Q2 2021 HEICO Corp Earnings Call
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Certain statements in today's call will constitute forward looking statements.
For HR is subject to risks uncertainties and contingencies heico's actual results may differ materially from those expressed and.
For implied by those forward looking statements as a result of factors, including the severity and magnitude and duration and if the COVID-19 pandemic.
HEICO liquidity and debt.
The amount of timing of cash generation.
For commercial air travel cost by the COVID-19 pandemic and its aftermath.
Airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services.
Product specification costs and requirements, which could cost and increase to our costs to complete contracts governmental and regulatory demands export policies and restrictions reductions in defense space or homeland security spending by U S and or for.
And customers or competition from existing and.
And your competitors, which could reduce our sales and our ability to introduce new products and services at profitable pricing levels.
And she could reduce our sales or sales growth.
Product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales.
Our ability to make acquisitions and achieve operating synergies for.
Acquired businesses customer credit risk interest.
Foreign currency exchange and income tax rates.
Economic conditions within and outside of the aviation defense space.
Medical telecommunications and electronics and <unk>.
Net negatively impact our costs, and driving us and UK and spending or budget cuts, which could reduce our defense related revenue.
Bart these decent inked and this call are encouraged to review all of Heico's filings for this.
Securities and exchange commission, including but not limited to filings on form 10-K form 10-Q and form 8-K.
Undertake no obligation to publicly update or revise any forward looking statements.
And as a result of new information future events or otherwise.
<unk> expense required by applicable law.
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Thank you and good morning to everyone on the call.
We thank you for joining US we welcome you to the HEICO second quarter fiscal 'twenty, 1 earnings announcement teleconference.
And 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 beginning my review of the operating results I'd like to take a moment and thank all of heico's talented team members for their loyalty and high performance during the continuing challenges brought on by COVID-19, the dedication to high growth customers and.
2 the safety of their fellow team members has been commendable and I want to thank every member of Heico's worldwide team should be proud of what we accomplished during these unusual circumstances and to recognize that our future is very bright and we will exit this COVID-19.9.
<unk> periods, a stronger and more competitive company.
I'd now like to take a few moments to address the impact of COVID-19 on Heico's recent operating results.
Results of operations for the first 6 months and the second quarter of fiscal 'twenty..1 continued to reflect the adverse impact from COVID-19.
And notably demand for our commercial aviation products and services continues to be moderated by the ongoing depressed commercial aerospace market, which we know is beginning to rebound and return to normal.
Looking ahead to the remainder of fiscal 'twenty, 1 and we're cautiously optimistic that the ongoing worldwide rollout of COVID-19 vaccines.
We'll have and in fact is having a positive influence on commercial air travel and we generate more favorable economic environment in the markets that we serve.
Summarizing the highlights of the first 6 months and second quarter of fiscal 'twenty 1 we.
We are pleased to report record quarterly net sales within the <unk> group and <unk>.
Our third consecutive sequential increase in quarterly net sales and operating income of the flight support group.
The Atg group set a quarterly net sales and operating income record and the second quarter of fiscal 'twenty 1.
Improving 11, and 9% respectively.
These increases principally reflects the impact from our profitable fiscal 2020, 1 acquisitions as well as very strong organic growth of 19% for our other electronic products.
The flight support group reported sequential growth and operating income and net sales and the second quarter of fiscal 'twenty.
And they improved 37, and 16% respectively as compared to the first for the fiscal 'twenty 1.
Our total debt to shareholders' equity reduced and improved from 27, 1% as of April 30, and 21 and that compared to 36, 8% as of October 31 'twenty.
Our net debt, which is total debt less cash and cash equivalents of $199 million as of April 30, <unk> 1 <unk>.
Compared to shareholders' equity ratio improved to 9.2% as of April 32001, and that was down from 16, 6% as of October 31 'twenty.
And this provides HEICO with substantial acquisition capital and the balance of our 1.5 billion dollar unsecured revolving credit facility as well as other available capital.
We are not a capital constrained and company.
Our net debt to EBITDA ratio improved to point for 7 times as of April 30, 21 down from 7.1 times as of October 31 'twenty.
During fiscal 'twenty, 1 we successfully completed 1 acquisition and we completed we have completed 5 acquisitions over the past year.
We have no significant debt maturities until fiscal 'twenty for and we plan to utilize our financial strength and flexibility to aggressively pursue high quality acquisitions of various sizes, which will accelerate growth and maximize shareholder returns.
And.
Cash flow provided by operating activities remain strong increasing 2% to $210.1 million and the first 6 months of fiscal 'twenty, 1 and that was up from $205.9 billion and the first 6 months of fiscal 'twenty.
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And March 'twenty, 1 and can be acquired all of the business assets and certain liabilities and pyramid semiconductor.
Pyramid has a specialty semiconductor designer and manufacturer, which offers a well developed line of processors static random access memory electronically erasable programmable read only memory and logic products on a day.
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Array of military and space and medical platforms. We do expect this acquisition to be accretive to earnings within the first 12 months following the closing.
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 the flight support group. Thank you.
The flight support group's net sales were $429.6 million and the first 6 months and fiscal 'twenty, 1 as compared to $553 million and the first 6 months for fiscal 'twenty debt.
<unk> support group's net sales were $233 million in the second quarter of fiscal 'twenty, 1 as compared to $252 million and the second quarter of fiscal 'twenty.
And net sales decrease in the first 6 months and second quarter of fiscal 'twenty..1 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 group's operating income was $61.3 million and the first 6 months of fiscal 'twenty, 1 as compared to $109.6 million and the first 6 months for fiscal 'twenty. The operating income decrease and the first 6 months of fiscal 'twenty, 1 principally reflects the previously mentioned.
Lower net sales as well as a lower gross profit margin higher performance based compensation expense and the impact from lost fixed cost efficiencies stemming from the pandemic.
Flight support groups operating income was 35.5 million and the second quarter of fiscal 'twenty, 1 as compared to $47.5 million in the second quarter of fiscal 'twenty.
The operating income decrease and the second quarter of fiscal 'twenty, 1 principally reflects higher performance based compensation expense.
Correct late resulting from the strong improvement and operations during the past 3 consecutive quarters.
The flight support group's operating margin was 14, 3% and the first 6 months of fiscal 'twenty, 1 as compared to 19, 8% in the first 6 months for fiscal 'twenty. The operating margin decrease and the first 6 months of fiscal 'twenty, 1 principally reflects an increase in SG&A.
<unk> as a percentage of net sales mainly from the previously mentioned higher performance based compensation expense and lost fixed cost efficiencies and the lower gross profit margin.
Support groups operating margin was 15, 4% and the second quarter of fiscal 'twenty, 1 as compared to 18, 9% and the second quarter of fiscal 'twenty.
