Q2 2023 HEICO Corp Earnings Call
Speaker 2: You are currently on hold for the conference call. At this time, we are assembling today's audience and plan to be underway shortly. We appreciate your patience and please remain on the line.
Speaker 1: I and.
Speaker 1: Know was my that.
Speaker 2: Welcome to the HICO Corporation Second Quarter Fiscal 2023 Financial Results Call. My name is Samara 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.
Speaker 2: ICO'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 public health threats such as the COVID-19 pandemic or health emergencies. ICO's liquidity and the amount and timing of cash generation.
Speaker 2: Governmental and regulatory demands, export policies and restrictions, reductions in defense of space or homeland security spending by US and or foreign customers or competition from existing and new competitors, which could reduce our sales.
Speaker 2: Our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth.
Speaker 2: 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 from acquired businesses, customer credit risk, interest foreign currency exchange, and income tax rates.
Speaker 2: Economic 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 and defense spending or budget cuts.
Speaker 2: which could reduce our defense-related revenue.
Speaker 2: Parties listening to this call are encouraged to review all of HIKO's filings with the Securities and Exchange Commission, including but not limited to filings on Form 10K, Form 10Q and Form 8K.
Speaker 2: 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 will now turn the call over to Lawrence Mendelsohn, High Coast Chairman, and Chief Executive Officer.
Speaker 3: Thank you very much and good morning to everyone on this call. We thank you for joining us and we welcome you to the HICO Second Quarter Fiscal 23 Earnings Announcement Telecomference.
Speaker 3: I'm Larry Mendelson, Chairman and CEO of HICO Corporation, and I'm joined here this morning by Eric Mendelson, HICO's Co-President and President of HICO's Flight Support Group, Victor Mendelson, HICO's Co-President and President of HICO's Electronic Technologies Group, and Carlos Macau, our Executive Vice President and CFO .
Speaker 3: Before reviewing our operating results in detail, I'd like to take a moment to thank all of HICO's talented team members for delivering another strong quarter. As I have said many times before, HICO's strength comes from its people, our team members.
Speaker 3: Their commitment to our customers and the consistent delivery of high-quality products and services is what drives our excellent financial results for shareholders.
Speaker 3: I continue to be very optimistic about the future for HICO and our over 9,000 team members.
Speaker 3: I'd like to summarize the highlights of the second quarter fiscal 23 results.
Speaker 3: They are record results. Consolidated second quarter fiscal 23 net sales represent record results for HICO driven principally by record net sales within the flight support group. This arose mainly
Speaker 3: from continued rebound in demand for commercial aerospace products and services and the contributions from our fiscal 23 and 22 acquisitions. Consolidated operating income and net sales in the second quarter of fiscal 23 each.
Speaker 3: improved by 28%.
Speaker 3: as compared to the second quarter of fiscal 22. These results mainly reflect 10% quarterly consolidated organic net sales growth, as well as the impact from some acquisitions.
Speaker 3: Consolidated net income increased 24% to $105.1 million, or 76 cents per diluted share in the second quarter of fiscal 23, and that was up from $85 million or 62 cents.
Speaker 3: then as of October 31, 22.
Speaker 3: Our net debt, which is total of that less cash and cash equivalence, $627.5 million as of April 30, 23, compared to shareholders equity ratios, was 21.9% as of April 30, 23.
Speaker 3: 3023 and that compared to 0.25 times.
Speaker 3: As of April , I'm sorry, October 31, 22.
Speaker 3: in our debt ratio in the first six months of fiscal 23, principally reflects the impact from financing the purchase of Accelia in January 23.
Cash flow provided by operating activities was $77.8 million in the second quarter of fiscal 23, and that compared to 96.8 million in the second quarter of fiscal 22.
The cash flow provided by operating activities in the second quarter of fiscal 23 reflects an increase in working capital principally driven by an increase in inventory to support our increased consolidated backlog. We continue to forecast strong cash flow.
and serve me.
I will now discuss our recent acquisition activity.
In March 23, we entered into an exclusive license and acquired certain key assets.
for the aircraft emergency locator transmitter or as we call it in the industry, the ELT, product line from Honeywell International. And this will fit nicely with the business operations of a subsidiary of the ETG group.
ELTs provide critical emergency transmission signals in the event of aircraft impact on land or water to enable first responders to low-grade the aircraft.
We expect this license and asset acquisition to be a creative to our earnings in the year following closing.
Earlier this month, we announced that we entered into an agreement to acquire WinCRAW Group.
for $1.9 billion in cash and $150 million in high-code class A common stock.
all to be paid at closing for a total of $2,50,50,000 in the aggregate.
Upon closing, which is expected to occur by the end of calendar 23,
When Quar would the Hikos largest ever acquisition in purchase price as well as in revenue and income acquired?
WinCore will become part of HIKO's flight support group.
WinCore is a large commercial and military aircraft aftermarket company offering factory new FAA approved aircraft replacement parts and value added distribution of high use commercial and military aftermarket parts.
an aircraft, an engine, accessory component repair, and overhaul services.
When Cores based in Peachtree, Georgia, and provides its parts and services internationally, employing approximately 1,000 team members in 19 facilities around the United States. HICO recently entered into the financing challenging energy autonomous units and e-commerce vehicles, pont???….
to high co-zernigs within the following year after closing.
This acquisition materially expands high-goes after market product offerings.
and will enable the combined company to offer even greater savings and greater capabilities to customers while expanding our new products and services development capacity.
When core is an ideal and perfect highly complementary fit with high core.
At this time, I would like to introduce Eric Mendelssohn, co-president of Haiko, and president of Haiko's flight support group, and he will discuss the second quarter results of the flight support group.
I would like to introduce Eric Mendelssohn, co-president of Haiko, and president of Haiko's flight support group, and he will discuss the second quarter results of the flight support group. Thank you.
