Q1 2021 HEICO Corp Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and dwell cash due to heico's fiscal year 2021 first quarter earnings results call.
Certain statements and today's call will constitute forward looking statements, which are subject to risks uncertainties and contingencies heico's actual results may differ materially from those expressed and.
Our implied by those forward looking statements as a result of factors, including the severity.
Magnitude and duration of victory with 19 pandemic HEICO.
Heico's liquidity and amount and timing of cash generation.
Lower commercial air travel caused by COVID-19, pandemic and its aftermath.
Airline fleet changes or airline purchasing decisions, which.
Good cause slower demand for our goods and services.
Product specification costs and requirements, which could cause and increase our costs to complete contracts governmental and regulatory demands.
Export policies and restrictions.
<unk> and defense space or homeland security spending by U S and or foreign customers or competition from existing and new competitors, which could reduce our sales our ability to introduce new products and services at <unk>.
<unk> pricing levels, which could reduce our sales or sales growth.
Development and manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales our.
Our ability to make acquisitions and achieve operating synergies from acquired businesses.
Customer credit risks.
Interest and foreign currency exchange and income tax rates.
Economic conditions within and outside the D N V Xing defense.
Space Medical.
Communications and electronics industries.
Which could negatively impact our costs and revenues.
And defense spending or budget cuts.
Which could reduce our defense related revenue.
Part D receiving listening to this call or reading a transcript of this school or encourage juice and.
Review all of Heico's filings.
With the Securities and Exchange Commission, including but not limited to filings on form 10-K.
Form 10-Q and form 8-K.
We undertake no obligation to publicly update our advice and any forward looking statement.
The other ancillary salt of new information future events or otherwise.
Except to the extent required by applicable law.
And that I now turn the call over to Mr. Lawrence <unk>, Mendelson, Heico's, Chairman and C E O.
Thank you Sir.
Thank you very much and good morning to everyone on the call and we thank you for joining us and we welcome you to Heico's first quarter fiscal 'twenty, one and 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 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 I get into some of the detail I would like to thank all of Heico's extraordinary team members, who have really performed and the most admirable way during this pandemic, which is now into about a year.
And as management looks at the company, we really believe that our success and the ability to keep our head well above water not to get into any financial binds not to struggle to sell data to date, and 10% and so forth and to be fiscally sound.
Is all attributed to the unbelievable talent and brilliance of the team members and I can tell you senior management and hold and the board holds these people and the highest regard so I thank them and our hats are off to the entire team.
Before reviewing our operating results and detail I'd like to take a few minutes and discuss the impact on heico's operating results from the Covid.
And Debbie.
Results of operations and the first quarter of fiscal 'twenty, one continued to reflect adverse impact from COVID-19, most notably demand for commercial aviation products and services continues to be moderated and impacted negatively by ongoing depressed.
From aerospace markets.
We continue to focus on health and safety measures at our facilities in accordance with the CDC guidelines in order to protect the global team members and mitigate the spread of COVID-19, while serving our customers needs and keep in mind that almost all of our facility.
These were opened continually since the <unk>.
Start of the Covid pandemic and.
And very very few members of our teams came down with this miserable disease and that was because of the safety measures and health measures that we employed throughout the company.
Consolidated net sales for businesses that operate within the commercial aerospace industry decreased by about 43% and the first quarter of fiscal 'twenty, one as compared to the first quarter of fiscal 'twenty.
As we move further into fiscal 'twenty, one we acknowledged that factors such as the duration spread and severity of the pandemic the emergence of new Corona strain behrens and distribution and effectiveness of COVID-19 vaccines will largely determine.
And the timing and pace at which commercial air growth space will recover.
As we mentioned in prior calls we anticipate that as the pandemic vaccine becomes more widely available consumer interest and commercial air travel should begin to reemerge as such.
We cautiously anticipate improved demand for our commercial aerospace products to slowly recover towards the second half of fiscal 'twenty one.
Summarizing the highlights of our first quarter of fiscal 'twenty one results.
I would tell you that despite continuing.
Difficult operating environment created by the pandemic HEICO continues to generate excellent cash flow.
And the cash flow provided by operating activities was very strong increasing 32% to $107 $2 million and the first quarter of fiscal 'twenty, one and that was up from $81 1 million and the first quarter of fiscal 'twenty.
We are encouraged by the second consecutive quarter of sequential improvement in net sales and operating income at our flight support group opt.
Operating income and net sales that flight support increased 20% and 3% respectively.
And the first quarter of fiscal 'twenty, one as compared to the fourth quarter fiscal 'twenty.
Clearly and improvement.
Net sales for Atg.
Base and electronics products moving forward.
And I think Lee by a very strong 19, and 14% respectively and the first quarter of fiscal 'twenty, one while the ongoing pandemic impact resulted in softer demand towards commercial aerospace products.
And January 21, we paid a regular semiannual cash dividend of <unk> <unk> per share and this represented our 85th consecutive semiannual cash dividend since 1970, non FICO strength and the face of ongoing challenging conditions.
Coupled with our optimism for Iqos future gave our board the confidence to continue paying a cash dividend.
Through the current health pandemic.
Total debt to shareholders' equity improved to 32, 2% as of January 31, 'twenty one.
And that compared to 36, 8% as of October 31 'twenty.
Our net debt, which is total debt less cash and cash equivalents of $273 million as of January 31, 'twenty one two.
To shareholders' equity ratio improved from 13%.
As of January 31, 'twenty warm and that was down from 16, 6% as of October 31 'twenty.
Our net debt to EBITDA ratio improve 2.62 times as of January 31, 'twenty, one and that was down from seven one on October 31, 20 and.
We have no significant debt maturities until fiscal 'twenty, four and we plan to utilize our financial strength and flexibility to aggressively pursue high quality acquisitions of various sizes to accelerate the growth and maximize shareholder return.
Last week.
And we publicly and proudly extended our congratulations to both NASA and jet propulsion laboratory, a known as JPL and on their successful Mars Perseverance Rover landing.
Our apex micro technologies, and Sierra microwave <unk>, plus and <unk> subsidiaries supplied mission critical hardware for the mission.
And once again that's.
And JPL and demonstrated remarkable talent and capabilities. Despite a year of great challenges for the world's population.
And they remain a beacon of optimism for all people.
And we are extremely proud of HEICO companies and team members, who contributed to this effort.
I think we want to focus on the extreme technical ability and unbelievable quality.
Our subsidiaries built into the electronics that day supply for that large perseverance Rover landing.
At this time and 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 the flight support group. Thank.
Thank you.
Flight support group's net sales were $199 3 million and the first quarter of fiscal 'twenty, one as compared to $301 1 million and the first quarter of fiscal 'twenty.
The net sales decrease is principally organic and reflects lower demand for the majority of our commercial aerospace products and services, resulting from the significant decline and global commercial air travel attributable to the pandemic.
The flight support groups operating income was $25 8 million in the first quarter of fiscal 'twenty, one as compared to $62 million in the first quarter of fiscal 'twenty.
The operating income decrease principally reflects the previously mentioned decrease in net sales as well as a lower gross profit margin and the impact from lost fixed cost efficiencies stemming from the pandemic.
And the lower gross profit margin principally reflects the impact from lower net sales of commercial aerospace products and services across all of its product line.
