Loar Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 13, 2024

There are 7 speakers on the call.

Operator

As a reminder, this conference is being recorded. It is now my pleasure to introduce Ian McKillop, Director of Investor Relations.

Operator

Thank you. You may now begin.

Speaker 1

Thank you, Rob. Good morning, and welcome to the LoRa Holdings 2024 Third Quarter Earnings Conference Call. Presenting on the call this morning are LoRa's Chief Executive Officer and Executive Co Chairman, Dirksen Charles Executive Co Chairman, Brett Milgram Treasurer and Chief Financial Officer, Glenn D'Alessandro as well as myself, Ian McKillop, the Director of Investor Relations. Please visit our website at lorgroup.com to obtain a supplemental slide deck and call replay information. Before we begin, we at LoRa would like to remind you that statements made during this call, which are not historical in fact, are forward looking statements.

Speaker 1

For further information about important factors that could cause actual results to differ materially from those expressed or implied in forward looking statements, please refer to the company's latest filings with the SEC available through the Investor Relations section of our website or at sec.gov. We'd like to also advise you that during the course the call, we will be referring to adjusted EBITDA, adjusted EBITDA margin and adjusted earnings per share, each of which is a non GAAP financial measure. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliations. To begin today, I will now turn the call over to Doerksen.

Speaker 2

Thanks, Ian. Good morning. Good morning, everyone. Our partners, analysts and those of you who are on the call and hearing our story for the first time, I'm Doerksen Charles, Founder, CEO and Co Chairman of Law. So look, I just want to remind everybody how we like to do these calls.

Speaker 2

We truly, truly, truly believe that your time is valuable. And as a result, we'll keep our remarks as brief as possible to allow the analysts the majority of the hour we've allocated to ask questions to ensure that we focus on the things that matter to you. So let's start by reminding you who we are. LoRa is a family of companies with a very simple approach to creating shareholder value. First, we believe that providing our business units an entrepreneurial and collaborative environment to advance their brands, we will generate above market growth rates.

Speaker 2

Since our inception in 2012 through the end of calendar year 2023, we have grown sales and adjusted EBITDA at a compound annual growth rate of 38% and 46%, respectively. We collaborate across business units by sharing best practices and ideas while assisting each other when it comes to execution. We execute along 4 value streams. We identify pain points within the aerospace industry and look to solve those problems through organically launching new products, which we believe over the long term will create 1 to 3 percentage points of top line growth. We focus on optimizing the way we manufacture, go to market and manage our companies to enhance productivity.

Speaker 2

And each year, we'll identify initiatives that will allow us to continually improve our performance with a focus on 1 or 2 major initiatives that will improve margins. We also each year across our portfolio of companies will achieve more price than inflation. Again, the sum total of all of these actions is margin improvement as we'll walk you through in a moment here. Most importantly, we are committing to developing and improving the talent of all our employees, because our success is truly as a result of their dedication and commitment. So best part of this to all my mates, including our new brothers and sisters in Texas, a big thank you for your commitment and hard work.

Speaker 2

I'll now turn the call over to Brett.

Speaker 3

Thanks, Dersin. This is a chart everybody has seen in the past. It really shows how our portfolio of companies that we've acquired and grown are constructed across end markets, across aftermarket versus OE split. And of course, the heavily weighted nature of it being proprietary products that we own. The key takeaway from this slide, I think, is that we want to have a very balanced portfolio, be it around end market, be it around customers, be it around products or again even the aftermarket and OEMs.

Speaker 3

However, and you've heard me say this in the past, while we are relatively agnostic and want to keep a balance across all those different categories, one thing that we are not agnostic about, we are incredibly disciplined about is our approach to acquisitions. As you see in these 6 or 7 different boxes right here, one thing I want to highlight as we talk about our applied avionics acquisition that we did recently is that it checks all these boxes. First and foremost, it's an aerospace and defense focused business. We are not going to open the aperture as others have said in so much as our acquisition focus. We want to maintain products in niche categories where we have a very strong market position

Speaker 2

and there's very high barriers to entry.

