Q1 2023 HEICO Corp Earnings Call
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[music].
Welcome to be Heiko Corporation first quarter of fiscal 20th twenty-three financial results call. My name is Tamara and I'll be today's operator.
Certain statements in today's call will constitute forward looking statements, which are subject to risks uncertainties and contingencies.
That goes 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 public health threats, such as the COVID-19 pandemic or health emergencies.
Hi goes liquidity and the amount of timing.
Of cash generation lower commercial air travel caused by health emergencies, and their aftermath airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services.
Products supposed to vacation costs, an requirements, which could cause an increase to our costs, a complete contracts supplemental and regulatory demands export policies and restrictions reductions in defense space or homeland security spending by U S and or foreign customers or competition from.
Existing and new competitors, which could reduce our sales.
Our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth.
Development or manufacturing difficulties, which could increase our product development and manufacturing costs and to lay sales our ability to make acquisitions and achieve operating synergies from acquired businesses customer credit risk interest foreign currency exchange and income tax rates economic condition.
Conditions, including the effects of inflation within and outside of the aviation defense space Medical telecommunications, and electronics industries, which could negatively impact our costs and revenues.
In defense spending or budget cuts, which could reduce our defense related revenue.
Parties listening to this call are encouraged to review olive Heico's filings with the Securities and Exchange Commission, including but not limited to filings on format 10-K Form 10-Q and form 8-K.
We undertake no obligation to publicly update or revise any forward looking statement, whether as a result of new information future events or otherwise except to the extent required by applicable law.
I now turn the call over to Lawrence Mendelsohn, Heico's, Chairman and Chief Executive Officer.
[noise], Thank yous tomorrow and thank you all on this cool good morning to everyone.
And we thank you again for joining US welcome you to this high go first quarter of physical twenty-three earnings announcement, Zoe a golfer.
I'm, Larry mantle, Olson, Chairman and CEO I go Corporation.
I'm joined here this morning by Eric Mendelssohn Haiku co President and President goes flight support group.
Remember Olson I go scope, president and President of Heico's Electronic technologies group and Carlos Macau, Our executive Vice President and CEO book.
Before reviewing our operating results in detail I'd like to take a moment. Thank all of heico's talented team members for delivering another very strong quarter.
Growth and profitability of our operating companies.
Continues to exceed my expectations.
People at our companies that make us exceptional and produce these outstanding results.
Again, thank you for another record breaking quarter and I continued to be optimistic that our growth will continue throughout fiscal twenty-three and beyond.
Summarizing the highlights of our first quarter of fiscal twenty-three record results.
Consolidated first quarter of fiscal twenty-three net sales represent record results for Heiko driven principally by record net sales within the flight support group, mainly arising from continued rebound and the demand for our commercial aerospace products.
And services.
Consolidated operating income and net sales in the first quarter of fiscal twenty-three improved 31% and 27% respectively.
As compared to the first quarter of fiscal 2002.
These results mainly reflects 14%.
Orderly consolidated organic net sales growth and the impact from our physical 22 and 23 acquisitions.
Consolidated operating margin improved to 20.8% in the first quarter of fiscal 2003 and that was up from 22% in the first quarter of fiscal 2002.
Consolidated net income increased 7% to $93 million or 67.
<unk> per diluted share in the first quarter of fiscal twenty-three and that was up from $86 $9 million or 63.
Diluted share in the first quarter of fiscal 2002.
It should be noted that net income attributable to haikou in the first quarter of fiscal 23 and 22, we're both favorably impacted by a discreet in net income tax benefit from stock option exercises.
As the benefit in the first quarter of fiscal 2003 net of control Noncontrolling interest was $6.1 million or four cents per diluted share.
Down from $17.5 million or 13 grew.
Per diluted share in the first quarter of fiscal 2002.
This information should be considered when analyzing the results the comparative results between physical 22 and 23.
In addition, the company incurred $5.1 million of acquisition costs related to the closing the excel Leah International acquisition in January 23.
And that decreased net income attributable to a high bill in the first quarter of fiscal 2003 by approximately $4.3 million with three cents per diluted share.
In my opinion that should also be considered when analyzing the results of our first quarter.
The comparatively lowered tax benefit from stock option exercises and the one time excel the acquisition cause reduced hours diluted earnings.
By approximately 11.
Our net debt, which is total debt less cash and cash equivalents of $642 million as of January 31 23.
Compared to shareholders equity was 23.3% as of January 31, 23, and that compared to 75 <unk> five.
Five 7% as of October 31, 22, obviously, the increase was the debt that we incurred to acquire Excelsior.
Our net debt to EBIT ratio was 1.02 times as of January 31, 23, and that compared to point.
0.25 times as of October 22, still a very very low.
Debt to EBITDA ratio.
The increase in our net debt ratios in the first quarter of fiscal twenty-three principally reflect the impact again from the purchase of excel. They're in January 2003, and that was heico's largest ever acquisition in terms of the purchase price.
