HEICO Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 29, 2024

There are 15 speakers on the call.

Operator

Welcome to the HEICO Corporation Second Quarter 2024 Financial Results Call. My name is Samara, and I will be your operator for today's call. Certain statements in this conference call will constitute forward looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward looking statements. Factors that could cause such differences include the severity, magnitude and duration of public health threats such as the COVID-nineteen pandemic HEICO's liquidity and the amount and timing of cash generation lower commercial air travel, 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 cost to complete contracts governmental and regulatory demands export policies and restrictions reductions in defense, space or homeland security spending by U.

Operator

S. 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 and 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. Parties listening to this call are encouraged to review all of HEICO's filings with the Securities and 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, Samara, and good morning to everyone on the call. We thank you for joining us, and we welcome you to this HEICO 2nd quarter fiscal 'twenty four 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 the President of HEICO's Flight Support Group Victor 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 would like to take a moment to thank all of HEICO's talented team members for delivering another excellent quarter.

Speaker 1

Your focus on customers and operational excellence has provided record quarterly results for our shareholders, and I remain extremely optimistic about HEICO's future. I also want to thank everyone on the call, the HEICO team members and our customers and vendors who themselves or family members have served this great country, some of whom made the ultimate sacrifice for our freedom. I hope you had these patriots in your thoughts on Memorial Day. HEICO is proud of the role we play in support of the armed forces of the United States and our allies. I will summarize the highlights of the Q2 fiscal 'twenty four results.

Speaker 1

Consolidated operating income and net sales in the Q2 of fiscal 'twenty four represent record results for HEICO and improved by 33% 39%, respectively, as compared to the Q2 of fiscal 'twenty 3. The results mainly reflect 21% organic net sales growth in the Flight Support's aftermarket replacement parts and the impact from our profitable fiscal 'twenty three and '24 acquisitions as well as improved results at ETG. Consolidated net income increased 17% to a record 123,100,000 dollars or $0.88 per diluted share in the Q2 of fiscal 'twenty four, and that was up from 105 $1,000,000 or $0.76 per diluted share in the Q2 of fiscal 'twenty 3. Consolidated EBITDA increased 35 percent to $252,400,000 in the Q2 of fiscal 'twenty four, and that was up from $187,200,000 in the Q2 of fiscal 'twenty 3. Our consolidated EBITDA margin was a very healthy 26.4% in the Q2 of fiscal 'twenty four.

Speaker 1

The Flight Support Group set all time quarterly net sales and operating income records in the Q2 of fiscal 'twenty four, improving an enormous 65% 49%, respectively, over the Q2 of fiscal 'twenty three. The increases principally reflect the impact from our profitable fiscal '23 and 'twenty four acquisitions and strong 12% organic growth, mainly attributable to increased demand for Flight Support Group aftermarket replacement parts and repair and overhaul parts and services. Our net debt to EBITDA ratio was 2.45 times as of April 30, 'twenty four, and that was down from 3 point 0 four times as of October 31, 'twenty 3. We remain on track to lower our leverage to 2x within 12 to 18 months post the Wencor acquisition. Cash flow provided by operating activities increased 82% to $141,100,000 in the Q2 of fiscal 'twenty four, and that was up from $77,800,000 in the Q2 of fiscal 'twenty 3.

Speaker 1

At this time, I would like to introduce Eric Mendelson, Co President of HEICO and the President of HEICO's Flight Support Group, and he will discuss the 2nd quarter results of the Flight Support Group. Thank you very much.

Speaker 2

The Flight Support Group's net sales increased 65 percent to a record $647,200,000 in the Q2 of fiscal 'twenty four, up from $392,200,000 in the Q2 of fiscal 'twenty 3. The net sales increase reflects the impact from our fiscal 'twenty three and 'twenty four acquisitions and strong 12% organic growth. The organic net sales growth mainly reflects 21% organic growth within our aftermarket replacement parts product line. Both the legacy HEICO and Wencour operations continue to exceed our expectations and the results prove that Wencour was an excellent investment for HEICO. Both HEICO's and Wencour's entrepreneurial culture and a record of producing high quality products continues to produce wins in the marketplace.

Speaker 2

Our customers continue to find great value in our larger Consistent with HEICO's time tested and well known operating philosophy, we continue to operate WENCOR as a standalone business operation. However, we have made good progress working together and serving our customers. Some examples of how we are now working together include the utilization of all HEICO and Wencore PMAs and DERs at all repair stations, commercial and defense aftermarket sales cooperation where appropriate, WENCOR e commerce platform lists all HEICO non competitive PMAs, Wencore is utilizing HEICO's manufacturing base to quote new products. Engineering and regulatory cooperation that we expect to yield tremendous benefits for our company, and sharing best in class vendors. The Flight Support Group's operating income increased 49% to a record $148,900,000 in the Q2 of fiscal 'twenty four, up from $99,900,000 in the Q2 of fiscal 'twenty 3.

Speaker 2

The operating income increase principally reflects the previously mentioned net sales growth, partially offset by higher, as expected, intangible asset amortization expense due to the Wencor acquisition, the prior year impact from the amendment in termination of a contingent consideration agreement and increased inventory obsolescence expense. The Flight Support Group's operating margin was 23% in the Q2 of fiscal 2024 as compared to 25.5% in the Q2 of fiscal 2023. Given that acquisition related intangibles amortization in the Q2 of 2024 consumed around 280 basis points of our operating margin. The FSG cash margin before that amortization, otherwise known as EBITDA, was around 25.8%, which is excellent in absolute terms and we are extremely pleased with it. The decrease in operating income as a percentage of net sales principally reflects the prior year impact from the previously mentioned amendment and termination of a contingent consideration agreement and the previously mentioned higher intangible asset amortization expense, partially offset by lower performance based compensation expense as a percentage of net sales.

Speaker 2

Now, I would like to introduce Victor Mendelson, Co President of HEICO and President of HEICO's Electronic Technologies Group to discuss the 2nd quarter results of the Electronic Technologies Group.

