Q3 2025 Heico Corp Earnings Call

Samara: Welcome to the Heico Corporation third quarter 2025 financial results call. My name is Samara, and I will be your operator for today's call. Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties, and contingencies. Heico's actual results may differ materially from those expressed in or implied by those forward-looking statements.

Speaker #2: Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties, and contingencies. Heico's actual results may differ materially from those expressed in or implied by those forward-looking statements.

Speaker #2: Factors that could cause such differences include the severity, magnitude, and duration of public health threats, such as the COVID-19 pandemic; Heico's liquidity and the amount and timing of cash generation; lower commercial air travel; airline fleet changes; or airline purchasing decisions, which could cause lower demand for our goods and services.

Samara: Factors that could cause such differences include the severity, magnitude, and duration of public health threats, such as the COVID-19 pandemic, Heico's liquidity and the amount and timing of cash generation, lower commercial air travel, 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 cost to complete contracts, governmental and regulatory demands, export policies and restrictions, reductions in defense, space, or homeland security spending by US and/or foreign customers, or competition from existing and new competitors, which could reduce our sales, our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth, product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales, cybersecurity events or other disruptions of our information technology systems could adversely affect our business, our ability to make acquisitions, including obtaining any applicable domestic and/or foreign governmental approvals, and achieve operating synergies from acquired businesses, customer credit risk, interest, foreign currency exchange, and income tax rates, and 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.

Speaker #2: Product specification costs and requirements, which could cause an increase to our costs to complete contracts. Governmental and regulatory demands, export policies and restrictions, reductions in defense, space, or homeland security spending by U.S.

Speaker #2: 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 could reduce our sales or sales growth.

Speaker #2: Product development or manufacturing difficulties could increase our product development and manufacturing costs and delay sales. Cybersecurity events or other disruptions of our information technology systems could adversely affect our business.

Speaker #2: Our ability to make acquisitions, including obtaining any applicable domestic and/or foreign governmental approvals, and achieve operating synergies from acquired businesses; customer credit risk; interest; foreign currency exchange; and income tax rates; and economic conditions, including the effects of inflation within and outside of the aviation, defense, space, medical, telecommunications, and electronics industries, could negatively impact our costs and revenues.

Speaker #2: 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.

Samara: 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 Eric Mendelson, Heico's Co-Chief Executive Officer.

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.

Speaker #2: I now turn the call over to Eric Mendelson, Heico's Co-Chief Executive Officer.

Speaker #3: Thank you, Samara, and good morning to everyone on this call. Thank you for joining us, and we welcome you to Heico's third-quarter fiscal year 2025 earnings announcement teleconference.

Eric Mendelson: Thank you, Samara, and good morning to everyone on this call. Thank you for joining us, and we welcome you to Heico's third quarter fiscal 25 earnings announcement teleconference. I'm Eric Mendelson, Heico's Co-CEO. I am joined here this morning by Victor Mendelson, Heico's Co-CEO, and Carlos McCow, our Executive Vice President and CFO. Before highlighting our third quarter of fiscal 25 record-setting results, I start this call by thanking all of Heico's team members for their dedication and focus on delivering another outstanding quarter. We continue to experience high growth rates across the majority of our subsidiaries and are humbled by the hard work and commitment of our team members that they bring every day to deliver these excellent quarterly results. Our customers require seamless execution and demand excellence in everything we do.

Speaker #3: I'm Eric Mendelson, Heico's Co-CEO. I am joined here this morning by Victor Mendelson, Heico's Co-CEO, and Carlos Macau, our Executive Vice President and CFO.

Speaker #3: Before highlighting our third-quarter fiscal 2025 record-setting results, I start this call by thanking all of Heico's team members for their dedication and focus on delivering another outstanding quarter.

Speaker #3: We continue to experience high growth rates across the majority of our subsidiaries and are humbled by the hard work and commitment of our team members.

Speaker #3: That they bring every day to deliver these excellent quarterly results. Our customers require seamless execution and demand excellence in everything we do. Our people are the only reason we continue to win in the marketplace and generate significant shareholder value.

Eric Mendelson: Our people are the only reason we continue to win in the marketplace and generate significant shareholder value. All of our shareholders should thank our team members for everything they do for Heico and our shareholders. Our record third quarter results reflect robust double-digit organic growth in our core businesses, further enhanced by the momentum from our disciplined acquisition strategy. On behalf of the board and our executive management team, thank you for another record-breaking quarter. As we look ahead, we see significant opportunities supported by a favorable pro-business environment that encourages innovation, investment, and expansion. Our laser focus on growth within the commercial aviation, defense, and space markets, combined with the exceptional talent of our team members, gives me confidence that Heico is well positioned to sustain strong momentum and capture additional market share gains across our diverse markets. We remain very optimistic about Heico's future.

Speaker #3: All of our shareholders should thank our team members for everything they do for HEICO and our shareholders. Our record third-quarter results reflect robust double-digit organic growth in our core businesses, further enhanced by the momentum from our disciplined acquisition strategy.

Speaker #3: On behalf of the Board and our executive management team, thank you for another record-breaking quarter. As we look ahead, we see significant opportunities supported by a favorable pro-business environment that encourages innovation, investment, and expansion.

Speaker #3: Our laser focus on growth within the commercial aviation, defense, and space markets, combined with the exceptional talent of our team members, gives me confidence that Heico is well positioned to sustain strong momentum and capture additional market share gains across our diverse markets.

Speaker #3: We remain very optimistic about Heico's future. In summarizing our third-quarter fiscal 2025 record results, we note that consolidated net income increased 30% to a record $177.3 million, or $1.26 per diluted share, in the third quarter of fiscal 2025, up from $136.6 million, or $0.97 per diluted share, in the third quarter of fiscal 2024.

Eric Mendelson: In summarizing our third quarter of fiscal 25 record results, we note that consolidated net income increased 30% to a record $177.3 million or $1.26 per diluted share in the third quarter of fiscal 25, up from $136.6 million or $0.97 per diluted share in the third quarter of fiscal 24. This is quite an achievement of which we are very, very proud. Consolidated operating income and net sales for the third quarter of fiscal 25 represent record results for Heico, increasing 22% and 16% respectively compared to the third quarter of 24. The flight support group set an all-time quarterly operating income and net sales records in the third quarter of fiscal 25, improving 29% and 18% respectively over the third quarter of fiscal 24.

Speaker #3: This is quite an achievement of which we are very, very proud. Consolidated operating income and net sales for the third quarter of fiscal '25 represent record results for Heico, increasing 22% and 16%, respectively, compared to the third quarter of '24.

Speaker #3: The flight support group set an all-time quarterly operating income and net sales records in the third quarter of fiscal '25, improving 29% and 18%, respectively, over the third quarter of fiscal '24.

Speaker #3: The increases principally reflect strong 13% organic growth from increased demand across all of its product lines and the impact from our profitable fiscal '25 and '24 acquisitions.

Eric Mendelson: The increases principally reflect strong 13% organic growth from increased demand across all of its product lines and the impact from our profitable fiscal 25 and 24 acquisitions. The electronic technologies group set an all-time quarterly net sales record in the third quarter of fiscal 25, improving 10% over the third quarter of fiscal 24. This increase principally reflects improved demand for the majority of its products, including double-digit organic net sales growth of other electronics and space products. Cash flow provided by operating activities increased 8% to $231.2 million in the third quarter of fiscal 25, up from $214 million in the third quarter of fiscal 24. For the third quarter of fiscal 25, cash flow provided by operating activities represents 130% of net income.

Speaker #3: The Electronic Technologies Group set an all-time quarterly net sales record in the third quarter of fiscal '25, improving 10% over the third quarter of fiscal '24.

Speaker #3: This increase principally reflects improved demand for the majority of its products, including double-digit organic net sales growth of other electronics and space products. Cash flow provided by operating activities increased 8% to $231.2 million in the third quarter of fiscal 2025, up from $214.1 million in the third quarter of fiscal 2024.

Speaker #3: For the third quarter of fiscal 2025, cash flow provided by operating activities represents 130% of net income. For over 36 years, a core tenet of Heico's unique business model has been to fund our organic growth with cash generated by operations and not incur debt to grow organically.

Eric Mendelson: For over 36 years, a core tenet of Heico's unique business model has been to fund our organic growth with cash generated by operations and not incur debt to grow organically. This doesn't happen by accident. Our operations are painstakingly designed and managed to generate excess cash that we use to make accretive acquisitions, thereby compounding our growth. I'm proud to report that cash generation remains exceptionally strong at Heico. Consolidated EBITDA increased 21% to $316.4 million in the third quarter of fiscal 25, up from $261.4 million in the third quarter of fiscal 24. Our net debt-to-EBITDA ratio was 1.9 times as of July 31, 2025, down from 2.06 times as of October 31, 2024. I would like to highlight that our liquidity improved significantly, even after deploying $630 million on acquisitions during the past nine months.

Speaker #3: This doesn't happen by accident. Our operations are painstakingly designed and managed to generate excess cash that we use to make creative acquisitions, thereby compounding our growth.

Speaker #3: I'm proud to report that cash generation remains exceptionally strong at Heico. Consolidated EBITDA increased 21% to $376.4 million in the third quarter of fiscal '25, up from $261.4 million in the third quarter of fiscal '24.

Eric Mendelson: We are very pleased with Heico's strong cash generation, which drives our ability to deliver quickly to support future acquisition opportunities. In July 25, we paid our 94th consecutive semiannual cash dividend since 1979 at the rate of $0.12 per share, representing a 9% increase over the prior dividend paid in January 2025. We continue to be very busy with acquisitions and completed our fifth acquisition of fiscal 25 in the third quarter. In July, our electronic technologies group acquired 100% of the stock of Gabelth Engineering. Gabelth designs and manufactures advanced solutions for aerospace platforms, including cockpit displays and other avionics components such as navigation, audio, surveillance, and communication panels for a wide range of aircraft. Gabelth is the third largest acquisition in Heico's history, and we expect Gabelth to be accretive to earnings within the year following the acquisition.

Eric Mendelson: Finally, we take a moment to remember Frank Schwitter, a member of our board of directors who passed away recently. Frank was a dear friend and CPA who served as a board member since 2006. He was a valued member of the Heico family, with his expertise in financial accounting and reporting having been developed over many decades, serving as a partner in the National Office of Arthur Andersen. We share our thoughts and prayers with his family and thank them for the many years of service and friendship he provided to our board. He will be greatly missed. I now turn the call over to Victor Mendelson, Heico's Co-CEO, to discuss the third quarter results of our flight support and electronic technologies groups in greater detail.

Frank was a dear friend.

And CPA who served as a board member since 2006.

He was a valued member of the HEICO family, with his expertise in financial accounting and reporting having been developed over many decades serving as a partner in the national office of Arthur Andersen.

We share our thoughts and prayers with his family and thank them for the many years of service and friendship he provided to our board.

You will be greatly missed.

Victor Mendelson: Thank you, Eric. As I discuss the operating results of our two segments, I join you in recognizing the extraordinary contributions of Heico's team members. Your talent, determination, and innovative spirit have turned challenging objectives into real success. On behalf of our shareholders, thank you for the energy and collaboration that not only drive our performance but also make these accomplishments especially rewarding. The flight support group's net sales increased 18% to a record $802.7 million in the third quarter of fiscal 25, up from $681.6 million in the third quarter of fiscal 24. The net sales increase in the third quarter of fiscal 25 reflects strong organic growth of 13% and the impact from our profitable fiscal 25 and 24 acquisitions. The organic net sales growth reflects increased demand across all of our product lines.

I now turn the call over to Victor Mendelson, Co-CEO, to discuss the third quarter results of our Flight Support and Electronic Technologies groups in greater detail.

Thank you, Eric. As I discussed the operating results of our two segments, I join you in recognizing the extraordinary contributions of those team members.

Your talent, determination, and innovative spirit have turned challenging objectives into real success. On behalf of our shareholders, thank you for the energy and collaboration that not only drive our performance.

But also make these accomplishments especially rewarding.

Support groups, net sales increased 18% to a record $800.2 million in the third quarter of fiscal 2025, up from $681.6 million in the third quarter of fiscal 2024. The net sales increase in the third quarter of fiscal 2025 reflects strong organic growth of 13% and the impact from our profitable fiscal 2025 and 2024 acquisitions.

Victor Mendelson: The Wencor and Legacy Heico operations continue to exceed our expectations, and obviously, this was an excellent combination which was completed around two years ago. Our customers continue to find great value in our larger aftermarket product offerings for their aerospace parts and component repair and overhaul needs, which has also translated into excellent growth and opportunities and success for Heico. The flight support group's defense business continues to present an excellent opportunity, especially as the current US presidential administration prioritizes defense and cost efficiency. Heico is well positioned to support these efforts by providing lower-cost alternative aircraft replacement parts, helping the government and taxpayers save money while expanding our market reach. Our missile defense manufacturing business is experiencing significant growth driven by increased demand by both the US and our allies.

The organic net sales growth reflects increased demand across all of our product lines.

When core and legacy hoop operations continue to succeed, our expectations are clear. Obviously, this was an excellent combination, which was completed around two years ago. Our customers continue to find great value in our larger aftermarket product offerings for their aerospace parts, component repair, and overall needs.

which is also translated into excellent growth, opportunities, and success for Hico.

The flight support groups. Defense business continues to present an excellent opportunity, especially as the current U.S. presidential administration prioritizes defense and cost efficiency. HEICO is well positioned to support these efforts by providing lower-cost alternative aircraft replacement parts, helping the government and taxpayers save money while expanding our market reach.

Victor Mendelson: With a substantial backlog of defense missile defense orders and ongoing shortages, we anticipate meaningful expansion from this pipeline, reinforcing our commitment to delivering cost-effective solutions with industry-best quality. The flight support group's operating income increased 29% to a record $198.3 million in the third quarter of fiscal 25, up from $153.6 million in the third quarter of fiscal 24. The operating income increase principally reflects the previously mentioned net sales growth and improved gross profit margin and SG&A expense efficiencies realized from the net sales growth. The improved gross profit margin principally reflects higher net sales within our repair and overhaul parts and services and specialty product lines. The flight support group's operating margin improved to 24.7% in the third quarter of fiscal 25, up from 22.5% in the third quarter of fiscal 24.

