Heico Q2 2024 Earnings Report

Heico EPS Results

• Actual EPS: $0.88
• Consensus EPS: $0.80
• Beat/Miss: Beat by +$0.08
• One Year Ago EPS: $0.76

Heico Revenue Results

• Actual Revenue: $955.40 million
• Expected Revenue: $951.24 million
• Beat/Miss: Beat by +$4.16 million
• YoY Revenue Growth: +38.90%

Heico Announcement Details

• Quarter: Q2 2024
• Date: 5/28/2024
• Time: After Market Closes
• Conference Call Date: Wednesday, May 29, 2024
• Conference Call Time: 9:00AM ET

Heico (NYSE:HEI) is an aerospace, defense and electronics company that designs, manufactures, and sells a range of products and provides repair and aftermarket services. Headquartered in Hollywood, Florida, HEICO supplies replacement components, repair services and engineered systems for commercial and business aviation, military and space markets as well as for selected industrial and medical customers. The company’s offerings are focused on sustaining and improving the reliability and availability of complex equipment across its end markets.

HEICO operates through two principal business areas. Its Flight Support activities provide FAA-approved alternative replacement parts (including parts manufactured under Parts Manufacturer Approval), repair services and accessory components for jet engines, airframes and avionics, plus distribution and logistics support to airlines, maintenance organizations and original equipment manufacturers. The Electronic Technologies side develops and produces electronic, electro-optical and photonics-based components and assemblies, including power and protection products, sensors, microwave and RF subassemblies and specialty electronics used by defense primes, spacecraft builders and industrial equipment manufacturers.

The company emphasizes aftermarket and niche engineered-product strategies, serving customers worldwide and aiming to reduce lifecycle costs for complex systems through certified repairs, replacements and upgrades. HEICO has grown through a combination of internal product development and a history of targeted acquisitions that expand its technical capabilities and market reach. As a publicly traded company, it operates under stringent quality and regulatory standards typical of aerospace and defense suppliers and maintains global service and distribution channels to support its customer base.

Heico Q2 2024 Earnings Call Transcript

Key Takeaways

• Record Q2 Results: Consolidated net sales jumped 39% to a record level and operating income rose 33% year-over-year, driving net income of $123.1 million ($0.88/diluted share) and a 26.4% EBITDA margin.
• Flight Support Group Strength: Segment net sales hit a quarterly high of $647.2 million (+65%), led by 12% organic growth in aftermarket replacement parts and Wencor acquisition synergies, with operating income up 49%.
• Electronics Technologies Group Momentum: Q2 sales grew 6% to $319.3 million (4% organically) on double-digit defense and aerospace demand, boosting operating income to $75.3 million and leaving a record order backlog.
• Deleveraging & Cash Generation: Net debt/EBITDA fell to 2.45x from 3.04x in six months, and operating cash flow surged 82% to $141.1 million, targeting a 2x leverage ratio within 12–18 months post-Wencor deal.
• Positive Outlook: Management expects continued sales growth across both segments from recent acquisitions and robust product development, particularly in ETG defense offerings, while maintaining financial flexibility.

Presentation

[Operator]

Welcome to the HEICO Corporation second quarter 2024 financial results call. My name is Samara, and I will be your operator for today's call. Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties, and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements.

[Operator]

Factors that could cause such differences include the severity, magnitude, and duration of public health threats, such as the COVID-19 pandemic. HEICO's liquidity and the amount and timing of cash generation. Lower commercial air travel, 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. and/or foreign customers, or competition from existing and new competitors, which could reduce our sales. Our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth.

[Operator]

Product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales. Our ability to make acquisitions, including obtaining any applicable domestic and/or foreign governmental approvals and achieve operating synergies from acquired businesses. Customer credit risk, interest, foreign currency exchange, and income tax rates. And 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.

[Operator]

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-K, Form 10-Q, and Form 8-K. 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.

[Lawrence Mendelson, Chairman and CEO at HEICO]

Thank you very much, Samara, and good morning to everyone on the call. We thank you for joining us, and we welcome you to this HEICO second quarter fiscal 2024 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation, and I'm joined here this morning by Eric Mendelson, HEICO's Co-President and the 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 would like to take a moment to thank all of HEICO's talented team members for delivering another excellent quarter. Your focus on customers and operational excellence has provided record quarterly results for our shareholders, and I remain extremely optimistic about HEICO's future.

[Lawrence Mendelson, Chairman and CEO at HEICO]

I also want to thank everyone on the call, the HEICO team members and our customers and vendors who themselves or family members have served this great country, some of whom made the ultimate sacrifice for our freedom. I hope you had these patriots in your thoughts on Memorial Day. HEICO is proud of the role we play in support of the Armed Forces of the United States and our allies. I will summarize the highlights of the second quarter fiscal 2024 results. Consolidated operating income and net sales in the second quarter of fiscal 2024 represent record results for HEICO and improved by 33% and 39%, respectively, as compared to the second quarter of fiscal 2023.

[Lawrence Mendelson, Chairman and CEO at HEICO]

The results mainly reflect 21% organic net sales growth in the Flight Support's aftermarket replacement parts and the impact from our profitable fiscal 2023 and 2024 acquisitions, as well as improved results at ETG. Consolidated net income increased 17% to a record $123.1 million, or $0.88 per diluted share in the second quarter of fiscal 2024, and that was up from $105.1 million, or $0.76 per diluted share in the second quarter of fiscal 2023. Consolidated EBITDA increased 35% to $252.4 million in the second quarter of fiscal 2024, and that was up from $187.2 million in the second quarter of fiscal 2023. Our consolidated EBITDA margin was a very healthy 26.4% in the second quarter of fiscal 2024.

[Lawrence Mendelson, Chairman and CEO at HEICO]

The Flight Support Group set all-time quarterly net sales and operating income records in the second quarter of fiscal 2024, improving an enormous 65% and 49%, respectively, over the second quarter of fiscal 2023. The increases principally reflect the impact from our profitable fiscal 2023 and 2024 acquisitions, and strong 12% organic growth, mainly attributable to increased demand for Flight Support Group aftermarket replacement parts and repair and overhaul parts and services. Our net debt to EBITDA ratio was 2.45 times as of April 30, 2024, and that was down from 3.04 times as of October 31, 2023. We remain on track to lower our leverage to 2 times within 12-18 months post the Wencor acquisition.

[Lawrence Mendelson, Chairman and CEO at HEICO]

Cash flow provided by operating activities increased 82% to $141.1 million in the second quarter of fiscal 2024, and that was up from $77.8 million in the second quarter of fiscal 2023. At this time, I would like to introduce Eric Mendelson, Co-President of HEICO and the President of HEICO's Flight Support Group, and he will discuss the second quarter results of the Flight Support Group.

[Eric Mendelson, Co-President at HEICO]

Thank you very much. The Flight Support Group's net sales increased 65% to a record $647.2 million in the second quarter of fiscal 2024, up from $392.2 million in the second quarter of fiscal 2023. The net sales increase reflects the impact from our fiscal 2023 and 2024 acquisitions, and strong 12% organic growth. The organic net sales growth mainly reflects 21% organic growth within our aftermarket replacement parts product line. Both the legacy HEICO and Wencor operations continued to exceed our expectations, and the results prove that Wencor was an excellent investment for HEICO. Both HEICO's and Wencor's entrepreneurial culture and a record of producing high-quality products continues to produce wins in the marketplace.

[Eric Mendelson, Co-President at HEICO]

Our customers continue to find great value in our larger aftermarket product offerings for their aerospace parts and component repair and overhaul needs. Consistent with HEICO's time-tested and well-known operating philosophy, we continue to operate Wencor as a standalone business operation. However, we have made good progress working together and serving our customers. Some examples of how we are now working together include: the utilization of all HEICO and Wencor PMAs and DERs at all repair stations, commercial and defense aftermarket sales cooperation, where appropriate. Wencor e-commerce platform lists all HEICO non-competitive PMAs. Wencor is utilizing HEICO's manufacturing base to quote new products, engineering and regulatory cooperation that we expect to yield tremendous benefits for our company, and sharing best-in-class vendors.