Speaker 3

Thank you, Eric. The Electronic Technologies Group's net sales increased 6% to 319 point $3,000,000 in the Q2 of fiscal 'twenty four, up from $301,800,000 in the Q2 of fiscal 'twenty 3. The net sales increase is attributable to 4% organic growth, mainly reflecting double digit organic net sales growth of defense and aerospace products, partially offset by lower organic net sales of other electronic products. We were very pleased to see this core ETG end market gain traction in the past quarter even sooner than we had previously expected as we previously thought it would more likely be an early Q3 event when we would see that turn up. While we continue to expect quarterly variation and lumpiness in our Defense net sales, we believe the overall trend over the long term will remain positive.

Speaker 3

The Electronic Technologies Group's operating income was $75,300,000 in the second quarter of fiscal 'twenty four, up from $68,000,000 in the Q2 of fiscal 'twenty three. The operating income increase principally reflects an improved gross profit margin and the previously mentioned net sales growth. The improved gross profit margin principally reflects increased net sales of defense products, partially offset by our expected decreased other electronics products net sales. The Electronic Technologies Group's operating margin improved to 23.6% in the Q2 of fiscal 'twenty four, up from 22.5% in the Q2 of fiscal 'twenty 3. Given that acquisition related intangibles amortization consumes around 400 basis points of our operating margin, the ETG cash margin before that amortization was around 27.5%, which is excellent in absolute terms and we are very pleased with it.

Speaker 3

The operating margin increase principally reflects the previously mentioned gross profit margin and net sales growth, partially offset by lower SG and A efficiencies. Growth in net sales of Defense and Commercial Aerospace product sales contributed to a favorable product mix during the Q2 and we note that we finished the quarter with a record order backlog.

Speaker 1

I'll turn the call back over to Larry Memels. Thank you, Victor. Now for the outlook. As we look ahead to the remainder of fiscal 'twenty four, we continue to anticipate net sales growth in both FSG and ETG, principally driven by contributions from our fiscal 'twenty three and 'twenty four acquisitions, as well as demand for the majority of our products. Notably, we remain optimistic on the ETG's opportunity to expand and grow its net sales of defense related products over the next 6 months of fiscal 'twenty four, and that is supported by a strong backlog.

Speaker 1

Additionally, we plan to continue our commitment to developing new products and services and further market penetration, while maintaining our financial strength and flexibility. In closing, I would like to thank our dedicated and loyal team members for their continued support and commitment to HEICO, Our dedication to customers, team members and the production of high quality, highly engineered niche products continues to be a winning strategy in the marketplace. The end markets we serve remain very healthy, and I'm highly optimistic about HEICO's future. Thanks for all you do to make HEICO a great company. And now, I would like to open the floor for questions.

Operator

Thank And we'll take our first question from Robert Spingarn with Melius Research. Please go ahead.

Speaker 4

Hi. Good morning, everybody.

Speaker 1

Good morning, Rob.

Speaker 4

Congrats on another just excellent quarter. I wanted to dig into the businesses a little bit. So Victor, I would start with you and then Eric, I have something for you as well. But Victor, in terms of you just talked about your margins and the mix improvement and it sounds like the second half should be better, especially based on your prior comments, I think saying something like 24% for the full year. So that implies a step up here in the second half.

Speaker 4

And is that a good number for next year? In other words, are we starting to move back toward the margins of a couple of years ago? Or does that depreciation keep us from getting there?

Speaker 5

Rob, I'm going to dive in here because I've had a bunch of conversations with analysts about this topic, maybe a little confusion. The 24% that's been battered around, that is what we aspire the segment's margin to elevate to. I don't know that we'll get there for the full year being an average of 24%. My comments last quarter were that my comments last quarter that, as the defense came back, that would be accretive to our margin, which we expected to come in the second half. And I thought, sometime during this fiscal year, we'd post the quarter at 24% -plus.

Speaker 5

And that's kind of where we're at.

Speaker 4

Okay. Thank you for clarifying that. Victor, I have a little bit more qualitative one then for you. And thinking about your data and microwave division, you've got Connectech there, which is one of NVIDIA's largest global hardware partners. I wanted to see if you're seeing an acceleration in orders or RFPs there and other businesses within ETG to support all of this demand for data centers?

Speaker 3

Yes. Rob, it's a good question. Connectech definitely is seeing increased demand for data centers and on NVIDIA products. And I would expect that to continue. Now while Connectec is not a huge part of our company, it's important and it's a great business.

Speaker 3

In terms of the other companies, I don't think we're seeing a lot related to data centers. It's not a material part of our business in ETG.

Speaker 4

Okay. And then, Eric, just quickly in your business, just outstanding organic aftermarket parts growth at 21%. And I've asked you this question in the past, but is there any way to parse that in terms of, for lack of a better expression, sort of same store parts growth, same customer, same parts versus pricing versus market share gains? In other words, what's driving the 21%?

Speaker 2

Hi, Rob. This is Eric. So, as you know, we operate a very decentralized business. And in order to drive to capture those numbers from all of the business units, it would be very difficult that we don't capture that. So, I don't know the specific finite answer to that.

Speaker 2

But, I can tell you that we've gotten a little bit of pricing. As I've mentioned on prior calls that our customers are very comfortable with our need to pass on our increases in the cost to manufacture and our cost to do business. And so, in order to maintain our margins, our prices have to go up by at least that amount. So, they understand that and we've been able to do that. So, there has been a certain amount in terms of price increase, cost increases driving price increases.

Speaker 2

And then, as far as the balance, I don't have these, as I said, the specific numbers in front of me. But, my guess is that it's probably, I don't know, half and half, half existing product, increased penetration and half the sale of new products that hadn't been sold in the year ago period. That would be my guess. Some of the businesses do capture this. So, I am able to see it for certain companies.

Speaker 2

And that's why I'm able to say what I just said. But, that's sort of my feeling on it. But, we are not a price increase story. So, we're not driving these 21% returns. A 21% increase is because we're raising price 21%.

Speaker 2

My guess is that price would be far less than a third, maybe even less than a quarter of that number. So, most of it would be volume increases.