The operating margin decrease and the second quarter of fiscal 'twenty, 1 principally reflects the previously mentioned higher performance based compensation expense.
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 Eric the electronic technologies group's net sales increased 9% to a record $466.6 million and the first 6 months of fiscal 'twenty, 1 up from $427.4 million and the first 6 months of fiscal 'twenty. The net sales increase and the first 6 months of fiscal.
'twenty, 1 principally reflects our fiscal 2020, 1 acquisitions as well as organic growth of 1% the organic growth principally reflects increased demand for other electronic and space products, partially offset by demand for commercial aerospace products.
The electronic technologies group's net sales increased 11% to a record $243.1 million.
And the fiscal and fiscal second quarter, and 21 up from $219 million in the.
Quarter of fiscal 'twenty, the net sales increase and the second quarter of fiscal 'twenty, 1 principally resulted from our fiscal 2020, 1 acquisitions as well as organic growth of 3% the organic growth principally reflects increased demand for our other electronic and defense products, partially offset by <unk>.
Kris demand for commercial aerospace products.
The electronic technologies group's operating income increased 7% to a record $131.4 million and the first 6 months of fiscal <unk> up from $123 million and the first 6 months of fiscal 'twenty.
And the operating income increase and the first 6 months of fiscal 'twenty..1 principally reflects the previously mentioned net sales growth, partially offset by a lower gross profit margin mainly from lower net sales of defense and commercial aerospace products that were partially offset by an increase and net sales of certain other electronic pre.
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The electronic technologies group's operating income increased 9% to $71.3 million and the second quarter of fiscal 'twenty, 1 as compared to $65.5 million and.
Second quarter fiscal 'twenty, yes.
The operating income increase in the second quarter of fiscal 'twenty..1 principally reflects the previously mentioned net sales growth, partially offset by a lower gross profit margin mainly from a less favorable product mix for our defense products as well as a decrease in net sales and commercial aerospace products that were partially offset by.
A net increase in sales of certain other electronic products. The electronic technologies group's operating margin was 28, 2% and the first 6 months of fiscal 'twenty, 1 as compared to 28, 8% and the first 6 months of fiscal 'twenty, the electronic technologies group's operating margin.
And was 29, 3% and the second quarter of fiscal 'twenty, 1 as compared to 29, 9% in the second quarter of fiscal 'twenty. The operating margin decrease and the first 6 months and second quarter of fiscal 'twenty..1 principally reflects the previously mentioned gross profit margin, partially offset by a decrease in SG&A.
Expenses as a percent of net sales mainly from efficiencies gained from the previously mentioned net sales growth and <unk>.
On the call back over to Larry Mendelson.
Thank you Victor and Eric.
Moving on to <unk>.
Details the diluted earnings per share.
Consolidated net income per diluted share was $1.3 and the first 6 months of fiscal 'twenty, 1 and that compared to $1.44, and the first 6 months of fiscal 'twenty. The decrease and the first 6 months of fiscal 'twenty..1 principally reflects the previously mentioned lower operating and.
And the flight support and higher income tax expense and that was partially offset by the previously mentioned higher operating income of the Atg group and lower interest expense.
Consolidated net income per diluted share was <unk> 51, and the second quarter of fiscal 'twenty, 1 as compared to <unk> 55, and the second quarter of fiscal 'twenty.
The decrease in second quarter of fiscal 'twenty, 1 and principally reflects the previously mentioned lower operating income of flight support partially offset by lower income tax expense as well as higher operating income of the <unk> group and lower interest expense.
Depreciation and amortization expense totaled $22.9 million and the second quarter of fiscal 'twenty, 1 that was up from $21.7 million and in the second quarter of fiscal 'twenty and total of $45.9 billion and the first 6 months of fiscal 'twenty 1.
Up from $43.3 million and the first 6 months of fiscal 'twenty.
The decrease and the second quarter and first 6 months for fiscal 'twenty, 1 principally reflects incremental impact from the fiscal 2020.1 acquisitions.
R&D expense increased to $34.2 million or 3.9% of net sales for the first 6 months of fiscal 'twenty, 1 and that was up from $33.9 million or 3.5 percentage of net sales for the first 6 months of fiscal 'twenty.
R&D expense increased to 18 million or 3.9 percentage of net sales and the second quarter of fiscal 'twenty, 1 and that was up from $16.8 million for 3.6 percentage of net sales second quarter of fiscal 'twenty.
We know that significant ongoing new product development efforts are continuing at both atg and <unk>.
<unk> support.
Our consolidated SG&A expense were $161.2 million and the first 6 months of fiscal 'twenty 1.
And as compared to 157.8 million and the first 6 months of fiscal 'twenty consolidated SG&A expenses with $83 million and the second quarter of fiscal 'twenty, 1 and that compared to $77 million and the second quarter of fiscal 'twenty.
The increase and consolidated SG&A expense and the first 6 months and second quarter of fiscal 'twenty 1.
Principally reflects higher performance based compensation expense and the impact from our fiscal 2020, 1 acquisitions, partially offset by reductions and other G&A expenses and selling expenses.
Consolidated SG&A expense as a percentage of net sales increased to 18, 2% and the first 6 months of <unk> 21 up from $16.2 and the first 6 months of fiscal 'twenty Consol.
Consolidated SG&A expense as a percentage of net sales increased to $17.8 million and the second quarter of fiscal 'twenty, 1 and that was up from 15, 1% and the second quarter of 'twenty the.
The increase and consolidated SG&A expense as a percentage of net sales and the first 6 months and second quarter of fiscal 'twenty 1 for.
Principally reflects higher performance based compensation expense.
Interest expense decreased 2.4 and $5 million and the first 6 months of fiscal 'twenty, 1 down from $8 million and the first 6 months of fiscal 'twenty.
Interest expense decreased to $2.1 million and the second quarter of fiscal 'twenty, 1 and that was down from $3.8 million and the second quarter of fiscal 'twenty.
The decrease and the first 6 months and second quarter of fiscal 'twenty, 1 was principally due to a lower weighted average interest rate on borrowings outstanding under our revolving credit facility.
Other income and.
The first 6 months and second quarter was not significant.
Talking about income taxes.
Our effective rate and the first 6 months of fiscal 'twenty, 1 was 12%.
As compared to <unk>, 3% and the first 6 months for fiscal 'twenty.
As previously mentioned HEICO recognized a discrete tax benefit from stock option exercises and both the first quarter of fiscal 'twenty, 1 and 'twenty.
And that accounted for the majority of the decrease in the year to date effective tax rate.
