Q4 2019 Earnings Call
Ladies and gentlemen. This is the operators today's conference is scheduled to begin momentarily until that time, Inc. Your line will again be placed and hold. Thank you for you patients once again, ladies and gentlemen, today's conference is scheduled to begin momentarily until that time your line.
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Certain statements in this conference call will constitute forward looking statements, which are subject to risks uncertainties and contingencies.
Hi goes actual results may differ materially you can do with express and well implied made those forward looking statements as a result of factors, including lower demand for commercial air travel or airline fleet changes or airline purchasing decision, which could cost, but where demand for goods and services cod.
Specification costs and requirements, which could cause any <unk> story cost to complete contract governmental and regulatory demands export policies and restriction reductions in defense species or homeland security spending by U.S. and offering customers like competition for Mexico.
I think and be a competitor, which could reduce or sale, our ability to introducing new products and services at profitable pricing level, which could reduce our sales or sales cooks product development and manufacturing difficulties, which could increase our product development costs and the leasing.
Our ability to make acquisitions and achieving operating synergies from acquired businesses.
That's a great credit risk interest point.
Fine grained T X genes in income tax seats economic conditions within and outside of the aviation defense space medical telecommunications and electronics industry, which could negatively impact our cost and revenue.
And defense spending or budget calls, which could you use our defense related revenue.
Well I guess listening to you or bidding like a transcript of this call are encouraged to give you all have heico's filings with the securities and Exchange Commission, including but not limited to filings on Form 10-K Form 10-Q and form peak.
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.
Ladies and gentlemen, thank you for standing by and welcome to this fiscal year 2019 fourth quarter and end of uranium official.
At this time all participants are in other centrality mode.
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I would now like to panic on France, a way to your speaker today, let's say two events mendelson. Thank you. Please go ahead.
Thank you very much and good morning to everyone on the cool again, we thank you for joining us and we welcome you to Heico's fourth quarter and 40 year of fiscal 19 earnings announcement telecom firms 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 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 record fourth quarter and annual results I would like to take a moment and thank all of heico's team members.
We are proud to leave some of the hardest working and most successful professionals in our industry.
Okay, great right in saying that the combination of our exceptional workforce and their entrepreneurial culture has been a winning formula for HEICO and has undoubtedly enabled us to achieve a 29 year compound annual growth rate.
Up 16% in net sales, 19% in net income and 24% in our stock price.
Now I'd like to take a few minutes to summarize the highlights of our record fourth quarter and full fiscal year result.
Consolidated fourth quarter fiscal 19, net sales of 541, and a half million dollars operating income of 120.6 million.
Net income of 85.7 million all represent record results driven principally by strong double digit organic growth within flight support.
In mid single digit organic growth within E T G.
And the impact of our fiscal 19 acquisitions.
Consolidated fiscal 19 net sales.
2 billion 55.6 million.
Operating income of 457.1 million.
Net income of 327.9 million.
Also represent record results driven mainly by our robust double digit organic growth within both of our operating segments as well as the excellent operating performance of our fiscal 19 acquisitions.
Consolidated net income and operating income in the fourth quarter of fiscal 19.
Our up 27% and 16% respectively on a 14% increase in net sales.
Consolidated operating margin improved to 22.3% in the fourth quarter fiscal 19, and that was up from 21.7% in the fourth quarter fiscal 18.
Consolidated net income and operating income in fiscal year, 19 are up 26% and 21% respectively.
On a 16% increase in net sales.
Consolidated operating margin improved to 22.2% in fiscal 19 and that was up one full point from 21.2% in fiscal 18.
Consolidated net income per diluted share in.
7%.
62 cents in the fourth quarter fiscal 19, and that was up from 49 cents in the fourth quarter fiscal 18.
And consolidated net income per diluted share increased 26%.
To $2.39 in fiscal 19 that was up from $1.90 10 fiscal 18.
The TG group set an all time quarterly net sales record in the fourth quarter fiscal 19.
[laughter] excuse me increasing 15%.
Over the fourth quarter fiscal 18 and that resulted from the excellent operating performance of the fiscal 19 acquisitions as well as strong demand for our defense related products.
Flight support also set all time quarterly net sales records in the fourth quarter.
Fiscal 19, increasing 12% over the fourth quarter fiscal 18, and that reef principally reflects strong double digit organic growth within our aftermarket repair and overhaul services as well as our repo.
Placement parts product lines.
Cash flow provided by operating activities increased 33%.
Two were record 437.4 million.
In fiscal 19, and that was up from 328.5 million in fiscal 18.
Cash flow provided by operating activities increased 9% to 124 million in the fourth quarter fiscal 19, and that was up from 113.7 million fourth quarter fiscal 18.
As you all can see we continue to generate significant cash flow for our shareholders by remaining focused on developing niche products and our strategic commitment to highly decentralized inefficient entrepreneurial structure.
As we reported yesterday.
The board of directors declared an eight cents per share regular semiannual cash dividend on both classes of stock and this is payable on January 20, Threerd 2020 to shareholders of record of January 19, 2020.
A cash dividend represents a 14% increase over the prior semi annual per share amount of seven cents.
The cash dividend was our 80 threerd consecutive semiannual cash dividend since 1979.
The increased dividend confirms our confidence and continued strong cash flow.
Heico's consistent growth strategies, and our desire to continue rewarding shareholders well at the same time, retaining sufficient capital to fund internal growth as well as acquisitions.
In September .
Our DB control subsidiary acquired all of the outstanding stock of GTT Q, a designer and manufacturer of radio frequency sources detectors and controllers for certain defense applications DB control is.
Part of our EG group and we expect the acquisition to be accretive to earnings within the first 12 months following its closing.
Yesterday, we announced the acquisition of 80.1% of the stock of quell Corporation, which designs and manufactures in my RF eye and transient protect and protection solutions.
Okay very wide variety of connectors that principally serve customers within the aerospace and defense markets.
