HEICO Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 27, 2024

There are 15 speakers on the call.

Operator

Welcome to the HEICO Corporation Third 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, among other things, 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 costs 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 cybersecurity events or other disruptions of our information technology systems could adversely affect our business and 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 within 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.

Operator

I now turn the call over to Lawrence Mendelson, HEICO's Chairman and Chief Executive Officer.

Speaker 1

Sarah, thank you very much and good morning to everyone on this call. We thank you for joining us and we welcome you to this HEICO 3rd quarter fiscal 'twenty four earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation, and I am joined this morning by Eric Mendelson, HEICO's Co President and 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. Now before reviewing our operating results, I'd like to take a moment and thank all of HEICO's talented team members for their contribution to our record setting performance. Your continued focus on exceeding customer expectations and operational excellence translated into excellent results for our shareholders, and I continue to be very optimistic about the future of HEICO.

Speaker 1

Over the past 16 quarters, we've experienced incredible growth in our commercial aviation markets after emerging from one of the darkest times in aerospace history when air travel slowed to a crawl amid COVID-nineteen pandemic. I couldn't be prouder of the professionalism and tenacity of our team members who demonstrated serving our customers during this period of rapid growth. Their ability to meet the challenge of accelerated growth is commendable. And this includes the remarkable WinCore team members who joined HEICO family last year. In addition, I am pleased with the progress and effort of our team members have made serving customers in the defense industry.

Speaker 1

It is my expectation that growth in this global industry will continue despite who wins the upcoming elections and the softer results we realized over the past few years appear to be in the rearview mirror. And now I'd like to summarize the highlights of our 3rd quarter fiscal 24 record results. Consolidated operating income and net sales in the Q3 of fiscal 'twenty four represent record results for HEICO and improved by 45% 37% respectively as compared to the Q3 fiscal 'twenty 3. I think you will all agree that those are astounding results. Consolidated net income increased 34 percent to a record $136,600,000 or $0.97 per diluted share in the Q3 of fiscal 'twenty four and that was up from $102,000,000 or $0.74 per diluted share in the Q3 of fiscal 'twenty 3.

Speaker 1

The Flight Support Group set all time quarterly net sales and operating income records in the Q3 of fiscal 'twenty four, improving 68% and 72% respectively over the Q3 of fiscal 'twenty three. The increases principally reflect strong 15% organic growth mainly attributable to increased demand for the Flight Support Group's commercial aerospace products and services and the impact from our profitable fiscal 2023 2024 acquisitions. Consolidated EBITDA increased 45 percent to 261,400,000 in the Q3 of fiscal 2024 and that was up from $179,800,000 in the Q3 of fiscal 'twenty three. Our net debt to EBITDA ratio was 2.11 times as of July 30 1, 2024 and that was down from 3.04 times as of October 31, 'twenty three. Our excellent operating results have allowed us to early achieve the forecast we made a year ago that our net debt to EBITDA ratio would return to a historical level of about 2x within roughly 1 year to 18 months following the WENCOR acquisition and that's excluding any impact of further acquisitions.

Speaker 1

Our acquisition pipeline is extremely robust with opportunities in both flight support and ETG and we intend to follow our time tested strategy of opportunistic acquisitions that continue to expand the cash generating ability of HEICO. Cash flow provided by operating activities increased 47 percent to 214,000,000 in the Q3 of fiscal 2024 and that was up from 145,900,000 dollars in the Q3 of fiscal 'twenty three. In July 'twenty four, we increased our regular semiannual cash dividend by 10% to $0.11 per share. This represented our 92nd consecutive semi annual cash dividend since 1979. I'd like to now discuss our recent acquisition activity.

Speaker 1

You may recall in December 23, we announced the acquisition of exclusive perpetual licenses and certain assets from Honeywell International to support the Boeing 737NG and the 777 cockpit display and legacy displays product lines, which that whole group has been performing extremely well for us. As a result, in May 24, we completed a second transaction with Honeywell International under which we acquired additional licenses and certain assets to further enhance the manufacturing of these new products, including screens for military variant of the Boeing 737NG and 777 cockpit displays and legacy displays product lines. Last week, we announced that our flight support group acquired the aerial delivery and decent divisions of Capo Aerial Systems. Purchase price of this acquisition was paid in cash principally using proceeds from our revolving credit facility and we expect this acquisition to be accretive to our earnings within the 1st year following the acquisition. At this time, I would like to introduce Eric Mendelson, Co President of HEICO and President of HEICO Flight Support Group, and he will discuss the 3rd quarter results of the Flight Support Group.

Speaker 1

Eric?

Speaker 2

Thank you very much. The Flight Support Group's net sales increased 68 percent to a record $681,600,000 in the Q3 of fiscal 'twenty four, up from $405,000,000 in the Q3 of fiscal 'twenty three. The net sales increase reflects the impact from our fiscal 'twenty three and 'twenty four acquisitions and strong 15% organic growth. The organic net sales growth mainly reflects increased demand across all of our product lines. As we continue to experience excellent organic growth within the FSG, we have also been highly successful in supplemental supplementing growth through acquisitions.

Speaker 2

Last week, we acquired Capewell, a Connecticut based leading provider of proprietary aircraft cockpit, emergency egress and aerial delivery products for both the commercial aerospace and defense markets. I am very impressed with their manufacturing process and strict adherence to high reliability and quality products, which help ensure pilot and troop safety worldwide. They also have an excellent staff of people who will fit extremely well within the HEICO family. The WENCOR operations continue to exceed our expectations and we are convinced this was an excellent investment for HEICO. 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 aftermarket product offerings for their aerospace parts and component repair and overhaul needs. We continue to operate WENCOR as a standalone business operation. However, we've made very good progress in working together and serving our customers in a combined seamless fashion. Some examples of how we're now working together include: 1, utilization of all HEICO and Wencor PMAs and DERs at all of our repair stations 2, commercial and defense aftermarket sales cooperation 3, Wencore e commerce platform lists all HEICO non competitive PMAs 4, Wencore is utilizing HEICO's manufacturing base, in particular our Specialty Products and Electronic Technologies Group to quote new products 5, engineering and regulatory cooperation 6, sharing best in class vendors and 7, driving various back office synergies such as payroll and export compliance that will help offset the cost of additional regulatory compliance such as Sarbanes Oxalate and HEICO's FAA ODA program. The Flight Support Group's operating income increased 72% to a record 153,600,000 dollars in the Q3 of fiscal 2024, up from $89,200,000 in the Q3 of fiscal 2023.

Speaker 2

The operating income increase principally reflects the previously mentioned net sales growth and an improved gross profit margin, partially offset by an increase in intangible asset amortization expense. The improved gross profit margin principally reflects higher net sales within our aftermarket replacement parts and repair and overhaul parts and services product lines. The Flight Support Group's operating margin increased to 22.5% in the Q3 of fiscal 2024, up from 22.0 percent in the Q3 of fiscal 2023. Given that acquisition related intangible amortization expense consumed approximately 2 70 basis points of our operating margin in the Q3 of fiscal 'twenty four, the FSG's cash margin before amortization or EBITDA was approximately 25.2%, which is excellent in absolute terms and is 180 basis points higher than the comparable Flight Support Group cash margin of 23.4% in the Q3 of fiscal 'twenty three. I am extremely pleased with these results.

