Héroux-Devtek Q4 2024 Earnings Call Transcript

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May 22, 2024

There are 8 speakers on the call.

Operator

Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to Erudevtech's Fiscal 2024 Fourth Quarter and Fiscal Year 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

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 Slide 2 of the accompanying presentation available on the company's website for the complete forward looking statement. I would like to remind everyone that this conference call is being recorded today, Wednesday, May 22, 2024, at 8:30 am Eastern Time. I will now turn the conference over to Mr. Martin Barassa, President and Chief Executive Officer and to Mr.

Operator

Stephane Larssonau, Vice President and Chief Financial Officer of Ehudevtech. Mr. Barrattard, please go ahead, sir.

Speaker 1

Thank you very much, Joelle, and good morning, everyone. On behalf of all of us here in Longue, I invite you to follow along by referring to the financial statements, MD and A, press release and presentation, which can be found in the Investors section of our website. We're pleased this morning to announce a very strong quarter of sales and profitability for IRUDEFT. Our Q4 of fiscal 2024 marks the 4th consecutive quarter of growth in both revenue and profitability, a sign that our focus on stabilizing our production system is paying off. The increase in volume, along with the effect of our pricing initiatives in response to inflationary pressure drove our Q4 EBITDA margin to 18%, marking a significant 540 basis point improvement over Q4 last year.

Speaker 1

These improvements clearly demonstrate the success of the strategy we've implemented over the past 2 years, restoring the health of our supply chain, stabilizing our production system, examining our production processes to identify efficiency gains and reviewing our pricing and supply agreements to offset the effect of inflations. Beyond this, the broader aerospace and macroeconomic environment suggests more good news to come. But first, I would like to turn it to Stephane for a review of our Q4 financial performance in more details.

Speaker 2

Thank you, Martin, and 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. Our non IFRS measures are defined and reconciled in the MD and A issued earlier today. Before I begin, I would like to take a moment to congratulate our teams for their hard work on resetting the business over the past year. The results we are presenting are a clear measure of their success.

Speaker 2

In Q4, sales for the quarter rose 18% year on year to a record $184,100,000 compared to $156,000,000 last year. Civil phase rose 55 percent to $75,800,000 from $48,900,000 for the corresponding period last year, mainly driven by increased deliveries for the Boeing 777 Embraer Creator and E-two program, while defense sales rose 1.1 percent to $108,200,000 from 107,100,000 For the full year, sales stood at $629,800,000 a 15.8% increase over fiscal 2023 exceeding pre pandemic levels. Sales sales were up 42.6 percent to $243,400,000 for the same reason as the 4th quarter, while defense sales were up 3.6% to $386,400,000 mainly due to higher aftermarket business for legacy program as well as higher delivery for the Sikorsky CH-fifty 3 ks and Lockheed Martin F-thirty 5 program. These positive elements were partly offset by lower demand for Boeing F-eighteen production. For the quarter, gross profit reached 39,400,000 dollars or 21.4 percent of sales compared to $22,700,000 or 14.6 percent of sales last year, reflecting the impact of higher volume and pricing

Speaker 1

initiatives, partly offset

Speaker 2

by the effect of inflation on costs. For fiscal 2024, gross profit was up $111,100,000 dollars compared to $73,500,000 last year or 17.6% and 13.5% of sales respectively for the same reasons. Operating income for the quarter rose to $27,600,000 compared to $9,900,000 at this time last year and to $59,800,000 up from $26,200,000 for the fiscal year. In both case, the stronger performance was due to higher throughput and profitability, while also reflecting a $4,000,000 provision reversal related to a previous business acquisition, which the indemnification period has expired. Adjusted EBITDA in Q4 totaled $33,100,000 up 68.8 percent from $19,600,000 in Q4 of 2023.

Speaker 2

For the year, adjusted EBITDA was $92,200,000 versus $61,400,000 in fiscal 2023, a 50% year over year improvement. Adjusted net income in the quarter stood at $16,700,000 or $0.49 per share compared to $6,200,000 or $0.18 per share in the same quarter last year. For the full year, adjusted net income was $34,300,000 or $1.01 per share compared to 12,600,000 dollars or $0.37 per share in fiscal 2023. Cash flow related to operating activity improved substantially in Q4 reaching $19,700,000 versus $4,500,000 last year, mainly reflecting the improved financial performance. As a result, at the end of Q4, our net debt to EBITDA ratio improved to 2.3 times from 2.7 times at the same time last year and 2.8 times last quarter.