Our missile defense manufacturing business is experiencing significant growth driven by increased demand on both the U.S. and our allies.

With the substantial backlog of defense missile defense orders and ongoing shortages.

We anticipate meaningful expansion from this pipeline reinforcing our commitment to delivering cost-effective solutions with industry-best quality.

The Flight Support Group's operating income increased 29% to a record $198.3 million in the third quarter of fiscal 2025, up from $153.6 million in the third quarter of fiscal 2024.

The operating income increase principally reflects the previously mentioned net sales growth, improved gross profit margin, and SG&A expense efficiencies realized from the net sales growth.

The improved growth profit margin principally reflects higher net sales within our repair and overhaul parts and services and specialty product lines.

Victor Mendelson: The operating margin increase principally reflects the previously mentioned improved gross profit margin and an impact from a decrease in SG&A expenses as a percentage of net sales, namely reflecting the previously mentioned SG&A expense efficiencies. Given that acquisition-related intangible amortization expense consumed approximately 200 basis points of our operating margin in the third quarter of fiscal 25, the FSG's cash margin before amortization, or EBITA, was approximately 27.3%, which has been consistently excellent and is 210 basis points higher than the comparable FSG cash margin of 25.2% in the third quarter of fiscal 24. And we note that we run the operations internally and evaluate our businesses based on EBITA, which to us is a real cash number, not one that just takes account for a made-up amortization number required by accounting regulations.

Sgna expense efficiencies.

Given that acquisition-related intangible amortization expense consumed approximately 200 basis points of our operating margin in the third quarter of Fiscal 2025, the FSGS cash margin before amortization, or EBITDA, was approximately 27.3%.

Which has been consistently, excellent.

And is 210 basis points higher than the comparable FSG cache margin of 25.2% in the third quarter of fiscal 2024.

And we know that we run the operations internally and evaluate our businesses based on EBIT, which to us is a real cash number, not one that just takes account for a made-up um.

Amortization number.

Victor Mendelson: I'm very happy with the continued expansion of our cash margin, and we believe our efficient and decentralized operating structure has permitted us to expand these margins as we simultaneously delight our customers with cost savings and lightning-quick turnarounds. For the electronic technologies group, our net sales increased 10% to a record $355.9 million in the third quarter of fiscal 25, up from $322.1 million in the third quarter of fiscal 24. The net sales increase reflects strong organic growth of 7% and the impact from our fiscal 25 and 24 acquisitions. The organic net sales growth is mainly attributable to increased demand for our other electronics, defense, and space products.

Required by accounting regulations.

I'm very happy with the continued expansion of our cash margin, and we believe our efficient and decentralized operating structure has permitted us to expand these margins, as we simultaneously delight our customers with cost savings and lightning-quick turnarounds.

For the Electronic Technologies Group, our net sales increased 10% to a record $355.9 million in the third quarter of fiscal 2025, up from $322.1 million in the third quarter of fiscal 2024. The net sales increase...

Victor Mendelson: The ETG's defense organic net sales increased by over 6% during the third quarter of fiscal 25 and are anticipated to continue steady growth during the remainder of the fiscal year as we again have significant order volume and a record backlog. The ETG's other electronics organic net sales increased 16% during the quarter, continuing the trend from the previous quarter increase in organic growth after following multiple quarters of lower demand due in part to inventory destocking at our customers for high-end industrial and electronic components. We're optimistic for continued growth going forward. The electronic technologies group's operating income increased 7% to $81 million in the third quarter of fiscal 25, up from $75.8 million in the third quarter of fiscal 24. The operating income increase principally reflects the previously mentioned net sales growth, partially offset by an increase in performance-based compensation expenses.

Reflects strong organic growth of 7% and the impact from our fiscal 2025 and 2024 acquisitions. The organic net sales growth is mainly attributable to increased demand for our other electronics, defense, and space products. The EtG Defense organic net sales increased by over 6% during the third quarter of fiscal 2025 and are anticipated to continue steady growth during the remainder of the fiscal year, as we again have significant order volume and a record backlog.

The ETG other electronics organic net sales increased 16% during the quarter, continuing the trend from the previous quarter increase in organic growth after following multiple orders of lower demand, due in part to inventory. These stocking at our customers for high-end industrial and electronic components.

We're optimistic for continued growth going forward.

Victor Mendelson: The electronic technology group's operating margin was 22.8% in the third quarter of fiscal 25 as compared to 23.5% in the third quarter of fiscal 24. The operating margin was sequentially consistent with the second quarter of fiscal 25 as both periods had a similar net sales mix and growth. The lower operating margin compared to the third quarter of fiscal 24 principally reflects an increase in SG&A expenses as a percentage of net sales, mainly driven by higher performance-based compensation expenses. Very importantly, as we talked about with the flight support group, before acquisition-related intangibles amortization expense, our operating margin was 26.6% as intangibles consumed around 380 basis points of our operating margin. Again, this is how we judge our businesses as that most closely correlates to cash. On a true operating basis, these are excellent margins, and we are very, very pleased with them.

The Electronic Technologies group's operating income increased 7% to $81 million in the third quarter of fiscal 2025, up from $75.8 million in the third quarter of fiscal 2024. The increase in operating income principally reflects the previously mentioned sales growth, partially offset by an increase in performance-based compensation expenses.

The electronic technology group's operating margin was 22.8% in the third quarter of fiscal 2025, compared to 23.5% in the third quarter of fiscal 2024. The operating margin was sequentially consistent with the second quarter of fiscal 2025, as both variants had a similar net sales mix and growth.

The lower operating margin compared to the third quarter of fiscal 2024 principally reflects an increase in SG&A expenses as a percentage of net sales, mainly driven by higher performance-based compensation expenses.

Very importantly, as we discussed with the flight support group before acquisition-related intangibles amortization expense, our operating margin was 26.6%, as intangibles consumed around 300 to 380 basis points of our operating margin.

Victor Mendelson: I turn the call back over to Eric Mendelson.

Again, this is how we judge our businesses, as that most closely correlates to cash on a true operating basis. These are excellent margins, and we are very, very pleased with them.

Eric Mendelson: Thank you, Victor. As we look ahead, we remain confident in achieving net sales growth across both the FSG and ETG segments, driven by continued organic demand for most of our products. Additionally, we aim to accelerate growth through our recently completed acquisitions while capitalizing on new acquisition opportunities. Our disciplined financial strategy continues to focus on maximizing long-term shareholder value through a balanced approach of strategic acquisitions and strong organic growth initiatives aimed at gaining market share while maintaining a strong financial position and preserving flexibility. Acquisition activity remains very strong across both operating segments with a solid pipeline of opportunities under review. Our focus is on identifying businesses that complement Heico's existing operations and strengthen our strategic position. True to our disciplined philosophy, we pursue only those transactions that are prudent, accretive, and capable of delivering lasting value to our shareholders.

I turn the call back over to Eric Mendelson.

Thank you, Victor.

As we look ahead, we remain confident in achieving net sales growth across both the FSG and EtG segments, driven by continued organic demand for most of our products.

Additionally, we aim to accelerate growth through our recently completed acquisitions while capitalizing on new acquisition opportunities.

Painting a strong financial position and preserving flexibility.

Acquisition activity remains very strong across both operating segments, with a solid pipeline of opportunities under review.

Our focus is on identifying businesses that complement our existing operations and strengthen our strategic position.

Eric Mendelson: Thank you very much for attending this call. Those were the prepared remarks, and now I'd like to ask Samara to please open up the floor for questions.

True to our discipline philosophy, we pursue only those transactions that are prudent, accretive, and capable of delivering lasting value to our shareholders.

Samara: 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 speakerphone, 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, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. And we'll take our first question from Larry Solo with CJS Securities.

Thank you very much for attending this call. Those were the prepared remarks, and now I'd like to ask Samara to please open up the floor for questions.

Thank you. If you would like to ask a question, please signal by pressing *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 we'll pause for just a moment to allow everyone an opportunity to signal for questions.

And we'll take our first question from Larry Solo, with CJS Securities.

Victor Mendelson: Hi, good morning. It's Pete Lucas. Hi, good morning. It's Pete Lucas for Larry. Congrats on another great quarter. Just wondering, in the ETG segment, if you could give us a little more color on how the Gabelth acquisition is performing relative to your expectations. Backing into it, it seems to be kind of in line with your historical EBITDA multiples. And then in terms of your current leverage, how does that set you up? I know you mentioned the pipeline for M&A, but are you comfortable if something were to come up in the short term? Thanks.

Victor Mendelson: Sure. Thank you. Those are good questions. This is Victor. So, you know, we've closed on the acquisition about a month ago, so it's early days, but so far, as we'd say, so good. It's doing almost exactly as we expected, but I will caution I don't make a trend out of one month. So far, we're very, very happy with how it's doing and pleased with the acquisition. And in terms of the cost of the acquisition, we can easily handle many more acquisitions, of course, depending on size, both on our existing line of credit and I think what we would very, very easily raise beyond that if we needed to. But we continue to have excellent capacity for acquisitions.

Hi, good morning. It's Pete. Lucas, hi, good morning, it's Pete. Lucas for Larry. Uh, congrats on another great quarter. Uh, just wondering, uh, in the EtG segment, if you could give us a little more color on how the Gables acquisition is performing relative to your expectations. Uh, backing into it, it seems to be kind of in line with your historical EBITDA multiples. And then, uh, in terms of your current leverage, um, how does that set you up? I know you mentioned the pipeline for M&A, but are you comfortable if something were to come up, uh, in the short term?

Thanks sure. Uh, thank you. It's it's a good question. This is Victor. So you know we we've we've closed on the acquisition about a month ago, so it's early days but so far as we'd say so good. It's doing, you know, almost exactly as we expected. But I, I, I will caution, I don't make a trend out of 1 month. Um, so far, we're, we're very, very happy with and and how it's doing and, and please with the acquisition, uh, and in terms of, of the cost of the acquisition, we can easily handle uh many more Acquisitions, of course, depending on size, uh, both on our existing line of credit and and I think what we would very, very easily, raise beyond that, if we needed to. Uh, but we we continue to have excellent capacity for acquisitions.

Victor Mendelson: Very helpful. Thanks. And just last one from me. It seems you saw a benefit from the tax rate this quarter due to R&D tax credits. Is that lower rate sustainable? And is that driven by the big beautiful bill? And do you see any other benefits from that bill that we should think about?

Carlos Macau: Yeah, this is Carlos. So the only benefit we saw in the quarter really related to cash, as you may know, the full depreciation of equipment that we buy that qualifies, they retro that back to January 25. So it helped alleviate some of our third quarter tax payments when the bill was passed. But I think going forward for us, it's mostly a cash benefit. We should see a little benefit from some of the changes to foreign, the FDII regulations that came out. I think overall our rate, you know, it was a little, it was around 18.9% for the quarter. And I think that going forward, you know, if we're thinking about a 19% to 20% rate, that's probably a good effective annual rate for Heico for the year.

Very helpful. Thanks and just uh last 1 for me. Uh it seems you saw a benefit from the tax rate, this quarter uh, due to R&D tax credits uh, is that lower rate sustainable, uh, and is that driven by the big beautiful Bill and do you see any other, uh, benefits from that bill? That we should think about.

Yeah, this is Carlos. So, um,

The, the only benefit we saw in the quarter really related to cash as you may know, the, um, full depreciation of equipment that we buy that qualifies the Retro that back to January 25. So it helped it helped alleviate some of our third quarter. Tax payments 1, the bill was passed, but but I think going forward for us it's mostly a cash benefit. Uh, we should see a little benefit from, uh, some of the changes to foreign uh, the fdii regulations that came out. I think, overall our rate, you know, was it was a little um, it was around 18.9% for the quarter and I think that going forward, you know, if we're thinking about a 19 to 20% rate that's probably um,

That's probably a good effective annual rate for Heico for the year.

Victor Mendelson: Very helpful. Thanks. I'll jump back in the queue.

Carlos Macau: You're welcome.

Very helpful. Thanks. I'll jump back in the queue.

You're welcome.

Samara: And our next question comes from Tony Bancroft with Covelli Funds.

And our next question comes from Tony Bankcroft with Gabelli Funds.

Victor Mendelson: Yeah, good morning. Congratulations, gentlemen. Very nice quarter. Just you were talking about, you sort of talked about missile defense a little bit. Would you maybe expound on that and maybe also talk about potential M&A in that space? It just seems like there's just so much going on with missile defense, obviously with Golden Dome and just what's, you know, all the kinetic war going on right now. Maybe you could talk a little bit more about that.

Yep. Good morning. Uh, congratulations, gentlemen. Very nice quarter. Just you were talking about, um, sort of talk about missile defense a little bit. Would you maybe expound on that?

Eric Mendelson: Yeah. So Tony, this is Victor. You know, missile defense has been a part of our business actually for many years, just about since we shortly after we started the ETG. And we are seeing opportunities. In fact, we are seeing some orders, I wouldn't call it yet major needle movers, for things related to Golden Dome, which, as you know, incorporates some existing technologies and products into something that sort of, I'll say, layers on top. So we continue to see orders from what we've been doing and getting orders on new products in addition to where we make products that are used for foreign missile defense as well. Basically, US products that are then sold onto from the US primes onto foreign countries, obviously US allies. So it remains a great opportunity for us. It's something we've been doing for a long time.

And, um, uh, maybe also talk about potential, uh, M&A in that space. It just seems like there's just so much going on with missile defense, uh, obviously with, um, the Golden Dome and just with, you know, all the kinetic war going on right now. Maybe you could talk a little bit more about that.

Eric Mendelson: And I will emphasize we've been doing it in what you would consider, people tend to consider legacy defense as well as new tech defense. And I think that's very, very important. We've always been very careful about serving all of the markets and not just playing to larger customers. And also, Tony, just to add, within the FSG, we also have a very big position in missile defense and are a leading manufacturer of rocket nozzles and other missile defense applications. And the market is very strong. We do look at additional acquisitions. We have a lot of organic growth capability in that area. And so I think both are going to continue to be very exciting for us.