Speaker 2

The increased operating margin principally reflects the previously mentioned improved gross profit margin as well as lower acquisition costs, partially offset by the previously mentioned higher intangible asset amortization expense. Now, I would like to introduce Victor Mendelson, Co President of HEICO and President of HEICO's Electronic Technologies Group to discuss the 3rd quarter results of the Electronic Technologies Group. Victor?

Speaker 1

Thank you, Eric. The Electronic Technologies Group's net sales were $322,100,000 in the Q3 of fiscal 'twenty four as compared to $325,900,000 in the Q3 of fiscal 'twenty three. The slight net sales decrease principally reflects lower other electronics and medical products net sales, partially offset by increased defense, space and aerospace products net sales. This is in line with our expectations as we've commented on earnings conference calls over the last few quarters and is consistent with inventory destocking at some customers. We continue to anticipate quarterly volatility in the ETG's defense net sales, but the overall trend remains very positive.

Speaker 1

As expected, other electronic net sales were lower during the Q3 of fiscal 'twenty four compared to the Q3 of fiscal 'twenty three. We believe these order trends in these markets have bottomed and we are seeing improved orders in some of our companies in these other markets. These other markets typically equate to between a quarter 30% of our sales. I continue to expect an overall return to growth in these end markets and businesses during the first half of fiscal 'twenty five. The ETG's record backlog and strong overall orders support our optimism and as the non A and D markets improve, we expect a healthy tailwind into our next fiscal year.

Speaker 1

Orders for commercial aviation and defense products have been very robust and we are very pleased with our business' performance like at Accellia which continues to be a strong acquisition meeting our performance expectations including growing its profit margins. Further, our order book and quotation activity for fiscal 'twenty six is building nicely. And I did mean to say fiscal 'twenty six in addition to 'twenty five of course, which augments our optimism for later periods as well. The Electronics Technologies Group's operating margin improved 23.5% in the Q3 of fiscal 2024, up from 22.8% in the Q3 of fiscal 2023. I also note that before acquisition related intangibles amortization expenses, our operating margin was above 27% as those intangibles amortization expenses consume around 400 basis points of our margin.

Speaker 1

And that's how we judge our businesses as that most closely correlates to our cash. So when we look at how our businesses are doing on an operating basis, we are very pleased with the overall margins and their continued improvement. The operating margin increase principally reflects the previously mentioned improved gross profit margin partially offset by lower level of SG and A efficiencies. I'll turn the call back over to Larry Mendelson. Thank you, Victor.

Speaker 1

Now for the outlook. As we look ahead to the remainder of fiscal 'twenty four, we remain optimistic about achieving net sales growth for both FSG and ETG. This growth is expected to be largely fueled by the contributions from our fiscal 'twenty three and 'twenty four acquisitions along with sustained demand for the majority of our products. Additionally, we are committed to ongoing product and service innovation, further market penetration and maintaining our financial strength and flexibility. In conclusion, I want to again express my gratitude to the exceptional team members for their unwavering support and dedication to HEICO.

Speaker 1

Our strategy of building a diversified portfolio of outstanding businesses continues to deliver positive outcomes for our shareholders. Our key markets are very strong and in fiscal 2024 is shaping up to be another successful year. Thank you as shareholders for your continued trust. And as I mentioned before, I remain very optimistic about the future for HEICO. And now we'll open the floor to questions.

Speaker 3

Thank

Operator

We'll take our first question from Robert Spingarn with Melius Research.

Speaker 3

Well, good morning and very nice quarter.

Speaker 2

Thank you, Rob. Thank you very much, Rob. Good morning to you. Thank you.

Speaker 3

A couple I thought I'd start with the end markets. And Eric, FSG's organic growth rate accelerated relative to the prior two quarters and I was wondering does this reflect the maturing integration that you just talked about between HEICO and WENCOR or is this simply a function of the market maybe demand strengthening in the end market and aftermarket?

Speaker 2

Yes, I see that's a great question, Rob. And I've spent a lot of time in business reviews and with our sales folks in particular over the last month going over a lot of the details. There's no question that the market remains strong, but I do think the reason why the incredible 17% growth rate was so outstanding is because of really two factors. 1, we continue to win in the marketplace. And HEICO is an accumulation or a combination of individual businesses working as hard as they can, planning years in advance, developing these products, having them on the shelf and being able to hit the demand and get them sold when the market needs them.

Speaker 2

So, I think that's number 1. Really, everybody's sort of, if you will, all the unsung heroes who are working their rear ends off every day to make this happen. So, that's probably the first reason. The second would definitely be due to the addition of Wencore and the broadening of our product line. I think in speaking with our customers, we are viewed as a much more complete supplier.

Speaker 2

I mean HEICO today has transitioned tremendously over the last many decades. And I think our customers are very confident in purchasing additional products from us, whether it's parts, distribution, PMA, repair. And I think we're growing our market share. So, it's really, I think, yes, a strong market, but more, I think, really focusing on the detailed buyer businesses and the broadening of the product line through WENCOR and the 7 37 and 777 display unit acquisitions.

Speaker 3

Okay. And then notwithstanding the strong growth, there have been some airlines out there talking about overcapacity that's been a bit of a theme here. Are you seeing any evidence of that in the order patterns so far?

Speaker 2

No, we really don't actually. And as a matter of fact, the number of airlines have sort of trimmed back their purchases. They, if you will, in hindsight, I think over ordered a bit in 2023, took more than they needed in 2023. So, we do have anecdotal evidence of certain customers cutting back this year, but that was really offset by strength at other customers. So I think we continue to do very well and that really that gets to the sort of the beauty of the HEICO model and that we've got all these individual business units who have to control their own destiny.

Speaker 2

And if they're short in one area, they figure out how to make it up in another area and this doesn't roll up to my desk after the fact. And instead, they're doing this real time. So, in summary, no, I mean the market for us remains quite strong.

Speaker 3

Okay. And then just on the OE side, both you and Victor have some exposure to commercial OE. Are you seeing any slowdown in orders on the OE side because of the slower than expected production ramps both at Airbus and Boeing or do you continue to ship at the higher targeted rates that they're just taking inventory?

Speaker 2

Yes. We've definitely seen a reduction off of forecast due to their build rates. There's no question Airbus is doing I think better than Boeing in that area. But, yes, definitely on the commercial OE production, things are softer than expected. That of course has been offset by our strength in the defense side.

Speaker 2

And we expect that strength to continue into 2025, 2026 and after based on our conversations with our customers and what they want there.

Speaker 3

Okay. And then, here's a question. Larry, I thought I would ask you this question, but anybody please jump in. You continue to be acquisitive. You just did another deal.

Speaker 3

How would you characterize the M and A pipeline as it stands today, maybe relative to the prior year or so? And is there any change in behavior from private equity folks who are out there with properties to sell?