Well as part of our EG group.
And we expect the acquisition also to be accretive to earnings within the first 12 months following closing.
In October 19, our Duquesne Seacom subsidiary received F.A.T.S. so certifications.
For their special underwater locator Beacon and low lithium battery and we're pleased to achieve these certifications.
At this particular product, which we call dk to 90 builds on seek coms product legacy and simplifies shipping and handling processes with the lower Lizzie in content.
And then December 19, our BT.
The P.T. subsidiary earned the military and Aerospace <unk> Electronics Innovators award platinum recognition for their gallium nitride based DC to DC converters.
This distinction is an important one and is the military and aerospace <unk> electronics innovators highest honor and recognizes companies in the aerospace and defense electronics industries, which have made groundbreaking contributions and innovative solutions.
To solve design challenges as always we thank VPT and they're incredibly capable management.
The outstanding accomplishment, and we're really humbled by their persistent excellent and innovation and just a comment.
The management and the people have VPT or some of the most unusually talented individuals.
But that's not exceptional for HEICO, because we have these people upgrading.
Companies throughout our system.
They are the ones that make HEICO successful.
At this time I would like to introduce Eric Mendelson co President of HEICO and President of Heico's flight support group and he will discuss the results of this flight support group.
Thank you.
The flight support group net sales increased 12% to a record 324.7 million in the fourth quarter fiscal 19 up from 290.3 million in the fourth quarter fiscal 18, the flight support groups net sales increased 13% to a record 1 billion 240 point.
2 million in fiscal year 19.
From 1 billion 97.9 million in fiscal 18.
The increases in the fourth quarter in fiscal year of 19 are attributable to strong organic growth of 12% and 13%, respectively, mainly due to increased demand and new product offerings across all of our product line.
The flight support groups operating income increased 14% to 62.2 million in the first in the fourth quarter of fiscal 19.
From 54.6 million in the fourth quarter fiscal 18. This increase principally reflects the previously mentioned net sales growth in the favorable impact from the changes in the estimated fair value of accrued contingent consideration, partially offset by a decrease in gross profit margin.
Mainly reflecting slightly less favorable product mix within our specialty products product line.
The flight support groups operating income increased 17% to a record 242 million in fiscal year 19.
Up from 206.6 million in fiscal year, 18, which resulted mainly from the previously mentioned net sales growth and improved gross profit margin, mainly attributable to higher net sales of our aftermarket replacement parts and efficiencies realized from the net sales growth.
The flight support group operating margin increased to 19.2% in the fourth quarter fiscal 19 up from 18.8% in the fourth quarter fiscal 18, principally reflecting the previously mentioned changes in the estimated fair value of accrued content.
In consideration, partially offset by slightly less favorable gross profit margin.
The flight support group operating margin increased to 19.5% in fiscal year 19 up from 18.8% in fiscal year 18, principally reflecting the previously mentioned improved gross profit margin inefficiencies realized from the net sales growth.
With respect to fiscal year 20, we are estimating net sales growth of approximately 7% to 8% over the prior year and the full year flight support group operating margin to approximate 19 in half to 20%.
Further we estimate mid to high single digit organic growth in fiscal 20.
These estimates exclude additional acquired businesses if any.
Now I would like to introduce Victor Mendelson co president of FICO and President of Heico's Electronic technologies group to discuss the results of the electronic technologies group.
Thank you Aaron.
The electronic technologies group's net sales increased 15% to a record 219.5 million in the fourth quarter fiscal 19 up from $191.1 million in the fourth quarter fiscal 18, which is attributable to the favorable impact from our fiscal 19 acquisitions as well as.
Organic growth of 4%, mainly due to increased demand for our defense products.
Electronic technologies group net sales increased 19% to a record $834.5 million in fiscal 19 up from $701.8 million in fiscal 18, as a result of 10% organic growth mainly due to increased demand for certain defense and aerospace products.
And the impact from our fiscal 19 acquisitions.
Electronic technologies groups operating income increased 13% to $64.6 million in the fourth quarter fiscal 19.
From $57.1 million in the fourth quarter fiscal 18 were principally reflecting the previously mentioned net sales growth, partially offset by higher acquisition related expenses.
The electronic technologies groups operating income increased 20%.
To a record $245.7 million.
Fiscal 19 up from $204.5 billion.
In fiscal 18. This increase principally reflects the previously mentioned net sales growth and an improved gross profit margin, mainly driven by increased net sales and a more favorable product mix for certain defense products and efficiencies realized from the net sales growth partially offset by.
Higher performance based compensation expense and higher acquisition related costs.
The electronic technologies groups operating margin remained strong at 29.4%.
In the fourth quarter fiscal 19 compared to 29.9% as reported in the fourth quarter fiscal 18.
The operating margin in the fourth quarter fiscal 19 is inclusive of the higher acquisition related costs associated with the recent acquisition, which negatively impacted the current period operating margin by approximately four tenths of a percent had we not incurred these additional costs the fourth quarter fiscal 19 operating.
Margin would have been consistent with the fourth quarter fiscal 18 operating margin.
Tektronix technologies group's operating margin improved to 29.4% in fiscal 19 up from 29.1% in fiscal 18, which resulted mainly from an improved gross profit margin, partially offset by increased this DNA expenses as a percentage of net sales inclusive of higher acquisition.
Related costs and higher performance based compensation expense with respect to fiscal 19, we were estimating net sales growth of approximately 5% to 6% over the prior year and anticipate the full year electronic technologies group operating margin to approximate 28% to 29% further we.
Estimate low to mid single digit organic growth in fiscal 20.
Which could be higher in fiscal 2000, depending on us defense spending app allocations.
These estimates exclude any additional acquired businesses, if any turn the call back over to Larry metals.
Thank you.
Do you Victor.
Moving on consolidated net income per diluted share increased 27% to 62 cents in the first quarter of fiscal 19.
