Héroux-Devtek Q2 2024 Earnings Call Transcript

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November 10, 2023

There are 7 speakers on the call.

Operator

Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to erudevtech Fiscal 2024 Before turning the meeting over to management, any uncertainties that could cause actual results to differ materially from those anticipated. We refer you to the press release available I would like to remind everyone that this conference call is being recorded today, Friday, November 10, I will now turn the conference over to Mr. Martin Brassard, President and Chief Executive Officer and to Mr.

Operator

Stephane Arsenault, Vice President and Chief Financial Officer of Heru DevTech. Mr. Brassard, please go ahead.

Speaker 1

Thank you very much, Sylvie, and good morning, everyone, and welcome to our 2nd quarter earnings conference call for fiscal 2024. I invite you to follow along by referring to the financial statements, MD and A and press release, dollars of sales this past quarter, continuing our positive momentum and bringing our trailing 12 month sales to just under $580,000,000 We delivered 14% more sales than during the first half of last year, and we expect to continue our improvements during the seasonally stronger second half of the fiscal year. This performance is remarkable accomplishment given the seasonal shutdowns and vacation that occurred during the Q2 and it attests to the hard work and dedication of our teams. Our adherence to the plan we put in place also drove stronger profitability compared to last year. We took another step towards restoring our margin to historical levels, but there remains work to be done.

Speaker 1

Linearity remains a challenge as our industry continues to operate in a difficult supply chain environment. We are working hard to adapt to it as our customers and suppliers, but we expect the conditions to remain for some still for

Speaker 2

Thank you, Martin, and good morning, everyone. As usual, please be aware that we will be referring certain non IFRS measures during the call, including adjusted EBITDA, adjusted net income and adjusted EPS. All non IFRS measures are defined and reconciled in the MD and A Shield earlier today. Our consolidated sales in Q2 increased by 6.6 percent to $141,500,000 compared to $132,700,000 last year, reflecting a 29.8% growth in the Civil Market segment Gross profit increased to $22,500,000 or 15.9 percent of sales from $18,400,000 or 13.8% of sales last year due to higher throughput and pricing initiatives, Partly offset by the effect of inflation on labor and general production supplies as well as a less favorable product mix. Operating income increased to $9,100,000 or 6.4 percent of sales from $8,600,000 or 6.5% of sales last year, reflecting higher gross profit, partly offset by higher employee related costs.

Speaker 2

For the same reason, adjusted EBITDA increased to $18,200,000 or 12.9 percent of sales from $16,200,000 or 12.2 percent of sales. Net income for the Q2 of fiscal 2024 stood at 4 €600,000 or 0 point 14 dollars per diluted share compared to €4,800,000 or 0 point 14 dollars per diluted share last year and up from $3,600,000 or $0.10 per share on an adjusted basis. Cash flow related to operating activity represented a usage of $15,600,000 in the 2nd quarter compared to $8,300,000 generated last year. The use of cash reflects continued investment in inventory, stabilize our production system These investments on our net debt to adjusted EBITDA ratio, withstood at 3.1 compared to 2.7 at March 31, 20

Speaker 1

We are quite pleased with our performance, and we can already see the positive outcomes of our efforts to return to historical levels of volume and profitability. Aerostage demand continue to increase. Passenger traffic levels are very nearly back to the pre pandemic levels Globally and domestic travel is in fact 9% higher. The return on travel demand is once again driving new aircraft orders and this combined with long term fleet replacement forecasts is pushing OEMs to increase production rates. And launch new aircraft programs, both in the United States and Western Europe.

Speaker 1

The expertise of our engineers and excellence of our manufacturing teams are attracting very strong demand for our services. As a result, we are well positioned to participate in many programs across the world that should drive our revenue for years to come. The contract we announced last week with IPP Aero is a great example of this. We will be partnering with them to develop a nozzle actuator technological demonstrator for the next generation fighter engine to kick off our participation in the FCAS program. Discussion with our clients and partners.

Speaker 1

In closing, I'd like to thank our team again for their efforts throughout the summer months, And I'm confident that the best is yet to come. Sylvie, we are now ready to answer questions.

Operator

Thank you, sir. And your first question will be from Konark Gupta at Scotiabank.

Speaker 3

Hey, good morning, guys. This is Eli filling in for Konark. Congrats on the good results and margin progression. Two questions on my behalf. So the 12.9% margin is the highest You've achieved in the last 6 quarters.

Speaker 3

How does it compare to your expectations in August? And what does the EBITDA bridge Look like from Q1, 11.6 percent.