Tax benefits from stock option exercises and both periods was the result of strong appreciation and HEICO stock price during the option is holding period and the larger benefit recognized in the first quarter of fiscal 'twenty was the result of more stock options exercised and that period.
Our effective tax rate decreased to 19, 5% and the second quarter of 'twenty, 1 fiscal 'twenty, 1 and that was down from $22.6 and the second quarter of fiscal 'twenty.
Decrease principally reflects the favorable impact of higher tax exempt unrealized gains and the cash surrender values of life insurance policies related to the HEICO leadership compensation plan.
Net income attributable to Noncontrolling interest was $11.5 million and the first 6 months of fiscal 'twenty, 1 and that compared to $13.4 million and the first 6 months of fiscal 'twenty.
The decrease and net income attributable to Noncontrolling interest and the first 6 months of fiscal 'twenty, 1 principally reflects a decrease and the operating results of certain subsidiaries of the flight support group and.
And which non controlling interests are held and that was partially offset by higher allocations of net income to noncontrolling interest as a result of certain fiscal 2000 and acquisitions as.
And as well as an increase and the operating results of certain subsidiaries of the Atg group and which non controlling interests are held.
Net income to Noncontrolling interest was $5.8 million and the second quarter of fiscal 'twenty, 1 as compared to $5.5 million and the second quarter of fiscal 'twenty.
For the full fiscal 'twenty, 1 year, we continue to estimate a combined effective tax rate and non controlling interest rate of.
<unk> 24, and 26% of pre tax income.
Now, let's talk about the balance sheet and cash flow.
1 thing I want to mention that in the second quarter of fiscal 'twenty 1 cash.
Cash flow from operations was 146% of.
Reported net income so the net.
Come was 70 point.
And $7 million and the cash flow was 100 almost $103 million.
Our financial position and forecasted cash flow and remain very strong as.
As we discussed earlier cash flow provided by operating active.
Activities increased 2% to 2 and a $210.1 million and the first 6 months of fiscal 'twenty, 1 and that was up slightly from $205.9 million and the first 6 months of fiscal 'twenty.
Our working capital ratio was for 5 to 1 as of April 30, compared to 4.8.
On October 31, 'twenty 1.
Our days sales outstanding of receivables improved to 41 days as of April 30, 21 that was down slightly from 44 days as of April 32000.
We continue to closely monitor receivable collection.
And motor to limit our credit exposure.
No 1 customer accounted for more than 10% of net sales our 5 top customers represented approximately 23% and 24% of consolidated net sales and the second quarter of fiscal 'twenty, 1 and 20, respectively.
Inventory turnover rate was 153 days for the period ending April $30.21, compared to 139 days for the period ended April 32000.
The increased turnover rate principally reflects lower sales volume from the pandemic impact on demand for certain of our commercial aerospace products and services.
Despite the increased turnover rate our subsidiaries has done an excellent job of controlling inventory levels and the first 6 months of fiscal 'twenty, 1 and we believe that's appropriate to support expected future net sales as well as our increased backlog as of April 32000.
And 1 which increased by 51 million to $895 million.
Looking ahead.
As we look ahead to the remainder of fiscal 'twenty..1 we are cautiously optimistic that the ongoing worldwide rollout of COVID-19 vaccines will have a positive influence and in fact is having a positive influence on commercial air travel and it will generate favorable economic environment and the <unk>.
Markets that we serve.
The pace of recovery and the global travel remains difficult to predict and can be negatively influenced by new COVID-19 variance and varying vaccine adoption rates.
And those uncertainties, we cannot provide fiscal 'twenty, 1 net sales and earnings guidance at this time.
We continue to estimate capital expenditures of approximately 40 million for fiscal 'twenty 1.
We believe that our ongoing fiscal conservative policies strong balance sheet high degree of liquidity.
No debt enables us and.
Degree of liquidity enables us to invest and new R&D and development enables us to execute on our successful acquisition program and positions HEICO for market share gains as the industry recovers.
Again, and closing I would like to again, thank our credit and incredible team members for their continued support and commitment to HEICO.
During these professionally and personally challenging times that strength will manifest from a culture of ownership mutual respect for each other and the unwavering pursuit of exceeding our customers' expectations.
Thank you all for everything you do to make HEICO and exceptional company and 100 mine.
And the listeners that a very high percentage of HEICO team members are HEICO share owners through their 401 K plans.
Have many millionaires multimillionaires and wealthy team members.
All support the operation of HEICO.
And that's the extent of my planned remarks, and I would like to open the floor for any questions.
For you.
Operator.
Thank you.
At this time I would like to thank Annie questions from my dad for SCD.
And I wanted to ask a question and you will need to press star 1 on the telephone.
And that would be star 1 on your telephone.
We have on first question from the line of Robert.
And Gary from.
Credit Suisse. Your line is happening.
Hi, Good morning, everybody good morning, Robert.
A few different questions.
And really across for all of you, but I'm going to start with Victor and the organic growth and the quarter and wondering if you could talk a little bit about the guild and the markets, where you did see positive growth and if you could size for us or quantify perhaps the negative growth and commercial.
Yes.
Rob Thank you.
Good questions.
And on.
In the quarter.
Our strongest growth came out of our what I would call other electronic markets and.
And I think we saw a strong rebound there.
Certainly year over year and continuing sequentially.
There and Thats in line with what we expected and that that was number 1 for US followed by medical.
Was our second strongest and.
And probably for obvious reasons, right and a year ago things were shutting down really and in both of those markets going the wrong way.
On.
And then third strongest was defense.
For us in terms of growth.
And then in space commercial space, we gave up a little bit of ground, but that's really a result of 2 things 1 I think tough comps, but also we had some things shifting out of more more of the ladder shifting out of the quarter into later part of the year.
And just delivery schedules that debt.
And that we're expecting in the later part of the year. So.
I would say space.
For us commercial space.
Should be decent overall on the year and then commercial aviation.
And was really the weakest for us and.
And that's.
That's down in the neighborhood of kind of what you would expect that kind of.
Comparable to what we're seeing and flight support group.
And so and no surprise for us there.
Okay, and then just on your margins.
You mentioned earlier, there's a little bit of gross margin pressure I assume that's the volume.
Shortfalls and the <unk>.
And markets you just cited but at the same time you are not far off your high margins.
And the lowest in that 31% neighborhood.
Might we think about margins once volumes recover and commercial or is it spread across.
Across the other.
Business lines, it doesn't really it doesn't necessarily matter how much commercial comes back.
Commercial is important to us and that's a good margin business for us. So I think that will help us.
But it is it is broadly spread across and as you've heard me say before.
It is also mix sensitive and.
<unk>.
So we're.
And where some of our higher margin defense products wind up selling.
We will influence that in the and the.
<unk>.
So I my.
