HEICO Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2023

There are 10 speakers on the call.

Operator

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

Operator

And or foreign customers or competition from existing and new competitors, which could reduce our sales our ability to introduce new products and services 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 and achieve operating synergies from acquired businesses, customer credit risk, interest, foreign currency exchange and income tax rates, Economic conditions, including the effects of inflation within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues and defense spending or budget cuts, which could reduce our defense related revenue. Parties listening to this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including, but not limited to, filings on Form 10 ks, Form 10Q 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, Samara, and Thank you all on this call. Good morning to everyone, and we thank you again for joining us. Welcome you to this HEICO 1st quarter fiscal 'twenty three earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO And I'm joined here 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. Before reviewing our operating results in detail, I'd like to take a moment to thank all of HEICO's talented team members for delivering another very strong quarter.

Speaker 1

The growth and profitability of our operating companies continues to exceed my expectations. It's the people at our companies that make us exceptional and produce these outstanding results. Again, thank you for another record breaking quarter, and I continue to be optimistic that our growth will continue throughout Fiscal 2023 and beyond. Summarizing the highlights of our Q1 fiscal 2023 Record results. Consolidated 1st quarter fiscal 'twenty three net sales represent record results for HEICO, Driven principally by record net sales within the Flight Support Group, mainly arising from continued rebound and the demand for our commercial aerospace products and services.

Speaker 1

Consolidated operating And net sales in the Q1 of fiscal 'twenty three improved 31% And 27%, respectively, as compared to the Q1 of fiscal 2022. These results mainly reflect 14% quarterly consolidated organic Net sales growth and the impact from our fiscal 20222023 acquisitions. Consolidated operating margin improved to 20.8% in the Q1 of fiscal 'twenty 3, And that was up from 20.2% in the Q1 of fiscal 'twenty 2. Consolidated net income increased 7% to $93,000,000 or 0.67 dollars per diluted share in the Q1 of fiscal 'twenty three, and that was up from 86,900,000 were $0.63 per diluted share in the Q1 of fiscal 2022. It should be noted that net income attributable to HEICO in the Q1 of fiscal 'twenty three and 'twenty two were both favorably impacted by a discrete net income tax benefit from stock option exercises.

Speaker 1

The benefit in the Q1 of fiscal 2023, Net of non controlling interest was $6,100,000 or $0.04 per diluted share, down from $17,500,000 or $0.13 per diluted share In the Q1 of fiscal 2022. This information should be considered when analyzing the results, the comparative results between fiscal 'twenty two And 23. In addition, the company incurred $5,100,000 of acquisition costs related to the closing the Accellia International acquisition in January 'twenty three, And that decreased net income attributable to HEICO in the Q1 of fiscal 'twenty 3 by approximately $4,300,000 or $0.03 per diluted share. In my opinion, that should also be considered when analyzing the results of our Q1. The comparatively lower tax benefit from stock option exercises and the one time Accelia Position cost reduced our diluted earnings by approximately 0 point 11 dollars Our net debt, which is total debt less cash and cash equivalents, of $640,200,000 As of January 31, 'twenty 3 compared to shareholders' equity was 23.3% as of January 31, 'twenty 3, and that compared to 7.5%, I'm sorry, 5.7% As of October 31, 2022.

Speaker 1

Obviously, the increase was the debt that we incurred to acquire Accellia. Our net debt to EBITDA ratio was 1.02x As of January 31, 'twenty 3, and that compared to 0.25x as of October 'twenty 2, still A very, very low debt to EBITDA ratio. The increase in our net debt Ratios in the Q1 of fiscal 2023 principally reflect the impact again from the purchase of Exelia in January 2023, And that was HEICO's largest ever acquisition in terms of purchase price. Cash flow provided by operating activities remained strong, totaling $76,700,000

Speaker 2

in the

Speaker 1

Q1 Of fiscal 2023, and that compared to $78,000,000 in the Q1 of fiscal 2022. The cash flow provided by operating activities in the Q1 of fiscal 2023 reflects An increase in working capital, principally driven by an increase in inventories To support our increased consolidated backlog, we continue to forecast strong cash flow from operations for fiscal 2023. In January 2023, we increased our regular Semi annual cash dividend by 11% to $0.10 per share. This represented Our 89th consecutive semiannual cash dividend, which we have paid since 1979. Let me now discuss our recent acquisition activity.

Speaker 1

As mentioned Previously, in January 'twenty three, we acquired Exelio International, our largest Ever in terms of purchase price and revenue, we are excited about the European defense and aerospace Opportunities which Exelaia brings to HEICO, and we look forward to supporting their continued growth plans. This acquisition is expected to be accretive to HEICO's earnings per share within the 1st year of the transaction closing. At this time, I would like to introduce Eric Mendelson, Co President of HEICO and President of HEICO's Flight Support Group, And he will discuss the Q1 results of the Flight Support Group. Eric?

