Héroux-Devtek Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

Key Takeaways

  • Erudevtech reported Q1 sales of $140.7 million, up 23.3% year-over-year, with gross profit margin rising to 14.3% on improved production throughput.
  • Adjusted EBITDA grew 43.2% to $16.4 million, while net income climbed to $4.0 million ($0.12 per share) from $1.0 million ($0.03 per share) in Q1 FY 2023.
  • Inventory investments of $25.8 million led to a net debt increase to $187.5 million and a net debt/adjusted EBITDA ratio of 2.8×, up slightly from 2.7×.
  • Workforce stabilization improved turnover by 30% (from 13% to 9%), as the company focuses on supply chain health, production optimization and contract repricing.
  • With record backlogs at Boeing and Airbus and higher defense budgets, Erudevtech’s diversified aerospace and defense order book positions it to capitalize on rebounding air travel and military spending.
AI Generated. May Contain Errors.
Earnings Conference Call
Héroux-Devtek Q1 2024
00:00 / 00:00

Transcript Sections

Skip to Participants
Operator

Good morning. My name is Sylvie. I will be your conference operator today. At this time, I would like to welcome everyone to Héroux-Devtek's Fiscal 2024 First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then one on your telephone keypad. If you would like to withdraw from your question queue, please press star followed by two. 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.

Operator

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 8th, 2023 at 11:00 A.M. Eastern Time. I will now turn the conference over to Mr. Martin Brassard, President and Chief Executive Officer, and to Stéphane Arsenault, Vice President and Chief Financial Officer of Héroux-Devtek. Mr. Brassard, please go ahead.

Martin Brassard
CEO at Héroux-Devtek

Thank you very much, Sylvie, and good morning, everyone. Welcome to our first quarter earnings conference call for fiscal 2024. I invite you to follow along by referring to the financial statements MD&A 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 first quarter sales of $141 million, 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 twelve-month sales to $570 million. We remain committed to maintaining this positive momentum that, along with our continued efforts and key initiatives, will allow us return to historical levels of profitability in the coming quarters.

Martin Brassard
CEO at Héroux-Devtek

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. 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 Stéphane for a detailed review of our first quarter performance.

Stéphane Arsenault
CFO at Héroux-Devtek

Thank you, Martin. Good morning, everyone. 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&A issued earlier today. Our consolidated sales in Q1 increased by 23.3% to 140.7 million, compared to 114.1 million last year. This improvement can be attributed to our ongoing effort to enhance our throughput. Gross profit increased to 20.1 million, or 14.3% of sales, from 12.5 million or 11% of sales last year. This increase was largely the result of increased throughput, but was partly offset by the effect of inflation on labor costs and general production supplies.

Stéphane Arsenault
CFO at Héroux-Devtek

Operating income increased to 7.5 million, or 5.3% of sales, from 2.6 million or 2.3% of sales last year, due to higher throughput, partly offset by higher selling and administrative costs, resulting from higher employee-related costs, as well as the 1 million negative impact of exchange rate fluctuation, representing 0.7% of sales. Adjusted EBITDA reached 16.4 million, up 43.2% from 11.4 million a year earlier for the same reasons. Net income for the first quarter of fiscal 2024 stood at CAD 4 million, or CAD 0.12 per diluted share, from 1 million, or 0.03 per diluted share in the corresponding period last year.

Stéphane Arsenault
CFO at Héroux-Devtek

Cash flow related to operating activities stood at a usage of 12.2 million in the first quarter, down from a generation of 12 million last year, reflecting 25.8 million invested in inventory this quarter. As of June 30, 2023, our net debt stood at 187.5 million, showing an increase compared to 165 million at March 31, 2023. This increase was primarily due to the cash flow usage described earlier. However, this quarter improved profitability partially offset the impact of the increased net debt on the net debt to adjusted EBITDA ratio. Consequently, that ratio stand at 2.8 times, up from 2.7 times reported as of March 31, 2023. Back to you, Martin.

Martin Brassard
CEO at Héroux-Devtek

Thank you, Stéphane. As you can see, our fiscal year has kicked off to a good start with a strong throughput in the first quarter 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 positions 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%. Our investment in inventory 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 a higher level of profitability, our efforts have begun to bear fruit, and the impact will be felt gradually over the next several quarters.