The flight support group's operating margin was 13.0% in the first quarter of fiscal 'twenty, one as compared to 26% in the first quarter of fiscal 'twenty.
The operating margin decrease principally reflects the previously mentioned lower gross profit margin and an increase in SG&A expenses as a percentage of net sales mainly from the previously mentioned loss fixed cost efficiencies and the effect of higher intangible.
Asset amortization expense.
I would like to point out that the full impact of the pandemic began to affect the SSG operating segment at the beginning of our third quarter of fiscal 'twenty.
Through practical and disciplined cost management, we have delivered sequential quarterly improvement in our FSP operating margin.
The SSG operating margin was just six 7% in the third quarter of fiscal 'twenty and has steadily increased to 11, 1% and the fourth quarter of fiscal 2020.
And 213% and the first quarter of fiscal 'twenty one.
Our team members and assembled workforce is our most valuable asset our team members engaged primarily in commercial aviation sacrifice greatly during the pandemic through limited and layoffs moderate furloughs and wage reductions from nearly all others not impacted.
By layoffs or furloughs.
These team members sacrificed a tremendous amount and we owe our loyalty to them as we held on to a much higher percentage of our workforce than most others.
We decided to operate with higher overhead, which reduced our gross margins and increased our SG&A.
A lot of companies speak about how their team members are important but HEICO demonstrated through actions, including by maintaining our 401 K matching contributions and granting our team members their maximum potential 401, K profit sharing contributions even though we missed our budget due to.
The pandemic.
We could and sacrifice the future in order to have better current period results, but that is not what HEICO was about.
That's the luxury of being part of the HEICO family as we don't feel pressured to make short term decisions that hurt future performance.
We also treated our customers suppliers and principals partners and acquisitions extremely well and truly believe this helps us grow faster than the industry as people preferred dealing with us due to our culture. We are confident that our motivated and assembled workforce will prepare.
US to new Heights as the pandemic passes.
Now I would like to introduce Victor Mendelson co president of HEICO and President of Heico's Electronic technologies group to discuss the results of the electronic technologies group.
Thank you and I would also like to Echo my gratitude to all of Heico's team members, including those at the electronic technologies group for their remarkable efforts during this difficult time.
90% of our people cannot work from home and have to come in and our businesses had been operating as essential businesses throughout this pandemic very carefully and very safely and taking care of each other and I'm very proud of the job that our people have done throughout this.
And tired difficult period as well as the many years before and I know that they'll continue to do the excellent work that they've carried out.
As for the electronic technologies group's performance and where net sales increased 7% to $223 6 million and the first quarter of fiscal 'twenty, one up from $208 $4 million and the first quarter fiscal 'twenty. The increase is principally attributable to the favorable impact from our fiscal 'twenty acquisitions.
The electronic technologies group's operating income increased 5% to $60 1 million and the first quarter fiscal 'twenty, one up from $57 $5 million from the first quarter fiscal 'twenty.
This increase principally reflects the previously mentioned net sales growth.
Electronic technologies groups operating margin was 26, 9% from the first quarter of fiscal 'twenty, one as compared to 27, 6% and the first quarter of fiscal 'twenty.
Lower operating income as a percentage of net sales principally reflects a lower gross profit margin, partially offset by a decrease in SG&A expenses as a percentage of net sales mainly from certain efficiencies gained from the previously mentioned net sales growth and lower gross profit margin mainly reflects a decrease.
And net sales of commercial aerospace products, and lower net sales and a less favorable product mix of certain defense products, partially offset by an increase and net sales of certain electronics products.
I turn the call back over to Larry Mendelson.
Thank you Victor.
Moving on to earnings per share.
Consolidated net income per diluted share was <unk> 51, and the first quarter of fiscal 'twenty, one and that compared to <unk> 89, and the first quarter of fiscal 'twenty.
The decrease principally reflects the previously mentioned lower operating income of the flight support group and higher income tax expense, partially offset by less net income attributable to noncontrolling interest as well as lower interest expense.
Depreciation and amortization expense totaled $23 million and the first quarter 'twenty, one and that was up from 21, six and the first quarter of fiscal 'twenty.
The increase and the first quarter of fiscal 'twenty, one principally reflects the incremental impact of higher intangible asset amortization expense from our fiscal 'twenty acquisitions.
Significant new product development efforts are continuing at both <unk> and flight support R&D expense was $16 2 million and in the first quarter of fiscal 'twenty one.
Or about three nine percentage of sales and that compared to $17 $1 million and the first quarter of fiscal 'twenty or three 4% of sales.
Consolidated SG&A expense decreased by 10% to $78 1 million and the first quarter of fiscal 'twenty, one as compared to 87 1 billion and the first quarter of fiscal 'twenty.
The decrease and consolidated SG&A expense reflects a decrease and performance based compensation expense, a reduction and other selling expenses, including outside sales commissions marketing and travel and the reduction and other G&A expenses.
Consolidated SG&A expense as a percentage of net sales was 18, 7% and the first quarter of fiscal 'twenty, one and that compared to 17, 2% and the first quarter of fiscal 'twenty.
The increase and the consolidated SG&A expense as a percentage of net sales per.
Principally reflects higher other G&A expenses as a percentage of net sales and the impact from higher intangible asset amortization expense.
Interest expense decreased to $2 $4 million and the first quarter of fiscal 'twenty, one and that was down from $4 3 million and the first quarter of fiscal 'twenty.
The decrease was principally due to lower weighted average interest rates, partially offset by a higher weighted average balance of borrowings under our revolving credit facilities.
Other income and the first quarters of fiscal 'twenty, one 'twenty was really not significant.
HEICO is income tax expense was $2 3 million and the first quarter of fiscal 'twenty, one and that compared to an income tax benefit of 22 9 million and in the first quarter of fiscal 'twenty.
HEICO recognized a discrete tax benefit from stock option exercises and both the first quarter of fiscal 'twenty, one and 'twenty.
$13 5 million and 47 6 million respectively. The tax benefit from stock option exercises and both periods was the result of the strong appreciation and HEICO stock price during the option is holding period and the $34 1 million dollar loss.
Your benefit recognized in the first quarter of fiscal 'twenty was the result of more stock options, which were exercised.
Net income attributable to Noncontrolling interest was $5 7 million and the first quarter of fiscal 'twenty, one and that compared to $7 9 million and the first quarter of fiscal 'twenty.
The decrease principally reflects a decrease in operating results of certain subsidiaries of flight support and which Noncontrolling interest are held.
For the full fiscal year 'twenty, one we now estimate a combined effective tax rate and non controlling interest rate of approximately 24 to <unk>.
26% of pretax income.
Moving over to the balance sheet and cash flow the financial position of HEICO and forecasted cash flow remains very strong.
As we mentioned earlier cash flow provided by operating activities was very strong and increased 32% to $107 2 million and the first quarter of fiscal 'twenty, one up from $81 1 billion and in the first quarter of fiscal 'twenty.
Our working capital ratio was strong and consistent at four nine times as of.
January 31, 'twenty, one and that compares to four eight as of October 31 'twenty.
Day sales outstanding of receivables Dsos improved to 45 days.
As of January 31, 'twenty, one and that compared to 46 days.