[Eric Mendelson, Co-President at HEICO]

The Flight Support Group's operating income increased 49% to a record $148.9 million in the second quarter of fiscal 2024, up from $99.9 million in the second quarter of fiscal 2023. The operating income increase principally reflects the previously mentioned net sales growth, partially offset by higher, as expected, intangible asset amortization expense due to the Wencor acquisition, the prior year impact from the amendment and termination of a contingent consideration agreement and increased inventory obsolescence expense. The Flight Support Group's operating margin was 23% in the second quarter of fiscal 2024, as compared to 25.5% in the second quarter of fiscal 2023.

[Eric Mendelson, Co-President at HEICO]

Given that acquisition-related intangibles amortization in the second quarter of 2024 consumed around 280 basis points of our operating margin, the FSG cash margin before that amortization, otherwise known as EBITDA, was around 25.8%, which is excellent in absolute terms, and we are extremely pleased with it. The decrease in operating income as a percentage of net sales principally reflects the prior year impact-

[Eric Mendelson, Co-President at HEICO]

... from the previously mentioned amendment and termination of a contingent consideration agreement and the previously mentioned higher intangible asset amortization expense, partially offset by lower performance-based compensation expense as a percentage of net sales. Now, I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the second quarter results of the Electronic Technologies Group.

[Victor Mendelson, Co-President at HEICO]

Thank you, Eric. The Electronic Technologies Group's net sales increased 6% to $319.3 million in the second quarter of fiscal 2024, up from $301.8 million in the second quarter of fiscal 2023. The net sales increase is attributable to 4% organic growth, mainly reflecting double-digit organic net sales growth of defense and aerospace products, partially offset by lower organic net sales of other electronic products. We were very pleased to see this core ETG end market gain traction in the past quarter, even sooner than we had previously expected, as we've previously thought it would more likely be an early third quarter event when we would see that turn up. While we continue to expect quarterly variation and lumpiness in our defense net sales, we believe the overall trend over the long term will remain positive.

[Victor Mendelson, Co-President at HEICO]

The Electronic Technologies Group's operating income was $75.3 million in the second quarter of fiscal 2024, up from $68 million in the second quarter of fiscal 2023. The operating income increase principally reflects an improved gross profit margin and the previously mentioned net sales growth. The improved gross profit margin principally reflects increased net sales of defense products, partially offset by our expected decreased other electronics products net sales. The Electronic Technologies Group's operating margin improved to 23.6% in the second quarter of fiscal 2024, up from 22.5% in the second quarter of fiscal 2023. Given that acquisition-related intangibles amortization consumes around 400 basis points of our operating margin, the ETG cash margin before that amortization was around 27.5%, which is excellent in absolute terms, and we are very pleased with it.

[Victor Mendelson, Co-President at HEICO]

The operating margin increase principally reflects the previously mentioned gross profit margin and net sales growth, partially offset by lower SG&A efficiencies. Growth in net sales of defense and commercial aerospace product sales contributed to a favorable product mix during the second quarter, and we note that we finished the quarter with a record order backlog. I turn the call back over to Larry Mendelson.

[Lawrence Mendelson, Chairman and CEO at HEICO]

Thank you, Victor. Now for the outlook. As we look ahead to the remainder of fiscal 2024, we continue to anticipate net sales growth in both FSG and ETG, principally driven by contributions from our fiscal 2023 and 2024 acquisitions, as well as demand for the majority of our products. Notably, we remain optimistic on the ETG's opportunity to expand and grow its net sales of defense-related products over the next six months of fiscal 2024, and that is supported by a strong backlog. Additionally, we plan to continue our commitment to developing new products and services and further market penetration while maintaining our financial strength and flexibility. In closing, I would like to thank our dedicated and loyal team members for their continued support and commitment to HEICO.

[Lawrence Mendelson, Chairman and CEO at HEICO]

Our dedication to customers, team members, and the production of high-quality, highly engineered niche products continues to be a winning strategy in the marketplace. The end markets we serve remain very healthy, and I'm highly optimistic about HEICO's future. Thanks for all you do to make HEICO a great company. And now I would like to open the floor for questions.

[Operator]

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Robert Spingarn with Melius Research. Please go ahead.

[Robert Spingarn, Managing Director at Melius Research]

Hi, good morning, everybody.

[Lawrence Mendelson, Chairman and CEO at HEICO]

Good morning, Rob.

[Victor Mendelson, Co-President at HEICO]

Good morning.

[Robert Spingarn, Managing Director at Melius Research]

Congrats on another just excellent quarter. I wanted to dig into the businesses a little bit. So, Victor, I would start with you, and then, Eric, I have something for you as well. But Victor, in terms, you just talked about your margins and the mix improvement, and it sounds like the second half should be better, especially, based on your prior comments, I think saying something like 24% for the full year. So that implies a step up here in the second half. And is that a, is that a good number for next year? In other words, are we starting to move back toward the margins of a couple of years ago, or does that depreciation keep us from getting there?

[Carlos Macau, EVP and CFO at HEICO]

... Hey, hey-

[Robert Spingarn, Managing Director at Melius Research]

Rob's waving me down.

[Carlos Macau, EVP and CFO at HEICO]

Yeah, Rob, I'm gonna dive in here because I've had a bunch of conversations with analysts about this topic of maybe a little confusion. The 24% that's been battered around, that is what we aspire the segment's margin to elevate to. I don't know that we'll get there for the full year being an average of 24%. My comments last quarter-

[Robert Spingarn, Managing Director at Melius Research]

Okay.

[Carlos Macau, EVP and CFO at HEICO]

Yeah, my comments last quarter, that as the defense came back, that would be accretive to our margin, which we expected to come in the second half, and I thought sometime during this fiscal year, we'd post a quarter at 24% plus, and that's kind of where we're at.

[Robert Spingarn, Managing Director at Melius Research]

Okay, thank you for clarifying that. Victor, I have a little bit more qualitative one then for you. In thinking about your data and microwave division, you've got Connect Tech there, which is one of NVIDIA's largest global hardware partners, and wanted to see if you're seeing an acceleration in orders or RFPs there and other businesses within ETG to support all of this demand for data centers?

[Carlos Macau, EVP and CFO at HEICO]

Yeah, Rob, it's a good question. Connect Tech definitely is seeing increased demand for data centers and on NVIDIA products, and I would expect that to continue. Now, while Connect Tech is not a huge part of our company, it's important, and it's a great business. In terms of the other companies, I don't think we're seeing a lot related to data centers. It's not a material part of our business in ETG.

[Robert Spingarn, Managing Director at Melius Research]

Okay. And then, Eric, just quickly, in your business, just, you know, outstanding organic aftermarket parts growth at 21%. And I, I've asked you this question in the past, but is there any way to parse that in terms of, you know, for lack of a better expression, sort of same store parts growth, you know, same customers, same parts, versus pricing, versus market share gains? In other words, what's driving the 21%?

[Eric Mendelson, Co-President at HEICO]

Hi, Rob, this is Eric. So as you know, we operate a very decentralized business, and in order to drive the, you know, to capture those numbers from all of the business units, it would be very difficult, and we don't capture that. So I don't know the specific finite answer to that, but I can tell you that we've gotten a little bit of pricing. As I've mentioned on prior calls, that our customers are very comfortable with our need to pass on our increases in the cost to manufacture and our cost to do business. And so in order to maintain our margins, our prices have to go up by at least that amount. So they understand that, and we've been able to do that.

[Eric Mendelson, Co-President at HEICO]

So, there has been a certain amount in terms of price increase, you know, cost increases, driving price increases. And then as far as the balance, you know, I don't have, as I said, the specific numbers in front of me, but my guess is that it's probably, you know, I don't know, half and half. Half existing product increased penetration and half the sale of new products that hadn't been sold in a year ago period.