Speaker 2

Rob, this is Eric. I'll take that just for a moment. Of course, a year ago, we were largely focused on OneCore. It's our largest deal in the history of the company, over $2,000,000,000 and that consumed a tremendous amount of capital as well as effort. So, but I can tell you that our pipeline today remains incredibly robust.

Speaker 2

We have a lot of projects in the work. Our acquisitions teams are nonstop running around the country. I think we worked very hard to differentiate ourselves as the buyer of choice. And we'll keep our fingers crossed that some of these will come to fruition. But, there's no question that in conversations, and I don't want to call out individual businesses because they have their own respective sellers and reasons for having dealt with us.

Speaker 2

But, I can tell you that on all of our recent acquisitions, I think HEICO's reputation has been key to getting all of those deals done and has made us a particularly attractive counterparty for our sellers and partners. And the pipeline remains very, very strong. Rob, I know this is Larry.

Speaker 1

I know you asked me the question, but Eric preempted me. So, what he told you is accurate. The pipeline is very full and we are looking at actually too many acquisitions right now. It's taking full time of a staff and I think it's very active. We're looking more for non private equity deals.

Speaker 1

That's more in our best interest. Although we do see some private equity, the problem is they're priced very high. And when we try to compete, normally we can't compete because of the pricing. But we have enough non private equity deals really to fill all that we need. So it's for us it's a buyer's market right now.

Speaker 3

Got it. Got it. And just quickly Carlos if I ask you what the blended organic growth rate was in the quarter? Thank you.

Speaker 4

You're talking about for the company as a whole?

Speaker 3

Yes. So when you factored all in, yes.

Speaker 4

Yes. So, all in, it was a tick over 7% organic growth for the whole company.

Speaker 3

Okay, excellent. Thank you all.

Speaker 5

Thanks, Rob. Thank you, Rob.

Speaker 3

Thank you.

Operator

We'll take our next question from Burt Zubin with Stifel.

Speaker 6

Hey, good morning and thank you for the questions.

Speaker 2

Good morning, Burt.

Speaker 6

Maybe Eric, just to start with you on the FSG side, I think you mentioned sort of accelerating growth, organic growth of 15%, extremely impressive. Last quarter, you had talked about the aftermarket replacement parts side being, I believe, 21% growth and you called out about a quarter of that being price with the discount relative to OEM being close to the widest you've ever seen it. So I'm curious, how did that change in the fiscal Q3? Was pricing increases an element of that growth or does it continue to be more of a volume story?

Speaker 2

Yes. Hi, Bert. So, the short answer, it's more of a volume story. I think last so, this quarter, it was 17% for the parts business. And last quarter, I think it was 21, as you mentioned.

Speaker 2

Most of that is volume. Some of it is price, but I would say it's definitely mostly on the volume side. We've been very firm about passing along our price increases to our customers and we've got to make sure as our costs have gone up and whether that's labor, special processes, material, purchased product, whatever it is, we've got to make sure that we get that passed along. So, definitely the vast majority of that is a volume and then much lesser extent would be the price.

Speaker 6

Eric, as you think forward for FS or for I guess just for the aftermarket replacement parts business, I know it was brought up earlier on the airline side you're seeing trimming capacity, lower yields. It doesn't sound like that's had any impact yet. Do you think there's an opportunity to gain meaningful share if we go into a little bit of a slowdown just because it opens up or I guess makes portfolio more attractive to customers that maybe bought PMA parts in sort of a lower percentage? Or do you think that becomes sort of the element where pricing maybe balances with volume? Just curious how you're thinking about maybe the next several quarters if things do slow down?

Speaker 2

Yes. Again, we haven't seen signs of any slowdown to date. As a matter of fact, quite the contrary, sort of surprisingly to the contrary. And with regard to normally when there is a slowdown, obviously, volumes drop, and that is when we pick up additional market share. That's when customers realize that they've got to take advantage of our additional cost savings, parts and repairs, and we pick up market share at that point.

Speaker 2

And then, of course, when the economy recovers, we recover even stronger than most because we've picked up market share. The customers are very, I think, very excited about the HEICO product line. They want to have competition. They're demanding competition. And HEICO provides very fair competition in that regard.

Speaker 2

So, I think that we're going to do very well and for sure pick up market share, get additional parts and repairs designed in when that if that occurs. Very helpful. And just one last question for Victor. Victor, if we look

Speaker 6

at the ETG business over the last several quarters, sort of bounced around from positive to negative on the organic side, sort of averaged about 0%. I think that business is meant to be sort of longer term low to mid single digit organic. I guess sort of a 2 part question. 1, I think earlier in the year you were expecting this more significant ramp in the back half. I'm just curious what changed that outlook?

Speaker 6

And then 2, as you go into FY 'twenty five, is there a potential that growth sort of exceeds your longer term growth target just as a function of recovering?

Speaker 1

Yes. Thank you, Bert. They're good questions. I don't think where we are and so far in the back half of the year has really been a surprise to us. I think we tried to hint in the Q2 call that we thought, for example, March were higher in that period that we would look for an average over the course of the year.

Speaker 1

So it's not really too far out of line, maybe slightly. We're doing the budgets for fiscal 'twenty five. But when I look at our backlog and I look at our order rate, it feels to me as though we would have a stronger growth rate in fiscal 'twenty five. Again, it's a little premature for me to say that with certainty because our companies do their budgets now and submit them in early October. So I'm waiting on those.

Speaker 1

But right now, that's how it feels to me, yes.

Speaker 6

Thanks very much.

Speaker 3

Thank you.

Operator

We'll take our next question from Larry Solow with CJS Securities.

Speaker 1

Good morning,

Speaker 7

Larry. Thanks so much. Good morning, everybody. Thanks for taking the questions and congrats on really impressive growth and even Victor, it sounds like some good bookings growth for your side of the business. So it looks like we'll be having hopefully some good couple of quarters upcoming.

Speaker 7

I guess a question to Eric for you. Just a couple of thank you for some of that detail on the Lencor stuff. So it sounds like you are certainly getting, it looks like some revenue synergies and stuff combining a lot of common services and whatnot. I'm just curious like, I don't know if you can break this out, but has the organic growth at Wencour kept up or even exceeded sort of the overall growth of FSG over the last few quarters?

Speaker 2

I would say it's very consistent with FSG. I mean, we look at the various 1 core businesses and their organic growth is very consistent. I mean, some are there can be little legacy HEICO businesses.

Speaker 7

And has the overall obviously, the PMA parts offering has increased 1 plus 1 certainly equals 2, but has it increased even more? And have you increased your overall offering of parts? Has that helped growth in the last few quarters?

Speaker 2

Yes, it has. And the overall offering has grown. And we've really seen the advantages of that and frankly the customer enthusiasm around it.

Speaker 7

Got you. Just a question, well, it sounds like the Capa acquisition, nice little tuck in. Any more color on that? It looks like I guess it's going to be in specialty products, so a little more niche, higher margin stuff, maybe a little bit more some choppy sales, bigger quarter sometimes, right? Is that how to look at that kind of

Speaker 2

a It's a terrific business. And they basically have 2 main product lines. 1 is the commercial and military aerial descent business. So, basically, when you are the cockpit egress business, you need to have basically way out of the cockpit in case the cockpit door is blocked or also cargo aircraft or tankers need egress from the aircraft in the event of a problem. And they have a very sophisticated, well time tested, appreciated product, which is in a number of commercial and military aircraft, which is really key and really the only way to get people out of the aircraft in the event they need to escape.

