Q1 2022 HEICO Corp Earnings Call
[music].
Welcome to Heico's fiscal year 2022 first quarter earnings results conference call.
My name is Holly and I will be the operator with 15 today.
Certain statements made during this call will constitute forward looking statements, which are subject to risks uncertainties and contingencies heico's actual results may differ materially from those expressed in or implied by those forward looking statements as a result of factors, including but not limited to the severity.
Magnitude and duration of the pandemic heico's liquidity and the amount and timing of cash generation lower commercial air travel caused by the pandemic and its aftermath airline fleet changes or airline purchasing decisions, which could cause lower demand for our kids and services.
Product specification costs and requirements, which could cause an increase to our costs to complete contracts.
Governmental and regulatory demands export policies and restrictions reductions in defense space.
This or homeland security spending by U S and or foreign customers or competition from existing and new competitors, which could reduce our sales our ability to introduce new products and services at profitable pricing levels.
Which could reduce our sales or sales growth 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.
<unk> from acquired businesses.
Or credit with interest and interest foreign inherent exchange and income tax rate.
MC conditions, including the effects of inflation within and outside of the aviation defense space medical and telecommunications and electronic industries, which could negatively impact our costs and revenues and defense spending or budget cuts, which could reduce.
Our defense related revenues.
Parties listening to this call are encouraged to review all of Heico's filings with the Securities and Exchange Commission, including but not limited to filings on Form 10-K form 10, Qs and form 8-K.
We undertake no obligation to publicly update or revise any forward looking statements whether as a result of new information feed.
Two events or otherwise except to the extent required by applicable law.
As we begin the call I turn the call over to Lawrence Mendelsohn, Heico's, Chairman and Chief Executive Officer, you may begin Sir.
Polly Thank you and good morning to everyone on this call. We thank you for joining us and welcome you to Heico's first quarter fiscal 'twenty two earnings announcement teleconference.
Larry Mendelson, Chairman and CEO of HEICO Corporation, and I'm joined here. This morning by Eric Mendelson, Heico's co President and President of Heico's flight support group.
Victor Mendelson Heico's co President and President of Heico's, Electronic technologies group, and Carlos Macau, Our executive Vice President and CFO .
Before reviewing our operating results in detail I would like to take a moment to thank all of heico's talented team members for delivering another strong quarter.
Your continued focus on exceeding customer expectations and operational excellence has translated into excellent results for shareholders and I'm encouraged by the steady improvement in the operating results over the past 18 months I'm also optimistic that this trend will continue.
<unk> during the remainder of the scope.
Year.
This fiscal year.
I will summarize the highlights of the first quarter fiscal 'twenty two results.
Consolidated operating income and net sales in the first quarter of fiscal 'twenty, two improved 23% and 17% respectively as compared to the first quarter of fiscal 'twenty, one driven mainly by our 13% quarterly.
<unk> consolidated organic net sales growth.
As well as the favorable impact from our fiscal 'twenty one acquisitions.
The flight support group reported quarterly increases of 103% and 37% in operating income and net sales respectively as compared to the first quarter of fiscal 'twenty one.
These results principally reflect strong 48% quarterly organic growth for our commercial aerospace parts and services.
Additionally, this marks the sixth consecutive quarter of sequential growth in net sales and operating income at flight support.
Our total debt to shareholders' equity improved to 10, 1% as of January 31, 'twenty two.
And that was down slightly from 10, 3% as of October 31 21.
Our net debt, which we define as total debt less cash and cash equivalents of $112 3 million at January 31 'twenty to.
Compared to shareholders' equity ratio.
Proved to four 8% as of January 31, 2002, and that was down slightly from five 6% as of October 31 21.
Our net debt to EBITDA ratio improve 2.22 times as of January 31, 'twenty, two and down that was down slightly again from.
Two six times as of October 31, 21.
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 growth and maximize shareholder returns.
Cash flow provided by operating activities was $78 million in the first quarter of fiscal 2002 and that compared to $107 2 million in the first quarter of fiscal 'twenty one the.
The decrease is principally attributable to an investment of $54 $8 million in working capital, partially offset by $18 million increase in net income from consolidated operations the.
The investment in working capital includes $29 $6 million increase in inventories.
