the Electronic Technologies Group. Thank you, Eric.

Speaker 1

The Electronic Technologies Group's net Sales increased 33 percent to a record $325,900,000 in the Q3 of fiscal 2023, up from $244,200,000 in the Q3 of fiscal 2022. The net sales increase Principally reflects the impact from our fiscal 'twenty three and 'twenty two acquisitions as well as increased commercial aviation and other Electronics products net sales, partially offset by lower year over year defense products net sales. We were pleased to see 10% sequential growth over the Q2 of fiscal 'twenty 3 in defense product net sales And we're equally pleased that quarterly organic commercial aerospace and other electronic products net sales growth contributed to 2% overall organic net sales growth in the Q3 fiscal 'twenty 3. The Electronic Technology Group's operating income increased 9% to $74,200,000 in the Q3 of fiscal 2023, up from $68,000,000 in the Q3 of fiscal 22. The increase in operating income principally reflects the previously mentioned higher net sales volume, partially offset by a lower gross profit margin and higher costs from our January 'twenty three acquisition.

Speaker 1

The lower gross profit margin in the Q3 of fiscal 23 principally reflects decreased Defense Products net sales, partially offset by increased Commercial Aviation and Other Electronics Products net sales. In line with our expectations, the Electronic Technologies Group's operating income was 22.8% in the Q3 of fiscal 'twenty three as compared to 27.9% in the Q3 of fiscal 'twenty two. This margin is after roughly 500 basis points of amortization. So the EBITA margin from what our businesses sell was really close to around 28%, which I and we consider to be excellent And is consistent with the margin range that I've talked about on other earnings calls and in other venues that we should expect for this business before taking account into future acquisitions. The lower operating margin principally reflects the previously mentioned lower gross profit margin and increased SG and A expenses as a percentage of net sales.

Speaker 1

I turn the call back over to Larry Mendelsohn. Thank you, Victor. As for the outlook of HEICO, in our opinion, as we look ahead to the remainder of fiscal 'twenty three, We continue to anticipate net sales growth in both the FSG and ETG Divisions principally driven by demand for the majority of our products. Additionally, Continued inflationary pressures may lead to higher material and labor costs. In addition, we've begun sharing the best practices and getting to know the WEN Core businesses, which share a very similar entrepreneurial culture and customer focus as HEICO's businesses.

Speaker 1

We do believe the Encore acquisition provides HEICO with additional scale to continue broadening our aerospace products Our operating margins, especially before non recurring acquisition expenses, remain very healthy and reflect our strong business operations. We believe our ongoing conservative policies and strong cash flows enable us to continuously invest in new research and development and take advantage of strategic acquisition opportunities, which collectively position HEICO for future market gains. In closing, I would like to again thank our incredible team members for their continued support and commitment to HEICO. I humbly welcome all of the WinCor team members to our family and look forward to winning new business together as one team. Thanks to all the HEICO team members for everything you do today to make HEICO an excellent company.

Speaker 1

I would now like to open the floor for questions. Thank you.

Speaker 2

Thank

Operator

And we'll start with our first question from Peter Arment with Baird. Please go ahead.

Speaker 2

Yes, thanks. Good morning, Larry, Eric, Victor and Carlos. Congratulations on the quarter, really great. Thank you. Eric, I just wanted to start there.

Speaker 2

Just when you closed the Xcelia deal, there was that obviously put Some pressure on the reported operating margins of the ETG Group. And it's just maybe if you could just level set us how we're thinking about The impact will be because of Lendcor is probably a little bit of a lower margin profile. How you think about what that kind of the impact will be? And then What are some of the opportunities to think about just from a synergy perspective?

Speaker 1

Let me just Kind of clarify one thing. The margins on Wencor and the margins on Accellia are really different. And so Eric and Victor can speak to that. The margins on Wencour are pretty much in line with the margins of Flight Support Group. But the margins on Xcelia are lower.