The flight support group's net sales increased 28% to a record 392.2 million in the second quarter of physical 23, up from 306.3 million in the second quarter of physical 22. The net sales increase in the second quarter of physical 23.
reflects robust 20% or a gain of growth, as well as the impact from our profitable fiscal 2022 acquisitions.
The organic growth mainly reflects increased demand for the majority of our commercial aerospace products and services.
resulting from continues recovery in global commercial air travel as compared to the second quarter of fiscal 22.
Oh.
sho.
The flight supporter group's operating income increased 51% to a record 99.9 million in the second quarter of fiscal 23 up from 66.2 million in the second quarter of fiscal 22.
The operating income increase in the second quarter of fiscal 23 principally reflects the previously mentioned net sales growth.
an improved growth profit margin in the impact from the amendment determination of a contingent consideration agreement.
Partially offset by an increase in performance-based compensation expense.
The improved growth margin in the second quarter of fiscal 23, principally reflects higher net sales within our aftermarket replacement parts in specialty products, product lines. The vice support groups operating margin improves to 25.5%.
in the second quarter of fiscal 23, up from 21.6% in the second quarter of fiscal 22.
The operating margin increase in the second quarter of fiscal 23 principally reflects the previously mentioned improved gross profit margin and decreased SG&A expense as a percentage of net sales, mainly reflecting the previously mentioned amendment and termination of a contingent consideration agreement.
partially offset by higher performance-based compensation expense.
Now I would like to introduce Victor Mendelssohn, co-president of HICO, and president of HICO's Electronic Technology Group to discuss the second corner results of the Electronic Technology Group.
Thank you, Eric. The Electronic Technologies Group's net sales increased 27% to a record $301.8 million in the second quarter of fiscal 23, up from $237.4 million in the second quarter of fiscal 22.
The net sales increase principally reflects the impact from our fiscal 23 and 22 acquisitions, as well as increased net sales of our other electronics, aerospace, and space products offset by decreased defense products net sales.
The Electronic Technologies Group's operating income increased 3% to $68 million in the second quarter of fiscal 23, up from $66 million in the second quarter of fiscal 22. The increase in operating income principally reflects the previously mentioned high net sales volume.
Partially offset by a lower gross profit margin and lower efficiency levels, mainly resulting from the impact of our January 23 acquisition. The lower gross profit margin in the second quarter fiscal 23, principally reflects decreased net sales of defense products, partially offset by net sales increases of our other.
electronics, and aerospace products. The electronic technologies group's operating margin was 22.5% in the second quarter of fiscal 23 as compared to 27.8% in the second quarter of fiscal 22. Keeping in mind that the ETG's non- cash amortization is about five
This performance equates to what we consider to be the real operating margin metrics by which to measure a business of around 27.5 percent, which is a strong performance at the operating level and consistent with my prior comments about the rough range where I expected our margins to be. The lower yet strong
Operating margin principally reflects the previously mentioned lower gross profit margin margin and increased SGNA expenses as a percentage of net sales mainly from the previously mentioned lower efficiencies.
Our defense sales remain lower than the prior year as anticipated and as I discussed on our last earnings call.
This overall reduced operating margin
Despite the strong sales increases of our other electronics and aerospace products.
In a little more detail on those sales, our commercial aviation sales and backlog have been particularly strong, and I would expect that to continue for some time. Sales of our other high-end electronic components have been healthy, though I still expect some softening. I would expect that to continue for some time.
In those markets overall, as the year wears on, our commercial space sales grew and overall, we have a good space products backlog. Those deliveries are not linear over the course of the year. AcceliA, our largest DTG acquisition, has performed in line with our expectations. So we are very happy with this.
average ETG operating margin by approximately two percentage points going
On supply chain, we continue to make progress in reducing our sales that have been delayed due to supply issues with our subsidiaries now estimating that amount fell below $30 million, even into the mid to low 20 million, so if one strips out, Excel, yeah.
The majority of our businesses tell us that overall supply conditions are either the same as or better than they were and they anticipate continued though uneven improvements throughout the year.
Of course, we remain very confident in the ETG's outlook, both long and short term, as our ETG companies are remarkable and irreplaceable set of businesses that are managed by gifted leaders and filled with talented team members.
Further, given the combination of the ETG's record backlog, the overall expected delivery timing for that backlog and anticipated orders, we expect our defense product net sales to start to increase within the next year, though of course we can never be certain of the timing in exact sales levels. I turn the call back to Larry Mendelssoh.
Thank you, Victor.
As we look ahead to the remained or a fiscal 23, we continue to anticipate net sales growth in both the FSG and ETG groups.
principally driven by demand for the majority of our products.
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.
We believe that our ongoing conservative policies
a strong balance sheet and a high degree of liquidity enables us to continuously invest in new research and development and to take advantage of periodic strategic inventory purchasing opportunity as well as executing on our successful acquisition program.
drive and determination to win in the marketplace has resulted in another quarter of outstanding results and we thank you for all that you do to make Heiko a great company. I would now like to open the floor for questions.
Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.
Again, press star 1 to ask a question and weíll pause for just a moment to allow everyone an opportunity to signal for questions.
And we'll take our first question from Rob Spingarn with Melius Research. Please go ahead.
And we'll take our first question from Rob Spingarn with Melius Research. Please go ahead. Hello. Good morning, everybody.
Morning. First, congratulations on the WENCOR deal. I have a couple of questions on that. So Eric, if it's okay if I could just start with you and I wanted to ask if you could perhaps offer some color on the differences between the two companies, PMA, distribution and component repair business.
the complementary nature of the transaction. If you look at their various businesses
Their product lines really complement HIKO's very well. You know, HIKO started out over in the PMA area focused on engine parts, when GOR has focused on non-engine parts. HIKO also does non-engine parts, but they're actually very little similarity in the product that we do.
overall is a lot of components and is in a lot of market niches where HICO is not in. So we think that that's going to broaden us. And then likewise, in distribution, we focus in different areas. One core, for example, is a very large position over in the bearings area, whereas HICO basically doesn't involve in the bearings.
