Héroux-Devtek Q1 2024 Earnings Call Transcript

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August 8, 2023

There are 8 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's Fiscal 20 24 First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

To Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. We refer you to the press release available on the company's website for complete forward looking statement. I would now like to remind everyone that this conference call is being recorded today, Tuesday, August 8, 2023 at 11 am Eastern Time. I will now turn the conference over to Mr. Martin Brassard, President and Chief Executive Officer and to Stephane Arsenault, Vice President and Chief Financial Officer of Erudevtech.

Operator

Mr. Barthard, please go ahead.

Speaker 1

Thank you very much, Sylvie, and good morning, everyone. Welcome to our Q1 earnings conference call for fiscal 2024. I invite you to follow along by referring to the financial statements, MD and A and press release, which can be found in the Investors section of our website. We are pleased to report a strong start to fiscal year 2024, achieving 1st quarter sales $141,000,000 up 23% versus last year. This performance is the direct results of the improvements We put in place to address the challenges of the current production environment and bring our trailing 12 month sales to $570,000,000 We remain committed to maintaining this positive momentum that historical levels of profitability in the coming quarters.

Speaker 1

The aerospace demand environment is exceptionally strong at present With major aircraft manufacturers such as Boeing and Airbus reporting record backlogs. This surge in demand is a result of air travel rebounding nearly to pre pandemic 2019 levels, reflecting the strong recovery of the industry. Furthermore, the defense sector has also experienced significant growth, Driven by increasing budgets from the U. S. And several NATO countries.

Speaker 1

Our strong reputation, customer relationship, experience and proven engineering know how position us Uniquely to capitalize on these opportunities. At this time, I would like to turn it to Stephane for a detailed review of our Q1 performance. Thank you, Martijn. Good morning, everyone.

Speaker 2

As usual, please be aware that we will be referring to 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 Our consolidated sales in Q1 increased by 23.3 percent to 140,700,000 compared to $114,100,000 last year. This improvement can be attributed to our ongoing effort to enhance our throughput. Gross profit increased to $20,100,000 or 14.3 percent of sales from $12,500,000 or 11% of sales last year. This increase was largely the result of increased throughput that was partly offset by the effect of inflation on labor costs General Production Supplies.

Speaker 2

Operating income increased to $7,500,000 or 5.3 percent of sales Excuse me, the cost resulting from higher employee related costs as well as the $1,000,000 negative impact the Q1 of 2019, representing 0.7 percent of sales. Adjusted EBITDA reached $16,400,000 up 43.2 percent from $11,400,000 a year earlier for the same reasons. Net income for the Q1 of fiscal 2024 stood at $4,000,000 or $0.12 per diluted share from $1,000,000 or $0.03 per diluted share in the corresponding period last year. Cash flow related to operating activities stood at the usage of $12,200,000 in the Q1, down from a generation of $12,000,000 last year, reflecting $25,800,000 invested in inventory this quarter. As of June 30, 2023, Our net debt stood at 187,500,000, a winging increase compared to 100 and $65,000,000 at March 31, 2023.

Speaker 2

This increase was primarily due to the cash flow usage CIBERTA's earlier. However, this quarter improved profitability partially offset the impact of the increased net debt on the net debt adjusted EBITDA ratio. Consequently, that ratio stand at 2.8 times up from 2.7x reported as of March 31, 2023. Back to you, Martin.

Speaker 1

Thank you, Stephane. As you can see, our fiscal year has kicked off to a good start with the strong throughput in the Q1 CFO as a result of our efforts to stabilize our production system. Things are looking up from a staffing standpoint. While we were able to maintain 99% of our position filled last year, employee retention was an issue. I'm glad to say that our workforce has somewhat stabilized as indicated by a 30% improvement in our turnover rate compared to last year from 13% to 9%.

Speaker 1

Our investment in Inventor is helping us to mitigate global supply chain issues, Leading to an improvement in our throughput, while there is still work to be done to return to higher level of profitability, Our efforts have begun to bear fruit and the impact will be fed gradually over the next several quarters. We are well positioned for upcoming opportunities in both the Civil and Defense market segment. While our order book is already healthy, our customers have many projects and we will continue to support them Citi as they pursue their growth. In the near term, we remain focused on 3 priorities: restoring supply chain health, optimizing production processes and reviewing pricing structure with customers and suppliers. We extend our heartfelt gratitude to our employees for their unwavering support.