Started the EtG, um, and we, we are seeing opportunities. In fact, we are seeing some orders, I wouldn't call it yet, major needle, movers, um, for things related to golden dome, which as, you know, uh, incorporates some existing, uh, Technologies and products, uh, into something that sort of, I'll say layers on top. So we, we continue to see orders from what we've been doing and and getting orders on new products, uh, in addition to, where we make, uh, products, uh, that are used for foreign missile defense as well. Basically us, uh, products that are then sold on to, uh, you know, from the US primes onto foreign, uh, countries, obviously us allies. Uh, so it remains a great opportunity for us, it's something we've been doing for a long time and I will emphasize we've been doing it in what you would consider. People tend to consider leg

Legacy defense, as well as new tech defense. Uh, and I think that's very, very important. We've always been very careful about serving, uh, all of the markets, uh, and not just playing to larger customers. And, and also Tony just to add with within the FSG, we also have a, a, very big position in missile defense and our, uh, leading manufacturer of Rocket nozzles and other

Uh, missile, uh, defense, uh, applications, and the market is very strong. We do look at additional acquisitions. We have a lot of organic growth capability in that area and.

So, I think both are going to continue to be very exciting for us.

Victor Mendelson: Thanks. Thank you, gentlemen. Great job.

Eric Mendelson: Thank you.

Thank you, gentlemen. Great job.

Thank you.

Samara: We'll take our next question from Sheila Caialu with Jefferies.

We'll take our next question from Sheila Kayalu with Jeffries.

Victor Mendelson: Good morning, guys. In great quarter. Maybe if I could ask, just going back to FSG, if we could just parse out the 13% organic growth by subsegment and by market. And I know there's been a lot of talk about engine versus airframe. Any context there?

Good morning, guys, and Gregor. Um, maybe if I could ask, just going back to FSG, if we could, just parse out the 13% organic growth by sub-segments and by market. And I know there's been a lot of talk about engine versus airframe, and any context there?

Eric Mendelson: So, Carlos, do you want to do the?

Carlos Macau: Yeah, sure. So, Sheila, we had a very interesting quarter. The parts business, as usual, grew in the low. It was in the low teens this quarter. It's pretty much similar to what we saw last quarter, where we saw some really nice growth within the repair and overhaul and specialty products group. Repair and overhaul was up in the mid-teens, and that was driven by a really nice mix during the quarter, which elevated our gross margin a little bit. And we were, you know, it's nice to see that. And as you recall, the repair business is pretty much a parts play. It's a component repair. As you know, we don't have hangers and we don't repair airplanes, but we do do components. And a lot of that work is a channel for us to really filter a lot of our PMA parts through.

So, Carlos, you want to do the? Yeah, sure. So, Sheila, we had a very interesting quarter the, um,

The parts business as usual, grew in the low. It was in the low teens this quarter. It's pretty much similar to what we saw last quarter where we saw some really nice. Um, some growth was in the repair and overhaul and Specialty Products group, uh, repair and overhaul, where it was up in the mid teens. And that was, um, that was driven by, uh, a really nice mixer in the quarter, which elevated our gross margin a little bit. Uh, and we were you know, it's nice to see that. And as you recall the repair,

Business.

Carlos Macau: So that was a nice surprise during the quarter. And as Eric just mentioned with specialty products, that growth was in the low double digits. And that's been driven principally by our defense business within the specialty products group. Although I would point out that now that we've seen some of the airframers getting a little bit better of a cadence, I do expect our commercial aerospace OEM work within specialty products to pick up a little better, be a little more steady than it had been in the past. So, Eric, you want to?

Eric Mendelson: Yeah. And then also, Sheila, to add, you asked about engine versus non-engine. As you know, we are a majority non-engine. And our engine, you know, it's hard to calculate because the businesses don't capture the information necessarily the same way. But I would say that our engine portion of our aftermarket business is probably around 25%, you know, roughly a quarter. That gives you a, you know, Heico historically had been had a higher percentage of engine, but we've made a number of acquisitions over the last number of years, the largest of which was Wencor, and the majority of those acquisitions have been non-engine. So that's why our percentage of engine is probably roughly in the one-quarter area of the aftermarket.

Is pretty much a parts play. It's a component repair. As you know, we don't have hangers and we don't repair planes, but we do do components and a lot of that work is a channel for us to really filter a lot of our PMA Parts through. So that that was a nice surprise during the quarter. And as Eric just mentioned with Specialty Products that growth was in the low double digits and and that's been driven principally by our defense business within the Specialty Products group. Although I would point out that now that we've seen some of the air framers, getting a little bit better of a Cadence. I do expect our commercial Aerospace OEM work within Specialty Products to, to pick up a little bit, or be a little more steady than it had been in the past. So,

Eric, you want? Yeah. And then also Sheila to add, you asked about engine versus non-engineer. As you know, we are a majority non-engineer, and our engine, you know, it's hard to calculate because the businesses don't capture the information necessarily the same way. But I would say that our engine portion of our aftermarket business is probably around 25%, you know, roughly a quarter.

Victor Mendelson: Got it. And then maybe just given news out this morning with the Pentagon thinking about taking equity stakes with defense contractors, any update on your end on PMA into the DOD?

That gives you a, you know, high high go historically had been had some, uh, was had a higher percentage of engine, but we've made a number of Acquisitions over the last year number of years, the largest of which was wcor and the majority of those Acquisitions has been non-engineered. So that's why our percentage of engine is probably roughly in the 1 quarter area of the after market

Eric Mendelson: Yeah, that continues to be an area where we think the Pentagon can save a lot of money. And the Pentagon is looking at a lot of things. They're trying to implement a lot of things right now, but we're very bullish on that. So we think that that will be continued opportunity for us. There's no reason why they shouldn't get those savings the same way as the commercial aftermarket and business aftermarket does. So we think that there's very good potential.

Got it. And then maybe just given the news out this morning with the Pentagon thinking about taking equity stakes in defense contractors, any update on your end on, uh, PMA into the DoD?

We can save a lot of money, and the Pentagon is looking at a lot of things. They're trying to implement a lot of things right now, but we're very bullish on that.

Victor Mendelson: Great. Thank you.

So, um, we think that there will be continued opportunities for us. There's no reason why they shouldn't get those savings, the same way as the commercial aftermarket and business aftermarket does. So, um, we think that there's very good potential.

Eric Mendelson: Thank you.

Great. Thank you.

Thank you.

Samara: And we'll take our next question from Peter Armon with Baird.

Victor Mendelson: Yeah, thanks. Good morning, Victor. Eric, Carlos, nice quarter.

And we'll take our next question from Peter Armont with Beard.

Carlos Macau: Hi, thanks.

Victor Mendelson: Hey, Eric, talking about FSG, you talked about the market share, and I know Carlos just went through kind of what the drivers were on MRO and some of the repairs and parts. But where are you seeing the opportunities in market share? Is this still benefiting from kind of the Wencor synergies, or how should we think about that? Or is it just new parts that you're developing and introducing?

Eric Mendelson: Yeah, I think it's across the board. Yes, there are synergies with Wencor to answer that part of your question. But we have very, very strong organic growth opportunities across the entire business. So specifically, if you look at PMA and repair, I just did the strategic annual sales meeting reviews I participated in and saw by subsidiary the focus that they've got on developing new products, whether it's PMA or repair. And it is, it frankly blew me away. We have got such technical capability, such customer support and demand that I'm really excited about the opportunities here. So I really see it very broad-based. And I think if you look at our numbers, the organic growth of 13% with the fact that our aftermarket business is only roughly 25% engine.

Yeah thanks uh good morning Victor. Eric Carlos. Nice quarter. Um hey Eric um talk talking about FSG uh you talked about some market share and I know Carlos just went through kind of what the drivers were on mro and and and some of the repairs and parts, but where are you seeing the opportunities in market share? Is this still benefiting from kind of the when core synergies or how should we think about that? Or is it just new parts that you're developing and introducing?

Yeah, I think it's across the board. Uh, yes, there are synergies with one core to answer that part of your question, but we have very, very strong, uh, organic growth opportunities across the entire business. So specifically, if you look at PMA and repair, uh, I just did the strategic annual sales meeting reviews I participated in and saw.

Eric Mendelson: I think we've, I was surprised, you know, after seeing where other companies reported, our, you know, 75% of our business is non-engine, and we turned in 13% organic growth. I mean, frankly, I don't know how our guys did this. It's phenomenal. And so I think that really speaks to the competitive advantage that we have where we don't run a single big integrated enterprise. We run dedicated targeted businesses that are really, excuse me for using the expression, but are killers in what they do. And they are really good, really knowledgeable. They know all the details. And the organic growth pipeline is just tremendous. And I think, you know, when you see 75% of our business being airframe and we're up 12%, you know, 13% organic growth, I think that speaks to the depth and the breadth of our product line and capabilities.

By subsidiary, the focus that they've got on developing new products, whether it's PMA or repair, and it is it, frankly blew me away. It it, uh, we are have got such technical capability, uh, such customer, uh, uh, support and demand that. I'm really excited about the, you know, the opportunities here. So I, I, I, I really see it very broad-based and I think if you look at our numbers, um, the, uh, organic growth of 13%, um, with the fact that our aftermarket business is only roughly, uh, 25% engine. I think we've, I was surprised, you know, after seeing where other companies reported our, you know, 75% of our business is not engine and we turned in 13% organic growth. I mean frankly, I don't know how our guys

Did this. It's phenomenal. And, um, so I think that really speaks to the competitive advantage that we have, where we don't run a single big integrated enterprise; we run dedicated, targeted businesses that are really, uh, excuse me for using the expression, but our killers in what they do. They are really good, really knowledgeable; they know all the details.

Victor Mendelson: Yeah, that's super helpful, Carla, there. Carlos, just on margins, you know, FSG, I think it was a really strong quarter for incremental margins. How do we think about this going forward? Is it just more mix-driven for this quarter, or do you think that margins like this can be sustained?

And the organic growth pipeline is just tremendous. And I think, you know, when you see 75% of our business being airframe and we're up 12, you know, 13% organic growth, I think that speaks to the depth and the breadth of our product line and capabilities.

Carlos Macau: So these guys keep making liars out of me. They're so good at what they do. I got to be candid with you. The margin that we posted this quarter exceeded my expectations. Is it sustainable? Look, I hope so. I still think that mix drove some of the growth in that margin, but it wasn't the super majority of the margin. I mean, our gross margin was up a couple of points. And a lot of that was driven by some of the mix. And you know, I'd love to see that continue, but mix is what it is, right? So, you know, I think, you know, if I had to project the segment, you know, I do expect now that we're somewhere in the 24s.

Yeah, that's super helpful color there on Carlos. Just on on margins. Uh you know, FSG I think it was really strong uh quarter for incremental margins uh how how do we think about? You know, this going forward is just more mixed driven, uh, that you for this quarter or or, or can do you think that, you know, margins like this can be sustained.

So, so these guys keep making liars out of me. They're so good at what they do. Uh, I got to be candid with you.

The margin that we posted this quarter exceeded my expectations. Um,

Carlos Macau: I had previously thought 23 to 24 was our range, but this year, the guys have just, they've outperformed and they've exceeded my expectations. So more to come on that. I mean, I wouldn't project out a model or forecast at 25% margins just yet. I think you should let us bank some, you know, a few quarters under our belt to see how this plays out. But you know, if you are modeling, if you assume around 24, you're probably in a good zip code, 24% OI margins.

Is it sustainable? Look, I hope so. I I I still think that mix drove some of the growth in that margin, but but it wasn't the super majority of the, of of the margin. I mean, our gross margin was up a couple points. Um, and and, and a lot of that was driven by some of the mix and, you know, I'd love to see that continue but mix is what it is, right? So, you know, I I think, you know, if I had to project the segment, you know, I do expect now that we're somewhere in the 24s, I, I had previously thought 23 to 24 was our range but but this year, the the guys have just they've outperformed and they've and they've exceeded my expectations. So so more to come.

Victor Mendelson: Appreciate it. Thanks, guys. Jump back in the queue.

On that. I mean I wouldn't I wouldn't project out a model or forecast at 25% margins. Just yet. I think you should let us Bank some you know, a few quarters under our belt, to see how this plays out. But you know, if you are modeling, if you assume around 24, you're probably you're probably in a good zip code 24, margins.

Appreciate it. Thanks, guys. Jump back in the queue.

Samara: We'll take our next question. I'm from Noah Papanok with Goldman Sachs.

Like our next question from Noah Papa, knock with Goldman Sachs.

Various Analysts: Hey, good morning, guys. Maybe just saying, hi, Carlos, does FSG have seasonality in the fourth quarter, up or down, sequentially?

Hey, good morning, guys.

Um, maybe just stay, Carlos. Does FSG have...

Seasonality in the fourth quarter: up or down sequentially?

Carlos Macau: You know, typically, if you look back over time, Noah, the fourth quarter is typically our strongest quarter in the FSG. So yeah, seasonality, I wouldn't call it seasonality, but what we do tend to see in the revenue side is our low points typically Q1, and then it slowly builds throughout the year. So that's kind of been our trajectory.

You know, typically if you look back over time, Noah, the fourth quarter is typically our strongest quarter in the FSG.

So, yeah, the seasonality— I wouldn't call it seasonality— but what we do tend to see on the revenue side is our low points, typically Q1, and then it slowly builds throughout the year. So that's kind of been our trajectory.

Various Analysts: Okay. So we can marry that with kind of how the incrementals are laid out, and that would kind of make the year of 24. And then your point previously is then you can expand a little bit from there next year with a normal increment.

Okay, so we can marry that with kind of how the incremental is played out, and that'll make the year of 2024, and then you're.