Cash flow provided by operating activities remains strong totaling $76.7 million in the first quarter of fiscal 2003 and that compared to $78 million in the first quarter of fiscal 2002.
The cash flow provided by operating activities in the first quarter of fiscal 2003 <unk>.
Reflects an increase in working capital principally driven by an increase in inventories to support our increased consolidated backlog.
We continued to forecast strong cash flow from operations for fiscal 2003.
In January 2003, we increased our regular semi annual cash dividend by 11% to 10 cents per share. This represented our 89th consecutive semi annual cash dividend, which we have paid since 19 <unk>.
79.
Let me know discuss our recent acquisition activity.
As mentioned previously in January 23, we acquired <unk> International.
Largest.
Ever in terms of purchase price and revenue. We are excited about the European defence and aerospace opportunities, which accelerated brings to a haiku and we look forward to supporting their continued growth plans.
This acquisition is expected to be accretive to heico's earnings per share.
The first year of the transaction closing.
At this time I would like to introduce Eric Mendelssohn co President of I'd go and President of Heico's flight support group and he will discuss the first quarter results of the flight support group Eric. Thank you the flight support groups net sales increased 36% to a record.
$371 $3 million in the first quarter of fiscal twenty-three up from $272.7 million in the first quarter of fiscal 2002.
Net sales increase in the first quarter of fiscal 2003 reflects strong 25% organic growth as well as the impact from our profitable fiscal 2002 acquisitions.
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 of fiscal 2002.
The flight support groups operating income increased 60% to a record $83.6 million in the first quarter of fiscal 2003 up from $52.4 million in the first quarter of fiscal 2002.
The operating income increase in the first quarter of fiscal 2003, principally reflects the previously mentioned net sales growth improved gross profit margin and deficiencies realized from the higher net sales volume.
The improved gross profit margin in the first quarter of fiscal 2003, principally reflects higher net sales within our aftermarket replacement parts and specialty products product lines and the impact of lower inventory obsolescence expenses, primarily due to increased demand.
And.
The price support groups operating margin improved to 22.5% in the first quarter of fiscal 2003 up from 19.2% in the first quarter of fiscal 2000 to.
The operating margin increase in the first quarter of fiscal 2003, principally reflects the previously mentioned improved gross profit margin and decreased SG&A expenses as a percentage of net sales mainly reflecting the previously mentioned efficiencies.
Now I would like to introduce Victor Mendelsohn co President <unk> and President of Heico's Electronic technologies group to discuss the first quarter results of the electronic technologies groups. Thank.
Eric the electronic technologies groups net sales increased 15% to $255.1 million in the first quarter of fiscal 2003 up from $222 $3 million in the first quarter of fiscal 2002.
The net sales increase is mainly attributable to the impact from our fiscal 2002, and 2003 acquisitions. The electronic technologies groups organic net sales in the first quarter of fiscal 2003 were consistent with the prior year and principally reflect an increased other electronics commercial aviation and medical <unk>.
Products net sales offset by decreased defense products net sales.
Tronic technologies groups operating income increased 2% to 56 $5 million in the first quarter of fiscal twenty-three.
Up from $55 $6 million in the first quarter of fiscal 2000 to the increase in operating income principally reflects the previously mentioned higher net sales volume, partially offset by higher acquisition costs and fees related to the Excelsior acquisition, and then lower gross profit margin and lower gross profit margin.
The first quarter of fiscal 2003, principally reflects decrease net sales of defense products, partially offset by increased net sales of our other electronics and commercial aviation products.
The electronic technologies grooves operating margin was $22, 2% in the first quarter of fiscal 2003 as compared to 25% in the first quarter fiscal 2002.
Lower operating margin principally reflects the accelerant acquisition costs, along with the lower gross profit margin and increased SG&A expenses as a percentage of net sales, partially offset by lower performance based compensation expense.
Although as we anticipated our defense net sales had been lower the <unk> backlog remains at record levels, even factoring out accelerant ETT subsidiary is unique business with unique drivers, but they are supplying mission critical high reliability or harsh environment products, which are required for.
Their customers products to operate this remains a very positive dynamic and materially explains are strong backlog in our confidence going forward.
Wow I don't have a crystal ball and it's I previously mentioned, we expect our commercial aviation demand to remain strong this year and beyond and the defence sales should strengthen in the later part of this year or even early next year is higher defense budgets in defense spending kicks in.
We also expect that are high and other non aerospace and defense markets, which had been very strong and continued to report record sales will become softer ahead due to what at least I believe will be a reversion to normal ordering patterns by manufacturers as general supplying canes supply chain conditions ameliorate.
Hopefully this coincides with the defense upturn that we can't be certain on the timing of beach.
Consistent with what we've often said and our experience over literally decades, we believe the <unk> should be a mid to low single digit organic sales grower over time with meaningful variations on that growth rate during individual quarters. This has been the <unk> pattern since the business was formed in 1996.
Six.