So this isn't, basically what you just said, this isn't just additive putting the two together, but it sounds like there's a pretty decent cross-selling opportunity where, you know, when the end-course customers can buy some more HICO parts and the opposite.
Absolutely. We feel very, very strongly about that. You know, there's a whole product line that HICO doesn't offer that we're going to now be able to offer to the airlines and, frankly, give them more choice, greater opportunity, greater savings.
and it's really going to work out very well. Also, Wencourt has got a whole set of manufacturers that makes product for them and frankly, a lot of those manufacturers can also make product for IKO as well and vice versa.
So we think it's really going to create a tremendous amount of efficiencies. And sort of lastly, you know, HICO has focused over the years more on, I would say, the airline market. Yes, we serve independent repair stations and brokers and smaller customers. But WinCorp really has a world of class.
e-commerce system, e-commerce platform, which I think is going to be a really great value to our customers. So I mean, I know that our component of fair stations like buying parts from one core. So I think that, you know, as we bring...
The best that both companies have to offer, I think it's really going to be good for our customers. Okay, and just to close the loop on this, Eric. I think normally HICO or FST does about 300 to 500 new PMAs. Annually get added to the catalog. I'm not sure what that equivalent number would be for when core.
our as we offer as we've got a more fulsome product line to offer to our customers I think that there's going to be additional development opportunities yes so we view it very much as additive and you know in today's market
Obviously, labor is very tight. We've got a great workforce. One course got a great workforce. We share our DNA is very, very similar. Companies that view themselves as small compared to the very large companies in the industry, and we're really very much focused on product quality, turn time.
service and price and I think that there is it's really a great great marriage and you know frankly something that we all wanted to do for quite a long time and I'm just happy that we were able to get it done. Rob this is last time to come.
As a comment to summarize, we really believe that this combination is a great win for our customers because with expanded capacity and we believe that we'll be able to offer customers better pricing, lower pricing, more products and more efficiency. So we look at it not so much as a win for our customers, but as a win for our customers.
capacity to...
give even more value.
Larry Eric, thank you very much. Victor Curlis, I had a couple for you, but I'll step aside. Thanks so much.
Larry, Eric, thank you very much. Victor Carlos, I had a couple for you, but I'll step aside. Thanks so much. Thank you, Rob. Thank you, Rob.
I'll take our next question from Peter Amin with Baird. Please go ahead. Bye.
take our next question from Peter with Baird. Please go ahead. Thanks. Good morning. Larry, Eric, Victor, Carlos.
Good morning. Good morning. Hey Victor, maybe I could just start with you. ATG margins are now kind of fully reflecting the inclusion of Vaxillia. How should we think about the progression from margins to go back?
towards kind of the 27%? You mentioned the 200 basis points of the 2% kind of impact, but how are you thinking about that progression back? Thanks. Yes, Peter, this is Victor. It's a good question. Right now, I'm keeping our assumptions within...
close distance of where we are. I think you probably know we're always fairly consistent, excuse me, conservative when it comes to this. I do believe that as some of our defense products pick up later this year, first part of next year, which tend to be higher margin, that it should bring...
the margins north of where we are, but I'm more comfortable right now saying that we'll stick where we are. But you know you've always kind of heard me say that I think within more or less 10% of where we are is the healthiest zone. Now of course that excludes acquisitions, right? So acquisitions could change.
clarification that how big was that or you said it was partially offset by a stock comp and just how do we think about kind of FST margins?
You're going forward. I know excluding a winch or, but just, you know, you've had really strong performance post-COVID, just any clarification that would be helpful. Thanks.
Hey, Peter, this is Carlos. I'll take that one. It was an earn-out on a 2021 acquisition that was basically two tranches of earn-out that we were going to pay, subject to operating performance levels. The companies at
has those earn-outs of the prior owners, we believe more than likely would have made that earn-out. We had probability weighted the likelihood of that outcome to be a success for them. The seller requested
a mechanism to get him his earn-out sooner. And what we wound up doing was renegotiating the earn-out structure and paying them the $9 million of earn-out basically this quarter versus paying it to them over the next, I think the first tranche would have been done at the end of next year and the second tranche would have been done at the end of 2016.
a good deal for our shareholders, a good deal for our partner, the owners of the company we bought, and that's how it all came about. And also, just to add, the proposal to do this was from our partners. So this wasn't a HICO-initiated proposal. Our partner came to us with this suggestion. We were pretty sure if that's what you want to do.
was done very well. I think that we have shown to our customers that we, you know, we started out as a very small company and you know everybody's heard me say this a hundred times, when you start out very small you've got to make sure that you keep your customers happy. It's sort of obvious because if you don't do that you're out of business.
And we, due to our approach of having inventory, we had inventory on the shelf, when frankly others ran out of inventory. And we continued to keep our people. We continued to work with the customers. We added product lines. We added new parts. And as a result, we're doing really, really well.
to repeat. But even if you pull that out, the operating margin was above 23%, which is really very, very good. And, you know, again, that's in a period of time where we're making our customers happy and.
you know, supplying parts to them and expanded product line at very, very competitive prices. So I really have to hand it to our team because frankly in the corporate office, you know, we just sort of set, make acquisitions, but the folks in the field were the ones who figured out how to do this. And the numbers just roll up where they do. We don't.
You know, we don't tell them where to be. It's just that's what comes out of the machine at the end of the day. So I really have to come in them for this. Appreciate all the coloring you can grab some one, or thanks again, guys.
We don't tell them where to be. It's just that's what comes out of the machine at the end of the day. So I really have to come in them for this. Appreciate all the coloring you can grab some one, or thanks again, guys. Thank you.
