Q2 2020 Earnings Call
[music].
Ladies and gentlemen, thank your for standing by and welcome to the HEICO Corporation fiscal year, 2022nd quarter earnings results Conference 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 or implied by those forward looking statements other as all the factors, including the severity of magnitude and duration of the call benign.
Outbreak heico's liquidity and the amount and timing of couch revaluation. The continued declines in commercial air travel cost by you'd be a call. The 19 outbreak nowhere demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for goods and services products. That's it.
The collection costs and requirements, which could cause an increase to our cost to complete contracts governmental and regulatory demands export policies and restrictions production send their fan.
Based on homeland security spending by U.S., and or foreign customers or come thirtys competition from existing and new competitors, which could reduce herself or ability to introduce new products and services at profitable pricing levels, which could reduce herself with sales growth product development or manufacturing difficulties.
Which could increase our product development cost into lease sale, our ability to make acquisitions and achieve operating synergies from acquired businesses Gossamer credit risk and trust foreign currency exchange and income tax rates economic conditions within and outside of the aviation defense space magical for the company.
Patients out of China industries, which could negatively impact for a cost him about the news and defense spending or budget cuts, which could reduce our need to find somebody did robyn.
Arc is listening to our reading a transcript of this call are encouraged true view all of high Court filings with the Securities and Exchange Commission, including but not limited to following some form 10-K form 10-Q, one form eight k. <unk> undertakes no obligation to publicly update or revise any forward looking statement, where the reserve.
Result of new information feature events or otherwise accepted extender required by applicable law.
I'll now like to hand upon friends overtures speaker today, Mr. Laurans Mendelson Heico's, Chairman and Executive Officer. Please go ahead Sir.
Thanks.
Good morning to everyone on the call them. We thank you for joining US welcome you to the HEICO second quarter fiscal 20 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 President of Heico's flights.
Fourth grade Victor Mendelson, Heico's co President and President of Heico's Electronic Technologies Group [laughter], excuse me and Congress, Macau, our executive VP and CFO.
Before reviewing our second quarter operating results in detail I'd like to take a moment to thank all of lycos talented team members.
You have responded with distinction to the unprecedented challenge of serving our customers and your local communities. During the onset of the Cobot 19 global pandemic I'm humbled by your collective actions and unwavering commitment to HEICO success.
I strongly believe your contributions to heico's entrepreneurial values [laughter] ownership culture, we continue to produce a winning formula in the marketplace. Despite the near term challenges that we face as a result of the covert 19 outbreak.
I'll now take a few moments to discuss our second quarter operating results.
The results of operations for the six and three months ended April 30, 2020 have been affected by cold, but 90, the effects of the outbreak and related actions by governments around the world to mitigate it spread have impacted our team members customers.
Suppliers and manufacturers.
[noise] in response to the economic impact from the outbreak, we and HEICO has implemented certain cost reductions.
Including layoffs.
[noise] temporarily reduced work hours.
Temporary pay reductions within various departments of our businesses.
Our entire executive management team and our board of directors.
Our response to the outbreak.
Implementing varying health and safety measures at our facilities [noise].
Including supplying and requiring the use of personal protective equipment.
Staggering work shifts.
Body temperature taking.
Increasing work from home capabilities.
Consistent and ongoing cleaning of work spaces in high touch area.
And establishing process is aligned with the center for disease and control guidelines to work with any individual exposed to cope with 19 on their necessary quarantine period and the process for the individually to return to.
Work.
With respect to our results of operations approximately half of our net sales are derived from defense space and other industrial markets, including electronics medical and communications.
Demand for products in that half of our business has not been fundamentally impacted and its operational results remain materially consistent with the financial expectations prior to the outbreak.
However, we have experienced and expect to continue experiencing periodic operational disruptions, resulting from supply chain disturbances staffing challenges, including some of our customers temporary facility closures transportation.
Interruptions and other conditions, which slowed production or may increase cost.
Well these issues have not yet been material it is possible to predict their future impact it it's impossible to predict their future impact and our current experience indicates that the likely effect.
I would be to delay orders and shipments measured in weeks and months into TEP rarely increase some cost.
And this as opposed to profoundly changing our business overall.
Fortunately [laughter] many of our defense and medical component design manufacturing and supply operations are believed to be crucial suppliers to markets.
Continuing strong needs, we well it has not had a material impact on consolidated net sales to.
Demand for our components used in medical equipment, such as Ventilators X rays system sterilization equipment personal protective equipment all increased as a result of the outbreak.
The remaining portion of our net sales is derived from commercial aviation products and services.
Outbreak has caused significant volatility and substantial decline in value across global economic markets, most notably the commercial aerospace industry has experienced an ongoing substantial decline in demand.
As such.
Our businesses that operate within the commercial aerospace industry.
Had been materially impacted by the significant decline in global commercial air travel that began in March 2020.
Once commercial air travel resumes.
Cost savings will most likely be a priority for our commercial aviation customers and we do anticipate recovery in demand for our commercial aviation products, which are frequently provide aircraft operators with.
Significant cost savings.
Furthermore, we believe that our cost savings solutions and robust product development programs will enable us to potentially increase market share.
And emerge with a stronger presence within this market.
Consolidated net income increased 22% to a record $197.3 million.
Well $1.44 cents per diluted share in the first six months of fiscal 20, and that was up from 161.1 million or $1.18 per diluted share in the first six months of fiscal 19.
Consolidated operating income increased 1%.
219.2 million in the first six months or fiscal 20 and that was up from 217.1 million in the first six months of fiscal 19, our consolidated operating margin improved.
To 22.5% in the first six months of fiscal 20 and that was up from 22.1% in the first six months of fiscal 19.
Cash flow provided by operating activities was strong increasing 15% to $205.9 million in the first six months of fiscal 20.
And that's up from 178.3 minutes.
In the first six months of fiscal 19.
We continue to forecast positive cash flow from operations for the remainder of fiscal Twentytwenty.
Our net debt, which is total debt less cash and cash equivalents.
$393.4 million as of April 30.
Compared to shareholders equity ratio decreased to 20.8% as of April Thirtyth Twentytwenty.
And that was down from 29.8% as of October 31.
92019.
Net debt to EBITDA ratio.
Decreased 2.72 times as of April 30, 20.
And that was down 7.93 times as of October 31, 19.
During fiscal 20, we successfully completed two acquisitions and we have completed five acquisitions over the past year.
We have no significant debt maturities until fiscal 2023.
And we plan to utilize our financial strength and flexibility to aggressively pursue high quality acquisitions.
To accelerate growth and maximize shareholder returns.
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 very much.
The flight support groups net sales decreased 18% to 252 million in the second quarter fiscal 20, as compared to 308.3 million in the second quarter fiscal 19.
Support groups net sales decreased 7% to 553.0 million in the first six months at fiscal 20.
As compared to 595.5 million in the first six months of fiscal 19.
The net sales decreased in the second quarter in for six months of fiscal 20 is principally organic and reflects lower demand across all of our product lines, resulting from the significant decline in global commercial air travel beginning in March 2020, due to the outbreak.
The flight support groups operating income decreased 24% to 47.5 million in the second quarter fiscal 20, as compared to 62.2 million in the second quarter fiscal 19.
The flight support groups operating income decreased 5% to 109.6 million in the first six months fiscal 20 as compared to 115 million in the first six months of fiscal 19.