Speaker 1

Back to you, Martin. Well, thank you, Stephane. I am very proud of our teams who have worked relentlessly this year. Their ability to deliver our throughput commitments in a still challenging production environment is remarkable. Thanks to their support and dedication, we were able to deliver excellence to our clients.

Speaker 1

Thanks to our customer for their continued support and confidence. And finally, to our supplier, many thanks for helping us maneuvering in this challenging production environment. These results represent a sustainable trend of performance, surpassing our historical levels supported by lasting improvements and a record backlog of $951,000,000 The aerospace industry outlook remains very strong. Global passenger traffic is back to pre pandemic levels and the ABDA is forecasting continued growth. On the defense side, geopolitical tension have added urgency to the defense industry's effort to maintain, develop and launch new aircraft programs, and we are very active on a number of defense platforms.

Speaker 1

The high demand we are seeing from prime contractors worldwide attest to the trust and recognition our customers have in the quality, safety and excellence of our products. This recognition is further echoed in Boeing's $35,000,000 commitment to partnering with us on the development of advanced landing gear technologies via the new Aerospace Innovation Zone in Longue. Joel, we are now ready to answer questions. Thank

Operator

Your first question comes from Konark Gupta with Scotiabank. Your line is now

Speaker 3

open. Great results there, absolutely. If I can like dig into the margin performance, which was pretty strong, and I don't think we have seen something like that in a long time on a normalized basis. The volumes for grade pricing, you said, obviously, is offsetting inflation. It's not finally catching up.

Speaker 3

Probably that supports the margin expansion and based on operating leverage as well maybe right and then you probably obviously restructured the business over the pandemic to support higher margins in the future. Do you think the 18% margin is a more sort of normalized reflection of your business today? Like in Q4, obviously, it's a stronger quarter normally. But is 18% reflection of what your business is capable of today? Or was there something one off in the quarter that drove that or helped that?

Speaker 3

Or was there something that pushed the margin down? Like could you have done more than 18%?

Speaker 1

You want to go? You said a lot

Speaker 2

of things, Karnark. So essentially, we were at the same question in Q2, right? Is this a one off? I think the team is delivering right on the order we have. So what you said, the operating leverage right, all the initiative we took in the past 18 months or 2 years, right, is paying off.

Speaker 2

And I think you highlighted what was done during pre pandemic as well. So addressing, right, the cost structure during that period of time, I think everything when you sum it up, we are in very good position, right, and we are delivering on those results.

Speaker 1

And just to add there, Stefan, every business unit contribute to the bottom line. So when everybody deliver on their plan, that's what's happening.

Speaker 3

Great. No, that's great. Thanks. Now in terms of the growth profile, civil is still doing pretty well. Obviously, it is coming off a low base.

Speaker 3

It's a 777, it's rebounding and you have the Embraer platforms are also performing well. When you look at the backlog, I know you pointed out in your prepared remarks about the geopolitical tensions and all that, plus even maybe some of the aftermarket pricing is getting a lot of traction these days. Volumes are going up as well because of all the supply chain issues. I'm wondering if the backlog, which went up by 10%, was it all driven by defense or would there be any contribution from civil? And I'm asking this because we are seeing help us split out what the backlog drivers were this quarter?

Speaker 3

Thank you.

Speaker 1

Well, the backlog increase in both segments, canard. So we're very fortunate to be present in all of the segment of the Aerospace, mainly Seaville and Defense. And in all the sub segment, as you know, we're present in everything. So we see demand and the backlog. It's always important to remind that this is only from POs.

Speaker 1

It's not the committed order. So there's a time also, a time zone because if we have to include all the contracts that we signed over and above the deal, we would be well above the $1,000,000,000 mark. So we saw so like I said in my remarks, we see strong demand in both segments. And the platform, the driving platform in the Civils are 777, Creator, the Falcon, Sys X will go up in revenue, right? E2 was also the E2 jets.

Speaker 1

And in the main defense platform, we see growth in the CH-fifty three ks. We see growth in the CH-forty seven. We see growth in many defense platform. And also, the F-eighteen program will phase out, as you know, production, but we're entering in the phase that we had strategically thought back when we won that contract in the aftermarket revenue and in the MRO revenue. So we're well positioned to continue our trend.

