Q3 2024 Loar Holdings Inc Earnings Call
Speaker Change: Ladies and gentlemen, thank you for joining us for today's conference. Our conference call will begin shortly. Once again, thank you for joining us today and our conference will begin shortly. Thank you.
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Speaker Change: Greetings and welcome to the Lohr Holdings Corporated 3rd Quarter 2024 Earnings Presentation. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation.
Speaker Change: If anyone today should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce Ian McKillop, Director of Investor Relations.
Thank you, you may now begin.
Ian Mckillop: Thank you, Rob. Good morning and welcome to the Lohr Holdings 2024 3rd Quarter Earnings Conference Call.
Ian Mckillop: Presenting on the call this morning are LORS Chief Executive Officer and Executive Co-Chairman Dirkson Charles.
Ian Mckillop: Executive Co-Chairman Brett Milgrim, Treasurer and Chief Financial Officer Glenn D'Alessandro, as well as myself, Ian McKillop, the Director of Investor Relations.
Ian Mckillop: Please visit our website at loregroup.com to obtain a supplemental slide deck and call replay information.
Speaker Change: Before we begin, we at Lohr would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements.
Speaker Change: To differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC, available through the Investor Relations section of our website or at sec.gov.
Speaker Change: We'd like to also advise you that during the course of the call, we will be referring to adjusted EBITDA, adjusted EBITDA margin, and adjusted earnings per share, each of which is a non-GAAP financial measure. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliations.
Speaker Change: To begin today, I will now turn the call over to Dirkson.
Speaker Change: Thanks, Ian. Good morning. Good morning, everyone. Our partners, analysts, and, you know, those of you who are on the call and hearing our story for the first time, I'm Dirkson Charles, founder, CEO, and co-chairman of LORC.
Speaker Change: So, look, I just want to remind everybody how we like to do these calls. We truly, truly, truly believe that your time is valuable, and as a result, we'll keep our remarks as brief as possible to allow the analysts the majority of the hour we've allocated to ask questions.
Speaker Change: to ensure that we focus on the things that matter to you. So let's start by reminding you who we are.
Speaker Change: Law is a family of companies with a very simple approach to creating shareholder value. First, we believe that by providing our business units an entrepreneurial and collaborative environment to advance their brands, we will generate above-market growth rates.
Speaker Change: Since our inception in 2012, through the end of calendar year 2023, we have grown sales and adjusted EBITDA at a compound annual growth rate of 38% and 46% respectively.
Speaker Change: We collaborate across business units by sharing best practices and ideas while assisting each other when it comes to execution.
We execute along four value streams.
Speaker Change: We identify pain points within the aerospace industry and look to solve those problems through organically launching new products
Speaker Change: which we believe over the long term will create one to three percentage points of top-line growth. We focus on optimizing the way we manufacture, go to market, and manage our companies to enhance productivity.
Speaker Change: and each year we'll identify initiatives that will allow us to continually improve our performance with a focus on one or two major initiatives that will improve margins.
Speaker Change: We also, each year, across our portfolio of companies, will achieve more price than inflation.
Speaker Change: Again, the sum total of all of these actions is margin improvement, as we'll walk you through in a moment here. Most importantly, we are committing to developing and improving the talent of all our employees.
Speaker Change: because our success is truly as a result of their dedication and commitment so best part of this to all my mates including our new brothers and sisters in Texas
A big thank you for your commitment and hard work.
I'll now turn the call over to Brett.
Brett Milgrim: Thanks Dirkson. This is a chart everybody's seen in the past. It really shows how our portfolio of companies that we've acquired and grown are constructed across end markets.
Brett Milgrim: across aftermarket versus OE split and of course the heavily weighted nature of it being proprietary products that we own.
Brett Milgrim: The key takeaway from this slide, I think, is that we want to have a very balanced portfolio. Be it around end market, be it around customers, be it around products, or again, even the aftermarket and OEMs.
Brett Milgrim: However, and you've heard me say this in the past, while we are relatively agnostic
Brett Milgrim: and want to keep a balance across all those different categories. One thing that we are not agnostic about, we are incredibly disciplined about is our approach to acquisitions.
Brett Milgrim: As you see in these six or seven different boxes right here, one thing I want to highlight as we talk about our applied avionics acquisition that we did recently is that it checks all these boxes.