Speaker 2

And the standard slides are either inactive or don't exist on certain types of aircraft. So, that's part of their business. And then, the other part of their business is the aerial descent piece where whether you're parachuting out of an airplane or if they're dropping tanks or various equipment out of C-130s or C-17s or whatever it is, you've got fairly sophisticated parachutes that attach to it and there are various attachment mechanisms and aerial drop mechanisms, which are really critical. So, we think that this is a great business. It's really appreciated by its customers.

Speaker 2

And frankly, it's the pioneer in this business. And since the 1940s was the original company that designed the device which permit paratroopers to jump out of airplanes and to detach once they hit the ground and not get dragged as a result of the parachute. And so that's a very strong business. It's a very niche business and that's why we thought it fit very well in our specialty products group. And of course, our specialty products has a lot of connection to the overall to the other parts of Flight Support.

Speaker 2

So, I think it's a very good fit. Yes, so we're very excited about it.

Speaker 7

Excellent. I guess just last question, maybe pass for Carlos. Just on the margin, you mentioned respectively on the FSE and ETG up to 25% 27% on the cash operating margin. Perhaps not so much in the next quarter or 2, but where do you see those margins over the next 3 to 5 years? I mean, can they continue to tick up on the cash side as you look out?

Speaker 4

So, the answer to your question is, as we continue to grow the volume of the business, as we expect, we'll eke out incremental margin gains consistent with our history. As the base of the business grows, the amount of overhead needed to support is relative to that growth, it's a little lower. So, I expect we'll get that. If you look back, I've quoted this before, if you look back a decade and look at the margin gains, that's kind of what I would expect going forward once we sell into our footprint here in the FSG and ETG. And I do think talked about an EBITDA margin, so it's pretty elevated.

Speaker 4

We were happy with it this quarter. And I think that as we move forward, that should continue to stabilize and EBITDA improvements.

Speaker 7

Great. Excellent. Thanks, everybody. Welcome. Thanks.

Operator

We'll take our next question from Peter Arment with Baird.

Speaker 8

Thanks. Good morning, Larry, Eric, Victor, Carlos. Nice results. Victor, could you talk a little bit about you talked about some of the booking rates and sort of the confidence in seeing ETG growth, thinking about next year, but just maybe some of the end markets that you're seeing. Is defense I assume it's almost 50% of your segment.

Speaker 8

Is that growing mid single digits and it's just as other areas that are seeing some softness or maybe just

Speaker 1

a little more color there? Thanks. Yes. So, Peter, the defense part of the business and commercial aviation really have been extremely strong, experiencing double digit growth. And again, that's where some of our longer term bookings really come on the defense side.

Speaker 1

And I'm seeing some of those fill out beyond 25, as well as some of the quote activity in the order indications again to 25 and beyond. So right now, I feel like defense is a good leader for us and commercial aviation has really been phenomenal. So when I take that together, I look at the other markets which are down consistent with what other people are seeing in these kinds of markets. And it looks like those order rates are bottoming out. It appears to us that our customers have kind of used up the excess inventory and orders are coming in.

Speaker 1

And if you add a sort of 6 month lead time on that, it gets us into fiscal 'twenty five. And that's why I say I feel like there will be a very nice tailwind from that next year. Of course, I can't be certain of that, but that's just how it feels right now.

Speaker 8

Got it. And just any impact from

Speaker 4

Peter, this is Carlos. I just want to point out, you're not wrong on what you said about 50% of the segment, but right now, we're tracking around 40%. So, we still have, I've mentioned in the past, once the mix sort of settles down, I do expect our defense to become closer to the 50% number over time. Right now, we're still a little behind on the total revenues in the segment being only around 40% for defense this quarter.

Speaker 8

Okay, that's helpful. And then just Carlos maybe just sticking with you on the leverage, it's come down exactly where you guys kind of thought it would to 2 point one turns. How are you thinking about just given that the M and A pipeline is full, but your ability to kind of want to still delever? Any updated thoughts on kind of where you're taking the leverage

Speaker 4

to? Well, I think, look, by nature, we're an acquisitive company and we set out an aggressive timetable to pay down some of the debt that we had and we've done that. I think the opportunities are bound as long as we can keep our leverage candidly under 3, there's opportunities for us. And I think that the goal for us is to find very profitable companies that don't disrupt that leverage, the ones that have real high EBITDA, which has been our history, right? I mean, we like high margin businesses.

Speaker 4

So, the more acquisitions we do with the higher margin, the less impact it has on that leverage and that's where I'm steering things when we talk internally about these deals.

Speaker 8

Terrific. I'll leave it there. Thanks guys. Yes.

Operator

We'll take our next question from David Strauss with Barclays.

Speaker 3

Good morning, David. Good morning. Thanks for taking the question.

Speaker 9

I wanted to ask about working

Speaker 3

capital. Last year, we had a fairly big inventory build this year, fairly big inventory build. How are you thinking about potentially slower growth or working capital or maybe working capital just coming down on an absolute basis from here?

Speaker 2

Hey, David. This is Eric. I'll start out with sort of the big picture and then Carlos will get to the specifics on the financial. HEICO has always been focused on customer service and making sure that we capture all of the incremental sales that we can capture. And if you look at coming out of COVID, HEICO recovered much quicker than most.

Speaker 2

And as a result of not cutting our people, not trimming our inventories too much, and bottom line, we were able to support the market when others weren't. And that's really been a huge HEICO advantage. So, I can tell you from an operational perspective, Victor and I are very, very focused on all of our business units reviewing working capital, understanding specifically how the inventory or the receivables have increased, obviously receivables that's up due to the huge increase in sales. But, with regard to inventory, our businesses have been really outstanding in terms of having the correct inventory on the shelf. There are a lot of companies where their inventory blows up and they've got the wrong stuff on the shelf and they can't sell it and then people find out after the fact that it's a problem.

Speaker 2

HEICO has always been very, very careful not to do that. And as a result, we have very, very robust inventory reserve policies to make sure that we're being very proactive and we make sure that we have the right inventory. So, I think that there is no question that there is a big internal focus on inventory. We want to slow the growth. But, it is really key to our business.

Speaker 2

And frankly, when you look at the 17% organic growth that we had in the aftermarket business, I mean that was really outstanding and that can only be accomplished through increased inventories. But Carlos will get into the specifics for you.

Speaker 4

I don't know how much more I could add to that. I would say that the rate of increase in inventory spend has come down relative to the growth in the business. I mean, our sales for the quarter are up 37% comparatively and our use, our inventory spends not ramping at that pace. So I'm happy with that. I think what I mentioned earlier in the year, David, was that we had a fair amount of orders outstanding on firm commitment inventory that some of our subsidiaries have made 2 years ago just because of lead times.