Speaker 1

But Eric and Victor can speak more detail to that. Yes. So we're Hi, this is Eric. We're obviously very excited about the Wencor acquisition for some of the reasons that I mentioned earlier on the call. We think that it's a tremendous broadening of our product line.

Speaker 1

It's sort of amazing that you get 2 companies sort of focused in different I can tell you that major customers have been extremely supportive of this business combination And I've really been looking forward to the benefits that it's going to bring. And I think that's one of the reasons why we were able to secure antitrust approval so quickly and because, frankly, our customers are really pushing us and very excited about this. So with regard to the margins, I would say that the WENCOR EBITA margins are very similar To the Flight Support margins. Carlos can get into some of the specifics that are basically within the same area. Obviously, there's going to be some intangible amortization as a result of those as a result of the acquisition.

Speaker 1

But as far as the EBITDA earnings of the business, it's going to be, in general, in the same area As the HEICO businesses. And we do anticipate tremendous synergies going forward. Right now, we're all in a learning phase. We want to be very careful and make sure that we Harness all of the benefits that this combination brings. Unlike many companies, we don't Sort of set out with an operating margin target.

Speaker 1

We just simply want each of the businesses to perform To the best of its ability and to generate the margins that are correct for its long term success. So if you look at the Flight Support group, I'm really happy that our margins people back in 2018 thought we were sort of at top margins, and now we're up 400 basis points from there. In 2019, they thought we were at Top margins were up 300 basis points. We did not set a target, a specific target of a number where we wanted to be. Instead, we just make the decisions that make sense for each operating businesses and the margins end up where they are.

Speaker 1

So I'm very encouraged that as a result of adding the WENCOR product line that we're going to continue on this journey to improve margins. But in general, they're the EBITA margins are in the same zip code as the Flight Support margins. Does that sort of answer your question?

Speaker 2

Yes. It's yes, very helpful. Maybe if Carlos Could you just clarify maybe on the purchase accounting adjustments?

Speaker 3

So we closed on Glencore August 4, So it's not in our 3rd quarter numbers, although we did have acquisition expenses incurred through the end of seventhirty one in there. We paid a little over $2,000,000,000 for Wancor. I would expect We expect the expenses related to the deal will be south of 1% of the purchase price. We don't have all of those bills in yet, if you would, but there will be some deal costs That's flowing in Q4 that are not capitalizable and will be expensed. So more to come on that as we get those bills.

Speaker 3

The purchase accounting side of it, I don't I don't expect huge inventory write ups like we normally have at Sun deals. Given the nature of their products, they have a lot of They have repair, they have parts and they have distribution. And so some of those businesses, particularly in the parts and distribution, they don't lend themselves to Inventory write offs up for insurance and other businesses. So we'll see how that plays out. And there'll be more to come on that, Peter, in the Q4.

Speaker 2

Okay. That's helpful. And just quickly, just to clarify, could you just quantify, if you can, if the impact of the supply On ETG in the Q3. Thanks.

Speaker 1

Yes, Peter. Hi, this is Victor. Good question. It's now running below or it ran below rather $20,000,000 probably a few $1,000,000 below the 20 Somewhere in that range. And so definitely moving in the right direction, big improvement there.

Speaker 1

And from talking with our companies and surveying them, The vast majority feel it's moving in the right direction, at least stabilized. So we're pretty happy with that.

Speaker 2

Appreciate all the color. Thanks guys.

Speaker 1

Thank you.

Operator

We'll take our next question from Pete Kibitski with Alembic Global. Please go ahead.

Speaker 4

Hey, good morning, everyone. Good morning. Maybe I'll start with Eric. Eric, just kind of broadly, we're kind of at the end of the summer travel season here for the most part, right? I was just wondering as you look at the potential for kind of or the reality maybe of economic weakness in Europe, in China, We'll see how long that lasts or not, but you talked to so many of the airlines.

Speaker 4

I was wondering if you could give us your perspective Do you think these guys are going to get more cautious on their aftermarket spend kind of in the forward 12 months in this environment? And maybe you can give a sense of with Wencor, is the opportunity for share gain maybe more than enough to offset any potential Greater caution about airlines and their spend.