[Robert Spingarn, Managing Director at Melius Research]

Mm-hmm, mm-hmm.

[Eric Mendelson, Co-President at HEICO]

That would, that would be my guess. Some of the businesses do capture this, so I am able to see it for certain companies, and that's why I, I'm able to say what I just said. But that, that's sort of my, my feeling on it. But we, you know, we are not a price increase story, so it, it's not, we're not driving these 21% returns, a 21% increases because we're raising price 21%. It, it, you know, my, my guess is that price would be, you know, far less than a third, maybe even less than-

[Robert Spingarn, Managing Director at Melius Research]

Makes sense

[Eric Mendelson, Co-President at HEICO]

... even less than a quarter of that number. So, most of it would be volume increases.

[Robert Spingarn, Managing Director at Melius Research]

Okay. And then just as a final sort of follow-up to that, we know that turnaround times for LEAP and GTF engines are significantly longer than they are for the prior gen CFM56 and V2500, and part of this is the lack of approved DERs and PMAs for LEAP and GTF. So knowing that these programs are early in their life cycle, I wanted to see if you've started to work on those, and what kind of ramp we might expect for HEICO's activity or FSG's activity on these two new engine types?

[Eric Mendelson, Co-President at HEICO]

So, Rob, that's a great question, and as you know, we're very sensitive about giving specific information due to competitive reasons, as you can imagine, on any particular platform. But I can tell you that we have our eyes on, you know, new platform opportunities. Yes, we're willing to develop some product, you know, based on speculation that we'll be able to sell it, but we really need to make sure that the customers will be there and commit to us. You point out in your question the basis and the reason why we exist and why our customers want us to exist, and I, I agree with you. I think that if there were alternative sources of supply, the situation wouldn't be as dire as it is.

[Eric Mendelson, Co-President at HEICO]

But at the moment, I'm gonna have to pass on really where we are at that point. But needless to say, we've got people focused on all parts of the market.

[Robert Spingarn, Managing Director at Melius Research]

... Fair enough. Thanks, everyone.

[Eric Mendelson, Co-President at HEICO]

Thank you, Rob.

[Operator]

We'll take our next question from Sheila Kahyaoglu with Jefferies. Please go ahead.

[Sheila Kahyaoglu, Managing Director in Equity Research at Jefferies]

Good morning, everyone, and great quarter. Thank you so much.

[Eric Mendelson, Co-President at HEICO]

Good morning, Sheila.

[Sheila Kahyaoglu, Managing Director in Equity Research at Jefferies]

Good morning, Eric. Just on your prepared remarks, you made a few comments about Wencor and how you're working together, and you're starting to see those results. I was wondering if you could quantify that in any way, or how you're tracking that internally. Are you looking into parts sold into a certain customer and the increase as you combine the sales force? Maybe if you could elaborate there.

[Eric Mendelson, Co-President at HEICO]

Got it. So, the answer is we don't specifically capture what those numbers are. It's very hard to capture. And what we're just trying to do is get the businesses to do what's in their interest and do what's in their customers' interest, and the combined HEICO interest. So unfortunately, I don't have a number, but I can tell you that, you know, just breaking down, looking at the various areas, the use of the Wencor PMAs, Wencor and HEICO PMAs and DERs at the repair stations is very significant. You know, we always said that the product selections from both companies were extremely complementary. There was not a lot of overlap.

[Eric Mendelson, Co-President at HEICO]

So you can just imagine when overhauling an LRU, by being able to purchase each other's PMAs, which to a certain extent was done, you know, pre-acquisition, but by being able to use each other's DERs and being able to rationalize where we overhaul these products, you know, we've got multiple repair stations that are obviously strong in certain areas and weaker in other areas, and they've been able to, by themselves, and without me orchestrating this, they've been able to share the technology and figure out where it makes sense to swap product lines, swap technologies. And as a result, it's really hard to measure this stuff. So we really don't even try. As far as the aftermarket sales cooperation, I'd say that's been excellent in terms of opening doors for each other.

[Eric Mendelson, Co-President at HEICO]

We've had meetings with airlines who are so excited that we have the potential of putting all of these increased number of products together and really provide a very, very unique service. And I can tell you, the airline support has been extraordinary. We thought that it would be good, but it is really off the charts outstanding. In terms of the defense aftermarket, we've already... There are all sorts of examples where in the international market, we were procuring parts from other sources. Now we're buying, the legacy HEICO companies are buying it from the Wencor companies and vice versa. So that's working extremely well. Having the... You know, we are able to see when we list the HEICO parts on the Wencor platform, we are able to see what that is, and that's been excellent and very good.

[Eric Mendelson, Co-President at HEICO]

In terms of manufacturing new products down the road, Wencor has a very aggressive new product development program, and having all of the 10 HEICO manufacturing businesses open to manufacture products makes a lot of sense, and I think is really gonna benefit future quarters. That hasn't benefited yet, it benefited the numbers. In terms of engineering and regulatory cooperation, that's substantial. By pooling the talents of both businesses, we're able to get a lot more done, and I can tell you in discussions also with the FAA, they're very excited about that as well, and then obviously sharing best-in-class vendors. So I'm sorry that I can't give you a specific number, but I think you see it in our organic growth and in our margin expansion, which is frankly beyond where I thought we would be.

[Eric Mendelson, Co-President at HEICO]

I'm just so happy with the results that I'm letting them speak for themselves.

[Sheila Kahyaoglu, Managing Director in Equity Research at Jefferies]

No, really appreciate that, Eric. And then maybe I wanted to ask another one on price. I know you said the top line contribution is about a third or a quarter of your growth. How do we think about that net price impact? And should we see that discount to the OEM narrow as it's widened throughout the last four years? Do we see that narrow, and do we see the Wencor coming through and all your efforts coming through with new product development and higher net price, even as inflation comes down? Does that make sense?

[Eric Mendelson, Co-President at HEICO]

No. Yeah, I understand your question, and I can tell you that our prices that we sell as a percentage of OEM, I would say, are unfortunately at an all-time low. So the OEMs have raised prices faster than we have raised prices. We want to make sure that, you know, as I said, that we need to pass on. Nobody wants a price increase, and you know, while it appears easy, I must say that I you know, I understand and I know what it feels to walk in our sales folks' shoes trying to get these price increases, because even though costs are going up, nobody wants to take a price increase, especially when you you know, when you're delivering so much value. So while we have been successful in recapturing our increased costs.

[Eric Mendelson, Co-President at HEICO]

And, you know, plus a little bit in some cases, at the percentage of OEM at which we sell our parts is, as I said, at an all-time low. And, you know, we're in the market capture space, and we think that we can continue to drive exceptional value for our customers by, you know, maintaining this philosophy.

[Sheila Kahyaoglu, Managing Director in Equity Research at Jefferies]

Got it. Thank you.

[Eric Mendelson, Co-President at HEICO]

Thank you.

[Operator]

We'll take our next question from Scott Deuschle with Deutsche Bank. Please go ahead.

[Scott Deuschle, Director at Deutsche Bank]

Oh, hey, good morning.

[Eric Mendelson, Co-President at HEICO]

Good morning, Scott.

[Victor Mendelson, Co-President at HEICO]

Good morning.

[Scott Deuschle, Director at Deutsche Bank]

Hey, Carlos, can you give us an update on the operating margins you think FSG should be able to do this year? It looks like you're tracking a good bit higher than the 21%-22% range you outlined previously.

[Carlos Macau, EVP and CFO at HEICO]

The FSG is performing exceptionally well right now. And the caution I'll throw at you is number one, you know, obviously, we're a conservative bunch, and I'm not sure at this point, once we get through this, what I'll call exceptional growth period, and the mix within the segment kind of flattens out or settles out. I'm still thinking that, you know, maybe it's towards the high end of 22 for sort of thinking out long term, once we settle in. But I, you know, wouldn't. I don't wanna guide or get you guys thinking about us having 23+% margins.