And my guess is as I've said before it's very difficult for me.
To get too worked up on our guys.
On the margins if they're in what I call very high territory and.
And so if it's.
There <unk>.
50 basis points for 100 basis points, even a couple of hundred basis points frankly within what we have.
Experience historically.
Within that range and I'm generally pretty happy.
And so but I think commercial aviation will be a benefit to us and the question is what gets offset and higher margin defense.
1 thing to keep in mind, Rob is that the kind of and for what it's worth the way I think about CTG margins is on normal years, not focusing on quarters, we should run anywhere from 20% to 30% on non-GAAP margin that is what I would expect out of the business to Victor's point is going to flux up down all over the place.
And on a quarterly basis, but it's a healthy segment good mix of companies and with commercial comes back way to fall on that sweet spot.
On relatively consistently.
Okay, alright, thanks for that Carlos Eric just switching over to MSG.
And that that we all ask I think each quarter is how the quarter trended month by month, how things are shaping up and.
In May and then if you could speak to your expectations.
How how airlines and customers will behave ahead of a strong summer and at least domestic summer travel season will they want the parks beforehand and they want the parts. After how do we think about that.
Good morning, Rob those are really good questions.
And you can imagine the quarter trended up.
As we went along in the quarter.
And with the U S carriers, adding back capacity.
And would anticipate debt it will continue to trend up of course Europe is very slow.
Asia is a little bit mixed right now.
But we would anticipate as the airlines start operating more aircrafts and theyre going to need more parts. So.
And I would say that.
Sort of what's the expected right now of course in the on.
New build area, our specialty products area that is still.
That hasnt seen as much of a recovery.
It is recovering.
But of course, the Newbuild is definitely more challenged and will take a little bit longer to respond and then the aftermarket did.
Yes.
Okay and then just a final question Larry for you you talked about M&A earlier, and the transactions that you've done.
How does how does things look today and the pipeline and to what extent does the potential capital gains tax increase influencing sellers.
I mean, I thought there would be a bigger impact.
And we don't really see that I think the number of opportunities as kind of normal the ability to.
Do the due diligence is getting a little bit better because we're able to access these places.
But I would say things look about normal.
Don't see any people running out.
For.
From what people tell me.
A lot of people are discounting the 40%.
Biden threat for capital gain and talking more about 25 or 28% and at those rates that doesn't seem to be a panic at this point.
I think with the with Congress pretty close that buys and my my personal opinion is that I don't think he's going to get 40% and I'm not even sure. If he is going to get 25 for 2018, Mike.
But there'll be a lot of pushback.
At this point I would say, Rob it's pretty normal.
Okay. Thank you everyone.
Thank you.
Thank you.
Next question is from the line of Peter Arment from Baird.
Please go ahead.
Hi, Good morning, you actually have Eric Ruden on the line for Peter today.
And maybe if I could just following up on the order environment, Eric and terms of airline inventory levels.
Last quarter, we were talking about inventory stocking and Destocking, having ended and you guys are pretty vocal and predicting that.
And you mentioned on a scheduled expand do you expect more parts with that maybe you could just comment is that in terms of in terms of thinking about restocking and are you seeing any of that yet or is it still kind of just in time type order activity.
Hi, Eric Good morning, and thanks for your question yes.
Yes, I think we called that correctly and we were the first ones to call the and the Destocking. When we did in December and then of course and our last quarterly call in February.
Right now what we see is obviously accelerated sales I mean.
And you can see the 16% increase.
Q1 to Q2 consecutive increase and so obviously the airlines are buying more and.
And our sense is that most of that is being used yet. Some is some inevitably will end up on the shelf, but we haven't seen what I would call day.
The serious restocking yet.
And my guess is that they've got to get all the aircraft back into service and then maybe the restart the restocking starts at that point once the aircraft.
The more intense restocking would start once the more once a greater percentage of the fleet.
And yet.
On.
Got into into service.
Also if you look at the European numbers.
The airlines are really suffering over there.
And.
The obviously I don't think that they are restocking at this point and that will come later and in the cycle. So my guess is we start to see some restocking more in heico's fiscal.
And <unk> 'twenty 'twenty 2.
Area, maybe theres, a little bit of it and our fourth quarter, but it's it's hard to say at the moment, but we did.
Correctly predict and of the Destocking and I think that due to our relationships with our customers, we're going to be right, there and understand when the airlines start to restock I mean I have had not.
Conversations with airline executives and I can tell you that they're very much focus the airline and I'm talking.
The executives of major airlines.
And they are very much focused on making sure that they can complete.
The fights that they've got planned and this is definitely a topic for the operations people and all the airlines. They are very much looking at this to make sure they've got the parts on the shelf.
Okay. Thank you and then maybe that's a good segue into my next question on just trying to frame up kind of how you guys are seeing market share gains and I appreciate it.
And I look at SSG and kind of just the revenue share of total flight activity coming out of previous downturns, HEICO and been able to increase that metric pretty significantly after the O 2 and OE and recessions and.
And if I look for Covid, so far theres been a pretty dramatic increase already and which appears to be a bit ahead of schedule as previous downturns, and we would expect to see that.
As we get and so the actual recovery, which still obviously has a long way to go so far. So I guess my question would be are you seeing increased contact with your customers already given that the inventory Destocking has ended and are now placing orders and maybe you can just provide a general update on the conversations I know you have with your sales team.
Yes, I'd be happy to.
The answer is yes, I think that HEICO is picking up market share and we see it.
As we look into the we've got very good visibility into the various products on which we are.
And on which we supply parts for.
And we would anticipate that debt will continue to pick up.
The.
On.
Yeah.
When you look at the different areas of our business, whether it's parts or repair or distribution I think we've got very good content in those areas and we will we will continue to go ahead and pick up there with regard to how this time is different from the other time at this time, we so precipitous.
We.
We would anticipate that they would bounce back quicker because they just as we said on the December call. They just couldnt continue to operate at the levels at which they were operating in the December area.
I do think that the market share gain is going to be.
<unk>.
More pronounced for HEICO as compared to other suppliers because of the value that we generate and we were very good to our customers through this whole pandemic were very good to our team members I think we're in a unique position to be able to respond and to take market share and I think youre going to continue.
See a market share shift.
Frankly, specifically towards HEICO as compared to other other suppliers and the industry.
Okay. Thanks, and appreciate the comments I'll leave it there.
Thank you.
Thank you. The next question is from Larry Solow from CJS Securities. Please go ahead.
Great. Thanks, Good morning, guys and good.
I'm wondering if that's just.
Perhaps just a couple of follow ups on.
On SSG Eric.
And with some good call. It has some good qualitative color.
And certainly you guys are continuing to rebound and I.
Ticked down about 25% now.