As of January 31, 'twenty of course.
Of course, we continue to closely monitor all receivable collection efforts.
Efforts in order to limit our credit exposure.
No one customer accounted for more than 10% of net sales our top five customers represented about 24% and 22% of consolidated net sales and the first quarter of fiscal 'twenty, one and 20, respectively.
Our inventory turnover rate increased to 164 days for the period ending January 31, 'twenty, one that compared to pre pandemic and 132 days for the period ended January 31 'twenty.
The increase and the turnover rate.
And typically reflects lower net sales volume, mainly resulting from the pandemic impact on certain on demand from certain of our products and services and.
And despite the increased turnover rate. Our subsidiary is really has done an excellent job controlling inventory levels and the first quarter of fiscal 'twenty, one, which we believe are appropriate to support expected future net sales.
And in consideration of Heico's consolidated backlog, which has increased by 62 million since October 31, 'twenty. The backlog was $906 million as of January 31, 2000 and more.
As we look ahead to the remainder of fiscal 'twenty one.
Pandemic will likely continue to negatively impact commercial aerospace and HEICO.
Given this uncertainty we cannot provide fiscal 'twenty, one net sales and earnings guidance. At this time. However, we believe that our ongoing fiscal conservative policies healthy balance sheet and increased liquidity will permit us to invest and new research and development and <unk>.
Gain market share as the industry recovers.
In addition, our time tested strategy of maintaining low debt and acquiring and operating high cash generating businesses.
Cross a diverse base of industries beyond commercial aviation.
Such as defense space, and other high end markets, including electronics and medical.
It's us and a good financial position to weather this uncertain economic period.
Furthermore, we are cautiously optimistic that the vaccine progress may generate increased commercial air travel and will result, and gradual recovery and demand for our commercial aerospace parts and services businesses and we expect that to commence primarily.
And the second half of fiscal 'twenty, one, although we do expect it to increase gradually until we get there.
In closing I again want to thank our incredible team members for their continued support and commitment to HEICO. During these professionally and personally challenging times that.
And as strength will manifest from our culture of ownership, our mutual respect for each other and the unwavering pursuit of exceeding our customers' expectations and we thank you for all you do to make HEICO and exceptional company I also would like to point out and in spite of the pandemic.
And in spite of decreased sales.
FICO.
Wanted to look and reward our team members and again this year.
Continued to make.
The 5%.
Match to team members four one K investments as you know most team members and the 6% HEICO matches it is 5%.
Their salary and HEICO shares.
And we would never cut that back.
And because we respect and we want to reward our outstanding team.
Thank you and now I'd like to open the <unk>.
Floor for any questions. Thank you.
Thank you Sir.
At this time I would like to take any questions from might have for us today.
A reminder, if you would like to ask a question over the phone and simpler car than the number one on your telephone keypad.
Again that would be star then the number one on your telephone keypad.
We have your first question from the line of Robert Spingarn from Credit Suisse.
Go ahead.
Hi, good morning.
And one early rock.
Hi, good set of numbers today, Larry can I start with you on on M&A and I think you said earlier that the company will continue to pursue.
Our strong M&A policy, what are you seeing trend wise and the market as the pandemic has evolved our sellers more or less willing to sell at this point.
Well, we see a lot of product coming out of some are coming out of private equity. So.
Sellers are willing to sell in the fly.
Flight support group, it's a little tougher because their profits have gone down and a lot of them are pulling their sales activity, hoping for recovery, which I know will become and however, and looking at our backlog of potential M&A possibilities. It's.
<unk> business as usual and <unk>.
Probably the difficulty here is the logistics of getting out kicking the tires checking and doing all these things and that really has slowed us down a little bit, particularly when youre dealing with private equity guys. They have the information and they're more up to speed, but when youre dealing with.
Private sellers, who.
And who have never sold a company before.
It becomes much more difficult, but the bottom line is we are seeing many opportunities summit very reasonable prices and.
And we're kicking the tires others are at the.
The 14, and 16 times, EBITDA multiples, which price us out of the game and we are also looking at small.
Companies that we traditionally buy size wise and we're looking at larger companies so and.
And of course as you know we are not physically constrained.
We've been asked many times would you use your currency.
Which is selling and a high multiple.
And for acquisition and the answer is yes, as a matter of fact.
Non transaction I don't know for the 11th close but.
Where the seller wants HEICO shares so.
Our currency, we have cash I've said this on the last call. We have cash we have stock and we have <unk>. So we're ready to give you.
Given the seller's whenever and wherever they would like I guess, we'd given bitcoin too.
And that was my next question, but in terms of the and.
In terms of the end markets you know historically, you've been a little more active.
And Victor side of the business with the defence and space types of acquisitions are we seeing any more opportunity or less opportunity and commercial Aero M&A.
Okay.
Rob This is Eric what we are seeing opportunity and commercial but.
As my.
My dad pointed out the.
At the current level of earnings are depressed, so it's a little difficult to.
Nail down prices, there, but we are and bill seeing plenty of opportunity.
Okay.
Couple of other ones Victor.
Wanted to just ask you a couple of things about Atg you have this very strong, 19% and 14% growth and space and other electronics could you talk a little bit about what's driving that and then and then separately how defense did and and clearly I guess commercial Aero was a factor as it has been across the industry.
Yes, Thank you Rob.
And those are good questions.
And on space I think you heard us talk about throughout last year that we felt it would strengthen and will continue to strengthen into this year for us that we saw our backlogs building and orders increasing and.
So that was really the follow through on that.
And I would expect that to continue for some period of time and then flatten out at.
And at some point and.
And but that that.
And really has been fairly broad based for us on the space side, which has been very nice.
And.
In terms of the other electronics markets, we started to see those firm up.
And the fourth quarter, a bit and that followed through and the first quarter.
We did see weakness as I talked about before.
The pandemic more on and I think.
Perhaps inventories.
And there was a call it a destocking effect or inventories that werent built at all and.
And that's reversed and I think we're seeing much more order inquiry out of our customers as well so on and at the moment that feels like it's continuing to move and the right direction.
And commercial Aero is still down but looking better.
Bit by bit.
The same general tone as you see with our flight support group I would say, we should follow that same trajectory.
And defense.
And defense at this point, we had some <unk>.
Some things that wind up getting delayed.
And moving out into the.
Second quarter.
Not as a result, really so much of our actions, but supply chain as well as actually on the customer side with and.
And inspection and delivery on there and things that have been built and where rate waiting for delivery. So we saw a little bit of that.
And I would say I would expect as a rule of thumb as we've talked about to see defense generally flatten out as we move forward I don't think thats any surprise to anybody.
And.
I would expect us to see medical markets firm up.
As we move out I think we all know they were tended to be softer last year because of the.
<unk>.
Cessation of elective procedures, and doctor visits and things like that and I think that's beginning to.
Reverse as people feel more comfortable returning to doctors' offices and zone.
Right and then just quickly on your margins your margins are always up there and the <unk>.
Call it mid to high Twenty's, but they dipped a little bit here and the quarter.
I assume thats mix.
And does that reflect commercial being down is there any different this quarter about the level.
And we're magnitude of commercial or maybe its something else I just wanted to ask you about that and yes our.
<unk> business is very strong kind of business. So therefore, it's a high margin business. So and then when that trails off.