[Carlos Macau, EVP and CFO at HEICO]

Now, I don't see impediments in front of us to, to continue to have these strong margins, but I do think that as the footprint settles down, we'll, we'll just see a natural tendency to have the margin come down a little. And by the way, the reason for that is during the quarter, we had exceptional growth in our, in our aftermarket parts business. Repair and overhaul was strong, not as strong as the parts business, and especially products was a little flat on the commercial OEM product build side. So I think as those segments, their growth patterns get back to normal, we might see a slight depression off that 23%, but not a ton.

[Scott Deuschle, Director at Deutsche Bank]

Okay.

[Carlos Macau, EVP and CFO at HEICO]

Does that answer your question, Scott?

[Scott Deuschle, Director at Deutsche Bank]

Yeah, it does. I mean, you did 22.5%, though, on the first half, and typically, your second half is stronger. I'm just trying to figure out what drives it down second half versus first half. So it sounds like that's kind of what you're teeing up.

[Carlos Macau, EVP and CFO at HEICO]

At some point, it's gonna be mixed. I'm not so sure that we are gonna lose momentum in what I'll call, you know, exceptional growth this year. So we probably will have margins that bounce around.

[Scott Deuschle, Director at Deutsche Bank]

Right.

[Scott Deuschle, Director at Deutsche Bank]

But, you know, I can't predict the exceptionalism of our team members. I mean, the operations and the way they're running the business now to keep up with the demand that's out there, to deal with this growth and employees and everything, they're just doing an exceptional job. So, you know, I'd hope this margin would continue. I'm just cautioning you that my view is once the mix settles in, you know, if we're running 21-22, we're gonna be very happy as a management team.

[Eric Mendelson, Co-President at HEICO]

And Scott, this is Eric.

[Eric Mendelson, Co-President at HEICO]

Scott, this is Eric, and I can tell you, and this is a shout-out to our many team members who I think are on this call, but HEICO has got the biggest bunch of sandbaggers that you've ever—that I've ever seen. And one, they're super talented. This is not meant to take away from their achievements, because their achievements are nothing short of incredible and amazing. However, having said that, as Carlos said, they tend to be very conservative. We joke around internally, Carlos and I call them sandbaggers. They know who they are, and they—

[Scott Deuschle, Director at Deutsche Bank]

Well, I think Carlos is a sandbagger, too.

[Eric Mendelson, Co-President at HEICO]

Oh, come on! Well, well, understand that we're just taking these numbers and rolling them up. And, you know, when we go and talk to them about, "Come on, you're performing at this, why is the number gonna go down?" They got 22 possible reasons, including a meteor strike and you know, all sorts of crazy stuff that could cause it. And as a result, we really take up the numbers and we even add a positive contingency very often to it, because we know that they're low. But it is very hard to, it's very hard to quantify. And the reason I don't, if you will, fight the sandbagging, is because it encourages them to look at all of the areas of potential risk.

[Eric Mendelson, Co-President at HEICO]

There are all sorts of things. It's a Herculean effort to achieve these numbers, and there are all sorts of things that can go wrong in the supply chain and with technology and processes, all sorts of things. They are very much focused on what can go wrong, and as a result, since they work so hard to mitigate those factors, they, most of the time, almost always, overperform. So that's sort of where we are in it. I mean, look, we're hoping to do better, but, you know, the, based on the numbers that we've got and the variations in the business cycle, this is what it rolls up to, so we, we just sort of go with that.

[Scott Deuschle, Director at Deutsche Bank]

Okay. Yeah, I appreciate that. Hey, Eric, I guess, while I have you, if, if I go back to 2022 and the first half of 2023, the specialty products was growing, like crazy. And I guess a lot of that was driven by munitions, but the growth rate has slowed quite a bit since then. So I guess my question is: Do you have a sense for when we might expect to see specialty products return to, you know, stronger growth profile? And then, you know, what you need to see in order for that to happen.

[Eric Mendelson, Co-President at HEICO]

Got it. So, the short answer to that is in fiscal 2025, we think is when it's gonna happen. I do wanna mention that actually, we don't make—HEICO doesn't make any munitions. I think what you're referring to is missile defense. So we are very active on missile defense interceptors, and we, we have a, you know, a high content there and, you know, on other missile platforms. But typically, it's more in the defense area, although I suppose there, there is some in, in the offensive, but it's, it's we don't make the explosive, the explosives themselves. When you look at the numbers, we're anticipating next year is going to be very strong. We've had significant ramp-ups in a number of businesses, and we have significant orders on the books, and now we've just got to produce.

[Eric Mendelson, Co-President at HEICO]

And-

[Carlos Macau, EVP and CFO at HEICO]

Record backlog.

[Eric Mendelson, Co-President at HEICO]

Record backlog. We're really very, very good in the specialty products area, so I'm anticipating very good results in 2025 on that.

[Carlos Macau, EVP and CFO at HEICO]

But by the way, Scott, one thing to point out with that defense business, just like in the ETG, it can be incredibly lumpy, and I think that's what Eric's pointing out. You have to ramp to serve these big projects, and, you know, their backlog is at record high, and we do expect good things in 2025. Not to say this year I don't expect growth, but just 2025, you know, is going to be a big growth force in that area.

[Scott Deuschle, Director at Deutsche Bank]

Got it. Still margin accretive growth like it's historically been?

[Carlos Macau, EVP and CFO at HEICO]

Yeah, on the defense side, that's correct.

[Scott Deuschle, Director at Deutsche Bank]

Got it. Thank you.

[Eric Mendelson, Co-President at HEICO]

Thank you.

[Operator]

I'll take our next question from Larry Solow with CJS Securities. Please go ahead.

[Larry Solow, Managing Director at CJS Securities]

Great. Great, thank you. Good morning, everybody. First question, it's just on the disparity between the really great growth in the parts business, 21%, and sort of the mid to high single digits, it sounds like, on repair and service and overhaul. Is that difference, you know, or part of that difference where you're capturing market share gains, or is that too simplified of a way to look at it?

[Eric Mendelson, Co-President at HEICO]

Yeah, I think there are some market share gains there. Hi, Larry, this is Eric. There are market share gains. I think that in the parts area... Remember, our business, you know, we typically ship discrete parts, so if we've got the part on the shelf, we're able to sell it. Whereas in the component repair business, we're really beholden to the supply chain. You know, we can have an LRU that's got a few hundred different part numbers in the bill of material, and one part is being held up, which actually is the case in many different businesses, and we can't ship it. And we've got this big backlog, and it's basically just sitting there. So that, you know, that's sort of I think what's also going on there.

[Larry Solow, Managing Director at CJS Securities]

Gotcha. And a question maybe for Carlos. Just, I did notice there was a bit of a contingency reversal in the quarter. Was that in FSG?

[Eric Mendelson, Co-President at HEICO]

Um, um-

[Carlos Macau, EVP and CFO at HEICO]

Yes, it was. Yes, it was. So, this quarter, we had a about. It was like a net $4 million. It was a $6 million reduction in the contingency, and then we had some inventory reserves we took for a product line. And so we had about a $4 million net pickup in the margin related to contingent earnout reversal, and that was due to an acquired contingent earnout through the Wencor acquisition.

[Larry Solow, Managing Director at CJS Securities]

Gotcha.

[Carlos Macau, EVP and CFO at HEICO]

Now, remember that-

[Larry Solow, Managing Director at CJS Securities]

The Wencor itself - Yeah, go ahead, please.

[Carlos Macau, EVP and CFO at HEICO]

Remember, that's, that's on our numbers right now, that's maybe 0.5 point to the margin. Last year, we had, if you recall, in the same quarter, we had a $9 million reversal for the renegotiations of a contingent earnout, and that was even more impactful to our margins. That was maybe 1.5% or something like out of the margin. So, you know, net, net, it was actually a headwind for this quarter.

