Q3 2023 Heico Corp Earnings Call
Welcome to the HEICO Corporation third quarter fiscal 2023 financial results call. My name is Tamara and I'll be your today as the operator.
Certain statements in this conference call will constitute forward looking statements, which are subject to risks uncertainties and contingencies.
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.
It goes liquidity and the amount and timing of cash generation.
Lower commercial air travel caused by health emergencies, and thereafter math.
Airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services.
Product specification costs and requirements, which could cause an increase to our costs to complete contracts.
Mental am 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.
The development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales.
Our ability to make acquisitions, including obtaining any applicable domestic and foreign governmental approvals and achieve operating synergies from acquired businesses customer.
Customer credit risk interest foreign currency exchange and income tax rates.
Gnomic 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, which could reduce our defense related revenue.
Parties listening to this call are encouraged to review all of Heico's filings with the Securities and Exchange Commission, including but not limited to filings on Form 10-K Form 10-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.
Thank you very much and good morning to everyone on the call. We thank you for joining us and we welcome you to this HEICO third quarter fiscal 'twenty three earnings announcement teleconference, I'm, Larry Mendelson, Chairman and CEO of HEICO Corporation, and I'm joined here. This morning.
By Eric Mendelson, Heico's co President and President of Heico's Flight support group, Victor Mendelson Heico's co President and President of Heico's Electronic technologies group and Carlos Macau, Our executive Vice President and CFO .
Before reviewing our operating results in detail I'd like to take a moment to thank all of heico's dedicated and talented team members, who are responsible for another strong quarter of excellent results.
They continue to produce the highest quality products and services for our customers, while maintaining our unique entrepreneurial corporate culture that has delivered excellent returns to shareholders.
I'd like to extend a warm welcome.
Proximate 1000, HEICO when core group team members, who recently joined the HEICO family, we look forward to our collective journey of exceeding customer expectations and winning in the marketplace.
I personally have never been more optimistic about the future for HEICO.
I'd like to now summarize the highlights of our third quarter fiscal record results consolidated third quarter fiscal 'twenty three net sales represent record results for HEICO driven principally by record net sales within flight.
Support group, mainly arising from continued strong demand for our commercial aerospace products and services.
The contributions from our fiscal 'twenty, three and 'twenty two acquisitions.
Consolidated operating income and net sales in the third quarter of fiscal 'twenty, three improved by 16, and 27% respectively as compared to the third quarter of fiscal 'twenty to these.
These results mainly reflect a 12% quarterly consolidated organic net sales growth and the impact from acquisitions.
I'd like to note an important item HEICO incurred acquisition cost from the wind core acquisition during the third quarter of fiscal 'twenty three.
This decreased our net income by approximately $3 5 million or <unk> <unk> per diluted share.
The way management looks at our operations, we were able to report 74 cents a share earnings in the third quarter.
After deducting this unusual <unk> <unk> per share so management considers our earnings in the third quarter as actually 77 cents.
Recognizing this our operating margins, especially before when core related nonrecurring deal expenses Thats, what I was talking about $3 $5 million or <unk>.
We remain strong and are consistent with the expectations.
We previously communicated in Investor calls and events. These margins are very healthy margins, even though our product mix. This year has meant lower overall margins than in prior years.
Consolidated net income attributable to HEICO increased 24% to $102 million or <unk> 74 cents per diluted share of course again after deducting <unk>.
Those special when core expenses in the third quarter of fiscal 2003, and that was up from 82 million $82 5 million or 60 cents per diluted share in the third quarter of fiscal 'twenty two.
In connection with the wind core acquisition, our net debt to EBITDA ratio was <unk> 75 times as of July 31, 2003, and that compared to point 25 times.
October 31 22.
Our net debt to EBITDA ratio increased in the first nine months of fiscal 'twenty three due to our successful offering of $600 million of 5.5% senior unsecured notes due August 128.
And $600 million of 5.35% senior unsecured notes due August $1 33.
We used the net proceeds from the sale of these notes to repay the outstanding borrowings under our revolving credit facility.
And to fund a portion of the wind core acquisition purchase price.
Cash flow provided by operating activities was very strong at $145 9 million in the third quarter of fiscal 'twenty, three and that compared to $149 $2 million in the third quarter of fiscal 'twenty.
True.
Cash flow provided by operating activities in the third quarter of fiscal 'twenty three reflect an increase in working capital principally driven by an increase in inventories to support increased consolidated backlog we.
Continue to forecast strong cash flow from operations for fiscal 'twenty three.
In June we were honored to announce that I will receive the prestige his 44th annual Howard Hughes Memorial Award from the Aero Club of Southern California on Wednesday September six.
The Howard Hughes Memorial Award honors exceptional leaders, who have advanced field.
Asian or aerospace technology.
Upon receipt of the award I will join 43 aviation and aerospace pioneers, including last year's honoree Harrison Ford.
As well as prior honorees.
General Chuck Yeager, Bob Hoover Neil Armstrong.