Our next question comes from Larry Salo with CJS Securities. Please go ahead.
Good morning guys, congrats on a really strong quarter. Maybe Eric will stick with you and just maybe a little more color just on...
just on the commercial aviation, just your markets. Obviously, you grew 20% this quarter, and I think that was on top of close to 25% organic growth, Q2 last year at 23%. We've recovered pretty much from COVID, I guess, or at least a narrow body, right, has recovered. Maybe you can give us a little color, narrow body versus wide body, and just recovery from COVID, and where we've gone from here.
Hope you see any change in order patterns or airlines holding more, less inventory, any color there too, would be great.
takes a very thing to be happy to answer that. The sales, the organic sales growth has really been frankly amazing.
In flight support, we just had our eighth quarter of organic growth over 20%.
So it's one thing to have four quarters where you bounce back, but we've had eight...
And, you know, the numbers are, you know, frankly surprised me to the upside every single quarter. And, you know, there's a lot of strength out there. I think that the airlines are getting ready for the summer season. They know that it's going to be really tough this summer. Everybody wants to fly.
I meet quarterly with our sales leaders and you know, I understand where we are and they just see Frankly continued strength
quarterly with our sales leaders and you know, want to understand where we are. And they just see, frankly, continued strength. So.
Asia was the, you know, in IS, the last region, if you will, to recover. A wide body is also the last of the fleet type to re-coil it's the right hardware, but we see added interest in the stuff that we're doing.
So we're able to bring on additional principles and develop additional parts and repairs. And I think it just in general speaks to the market. I mean, ultimately, there will be a slow down. We can't continue at this pace forever. And, but I'm still very, very bullish that.
even when that, you know, slow down or a little dip occurs, which again, we don't see on the horizon right now, even after that occurs, we're going to continue to ride right through this just as we have in the past. It's like impossible at a time, impossible at a time, these things, and that's why we're so committed to the market.
Got it. And how would you just follow up on the margin question, maybe Carlos can chime in. I think your margin is extra, the one-time benefit or like for the segment, year to date or the first two quarters, close to 23%. Carlos, just how should we look at that going forward, feel that you're operating close to, you know, also and those are close to it.
Is this a high watermark? Should we tail back a little bit as we look out over the next couple of quarters? What's your feeling on that? Thanks.
We're intentionally not giving guidance to some of you careful about what I say, but I do think that we are in a circumstance right now in the business environment where the segments performing extraordinarily well. You've got high growth, you've got good product mix.
So, you know, we would love this to continue. And I think that, you know, if we're, I think where we fall out candidly is between maybe 22 and 23 is a run rate type segment margin. But I don't want to make too many promises right now because we still have to settle into our footprint from...
You know, the disruptions that were caused by COVID. Got it. Great. Appreciate that. Oh, thanks, guys.
You know, the disruptions that were caused by COVID. Got it. Great. Appreciate the call. Thanks, guys. Good. We'll take our next question from Pete.
Zibitsky with Olympic Global. Please go ahead.
Hey, good morning guys. Good morning. I guess maybe for Victor, ETG, Victor, just within defense obviously there's been some supply chain issues, but kind of beyond supply chain,
Are you seeing areas where your defense sales are strong, some areas where it's weak? Is it just kind of a timing mismatch right now in terms of what the Pentagon is prioritizing for purchases?
Yeah, hi, this is Victor. So the answer is yes, and it's not unusual for us to have a variety of results in different businesses. It's maybe a little more pronounced between some of our higher and lower margin products and businesses now than it has been at other times.
In some cases, we have backlog, but delivery is not due yet. In some cases, we're expecting some large orders, some of which have been delayed. Others are for foreign military use. They may be US customers, and they may even go through the DOD.
like an FMS or things of that nature. So that's why we tend to have that optimism as we get a little bit further out. But it is, as you pointed out, is a little bit of a mixed bag, which is not terribly unusual for us.
You don't feel like you've lost any market share or the competition has gotten particularly intense amongst suppliers.
Yeah, definitely not. We feel strongly we haven't seeded market share on any, you know, products or programs.
It's more, you know, in a sense, what they're buying at the particular moment. But we feel pretty good about the backlog and the orders and the order estimates going forward. But again, I'm not anticipating it as a next quarter.
change or even necessarily the quarter after that, I think it goes a little further and deeper into time based on when I look at our backlogs or delivery schedules and some of the orders that we're anticipating. Okay, so am I right? You know when I you guys talk about Accelia being two points of headwind, I think from a core perspective and some modest increase in amortization.
So it still seems maybe you're down a couple points year over year in underlying core margin at ETG. And so is that basically all mixed essentially? So you really need, you know, defense mix to recover in ETG to get back to kind of the core level of margin that you did, you know, the past year or two. Is that the right way to think about it?
That's a good way to think about it. I think that's right. Or mix on some of the other higher margin products that we have.
That's a good way to think about it. I think that's right. Or mix on some of the other higher margin products that we have. Okay, thanks guys.
It doesn't just have to be defense. Well, I think it's defense weighted. Right, OK. Thank you. Thanks. We'll take our next question from Kristen Lwag with Morgan Stanley . Please go ahead. Good morning, guys.
have to be defense, well, I think it's defense weighted. Right, okay. Thank you. Thanks. We'll take our next question from Kristin LeWanda with Morgan Stanley . Please go ahead. Good morning, guys. Good morning. Good morning. Good morning.
With the recent acquisition, once you complete this, I think, Laurent, you mentioned that you expect net debt to EBITDA to be below three times. But this leverage is still higher than where you've historically operated. How do you think about the debt load for the business going forward? When you look at the other main after commercial aerospace aftermarket player, they could lever up as much as seven times.
to answer that question. First of all, I want to emphasize that according to our projections, when we close this transaction, our debt to EBITDA will be under three times. I think the number is 2.8 times or 2.7 Carlos.