Speaker 3

Thank you. The Flight Support Group's net sales increased 36 percent to a record $371,300,000 in the Q1 of fiscal 'twenty three, up from $272,700,000 in the Q1 of fiscal 2022. The net sales increase in the Q1 of fiscal 2023 reflects strong 25 percent organic growth as well as the impact from our profitable fiscal 2022 acquisitions. The organic growth mainly reflects increased demand for the majority of our commercial aerospace products and services, resulting from continued recovery in global commercial air travel as compared to the Q1 of fiscal 2022. The Flight Support Group's operating income increased 60% to a record 83 point $6,000,000 in the Q1 of fiscal 2023, up from $52,400,000 in the Q1 of fiscal 2022.

Speaker 3

The operating income increase in the Q1 of fiscal 'twenty three principally reflects the previously mentioned net sales growth, Improved gross profit margin and efficiencies realized from the higher net sales volume. The improved gross profit margin in the Q1 of fiscal 'twenty three principally reflects higher net sales within our aftermarket replacement parts and specialty products product lines and the impact of lower inventory obsolescence expenses, primarily due to increased demand. The Flight Support Group's operating margin improved to 22.5% in the Q1 of fiscal 2023, up from 19.2% in the Q1 of fiscal 2022. The operating margin increase in the Q1 of fiscal 2023 principally reflects the previously mentioned Improved gross profit margin and decreased SG and A expenses as a percentage of net sales, mainly reflecting the previously mentioned Now I would like to introduce Victor Mendelson, Co President of HEICO and President of HEICO's Electronic Technologies Group to discuss the Q1 results of the Electronic Technologies Group.

Speaker 1

Thank you, Eric. The Electronic Technologies Group's net sales increased 15% to $255,100,000 in the Q1 of fiscal 'twenty three, up from $222,300,000 in the Q1 of fiscal 22. The net sales increase is mainly attributable to the impact from our fiscal 2022 2023 acquisitions. The Electronic Technologies Group's organic net sales in the Q1 fiscal 2023 were consistent with the prior year and principally reflected increased other electronics, commercial aviation and medical products net sales offset by decreased Defense Products Net Sales. The Electronic Technologies Group's operating income increased 2% The $56,500,000 in the Q1 of fiscal 2023, up from $55,600,000 in the Q1 of fiscal 2022.

Speaker 1

The increase in operating income principally reflects the previously mentioned higher net sales volume, partially offset by higher acquisition costs and fees related to the Accellia acquisition and a lower gross profit margin. The lower gross profit margin in the first and commercial aviation products. The Electronic Technologies Group's operating margin was 22.2% in the Q1 of fiscal 2023 as compared to 25% in the Q1 of fiscal 2022. The lower operating margin principally reflects the Celia acquisition costs, along with the lower gross profit margin and increased SG and A expenses as a percentage of net sales, partially offset by lower performance based compensation expense. Although, as we anticipated, our defense net sales have been lower, The ETG's backlog remains at record levels, even factoring out Exelio.

Speaker 1

Each ETG subsidiary is a unique business With unique drivers, but they all supply mission critical, high reliability or harsh environment products, which are required for their customers' products to operate. This remains a very positive dynamic and materially explains our strong backlog and our confidence going forward. While I don't have a crystal ball, as I previously mentioned, we expect our commercial aviation demand to remain strong this year and beyond, And the defense sales should strengthen in the later part of this year or even early next year as higher defense budgets and defense spending kicks in. We also expect that our high end other non aerospace and markets, which have been very strong and continue to report record sales, will become softer ahead due to what, Least idly will be a reversion to normal ordering patterns by manufacturers as general supply chain conditions ameliorate. Hopefully, this coincides with the business upturn, but we can't be certain on the timing of each.

Speaker 1

Consistent with what we've Often said and our experience over literally decades, we believe that ETG should be a mid to low single digit organic sales grower over time, With meaningful variations on that growth rate during individual quarters. This has been the ETG pattern since the business was formed in 1996. When asked on these calls what I believe our operating margins will be, you've heard me remark that I felt our cash margin, Which is the operating margin before acquisition accounting, which is the true economic margin the business realizes, would stay within the ranges we are now seeing, obviously, before considering the impact from future and unknown acquisitions. Keeping in mind that our noncash amortization expense is around 500 basis points and That we had meaningful transaction expenses in the quarter from the Exelix acquisition, which trended our operating margin by another couple of 100 basis points. Our companies continue to report excellent margins in the expected range.

Speaker 1

I'm often asked what impact Accellia, which is a strong margin Business but is lower margins than our overall average should have on overall ETG margins, I would say It will probably be around 200 or probably trim around 200 basis points of consolidated margins going forward Before, of course, taking into effect any future and unknown acquisitions, still great margins overall. As we anticipated in our last conference call in other settings, our business has made material progress reducing supply chain delays, which we expect to continue, Though unevenly throughout the year. By the way, in the Q1, we roughly estimate that somewhere around A little shy of $30,000,000 of shipments were delayed, mostly into our Q2 versus over $40,000,000 of delays during fiscal 2022's Q4. Overall, we remain very excited about the ETG's prospects over time and are thrilled to have the irreplaceable set of businesses we operate in this group with strong margins and reasonable growth prospects. I'll turn the call back over to Larry Memmers.