[Larry Solow, Managing Director at CJS Securities]

Year over year, but maybe that gives us a little bit of a reason for a little bit of a sequential decline going to the back end of the year. There was a little bit of a benefit this quarter, I guess. And just, just in terms of Wencor-

[Carlos Macau, EVP and CFO at HEICO]

I appreciate you supporting us on that.

[Larry Solow, Managing Director at CJS Securities]

Yeah. Yeah, yeah, absolutely. Just, just on Wencor, Eric, you, you mentioned sort of this still operating as a standalone, and I think that that's the beauty of your, of, of HEICO and most of your subsidiaries kind of run autonomously. Being that Wencor is so large and, and somewhat has a lot of similarities with your, your core PMA parts, business and distribution and whatnot, are there opportunities to, you know, to sort of merge, you know, blend those two companies more together than, than the normal HEICO, you know, way you operate?

[Eric Mendelson, Co-President at HEICO]

Hi, Larry. So that's a great question. A lot of people have wondered about that. And as you know, HEICO has the unique ability, which you don't typically find in a company of our size, to operate businesses in the similar or same spaces and to sort of direct traffic so they don't hurt each other, and make sure that we maintain the entrepreneurial spirit. And I think that is the single most important thing that we can do. Just last week, I was at the Aerospace Industries Association Board of Governors meeting, and actually, PwC did a wonderful presentation speaking about what's going on in terms of the employment trends in the aerospace market.

[Eric Mendelson, Co-President at HEICO]

What was interesting is that the lack of interest from people with regard to aerospace is not due to the mission of aerospace or even the defense part, because, you know, some people are sensitive about that. It's not due to the earnings level. It's due to the fact that when people join large companies, they feel pigeonholed, and they don't feel like they have—they're able to get a good experience. And I think that that's the unique thing about HEICO. We recognize that there's no question there's synergy. You know, if we can functionally put things together, we can drive certain processes, eliminate costs, and do all that.

[Eric Mendelson, Co-President at HEICO]

But what it does in the process is it kills the entrepreneurial nature, the enthusiasm, the desire to stay up late, to work late, to make sure that you accomplish what your customer needs, where you have full responsibility for the product, from selecting it, designing it, manufacturing it, procuring or manufacturing, and inspecting it, selling it, accounting for it. And this is what is very, very motivational to our team. So to answer your question, no, there's no plan to put this together. However, there is the opportunity to cooperate.

[Eric Mendelson, Co-President at HEICO]

And frankly, with the organic growth that we've got, if we could just have these businesses work together and become more efficient but still retain their entrepreneurial spirit and their individual focus, there are tremendous cost benefits by just giving our internal people the internal promotional opportunities and not having to go outside and hire more people. So, I don't see, if you will, cost synergies in terms of job reductions. But I do see the opportunity for our people to put their heads together and figure out. You know, we've already gotten to the point where one plus one equals two and a half, but I think we're going to continue to focus, so one plus one can equal three or four or five.

[Eric Mendelson, Co-President at HEICO]

That's really the focus, and it's not going to be through job cuts, you know, the way some other companies handle this kind of thing.

[Larry Solow, Managing Director at CJS Securities]

Got it. I appreciate that, Carl. If I could just slip one in for Victor, if you guys don't mind. Just, Victor, 4% organic growth, double-digit defense, on the defense side. What was sort of the standouts on the offsets on the negative side that kind of offset some of that growth on the other products? Anything, extraordinary there?

[Victor Mendelson, Co-President at HEICO]

Yeah, Larry, thank you for the question. It's a good question, and I was feeling neglected, so glad to answer your question.

[Larry Solow, Managing Director at CJS Securities]

Absolutely.

[Victor Mendelson, Co-President at HEICO]

But all kidding aside, the weakest part was the other markets, you know, the non-aerospace and defense markets, which you may recall in the last couple or several calls, I said to anticipate that being lower, and I would expect order rates to start to tick up in the back half of the year. I'm not sure whether it's the third or fourth quarter, but you know, we're certainly seeing some green shoots here and there, though not across the board. But that is the case, and it's really a result of customer inventory channels.

[Victor Mendelson, Co-President at HEICO]

They had stocked up and, much the same way a lot of companies in our industry have done, and our industries have done, and I think they're working off those inventories at this point, and that'll continue for a little bit longer. And then you add a lead time in after the orders start to turn, so we had a little lead time. So I'm optimistic about those businesses, but I think we have probably, I don't know, a couple quarters or so left to go on negative comparisons.

[Larry Solow, Managing Director at CJS Securities]

Got it.

[Victor Mendelson, Co-President at HEICO]

Um-

[Larry Solow, Managing Director at CJS Securities]

Thank you. Thanks, everybody.

[Victor Mendelson, Co-President at HEICO]

You're welcome.

[Larry Solow, Managing Director at CJS Securities]

Awesome. Thanks.

[Eric Mendelson, Co-President at HEICO]

Thanks, Larry.

[Operator]

Our next question comes from Peter Arment with Baird. Please go ahead.

[Peter Arment, Senior Analyst at Baird]

Yeah, good morning, everyone. Thanks, thanks for all the details and, and great quarter. So Eric, I wondered, you, you made in your prepared remarks, you made some comments about, you know, kind of the partnership that you, with Wencor and your traditional PMA business. You mentioned Wencor is utilizing HEICO's manufacturing base to quote new products. Just curious to get more color on that, what kind of opportunity that is for, for, for Wencor?

[Eric Mendelson, Co-President at HEICO]

We think it's pretty substantial. Wencor has an excellent vendor base, and they remain loyal to that vendor base. They're not, in general, moving product from, you know, established vendors who are making it. However, as you know, the industry supply is very tight right now, even in the HEICO businesses. And we have the opportunity to redirect capacity, frankly, in our specialty products group, more towards the HEICO businesses. And I've been out there working with, you know, the head of our specialty products group and I are working with our individual businesses to explain the virtue of manufacturing for HEICO and Wencor, as opposed to only, you know, third-party customers.

[Eric Mendelson, Co-President at HEICO]

Because, you know, when third-party customers, they're great, and we wanna stay focused on them as well, but when it's an internal customer, you know very clearly what's going on competitively, and we're able to move priorities for them. So, and also able to really focus on the quality. I mean, that's been a key, key focus for HEICO and for Wencor in terms of making sure that the products that we supply are the absolute best in the industry. So I think this is something that will start to pay dividends in 2025 and after, both in terms of more timely deliveries to our-

[Eric Mendelson, Co-President at HEICO]

... internal customers, as well as frankly, profit margin that our, specialty products companies can make by supplying these high-quality parts to the HEICO companies. There's a lot of stuff that we can do. You know, there are 10 different businesses in our specialty products group, and they all have unique capability, and I think there's opportunity in the vast majority of them.

[Peter Arment, Senior Analyst at Baird]

Perfect. I think that's great color. And then just, Eric, just staying with you on just what you're seeing from an international travel perspective, what are you seeing, any pockets of strength or weakness or anything to call out on a regional basis? Just curious on that.

[Eric Mendelson, Co-President at HEICO]

So I spoke with all of our sales heads last week and went over all the details, and we're seeing tremendous strength around the world. The Americas remain strong, as well as Europe and Asia, Middle East, China. So we're seeing very good strength across the board. You know, the market seems extremely strong. People wanna travel, both for business as well as leisure. So things look good. I wouldn't say there's one or two areas of particular strength. I'd say it's very broad-based.

[Peter Arment, Senior Analyst at Baird]

Great. And then just quickly on Victor, on... You had some, I guess, some timing delays in Q1. Just, you know, how is the supply chain or looking for your ETG when you think about obviously, kind of, the back half of the year? How are you thinking about that?