Speaker 1

Yes. So Pete, let me start out by saying the market is incredibly And we at the moment, we don't see any slowdown in sight. We Having said that, we also understand that all recoveries are tend to end with a little bit of an overshoot and then things Turned down just a little bit and then they resumed their upward climb. I think one of the interesting things that may be going on now Is that there's a lot of older equipment out there that really needs a lot of maintenance. And there has been a shortage of parts.

Speaker 1

The airlines still don't have as much as many parts as they need. And so we really see a lot of support in the market. So I don't see a slowdown in the cards right now. As far as China and Asia goes, those were the last to recover. So I don't think that we've even seen the full recovery there yet.

Speaker 1

So I think things are very strong in general. I mean, we're in this for the long haul. And whenever a little slowdown comes, to your point, think that there's going to be a lot of synergy opportunities between HEICO and WENCOR and being able to broaden our product lines. And I think we will continue to gain share and we'll move through that period very well. So I'm Not concerned about it at all.

Speaker 4

Okay. That's very helpful. I appreciate that. Last one for me is just, I know you guys are not aggressive with pricing, but just should we expect the continued approach at FSG just to be Make sure you kind of you claw back inflation, so you get some modest net pricing power post inflation. Is that kind of The general way to think about things going forward?

Speaker 1

Yes. I think that's fair. I mean, our businesses Always want to gain market share. We always believe in an We don't work out of scarcity, and we think that tomorrow always has greater opportunity than today. Having said that, we've got to make sure that we recapture our costs and we maintain and grow our margins a bit.

Speaker 1

So I think due to the efficiency that we've got in businesses, the operating leverage, I would anticipate that we're going We save our customers a lot of money. We treat them very, very well. They know that. And I think that's why, frankly, they were so supportive Of the 1 Corp combination. These two companies coming together is something which is really going to be very helpful to our customers.

Speaker 4

Great. Thanks so much for the color. Appreciate it.

Speaker 1

Thank you. Thank you.

Operator

Our next question comes from Larry Solow with CJS Securities. Please go ahead.

Speaker 2

Great. Good morning, guys. And I echo Mike and Graff Good quarter and obviously the mortgage accretion in your history. Sticking with the WENKORE theme, just for a couple of questions. I know you don't give specifics, But it feels like on synergies and accretion immediately and or targets, but it feels like this acquisition More than many, larger obviously, but it just feels like 1 plus 1 equals 3 in many places more than Your usual acquisition, just kind of trying to want to talk through some of the complementary things and where you see some of the combination really benefiting HEICO the most.

Speaker 1

Thanks. Yes, I agree with you. I think that this one is a uniquely synergistic acquisition. It's something that we had to do. It makes us a stronger competitor, much more efficient, brings more products to our customers.

Speaker 1

The other thing, Larry, that it does is as we share best practices, and we've already started doing this, each company is sort of focused in different areas. I think there's a tremendous amount that we can learn by sharing those best practices and going to what I call the highest common denominator. If we are so fortunate as to have operating efficiencies, that would really be great news, 1, because our costs will go down. But 2, the combined HEICO and WinCorp have over 100 unfilled job openings. And we've learned that our best and most productive team members typically come from inside, From inside of the businesses, they understand the culture.

Speaker 1

And we think that there's going to be great opportunities for the HEICO and the 1 core team members to take on expanded roles going forward. So I think when you put all of that together, Hopefully, the need we won't have to go out and hire as many people from the outside. Instead, we can promote from within. I think we're really in a very unique opportunity here. I want to be careful and not get too far over our sleeves before Having the opportunity to get into the details because it's all detail driven.

Speaker 1

We don't come out with a model and say, okay, we expect you from the corporate office to cut costs by X and raise price by Y and do that. Some companies do that, and it's extremely effective for them. What we have found in our very competitive businesses Is the best thing is just to make the right long term operating decisions. And if you do that, you plant the seeds and you reap the benefits For years to come. And so you've been around HEICO for a long time, and I don't think any of us back in 20 2019 thought that we would be increasing our operating margins by 300 basis points from 'nineteen, 400 basis points from 'eighteen Just through our standard operating procedure.