General Jimmy do little Elon, Musk, Jim level, Maryland, Houston, and Captain Sully Sullenberger and many others.
I am profoundly honored to receive such a prestigious award from such a prestigious organization, though I believe it really belongs to all of Heico's team members.
Because it results from all of their remarkable work and success over several decades, the Aero club of Southern California is recognized as one of the leading aviation and aerospace organizations in the world and the idea that they would be so this award upon me Lee.
Gives me deeply humbled and very grateful.
Last week, we announced that our <unk> plus and <unk> subsidiaries supplied mission critical electronic components in.
<unk> three spacecraft, which successfully executed a soft landing on the Moon South pole, we offer our congratulations to the Indian space Research organization, and we are honored to be a trusted supplier on this.
Remarkable and historic mission.
The level of sophisticated engineering quality and precision demonstrated by our subsidiaries on this project was outstanding and commendable.
I'd like to now discuss our recent acquisition activity.
Earlier this month, we completed the acquisition of wind core.
One 9 billion in cash and approximately $1 1 million shares of HEICO class a common stock within assigned value of $150 million in the merger agreement or a total of two point over $5 billion in the aggregate.
The transaction was heico's largest ever in terms of purchase price as well as revenue and income acquired.
We believe when core is a perfect as highly complementary fit with HEICO and we expect the combination will be transformative, providing a unique and growing portfolio of proprietary cost saving solutions for.
Our airline and OEM customers.
We continue to anticipate this highly synergistic acquisition.
To be accretive to our earnings within the year following closing.
In addition.
FICO anticipates that it will continue to achieve its often articulated growth objective in.
In the years subsequent to the closing.
Immediately followed following the closing.
We forecast.
Pro forma.
Net debt to EBITDA leverage ratio will be approximately three to one and we will return to historically low levels.
Within roughly one year to 18 months after acquisition, excluding the impact of future acquisition or possible capital deployment activities.
At this time I would like to now introduce Eric Mendelson co President of HEICO and President of Heico's flight support group and he will discuss the third quarter results of the flight support group Eric. Thank you very much first of all I would like to welcome our.
Our new 1000, when core team members into the new hydro and wind core family.
This combination has been something that we've dreamed of doing for literally the past 20 years, and we could not be more excited and more overjoyed that this finally has come to fruition.
Over the last number of weeks I've been visiting when core facilities around the United States and have a very busy schedule planned for the next couple of months as I go out and meet all of the one core team members I've been particularly impressed with the quality and the outstanding character.
<unk> ability and DNA of the <unk> team members you never know.
What is.
Going to happen down the road and you never know exactly what it's like to work with people who have been in the same space, but you havent gotten to know very well over many years and I can tell you that our hopes and dreams have been completely fulfill it as I've gotten to know the <unk> team.
Members in their DNA it is remarkably similar to heico's.
Style and DNA and it is something that I think is going to yield tremendous results for many many years to come so again welcome to all of our new team members from one quarter.
Going into the result, the flight support group's net sales increased 23% to a record $405 million in the third quarter of fiscal 'twenty three up from $333 million in the third quarter of fiscal 'twenty two.
The net sales increase in the third quarter of fiscal 2003 reflects robust, 19% organic growth as well as the impact from our profitable fiscal 'twenty two acquisition.
The organic growth mainly reflects increased demand for the majority of our commercial aerospace products and services, resulting from continued global commercial air travel growth as compared to the third quarter of fiscal 2002.
The flight support group has now achieved 12 consecutive quarters of growth in net sales and these numbers don't yet include the positive impact we expect from the <unk> acquisition, which will further transform our business as the world's leading independent aftermarket supplier.
The flight support group's operating income increased 26% to $89 2 million in the third quarter of fiscal 2003 up from 70.
<unk> 8 million in the third quarter of fiscal 2000 to.
The operating income increase in the third quarter of fiscal 'twenty three principally reflects the previously mentioned net sales growth and an improved gross profit margin, partially offset by an increase in the previously mentioned acquisition costs related to the <unk> acquisition.
The improved gross profit margin in the third quarter of fiscal 'twenty, three principally reflects higher net sales and a favorable product mix across all of our product lines.
The flight support group's operating margin improved to 22.0% in the third quarter of fiscal 'twenty three.
Up from 21, 4% in the third quarter of fiscal <unk> to the.
The operating margin increase in the third quarter of fiscal 'twenty three principally reflects the previously mentioned improved gross profit margin, partially offset by the previously mentioned acquisition costs, which reduced our operating margin by approximately 81 basis points.
Our second quarter of fiscal two three margin of 25, 5% included a onetime benefit of two 3%, yielding a 23, 2% net operating margin on a continuing basis, our third quarter of fiscal 'twenty three.
Margin was 22, 8% before the unique costs related to the <unk> acquisition.
We're very proud of these excellent operating margins, which have increased approximately 300 basis points from our then record 2019 and increased 400 basis points from our record 2018.