The fourth quarter fiscal 19, and that was up from 49 cents in the fourth quarter fiscal 18 diluted earnings per share increased 26%.
In the fiscal year, two 2039 cents and that was up from $1.90 in fiscal year 18, and these increases reflect the very strong operating performance within both segments flight support any TJ.
Depreciation and amortization expense totaled 21.8 million in the fourth quarter fiscal 19 that was up from 19.7 million in the fourth quarter fiscal 18 and totaled 83.5 million fiscal 19 and that was up from 77 million in fiscal 18.
Okay.
The increase in the fourth quarter and fiscal year 19, principally reflects the incremental impact of higher depreciation and amortization expense of intangible assets from our fiscal 19 acquisitions.
R&D expense increased 7% to 17.9 million in the fourth quarter fiscal 19 that was up from 16.8 million in the fourth quarter fiscal 18, and it increased 16% to 66.6 billion in fiscal.
All year 19, and that was up from 57.5 million in fiscal 18.
Significant new ongoing product development efforts are continuing as usual at both flight support and IEG and we continue to invest approximately 3% of each sales dollar into new product development.
Consolidated SGN a expense was said 88.8 million.
And 82.8 million in the fourth quarter fiscal 19 in fiscal 18, respectively.
Due principally to the impact of fiscal 19, and 18 acquisitions and that was partially offset by are favorable change in the estimated fair value of accrued contingent consideration.
Consolidated as DNA expenses were 356.7 million and 314.5 million in fiscal 19.
In fiscal 18, respectively, due principally to the impact of fiscal 19, and 18 acquisitions as well as higher performance based compensation expense and changes in the estimated fair value of accrued contingent consideration.
Consolidated SGN a expense as a percentage of net sales decreased to 16.4% in the fourth quarter fiscal 19.
Down.
About 1% from nine slipped from 17.4 in the fourth quarter fiscal 18, and this is mainly attributable to favorable changes in estimated fair value of accrued contingent consideration.
Consolidated SGN a expense as a percent of net sales.
Decreased to 17.4% in fiscal 19 down slightly from 17.7 in fiscal 18, which is mainly attributable to efficiencies realized from net sales growth I think everybody on the call can understand that as we grow our business.
We are.
Perfect shrinking the SGN a expense so.
It's a.
Very beneficial increase in our performance.
Interest expense was 5.2 million in the fourth quarter fiscal 19 that was compared to 5.1 million in fourth quarter fiscal 18.
And 21.7 million in fiscal 19, compared to 19.9 million in fiscal 18.
The increase in fiscal 19 was principally due to higher interest rates, partially offset by a lower weighted average balance outstanding under our revolving credit facility.
Other income and expense in the fourth quarter fiscal 18, and 19 was not significant so we won't comment on it.
Income taxes.
Our effective tax rate in the fourth quarter fiscal 19 decreased to 19.8% compared to 24.9 in the fourth quarter fiscal 18.
And this decrease principally reflects the favorable in bag of higher tax exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO corporate leadership compensation plan as well as the reduction in the federal tax rate for.
I'm, a blended rate of 23.3% in fiscal 18 down to 21% in fiscal 19.
Our effective tax rate in fiscal 19 decreased to 17.8% from 19.8% in fiscal 18 and the decrease.
This is mainly attributable to the reduction in the federal tax rate from a blended rate of 23.3% in fiscal 18% to 21% in fiscal 19.
The decrease in our effective tax rate in fiscal 19 also reflect a 14.3 million dollar larger tax benefit in fiscal 19 from stock option exercises compared to fiscal 18.
Partially offset by the net impact of certain discrete tax benefits recorded in fiscal 18.
Provisions of the tax act that became effective for HEICO in fiscal 19.
Did not have a material net effect on the companys effective tax rate.
Net income attributable to non controlling interest was 6.9 million in the fourth quarter fiscal 19 compared to 6.7 million in fourth quarter of 18 fiscal 18 net income attributable to non controlling interest was 31.8 million in for.
Fiscal 19 compared to 26.5 in fiscal 18.
The increase in the fourth quarter in fiscal year 19 reflects improved operating results of certain of our flight support group VTG subsidiaries in which Noncontrolling interest our hill.
For the full fiscal 20.
We estimate a combined effective tax rate and non controlling interest rate of.
19% to 20% of pretax income.
Now moving onto the balance sheet and cash flow.
Our financial position and forecasted cash flow excuse me remain very strong.
As we've discussed earlier cash flow provided by operating activities was very strong and an increased 33% to a record 437.4 million in fiscal 19 and that was up from 328.5 million in fiscal 18.
Cash flow provided by operating activities increased 9% to 124 million in fourth quarter fiscal 19, and that also was up from 113.7 million fourth quarter fiscal 18.
Our working capital ratio was 2.8 and 2.6.
Times as of October 30, 119, and 18, respectively.
Dsos day sales outstanding of receivables was 47 days as of October 30, Onest 19.
Pretty much comparable to the same date in 18 and of course, we closely monitor receivable collections to limit our credit exposure. We have historically had very few losses on credit.
No no one customer accounted for more than 10% of net sales and our five top five customers represented about 20% of consolidated net sales in both fiscal 19 and 18.
Inventory turnover rate of 124 days.
For the year ended October 19 was comparable to the same period and 18.
Total debt to shareholders equity decreased to 33.2%.
As of October 30, 119 that was down from 35.4% as of October 30 118.
Net debt.
Which is cash total debt less cash and cash equivalents of 100 505 million.
To shareholders equity decreased to 29.8%.
As of October 30 were 19 and that was down from 31.5% as of October 30 118.
Net debt to EBITDA ratio improved two point.
Nine three times, that's less than one time EBITDA as of October 30, 119, compared to 1.04 times as of October 31.
18, and during fiscal 19.
We successfully completed seven acquisitions, I mean, clearly just point out.
Something which is obvious that our debt to EBITDA ratio is extremely low we have.