Speaker 2

Yes. Well, It's a very good remark. Obviously, this is the trail and the effort we have put In the last few quarters, right, reestablishing our throughput and obviously the volume and pricing It's contributing to the margin. So we're on a path to bring back the margin to historical level. I think Mabte has been pretty clear on that In the past few quarters, so this is again a step in the right direction.

Speaker 2

And the bridge compared to Q1 last year is reflective of what I just said, right? Volume pricing, Partly offset by the inflation, right, that we had versus last year on our supplies and utilities and freight, But it's getting better compared to Q1.

Speaker 3

All right. Thank you. That's helpful. And my last question is, What are your top capital allocation priorities at this time given the ongoing improvement in margins?

Speaker 2

The number one priority has been to invest in our working capital, right, to reestablish our throughput. But also you see, as Martin said, our trailing 12 month sales has increased again this quarter to 5 And $80,000,000 So this is going in the right direction on our goal to exceed $600,000,000 of revenue, right? That's the goal. And so that's the priority that we have done since the past 3 quarters. And we have bought back shares, right, through the NCIB program announced in August.

Speaker 2

So that remains the same priority as the previous quarter.

Speaker 3

Okay, great. Thanks.

Speaker 1

Thank you, Kevin.

Operator

Next question will be from Cameron Doerksen at National Bank Financial. Please go ahead.

Speaker 4

Yes. Thanks. Good morning, guys.

Speaker 1

Good morning. Good morning.

Speaker 4

So I want to follow-up on Just commentary around the working capital. Obviously, another significant investment in the second quarter here, another $16,000,000 in inventory. I guess, maybe 2 questions from this. I mean, how much more do you have to invest in to Get comfort around the throughput. And how much do you think is excess inventory at this point?

Speaker 4

I mean, I'm just trying to think about when this It unwinds what kind of cash generation that might produce?

Speaker 2

Okay. So good question. So we're more at the end than at the beginning to answer your question. So we are in a very good place to have a very Strong second half of this fiscal year. So that's what we've done to put that in place.

Speaker 2

We don't have excess inventory, But we have inventory to support the issue we have within the production system. So if you go back to fiscal 2020, right, pre pandemic, right, when the pandemic hit, We were at about $240,000,000 right. So and we were trending to sales at the time that are similar to what foreseen in the next couple of quarters. So probably have anywhere between $40,000,000 to $50,000,000 of inventory additional I'd like to manage through the production environment, but this will be an opportunity, right? Not in the short term, but will be an opportunity eventually when things stabilize.

Speaker 4

Okay. No, that's helpful. And maybe you can just update us on where things are on Discussions you're having with customers around repricing. I know this is it's a long game to do this, but how are the How is the tone of those conversations you're having with some of your customers to try to get pricing up to offset inflation?

Speaker 1

Yes, very good tone, Cameron. So We work transparently with our customer. We are ready to share information and The initiatives that we took last year is bearing fruit. It's in line with our expectation. And we have very constructive discussion and positive discussion, and we haven't been able To readjust the pricing, right, or to structure better the pricing to reflect the conditioned environment.

Speaker 1

So there's still work to be done. We still have contract that That will be expiring in few years to come. That will give us another an opportunity to review our pricing there. But All in all, it's going well. We're starting to see the effect of that, like Stephane said, in our margin.

Speaker 1

But We should see a greater impact towards the end of the fiscal year.

Speaker 4

Okay. That's helpful. Thanks very much.

Speaker 1

Thank you, Cameron. Thank you.

Operator

Next question will be from Jonathan Lemmer at Laurentian Bank Securities. Please go ahead. Jonathan, please unmute.

Speaker 5

Can you hear me okay?

Speaker 2

Yes.

Speaker 1

Hello? Yes. Good morning, Jonathan. Good morning.

Speaker 5

Good morning. Thanks for taking my question. Just a follow-up on that last point. Could you share with us a little more color about the portion of revenue that's subject To repricing and maybe what portion you've already completed the negotiations on and what portion We'll be expiring over the coming year.

Speaker 1

It's a very touchy question. It's a difficult question to answer. What I can tell you is the contract that we were allowed to do it and That we had an opportunity, they're done, right? So a portion of it to clearly evaluate based on our A percentage of our sales, it's very difficult to answer at this point, Jonathan.

Speaker 5

I understand. That's fine. I'll pass the line. Thank you.

Speaker 3

Okay. Thank you very

Speaker 1

much, Madam. Thank you.

Operator

Your next question will be from Tim James at TD Cowen. Please go ahead.

Speaker 6

Thanks. Good morning.

Speaker 1

Good morning.

