HEICO Corp Q4 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Larry Solow - CJS Securities - Analyst : Congratulations on another good quarter, good year. I guess the first question, maybe a couple for Eric. You gave us a lot of good detail on the Wencor acquisition. It sounds like things are really going well there. Just curious, you mentioned some of -- obviously, it was one of the bigger acquisitions that could you've ever done, and you spoke about a lot of things there. Curious as we look out going forward, are there still opportunities to gain even more revenue synergies? Or are there things on that you've had this the hood for a little more than a year under the -- under the umbrella, excuse me, things that maybe you didn't think were available or sort of positive surprises that you can work on going forward on that side of the business? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Larry, and thanks for your question. First of all, we -- as you pointed out, we're very happy with the Wencor acquisition. It has been immensely successful and exceeded all about our wildest expectations. Number one, starting with the people. They are outstanding. They really fit the HEICO culture. The companies are very similar, and the businesses are working extremely well together. We're in a unique situation that all of our aftermarket businesses are running, of course, at record numbers, performing exceptionally well. And they are so busy just trying to accomplish what they've each got in their backlog in terms of getting the parts out of the door and developing all this new stuff that we've just left them alone right now. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 18, 2024 / 2:00PM, HEI.N - Q4 2024 HEICO Corp Earnings Call I do think that there is additional opportunity in further cooperation and going to the customers with a bigger basket. But as of now, I mean, you can see with these kinds of results, 12% organic growth, 13% in the aftermarket. Following a tremendous deal like that, that beats what anybody thought was possible. So we're very, very happy with that. But we do think that there are additional opportunities. Our teams are working very closely together in the parts and repair side to harvest those opportunities. We've already been very successful by putting all of the HEICO and the Wencor PMAs as well as the HEICO and Wencor DER pairs together. So our repair stations can focus in particular unit and really drive costs down and service levels up to the customer. And we've been very successful in that, and we anticipate continued success in that area. So yes, I think as I said internally, I think Wencor is going to be the gift that keeps on giving, not only because of Wencor, but because of the HEICO legacy businesses and really being the perfect fit there and just going so well.

Question: Larry Solow - CJS Securities - Analyst : Got it. Great. I appreciate all that color. And maybe just lastly a question for Carlos. Just margins. I know you guide specifically but just sort of a high-level outlook for the coming year. FSG was looking back was pretty consistent in fiscal '24. And ETG, I know it was a little bit more mix dependent. So just any thoughts as we look into fiscal '21? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 18, 2024 / 2:00PM, HEI.N - Q4 2024 HEICO Corp Earnings Call

Question: Scott Mikus - Melius Research - Analyst : This is Scott Mikus on for Rob Spingarn. Eric, you brought up the [margin] in saving money across the federal government. So I was just wondering, could you quantify right now what percentage of FSG sales are directly to the DoD? And then for programs other than the commercial derivatives like the P8, have you already started the process of aggregating a list of potential parts that could be sold to the DoD? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Yes. So as far as what percentage goes to the DoD, I don't have that information in front of me. But I can tell you that defense is approximately a quarter of the FSG sales. So you get an idea there. In terms of the opportunity. We -- the opportunity is not only in the areas that you mentioned. But yes, we have come up with a list. We are aware of what the opportunities could be. Of course, I don't want to -- I can't outline it on the call, but we are -- it is quite substantial. And the government really should be saving these dollars.

Question: Ken Herbert - RBC Capital Markets - Analyst : Maybe, Eric, to start. As you look at FSG organic growth within to fiscal '25, I know you're probably not going to get too specific, but is there any reason we shouldn't see double-digit organic growth again across FSG in fiscal '25? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Yes. I -- no, I don't think there's any reason you shouldn't see it. We're very optimistic on our three disaggregated revenue bucket of parts repair and specialty products, they're all very strong. And so I said that is a double-digit expectation is reasonable. I mean, of course, we're only 45 days into the year. So we always want to be a little circumspect and always at the end of the year between Thanksgiving and the New Year, volumes can be skewed one way or the other depending on shipments from our vendors to us and then what the customers want and the way they manage their inventory. So I don't like to take the months of November and December in order to prognosticate the rest of the year. But yes, our internal numbers are for double-digit organic growth within the Flight Support and again, very strong in all three of our segments.