The operating income decreased in the second quarter in for six months of fiscal 20, principally reflects the previously mentioned decrease in net sales in a lower gross profit margin, mainly within our aftermarket replacement parts and repair and overhaul parts in products service.
Product line.
Partially offset by a decrease in performance based compensation expense.
The flight support groups operating margin decreased to 18.9% in the second quarter fiscal 20 as compared to 20.2% in the second quarter fiscal 19.
The decrease principally reflects the previously mentioned lower gross profit margin, partially offset by a decrease in SDMA expenses as a percentage of net sales mainly from the previously mentioned lower performance based compensation expense.
The flight support groups operating margin increased to 19.8% in the first six months of fiscal 20 up from 19.3 person in the first six months of fiscal 19.
The increase principally reflects a decrease in s. feeney expenses as a percentage of net sales mainly from lower performance based compensation expense, partially offset by the previously mentioned lower gross profit margin.
Now I would like to introduce Victor Mendelson co president of HEICO, and President of Heico's Electronic technologies group to discuss the electronic technologies group results.
Thank you Eric.
The electronic technologies group's net sales increased 2% to $219 million in the second quarter fiscal 20 up from 200 Ford $14.5 million in the second quarter fiscal 19.
The increase is attributable to the favorable impact from our fiscal 19, and 20 acquisitions, partially offset by an organic net sales decreased 2%. Your organic net sales decreased is mainly attributable to lower space product shipments, partially offset by increased demand for space products the electronic technologies group.
Net sales increased 7% to a record $427.4 million in the first six months of fiscal plenty up from $398.9 million in the first six months of fiscal 19. The increase is attributable to the favorable impact from our fiscal 19, and 20 acquisitions as well as 2% Oregon.
Panic growth, mainly due to increased demand for our defense products, partially offset by lower space product shipments.
The electronic technologies group's operating income decreased 3% to $65.5 million in the second quarter fiscal 20, as compared to $67.4 million in the second quarter fiscal 19.
This decrease principally reflects a lower gross profit margin, mainly due to a decrease in net sales of our space and commercial aerospace products, partially offset by increased net sales of our defense products as well as the previously mentioned net sales growth and lower performance based compensation expense.
The electronic technologies group's operating income increased 3% to a record $123 million in the first six months of physical 20 up from $119 million in the first six months of fiscal 19. The increase principally reflects the previously mentioned net sales growth and lower performance based compensation expense.
Since partially offset by a lower gross profit margin, mainly due to an end to a decrease in net sales of our space and commercial aerospace products, partially offset by increased net sales of our defense products.
The electronic technologies group's operating margin was 29.9% in the second quarter fiscal 20 as compared to 31.4% in the second quarter fiscal 19 electronic technologies group's operating margin was 28.8% in the first six months of fiscal 20 as compared to 29.8% in.
The first six months of fiscal 19, the decrease in the second quarter in first six months of fiscal 20 is mainly due to the previously mentioned lower gross profit margin, partially offset by a decrease in s. DNA expenses as a percentage of net sales mainly from lower performance based compensation expense they turn the call back over.
Sure Larry metals.
Thank you Victor [noise].
Moving on to.
Diluted earnings per share a consolidated net income per diluted share decreased 8% to 55 cents in the second quarter fiscal 20 and that compared with 60 cents in the second quarter fiscal 19.
The decrease principally reflects the previously mentioned lower operating income of the flight support group.
Consolidated net income per diluted share increased 22% to adopt 44 in the first six months of fiscal 20 and that was up from $1.18 in the first six months of fiscal 19.
That increase principally reflects an incremental discrete tax benefit from stock option exercises recognized in the first quarter fiscal 20.
Depreciation and amortization expense totaled 21.7 million in the second quarter fiscal 20 up from 20.5 million in the second quarter fiscal 19 and took 43.3 Miss in the first six months of fiscal 20 up slightly.
From 40.5 million in the first six months of fiscal 19.
The increase in the second quarter and first six months of physical 20, principally reflects incremental impact from our fiscal 19 and 20 acquisitions.
[noise] research and development expense was 16.8 million in both the second quarter fiscal 20 and 19.
And increased 6% to 33.9 million in the first six months of fiscal 20 and that was up from 32 million in the first six months of fiscal 19.
Significant ongoing new product development efforts are continuing at both flight support and electronic technologies as we continue to invest between three and 4% of each sales dollar into new product development.
[noise], our consolidated SGN, a expenses decreased by 22%.
20.22, 70.7 million in the second quarter fiscal 20, and that's compared to 90.2 million second quarter fiscal 19, our consolidated SGN a expenses decreased by 10% to 157.
1.8 million in the first six months of fiscal 20 and that compared to 174.5 million in the first six months of fiscal 19.
The decrease in consolidated as DNA expense in the second quarter and the first six months of physical 20.
Principally reflects lower performance based compensation expense and reductions in other selling expenses, including outside sales commissions marketing and travel.
Partially offset by the impact from the fiscal 19 and 20 acquisition.
Consolidated as DNA expense as a percentage of net sales.
Decreased to 15.1% in the second quarter fiscal 20, and that was down from 17 in a half percent and the second quarter fiscal 19.
That decrease in consolidated SGN, a expense as a percentage of net sales in the second quarter fiscal 20, principally reflects lower performance based compensation expense.
Partially offset by some inefficiencies, resulting from the overall impact of the outbreak.
Consolidated his DNA expense as a percentage of net sales decreased to 16.2%. The first six months of physical 20, and that was down from 17.8% in the first six months of fiscal 19.
The decrease in consolidated as DNA expense as a percentage of net sales in the first six months of fiscal 20, principally reflects lower performance based compensation expenses.
Interest expense decreased 3.8 million in the second quarter fiscal twin D and that was down from five and a half million in the second quarter fiscal 19.
And it decreased to 8 million in the first six months of fiscal 20 down from 11 million in the first six months of fiscal 19.
The decrease in second quarter and first six months of fiscal 20 was principally due to a lower weighted interest rate on borrowings outstanding under our revolving credit facilities.
Other income in the second quarter and six for six months of fiscal 2019.
It's not significant.
Our effective tax rate in the second quarter fiscal 20 was 22.6%.
As compared to 22.5 in the second quarter fiscal 19.
Our effective tax rate in the first six months of fiscal 21.3% compared to 14.5% in the first six months of fiscal 19.
As previously mentioned HEICO recognized a discrete tax benefit from stock option exercises.
In both the first quarter fiscal 20, and 19 and this accounted for the majority of the decrease in our year to date effective rate.
The larger benefit from stock option exercise recognized in the first quarter fiscal 20.
Was the result of more stock options exercise.
As well as the strong appreciation in HEICO stock price during the option is holding period.
The majority of options exercise, which generated this cash windfall for HEICO.
We're approaching their 10 year expiration dates.
Net income attributable to non controlling interests were five and a half million in the second quarter fiscal 20, compared to 8.3 million second quarter fiscal 19.
Net income attributable to non controlling interest was 13.4 and in the first six months of fiscal 20.
Compared to 17 million in the first six months the fiscal 19.
The decrease in the second quarter and first six months of fiscal 20.
Principally reflects the impact of a dividend paid by HEICO aerospace.
In June 2019, which effectively results in the transfer of the 20% non controlling interest held by Lufthansa technique.