Speaker 4

Okay. And then, just as a final sort of follow-up to that, we know that turnaround times for LEAP and GTF engines are significantly longer than they are for the prior gen CFM56 and B2500. And part of this is the lack of approved DRs and PMAs for LEAP and GTF. So knowing that these programs are early in their life cycle, I wanted to see if you've started to work on those and what kind of ramp we might expect for HEICO's activity or FSG's activity on these 2 new engine types?

Speaker 2

So Rob, that's a great question. And as you know, we are very sensitive about giving specific information due to competitive reasons as you can imagine on any particular platform. But, I can tell you that we have our eyes on new platform opportunities. Yes, we're willing to develop some product based on speculation that we'll be able to sell it. But, we really need to make sure that the customers will be there and commit to us.

Speaker 2

You point out in your question the basis and the reason why we exist and why our customers want us to exist. And I agree with you. I think that if there were alternative sources of supply, the situation wouldn't be as dire as it is. But, at the moment, I'm going to have to pass on really where we are at that point. But needless to say, we've got people focused on all parts of the market.

Speaker 4

Fair enough. Thanks, everyone.

Speaker 2

Thank you, Robert.

Operator

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

Speaker 6

Good morning, everyone, and great quarter. Thank you so much.

Speaker 7

Good morning, Sheila.

Speaker 6

Good morning. Eric, just on your prepared remarks, you made a few comments about OneCore and how you're working together and you're starting to see those results. I was wondering if you could quantify that in any way or how you're tracking that internally. Are you looking into parts sold into a certain customer and the increase as you combine the sales force? Maybe if you could elaborate there?

Speaker 2

Got it. So, the answer is, we don't specifically capture what those numbers are. It's very hard to capture. And what we're just trying to do is get the businesses to do what's in their interest and do what's in their customers' interest and combine HEICO interest. So, unfortunately, I don't have a number.

Speaker 2

But, I can tell you that just breaking down, looking at the various areas, the use of the Wincor PMAs Wincor and HEICO PMAs and DERs at the repair stations is very significant. We always said that the product selections from both companies was extremely complementary. There was not a lot of overlap. So, you can just imagine when overhauling an LRU by being able to purchase each other's PMAs, which to a certain extent was done pre acquisition, but by being able to use each other's DERs and being able to rationalize where we overhaul these products, we've got multiple repair stations that are obviously strong in certain areas and weaker in other areas. And they've been able to, by themselves and without me orchestrating this, they've been able to share the technology and figure out where it makes sense to swap product lines, swap technologies.

Speaker 2

And as a result, it's really hard to measure this stuff. So, we really don't even try. As far as the aftermarket sales cooperation, I'd say that's been excellent in terms of opening doors for each other. We've had meetings with airlines who are so excited that we have the potential of putting all of these increased number of products together and really provide a very, very unique service. And I can tell you, the airline support has been extraordinary.

Speaker 2

We thought that it would be good, but it is really off the charts outstanding. In terms of the defense aftermarket, we've already there are all sorts of examples where in the international market, we were procuring parts from other sources. Now, we're buying the legacy HEICO companies or buying it from the WENCOR companies and vice versa. So, that's working extremely well. Having the we are able to see when we list the HEICO parts on the Wencore platform, we are able to see what that is.

Speaker 2

And that's been excellent and very good. In terms of manufacturing new products down the road, WENCOR has a very aggressive new product development program and having all of the 10 HEICO manufacturing businesses open to manufacture products makes a lot of sense and I think is really going to benefit future quarters that hasn't benefited yet. It benefited the numbers. In terms of engineering and regulatory cooperation, that's substantial. By pooling the talents of both businesses, we're able to get a lot more done.

Speaker 2

And I can tell you in discussions also with the FAA, they're very excited about that as well. And then, obviously, sharing best in class vendors. So, I'm sorry that I can't give you a specific number, but I think you see it in our organic growth and in our margin expansion, which is frankly beyond where I thought we would be. And I'm just so happy with the results that I'm letting them speak for themselves.

Speaker 6

No, really appreciate that, Eric. And then, maybe I wanted to another one on price. I know you said that top line contribution is about a third or a quarter of your growth. How do we think about that net price impact and should we see that discount to the OEM narrow as it's widened throughout the last 4 years? Do we see that narrow and do we see the OneCore coming through and all your efforts coming through with new product development and higher net price even as inflation comes down?

Speaker 6

Does that make sense?

Speaker 2

No. Yes. I understand your question. And I can tell you that the prices that we sell as a percentage of OEM, I would say, are unfortunately at an all time low. So, the OEMs have raised prices faster than we have raised prices.

Speaker 2

We want to make sure that, as I said, that we need to pass on nobody wants a price increase. And while it appears easy, I must say that I understand I know what it feels to walk in our sales folks' shoes trying to get these price increases because even though costs are going up, nobody wants to take a price increase, especially when you're delivering so much value. So, while we have been successful in recapturing our increased costs, and plus a little bit in some cases. The percentage of OEM at which we sell our parts is, as I said, at an all time low. And we're in the market capture space.

Speaker 2

And we think that we can continue to drive exceptional value for our customers by maintaining this philosophy.

Speaker 6

Got it. Thank you.

Speaker 2

Thank you.

Operator

And we'll take our next question from Scott DeGel with Deutsche Bank. Please go ahead.

Speaker 8

Hey, good morning.

Speaker 2

Good morning, Scott. Hey, Carlos,

Speaker 5

can you give us an update on

Speaker 8

the operating margins you think FSG should be able to do this year? It looks like you're tracking a good bit higher than the 21% to 22% range you outlined previously.

Speaker 5

Yes, the FSG is performing exceptionally well right now. And the caution I'll throw at you is, number 1, obviously, we are conservative bunch. And I'm not sure at this point, once we get through this, what I'll call exceptional growth period, and the mix within the segment kind of flattens out or settles out, I'm still thinking that maybe it's towards the high end of 'twenty two for sort of thinking out long term once we settle in. But I wouldn't I don't want to guide or get you guys thinking about us having 23 plus percent margins. Now, I don't see impediments in front of us to continue to have these strong margins, but I do think that as the footprint settles down, we'll just see a natural tendency to have the

Speaker 9

margin come down a little. And by

Speaker 5

the way, the reason for that is during the quarter, we had exceptional growth in our aftermarket parts business. Repair and overhaul was strong, not as strong as the parts business. And Specialty Products is a little flat on the commercial OEM product build side. So, I think as those segments, their growth patterns get back to normal, we might see a slight depression off that 23%, but not a ton. Does that answer your question, Scott?