Now I would like to introduce Victor Mendelson co president of HEICO and President of Heico's Electronic technologies group to discuss the third quarter results of the electronic technologies group. Thank you Eric.
The electronic technologies group's net sales increased 33% to a record $325 9 million in the third quarter of fiscal 'twenty three up from $244 2 million in the third quarter of fiscal 'twenty to the net sales increase principally reflects the impact from our <unk>.
Fiscal 'twenty, three and 'twenty, two acquisitions as well as increased commercial aviation and other electronics products net sales, partially offset by lower year over year defense products net sales we.
We were pleased to see 10% sequential growth over the second quarter of fiscal 'twenty, three and defense product net sales and we're equally pleased that quarterly organic commercial aerospace and other electronic products net sales growth contributed two 2% overall organic net sales growth in the third quarter fiscal.
23.
The electronic technologies group's operating income.
Increased 9% to $74 2 million in the third quarter fiscal 'twenty three up from $68 million in the third quarter of fiscal 'twenty two the increase in operating income principally reflects the previously mentioned higher net sales volume.
Partially offset by a lower gross profit margin and higher costs from our January 23 acquisition, the lower gross profit margin in the third quarter of fiscal 'twenty three principally reflects decreased defense products net sales, partially offset by increased commercial aviation and other electronics.
<unk>.
Net sales.
In line with our expectations the electronic technologies group's operating income was 22, 8% in the third quarter fiscal 'twenty three as compared to 27, 9% in the third quarter fiscal 'twenty two.
This margin is after roughly 500 basis points of amortization.
So the EBITDA margin from what our business is sell was really close to around 28%, which we consider to be excellent and is consistent with the margin range that I've talked about on other earnings calls and in other venues that we should expect for this business before taking account.
To into future acquisitions.
Lower operating margin principally reflects the previously mentioned lower gross profit margin and increased SG&A expenses as a percentage of net sales.
Turn the call back over to Larry levels.
Thank you Victor.
As for the outlook of HEICO in our opinion.
As we look ahead to the remainder of fiscal 'twenty. Three we continue to anticipate net sales growth in both the MSG and atg divisions, principally driven by demand for the majority of our products. Additionally continued inflationary pressures.
<unk>.
May lead to higher material and labor cost. In addition, we've begun sharing the best practices and getting to know the wind core businesses.
Share a very similar entrepreneurial culture and customer focus as heico's businesses. We do believe the <unk> acquisition provides heiko with additional scale to continue broadening our aerospace products and services while main.
Painting, our special culture of treating customers with respect and integrity.
Our operating margins, especially before nonrecurring acquisition expenses.
Made very healthy and reflect our strong business operations.
We believe our ongoing conservative policies and strong cash flows.
Enable us to continuously invest in new research and development and take advantage of strategic acquisition opportunities.
Which collectively position HEICO for future market gains.
In closing I would like to again, thank our incredible team members for their continued support and commitment to HEICO I humbly welcome all of the wind core team members to our family and look forward to winning new business together as one team.
Thanks to all the HEICO team members for everything you do today to make HEICO and excellent company.
I'd now like to.
Open the floor for questions. Thank you.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question I will start with our first question from Peter Arment with Baird. Please go ahead.
Yes. Thanks.
Larry Eric Victor and Carlos.
Congratulations on the deal.
Great. Thank you.
Eric I just wanted to start there just.
When you closed the.
Cilia deal there was that obviously put.
Some pressure on.
The reported operating margins of the Atg group and I, just maybe you could just level set us how we're thinking about the impact will be.
Because of <unk> is probably a little bit of a lower margin profile. How you think about what that kind of the impact will be and then what are some of the opportunities to think about just from a synergy perspective.
Let me just.
Clarify one thing the margins on when core and the margins on excel.
Are really different and so Eric and Victor can speak to that the margins on when core.
Or pretty much in line.
With the margins of our flight support group, but.
The margins on <unk> are lower but Eric.
Victor can speak more detail to that yes.
Hi, This is Eric we're obviously very excited about the <unk> acquisition for some of the reasons that I mentioned earlier on the call.
We think that it's a tremendous broadening of our product line, it's sort of amazing that you could have two companies sort of focused in different spaces and now with the opportunity to bring them together, we're able to offer significantly more to our customers and I can tell you that major customers had been.
In extremely supportive of this business combination.
We have really been looking forward to the benefits that that it's going to bring and I think thats. One of the reasons why we were able to secure antitrust approval, so quickly and because frankly, our customers are really pushing us very excited about this.
So with regard to the margins I would say that the way core EBIT margins are very similar to the flight support margins Carlos can get into some of the specifics that are basically within the same area, obviously, there's going to be some intangible and.
Organization as a result of those as a result of the acquisition, but as far as the EBITDA earnings of the business, it's going to be in general in the same area.
As the HEICO businesses.
And we do anticipate tremendous synergies going forward right now we're all in a learning phase we want to be very careful and make sure that we are.