Eight of our existing subsidiaries.
Two heico's flight support group.
Our financial position and forecasted cash flow remains very strong.
As I previously discussed cash flow provided by operating activities was very strong increasing 15% to $205.9 million in the first six months of fiscal 20 and that was up from 78.3 million in the first six months of fiscal.
19.
We continue to forecast positive cash flow from operations for the remainder of this school 20.
Our working capital ratio improved.
To 4.4.
Times as of April 30, as compared to 2.8 as October 31 19.
Our day sales outstanding receivables improved to 44 days as of April 30, 20, compared to 45 days compared to April 32019.
Of course, we continue to closely monitor all receivable collection efforts in order.
To limit our credit exposure.
No one customer accounted for more than 10% of net sales and our top five customers represented approximately 24 and 21% of consolidated net sales in the second quarter of fiscal 20 and 19.
Respectively.
Our inventory rate increased 239 days for the period ending April 32020, [laughter] and that's compared to 126 days for the period ended April 32019.
The increase in the turnover rate.
Reflect certain inventory purchase commitments based on pre outbreak net sales expectations.
And also to support the backlog of certain of our businesses.
Now, let's talk about the outlook.
Our results of operation for the second quarter and first six months of fiscal 20 have been affected by the outbreak.
In our quarterly report on form 10-Q for the three month period January ending January twin 31 Twentytwenty.
We provide financial guidance for fiscal Twentytwenty.
But know that it excluded any impact from the Corona virus outbreak because it was such an early stage.
As no within our form 10 8-K filed on April 15 2020.
We withdrew our fiscal 20 financial guidance due to the recent developments pertaining to the impact from the outbreak.
Hi go into the outbreak with a healthy balance sheet that included strong cash position and nominal debt.
We cannot estimate the duration of magnitude of the outbreak and cannot confidently predict when demand for our commercial aerospace products.
Returned to pre outbreak levels.
However, we believe that HEICO is favorably position for long term success.
Despite the short term challenges created by the outbreak in the global economy.
Our time tested strategy of maintaining low debt.
And acquiring.
And operating high cash generating businesses.
Across a diverse base of industries beyond commercial aerospace such as defense space and other industrial markets, including electronics and medical puts us in a good financial position to whether this period of economic uncertainty or.
Finally, we continue to file Fourq as positive cash flow from operations for the remainder of fiscal Twentytwenty.
I would like to end by thanking our team members who.
For their continued support and commit to heiko.
During these professionally and personally challenging times, our executive team is focused on your safety and your professional success.
We will exit this outbreak stronger than before.
That strength will manifest from our culture of ownership.
Mutual respect for each other and the wavering pursuit of exceeding our customers' expectations.
And we thank all of our team members for all the things you do to make HEICO an exceptional company.
I would also like to point out.
That heico's executive team has gone through at least three for me five.
Situations similar to this cobot 19 outbreak.
We went through the 911, we went through so ours, we went through the 2008.
Financial collapse.
And in every event HEICO came back stronger and more profitable than before I'm completely confident and our management team is completely confident that we will get repeat this performance. So again, thank you all and now.
We can open the floor for questions.
Thank you Sir at this time, if anyone would like to ask a question you will need to press star one on your telephone to withdraw your question press the pound or Heska. Please standby, while we compile the company roster.
For the first question, we have Robert Springer from Credit Suisse. Your line is open.
Good morning.
Good morning, Larry Larry. Thank you for all of that detail in color I'm going to have a couple of questions.
I'll now pass G.. So I guess these will go to Eric.
And look Eric obviously this is an incredibly dynamic situation and we I think we can all appreciate the lack of visibility.
Due to the virus, but how would you characterize the cadence of Q2.
February through April how do we think about it in components as this thing accelerated and then how might we frame that in the context of well when a bottom is to be clear.
I wouldn't have reached that in the quarter.
Thank you Rob that that's a very good question and we've spent a lot of time internally I thinking about thinking about that and looking at what happened basically February was an outstanding month. It was a short month, but had it been the length of the other months it probably would have been a record month for us.
We entered March very strong I would say that March overall.
I was quite decent.
It did start coming off in the second half of the month, but still.
You know, we were able to hold our own in March.
April was the point, where we really started to get impacted in of course, we still had some backlog as of that was preordered before the month began so April started coming down.
And you can see the results where they are now I think we are hopeful that may is probably the bottom of the crisis.
It's very hard to say that with all certainty may is not concluded yet we're starting to get June orders remember, we get most of our orders in the month of shipments of its very hard to have visibility, but as we can see a as enthusiasm in the country starts improving as you know.
There are few Dixon vaccines look like they're coming along and people are getting more comfortable with the idea of traveling we think that it should be up from here.
That would really be our our internal guess if if ER.
If you want to get into the numbers, we stress tested our sales and earnings to make sure that we can withstand whatever may come our way and we believe that within the flight support group based on the.
Hi, current expense levels that we can sustain a drop of sales in flight support in the 50% to 60% area.
Still breakeven now that 50% to 60% drop in fights aboard sales would imply probably a 70% to 80% drop in the aftermarket but.
With all of the business units, we've run those numbers, we understand what that is and when I say breakeven at 50% to 60% down that is after writing off all of the.
All of the inefficiencies in the under absorbed overheads that would end up getting.
Incurred in a reduced volume environment.
Okay and then just.
I appreciate all the that's very helpful. I would one other thing I wanted to ask you and perhaps too just compare with what we've heard from some of your peers and this has to do with use surface a bomb material.
In the parked fleet some of your peers have noted that it's not really an issue.
Until price points get above about $5000.
Would you agree with that and what is fscs exposure at those higher higher levels if at all.
I would agree with that and a you know I've been on the calls where people have suggested those numbers. We think that 5000 dollar Mark is probably a good number I can tell you that less than in we've not disclosed this in the past due to compare.
Additive reasons, but based on where we are in the cycle in the crisis I I think it's something which is reasonable to speak about now that only less than 10% of our PM may sales have less than 10% of RPM may sales volume is driven.
By parts that cost over $5000.
So therefore, we believe that you know our focus on that type of products that we've done would.
Tend to not lend themselves to as much cannibalization as a result, you serviceable material.
Got it got it. Thank you very much I'll jump back and thank you. Thank you.
Next question, sorry is from Peter or Matt from Baird line is open.
Thank you good morning, Larry Victor <unk> This morning warning.
Eric I guess youre going to be popular today, so I'll.
Continue just talk about Fs Gee I guess, maybe you could just talk a little bit about when you said that stress test regarding up as GE.
How does that you know how are you thinking about that within the context of all the retirements that we're hearing about or when you think about the age of fleet, what that's going to look like how does how do you how do you think about that.
Yes, Peter that's a great question you know what we.
See right now the initial impact of course is if the airlines aren't fine the aircraft they don't need the parts and they need to burn off their inventories and we've been through various examples of how de stocking works, but basically if an airline was using let's just say 100 units of uptick.
Order widget.
You know before the crisis and they wanted to maintain let's just say three months of.
Inventory on hand, there would be 300 units.
If due to consumption the demand hypothetically falls, 50% then they would only be using 50 units and if they wanted to hold three months of inventory and of course in some cases, they want to hold less due to the financial impact that they are suffering right now it would only need 150 pieces.
So therefore, if they had 300 on the shelf they only need 150, they're gonna have to burn through 100 150 pieces in before they place those orders.