Speaker 3

That's great. And if I can follow-up on that aftermarket comment before I turn it over. Have you seen any substantial or significant interest from customers in aftermarket? And I know you are more aftermarket in defense as compared to civil. But given the supply chain mess up right now, we are seeing globally, are you seeing a lot of demand for aftermarket products?

Speaker 3

And did you see that in the quarter as well?

Speaker 1

Not in our actual results yet, but we see that there's going to be some opportunity there, right, especially in the defense, right, that we choose up to produce or to manufacture landing gear for all the USAT platforms. So that could be a good opportunity for us. But also, it's active. But the growth is going at the same rhythm as the OE business for us.

Operator

Your next question comes from Benoit Poirier with Desjardins. Your line is now open.

Speaker 4

Hey, good morning, Martin. Good morning, Stephan, and congrats for your very strong finish.

Speaker 1

Thank you, Benoit.

Speaker 4

Yes. Just in terms of organic growth, obviously, very strong organic growth, especially on the civil side with 55% achieved in the quarter.

Speaker 5

So could you maybe provide more granularity about the contribution from

Speaker 4

pricing actions, Sapien?

Speaker 1

[SPEAKER SEBASTIEN DE MONTESSUS:] I'm sorry to interrupt. We have very, very difficulty to hear you the right side. I'm sorry.

Speaker 5

Okay. Sorry, guys. Let me see here. Okay. It should be better now.

Speaker 5

Just in terms of the organic growth, you achieved 55% for Civil in the quarter, so very strong performance. Could you maybe talk about the impact from pricing action taken? And should we expect further pricing benefits going through fiscal year 2025?

Speaker 2

Well, essentially, we have growth in the platform we listed, right, in our MD and A. So this is a continuous initiative, right. You cannot in our business have a repricing or adjusted pricing in the same fiscal year. So this will be over a couple of fiscal year that we will see the pricing effect from contract expiring and also the full benefit from the one implemented this fiscal year. So this is where we stand, but the demand is strong, right?

Speaker 2

As Marte said earlier, the order book or the backlog, we see growth in both civil and defense. And it's

Speaker 1

a combination margin improvement, it's a combination of several factors,

Speaker 5

Naimo. Okay. That's great. And this week earlier, we saw a nice announcement with Boeing. They are going to invest here in Quebec, but also in L'Anguil and IrudefTech will benefit as well.

Speaker 5

So could you talk about the positive implication and what is your expectation in terms of the benefits with Boeing going forward?

Speaker 1

Well, it's always a good news and good opportunity for us to have leaders such as the largest OEM in the world to come here and express their desire to work with us in developing new lighting gear technology. So it could be technology breakthrough, it could be new platforms, it could be everything. So it's always refreshing and it's always good opportunity fees when we have leaders in the aerospace industry that clearly expressed their desire to work with us. So we'll see where the future is going to lead us, Benoit, But we're enjoying strong relationship with many customers and Boeing is one of them.

Speaker 5

Okay. And in terms of free cash flow, very good performance. Looking at your leverage, it went down. You haven't been active in terms of buyback in the quarter. Was there any reason why?

Speaker 5

And given your leverage ratio significantly improved, is M and A now back on the table?

Speaker 1

So you see, Benoit, you said it, free cash flow was a good free cash flow quarter. We need some stabilization in generation of free cash flow before going as aggressive as we have been in the past for the NCIB. So we just want to be prudent because it's still a challenging environment. And our strategy is paying off, but let us deleverage a little bit and then we'll be back.

Operator

Your next question comes from Cameron Doerksen with National Bank Financial. Your line is now open.

Speaker 6

Yes, thanks. Good morning.

Speaker 1

Good morning. So I wanted to ask

Speaker 6

you about the bidding activity. I mean, you cited very active, especially on the defense side. Obviously, you're not going to go into specific things that you're bidding on here. But just wondering if there is business out there that you're bidding on now that would contribute to revenue growth over the next couple of years? Or is it more things that you're looking at that are kind of longer term programs?

Speaker 6

Just any color there would be helpful.

Speaker 1

It's both. It's both, depending on the system we're working on. It is both, but we're also working on that actively on long, long term platform. So you know what's happening in the U. S, you know what's happening in Europe, you know what's happening in South Korea.