Brett Milgrim: First and foremost, it's an aerospace and defense-focused business. We are not going to open the aperture, as others have said, in so much as our acquisition focus. We want to maintain products in niche categories where we have a very strong market position and there's very high barriers to entry.
Brett Milgrim: Those barriers to entry are created because we have proprietary content where we are one of just a very very few Number of people on the planet who can make a particular product
Brett Milgrim: We also want to have a balance between aftermarket and OEM, but every category that we're in and every product that we sell has to have some aftermarket exposure to it. And ultimately, we want to put...
Brett Milgrim: this portfolio of companies together and these capabilities together so that we can create cross-selling opportunities across the group.
Brett Milgrim: and maintain longstanding customer relationships where we can build strong relationships with customers, drive revenue, and have outsized growth relative to the market.
Brett Milgrim: Applied Avionics designs and manufactures Vivisun ruggedized mil-spec lighted push-button switches and indicators, as well as the Nexus line of Avionics interface solutions, which integrate system-to-system functions like ARINC 429 converters and solid-state relays directly into the switch, enabling expanded solution capabilities behind the cockpit panel.
Speaker Change: Applied is an excellent complement to our existing portfolio of more than 15,000 products, whether it's sensors, water purification systems, de-icing systems, or human interface devices, or one of the many other products
Speaker Change: We continue to believe that we have capabilities that are unique to serving our customers for Lohr. I will now pass the call over to Glenn. Thank you, Ian. Good morning, everyone.
Glenn D'Alessandro: Let me start by discussing sales by our end markets. This comparison will be on a pro forma basis as if each of our businesses were owned as the first day of the earliest period presented.
This market discussion includes the recent acquisition of applied avionics.
Glenn D'Alessandro: We had record sales during the third quarter of 2004. In total, our sales increased to $110 million, a 16% increase as compared to the prior year period. This increase was driven by strong performances in defense, commercial OEM, and commercial aftermarket.
Glenn D'Alessandro: Commercial aftermarket sales increased 19% in Q3 as compared to the prior year period and are up 16% sequentially from Q2-24.
Glenn D'Alessandro: This is primarily driven by the continued strength and demand for commercial air travel. During Q3-24, our commercial aftermarket bookings remain strong.
Glenn D'Alessandro: Our total commercial OEM sales increased by 21% in Q3-24 as compared to the prior year period.
Glenn D'Alessandro: This increase was driven primarily by higher sales across the state.
Glenn D'Alessandro: significant portion of the platforms we supply, including general aviation, wide body, and narrow body aircraft as an improving.
Glenn D'Alessandro: supply chain has allowed us to deliver parts that were previously held because our customers were experiencing bottlenecks in other areas of their supply chain.
Glenn D'Alessandro: Our defense sales increased 25% as compared to the prior year period. This was primarily due to strong demand across multiple platforms and an increase in market share as a result of new product launches.
Glenn D'Alessandro: Defense sales will continue to be lumpy given the nature of ordering patterns of our end customers for our products.
Glenn D'Alessandro: Let me recap our financial highlights for the third quarter of 24.
Our net organic sales increased 17% over the prior period.
Glenn D'Alessandro: Our gross profit for Q3-24 increased 200 basis points as compared to the prior year period. This increase was primarily due to the execution of our strategic value drivers as well as operating leverage. This was partially offset by dilutive effects related to the move of one of our manufacturing facilities.
Glenn D'Alessandro: expense as a result of paying down $285 million of indebtedness with the proceeds from the IPO and the refinancing of our credit agreement in May of 2024.
Glenn D'Alessandro: This was partially offset by higher interest as a result of the $360 million incremental term loan for the acquisition of applied avionics as well as higher income taxes.
Glenn D'Alessandro: Adjusted EBITDA was up $9 million in Q3'24 versus the prior year period.
Glenn D'Alessandro: Adjusted EBITDA margins remain strong at 36.8% due to a favorable sales mix.
Glenn D'Alessandro: execution of our strategic value drivers and operating leverage. This was partially offset by the continued build-out of our infrastructure to support our reporting, governance, and control needs as a newly public company.
Our adjusted EBITDA margins are expected to grow.
to 37.5% in calendar 25.
This represents a 270 basis point margin growth since 2022.
Glenn D'Alessandro: This chart shows we have been executing on our value drivers while acquiring two dilutive acquisitions and incurring infrastructure costs to support our needs as a public company.