Speaker 1

So I think that we've got that opportunity. 1 quarter is extraordinarily well run. They've got a DNA so similar to HEICO. They're very focused on the customer, very focused on efficiency, Getting it done, jumping through hoops for the customers. So there couldn't be a better marriage.

Speaker 1

So I couldn't be more optimistic. Everything that we had hoped for in the acquisition is proving true. So we're I think we're well on our way.

Speaker 2

Okay. I appreciate all that color. And then maybe switching gears I'll pass to Victor. Just you guys mentioned obviously defense has been a little bit of a laggard year to date more on the delivery side than on the booking. Could you maybe speak to some of your other markets, as well as defense bookings on a go forward basis, Kind of where we stand there and just on the margin, segment margin, I know obviously, XL has impacted margin somewhat, but As defense comes back, could we expect maybe a little bit of a rebound off of kind of these 22%, 23% numbers that we've seen in the last two quarters?

Speaker 2

Thanks.

Speaker 3

So yes, a couple of things. I mean, the defense businesses that

Speaker 1

we're seeing orders Increase in those particular businesses

Speaker 2

tend to

Speaker 1

be our higher margin businesses. So I would expect that this Kind of 28% EBITA margin, probably at some point over the next 6 months starts To tick higher, though I want to see that. And we're doing budgets now, and we're going through our budget cycle. So I want to really see that for sure.

Operator

That's kind

Speaker 1

of how it feels now. Commercial Aviation, I would expect to remain strong. A variety of Space businesses for us, I think, will remain strong from what I see, orders being healthy. I think the other electronics, the other high end electronics, As I said, I think in my last two calls, those I would expect to be softer, and they're more tied to, let's Say the general economy in their own different cycles than the other businesses. And I think that will take a little bit of time to Cycle through more than 6 months.

Speaker 2

Got it. Great. Thanks, guys. Congrats again.

Speaker 3

Thank you.

Operator

We take our next question from Michael Ciarmoli with Truett Securities. Please go ahead.

Speaker 5

Hey, good morning, guys. Congrats on the getting the deal done and good results as always. Maybe, Eric or Carlos, you referenced kind of the historical FSG Margins here a couple of times and how you've exceeded kind of those, if we were to say, they'd be assumed prior peaks.

Speaker 2

I guess you're not going to

Speaker 5

give specifics, but with WENCOR, with the potential synergies and I guess as you look forward, do you think you've got room to push these FSG margins even higher once you kind of Fully extract all those synergies with Bencor and maybe penetrate even further on both revenue and cost synergies?

Speaker 1

Good morning, Michael, and thank you for your comments. This is Eric. First of all, The short answer is yes. I want to be careful as to not get out and set expectations very high Because we are in right now the process of HEICO understanding how the 1 core businesses operate, 1 core understanding how the HEICO businesses operate. So it's very, very important.

Speaker 1

We did not set out when we Increased margins over the last 5 years by 400 basis points. We didn't do that by, if you will, setting a goal And then going towards that goal. Instead, what we did was made sure that we had really capable, hungry, talented, hardworking, honest People running each of their businesses and doing the best that they could possibly do. And That's exactly how Wincor operates. That's how HEICO continues to operate.

Speaker 1

So I personally am hopeful That we continue to increase these margins as time goes on. But I want to be careful as Not yet ahead of ourselves and start predicting what those numbers are going to be. I'd rather and it's not a matter of underpromising It's a matter of truly not knowing. We just make the right decisions and we do the right things. And that Lays the foundation for a terrific groundswell of opportunity.

Speaker 1

So I think it's important to go ahead and do that and continue doing that. But yes, I think the margins are going to increase. Now we do have, of course, the amortization that's coming from the Wencore acquisition, and Carlos I can get into that, and it's really important that everybody model that. But of course, that's a noncash charge. It has nothing to do with the operating income of the business.