Harness all of the benefits that this combination brings.
Unlike many companies, we don't sort of set out with an operating margin target. We just simply want each of the businesses to perform to the best of its ability to generate the margins that are correct for its long term success. So if you look at device support.
Group I'm really happy that our margins people back in 2018 and thought we were sort of that top margins and now we're up 400 basis points from there in 2019. They thought we were a top margins were up 300 basis points, we did not set a target.
A specific target of a number where we want it to be instead.
We just make the decisions that makes sense for each operating businesses in the margins end up where they are so I'm very encouraged that as a result of adding the <unk> core product line that we're going to continue on this journey to.
To improve margins, but in general there the operate the EBIT margins are in the same ZIP code as the.
The flight support margins.
That.
So to answer your question yes.
Yes.
Yep very helpful. Maybe if Carlos.
Just clarify maybe on the purchase accounting adjustments.
So.
We've closed on one core August four so it is not in our third quarter numbers. Although we did have acquisition expenses incurred through the end of the 731 in there.
We paid a little over $2 billion for land core I would expect the.
I would expect the expenses related to deal with south of 1% of the purchase price. We don't have all of those bills and yet if you would but there will be some deal costs that flow in in Q4 that are not capitalized and will be expense so more to come on that as we get those bills.
The purchase accounting side of it.
Don't expect.
I don't expect huge inventory write ups like we normally have with some deals given the nature of their products. They have a lot of they have repair they are parts and they have distribution and so some of those businesses, particularly in the parts and distribution they don't lend themselves to.
Onto our write ups that we've experienced in other businesses. So we'll see how that plays out.
And there'll be more to come on that Peter in the fourth quarter.
Okay. That's helpful and just Victor just to clarify could you just quantify if you can.
Impacting the supply chain.
In the third quarter. Thanks.
Yes, Peter Hi. This is Victor good question, it's now running below or ran below rather $20 million, probably a few million dollars below 20.
Somewhere in that range and so definitely moving in the right direction Big improvement, there and from talking with our companies and surveying them.
The vast majority feel it's moving in the right direction.
At least.
<unk>, so we're pretty happy with that.
I appreciate all the color thanks, guys. Thank.
Thank you.
We'll take our next question from Dubicki with Alembic Global Please go ahead.
Hey, good morning, everyone.
Maybe I'll just start with Eric Eric just.
You kind of broadly we're kind of at the end of the summer travel season here for the most part right.
Wondering as you look at the potential for kind of are the reality is maybe of economic weakness in Europe , and China, We will see.
See how long that lasts or not but.
You talked to so many of the airlines have I was wondering if you could give us your perspective on.
Do you think these guys are going to get more cautious on their aftermarket spend kind of in the forward 12 months and in this environment.
And maybe you could give a sense of with one core is the opportunity for share gain maybe more than enough to offset any potential.
No.
Greater caution by the airlines and their spend.
Yes, so Pete.
Let me start out by saying the market is incredibly strong.
And when we at the moment, we don't see any slowdown in sight.
Having said that we also understand that all recoveries are tend to end with a little bit of an overshoot and then things trend down just a little bit and then they resume their upward climb I think one of the interesting things that may be going on now is that there is a lot.
To order equipment out there that really needs a lot of maintenance and there has been a shortage of parts. The airlines still don't have as much as many parts as they need.
And so we really see a lot of support.
The market, so I don't see a slowdown in the cards right now.
As far as China, and Asia goes those were the last to recover so I don't think that we've even seen the full recovery there yet. So I think things are very strong in general I mean, we're in this for the long haul and whenever a little slowdown.
<unk>.
To your point I think that theres going to be a lot of synergy opportunities between <unk> and being able to broaden our product lines and I think we will continue to gain share and we will move through that period.
Very well, so I am not not concerned about it at all.
Okay. That's very helpful. I appreciate that last one for me is just.
I know you guys are not aggressive with pricing.
But curious.
Should we expect the continued approach in FSD just to be make sure.
You've kind of claw back inflation. So you get some modest net pricing power post inflation is that kind of the general way to think about things going forward.
Yes, I think Thats fair I mean, our businesses.
I always want to gain market share we always believe.
In an expansionary opportunity, we don't work out of scarcity, and we think that tomorrow always has greater opportunity than today.
Having said that we've got to make sure that we recapture our costs and we maintain and grow our margins a bit. So I think due to the efficiency that we've got in the businesses. The operating leverage I would anticipate that we're going to continue to move in a positive direction.
While continuing to generate huge value for our customers I mean, we save our customers a lot of money, we treat them very very well they know that and I think thats why frankly, they were so supportive of the <unk> combination.
These two companies coming together is something which is really going to be very helpful to our customers.
Great. Thanks, so much for the color I appreciate it. Thank you. Thank you.
Our next question comes from Larry Solow with CJS Securities. Please go ahead.
Great. Good morning, guys and I'll Echo my congrats on that.
Good quarter, and obviously, that's the largest acquisition in your history.