NetNet will be under three times. The reason that we insisted upon giving HICO A-Shares in the transaction was the purpose to keep the leverage under three times.
HICO has never been a highly leveraged company. Until now we've never been above two times. We've been below. Our projections show that within a year we expect to be slightly below two times again.
So to answer your question, at this point we are not thinking about becoming a highly leveraged company at six or seven times. We felt that taking leverage on it under three times and being able to reduce it within approximately one year, below two times and then getting innovative and light coming into service to help molecule development. So doing that and going beyondWhat you're trying to accomplish, you need to alllad us to fail to train our customers
It's consistent with our past practices of being very conservative on the leverage side.
The other thing that I want to point out is that we don't give guidance, but we do tell the street that we project, we try to grow 15 to 20 percent bottom line on an annual basis in this compound. We have done that pretty consistently for the past 30 years.
And according again to our projections, we believe that we will be able to, in 24, grow within that 15 to 20 percent increase. Now of course everything is dependent upon market conditions and everything else, but...
based on everything we know today, this acquisition will permit us to continue to compound at least in 24, and our leverage will be below two times when we get to the end of 24. So I presume that we will continue to make smaller acquisitions.
as long as the leverage does not go up. So, I don't know, does that answer your question? Yes, it does. Thank you very much for the color.
I'm going to take our next question from Pete Otherlund with Truist Securities. Please go ahead. Good morning. I'm on for Mike Trimoli this morning. Thanks for taking our questions. First I just wanted to ask one on the OneCor acquisition. And then Jamie Him, on theuan.com, our website supervisorsu<|my|>c ErnestB doctorate all contact information if not more information, by call.
question and something we've been thinking about quite a bit. Onecore is a very very well run company.
and they've got a tremendous asset in their people. So frankly, our plan at the moment is just to acquire it and leave it as a separate standalone company for the near term. Let's see what benefits could exist between the two companies over time.
We'll share best practices and we'll figure out how to serve our customers even better. I think there's obvious areas where we can help each other continue to grow and improve, but the plan is to leave it as a separate standalone company.
this is and we'll figure out how to serve our customers even better. So I, you know, I think there's obvious, you know, areas where we can help each other continue to grow and improve but the plan is to leave it as a separate standalone company for the moment.
All right, that's helpful. And then just kind of follow up on some of those synergies that you might expect from the WENCORE acquisition. Do you expect that as a combined company, it might give you an opportunity to speed up development of new PMA parts, or do you anticipate there might be any benefits related to scale in terms of working to get PMA parts approved? Yeah, that's also a great question. In terms of scale and gaining PMA parts approved, we've got a great track record.
with the FAA to be able to get parts approved. So I feel pretty confident that you know we'll be able to continue to add to that. WENCORE has, you know as I mentioned earlier, a product line that HICO doesn't offer. So I think that this is going to add to the portfolio and yes it will.
Also, when we go to customers, very often customers ask for a broader product line. And by adding the two product lines together, we're going to be able to cover a lot more of the waterfront. And so we're very excited about all the benefits that that's going to bring.
Great, well congrats on the acquisition and thanks for taking the questions. Thank you. We'll take our next question from Sheila Caillou with Jefferies. Please go ahead. Thank you guys and congratulations. Mary, I wanted to ask you a question first. You mentioned inventory and supply chain a few times.
things were happening. Number one, our backlog is larger and to fill that backlog to supply the customers on time, we have to have inventory. So that went up. Number two, because of supply chain issues,
our subsidiaries want to make sure they have inventory on the shelf to meet the customer's demand. So those two things increase the inventory. And that was the main increase, I think, in inventory. And then also Sheila to add to that.
We are anticipating additional growth in the businesses and in particular over in the distribution side, picking up additional principles, additional territories. So we had to grow inventory for that. And then also I think everybody's pretty aware of the extended lead times in the industry. A product that used to have four lead, you know, eight lead lead times now can have...
very big customer, we've got 98% on-time delivery in a market where we are having the place of the 52 week lead times for the products to which we are distributing to them.
So, the way we're able to get 98% of this particular business on time delivery when others are dozens of points below that is by holding the inventory. So we want to be there for our customers. We've never been cash constrained. We want to make sure that we invest in the right inventory. It doesn't do any good to have the wrong inventory.
it's the right thing to do. OK, that's super helpful. And then, Victor, maybe for you with Accelia, I mean, obviously, we all understand that it's lower margin. But is it lower margin for now? Is there something structural in the business? Or is it just a factor of its footprint? Look, it's a good margin business in absolute terms. It's just not as high margin as the rest of the business.
Their margins have been increasing over the last several years. I think that I would expect that to continue, but I don't anticipate it's going to get to the same margin as the rest of the ETG in the near term at least, in the next couple of years, absent some acquisition or acquisitions which would change that story.
strong company that had a lower margin than, I mean, when ETG was 28 or 33 percent, we always said if we bought a company that had close to 20 percent, it's going to lower the average margin. But the cash and profit generation and the size of
the acquisition of Xcelia warranted us saying fine, we'll lower, we'll take a lower operating margin because this is a very fine company and it, by the way, has great management and we believe it has the abilities to grow. So those things overrode the desire. It would have been great to have higher margin. We do believe.
that as we build in some efficiencies, that that margin can creep up. Okay, great. Thank you so much. Our next question comes from Josh Sullivan with the Benchmat Company. Please go ahead.
Good morning. Good morning Josh. Just on that comment of doing you know PMA parts you haven't maybe done in the past using possibly some of WENCOR's expertise you know what is your appetite to expand the PMA waterfront you know where might you go with PMA you haven't gone in the past? yeah there's you know I
It's a great question and something that we've thought quite a bit about.