Carlos Macau: Yeah, I mean, I would think, as we've said in the past, Noah, we do expect, you know, absent big mix swings within the FSG, we do expect, you know, the normal cadence of 20, 30 bips improvement. A lot of that's just leverage on our SG&A spend. Those are the kind of things that we sort of count on and look to achieve. Things like this quarter where we, you know, you can't control mix. And when we have, you know, good mix quarters, in particular, like Eric pointed out with the growth and repair and overhaul, that that, you know, that's hard to predict in any one given quarter. So I wouldn't, I wouldn't take, you know, the almost 25% operating margin and sort of parlay that into the next future quarters.

Point previously is that you can expand a little bit from there next year with over the normal increment.

Yeah, I mean, I I would think as as we said in the past Noah we do expect, you know, absent big mixed swings within the FSG, we do expect, you know, the normal Cadence at 2030 BS Improvement. A lot of that is just leverage on our sg&a. Spend those are the kind of things that we sort of count on and and look to achieve

Things like this quarter where we, you know, you can't control mix. And when we have, you know, good mixed quarters, in particular, like Eric pointed out with the um.

Growth and repair and overhaul, uh, that, that, that, that.

Carlos Macau: I'd, I mentioned to the other analysts, but let's see how the next couple of quarters play out before we start getting into the zip code. You could probably count at 24 and let's see where we go from there.

You know, that's hard to predict in any one given quarter. So I wouldn't, I wouldn't take, you know, almost 25% operating margin and sort of parlay that into the next few quarters. I think I mentioned to the other analysts.

Let's see how the next couple of quarters play out before we start getting into that zip code. You could probably count it as 2024, and let's see where we go from there.

Various Analysts: Yeah, that makes sense. Maybe you could similarly speak to your, how you're thinking about ETG, which, you know, I know you've explained why that's a little bit more volatile quarter to quarter. It was up in the first quarter, down in the second and third. Usually, it has some stronger seasonality in the fourth quarter. Do you expect that? And what's your thinking of the range?

Yeah, that makes sense.

Maybe you could similarly speak to how you're thinking about EtG, which...

Carlos Macau: Yeah, so look, I was pleased with the ETG's performance this quarter. You know, I think I've mentioned to you and other folks I've spoken to that, you know, the third quarter to me always felt like a repeat of Q2. It looked that way in our forecasts, and the margin sequentially was the same. You know, I expect that that segment on any given Sunday is going to run between 22 and 24% operating margin, and we sort of split it right down the middle of the goalpost this quarter. So from my perspective, this is kind of the area you can count on. The numbers will move up and down from there, and it will be dependent on mix. I think volume-wise, similar to the FSG, as we continue to grow that base of business, we will see some operating leverage in the expenses.

You know, I know you've explained why that's a little bit more volatile quarter to quarter. It was up in the first quarter, down in the second. And third usually has some seasonally stronger performance. In the fourth quarter, you expect that. And what’s your latest thinking of the week?

Yeah, so look, I was pleased with the TG's performance this quarter. You know, I think I'd mentioned to you and other folks I've spoken to that.

You know, the third quarter to me always felt like a repeated Q2. It looked that way in our forecasts, and the margin sequentially was the same. You know, I expect that that segment on any given Sunday is going to run between 22% and 24% operating margin, and we sort of split it right down the middle of the goal post this quarter.

Carlos Macau: But no, I think from a profitability standpoint and a go-forward perspective, not much has changed in my view. I think that 22 to 24% range still holds true.

So, from my perspective, this is kind of the area you can count on. The numbers will move up and down from there, and it will be dependent on mix. I think volume-wise, similar to the FSG, as we continue to grow that base of business, we will see some operating leverage in the expenses. But, um,

But no, I uh, I think from a profitability standpoint, I look and I go forward perspective. Not much has changed in my view. I think that 22% to 24% range still holds true.

Various Analysts: Okay. Would you guys say Gabelth was your third largest ever acquisition? And if so, is that on enterprise value, or is that on revenue or EBITDA? And can you give us any sense for the revenue and EBITDA?

Eric Mendelson: Sure. So that was on enterprise value, purchase price, purchase consideration. And I don't know that we're breaking out other numbers, Carlos, so I'm going to.

Okay, did you guys say Gables was your third largest ever acquisition? And if so, is that on enterprise value or is that on revenue? Could you clarify that? Can you give us any sense for the revenue in EBITDA?

Carlos Macau: No, we're not. So look, you'll see it. We're going to issue, in the 10K, you'll see the cumulative acquisitions for the year. Gabelth on its own doesn't really cross any materiality threshold, so we won't be breaking out their specific numbers. But you'll be able to tell, I mean, look, it was the big acquisition we had in the quarter. You'll be able to see in our cash flows what we paid for it. It's no big secret. But as far as the numbers go, you know, we've gotten so big, Noah, that some of these acquisitions, even though they are large from our historical standpoint, to our numbers aren't significant or material to the overall picture. So we don't give a lot of details in that regard.

Sure. Um, so that was on Enterprise that purchase price purchase consideration and um, I don't know that we're breaking out uh other numbers Carlos so I'm going to know we're not. So look, um, you you'll see it. Uh, we're going to we're going to issue in the 10K. You'll see the cumulative Acquisitions for the year gables on its own. Uh, doesn't really cross any materiality thresholds. So it won't be breaking out there specific numbers. Um, but uh, you'll be able to tell I mean, look, it was the it was the big acquisition. We had in the quarter you'll be able to see in our cash flow is what we paid for it. It's no big secret but uh but as far as the the numbers go, you know, we've gotten so big, Noah that some of these

Acquisitions, even though they are.

Eric Mendelson: Yeah, and this is Victor. I will note that that acquisition is a growing company. It's a growing business. There's a lot of new stuff, new programs, new things that they've gotten on, which are quite significant to it. So we expect that to be a nice growth story internally as it unfolds over the next few years. It's a major, major motivator for us. It wasn't just, you know, sometimes we, you know, we might break back this acquisition at a good price. This is a great business, but I think we bought it more for the growth than just where it is right now.

Um, large from our historical standpoint to our numbers aren't significant or material to the overall picture. So we don't give a lot of details in that regard. Yeah, I, and this is Victor. I, I will note that that acquisition is a growing.

Is a major major motivator for us. Okay, it wasn't just, you know there sometimes we we you know, by great position of good price. Uh this is is is a great business, but I think we bought it more for the growth than just where it is right now.

Various Analysts: Okay. Interesting. All right. Thanks so much.

Eric Mendelson: Thank you.

Okay, interesting. All right, thanks so much.

Various Analysts: Thanks, Noah.

Samara: And we'll take our next question from Ken Herbert with RBC Capital.

Thank you. Thanks Noah.

And we'll take our next question from Ken Herbert, with RBC Capital.

Various Analysts: Yes. Hi, good morning, everybody.

Eric Mendelson: Good morning, Kenny.

Yes. Hi. Good morning everybody.

Various Analysts: Morning.

Various Analysts: Hey, maybe Eric, just start. As you look at the, you know, I think this third quarter, you were up against some of your more challenging comps in terms of FSG organic growth. Can you comment specifically within FSG on the commercial side with your airline customers? Has anything changed in the third quarter in the pricing dynamic or specifically your outlook for airline inventory levels as you move into the fiscal 26? Are you getting as good a pricing as you've gotten in prior quarters? And is there any risk on the inventory side at airlines that you'd call out in the next few quarters?

Good morning. Good morning.

Eric Mendelson: Got it. So to take the first part of your question, with the 13% organic growth, you're right. I mean, it's great numbers, especially considering that it was on top of 15% organic growth a year ago and 19% organic growth before, you know, in 2023. So I'm very happy with the sustained organic growth. We are getting pricing, but again, it is commensurate with our cost increases. So our philosophy always has been, and our customers understand, nobody wants a price increase, but we must pass along our price increases, our cost increases in order, you know, to be a viable, sustainable business. And so we have been able to do that. As far as I think you're probably also going to, you're asking about inventory levels and what's going on at the customers. And it's really a mixed message.

Hey, uh, maybe Eric to start, as you look at the, you know, I think this third quarter you were up against some of your more challenging comps in terms of FSU organic growth. Can you comment specifically within FSG on the commercial side with your airline customers? Has anything changed in the third quarter in the pricing dynamic, or specifically your outlook for airline inventory levels as you move into the fiscal '26? Are you getting as good a pricing as you've gotten in prior quarters? And is there any risk on the inventory side at airlines that you'd call out in the next few quarters?

Got it. So, uh, to take the first part of your question, uh,

Eric Mendelson: There are, as you know, when we all went through the pandemic, there were some significant shortages that occurred afterwards. And there was a certain amount of over-ordering in particular areas. And we are seeing some destocking in some areas, yet we continue to see huge shortages in others. So therefore, the way I sort of look at it on the Heico portfolio is they net each other out. And we, you know, overall, we are not seeing destocking, but that is, you know, again, there are pockets of destocking and pockets of, you know, customers just clamoring and can't get enough because the supply chain is just too thin for what they need. So I would sort of characterize it that way.

With the 13% organic growth. You're right. I mean, it is a great numbers, especially, considering that. It was on top of 15%, organic growth a year ago and 19% organic growth, uh, before you know, in 2023. So I'm very happy with the, uh, with the sustained organic growth. Um, we are getting pricing, but again, it is commensurate with our cost increases. So our philosophy always has been and our customers understand. Nobody wants a price increase, but we must pass along our price increases our cost increases in order, uh, you know, to be a viable sustainable business and so we have been able to do that. Um, as far as I I think you're probably also going to go, uh, you're asking about um, inventory levels and what's going on at the customers and it's really a mixed message. Um, there are

As you know, when we all went through the pandemic, there were some significant shortages that occurred afterwards, and there was a certain amount of over-ordering in particular areas. We are seeing some destocking in some areas. Yet, we continue to see huge shortages in others. Therefore, the way I sort of look at it on the Heico,

Portfolio. Do they net each other out?

And, you know, overall we are not seeing, uh, destocking. But that is, you know, again, there are pockets of destocking and pockets of, uh, you know, customers just clamoring and can't get enough because the supply chain is just too thin for what they need.

So I, I, I would sort of characterize it that way.

Various Analysts: That's helpful. Thanks, Eric. And on the destocking comment, is there any more granularity you could provide on that either with reference to your engine versus non-engine exposure or any other parts of the aftermarket, maybe specifically where you're seeing more inventory pressure from your customers or destocking?

Eric Mendelson: Yeah, you know, I would say I think in the areas of destocking are probably less on the engine side. There are some, and are probably slightly greater on the non-engine side. But then, as I said, again, for us, it sort of all nets itself out, and we don't see a destocking phenomenon on our parts on average across the board. We continue to see extremely strong demand, a tremendous demand. And, you know, frankly, sometimes it's a little hard for me to understand and to parse out where the market is growing versus where our market is going. Our people are very focused on growing organically and gaining market share. And they do that in, of course, the PMA and the repair, but they also do that in the distribution.

That's helpful. Thanks, Eric. And on the daring comment, is there any more granularity you can provide on that, either with reference to your engine versus non-engineer exposure, or any other parts of the aftermarket? Maybe specifically where you're seeing more inventory pressure from your customers or destocking?

Yeah, I I you know, I I would say, I think in the the areas of destocking are probably less on the engine side. There are some, um, and our, uh, are probably, uh, a slightly greater on the non-engineering. As I said, again for us, it's sort of all Nets itself out and we we don't see a, a destocking phenomenon, uh, on our parts, uh, on average across the board. We, we, we continue to see extremely strong, um, demand, uh, a tremendous demand. And

You know, frankly, sometimes it's a little hard for me to understand and to parse out where the market is growing versus where our market is going. Um, our people are very focused on growing organically and gaining market share.

Eric Mendelson: And I really believe that Heico has increased market share over in the distribution side and, frankly, is so good through our distribution businesses in selling our principles product that it can hide what can be going on in the marketplace. Because, you know, our folks are so good at bringing on additional principles and making sure that we operate with a small company mindset where we get very high market share and we don't drop the ball. We don't, at Heico, there's never an excuse that, oh, you know, that fell between the cracks. That just doesn't happen. And our distribution businesses are very focused at picking up all of the sales that they possibly can. So I think that also could be a reason why we don't see destocking because our folks are just out there picking up every single thing they can.

And they do that in, of course, the PMA and the repair, but they also do that in the distribution. I really believe that Hao has increased market share over in the distribution side, and frankly, he is so good through our distribution businesses in selling our principal's product.

Eric Mendelson: And I think that's somewhat uncharacteristic of the industry.

Because, you know, our folks are so good at bringing on additional principles and making sure that we operate with a small company mindset where we get very high market share and we don't drop the ball. We don’t at Howe; there’s never an excuse that, "Oh, you know, that fell between the cracks." That just doesn’t happen, and our distribution businesses are very focused at picking up all of the sales that they possibly can. So, I think that also could be a reason why we don't see these stocking issues, because our folks are just out there picking up every single thing they can. And I think that's somewhat uncharacteristic of the industry.

Various Analysts: Thanks, Eric. Nice, nice results across the board. Thank you.

Eric Mendelson: Thank you.

Thanks, Eric. Nice, uh, nice results across the board. Thank you.

Thank you. Yeah.

Victor Mendelson: And we'll take our next question from Jonathan Seigman with Stifel.

We'll take our next question from Jonathan Sman with Stevil.

Various Analysts: Morning, Eric, Victor, and Carlos. Thanks for taking my question.

Eric Mendelson: Good morning, Jonathan.

Good morning, Eric, Victor, and Carlos. Thanks for taking my question.

Good morning, Jonathan. Uh, could you...

Various Analysts: Could you maybe comment a little bit on how Europe is trending? The company's got a larger exposure there with the acquisitions. Just are you seeing any impact from the headlines of stronger defense spending there? And how is the business faring? Thank you.

Eric Mendelson: Sure. John, this is Victor. So Europe is doing quite well for us. It's been a success story. As you know, we expanded in Europe through what was then, I guess what still is our second largest acquisition, Excelia, which has done very well and in part because of defense. That has really shined for them and for us. And then other defense sales, including in the flight support group on missile defense, which Eric mentioned a little bit earlier, as well as sales from our other businesses, by the way, that we've owned in Europe for much longer and some US-based. So right now, that's good for us. Look, we are also mindful of nationalism issues and things like that. So, you know, we understand where the limits might be in US-based businesses selling into Europe as we get a little further out into the future.