Which reflect strategic buys within distribution businesses and to support an increase in the consolidated backlog as well as a decrease in accrued expenses, resulting from the payment of fiscal 'twenty, one accrued performance fees.
<unk> compensation.
A little bit of color, we added to inventory.
As you know to prevent inventory shortages, so our companies would not be running out of stock and could.
Please their manufacturing processes and ship.
We think that that was a very wise decision.
In January 22, we paid a regular semiannual cash dividend of nine <unk> per share.
This represented our 87th consecutive semi annual cash dividend since $19 79.
In January 22, we reported that our subsea Sierra microwave subsidiary.
Sign design designed and manufactured flight critical components and the James Webb space Telescope, which is considered to be the premier Observatory over the next decade as always we thank Sierra microwave for their outstanding.
Lishman, great quality, and we take great pride in their involvement in this amazing feat.
Moving over to recent acquisition activity.
February 22, we announced flight support it entered into an agreement to acquire a 74% of the membership interest of pioneer industries LLC, a specialty distributor of spares.
For military aviation Marine and ground platforms the.
The remaining 26% we will continue to be owned by certain members of Pioneer's management team and closing is expected to occur in the second quarter of fiscal 'twenty two.
We expect this acquisition to be accretive to earnings within the first 12 months following closing.
At my own comment, which was not prepared is that in my own mind.
Yes.
It was a very timely acquisition because of the events, taking place in Ukraine, and possibly in the future in the far east.
We think our military budget clearly I've read this morning that Congress is probably going to pass some additional.
Military.
Doug.
Budgets and I would not be surprised to see that.
Okay.
My comment is that's a good idea.
We continue to vet excellent M&A opportunities, which meet our high standards for acquisition.
Due diligence is ongoing on many of these opportunities and I'm optimistic that we will be successful in closing additional transactions in fiscal 'twenty two.
All of which I believe will be accretive to earnings.
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 Inc. Thank you.
The flight support group's net sales increased 37% to $272 7 million in the first quarter of fiscal 'twenty two up from $199 3 million in the first quarter of fiscal 'twenty one.
The net sales increase reflects strong organic growth of 30%.
Well Ed.
As well as the impact from our profitable fiscal 'twenty one acquisitions.
The organic growth mainly reflects increased demand for the majority of our commercial aerospace products and services, resulting from continued recovery in global commercial air travel as compared to the first quarter for fiscal 'twenty one.
The flight support group's operating income increased 103% to $52 4 million in the first quarter of fiscal 2002 up from $25 8 million in the first quarter of fiscal 'twenty one.
The operating income increase principally reflects an improved gross profit margin mainly from the previously mentioned net sales increase which was across all of our product lines.
Additionally, the operating income increase reflects the previously mentioned net sales growth and the benefit of SG&A efficiencies realized from higher net sales volume.
The flight support group's operating margin increased to 19, 2% in the first quarter of fiscal 'twenty two up from 13% in the first quarter of fiscal 'twenty one.
The operating margin increase principally reflects the previously mentioned improved gross profit margin as well as a decrease in SG&A expenses as a percentage of sales.
As a percentage of net sales, mainly reflecting the previously mentioned efficiencies.
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 were $222 $3 million in the first quarter fiscal 'twenty two.
Which was comparable to the $223 $6 million in the first quarter of fiscal 'twenty one.
The electronic technologies group experienced continued growth in medical and other electronics products net sales as well as from the impact from our fiscal 'twenty, one acquisitions offset by a slight decrease in defense and space product net sales in the first quarter of fiscal 'twenty two.
As historically as has historically been the case electronic technologies group sales tend to be lumpy by quarter and we expect that this year's three remaining quarters sales will each be greater than the first quarter sales, which were reduced as a result of many team members being out from work as the <unk>.
<unk> variance surged, we witness the same issue with both vendors and customers, particularly in January which delayed production deliveries and orders at various subsidiaries. We expect these effects to be cured during the remainder of our year.
The electronic technologies groups operating income was $55 $6 million in the first quarter of fiscal 'twenty, two as compared to $60 $1 million in the first quarter of fiscal 'twenty one.
The decrease principally reflects a lower gross profit margin mainly from an increase in new product research and development expenses as a percentage of net sales to support ongoing new product development activities as well as lower level of efficiencies on SG&A expenses during the quarter.