Speaker 1

I mean, that's a nonsensical charge, which actually we get a tax benefit from. So But yes, I think our margins are going to continue to do well. Carlos, I don't know if you want to get into some of the specifics there.

Speaker 3

Yes. I would just say, Michael, As I said over the past several quarters, the FSG continues to grow at a fast pace. All verticals within the Flight Support Group are growing at that pace, and we still haven't settled into what I'll call our footprint where the mix sort of normalizes. So until that happens, we're going to have movement in the margin plus and minus. This quarter, it was 22%.

Speaker 3

I think I've I think that on a long term basis, we might settle in around that point and then grow gradually from there. I don't know if we're at that point yet because I do think there's some more growth to come that may be that may have the verticals growing at different rates that messes with mix a little bit. But I do think if you look at the last decade, the FSG, the one thing that's been pretty consistent is the EBITDA margin gains Just about every year. And it's not large gains. It's just steps, right?

Speaker 3

Leveraging our fixed costs, it's new products and things like that. I expect that pattern to Continue once we settle into our, I'll call it

Speaker 1

more for the next segment.

Speaker 5

Okay. Perfect. And just one more on housekeeping, just to kind of maybe Level set ups for modeling, I mean, looking at the fiscal 4th quarter 2 months contribution from WENCOR, I mean, was this sort of If you

Speaker 2

can maybe give us a sense, has

Speaker 5

it been sort of just under $200,000,000 quarterly revenue run rate or what can we Expect from the Wancor contribution in this 4th quarter?

Speaker 3

I think that's a good question. What I'll I'll give you this guidance. We expected when we put when we did the deal that 1 quarter would do Pro form a sales are around $724,000,000 in $23,000,000 And we still expect that. So I mean, I guess you could divide that number by Come up with a quarterly run rate, but that's what we continue to expect. And the truth is they've done a little better Since we've acquired them.

Speaker 3

But I think for modeling purposes, if you take what we already published, the $724,000,000 divided by 4, that'll give you a quarterly run rate for now. And once we get through Q4 and we have our C legs on to us on the acquisition, we'll give some better thoughts at that point.

Operator

Our next question comes from Ken Herbert with RBC Capital Markets. Please go ahead.

Speaker 6

Yes. Hi, good morning, everybody. Maybe, Eric, If I could start with you with another question on WENCOR. Can you talk a little bit about how that business has grown organically over the last Couple of years coming out of the pandemic and how should we think about with the WEN Core business The sort of the organic growth profile of that business over the next few years, maybe either relative to FSG at large or relative to some of the specific product lines within your business?

Speaker 1

Hi. Good morning, Ken. I'd be happy to answer that. I would say that WinCo's growth rate has been very similar to HEICO's, very comparable. They've done a great job in growing the PMA business, the repair, the distribution, defense.

Speaker 1

So it's been very, very similar HEICO's. So and their operating philosophy is similar to HEICO's, that's why I think that there's Going to be immediate opportunities to start working together. As a matter of fact, one of our businesses just sent me an e mail on Friday, They didn't even know OneCore supplied before we started introducing some of the various Okay. So I think there's going to be a lot of opportunity there. And But the growth rates, I would say, are really quite similar.

Speaker 1

What WENCORE has been extraordinarily aggressive in its market. And it's sort of interesting that HEICO 1 Corp sort of didn't bump up against each other very much. There's been relatively little overlap, It's been in different areas. So I think it is sustainable.

Speaker 6

That's great. And as you look at the Wancourt business and you look out over the next few years at obviously the distribution, the repair and the PMA Mine is within Wancor. Are there any particular parts of the business that you're maybe more bullish about or where you see some real unique opportunity To take share, how should we think about the various pieces of OneCore and the outlook over the next couple of years?