Did you make me a comment a little bit on how Europe is trending companies got a larger exposure there with the with the Acquisitions just uh are you seeing any impact from the headlines of stronger defense spending there? And how is how is the business fairing? Thank you.

Eric Mendelson: Hence our appetite for acquisitions on the continent. And also, I can tell you as far as the flight support area, we're doing extremely well with our customers over in Europe, you know, whether it's PMA, repair, or distribution. And in particular, our distribution businesses have very large European network. You know, we've got many, many people on the ground over in Europe focused on distribution, hundreds of people. And so we, I think our market share is very good, and that remains a critical and important market for us. And it's doing very well.

Sure, uh, John this is Victor. So Europe is doing quite well for us. Uh, it's been a success story. As, you know, we expanded in Europe through a, what was then? Uh, I guess what still is our second largest acquisition exxelia, uh, which is done very well. And in part because of defense that has really shined, uh, for them and for us, um, and then other other defense sales in including in the flight, support group on missile defense, which Eric mentioned a little bit earlier, uh, as well as sales from, uh, our other businesses. By the way that we, we've owned in Europe for, for much longer, uh, and some us-based. So, so right now that's good for us. Uh, look, we, we are also mindful of nationalism issues and things like that. So, um, you know, we understand where the limits might be, uh, in in us-based businesses selling into Europe as we get a little further out into the future, uh, hence, our appetite.

For Acquisitions, uh, on the continent. And and also I can tell you if, as far as the fight support area, we're doing extremely well with our customers over in Europe. Uh you know whether it's PMA repair or distribution uh and in particular our distribution businesses have very large European Network. You know, we've got many, many people on the ground over in Europe focused on distribution, it's hundreds of people. And um, so we I

I think our market share is very good, and that remains a critical and important market for us. It's doing very well.

Various Analysts: Great to hear. And in this favorable environment, are there new opportunities to organically invest, or should we expect just acquisitions being the primary use of cash? Thank you.

Eric Mendelson: I think it's both. We have been expanding in Europe, both our footprint. We just completed, I still consider the UK part of Europe, although it's not EU. And we just completed a new facility in the UK. And one of our businesses, we're starting on another outside of Paris and another business, as well as some capital improvements, facility improvements, and additions in other places in Europe. So I would expect it to be both organic and acquired. And Jonathan, as I mentioned in the beginning of my prepared remarks, our cash flow remains very strong. So I think one of the unique things is that we're able to grow in all geographies and also in Europe and still generate cash from that region that we're able to use in acquisitions. So we're able to grow organically.

Great to hear. And what, uh, innocent, favorable environment are there new opportunities to organically invest, or should we expect just acquisitions being the primary use of cash? Thank you.

Eric Mendelson: We don't have to tie up all sorts of capital in order to grow organically. And we can actually take additional cash that comes out of the businesses and use it for acquisitions. And that's really what creates this whole compounding effect at Heico.

I think, I think it's both, uh, we have been expanding in Europe, uh, both our footprint. We we just completed. I still consider the UK part of Europe, although it's not a year. Um, and uh, we just completed a new facility in the UK and 1 of our businesses were starting on another, uh, outside of Paris. And another business, uh, as well as some Capital, uh, improvements facility, improvements in additions, in other places in Europe. So, um, I would, I would expect it to be both organic and, uh, Acquired, and and, and, and Jonathan is I mentioned in beginning of my prepared remarks, our cash flow remains very strong. So I think what 1 of the unique things is that we're able to grow in all geographies in also in Europe uh and still generate cash from that region that we're able to use in Acquisitions. So we're able to grow organically. We don't

We have to tie up all sorts of capital in order to grow organically. We can actually take additional cash that comes out of the businesses and use it for acquisitions. And that's really what creates this whole compounding effect at Heico.

Various Analysts: Fantastic. Thank you again.

Eric Mendelson: Thank you.

Fantastic. Thank you again.

Thank you.

Samara: And we'll take our next question from Ron Epstein with Bank of America.

And we'll take our next question from Ron Epstein with Bank of America.

Victor Mendelson: Hey, good morning, guys.

Eric Mendelson: Morning, Ron.

Hey, good morning, guys.

Victor Mendelson: Maybe just a quick question on capacity. With all the growth you're seeing across both, you know, your commercial businesses and your defense businesses, is there anywhere where you're just kind of squeezed on capacity?Yeah,

um, morning, Ron

Businesses are there; is there any way we can manage, or are you just kind of squeezed on capacity?

Eric Mendelson: there are a number of areas. There are a number of facilities that we've got to expand. It is still hard to hire people in certain geographies, although that is getting easier. I think AI and, you know, what's going on in the economy is helping in that area. But overall, I would say we're well, we're very well positioned. We've made the investments to be able to handle future growth. And I think the other unique thing at Heico is we haven't squeezed the fruit in terms of, you know, operating at our various facilities in excess of their true ability. So we've got plenty of capacity to be able to continue to grow and expand. So I think we're good in that area. We're always very mindful of that.

Yeah, there are, uh, a number of areas. Uh, there are a number of facilities that we've got to expand. It is still hard to hire people in certain geographies, although that is, uh, getting easier. I think, uh, AI and, you know, what's going on in the economy, is helping in that area. Um, but overall, I would say we're very well positioned. We've made the investments to be able to handle future growth, and I think the other unique thing in Heico, we haven't...

Carlos Macau: I could use a few more desks for my accountants, but other than that, I think you're right.

Squeezed the fruit in terms of, you know, operating at our various facilities that, uh, in excess of their true ability. So we've got plenty of capacity to be able to continue to grow and expand. So I, I, I think we're good in that area. We're always very mindful of that.

I could use it for more guests.

I could use a few more desks for my accountants, but other than that, I think you're right.

Carlos Macau: Gotcha, gotcha, gotcha. And then, how are your supply chains doing, right? I mean, the suppliers to you, maybe on raw materials and other things?

Eric Mendelson: Yeah, in general, things aren't much improved. There are still some, there are a number of areas of continued shortage and where we've got parts on backlog and we're dying to get parts and our sales could be considerably higher if we had those parts. So that still remains a challenge, but there's no question that the amount has gone down significantly. One of the other things that we watch is, you know, we do a tremendous amount of incoming inspection at Heico. And we don't just go dock to stock. We instead inspect the parts, and we've got a very robust inspection process. And I can tell you that a year and a half ago, two years ago, the backlog in incoming inspection was quite large. And our folks have done a great job in working that down.

Gotcha, gotcha. Gotcha. And then, how are your supply chains doing? I mean, the suppliers to you, maybe on raw materials and other things.

Eric Mendelson: And I think that speaks to, you know, the capacity issues, adding people, adding facilities to be able to get all this stuff through. So we've made very good progress in that area.

Yeah, there in general there, things aren't much improved. Uh there are still some, there are a number of areas, the continued shortage and where we've got Parts on backlog, and we're dying to get parts. In our sales could be considerably higher if we had those parts, um, so that, that Still Remains a challenge. But there's no question that uh, the amount has has gone down significantly 1 1 of the other things that we watch is, you know, we do a tremendous amount of incoming inspection at Hico and, uh, we don't just go Dr. Stock, uh, we instead inspect the parts and we've got a very robust inspection process and I can tell you that uh a year and a half ago, 2 years ago, the backlog in incoming inspection was quite large uh and our folks have done a great job in working that down and I think that speaks to you know, the capacity

Carlos Macau: Ron, I would say, just Carlos, I was just going to add to that, you know, I do think I'm a big believer in this. While administratively, it's a little challenging, we don't have centralized purchasing. The ability for our, you know, we probably have 100 supply chains, and the ability for our guys to bob and weave and negotiate and beg and whatever they need to do to get product in times where we've experienced shortages, I think it allows us to be a lot more flexible and meet our customers' needs. You know, it's probably a more expensive process at the end of the day. I mean, I think it's less efficient than centralized processing.

Capacity issues, adding people, adding facilities to be able to get all this stuff through. So, um, we've made very good progress in that area.

Ron: I would say this is Carlos.

I was just going to add to that. You know, I do think I'm a big believer in this.

While administratively it's a little challenging, we don't have centralized purchasing. The ability for our, you know, we probably have 100 supply chains and the ability for our guys to bob and weave and negotiate and beg, and whatever they need to do to get product in times, um, in times where we've experienced shortages, I think it allows us to be a lot more flexible and meet our customers' needs.

Carlos Macau: But the truth of the matter is, from a customer perspective, as to Eric's point, we don't tend to run out of things because our guys are able to negotiate locally for raw materials and supplies. And I think that does give us a competitive advantage.

Carlos Macau: Got it, got it. And have you, I mean, Carlos, have you guys had to keep a little more inventory around just to kind of smooth any gaps?

You know, it's probably a more expensive process at the end of the day. I mean, I think it's less efficient than centralized processing, but the truth of the matter is, from a customer perspective—uh, as to Eric's point—we don't tend to run out of things because our guys are able to negotiate locally for raw materials and supplies. And I think that does give us a competitive advantage.

Eric Mendelson: So we've always, we've always given our subsidiaries sort of the green light to make sure they have what they need for their customers. I mean, candidly, a few years ago, post-COVID, it got a little out of hand in my judgment. I think we invested a little too much in inventory. What you've seen and you saw in our cash flow statement probably was our investment inventory has come down. You know, the ETG candidly has done an excellent job this year on managing inventory. They had very little use of working capital for the first nine months of the year as it relates to investment in inventory. FSG's investment in inventory has been commensurate with our organic growth. So I think the situation on the inventory side for us this year is pretty positive.

Got it, got it, and have you. I mean, Carlos, if you guys had to keep a little more inventory around just to kind of smooth any gaps,

So we've always, we've always given our subsidiaries sort of the green light to make sure they have what they need for their customers. I mean, candidly a few years ago, postco had got a little out of hand in my judgment. I think we invested a little too much in inventory. What what? You've seen and you saw in our cash flow statement probably was our investment. Inventory has come down, you know, the EtG candle has done an excellent job this year, on managing inventory. Um, they had very little use of working capital for the first time much of the year as it as it relates to invest.

Carlos Macau: Got it. Cool. Thank you, guys.

Investment in inventory, fsg's investment in inventory, has been commensurate with our organic growth, so I think, I think the uh, the situation on the inventory side for us, this year is pretty is pretty positive.

Got it. Cool. Thank you, guys.

Eric Mendelson: Thank you.

Thank you.

Samara: And we'll take our next question from Gavin Parsons with UBS.

I'm going to take our next question from

Eric Mendelson: Oh, there we go. Thanks, guys. Good morning.

Eric Mendelson: Good morning.

There we go. Thanks, guys. Good morning.

Good morning.

Eric Mendelson: What would you say is the average price gap now between one of your PMA parts and the OEM part?

Eric Mendelson: Oh, yeah, that's really a hard number to estimate. You know, I think that, you know, if you were to look across the entire business, you know, it's, you know, of course, it depends on how long somebody has been buying a product. Because if a customer has been buying a product for a very long time and has it on contract, then we give them some form of price protection. You know, our, I don't, I can't tell you what our average is. I can take a guess, but I can tell you that I would say the range is from a 20% discount on the low end and on parts where customers have been buying them for a long time. And we've been able to control our cost. It could be as high as a 70% discount.

What would you say is the average price gap now between one of your PMA parts and the OEM part?

Oh yeah, that's really a hard number to estimate. You know, I think that...

You know, if you were to look across the entire business, you know, it's.

On how long somebody's been buying a product. Because if a customer has been buying a product for a very long time and has it on contract, then we give them some form of price protection.

Eric Mendelson: So, you know, if you want to, you know, say probably on average, we're probably one third to 40% below the OEM price, I would say, you know, something like that. But I don't have a number across the board. The other thing is, of course, in our repair business, we have a lot of proprietary repairs, which save our customers considerable dollars. And there, the savings can be easily north of 50%.

You know, our I I don't I can't tell you what our average is. I I I can take a guess but I can tell you that I would say the range is from a 20% discount on the low end and on Parts, where customers have been buying them for a long time. Uh, and we've been able to control our cost, it could be as high as the 70% discount.

So, you know, if you want to, you know, say probably on average, we're probably 1/3 to 40% below the OEM price. I would say, you know, something like that. But I, I, I don't have a, uh, a number on the board. Um, the other thing is, of course, in our repair business, uh, we have a lot of proprietary repairs, which save our customers considerable, uh, dollars. And the savings can be easily north of 50%.

Eric Mendelson: That's really helpful. And maybe this is a range question too, but anything that you could share on what your average market share is or customer wallet share is across the portfolio?

That that's really helpful and maybe this is a range question too but anything that you could share on what what your average market share is or customer wallet, share is across the portfolio.

Eric Mendelson: We, you know, we're careful over on the PMA side. We never want to take a majority market share on any particular part that we go after. You know, it would be hard to come up with that number, you know, depending on what the denominator is. But I do believe that there is still plenty of, if you will, unsold potential. So I'm, you know, very confident of our continued growth and market penetration.

Um, we, you know, we're careful over on the PMA side. We never want to take a majority market share in any particular part that we go after. Um, it, it, you know, it it it would be hard to come up with that number, you know, depending on what the denominator is. Um, but I do believe that there is still plenty of, uh, if you will unsold potential. Uh, so I'm, you know, very confident of our of our continued growth and Market penetration.

Eric Mendelson: Got it. Thank you.

Eric Mendelson: Thanks, Gavin.

Got it. Thank you.

Thanks Gavin.

Samara: We'll take our next question from Pete Skubicki with Olympic Global.

Victor Mendelson: Hey, good morning, guys. I just want to circle back to the Gabels deal, just because, you know, it seems like you guys have made a number of avionics acquisitions at this point. And so I'm just wondering if you could speak to the strategy, if they're just kind of, you know, one-off deals, or is there a deeper strategy there in terms of maybe moving up the value chain in the commercial OE world, or just, you know, maybe these deals are mostly aftermarket? I'm not sure, but I was wondering if you could just speak to the strategy after a number of avionics deals. Thanks.