Speaker 5

Yes, it does. I mean, you did 22.5%

Speaker 8

in the first half and typically your second half stronger. I'm just trying to figure out what drives it down second half versus first half. So it sounds like that's kind of what you're teeing up.

Speaker 5

At some point, it's going to be mixed. I'm not so sure that we are going to lose momentum in what I'll call exceptional growth this year. So, we probably will have margins that bounce around. But, I can't predict the exceptionalism of our team members. I mean, the operations and the way they're running the business now to keep up with the demand that's out there to deal with this growth and employees and everything, they're just doing an exceptional job.

Speaker 5

So, I hope this margin would continue. I'm just cautioning you that my view is once the mix settles in, if we run-in 'twenty one to 'twenty two, we're going to be very happy as a management team.

Speaker 2

And Scott, this is Eric. Scott, this is Eric. And I can tell you, and this is a shout out to our many team members who I think are on this call, but HEICO has got the biggest bunch of sandbaggers that you've ever that I've ever seen. And one, they're super talented. This is not meant to take away from their achievements because their achievements are nothing short of incredible and amazing.

Speaker 2

However, having said that, as Carlos said, they tend to be very conservative. We joke around internally, Carlos and I call them sandbaggers. They know who they are. And Well, I think Carlos

Speaker 8

is a sandbagger too. Well,

Speaker 2

I understand that we're just taking these numbers and rolling them up. And when we go and talk to them about, come on, you're performing at this, why is the number going to go down? They got 22 possible reasons, including a meteor strike and all sorts of crazy stuff that could cause it. And as a result, we really take up the numbers and we even add a positive contingency very often to it because we know that they're low. But it is very hard to quantify.

Speaker 2

And the reason I don't, if you will, fight the sandbagging is because it encourages them to look at all of the areas of potential risk. There are all sorts of there's it's a Herculean effort to achieve these numbers. And there are all sorts of things that can go wrong in the supply chain and with technology and processes, all sorts of things. And they are very much focused on what can go wrong. And as a result, since they work so hard to mitigate those factors, they most of the time, almost always, over perform.

Speaker 2

So, that's sort of where we are in it. I mean, we're hoping to do better. But, based on the numbers that we've got and the variations in the business cycle, this is what it rolls up to. So, we just sort of go with that.

Speaker 8

Okay. Yes, I appreciate that. Eric, I guess, while I have you, if I go back to 2022 and the first half of twenty twenty three, the specialty products was growing like crazy. And I guess a lot of that was driven by munitions, but the growth rate has slowed quite a bit since then. So I guess my question is, do you have a sense for when we might expect to see specialty products return to stronger growth profile?

Speaker 8

And then what you need to see in order for that to happen?

Speaker 2

Got it. So the short answer to that is in fiscal 'twenty five, we think is when it's going to happen. I do want to mention that actually we don't make HEICO doesn't make any munitions. I think what you're referring to is missile defense. So we are very active on missile defense interceptors and we have a high content there on other missile platforms.

Speaker 2

But, typically, it's more in the defense area, although I suppose there is some in the offensive. But we don't make the explosives themselves. When you look at the numbers, we're anticipating next year is going to be very strong. We've had significant ramp ups in a number of businesses, and we have significant orders on the books. And now we've just got to produce.

Speaker 2

Record backlog. Record backlog. We're really very, very good in the specialty products area. So, I'm anticipating very good results in 2025 on that.

Speaker 5

By the way, Scott, one thing to point out with that defense business, just like in the ETG, it can be incredibly lumpy. And I think that's what Eric's pointing out. You have to ramp to serve these big projects. And their backlog is at record high and we do expect good things in 2025. Not to say this year, I don't expect growth.

Speaker 5

I'm just 25% beyond is going to be a big growth force in that area.

Speaker 8

Got it. And still margin accretive growth like it's historically been?

Speaker 5

Yes. On the defense side, that's correct.

Speaker 9

Got it. Thank you.

Speaker 2

Thank you.

Operator

We'll take our next question from Larry Solow with TJS Securities. Please go ahead.

Speaker 10

Great. Thank you. Good morning, everybody. First question, it's just on the disparity between the really great growth on the parts business, 21% and sort of the mid to high single digits, it sounds like on repair service and overhaul. Is that difference or part of that difference where you're capturing market share gains?

Speaker 10

Or is that too simplified of a way to look at it?

Speaker 2

Yes. I think there are some market share gains there. Hi, Larry. This is Eric. There are market share gains.

Speaker 2

I think that in the parts area, remember our business, we typically ship discrete parts. So, if we've got the part on the shelf, we're able to sell it. Whereas in the component repair business, we're really beholden to the supply chain. We can have an LRU that's got a view 100 different part numbers in the bill of material and one part is being held up, which actually is the case in many different businesses, and we can't ship it. And we've got this big backlog and it's basically just sitting there.

Speaker 2

And so that's sort of, I think, what's also going on there.

Speaker 10

Got you. And a question maybe for Carlos. I did notice there was a bit of a contingency reversal in the quarter. Was that in FSG?

Speaker 9

Yes, it was. Yes, it was.

Speaker 5

So, this quarter, we had about it was like a net $4,000,000 It was a $6,000,000 reduction in the contingency, and then we had some inventory reserves we took for a product line. And so, we had about a $4,000,000 net pickup in the margin related to a contingent earnout reversal. And that was due to an acquired contingent earnout through the OneCore acquisition.

Speaker 9

Got you.

Speaker 5

Now remember that remember that's on our numbers right now, that's maybe a 0.5 point to the margin. Last year, we had, if you recall, in the same quarter, we had a $9,000,000 reversal for the renegotiations of a contingent earnout. And that was a little bit more impactful to our margins. That was maybe 1.5% or something like that of the margin. So, net net, it was actually a headwind for us this quarter.