So I think thats the initial impact that everybody in the industry's scene.
Then you've got.
A a further breakout dichotomy between components in engines.
So we believe that the sales of compose component overhaul component parts is going to be fairly linear too.
Number of fights are available seat miles.
Because airlines typically are not going to remove a serviceable component from a.
From a serviceable airplane and stick it on another aircraft and then end up with an unserviceable airplane.
Thats a just cannibalized.
So we think that the sales of component overhaul and component parts will come back first we believe that the engines will be more impacted and that airlines will figure out how to.
Not in duct engines, and not either swap them off aircrafts that have good engines as needed or just delay the engines going into the shop and then of course heavy maintenance is the last part.
So roughly two thirds of our PMT sales are in the component area.
Right and.
We expect that that it's going to come back before the engines and the heavy maintenance now how did you know your question was on.
Uh huh.
Retirements.
So airlines are obviously faced with the dilemma do they continue to fly the existing equipment or do they go ahead and take deliveries.
We could have a whole debate on this our belief is that in areas, where airlines are going to lose significant deposits, they're going to take those deliveries, but by and large they're going to defer the maintenance on the planes that require the most dollars to be able to fly.
But that it will make sense to go ahead and make that equipment serviceable.
Before they take deliveries of new aircraft and you know I'm, not saying that deliveries new aircraft is going to shut off its not but we think that that that's going to be more seriously impacted so that that sort of how we how we look at the market.
So that's very helpful color and if I could just ask one Larry I just regarding Yale thoughts on on M&A. I know you had kind of an active pipeline before covert 19, maybe just give us your thoughts on deploying capital now during this.
Well, we were in a very as you know.
Because you read our reports we were in a very strong capital position, we have very low debt very low leverage we have great availability.
We are actively in the market we are doing due diligence on a number of project.
As you can imagine with the travel restrictions and difficulty and you know cobot.
The due diligence process is extended because we can't get out to the locations as often and you know is thoroughly as we might like.
But I would say that we are all we're ready to.
Make the acquisitions, if they make sense, we we don't change our basic principles.
We want an acquisition that's going to be accretive that's going to have cash flow.
That's going to earn its keep so to speak if we if we write a check a we expect to bring that acquisition in house and have it accretive in the first year.
In the Aerospace group.
There are companies, which are suffering so.
In order to pay the price that they may want.
It doesn't really work for us it doesn't work in our model and we're not going to get ourselves in a kish crunch. We I have said for many years that HEICO is not an aerospace or electronics company. It is a vehicle that generates strong cash flow and that's what we do and.
We will make decisions based upon our cash flow profitability, but I can tell you that.
I wouldn't be surprised if we were to announce an accurate I can definitely tell you because you never know until.
Deal closes if it will but I can tell you we have an appetite we have the financial capability.
We are active the as we can possibly be.
Thank you very much Larry.
[music].
Next question from lobby Italo from Estrace cities lines open.
Great. Thanks, Good morning, guys good to hear your voices and not.
All the families are doing well I'll. Thank you Larry you absolutely just a few follow ups I'm not just on the.
The aircraft retirement question, obviously, a lot of talk about retirement plan going forward can you sort of just speak to that drop off.
Or since I know, there's been a it all over the last 10 years or sell big build out new aircrafts and a lot of those probably have not been on warranty you guys haven't been benefiting from that.
Will there be some offset there as you look out obviously, we don't know exactly how many plant debt retire, but I imagine will be some offsetting some of these newer aircraft because our off want go off warranty that a fair statement.
Yeah, I am the Air Hi, Larry This is Eric a as as you said as the aircraft come out of warranty they really come into our sweet spot.
You know, there's all debate over what's going to be permanently retired and what's going to be temporarily retired I think that there's a fair amount optimism that a lot of equipment does go back into service of course, there's been a delay in the production of new equipment and of course to build rates have been.
Reduced.
So.
Again, we're optimistic because even if you assume an aggressive retirement schedule, you've still got all of the other equipment aging one year per year. You know the fleet is approximately 25000 aircraft. So even if a chunk of aircraft come out then you know.
Albeit they will we don't think we're going to be hit as a result, the cannibalization that badly.
And yes, there would be a short term impact, but we think that you know as the you know the lion share of the and aircraft that remain in service age should that will provide plenty of opportunity for us in terms of.
Our sales, whether it's a parts or repairs.
Okay and Lucky in terms of obviously again.
To read in the future, but and prior downturns, although this could be a little bit more little bit more extraordinary then par downturns obviously be.
The motivation incentive.
And demand for Pmeight parts, it's has spiked.
And can vary will happen again this time around what not just in terms of the outlook for Oh, you guys and sort of maintained a level of new parts per year.
Getting into specific where any thought of maybe remote out in the future maybe increasing the amount of.
Pmeight parts, you introduce an annual basis that demand does increase yes, it's something that we are capable of doing you know we've done a very thorough review of our new product development pipeline wanting to make sure that everything that weve that we're spending money on in that we're going to develop in source that in fact.
There is going to be a need for it. So we've gone ahead and done that.
At this moment.
We haven't increased the amount the new product development, but we're basically holding it roughly steady and consistent with prior years, because we want to make sure that we're able to support the airlines coming out of this crisis and we think we're going to be in a very good position to be able to support the airline.
Yes.
You know <unk> and I know that this is sort of my perspective, and a as a result of my involvement with Heiko.
But I really do believe that it's important that people are not conflate.
The growth in Pmeight.
With the growth of HEICO in that I think airlines look at HEICO HEICO is a $10 billion market cap company, where a respected in serious industry participants all at a major companies are aware of US and you know as I've said many times the PMT industry is now.
I didn't easy business to be it you know, it's very difficult we have to fight for every single piece of business that we have so I'd be very careful about making a state I and I don't mean, you, but I mean people right enteral, making a statement that pmeight is going to do very well coming out of this crisis I have a lot.
I have confidence that HEICO is going to be able to do very well coming out of this crisis because of the products that we offer in our financial stability.
You know looking at other companies I'm not so sure I I think they're going to have a lot of they're going to have a lot of pressure. If you look at other companies sort of how they've done over a longer period of time the PM. A space has not been very good for them. So I think our motto of.
Continuing to develop new parts and making sure that we take care of the customers and we're very fair on pricing I think really wins us a lot of friends.
For that reason I'm very optimistic on our.
You know our future.
Right. So it sounds like an opportunity hopefully take some country takes a market share.
Yeah.
I I do feel that our market share is going to continue to go up our our market share in PM may was already high but even gone right. So and I anticipate that that's going to continue.
Right, Okay, well just switching gears a question for Victor upkeep monopoles.
Thanks, whereas it was starting to feel like chop liver here [laughter] never never come from just a quick if you obviously some of your business. These are from a more insulated well certainly against the consumer.
On the defense and medical side and you.
You mentioned space or do you expect a rebound in the back half how about just on the sort of it I'm not the general industrial piece of your business, which I think it's I don't know 20%, 20% of the segment does that is that piece, maybe more susceptible to without sir.
Larry I would say that is more susceptible it's held up pretty well.
It's it's been Choppier, though overall.
And it's it's harder to predict I think it will be softer than the rest of the business.
You know certainly than space and in defense and we'll just have to see how it plays out.
Fair enough. Okay, just just lastly, Ah Carlos I'm not.