I'll take our next question from Pete. Scoopski with Olympic Global.

Hey, good morning, guys. Um, I just want to circle.

I just want to Circle back to the gables deal just because, uh, you know, it seems like you guys have made a number of avionics Acquisitions at this point. And so, I'm just wondering if you could speak to the strategy, if they're just kind of, you know, 1-off deals or or is there a deeper strategy there in terms of maybe moving up the value chain in the commercial commercial, OE world or, or, or just, you know, maybe these deals are mostly aftermarket and I'm not sure, but I was wondering, if you could just speak to the strategy.

Eric Mendelson: Sure, sure. So the answer is, you know, we've been active in avionics and cockpit electronics actually since 1999, I think, when we made our first two acquisitions in this space. One was in our repair and overhaul when we started with an acquisition called Air Radio and Instrument. And at the same time, our radiant power business with emergency backup power supplies and some other things and panels that are used in cockpit. So it's always been an attractive sector for us. We've expanded in that over the years, in 2001 with another acquisition, and then beyond that with a series of others, mostly in repair and overhaul, but also adding other things like emergency locator transmitters, which are related, and panels and displays over the years. So it's an attractive area where we've been able to expand somewhat opportunistically.

After a number of avionics deals. Thanks.

Sure, sure. So, the answer is, you know, we've been active in avionics and cockpit Electronics actually since, uh, 1999. I think, when we made our first 2 acquisition in this space, uh, 1, uh, was in our repair and overhaul when we started with an acquisition called are radio and instrument and at the same time, uh, radiant power business, uh, with emergency backup, power supplies, and some other things and panels, uh, that are used in in cockpit. So it's always been an attractive sector for us. We've expanded in that, uh, over the years. Um, and in 2001 with another acquisition and then beyond that with a series of others, mostly in repair and overhaul but also adding other things like emergency, locator transmitters, which are related, um and panels, uh, and displays over the years. So it's an attractive area where we've been able to

Eric Mendelson: We're not just, I wouldn't say we're looking to rise in the food chain. That is not our objective. We're really looking to go where there are excellent opportunities and excellent both OEM opportunities as well as aftermarket. Aftermarket is a big part, of course, of the strategy. And in the case of Gabels Engineering, it is, as we talked about in the press release, a storied company founded in 1946, which had a wealth of suitors. I mean, many, many, many people wanted to buy this company, would have loved to have acquired it. But ultimately, we had established a relationship over a fair number of years, also being a local company here in South Florida, located near a number of our other facilities, including our offices where we're sitting right now. And so the opportunity presented itself.

To expand somewhat opportunistically. Uh, we're not just, I, I wouldn't say we're looking to rise in the food chain; that is not our objective. We're really looking to go where there are excellent opportunities. And excellent, uh, both OEM opportunities as well as aftermarket. Aftermarket is a big part, of course, of the strategy, and, um, in the case of Gable's engineering,

Eric Mendelson: They were ready to do something, but most importantly, they wanted a good home for the business. They wouldn't sell it to just anyone. They did select us out of many other opportunities, and it wasn't just based on economics. It was really based on what they thought we would do with the business, how we could grow it, and that we would be a great steward. So the answer to your question is it's a combination of things, which is very typical of our acquisitions. That is very often the case. You know, we may target something, but we may not be able to make acquisitions in it either affordably or sensibly. And that's how we've grown the business. We don't just stop there and say, "Okay, we can't get what we want on a path, on a product roadmap." We're going to look beyond that.

Eric Mendelson: We're going to take adjacencies and move. Now, I think that's been a big part of our success, is our willingness and ability to bob and weave over the years. So we're very happy to have that acquisition, again, being a very unique company in the industry. In fact, I'll just add that their terms are like Kleenex is a sort of a generic term or Xerox. People refer to panels in cockpits as Gabels panelists. I mean, that is a term in the industry. So it's a really special business.

To sell it to just anyone. They did select us out of many other opportunities and it wasn't just based, uh, on economics. It was really based on what they thought we would do with the business, what how we could grow it? Um, and that we would be a great Steward. So the answer to your question is, it's a combination of things, uh, which is very typical of our Acquisitions. That is very often the case, uh, you know, we make targets something, but we may not be able to make Acquisitions in it. Either affordably or sensibly, uh, and that's how we've grown the business. We don't just stop there and say, okay, we can't get what we want on a, on a path on a product road map. Uh, we're going to look beyond that. We're going to take adjacencies and move, and I think that's been a big part of our success is our willingness and ability to Bob and weave over the years. So we're very happy uh, to have that acquisition again being a very unique company in the industry in. In fact, I'll just

Victor Mendelson: That's great. Yeah, very helpful. And just Victor, and you, you know, all these deals that you've done in the avionics world, you continue to run them separately. You're not kind of integrating them into one big avionics company. Is that right?

Understand that their terms are like "Kleenex" is a sort of a generic term or "Xerox." People refer to panels in cockpits as, uh, "Gable's panels." I mean, that is a term in the industry, so it's a really special business.

Eric Mendelson: Yeah, we're not integrating them into one large avionics company. However, the businesses do cooperate. And I think that's where Heico has been particularly successful over the decades, is being able to get what I call, we call soft synergies, where they cooperate going to customers for new programs. They cooperate technically. They cooperate on production, quality, and others. They will use other Heico companies as suppliers, which is very common and increasingly common. And of course, a major, major benefit has been and continues to be distribution. We have an amazing distribution business led by some really remarkable people who have built that business over time, really absolutely stunning and a unique distribution business, which I don't know if Eric cares to comment on. But over the years, we have put a lot of distribution with that business.

That's great. Yeah, yeah. Very helpful. And just Victor and you, you know, all these deals that you've done in the abiotic world, you continue to run them separately. You're not kind of integrating them into one big avionics company, is that right?

Eric Mendelson: And I think that's been a big part of our success in the cockpit and avionics and electronics space. Yeah, I would agree, Pete, that the distribution has been very key to making a number of these acquisitions, you know, more accretive and significantly more successful because we do have a unique position with our customers. We're able to increase our market share and do exceptionally well. And I think provide a very, very strong outlet. So that's been a big key. To your question as to whether there's a broader strategy, you know, Heico started out life as a JT8D engine parts manufacturer, and then we got into other engines and components. And as time has gotten on into structures and avionics, we're looking to continue to build out our capabilities, yet leave them very entrepreneurial. So everybody is very much focused on their unique technology.

Yeah, we're we're not integrating them in into 1 large avionics company. However, the businesses do cooperate and I I think that's where haiko has been particularly successful over. The decades is being able to get what I call or recall soft Synergy. Uh, where they cooperate going to customers for new programs. Uh, they cooperate technically, they cooperate on production quality and others. Uh, they will use other Hico companies, uh, as as suppliers, um, which is, which is very common and increasingly common. And, of course, uh, a major major benefit has been and continues to be distribution. Uh, we have an amazing distribution business. Uh, led by some really remarkable people, uh, who have built that business over time, really, absolutely stunning. And a unique distribution business with. I don't know if Eric cares to comment on, but um, over the years, we have put a lot of distribution with the

Business. And I think that's been a big part of our success in the cockpit and avionics and electronic space. Yeah, I, I, I would agree, uh, Pete that the distribution has been very key to making a number of these Acquisitions, uh, you know, more accretive and, and significantly more successful. Because we do have a unique position with our customers. We're able to increase our market share and do exceptionally well, and I think provide a, a, a very, very strong Outlet. So that that's been a big key, uh, to your question as to whether there's a broader strategy, you know, Hico started out Life as a jt8d engine parts manufacturer. And then we got into other engines and components and uh, as time has gotten on in the structures and avionics and uh, we're looking to continue to to build out our capabilities yet. Leave them very entrepreneur.

Eric Mendelson: And our thought is if we're very good at the details, that there'll be a very good solution. But we do have, you know, as you pointed out, in avionics, we did acquire Gabels. We acquired some wonderful Honeywell product lines and display units and aircraft information management systems. We bought Millennium Avionics. I mean, we do have a very, very strong avionics business within Heico. And that's been built over a long period of time with a lot of experience.

Entrepreneurial. So everybody is very much focused on their unique technology, and our thought is that if we're very good at the details, there'll be a very good solution. But we do have, you know, as you pointed out, Navionics. We did acquire Gables, we acquired some wonderful Honeywell product lines and display units, and Aircraft Information Management Systems. We bought Millennium Avionics, I mean,

We do have.

Victor Mendelson: Yeah, no, that's great. I appreciate it, guys.

A very, very strong avionics business within HEICO. And that's been built over a long period of time. It's something that has a lot of experience.

Eric Mendelson: Thanks, Pete. Thank you.

Yeah. No, that’s great. I appreciate it, guys.

Thanks Pete. Thank you.

Samara: And we'll take our next question from Scott Mikes with Amelius Research.

And we'll take our next question from Scott Micas with Amelia's Research.

Carlos Macau: Morning, Eric, Victor, and Carlos. Nice results.

Eric Mendelson: Thank you.

Carlos Macau: Morning, Scott.

Morning, Eric, Victor, and Carlos. Nice results.

Eric Mendelson: Eric, I have a quick question on the organic investment opportunities, particularly in the PMA business. When you're evaluating what parts to pursue, how do you form that business case? Are you looking for a payback over a year or two, or does the part eventually have to be able to generate, say, 3 million plus in revenue with accretive margins to make it worthwhile? How do you think about evaluating that process? You know.

Victor Mendelson: I mean, we look at a lot of things. We look at how similar it is to something that we've done before, how much the customer wants it, what the payback looks like, what the investment is, how quickly we can get it from the vendor. I mean, there's all of that stuff put together. And then, you know, basically, that goes into an IRR analysis, and we've got to, you know, we evaluate that because, you know, obviously, that's important. And sort of pull it all together. So I would say it's sort of a complex process. But we want to continue to develop as many parts as we possibly can. We plan on being everywhere. So we tend not to exclude things.

You know, I mean, we we look at a lot of things, we look at how similar it is to something that we've done before, how much the customer wants it? What the payback looks like, what the investment is, how quickly we can get it from the vendor. I mean, there's all of that stuff put together and then, you know, basically that goes into an irr analysis. And we've got to, you know, we we evaluate that because uh, you know, obviously that's important um and sort of pull it all together. So I I would say it's a, it's sort of a complex process. Um, but we want to continue to develop as many parts as we possibly can, and we plan on being everywhere. So, uh, we, we, we tend not to exclude things.

Carlos Macau: Okay. And then thinking about the margins and FSG, they're very good again. Is there still more margin expansion opportunity from insourcing more work that Wencor had previously used to build the print shops for?

Okay. And then, thinking of the margins that...

SG is very good again. Um, is there still more margin expansion opportunity from insourcing more work that Corps had previously used build-to-print shops for?

Eric Mendelson: The answer is yes. I think that there is additional opportunity for the Wencor companies to continue to grow with the other Heico companies. As far as resourcing product that's already made by an existing vendor, we do have the capability to do that, and we have done that, but that's probably not our preference. Our preference would be to be loyal to our vendors and give our other family companies the opportunity to bid on new product going forward. And so I think that's more of the focus. You know, as far as the margin, of course, in the third quarter, FSG was 24.7% operating margin, which frankly is beyond any number I thought it could be. The thing which I think we're even more impressed with is that our EBITDA margin was 27.3%, which is really more than we ever thought that could be.

The answer is, yes. I I I think that there is additional opportunity, um, for the wcore companies to continue to grow, uh, with the other Hico companies. Um, as far as resourcing product, that's already made by an existing vendor, we do have the capability to do that and we have done that but that's probably not our preference, our pre

Reference would be to be loyal to our vendors and give our other, uh, family companies the opportunity to bid on new products going forward. Um, and so I think that's more of the, uh, that's more of the focus. Um, you know, as far as the margin.

Eric Mendelson: And that's done while we continue to deliver great value to our customers, and we don't take advantage of them. So, you know, I would have asked me 10 years ago when we were roughly 10% below this number, you know, in that area, if we could ever get to this number, I would have told you, you know, not in the foreseeable future, not something that I'm really thinking about. But we just put one foot in front of the other and work hard every day, and the numbers don't lie, and they are what they are. So I think that there is additional, you know, insourcing opportunity, and we'll just sort of have to see how that plays out.

Of course, in the third quarter FSG was 24.7%, operating margin, which frankly is beyond any number. I thought it could be. Um, the thing with I think we're even more impressed with is that our ebit a margin was 27.3%, uh, which which is really more than we ever thought that could be. And that's done while we continue to deliver a great value to our customers and we don't take advantage of them. So, um, you know, I, I would have asked me 10 years ago when we were roughly 10% below. This number, uh, you know, in that area if we could ever get to this number, I would have told you you know, I not in the foreseeable future, not something that I'm really thinking about, but we just put 1 foot in front of the other and work hard every day and the numbers don't lie and they they are what they are. So um

I think that there are additional, uh, you know, insourcing opportunities. Um, we'll just sort of have to see how that plays out.

Carlos Macau: All right. Thank you.

Eric Mendelson: Thank you.

All right. Thank you.

Thank you.

Samara: We'll take our next question from Christine Leewog with Morgan Stanley.

We'll take our next question from Christine Lee.

Various Analysts: Hey, good morning, everyone. And thank you for taking my question. You know, Eric, Victor, and Carlos, talk about the supply chain. And it sounds like, you know, the bobbing and disruptive.

Good morning, everyone. And, uh, thank you for taking my question. Um, you know, Eric Victor, um, in talking about the supply.

During a disruptive.

Eric Mendelson: Christine, I think unfortunately, your connection, can you repeat that? You may have to call back in if the connection is not good.

Christine I think unfortunately I I your connection can, can you repeat that? You, you may have to call back in it. It the the connection is not good.

Various Analysts: What you?

Would you like?