Speaker 1

So of course, there's not many landing gear people, electromechanical actuation and actuation and defense specialized defense product. We have all that in our portfolio. So yes, all the business units are very active in defense programs right now.

Speaker 6

Okay. And just wondering if you can provide some, I guess, some sort of estimate around what you think the CapEx will be in fiscal 2025? Significant rebound here in the revenue significant rebound here in the revenue above the pre pandemic levels. How much more can you grow without having to, I guess, invest more in plant and equipment? I mean, I guess, the question is where were you as far as capacity utilization?

Speaker 1

It's always a difficult question to answer, but we do our forecasting over 5 years. But the thing like I explained it in the past calls, we're trying hard. The automation, reducing the machining hours is reducing the need of the CapEx. So we've started that initiatives 2 years ago. And again, that we always told you that it's between 4% to 5% of sales that you should really consider.

Speaker 1

And we continue like that.

Speaker 6

Okay. All right. I'll pass the line. Thanks very much.

Speaker 2

Maybe Cameron, right. We had mentioned in the previous quarter that pre pandemic, right, we were growing at that time and we had guidance in place at that time, anywhere between $650,000,000 $680,000,000 this is where we were going at that time. But these were with 2020 pricing, right? So inflation has come and obviously contract are reflecting more and more than the new pricing. So we have capacity ahead of us to continue to grow.

Speaker 2

And CapEx wise, it's the same answer we're giving typically, right? It's around the 5% mark. So in terms of CapEx that we're spending annually typically. So that will continue to be our plan.

Speaker 6

Okay. No, that's helpful. Thanks very much.

Speaker 1

Thank you, Cameron.

Operator

Your next question comes from Tim James with TD Cowen. Your line is now open.

Speaker 7

Thank you. Good morning. Great quarter. Just wondering, Stephane, could you comment on or provide any thoughts around sort of remaining working capital investments that are required for the balance of the year? How should we think about the need for cash to go into working capital for sorry, for the balance for fiscal 2025 at this point?

Speaker 2

Yes, sure. So as you have seen, we are in a growth mode, right? Everything is pointing out in that direction. The order book, which is 40% higher than 2 years ago, We have inventory to support a growth, especially our work in process position. We're very well positioned to start the year of fiscal 2025.

Speaker 2

So as this year is completing, I think we'll see more stabilization of our inventory over the year. So I think we pointed out at the time 18 months. I think it's going to be around that period in the next fiscal year. I think things will be stabilized in fiscal 2025. And essentially the investment as you see that we've done in inventory is in support of the growth we are entertaining in our business.

Speaker 7

Okay. Thank you. When you look at the opportunities, the bidding that you're doing, the opportunities that you see ahead, whether it's over the next couple of years or the very, very long term opportunities. Are those can those be achieved if you have success on those, can those be achieved and delivered while keeping CapEx in that kind of 5% plus or minus range? Or could there be opportunities where you have a CapEx commitment that more closely resembles going back to the, say, the 777 investment that you made many years ago.

Speaker 7

I realized that was a bit unique and one off. Could you just talk about what

Speaker 1

to give you the perspective, Tim, we've been introducing many platform over the years. If you look at where we were in 2,008 and where we are today, if you exclude the 777, these CapEx, it's easy to get in the program where you're at the beginning of our program. So your CapEx profile will go with will better match with our with the revenue. When you have obviously, when you have a 777, right, and you're at 0 and you need to produce capacity to get to 100 ships a year. I haven't seen many landing gear company doing that in the industry.

Speaker 1

So those are big challenges, and we demonstrate that we could do it. So if we don't have things like that, the 777 CapEx profile normally follows the revenue generation in a more steadier flow than when we had when we did the 777.

Speaker 2

So we have many platforms, Tim, that we have embedded growth because of these reasons that Martijn explained, right. It's investment we've done in the past years that production rates are increasing, the 53 ks is an example, right. The investment we've done in our program, either creator 6x, 10x, right. These are our program that will have increased rate or entry in service in the next couple of years. The KFX is also another example.

Speaker 2

MQ25.

Speaker 1

The MQ25. And then it can go on and on and on, yes.