The electronic technologies groups operating margin was 25% in the first quarter of fiscal 'twenty, two as compared to 26, 9% in the first quarter of fiscal 'twenty, one the lower operating income as a percent of net sales principally reflects an increase in SG&A expenses as a percentage of net sales mainly from the <unk>.
We mentioned reduced deficiencies as well as the previously mentioned lower gross profit margin I turn the discussion back over to Larry Mendelson.
Okay.
Consolidated net income per diluted share increased 24% to <unk> 63 in the first quarter of fiscal 'twenty, two and that was up from 2051 in the first quarter of fiscal 'twenty one.
The increase principally reflects the previously mentioned higher consolidated operating income.
Depreciation and amortization expense totaled $23 2 million in the first quarter of fiscal 'twenty, two and that was up very slightly from $23 million in the first quarter of fiscal 'twenty one.
Research and development.
Significant ongoing new product development efforts are continuing at both electronic technologies and flight support and this is critical to the development of new products and technologies that fuel our growth.
R&D expense increased to $18 4 million or three 8% of sales in the first quarter of fiscal 'twenty, two and that was up from $16 2 million or three 9% of sales net sales in the first quarter of fiscal.
'twenty one.
Consolidated SG&A expenses were $91 4 million in the first quarter of fiscal 'twenty, two as compared to 71 point $78 1 million for the first quarter of fiscal 'twenty, one and that's in line with our large net sales growth.
And is inclusive of a $3 $8 million higher corporate expense, mainly attributable to increased performance based compensation expense as well as the suspension of corporate salary reductions as of the end of the first quarter of fiscal 'twenty one.
Consolidated SG&A expense as a percentage of net sales was 18, 6% in the first quarter of fiscal 'twenty two.
And that compared to 18, 7% in the first quarter of fiscal 'twenty, one slight drop.
Interest expense decreased.
Two.
8 million in the first quarter of fiscal 'twenty two.
<unk> from $2 4 million in the first quarter of fiscal 'twenty, one and that was due to lower weighted average borrowing.
<unk> outstanding under our revolving credit facility.
Other income in the first quarter of fiscal 'twenty, one 'twenty two was not significant.
Heico's effective tax rate was.
Was four 1% in the first quarter of fiscal 'twenty, two and that compared to two 9% in the first quarter of fiscal 'twenty one.
The rate increase slight rate increase.
<unk> and unfavorable impact from tax exempt unrealized losses in the cash surrender value of life insurance policies.
<unk> to the HEICO leadership compensation plan during the first quarter of fiscal 'twenty two.
As compared to tax exempt unrealized gains recognized on such policies in the first quarter of fiscal 'twenty one.
Partially offset by a larger tax benefit from stock option exercise recognized in the first quarter of fiscal 'twenty two.
Well my comment on this when we get into the details and the questions. Some people have pointed out that the.
The gain from year to year was a result of <unk>.
Tax and so forth and.
If you study dig deep into it youll see that the two tax provisions are fairly comparable so we're really comparing apples and apples.
So when you say that.
To analyze it.
Certain people have pointed out that it's all due to tax benefit in my opinion that is definitely not the case and those people should clarify with Carlos who can explain it to them in more detail.
Heiko recognized a discrete tax benefit from stock option exercises.
In both the first quarter of fiscal 'twenty, two and 'twenty, one and they were $17 8 million and $13 5 million, respectively and that resulted from strong appreciation in HEICO stock price during the option is holding periods.
For those of you who are not familiar with the taxation of stock options again, Carlos can get into the detail.
But essentially.
The.
The recipient of the stock option when he exercise it pays ordinary income tax on the gain.
Whether he sells the stock or not and the company takes a tax deduction.
For the opposite side for the gain so.
That's how the company picks up.
This tax benefit.
Net income attributable to Noncontrolling interest was $7 3 million in the first quarter of fiscal 'twenty, two that compared to $5 7 million in the first quarter of fiscal 'twenty, one principally reflecting aggregate increase in the operating results of subsidiaries.
In which noncontrolling interests are held.
Bottomline Noncontrolling interest owned companies did very well.
For the first full fiscal year 'twenty, two we continue to estimate a combined effective tax rate.
And noncontrolling interest rate of.
Between 25, and 27% of pre tax.
Moving onto the balance sheet and cash flow, our financial position and forecasted cash flow remain very strong.