When asked on these calls what I believe are operating margins will be you heard me remark that I felt to our cash margin, which is the operating margin before acquisition accounting, which is the true economic margin of business realizes would stay within the ranges. We are now seeing obviously before considering.
Entering the impact from future an unknown acquisitions keeping.
Keeping in mind that our non-cash amortization expense is around 500 basis points.
And that we had meaningful transaction expenses in the quarter from the <unk> acquisition, which trimmed our operating margin by another couple of hundred basis points. Our companies continue to report excellent margins in the expected range.
I'm, often asked what impact Excelsior, which is a strong margin business, but his lower margins in our overall average.
Should have an overall atg margins I would say it will probably be around 200, and will probably trim around 200 basis points off consolidated margins going forward.
Before of course, taking into effect any future an unknown acquisitions still right margins overall as we anticipated on our last conference call in other settings. Our business has made material progress reducing supply chain delays, which we expect to continue though unevenly throughout the year, but.
By the way in the first quarter, we roughly estimate that somewhere around a little shy of $30 million of shipments were delayed mostly into our second quarter versus over $40 million of delays during fiscal 2000 two's fourth quarter. Overall, we remain very excited about the <unk> prospects over time and are thrilled.
To have the irreplaceable set of businesses, we operate in this group with strong margins and reasonable growth prospects I turn the call back over to Larry Mendoza.
[noise]. Thank you Victor.
As for the outlook.
Additionally, continued inflationary pressures and lingering supply chain disruptions stemming from the COVID-19, pandemic may lead to higher material and labor costs.
During fiscal 23, we plan to continue our commitments to developing new products.
And services further market penetration and an aggressive acquisition strategy, while maintaining our financial strength and flexibility.
In closing I would like to again, thank our incredible team members for their continued support and commitment to haiku.
The remainder of fiscal twenty-three looks promising and I believe our unique culture of ownership and entrepreneurial spirit will continue to provide for outstanding operating results for our shareholders.
Thank you all.
What you do to make Haikou, a great company and with that I would like to open the.
Floor of the lines.
Questions.
Thank you if you would like to ask a question.
By pressing star one on.
On your telephone keypad.
Using a speakerphone.
Make sure your mute function is turned off.
Again star one to ask a question.
For just a moment to allow everyone an opportunity to thank you for your question.
And we'll take our first question from Scott.
Credit Suisse. Please go ahead.
Hey, good morning.
Good morning.
Eric have you been able to work with your airline customers to reopen any of your aftermarket LTA has to get some price increases through early or have the airlines journal and not been willing to do that.
Hi, Hi, Scott, Yes, we've been able to.
Get price increases are LTA has do permit us to.
Price, although typically it's capped at various levels, depending on the level of business that the customers have with us, but yes, we have been successful in.
Game price from our LTA customers as well as our Nadal Ta customers.
Okay, great and Victor on the defensive side I think some of your peers are exposed to four to five years <unk> was.
Basically a little to no inflation protection at all and that's causing them to under earn relative to what their their businesses are capable of so I guess I was curious if that's been a constraint on profitability for you at all as well and just any detail you can offer on exposure to <unk> on the defense side of the business.
Yeah, I generally speaking we don't have.
Four and five year.
Pricing locked in office on those elves lta's.
But there definitely is a lag effect on.
On pricing price adjustments right, we generally don't have orders of less than a year. So usually.
That takes some time to filter through we've been pretty successful offsetting and over time almost all of our companies feel that we will offset the inflationary effects, but.
There can be a delay in let's say.
Six months a year, we do have some longer term pricing locked in in some instances.
Okay, and then last question from a Carlos maybe you can just say what the atg backlog was in the quarter and maybe how that's turned it relative to the last year or whatever compare is most useful. Thank you.
Sure.
If you look at the backlog compared between Q1 twenty-three in Q1 22. It is up it's about 856 billion roughly for the end of Q1 hundred 23, which by the way is pretty consistent with Q force backlog, which was elevated.
But it is substantially larger than it was in Q1, 2002, which is around $660 million.
Okay. Thank you everyone.
Hey, welcome you. Thanks.
Our next question comes from Peter.
Please go ahead.
Yeah come on Larry Thank you Carlos Eric Erick.
Right.
<unk> another strong corner for margins and second corner, where we've seen margins you know, Bob 22% and you've given a lot of reasons why the efficiencies, but I guess, maybe we just kind of talking on Scott's question I'm I'm just your ability.
On some price how are you thinking about just.
This level of margins going forward any color that would be helpful.
Yeah.
Flea, we're going to continue to <unk>.
Treat our customers well as I've said for the last year or so we've got to make sure that we maintain our margins and disinflationary environment, both materials and labor are increasing in cost and we need to make sure that we pass along that cost plus we're able to get a reasonable margin on <unk>.
Top of it so I think.
The numbers can fluctuate quarter to quarter, depending on mix, but.
I think we're in a pretty good area.
And.
Where.
We like where we are we have not.