Glenn D'Alessandro: Our whole year market assumptions are as follows. Commercial OEM, up high double digits. Commercial aftermarket, up mid double digits. Defense, up high double digits.
Thank you.
Speaker Change: Our 24 outlook is as follows. Sales $390 million to $394 million.
Adjusted EBITDA $141 million to $143 million
Speaker Change: adjusted EBITDA margin approximately 36 percent, net income $19 million to $20 million, adjusted EPS $0.35 per share to $0.37 per share.
Speaker Change: Our 24 assumptions used in calculating the 24 revised forecasts are as follows.
Capital expenditures, approximately $9 million, down from $11 million.
Speaker Change: Full year interest expense of approximately $54 million. This is up from our previous forecast of $42 million due to the borrowing of $360 million for the acquisition of Applied Avionics in Q3.
Full year effective tax rate is approximately 30 percent.
Speaker Change: Depreciation amortization is 43 million. This is up from the previous forecast of 40 million as a result of higher depreciation and amortization from the purchase of applied avionics in Q3.
Speaker Change: Non-cash stock-based compensation is approximately $11 million, up from $10, and our fully diluted shares are approximately $91 million. Let me turn the call back over to Dirkson to share our 25 outlook.
Speaker Change: Okay, this is the part of the call that I enjoy the most. Glenn just gave you a 13 week forecast, which I always struggle with, right, because we're building this business for the long term, long, long term. But I realized we have to, so we did.
Speaker Change: So, let's talk about our initial guidance for 2025, and I'll repeat that, initial guidance.
Speaker Change: Now, we know most of our colleagues in the public environment will wait until they report earnings for the full year to share their outlook, but we felt we wanted to share how we are thinking about the business next year with you guys as soon as possible.
Speaker Change: So, given the fact that we have such strong visibility in our business as a result of the proprietary content of our portfolio and record backlogs at the end of the third quarter,
These characteristics
combined with the high demand for aircraft by airlines.
Speaker Change: The challenges by the OEMs to produce new aircraft, and you can pick your favorite poison, whether that's a strike or supply chain challenges.
Speaker Change: We continue to drive increased aftermarket demand, so for our part, so
Speaker Change: Just given the geopolitical disability in the world, we see and we expect on a performer basis, assuming we own all of our businesses since the beginning of 2024 that our end markets will be up as follows. So let's go through it.
Commercial OEM and aftermarket will be up high single digits.
Speaker Change: versus 2024. Our defense and market sales will be up high double digits versus 2024. These market assumptions, along with our continued execution of our value drivers, will allow us to meet
or exceed the following for calendar year 2025.
Net sales between $470 to $480 million.
Speaker Change: adjusted EBITDA between 176 and 180 million while adjusted EBITDA margin will be approximately 37.5% which I'd like to highlight is a 150 basis point improvement over 2024.
Speaker Change: Net income between 33 and 37 million adjusted EPS between 45 cents and 50 cents per share
In addition...
Speaker Change: We expect capital expenditures of approximately $14 million, interest expense of approximately $60 million, while our effective tax rate will be approximately 30%.
Speaker Change: Depreciation and amortization approximately 51 million and our non-cash stock-based compensation will be approximately 15 million. All of this divided by a fully diluted share count of 93 million shares.
Speaker Change: So please note that all of the amounts I've just outlined for you relative to calendar 2025 performance assumes no additional acquisitions.
Speaker Change: However, as we have noted previously, our drumbeat is to complete one or two acquisitions each year.
Speaker Change: Well, we cannot predict the timing of such acquisition. One last metric, which is not on the slides, that I want to share for 2025.
Speaker Change: to be greater than 125% of our net income, assuming no additional acquisitions.
I'm going to say that one more time.
Speaker Change: We expect operating cash flow minus capital expenditures to be greater than 125% of our net income, assuming no additional acquisitions in calendar 2025.
So, with that, Rob, let's turn it over for questions.
Rob: Thank you. We will now be conducting a question and answer session. If you would like to ask a question at this time, please press star 1 on your telephone keypad and a confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star 2 to remove yourself from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.
Speaker Change: One moment please while we poll for questions, and that's star 1. Thank you.
Thanks for watching!
Thank you.