Working capital ratio improved to three six times as of January 22.
January 31, 'twenty, two and that was up from three two times as of October 31 21.
Our accounts receivable days outstanding.
Which we call Dsos.
Improved to 43 days as of January 31, 'twenty two.
And that was down from 45 days as of January 31, 'twenty one.
We continue to closely monitor all receivable collection efforts in order to limit our credit exposure.
No one customer accounted for more than 10% of net sales and our top five customers.
<unk> represented approximately 22 and 24% of consolidated net sales in the first quarter of fiscal 'twenty, two and 'twenty.
Yes.
Inventory turnover rate decreased to 154 days for the period ended January 31, 'twenty, two and that was down nicely from 164 days for the period ended January 31 'twenty one.
Okay.
I'd like to talk about the outlook as we see it.
As we look ahead to the remainder of fiscal 'twenty, two we expect global commercial air travel to continue on the path to recovery. Despite the potential for additional pandemic variance, we remain cautiously optimistic that the ongoing.
Worldwide COVID-19 vaccine rollout.
Including boosters.
We will continue to positively influence global commercial air travel and benefit the markets we serve.
However, it remains very difficult to predict the pandemics paas and effect.
Including factors like new variance.
And Asian rates.
Potential supply chain disruption and inflation, which can impact our key markets. Therefore.
Therefore, we feel.
It would not be responsible to provide fiscal 'twenty two net sales and earnings guidance at this time.
However, we believe that our ongoing conservative policies very strong balance sheet high degree of liquidity enable us to continually invest in new research and development.
<unk> advantage periodic strategic inventory purchasing opportunities and execute on our successful acquisition program.
All of which collectively position HEICO for market share gains.
In closing I would like again to thank our incredible team members for their continued support and commitment to HEICO.
The remainder of fiscal 'twenty, two looks very promising and I do believe that our culture of ownership and entrepreneurial excellence will provide the necessary foundation to.
To win in the marketplace.
We thank all of our team members for everything you do to make HEICO a great company.
We also think our.
Shareholders, who have been extremely supportive during these difficult times and we appreciate your interest.
CERN with HEICO and now I would like to open the floor for questions.
As a reminder, in order to ask a question you will need to press Star then the number one on your telephone keypad to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Your first question comes from the line of Robert Spingarn with Melius research.
Sure.
Hi, good morning, everybody.
Good morning.
Larry Thank you for all of the color I have a couple of questions here for Victor and for Eric.
Victor I guess I'd start with the R&D and you talked about the margin pressure there.
Is that elevated R&D across all of your product lines or is there a specific target market.
And so where are you concentrating that spend and is there a seasonality here because I see a similar margin decline.
A decline last year in the first quarter. So would you expect margins to rise from here.
Rob Thank you good questions.
The answer is that of course, it's not every business everywhere, but I would say, it's fairly broad across our product lines, where were spending but it varies of course by business.
There can be a seasonality to it I don't know honestly this year, whether there is one.
<unk>.
But it can be there are times of the year and some of our businesses, where they have to do more spending and then it tends to play now most of it most of our R&D expense is people and that's followed by.
Third party vendor expenses things like testing and.
Parts, where we have to buy parts and discard them and we do destructive testing and things like that.
So I'd have to actually go in and look at case case by case.
In terms of our margins.
I would say that.
As you've heard me say in the past that by the way. These margins if you add amortization of about.
Four to 500.
<unk> points to it you get to about 30%.
On an operating basis.
Considering operating basis, obviously, a cash flow basis.
So those are pretty high margins.
I have said in the past I think that we're.
We're going to stay in shooting distance of that whether it's down below that a little or up above that it's going to vary I think by quarter.
Okay, Alright, that's very helpful and then Eric I've got one for you.
Just really on the supply chain and are you seeing concerns from the airlines about the ability to procure enough spare parts from the OE component manufacturers that may be driving.
And accelerated interest in your products.
Good morning, Rob Thats, a very good question.
We made the conscious decision to.
If you recall when we had when the pandemic started to retain a higher percentage of our people and to make sure that we invest in is invested.
Invested in inventory in order to be able to support the market whenever recovered. So the short answer is yes, I think that we are picking up some market share due to.
Competitors, not being able to supply.