Just on the accounts receivable.
Is there anyway to sort of decipher the agency receivables has that gotten materially different over the last quarter.
And then just last question just you took.
Although draw down on your revolver, what's the sort of thoughts on thanks.
Thanks for the question Larry So.
The receivables are actually very high quality right now we did a good job on a on collections during the quarter and as you can see from the press release receivables are down it was a source of cash for so that was very good. The age right is not the aging is not deteriorated I mean candidly I am worried about airline bankruptcies that.
Impact on our receivables, we don't tend to have high concentrations with anyone airline or or any what I'll call significant exposures, but for the health of the industry I do worry about that we'll see how that plays out over the next three to six months.
As far as the.
The dry you're correct. We had 'em, we took a draw in March and I did that preemptively to make sure that yes.
The banks for whatever reason seized up.
As we saw back in the financial crisis that HEICO wasn't at the Mercy of.
The banks and the case, where we needed to draw the line for an acquisition or for whatever capital needs. We had and so I took the drop in a practice that you could see we didn't use it we have about close to $350 million on the balance sheet right now and you know my carrying cost for that is so low that I'm going to let it sit there for a while.
And if we had for acquisitions greatest not just repaid along with it.
Great all right excellent guys. Thank so much appreciated.
Okay.
Next question is from Gautam Khanna from Cowen Your line is open.
Hey, Thanks, good morning, guys.
Good morning.
Morning.
A couple follow up questions I guess the first.
I don't know Eric if he could characterize this but in terms of kind of what you're seeing in current orders.
And on the a pure may side.
Should we just assume it's sort of down in line with available seat miles or is there any discernible.
Difference at this point I'm just curious.
We all assume that you're going to pick up share you know relative to just general aftermarket parts suppliers, but I wonder like in this.
In the current environment is it just kind of Armageddon everything's down.
At or around the same rate disaster.
Worse or.
Anything you can say about kind of made trends.
Yeah, that's it that's a great question.
In the past in order to sort of keep things simple we used to say that the greatest proxy for the aftermarket was really available seat miles.
You know ultimately passenger seat miles would impact available seat miles, but available seat miles were really the driver and.
As we got into this crisis, we realize yes, I mean, obviously that's important but just the number of flight is also very important most of our sales have always been on the narrow body product.
So wide bodies, what's obviously most impacted right now are even more impacted the narrow body and most of our sales are over on the narrow body. So I would say number of flights is probably the highest correlated.
To the aftermarket right now and the thing that were really looking at.
But remember the other issue that you've got as I mentioned earlier was the destocking phenomenon and that is extremely sharp in extremely painful in the beginning because everybody's got a burn off their inventory.
And.
You know until that until that happens you know, it's very hard to see a rebound.
But I I would say you know that's probably the.
The big driver for Us a number of flights.
To follow up on that it's or any way you can give us some rule of thumb on.
The mix of Peter maybe that you guys. That's how what percentage is narrow body versus like body. So that we.
We're tracking the right data points.
Yeah.
I I.
I don't have that with me, but I'm guessing that 70 525 is probably a good you know a good guess on what it is it sometimes can get a little complicated because some of the components can go and narrow body aircraft as well as wide body aircraft. So you have to make all sorts of assumptions, but I would say yeah, the 75% narrow body.
He is probably good you know rough approximation of it.
Okay. That's really helpful. He Victor I was also wondering in your business.
What are sort of bookings trends looking like obviously, we had very difficult comparisons this year because of the great growth last year, but.
Just wanted to see like how much.
How much do we have left it you know one in terms of.
Organic growth, what's your visibility at this point speak to that bookings in the in the EPG are they tend to get batched in in the business, particularly on the defense side in the space side. So.
They tend to come in in large amounts and so recently within the last couple of months. We've had some very large orders that had come in.
So you know order flow on on defense and space has been pretty strong for us.
And you know that's why we made the comment in the release that.
We had softer shipments in space, we didn't say softer demand.
We referred to softer shipment because demand in space for us remains strong.
Okay. That's good for the second half.
<unk>.
Expect or.
Yes, I, you know that would be that'll start to materialize in the second half of the year as well as in 2021 fiscal 2021 for us.
Okay.
Larry One last one for you if you don't mind.
You talked a little bit about the acquisition pipeline and certainly the interest in doing acquisition.
The acquisition pipe, we are looking we're doing due diligence on a number of companies.
Again earlier I commented on acquisitions and.
You know, it's more difficult because of logistics issues getting out doing the due diligence you know we do a very thorough due diligence we go out to factories, we look at how their manufacturing what their manufacturing processes are in addition to financial we studied the more.
Markets and so we do a very thorough.
Due diligence process, it's more difficult because we can't get out to the sites as easily because of the covert.
But again, we have a great appetite.
Our appetite for acquisition has not changed at all and a as a matter of Frac.
We're cautiously optimistic that we will see us some opportunities maybe people will be willing to sell at prices that match our.
Our strategy because you know, we we don't pay 14 or 12 times.
EBITDA and we're hoping that some of the competition that we used to get from private equity might be.
Less because of.
The ability to their private equities less ability to raise funds in this environment.
We have plenty of availability capital, we're not capital constrained we have very low debt level. So we are.
Aggressively looking for acquisitions, now, saying that many companies.
Have seen particularly in the aerospace side have seen there.
Revenues a drop.
And we normally do not pay prices base to fund future promises we want companies that will carry their way.
Generate cash flow generate the margins that we demand at HEICO. So our discipline has not changed and we will never want to grow just to be bigger.
We only will grow to be more cash flow positive so.
I think the opportunities are out there I think over the next six months or a year I would think we will see more opportunities.
And you know we're open for business, we'd like to make as many good transactions as we can.
Would you say that Theres larger acquisition opportunities that have showed up in the pipeline.
I'm showing up.
As of late or no I think it's I think it's all it's pretty much the same.
You know the mix is pretty much the same we look at low.
The smaller ones, we again the key for US is not big the key you know investment bankers come to us and they bring us deals, where there's 711% operating margins, they're big but.
We're not interested in big we want cash flow. So we won 20%, 30% operating margins that really earn their keep with great entrepreneurial management just to be big HEICO is not a company that wants to grow to just be big we will always.
Grow to be cash flow big that's where we want to be big.
And so the size of the company is not nearly as important as the profitability and the cash flow.
Thank you very much guys.
[noise] next question, Sir we have Ken Herbert from Canaccord Linings open.
Hi, good morning, everybody really nice quarter. Thank you Ken.
Hey, Eric I, just wanted to start with you I wanted to follow up on a comment you made earlier regarding your expectations maybe for the recovery as you look at the aspects of the aftermarket component versus engine versus heavy maybe and as you as you think about for your business, maybe a a delay or a lag in the end.
Engine recovery relative to component is that is that maybe a matter of months, maybe a matter of quarters any sort of.
Quantification or how you're sort of expecting the recovery to play out on engine versus component and timing would be it would be very interesting.
Can that's a very good question I know you've been writing about this topic in very much focused on it which I think is very good.
My personal belief is that.
As airlines are not going to induct engines until they absolutely have to.
So I think that that is again the last thing to come back I think we'll be heavy maintenance I don't think they're going to indicate heavy maintenance until they absolutely have still I and with engines I think they're going to wait.
So.