Speaker Change: I do have a question from the line of Jason Gursky with Citigroup. Please receive their questions.
Good morning, everybody.
Thanks everyone.
Speaker Change: Dirkson, can you walk maybe walk us through what you view to be the risks and opportunities?
Speaker Change: around your guidance in 2025. You kind of went out of your way to suggest that this is your initial guidance and these are kind of the minimums that you expect to achieve. So I'm just kind of curious what you think the risks and opportunities are.
Speaker Change: Thanks for the question, Jason. And yeah, I think you picked up on that correctly.
Speaker Change: So look, I know everyone is just getting to know us as a management team. This is just the third time we're reporting as a public company. But we don't like to share numbers with anyone and we view all of the participants on the call as our partners that we believe we can't meet or exceed.
Speaker Change: and I guess I'd say to you this way, I think our initial guidance that we came out with for EBITDA for the year was 132 to 134.
Speaker Change: We came back the next quarter and we said 134 to 136.
Speaker Change: This guidance for 2024, and we'll get to 2025 in a second.
And $143 million includes applied avionics.
Speaker Change: which I'll do some homework for folks who haven't done it yet. If you look at the performer financials, you'll see the first six months sales were 22 million. We told everyone for the year would be 40, so therefore the second half of the year is 18 million dollars. So we've owned it for four months.
Speaker Change: Which is about 12 million dollars of revenues at the 50% EBITDA margins at six
Speaker Change: You take 143 minus 6, you get 137. We have just guided higher than the high end of what we told you previously.
Speaker Change: So, that's our history today, and now let's talk about 2025. It is our initial guidance, and as I said on the call.
Speaker Change: Most folks don't go this early, right? Normally folks, you only be hearing from us about 2025 until March of next year when we report earnings.
Speaker Change: We didn't think it was appropriate to wait that long to share with you guys.
Speaker Change: So what's in the guide? Everybody knows that the commercial OEM stock part of the business is challenged.
Speaker Change: between Boeing strikes and challenges within their supply chain, Airbus challenges within the supply chain, et cetera, Textron striking. The way we think about the guide for 2025 is
Speaker Change: There is an impact to us, but as you guys know Boeing's Boeing sales to us 12 million dollars roughly a year half of that OEM
So, you know, you're talking $6 million.
Speaker Change: Small impact, so I don't see a lot of risk to our numbers and our guide for 2025 on the OE commercial side.
Speaker Change: On the aftermarket side, given it's November and we're talking about the results through 2025,
Speaker Change: We are thinking about it cautiously, so I'd say this way, we're cautiously optimistic. So, high single digits.
Speaker Change: Feels about right for us now given as you guys know a pricing leverage What we expect to happen with volumes given the OEM challenge of producing aircraft. We do see strong Volume strong backlog on that side of the business
So, I'm comfortable, actually extremely comfortable, in the commercial aftermarket.
Speaker Change: In terms of defense, which we share every time is choppy.
Speaker Change: The good news is we're starting the year with solid, solid backlog.
Even though we see deliveries picking up more in the...
Speaker Change: second into the last half of 2025. So a little bit more choppy in the first quarter of 2025. Feel really, really good about that. So other than some Black Swan event, we feel really, really good about what we're sharing with folks.
Hopefully I answered your question and they're somewhere adjacent.
Speaker Change: Pre-cash flow to net income. Can you maybe just walk through You know some of the drivers of that and maybe talk a little bit about working capital and just kind of what the source of The the high conversion relative to net income. Thanks
Sure, sure. Well, obviously, you know...
Let's start with Eva Dower, right?
Speaker Change: Receivables should be up because of the higher sales. We gave you the interest and capital expenditures, so nothing significant. And as Dirkson said, we will be, we should be above 125 percent.
Okay, great, thanks. I'll pass the line.
Once again, that's star one to ask a question.
Kenneth Herbert, Sheila Kahyaoglu, Jason Gursky
Speaker Change: Thank you. At this time, there are no further questions. I'd like to turn the floor back to Dirkson Charles for closing remarks.
Dirkson Charles: You guys are easy today. No, thanks for taking the time to hear our story.
Actually, Rob, I think...
Speaker Change: I need to hold off. Yes, I was just going to say we just have some more analysts that just came into queue. I guess you guys, it's not that easy. Our next questions will be from Sheila Kayaglu with Jeffreys.