Speaker 4

And so, we made good on those. We're not the type of company that just disrupts our vendor base or does bad things to our vendor base to take advantage of a moment in time, going to be partners with our vendors and make sure that we're good to them as we expect them to be good to us. So, the rate of those firm orders has come down. We're now sort of beyond that. And I do expect use of working capital, particularly in inventory to come down a little bit.

Speaker 4

But it will continue to grow a little bit as the business grows as Eric pointed out. So I wasn't pleased this quarter with the working capital use. We expected it. And again, the rate of change in that inventory spend is down considerably compared to the first half

Speaker 2

of the year. And also, David, just to add one other little anecdote. Of course, the purchase of the 737NG and 777 display unit business was the purchase of a product line. And as a result, a good chunk of the inventory increase was due to that. So that really is an acquisition.

Speaker 2

It's a new business. It's all good inventory. But that obviously shows up as inventory. So, you have to sort of take that into account. So, when that's stripped out, the increase is much smaller.

Speaker 3

Great. Thanks for the detailed answer. The other question I had on FSG margins, I know you talked about the year over year improvement, but margins did drop GAAP margins did drop a little bit sequentially. What drove that 50 basis point drop sequentially? Was that mix or something else?

Speaker 4

There is I think David, what we've told folks, there's nothing unusual about what's happening in the margin sequentially. I think what we've told folks is that we expect the segment to run between 22%, maybe as high as 23% as it has been in the last quarter. I don't think there's any unusual going on. It's ebbs and flows. You have a little shift in mix.

Speaker 4

As Eric pointed out, some of the commercial business was down in specialty products. The parts business is doing very well. That is margin helpful. The repair business is growing also. That's a little bit less accretive than the parts business.

Speaker 4

So you're going to have puts and takes as we get the business to sort of settle into the vertical footprints of the segment. So I wouldn't look there's no one times or odd things going on in there.

Speaker 2

But David, this is Eric. Also, the way that I look at it from an operating perspective is a year ago, our EBITDA margin or what we call the Flight Support Group cash margin in the Q3 was 23.4%. This year, despite the acquisition of Wencour, which was at a sort of a lower cash margin, we've been able to increase the cash margin up 180 basis points to 25.2%. So, I think those numbers are really outstanding. And this, as Carlos says, they just bounce around.

Speaker 2

I mean, we that's why we say it's going to be within a certain range, but that's just standard noise.

Speaker 3

Got it. Okay. Thanks very much. Thank you.

Operator

We'll take our next question from Pete Skibitski with Alembic Global.

Speaker 9

Good morning, guys.

Speaker 7

Good morning.

Speaker 9

I guess to start with Eric. Eric, last quarter you guys talked about the supply chain negatively impacting the repair business. And I think maybe it sounds like it did a bit this quarter as well, it sounds like parts kind of drove the business. So can you talk through kind of do you see any light at the end of the tunnel there or maybe more specifically what's going on with the supply chain?

Speaker 2

Yes, I would say, Pete, we definitely have supply chain problems all over the business. Our vendors are challenged. There's a huge demand out there. And getting we really got to be on top of your supply chain. You got to be on top of your vendors to make sure that you're prioritized and that they do is what they expect.

Speaker 2

We still have a large backlog of past due. And frankly, that's driven by certain vendors or many vendors' inability to produce according to their commitments. So, that continues to be a struggle. And frankly, I don't see a tremendous amount of improvement in the aviation supply chain. Basically, demand is just outstripping supply, a lot of people retired, some businesses shut down, some businesses lost their, if you will, special processes.

Speaker 2

Despite everyone knowing that this is a high-tech industry, there are a lot of, I would say, less documented processes out there with suppliers. And when they didn't need to produce for a period of time, largely as a result of certain large OEMs ripping out all their orders very quickly, those folks retired and a lot of these special processes went away undocumented. And the industry has really struggled. And I think this is why if you look at the airframers, the engine manufacturers, they have really, really struggled as a result of their actions and basically slashing the supply chain the way they did. This is why HEICO, we fought like hell to keep our people, to lay off as few as possible, to figure out how people would go to reduce schedules because we knew that when the industry came back, we wanted to make sure that our most valuable asset was going to come back.

Speaker 2

And I can tell you that there are companies out there who just went and cut 40%, 50% of their workforce is not on a temporary basis, but on a permanent basis. And as a result, when they go back and they try to hire these folks, they can't get them back because some have retired, some are pissed off, all sorts of reasons. So, it's a long road back. And I think that's why the major manufacturers are having a big, big problem.

Speaker 9

Okay. So, you think just go forward, you expect the parts business to grow faster because that business you're less beholden to suppliers versus the repair business?

Speaker 2

I wouldn't say it's hard to say which will grow faster. We're pretty confident of our growth in both. There's no question that when you ship individual parts, you are less impacted by a particular supplier's inability to supply because you can ship all the other parts that you have in stock. Whereas when you're overhauling a component or a line replaceable unit LRU, you can only ship the component if you have all the parts. So, if there's a bill of material of 200 parts and you're missing 1, you're not shipping that unit.

Speaker 2

So, that creates complications. And of course, when you're building a complex assembly like an airplane or an engine, you have that problem in spades. So, but I think all of our businesses are performing quite well. It's just that there is plenty of past due backlog and sales actually could be even higher if we had those parts in from our suppliers.

Speaker 9

Okay. That's all fine. I appreciate that. And if I could just ask one to Victor. Victor, you touched on it, but I was wondering if you could talk more about the medical and other area in ETG.

Speaker 9

And I know almost if we could bifurcate it because I know the medical portion had that COVID type surge and now it's kind of normalizing. I imagine in the next quarter or 2 that will kind of normalize. But is the broad economy negatively impacting the other portion of medical and other or are you not is that growing more strongly than medical is?

Speaker 1

Yes. I think what happened in medical is we had very strong orders in actually 2021, 2022 at first and the things we make it was some of it was stronger, but a lot of it was weaker because if you remember they talked about the elective procedures and things like that that were deferred. And then there was a surge in 2021 and 2022 and even part of 2023. And then I think what happened was the manufacturers concluded they had too much on the shelves and I think maybe some of the orders at our customers level, right, from the end users did not materialize or they were slower. They've had to work through those that inventory.

Speaker 1

And we're now seeing more of the customers coming back to us saying, oh, you know what, can you move things to the left, right, as opposed to moving them out to the right before as opposed to deferring them there, can you pull these in, Can you ship sooner? We were going to defer this order, but now we're not going to, right? We were having discussions like those. I don't know if it's a sign of the broader economy as well mixed into it. It's a good question and I wish I had great visibility on that.

Speaker 1

But I do know at the very least, it seems like a classic case of over ordering and higher expectations for, let's say, the actual healthcare delivery from the healthcare delivery system out of the manufacturers.

Speaker 9

Okay. So it sounds like you think that the destocking is about over in the next quarter or so, it sounds like?

Speaker 1

Yes, that's how it feels to me. I would say where I've seen some signs, some green shoots, so to speak, but it feels more kind of in this bottom or bottoming mode. And but we're seeing much higher quote activity. And usually, not always, but usually that's an indication it gets followed up by orders not long after.

Speaker 9

Okay, great. Thanks guys.

Speaker 3

Thank you, Pete. Thank you.