Tremendous liquidity capability, we continue to look for acquisitions good acquisitions.
But we are very disciplined and what we're look for but we certainly have the firepower and the financial strength to to accomplish.
Our growth goals are.
We have no significant debt maturities until fiscal 23, and we will utilize our financial flexibility to aggressively pursue the high quality acquisitions in order to accelerate growth and maximize shareholder returns.
As we look ahead to fiscal 20, we anticipate net sales growth within flight support and EG, resulting from increased demand across the majority of our product lines and our commitments to developing new products and services.
Further market penetration.
Pursuing an aggressive acquisition strategy.
With discipline, while maintaining our great financial strength and flexibility.
Based upon current economic visibility, we believe fiscal 20 will be a record another record year.
We are estimating approximately 13% to 14% growth in full year net income, 6% to 8% growth in full year net sales over fiscal 19.
We anticipate fiscal year 20.
Salivated operating margin to approximate 21 and ahead after 22%.
Depreciation amortization expense about 89 million.
Cap ex to approximate 42 million cash flow from operation to approximate 475 million and these estimates exclude additional acquired businesses. If any I just want to mention at this time that historically many analysts have written.
Correctly, so that coming out of the box and giving initial guidance.
For the past number of years Heiko.
Has given that guidance on the conservative side.
I do believe without sticking my neck out too far I do believe that we will be conservative again that is our policy and we would rather under promise and overperform than promise something.
That we cannot deliver so I really hopefully.
As you know our target growth is bottomline growth net income of 15% to 20% over the prior year and I'm very confident that we will be able to accomplish that.
In fiscal 20.
In closing Heico's team members have delivered these outstanding results and again deserve the credit for the hard work the discipline and it took to successfully navigate another quarter.
Our team members continue to win in the markets. They serve and Heico's management team has to get up most respect for everything they do to make this company a great success.
Unfortunately, we can't reflect the quality and the competence.
Of the people within HEICO the team members cannot be reflected in the financial statements. However, what they do is reflected in the performance and driving and the growth of net income annually and this has happened over the past 30 years. So.
I don't think it's a flash in the Pan.
With that that is the extent of our prepared remarks, and I would like to open the floor for questions. Thank you.
Thank you at this time, we would like to take any questions. You might have offers today and as a reminder, you may ask a question by pressing Star then the number why on your telephone keypad. Once again. Please press star one nine your telephone keypad to ask a question to the dry question, you mean press the pound board.
Please standby will be composite kuni roster.
We have your first question comes from the line affiliates your fellow from UBI.
Your line is open please ask your question.
Good morning, gentlemen.
Morning.
So thanks for a little bit the clarity on the little bit just capturing the sales gross margin guidance and net income growth, but can you give us a little bit more what's driving down the combined.
I'm, sorry tax rate and see I from 25 to this 19 or 20 is there a special tax item or what's really driving down the anti next year I guess, that's not tax.
Lewis as Carlos can hear me, Okay Yep.
So.
And.
As you can recall from looking back at the year are both classes of shares has nice growth in stock appreciation and one thing that we did experience and our and our fiscal year was an acceleration of some option exercises will winds up happening as as those options get exercised the company gets a tax.
Benefit for the appreciation if you would have the shares inherited the benefit of our team members in the form of compensation expense, we recognize that every quarter because we had.
Almost double the amount of option exercises in fiscal 19, which principally the majority of them were due to time outs, we have tenure options and the tax Deerfield exercising you lose them. So we had quite a few options in that situation.
Those good exercise this year about double the prior year. So that is going to cause us to have the lower tax rate next year history tax cash benefit the HEICO and we'll experience that in Q1 fiscal point.
Okay. So similar to last year, just larger magnitude.
Yes, and we also have pretty consistent sci rates with the prior year. So.
Roughly around 7%.
Okay all right.
Just one quick follow up I guess for Eric.
I understand that you guys don't have a single platform risk I guess, but how do you guys think about the guidance given the sound three seven Max news after the close yesterday.
Lewis I think HEICO is probably one of the companies in the industry with the least impact as a result of the 73 seven Mac, we do have some new content that goes on it.
And that will be impacted but I believe that's going to be mitigated by the increase in our aftermarket parts sales. So I don't see that as a major items HEICO heico's always got various speed bumps along the way we take care of it we don't call out.
Special excuses for.
Special event, so I'm very confident that theres not going to be much of an impact heiko.
Hi, John .
Louis all the also.
We can factor it in and give you a hard number but traditionally is older airplanes fly that's our business supplying parts and older airplanes. So you can put 202 together for yourself.
Should be a again don't want to call it a benefit but to Eric's point should be.
At least impact.
Right.
Yes.
Thank you guys.
Thank you.
We have our next question from the line of Robert Spingarn credits Smith, Sir Your line is open. Please ask your question.
Hi, good morning.
Good morning, Rob.
So I wanted to dig into the guidance a little bit for both segments, you talked about your organic growth expectations, a little bit different for the two so Eric and Victor If you could walk through how you think about growth and Eric in particular based on that last question.
It does look like the Max is going to re delivery. The Max is going to slip here a bit we've got.
Placement lift if you will or alternate lift in there with older aircraft consuming parts of how to what extent does that inform your expectations for 20, and then if you could also comment on the directionality of the margins in each segment.
Sure. Good morning, Rob. This is Eric I'll go ahead, you can go first.
You know.
With the flight support group, we had organic growth in the fourth quarter fiscal 19 at 12%.
And that was against an extremely difficult comp in the fourth quarter fiscal 18, our organic growth was 13%.
So that means between the two years, we had organic growth of 25% which is really.
Number that is outstanding and frankly, I've never seen before at HEICO or at any other company, we'll be able to post 25% organic growth over a two year period, I think fourth quarter surprised us with the strength that we had in fiscal 19 coming on.
Fiscal 18, and frankly, I would've expected some of that to fall into fiscal 20. So I think thats one of the things that tempering down our expectations for fiscal 2008, we just shipped so much in fiscal 19, because that's when our customers wanted it that.