Speaker 1

Yes. I think they're very well positioned in each of the businesses. PMA is very strong in areas complementary to HEICO in a lot of products that HEICO is not in. So I think that by having a bigger Supply basket that we can offer to our customers, we're going to generate a lot of value. Likewise, on the repair side, 1Core operates in a very decentralized, autonomous, entrepreneurial fashion, and they have focused in areas Where HEICO wasn't, by and large.

Speaker 1

So I think that, that's going to be very strong. Distribution has been phenomenal. They've captured a lot of lines, and they have a great relationship with their Distribution Partners, and they've got a very robust pipeline. So I

Speaker 2

think that's going to be good.

Speaker 1

And then in the defense market, they're relatively new to that, And they found some defense areas where we haven't been playing. So it's really Adding to the product line. So I don't mean to not answer the question, but I would say I'm very optimistic on All 4 of OneCore's verticals. And then really, I think those vertical, which I'm very also optimistic on, is our specialty products because WENCOR doesn't manufacture things themselves, and they buy a lot of stuff. And HEICO's Specialty Products Group Manufacturers, I mean that's our specialty to manufacture these basically source approved products.

Speaker 1

And I think that we're going to be able to make a lot of stuff for WinCor, not necessarily that they're going to Resource existing suppliers. They're very loyal to their existing suppliers. But I think on a go forward basis in the time when Capacity is very tight. They're already asking our businesses to make product for them. So I think Our Specialty Products business is also going to be a beneficiary.

Speaker 1

But that's going to be over like a 5 year period because it takes A while to get all of that manufacturing product digested. But I think it's going to be All across the Flight Support Group's 5 sort of operating verticals.

Speaker 6

Thanks, Derek. Congrats on the deal, Linda. Good luck with the integration.

Speaker 1

Thank you very much, Ken.

Operator

We'll take our next question from Sheila Kahyaoglu with Jefferies. Please go ahead.

Speaker 2

Thank you. Good morning, guys. So I wanted to go back to the same line of questioning you've had over the last Few questions. Maybe on OneCore, just maybe touch upon the opportunity. Eric, you've been talking about it a lot

Speaker 7

on the revenue synergies and What portion of their business is distribution for their own PMA parts versus third parties and the same thing for HEICO and how that kind of results in the delta revenue per employee, which is almost double HEICO's.

Speaker 1

Yes. So as you're aware, Sheila, so we disaggregate revenues into 3 areas: Parts, repair and specialty products. So when Kora's business is going to be included in the Parts and the repair section for of the flight support numbers. So and my guess is that it's probably going to be roughly onethree repair, Roughly twothree parts. And the parts includes both distribution maybe a little bit more on the parts side.

Speaker 1

The parts includes distribution as well as PMA. So they're all growing very well. There's tremendous synergy opportunity between these businesses. So I think they're going to continue to do extraordinarily well. And as you know, there's a big interplay between Those various areas because the repair businesses obviously require parts in order to repair their products, And those come in, in the form of distributed product as well as PMA product.

Speaker 1

So I think it's Going to be very strong there. But that sort of gives you an idea. Roughly, let's just say, 71 quarter is roughly 70% parts, 30% repair in that general area.

Speaker 7

Okay. And Eric, another one for you. Sorry, I'm just keeping it to you for today. There's this thesis out there that aftermarket is And decelerating for whatever reason. How do you guys model the trajectory of FSG and Melanzi in this year?

Speaker 7

Is it just Warranty aircraft or is it individual sales? Can you guys give us your thoughts on how you think the overall aftermarket business is going to grow from here?

Speaker 1

Well, for us, the aftermarket business is extremely strong. Back in last December, I thought that even though we weren't seeing any softening, that a softening would be inevitable and Would come, and I was wrong. Things remain extremely strong. And I think that is a result of us capturing share, more people wanting to do more things with us. And I think, frankly, the future for us is very good.

Speaker 1

We don't see a softening as of now. And our backlog is tremendous. Some of our backlogs in some of the businesses are 2x the historical rate. So things are really strong.