Relative to.
Pre pandemic and then fiscal 19 and to do you still think that you can get back without giving specifics, but get back to fiscal 2019 levels sometime in fiscal 'twenty, 2 and perhaps even before.
The market or passenger demand fully recovers and then I guess part 2 of that question is sort of the magnitude of the cadence for that recovery because it looks like this quarter was a pretty good sequential improvement.
Do you expect that to continue.
And we look out for the next few quarters or maybe slow down a little bit.
Yes, I think that's a good question for Larry.
Of course, I don't have a crystal ball and I don't know what.
The next number of quarters are going to be like I mean, with the 16% growth that we saw in the second quarter and my sense is that that quarter over quarter, that's a pretty.
Hard number to beat.
So I would.
I'm there.
HEICO.
We're very cautious and we want to make sure that we've got the parts on the shelf, we're not over Levered and we want to make sure that we've got the parts on the shelf. So we can.
And our customer demand.
However, we want to be careful about getting over our skis. So I think 16% quarter on quarter improvement is is very high.
Who knows what it'll be in the third quarter and the fourth quarter I would be surprised to see that kind of.
Improvement I think our 16% number has surprised frankly.
And frankly, it surprised us I think probably surprising most people on the call today and I do think part of that is a market share shift and.
And HEICO, winning in the marketplace because of how we behaved during the pandemic.
If you look at what <unk> came out with this morning, Theyre predicting and global passenger numbers will recover at a 52%.
<unk>.
Pre COVID-19 levels in 2021, and rising to 88% in 2022, and 105% and 2023.
So.
My guess is that it's going to be until 2023 in order to.
Meet the 2019 numbers remember HEICO.
Year and is in October.
And therefore for US to report 2022, equaling 2019 is much harder than for most people for others, who would have to better months. If you will in there.
So I think it's really more of a 2023 story, but I mean this is something that we're watching very very carefully.
If you look its really leisure travel that is saving the industry right now and business travel is and the tank.
At a fraction of where it used debate.
And international travel is and.
And the tank also and the airlines really have a skeleton network.
Up to be able to support the.
The international destinations so I know the bite and administration is looking at.
Changing rules and getting rid of $2.12 F and setting up these carter's between the United States and other countries and I think this is going to be very important for the United States to lead because.
On the United States has always done very well.
And with the aerospace and defense industry and exports and we really got to get out there and lead they've got to get these travel card doors opened.
So the airlines can start doing well on the longer haul as well as on the business travel and so I think those are the 2 things that I would really watch out for yes, Europe will be back this summer.
And it's starting to come back, but again, that's on a leisure.
Right now that's not on business and its not on long haul so we.
Really need the governments around the world to address this and we certainly advocate for a safe via policy, whereby you have to show a either a.
Positive either a vaccination or negative COVID-19 test, 1 or the other but the U S has really got to get out front and this and and lead the world.
Alright, Okay. Great. Appreciate it that was really good color and then just.
Second question.
Perhaps for you or maybe perhaps Carlos can chime in too just on the and you guys mentioned several times on the increase in incentive comp.
And clearly it seems like it's a signal that I guess, you expect business to at least continue to improve.
Level of incentive comp was there some catch up and there I guess, both at <unk> level and at the corporate level.
And this quarter relative to last few quarters, and maybe it will trend back more to a normalized level as we look out.
Well I think its Larry this is Carlos.
Relative to 2020, we didn't we didn't have and the second quarter last year, we actually had reversals of Q1 and bonus right. So we sort of didn't have.
Good comp to 20 to go against it here. It sounds like your question is are they more normalize or we're getting to something more normal I would say that we're still below 19 levels on performance based comp stuff.
And I would.
Debt to be the case throughout 'twenty 1.
We're not going to get up we're not going to get up to those levels of volume that we had 19 I don't think this fiscal year right. So.
We're not out of line, we're just in a situation. It's a very unique this quarter, whereby we had in 2000 and some reversals, which amplify if you would the impact of the performance based comp, but your thesis on your commentary about expecting the rest of the year to play out very nicely, yes, we expect that and that is why we do have.
For <unk> comp and the numbers this year.
Fair enough I appreciate it thanks Carla sure.
Thank you the net.
1 is from Josh Sullivan from the Benchmark company. Please go ahead.
Hey, good morning.
Good morning, John already addressed.
Just curious on the overall trends.
PMA adoption and interest are you seeing more demand out of the existing traditional PMA customers. When you talk about market share gains or is COVID-19 inducted kind of any new were previously.
Underrepresented categories of customers for PMA parts.
I would say it comes and Josh This is Eric I would say it comes from both.
The bigger area since we were already.
Pretty much for working with everybody I think it would be more of increased penetration to everybody else, but there are other underrepresented I think thats a good term you are using.
To describe the opportunity and we are seeing progress there as well.
And then.
I guess, what I'm, what I'm trying to get at just as maybe we see maybe more be seen ownership of the global fleet.
Their acceptance increased or just what is the you know the viewpoint of the leasing customer base at this point.
I think we're making progress and that area.
There are a number of lessors, who do use our parts.
And I think that the.
Tide is rising and for US there I mean, this is not going to be and immediate.
Switch.
There are <unk>.
Commercial reasons why.
Some folks wanted us.
Day with OEM parts.
But it is substantial penalty to their customers. So we are making good progress and the area and I think a lot more upside exists for us and Thats why im optimistic on it.
Got it.
And then maybe just 1 last 1 just switching gears what is your overall exposure to semiconductors and semi cap market at this point with apex and pyramid. Just curious how you guys see yourself fitting into the overall just conversation around globally global semiconductor supply chain.
Yeah.
Yes, Josh this is Victor and generally we are.
And keeping our participation in <unk>.
And me conductor market for the most part.
In the high rail areas defense and so on.
Again, consistent with our view heico's view of being and niches and low production run markets kind of the higher value added as opposed to mass markets.
And we have an appetite to grow and knows.
<unk> are lengthening supply chains and those markets.
And I think we should grow and those we are adding both.
And.
Market penetration, we believe as.
As well as new product development, and we're trying to expand there.
And look for more acquisitions.
I don't see us.
Being a participant for example, and automotive.
I don't think thats likely although I wouldn't rule it out if there were some very unique high and applications.
And I see us participating in places like defense like aviation.
Hi, and.
On the clean energy.
Power wind power generation and things like that.
And which we've done it.
<unk> for example, and are doing and connect Tech electric.
And electrification and rail and things of that nature would also be <unk>.
Markets that we'd continue to serve.
Okay. Thank you appreciate the time thank.
Thank you.
Thank you. The next 1 is from Robert <unk>.
And from vertical research your line is now open.
Thanks, so much good morning.