Speaker 2

So to your question, I mean, those platforms, right, will enter into service or grow in rate in the next couple of years, which will accelerate our growth.

Speaker 7

Yes. I'm thinking primarily, as you've addressed Martijn, sort of future opportunities that you might win opposed to those new ones that you've got that are ramping up? And just if there's any way any of them could sort of require CapEx measured in the tens of 1,000,000 for a particular win, another 777.

Speaker 1

Another 777. It's again, it's that when you're entering in a new program, so that your customer going from 1 to 5 to 10 chipset up to and it takes 4, 5 years to get the ring, right? So you're developing these platform over and then you build up your capacity slowly, gradually, and you don't even see it, right, in the numbers. But if you have a big one where you're at 0 and you need to meet rate within a specific period of time, let's say, 2, 3, 4, 5 years, this is really where depending on the rate that will generate the CapEx above the 5% threshold

Speaker 7

Yes. When you reflect back on 777 and the CapEx that was required for that, would you do anything differently? I mean, my view is you just you got caught in the market, took an unexpected turn shortly after that investment. But it's tough to fault you for that. But with the 777 experience and the timing of the CapEx or the amount or the sort of terms of it, would you do anything different?

Speaker 7

Or if again in the future, if something similar were to come along?

Speaker 1

But also with always with experience, we can always improve. But to get that contract put us on the map, right? And it propels us to a leader in the in our field. So So financially, like you said, 777, we've built up capacity for 100 shipsets and now we went as little as 2 shipsets a year, right? But of course, we would have done something differently.

Speaker 1

We're less naive than we were in 2013, right, obviously. So I will not share that with you on the line. Line. But of course, we have experience now, and that makes us better, and we grew through this experience. So and again, like I said, and I want my shareholder to understand that is not many team would have done what we've done.

Speaker 1

Yes. Okay. That's helpful. Very proud of the team.

Speaker 7

Yes. If I could just squeeze one more in, just turning back to this quarter, specifically the Q4, was there anything that surprised you internally, if you don't positively in the quarter that or was this really all kind of running according to plan?

Speaker 1

Of course, all because we always maneuver. We're in decentralized environment, right? There's always hiccups that we need to watch out. But this one, all the stars align properly. So yes, we were surprised about these things, but our plans supported that.

Speaker 1

It seems that the strategy and all the strategy working with the suppliers, inventory, specifically stabilizing the production system, etcetera, etcetera, drove those results. But I'm not saying that we ain't going to have bumps in the road yet. We always need to be cautious because it's still a difficult environment. It's still production. The orders are there, but it's a challenging and that's why I thank the customers, the suppliers and the employees because it's really a team effort to overcome all of these challenges.

Speaker 2

Our business unit performed to that plan, Tim. So, it's just at the end the level of contingency, right, And managing the environment, right? It looks like things are stabilizing a bit, but inventory investment that we did is paying off as well.

Speaker 7

Super. Okay. Thank you very much.

Speaker 1

Have a good day, Tim.

Operator

There are no further questions at this time. I will now turn the call back to management for closing remarks.

Speaker 1

Yes. Thank you, Joel. And I could not excuse myself before closing the call to not thank our shareholder for their continued trust and confidence in our company, in our team and in our business. So thanks again for your interest level of interest and continued support in us. Thank you, and have a good day.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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Key Takeaways

  • Q4 sales rose 18% year-over-year to $184.1 million, marking the fourth consecutive quarter of revenue and profit growth and driving an 18% EBITDA margin—up 540 basis points from last year.
  • Fiscal 2024 full-year sales reached $629.8 million, a 15.8% increase over 2023 that surpassed pre-pandemic levels, with civil revenue up 42.6% and defense revenue up 3.6%.
  • Operational improvements—stabilizing the supply chain, enhancing production efficiency, and implementing pricing initiatives—helped offset inflation, expand margins, and build a record backlog of $951 million.
  • Adjusted Q4 EBITDA climbed 68.8% to $33.1 million and full-year adjusted EBITDA rose 50% to $92.2 million, while adjusted EPS for Q4 was $0.49 (up from $0.18) and $1.01 for the year (up from $0.37).
  • The company cited a strong aerospace outlook—global passenger traffic back to pre-pandemic levels and rising defense demand—and highlighted Boeing’s $35 million investment in advanced landing-gear R&D as a vote of confidence.
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