Received a lot of price in these margins we've received some.
And I think there is an opportunity to get some more but of course as we replace inventories inventory costs will be going up so I'm reluctant to predict to forecast the change in margins I think that this is really a reasonable level and we run the business.
Very much.
In the viewpoint of what's right for our customers and what's right for the business and the margin and just sort of falls out of the end.
So I don't have a.
Way to tell what it's going to be but I do feel that these are reasonable numbers going forward.
Yeah, I appreciate that and Eric have you seen any pick up in kind of a wide body mixed yet obviously, you can wipe out a traffic study materially pick up globally.
Yeah, we've seen we've seen some pick up in in wide body, yes, I am.
And everybody anticipates continued strengthening in those markets.
Okay, and just one last time Carlos on the net leveraged kind of jumping up.
Following silly a deal uhm any thoughts on just deleveraging are where your comfort level is more M&A is going to be achieved this year. Thanks.
Well, we have a pretty full pipeline on M&A and we're gonna do all the deals that makes sense for our shareholders. So if we find transactions that makes sense for the company and the shareholders will find a way to do it.
We never really been concerned about a a leverage number too much.
I think Larry said in the past that we would we would take on substantial leverage for the fifth.
Find that animal yet I mean, right now of one times Levered I feel like we're under Leverages I'd love nothing more than to find more opportunities to get that leverage number up however, I do think our culture and our pattern of operations suggests that if we do borrow we make a hell of an effort to delever quickly and so as we move forward.
Outside of use of cash for let's say acquisitions, Capex and things like that we will be looking to reduce reduce our credit exposure. So that we can reload on other deals as they come in front of us.
I appreciate that thanks, guys.
Thank you Sir.
The next question comes from Larry Although with C. J S Securities. Please go ahead.
Great. Thanks.
Morning, everybody congrats on a real warning, especially.
Great quarter, especially with these adjustments Uhm I guess, Eric with a couple of questions for your first so that the SSG organic revenue growth, 23% this quarter and I think if you look back last year I think it you want it was somewhere I think it was close to 30% so.
Obviously last year was a little bit of easier comp issue was not how.
How do you you know you see ordering patterns and stuff it feels like.
They're still building back inventory or just all new sales for you just trying to get a little grasp on really amazing corner.
Consider the outperformance compared to where we were from.
The top line.
Good morning, Larry Yes.
We're very pleased with the numbers actually are.
First quarter 2002 organic growth I think was 30%. So now we've found 25% on top of 30%, which is really quite outstanding.
Yeah.
Frankly far more than we had internally predicted are businesses continue to do very well spoken with our salespeople over the last couple of weeks to understand our sales leadership to understand.
What's going on and they anticipate basically continued continued strength in the business.
I am reluctant to anticipate growth beyond the level, where we are I mean, we grew 7% from the fourth quarter.
Just a quarter on quarter number top line I think that we're running at a really solid rate and I want to see a few more quarters to really understand where we are none of our customers and our salespeople do not believe that the airlines are overstocking, but as a cough.
Caution everybody over the last number of quarters.
Every every downturn of course, followed by recovery and every recovery is followed by a slight overshoot and I. Specifically asked this question to our sales leaders are we in do we have any indication that we're in overshoot area and the answer is no nobody thinks that we're in the <unk>.
<unk> area.
So I'm cautiously optimistic the numbers are incredible phenomenon.
<unk> I think we're capturing market share and this is unique the heiko we've.
We we speak to our customers and we see what's going on with other suppliers and we think that frankly the performance at Heiko is really with regard to the after market industry, leading and we're outperforming others and.
And that's as a result of being able to hold inventory treating our customers right not jamming them with price increases, making sure that they get value. So.
So.
Very good about where we are.
Okay I know we've asked questions on the margin laptops several.
Several quarters they'd been kind of running a little bit above that sort of 2021 alright.
Mix.
Changed at all over the last few years that maybe help that margin or not particularly.
Not particularly not particularly as a matter of fact, we've had a little bit more.
Intangible amortization, so that would have as a result of the acquisition. So that would have to decrease the margins.
So now I don't think it's really a mixed thing I think we're we're just very efficient.
Got a great team.
The thing that's interesting is I think that these margins are resolved of frankly, what we did a decade in two decades ago, they're not as a result of what we've done in the last year or two.
When you treat your customers rate you treat your people right you get into a virtuous cycle and I think that's very much where we are in.
I think we're reaping the benefits of the long term the culture that we put into place over 20 years ago 30 years ago, and that's what's driving these numbers we had the parts. When other people then we continued to develop.
A lot of new pm.
<unk> and other products through the downturn, we continued to take inventory we did all of the right things and that's why these members are coming out and frankly, even surprising us.
Gotcha and then just one quick a follow up with Carl It's just on the on the little bit of a higher tax rate this quarter I know a little bit less.
Option credit for Ya got has your full year outlook at all change I don't know if you'd comment the that I was getting out of the call for a couple minutes is your full your outlook changed at all for the tax rate.