Tends to hit our margins. It was also mix on the defense side definitely mix on the defense side and.
And.
And I'll point out.
That the margins and we've talked about this before we don't really go to art. After people, if we're running let's say and El <unk>.
And 32%.
What I call cash margin right.
And the real margin and we have amortization in there, which which is the obviously the number and the operating margin that we report.
But there is about four to five points of amortization and Theres probably.
This period and additional beyond that.
And half a point or so beyond what we saw last year, which was a further headwind. So if you take that out it was it was actually much more comparable to where we were last year.
But even so I mean, if I look at it and I say.
And look at how we're doing and you've heard US say this before on many calls and in conferences and so on and I don't really don't ramp people on and Knuckles. If there are 100 basis points or 200 basis points, lower and they're giving us 32% as opposed to 33 four.
And.
People ask where do you think your margins are going to be.
Generally say look I think we're comfortable within this range up or down 10%.
Although I think the up part is always hard.
Yeah.
So.
It's consistent with what it to be honest, what we are expecting.
Okay, Okay, Eric just quickly.
On order flow and Eric customer behavior or are you starting to see any signals of restocking.
And of Airlines trying to get set up for potential recovery here in the summer.
Yes.
No.
I'll answer that by saying I think we correctly called the bottom of the market in may.
Yes.
As this was happening and we also in our fourth quarter correctly called that Destocking was over.
And then other companies have since come out and said the same thing, but I think we were the first to talk about it.
With regard to restocking I wouldn't say that we've seen restocking so much as we've seen really depletion of inventory and when customers order items they need it right away.
Now that doesn't mean, there out of all inventory, but.
They are out of ballparks, but the parts that they need they really don't have on the shelf and theres not a lot of safety stock. So no I don't think that we've seen restocking yet I think they are being very careful if you look in particular, what's going on in Europe right now with the.
And the passenger miles just cratered and really at the bottom.
And somewhat similar to what we saw and this spring.
And those airlines are not in a position right now.
Stock and Alt.
So we're seeing and a whole bunch of other markets as well. So no I think that benefit is yet to come and I would anticipate it's very hard to predict obviously with the variance and.
And what's going to happen with the virus, but I don't think youre going to see a restocking until the airlines really.
And start seeing that surge and travel, which we all know is going to come but I think they're going to really hold off and spending the cash until the last possible moment.
Okay excellent. Thank you all.
Thank you.
Thank you. Your next question comes from the line of beat their arm and from Baird.
Your line is now open yes. Thanks.
Good morning, Larry Victor Carlos.
Sure Eric.
And I just wanted to follow up on just what Rob just asked about Eric just I guess, maybe just to ask it a different way.
And less about the restock, but more about just qualitatively maybe some of the conversations you're having about potential pickup and share. Your I know you've talked about that and the past that coming out of downturns, you've been able to increase share and maybe any color you can give us there would be helpful.
Yes, we're very optimistic I've spoken with all of our sales heads to understand where the opportunities are and the color of those discussions.
And I can tell you that they are extremely optimistic as well as our business heads are very optimistic in terms of the recovery and in terms of our position.
With respect to those customers.
HEICO is no longer a small company were diversified we're in many different areas I think our customers Trust us they are relying on us to deliver cost savings and I think that we're going to be and a very unique position going forward. If you look at most of.
Our colleagues or competitors and the industry I think that there are cuts were far more aggressive I know that there are cuts were far more aggressive than ours.
Added to in my comments that we.
Held onto a much higher percentage of our workforce and protect and a much higher percentage of our workforce than both our smaller and larger competitors. So I think we are in position, we don't have to rebuild a workforce, but we don't have to re motivate our workforce and I think we're going to be very strong.
In mining those opportunities I can tell you that at the moment things are.
Difficult there are some airlines that are working partial days, where they've decided to also try to hang on to their workforce and their rotating them where people work a couple of days every other week. So it's more complicated.
Getting in touch with people, but I think where we've got those relationships and.
And.
Our people are very excited about both the new product that is coming out as well as the comments that we're getting from our customers I think after going through a pandemic like this.
Buying.
The type of products that HEICO offers is a no brainer, because we generate savings without technical risk.
So I think people understand that and Thats, what specifically gives me the optimism and.
And would you characterize that as just that you expect that you or maybe your existing customers you would expand kind of the reach there and then maybe also you are seeing some new customers show interest and your products.
Yes.
Would say that is correct.
Not a line of new customer opportunity, because we pretty much deal with everybody. However, youre correct and that the existing I would say more penetrated customers are wanting to do more with us as well as customers, where we are less penetrated they are very focused on a whole variety of products.
We offer that we haven't sold them in the past and I think that we will continue to do very well and also I want to point out that even though we will take market share.
In no means.
And should this be interpreted that.
OEM businesses will not do well because we take a minority of the market share we leave a majority for the OEM.
And the Oems have been pretty aggressive with price increases and.
We're just trying to take our little piece and I think their business models are very much intact right.
Right right and then just two quick ones Carlos I'm, just capex was up quite a bit year over year and just wondering what the kind of the trend is there anything to call out and then also just a clarification on what you expect the tax rate to be for the balance of the other year. Thanks sure sure sure good morning, Peter So.
Capex was up we had planned and our budgets to have some capital expansion and two of our facilities.
Actually they are both and the Atg group, where we are expanding their footprint.
With some some new equipment and some more floor space for them to support their growth and so that was.
About half that spend if you would.
Is that type of growth expansion for the for the quarter, which we didn't see last year and the numbers. So that's why it accelerated a bit.
And then on the tax rate, yes, so the tax rate.
I think what we're going to wind up seeing this year for HEICO as Larry mentioned earlier that we expected, 24% to 26% rate I think that breaks down.
Somewhere 18% to 19% on the tax rate for the year, the effective tax rate and then NCI could be 6% to 7%. Both those percentages are pre tax income. So that's kind of where my head is on those rates.
I appreciate it nice results guys. Thanks.
Thank you.
Thank you.
Your next question comes from the line of God, Canada from Cowen. Please go ahead.
Yes, Thank you and good morning, guys.
Good morning.
Hey, just first for Carlos was there any bad debt expense and MSG or elsewhere this quarter.
And then we always have a.
A little bit of pluses and minuses on our door.
Normal cadence for HEICO, I think thats, what we experienced in Q1, there were no bankruptcies there weren't any large buckets of receivables age or anything like that so it was on the bad debt side, it's pretty much business as usual under normal times in that regard.
So no one timers, there or any amplified charges.
Okay.
It was interesting if you were to strip out the $1 5 million of bad debt and Q4.
The incremental margins sequentially it was like 49% net.
ESG and I just wondered is that right I mean, that's that's what it is right I mean, it's fairly high incremental margin.
Yes, the incremental margins are high on the rebound absolutely we have seen that two consecutive quarters and rollout.
If you look at it fluctuate that's correct.
And maybe Eric if you could talk about SSG, if youre seeing any.
Differing trends by the <unk>.
Submarkets there so.
The PMA products versus the repair.
Obviously specialized products, but just if you could disaggregate, what youre seeing and the various submarkets.
Sure Gautam.
The obviously the commercial aviation market continues.
To be down the most and.