Speaker 10

Year over year. But maybe that gives us a little bit of a reason for a little bit of a sequential decline going

Speaker 5

to the back end of

Speaker 10

the year. There was a little bit of a benefit this quarter, I guess. And just in terms of

Speaker 5

the 1 quarter I appreciate you supporting us on that.

Speaker 10

Yes, absolutely. Just on OneCore, Eric, you mentioned sort of this operating as a standalone, and I think that's the beauty of HEICO and we'll see your subsidiaries kind of run autonomously. Being that 1 core is so large and somewhat has a lot of similarities in your core PMA parts business and distribution and whatnot, are there opportunities to sort of merge blend those 2 companies more together than the normal HEICO way you operate?

Speaker 2

Hi, Larry. So, that's a great question. A lot of people have wondered about that. And as you know, HEICO has the unique ability, which you don't typically find in a company of our size to operate businesses in the similar same spaces and to sort of direct traffic so they don't hurt each other and make sure that we maintain the entrepreneurial spirit. And I think that is the single most important thing that we can do.

Speaker 2

Just last week, I was at the Aerospace Industries Association Board of Governors meeting. And actually PWC did a wonderful presentation speaking about what's going on in terms of the employment trends in the aerospace market. And what was interesting is that the lack of interest from people with regard to aerospace is not due to the mission of Aerospace or even the defense part because some people are sensitive about that. And it's not due to the earnings level. It's due to the fact that when people join large companies, they feel pigeonholed and they don't feel like they have they're able to get a good experience.

Speaker 2

And I think that that's the unique thing about HEICO. We recognize that there's no question there's synergy. If we can functionally put things together, we can drive certain processes, eliminate costs and do all that. But what it does in the process is it kills the entrepreneurial nature, the enthusiasm, the desire to stay up late, to work late, to make sure that you accomplish what your customer needs, where you have full responsibility for the product from selecting it, designing it, manufacturing it, procuring or and inspecting it, selling it, accounting for it. And this is what is very, very motivational to our team.

Speaker 2

So to answer your question, no, there's no plan to put this together. However, there is the opportunity to cooperate. And frankly, with the organic growth that we've got, if we could just have these businesses work together and become more efficient, but still retain their entrepreneurial spirit and their individual focus. There are tremendous cost benefits by just giving our internal people the internal promotional opportunities and not having to go outside and hire more people. So I don't see, if you will, cost synergies in terms of job reductions.

Speaker 2

But I do see the opportunity for our people to put their heads together and figure out to we've already gotten to the point where 1 +1 equals 2.5. But I think we're going to continue to focus, so 1+1 can equal 3 or 4 or 5. And that's really the focus. And it's not going to be through job cuts the way some other companies handle this kind of thing.

Speaker 10

Got it. I appreciate that color. If I could just slip one in for Victor, if you guys don't mind. Just Victor, 4% organic growth, double digit defense on the defense side. What was sort of the standouts on the offsets on the negative side that kind of offset some of that growth on the other products?

Speaker 10

Anything extraordinary there?

Speaker 3

Yes, Larry, thank you for the question. It's a good question. And I was feeling neglected. So I

Speaker 5

had to answer the question. Absolutely.

Speaker 3

But all kidding aside, the weakest part was the other markets, the non aerospace and defense markets, which you may recall in the last couple or several calls, I said to anticipate that being lower and I would expect order rates to start to tick up in the back half of the year. I'm not sure whether it's the 3rd or Q4, but we're certainly seeing some green shoots here and there, though not across the board. But that is the case. And it's really a result of customer inventory channels. They had stocked up and much the same way a lot of companies in our industry have done and our industries have done.

Speaker 3

And I think they're working off those inventories at this point. And that'll continue for a little bit longer. And then you add a lead time in after the orders start to turn. So, we had a little lead time. So, I'm optimistic about those businesses.

Speaker 3

But, I think we have probably, I don't know, a couple of quarters or so left to go on negative comparisons.

Speaker 10

Got it. Thank you. Thanks, everybody.

Speaker 11

You're welcome. Awesome. Thanks, Larry.

Operator

Our next question comes from Peter Arment with Baird. Please go

Speaker 11

ahead. Yes, good morning, everyone. Thanks for all the details and great quarter. So Eric, I wanted you made in your prepared remarks, you made some comments about kind of the partnership that you with Wencore and your traditional PMA business. You mentioned OneCore is utilizing HEICO's manufacturing base to quote new products.

Speaker 11

Just curious to get more color on that, what kind of opportunity that is for OneCore?

Speaker 2

We think it's pretty substantial. 1Core has an excellent vendor base and they remain loyal to that vendor base. They're not in general moving product from established vendors who are making it. However, as you know, the industry supply is very tight right now, even in the HEICO businesses. And we have the opportunity to redirect capacity, frankly, in our Specialty Products Group more towards the HEICO businesses.

Speaker 2

And I've been out there working with the Head of our Specialty Products Group and I are working with our individual businesses to explain the virtue of manufacturing for HEICO and Wincor as opposed to only third party customers because when 3rd party customers, they're great and we want to stay focused on them as well. But when it's an internal customer, you know very clearly what's going on competitively and we're able to move priorities for them. So and also able to really focus on the quality. I mean, that's been a key, key focus for HEICO and for WENCOR in terms of making sure that the products that we supply are the absolute best in the industry. So, I think this is something that will start to pay dividends in 2025 and after, both in terms of more timely deliveries to our internal customers as well as, frankly, profit margin that our specialty products companies can make by supplying these high quality parts to the HEICO companies.

Speaker 2

There is a lot of stuff that we can do. There are 10 different businesses in our specialty products group and they all have unique capability. And I think there is opportunity in the vast majority of them.

Speaker 11

Perfect. Great color. And then, just, Eric, just staying with you on just what you're seeing from an international travel perspective? Are you seeing any pockets of strength or weakness or anything to call out on a regional basis? Just curious on that.

Speaker 2

So, I spoke with all of our sales heads last week and went over all the details and we're seeing tremendous strength around the world. The Americas remain strong as well as Europe and Asia, Middle East, China. So, we're seeing very good strength across the board. The market seems extremely strong. People want to travel, both for business as well as leisure.