Speaker 2

Thank you,

Speaker 1

Victor. And as for the outlook, If we look ahead to the remainder of fiscal 2023 and continue to anticipate net sales growth In both Flight Support and ETG, principally driven by demand for the majority of our products. Additionally, continued inflationary pressures and lingering supply chain disruptions stemming from the COVID-nineteen pandemic may lead to higher material and labor costs. During fiscal 'twenty three, we plan to continue Our commitments to developing new products and services, further market penetration And an aggressive acquisition strategy, while maintaining our financial strength and flexibility. In closing, I would like to again thank our incredible team members for their continued support and commitment to HyCall.

Speaker 1

The remainder of fiscal 'twenty three looks promising, and I believe our unique culture of ownership And entrepreneurial spirit will continue to provide for outstanding operating results for our shareholders. Thank you all for what you do to make HEICO a great company. And with that, I would like to open the floor and the lines for questions.

Operator

And we'll take our first question from Scott DeGel with Credit Suisse. Please go ahead.

Speaker 4

Hey, good morning.

Speaker 5

Good morning, John.

Speaker 4

Eric, have you been able to work with your airline customers to reopen any of your aftermarket LTAs to get some price increases through early or have the airlines generally not been willing to do that?

Speaker 3

Hi, Scott. Yes, we've been able to get price increases. Our LTAs do permit us To adjust price, although typically it's capped at various levels depending on the level of business that the customers have with us. But yes, we've been successful in Full in, getting price from our LPA customers as well as our non LPA customers.

Speaker 6

Okay, great.

Speaker 4

And Victor, on the Defense OE side, I think some of your peers are exposed to 4 to 5 year LTAs with Basically little to no inflation protection at all and that's causing them to under earn relative to what their businesses are capable of. So I guess I was curious if that's been a constraint on profitability for you at all as well and just any detail you can offer on exposure to LTAs on the defense side of the business.

Speaker 1

Yes. Generally speaking, we don't have 4 5 year pricing locked in On those LTAs. But there definitely is a lag effect on pricing Price adjustments, right? We generally don't have orders of less than a year. So usually, That takes some time to filter through.

Speaker 1

We've been pretty successful offsetting it over time. Almost all our companies feel that we will Offset the inflationary effects, but there can be a delay in, let's say, 6 months or a year. We do have some longer term Pricing locked in some instances.

Speaker 3

Okay. And then last question for

Speaker 4

me, Carlos, maybe you can just say what the ETG backlog was in the quarter And maybe how that's trended relative to the last year or whatever compares most of these? Thank

Speaker 2

you. Sure. If you look at the backlog compared between Q1 'twenty three and Q1 'twenty two, it is up. It's about $856,000,000 roughly for The end of Q1 'twenty three, which by the way is pretty consistent with Q4's backlog, which was elevated, But it is substantially larger than it was in Q1 'twenty two, which is around 660,000,000

Speaker 4

Okay. Thank you, everyone.

Speaker 2

You're welcome. Thanks, Justin.

Operator

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

Speaker 5

ahead. Nathan Martin, Larry, Victor, Carlos, Eric.

Speaker 3

Another strong quarter for margins in the Q2 where we've seen margins above 22%. And you've given a lot

Speaker 7

of reasons why the efficiencies.

Speaker 3

But I guess maybe just kind of talking on Scott's question on just your ability

Speaker 5

to pass on some price. How are

Speaker 3

you thinking about just This level of margins going forward. Any color there would be helpful. Yes. Obviously, we're going to continue To treat our customers well, as I've said for the last year or so, we've got to make sure that we maintain our margins in this Inflationary environment, both materials and labor, are increasing in cost, and we need to make sure that we Passed along that cost, plus we're able to get a reasonable margin on top of it. So I think The numbers can fluctuate quarter to quarter depending on mix.

Speaker 3

But I think we're in a pretty good area and We like where we are. We have not received a lot of price In these margins, we received some, and I think there's an opportunity to get some more. But of course, as we replace inventories, inventory costs will be going up. So I'm reluctant to Predict or to forecast the change in margins. I think that this is really a reasonable level, and we run the business very much In the viewpoint of what's right for our customers and what's right for the business, and the margin just sort of falls out at the end.

Speaker 3

So I don't have a way to tell what it's going to be, but I do feel That these are reasonable numbers going forward. Yes. Appreciate that. And Eric, have you seen any pickup in kind of the wide body mix I would say we've seen widebody traffic starting to materially pick up globally. Yes.

Speaker 3

We've seen some pickup in widebody, yes. And everybody anticipates continued strengthening in those markets.

Speaker 7

Okay. And just one last one, Carlos, on the net leverage kind of jumping up, Paul, any thoughts on just deleveraging

Speaker 3

or where your comfort level is if more M and A is going to be achieved this year? Thanks.

Speaker 2

Well, we have a pretty full pipeline on M and A, and we're going to do all the deals that make sense for our shareholders. So If we find transactions that make sense for the company and the shareholders, we'll find a way to do it. We never would have been concerned about a leverage number too much. I think Larry said in the past that we would take on substantial leverage for the I haven't found that animal yet. I mean, right now, at one time levered, I feel like we're underleveraged and I'd love nothing more Than to find more opportunities to get that leverage number up.

Speaker 2

However, I do think our culture and our pattern of operations suggest If we do borrow, we make a hell of an effort to delever quickly. And so as we move forward outside of use Of cash for, let's say, acquisitions, CapEx and things like that, we will be looking to reduce our credit exposure so that we can reload on other deals as they come In front of us.