In effect made our 19 number is higher and I believe some of those shipments.
Probably normally would have occurred in fiscal 2000, so I think that they're very strong I think our margins continue to increase.
Last year I think it was 18.8% operating margin. This year was about 9000 have for flight support group approximately.
And.
So I anticipate the margins will continue to trend in that area.
Okay.
Did that answer your question I don't know.
The only other variable that we're all a bit focused on again is just.
Yes with regard to Max I know, we're all kind of guessing here on timing and you may not be able to too.
Really calibrate how much of your strength is coming from those temporarily extended airplanes, but is there a range. There are right way to think about your numbers if we havent early.
Max return and in in calendar 20.
Versus a late return.
Is there any kind of thought process around that we can anchor too.
It's really hard to do I mean, even at our level. Our we do have some content, which I mentioned on the Max and of course that does get negatively impacted but it gets mitigated by the aftermarket so I think that Max.
Delay is probably net net beneficial for HEICO or actually I'm sure net beneficial Franco.
But it's very difficult take for us to get on really where that is because it really depends on how much money the airline site to put into the legacy fleet to keep it flying.
I suspect after the announcement yesterday that airlines will be more encouraged to spend money because they realize this is not going to be a fast returned to service.
So.
When I talk with our folks internally.
Frankly, I expect that.
There should be very good aftermarket revenues as a result of it and of course, you never know how long this could take the get corrected.
And now that the pauses in there it could end up taking longer I think then.
People originally thought in terms of resolving the regulatory technical.
The manufacturing issues. So I think net net for our aftermarket business. It will be good, but it's very hard to figure out the exact number.
The other thing, which I also did want to point out.
You asked about margin is that while we had 12% organic growth in the fourth quarter and flight support we actually had operating income growth of 17% and that was basically all organic and I think that our team really did a phenomenal job because.
When you look at 70% organic growth in a single quarter on top of a difficult comp is really frankly, even surprising.
Right.
Rob Rob This is Larry I, just want to add my own thoughts the budgets and the estimates in the guidance.
Was done prior to Boeing announcing the push out of the Max production the cause of stopping so to my knowledge I don't think our peak, knowing our people, who who actually 10 Carlos always says to me those guys are sandbagging.
Okay, So and knowing these people I suspect that they didnt put a lot of.
Extra power into the benefits that we may receive I think they just looked at it business as usual without.
Any effect additional impact up from the Max delay so I don't think the guidance contains much.
Have a push as a result of what happened.
With the Max.
Right Okay.
Okay. Thanks for that.
Actor on your side, yes, Rob So I would say that.
As I have in the past we go through this budget process and each subsidiary submits a bottoms up budget and they are generally conservative and then I go through with each company.
We review the budget and.
I get a sense for.
Where I think there, perhaps being too conservative in some being too aggressive.
And then there is everybody in between.
And so this is really based on what I received from from our guys.
And.
Hi, My sense of it is that they are being more conservative than usual I think they're concerned over where things could go in a number of areas like the defense budget.
And some other.
Areas in space, which is doing very well for US right now by the way at this point in time and.
As a very good outlook for us for next year. So I just kind of have to accept what they give us and I don't really make too many adjustments unless they basically knowledge to me that they know they're right.
Thanks, Justin.
Just on that.
On the difference between space and defense and I guess, you've some commercial as well, but I think you said faults in the in the press release and in your comments, that's that defense drove the organic growth in the quarter in the late this quarter.
Correct.
And so does that mean that the other areas were flattish or maybe down a little and and how do we think about those three pieces within your guide for this coming year, Yes. That's a very good question. The answer is no the others didn't do poorly they just didnt overall didnt.
Do as well.
In the in a period and for the next year.
I would say, it's we've got a pretty good.
Growth estimate.
Across the board, but we have pockets.
Here and there are companies that are giving us lower forecast than I think they're really believing internally themselves.
And some of that is on the defense side, but we're thinking 2020 will be very good for US for example on the space side.
It should be very good for us commercial aviation.
It is kind of a mixed bag for us for fiscal 2020.
We've got some good prospects there, but I think are guys have been.
Again on the conservative side, and that's sort of proven out a little bit so far, but I can't really make any trends out of the first.
Month or six weeks of of the fiscal year.
Right and your end, you're saying you think that from a margin perspective, you'll be just I.
I guess I share around where you've been a hair below.
Yes exactly exactly.
And.
As you've heard me say before when our.
Guys come in and.
Businesses that are averaging before amortization of intangibles than a low thirtys.
And they come in to you and they say well somebody says I'm going to be 50 basis points lower I really can't get too upset with spent because in absolute terms theyre doing great. It is typical for them.
Again to come in and give me a conservative look at the.
At the margins, but I I believe and you've heard me say this before and I think we believe and you've heard essays before that we prefer to.
Hi people rely on our official guidance and if we do better grade, but if not then we feel comfortable or.
Okay.
Doing the right thing Carlos has some Rob Rob I would just I would just add to the Victor and Eric's comments you know.
You will see this in the K, but our our backlogs up the here that you will see backlog stuff like 15% over last year at this time, which indicates to me that their strength going into 2020, I think one of the challenges and we put our budgets together. It was really across both segments was we had breakneck growth.
And our defense business that we anticipated that but the question as you know at what point does have moderate a bit and I think what what Victor and Eric if done in the budget. So we're really with the subsidiaries and business leaders has done is it moderated expectations that you know trees don't grow the sky, we can't continue to grow what I'll call. It breakneck pace.
In that segment of our business now I hope I'm wrong, and I think well as a management team believes that we'll continue to be very well and that that will continue but as Larry mentioned that Victor has both as you know our guidance is relatively conservative coming out of the box and we hope to we hope to do better and over deliver.
Thanks for the color guys appreciate that I'll step out thanks Ross rock.