Martin Brassard
CEO at Héroux-Devtek

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 as they pursue their growth. In the near term, we remain focused on three 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. We will continue to strive for excellence, capitalize on opportunities, and achieve sustained growth. Sylvie, we are now ready to answer questions.

Operator

Thank you. If you would like to ask a question, simply press star, then number one on your telephone keypad, and if you would like to withdraw your question, please press star 2. Again, if you have a question, please press star one on your telephone keypad. Your first question will be from Cameron Doerksen at National Bank. Please go ahead.

Cameron Doerksen
Cameron Doerksen
Managing Director and Senior Equity Analyst at National Bank Financial

Yeah, good morning. Thanks very much.

Martin Brassard
CEO at Héroux-Devtek

Good morning.

Cameron Doerksen
Cameron Doerksen
Managing Director and Senior Equity Analyst at National Bank Financial

A question on, on inventory. Obviously, you've been investing a lot there over the last year to, to really stabilize the production system. We saw another big investment in the first quarter. Maybe you can just talk about where inventory goes from here. When do you think we would start to see a kind of a line down in that inventory investment?

Martin Brassard
CEO at Héroux-Devtek

Okay. Well, first, Cameron, is, our backlog is healthy. We have increased the backlog since March 31st. We're in a growing mode. We will stabilize our inventory. 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. We are stabilizing the, the, the inventory as we speak. Stéphane, anything to complement there?

Stéphane Arsenault
CFO at Héroux-Devtek

No, I think, this, this allowed us in the past year, right, to, to increase the throughput, and, we want to maintain that. It's still a challenging environment, but, we'll see eventually, as this stabilize, that the throughput increase, then we'll adjust the inventory accordingly.

Cameron Doerksen
Cameron Doerksen
Managing Director and Senior Equity Analyst at National Bank Financial

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, the inflation. Is, are you having some success there?

Martin Brassard
CEO at Héroux-Devtek

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.

Cameron Doerksen
Cameron Doerksen
Managing Director and Senior Equity Analyst at National Bank Financial

Okay. That's great. I'll, I'll pass along. Thanks very much.

Operator

Thank you.

Martin Brassard
CEO at Héroux-Devtek

Thank you.

Operator

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

Konark Gupta
Konark Gupta
Equity Research Analyst at Scotiabank

Thanks, operator. Morning, gents.

Martin Brassard
CEO at Héroux-Devtek

Morning, Konark.

Konark Gupta
Konark Gupta
Equity Research Analyst at Scotiabank

Morning. Just wanted to understand the margin progression a little bit. Obviously, you guys are still kind of looking at some upside or rebound in margins, right? From where you were, maybe a few years ago, 15% plus, call it. The three pillars that you mentioned, Martin, the production processes, supply chain health, and pricing, which of the three buckets you think are most important to get back to 15%?

Martin Brassard
CEO at Héroux-Devtek

They're all important, Cameron, Konark. They're all important. So, we face a lot of inflation, so we need to relook at, at the expenses, mainly in the shop supplies. Energy costs is going down now in, in Europe. Transportation is somewhat going down, too. With the stabilization of the production system, that would help also to reduce the cost into our manufacturing processes, increase efficiencies, and also, you know, the pricing structure revision with our supply chain and customers. I would not name... We're working on the three fronts. They're all important to us to get back to, the historical level of profitability.

Konark Gupta
Konark Gupta
Equity Research Analyst at Scotiabank

Okay, that's a great answer. Thank you. And then the supply chain aspect, you know, like Airbus and Boeing, they, they both came out recently, and they, they kind of, you know, 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, a constant pressure on supply chain for many more years? Or do you think the supply chain is kind of, you know, creating capacity to absorb that increase in production rate so that there's no more supply chain disruptions? You know, like, is the supply chain getting better? It's getting worse. It, it's steady for the next few years.

Martin Brassard
CEO at Héroux-Devtek

The rebound is a challenge that we're all facing, right? The demand rebounded sharply since last year. Of course, right now the demand is higher than the capacity. We are, we will adapt. The supply chain will adapt. Raw material is, is one of our concern, you know, in the industry, throughout the industry. It's all, and there's another common denominator is the skilled labor workforce. There was a lot of people, you know, that has restructured. Now we need, especially in the raw material, that we need to get back this capacity build up. But the industry will adapt. I'm confident that we will all adapt. We, we, we saw somewhat, you know, in the quarter, some stabilization, but there's gonna be some, again, bump in the road.