Sorry about that, guys. That might have been a mistake.
Sheila Kayaglu: Congratulations on a good quarter and providing the 25 guide. So maybe let's start off on the quarter if that's okay. Just commercial aftermarket pro forma up 19, sequentially up 16. What drove that versus peers maybe a thousand BIPs below that and how much did applied contribute?
Um
Speaker Change: So we don't talk specifically about one business unit over another in terms of contribution because the numbers we're sharing is on a performer basis.
So...
Speaker Change: But it's really, Sheila, it's across all the platforms. It's actually one of the first things we look at. And there isn't a platform that wasn't up, you know, quarter over quarter, year over year.
Speaker Change: because even quarter over quarter we're up 16% in commercial aftermarket.
Speaker Change: So, for us, it's market share, it's new product introduction, and it's just good performance. You know, executing on a value drive, that's what's driving it.
Speaker Change: We really feel good about it, which is going back to Jason's question about the 9% into 2025.
Speaker Change: We, you know, I think on the last call I said it looks like blue skies and my teammates in the room here looked at me like wow. But the commercial aftermarket really, really feels good to us, Sheila.
Speaker Change: Understood, that makes sense. And then maybe just on the 25 guide, I just want to make sure we have it correctly here because 70% of your business is guided, you know, commercial OE and aftermarket guided to grow high single digits and then military...
Speaker Change: which is 15%, let's say, growing high teens. How do you think about that total mid-teens organic growth, essentially, that you have for 25? What are we missing?
Speaker Change: What are you missing? Just the calculation. It just seems like most of your business has grown high single digits.
That's correct. So high single digits.
Speaker Change: I'll say it this way, 9-10%, high single, low double, and on the military side it's really, really strong, if I could say it that way.
Speaker Change: So, you're not missing anything other than the fact that we want to make sure, as we've learned from speaking to a number of our partners in this call, that we don't push the envelope hard in terms of giving guidance.
Speaker Change: So, we're going to be up 14% in total year-over-year on a performer basis.
Speaker Change: but we feel really good about it. So your math is right. Oh, and by the way, the non-aviation is actually down year over year. So that could be a piece of the missing math for you.
Thank you.
Speaker Change: Yes, it might be. Yeah, that makes sense. That makes sense. Okay, great.
Speaker Change: And then maybe just, you know, while I have you guys for the quarter, as we think about the Q4 exit rate, the guidance implies 2024 exits with 36% margins in Q4 versus even about 30 bips above that year-to-date. What drives that Q over Q deceleration?
Speaker Change: I hate using this word because I think it's a four-letter word, but there's some mix in there because
Speaker Change: Defense is going to be a greater, you see it's growing faster, while we make good money, the margins on the commercial side of the business is higher, so that's a piece of it.
We also, as we discussed...
Speaker Change: We do have a small impact on the commercial OE side of the business.
Speaker Change: We got the same love letters that everybody got across the industry from Boeing and Textron when they were on strike Stop shipment whole all that stuff moving to the right and again commercials higher margin and defense so we have
Speaker Change: I'll give you a number. Approximately three-ish million dollars of revenues that has moved to the right because of those love letters we got from the OBMs.
Speaker Change: that's that's part of it. Plus the fourth quarter for us I think it's a little bit different than most public companies in that
Speaker Change: Like I said earlier, 13 weeks is 13 weeks and it really doesn't matter in the long term.
Speaker Change: So, we'll get the phone calls from our customers saying can you move it into January because we want to manage our balance sheet.
Speaker Change: and that and it's usually commercial aftermarket parts that that happens with a lot.
Speaker Change: So, you know, we have factored some of that into how we think about the fourth quarter.
Understood. That makes sense. Thank you so much
Thanks, Sheila.
Thank you.
Thank you.
Speaker Change: from Mr. Charles, I'll turn the floor back over to you for any further remarks.
Dirkson Charles: Okay, I was going to say it's going to be an easy call until Sheila Adaland, but no, thanks. Thanks everyone for taking the time to join us on the call. Look forward to speaking again, I guess, in late March. You have our guide for 2025. It's our initial guide, as we said.
Dirkson Charles: And, most importantly, I truly, truly want to thank all of my mates, all 1,500 now of them across the group, because without you guys, none of this happens. So thanks to everyone participating, and thank you to our colleagues.
Speaker Change: Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.