We think that there's a whole set of parts that we just haven't been able to tap as efficiently. And if you look at HICO's sort of developed a certain skill, engineering skill set to go after the types of parts that HICO does.
and one quarter's done the same for the parts that they've done. And by being able to focus in each of those areas, I think there's going to be a lot more that we can do together. You know, a lot of these parts made up, so you know, you can have a complex part next to a less complex part, but the two, you know, there's a certain interaction between them.
And so this is really going to help us develop a much fuller product set because we're going to be able to expand into areas that we haven't done in the past.
Just on the growth of PMA in general, there's some thought PMAs have benefited from some of the struggling OEM supply chain issues. How should we think about that dynamic if and when OEM supply chains recover? Do you still think PMA growth will be as strong in the out years?
Well, I sure hope so. We think that there's really been a prominent...
I sure hope so. We think that there's really been a shift and change.
in the industry. So, you know, we've been out there, both Haikon and one quarter have been out there preaching to the customers for, you know, whatever, 50 years about PMA. And it's taken a certain period of time, but you know the old saying, what is it, the necessity is the motherhood of invention. And so we've been out there with
frankly, as good.
technical product if not better and don't get me wrong our you know where the OEM companies out there supplying the market they supply very very fine products so to supply products that are you know the same as the OEM is quite a technical challenge
And then, frankly, in order to have the products on the shelf, that really takes a tremendous amount of effort. So I think we're in a very, very good position to continue to grow our sales. And we compete with the OEM.
and they are really high quality excellent companies. And they're really, really tough to compete with because they offer a very broad product set with an outstanding quality. So we think that this is the opportunity to obviously bring multiple products together and be able to compete.
with the OEMs on a better basis. Also, I have to say I don't want to mention which ones, but even OEMs have now moved to buying both HICO and WENCOR a PMA product because if they don't have the parts on the shelf and they've got to ship even their own their own repaired unit.
And again, I don't want to go into which ones or what they are, but they purchase our parts to go ahead and do that. And we're happy to sell it to them.
or what they are, but they purchase our parts to go ahead and do that. And we are happy to sell it to them.
I think it's really coming together and there is you know, what I believe is a permanent market shift in how ICO and WNCore parts are viewed in the marketplace.
Thank you for this time. Thanks. Our next question comes from Tony Bancroft with Gabelli Funds. Please go ahead.
All right, good morning, gents. Thanks for taking my question. Well done on the quarter. Very nice. Just maybe could you just frame?
Could you frame the maybe what else is out there in the PA market who else participates there besides the wind cores? It sounds like they're one of the smaller relative to you, but the larger ones out there. Is that where you want to focus going forward? Maybe just talk about that. Hi, Tony. This is Eric. I'd be happy to go ahead. The tattoos are made or don't convert as it would normally do in the PA market. I'm removable at life savings, Korea, like so many replacing companies. There's some of the well, there's a lot of things we could have done to make this information
And so I think that that will continue. Our area really for future acquisitions, I wouldn't say is in the PMA area. Our area for future acquisitions would be – I want to be careful not to – we welcome our competitors to this call, but we don't want to exactly –
tell them what we're going to be going out after. But we think that there are a lot of adjacent white spaces in which HICO does not participate, many, many. And, you know, HICO is still, even though we've done quite nicely, we're still a very small company and there's so much more to do out there. So I think we're going to grow, we're going to focus in areas that are additive.
Thanks, great job.
Thank you.
Thank you.
Our next question comes from Holland Ducharme with Sterling Capital. Please go ahead. Hi, good morning. Thanks for taking my questions. Quick housekeeping for Victor Carlos on ETG. Did you give the organic sales number for that segment for the quarter? I missed it. And then follow up, I'll just ask them all at the same time here. Follow up on just pulling the thread for the WENCOR deal for Eric and or Larry. I'll just ask them all at the same time.
I wanted to maybe pull that thread with using kind of two lenses, strategic and financial. So strategic, you talked about the marriage of both PMA franchises.
But can you talk about perhaps marriage of distribution and PMA and what I mean by that is it sure looks like WENCOR has put more muscle in recent periods into signing exclusive distribution agreements.
from the financial lens, in your previous responses, you talked about not doing anything different or special with integrating this culture. And then having the same DNA as you all, you know, we kind of view the real moat, the real asset of Heiko is your culture. And one differentiator, if you look at this asset now, when core
much stronger financial model. So can you just talk a little bit about that? That DNA looks and smells a little different in terms of opportunity and the capacity to reinvest. And so we'd just love to hear you tee off with some opportunities there. Thank you very much.
Let me make one comment. WNCOR was owned by Private Equity and their model is heavy leverage. HICO, when it closes, will own WNCOR and our model is low leverage. So that leverage situation will totally disappear. Eric wants to know. And Colin, these are really great questions and I'm glad you're heading to the next one.
You know, we really focus to make sure that we get, you know, maximum benefits to the customers, making sure that they know what's available for sale and that we get the product sold. But the other area of similarity is both Heiko and Winkler have been able to bring two distribution partners the ability to develop additional parts that they don't already offer in their catalog. And, you know, I'm glad you're making that up. I'm glad you're making that up.
and really help them and likewise, HICO can bring to the WNCOR distribution partner. So I think that this is going to increase competition in the distribution aftermarket and make the products that go into the airlines just being that much bigger so they're going to be able to save a lot more money on it.
So that was on the strategic side. You asked also about financial and the culture side. The businesses, the people are really, really similar. Again, as I said, focused on the details, focused on quality, making sure that we're out there with the customers, whatever they need, when they need it, we move heaven and earth for them and that is...
identical in both Heiko and WENCOR. And you're right that the people are the real asset. I mean, that's the most important part of the business by far. And WENCOR has been constrained as a result of being private equity owned. And they have been constrained. And I think frankly Heiko's lower leverage is going to free the WENCOR people.
to be able to go out and sell additional product, take additional inventory positions, hold additional inventory if that's what makes sense, broaden what they do, and again, that's going to help our customers because the more we sell them by definition, the more they make. I mean, we've got, by definition, competition on pretty much every single thing that we offer, and our competitors are these big, huge companies that push us for the Awesome Kinn III
do a phenomenal job and are really, really hard to compete with. So WENCOR in a sense has had one hand tied behind its back for the last number of years and now we're going to be able to go out and free that hand and I think it's going to work out really, really well for our customers.