Speaker 2

So, things look good. I wouldn't say there's 1 or 2 areas of particular strength. I'd say it's very broad based.

Speaker 11

Great. And then just quickly on Victor, you had some, I guess, some timing delays in Q1. Just how is the supply chain looking for your ETG when you think about obviously kind of the back half of the year? How are you thinking

Speaker 10

about that?

Speaker 3

Hi. Yes, this is Victor. So, I think our supply chain has pretty much returned mostly to normal. I don't think companies talk too much about and focus too much about supply chain issues, small supply chain issues that were in the noise level then. But certainly, people are no longer afraid to do that.

Speaker 3

But it seems to me as though things are maybe not quite entirely back to normal, but fairly close. There are still some pockets here and there where some lead times are extended or deliveries are delayed. But again, my sense of it is that wasn't unheard of before the pandemic either. We just didn't really hear much about it.

Speaker 11

Okay. And your R and D efforts, Victor, I know you guys called that out in Q1. Just is that for existing orders or is there new opportunities that you really are?

Speaker 3

It's a combination. I mean, our R and D activities in ETG remain very strong. It's a key part of what we do. And that's for some of its customer funded, shows up as revenue, NRE and things like that. But a lot of it is related to product development for future products.

Speaker 3

And in the aerospace industry, generally speaking, R and D expense, if you start something today, it takes time, years before it turns into revenue or meaningful revenue. So, we have to keep that constant investment going. I think it's something we've been very successful with and our subsidiaries have

Speaker 5

been very successful with over a long period of time. Yes, Peter, we spend roughly 3%, sometimes 4% of sales on R and D. That's pretty consistent, and that's what we saw this quarter. And company wide, I should say.

Speaker 3

And ETG is probably higher than that for a variety of reasons because we have some businesses, ETG is probably above 5% on R and D.

Speaker 11

Terrific. Thanks guys. Appreciate all the details.

Operator

Our next question comes from Burt Soudin with Stifel. Please go ahead.

Speaker 12

Hey, good morning and thank you for the questions.

Speaker 11

Good morning.

Speaker 12

Victor, maybe just to start with you. You gave some good color on ETG and what you're seeing there. You've seen a little bit of volatility in your organic growth over the last several quarters. As we think forward, do you expect that to stabilize? And do you still see that group on track for the mid single digit growth you thought you would see in 'twenty four?

Speaker 3

Yeah. Historically, this has been the case for ETG that it's volatile growth quarter by quarter. And I would expect that to continue to be the case. I don't think we've suddenly reached a different run rate, but I think the overall trend is a positive and upward trend. And that's supported by the backlog.

Speaker 3

It's supported by quote activity and other things.

Speaker 12

Got it. Okay. And then, Eric, one for

Speaker 5

you And Carlos was going to add to that. I just want to interject. We still expect low to mid single digit growth in ATG for the year, which that statement implies volatility if you think about what we've done to date versus the next two quarters. So, I think Victor is right, it's going to be up and down, but we do expect the low to mid single digit growth for the year organically.

Speaker 12

Got it. Okay. Thank you. On the FSG side, just a question for you, Eric, maybe just a little more high level. A lot of what you're seeing would seem like on the volume side for parts in terms of what you're expecting in repairs has been driven by a variety of macro features.

Speaker 12

But largely, the combination of the aging global fleet, air travel demand, what we've seen there and just depressed inventory. Carlos, you made some comments about some normalization in what you're seeing today over time. Like how do you think about those macro trends as you look out? It sounds like from what you were saying, Eric, you're seeing strength across the board. Is there anything concerning you that, that might change in the near term?

Speaker 2

So, Bert, that's something that we think about all the time. However, in order to be in this industry, you've got to really have a long term view. And we never know what's going to come around the corner, but we've got to be well positioned for everything. So, we're fundamental believers in commercial and military aviation. We think that these are really good spaces to be in.

Speaker 2

We understand them extraordinarily well. We're really appreciated by our customers. Yes, there is tremendous strength. Yes, there is a certain percentage of the fleet that's down as a result of issues that are going on. But, we also have a fleet, a massive fleet of 20, something 1000 aircraft that's aging 1 year per year.

Speaker 2

And most of the other major players out there increase price very substantially. So, we think that we're in a very good area. Could there be a little air pocket here or there? Sure. That could absolutely happen.

Speaker 2

But, that's why we don't like to be over levered. And we want to make sure that we've got plenty of cash to always do the right thing to continue our successful acquisition program, which is key to everything we do. And

Speaker 5

we're going to

Speaker 2

be very strong no matter what happens out there. So and then also to point out the obvious, I mean, every roughly 9 years, 10 years or so, there's always some black swan event. The last one, of course, was the most dramatic. But look at how strong we've emerged from it. And when we look at our sales as a percentage of what we were doing in 2019, I mean, this company has absolutely transformed for the better and grown tremendously, both organically and via acquisition since then.

Speaker 2

So, we don't worry about, if you will, the little air pockets or what could be happening down the road. I mean, I could paint a scenario where, look, we hope that the new manufacturer gets straightened out because we can benefit very well as a result of that. And we hope the world economy remains strong and people want to travel and all that capacity is soaked up. It becomes impossible for anybody to calculate. So, we just keep our heads down and focus on the business, and I'm very confident we're going to do well.

Speaker 12

Thanks for that, Eric. Just one quick follow-up for Carlos on the interest expense side. Eric just mentioned not wanting to over leverage. You guys started to pay down some debt. Should we still expect interest expense to sort of follow the same glide path that you were talking about last quarter?

Speaker 5

Yes, I think so. I think, not counting on any movements really in the interest rate, we probably will wind up running 30 I think we ran $38,000,000 this quarter. It's probably going to be down $1,000,000 each quarter after this or so just from debt from principal pay down. So, that's probably what we're going to see this year as we continue to delever that will be the interest expense.

Operator

We'll take our next question from Ken Herbert with RBS Capital Markets. Please go ahead.