We have our next question from the line of Greg Konrad from Jefferies. Your line is open. Please ask your question.
Good morning, and great quarter.
Thank you.
Not to harp on the outlook in specifically EPG, but in the prepared comments I think Victor you mentioned that EPG could be higher based on U.S. defense allocations are there particular areas of the budget that we should be focused on in terms of upside drivers.
Well I think it's.
I don't want to say, which programs, but I think it's more specific on programs.
That.
Our guys are giving me a few when a few businesses and isolate a number of incidents.
Subsidiaries.
That they're giving me giving us.
A more conservative view then.
Then we think is likely but they are I mean, its specific programs and specific products.
That's helpful and then.
Some press reports about expansion of PMA parts in Asia, I mean, any color around potential penetration and may be regional opportunities that you're seeing within the market.
We continue to do very well in Asia, we've been selling into Asian now for over 25 years.
Those customers are the great customers for us.
And I, just anticipate continued enthusiasm and excitement for what we're doing I met with our.
Sales leadership.
Over the last couple of weeks and gone on that.
Reviewed a customer by customer.
Review and I can tell you were doing extraordinarily well, there's been a lot of et cetera, and theres a lot of enthusiasm around our part.
Quick Okay, Yes, no go that's right without naming specific customers.
In general there's been a tremendous amount of doozy hasn't for apart.
Echo is got really is exceptional.
Quality in technical reputation in the industry with 75 billion part shifted no airworthiness directive is or insight shutdowns, we really have a.
Technical experienced rating with these airlines unlike any other frankly any other supplier that works with them. So.
They particularly the Asian customers really appreciate that so I think we're going to continue to do very well.
And then just follow up on on PM. I mean, obviously, the assai is kind of looked at their process specific.
Aircrafts certification I mean is there any read through or carryover into the PM, a market and maybe opportunities or changes.
The process.
I don't believe so I think the phase very satisfied with the process HEICO is very good relationship with the Epay They trust us.
And our I would have to say our relationship has never been better so.
We don't see any.
Any negative impact.
Thank you.
Thank you.
Our next question comes from the line of Peter Arment from Baird. Your line is open. Please ask your question.
Thanks, Good morning, Larry Eric Victor Carlos.
And more nice quarter.
Carlos maybe just a quick one on just capex pretty big step up kind of where you finished.
Versus 19 out of $42 million, just is that all timing related or is there anything specific you want to call out.
No. There is some specific growth capital we have perfect.
2020, we have some expansion that we're planning on which is not speculative and we have some renovations were doing to accommodate grows so thats in the budget, it's not too dissimilar from the prior year I think last year, we just had an extraordinarily low span and keep in mind, we brought on seven new companies and they have needs to so I think overall.
Even though it appears like a big step up from 19. If you look at 18 is pretty similar to that spend so I think I think that we're going to be around that ballpark number now having said all that right at the end of the day. We always are guys always want to being very frugal and as long as mentioned the guys.
Mentioned before you know those lob by used equipments that new equipment, if they can get a cheaper they still retains the that entrepreneurial mindset on status. So.
I don't at this point organics expected exceeding that but I do based on our plan is expected to approximate that 42 million.
Okay. That's helpful. And then just quickly on on M&A you.
Do you continue to obviously source deals in ends in quite successfully another strong year 240, I think 41 million you spent in fiscal 19, maybe Larry just comment a little bit on you know the environment, where multiples have been high for an extended period of time, but you're still able to get deals done.
Yes, I think that's exactly right multiples are high.
We still are the best buyer actually for the type of company that we want to acquire and that is a an entrepreneurial company that has really.
His heart in the business and we are the best buyer from a cultural point of view there are a lot of opportunities we're looking at them and.
I would say the the runway is filled we just have to find the right companies. So I mean last year, we did six and the or seven and.
We are the atmosphere wasn't very much different than it is today.
Quite honestly, we see some of the private equity people paying enormous prices.
They don't always make the right decision, sometimes they do they do very well, but I.
I think we'll be able to do our normal if you will number of acquisitions and the kind of acquisitions we want.
So.
No I think that yes price.
Is it consideration, but we found in the in the past two when prices drop in conditions of bed sellers also pull out of the market because they feel they missed the peak and they're going to wait till the price comes back so.
Again, I think it's kind of normal for us and we'll just continue doing what we did again, if we did seven last year the market conditions aren't that much different today than they were over the last year.
Appreciate the color. Thanks.
We have our next question from the line of Ken Herbert Your line is open. Please ask your question.
Hi, good morning, everybody good morning, Chad.
Hi, Eric I first wanted to ask.
And either you or your distribution or your P. and they businesses has pricing I know.
The majority of your growth is volume pricing at all been any more of a tailwind either in the third or in the fourth quarter in particular, considering pricing for the aftermarket industry in the aggregate has been a much stronger tailwind to 19 than in 18, but I'm curious if that's provided any cover for you to see any incremental benefit recently.
Good morning, Ken.
You know HEICO we.
Often speak with investors, who say why don't we pushed pricing and our philosophy really has been to maintain outstanding customer relationships and leave a lot on the table.
To make sure that the customers want to come back for more because.
With with organic growth of 25% over two year period and.
Operating income growth of roughly 17% all organic in the fourth quarter. We believe that we're doing very well and if you will we want to share the benefit so to answer your question no. We have not been pushing pricing. We know that this is an opportunity for us. It is something that we have not done.
Okay.
And.
Frankly in order to just continue to develop the relationships that we have with our customers.
You've been do a number of our customer event and I think that the energy that our customers feel toward Tyco and spirit. Among our people is sort of unique in the industry and I think moderating pricing is one of the ways that we are able to do that so.
Frankly, private equity folks whether you know on the repair side of the Pmeight side, they've got to push pricing because they've got big debt payment. We don't have that so were able to really take the longview and I think thats, how weve been able to accomplishes over 30 years.
Okay.
Very helpful.