And that would be in our parts business, which includes PMA and distribution as well as component overhaul as well as the specialty products that go to.
Net.
Commercial.
Applications and primarily Newbuild.
And the specialty products area has been down significantly in the commercial area and not in the defense, but and the commercial area because as you see the build rates have gone down so.
The E.
Youll see our aftermarket replacement parts.
And was down actually a little less than repair and overhaul and specialty products. However, a lot of our military business also goes through there. So thats one of the reasons why but I would say in general.
Commercial is what was hit defense and space is still relatively strong in particular on the products that we provide.
So if that gives you and.
And indication.
Okay. That's helpful and is there any discernible difference between.
What youre seeing demand wise and the distribution channel that you guys control versus the direct sales.
No I would say, it's all in the in the similar.
Miller area.
Okay, and then one for Victor if you wouldn't mind.
Your comment.
Defense eventually flattens out and I'm just curious what do you think the timeframe is when we.
We see the primes guiding.
Kind of low single digit growth.
And for sales and 2021, I mean do you think that's sort of where we ended up tracking on the defense side of BTG.
And.
And I wanted to clients from their Hudson, how should we frame it.
It's difficult to know of course and <unk>.
It's early days the administration, but it sort of feels like that.
To me and.
I think they probably have as good a handle on it as anybody.
And of course budgets for the budget more budgets for 'twenty, one or a really pretty set.
And the direction is fairly well known although there can be variations for sure.
And when the current government fiscal year.
So.
I.
<unk> got like I said.
Reasonable handle on the situation as reasonable as anyone has and I think we're all just waiting to see where it shakes out and where we're all watching certainly late.
But for example.
And the daily comments now coming out of D C and the.
And the struggles in between.
Various Democrats for example, but I'll comment the Hawks and doves.
And so we will just kind of wait and see where it pans out but I think at the very least one thing it does seem is that.
There does not appear to be this movement toward the budget control Act.
And that we saw in the Obama administration, and so I think that's a positive.
That's helpful and and one for you Larry I was intrigued by your remark.
About one of the targets you were looking at would actually prefer stock.
Is that anything you can say about that type of target as it would that be a reserve for a large acquisition and.
In other words.
Youre not inclined to use stock on some of these $100 million deals, but it would have to be kind of one that moves the needle where you'd actually.
<unk> stock.
And the currency for M&A.
As you know our preference has always been to pay cash.
Occasionally we will get and it's very rare, we'll get somebody who preferred stock probably for tax reasons number one and number two.
Because these people and certain ones are really long term believers and HEICO. So.
It doesn't really matter to us if we want that acquisition and the only way we can make it is by giving stock we would do it and.
And.
As you know we would still wanted to have it accretive as to earnings and cash and it will have the same impact I mean, the alternative is.
And then.
And we could sell stock and give them cash, but they they don't want cash in this case so.
Again, if we want the deal badly and we would give them stock but this is this is really an unusual case.
Got it and I should not infer that.
It's a big deal because of because they can't.
Can't make any income from federal and no okay.
Terrific. Thank you very much guys I appreciate all the candor.
Sure.
Thanks.
Thank you and that.
Next question is from the line of Larry Solow from CJS Securities. Please go ahead.
Hi, Good morning, it's Pete Lukas for Larry.
I've covered most everything just one question kind of a random one any thoughts on the price disparity or lack thereof between the common and the eight shares discounts Wayne from over 20% six months ago to close to 5% today, which we think makes sense, but would love to hear your thoughts.
We agree with you and we thank.
And they get baked a lot of sense, we have no idea over the years. We've been asked this question many times and we never really have the answer.
We think now and I would say im speaking for everybody and the corporate office and we think it makes a whole hell of a lot of sense.
That debt.
Differences shrunk so much so but as to what the reason is I guess a lot of investors realize that they.
And they are better off buying the shares at a discount and then.
And shares.
That's all I can venture it's just a guess.
And maybe I'll add to that we believe they should be at parity I mean, there should not even be a 5% discount.
And at all and there had been times originally when the shares were issued and fact that they traded at par with well actually they traded originally at a premium to hei.
And then.
And some time.
Very helpful. Thanks, I'll jump back in the queue. Thanks.
Thanks.
Thank you and your next question is from the line of skin Herbert from Canaccord.
Your line is now open.
Hi, good morning, Thank you.
Good morning.
Hey.
First Victor.
And over the last couple of years, you've seen a really nice sequential step up and margins.
Within the <unk> segment from the first and the second quarter.
Can you.
Sorry, if I missed it earlier, but what should we expect a similar step up here.
And 21 or how are you thinking about the margin progression of the first quarter.
Uh huh.
We've got to be careful at this point there is still a little too much uncertainty so and.
And I think I'll stick with with what I said before which is pretty much within 10% or so.
Where we are feel.
<unk>.
Pretty safe.
And to me and a one way up or down and in.
Our margins and.
And we'll see where it comes out and not trying to be evasive, but I just.
Just don't really know yet we're still too early into the quarter.
Okay fair enough, what was the amortization headwind and the quarter.
Sure.
Kenneth Carlos there was about <unk>.
Related to the acquisitions, we did and the prior year, there was about $1 million, one roughly and additional amortization expense that we absorbed for those those acquisitions that were started round in Q1 of 'twenty. So that would be the incremental uptick and amortization expense and went through the atg has a wide margin.
Perfect.
Thanks, Carlos and and if I could Eric just one for you.
And we're starting to share about some delays on on OEM material and perhaps that risk is getting a little greater just because of all the restructuring and cost cutting we've seen and the industry. As you look at your portfolio I think clearly that benefits the PMA product line and Thats always been a and.
Opportunity for you.
And could perhaps be a risk on the distribution side, if youre seeing delays and some from some suppliers are you seeing any opportunities emerge potentially get from from the risk of delays from OEM material and how do you think about that as it emerges.
Potentially presenting opportunities or risks to your segment.
Yes, it's a good question, Ken we are seeing some opportunities.
As a result of Oems cutting back inventory, we were pretty careful to maintain both and all of our businesses sufficient inventory because we're not capital constrained and.
And.
And we need happy customers, because we have and expansionary view of the market and our position in the market. So we want people to be very happy and we don't do from our view of perspective and scarcity and.
And we are seeing opportunities.
That you alluded to I think that there are going to be pockets of opportunity, having said that I think the our competitors or our OEM competitors are well run.
And they will be able to flex up and.
Build the inventory that is required in order to cash.
That is by the demand so yes, I think it could help us get.
And if you will expect out on some products.
And so that is that as a potential area of opportunity for us.
Okay, and just finally, Erik Theres been obviously unfortunately from tragedy is around the PW 4000, and I know you typically don't talk about types of engines, but I can imagine that's been a significant market for you over time or are you seeing any potential incremental risk to the PW 4000, if theres any sort of accelerated.
Tire meant or just continuance of some of those engines.
I don't think that thats going to be a major impact to us.
And I will come out because of the unique extenuating circumstances, and this and mentioned and of course, we do have HEICO parts on the PW 4000 engine. We of course did not have anything on that engine, which could have contributed to this kind of a fan blade release were very.
Knowledgeable about the incident and it's for that reason that HEICO does not produce parts that are susceptible to this kind of issue.