But I think the majority of the market share, though that we're picking up is.
Is because customers are approving parts.
That they hadn't purchased before from us.
Yes.
And in meeting with our sales heads last week, and reviewing going customer by customer and understanding what the situation is and what the customers are looking for I can tell you that our people are more optimistic than I have ever seen them in terms of heico's Mark.
Share capture and what the future looks like for us. So yes. Some of the short term lack of supply has helped but I think it's more of.
Really the long term development and positioning of the product line, which has helped us so much.
It's really driven by the value opportunity that the customers are looking for correct correct. Okay. Okay, and then just on and that's really about existing parts. In your catalog is there any evidence that this is also accelerating the pace of.
New Park development more airlines and customers coming to you and saying can we develop these other parts that you don't currently have for the same reasons.
The answer is yes.
I would say that the airlines have been fairly lean in terms of staff going through the crisis and obviously they've had to focus on many things. So I think that the opportunities that we're seeing are more driven by us.
In the recent past.
As opposed to driven by the customers, but the customer support is just as strong if not stronger than it was in the past.
And again, it's due to the the competitive.
Nature of our products and the desire for the airlines to have alternative sources at competitive prices.
Hey, just a last question on this would you say your new parts development activity.
This year is any different than prior years or are you doing more or less regardless of the reason.
Yes, I would say, it's consistent with prior years.
When did we denied as you probably remember we did not take down new product development.
During the crisis, we continued to develop a similar number of products.
Those products are getting sold and our current deductions in our forecasted induction I would say are consistent with those numbers, we do have the ability to flex it up if we want.
<unk> NAND.
We'll have to see how the market developments are.
Okay. Thanks, so much I appreciate it thank you Rob.
And your next question comes from the line of Peter Arment with Baird.
Yes, good morning, Larry.
Good morning.
Eric maybe just to come back to you, maybe just talking about the margins a little bit.
Covered all the way back which is really great to see and are you seeing any kind of structural gains coming out of the pandemic. I know you were focused on a lot of cost in but you'll always find a careful on pricing too. So maybe you can talk a little bit about margins.
So youre talking structural gains in margin specifically.
In customers so.
The 19, 2%.
Honestly surprised me on the upside.
We thought that we would get back to our historical level, but I thought that it was going to take a longer period of time.
And I think that speaks to <unk>.
Frankly, the strength of our people and the strength of the product offering. So we will have to see what develops going forward.
But I don't see any reason why we shouldnt get back to our old margins fairly soon.
And possibly exceed them I want to be careful and not get in front of myself and predict an increase in them, but I can tell you based on the confidence that I see coming out of the sales and marketing group as well as the businesses.
I think that that's a real possibility.
That's really helpful. And then just on just staying on the economy.
And environment.
How did you see the cadence of orders during the quarter because you obviously had to deal with Amazon and are you seeing any changes now as we kind of prepare for what could be a busy.
Spring and summer season.
Yes.
As I had mentioned in the fourth quarter call in December we thought <unk> would be.
Negative.
And of course in general was negative for the industry. However, there has been.
Very strong strength.
I would say the quarter was fairly consistent across it.
And I can tell you that the forecast going forward as consistent as well and very strong. So again, I think thats a combination of our market share gains.
As well as the market just being strong.
Appreciate all the color thanks, guys.
Thank you.
And your next question comes from the line of Peter Dubinsky with Alembic Global.
Hey, good morning, everyone.
Just a follow up on Peter's question with regard to MSG margin rates.
I think we're really talking about a lot of volume positive volume impact I mentioned and just the net inflationary impact to the business.
Are you guys seeing gains net of inflation or origin inflation kind of holding you back I guess that kind of gets the pricing could you talk about all that.
Yes.
Absolutely.
This is Eric with regard to again I feel very confident of our ability to have to maintain.
Gains net of inflation and we've been very cognizant to make sure that we pass those added costs onto our customers, we're not trying to take advantage of them to change.
The value proposition, but we do need to make sure that we get our costs covered so I can tell you that our business is yes. They have seen cost increase in all the usual areas and they've been extremely proactive in making sure that we get those price increases.
Well to maintain our margins and not give up ground because of inflation.
I appreciate that just one last one for me.
Maybe you guys are anticipating just a week or two ago, but certainly with the news. This morning of this Russian invasion.