Speaker 1

We will continue to strive for excellence, capitalize on opportunities and achieve sustainable growth. Sylvie, we are now ready to answer questions.

Operator

Thank And your first question will be from Cameron Doerksen at National Bank. Please go ahead.

Speaker 3

Yes. Good morning. Thanks very much.

Speaker 2

Good morning.

Speaker 3

So a question on inventory. Obviously, you've been investing a lot there over the last year to really stabilize the production System. Saw another big investment in the Q1. Maybe you can just talk about where inventory goes from here? When do you think we would start see a kind of a wind down in that inventory investment.

Speaker 1

Okay. Well, first, Cameron, is Our backlog is healthy. We have increased the backlog since March 31. So we're in a growing mode. We will stabilize our inventory.

Speaker 1

We are focused on stabilizing the inventory, mainly on purchase part because raw material is a key to keep our manufacturing or machining plant busy. And so we are stabilizing the inventory as we speak. Stephane, anything to complement there?

Speaker 2

I think this allowed us in the past year, right, to increase the throughput and we want to maintain that. It's still a challenging environment, but we'll see eventually as they stabilize and the throughput increased and We'll adjust inventory accordingly.

Speaker 3

Okay. Maybe just for my second question, maybe you can talk a little about what progress you're making on repricing some of the contracts to offset the inflation. Are you having some success there?

Speaker 1

We have like I said, we have constructive discussions with customers. Yes, we have good results. We're working with our customers in full Transparent matters and we see collaboration from customers.

Speaker 3

Okay. That's great. I'll pass the line. Thanks very much.

Operator

Thank you.

Speaker 2

Thank you.

Operator

Next question will be from Konark Gupta at Scotiabank. Please go ahead.

Speaker 4

Thanks, operator. Good morning, gents. Good morning, Ron. Good morning. Just wanted to understand the margin progression a little bit.

Speaker 4

Obviously, you guys are still kind of looking at some upside, rebound in margins, right, from where you were maybe a few years ago, 15% plus, call it. So the 3 pillars that you mentioned, Martin, the production processes, supply chain, health and pricing. Which of the 3 buckets you think are most important to get back to 15%?

Speaker 1

They're all important, Conor. They're all important. So we faced a lot of So we need to relook at the expenses, mainly in the shop supplies. Energy cost is going down now In Europe, transportation is somewhat going down too. With the stabilization of the production system, that would help also to reduce the Process to our manufacturing processes, increase efficiencies and also the pricing structure revision with our supply chain and customers.

Speaker 1

So I would not name, so we're working on the three fronts. They're all important to us to get back to the historical level of profitability.

Speaker 4

Okay. That's a great answer. Thank you. And then the supply chain aspects, like Airbus and Boeing, they both came out recently and they kind of maybe affirmed most of their production rate goals For the medium term and the long term, which means that they are asking the supply chains to increase production rate As I thought before, does that make things continuously difficult for you guys given there will be a constant pressure on supply chain for many more years. Do you think the supply chain is kind of creating capacity to absorb that increase So that there is no more supply chain disruptions.

Speaker 4

Like is the supply chain getting better? It's getting worse? It's steady for the next few years?

Speaker 1

The rebound is a challenge that we're all facing, right? The demand rebounded sharply since last year. So of course, right now, the demand is higher than the capacity. So we will adapt. So the supply chain will adapt.

Speaker 1

So raw material is one of our concern In the industry, throughout the industry. And it's all and there's another common denominator is the skilled labor workforce. So there was a lot of people that has restructured. Now we need, especially the raw material that we need to get back this capacity build up. So but the industry will adapt.

Speaker 1

I'm confident that we will all adapt. So We saw somewhat in the quarter some stabilization, but there's going to be some, again, bump in the road. So right now, the industry is adapting and skilled labor workforce and raw material our domain constraint to get up to full capacity.