[Victor Mendelson, Co-President at HEICO]

Hi. Yeah, this is Victor. So, you know, I think our supply chain has pretty much returned mostly to normal. I don't think companies talk too much about and focus too much about supply chain issues, small supply chain issues that were in the noise level then. But certainly, people are no longer afraid to do that. But it seems to me as though things are maybe not quite entirely back to normal, but fairly close. There are still some pockets here and there where some lead times are extended or deliveries are delayed. But again, my sense of it is that wasn't unheard of before the pandemic either. We just didn't really hear much about it.

[Peter Arment, Senior Analyst at Baird]

Okay. And your R&D efforts, Victor, I know you guys called that out in Q1. Just, you know, is that for, you know, existing orders, or is there new opportunities that you're really pursuing?

[Victor Mendelson, Co-President at HEICO]

It's a combination. I mean, our R&D activities in ETG remain very strong. It's a key part of what we do. And that's for some of it's, you know, customer funded, shows up as revenue, NRE and things like that. But a lot of it is related to product development for future products. And, you know, in the aerospace industry, generally speaking, the R&D expense, if you start something today, it takes time, years before it turns to revenue or meaningful revenue. So we have to keep that constant investment going. I think it's something we've been very successful with, and our subsidiaries have been very successful with over a long period of time.

[Eric Mendelson, Co-President at HEICO]

Yeah, Peter, we spend roughly 3%, sometimes 4% of sales on R&D. That's pretty consistent, and that's what we saw this quarter. And company-wide, I should say.

[Eric Mendelson, Co-President at HEICO]

ETG is probably higher than that, for a variety of reasons, you know, because we have some businesses. ETG is probably above 5%, on R&D.

[Peter Arment, Senior Analyst at Baird]

Terrific. Thanks, guys. Appreciate all the details.

[Operator]

Our next question comes from Bert Subin with Stifel. Please go ahead.

[Bert Subin, Managing Director at Stifel]

Hey, good morning, and thank you for the questions.

[Victor Mendelson, Co-President at HEICO]

Good morning.

[Bert Subin, Managing Director at Stifel]

Victor, maybe just to start with you, you know, you gave some good color on ETG and what you're seeing there. You've seen a little bit of volatility in your organic growth over the last several quarters. As we think forward, do you expect that to stabilize, and do you still see that group on track for the mid-single-digit growth you thought you would see in 2024?

[Victor Mendelson, Co-President at HEICO]

Yeah, you know, historically, this has been the case for ETG, that it's volatile growth quarter by quarter. And I would expect that to continue to be the case. I don't think we've suddenly reached a different run rate, but I think the overall trend is a positive and upward trend. And you know, that's supported by the backlog, it's supported by quote activity, and other things.

[Bert Subin, Managing Director at Stifel]

Got it. Okay. And then, Eric, one for you-

[Victor Mendelson, Co-President at HEICO]

Carlos was gonna add to that.

[Bert Subin, Managing Director at Stifel]

Sorry.

[Carlos Macau, EVP and CFO at HEICO]

I just wanna-

[Bert Subin, Managing Director at Stifel]

Okay, sorry.

[Carlos Macau, EVP and CFO at HEICO]

Interject. We, Bert, we still expect low- to mid-single-digit growth in ETG for the year, which that statement implies volatility, if you think about what, you know, what we've done to date versus the next two quarters. So I think Victor's right, it's gonna be up and down, but we do expect a low- to mid-single-digit growth for the year organically.

[Victor Mendelson, Co-President at HEICO]

Yeah.

[Bert Subin, Managing Director at Stifel]

Got it. Okay, thank you. On the FSG side, this question for you, Eric, maybe just a little more high level. You know, a lot of what you're seeing would seem like on the, the volume side for parts and, and in terms of, you know, what you're expecting in repairs has, has been driven by, you know, a variety of macro features, but largely the, the combination of the, the global, the aging global fleet, you know, air travel demand, what we've seen there, and, and just depressed inventory. Carlos, you made some comments about, you know, some normalization in what you're seeing today over time. Like, how do you think about those, you know, those macro trends as you look out? It sounds like from what you were saying, Eric, you're seeing strength across the board.

[Bert Subin, Managing Director at Stifel]

Is there anything concerning you that might change in the near term?

[Eric Mendelson, Co-President at HEICO]

So Bert, that's something that we think about all the time. However, in order to be in this industry, you've gotta really have a long-term view. And, you know, we never know what's gonna come around the corner, but we've gotta be well positioned for everything. So we're fundamental believers in commercial and military aviation. You know, we think that these are really good spaces to be in. We understand them extraordinarily well. We're really appreciated by our customers. Yes, there is, you know, tremendous strength. Yes, there is a certain percentage of the fleet that's down as a result of, you know, issues that are going on. But we also have a fleet, a massive fleet of 20-something thousand aircraft that's aging one year per year, and most of the other major players out there increase price very substantially.

[Eric Mendelson, Co-President at HEICO]

So we think that we're in a very good area. Could there be a little air pocket here or there? Sure. That could absolutely happen, but that's why we don't like to be overlevered, and we wanna make sure that we've got plenty of cash to always do the right thing, to continue our successful acquisition program, which is key to everything we do. And we're gonna be very strong no matter what happens out there. So... and then also to point out the obvious, I mean, every roughly nine years, ten years or so, there's always some black swan event. The last one, of course, was the most dramatic. But look at how strong we've emerged from it.

[Eric Mendelson, Co-President at HEICO]

And when we look at ourselves as a percentage of what we were doing in 2019, I mean, this company has absolutely transformed for the better, and grown tremendously, both organically and via acquisition, you know, since then. So we don't worry about, you know, the if, if you will, the little, the little, air pockets or, you know, what could be happening down the road. I mean, I could paint a scenario where, I mean, look, we hope that, the new manufacturer gets straightened out because we have we can benefit very well as a result of that. And we hope the world economy remains strong, and people wanna travel, and all that capacity is soaked up. It becomes impossible for anybody to calculate.

[Eric Mendelson, Co-President at HEICO]

So we just keep our heads down and focus on the business, and I'm very confident we're gonna do well.

[Bert Subin, Managing Director at Stifel]

Thanks for that, Eric. Just one quick follow-up for Carlos. On the interest expense side, you know, Eric just mentioned, you know, not wanting to overleverage. You guys started to pay down some debt. Should we still expect interest expense to sort of follow the same glide path that you were talking about last quarter?

[Carlos Macau, EVP and CFO at HEICO]

Yeah, I think so. I think, you know, I'm not, not counting on any movements really in the interest rate. We probably will wind up running $30 million. I think we ran $38 million this quarter. It's probably gonna be, you know, down $1 million each quarter after this or so, just from debt, from principal pay down. So, that's probably what we're gonna see this year. As we continue to delever, that will be the interest expense-

[Bert Subin, Managing Director at Stifel]

Thank you.

[Carlos Macau, EVP and CFO at HEICO]

Glide path, refer to. Okay.

[Operator]

We'll take our next question from Ken Herbert with RBC Capital Markets. Please go ahead.

[Ken Herbert, Managing Director at RBC Capital Markets]

Yeah, hey, good morning, and really nice quarter.

[Eric Mendelson, Co-President at HEICO]

Thanks, Ken.

[Carlos Macau, EVP and CFO at HEICO]

Thank you.

[Ken Herbert, Managing Director at RBC Capital Markets]

Hey, Eric, maybe, maybe just to start off, when we think about, your, the aerospace sales within the FSG segment, can you remind us the mix of what you're selling that's under long-term contracts versus maybe what's more book and ship?

[Eric Mendelson, Co-President at HEICO]

I don't have that information in front of me. But our... You know, I'm guessing it's in the, you know, when you go across all of the businesses, you know, I'm guessing it's in the sort of 50/50 area, but I don't have that, I don't have that specific information. As a result, as I said, you know, as I mentioned earlier, as a result of these, the decentralized structure, it, it... We don't capture a lot of that information, but my guess is it's probably around the 50/50 area.