Do you guys foresee any.
Near term impact to your business do you do you change how you manage the business.
Do you get concerned about supplies like titanium that sort of a thing I was just interested in your kind of top level thoughts.
Yes.
If you look at our businesses.
Think one of the key strengths of HEICO as the decentralized nature.
And we've got these basically fix the decentralized business units, who are each very intimate and knowledgeable about the products that they use and they work very closely with their suppliers to get what they need and thats not to say that we don't have occasional shortages.
We do however, I would not say that there is anything there.
There is no one input that is so predominant that would have a major impact across all of HEICO.
Specifically, if you look at titanium coming out of Russia, Yes, we are a user of titanium, but I think that we've got the ability to buy titanium in the quantities that we use it from a variety of sources. So we're typically able to mitigate that.
And typically it's not going to be a major impact to us like it would other.
Other folks who require very very large quantities of this.
So we're still very bullish on our business both on the commercial side as well as the military.
Frankly events of today.
Proved the importance of having a strong defense not only in the United.
I did state in our NATO, but around the world.
And when the World goes through periods of time without conflict.
I think events like today serve as very good reminders that there'll always be somebody out there who wants to stabilize and the best way to ensure pieces through strong defense and Thats. Why we are we continue to be very bullish on defense.
As well as the commercial side, and we really like the nature of our businesses.
Great. Thanks, guys.
Thank you.
And your next question comes from the line of Larry Solow with CJS Securities.
Hi, its actually lead you go to for Larry This morning, good morning, good morning.
So just going back to the inflation and pricing conversation.
Given that both you and obviously the OEM parts producers are seeing inflation and are trying to price to.
Capture the inflationary increases.
Does that how does that impact the spread between the OEM parts on the PMA parts and does that make you more competitive in periods of rising material costs.
I would say that it does make us more competitive there the OEM responses tend to be very aggressive.
They tend to be in excess of their true cost changes so.
We've got the ability to create additional value to make sure that we cover our costs.
Make sure our margins don't shrink as a result of it.
I think it does make our product offering even more compelling.
Okay, and then just looking at the SSG revenue in Q1, it looks like we're about 5% below where we were in Q1 of 2019, obviously not all organic because we have some M&A in there.
But that was also despite the omicron impact during Q1, so if we look forward and assume that the omicron impact.
Is less and less in the next few quarters than it was in Q1.
Is it a reasonable assumption to think that SSG revenue looks closer to where it was in 2019.
For the full year, just given the Q1 performance and if for some reason that's not the case what are the other factors, we should be thinking about.
To make that not the case.
So this is Carlos I think if you if you strip out the acquisitions that we've had since then it's going to be a slow grind the rest of the year up to those levels.
What do we I hope we get there in total, but our expectation is that by the end of this fiscal year for HEICO, we ought to be at a run rate it mirrors.
2019.
End of this year, maybe first quarter 'twenty, that's been our goal since day one of this crisis and what we thought would happen and I think that's playing out so.
I don't know without giving guidance for the full year, but is that Directionally get you where your questions going I hope it's helpful.
It is helpful. In your commentary on <unk>, specifically or both segments SSG specifically.
Great very helpful. Thank you.
Yeah.
Thank you. Our next question comes from the line of Ken Herbert with RBC capitals.
Yes, hi, thanks.
Carlos maybe I could just follow up on that or Eric it looks like organically.
The last three quarters SSG revenues have grown about call. It five ish percent mid single digits sequentially.
Is there any reason that sort of sequential growth in the segment Shouldnt change as we as we think about the next three quarters here or for the year.
I can't it's Eric.
I think that we're going to continue as I mentioned continue to grab market share.
And our sequential growth will continue.
You look our first quarter with frankly, well ahead of what anybody.
Expected.
Can tell you in particular over on the aftermarket side.
The quarter over quarter change was really quite strong.
So I think yes as the year continues.
We will we will continue to post the increase I don't know if Carlos as Scott added color, Yes, I think I think candidate that's probably the right way to look at it because what that does is it drives us north as opposed to assuming.
That will have peaks and valleys throughout the year. We continue to believe that this is going to be more of a linear ramp.
The 19 levels.
Whether it's 5%, 4%, 10% whatever it is it's going to get us back.
At a rate that is more linear than jumping at least in the SSG and to Eric's point.