Speaker 3

Those barriers to entry are created because we have proprietary content where we are one of just a very, very few number of people on the planet who can make a particular product. We also want to have a balance between aftermarket and OEM, but every category that we're in and every product that we sell has to have some aftermarket exposure to it. And ultimately, we want to put this portfolio of companies together and these capabilities together so that we can create cross selling opportunities across the group and maintain long standing customer relationships where we can build strong relationships with customers, drive revenue and have outsized growth relative to the market.

Speaker 1

Yes, and as Brett mentioned with the addition of Applied Avionics to the LoRa family, we have further enhanced and diversified the proprietary nature of our product offering. Applied Avionics designs and manufacturers VIVISUN ruggedized mil spec lighted push button switches and indicators, as well as the Nexus line of Avionics interface solutions, which integrate system to system functions like airing 429 converters and solid state relays directly into the switch, enabling expanded solution capabilities behind the cockpit panel. Applied is an excellent complement to our existing portfolio of more than 15,000 products, whether it's sensors, water purification systems, de icing systems or human interface devices or one of the many other products, we continue to believe that we have capabilities that are unique to serving our customers for allure. I will now pass the call over to Glenn.

Speaker 4

Thank you, Ian. Good morning, everyone. Let me start by discussing sales by our end markets. This comparison will be on a pro form a basis as if each of our businesses were owned as the 1st day of the earliest period presented. This market discussion includes the recent acquisition of Applied Avionics.

Speaker 4

We had record sales during the Q3 of 'twenty four. In total, our sales increased to $110,000,000 a 16% increase as compared to the prior year period. This increase was driven by strong performances in defense, commercial OEM and commercial aftermarket. Commercial aftermarket sales increased 19% in Q3 as compared to the prior year period and are up 16% sequentially from Q2 'twenty four. This is primarily driven by the continued strength in demand for commercial air travel.

Speaker 4

During Q3 'twenty four, our commercial aftermarket bookings remained strong. Our total commercial OEM sales increased by 21% in Q3 'twenty four as compared to the prior year period. This increase was driven primarily by higher sales across a significant portion of the platform suite supply, including general aviation, wide body and narrow body aircraft as an improving supply chain has allowed us to deliver parts that were previously held because our customers were experiencing bottlenecks in other areas of their supply chain. Our defense sales increased 25% as compared to the prior year period. This was primarily due to strong demand across multiple platforms and an increase in market share as a result of new product launches.

Speaker 4

Defense sales will continue to be lumpy given the nature of ordering patterns of our end customers for our products. Let me recap our financial highlights for the Q3 of 'twenty four. Our net organic sales increased 17% over the prior period. Our gross profit for Q3 'twenty four increased 200 basis points as compared to the prior year period. This increase was primarily due to the execution of our strategic value drivers as well as operating leverage.

Speaker 4

This was partially offset by dilutive effects related to the move of 1 of our manufacturing facilities. Our increase in net income of $6,000,000 in Q3 'twenty four versus Q3 'twenty three is primarily due to higher operating income and lower interest expense as a result of paying down $285,000,000 of indebtedness with the proceeds from the IPO and the refinancing of our credit agreement in May of 'twenty four. This was partially offset by higher interest as a result of the $360,000,000 incremental term loan for the acquisition of Applied Avionics as well as higher income taxes. Adjusted EBITDA was up $9,000,000 in Q3 'twenty four versus the prior year period. Adjusted EBITDA margins remained strong at 36.8 percent due to a favorable sales mix, execution of our strategic value drivers and operating leverage.

Speaker 4

This was partially offset by the continued build out of our infrastructure to support our reporting, governance and control needs as a newly public company. Our adjusted EBITDA margins are expected to grow to 37.5% in calendar 'twenty five. This represents a 2 70 basis point margin growth since 2022. This chart shows we have been executing on our value drivers while acquiring 2 dilutive acquisitions and incurring infrastructure costs to support our needs as a public company. Our full year market assumptions are as follows: commercial OEM up high double digits commercial aftermarket up mid double digits defense up high double digits.