Speaker 2

You've got an older

Speaker 1

fleet, which requires a lot of very expensive parts. And a lot of these you can't any of these components And you've got to get them fixed. And I think things are continuing to remain strong. Yes, the day will come When we come off the top of it and the whole industry comes off the top a little bit and does a little bit of a dip. But I think, frankly, the industry is Very, very well positioned and is going to go from strength to strength here.

Operator

Thank you.

Speaker 1

Thanks, Sheila.

Operator

And the next question will come from Josh Sullivan with The Benchmark Company. Please go ahead.

Speaker 2

Hey, good morning.

Speaker 1

Good morning.

Speaker 2

Just comments around using strong cash flow to invest in R and D. As you integrate Glencore and explore new value parts or P and A opportunities, should we expect a development cycle from the time you increase Kind of that investment in P and A development to the time of FAA approvals. Any R and D cycle to think about as you integrate here?

Speaker 1

I don't think so. I think that the cycles are pretty short at both HEICO and Glencore. I think actually That's probably one of the things that we may be able to help Glencore shorten some of these cycles. But I would say, in general, the cycles are very similar. I don't think there's going to be A major change in new product development spending.

Speaker 1

We're just going to continue doing the things that we've always done. And I think it's going to be Very consistent. But by sort of putting together these 2 baskets of products, It's just becoming of tremendous value to our customers. This is something that they really need. They've expressed a lot of frustration when they can't get a part or they can't get a component.

Speaker 1

There have been a lot of shortages, both HEICO and Lincor, notwithstanding our big backlogs, Our big backlog, I think, have done a really good job with on time delivery relative to the industry. And That's why I think our customers want to reward us with more business. Got it.

Speaker 2

And then just the comments around you call out majority of products driving growth. Just curious within FSG, What types of products were in that minority, which didn't drive growth or any common themes there?

Speaker 1

Yes. There has been a couple of businesses, I would say, more in the specialty products area, Where basically commercial OEM products, you're familiar with the Sort of the vagaries of the commercial build market, certain things are hot, certain things are not. So I would Say there's been a little bit of a slowdown in some of that. I would say that's probably the area that has been, If you will, the slowest, but the backlogs are very strong and I can tell you over on the defense side of our specialty products business. Backlogs are enormous, and we're very optimistic for future sales.

Speaker 1

So I think we're very, very well positioned. I mean, frankly, if we had the capacity right now, we could Our specialty products in a number of businesses could ship significantly more than they are. I mean, we are just So busy. And yet, we continue to add space and add real estate, Add machines, add people, but just keeping up with the demand is really difficult. These tend to be a little bit longer cycle, but I think both Wencor and the HEICO businesses, If they could, they would really load significantly more business into our specialty products.

Speaker 1

But we just Don't have the capacity at the moment. Great. Thank you. Thank you.

Speaker 3

As a

Operator

reminder, it's star 1 to ask a question. We'll take our next question from Jack Ingers with TD Cowen. Please go ahead.

Speaker 2

Hey, guys. Good morning. This is Jack on for Gautam today. Good morning. Good morning.

Speaker 2

Eric, just going back to 1Core here. I think you talked about the margin Profile EBITDA roughly similar to FSG. And I know, Larry, you kind of mentioned about Leverage up 3 times and sort of quickly deleveraging to historical levels over time. I kind of just want Dig on that a little bit more because it seems pretty robust. And if we're kind of looking at this correctly, I mean, it does seem like quite an inflection in cash and EBITDA.

Speaker 2

So I just kind of wanted to dig on sort of the cash Profile of 1 core, maybe working capital dynamics, things like that, just any color. Thanks.

Speaker 1

Yes. I think there, 1 core cash profile is very similar to HEICO's. They as As far as receivables and inventory, they have a very similar policy. In terms of cash generation, I think it's going to be very, very similar to HEICO. Of course, we are going to have the as I mentioned in our earlier question, we will have the intangible amortization To contend with, but that's a noncash charge.

Speaker 1

I mean that doesn't impact our cash. And as I mentioned, you can get a tax benefit for a chunk of it. So It helps cash. But it's, I would say, very, very similar. We've been very fortunate to acquire Almost like a brother from another mother.