Speaker 5

Appreciate that. Thanks, guys.

Speaker 3

Thanks, Peter.

Operator

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

Speaker 7

Great. Thanks and good morning everybody. Congrats on a real good quarter, especially with the great quarter, especially with these adjustments. I guess, Eric, a couple of questions for you first. So the FSG organic revenue growth 23% this quarter, and I think if you look back last year, I think in Q1, it was Somewhere, I think it was close to 30%.

Speaker 7

So obviously, last year was a little bit of easier comp, this year was not. How do you see ordering patterns and stuff Feels like are they still building back inventory or is this all new sales for you? Just trying to get a little grasp on Really an amazing quarter and pretty considerable outperformance compared to where we were in the top line.

Speaker 3

Good morning, Larry. Yes, We're very pleased with the numbers. Actually, our Q1 'twenty two organic growth, I think, was 30%. So now we've done 25% on top of 30%, which is really quite outstanding. Okay.

Speaker 3

Yes. And it's Frankly, far more than we had internally predicted. Our businesses continue to do very well

Speaker 1

and spoken with our Sales keep going over the last couple of

Speaker 3

weeks to understand or sales leadership to understand what's going on. And they anticipate basically continued strength in the business. I'm reluctant to anticipate growth beyond the level where we are. I mean, we grew 7% from the 4th quarter, just a quarter on quarter number top line. I think that we're running at A really solid rate.

Speaker 3

And I want to see a few more quarters to really understand where we are. None of our customers and our sales people do not believe that the airlines are overstocking. But as I cautioned everybody over the last number of quarters, Every downturn, of course, is followed by a recovery, and every recovery is followed by a slight overshoot. And I specifically asked this question to our sales leaders. Are we in do we have any indication that we're in the overshoot area?

Speaker 3

And the answer is no. Nobody thinks that we're in the overshoot area. So I'm cautiously optimistic. The numbers are incredible. They're phenomenal.

Speaker 3

I think we're capturing market share, and this is Unique to HEICO, we speak to our customers and we see what's going on with other suppliers. And we think that frankly the performance at HEICO is really with regard to the aftermarket is industry leading and we're outperforming others. And that's as a result of being able to hold inventory, treating our customers right, not jamming them with price increases, making sure that they get value. So I feel very good about where we are.

Speaker 7

And I know we've asked questions on the margins last Several quarters they've been kind of running a little bit above that for the 2021 historical range. Has the mix Changed at all in the last few years that could maybe help that margin or not particularly?

Speaker 3

Not particularly, not particularly. As a matter of fact, we've had a little bit more intangible amortization, so that would have as a result of the acquisition, so that would have decreased the margins. So no, I don't think it's really a mix of things. I think We're just very efficient. We've got a great team.

Speaker 3

The thing that's interesting is I think that These margins are a result of frankly what we did a decade and 2 decades ago. They're not a result of what we've done in the last year or 2. When you treat your customers right, you treat your people right, you get into a virtuous cycle, and I think that's very much where we are. And I think we're reaping the benefits of the long term culture that we put into place Over 20 years ago, 30 years ago, and that's what's driving these numbers. We had the parts when other people did.

Speaker 3

We continue to develop A lot of new PMAs and other products through the downturn. We continue to take inventory. We did all of the right things. And that's why these numbers are coming out and frankly even surprising us.

Speaker 7

Got you. And then just one quickly follow-up for Carlos. Just on the little bit of a higher tax rate this quarter and a little bit less Stock option credit for you guys. Has your full year outlook at all changed? I don't know if you'd comment to that.

Speaker 7

Has your full year outlook changed at all from the tax rate?

Speaker 2

No, it really hasn't. The 4th quarter tax rate was substantially larger this quarter than Q1 of 'twenty two, which the reason Larry mentioned is the lower benefit tax stock option, the tax benefits that we experienced. If you look at the rate, It's 100% of the increase is due to that. I think for the year, we should fall out between 20% 21%, kind of where we fell last year. I think that's where we'll wind up

Speaker 7

Sure. Got you. Very appreciate all the color. Thanks guys.

Speaker 2

Thanks, Larry.

Operator

The next question comes from Pete Osterland with Truist Securities. Please go ahead.

Speaker 2

Good morning. Thank you for taking our questions today.

Speaker 7

First, I just wanted to ask, within the Flight Support Group, what

Speaker 3

are you seeing for product demand in the Has there been any choppiness as a result of their emergence from the pandemic lockdowns? And are you seeing any potential that sales into that market could be a Strong tailwind for FSP sales over the rest of the fiscal year? Hi, this is Derek. Good morning. Yes, we're doing quite nicely in the Chinese market.

Speaker 3

I mean, we tend to be I tend to not I'd like to get into a lot of detail on specific customers or markets for competitive reasons, but I can tell you that we're doing very well. We've got a very good And I think we are well positioned to pick up market share and to continue to grow that market as it recovers. Frankly, our sales there have really been outstanding over the last year in excess of What we had predicted and frankly where we were in 2019, and I think we'll continue to benefit as that market recovers.