Sticking with the one core themes for a couple of questions. Eric I know you don't give specifics, but it feels like on synergies and accretion immediately.
Targets, but it feels like this acquisition.
More than many larger obviously, but it just feels like one plus one equals three.
And in many places more than.
In your usual acquisition, just kind of trying to want to talk through some of the complementary things and where you see somebody come about.
Combination really benefiting HEICO otherwise.
Okay.
Thanks.
I agree with you I think this one is a uniquely synergistic acquisition.
Each company sort of focused in different areas and I think there is a tremendous amount that we can learn by sharing those best practices and going through what I call. The highest common denominator. If we're so fortunate as to have operating efficiencies.
That would really be great news, one because our costs will go down but to the combined HEICO or <unk> have over a 100 unfilled.
Job openings and we've learned that our best and most productive team members typically come from inside from inside of the businesses. They understand the culture, and we think that theres going to be great opportunities for the HEICO and the <unk> team members to take on expanded roles going.
Forward.
So I think when you put all of that together hopefully the need.
We won't have to go out and hire as many people from the outside instead, we can promote from within.
I think we're really in a very.
A very unique opportunity here I want to be careful and not get too far over our skis before.
Having the opportunity.
<unk> to get into the details because it's all detailed driven.
We don't come out with a model and say, okay. We expect from the corporate office to cut costs by accident raise price by Y and do that.
Some companies do that it's extremely effective for them. What we have found in our very competitive businesses is the best thing is just to make the right long term operating decisions and if you do that you plant the seeds and you reap the benefits for years to come and so.
<unk> been around HEICO for a long time and I don't think any of US back in 2018, 2019 thought that we would be increasing our operating margins by 300 basis points from 19 400 basis points from 18.
Just through our standard operating procedure. So I think that we've got that opportunity one quarter is extraordinarily well run.
They've got a.
DNA, so similar to HEICO theyre very focused on the customer very focused on efficiency getting it done jumping through hoops for the customers. So there couldn't be a better marriage.
So.
I couldnt be more optimistic everything that we had hoped for in the acquisition is proving true.
So we're I think we're well on our way.
Okay. I appreciate all that color and then maybe switching gears real fast Victor just.
You guys mentioned, obviously defense has been a little bit of a laggard year to date more on the delivery side and then on the bookings could you maybe speak to.
Some of your other markets.
Well as defense bookings on a go forward basis kind of where we stand there and just on the margin segment margin I know obviously excellently.
Impacting margins somewhat but.
Fence comes back can we expect maybe a little bit of a rebound off of kind of these 22, 23% number that we've seen the last few quarters.
So a couple of things I mean, the defense businesses that were seeing orders increase in those particular businesses tend to be our higher margin businesses. So what I would expect that this.
Kind of a 28% EBIT a margin.
Probably at some point over the next six months starts to take higher though I want to see that in.
We're doing budgets now and we're going through our budget cycle. So I wanted to really see that for sure, but that's kind of how it feels now commercial aviation I would expect to remain strong.
A variety of space businesses for US I think will remain strong from what I see orders being healthy.
I think the other electronics the other high end electronics as I said I think in the last two calls.
I would expect to be softer.
And.
They're more tied to let's say the general economy in their own right.
<unk> cycles than the other businesses.
And I think that it'll take a little bit of time to cycle cycle through.
More than six months.
Got it great. Thanks, Scott Congrats again.
Thank you Sir.
Thank you. Our next question from Michael <unk> with <unk> Securities. Please go ahead.
Hey, good morning, guys. Congrats on getting the deal done good results as always.
Maybe.
Eric or Carlos you referenced.
Historical SSG margins here, a couple of times and has it exceeded kind of those if we were to say they'd be assumed prior peaks.
I guess youre, not going to give specifics, but with when core with the potential synergies and.
I guess as you look forward do you think you have.
Even further on both revenue and cost synergies.
Good morning, Michael.
Thank you for your comments this is Eric.
First of all.
The short answer is yes.
I want to be careful as to not get out and set expectations very high because we are in right now the process.
Heiko understanding how the when core businesses operate one quarter understanding how the HEICO businesses operate so it's very very important we did not set out when we increased margins over the last five years by 400 basis points, we didn't do that by if you will setting of <unk>.
And then going towards that goal instead, what we did was made sure that we had really capable Hungary talented hardworking honest people running each of their businesses and doing the best that they could possibly do.
And that's exactly how <unk> operates that's how ichor continues to operate so I personally am.
Hopeful that we continue to increase these margins as time goes on but I want to be careful as to not get ahead of ourselves and start predicting what those numbers are going to be I'd rather not.
Not a matter of under promising and over delivering its a matter of truly not knowing.
We just make the right decisions and we do the right things and that lays the foundation for a terrific.
Uh huh.
Terrific groundswell of opportunity.
So I think it's important to go ahead and do that and continue doing that but yes. I think the margins are going to increase now we do have of course, the amortization that's coming from the <unk> acquisition and Carlos can get into that it's really important that everybody model that but of course thats a non cash charge. It is nothing.