If I could just on the fourth quarter growth, maybe at a slightly different way I wanted to follow up on question asked earlier around international opportunities can you provide anymore, maybe detail on the growth you're seeing with with.
Airlines were customers in emerging markets that are coming off a relatively lower base for you relative to maybe more established western Europe or North American legacy Airlines is there any color you can provide on on how the growth might break out and to what extent you were seeing penetration into what historically have been more channel.
And customers.
Emerging markets.
Yes, we are we're doing very well with new customers.
The opportunity for us is to bring on a new customers as well as to take existing customers and broaden the product line. So overall, we're doing I think very well in both of those areas, but frankly that story is consistent with the last 20 years and I wouldn't say that it really is.
Any different than it is now but we.
You know it continues to I would say grow at a similar rate.
How it has in the past.
Okay, that's great and just just finally.
Sure where there any.
Any impact or any delayed shipments.
In October for you as a result of the lack of the fiscal 20 defense budget, I mean was timing and all of a factor.
Some of what May be you alluded to this earlier.
Maybe would hold back some of the organic growth for you in the fourth quarter. The could you maybe slipped into 20 or was that was not a factor.
Is it so good question for the defense budget No I don't think you know the continuing resolution issues and so on I don't think that really.
Impacted us we do have.
Every quarter the shipments that slip from one to the other for any number of ordinary reasons like the truck Doesnt show up for the customer doesn't perform their final test and evaluation things things of that nature.
And we had what I would call the typical noise level of that in the fourth quarter. So nothing nothing notable.
At this point.
All right well. Thank you very much thank you.
We have our next question from the line of Michael Ciarmoli. Your line is open from Suntrust. Your line is open. Please ask your question.
Hey, good morning, guys nice quarter, thanks for taking the questions.
Thank you.
Maybe I don't know if this is this is eric or Victor, but maybe just to go back to Pmeight penetration adoption certainly within the commercial space. It seems like you're very well penetrated can you maybe talk about what you're seeing within the.
Marketplace, especially as they look to.
Cut costs, maybe we'd themselves off of some of the sole source suppliers out there are you.
Looking at that market is there a lot of runway for growth or maybe you could just give some color on penetration rates and what you're expecting at that level. There hi, good morning, Mike. That's a great question. We think that there is a good opportunity we're harvesting that opportunity. It is a very difficult market to access.
Because.
The may complain about high prices in particular areas, but they have to really dedicate the resources to go after it we are succeeding in that area and I think due to heico's.
Reputation that where that we're able to do well.
You know if that gives you the color you're looking for.
And can I assume it's you know fixed wing rotorcraft kind of the normal product lines that you might penetrate.
In the commercial world.
Yes, yes, I think that they're probably more fixed wing.
Got it.
And then maybe back to the 737 Mac situation.
Okay, and I mean thinking about the returned to service obviously a lot of the carriers are looking for extra capacity have used older planes, you get a sense that there could be some headwinds when we finally get that return to service pick a date, maybe it is mid year for global returned to service I mean, if we do.
A wave of legacy retirements, and we see a lot of surplus parts used serviceable material in the marketplace do you think that actually flips around and create some headwinds for you guys that we should be aware of.
I don't think so you know I my guess is and new I frankly don't know much more than what everybody reads in the Wall Street Journal and reasons various analyst reports and the publications I mean, this is a very complex situation and I feel very badly for.
Boeing for what they're going through with it but it's very difficult to I mean this is a monumental task that these folks have ahead of themselves. So you've got to assume that it's going to take.
A good chunk at time until I returned to service guest who knows six months or something and once that happens. They then have to get.
Four hundreds but aircraft that are built into the system. So I think thats going to take a period of time I do think that airlines, who have been deferring maintenance anticipating a return to service are going to have to finally, if you will bite the bullet and and do some this maintenance but also.
This news is.
Relatively new so it's hard to.
Guesstimate on what the impact to HEICO is going to be but no I don't anticipate some massive.
Retirements based upon the returned to service of these aircraft I think it's going to take a really a while to get than delivered.
Got it so yeah okay.
Okay last one for me just can you give a little bit more color Eric on the product development.
Are you seeing more opportunities on on specific parts of the plane whether its engine airframe.
You know, whether it's some of the newer planes coming off warranty and you're seeing new Greenfield opportunities just anything you could provide around how you are spending and where those new products are being targeted for sure I I would say, it's really consistent with every place in the path, we're doing very well over on the engine side.
The components side across the fleet narrow body wide body I think it's a broad based support for our business as they make Canada is question I think by being very customer friendly with regard to pricing that also helps us in has helped to develop the culture.
Sure.
That.
Hi go has in the customer appreciation that we've got so it's really very broad based.
Across our entire.
Product family.
Got it helpful. Thanks, a lot guys I'll jump back in queue. Thank you.
We have our next question from the line of George Glean from C.L. King. Your line is open. Please ask your question.
Thank you good morning, gentlemen, nice quarter as always thanks.
Welcome.
Just wanted to come I know, we're beating a dead horse you're on the 737, but.
Can you provide any average content over any time period that you've looked at within the fleet and I realize many planes many customers, but is there any way to gauge over three or five year period on a per platform how much an average customer might take in content from Michael for that plane and that's really all that thanks.
Yes, it's a good question, but due to the decentralized nature of our business it would be very difficult for us to determine exactly what that number is.
It depends on based on the burn rate as apart that which customers improve which part I think we have it later into our expectations.
But it it by itself it really would be difficult to do.
Understood just thought I try thanks. Thank you.
Okay. Thanks very much.
We have our next question from the line as Gautam Khanna from calling your line is open. Please ask your question.
Thanks, Good morning, guys.
Morning.
Just had a couple of questions. One I was wondering if you could tell us where you are on the CFM Park development qualification.
And any news there.
When do you anticipate launching more products.
Given.
Developments earlier in the year.