Eric Mendelson: I'm sorry. We can't hear you. If you call back in, we'll get to your question very quickly.

I'm sorry, we we we can't hear you. I think if, if you call back in, we'll, uh, we'll, we'll, we'll get to your question very quickly.

Samara: And in the meantime, we'll take the next question from Gotham Connor with TD Cowan.

And in the meantime, we'll take the next question from Gotham Condo with TD Cowen.

Various Analysts: Hey, good morning, guys. How are you doing?

Eric Mendelson: Morning. Good, Gotham. How are you?

Hey, good morning, guys. How are you doing?

Various Analysts: Excellent. Doing well, thank you. You know, I was curious on the, you know, Carlos, you made that comment about FSG profit rates kind of exceeding even your expectations, and NAICS is a part of it. But I'm curious, has the profitability of the various product lines themselves just increased? You know, aftermarket parts, repair, etc. Have you seen an increase in profitability just in the baseline PMA business or the repair business?

Good morning. Good Gotham. How are you? Excellent doing. Well, thank you. You know, I was curious on the, you know, Carlos, you made that comment about FSG profit rates.

Kind of exceeding even your expectations and makes us a part of it, but I'm curious.

The profitability of the various product lines themselves just increased, you know, aftermarket parts repair.

Etc.

have you seen a, uh,

Eric Mendelson: I would say that, yeah, look, I would say, you know, I highlighted repair because it has, it did have a positive impact on the quarter, and it was due to MIX. And you know, it honestly, with the repair business, you kind of eat what you kill every week. And so it's very difficult to predict, you know, what we're going to repair next quarter, by example. I mean, you know, you get RFPs to do jobs. And what we have seen in the repair business is, is, is the one thing that is helpful to profitability is the PMA-friendly side of those repairs. So we've had, we've had a nice, we had a nice quarter where there was a lot of PMA-friendly repairs that we did. Our guys, to Eric's point, continue to develop new DER repairs every day.

An increase in profitability, just in the Baseline PMA business or the repair business.

Border and it was due to mix and you know, it honestly with the repair business, you kind of eat what you kill every week and so it's very difficult to predict, you know what, we're going to repair next quarter, by example. I mean you you know, you get rfps to do jobs and what we have seen in the repair business is is is is the 1 thing that is helpful to profitability is the PMA friendly side of those repairs?

Eric Mendelson: And so I think is that, you know, that, that, that if that continues, it does have a very positive impact on our margins. Now, not every quarter feels like this one. You're with me on the repair side. It does, it is kind of hit or miss. But, but no, I was very, very happy with that. And then also, don't, don't, don't forget it. We mentioned especially products, you know, that defense business we have there. You know, we've banked, gosh, three years' worth of firm backlog there. And those guys are working super hard, and we're expanding that business. And that is good business for us. And so I think those two factors, coupled with the very strong parts business that we've seen all year, is really what's driving this margin.

So we've had, we've had a nice. Um, we had a nice quarter where there's a lot of pmma friendly repairs that we did. Our guys, to Eric's Point, continue to develop new deer repairs every day. And so I think is that, you know, that that that if that continues, it does have a very positive impact on our margins. Now,

Not every quarter feels like this 1. You with me on the repair side it is it does. It is kind of Hit or Miss uh but but no I I was very, very happy with that and then also don't, don't don't forget it. We mentioned, especially products, you know that defense business. We have their

you know, we've banked

Victor Mendelson: And Gotham, I should also add that, you know, while Carlos is absolutely right on the, you know, our independent proprietary repair business does have very strong margins, I should also add that we are doing exceptionally well on OEM-aligned, OEM-licensed repairs as well. And those continue to be, you know, of great value to our customers, as well as to Heico, as well as to our OEM partners. So Heico is really agnostic when it comes to, you know, what product we want to sell. I mean, we want to be out there. There are some customers who want an alternative product, and we're obviously the largest in that space, and we'll deliver it to them.

Gosh, 3 years worth of firm backlog there and and those guys are working super hard, and we're expanding that business and that is good business for us. And so I think those 2 factors coupled with the very strong Parts business that we've seen all year is really, what's driving, this margin and, and, and Gotham. I, I I should also add that, you know, while Carlos is absolutely right on the, uh, uh, you know, our independent proprietary repair business, uh,

Victor Mendelson: But there are other customers who want an OEM product, and we are absolutely there and aligned to develop that OEM product, whether it's through our repair business, even our PMA business has OEM-licensed product. Our distribution is all OEM, all OEM. So we're really very strong across the board, and it's whatever our customers want. And it's not so much us, you know, pushing one thing or the other. It's responding to their needs and requests.

Does have very strong margins. I should also add that we are doing exceptionally well, on OEM aligned, OEM licensed repairs as well. And, uh, those continue to be, you know, of Great Value to our customers, uh, as well as the heco, as well, as, to our OEM Partners. So, Hico is really agnostic when it comes to, uh, you know, what, what product we want to sell. I mean, we want to be out there. There are some, uh, uh, customers who want an alternative product, and we're obviously the largest in that space and we'll deliver it to them. But, there are other customers who want an oem product, and we are absolutely there in a line to develop that OEM product, whether it's through our repair business, even our PMA business as OEM licensed product. Our distribution is all over,

Em, all OEM.

So we're really very strong across the board, and it's whatever our customers want. And it's not so much us, uh, you know, pushing one thing or the other. It's responding to their needs and requests.

Various Analysts: That makes sense. I'm curious on the Wencor integration, or maybe you said differently, cross-selling opportunity, how far along you are there. And the basis of my original question was, you know, on the PMA just aftermarket part side, given the OEM equivalent products seem to be getting a lot of pricing each year, I would think we would start to see the base level of the PMA aftermarket sales, just the profitability continuing to rise, just because you get, you know, a discount off of the OEM list price, which keeps going up at a rate well above inflation. Are you seeing, you know, maybe if you could speak to both of those, are you seeing the base PMA aftermarket business profit rates increase, perhaps because of that that lift as they're linked to OEM prices? And secondly, where are you on that Wencor cross-sell opportunity?

That makes sense. I'm curious on the um,

When it comes to core integration, or perhaps more appropriately referred to as cross-selling opportunities, how far along are you there?

And the basis of my original question was, you know, on the PMA just aftermarket parts side, given the OEM.

Equivalent products.

Seem to be getting a lot of pricing each year. I would think we would start to see the base level of the PMMA, aftermarket sales just.

The profitability continues to rise just because you get, you know, a discount off of the OEM list price, which keeps going up.

At a rate well above inflation.

Are you seeing, you know, maybe if you could speak to both of those: are you seeing the base PMA aftermarket business?

Profit rates increase, um, perhaps because of that.

Various Analysts: How far along are you in that journey? Thank you.

Eric Mendelson: So let me start on the Wencor cross-sell opportunity. We've made good progress. And I'm glad you use the term, you know, cross-sell opportunity and not consolidation because, you know, we do operate these businesses separately. But there is an opportunity where a customer, you know, comes to us and they want a bigger product line of a particular area, and we're able to deliver it. And the Wencor combination has been incredibly successful. The DNA of Wencor matches Heico beautifully. And we're able to really satisfy our customers. And you can see for after two years of two years of this, how well we are doing and how happy our customers are. So that's a given. As far as the margins, you know, we've always said that we're going, we need to pass along our cost increases. And we've done that.

That lifts as they're linked to OEM prices and and secondly, where are you on that? 1 cor cross sell opportunity. How far along are you in that Journey? Thank you, so. So, so let me start on on the wcore. Cross sale opportunity. Uh, We've made good progress, uh, and you I'm I'm glad you used the term, you know, uh, cross sale opportunity and not consolidation because you know, we we do operate these businesses separately. But there is an opportunity where a customer want you know, comes to us and they want to

Eric Mendelson: We have not used increasing prices as a profit grab. You know, we're continuing to make sure that we deliver value to our customers in all areas that we provide, whether it's independent or whether it's OEM-aligned. So, you know, I think that's why we're capturing so much market share. And frankly, I think the margins are getting better because our people just work exceptionally hard. And they really go the extra mile, and they figure out how to get the customers what the customer needs, you know, while we make sure we take care of our suppliers, as I had mentioned in the prior question about Wencor and their suppliers and how we're loyal to them. And I think it's just doing good business. And there's just a general efficiency increase. And as we put more volume across the platform, we're able to drive higher operating margins.

We have not used increasing prices as a profit grab. We are continuing to make sure that we deliver value to our customers in all areas that we provide, whether it's independent or whether it's OEM-aligned.

Carlos Macau: Do you mind if I interject?

So, um, you know, I I think that's why we're capturing so much market share. And frankly, our I I think the margins are getting better because our people just work exceptionally hard and they they really go the extra mile and they figure out how to get the customers what the customer needs. You know, while we make sure, we take care of our suppliers, as I mentioned, in the prior question about when core and their suppliers and how we're loyal to them. Uh, and I, I think it's just doing good business and there's just the general efficiency increase and as we put more volume across the platform, uh, we're able to drive higher operating margins.

Eric Mendelson: Yes.

Carlos Macau: One thing that's helpful, this is Carlos, one thing that's helpful in understanding some of what Eric just said is that a lot of our large PMA relationships are done on long-term contracts. And, you know, we continue to commit to our customers anywhere from three to five years in these contracts. And more often than not, we will lock in pricing with, you know, either a CPI inflator or flat pricing. And there's a lot of reasons strategically to do that. It's additive to our business. They add more parts every year. But it does guarantee pricing for them. And that's part of the reason why, you know, when you start thinking about pricing our PMA business, many times we are locked in.

Do you mind, do you mind? If I, you know, once the 1 thing that's helpful, this is Carlos, 1 thing. That's helpful to understanding, um, somewhat Eric just said, is that a lot of our large PMA relationships are done on long-term contracts,

Carlos Macau: Now, we are able to go back in inflationary times, as we've shown over the last five years, to get a little price to cover our costs even when we have these types of arrangements. But to your earlier question about, you know, the OEM prices rising at much faster rates, even if those prices go up, maybe our standard price list mirrors that growth, but our true net revenue or net sale is based off contractual relationships, which more often than not in the PMA space is going to have a fixed price component. So it's not really impacted by that type of movement in the market.

And, you know, we continue, um, to commit to our customers anywhere from 3, to 5 years in these contracts and, and more often than not, we will lock in pricing with, uh, you know, either a CPI inflator or flat pricing. Uh, and there's a lot of reasons strategically to do that. It's it's additive to our business. They they add more parts every year, but it does guarantee pricing for them. And that's, and that's part of the reason why, you know, when you start thinking about pricing or PMA business, many times, we are locked in. Now, we are able to go back in inflationary times as we've shown Over The Last 5 Years uh to get a little price to cover our our our costs, even when we have these type of Arrangements. But but to um to your earlier question about you know the OEM prices rising at much faster rates.

Even if those prices go up, maybe our standard price lists mirror that growth. But it is true, net revenue or a net sale is based off contractual relationships, which, more often than not in the PMA space, is going to have a fixed price component.

Various Analysts: Right. Thank you very much, guys. Appreciate it.

So, it's not really impacted by that type of movement in the market.

Carlos Macau: Thanks.

Right. Thank you very much, guys. I appreciate it.

Eric Mendelson: Thank you.

Thanks, thank you.

Samara: We'll take our next question from David Strauss with Barclays.

I'll take our next question from David Strauss with Barclays.

Various Analysts: Good morning. Thanks for getting me in. This is Josh Bourne on for David. Lots already been asked. I just wanted to ask, how much of a headwind will intangible amortization be from Gabels on the margins for ETG?

Good morning. Thanks for getting me in. This is Josh Corn on for David.

Uh, lots already been asked, so just wanted to ask, uh, how much of a headwind will, uh, intangible amortization be from Gables on the margins for EtG?

Eric Mendelson: Carlos, I mean, look, we're probably, we're looking somewhere around a million dollars a month in amortization right now. So you can do the math there and figure out what it is on the OI margin.

I mean, look, we're probably.

We're looking somewhere around uh a million dollars a month in in amortization right now. So you can do the math there, and and figure out what it is. On the, on the, on the, on the oi margin.

Various Analysts: Okay. Thank you. I'll just stick to one. Thanks.

Okay.

Eric Mendelson: All right. Thank you.

Victor Mendelson: And by the way, just to add on, you know, as you know, and I just want to make sure we reiterate, you know, the intangible amortization is really, as far as we're concerned, an accounting made-up number. And it really doesn't impact the performance of the company. You know, the performance of the company is outstanding. And really, the way that we look at these acquisitions is EBITDA. And you know, it's sort of a little frustrating because a lot of people in the industry look at acquisitions via EBITDA. And to us, depreciation is a real expense. You know, this is something that we, if you're going to be in business long-term, you've got to make capital expenses, which typically equal or are similar in the same range as depreciation. But it's really the EBITDA number that's important.

All right, thank you. And and and and by the way, just just to add on, you know, as you know, and I just want to make sure we reiterate uh you know, the intangible amortization is really as far as we're concerned and accounting made up number and it really doesn't impact the performance of the company. You know, the the performance of the company is outstanding and really the way that we look at these Acquisitions is ebit a and you know, it's sort of a little frustrating because a lot of people in the industry look at Acquisitions uh via ebit da and to us depreciation is a real expense. You know, this is something that we if you're going to be in business, long term you've got to make capital

Victor Mendelson: And especially when you look at EBITDA, Gabels is really outstanding. It's just a simply outstanding company.

Expenses which typically equal or similar in the same range as depreciation, but it's really the ebit, a number that that's important. And, uh, especially when you look at ebit a, uh, Gables is really outstanding just simply outstanding company.

Various Analysts: Thank you.

Victor Mendelson: Thank you.

Thank you.

Thank you.

Samara: And we'll take our next question from Michael Tremoli with Truist Securities.

And we'll take our next question from Michael Charmoli with Truist Securities.

Various Analysts: Hey, good morning, guys. Thanks for sticking around to take the questions. I'll try and be quick here. Just Carlos, on the FSG margins, I think you called out SG&A efficiency as well. Are there any other actions you guys are taking to strip out costs or consolidate? Maybe it dovetails in with kind of the Wencor ongoing synergies?