I think the FAA AED that they've come out with two and mandate the thermal imaging of the hollow composite fan blade is.
Sufficient and is appropriate I would feel entirely comfortable flying on the PW 4000 powered triple seven.
That they're going to get this under control quickly.
Look.
None of the incidents caused a crash.
And so I think it shows that Pratt and Whitney did a great job and really designed to very high quality product.
To be able to withstand such an event.
So I do think that there will be opportunity for us to sell our parts as those engines do come in for service.
As you know roughly half of them have been grounded due to the pandemic.
But I think that those are perfectly good aircraft and Pratt is more than capable of resolving this issue.
Great well, thanks for all the color.
Thank you.
Thank you. Your next question comes from the line of Noah <unk> from Goldman Sachs. Please go ahead.
Hello, everyone.
Good morning.
Good morning.
Carlos.
The back to that discussion and the <unk> margin and some other moving pieces and there mhm.
I mean last quarter, you had quantified the bad debt expense, even though it was only one 5 million and so the lack of quantification and this quarter can I interpret that to assume that is now pretty close to zero.
No I wouldn't say, it's zero its just more than normal run rate, it's certainly less than 1 million fire we had in Q1.
It's not something no other.
And that sticks out or there was a flux and any of the numbers this quarter.
There wasn't a hero and certainly wasn't a $1 million so.
Okay.
Got it and.
And then you had also.
Last few quarters.
Two.
<unk>.
Inventory obsolescence reserves and addition to that.
Bad debt expense and it was at.
Sizable number and the back half of last year did you have that again and the fiscal first quarter.
We have.
I guess I guess the answer to that question is we have a little bit of that right now the bigger hits were taken last year, because if you recall.
Last year, we had some specific reserves and we took for fleet retirements and aircrafts that were being put down and so we took we.
And we took on a per cent reserve and some of that stuff that we had and stock and then with the lower sales volumes that were experiencing and the SSG you do get into this situation and when you project demand over the near term you do wind up with a little bit of a kick to your slow moving reserve and so we have a little bit of that but nothing nothing that Noah.
And as noteworthy to call out as being any different and then maybe would've been let's say in Q1 and 20. It was about the same pace.
Okay.
So those items are now kind of getting pretty close to normal or abnormal.
Right.
But your <unk> is usually seasonally the lower margin of the year.
And then.
Presumably there's some volume pick up and the back half of the year.
I guess, how much of a margin lift through the year and F. S. G should we be.
Looking at with what we know today.
Well I would say I would say this we've demonstrated.
The ability or the market has allowed us to participate and having sequential growth and the margin.
And I don't foresee, even though we're not giving guidance on real careful I don't see it.
And narrow right now where we wouldnt continue that cadence I don't think it's going to be a cliff up if you would I think it's going to be a steady progression back towards normal at some point, we're not going to get there in 'twenty, one and my judgment, but I do think we will see marginal improvements as we play out the year and as our volume pick up and it and.
And that's logical if you think about the cost structure of the SSG. It is highly variable we have very low fixed cost components. So as the volumes kick up we do get we do get.
And you get flipped and our and our margins so you'll see that throughout 'twenty one.
Got it.
And then on the ETD margin Carlos or Victor.
You guys have spoken in the past to the lumpiness quarter to quarter from from mix or other items, but you have specified that that segment's margin should be and the 28 to 30 per cent range over time.
And to make sure that still holds and nothing has changed there.
I mean, this is Carlos and I think.
On an annual basis, because as we've talked about in the past and I know youre aware of the quarter by quarter.
Margins are real tough because you have pushes and pulls and it is a lumpy business.
On a normal year and.
And I'm not so sure I would call <unk>.
And we won a normal year, yet you know what I mean, but are nowhere near ICSC I do see that segment of the 20% to 30% range could it be a tick lower agreement and tick higher of course, it could but I.
Think expectation wise.
If you're if you're if you're thinking about a normal year, that's the range and we'll see how 21 plays out I wouldn't necessarily call. It 21, and normal year, yet and what I mean.
Sure.
Hopefully you're getting there.
Okay and then on.
And the <unk> organic revenue growth rates.
That's been chalking around a bit and recent quarters.
With.
Some of them with the non defense pieces and Theyre going against you.
Yes.
Looking at the model starting next quarter and your fiscal second quarter, and you will be annualizing the startup with declines.
Can that give us reason to expect the organic growth rate of the segment to start to.
Consistently get back to a definitively.
Definitively positive territory.
The answer that question is I think our second quarter. It straddles this pandemic right. So.
So we kind of have half the quarter is good half the quarters shell shocked that was the initial bow wave that came in from this whole pandemic. So we've got still kind of a <unk>.
Lumpy Q2 to deal with but yes to answer your question as we get into the back half of the year.
The comps get easier and as the business and the <unk>.
Vaccine kicks in and people start traveling we expect that the Atg's commercial aerospace business will pick up.
And that will be helpful to the margin because that was the one area that drug is down this quarter.
<unk> Q1 of 'twenty.
Okay.
And then just lastly, I wanted to dig a little further into free cash flow Carlos.
Okay.
And your fiscal 'twenty free cash flow was only down 5% despite.
All of the challenges.
And your <unk>.
Free cash is up again year over year.
Alright.
And comparing to a normal period of time.
And I guess.
Where does that go from here is there anything.
Anything that was abnormally hoping fiscal 'twenty that reverses on you or should we be thinking that that.
And just growth 21 versus 'twenty and I know you have the higher capex, but you still have and up and once U verse versus last year, just any further thoughts on where you go from here with the free cash flow and the business now.
Look I think our free cash flow if I think if I think in terms of operating cash flow I do think that as the year plays out we should run.
And our conversion rate of let's say around 130% and net income.
Okay. So that's traditionally about where we grant and I believe will convert at that rate, which will help our free cash flow numbers that youre talking about.
The problem is with and I want to be very careful because it is and uncertain time for us.
Pretty good net income number right now is hard to do.
And so until we get to it until we get to a point, where I know and the numbers flesh out, we'll probably see a converted 130 plus percent.
I don't want and I want to be careful not to give you some kind of guidance here that we have certainty on net income because right now it's still in flux.
As we get more.
Okay.
Yeah, sorry go ahead.
So like I say is our subsidiaries get more confident and their end markets.
And we'll start talking a little bit more about guidance and things like GAAP, but right now that's not on the table.
That's helpful and the capital expenditure piece.
I think last quarter, you discussed approximately $40 million for the year right.
And that would put the expansion effort pretty loaded into the number you just had per <unk> is that.
Correct applications per se.
Yes, that's exactly the case.
Okay.
This was no surprise, we had planned on this and it was part of the $40 million.
So that moves back kind of sub $10 million a quarter and.
And.
And then 22 or beyond 'twenty one.
Net of a one time thing beyond 'twenty, one goes back up.
Yes, I mean look every year and.
Every year, we have the potential for one of our facilities.
Graduating and <unk>.
<unk> and havent needs for bigger facilities or expansion, we always have growth capital plan. This year to your point and Q1, it's a little bit more amplified, but I think that.
If youre thinking about modeling or.
And you're thinking about 'twenty, two and things like that I think our if you think of long terms of our capex being somewhere between.
Somewhere around one five percentage sales.