The one thing it is hard to predict is the strength that we're going to have in any one particular market segment and I think eric's pointing out that our aftermarket was incredibly strong in Q1, which typically for HEICO Q1 is probably our down quarter right. It's been historically, our softest quarter due to.
November and December holiday seasons travels less days in the quarter, those kind of things and less claims being worked on they are all in the air flying. So we were very pleased with the <unk> performance in Q1, it did exceed what we thought the company would do in Q1 of this year.
No that's great thanks, and if I run that out it looks like you're obviously.
You've got another call it sort of quarter of easy comps. This quarter, just just considering the timing and then the second half of fiscal 'twenty, two obviously, you're up against more challenging comps within SSG, but if I run that out it looks like you should still be able to maintain.
Pretty significant sort of growth relative to sort of historical averages and where traffic growth could be and I'm guessing part of that is it sounds like we're maybe hearing some some restocking efforts at some airlines and obviously a lot of pent up demand, but is there anything else you would call out Erik that could perhaps get.
Get to or maintained sort of above trend line growth in the back half of the year with what youre seeing in the marketplace today.
Yes.
Going out on a limb here a little bit and of course, we don't have the orders at the moment to support them because we get most of our orders in the month of shipment, but I think we're going to be comfortably ahead.
The back half of the year as well given everything that we know today with regard to omicron Ukraine.
I feel very confident in.
Predicting.
Continued growth.
I had the luxury of being able to look at certain detailed numbers and I can tell you the.
When you look at our commercial aftermarket.
Quarter over quarter change has really been.
Very very good.
And if you look at the.
The growth that we've had over the prior year. That's also extremely strong so I feel our growth is going to continue it's not going to be based on what we see here today, it's not going to be limited in our first and second quarter, we're going to grow substantially.
Third and fourth quarter as well.
Great No that's excellent and if I could just one for Victor you called out Victor in the quarter, some supply chain and omicron related disruptions is it possible to size that a little bit or maybe think about within the defense portfolio specifically within <unk>.
That could've looked organically.
Excluding some of these onetime disruptions.
Yes, it's a good question.
Answer is and by the way the disruptions.
Talking about it's mostly actually people related I think as I as I commented I think at one point.
During January .
A rough estimate is that we had.
Those 210%, maybe 8% I'm not sure exactly the number of our people in atg out because of Covid either they added are exposed to somebody you added or they were carrying for somebody but there was a point in January when the country in the world was experiencing that surge so.
I went into January believing our sales would be at least $10 million higher.
When were they wound up.
And that's so the people issue existed within our company.
So had it as I said at some suppliers and even customers and we had customers pushing out.
Deliveries delaying deliveries you got to cooperate with your customers I mean, you could go.
And in some instances, where I think we had the ability to really push the customer based on a purchase order or a contract, but we don't believe in doing that so these things should resolve themselves over the course of the year in that.
I felt really good in December sales would be at least $10 million higher in the quarter, but.
When they move out and that's why we point out atg, so great business.
Great margins over time, but it tends to be lumpy like that.
Something else I should comment on it I think I've been saying it for over a year now maybe year and a half that we thought defense budgets would moderate.
Drop or flatten out at the very least and so this isn't inconsistent with our own internal thoughts and planning now now what's transpired recently in Ukraine, and elsewhere may change that calculus, who knows and we'll see.
But this is not outside of our contemplation certainly.
Great. Thank you very much Victor thank.
Thank you.
Yeah.
Thank you. Our next question comes from the line of Michael CMO, Lee, which Louis.
<unk>.
Hey, good morning, guys. Thanks for taking the questions here.
Maybe Eric just could you give a little bit more color on maybe what youre seeing from from your customers regarding wide body ordering and parts procurement.
Seems like the.
The airline industry in general is getting ready for a pretty big uptick in international travel or you're seeing that demand flow through yet.
We are we are starting to see wide body recovery. If you look at the statistics.
Obviously domestic is.
<unk>.
And followed by Europe of course Asia.
And.
South America are still.
Depressed and but we do see continued.
Recovery in those markets and including Wi Fi. So, yes, I think people are getting ready for a good wide body increase.
Yes.
Demand here.