Hey, uh, good morning, guys. Thanks.

for uh,

Um, just Carlos on the FSG margins. I think you called out SG&A efficiency as well. Are there any other actions you guys are taking to strip out costs or consolidate? Maybe if you could tie in with kind of the ongoing core synergies?

Carlos Macau: No, we're not. Michael, as you know, we run all these decentralized operations. So there's no real corporate program. I think what you wind up having with Heico is you have a lot of very efficiently run subsidiaries that when you add revenue growth on top of that, they don't often need to expand their SG&A footprint. You know what I mean? They can handle the additional volumes, or maybe it requires a few more salespeople. But the truth of the matter is there's not a big spend on overhead and SG&A type activities that aren't directly related to a sale that we typically incur. So that leverage that we're getting, it's been the story at Heico ever since I've gotten here. We seem to always, the revenues outpace our SG&A spend, and we get a little leverage off it. I expect that will continue.

No, we're not. Um

Various Analysts: Got it. And then, Eric, just real quick on the destocking, you know, on your specialty products, are you seeing anything specifically related to Boeing, to the MAX? We've heard that specifically on the destocking, and potentially it could be a drag into next year. But anything on from that customer or that program?

Michael. As you know, we, we run all these decentralized operations, so there's no real corporate program. I think, I think what you wind up having with haiko is you have a lot of very efficiently run subsidiaries that when you add Revenue growth on top of that, they don't often need to, uh, expand their sgna footprint. You know what I mean? They can handle the additional volumes or maybe it requires a few more salespeople. But the truth of the matter is there's not a big stand on overhead and SG and I type activities that aren't directly related to a sale that we typically incur so that leverage that we're getting. It's been it's been the story at Howe ever since I've gotten here. We seem to always uh the revenues outpace the sg&a spend and we get a little leverage off it. I expect that will continue.

And then, uh, Eric just uh, real quick on the D stocking. You know, on your Specialty Products are, are you seeing anything specifically, uh, related to bowing to the max? We we've heard that specifically on the D stocking and potentially, it could be a dragon to next year. But anything on on from that customer or that program

Victor Mendelson: Are you talking from an OE basis or an aftermarket basis?

Various Analysts: Sorry, on an OE, new production basis.

Hey, just talking from an OE basis or an aftermarket basis.

Victor Mendelson: On an OE basis. No, I mean, we've seen a little bit of it in certain areas. We've seen a little bit of it, but we're very confident that Boeing is going to be extraordinarily successful with the MAX. And we feel very well positioned there. You know, and I think anybody who's buying into that program is going to do very well. You know, the whole industry, all of the OEMs. Yeah.

No, we knew production basis.

On an OE basis, um, no. I mean we've seen a little bit of it in certain areas. Um,

uh,

we we we've seen a little bit of it, but we're we're very confident that Boeing is uh, going to be extraordinarily successful with the Max and uh, we we we feel very well positioned there.

Various Analysts: Perfect. Thanks, guys. Thanks for sticking around. Take the question.

You know, and I I I think anybody who's flying into that program is going to do very well. Um, you know, the the the whole industry, all all of the oems. Yeah.

Perfect. Thanks guys.

Victor Mendelson: Thank you.

Various Analysts: Cheers, Michael.

You guys, Michael.

Samara: And we'll take our next question from Louis Rossetto with Wolf Research.

We'll take our next question from Lewis Roseto with Wolfe Research.

Victor Mendelson: Hey, good morning. Thank you, guys.

Eric Mendelson: Hey, Louis.

Victor Mendelson: Hey, good morning, Louis.

Hey, good morning. Thank you, guys.

Victor Mendelson: Maybe just on M&A, as we think about future deals, are you focused on remaining sort of a designer manufacturer and providing repair services, or are you open to some of these more software-oriented product offerings?

Hello. Hey, good morning, Louis.

Victor Mendelson: Yeah, we're open to that for sure. And in fact, some of our businesses have software products and sales and offerings. It's not a huge part of what we do, but we would be eager to grow in that. And I suspect we will over time. Again, as I was talking about earlier, in avionics, when we started, we get a foothold and we try to grow affordably and sensibly. So I would imagine over time that will happen.

Maybe just on M&As as we think about future deals. Are you focused on remaining sort of a designer manufacturer and providing repair services? Are you open to some of these more software-oriented product offerings?

Yeah, we're we're open to that for sure. And in fact some of our businesses have software uh products and sales, um, and offerings, it's not a huge part of what we do, but we would be eager to grow in that. And and I suspect we will uh, over time again as as I was talking about earlier in avionics, when we started, we get a foothold and we try to to grow affordably and sensibly. Um, so I would imagine over time, that will happen.

Victor Mendelson: Very appreciated. And then maybe just one more on Gabels. I guess when you guys did Excelia, you were pretty, I think, open about that it would be dilutive to margins, whether that was operating margins or EBITDA margins. Is there just no impact from Gabels, just given how, you know, the size of it, or it's relatively within the overall segment view?

We appreciate it, and then maybe just one more on Gables. I guess when you guys did Excel, you were pretty, I think, open about that it would be dilutive to margins, whether that was operating margins or even on margins.

Carlos Macau: So, so Louis is Carlos. I mean, we bought that thing the last week of July, the last week of our quarter. So there wasn't any impact, obviously, to Q3. We'll, you know, we're still studying the business and we're still integrating, doing the things we need to do. So there'll be more on that topic in Q4. I think it was mentioned earlier, you know, it's a very unique business with incredible demand and really nice positions on a lot of OEM platforms. So more to come on that. I don't think it will be dilutive to the margins. I do think that in the early years, we will have some heavy amortization. So that will dampen the OI margin a little bit on the business, but I don't think it should be as pronounced as the Excelia deal was when we did that back in January of '23.

Is there just no sign no impact from from Gables just given how, you know, the size of it or it's relatively within the uh overall segment view. So, so what is this Carlos? I mean we we bought that thing the last week of July the last week of our quarter. So there wasn't any impact obviously to Q3. Um, we'll you know, we're still studying the business and we're still integrating doing the things we need to do. So they'll be, they'll be more on that topic in Q4. I think it was mentioned earlier, you know, it's a very unique business, uh, with with Incredible demand and, and, and really nice positions on a lot of OEM platforms. So, more to come on that. I, I don't think it will be delivered to the margins. I do think that in the early years we will, we will have

And heavy amortization. So that will dampen the, uh, the OI margin a little bit on the business. But I don't, I don't think it should be as pronounced.

Victor Mendelson: Appreciate it. Thank you.

Uh, as the Excel deal was when we did that back on January 23rd.

Appreciate it. Thank you.

Samara: And we'll take the next question from Christine Leewog with Morgan Stanley.

Various Analysts: Hey, guys. Sorry about earlier. Can you hear me now?

Eric Mendelson: Perfectly.

Hey guys, sorry about, uh, earlier. Can you hear me now?

Various Analysts: Okay, great. So hey, Eric, Victor, Carlos. You know, I just want to touch on a supply chain question. You know, you guys mentioned earlier that, look, the approach that you have for bobbing and weaving and not having a centralized supply chain has been very helpful in getting you the parts that you need in this period of supply chain disruption. But I guess, you know, at this point, you know, we're seeing demand for aerospace and defense continue to be strong, things to be moving in the right direction, and the supply chain stabilizing. And look, compared to pre-COVID, you're a much bigger company now. So at some point, would you consider going to a more centralized supply chain? And if you go in that direction, how much could you potentially save? I mean, Carlos, you mentioned that your current approach does probably cost you more money.

Perfectly.

Various Analysts: But as things stabilize and you move in that direction, how much in margin could you potentially capture?

Direction and supply chain stabilizing and look before compared to preco, you're, you're a much bigger company now. So, at at some point, would you consider going to a more centralized supply chain and if you go in that direction, um, how much, uh, could you potentially save? I mean, Carlos, you mentioned that, uh, your current approach does probably cost you more money but, um, as seeing stabilized and you move in that direction, um, how much in margin could you potentially capture

Carlos Macau: I'll give you my two cents on that. I don't think culturally at this point that, you know, in the next three to five years, I don't see that as being a direction we had. You know, look, as the company matures and we get larger, you know, maybe those things will come into play. Right now, I don't think it's necessary. And like I said, over the next three to five years, I don't think that strategy would work. Now, there could be, we could migrate to pockets of purchasing where we have businesses in similar end markets or similar product areas where they might, you know, co-source together on certain products. And by the way, we do some of that now, but it isn't housed in what I would call centralized purchasing or anything like that. So I think, Christine, I think that's where we're at right now.

I give you my two cents on that. I don't think culturally, at this point, that...

You know, in the next 3 to 5 years, I don't see that as being a direction. We had, you know, look as the company matures and we get larger, you know, maybe.

Maybe those things will come into play right now. I don't think it's necessary, and like I said, over the next 3 to 5 years, I don't think that strategy would work. Now, there could be, we could migrate to pockets of.

Carlos Macau: To be honest with you, I haven't done a study to give you a precise number. Obviously, if you consolidated everything from a pure G&A spend, I think it would be cheaper. But I do think that the potential for lost customer revenue and for disrupting our happy customer base is probably not worth it for Heico at this point in our life cycle.

Purchasing where we have uh businesses in similar and markets or similar product areas where they might um you know, Co Source together on certain products and by the way, we do some of that now but it isn't it isn't uh housed in what I would call Centralized purchasing or anything like that. So I think Chris Christine I think that's where we're at right now, to be honest with you, I haven't

Samara: Yeah, that makes sense. And if I could follow on, Eric, you mentioned earlier for PMA, you have some products that are maybe 50% or 70% discount to the OEM. And you know, some of this is due to your longstanding, you know, price guarantees with customers. But I guess broadly speaking, I mean, because the OEMs have raised prices so much in the last five years, those are probably parts you could potentially increase pricing. But you know, your customers are still getting a significant savings. How should we think about potential margin opportunity there? And are you seeing some of those contracts roll off in the near term to give you a little bit of tailwind on margin?

I haven't done a study to give you a precise number. I, obviously, if you consolidated everything from a pure G&A spend, I think it would be cheaper, but I do think that the potential for lost customer revenue and for disrupting our happy customer base is probably not worth it for Hico at this point in our life cycle.

Eric Mendelson: Yeah, that's a great question. And we do see contracts rolling off over time. When the percentage savings is that high, it's typically after somebody's been purchasing the part from us for a long time, which would, in many cases, imply that they are more mature products. So, you know, look, if we wanted to be, if we wanted to maximize short-term margin, yeah, we could absolutely increase prices substantially. But these are products that are at, you know, the longer end of the tail of their lifetimes. Our customers have been very loyal to us. And yeah, you know, around the fringes, we do have to obviously increase our price to cover our increased costs. And some of those costs have been substantial. And we will do that without a question of a doubt.

Yeah, if that makes sense. And if I could follow up, um, Eric you mentioned earlier for PMA, you have some products that are maybe 50% or 70% discount to the OEM um, and, you know, some of this are due to your long-standing, you know, price guarantees with customers but but, I guess, broadly speaking, I mean, because the oems have raised prices so much, um, in The Last 5 Years. Uh, those are probably, uh, Parts you could potentially increase, um, pricing, but you know, your customers are still getting a significant uh, savings. How should we think about potential margin opportunity there? And um, are you seeing uh some of those contracts roll off in the near term to to give you a little bit of Tailwind on margin?

Yeah, that's a great question. And, uh, we do see contracts rolling off over time. When the percentage savings is that high, it's typically after somebody's been purchasing the part from us for a long time, which would, in many cases, imply that they are more mature products.

So, uh, you know, look, if we wanted to be, if we wanted to.

Eric Mendelson: But in terms of really resetting and doing a profit grab, that's really not the Heico way. And so I would not, you know, model that kind of, you know, that kind of activity.

Maximize short-term margin? Yeah, we could absolutely increase prices substantially. Um, but these are products that are at, you know, the longer end of the tale of their lifetimes. Our customers have been very loyal to us and yeah, you know, around the fringes we do have to obviously increase our uh, price to cover our increased costs and some of those costs have been substantial uh and and we will do that with that, a question of a doubt, but in terms of really resetting and doing a profit grab, that's that's really not the hike away.

And, um, so I would not, you know, model that kind of, um, you know, that kind of activity.

Samara: Well, great. Well, thank you very much. And thanks for taking my questions and getting me back in queue.

Eric Mendelson: Great.

Carlos Macau: Thanks, Christina.

Well, great. Thank you very much, and thanks for taking my questions and getting me back in queue.

Eric Mendelson: Thank you.

Victor Mendelson: Thank you. Well, we thank everyone for participating. I think that is the end of the questions. Samara, do we have anybody else with questions?

Great. Thanks for staying up. Thank you. Thank you. Well, we thank everyone for participating. I think that is the end of the questions.

Samara: There are no additional questions.

Uh, Samara, do we have anybody else with questions?

Victor Mendelson: Okay. Well, thank you, everyone, for participating. We will have the fourth quarter results call in late December. And we look forward to your, you know, continued interest. And we thank you for your continued interest in Heico. If anyone has any additional questions, of course, as always, feel free to reach out to Carlos, Victor, or me, Eric. And we'd be happy to fill you in. But we wish you a pleasant end of the summer. And thank you for your support of Heico over the years. And that concludes today's call.

There are no additional questions.

Okay. Well, thank you everyone for uh, participating. We will have the fourth quarter, uh, results call in late December and uh, we look forward to your, uh, you know, continued interest. And we thank you for your continued interest in. Hico, if anyone has any additional questions, of course, as always, feel free to reach out to a Carlos Victor or me Eric, and uh, we'd be happy to fill you in. But uh, We Wish You a pleasant end of the summer and thank you for your support of Hico over the years.

Concludes today's call.

Samara: Thank you. And this does conclude today's call. Thank you for your participation. You may now disconnect.

Thank you. This does conclude today's call. Thank you for your participation. You may now disconnect.