You know how much longer that is from component I think it's really on very much a case by case basis, but you know I'm guessing that it could be six months delay.
From a you know from when Nick the components come in but it's really it's something that we're gonna have to look at depending on that particular engine type.
And Ah you know the airline that is operating it but I definitely expect them to really want to conserve cash and of course engines that need a lot of life limited parts. Those you know goes without saying are really going to be at the end of the line.
And I think those are the as a part of the aftermarket that's really going to experienced the most.
Short term and perhaps intermediate term pain.
And those will end up getting overhauled, but I think that's just you know further down the line.
Yes, well that's very helpful. Do you get a sense that the.
As you look out over the next six to 12 months or so as things do come back that relative to prior downturns, there will be more sort of green time availability on the engine suite today, which which certainly could further sort of depress the timing of the engine recovery.
I think yes, I think definitely the airlines are going to manage the green time, a very effective way there also less stores out there.
Who are being very creative and very innovative on buying up engines with green time buying up aircraft taking off the engines add to the point, where the engines don't have to be overhauled by as much and there are less stores out there who.
Recognize that what airlines care about his thrusts they want safe thrust and I think a number of Oems have gotten away with conflating.
You know they.
Their sales of spare parts with the quality or the aftermarket demand for the re marketability of those engines and we've seen less stores go out there and recognize that airlines are just as happy to operate engine.
Ends, which have alternative material in them and.
The airlines are able to achieve savings and the lessors are able to make money. So I do think that engines that have more OEM material and require more of the life limited parts are going to be delayed and definitely the green time engines are going to be used for.
Yeah.
Great and if I could or just just one more appreciate all the extra detail you're giving today as you think about the cash preservation or conservation approach from the airlines, which I completely agree with do you think that presents any incremental opportunities for you with emerged.
Market Airlines were airlines that historically have not been where you where you maybe had a less representation relative to more established airline says this current environment, maybe provide the opportunity for you to accelerate.
The work with some customers that you've historically not done as much work was.
Yeah, absolutely can we believe that there is a lot of opportunity for us in those markets. Those discussions were actually occurring before the Kobe crisis, They really picked up in the months before covance.
And now with the airlines.
Being really behind the eight ball, we anticipate I think really for HEICO and that goes to my earlier comment in that HEICO is recognized as a serious industry player with a 10 plus billion dollars market cap.
And were able to stand behind these products. So I think that we are going to disproportionately benefit.
On the rebound and I think these airlines are going to see the opportunity.
I would that HEICO solution can give them.
Yes, I do I do anticipate us being able to.
Sort of mitigate the downturn and pick up market share as a result of.
Picking up some of these customers, where we didn't do as much within the past.
Great. Thank you very much thank you.
Next question, how Josh Sullivan from the Benchmark Company line is open.
Hey, good morning, Thank you for taking the questions.
Well I judge.
You guys had more of an entrepreneurial acquisition model with with your portfolio companies can you talk about your other relationship in this environment how much of your directing to those portfolio companies to implement disciplined cost reductions versus what there what they're doing organically.
You know, we Oh gosh it sure we really don't direct our companies.
To take actions, we expect them to do what's right for the business that that doesn't mean, we don't have discussions with them about it but ultimately we expect them to be the same companies. They were pre acquisition and you've heard us say that the key is buying right that if you buy the right business and you bye.
The right kind of company that does the right things then you don't have to direct them post acquisition. So our companies took it upon themselves to take the actions that they've taken individually and they've done what's right at the at the local level.
And they're the right ones to make those judgments because they need to make sure they save where they can save a but at the same time, we know that will come out of this and we need to grow and heico's a growth company and we'll continue growing.
So we have to take the right actions across the board. The other part is one of motivation that we don't want to de motivate our managers by ruling from on high so to speak and rolling from on top so it's a combination of those things and what we have noticed and again over a period of of decades deals.
And with downturns and crises is that it works. It actually is very effective that we get to the levels, we need to get too and we get the reductions that we need to get but we do it in a much more humane way.
And a much less disruptive way than the companies that come out and say that's it we're getting rid of 20% of our people and then people are quaking in their boots as the who's next and we find better I think you better in creative ways to keep our folks motivated unhappy.
Larry just to add to what Victor said I agree completely.
We get to simplify it is think of the characteristic so in in a decentralized company as HEICO is we would much prefer the carrot than the stick and all of the the business unit managers and president of the companies are inside.
Since devised to a very high degree to produce good results. They are also basically entrepreneurial when we acquired the company as Victor told you. So.
So by incentivizing them to do the right thing, we don't have to hit them with the stick. They they you guys are really really smart operators. They are terrific. So that's the benefit that we get running a D. Highly decentralized company now they reported to us we.
No what they're doing we get financial reports weekly, but these people are known entities and they know exactly what to do these we have a group I would say what doesn't show up in the financial statement is the brilliance of the managers that we have running these companies. So I think that's at the.
Hearth and.
I appreciate that and then just kind of related to you know as far as the free cash flow outlook. That's may isn't the trough for commercial aerospace your how sensitive is that guidance or any thoughts around that.
Apologies everyone.
We will assume the conference in a moment please standby.
Ladies and gentlemen, apologies again further interruption. Please stand by the conference will resume short list.
Yes.
Again, ladies and gentlemen, please stand by and we will be seem shortly thank you.
Slide 381.
666.
Ladies and gentlemen of speakers are now.
Ill back.
Okay.
So John do you still there.
Yes, I am here I'm sorry.
We must have had a power failure here and the hub the system went down just disconnected Dave.
We are you satisfied with the did you get the whole answer.
We did I was actually just beginning an excellent okay.
Okay. Thank you, Sir and just as far as the free cash flow outlook.
May isn't the trough for commercial aerospace how sensitive is that free cash flow guidance essentially.
Josh This is Carlos I, just want to reiterate we haven't given free cash flow guidance.
The guidance, we've given is that we will make will remain cash flow positive we have measured as a very.
Variable cost structure.
Which allows us to flex in business.
And maintain cash flow positive so I want to be very careful that they were not putting numbers to that because as a management team. We're dealing with this without the luxury of having certainly in the future here.
Got it.
Okay. Thank you.
For the next question, we have kiloton young from Jefferies. Your line is open.
Good morning, everyone and thank you for the time.
Eric your popular today, so I apologize and I know you've talked about this a bunch, but I want delve in more into the EMEA market and I know you guys have the best share because of your product offering and your rigorous process behind it.
Wanted to see how you're thinking about balancing airlines.
Choosing lower cost products.
And also the aircraft ages aircraft being retired I'd say 18 years old versus 24 years also how that those two things balance each other as you think about gaining share in this market.
Sure.
Thats a good question.
And I've been reading your material throughout the whole crisis I found it very interesting with the yet a lot of the data that you've had in there.
I think the big driver is going to be the aircraft that need first heavy maintenance and then engine maintenance and I think thats going to be the driver before.
Hey, good in other words, you could have hypothetically, an 18 year old.
Aircraft that needs a lot of money to be putting it in order to five whereas you just overhaul at 24 year old aircraft Youre going to end up deciding to provide the 24 year on aircraft because from a cash perspective, you don't need to put money in it.
So I think it's going to be very much based on a.
An airline by airline fleet by lead aircraft serial number by serial number.
As they figure out which aircraft theyre going to use we are in the process that were part of a steady whereby we've got somebody looking into this for us to be able to determine what areas are going to be impacted the most and.