To do with the operating income in the business.
Nonsensical charge.
Which actually we get a tax benefit from so.
But yes, I think our margins are going to continue to do well Carlos I don't know if you want to get into some of the specifics there.
Just say, Michael as I've said over the past several quarters.
The SSG continues to grow at a.
A fast pace.
All verticals within the flight support group are growing at a fast pace and we still haven't settled into what I'll call, our footprint, where the mix sort of normalizes.
So until that happens, we're going to have movement in the margin plus or minus.
This quarter was 22% I think I've been pretty clear that I think that on a long term basis, we might settle in around that point and then grow gradually from there.
I don't know if we're at that point, yet because I do think there's some more growth to come that may be.
Then they have the vertical is growing at different rates that messes with mix, a little bit, but but I do think if you look at the last decade. The SSG. The one thing thats been pretty consistent is the EBIT margin gains just about every year and it's not large gains. It's just steps right deleverage on our fixed cost with new products and things like that I expect that pattern to continue.
Once we settle into our what I'll call normal footprint our mix in the segment.
Okay, perfect and just one more on housekeeping just to kind of maybe level set us for modeling I mean looking at the.
Fiscal fourth quarter two months contribution from when core I mean was this sort of if you can maybe give us a sense is it been sort of a J.
Just under 200 million quarterly revenue run rate or what can we expect expect from the <unk> contribution in this fourth quarter.
So I think Thats a good question.
Well.
I'll give you this guidance.
We expected when we put when we did the deal that <unk> would do.
Pro forma sales around $724 million in 2003.
And we still expect that so I mean, I guess, you could divide that number by four and come up with a quarterly run rate, but that's what we continue to expect.
The truth is they've done a little better.
Since we've acquired them, but I think for modeling purposes. If you take what we already published the $724 million divided by four that I'll give you a quarterly run rate for now and once we get through Q4, and we have our sea legs under us on the acquisition will give some better thoughts at that point.
Okay perfect fair enough, thanks, guys I'll jump back in the queue.
Thank you.
Our next question comes from Ken Herbert with RBC capital markets. Please go ahead.
Yeah.
Yes, hi, good morning, everybody.
You may begin.
Maybe Eric if I could if I could start with you with another question on on one core can you can you talk a little bit about how that business has grown organically over the last couple of years.
Coming out of the pandemic and how should we think about with the one core business.
The sort of the organic growth profile of that business over the next few years, maybe either relative to <unk>.
First G at large or relative to some of the specifics.
Clients within your business.
Hi, good morning, Ken.
Would be happy to answer that.
I would say that <unk> growth rate has been very similar to how it goes.
Very comparable they've done a great job in growing the PMA business the repair the distributions defense.
So it's been very very similar to heico's so.
And there are operating philosophies is similar to how it goes and Thats why I think that there is going to be immediate opportunities.
To start working together as a matter of fact, one of our businesses just send me an email on Friday I placed a $400000 order with one quarter on a bunch of stuff they didn't even know one quarter supplied.
Before we started introducing some of the various folks so I think theres going to be a lot of opportunity there.
But the growth rates I would say are really quite similar when quarter has been extraordinarily aggressive.
In its markets.
And it's sort of interesting that hydro <unk> didnt bump up against each other very much.
There's been relatively little overlap and it's been in different areas.
No.
I think it is sustainable.
Yeah, that's great and as you look at the core business and you look out over the next few years, obviously the distribution of the repair and the PMA lines within <unk> are there any particular parts of the business that you are maybe more bullish about or where you see some real unique opportunity to.
To take share how should we think about the various pieces of one quarter and the outlook over the next couple of years.
Yes, I think they are very well positioned in each of the businesses.
<unk>.
PMA is very strong and in areas complementary to HEICO.
A lot of products that HEICO is not in so I think that by.
Having a bigger.
By basket that we can offer to our customers, we're going to generate a lot of value. Likewise on the repair side. When core operates in a very decentralized autonomous entrepreneurial fashion and they are focused in areas where.
Sure Heiko.
By and large so I think that that's going to be very strong.
Distribution has been phenomenal they've captured a lot of lines in <unk>.
Have a great relationship with their distribution partners.
They've got a very robust pipeline. So I think that's going to be good and then in the defense market. They are relatively new to that and they found some.
Defense areas, where we haven't been planned so it's really adding to the adding to the product line. So I don't mean to not answer the question, but I would say.
Very optimistic on all of all four of linked quarters verticals and then really high goes this vertical which I'm very also optimistic on is our specialty products because.
One quarter doesn't manufacture things themselves.
And they buy a lot of stuff and heico's specialty products group manufactured I mean, that's our specialty.
Two.
Manufacturer. These basically source approved products and I think that we're going to be able to make a lot of stuff for wind core not necessarily that theyre going to resource existing suppliers. They are very loyal to their existing suppliers, but I think on a go forward basis.