And then I think you had some ETG, Carlos, or... I gotta follow that. All right, so you asked about the ETG. For the quarter, it was down 3% organically, most of that driven by defense. The other slips within the ETG organically were all up.
They were either flat compared to the prior quarter or all up, so that's the quarter. I think for the year similar, it was somewhere around year to date, around 2% down for the segment on organic growth.
Thank you. You're welcome. As a reminder, it's star one to ask a question. We'll take our next question from Noah Popenik with Goldman Sachs. Please go ahead. Hey, good morning everybody. Good morning, Noah. Can you frame?
your market share now in PMA and then where Wencorse sits.
chair now in PMA and then where WENCOR sits in that respect.
and it sounds like you do not foresee any issue in terms of closing with that combined size in PMA. Is that because the combined PMA there would still be smallest percentage of total PMA or because it would still be small as a percentage of total aerospace broad aftermarket? Yes, we don't know specific shares because it's impossible to get that information.
into which we can grow is very, very considerable. So that's why we're very optimistic for the future and why we think that there's really a lot of opportunity here.
Were you able to, in the diligence process, look into whether or not market share and just PMA would be a factor?
No, I mean, look, we study everything, but the, you know, as I've always said and I've been asked on these calls for 20 years about, you know, what are the factors in the marketplace that affect us the most, and it's always been the OE. It's always been. I mean, the.
OEMs, they have the home field advantage, they're selling the original product, they're in there, they got point of sale ability, when they sell the asset, they're able to tie up the maintenance long term. They offer a full product set. That's always been our competition. So, if you had to pin me down and get...
It's 2%. We're never going to be, you know, we're never going to have the sales of some of these very large companies. But I think we can continue to grow our product line and be able to, you know, offer more product at very good prices to our customers and save them a lot of money. I mean, the airlines are saving a fortune as a result.
of our products and if they're able to do that, we're at 2%, I think they'll be able to save even more as we move forward here. No, as you know, the OE generally has a monopoly position in replacement parts. He starts off with offering the only available parts if they want to replace parts, they have to go to the OE. Heiko has a tiny share because of its PMA.
But PMA has succeeded because of its price benefit to the airlines. So we offer a much greater value to the airlines and that's where our competitive advantage exists. So you know what the marketplace looks like, but we are very small compared to what the market is. And we only, essentially we said, we only compete with ourselves, so we try to grow.
The $9 million was a liability on our balance sheet up through the middle of Q2, and then we reversed it when we renegotiated the transaction, and it went through EBIT in the segment. So there was about 2.3% worth of benefit to the OI margin related to this matter.
So Carlos, I guess, you know, that's a pretty sporty margin if I adjust that. Yeah, should I work from there going forward, or does that have some other favorable timing that?
doesn't repeat in the near term or how should I think about the next steps there? So, you know, look, I'm always conservative when we talk about margins because really who knows, right? But I would say what I've told people pretty consistently is that we're in an extraordinary time right now where the business is growing and growing.
We have product in our sales, as Eric pointed out, what was it, eight quarters of 20% or higher growth? So when you're in an environment like that, you get tremendous leverage on your fixed costs, you get favorable product mix, et cetera. I am cautiously optimistic that the margins will remain high. Today I'm more optimistic they would be higher than I was yesterday.
What's that number? If I'm modeling, I'm thinking 22 to 23 might be the norm for this segment, but I can't tell you that with great specificity because we need the business to calm down, if you would.
the industry calm down, take a pause, etc. And once we see what the footprint looks like, it'll be an easier question to answer. But right now all businesses within the flight support group are firing on all cylinders. So this is what you get in a period like this and we'll see where it shakes out once the industry tames down a little bit. Interesting. Okay.
And then what was the organic growth or decline in just defense within ETG revenue? So it was double digits. It was in the low teens.
And that's been a little better than it had been in prior quarters. And I think that Victor pointed out, I think the trend is that we're starting to see a little bit of life in the defense segment. Hopefully, for the ETG, hopefully that that plays itself out towards the back half of the year. Our defense was down double digits in the quarter? Yes, in the ETG. A good internal angle, Not SWING.
It was up quite nicely in the FSG, by the way, but it was down in the ATG. Defense electronics in particular has been soft for about the last four quarters. And it sounds like you expect that to maybe be a little better in the back half, but probably still down year over year. Is that what you're looking for? The
That's what we're hoping for, yeah. If you look at the backlog and the timing of deliveries, as Victor talked about earlier, that's what we think is going to play out.
Okay, all right, thanks a lot guys, I appreciate it. You bet. We'll take our next question from Louis Raffato with Wolf Research. Please go ahead.
All right, thanks a lot guys, I appreciate it. You bet. We'll take our next question from Louis Raffato with Wolf Research. Please go ahead. Hey, good morning guys.
Good morning, Louis. Eric, you've provided some really good thoughts on the FSC business and WENCORE. I guess as we think about product development, you kind of mentioned you guys did some parts, WENCORE did other parts, but you guys could maybe leverage each other. How do you think about PICO wanting to do a part that maybe WENCORE would have done in the past? How do you manage that going forward?