Speaker 13

Hey, Eric. Maybe just to start off, when we think about your the Aerospace sales within the FSG segment, can you remind us the mix of what you're selling that's under long term contracts versus maybe what's more book and ship?

Speaker 2

I don't have that information in front of me. But, our I'm guessing it's in when you go across all of the businesses, I'm guessing it's in sort of the fifty-fifty area, but I don't have that specific information. As I said, as I mentioned earlier, as a result of the decentralized structure, we don't capture a lot of that information. But, my guess is it's probably around the half half area.

Speaker 13

Okay. And are you maybe organizationally trying to skew maybe one way or the other as you have contracts coming up for renewals, say, with some of your large airline customers? Are you trying to, in the businesses, drive them to maybe more of a book and ship scenario? Or strategically is that something you're comfortable deciding the operating units do what's best?

Speaker 2

Well, so my comment about the fifty-fifty is looking at our entire parts business, which includes both PMA and distribution. So, I think the distribution would probably skew to less contracts, in other words, less than 50%, and the PMA would be more than 50%. So that's sort of the dichotomy there that I was looking at. Our customers with regard to PMA, they like the idea of having a long term agreement and we like that idea too because we can go out and procure the product for them and protect them. Clearly, if they want to be protected on price, we're happy to do that.

Speaker 2

But in turn, they've got to commit to us. So, definitely on the PMA side, the percentage of contracts would be, I'm guessing, well over 50%.

Speaker 13

Okay. Okay, that's helpful. And then, maybe just finally, Victor, to put a finer point on sort of the lumpiness, you're up against some pretty tough comps within the defense and space sales within ECG in the second half of this year, especially in the Q4. Do you is it fair to assume that you're seeing backlog We should still see growth in the defense businesses into the back half of this year? Could we maybe see those down a little bit just considering the strength in the back half of 'twenty three?

Speaker 3

Yes, I'd like to see how it plays out. I'm feeling good at the moment about the Q3. And I think the 4th, if I look at the shipment schedules, it's flatter,

Speaker 5

more challenging. But I think we had like a 6% organic growth, I think, in Q4 ETG last year. So that's a tough comp.

Speaker 3

Yes. So, it's going to be a tough one. I think we'll have to let it play out. We'll see where it goes. I don't think it's so easy, but we'll see where it goes.

Operator

Our next question comes from Sam Strosacker with Truist Securities.

Speaker 7

On for Mike Ciarmoli. Nice quarter. I was just curious kind of looking at the support or sorry, the strength in aftermarket, could you guys kind of maybe try and break that out a little bit more? Was there any particular areas of strength or weakness, whether it be across airframe, engines, interiors or even not weakness, but certain areas that you were seeing more growth from versus others?

Speaker 3

I would say, overall, it was very broad

Speaker 2

based in the quarter. It's hard to sort of get into it by particular product type and that can be sort of heavily skewed depending on what inventory packages are taking place. So, at the moment, I think it would be misleading for me to get into that because people would extrapolate and view it perhaps not correctly. So, if you don't mind, I'd rather punt and talk about that perhaps next quarter as we start to see some of this. But as I mentioned earlier, it does appear to be very broad based.

Speaker 2

The support is really broad based.

Speaker 7

Fair enough. And then obviously you guys are still sort of working on the integration of Wengcor, but how are you guys kind of thinking about M and A going forward in

Speaker 11

the long term?

Speaker 2

We are fully 100% committed to M and A. It is a key part of HEICO's strategy and it drives a nice chunk of our growth. As you can see, we were over 3 times levered after we completed the Wencor acquisition. And then, we also purchased the Honeywell display unit product line. Now, we're down to 2.45 times.

Speaker 2

Our M and A teams are very, very focused in finding great companies. We're in discussions with many. We work really hard to be the acquirer of choice. I think that we are sort of lucky and fortunate in that our competitive advantage is this decentralized model, which appeals to people very well. I mean, I can tell you when I visit companies and even in processes, I would say at least 4 out of 5 leadership teams tell us that HEICO is their preferred acquirer.

Speaker 2

And of course, who knows what they tell all the different bidders out there. But, I really do believe that our approach is unique and people want a part of it. And we are very, very much focused. And also, it's supported by our customers. I mean, it was our customers who wanted and who were so excited about the Wincor acquisition because we could put these 2 product lines together and really offer much more of a competitive offering to our airline customers.

Speaker 2

I mean, they were the ones most supportive of doing this. So, we're going to remain very, very active in that area.

Speaker 10

Great. Thanks guys.

Speaker 5

Thank you.

Speaker 2

Thank you.

Operator

We'll take our next question from Louis Raffetto with Wolfe Research. Please go ahead.

Speaker 9

Great. Thank you. Eric, just a couple for you. I think FSG sales were up about 5% sequentially, but if I look at your acquired growth, thinking about Wencor and then the Honeywell product line, it looks like Wencor sales were flat even down sequentially, while legacy was up mid single digits. Is that sort of the right way to think about it?

Speaker 2

We don't get into the specifics. But, no, I wouldn't say that 1 quarter sales were down. I mean, WENCOR is performing extremely well. They're way up as compared to last year. So, they're performing well.

Speaker 2

I mean, look, in any of the businesses, you've got this we're at the mercy of the supply chain. And I can tell you that we've got a lot of suppliers who are very, very late. And that can sway quarters significantly actually. But, Wincor is performing extraordinarily well, winning new business. We couldn't be happier.

Speaker 9

All right. Appreciate the insights. And interesting to hear about you're not the only one who mentioned the part supply sort of limiting the MRO, so just good for that insight. And I guess you would I know Eric kind of confirmed the load or Carlos confirmed the low to mid single digit growth for ETG. I mean, I think you guys have kind of laid out high single digit to low double digit growth for FSG.

Speaker 9

I mean, it seems like you're certainly going to be at the high end of that, if not above that. Is that a fair assumption?

Speaker 5

I think we're going to stick with the high to low double digit growth for the year. I think it's still a good assumption, Lou.

Speaker 10

All right. Thank you very much.

Speaker 2

Thank you. Thank you.

Operator

And next we'll take our question from Gautam Khanna with TD Cowen. Please go ahead.