Speaker 4

Our 'twenty four outlook is as follows: sales $390,000,000 to $394,000,000 adjusted EBITDA $141,000,000 to 143,000,000 dollars adjusted EBITDA margin approximately 36 percent net income $19,000,000 to $20,000,000 adjusted EPS $0.35 per share to $0.37 per share. Our 'twenty four assumptions used in calculating the 'twenty four revised forecasts are as follows: capital expenditures approximately $9,000,000 down from 11,000,000 dollars Full year interest expense of approximately $54,000,000 this is up from our previous forecast of $42,000,000 due to the borrowing of $360,000,000 for the acquisition of Applied Avionics in Q3. Full year effective tax rate is approximately 30%. Depreciation and amortization is $43,000,000 This is up from the previous forecast of $40,000,000 as a result of higher depreciation and amortization from the purchase of Applied Avionics in Q3. Non cash stock based compensation is approximately $11,000,000 up from $10,000,000 and our fully diluted shares are approximately $91,000,000 Let me turn the call back over to Derrickson to share our 'twenty five outlook.

Speaker 2

Okay. This is the part of the call that I enjoy the most. Glenn just gave you our 13 week forecast, which I always struggle with, right, because we're building this business for the long term, long, long term. But I realize we have to, so we did. So let's talk about our initial guidance for 2025 and I'll repeat that initial guidance.

Speaker 2

Now we know most of our colleagues in the public environment will wait until they report earnings for the full year to share their outlook. But we felt we wanted to share how we are thinking about the business next year with you guys as soon as possible. So given the fact that we have such strong visibility in our business as a result of the proprietary content of our portfolio and record backlogs at the end of Q3, these characteristics combined with the high demand for aircraft by airlines, the challenges by the OEMs to produce new aircraft and you can pick your favorite poison, whether that's a strike or supply chain challenges. We continue to drive increased aftermarket demand. So for our part, so just given the geopolitical visibility in the world, we see and we expect on a pro form a basis assuming we own all of our businesses since the beginning of 2024 that our end markets will be up as follows.

Speaker 2

So let's go through it. Commercial OEM and aftermarket will be up high single digits versus 2024. Our defense end market sales will be up high double digits versus 2024. These market assumptions along with our continued execution of our value drivers, will allow us to meet or exceed the following for calendar year 2025. Net sales between $470,000,000 to $480,000,000 adjusted EBITDA between $176,000,000 $180,000,000 while adjusted EBITDA margin will be approximately 37.5%, which I'd like to highlight is 150 basis point improvement over 2024.

Speaker 2

Net income between $33,000,000 $37,000,000 adjusted EPS between $0.45 $0.50 per share. In addition, we expect capital expenditures of approximately $14,000,000 interest expense of approximately $60,000,000 while our effective tax rate will be approximately 30%. Depreciation and amortization approximately $51,000,000 and our non cash stock based compensation will be approximately $15,000,000 All of this divided by a fully diluted share count of 93,000,000 shares. So please note that all of the amounts I've just outlined for you relative to calendar 2025 performance assumes no additional acquisitions. However, as we've noted previously, our drumbeat is to complete 1 or 2 acquisitions each year, but we cannot predict the timing of such minus capital expenditures to be greater than 125 percent of our net income assuming no additional acquisitions.

Speaker 2

I'm going to say that one more time. We expect operating cash flow minus capital expenditures to be greater than 125 percent of our net income assuming no additional acquisitions in calendar year 2025. So with that, Rob, let's turn it over for questions.

Operator

Thank you. We'll now be conducting a question and answer

Speaker 2

Thank

Operator

you. I do have a question from the line of Jason Gerske with Citigroup. Please proceed with your question.

Speaker 5

Hey, good morning, everybody.

Speaker 2

Hi, Jason.

Speaker 4

Tertin, can you walk

Speaker 5

maybe walk us through what you view to be the risks and opportunities around your guidance in 2025? You kind of went out of your way to suggest that this is your initial guidance and these are kind of the minimums that you expect to achieve. So I'm just kind of curious what you think the risks and opportunities are?