Speaker 4

Okay. That makes sense. Thanks. And last one for me before I turn it In the MD and A, there's some discussion about a new restricted share unit plan That was introduced during the quarter. Can you talk about what the plan is and how does that impact the compensation structure?

Speaker 1

Well, the RSUs are in view of a stock option. So there is no more stock option. So it's RSU to replace the stock option based compensation.

Speaker 4

I see. Okay. Thank you. Thanks for the answers.

Speaker 1

Thank you.

Operator

Next question will be from Benoit Poirier at Desjardins. Please go ahead.

Speaker 5

Yes. Thank you very much. Good morning, everyone. Just with respect to your backlog, it remains at a healthy level. Could you provide maybe more granularity around your backlog.

Speaker 5

You've been disclosing that amount every quarter. And also if you could provide more color about the bidding pipeline, especially after your visit at the Paris Air Show.

Speaker 1

Yes, great question, Benoit. Good morning. So the backlog increased compared to March. We don't disclose for a year or 2 now the quarterly backlog because of the timing of the orders. So I think we wanted to give you some color about the if it the tendons or the where the backlog would be growing.

Speaker 1

So it grew. It grew. 2nd is after our show at Le Bourget, this is the busiest show that we have attended since 2,005. My personal, we were booked fully booked wall to wall from 8 in the morning to 11 at night. Customers had great opportunities.

Speaker 1

So many projects there. And again, like I said in my remarks, We are well positioned to benefit from these opportunities in the defense and in the civil side. And the strength of Irubtech is also the diversification of our revenue. We're not only in the civil and defense, but we're also present in all sub segment of the market. So obviously, there's a lot of interest from the OEMs to do business with us.

Speaker 5

That's great color, Martin. And on the recent acquisition of Raytheon's actuation business, Safran management stated that they are prepared to make small divestitures if needed for antitrust reason. I was curious whether you see some opportunities on the actuation side with Jean Francois following the comments made by management.

Speaker 1

Yes, Benoit. So we will continue to have our disciplined M and E strategy there. But you saw the multiples, right? So there's a lot the market is bullish About the Aerospace and Defense Company. So we are looking at some acquisition, but right now, We have so many opportunities that is in front of us that we believe investing in our company We'll give a better return to the shareholders.

Speaker 5

That's great. And last one for me, we saw that

Speaker 1

And again, I'm sorry, Benoit, again, our focus we're very focused On our 3 main actions there that we need to get back to historical level of performance.

Speaker 5

That's great color, Martin. And last one for me, Northrop Grumman announced that they won't be bidding on the NGAD fighter, so which Seems to be a dogfight between Lockheed and Boeing. So given you have good relationship with both OEMs, It's fair to assume that this should be a part as it is for you at the end of the day, Martin?

Speaker 1

Yes. We have relationship with all 3 OEMs. But if I'm not mistaken, Benoit and Northrop has The Air Force and GAAP, they're not bidding, if I read well, if I correct. They're interested into the Navy and GAAP. So right now, that's a good potential project for us.

Speaker 1

And We're working with all well, with all 3 of them, meaning Northrop, Lockheed and Boeing. So Those are great opportunities that are ahead of us or ahead of the industry.

Speaker 5

Thank you very much for the time.

Speaker 1

Yes. Thank you for the line. Thank you.

Operator

Next question will be from Jonathan Lemmer Laurentian Bank Securities. Please go ahead.

Speaker 6

Good morning.

Speaker 1

Good morning, Jonathan. Martijn, your

Speaker 6

comments on returning to historical levels of profitability seem to me increasingly confident. For any reason, the adjusted EBITDA margin cannot get back to the pre pandemic range of around 15% to 16% over the coming year?

Speaker 1

No, there's no reason preventing us to get back there. As soon as we first stabilize our production system, we get our throughput between 140 to 160, Right. Stabilize the production system, work more efficiently and reviewing the pricing structure. I see no reason why we cannot get back to this level.

Speaker 6

And could you just update us on production initiatives that you've completed since the last quarter and Which ones are still in the pipeline? I know you have some investments in automation around deeper ring and

Speaker 1

So yes, so it's a journey to optimize and maximize our production, our programs, our methodology. So we did very good progress during the quarter. We have better hours, better throughput coming from our machining side, less human intervention. So we'll continue that journey. And it ain't going to be well, it's a journey.