Operator

We'll take our next question from Louis Rosato with Wolfe Research.

Speaker 4

Hey, good morning gentlemen.

Speaker 1

Good morning, Louis. Good morning.

Speaker 4

Maybe I can just start with, I guess, a couple of things

Speaker 10

I noticed, impairment charge, not something we see from you guys. So just was curious if you had any sort of additional information about that. And is that at all related to the change in the contingency consideration as well? Just not sure if those kind of offset each other on the income statement

Speaker 4

or if one was in one spot and

Speaker 10

one was somewhere else?

Speaker 4

So, this is Carlos, Louis. The impairment charge and the contingent contingency reversal were both within the ETG segment. They were for 2 different subsidiaries. 1 was related to a business we have that is in the space industry where some of the end markets have changed, the revenue projections have come down. So, this was a trade name impairment.

Speaker 4

It's just essentially math. The business is doing fine. It's just our expectations were a little higher on the business when we bought it as far as putting a value to a trade name. And so we came to the conclusion this quarter that we would impair that trade name a bit. The contingent earnout was due to change in circumstances at one of our subsidiaries whereby the likelihood that they would meet the earnout objectives was low and it was kind of a cliff earn out.

Speaker 4

So it was an all or nothing thing. So that occurred this quarter when it became apparent to us that they weren't going to earn that earn out. So it's a coincidence they happen at the same time, 2 different subs. They both went through selling they went through general administrative expenses, so they kind of offset each other. It was a bit of a non event.

Speaker 4

All right. Appreciate the color, Carlos. And then maybe just the CapeWell deal, I know it's not hugely material, but anyway just the size at least from a cash usage in the Q4? Yes. I don't think I don't believe they're going to I don't think it's going to be a big cash usage.

Speaker 4

I mean, we borrowed for the majority of the acquisition. It should be a good deal for us. It's a good margin business. As Eric pointed out, it does niche stuff in aviation parts and some military. And so more to come.

Speaker 4

We'll see. It's not a it's an immaterial acquisition of HEICO in total. So we're not giving out too much of the financial details or anything like that, but it is not dilutive to the segment margins, if that's part of your question.

Speaker 2

Yes. I can tell you, I'm really excited about this business, excited about the technology, the people, the capability. You look at what on the two businesses, I mean, one is the cockpit or aircraft egress. These are really critical, very cost effective solutions.

Speaker 7

If you

Speaker 2

don't have these solutions and the airplane catches on fire in certain situations, it's going to be really bad. And these solutions are time tested and work extremely well. So we're really happy for them to be in the HEICO portfolio. And if you look at the military threats that are facing this country and the world today, the aerial drop solutions are really, really critical, super, super critical. And we're working on a number of programs with various militaries around the world.

Speaker 2

But you've got if you've got to deliver material to hotspots where you don't control the ground, this is the only way to do it. And there's all sorts of neat technology going on now, which is going to further drive this, because now of course you're able to have these autonomous vehicles, you're able to drop all sorts of autonomous vehicles and there's going to be a huge demand for this. So we think that it's really a good space to be in, great name. This company, I mean, was the Capo was the pioneer in this space. And whether it's paratroopers or they also have the ejection seat release mechanism.

Speaker 2

So if you eject from a fighter aircraft and you've got releases you at a certain point, you're able to do that. And they're really very, very well accepted by the customers around the world. So, I think it's going to fit extremely well in the HEICO portfolio.

Speaker 4

Really appreciate it. Thank you.

Speaker 2

Thanks, Lewis.

Operator

We'll take our next question from Ken Herbert with RBC Capital Markets.

Speaker 2

Good morning, Ken.

Speaker 11

Yes. Hi, good morning. Hey, good morning, Eric. Maybe, Eric, I just wanted to start with you and the FSG segment. As you think about since you acquired Wencor, you've basically sort of been 2x ing your organic growth relative to sort of volume growth in the industry, if I assume sort of the high single digit 10% ASK growth we've seen over the last several quarters.

Speaker 11

As you think about normalizing now that you have Wancor and the opportunities from price share gain, secular trend in terms of PMA growth, is sort of 2x volume growth the right way to continue to think about how you view your aftermarket opportunity within the segment sort of beyond fiscal 'twenty four?

Speaker 2

Well, we certainly hope so. I don't know whether 2x is the correct number. We'll, I guess, find out after the fact. But, there's no question that we have significant growth in excess of the market, Whether you look at ASMs or whatever other factor, we're really growing well. And yes, that is a result of capturing market share.

Speaker 2

And there frankly is still a lot out there. So, we're working really, really hard to make that happen. Frankly, if you'd asked me this many years ago whether we'd be at this number, I wouldn't have thought so. But, our people continue to surprise us as a result of their hard work. So, we hope so, but I guess time will tell.

Speaker 11

Okay. And as I think about the share opportunity, are you seeing it more from new customers that airlines that maybe you haven't worked with before or is it sort of a greater capture of the wallet at additional customers and any sort of differentiation you can provide along those lines?

Speaker 3

Yes. I mean, we pretty

Speaker 2

much deal. We sell to, I would think, every single airline in the world, certainly every major airline in the world. So, it really is a story of additional capture at those airlines. That's really the big that is the big key for us.

Speaker 11

Okay. And just finally, can you quantify the Honeywell sort of the product line impact in the Q2 growth or I'm sorry, the Q3 growth?

Speaker 2

I don't Carlos, I don't know if we're providing So, Ken, what I

Speaker 4

could tell you is that roughly $217,000,000 just a tick on a turn, dollars 17,000,000 sales in the quarter were inorganic, were acquired. And so most of that was OneCore and a little bit of the legacy display business.

Speaker 12

Okay.

Speaker 2

Perfect. I should add, Ken, that again, just as I mentioned about Capewell in the prior call prior question, we're very excited about the legacy business. And we think that this has got tremendous potential. It gets us into a unique technology. And we're really very, very excited about it and happy to entrench ourselves even deeper with our customers.

Speaker 2

So, I think that that was an outstanding product line acquisition and frankly something that's extremely transformative for HEICO because it really puts us into the guts, a key part of the airplane. I mean, when you go next time you go in a cockpit on a 737 or NG, just take a quick look in there and you'll see our 6 big screens. And that is really very high visibility, of course, for the pilots, but 2 within the airline. So and we have very, very good customer response thus far. They're very happy that HEICO has entered this business and we'll give them the turn time and the quality that they expect.

Speaker 2

So, I'm very bullish on that.

Operator

Our next question comes from Sheila Kahyaoglu with Jefferies.

Speaker 13

Thanks so much guys and good morning. A few questions if that's okay. I'll start out with Victor and then go to Eric for the last one. Victor, maybe can you talk about just to double check the trade name impairment, that $6,000,000 is offset by the contingent liability this quarter, so they net out. And if you could give us an idea of cash margins, 27% cash margins this quarter versus 28% last year, kind of what happened there and how do we think about pre Accellia cash margins?

Speaker 1

Sure. I'm going to let Carlos answer on the impairment and the cash margins And I will just comment that the Accellia business as a rule of thumb penalizes us by about 200 basis points of margin and somewhere in that zone. But I'll let Carlos, if Carlos, you don't mind taking that.