Speaker 2

Thanks for the question, Jason. And yes, I think you picked up on that correctly. So look, I know everyone is just getting to know us as a management team. So just a third time we're reporting as a public company. But we don't like to share numbers with anyone and we view all of the participants on the call as our partners that we believe we can't meet or exceed.

Speaker 3

And

Speaker 2

I guess I'd say it to you this way, I think our initial guidance that we came out with for EBITDA for the year was 132 to 134. We came back the next quarter and we said $134,000,000 to $136,000,000 This guidance for 2024 and we'll get to 2025 in a second, at $143,000,000 includes applied avionics, which I'll do some homework for folks who haven't done it yet. If you look at the pro form a financials, you'll see the 1st 6 months sales were 22,000,000. We told everyone for the year would be 40. So therefore the second half of the year is $18,000,000 So we've owned it for 4 months, which is about $12,000,000 of revenues at the 50 percent EBITDA margins at 6%.

Speaker 2

You take 143 minuteus 6, you'd 137, we have just guided higher than the high end of what we told you previously. So that's our history to date. And now let's talk about 2025. It is our initial guidance. And as I said on the call, most folks don't go this early, right.

Speaker 2

Normally folks, you only be hearing from us about 2025 until March of next year when we report earnings. We didn't think it was appropriate to wait that long to share with you guys. So what's in the guide? Everybody knows that the commercial OEM stock part of the business is challenged. Between Boeing strikes and challenges within their supply chain, Airbus challenges within the supply chain, etcetera, Textron striking.

Speaker 2

The way we think about the guide for 2025 is there is an impact to us. But as you guys know, Boeing sales to us $12,000,000 roughly a year, half of that OEM. So you're talking $6,000,000 small impact. So I don't see a lot of risk to our numbers and our guide for 2025 on the OE commercial side. On the aftermarket side, given its November and we're talking about the results through 2025, we are thinking about it cautiously.

Speaker 2

So I'd say this way, we're cautiously optimistic. So high single digits feels about right for us now, given, as you guys know, our pricing leverage, what we expect to happen with volumes given the OEM challenge producing aircraft. We do see strong volume, strong backlog on that side of the business. So I am comfortable actually extremely comfortable on the commercial aftermarket. In terms of defense, which we share every time is choppy, the good news is we're starting the year with solid, solid backlog, even though we see deliveries picking up more in the second into the last half of twenty twenty five.

Speaker 2

So a little bit more choppy in the Q1 of 2025. Feel really, really good about that. So other than some black swan event, we feel really, really good about what we're sharing with folks. Hopefully, I answered your question in there somewhere, Jason.

Speaker 5

Yes. No, I appreciate that. That's helpful. And then maybe just one quick follow-up. Glenn, for you on the cash flow guidance for 2025% and the 125% conversion, free cash flow to net income.

Speaker 5

Can you maybe just walk through some of the drivers of that and maybe talk a little bit about working capital and just kind of what the source of the high conversion relative to net income? Thanks.

Speaker 4

Sure. Well, obviously, let's start with the EBITDA, right? We don't expect a significant use in working capital for 2025. We expect inventory leveling out and receivables should be up because of the higher sales. We gave you the interest, so and capital expenditures.

Speaker 4

So nothing significant. And as Dirksen said, we will be we should be above 125%.

Speaker 5

Okay, great. Thanks. I'll pass the line.

Operator

Thank you. At this time, there are no further questions. I'd like to turn the floor back to Dierks and Charles for closing remarks.

Speaker 2

You guys are easy today. No, thanks for taking the time, getting our story. Actually, Rob, I think I need to hold off. Yes, yes. I was just going

Operator

to say we just have some more analysts that just came into queue.

Speaker 2

And again, it's not that easy.

Operator

Our next questions will be from Sheila Kahyaoglu with Jefferies.