Speaker 1

Thanks. That's helpful. And then I have one for Carlos. Could you provide an estimate for what you expect interest expense

Speaker 7

to be For the year, is the Q1 level a good run rate to use or just

Speaker 3

any help you can get there?

Speaker 2

Well, I think our interest Right now, it's running close to 6% on our debt. It's variable. We just borrowed $500,000,000 for Axcelius. So

Speaker 7

the I

Speaker 2

haven't really given the forecast on that, but if you take our outstandings, it's It's going to be somewhere at $10,000,000 If you're thinking about a run rate, it could be around $10,000,000 a quarter, something like that.

Speaker 7

Appreciate the help. Thanks.

Operator

We'll take our next question from Kristine Liwag with Morgan Stanley. Please go ahead.

Speaker 8

Hey, guys. Following up on some of the questions on leverage, Laurent, you said that You've got a busy pipeline for acquisitions. So how should we think about how you finance this? I mean, the business is under levered And also you guys use that class ASOC to finance acquisitions before. How do we think about the balance of financing for those incremental portions?

Speaker 8

And you guys have historically won a very under levered book, but what would be the peak leverage you're willing to consider if the deals are available in accretive?

Speaker 1

Right now to use our credit line, which we're under drawn on that credit line. We have We can go to $1,500,000,000 and we have facility to go to $1,850,000,000 And we're right now, what Carlos, dollars 6 50 or something like that. Yes, on 700. 700. So we have plenty of room on that.

Speaker 1

In the event that We were to consider something larger. We have spoken to our banks, and the banks are fully supportive Going much further if we would like to. At the moment, we have no request into them to do that. But we've always spoken with them and said in the event that we need additional funds, we can do that. As for issuing HEICO Class A stock in an acquisition, we normally don't do that because We find that because of strong cash flow, we'd rather pay cash and reduce the debt balance quickly.

Speaker 1

As Carlos said earlier, we would increase the leverage amounts as long as we could bring them down to

Speaker 7

a much more

Speaker 1

manageable The amount which I consider in the area of 2x to 3x EBITDA at 2x to 3x. We've never been at 2x EBITDA, we've always been below. So and we will continue to be a low levered company. We never intend to go As some companies go to 5, 6, 7 times, we do not do that. Does that answer your question?

Speaker 8

Yes, that's great. Very helpful. Thank you. And if I could ask another question. During COVID, Airlines were a lot more cost conscious and PMAs were a priority for them.

Speaker 8

Now that we've seen air traffic Continue to be strong and sustained. We are seeing that globally. Can you talk about where PMA is in terms of your airline customers' priorities? And if you could provide some information regarding how your market share evolved maybe for your top 10 customers and their use of PMA, that would be most appreciated.

Speaker 3

Yes, I'd be happy to do that. A couple of things. Of course, actually, during Kristine, during the pandemic, actually, customers were so, perceived to a problem That I don't know that they were approving many alternative parts at that moment. However, we were very confident That we would ultimately get those parts approved. So we continue to develop them, continue to manufacture them Through the pandemic.

Speaker 3

So when the pandemic got to the end, we started getting a lot of parts approved. We hear from our customers that, that is not a PMA item. It's really a HEICO Specific item. HEICO developed these parts, HEICO developed these repairs, and I think that our Growth is really unique for the industry. So I've been very careful, and I would not describe it as a broad Interest in P and A, I think this is specifically a broad interest in HEICO.

Speaker 3

As we've gotten larger, we're a $20,000,000,000 market cap We've got deep technology and strong financial ability, And our customers see that, and I think we've been rewarded with a unique opportunity right now. So but as far as HEICO goes, we continue to develop a lot of parts and repairs. We've got a lot in Progress, our distribution businesses are doing very well in taking market share from others. So I anticipate Continue to look certainly over the numbers that we did last year. Again, our Q1 numbers were frankly so out of the park That I'm reluctant to predict increases off of those for the next couple of quarters, and We'd like to mature at this level.

Speaker 3

1st, I'm not saying that we won't, but frankly, when we did our Q4 call 2 months ago, I had no belief that we would be hitting these numbers that we're hitting now. So I prefer to be A little bit conservative going forward, but I do anticipate continued growth off of last year.

Speaker 8

Thanks, Eric, and thanks, everyone.

Speaker 2

Thank you.

Operator

Next question comes from Sheila Kahyaoglu with Jefferies. Please go ahead.

Speaker 9

Thank you. Good morning, everyone. Thanks for the time. Eric, just on your last point, FSG sales are 8% above 2019 levels. I'm guessing that has minimal gross price in there.

Speaker 9

So to your market share point, where do you think you're gaining share? Is it just additional products, additional customers on the same product? Are you coming out with more products because customers are demanding it. Is it regional growth? Can you talk a little bit about that?

Speaker 9

And I appreciate the earlier color.

Speaker 3

Yes. It's good morning, Sheila, and thanks for your question.

Speaker 1

I would say it is a strength

Speaker 3

across the board. We are getting significant sales of parts to customers who had not Purchased those customers not purchased those parts before. So I anticipate continued increase there. Normally, when a customer switches to us, they buy all of their demand from us. So yes, part of it is they're seeing their own recovery And the volumes are increasing.