Back to Ken's line of questioning I mean, each carrier's prep for the summer season does that does that create a step function increase at all in your <unk> SSD revenues and maybe bleed into early <unk> or you think you've kind of got all of that contemplated.
I think we our forecast takes that into account and that's one of the reasons why.
I continue to be very bullish.
In particular in our aftermarket areas, but also in our new OE equipment areas as well.
<unk> seen continued growth throughout the.
Fiscal 'twenty, two and 'twenty three due to market share gains.
As well as recovery.
Got it and then just back to the FSP margins I mean, you're still basically running.
I guess revenue, maybe give or take 50 million below your quarterly run rate high you've been getting really good incrementals, you've talked about the efficiencies I mean, you're in shooting distance already with the margin.
Assuming you've got.
Some sustained efficiencies better cost take out I mean could we see these SSG margins get into that 22% to 23% range.
Once we're kind of fully recovered and you guys are kind of humming at a quarterly run rate in excess of 300 and call it $20 million in revenue.
Mike This is Carlos.
Look we do expect at some point.
The future here in the near future that we will get back to normal.
Approximately 20% operating margins on a sustained basis.
During Covid just just the plentiful.
Great.
It is structurally changed business we didn't.
Tooled plants do things that would impact the way we operate and in fact, we kept that structure in place and so I would be cautious to heartland or think about expanded margins at higher anchor now I do think what youll see in the FSD is once we level out when we get back to 19 on rates.
The growth from there you ought to witness what happened historically, if you look back over 15 years, you will see.
<unk> margins just had the vocal and we'll tick ups and really that was a function of.
Growth in the business and really efficiencies on our fixed cost and SG&A spend and I think that would continue but I wouldn't anticipate that for the near term I think thats more of an intermediate play and thinking got it got it and then just last one Eric any any thoughts.
And maybe even using history as a guideline here on airline consolidation, we've got frontier and spirit.
What should we expect I mean, if we see more consolidation globally, what typically happens to the the HEICO catalog is that consolidation generally good for you bad for you based on historical trends.
Consolidation is typically very good for us.
Because basically the more aircraft that our customers got.
The more savings potential they've got so.
It tends to be very good for US there are you point out frontier and spirit. There are also some other some other talk in Europe about some other consolidation. So I think again whenever that occurs.
Yes.
Typically are always good news for us.
Got it perfect. Thanks, guys.
Thank you.
Yeah.
And your next question comes from the line of Christine Li Li Wang with Morgan Stanley .
Hey, good morning, guys. Good morning. Thanks.
When you start looking at the pipeline for potential acquisition targets.
Are you seeing a.
More opportunities. These days I guess, when we look at Covid, we've seen fewer bankruptcies and a supply chain and as it seems you know the the payment.
The paycheck protection program seem to have worked but as this kind of expires.
Spire doesn't banks are now starting to collect on bad debt.
Does this open up opportunity there for targets.
I think I have seen I.
I think we have a pretty full pipeline, we're doing a lot of due diligence.
I can tell you the big issue that we face.
As competition from say private equity or corporate buyers, who will pay 17 times EBITDA and we can't compete our model doesn't work at 17 times EBITDA and.
We were with a an investment banker, who you probably know fairly well or you would know and he came for a meeting to talk about an acquisition and in the conversation you said you realized that 90% of all acquisitions are not successful and the percent.
Easy to make acquisitions, it's easy to buy but its not so easy to make them work out and our model requires us to buy a company continue it and keep it in the portfolio virtually forever. We don't hold expression, we don't buy a company put lipstick.
Nick on the pig and dump it in three years, so we make a profit.
Because we increased the multiple cut expenses by a few bucks that's not our model so.
We're competing with people who have a different model than we do now saying all that we are still able to find companies who are very anxious to join HEICO because of the HEICO culture, but when youre dealing with say another private equity company or corporate.
They really don't care about the culture. They just wanted to get the highest dollar and if they want the highest dollar we tell them at the get go we're not your buyer.
I would say this is the most difficult part that we're facing however, there are many people.
I say it because look we've made 89 acquisitions in.
We give list of people that sold companies to us we'd give you a list to see if we have done what we said how we've treated people how we treated their.
Team members and everything else.
<unk>.
That's very positive so many private owners, who would rather sell to us at a slightly lower price than to sell to say.
One of the other companies that private equity guys.
Because they know that the COVID-19 .