Speaker 1

It's a 2 1, 2, 3 years journey. It's a constant improvement, But the ball is rolling.

Speaker 6

Great. And I'm just curious, there was a Strong acceleration in revenue growth in Q1 in both the defense and the civil sales on an organic basis. Can you tell how much of that was from improving the production throughput and whether some of it was from Stronger demand, whether on the aftermarket side or anything related to the step up in customer delivery rates.

Speaker 1

So right now, the demand is there, Jonathan. The demand is increasingly there. So why we have more throughput and we are between the 100 north of the 140 is better execution. So we need to continue to better execution because like I said, it's not the problem of having the order, it's the problem of delivering them In an efficient manner.

Speaker 6

I'll leave it there. Thanks for your comments.

Speaker 1

Thank you, Jonathan. Thank you.

Operator

You. And your next question will be from Tim James at TD Cowen. Please go ahead.

Speaker 7

Thank you. Good morning, everyone. My first question, just looking at revenue in the quarter, I'm just wondering if Given all the moving parts and the supply chain challenges, etcetera, were there any deliveries or revenue that came through in the Q1 that was kind of a catch up From previous quarters that maybe you couldn't get shipsets out the door because of supplier issues or was this was the quarter And the revenue fairly representative of what kind of the plan was for deliveries.

Speaker 2

It is representative of the plan we have to answer your question. So it's a mixed bag, so catching up, Delivering order. I think overall, it's really what we had as a plan for this quarter.

Speaker 1

Okay. Thank you.

Speaker 7

Then I'm just wondering if there if as you look at The world today, the demand that you're seeing, the supply chain challenges, you've had labor turnover slowdown, which is great. To Do you think are there any cost saving initiatives that you think are required at this point? Or is it really you've kind of you've got the footprint you need, you've got the labor For Celine for the most part and it's just a matter of kind of executing on what's in front of you.

Speaker 1

It's a matter of executing in front of us in a more efficient manner. So as soon as we stabilize labor, we stabilize the supply chain, We'll get back to cost cutting, Tim. We'll get back to operate more and more efficiently, Because people and the resource will be used to really define, to really chase discuss reduction and not change parts, right, to make the delivery.

Speaker 7

Could you comment at all on and forgive me if I missed this earlier, but your CapEx plans for fiscal 2024, is there any update there? What do you expect to spend in terms of capital expenditures on both PP and E and intangibles?

Speaker 2

On the fixed asset front, right, it remained about the same goal, about 4% of our top line. So And in reference to your question for the intangible is mainly on the development program that we have. So we have the 10x, right, that is being developed And the cargo actuators and CESA. So these are the 2 main programs. So we have invested about $3,000,000 $3,500,000 this quarter.

Speaker 2

So It's really timing of the payment we receive on different milestone with those customer. So It will remain about the magnitude that we had in the Q1.

Speaker 4

Okay.

Speaker 7

And then my last question, I guess, going back to Cam's question earlier about inventories, And you mentioned that you'll stabilize them and the plan is to stabilize them here for the balance of the year. When we get through this period of Supply Chain Challenges and Uncertainty. Is there an opportunity do you think for inventories to relative to backlog or relative to revenue to go lower again or do you think when conditions normalize this level of inventories, Again, adjusting for growth in the business is the right place to keep inventory.

Speaker 1

Yes. Adjusting inventory for the growth. We have so many projects, Tim, right? Like

Speaker 2

I said

Speaker 1

in defense and civil program, Benoit touchpoint on the NGAD and then the collaborative combat aircraft program. All of these programs Are very strategic for us and important for us. But all in all, all being equal,

Speaker 7

Thank you very much for your time.

Speaker 4

Thank you.

Speaker 1

Thank you. Thank you, Tim.

Operator

Thank you. And at this time, Mr. Bassat, we have no further questions registered. Please proceed with closing remarks.

Speaker 1

Thank you very much. Thank you, everybody. We are very proud of the of our performance and we're committed to improve our company and make our company stronger. So thank you very much and have a great day.

Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your

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Earnings Conference Call
Héroux-Devtek Q1 2024
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