[music].
Basically come back online.
So I think that's really how we look at it more on.
Cashing basis as opposed to a straight age basis now having said that if you've got two aircraft type pathetically and they both need the same number $1 to be made viable then obviously to the extent you own both of them than you would pick the obviously the under one because.
Is that you would have a longer life in that.
However, I think a lot of this gets very complicated because it depends what at least what airlines are able to get back what's owned with fully depreciated and it's a fairly complicated calculation. So I don't think it's going to be a one size fits all approach.
Okay that makes sense. Thanks, I appreciate the extra color and I. Thank you guys will always.
If the market.
Long in some ways and myself Ron in terms of 10% of your business is actually a Lee I believe with enough SG can you talk about you know your expectations for that part of the business.
Then on your breakeven forecast of 50% to 60% decline.
Does that assume any sort of cost cutting or is that just the current.
SGN a.
My question, we've seen thus far.
Yes. Good question, Joe Let me start with the second part of the question.
We have done.
Yes.
We are number one asset is our people. So we've been very careful to try to impact our people the least as possible having said that with the current reality in the reduced level of business. We've had to make some adjustments. So we have done layoffs. We have done for those we have done voluntary program.
In terms, where people are not working one or two days a week and then we've also done.
Wage.
Temporary wage reductions, which we've all taken in order to be able to pitch. It when you put all of that together we've calculated at our breakeven on Fs GE is we can withstand a drop of 50% to 60% total sales.
And if you assume roughly that SSG is approximately.
80%.
Aftermarket and let just say the aftermarket is down pick a number 70% than that implies basically a 70% to 80% drop in the aftermarket we think that initially.
The drop in the OEM sales.
Actually coming out of the shoe wasn't as much because they have a certain amount or but that is going to start to kick in so.
We anticipate again aftermarket down sharply OEM not down as much but that.
Reduction is going to last longer than the aftermarket because we anticipate the aftermarket is going to come back first.
So I would say that sort of how we how we look at that makes sense. Thank you. So much for all the color everyone.
Thank you show actually a lot.
Next question, we have Michael from only from Suntrust. Your line is open.
Hey, good morning, guys. Thanks for sticking around here to take a questions.
Maybe maybe Eric and Carlos on this kind of stay on on Sheilas question.
Looking at.
The second quarter here in the fall off that you saw.
In April probably assumes you know maybe revenues were down 50% or so I mean should we think about SSG being down in that 50% to 60% range for the next two quarters or so and I just wanted to tie in yes gionee.
Down at.
15% or similar revenues for the quarter I think you guys, usually run that kind of 17 and a half I mean are you re sizing the business you know that low level of SGN, a sort of implies that the full year revenue run rate maybe comes in below 1.7 billion or so.
Is that the right way, we should be thinking about this unit Cornish DNA in the quarter and then I.
I guess that the kind of what you just said Eric with the aftermarket down sharply in terms of.
Tying together a growth rate for the for the next quarter or too.
Yes, so Mike this is Eric and that's a great question.
We we have to be careful because we have withdrawn guidance because we truly don't know what the numbers are going.
We began the impact thus far we see that airlines are not flying.
We care about our people you know as I said number one.
But our people.
And so we've obviously had to reduce our cost structure to be able to live with this new reality, but we want to make sure that were able in terms of new product development, developing new stuff as well as maintaining our sales force and maintaining the leadership our businesses that we are able to respond.
So that's why we're providing this.
If you will framework that Fs gene can be down 50% to 60% revenue and still breakeven.
It does as that revenue falls, we do approach more of the breakeven area and the reason we give the range of 50% to 60% is it depends very much on mix.
But the other thing which is very important to note is that we've always had.
Just going back 30 years, we've always had an extremely conservative accounting model and accounting standard one or the old trick manufacturing is that when volumes fall one other ways that companies can delay taking the pain is basically by increasing cost and who.
Going into box.
Cost that ends up getting amortized or increasing the standard costing of products going forward. We're very careful cannot do that so we write off when we have excess manufacturing cost an underutilized overall, we're very careful to write that off so we don't.
Have future pain, so when I say that our numbers are down you can withstand a drop of 50% to 60% still breakeven. That's after taking all of the inventory reserves and writing off all of the excess manufacturing costs and not putting them into inventory not putting them into fixed.
With that and not doing things that we think are really.
Penalized the long we want our businesses to understand very clearly how they're doing in the short term and if companies play around and they play games and they end up reporting higher short term profits in order to delay the pain. The nektars confuses the team members on really where you stand.
So.
I hope that gives you a little bit of IDR color into how we're thinking about.
Yes, no thats that's extremely helpful. And then just another one Eric on on your customers.
Which one of your customers might really be at risk of bankruptcy or failure here. As you know this this kind of pandemic carries on and certainly there is going to be some failures out there I imagine, but if you kind of looked at the customer list from that regard.
We have but it becomes honestly very complicated to build the revenue model based on that we do look at it.
But.
Carlos and let him comment on our accounts receivable a process, but we are careful with regard to companies that are at risk of filing for insolvency or bankruptcy and yes, we do get stung and we like to make sure that we're supporting our customers, but we want to do so in an intelligent.
In until when Carlos can expand on that my guess is Carlo so.
With that concern on your part I mean, we're already in the papers and seeing the.
The industry email.
There will be some there probably will be some bankruptcies in the airline space and I don't know it's good to be.
Caustic far along the way I don't know what geography, we're going to stay at the one thing we've done to try and limit that exposure as we sat down with all of our folks at the businesses.
Got over there.
The credit limits that gives customers made sure that their mindful about collecting side.
And are not overextending HEICO, we don't want to be everybody's bank.
Total, we still have to conduct business in a relatively normal fashion with these customers because we don't want to burn any customer goodwill by acting.
Two unusual during this time period. So it's a fine line, we got to balance I would say it ended the quarter. Our receivables were very good shape. The age of the receivables was was very new there wasn't a lot of any.
Any stuff over extended but.
Yes going into Q3 and four we'll just have to be mindful and if there are bankruptcies, we'll deal with it but because of art diversified platform in the fact that we are dealing with.
Multiple airlines across the globe, we don't have a ton of exposure or concentration in any one airline that could cause as major issues.
Nobody on it.
It does and then just point of clarification on on Chaucer's question, you guys mentioned or even in the press release that you could maintain positive cash from operations, so not necessarily free cash flow, but.
Clearly you guys are comfortable and looking at maybe working capital managing inventory some of those variable costs. So so clearly cash from ops is going to be positive for the remainder of the year, Yes thats.
The snehal their air describe a little while other if we stress test the business said, yes extreme levels, we still wind up with positive cash.
Got it alright, guys. Thanks, a lot appreciate it.
Thank you.
Next question, sorry is from calling to talk from Sterling capital. Your line is open.
Hi, good morning, Thanks for taking the question I hope the HEICO families all healthy and say so I had a quick clarification for Carlos regarding the expense rationalization kind of framework, you've talked about the playbook a bit bottom up very entrepreneurial, which is consistent with prior messaging at the subsidiary level, but clarifying.
So substantially all of that expense reduction has that been bottom up.
You know in coming from the constituent businesses versus.
Being frame top down.