No I really it really hasn't.
The the fourth quarter tax rate was substantially larger this quarter than Q1 of 2002, which the reason Larry mentioned as the as the lower benefit from Tac ops tax.
Stock option that tax benefits that we experienced if you look at the rate.
It's 100% of the increase is due to that I think for the year, we should fall out between 20, and 21% kind of where we fell last year I think that's where we'll lineup this year.
Gotcha I appreciate all cut the call and thanks guys.
Thanks, Larry.
Our next question comes from P.
<unk>.
Securities. Please go ahead.
Good morning, Thank you for taking our questions today.
First I just wanted to ask within the flight support group what are you seeing for a product demand in the Chinese market has there been any shopping with as a result of their emergence from the pandemic Lockdowns in are you seeing any potential that sales into that market could be a strong tailwind for FFC sales over the rest of the fiscal year.
Hi, This is Eric good morning.
Yeah, we're doing quite nicely in the in the Chinese market anywhere we tend to be I tend to not like to get into a lot of detail on specific customers are markets for competitive reasons, but I can tell you that we are doing very well we've got a very good presence there and I think we are well positioned to pick.
Market share and to continue to grow that market as it recovers.
Frankly, our sales there have really been outstanding over the last year and in excess of what we had predicted and frankly, where we were in 2019.
And I think we'll continue to benefit is that market recovers.
Alright, that's helpful. And then I had one for Carlos could you provide an estimate for what you expect interest expense to be for the year is the first quarter level a good one right to use or if any help he could get back.
Well I think our interest right now is running close to 6% on our on our debt it's variable.
We just we just borrow a half a billion dollars for accelerates so.
I haven't really given a forecast on that but if you if you take our outstandings, it's going to be somewhere.
At $10 million, if you're thinking about a run right. It can be around 10 million a quarter something like that.
I appreciate the help thanks.
We'll take our next question Christine.
With Morgan Stanley . Please go ahead.
Hey, guys I'm following up on some other questions of leverage <unk>. He said that you've got a busy pipeline for acquisitions, how should we think about how you finance. This I mean, the business is under my bird and I'll see you guys use that <unk> to finance acquisitions before.
Do we think about the balance of financing for those incremental portions and you know you guys have historically run a very under like a clock, but what would be the peak leverage you're willing to consider it the deals are available that creative.
Q1 answer.
Basically we.
We will continue right now to use our credit line, which were under drawing on that credit line. We have we can go to a billion five.
And we have facility to go to a billion 850, and we are right now what Carlos 650 or something like that.
700, so we have plenty of room on that.
In the event that we were to consider something larger we have spoken to our banks and the banks are fully supportive of going much further if we would like to.
At the moment, we have no.
Request into them to do that but we will we've always spoken with them and said in the event that we need additional funds, we can do that as for issuing.
Heiko class a stock in an acquisition, we normally don't do that because we find.
That because our strong cash flow, we'd rather pay cash and reduce the debt balance quickly is Carlo said earlier, we would increase the leverage amounts as long as we could bring them down to Amanda much more manageable.
The amount, which I consider in the area of two to three times EBITDA at two to three times, we've never been at two times EBITDA, we've always been below.
So.
And we will continue to be a low level company, we never intend to go.
Some companies go to 567 times, we do not do that.
Does that answer your question.
Yeah, that's great very helpful. Thank you and if I get them ask another question.
During Covid Airlines were a lot more cost conscious and Pma's, where I'll tell you all ready for them now that we've seen air traffic continue to be strong entertain we're seeing that globally can you talk about where PMA as in terms of your airline customers priorities and if you could provide.
Some information regarding how you market share of all maybe for your top 10 customers and now you said PMA and that would be most appreciated.
Yeah.
Happy to do that.
A couple of things of course actually there are interesting during the pandemic actually customers were so.
Six foot problems that I don't know that they were approving many alternative parts at that moment. However, we were very confident that we would ultimately get those parts approved so we continued to develop.
Denude the manufacturer through the pandemic so when the pandemic of got to the and we started getting a lot of parts approved we hear from our customers that that is not a PMA.
Item, it's really a heiko specific items heiko develop these parts Tiger develop these repairs and I think that our growth is really unique for the industry. So it'd be very careful and I would not describe it as a broad.
Interest in PMA I think this is specifically a broad interest in haikou as we've gotten larger 20 billion dollar market cap company, we've got deep techno technology.
And strong financial ability and our customers see that and I think we've been rewarded with a unique opportunity right now so but as far as heiko. Those we continue to develop a lot of parts and repairs. We've got a lot in progress or distribution businesses are doing.
<unk>, well and taking market share from others, So I anticipate.
Continued growth certainly over the numbers that we did last year again, our first quarter numbers were frankly, so out of the park that Unreluctant too.
Predict increases off of those for the next couple of quarters and something like that.
Mature at this level first I'm, not saying that we won't but.
And frankly, when we did our fourth fourth quarter call two months ago I had no.