In general, I would say that in the past, if WENCOR already had a part, HICA would not develop the part. So they really sort of play, if you will, very much in two sandboxes. So we think that we're really going to be able to get best debris here whereby...
each business can focus on what it does exceptionally well. And also there's a lot of engineering and technical tools that each company uses, frankly, that can improve the process of the other company as well. And I think all of it is put together is just going to.
benefit the customer with a broader product set and going into areas where we haven't gone into in the past. I'm reluctant, as you can imagine, Louis, to get into specificity because we don't want to tip people off as to where we're going. We think that there's a lot of stuff to be developed where no alternative exists now and we're going to be able to go tackle that stuff. All right, great. Thank you. I guess, Victor, one for you. In the press release, I want
Larry mentioned, to be clear, that's not pro forma. That's just kind of adding the $1.9 billion. I guess technically if you kind of give yourself credit for that EBITDA, I think it should be.
you know, lower probably under two and a half times. Is that correct? You know, we'll see. I mean, I think the net leverage in our model should be around 2.8. We'll see how much is outstanding on our line when we When we get this thing, it'll all be dependent on how much debt we pay down between now and closing. So.
But that's what our best forecast is right now. Sorry, but is that including any EBITDA from WENCORE or is that just sort of the HICO EBITDA and then the WENCORE bet? It would be the pro forma earnings for both companies.
Okay, great. Thank you very much. You're welcome. Thanks, Lewis.
We'll take our next question from Gautam Kanna with TD Cohen. Please go ahead. Hi, good morning, guys. Hi, good morning, guys.
We'll take our next question from Gautam Kanna with TD Cohen. Please go ahead. Hi, good morning guys. Good morning. Good morning.
Hey, I wanted to ask a couple questions. First, on the Wencore multiple you guys are paying for it, maybe just a little bit of background on the sale process. Like,
It seems like a fairly low multiple all things considering. Was it an auction? If you could just describe the background to how this acquisition came about.
First of all, it's a good question. We have known about WENCORP for many years. We were aware of it in previous times. We try to buy it at much lower prices. There was an auction. We were competing with some, what we consider,...
pretty well financed private equity groups. We don't feel that we paid a low price. We feel that we, actually I feel that I paid a high price and much higher than we had really wanted to pay. So the auction pushed us up. so we had to I ring
and we paid what I consider, and we consider a market price. Yes, so I mean look, obviously we always try to, you know, do right by HICO shareholders, so we want to, you know, pay a most reasonable price possible. It was very competitive.
you know, there was a lot of interest in the company. And, you know, we think that it was a fair price for this business. I mean, it's a large business, it's a large asset, it's much bigger than anything we bought in terms of earnings or people, revenue. So, I think overall it's…
it's a fair price for, it's a very fair price for the business. And we're really excited going forward. There's, you know, as we said, great opportunities for our customers. So overall, we think it's going to work out very well.
And perhaps could you just frame, you know, on paper, you know, looks very accretive, but then there's amortization and other deal-related costs. What is your expectation for earnings accretion in 24 and then perhaps in 25, just to help frame it? Well, I'll tell you what. I'd be happy to answer that question for you when we close. I'm going to stop here.
At the moment, we've signed the deal, but we haven't closed it, so I'd rather not get into forecasting that stuff until we've actually closed on the deal. Fair enough. Curious, Eric, if you could talk about mix within the quarter, specialized products versus the other two subsegments at FSG.
If that helps kind of the margins in the quarter Yeah, they Look all of the businesses had very similar Organic growth between you know parts and distribution specialty products And the repair so I mean they were all in sort of similar areas
Some parts of the business have higher margins than other parts of the business, but overall we were really pleased with the development.
We think that specialty products, there's still plenty of tailwind to cover because the OE cycle has not fully recovered. And we think that we are frankly best of breed in what we do over in specialty products area. And I think that there is a lot of opportunity, a lot of opportunity.
for us here to continue to grow and do well as the business, you know, as the industry recovers. And also when you specifically talk about specialty products, WENCOR doesn't have any manufacturing capability or relatively minimal and this is one of the other very complementary features of the deal because...
We've got some really outstanding, truly truly best in class manufacturing capabilities within our specialty products group. So while WNCORE will continue to be loyal to its existing suppliers, as we develop additional product going forward, I think that there's going to be a very, very good capability for WNCORE to use some of the HICO specialty products.
businesses as manufacturers and also we'll be able to create some redundancy so we don't just have, you know, single sources for some of these products. We're really good at this.
machining, sheet metal fabrication, and composites, various stuff that we do. And I think that that's going to provide opportunities for WENCOR to grow their product set to get into areas where perhaps traditionally they haven't gotten into because they didn't have a supplier to be able to make something which is somewhat similar to what they've done but different.
So I think specialty products is going to be a great asset for the combined company going forward. And just one last question. I was wondering if you could comment on whether there are any maybe regions that are still lagging with respect to demand.
that still have a big catch-up opportunity if there's anything you can say by customer set or region or some other way.
Yeah, we look at the sales and I mean, obviously in Asia, things have not fully recovered. And likewise in South America. I think that there continues to be opportunity, if you will, recovery coming out of COVID.
you know, frankly, in our other markets, we're way ahead of where we used to be, where we were pre-COVID. And we're doing extraordinarily well, and I think, again, that's the result of just being able to sell more stuff. So, you know, I think that there's added recovery opportunity.
Thanks guys. And I think everybody is aware of the wide body in Asia. I mean that's the last thing to come back and so there's very good opportunity there.
particular and I think everybody is aware of the wide body in Asia. I mean, that's, that's the last thing to come back. And so there's very good opportunity there. Appreciate it. Thanks.
Thank you. And there are no additional questions at this time. Thank you very much. I want to thank everybody who participated on this call, people who asked questions and those who were just listening. I want to remind you that if you do have questions, please call us.
give us a call, we'll try to respond to them. And unless you have any other comments or questions, I want to again thank the HICO team members. They're the guys who make it happen, and they do a phenomenal job. And we will, in another three months, we will have another third quarter earnings call. Thank you all, and this is the end of our...
Thank you. And this concludes today's call. Thank you for your participation. You may now disconnect. Am Ahungchen,
you