Speaker 3

But also a large part of it is we're doing very well in coming out with New products and getting those products sold. And then of course the flow through between PMA distribution has been very strong, and we've been helping our distribution principles obtain P and As and we sell those parts as well and that's worked out very well. So it's really broad based strength. We still have as far as geographies, we still have recovery opportunity, I would say, primarily in Asia, As a result of the those markets are still lagging, as you know, from your weekly report. So I think that there's continued opportunity there.

Speaker 3

But yes, we are we're past our 2019 numbers and Really very, very happy about that.

Speaker 9

Great. Thank you. I have one for Victor and one for Carlos. So Victor, in terms of Axcelia, we're calculating about from 1 month of contribution, 50 basis points of dilution. And then margins are still down 40 bps year over year outside of Axcelia.

Speaker 9

So can you kind of talk about What the mix impact specifically is? Is it just more of a specialty products that are non defense? And how long you think that will continue?

Speaker 1

Sure, Sheila. I think I assume those numbers include The dilution from the transaction expenses. So those are nonrecurring expenses, and that was that probably accounted for a very good In the quarter, but the mix of Xcelia is majority aerospace and defense. And then they have a variety of other markets. Some of it is energy, some of it's clean energy, Some of it is transportation, trains, for example, and other electrification initiatives.

Speaker 1

So it's a pretty broad product base. And just across the board, their margins are generally Lower than our margins. I wouldn't be surprised if over time those move up. I don't want to make a I think it's a little too early to do that, but they certainly are margin focused, and their margins have been on an upward trend over the last, I don't know, 4 or 5 years. So maybe we like that as well.

Speaker 9

Great. And then Carlos, last one for Inventory was a use of cash in the quarter about $52,000,000 following $89,000,000 in fiscal 2022, which is pretty unusual for you guys. So How do we kind of think about that unwinding?

Speaker 2

That's a good question, Sheila. We knew that we would have a spend this quarter. The spend this quarter was rather concentrated. Of that $52,000,000 roughly $30,000,000 that was related to distribution buys They relate to certain contracts that you didn't use or renew. And so we have we do have some bulking up in that area.

Speaker 2

If you pull the $30,000,000 out, it's $20,000,000 of inventory spend. Yes, that probably felt about right just for supporting our backlog. I don't anticipate Huge investment in inventory like we had last year. In fact, with interest rates going up, I would encourage our subs to be smart on that. But I've also told them that if they have customer demand, we don't want them to be in a situation where they don't have product to support the customer.

Speaker 2

So it's a delicate balance. But I don't believe that you'll see us have the same level of investment for the full year this year as we did last year.

Speaker 9

Okay, great. Thank you.

Speaker 2

Thanks, Sheila.

Operator

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

Speaker 6

ahead. Yes. Hi, good morning. Maybe a first question for Victor or Carlos. It sounds like, Victor, the commentary on sort of the pace of recovery of supply chain in your defense markets, in particular, Maybe a little slower than expected.

Speaker 6

Do you still see sort of full year ATG organic growth up Low to mid single this year? And then how does that recovery look in terms of the top line for the segment over the next few quarters?

Speaker 1

Yes. I would this is Victor. I would think that's probably right, lowtomidsingledigits Organic growth, I think it's a little early to tell with certainty. I mean, again, when the defense Budget, the defense recovery moves in for us is really a little bit up in the air. Not that it's been bad, by the way.

Speaker 1

I mean, our businesses aren't doing well in absolute terms. But I would expect that later this year Possibly into next year, we would see it. I mean, I just on timing, I just don't know. Supply chain, by the way, for us, from our vendors, Like, I think, a lot of other people, still not easy. But as I mentioned in my comments, definitely improving, and our company is Across the board are saying either it's improving or at least not the ticker ratings.

Speaker 1

So that's a good sign.

Speaker 3

Okay. And even when

Speaker 6

I do the add backs for the ETG margins, it still seems like it's obviously a little bit lower than it's been. Was there anything structurally different in the segment or maybe higher costs associated with maybe some investments in pre buys? How should we think about sort of the core ETG margins, obviously excluding the amortization and of course the Accellia impact?

Speaker 2

Sure. And that's what I was alluding to

Speaker 1

in my remarks is that over time people have said to me, look, and on these calls in particular, where do you think The margins are going to be and I would say, listen, I don't know exactly, but I think if you kind of think of where we are, We were, which is kind of the you've already cut the cash margin, right? Low 30s, 32%, 31%, 33%, bouncing around in that range. I've always said, listen, I think within 10% of that is probably reasonable, and that's where we're finding ourselves more or less, Before transaction expenses, etcetera. So I do think that's reasonable. And that is mix sensitive.

Speaker 1

I mean, that is definitely mix sensitive. In defense, we have some higher margin products, of which we're selling less right now. And that tends to shift Over time, but it's definitely mix sensitive.

Speaker 2

Ken, this is Carlos. This is Carlos. Just to be Clear, because we didn't include this in the $5,100,000 If you add in the ETG margin, if you add in the $5,100,000 and then throw another $1,000,000 in there Amortization costs related to the deal that's new, you get back to a margin that's very similar to what we had last year to what Rick was trying to point out.