[Ken Herbert, Managing Director at RBC Capital Markets]

Okay. Are you maybe organizationally trying to skew maybe one way or the other as you have contracts coming up for renewals, say, with some of your large airline customers? Are you trying to, in the businesses, drive them to maybe more of a book and ship scenario? Or strategically, is that something you're comfortable just letting the operating units, you know, do what's best?

[Eric Mendelson, Co-President at HEICO]

Well, so my comment about the 50/50 is looking at our entire parts business, which includes both PMA and distribution. So I think the distribution would probably skew to less contracts, in other words, less than 50%, and the PMA would be more than 50%. So that, that's sort of the dichotomy there that I was looking at. Our customers, with regard to PMA, they like the idea of having a long-term agreement, and we like that idea too, because we can go out and procure the product for them and protect them. You know, clearly, if they want to be protected on price, we're happy to do that, but in turn, they've got to commit to us.

[Eric Mendelson, Co-President at HEICO]

So, you know, definitely on the PMA side, the percentage of contracts would be, you know, I'm guessing well over 50%.

[Ken Herbert, Managing Director at RBC Capital Markets]

Okay. Okay, that's helpful. And then maybe just finally, Victor, to put a finer point on sort of the lumpiness. You're up against some pretty tough comps within the defense and space sales within ETG in the second half of this year, especially in the fourth quarter. Is it fair to assume that you're seeing backlog, that we should still see growth in the defense businesses into the back half of this year? Or could we maybe see those down a little bit, just considering the strength in the back half of 2023?

[Eric Mendelson, Co-President at HEICO]

Yeah, I'd like to see how it plays out. I'm feeling good at the moment about the third quarter. And I think the fourth, if I look at the shipment schedules, it's flatter, more challenging. But,

[Carlos Macau, EVP and CFO at HEICO]

I think we had, like, a 6% organic growth, I think, in Q4 ETG last year, so that's a tough comp.

[Eric Mendelson, Co-President at HEICO]

Yeah. So it's gonna, it's gonna be a tough one. I think we'll have to let it play out. We'll see, see where it goes. I don't think it's so easy, but we'll see where it goes.

[Ken Herbert, Managing Director at RBC Capital Markets]

Great. All right, thanks a lot, guys.

[Eric Mendelson, Co-President at HEICO]

Thank you.

[Carlos Macau, EVP and CFO at HEICO]

Thanks again.

[Operator]

Our next question comes from Sam Strassacker with Truist Securities. Please go ahead.

[Michael Ciarmoli, Managing Director at Truist Securities]

Hi, good morning, guys. For Michael Ciarmoli, nice quarter. I was just curious, kind of looking at the support or sorry, the strength in aftermarket. Could you guys kind of maybe try and break that out a little bit more? Was there any particular areas of strength or weakness, whether it be across airframe, engines, interiors, or maybe even not weakness, but certain areas that you were seeing more growth from versus others?

[Eric Mendelson, Co-President at HEICO]

I would say overall, it was very broad-based in the quarter. It's hard to sort of get into it by particular product type, and that can be sort of heavily skewed, depending on, you know, what inventory packages are taking place. So at the moment, I think it would be misleading for me to get into that, because people would extrapolate and view it perhaps not correctly. So if you don't mind, I'd rather punt and talk about that perhaps next quarter as we start to see some of this. But as I mentioned earlier, it does appear to be very broad-based, the support is really broad-based.

[Michael Ciarmoli, Managing Director at Truist Securities]

Fair enough. And then obviously, you guys are still sort of working on the integration of Wencor, but how are you guys kind of thinking about M&A going forward in the long term?

[Eric Mendelson, Co-President at HEICO]

We are fully 100% committed to M&A. It is a key part of HEICO's strategy, and it drives a nice chunk of our growth. As you can see, we were over 3 times levered after we completed the Wencor acquisition, and then we also purchased the Honeywell display unit product line. Now we're down to 2.45 times. Our M&A teams are very, very focused in finding great companies. We're in discussions with many. We work really hard to be the acquirer of choice. I think that we are sort of lucky and fortunate in that our competitive advantage is this decentralized model, which appeals to people very well.

[Eric Mendelson, Co-President at HEICO]

I mean, I can tell you when I visit companies, and even in processes, I would say at least four out of five leadership teams tell us that HEICO is their preferred acquirer. And of course, you know, who knows what they tell all the different bidders out there. But I really do believe that our approach is unique, and people want a part of it, and we are very, very much focused. And also, it's supported by our customers. I mean, it was our customers who wanted and who were so excited about the Wencor acquisition, because we could put these two product lines together and really offer much more of a competitive offering to our airline customers. I mean, they were the ones most supportive of doing this.

[Eric Mendelson, Co-President at HEICO]

So, we're going to remain very, very active in that area.

[Michael Ciarmoli, Managing Director at Truist Securities]

Great. Thanks, guys.

[Carlos Macau, EVP and CFO at HEICO]

Thank you.

[Eric Mendelson, Co-President at HEICO]

Thank you.

[Operator]

We'll take our next question from Louis Raffetto with Wolfe Research. Please go ahead.

[Louis Raffetto, Research Analyst at Wolfe Research]

Great, thank you. Eric, just a couple for you. I think FSG sales were up about 5% sequentially, but if I look at your acquired growth, I'm thinking about Wencor and then the Honeywell product line. It looks like Wencor sales were flat, even down sequentially, while legacy was up mid-single digits. Is that, that sort of the right way to think about it?

[Eric Mendelson, Co-President at HEICO]

I mean, we don't get into the specifics, but no, I mean, I wouldn't say that Wencor sales were down. I mean, Wencor is performing extremely well. They're way up as compared to last year, so they're performing well. I mean, look, in any of the businesses, you've got this... you know, we're at the mercy of the supply chain, and I can tell you that we've got a lot of suppliers who are very, very late. And that can sway quarters, you know, significantly, actually. But, Wencor is performing extraordinarily well, winning new business. We couldn't be happier.

[Louis Raffetto, Research Analyst at Wolfe Research]

All right. Appreciate the insights, and, you know, interesting to hear about, you know, you're not the only one who mentioned the, the part supply sort of limiting the MRO. So just good for that, that insight. And I guess you would—you know, I know Eric kind of confirmed the, the lower, Carlos confirmed the low to mid-single-digit growth for ETG. I mean, I think you guys have kind of laid out high single digit to low double digit growth for FSG. I mean, it seems like you're certainly gonna be at the high, high end of that, if not above that. Is that a fair assumption?

[Carlos Macau, EVP and CFO at HEICO]

I think we're gonna stick with the high to low double digit growth for the year. I think that's still a good assumption, Lou.

[Louis Raffetto, Research Analyst at Wolfe Research]

All right. Thank you very much.

[Eric Mendelson, Co-President at HEICO]

Thank you.

[Carlos Macau, EVP and CFO at HEICO]

Thank you.

[Operator]

Next, we'll take our question from Gautam Khanna with TD Cowen. Please go ahead.

[Gautam Khanna, Aerospace and Defense Equity Analyst at TD Cowen]

Hey, thanks for staying on line to talk to me, Eric.

[Eric Mendelson, Co-President at HEICO]

Yeah. Hey, Gautam.

[Gautam Khanna, Aerospace and Defense Equity Analyst at TD Cowen]

Hey, so I was curious, how far along are you guys on kind of introducing Wencor's product suite to your to HEICO's legacy airline customers, and vice versa? I know there was a whole the comment when the deal was announced, that Wencor was bigger with the MRO facilities than with HEICO, and you guys were stronger at the airlines. I'm just curious, like, how much time does it take to kind of make those introductions and have the product catalog added to the contracts that you guys already have, if you will? You know, each of those companies already have.