Belief that we would be hitting these numbers that we're hitting now so I prefer to be a little bit conservative going forward, but I do anticipate continued growth off off of last year.
Great. Thanks, Eric and thanks, everyone date.
W.
Next question comes from Sheila.
Jeffries. Please go ahead.
Thank you good morning, everyone. Thanks for the time.
Eric just on your last point now F. S. G sales are eight per cent about 2019 marbles I'm guessing that has minimal crashed hyphen. There. So you know.
T R might get your appointment where do you think you're gaining sure isn't just additional products.
I shall customers on that same product are you coming out with more products because customers are demanding it is it regional cross can you talk a little bit about that and I appreciate the earlier caller.
Yeah.
Good morning, Sheila and thanks for your question.
I would say it is a strength across the board.
We are getting significant sales of parts to customers, who had not purchase those customers not purchased those parts before so I anticipate continued increase their normally when a customer's switches to us they buy all of their demand from us so.
Yes part of it is they're seeing their own recovery and they are the volumes are increasing.
But also a large part of it is we're doing very well and coming out with.
New products and getting those products solid and.
And then of course the.
Flow through between.
PMA and distribution has been very strong and we've been helping our distribution principles obtain pma's and we sell those parts as well and that's worked out very well. So it's really broad base strength, we still have as far as geography's, we still.
Half recovery opportunity I would say primarily in Asia.
As a result of the.
Those markets are still lagging.
From your from your weekly report so I think that there is there is continued opportunity there, but yes. We are we're past our 2019 numbers and really very very happy about that.
Oh, great. Thank you I have one perfect and one per carload. So next door in Canada, <unk> calculating about and one month contribution 50 basis points of dilution.
And then you know margins are still down 40 <unk>.
<unk> outside of <unk>. So can you kind of talk about what the next and pack specifically as visit <unk>.
You wanted a specialty products that are non.
Non-defense and how long you think that'll continue <unk>.
Sure Sheila.
I think I assume those numbers include the dilution from the transaction expenses. So those are nonrecurring expenses and that was.
That probably accounted for a very good portion that in the quarter, but.
The mix Excel is majority aerospace and defense.
And then they have a variety of other markets. Some of it is energy some of its clean energy.
Some of it is transportation trains for example, and other electrification initiatives. So it's a pretty broad product base and just across the board their margins are generally lower than our margins.
No I wouldn't be surprised if over time those move up I don't want to make a prediction is to that I think it's a little too early to do that but they certainly are margin focused.
And their margins had been on an upward trend over the last I don't know four or five years. So.
We we like that as well.
And then Carlos last them for you and you know inventory with a user cashing in according to about 52 million following.
89, nine and just got 22, which is pretty unusual for you guys. So how do we kind of think about that online dang.
That's a good question Sheila.
We knew that we would have to spend this quarter spend this quarter was.
Rather content towards traded up that 52, roughly 30 that was related to distribution buys that relate to certain contracts that either renewable view and so we have we do have some ah bulking up in that area. If you pull the 30 out it's $20 million worth of inventory span, yeah that that probably felt about right just for some.
Pouring our backlog I don't anticipate.
Huge investment and inventory like we had last year in.
In fact with interest rates going up of encouraged our substitute.
To be smart on that but I've also told them that if they have customer demand demand. We don't want there to be in a situation, where they don't have product to support the customer. So it's a delicate balance but I don't believe that you'll see us have the same level of investment for the four year. This year as we did last year.
Okay, great. Thank you.
Thanks Sheila.
Our next question comes from Ken Herbert with RBC capital markets.
Please go ahead.
Yes, Hi, good morning, maybe first question for Victor Carlos.
It sounds like Victor the commentary on sort of the pace of recovery of supply chain in your defense markets. In particular, you know maybe a little slower than expected.
Do you still see sort of full year a T G organic gross up you know.
<unk> singled this year and and how does that recovery looks in terms of the top line for the segment over the next few quarters.
Yeah, I would I. This is Victor I I would think that's probably right low to mid single digits.
Organic growth I think it's a little early to tell with certainty I mean.
Again, when when the defense.
Budget defence recovery moves in for US is really.
Little bit up in the air and not that it's been bad by the way.
Businesses aren't doing well in absolute terms.
But I would expect that it later this year and possibly into next year, we would see and I mean, I just timing I, just don't know supply chain by the way for us from our vendors.
I think a lot of other people still not easy, but as I mentioned in my comments definitely improving and our company is kind of across the board are saying, either it's improving or at least not deteriorating. So that's that's a good sign.
[noise], Okay, and even when I when I do the add backs for for the E. T. G margins. It still seems like it's it's obviously a little bit lower than it's been was there anything structurally different did the segment or maybe higher costs associated with with maybe some investments in pre buys where how should we think about.
Sort of the the court T G margins obviously excluding.
Amortization and of course, the accelerator impact.
Sure.