Time, when capacity is very tight they're already asking our businesses too.
Make product for them. So I think our specialty products business is also going to be a beneficiary, but thats going to be over like a five year period, because it takes a while too.
To get all of that manufacturing.
<unk> product digested, but I think it's going to be.
All across.
The flight support group's five sort of operating verticals.
Great. Thanks, Sharon Congrats on the deal and good luck with the integration.
Thank you very much Ken.
We will take our next question is from Sheila <unk>.
With Jefferies. Please go ahead.
Thank you good morning, guys.
I wanted to go back to the same line of questioning any of that.
Your question, maybe on one core.
They may touch upon the opportunity Eric you've been talking about that a lot of the revenue synergies.
What portion of their business is distribution.
Sure.
PMA parts versus third parties in that same thanks for HEICO.
How that kind of the delta.
Revenue per employee, which is almost double of HEICO.
Yes so.
As you're aware, so we disaggregate revenue into three areas.
Parts repair and specialty products.
So <unk> business is going to be included in the parts and the repair section four.
The flight support numbers. So my guess is that it's probably going to be roughly.
One third repair roughly two thirds parts and the parts includes both distribution, maybe a little bit more on the parts side.
The parts includes distribution.
As well as PMA so.
They're all growing very well.
There is tremendous.
<unk> opportunity between these businesses.
So I think.
I think theyre going to continue to do extraordinarily well and as you know there is a big interplay between those various areas because.
The repair business is obviously require parts in order to repair their products and those come in the form of distributed product as well as PMA product. So.
I think it's going to be very strong there.
But that sort of gives you an idea roughly let's just say 70, <unk> roughly 70% parts, 30% repair in that general area.
Okay.
Another one for you sorry, I'm just keeping it to you.
No. There's this thesis out there that after market is softening and decelerating for whatever reason.
How do you guys model the trajectory of FX.
On gaming.
Warranty aircraft or is it individual sales can you guys give us your thoughts on how you think.
We're all after market business is going to grow from here.
Well for us the aftermarket business is extremely strong.
Back in last December I thought that even though we werent seeing any softening that is softening would.
Be inevitable.
Would come and I was wrong.
Things remain extremely strong.
And I think that is a result of us capturing share.
More people wanting to do more things with us.
And I think.
Frankly, the future for US is very good we don't see a softening as of now.
And our.
Our backlog is tremendous.
Some of our backlogs in some of the businesses are two times the historical rate.
So things are really strong you've got an older fleet.
Which requires a lot of very expensive parts.
And a lot of these.
You can sell a lot of these components.
Components, and you've got to get them fixed and.
I think things are continuing to remain strong yet the day will come when.
We come off the top of the whole industry comes off the top a little bit and does a little bit of a dip, but I think frankly, the industry is very very well positioned and is going to go from strength to strength here.
Thank you.
Thanks Sheila.
And the next question will come from Josh Sullivan with Benchmark Company. Please go ahead.
Hey, good morning.
Alright.
Just the comments around using strong cash flow to invest in R&D as you integrate glencore and explore new value parts of peanuts PMA opportunities should we expect a development cycle from the time, you increase kind of that investment in PMA development to the time at the FAA approvals.
Any R&D cycle to think about as you integrate here.
I don't think so I think that.
The cycles are pretty short at both HEICO Winkler I think actually that's probably one of the things that.
We may be a may be able to help linked quarter shorten some of the cycles.
But I would say in general the cycles are very similar I don't think theres going to be a major change in new product development spending were just going to continue doing the things that we've always done.
I think it's going to be.
Very very consistent but by.
Sort of putting together these two baskets of products.
It is just becoming a tremendous value to our customers. This is something that they really need.
They have expressed a lot of frustration when they can't get a part or they can't get a component there have been a lot of shortages, both HEICO and win court notwithstanding our big backlogs I think have done a really good job with on time delivery relative to the industry.
And that's why I think our customers want to reward us with more.
More business.
Got it got it.
And then just the comments around you call up the majority of products driving growth, but curious within SSG what types of products are in that minority, which didn't drive growth or any common themes there.
Yes, there have been a couple of.
Businesses I would say more in the specialty products area, where basically commercial OEM products youre familiar with the sort of the vagaries of the commercial build market.
Certain things are hot certain things or not.
So I would say there has been a little bit of a slowdown.
In some of that.
I would say that's probably the area that has been if you will the slowest, but the backlogs are very strong and I can tell you over on the defense side of our specialty products business.
Backlogs are enormous and we're we're very optimistic for future sales. So I think I think we're very very well positioned I mean frankly if.
We have the capacity right now we could.
Our specialty products and a number of businesses could ship significantly more than they are I mean, we are just so.
A busy and yet we continue to add <unk>.
But just keeping up with the demand is really difficult and these tend to be a little bit longer cycle, but.
I think.
Both <unk> and the HEICO businesses, if they could they would really load significantly more business into our specialty products, but.
We just don't have the capacity at the moment.