Speaker 6

Sorry about that guys. No worries. Yes, it might have been a

Speaker 2

little bit

Speaker 6

of a shake, but congratulations on a good quarter and providing the 25 guide. So maybe let's start off on the quarter, if that's okay. Just commercial aftermarket pro form a up 19, sequentially up 16. What drove that versus peers maybe 1,000 bps below that? And how much did Applied contribute?

Speaker 2

So we don't talk specifically about one business unit over another in terms of contribution because the numbers we're sharing is on a pro form a basis. But it's really, Sheila, it's across all the platforms. It's actually one of the first things we look at. And there isn't a platform that wasn't up year quarter over quarter, year over year, because even quarter over quarter, we were up 16% in commercial aftermarket. So for us, it's market share, it's new product introduction, and it's just good performance, executing on our value drivers.

Speaker 2

That's what's driving it. We really feel good about it, which is going back to Jason's question about the 9% into 2025. We I think on the last call, I said, it looks like blue skies and my teammates in the room here looked at me like, wow. But the commercial aftermarket really, really feels good to us, Sheila.

Speaker 6

Understood. That makes sense. And then maybe just on the 25 guide, I just want to make sure we have it correctly here because 70% of your business is guided commercial OEM aftermarket guided to grow high single digits and then military, which is 15%, let's say growing high teens. How do you think about that total mid teens organic growth essentially that you have for 25%, what are we missing?

Speaker 2

What are you missing?

Speaker 6

Just a calculation. It just seems like most of your business is growing high single digits.

Speaker 2

That's correct. So high single digits, I'll say this way 9%, 10%, high single, low double. And on the military side, it's really, really strong, if I could say that way. So you're not missing anything other than the fact that we want to make sure as we've learned from speaking to a number of our partners in this call that we don't push the envelope hard in terms of given guidance. So we're going to be up 14% in total year over year on a pro form a basis.

Speaker 2

But we feel really good about it. So your math is right. Oh, by the way, the non aviation is actually down year over year. So that could be a piece of the missing math for

Speaker 6

you. Yes, that makes sense. That makes sense. Okay, great. And then maybe just while I have you guys, for the quarter, as we think about the Q4 exit rate, the guidance implies 2024 exits with 36% margins in Q4 versus you've been about 30 bps above that year to date.

Speaker 6

What drives that Q over Q deceleration?

Speaker 2

I hate using this word, because I think it's a 4 letter word, but there's some mix in there, because defense is going to be a greater you see it's growing faster. While we make good money, the margins on the commercial side of the business is higher. So that's piece of it. We also as we discussed, we do have a small impact on the commercial OE side of the business. We got the same love letters that everybody got across the industry from Boeing and Textron when they were on strike, stop shipment, hold all that stuff moving to the right.

Speaker 2

And again, commercial is higher margin than defense. So we have I'll give you a number, approximately $3 ish million of revenues that has moved to the right because of those love letters we got from the OEMs. That's part of it. Plus the Q4 for us, I think it's a little bit different than most public companies in that like I said earlier, 13 weeks is 13 weeks and it really doesn't matter in the long term. So we don't get the phone calls from our customers saying, can you move it into January because we want to manage our balance sheet and that and it's usually commercial aftermarket parts that that happens with a lot.

Speaker 2

So we have factored some of that into how we think about the Q4.

Speaker 6

Understood. That makes sense. Thank you so much.

Speaker 2

Thanks, Sheila.

Operator

Thank you. Mr. Charles, I'll turn the floor back over to you for any further remarks.

Speaker 2

Okay. I was going to say it's going to be an easy call to tell Sheila, I dialed in. But no, thanks everyone for taking the time to join us on the call. Look forward to speaking again, I guess in late March. You have our guide for 2025.

Speaker 2

It's our initial guide, as we said. And most importantly, I truly, truly want to thank all of my mates, all 1500 now of them across the group, because without you guys, none of this happens. So thanks everyone for participating and thank you to our colleagues.

Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.

Powered by Quartr
Earnings Conference Call
Loar Q3 2024
00:00 / 00:00