Speaker 4

Sure. Good morning, Sheila. So, as I mentioned earlier, the impairment, in the world of accounting, you have to assess all these intangible assets all the time. And when you establish purchase accounting on day 1 for an acquisition, you make estimates on what you think the revenues are going to do. And when you have a trade name, it's a static intangible asset.

Speaker 4

It doesn't amortize. You have to look at it under an impairment model. In this particular case, there was a change in some of the end markets that affect one of our subs, and we thought it was prudent to impair some of that trade name this quarter. And that's really what it was. Nothing spectacular.

Speaker 4

We do the analysis every quarter. We look at it annually. And it just so happened this quarter, we decided that to compare that trade name made a lot of sense. Candidly, it makes my life easier because anytime you can get stuff off the books like that, it's less things to housekeep on a quarterly basis. So that's why we did it.

Speaker 13

Got it. So, they net out each other?

Speaker 4

They do, yes. The contingent earn out change and the impairment. The earn out change is about $5,500,000 in ETG positive and the negative was a $6,000,000 earn out. So, it's roughly about a $500,000 drag, not significant at all to the operating margin. Thank

Speaker 13

you. Thanks, Carlos, and good morning, sorry. I wanted to just ask about cash margins year over year. I think they were down 100 bps, is that right? Any TG?

Speaker 4

Yes, down just a tick and I think that's just because of the volume drop. If you listen to what we said earlier, the end markets, the other electronic products, so non defense, non space, non aerospace, those other lines of business we serve is roughly 30%, give or take, of the segment. That business is down, as Victor talked about earlier. What's, I think, contributing some of the drag on the margin is the SG and A spend that we have is not really materially changed. Again, as Eric talked earlier, we don't really have knee jerk reactions at HEICO if one of our businesses is having a challenge in any particular quarter or year, unless it's something that we believe will last a lifetime, we don't ask them to right size their business.

Speaker 4

We actually want to retain that talent and keep that overhead spend so that when the business turns, we're there to support our customers. I believe that that contributed. We talk about that as SG and A inefficiencies or lack of efficiencies in SG and A. That's really, I think, what the volume aspect and the impact of that has had on the segment. And that, once those sales come back, which we expect they will turn, I think the order volume and the backlog supports that judgment, that will go away and you should see some expansion in the margins.

Speaker 2

Sheila, this is Derek. Although this isn't my area, but looking at the numbers, it looks like to me actually that the cash margin of ETG went up roughly 70 basis points from last year. So, it's improved. Yes.

Speaker 13

Okay. Sorry, I must have got the wrong number. Yes. And I'm going to get to you, Eric, I promise. But Victor, maybe just I know you've been asked this for 12 quarters straight.

Speaker 13

Why do you think the defense markets are dragging when even underperforming peers are starting to see double digit defense growth?

Speaker 1

We had double digit defense growth this year. So I don't think we're underperforming. I think we have excellent defense growth this year.

Speaker 13

Okay, got it. So, that 30% that's the drag. And then last question

Speaker 1

Right, the drag is from the other markets for sure.

Speaker 13

Okay. Eric, you laid out 7 sort of opportunities and whether it's revenue or cost synergies that have happened with OneCore. Maybe if you could talk about you made a comment about commercials and sales cooperation and WENCOR lists all PMAs now. So how do you think about where the PMA focus is when we think about HEICO and WENCOR as a combined entity going to an airline? How does it allow you to upsell?

Speaker 2

Yes. So, what we do, we still go as individual businesses to the airlines, which is really typical of the HEICO model, because even though we have, for example, even pre 1 core within the HEICO parts group or the HEICO repair group, there are many subsidiaries. So, for example, in the HEICO parts group, there are 6 PMA companies. And within the HEICO Repair Group, there are 11 repair companies. And those companies already went individually to the airlines to make sure they were supporting their product and to find additional opportunities.

Speaker 2

So, we still there may be an overall, if you will, HEICO parts group contract and contact and well as HEICO repair group contact and contract. However, we always sent the individual businesses in because they're the ones who are most knowledgeable about their product line. So you want to go sit down with an engineer or somebody in the shop, there's nobody better than somebody who's really into the details and understands everything there is to know about that particular product, the materials, the metallurgy, the dimensions, the manufacturing process, how it's inspected, how it's installed, how other people are using it. And that's always been the strength of HEICO. And fortunately, ENCORE has done exactly the same thing.

Speaker 2

I think frankly, they saw the HEICO model. This is pre acquisition. They saw the HEICO model and they thought that it worked quite well and imitation is the greatest form of flattery and they adopted it. So there's no change. So when core goes in the same way, really understands their product and they make sure on a parts and repair basis that they're in there at the detail level.

Speaker 2

Now having said that, we do get executives and other senior leadership from the airlines saying, hey, look, you guys got 19,000 PMAs and you got thousands of whatever the number is, 7,000 DERs. And I want to understand what we can do as a bigger package. And so when they want to do that, then we're able to aggregate it and show them the

Speaker 3

greater overall package and what they can achieve.

Speaker 2

And we've been very successful in Got it. Thank you so much. Thanks, Sheila. Thank you. And then,

Speaker 13

Got it. Thank you so much.

Speaker 2

Thanks, Sheila.

Operator

We'll take our next question from Michael Ciarmoli with Truist Securities.

Speaker 5

Hey, good morning, guys. Thanks for taking the question. Thanks for sticking around here. Maybe Eric, just back to Ken's line of questioning and even what you've been talking about, you're outgrowing the market, you're getting the synergies and cross and upsell opportunities from WENCOR. And I guess the sequential revenue growth, 2 part question here.

Speaker 5

In FSG, sequential growth has ticked higher every quarter. You're over 5%. How can we think about FSG growth if and when Boeing and Airbus can start getting these planes out the door? Would you expect to see some pressure on your volumes? And I mean, you talked about airlines and you're picking up share, but I'm just curious if that's because they're just operating older equipment longer.

Speaker 5

And once we start to see some of the global fleet go under higher levels of warranty, is that going to create a natural headwind for you guys?

Speaker 2

I certainly hope not. I mean, I understand logically what you're saying, but I think that's also counterbalanced by the fact that a lot of aircraft have been delivered in the last 10 years. And those aircraft are significantly more expensive to maintain than the old ones. And they are all getting older by 1 year every year. So yes, to the extent there is greater retirements that would reduce sales.

Speaker 2

However, that's being mitigated by this huge group of aircraft that had been recently delivered that and the newer generations and the fleet sizes are significantly larger than the older ones. So, I think that's going to mitigate it. And you look at also the additional products that we offer now in particular with the Wincore acquisition and the display units and all that stuff, we have significantly higher content on these newer aircraft. So I think that's going to mitigate it. And then also anecdotally, I can tell you that there are a number of airlines who are in fact operating, as you suggested, older aircraft, but I can tell you and don't exactly quote me on this because if I'm getting it slightly mixed up, I don't want but directionally, you'll understand what I'm saying.