Speaker 1

I mean, it's the businesses are just very, very similar.

Operator

And our next question comes from Louis Raffetto with Wolfe Research. Please go ahead.

Speaker 3

Hey, good morning.

Speaker 5

Good morning. Good morning, Louis.

Speaker 3

Maybe just a follow-up on Jack's question there. When you guys about the historical leverage within 12 to 18 months? I guess, what are we looking at? Like, are we looking at the 2019 to 2022 when you were sort of 0 to a half Turn levered, are you talking sort of further back or you were 1 to 2 turns? Just trying to get a sense.

Speaker 3

Louis, this is Carlos. When we talk about historical numbers, we're talking something below 2%. That's how we think about it. Okay, great. Thank you.

Speaker 3

And then maybe Carlos, just the corporate expense seemed to step up in the quarter. Was there anything else related to the deal Anything else just to be mindful of? No. There was a lot there was some intersegment activity, which Sure. It's maybe on an apples to apples basis, it might have been $1,000,000 higher.

Speaker 3

That's not unusual. It's just I mean, there were some step ups in some costs, in particular, IT and Professional services, travel, things like that. There were some increases there. But I would say that proportionally with the growth in the business, It didn't necessarily grow at an outward pace. You know what I mean?

Speaker 3

It was pretty much consistent with the growth in the business. Okay. That's great. And then, I mean, I guess, Larry, maybe one for you. Just additional M and A from here.

Speaker 3

Obviously, you've done your 2 largest deals back to back now. I guess, how do we think about you absorbing WENCOR and sort of moving on with your historical strategy from here?

Speaker 1

Well, I think we might have to take a little bit of a rest. We want to get, as we mentioned, get that debt down below 3 and into the area of 2 times EBITDA. However, I think there might be some bolt on acquisitions. We're looking at a number of Transactions. We don't drop our M and A strategy just because of the 2 large acquisitions.

Speaker 1

And we are looking at them. And I think we will find ways to finance them, At the same time, keeping the desire to get below 2x EBITDA. So I think we can walk and chew gum at the same time. I think we can do it And we'll work that out. We'll work the financial arrangements out.

Speaker 1

As we are now, We're rated as a credit investment credit rating on our bonds. We want to keep that. We're very proud of that. In addition, it saves us interest cost. And so we will, again, push to get it down below 2 and or two times.

Speaker 1

Prior to this, when core, we had never been even at 2x EBITDA. So I'll remind you of that. And we don't like leverage, strong leverage, so we're going to work towards that. But we I think we still will be able to make acquisitions

Speaker 3

Great. Thank you. And then, Victor, just a quick one for you. I think, obviously, the defense growth was nice Sequentially at 10%. I think you said it was still down maybe year over year.

Speaker 3

Do you have that number? I know last quarter you said it was down 14%, but just curious this quarter.

Speaker 2

Hey, Louis, this is Carlos. I still

Speaker 3

have that number handy. Organically, the bench is down in the high single digits, which That's coming off the last, gosh, 4, 5, 6 quarters, that's heading in the right direction. That's why it was important to us when we saw that sequential growth in defense. I highlight that because we've been waiting for that. That's something we've known was going to come.

Speaker 3

We just didn't know exactly when. So that's once quarter doesn't make a trend, but we're optimistic, Not only given that swing, but also some of the forecast from our subs tend to support the fact that we're seeing a turn here in our Defense Electronics business.

Operator

There are no additional questions at this time.

Speaker 1

Okay. This is Larry Mendelson, and we have no more questions. If any of you do have questions, you know that Eric, Victor, Carlos and I are available. Give us a call. We'll try to help you out.

Speaker 1

And we thank you for participating in this call, and we look forward to speaking to you in the 4th quarter earnings call, which will be sometime towards the middle or end of December. So thank you all, and this is the end of the call.

Operator

Thank you. And this concludes today's call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
HEICO Q3 2023
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