Good morning, Rob.
I've just got a couple for you.
First of all there's been some talk that rolls Royce might be close to a deal with IATA on sourcing and some it's MRO chain and the fact that it could be a little bit monopolistic at the moment.
Does this presented an opportunity for you to gain share on the Rolls Royce fleet or is this not really aligned with what youre focused on.
Hi, Rob, it's Eric I'd be happy to take.
<unk> take that question.
We've read the same in the trade press about Rolls Royce and <unk> being close to a deal as you know rolls Royce and had a fairly.
Closed and smaller network than the other manufacturers so it.
And it was never a focus for HEICO.
So.
And I don't think that this is something that.
It's a major opportunity for us.
But if a customer wants us to go in that area.
We'd be happy to talk to them.
But I think growth.
To the the quantities of engines and the fact that their wide body engines.
And that in order to have them service. They would go into these various JV shops I.
I wouldn't see this as an area of focus for us.
And then secondly on a lot of talk around obviously bad inflation I was wondering if you'd seen any signs of impact input cost pressure.
For the last quarter and what's your ability to pass on and the inflated cost to other line.
I think with regard to certainly with regard to our aftermarket business I think we've got the opportunity to pass along the cost increases.
And if you look at the.
And the fact that we offer a great value to our customers I think that if our input.
Costs went up that we would have the ability to do that I would fully anticipate.
<unk>.
OEM list prices will reflect.
This latest inflation pressure.
And we're going to work very closely with our customers to explain if we've got a push along some cost increases why we have to do that we're all very familiar with.
The labor challenges in the United States These days and even to get.
Standard.
Materials.
It's challenging on the consumer side.
As far as on the manufacturing side I think outside of things that are directly and <unk>.
Consumer facing.
And there has been less of that but it is something that we're keeping a very very close eye on to make sure that.
We were able to adjust our prices we feel very confident.
I can tell you that as individual shareholders and HEICO and.
On the event there is greater inflation.
Shareholder of HEICO, I feel very confident that HEICO will be able to.
Make up any potential.
On.
And the.
Evaluation problems as a result of inflation, we're going to be able to increase our prices and.
And.
And eliminate that risk in my opinion as a shareholder.
That makes sense. Thank you very much.
Yeah.
Thank you.
Ken Herbert from Canaccord.
Yes, hi, good morning, everybody.
Good morning, Ken.
Hey, Eric.
Just wanted to ask 1 final question on SSG, if I could for your up 16% sequentially can you can you break that down at all or provide any color on how the respective businesses repair distribution and replacement parts.
Fit into that in terms of where you saw maybe more growth versus versus less growth.
Yes, I can I would be I would be happy to do that.
We sought.
As you would anticipate.
The.
The area that we were of course down and the most as compared to last year would have been the commercial aerospace because commercial aviation because of the pandemic and if you look at defense.
And that wasn't down to the extent that the commercial was.
When you dig a little bit deeper specialty products, which is the OEM supplier, which is more <unk>.
Dominic OEM supply that was down.
The largest area with the parts and distribution and the component repair knocked down.
Nearly as much as the specialty products, but we do anticipate that with Airbus and Boeing increasing their build rates that specialty products will be coming behind coming from behind very shortly here.
Okay. So it's fair to say then that your pure aerospace aftermarket businesses distribution repair and and the.
The replacement parts within SSG were up greater than the 16% sequentially you saw for the segment and the quarter.
I would think so I don't have the day.
The numbers here in front of me to validate that but I believe that would be the case here Carlos can that's correct Ken.
And if you look at those 3 lines of business and Eric just laid out the.
The organic shrink if you would was and the mid single digits on parts and repair and component repair. So there they are coming back to.
<unk> specialty products was not as robust and was a bigger drag on the segment. So I think what that information you should be able to back into the numbers you are looking for.
Perfect Thanks, Carlos and.
And if I could maybe victor or Larry.
Number of your recent acquisitions have of course been on the defense side can you just comment on what Youre seeing now moving forward in terms of multiples and are you are you maybe being a little bit more patient on the on the defense market, because you think multiples could get a little bit more attractive as we as we move further and of this budget cycle.
Yes.
So this is victor.
We've been very careful really all along on the multiples that we would pay on defense.
Thinking that and you've heard US say this that the defense budgets don't grow to the sky and that though.
And excellent place to live and that there's a strong need and defense and.
And we can do very well and defense that we needed to be careful for.
And just that reason.
So we've been cautious I can tell you that we've turned away a lot of potential acquisitions, particularly over the last year and 9 months. When there were no commercial aviation deals of course, and all the A&D Rite Aerospace and defense was going to D defer.
And because.
There was a feeding frenzy, if you wanted to participate in this sector. There was only 1 place you could buy so all of the money was funneled into and to that and we we set out a lot of potential acquisitions. So I would think.
Things will stabilize and some of the opportunities we decided.
And that we would pass on or other kinds of opportunities we passed on overvaluation.
Might become opportunities again, and not the very same companies, but the types of companies.
And we're extremely selective I think there are great companies and great opportunities, but as always we have to be careful and for whatever it's worth.
And we look at probably.
Somewhere in the neighborhood of 100 acquisitions for every 1 that we make probably north of that now and.
And that's that's always probably going to be the case.
Selectivity is really.
And is really key we don't want to just rush out and buy anything.
Great. Thanks for the detailed Victor.
Yeah.
Thank you. The next 1 is from <unk>.
Noah <unk> from Goldman Sachs easing on line.
Hey, good morning, everybody good morning Noah.
Hey, just trying to pull apart.
On the SSG margins.
The sequential incremental is about 30%.
And the decremental if I look at it.
2 year changed so going back to <unk> and 19 is about 30%.
And I think the business has something and a 30% on the incremental decremental pretty consistently but the the year over year is much higher it's a 55% decremental and then also I think if I had.
Rip out the abnormal expenses, you had and the back half of last year, you were maybe already near the 15 ish percent that you had on a quarter. So.
All of that explained by the incentive comp.
You've discussed here not taking place last year and now that's coming back or is there some other way to.
Square the circle on those changes and the <unk> margin.
No. This is Carlos it is completely explained by the performance based comp.
Okay.
Got it that makes sense.
And then Eric within within the SSG revenue change you've mentioned share gain and a few times here and you spoke to being positively surprised by the rate of sequential increase.
Attributing that to share gain could you maybe give us some specific examples of where you are already picking up share here and the early parts of a recovery just so we can.
Better understand that.
I would say in particular, it would be over and the PMA area.
And as.
And I talked with our sales folks and customers and understand what they want us to focus on.
It's in based and basically what we've what we've always called the adjacent white spaces as.
As we broadened our product line.
On.