Speaker 6

Perfect. Thanks, Carlos. Appreciate the color.

Speaker 7

You're welcome.

Operator

The next question comes from Gautam Khanna with Cowen. Please go ahead.

Speaker 7

Hey, thank you. Good morning, guys.

Speaker 1

Good morning.

Speaker 7

Hey, I just first to follow-up on Carlos' last point of clarification. So in terms of one time items at ETG in the quarter, was it the $5,100,000 plus $1,000,000 of amortization? Or was it Were there other things related to the Xcelia transaction that flowed through there?

Speaker 2

So the one time step was $5,100,000 And What I was pointing out was that we took on some additional amortization for the month of January. It was close to $1,000,000 and that relates to new amortization. It has things in there such as inventory write ups, purchase accounting, amortization. So there's an element of that, that is kind of Short term, the inventory write up only lasts for a quarter and a half or something like that or a couple of quarters. So there's an element of that additional $1,000,000 which It's not really a one time cost.

Speaker 2

We're going to have the acquisition going forward. But the point I was trying to make was that if you kind of factor all that And ETG is running around 25% operating margin, which is what we posted last year at this time. That was the point of that statement.

Speaker 7

Yes. Okay. Now that helps. Thank you. I was also curious, on supply chain, we often hear about ETG having some challenges in the supply chain.

Speaker 7

Is Flight Support also seeing supply chain challenges? And if so, kind of what is the past use there,

Speaker 3

if anything? Yes. Hi, Ghassan, it's Eric. Yes, we definitely have seen supply chain challenges within FSG. Frankly, our Sales and earnings would be even higher if we got all of these parts in, which We're not able to get at the moment.

Speaker 3

Look, I think we're doing better than most, and that's as a result of our decentralized structure. We don't do Soviet Central Planning at HEICO. We let the businesses figure out what they need. They stay very close to their Customers, that's how everything is designed and that as a result, I think we were ahead of the curve and you saw our inventories go up a year ago and now you've seen the results Having that inventory on the shelf. And now our inventories are up again, and we're going to be in position to be able to Our customers is this level of sales hopefully continues to go up.

Speaker 3

But yes, We are definitely seeing the same supply chain challenges around materials and in particular labor At our suppliers, there were aerospace products are made in relatively small quantities for the aftermarket. And you'd be surprised how many manufacturers around the world and very high quality, good manufacturers Had people retire and they sort of, if you will, lost the recipe on how to do certain processes, and I'm talking major companies. So they struggle getting people trained to be able to Replicate those processes and often make parts that have not been acceptable. So but I think things are definitely getting better in that regard.

Speaker 7

Okay. That's really helpful. And then just, Victor, if you don't mind, maybe also just elaborating on how the supply chain has improved and where maybe incrementally things got worse, if any. Just curious where you're seeing the bottlenecks still? Thank you.

Speaker 7

I mean,

Speaker 1

it's Thank you. This is It's still on the component side. And our business is by so many different components, subcomponents, Plus raw materials, things like metals and silicones and so on.

Speaker 7

Those have been easier

Speaker 1

for us, but it's Generally, on the electronic component side, I mean, an area that remains difficult, I think, for everybody in the industry, certain Items, things like FPGAs. There are some other parts and components I'm aware of where some vendors are slipping. I'd rather not call them out Publicly on this and where they keep falling short rather consistently, where we have Effectively, it's all source situations, and it's hard to dual source and things of that nature. But It is our company's close to half of our companies report to us that it's improving more than half at least Static or improving, and it's the minority who see it, very small minority going the other way. So that's what I think.

Speaker 1

We'll continue to make progress. It will be uneven on it, 1 quarter forward, maybe for the next one, a little bit backward, but generally, in the right direction. I think that's probably because People in the manufacturing chain generally, companies in the manufacturers generally, have gone out and put more on the shelves. And I think there's going to be a reversion to the mean. And that will happen over some period of time, whether it's a year or 6 or 9 months or I don't exactly know.

Speaker 7

Thank you, guys. Appreciate it.

Speaker 5

Thank you.

Operator

The next question comes from Josh Sullivan with The Benchmark Company. Please go ahead.

Speaker 1

Hey, good morning. Good morning, John.

Speaker 7

On your PMA HEICO customers, given the value of the parts offer, you talked about how customers switch over to the entire HEICO portfolio when they realize the value. Is this impacting airline long term aircraft fleet planning decisions at all? Are you seeing any data that suggests because HEICO's PMAs, Legacy aircraft can be kept profitable for longer, maybe delaying any retirement decisions?

Speaker 3

We have heard at various places that, that is a consideration. I don't know if That's also partly designed to get us to manufacture more products

Speaker 1

for our customers. But yes, we

Speaker 3

can have a Considerable impact on the cost of operation of older equipment. And when our customers commit to Long term and we give them pricing protection, we can get into an area where our Parts can be as much as 70% below the OEM after many years, and we still drive a very nice margin Andy, you're on save a lot of money. So I do think it's a factor, but I think the larger factor is The overall cost of the aircraft, what they want to do in terms of reliability, fleet simplification, all

Speaker 1

of that stuff.