[Eric Mendelson, Co-President at HEICO]

Yes. So Gautam, I think what you're referring to is, you know, we said that historically, you know, Wencor originally got its, you know, its sort of focus was more in the repair stations. They still dealt with the airlines, but more of their-

[Gautam Khanna, Aerospace and Defense Equity Analyst at TD Cowen]

Mm.

[Eric Mendelson, Co-President at HEICO]

Their focus originally was in the repair stations, and it was sort of vice versa with HEICO. But I can tell you that the cooperation is going extremely well. We are... Both companies are helping each other, and there are airline customers where Wencor had more of a presence, and there are airline customers where HEICO had more of a presence. And we are introducing the folks on both sides, so they can go ahead and take advantage of those relationships and that history and be able to sell the product. So I think that that is happening as we speak, and I anticipate that that's going to continue to occur in 2025. I think we will continue to see the very good results in that area.

[Gautam Khanna, Aerospace and Defense Equity Analyst at TD Cowen]

Has there already been traction, like commercial traction? You guys are already getting sales from some of that cross-selling opportunity, or is this still on the comms?

[Eric Mendelson, Co-President at HEICO]

No, we—

[Carlos Macau, EVP and CFO at HEICO]

No, no, we, we-

[Eric Mendelson, Co-President at HEICO]

We have received sales on it, and I think that's one of the reasons you see the organic growth rate, and you see the margins that we have, because we've already realized the benefits. I think there's a lot more to come, and but we've recognized them thus far.

[Gautam Khanna, Aerospace and Defense Equity Analyst at TD Cowen]

Gotcha. That's helpful. And then, Carlos, I know you, you addressed this earlier in the call, but just do you have a better sense of the long-term FSG margin framework? At one point, it was 22% long term. I know there's reasons you guys are over that now, but is that still kind of the right bogey longer term with Wencor, or do you think it could be structurally higher than that?

[Carlos Macau, EVP and CFO at HEICO]

I think the long-term margin probably is around that 22% rate. And I do think that if you look back over the, if you sort of ignore the COVID period and look back over the decade prior to that, you will see that our margin's pretty consistent and that every year we get little improvements in it. I think we're gonna be, we're heading towards that pace, to where we get back, as I mentioned earlier, to a normal footprint within the segment when the mix is kind of what it used to look like, and then we move forward from there, and you got those little efficiencies. That's my expectation long term.

[Eric Mendelson, Co-President at HEICO]

Of course, Gautam, we... This is Eric. We've got, as I mentioned, in the quarter, we had 280 basis points from intangible amortization. So you add that, and we're really approaching 25% on an EBITDA basis, which is outstanding.

[Gautam Khanna, Aerospace and Defense Equity Analyst at TD Cowen]

Yeah, absolutely. And then last one, Eric, just in terms of product introductions, I know in the past, you talked about 300-500 PMA parts developed each year. What's the right number, now that you own Wencor and have some experience with them? Is it higher than that, or is it the same number, 300-500?

[Eric Mendelson, Co-President at HEICO]

Yeah, I would think it's closer to the 500 area. Wencor continues to focus and develop, you know, a very aggressive number of products. HEICO, obviously the same. You know, the key is getting all those parts manufactured and getting the airlines to buy them. So we've got, we've got the capability and, you know, we continue to, you know, we're not gonna cut back in any of that area.

[Gautam Khanna, Aerospace and Defense Equity Analyst at TD Cowen]

Thanks, guys. Appreciate it.

[Eric Mendelson, Co-President at HEICO]

Thank you.

[Operator]

We'll take our next question from Louie DiPalma with William Blair. Please go ahead.

[Louie DiPalma, Research Analyst at William Blair]

Eric, Victor, and Carlos, good morning.

[Victor Mendelson, Co-President at HEICO]

Good morning.

[Lawrence Mendelson, Chairman and CEO at HEICO]

Good morning.

[Louie DiPalma, Research Analyst at William Blair]

One of the recurring themes on both FSG and the ETG sides of the business is your ability to consistently introduce new products to the market. You just mentioned the target of 500 new PMA parts per year. Similarly, I was wondering, what is ETG doing in terms of new products per year? And is there still a long runway, and is the Ukraine war inspiring new ideas and demand for new types of products? Thanks.

[Victor Mendelson, Co-President at HEICO]

Louie, Louie, this is Victor. Thank you. It's a, it's a very good question. I don't know the number of new products and new part numbers we actually introduce in the ETG each year because it, it's a very large number, and we have so many subsidiaries. But one of the things that we do look at when we meet with the companies, each year we do an annual meeting, we do a budget review, and it's a bottoms-up budget. We do look at, with each one, their new product introduction, and it is a very active and regular rate. And I, I think it's my sense of it is it's probably higher than most people I see in the industry, so very, very happy with that, and that will continue.

[Victor Mendelson, Co-President at HEICO]

That was my allusion earlier to the R&D spending and why it's so critical for us to do in good times or in bad. We don't cut R&D spending if a business is weaker in a particular moment, because ultimately, that's our salvation, right? And that's how we grow the business over time, and we look at it on a very long-term basis. In terms of Ukraine, yes, you know, the Ukraine has meant more new product introduction in some of our businesses, and has stimulated sales in a number of our businesses as well. And it's Ukraine's had an interesting effect because I think it has reminded our allies in Europe, our friends, of the need to expand their defense spending sustainably, and long term. And that's happened, right?

[Victor Mendelson, Co-President at HEICO]

And that's happening, and we're seeing more investment there. The company we acquired, we completed the acquisition in January 2023 of Exxelia, which is a company headquartered in France with significant operations and sales in Europe. And that was one of the things that attracted us to that business, was the opportunity to offer products to our friends and allies, as well as, by the way, here in the US. And the Ukraine war does have an impact on US companies and obviously, as we know, what the US supplies. So I would expect that to continue. And then when that conflict ends, and I hope it ends soon, of course, but when that ends, I think it will have an enduring effect on how people look at defending themselves and what they spend to do it.

[Louie DiPalma, Research Analyst at William Blair]

Great. I think you have a number of microwave product and components. Are you supplying to some of the microwave OEMs in terms of, like, air defense and counter-drone functionality?

[Victor Mendelson, Co-President at HEICO]

Yeah, sure. And of course, as, as you can imagine, I can't point out specific programs, but I can say that is part of, that is definitely part of the business. And it, it is, it's within, the ambit of what we do.

[Louie DiPalma, Research Analyst at William Blair]

Great. Thanks, everyone.

[Victor Mendelson, Co-President at HEICO]

Thank you.

[Operator]

That concludes today's question and answer session. At this time, I'll turn the conference back to you for any additional or closing remarks.

[Lawrence Mendelson, Chairman and CEO at HEICO]

This is Larry Mendelson. I want to thank everybody on this call for their interest in HEICO. We look forward to speaking with you when we report third quarter results, and that will be sometime about three months from now. Meanwhile, have a very good summer. Enjoy your summer, be safe, and HEICO will, I believe, do extremely well. Thank you, and that's the end of this call.

[Operator]

Thank you, and this concludes today's call. Thank you for your participation. You may now disconnect.

Participants

Executives

• Carlos Macau, EVP and CFO
• Eric Mendelson, Co-President
• Victor Mendelson, Co-President

Analysts

• Bert Subin, Managing Director at Stifel
• Gautam Khanna, Aerospace and Defense Equity Analyst at TD Cowen
• Ken Herbert, Managing Director at RBC Capital Markets
• Larry Solow, Managing Director at CJS Securities
• Lawrence Mendelson, Chairman and CEO at HEICO
• Louie DiPalma, Research Analyst at William Blair
• Louis Raffetto, Research Analyst at Wolfe Research
• Michael Ciarmoli, Managing Director at Truist Securities
• Peter Arment, Senior Analyst at Baird
• Robert Spingarn, Managing Director at Melius Research
• Scott Deuschle, Director at Deutsche Bank
• Sheila Kahyaoglu, Managing Director in Equity Research at Jefferies