Picking up products, which customers hadn't typically worked with us on in the past and that's really the area, where I would say and I'm most optimistic on that front.
Can you can you tell us what some of those are.
I would rather not because we don't we try not to speak about particular customers or product types due to competitive reasons. We do have a number of our competitors on the call. This morning, and I welcome them.
But I'd, rather not give them a roadmap on where we're going.
Fair enough, Okay, and then just last 1 quickly Carlos just on the free cash.
Your and most normal years your free cash is stronger and the back half and the first half and even last year with the weather.
With the pandemic it was it was about even.
And this year youre recovering through the year. So should we expect your free cash flow to be higher and the second half than the first half of for your fiscal 'twenty 1.
Yes.
And I.
I expect that however, and the efficacy cared for and that as volumes increase we are going to have some build and working capital that we're going to have to replenish and things like receivables and inventories will will go up a little bit, but I do expect we'll have stronger free cash flow in the latter half of 'twenty 1.
Okay. Thanks very much.
George.
Okay.
Thank you. The next 1 would be from Sheila <unk> from Jefferies. Your.
Your line is now open.
Good morning, guys and thanks for the time.
Eric I wanted to ask for more of that share gains. If that's okay. Maybe can you tell us.
On share gains, where you're gaining share from other PMA manufacturers is that versus U S and is at the early on and then what makes and airlines shoes.
And your service above part versus the PMA and does it differ with less doors or just airlines other operators.
So good morning, Sheila with regard to the share gains I think it's against other PMA companies as well as other Oems. So it's both.
With regard to U S M.
Less than 10% of our sales are parts and excess of $5000 over on the PMA side. So we don't believe that we are.
Exposed to the U S and market.
So therefore, it's not a it's not a major item for us.
If there is used serviceable out there I think.
And it makes financial sense. It ultimately will get sold and we will get used but its not really a big area of focus for us we do have a subsidiary debt.
It does very well in the U S and market Prime Air and provides us a glimpse into what's going on in that space.
So we're we're very knowledgeable about it but and for those reasons. We don't believe that there is much of an impact on our other businesses.
Okay. No. That's helpful color and then maybe can you talk about.
You gave color on the commercial air business declining more specialty and we expected to pick up.
Production rates change.
But can you talk a little bit about what.
And what Youre seeing within the commercial Aero market and how do you expect that to recover whether it's engine parts and I know engineers and much less of a focus than it was a decade ago airframe.
And carriers wherever you guys play in terms of how you expect that sort of recovery and pickup.
So the engine market.
<unk> has been more delayed than the non engine market I would say that it fell more precipitously.
And it's also coming back a little slower as airlines focus on preserving cash, but that will go ahead and come back.
A majority of our PMA business is in the non engine market, we still do have engine parts exposure.
And it's still an important part of the business for us but as.
As we've said historically most of our business is in the is and the non engine side.
Okay.
And then last 1 for either you or Victor Carlos to following up on Bob's question, we've been getting this a lot.
And obviously inflation is apparent when do you maybe can you define your split of labor versus commodities for within your cash.
And how do we think about when our kids and major.
And that any costs.
So as Sheila this is Carlos.
Yeah.
The products that HEICO and make a lot of the input cost frankly is IP for a lot of engineering a lot of R&D. The actual material cost and this is pretty consistent within both segments.
Actual material cost is is lower so unless concerned about inflation on raw materials and to Eric's point earlier, and the conversation and I do believe that the.
For the Oems, who we use as you know the pricing umbrella to set our pricing they'll capture that and we'll follow them up if there is something to be gained there.
I think on the labor side, that's where we could feel it a little bit more and as we grow and as we expand and hire more skilled labor and things like that I do think that that could have a little bit of and impact.
But I don't think we're going to be impacted any more adversely than any other corp out there I think that the.
And the type of workers that were hiring and the types of labor inflation as seen across the country and even really globally.
There's nothing unique about HEICO that would cause us to be different than other folks.
Thank you guys very much for this from it.
Thank you.
Thank you.
Next we have Louis Raffetto from UBS. Please go ahead.
And thank you and good morning, actually just a follow up on that so Eric I think you guys cut like 25% of your head count last year and MSG are you hiring them back now as these volumes return or do you see yourself being I.
I guess, a leaner going forward.
Yes, I am not sure.
I don't think we cut 25 percentage of head count what we did was we had eliminated lay offs and.
And we also had.
Furloughs, some of which were voluntary and then for those who remained on the aftermarket space. We all took voluntary pay cuts.
But HEICO retained a much larger percentage of our workforce than our peers in the commercial aviation space. So we're in a very good position right now, where we're able to generate our new product development. I mean, there were a lot of other companies that got at their new product development efforts HEICO did not.
Do that.
We've retained our skills. So I think that we're in a very good and unique position to be able to gain market share and satisfy our customers going forward.
Okay.
Circle up with Carlos on the numbers on the 10, Ks and I guess.
So I guess Victor for you I think the budget comes out later this week and any specific areas that you're looking at and that our debt.
We should be thinking about it I know you mentioned earlier about some of the higher margin defense things I know J D and something that had been particularly big for the ICT acquisitions. So just trying to get a sense as to what your.
And we're looking on that.
Yes, I think at this point Louis we ought to wait and see it's Friday, when theyre going to put the budget out and.
And we will see exactly what it looks like and as a rule of thumb.
As you know we've tried to bias the business very heavily toward intelligence surveillance reconnaissance standoff warfare.
The higher technology segments of the defense budget.
And we tried to live less in the operations tempo on.
And though we're not entirely outside of that and generally speaking we believe that's where.
Expenditures over time would be more heavily weighted and.
And.
So that should benefit us relative to.
Others, but I think we have to wait and just see where it comes out and of course Friday will be the first shot and then there will be the negotiations and I will go through the committees and so on and it will take some time to shake out from there, but we'll at least have a sense of priorities and.
And of course things like.
Missile defense remain important and that's a good part of what we do both and the ETE GM and the flight support group.
And within HEICO. So I think we'll continue to do that.
By the way Louis this is Eric.
And looking at some of our numbers.
The larger.
On a lay offs did occur in our specialty products area, which are non after market facing businesses. So and predominantly most of the reduction was done and in particular facility in Asia due to just the lack of work. So we feel very confident that we're going to be able.
And to spool up that those processes those businesses have very well defined processes and labour content manufacturing processes. So we feel that we're going to be and a very good position to be able to spool up in the aftermarket space.
On our way.
Lay offs Werent anywhere near the number that you said I think you may be referring to other companies that were in the aftermarket.
Cut their employment to those levels, but HEICO never did and the Asia reduction actually some of that was government mandated because there was ordered shutdowns exactly and some of those.