There were a I would say, we're doing very well over in that area. We continue to develop products I think theres a lot of customer interest I'm reluctant due to competitive reasons to specifically call it out.
But I think that.
The I add a resolution has been uniquely good for heiko.
And frankly, I think CFM is going to continue to do extremely well they've got a lot of parts and that engine, we're going to take our little Pete.
But I think it will continue to be important to high go as well as see event.
Okay and can you also maybe in the queue usually comes out but the growth in aftermarket parts versus arent now in the quarter, what do you seen an aura now.
In order.
We saw really actually in Q4, we saw very strong organic growth in our component repair business.
And it was probably at of all the three groups. It was probably the quickest organic grower. However, both other groups grew a very strong also so and that was I think the first time.
In fiscal 19 that we'd actually see to repair business.
Outpace the parts and the specialty product group. So that tells me that.
So.
The repairs, but starting to pick up and as Aaron mentioned earlier, maybe some.
Or off.
Is there a plastic Nick.
Okay.
What benefiting.
Okay. Thank you and just one last one should we assume a normal.
You are for product, new Pmeight part introduction fivesix hundred parts or.
How does twentys shape Bob.
I would say consistent with past years consistent with past years.
Thank you very much guys, but yes, we're doing very well in that area as well so.
Thank you very much.
Right.
Once again I would like to remind everyone. If you would like to ask a question. Please press Star then the number what are your telephone keypad never next question from the light if colander him from Sterling capital. Your line is open. Please ask your question.
Hi, good morning folks. Thanks for the question most of my questions have been answered, but I just wanted to drill down a little bit with Eric on your I guess it was in the release your comment on the year on year, Paris and benefit from contingent consideration could you just shed a little bit more color is that just a compare or is that actually a.
You know a decline based on some recent deal performance and then also for Carlos you talked a little bit about the capex expectations for the year forward. If you could provide a little bit more color on which sides of the business and perhaps which end market verticals are kind of driving that growth that'd be great. Then I had a follow up thanks.
I will let me let me take the this is Carlos let me take the contingent earn out question.
The favorability of that is really a change on a change we had in Q4 2018.
The charge that we took to increase contingent earn out based on anticipated better performance, which actually panned out 90 through a right to do that we did not have similar charges. In Q4 18, so that actually was a health that helped us.
The undersea understand that yeah got it I appreciate that color and then just.
Following up on that Capex, which kind of sides of the business or end market verticals, there driving that increased forecast.
So across both across both segments. We have we have capex spend growth. However, we have within the.
Within EPG, we do have some expansion that we're doing that we plan to do which is theater that up a little bit on their side and then we actually have some.
So we actually do some corporate renovations, which are not not a ton, but thats something thats really not that shared by all segments in the corporate office. So it's an expansion that we're doing there.
Some of that goes towards flight support and so that goes towards corporate but other than some some expansion for those reasons. It's the normal capex trends that we normally see here HEICO nothing nothing unusual.
Okay. Thanks, and then just a quick follow up for Eric.
Just speculating, perhaps probing a little bit here as we get extensions with the Max kind of deliveries is there a sales opportunity, perhaps with content per platform I'm thinking specifically of.
Airlines that in your words eventually have to bite the bullet they forestalled certain maintenance. They haven't used you know I've used HEICO it on on certain parts of the aircraft, perhaps not on others is this an opportunity for you kind of uniquely to grow your wallet share and expand relationships to seize the moment. Thanks.
I think yes, it is an opportunity for us to pick up additional sales that maybe the primary.
Route for that will be parts that customers had already been buying from us in the past and maybe they slowed down buying because they thought they were going to retire the aircraft and that will permit them to go ahead and may expenditures.
As far as customers, who haven't purchase the parts, yes, I think that.
It's all part of our continuing value proposition.
They see the benefit that they've got from you know as a result of buying our parts the cost impact that they've got on the Mac being at a service and clearly they can save money is the result of buying additional part so yes, I think you've hit the nail on ahead.
Okay. Thanks, and then one final one for Victor I Love looking at the Companys you you roll up overtime quell looks very interesting indeed to my untrained eye you know rubber seals.
It looks replicable from from the outside looking in can you just perhaps use the lens of your M&A framework and talk a little bit about whether it be patent protection or perhaps increase growth opportunities. Once you bring this product set onboard what do you see with this asset.
You know over time thanks.
Yes. Thank you. It's it does a good question, it's a great company.
If you wouldnt be very difficult if not impossible to replicate those parts, they're not they're not rubber seals. They are they are EMI filters their electrical filters with electronic components embedded in them and they operate in a certain way.
And they are built in a certain way that would be very very difficult to replicate aside from the fact that some of their products have patent protection.
I don't rely on the patent protection in fact.
Usually.
For any of our products.
You've got to really rely on competitive protection.
And if thats at least in our opinion.
So it's a growing businesses rapidly growing business successful business has been around for a while but their growth has really stepped up in the last few years, because some of the because of some of the changes they made marketing changes in particular and getting much more aggressive about going out and visiting the customer base I personally interviewed there.
Top customers in the due diligence in the last week or so major companies engineers purchasing people alike, and they were raving about well now having said that.
Hi, it's our typical kind of acquisitions. So it is not going to change heico's profile don't expect it that we as you know we don't swing for the fences their singles and doubles. So it's not the sort of thing that youre going to pick up.
Our next earnings report and find that Weve doubled because we're getting a giant increase because.
Of this business it will add to HEICO is our typical acquisitions deal.
Thank you very much.
Welcome.
There are no questions at this time please continue.
Well, we wanted to thank everybody who is in listening on this call.
And we will be back again in the middle of February I guess for more towards the end of February with first quarter 2020 .
Report.
We wish everybody a very good holiday healthy and happy holiday season.
We are available for questions. If you have any and that is all that we have poor today. So have a good holiday and we are now signing off.
Ladies and gentlemen, this concludes today's conference call. Thank you all for participating you may now disconnect.
Okay.
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