Speaker 6

I'm wondering if you could talk about any if there are any Aftermarket, new opportunities in terms of aftermarket revenue or aftermarket business development over the next couple of years that you see, you kind of touched on new platform opportunities. Are there any it's a little tougher to see from the outside, but are you seeing any opportunities to build and take market share effectively in the

Speaker 1

Well, we our order book for aftermarket sales or aftermarket order is very, very strong. Closely to the strongest that it's ever been. We're busy with the product that we developed So our Aphi products and people wants to fly their assets. So It's a healthy situation that we have in the aftermarket as we speak. And with the geopolitical tension, there's going to be some demands also with The aftermarket of the U.

Speaker 1

S. And Westerners countries to replace And to maintain aircraft and other systems or other Defense Systems, given the situation That's what we see in the aftermarket today. So yes, we sell.

Speaker 6

Then maybe following on that question, if I think forward to A couple of years, 2 to 3 years out when hopefully a lot of the supply chain and logistics challenges are behind you And more of the inflation has been passed on through contracts. Could you talk about how your product mix and your Service mix might be different than it was pre pandemic. And I'm thinking about the actuation

Speaker 3

business, sort of its contribution

Speaker 6

aftermarket Situation business, sort of its contribution aftermarket versus new platform, just anything From a product mix perspective that we should think about when comparing kind of longer term margins to historical margins?

Speaker 1

Well, I would say that the because of the defense demand is going up and 777 We'll take some time to get to the historical level or pre pandemic level at 66 airplanes or 70 airplanes a year. Aside of that, the percentage should remain approximately the same because we're booking business as we speak OE and aftermarket, like I said, we're solicited with many projects on the different sides In the U. S, in the U. K, in Europe and even in South Korea. So we're going to be busy.

Speaker 1

So we're in a good position today. So to give you A straight percentage, you can use approximately the same percentage than what we're leaving today, but the nominal The value will increase. The total will increase. But in percent, it should be as we are today, Right, Stephane. Yes.

Speaker 2

And contributing to that, Tim, we have product that we have developed in the past few years like You know the Creator and other program, right? These eventually will see aftermarket.

Speaker 6

Yes. And that's one of the factors I'm trying to consider. I'm thinking back to pre pandemic. You did have some products in development, which would have biased margins Lower been a bit of a headwind and those should be in more of a production or a higher margin phase going out a couple I would think that would actually help the comparison slightly. But that's helpful.

Speaker 6

Thank you. My last question just on capital expenditures. Correct me if I'm wrong, but there's nothing in your pipeline of deliveries over the next couple of years That should require any significant growth CapEx, is there? Or like you should be your CapEx should be reasonable? And If there is a need for additional or a step up in CapEx, it would probably come hand in hand with a new business opportunity.

Speaker 6

Is that a Good way of thinking about your CapEx over the next 2 or 3 years?

Speaker 1

Absolutely. That's a fair statement. Of course, if we have big opportunities, Really big opportunities CapEx will have to be revised, but today it's a normal trend. Again, for the free cash flow between 3% to 5% of

Operator

And at this time, Mr. Brassard, we have no other questions registered. I'm sorry. We do have a follow-up from Jonathan Lemmers.

Speaker 6

I just wanted to also ask about the opportunity going forward on single aisle jets. At what point do you believe that you'll have opportunities to increase your content on those? Do you see How is the bidding pipeline looking over the next year?

Speaker 1

So on the single line, so the line is not very good, Jonathan. So I believe I understood the question. The question was to if we see any opportunities on the single line market in our park and we see it. So On the single line market, so Airbus is looking for new airplanes So to be launched with the new propulsion strategy or greener airplane. So before they launch a new airplanes in the single aisle, We ain't going to look we cannot touch that market because the IP belongs to Safra.

Speaker 1

As opposed to the 7 37 MAX, which is the other platform, the other single line, This one is a build to print contract, but the contract expires in 2030. So when are we going to have the chance is Depending on the customer needs and the opportunity will come with the launch of a new platform By Boeing and by Airbus, and I expect and when I read between the line their communication, it is towards the end of the decade. So Probably in the timeframe between 2027 to 2,030, but obviously, we would be called slightly before that You'll be invited to propose our solution for these programs. Does that answer your question? Did I understand well?

Speaker 5

Yes, that's interesting. Thank you. And I'll fix my line.

Speaker 1

Okay. All right.

Operator

Thank you. Again, Mr. Brassard, we have no other questions registered at this time. Please proceed.

Speaker 1

Okay. Thank you very much, everyone, and I thank you for your confidence and looking forward to have other discussions with you and update you on our business. Thank you very much and have a great day.

Operator

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending.

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Earnings Conference Call
Héroux-Devtek Q2 2024
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