Thats correct called so I think as Victor mentioned earlier, we're very well first of all were our guys and manage these businesses are incredibly entrepreneurial and one thing we have noticed about them as they don't change much when they when they all the business and they ran it they read out using their checkbook and just because heico's either co invested.
Them or acquired the business doesn't seem to change the way that they manage the frame of reference as they have on how to deal with both good and challenging times and so what we've noticed is that these folks at these subsidiaries because we allow them to operate a decentralized fashion. They do make good decisions and they do tightening their belts when they need to.
A very.
Aware of and conscientious of working capital management of listening to their customers understanding demand is best that they can during this time period and so we haven't we don't have a need or we havent felt the.
We have felt it necessary that we'd be heavy handed in these circumstances. They have done the right thinks it just so happens that with them doing what they need to do to manage their businesses. We have also contributed at the corporate level.
By taking.
Hey reductions by the executives at the corporate staff and also board of directors. So we've sort of all contributed if you would to the.
The collective misery challenging times and of course, we hope that this is short term and that we can all get back to normal soon as possible.
Okay, Thanks for that and I wanted to get.
I would take a look at the M&A kind of outlook and perhaps view it in a different lens Larry was very clear in that.
Nice frame for HEICO is a vehicle for free cash flow and you're looking for solid cash flow from from from your targets over time, recognizing that that frame has been consistent overtime.
One could also equally recognize the unique nature of this crisis you guys have been through several but not as far as I know have seen seat miles collapse 95 ish percent and so I guess my question is.
Maintaining that free cash frame.
Are you willing to consider targets that are long term quality assets with a quality longer term outlook, which are distressed in nature today and facing liquidity pinches.
Where you could foresee them, becoming part of the HEICO family and expanding your aperture given the unique.
Complexity in of this crisis. Thanks.
Let me answer this is Larry.
We will look at those kinds of companies depending upon.
What we think their ultimate profitability will be.
So the answer is yes.
We are inclined not to pay up for.
Brian This guy in the future, but there are some companies that we know of now that we're looking ahead that meet those kind of qualifications that you just mentioned.
We will have to see.
How they work out what the prices if there for sale. So yes, but we would consider so the answer to your questions. Yes, and this is Victor I'd just add to that we cast the very broad met in the acquisitions, we look at and look for so we consider many different transactions and different.
Styles, and that's very important to what we do so we understand we've got a look at a lot of things and consider many things.
In order to find the right. One so we are willing to look and consider all style of deals even ones that may not be performing well today, maybe distressed at this point.
Thanks.
Next question.
Please refer to from the yes. Your line is open.
Hey, good morning, guys warning morning.
So sorry, Eric to take on here, but.
Yes, so I know in the past you said that.
Traditionally didnt get onto an airplane. So it was about 10 years old.
So is that still the case is that primarily just for the team made business or do you think that applies for sort of MRO as well.
No I think.
Clarify Louis what I, what I meant or what I said or what I meant to say was that we typically don't get on a new airplane until.
It doesn't have meaningful revenue to us until 10 years after the first delivery.
But not not 10 years after each aircraft is delivered in its probably shorter than that maybe it seven years or something like that I would say that's the case more on the pmeight and the repair side on the distribution side, we would be on it right away.
We beyond it immediately and of course into specialty products, we would occur we would achieve revenue even before it's delivered.
So.
As you know to put a little bit of color into that thought.
Great. Thank you.
And so.
I know if we go back to kind of like 2014, 15, 16 area. One flight support Didnt have a stronger growth one of the things you guys talked about back then and you heard from other people industry was that the needs. The fleet was kind of younger given the dynamics of increased retirements and newer planes coming in so I guess do you.
I don't know anyone can argue with the fact that agent suite is likely to get quite a bit younger than becoming your to do you think you'd be able to offset that with share gains.
Yes, so I think what you're referring to in the 2014 15 time was the reason our sales were lower than was because we had something like I don't have the numbers in front of me, but something I, 22% organic growth in the year or two before that so I think what happened was.
A lot of equipment got deferred there was a lot of deferred maintenance.
Was massive sales we weigh outperformed in the area in the period before so then it slowed down a little bit in that period, I think thats, probably the thing that drove.
The lower sales growth in.
The 14 15 timeframe.
Okay, Great and then just one follow up on the M&A. So.
Maybe Larry maybe best for you you traditionally talked about wanting.
Yes, I think you said earlier, 20% type of margins I guess, how do we circle that with the fact that FSP has called roughly 20% margins, Yes, correct me, if I'm wrong, but I'm guessing the DNA aftermarket has higher margins in specialty products has lower margins. So is there a lot of opportunity there.
Yeah, we think that I mean look theres no question that it is hard.
You know to find those types of businesses.
In over on the MSG side, I would say more often than not where probably lower than that in terms of margins and then through our ability to increase sales.
And to increase the profitability of the business going forward, we get it closer to our area.
But I would say into the 20% is something that we like to be sometimes we're able to.
Find the business, that's over 20%, but I wouldn't say that that is a.
Walkaway point, if we see a very realistic path then we could start with something below that number.
Great. Thank you.
Just to clarify I will not go for a company that has a very low margin unless it's a bolt on acquisition, where we know so if we buy a company we bought launched companies within SSG, we have purchased launch companies and within three months they have become.
Big profit makers, why because we strip that remove the location we closed the factory, we and we merge it into one of our other operations and then all of US on it goes from there could be a loss to over 20%.
Great.
Keep in mind, we're looking for remember this because I don't know if you keep in mind when you write your report.
We are looking for constant cash flow and growth. That's what HEICO is all about forget aerospace electronic technologies, whatever HEICO is a.
Nickel to generate cash flow and we do it through those two divisions, which normally has high margins and.
And I think if you understand that you'll understand HEICO better.
Alright upper setting last question, we have Mr., Barry Haimes from Sage asset management. Your line is open.
Thanks very much.
Two questions I think both quick.
One.
Can you.
For.
Yes, she just give us what the revenue decline was in the month of April just so we have a marker and sort of where things were.
And then second question was.
Do you have any idea roughly the number planes in the.
In the narrow body fleet globally.
And then hemi Max's are built in sitting on the sidelines waiting to come into that fleet when we get approval.
And when we get approval. Thank you.
Yes, so the.
The first question Barry with regard to April we don't break out the specific numbers.
Within the quarter, but I think you can do some back in the envelope massing sort of getting an idea of where that is the reason that we're not giving them out is because it's not necessarily representative of.
If you will the bottom or.
How the entire.
Quarter operated.
With regard to the number of narrow body aircraft I don't have that in front of me, but I think it's somewhere in the 20000 aircraft area and with regard to the Max I think there are approximately 400 that were delivered.
I had been park and then Boeing has got approximately another 400.
You know in various stages of production that will lead to get delivered.
Great. Thanks, very much appreciate it.
Well.
Thank you.
I'm showing no further questions at this time I would now like to turn the conference back at your percentage. Thank you.
Well I.
The management team and HEICO wants to thank everybody on this call for their interest in HEICO. We are available at any time. If you have other questions you you're welcome to call Me Carlos Eric Victor and we can clarify anything.
And we are happy to discuss it and otherwise we look forward to speaking to you after the third quarter announcement.
Cool will be some time.
Yes in the Middle of August the end of August. So thank you all and please stay safe and healthy.
During this cobas.
For them it.
This concludes the goal.
Thank you for centers, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect have a great day.
Okay.
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