That's what I was alluding to in my remarks is that over time people have said to me look I know on these calls in particular, where do you think the margins are gonna be and I, you know I would say listen I I don't know exactly but I think if you you kind of think of where we are we are we wear which is kind of the <unk> the cash margin right.
Low thirties, 32% 30, 133, no bouncing around in that range and I've always said listen I think within.
10% of that is probably reasonable and that's where we're finding ourselves more or less.
Before transaction expenses et cetera, So I do think that's reasonable and that is mixed sensitive I mean that is definitely makes sensitive in defense, we have some higher margin products.
We're selling less right now.
And.
That tends to shift.
Over time, but it's definitely mix sensitive.
Kansas has purpose.
This is Carlos just just to be clear because he didn't include this in the $5.1 million if you add in.
The Atg margin if you add in a five Y Y and then throw another million dollars and therefore act amortization costs related to the deal that's new.
You'll get back to a margin this very similar to what we had last year tour Victor with Strat was pointing out.
Perfect. Thanks, Carlos appreciate the color.
Welcome.
The next question comes from.
With Cohen. Please go ahead.
Hey, Thank you good morning, guys.
Good morning.
Hey, I just first to follow up on Carlos is last point of clarification. So in terms of one time items at C. T G in the quarter was it.
The 5.1% a million dollars a amortization or was it.
Are there other things related to the accidentally a transaction that's led through there.
So the one time stuff was $5.1 million and what I was pointing out was that we took on some additional amortization for the month of January or is it close to a million dollars.
And that relates to new amortization it has things in there such as inventory write ups.
Accounting amortization. So there's there's an element of that that is kind of.
Short term.
Inventory right up only lasts for a quarter and a half or something like that or a couple of quarters. So there is an element of that additional million dollars, which.
It's not really a one time costs, we're gonna have the amortization going forward, but what's the point I was trying to make was that if you can affect all that stuff in the a T. G is running around 25% operating margin, which is what we posted last year. At this time that that was the point of that statement.
Yep, Okay. Now that helps thank you I was just curious on supply chain, we often hear about a T G. Having some challenges in the supply chain is flight support also seen.
Apply chain challenges and if so what kind of what is the past use there.
Yeah, we we hire you guys have myths, Eric yes, we definitely have seen supply chain challenges within FFG.
Frankly, our sales and earnings would be even higher.
If if if we got all these parts in which.
Which we're not able to get at the moment look I think we're doing better than most and that's as a result of our decentralized structure, we don't do Soviet Central planning and Heiko.
We let the businesses figure out what they need they stay very close to their customers that's how.
Everything is designed and as a result, I think we were ahead of the curve and you saw inventories go up a year ago and now you've seen the results of having any inventory on the shelf and now our inventories are up again, and we're gonna be in position to be able to support.
Our customers is.
This level of sales hopefully continues and continues to go up but yet we are definitely seeing the.
The same supply chain challenges around materials and in particular labor at our suppliers.
There were.
Aerospace products are made in relatively small quantities for the aftermarket and <unk>.
You'd be surprised how many manufacturers around the world and very high quality good manufacturers.
Had people retire in a sort of if you will of us the recipe on how to do certain processes and I'm talking major company.
So they.
They struggle getting.
People trained to be able to.
Replicate those processes and often the parts that.
Have not been acceptable.
So, but I think things are definitely getting better in that regard.
Okay now that's really helpful. And then just Victor if you don't mind.
Maybe you also just elaborating on how the supply chain has improved and where maybe incrementally things got worse if any.
Just curious where are you seeing the bottlenecks.
Still.
I mean, it's.
Thank you this is.
It's still on the components side and.
Our businesses by so many different components sub components, plus raw materials things like metals and silicones and so on those those have been easier.
For us, but it's generally on the electronic component side, I mean, an area that remains difficult I think for everybody in the industry.
Certain items things like FPGA is there some other <unk>.
Parts and components I'm aware of where some vendors are slipping I'd, rather not call them out.
Publicly on this end, where they keep falling short rather consistently where we have.
Effectively sole-source situations and it's hard to dual source and things of that nature.
But it is it is our companies are.
Close to half of our companies report to us that it's improving more than half at least static or improving.
And it's the minority who see it very smaller minority.
Going the other way so that's why I say I think we'll continue to make progress.
It'll be uneven on it one quarter forward, maybe next one a little bit backward, but generally in the right direction I think that's probably because manufacturers people in the manufacturing chain generally companies and the manufacturers generally and have gone out and put more on the shelves and I think you know, there's there's going to be a reversion to the mean.
And that that will happen over some period of time, whether it's a year's six or nine months or I don't exactly know.
Thank you guys I appreciate it.
Thank you.
Work.
The next question comes from Josh Sullivan with a benchmark company. Please go ahead.
Hi, good morning.
Good morning, Josh.
On your PMA Heiko customers, you know given the the value of the parts offer any talk about our customers switch over to the entire heiko portfolio when they realize the value.