And that's another good point, Louis and I, 1 thing Lewis you May remember and we did take a 20% pay cut the executives did and Novartis as last year, and maybe thats, what youre remembering when youre thinking about those layoff numbers that you quoted earlier.
And I'm just looking at the reported head counts from the 10 case side and just employee the employee numbers basically from 10-K 10-K, but and we can follow up offline to go over that and maybe it's the way furloughs or something like that is kind of reported and employee head count numbers.
So I guess just just 1 on 1 of the final up here.
I guess guidance.
Still on the guidance I gave for SSG, but I'm not sure I get for Atg do you guys just not want to give sort of piecemeal guidance or you just don't give anything or is there something else within atg that you don't feel like you have really good visibility on.
And.
And Atg for example, commercial aerospace can make up anywhere from 10% to 15% of that segment's run rate.
And so there is it isn't as clear as we'd like it to be right now and the truth of the matter is I would rather not get piecemeal guidance, where we're typically only giving guidance on an annual basis and I don't want to go on.
And into a game, where we're giving segment guidance for 1 and not for the other I just don't think thats helpful and may cause confusion. So.
We'd rather we'd rather ride this out and.
Hopefully the company will continue to to outperform folks expectations, but nonetheless, the visibility right now for guidance.
Such that I wanted to give at this time and frankly Louis This is Eric our 16% increase and fight support with so far beyond what we or anybody else thought was possible are doable and I really give tremendous credit to our team members for accomplishing that and we've given guidance 3 months ago, we would have missed it.
And everybody would have said that we sandbag debt when in fact.
Things just got much better much quicker. So I just don't think we're in a position right now to give guidance. It wouldn't be the responsible thing to do Lewis. This is Larry I want to add my 2 cents to Erik and Carlos I completely agree with that policy remember pleased that HEICO.
<unk> is 1 company.
Not 2 companies, it's not an atg company and a flight support company and when we talk about the results of HEICO as a combined operation so to give guidance and 1 division and not the other would be in my opinion totally and proper and it's not something that we're going to do.
Fair enough. Thank you.
Yeah.
Thanks.
Thank you again as a reminder, if you would like to ask a question simply press Star then the number 1 on your telephone keypad.
Our next question is from the line net Delta.
Gautam Khanna from Cowen.
Go ahead.
Good morning. This is Scott on for Gautam.
Morning.
Just 1 for me just given your comments on the active defend them and end market last year.
Are you seeing any difference and in any and market. This year for M&A and are you seeing more opportunities and commercial versus defense or is that still pretty limited.
I think that.
And this is Victor and I think we're still seeing much heavier bias on defense, we are seeing some commercial.
Start to awaken, which is really consistent with the.
What we expected.
I think people are feeling a little more comfortable about making.
On some projections about where they might be and asking for pricing based upon and reasonable recovery.
And at least privately.
But for the most part it remains heavily weighted towards defense for defense and space and <unk>.
Other markets.
Okay, great. Thank you Youre welcome.
We have for your next question from <unk>.
The current.
Sterling capital. Please go ahead.
Hi, Good morning, guys. Thanks for squeezing me in here just maybe just 2 quick ones for current Investor Carlos here.
The revolver pay down and you guys Opportunistically expanded that couple of quarters ago.
Anything to read there any significance if you could just help characterize that for us and then for.
And <unk>.
I don't know if it's got a connected frame to just kind of the M&A pipe Larry characterized that is somewhat normal but anything you can give us top of funnel there, perhaps you know LOI signed.
In terms of trends just interested there and then finally on incremental kind of free cash flow margins going forward Carla.
Carlos if you could just talk about the facility footprint, perhaps I know you had talked about some required capex to upgrade some equipment.
And in prior quarters, where does that stand as we continue to recover here do you anticipate.
Anything.
And out of the ordinary from a from a capex standpoint, just kind of characterizing where your where your footprint kind of stands today. Thank you. This is Larry let me handle the M&A question.
Never speculate on LOI or anything like that because even if we were to sign an LOI it would be slightly misleading because theres a lot of due diligence that goes into it and we sign.
For confidentiality agreements all the time, we do due diligence and we discover that it's not for us. So I would never want to mislead the public and make them think Oh, we had this thing, but I think our comment that the pipeline is what we would call normal we are looking at a number of transactions.
And we can never predict which ones are really going to close I mean, we have some to be honest with you right now that that look very good at the beginning and as we get into them. They look a little dirty and so those may if I had this conversation with you 2 months ago I would say for.
And Oh this looks very good we think were going to close very soon and that would have been misleading. So it's still may close it may not but I don't want to lead anybody and the wrong direction.
Currently, yes, I'd call and I would just say that.
As we grow our appetite for acquisitions continues to expand and Thats really why we expanded the credit agreement last year to make sure that we have plenty of dry powder available to accommodate.
Accommodate the growth expectations, and we have as a management team.
For the pay down on the credit facility.
On a ton of cash last quarter and.
And.
Besides banking some of the balance sheet, we paid down the debt, we're not borrowing at a very high rate I think my average rates around 1.2% on our debt. So it's a very low carry and.
So we will keep paying it down, but it's a very efficient source of capital for us and very flexible.
The question you had about the Capex, we continue to expect around $40 million worth of Capex. This year.
The first half of 'twenty, 1 we did have a fair amount of expansion capital.
We spent about $22 million for the first 6 months of this year and a good chunk of that was expansion capital.
And to grow our footprint, if you would and some of our key businesses. So that's all a good thing that's growth capital right and then the rest is maintenance maybe.
60, 40 split or something like that on on the spend.
And I would expect as I mentioned earlier on the call I do think that our free cash flow generation and the second half of our fiscal year tends to be it's historically been a little stronger I would expect that pattern to continue.
Absent any other resurgence or logistic issues associated with getting out of this pandemic.
That answer your question call.
Yeah, that's that's great.
That's helpful color I appreciate it.
Okay.
Yes.
Thank you we don't have any further questions at this time presenters. Please continue.
Okay.
Sure.
This is Larry Mendelson I've wanted to thank everybody on the call for your interest and your input.
We look forward to improving conditions, we believe there will be improving conditions and the second half of our fiscal year and running into 'twenty 2.
Barring any resumption of <unk>.
Covid issues or other kinds of problems, but.
We look forward to speaking to you at the third quarter.
Call, which should be sometime towards the middle end of August and in the meantime, if anybody has any questions or comments. Please call US we are all available Eric Victor Carlos myself, and we'll be happy to speak with you and try to respond to your questions. So again. Thank you all very much.
And this is the end of our.
Q2.
Conference call.
This concludes today's conference call. Thank you for participating you may now disconnect have a great day.
[music] coming on.