Speaker 3

But There's no question that we are a major cost driver for them, especially as the aircraft get

Speaker 1

Thank you for the time.

Speaker 5

Thank you.

Operator

We'll take the next question from Louis Repetto with Wolfe Research. Please go ahead.

Speaker 2

Good morning, guys.

Speaker 3

Good morning, Mike.

Speaker 4

Eric, I guess you

Speaker 2

called out the 23% organic growth for commercial aero. So I guess Defense is up even more. Can you just sort of differentiate your defense end market versus that in ETG?

Speaker 3

So the defense market that we've got, let's see, Yes, the defense market was up a greater percentage. We do have a lot of components on in the missile defense area, and we're particularly strong there. Look, it can bounce around year over year. I'm very pleased With the numbers, we've made a big push into defense, and we're doing very nice. I would say that the big difference, Louis, is that the flight support, defense stuff in general doesn't have the Same supply constraints with regard to certain electronics that ETG has.

Speaker 3

ETG is getting more susceptible to the chip issues. And over on the Flight Support side, we don't have a lot of that. So that's really the main driver there.

Speaker 2

That's great color. It's glad to hear. I know defense is an area that's probably, I think, underwhelmed, but it's been a big So it's good to hear that you're making some headway there.

Speaker 3

Yes. It's probably It is a huge opportunity. It is a huge opportunity, and we have a big focus

Speaker 2

Carlos, Jay, back to the backlog in ETG, I think you said 856,000,000 So that's up $150,000,000 or so from last quarter. Is that the bulk of that from Exelio? Or Just trying to gauge the $856,000,000 from the $660,000,000 And again, it's a little over $700,000,000 a year. Yes. So if you're looking at Q4 backlog, yes, A lot of the majority of that, not all of it, but the majority of it is Exela adding on that we picked up in January.

Speaker 2

Just one more. There was a small change in the accrued contingency in the quarter. Just what segment that impacted? Was that sort of another headwind Within ETG or was that in FSG? That was A combination of discount rates and FX, which broadly affected both segments.

Operator

And our next question comes from Ron Epstein with Bank of America. Please go ahead.

Speaker 5

Hey, good morning guys. Just a couple of questions for you. One thing we've been hearing is that some of the Buyers, when you go down into the lower tiers of the supply chain are suffering from working capital needs and The balance sheets are kind of maybe upside down because of making investments before the pandemic and then things not playing out, like getting aggravated by the 7/37 Has that created any opportunities for you all from an M and A perspective to maybe pick up some interesting, Albeit smallholder companies that would be available today that might not have been before.

Speaker 3

Yes. Hi, Ron. This Derek, yes, I would say that there has been some opportunity in that area. But Normally, that's sort of not the area, folks who are having those issues, in general are not The companies that we're working with. So I don't anticipate it at this point being a huge opportunity for us.

Speaker 3

I mean, frankly, the large companies have to make sure that if they get paid as they have been, getting paid earlier from the government that They take care of the supply base. And I think those companies are more In that general realm. So it's not as applicable to us.

Speaker 5

Got it. And then if we think about the PMA, if you just following up on questions that you mentioned earlier, The global fleet kind of got 2 years older and everything was In a coma because of the pandemic. So you've got a fleet that's 2 years older, you've got aircraft that are that much closer to a D check. They might not be on long term maintenance contracts anymore. They might be on a warranty.

Speaker 5

Are you seeing a pickup in demand for your Just for like a 3rd detail on some of these aircraft.

Speaker 3

Yes. I think I don't have Specific information on that, but yes, I do believe that we are selling parts For checks that had not been anticipated. I don't think it's a large Part of our sales, but yes, I am aware that we are benefiting from that.

Speaker 5

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

Speaker 4

Thanks, Ron.

Operator

And it appears there are no additional questions at this time. I'll turn the call back to the speakers for any additional or closing remarks.

Speaker 1

Thank you. Again, this is Larry Mendelson, and I want to thank everybody on this call for your interest in HEICO. If you do have questions, we are available, Eric, Victor, myself, Carlos. So you can give us a call or email. And we look forward to speaking to you at the Q2 earnings call, Which will be in about 3 months from now.

Speaker 1

So have a good day you all and we'll speak to you soon.

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Key Takeaways

  • Record Q1 results: Consolidated net sales rose 27% year-over-year (31% operating), including 14% organic growth, led by a strong rebound in commercial aerospace.
  • Improved profitability: Operating margin increased to 20.8% (from 20.2%) and net income grew 7% to $93 million ($0.67/share), despite lower tax benefits and $5.1 million of acquisition costs.
  • Major acquisition: In January HEICO closed its largest-ever purchase of Exelia International, expected to be earnings-accretive in the first year and to expand its European defense and aerospace footprint.
  • Strong cash flow and balance sheet: Q1 operating cash flow was $76.7 million, net debt rose to $640.2 million (1.02× EBITDA) after the Exelia deal but remains low, with a commitment to rapid deleveraging.
  • Segment performance: Flight Support sales jumped 36% with a 22.5% operating margin, and Electronic Technologies grew 15% (organic flat) with a record $856 million backlog, as supply chain bottlenecks ease.
AI Generated. May Contain Errors.
Earnings Conference Call
HEICO Q1 2023
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