Speaker 2

For example, on the A320, I think there's not a 5th heavy maintenance check. So they're continuing a number of airlines are continuing to operate this aircraft to the end of the 5th maintenance check where they hadn't been planning on doing it. That is not creating any revenue for us. So, I think that there is a certain amount of older aircraft that continue to fly, which aren't generating maintenance dollars. And that stuff is going to be pulled out.

Speaker 2

So, I think you look at all this together, and I'm very bullish. I mean, look, we are not the team members of HEICO, the leadership, my family, we're not invested in HEICO for any one cycle. We're invested because we think that this is a very, very excellent space to be with both commercial travel, business and leisure, as well as defense for decades. And there will inevitably be little bumps here and there. But the truth is, not even the experts in the industry know where this is going to come out.

Speaker 2

And historically, we've always sailed right through those periods. So, I can tell you from an operating perspective, that doesn't change our direction of travel or our focus on developing new products or making sure we have inventory on the shelf. Because whenever we've been trying whenever historically we've tried to be, if you will, too cute and too smart, you miss it. And HEICO's strength is because we had the parts on the shelf when no one else did.

Speaker 5

Got it. That's helpful, Larry. Thanks. And then just one last quick one, shifting gears. Back to Capewell and specifically the Aerial Descent, is that company and their product lines, are they a competitor with TransDigm's airborne systems or are they complementary or just how to think about their positioning in the marketplace?

Speaker 2

Yes, I think they're complementary. I think they're complementary. I think that a lot of the release mechanisms are sold to TransDigm and they're very complementary in the market.

Speaker 5

I'll jump back here guys. Thanks for staying on and taking the question.

Speaker 2

Thanks, Mike.

Operator

We'll take our next question from Gautam Khanna with TD Cowen.

Speaker 14

Hey, good morning, guys.

Speaker 2

Good morning, Gautam.

Speaker 14

I had a quick question first for Eric, just in terms of the aftermarket replacement parts, did you notice any discernible differences between types of products in terms of relative growth rate, like maybe engine versus airframe or stuff sold through the distribution channel versus direct? I don't know if there's any way to parse it, but or is it all kind of the same?

Speaker 4

Yes. I would

Speaker 2

say it's all the same. I'm not aware of any major trends in one particular area versus the other. I mean, there are always puts and takes in the quarter based on a 1,000,000 factors, frankly, we don't even understand. But, no, I would say that the strength was very, very broad based.

Speaker 14

It was. Okay. And in terms of the WEN Core integration, and I know you generally don't integrate things fully, but here you do have some common product development opportunity and the like. I was just wondering like where are we with respect to level of integration relative to where you expect to be kind of a year or 2 years from now? Are we 50% of the way there?

Speaker 14

Are we I'm just curious from

Speaker 2

a Yes. I

Speaker 14

think space, what have you.

Speaker 2

No. I think we've done a great job. But I think that there's more. And I think I don't want to tip our competitors off as to additional stuff that we can do. But, I think that there is still plenty of gas in the tank there.

Speaker 2

And as I've said before, Whencor is going to be the combination of HEICO and Whencor is going to be the gift that keeps on giving. And I think that there is a lot of additional areas where the businesses can benefit from one another, the customers can benefit. Frankly, we've got promotion opportunities within the Company. There is a lot of as we continue to acquire businesses, we need more we need additional team members to step up and take more responsibility. And I think that when we look at the HEICO and the Wincor team members, really the sky is the limit for them.

Speaker 2

For folks who want to work hard, who want to take on more responsibility, We have a lot of whether it's acquisitions or whether it's organic growth, I mean, my gosh, 17% organic growth in the quarter, I mean, that's like a breakneck pace. And that's creating all sorts of promotional opportunities for people. The acquisitions are creating promotional opportunities for people. There's additional stuff that we can do on, in particular, on the repair side. Sharing even more repairs, frankly, across our businesses.

Speaker 2

There's a lot of stuff that can be done. But when you're growing at 17%, it's hard just to keep up before you do all that stuff. So, where are we? I would say, we're definitely for sure in the first half. Where are we?

Speaker 2

We may even be at the Q1. I think, there is a lot more, but it's going to happen over time. It's not going to be something right away and it's going to work out very well to people's personal career opportunities as they take on more because I can tell you we've got so many acquisitions in the hopper and one of the greatest constraints that we have is not having enough internal people who we can promote to take on more responsibility at acquisitions. And sometimes we have to pass on acquisitions because we don't have those internal people. So, I think there's going to be a very big opportunity.

Speaker 14

Thank you, Eric. And Victor, just one for you. In the past, you've called out space at times as being something that lagged. How is that business trending within ETG?

Speaker 1

Yes, I think overall, Carlos, correct me if I have it wrong, but this year or this quarter, it's roughly flattish for us.

Speaker 7

I think it's a

Speaker 1

good important business. Carlos, did I have that right?

Speaker 4

I'm sorry, was that the organic growth?

Speaker 14

Yes, organic of the space.

Speaker 4

Yes, it's flattish for the quarter. I mean it's up, but it's for the year, it's flattish, it is up a little bit for the quarter.

Operator

We'll take our final question from Tony Bancroft with Gabelli Funds.

Speaker 12

Good morning, gentlemen and congratulations on the great quarter and I thought a great job with the Capewell acquisition and I'm grateful to be a 5 jump jump using Capewell's products and not getting dragged across the Alabama fields at an airborne school. But regarding the displays acquisition from Honeywell, obviously, it looks like a great business as well, a lot of opportunity of integration there into those platforms. Are there any other programs on the display side like that out there? I know there's obviously other OEs that do it obviously and then smaller companies like ISSC, just want to get your thoughts on that market?

Speaker 2

Yes. We think Tony, this is Eric. We think the display unit is a really good market to be in. We already do some displays. I can tell you that these displays in particular would be extremely difficult if not impossible to do unless it was the way that we did it through the purchase of the Honeywell IP to be able to overhaul these.

Speaker 2

So, I think that that's very important and we can take their IP and their product and then we're able to combine that with the HEICO high quality and turn time that our customers have come to expect and deliver a terrific product. So, I'm very, very excited about this. It really fits extremely nicely within our avionics package at HEICO.

Speaker 12

Thank you. Great job.

Speaker 2

Thank you. And we're glad that you're safe with our Capewell releases.

Speaker 3

Good product.

Speaker 12

Good, safe product. I like it.

Speaker 2

Thank you.

Operator

And at this time, I will turn the conference back to Lawrence Mendelsohn for any additional or closing remarks.

Speaker 2

I think we're having a technical challenge. This is Eric. So, I'd like to thank everybody for participating on our Q3 earnings call. We look forward to speaking with you on our Q4 call towards the end of December. If anybody has any questions, please don't hesitate to reach out to Carlos or Victor or me or our dad, and we're happy to speak with you and answer whatever additional questions you have.

Speaker 2

We thank you very much for your interest in HEICO. We hope you appreciate the great results that we've put forth today and look forward to a terrific Q4. So, stay well and enjoy the rest of your summer. Thank you very much. This concludes the call.

Operator

Thank you. And thank you for your participation. You may now disconnect.

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Earnings Conference Call
HEICO Q3 2024
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