That's generally where we've trended and thats.
Kind of a conservative way to think about it and put your model together.
Excellent okay. Thanks, so much.
And welcome.
Thank you. Your next question comes from the line of Michael <unk> from <unk> Securities. Please go ahead.
Hey, good morning, guys. Thanks for taking the questions here my results as always.
Maybe.
I don't know who wants to field. This one Victor and Eric Carlos but maybe just if you could touch on the backlog I think you called it out as $906 million. So so a nice little sequential uptick can you can you give us any more color there in terms of.
The breakout by segment, where you're seeing disproportionately more strength and atg or SSG and maybe some some color on product lines there.
I'll take a stab and I'm sure the guys and they want a follow up.
Yes.
As you know Michael the SSG.
For the most part and not everything because we do have defense and that that has backlog growth for the most part the SSG you kind of eat what you kill and the month and get the order. It's your business and it doesn't have a ton of backlog by its nature.
So a lot of the expansion that we're seeing and backlog has come in through SSG defense and through the atg.
And to parse that out within the Atg were seeing as Victor match, and we're seeing strength and some of our space backlog and kind of this first half of the year and general electronics and things like that I think defense and.
It's pretty stable, it's lumpy, but the backlogs there right now and.
Commercial Aero and Atg is down so we're not seeing and expansion of that backlog at the moment, so thats kind of a breakout.
Okay No that's helpful.
And then just and maybe a little bit more on <unk>.
Eric on some of the you know.
Call it bookings trends youre seeing from some of the airlines I mean, obviously there is still.
Pretty significant reduced utilization of older planes.
Can you help us or quantify are you seeing a cigna.
A significant amount of pickup on the parts side in support of the newer younger fleet I know you've been pretty garden and in the past on what kind of content and you've got on the 87 and $3 50, but.
Are you guys positioned do you think to support a younger fleet.
This kind of emerge through this pandemic pandemic and presumably the fleet age tilt slower given given the older retirements.
That's a great question Mike.
Yes, I think the short answer is we are well positioned on the newer equipment.
I think that we're going to do very well on that a lot of customer interest and customer approvals and those areas.
In addition, also to point out we took the position early in the pandemic that.
A lot of these aircrafts would not be.
Retired as some of it some thought.
For the simple reason that they already exist and the lessors and the banks that would end up having to replace them.
<unk>.
And the new home for them would have two options one is to cut it for parts or two is to go in and lease it out and we think leasing it out makes a lot more sense. When you have got life on the aircraft. So we thought that the price of.
The rental rates and what was going to fall.
To the point where the.
New build was not going to make as much sense and where that was going to have a greater.
A greater impact now.
And now of course, the wildcard is the environmental.
The impact of new equipment and to the extent that governments, both in the United States and Europe help subsidize if you will some of the newer equipment that could have an impact we haven't really seen much of that and if you look.
And out of the build rates sort of.
Net.
Underestimated the amount of the decline and.
And they're taking that down so I would say that were.
Sanguine on the new build rates.
Coming back to the 2019 levels I think that of out of the order is still economic equipment will continue to operate.
And.
So I think we're going to be well positioned and both the new equipment as well as the older equipment.
Got it got it that's helpful and <unk>.
And up to the customers, presumably I think everybody in this industry is watching oil prices, which which keep climbing that could kind of.
Throw a wrench into keeping some of that older equipment for sure with these cash strapped airlines. So I'm sure you guys are watching that that indicator as well.
<unk> and.
I think go out of the recent climb was due to the cold snap that we've had here and the United States and yes.
And that should pass.
So I still think that the order equipment with it to lower acquisition costs makes a lot of sense.
And the guideline.
Items see them.
At this point, who wants to commit to a newer equipment, where you increase your cost base in the face of what we've just gone through.
I think the order equipment is going to hang in there and do well and actually the number of aircrafts retired was even below what we thought it was going debate and we were on the low side of the spectrum and the estimates on.
And the retirement I mean, a lot of people spoke of.
Big retirements, and we didn't share that view.
But we're positioned well I think and both sides.
Got it last one I had just a Carlos I think you guys called out this quarter all of commercial aerospace across the entity was down 43% did you have that number in the fourth quarter, just trying to get a sense of that.
The rate of decline there I think you called it out for 2020, our fiscal 'twenty and total but did you have.
What all of Aero did and fiscal fourth quarter.
Yes.
And I don't recall, what it was and the fourth quarter up from that you're right. We did disclose it per the year. It was like and the mid <unk> or something like that for the year I don't recall that with the fourth quarter was.
Okay, Okay, and the worst alright.
Alright, good stuff thanks, guys. Thanks.
Thanks, Mike.
Thank you and your next question comes from the line of clean lukewarm from Sterling capital. Please go ahead.
Hi, good morning, Thanks for taking the question most of my questions were answered, but just a quick one for Carlos perhaps just trying to take a look at the incremental margin progression.
From a different angle.
You guys have kept.
Human resources and capacity given the culture through the pandemic totally understandable, but.
Clearly it seems to me like the business is built and can sustain and.
With the current expense structure, a higher revenue level and that's my question for Carlos I mean, if you had to back into.
How much incremental revenue, perhaps from a percentage basis. Your current expense base from a human resource and capacity could sustain what's your best guess might be.
Well I think that our business is right now are positioned to handle quite a bit of sales growth and the SSG, which I think is what you're focusing on.
Naturally as that business picks up we will have we will have some hires.
To get back up to levels, we saw and 19, but that's going to be a slow tick upward and I think what will what youll see happen is that as the sales grow you will see.
US catching some more leverage and our fixed costs as that expands but we will have we will have some expenditures I don't have a percentage for you because.
The problem the problem Greg is that we don't have total clarity on what those sales are going to day, we have a sense that theyre going to rise, but we don't know.
The magnitude of the steepness of that rise. So we're very nimble and we will flex as necessary, but as we're sitting here today the current business can handle.
Pretty sizable jump and sales before we got to go out and make meaningful hires.
Okay. Thanks, and then just as a quick follow up maybe one for Carlos and one for Eric Carlos you talked a little bit about Oems continuing to push price somewhat surprising given the health of the customer base through the pandemic.
Heico's franchise poised to take share can you talk about the price disparity I E. The umbrella is that widening over time, and therefore better positioning you not just with the recovery, which would normally be.
Time for you to take share, but is that price umbrella, making that.
Opportunity even more positioning.
Positioning HEICO to be and even.
And more attractive option.
As the economy recovers here and then just quickly for Victor.
Congrats again on the on the perseverance landing very exciting for the company and for the country you guys are putting a variety of parts sensors.
Memory et cetera on electronic vehicles and on Mars wondering if theres any crossover opportunity to participate and what is and still still and early.
But large and growing market for electronic vehicles here on Earth, where share positions are still fluid.
And if thats even on your radar.
So this is Eric I'll go ahead and start.
First.
With respect to the pricing umbrella, we treat our committed customers extremely well and so we moderate price increases for them if they commit to us for a long period of time, so yes, you're absolutely right that per.
Pricing umbrella does widen over time.
And we can get to a point, where if somebody has been buying apart from us for 15 or 20 years.
Our price could end up being 70%, 80% below the OEM price.