Martin Brassard
CEO at Héroux-Devtek

So right now the industry is adapting and, and, and skilled labor workforce and raw material are the main constraints to get up to full capacity.

Konark Gupta
Konark Gupta
Equity Research Analyst at Scotiabank

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

Martin Brassard
CEO at Héroux-Devtek

Well, the, the, the RSUs are in lieu of a stock option, so there's no more stock option. It's gonna be the RSU to replace the stock option-based compensation.

Konark Gupta
Konark Gupta
Equity Research Analyst at Scotiabank

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

Martin Brassard
CEO at Héroux-Devtek

Thank you.

Operator

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

Benoit Poirier
Managing Director and Senior Equity Research Analyst at Desjardins Capital Markets

Yeah, thank you very much. Good morning, everyone. Just with respect to your backlog, it remains at, at a healthy level. Could you provide maybe more granularity around your backlog? You've been disclosing that amount every quarter. Also, if you could provide more color about the bidding pipeline, especially after your visit at the Paris Air Show?

Martin Brassard
CEO at Héroux-Devtek

That's a great question, Benoit. Good morning. The backlog increased, you know, compared to March. We don't disclose, you know, for a year or two now, the quarterly backlog because of the timing of the orders. I think I, I, we wanted to give you some color about the, if it, the tendons or the, where the backlog would be growing. It grew. It grew, you know, it grew. Second is, after our show at Le Bourget, this is the busiest show that we have attended since 2005. My personal, you know, we were booked, fully booked, wall-to-wall, from 8:00 A.M. -11:00 P.M. Customers are great opportunities, so many projects there.

Martin Brassard
CEO at Héroux-Devtek

Again, like I said in my, in my remarks, we are well positioned to benefit from these opportunities in the defense and in the civil side. The strength of Héroux-Devtek is also the diversification of our revenue. We're not only in the civil and defense, but we're also present in all sub, sub-segments of the market. Obviously, there's a lot of interest from the OEMs to do business with us.

Benoit Poirier
Managing Director and Senior Equity Research Analyst at Desjardins Capital Markets

Okay. That, that's great color, Martin. 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, you see some opportunities on the actuation side with Safran following the, the comments made by management?

Martin Brassard
CEO at Héroux-Devtek

Yes, Benoit. We will continue to have our disciplined M&A strategy there. You saw the multiples, right? There's a lot the market is bullish about the aerospace and defense company. We are looking at some acquisition, but right now, you know, we have so many opportunities that is in front of us that we believe investing in our company will give a better return to the shareholders.

Benoit Poirier
Managing Director and Senior Equity Research Analyst at Desjardins Capital Markets

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

Martin Brassard
CEO at Héroux-Devtek

Again, and sorry, Benoit. Benoit, again, our focus, we're, we're, we're very focused, you know, on our three main actions there, that we need to get back to historical level of performance.

Benoit Poirier
Managing Director and Senior Equity Research Analyst at Desjardins Capital Markets

Good. That's great color, Martin. Last one for me. Northrop Grumman announced that they won't be bidding on the NGAD fighter, which seems to be a dogfight between Lockheed and Boeing. Given you have good relationship with both OEM, it's fair to assume that this should be a positive for you at the end of the day, Martin?

Martin Brassard
CEO at Héroux-Devtek

Yes. It, we have, we, we have the, we have relationship with all three OEMs. If I'm not mistaken, Benoit, Northrop has said that the Air Force NGAD, they're not bidding, if I read well, if I, if I correct. They're interested into the Navy NGAD. Right now, that, that's a good, good potential project for us. We're working with, with all, well, with all three of them, meaning Northrop, Lockheed, and Boeing. Those are great opportunities that are ahead of us or ahead of the industry.

Tim James
Tim James
Research Analyst at TD Cowen

Thank you very much for the time.

Martin Brassard
CEO at Héroux-Devtek

Yeah. Thank you. Thank you.

Operator

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

Jonathan Lamers
Analyst at Laurentian Bank Securities

Good morning.

Martin Brassard
CEO at Héroux-Devtek

Good morning. Good morning, Jonathan.

Jonathan Lamers
Analyst at Laurentian Bank Securities

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

Martin Brassard
CEO at Héroux-Devtek

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 140-160, 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.

Jonathan Lamers
Analyst at Laurentian Bank Securities

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, you know, around deburring and parts of the production line.