But it doesn't <unk> airline longterm aircraft fleet planning decisions at all you know you've seen any data that suggests because tyco's PMA. His legacy aircraft can be kept profitable for longer maybe did lane any retirement decisions.
We have heard.
At various places that that is a consideration.
I don't know if.
That's also partly designed to get us to manufacturing more products for our customers, but yes, we can have a considerable impact on the cost of operation of older equipment and when our customers commit to us longterm and we give them.
Pricing protection, we can get into an area, where our parts can be as much as 70% below the OEM.
After many years and we still drive very nice margins and the airlines save a lot of money. So I do think it's a factor.
I think the larger factor is the overall cost of the aircraft what they want to do in terms of reliability.
Sweet simplification all of that stuff, but there's no question that we are a major cost driver for them, especially as the aircraft at all.
Thank you for the time.
Thank you.
As a reminder, it started one to ask a question.
The next question.
With Wolf Research. Please go ahead.
Good morning dies.
Good morning.
Uhm, Eric I guess, you call that the 23 per cent organic growth for commercial arrow. So I guess defenses up even more can you just sort of differentiate your defense and market versus that an E. P. G.
So.
The defense market that we've got let's see.
The.
Yes, the defense market was up a greater percentage.
We do have a lot of components on in the missile defense area and were were particularly strong there look you can bounce around.
Euro per year.
I'm very pleased with the with the numbers, we've made a big push into defense and we're doing very nicely I would say the big difference Lewis is that the flight support defense stepped in general doesn't have the same supply constraints with regard.
Certain electronics.
<unk> more susceptible to the chip issues.
And over on the flight supported side.
We don't have a lot of that so that's really the main driver of there.
Oh, that's a great color, it's glad to hear that I know of defense has been area that's probably.
[noise] underwhelmed, but it's been a big opportunity. So it's good to hear that you're you're making some headway there.
Yeah.
It is a huge opportunity it is a huge opportunity and we have a big focus in that area.
Yeah.
Call us back to the the backlog.
N E T. G. I think you said 856 million. So that's up 150 million or so from last quarter. It is that the bulk of that from <unk> or just trying to gauge. The 856 from the 660 and I got a little over 710 a year.
Yeah. So if you're if you're looking at Q4 backlog, yes, a lot.
A majority of they're not all of it but the majority of it is aksel, you're adding on that we picked up in January .
Alright, great I think we have and then just.
Yep.
Just one one there was a small change in the accrued contingency in the corner, just which segment that impacted was that sort of another headwind within a T. G or was that an S. S. G.
That was.
That was.
A combination of a discount rates and FX, which broadly affected both segments.
Alright that is perfect. Thank you very much.
Thanks Buddy.
And our next question comes from Ron.
Please go ahead.
Yeah. Good morning drive just a couple a couple of questions for you.
Yeah. One thing we've been hearing is that some of the suppliers would you go down into the lower tiers of the supply chain or.
Suffering from working.
Working capital needs.
Your balance sheets are kind of maybe upside down because of making investments before the pandemic and then things not pointing out that getting.
Aggravated by the 737 situation is.
Has that created any opportunities for you I'm in emanated perspective to maybe pick up some interesting, albeit smaller companies.
That would be available today that might not have been before.
Yeah, Hi, Ron This is Eric Yeah, I would say that there has been some opportunity in that area.
But normally.
And not be area, the folks who are having those issues.
In general are not the.
The companies that were working with so I.
Don't anticipated at this point being a huge opportunity for us.
Frankly the.
The large companies had to make sure that if they get paid as they had been getting paid earlier from the government that they take care of their supply base and I think.
Those companies are more in that in that general around so it's not as not as applicable to us.
To the kind of drug abuse.
Got it and then.
If we just got the the P M.
<unk>.
Earlier.
Yep, the global fleet kind of <unk> <unk> <unk>.
Two years older when I'm sort of everything was no.
I'm in a coma.
Because of the pandemic. So you got a fleet. That's two years older aircraft that are that much closer to a D check they might not be on longterm maintenance contracts anymore, they might be out of warranty.
Are you are you are you seeing a pick up in demand for your product.
For like a third <unk> on some of these aircraft.
Yeah, I think I I don't have specific information on that but yes, I do believe that we are.
We are selling parts for.
Check that had not been anticipated.
I don't think it's a large part of our sales, but yes, I am I am aware that we are benefiting from that.
Got it got it got it got it okay. Thank you very much.
Thanks, Ron.
Once again as a reminder, it is star one to ask a question.
And it appears there are no additional questions at this time I'll turn the call back to the speakers for any additional are closing remarks.
Thank you again this is Larry Mendelsohn and I want to thank everybody on this call for your interest in Haikou.
If you do have questions. We are available are victimized self Carlos.
So you can give us a call or email and we look forward to speaking to you at the.
Q2 earnings call.
Which will be in about three months from now so have a good day, you all and they will speak to you soon.
And this concludes today's call. Thank you for your participation you may now disconnect.
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