And where we're still able to earn a fair margin on it and we're able to give very good value and then we add more products as a result of that there is no question that we've got the opportunity. If we wanted to push pricing that we could but we've decided that the future is much greater to us and we.
And would rather continue on our growth path.
And sort of limit voluntarily limit those opportunities in order to capture more market share.
The Oems I would say this year in general.
Their price increase I mean, they've been across the board some have decided to raise price substantially and in order to make up all of the lost margin net Dave.
Surrendered due to the pandemic others had been slightly more.
Moderate in their price increases, but I would say, it's pretty much across the board.
As usual so the.
Tycho.
<unk> has even been enhanced during the pandemic.
And so and then for Victor.
Okay.
It's a very good question and I appreciate your asking and actually it's insightful.
And thank you by the way for the complement to our people into our company and on.
Perseverance.
The answer is yes.
Some of our businesses are working on autonomous vehicles cars automobiles.
And it's not I wouldn't call. It a big part of our business I think it has some potential for US we'll see how it develops part of the question is we tend to be a high and higher margin producer as you know.
And we tend not to be in the extreme high volume low margin and which is often where automotive alive and so we'll have to see how it develops for us is it something that turns into an opportunity.
Longer term.
Or are we really more on the development and so right now what we're doing there tends to be more and the development and unfortunately.
And I can't.
Tell specifically youre disclose specifically.
The companies were working with programs one because we're subject to some confidentiality agreements on those.
And they wanted kept secret but.
And by the way I can say, it's not just the automotive companies, but it's the tech companies as well who are.
Involved with automotive applications.
And.
Carlos do you have.
Couldn't have said it better Victor.
Net of other.
Was there one that you were going to answer and I think Eric took care of and numbers.
Alright, Thanks John.
Thank you Paul.
Thank you. Your next question is from the lunch Greg Konrad from Jefferies. Please go ahead.
Good morning.
Good morning.
Quick two quick follow ups, one on <unk> I think last year defence and space was about two thirds of the segment any granularity around the breakout and then you mentioned space was broad based in terms of opportunities any color around drivers I mean, you mentioned and Mars Rover, but how much is <unk>.
Government versus maybe some of these new commercial space opportunities we hear about.
Yes, so just in terms of giving you a sense of the breakdown.
And our sales its comparable to where it's been I mean, it's a little better than half is defense.
And commercial spaces around the 10% range and in other markets.
Other electronics and government markets kind of about a quarter and.
Our medical bounces around 5% to 10% and commercial aviation.
As.
Sub 10% now between five and 10 running.
We're running between five and 10 and.
I would expect commercial aviation to get back up more towards 10%.
As well as the year wears on or as we get into next year certainly based on what we know today.
And how things are doing.
And on the space side.
You are right of course per <unk>. There was no revenue in the quarter from that is that launched and of course in July of last year.
But it's it's broad based it tends to be more satellites.
And most heavily satellites and most heavily communication satellites.
The the space exploration part of the business is nice and it is and it is a profitable business for us, but it is not.
And the bread and butter part if you will it tends to be.
The bragging rights if you if you will.
For us and it tends to be.
And the more noteworthy, but obviously they are not a lot of rover's built each year and launched each year.
But when you get into Earth observation there are a number of Earth observation satellites that were on that we're getting on that or companies or supply and components on.
And as well as some launch vehicles.
So that's.
Broadly where we mine.
Thank you and then just a quick question on FSD I mean, you mentioned Europe earlier and the call. When we think about the eventual approved men.
The aftermarket should that kind of follows the capacity trends that we're seeing and the regions with <unk> recovering ahead of others and is that kind of what we should be looking at in terms of regional trends.
Yes, absolutely I think you nailed it.
There may be a little bit of a recovery.
Slightly before that as airlines get prepared if they start to see bookings I think that could drive it.
Drive and early recovery, they've got to make sure that they've got the aircraft ready for I believe what's going to be a surge down the road.
Thank you.
Thanks, Rick.
Thank you again as a reminder, if you would like to ask a question over the phone simply press Star then the number one on your telephone keypad.
Yes.
We have another question from Luis <unk> from UBS. Please go ahead.
Hey, guys. Thanks for getting me on just take one from one from each year and Carlos the SG&A trend up a bit and the quarter is that some of the performance comp coming back in is that also maybe what weighed a little bit on the SSG margins because I think if you add back the bad debt expense and the inventory reserves sort of day.
Clean margins did tick down but is that just maybe some of that SG&A come back.
The performance based comp in the first quarter of.
2000, and 2021 were fairly comparable.
So because you remember last year.
We have very low bonuses for this year, we're and we're wanting to take care of our folks is we do see some green shoots and the process going forward. So I think what we're seeing to be candid with you is that as the.
As the sales have started to tick up a little bit we're still not catch and the leverage and our SG&A. The weighted we experienced in Q1 of 'twenty, we had a great quarter and 'twenty and comparatively speaking its.
Some of the <unk> cost inefficiencies.
As the only way I can think to put it that we're experiencing when compared to Q1 'twenty.
And I don't think it has anything to do with performance based comp.
Okay.
And then Eric talk and the share share taking I guess is that do you see that more on the parts side of the MRO side I, just obviously and parts to your point you have 70, 80% lower price and some cases, that's extremely competitive are you as competitive on the MRO side. It's just trying to get a sense, where you think that share taking could take place.
Yeah, I think it's really across the board in all of our businesses.
Yes, you are right that the first of all the 70% to 80% price benefit would be for as I mentioned for a customer who has committed to us and has been buying something per say 15 to 20 years, so and.
And that would be the maximum I mean, thats, not where we come out of the box.
No.
If you look at repair typically parts as a percentage of repair is just say roughly 40% of the cost. So you are right that the.
Extreme cost benefit would be more on the <unk>.
<unk> on the PMA side.
But I think we're very competitive across the board and everything that we do.
Okay, great. Thank you and then Victor and just for you.
To your earlier point aviation is now 5% to 10% of our BTG and correct me, if I'm wrong, but I think it's primarily OEM.
Whereas the uncertainty.
In Atg and defense all defense primes have guidance just what what else is it that you guys are particularly so uncertain about and that business.
Lou This is Victor.
The business is roughly split between OEM and aftermarket in Atg four.
For commercial aviation.
And so.
That pretty much explains.
What we're looking at right.
Got the uncertainty and aftermarket, which is improving and the uncertainty and new production, which I think is also probably moving and in the right direction. I mean, there was a lot of disruption and new aircraft production rates and shifting.
Which seems to be moving again and the right direction and we've got the Max which is now resuming production, but then it stopped and so that's why I'm generally optimistic about the direction that we're moving and commercial aviation and I just don't know the exact timing.
Okay, and I think that earlier number someone asked that I think it was minus 49, 5% for the fourth quarter. So just so.
And is there.
Thank you guys.
Thank you.
No further questions at this time Mr. Mendelson. Please continue.
Thank you very much I wanted to thank everybody on the call for your interest and HEICO as you know we remain available if you have questions give us a call.
Eric Victor Carlos derived we'll be happy to speak with you and.
And if not we look forward to speaking to you at the.
Q2 conference, which will be and about three months so.
Stay well stay healthy hopefully get vaccines and we'll speak to you real soon thank you all.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Great day.
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