Great. Thank you.
Thank you.
As a reminder, its star one to ask a question we will take our next question from Jack <unk> with TD Cowen. Please go ahead.
Hey, guys. Good morning. This is Jack on for Gautam today.
Well anyway.
Good morning, good morning <unk>.
Eric just going back to <unk> here I think you talked about the margin profile EBITDA roughly similar to SSG.
And I know Larry you kind of mentioned about net leverage at three times and sort of quickly deleveraging.
Historical levels over time.
I kind of just wanted to dig on that a little bit more.
Because it seems pretty robust and if we're kind of looking at this correctly.
I mean, it does seem like quite a inflection in cash and EBITDA. So I'll just kind of wanted to dig on sort of the cash profile of one core maybe.
Maybe working capital dynamic things like that just any color. Thanks.
Yes, I think good there when quarters cash profile is very similar to heico's.
They.
Far as receivables and inventory they've a very similar policy.
In terms of cash generation I think it's going to be very very similar to HEICO of course, we are going to have the as I mentioned in an earlier question, we will have the intangible amortization.
To contend with but that's a noncash charge.
It doesn't impact our cash and as I mentioned, we even get a tax benefit for a chunk of it so.
It helps cash.
But.
I would say very very similar.
Been very fortunate to acquire.
Almost like our brother from another mother.
The businesses are just very very similar.
Okay. That's helpful I'll leave it there thank you.
Thank you.
And our next question comes from Louis Raffetto with Wolfe Research. Please go ahead.
Hey, good morning.
Good morning, Good morning, good morning Louis.
Maybe just to follow up on Jack's question. There when you guys talked about the historical leverage within 12 to 18 months I guess what are we looking at like looking at the 2019 to 2022, where you were sort of zero to a half turn levered are you talking sort of further back where you were a one to two turns of leverage just trying to get a sense.
Sure.
Louis This is Carlos.
We talked about historical levels, we're talking something below two that's how we think about it.
Okay, great. Thank you and then maybe Carlos just.
The corporate expense seemed to step up in the quarter was there anything else related to the dealer or anything else just to be mindful of.
No. There was there is a lot of there was some intersegment activity, which was maybe.
Apples to apples basis, might've been $1 million higher thats not unusual.
Timing there were some step ups in some costs.
<unk>.
And in particular IP in.
Professional services travel things like that there were some increases there, but I would say that proportionally with the growth in the business it didn't.
It didn't necessarily grow it out and our pace you know what I mean, it was pretty much consistent with the growth in the business.
Okay, that's great and then.
I guess, Larry maybe one for you just yet.
Additional M&A from here, obviously, you've done your two largest deals back to back now.
I guess, how do we think about <unk>.
Absorbing when core and sort of moving on with your historical strategy from here.
Yeah.
Well I think we might have to take a little bit of a risk.
We want to get as we mentioned to get that debt down below three and into the area of two times EBITDA.
However, I think there might be some bolt on acquisitions, we're looking at a number of transactions.
Drop our M&A strategy, just because of the two large acquisitions.
And.
We are looking at them and I think we will find ways to finance them.
At the same time, keeping the desire to get below two times EBITDA. So I think I think we can.
Walk and Chew gum at the same time I think we can do it.
And we will work that out we'll work the financial arrangements out.
As we are now we're ready it rated as a credit.
An investment credit rating on our bonds, we want to keep that.
We're very proud of that and.
In addition, it saves us interest cost.
And so.
So we will again pushed to get it down below two <unk>.
And two times prior to this wind core we have never been even at two times EBITDA. So I'll remind you that and we don't like leverage strong leverage so we're going to work towards that but I think we still will be able to make acquisitions and do both.
Yeah.
Great. Thank you Victor just a quick one for you I think obviously the defense growth was nice sequentially up 10% I think you said it was still down maybe year over year do you have that number I know last quarter. You said it was down 14, but just curious this quarter.
Hey, Louis this is Carlos I actually have that number handy.
Organically defense was down in the high single digits, which.
That coming off the last gosh 456 quarters, that's heading in the right direction Thats why it was important to us when we saw that sequential growth in defense.
Is that because we've been waiting for that that's something we've known it was going to come with just didn't know exactly when so thats one quarter doesn't make a trend, but we're optimistic not only given that swing.
But also some of the forecasts from our subs tend to support the fact that we may be seeing a turn here in our defense electronics business.
Does that agree with extensive right on the Mark right on the Mark.
I appreciate it.
Thank you.
Okay.
And there are no additional questions at this time.
Okay. This is Larry Mendelson.
We have no more questions.
If any of you do have questions you know that Eric Victor Carlos and I are available give us a call we will try to help you out.
And we thank you for participating in this call and we look forward to speaking to you in the fourth quarter earnings call, which will be some time.
Towards the middle or end.
Of December so thank you all and this is the end of the call.
Thank you and this concludes today's call. Thank you for your participation you may now disconnect.
Okay.
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Yes.
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