Martin Brassard
CEO at Héroux-Devtek

so it's a journey to optimize our production, our programs, our methodology. We did very good progress during the quarter. We have better hours, better throughput, in coming from our machining site, less human intervention. We continue that journey, and it ain't gonna be... It's a journey. It's a two, two, one, two, three years journey. It's a constant improvement, but the ball is rolling.

Jonathan Lamers
Analyst at Laurentian Bank Securities

Great. I'm just curious, there's 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, you know, whether on the aftermarket side or, or anything related to the step up in customer delivery rates?

Martin Brassard
CEO at Héroux-Devtek

Right now, the demand is there, Jonathan. The demand is increasingly there. Why we have more throughput and we are between the 100 and north of the 140, is better execution. 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.

Jonathan Lamers
Analyst at Laurentian Bank Securities

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

Martin Brassard
CEO at Héroux-Devtek

Thank you, Jonathan. Thank you.

Operator

Once again, as a reminder, ladies and gentlemen, if you do have any questions, please press Star followed by one on your touchtone phone. Your next question will be from Tim James at TD Cowen. Please go ahead.

Tim James
Tim James
Research Analyst at TD Cowen

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, and the supply chain challenges, et cetera, were there any deliveries or revenue that came through in the first quarter that was, was kind of a catch up from previous quarters that maybe you couldn't, couldn't get, get ship sets out the door because of supplier issues? Or was the quarter and the revenue fairly representative of what kind of the, the plan was for deliveries?

Martin Brassard
CEO at Héroux-Devtek

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

Tim James
Tim James
Research Analyst at TD Cowen

Okay, thank you. I'm just wondering as you look at the world today, the demand that you're seeing, the supply chain challenges, you've had, labor turnover slow down, which is great. 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 force you need for the most part, and it's just a matter of kind of executing on what's in front of you?

Martin Brassard
CEO at Héroux-Devtek

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

Tim James
Tim James
Research Analyst at TD Cowen

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

Martin Brassard
CEO at Héroux-Devtek

On the fixed asset front, right, it remain about the same goal, about 4% of our top line.

Stéphane Arsenault
CFO at Héroux-Devtek

...as a reference to your question for the intangible is mainly on the development program that we have. We have the T-X, right? That is being developed and the cargo actuators and CESA. These are the two main programs. We have invested about 3 million, 3.5 million this quarter. It's really timing of the payment we receive on different milestone with those customers. It will remain about the magnitude that we had in the first quarter.

Tim James
Tim James
Research Analyst at TD Cowen

Okay. My last question, I guess going back to Cam's question earlier about inventories. You mentioned that you'll, you'll stabilize them, the plan is to stabilize them here for the balance of the year. When we get through this period of, you know, supply chain challenges and uncertainty, is there an opportunity, do you think, for inventories, you know, relative to backlog or relative to revenue, to go lower again? Do you think, you know, when conditions normalize this level of inventories, again, adjusting for, for growth in the business is, is the right place to, to keep inventory?

Stéphane Arsenault
CFO at Héroux-Devtek

Yeah. Adjusting, adjusting inventory for the growth. We have so many projects, Tim, right? Like I said, in defense and civil program, Benoit, at such point, you know, on the NGAD, and then the Collaborative Combat Aircraft program. All of these programs, are very strategic for us and important for us. All in all, all being equal, you know, for the same amount of revenue, yes, the inventory should go down.

Tim James
Tim James
Research Analyst at TD Cowen

Thank you very much for your time.

Stéphane Arsenault
CFO at Héroux-Devtek

Thank you.

Operator

Thank you.

Stéphane Arsenault
CFO at Héroux-Devtek

Thank you, Tim.

Operator

Thank you. At this time, Monsieur Brassard, we have no further questions registered. Please proceed with closing remarks.

Stéphane Arsenault
CFO at Héroux-Devtek

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. 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 line.

Analysts
    • Benoit Poirier
      Managing Director and Senior Equity Research Analyst at Desjardins Capital Markets
    • Cameron Doerksen
      Managing Director and Senior Equity Analyst at National Bank Financial
    • Jonathan Lamers
      Analyst at Laurentian Bank Securities
    • Konark Gupta
      Equity Research Analyst at Scotiabank
    • Martin Brassard
      CEO at Héroux-Devtek
    • Stéphane Arsenault
      CFO at Héroux-Devtek
    • Tim James
      Research Analyst at TD Cowen
Powered by Quartr