Speaker 7

Hey, so I was curious how far along are you guys on kind of introducing when course product suite to HEICO's legacy airline customers and vice versa? I know there was a whole the comment when the deal was announced that WENCO was bigger with the MRO facilities than with HEICO and you guys were stronger at the airlines. I'm just curious like how much time does it take to kind of make those introductions and have those the product catalog added to

Speaker 2

the contracts that you guys already have, if you will, each of those companies already Yes. So, Agata, I think what you're referring to is, we said that historically, Wincor originally got its sort of focus was more in the repair stations. They still dealt with the airlines, but more of their focus originally within the repair stations and it was sort of vice versa with HEICO. But I can tell you that the cooperation is going extremely well. We are both companies are helping each other.

Speaker 2

And there are airline customers where Wincor had more of a presence and there are airline customers where HEICO had more of a presence. And we are introducing the folks on both sides, so they can go ahead and take advantage of those relationships and that history and be able to sell the product. So, I think that that is happening as we speak. And I anticipate that that's going to continue to occur in 2025. I think we will continue to see the very good results in that area.

Speaker 7

Has there already been traction, like commercial traction? You guys are already getting sales from some of that cross selling opportunity? Or is this still on the comps? No, no.

Speaker 2

We have received sales on it. And I think that's one of the reasons you see the organic growth rate and you see the margins that we have because we've already realized the benefits. I think there's a lot more to come. And but we recognize them thus far.

Speaker 7

Got you. That's helpful. And then, Carlos, I know you addressed this earlier in the call, but just do you have a better sense of the long term FSG margin framework? At one point, it was 22% long term. I know there's reasons you guys are over that now.

Speaker 7

But is that still kind of the right bogey longer term with Wencore or you think it could be structurally higher?

Speaker 5

I think the long term margin probably is around that 22% rate. And I do think that if you look back over the if you sort of ignore the COVID period and look back over the decade prior to that, you will see that our margin is pretty consistent and that every year we get little improvements in it. I think we're going to be we're heading towards that pace to where we get back, as I mentioned earlier, to a normal footprint within the segment when the mix is kind of what it used to look like and then we move forward from there eke out those little efficiencies. That's my expectation long term.

Speaker 2

And of course, Gautam, this is Eric. We've got, as I mentioned, in the quarter, we had 2 80 basis points from intangible amortization. So, you add that and we're really approaching 25% on an EBITDA basis, which is outstanding.

Speaker 7

Yes, absolutely. And then last one, Eric, just in terms of product introductions, I know in the past you talked about 300 to 500 PMA parts developed each year. What's the right number now that you own Wancor and have some experience with them? Is it higher than that or is it the same number, 300 to 500?

Speaker 2

Yes. I would think it's closer to the 500 area. WENCOR continues to focus and develop a very aggressive number of products. HEICO, obviously, the same. The key is getting all those parts manufactured and getting the airlines to buy them.

Speaker 2

So, we've got the capability and we continue to we're not going to cut back in any of that area.

Speaker 5

Thanks, guys. Appreciate it. Thank you.

Operator

And we'll take our next question from Louie DiPalma with William Blair. Please go ahead.

Speaker 14

Eric, Victor and Carlos, good morning.

Speaker 5

Good morning.

Speaker 14

One of the recurring themes on both FSG and the ETG size of the business is your ability to consistently introduce new products to the market. You just mentioned the target of 500 new PMA parts per year. Similarly, I was wondering what is ETG doing in terms of new products per year? And is there still a long runway? And is the Ukraine war inspiring new ideas and demand for new types of products?

Speaker 3

Louis, this is Victor. Thank you. It's a very good question. I don't know the number of new products and new part numbers we actually introduce in the ETG each year because it's a very large number and we have so many subsidiaries. But one of the things that we do look at when we meet with the companies each year, we do an annual meeting and do a budget review and it's a bottoms up budget.

Speaker 3

We do look at with each one their new product introduction. And it is a very active and regular rate. And I think it's my sense of it is it's probably higher than most people I see in the industry. So very, very happy with that. And that will continue.

Speaker 3

And that was my allusion earlier to the R and D spending and why it's so critical for us to do. In good times or in bad, we don't cut R and D spending if the business is weaker in a particular moment because ultimately that's our salvation, right? And that's how we grow the business over time. And we look at it on a very long term basis. In terms of Ukraine, yes, Ukraine has meant more new product introduction in some of our businesses and has stimulated sales in a number of our businesses as well.

Speaker 3

And it's Ukraine's had an interesting effect because I think it has reminded our allies in Europe, our friends, of the need to expand their defense spending sustainably and long term. And that's happened, right? And that's happening, and we're seeing more investment there. The company we acquired, we completed the acquisition in January 23 of Excellia, which is a company headquartered in France with significant operations and sales in Europe. And that was one of the things that attracted us to that business was the opportunity to offer products to our friends and allies, as well as by the way here in the U.

Speaker 3

S. And the Ukraine war does have an impact on U. S. Companies and, obviously, as we know, with the U. S.

Speaker 3

Supplies. So, I would expect that to continue. And then, when that conflict ends, and I hope it ends soon, of course, but when that ends, I think it will have an enduring effect on how people look at defending themselves and what they spend to do it.

Speaker 14

Great. And I think you have a number of microwave products and components. Are you supplying to some of the microwave OEMs in terms of like air defense and counter drone functionality?

Speaker 3

Sure. And of course, as you can imagine, I can't point out specific programs, but I can say that is part of that is definitely part of the business. And it's within the ambit of what we do.

Speaker 14

Great. Thanks, everyone.

Speaker 3

Thank you.

Operator

And that concludes today's question and answer session. At this time, I'll turn the conference back to you for any additional or closing remarks.

Speaker 1

So, this is Larry Mendelson. I want to thank everybody on this call for their interest in HEICO. We look forward to speaking with you when we report 3rd quarter results. And that will be sometime about 3 months from now. So, meanwhile, have a very good summer.

Speaker 1

Enjoy your summer. Be safe. And HEICO will, I believe, do extremely well. Thank you. And that's the end of this call.

Operator

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

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