Question: Scott Mikus - Melius Research - Analyst : Okay. That's very helpful. And just one more, if I could. The -- there's obviously been a lot of commentary recently around greater confidence in sort of execution in terms of new aircraft deliveries and new engine deliveries out of the OEMs. What's your view on if things do start to perform better there how quickly can fleets really start to sort of turn around to become younger? How quickly do you think spending on some of the legacy assets would actually start to slow -- and legacy aircraft would start to slow as that tide does ideally get better in 2025 and '26 in terms of just sort of the execution on the airframe and the engine OEM side, if that makes sense? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Yes. So number one, I have tremendous respect for the airframe and the engine OEMs. They're phenomenal companies. They build incredible products. But unfortunately, they are at the they're dependent on their supply chains. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 18, 2024 / 2:00PM, HEI.N - Q4 2024 HEICO Corp Earnings Call And those supply chains, as we know, got terribly beat up through COVID, as many companies slash their orders, and the people are just not at the suppliers. So they talk about increasing the production rates, and I think that's the intent. And marginally, they have in some areas, but I think they've had a lot of challenges. And I can tell you, I go around to our businesses, and I see the supply chain challenges that exist, and they are still tremendous. So I personally are not putting any money down that the supply from the OEM suppliers is going to turn around substantially. I have not seen evidence of that. So I expect the aftermarket to continue to remain very strong. And I think airlines have been bitten so badly by the deferrals that they don't want to get in the situation where they don't have the legacy assets to be able to complete their routes and their schedule. So I expect them to continue to spend money, I mean not foolishly, but they've got to always have a backup plan. And that's why I think the aftermarket is going to be strong. In addition, if you look even with the OEM deliveries increasing. If you look at the available seat miles and what IATA predicted, I mean 8% available seat miles increasing in 2025. This is a huge number. And frankly, it would be very easy to absorb the additional seats and keep the older aircraft in service. So we -- based on the order trends that we see, it remains very, very strong for the legacy aircraft. So at this moment, don't see a change there.

Question: Gautam Khanna - TD Cowen - Analyst : Yes. I was wondering, COD and PMA parts, what historically has been the disconnect there on their ability -- on their willingness to entertain buying those? Is it -- is it -- I'm just curious like do they require OEM parts? Or is it just culture? Or I'm just curious like what actually has prevented (inaudible) Yes. Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group They don't have a process. As Carlos says, they don't have a box to check. And what the airlines had to have, and this is what we worked on 35 years ago. When I first went into the airlines and showed them what we could do and said we could develop all these additional stuff. They said to me, that's a great idea, but we can't buy PMA parts. And I said, well, what do you mean, you're already buying our combustion chambers where the fuel and air is mixed and burned, and we've supplied those parts to you for 20 years with a follow service record, why can't you should be able to buy these additional parts. And this is the process that we're going to use with the FAA. And frankly, this is the box that you have to check, and that's been immensely successful. So I think the government must change. This cannot be business as usual. The United States cannot continue to irresponsibly run at these budget deficits. And there is no reason if a part is good enough for the President or the Vice President or senators or representatives or the Secretary of Defense to fly on when they fly commercially, maybe the President doesn't, but everybody else certainly does when they fly commercially, but it can't be used for the DoD. That is nonsense. It's a relic of the past. And I think the government recognizes this is low-hanging fruit. This must change. And frankly, HEICO is the one to do it. And we've got a lot of opportunities. I need to be very careful. And obviously, you know us well, and I don't want to get into details on specifically what but you don't have to be a rocket scientist to figure out the opportunity here. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 18, 2024 / 2:00PM, HEI.N - Q4 2024 HEICO Corp Earnings Call And we think it's very substantial. And I just want to add that we still think that the current providers are going to continue to do very well. And HEICO provides products to the DoD, and there's still tremendous number of products out there and not everything lends itself to what we can provide. But I think what we can provide is very significant for HEICO.

Question: Gautam Khanna - TD Cowen - Analyst : That makes sense. And last one, Carlos, I was wondering if you could give us some framework for the inorganic contribution in the opening fiscal year based on what you've already acquired?

Question: Sheila Kahyaoglu - Jefferies - Analyst : Good morning and thank you for the time. Eric, if I could start with you, if that's okay, please. If you could just talk about the organic growth within FSG up 12% and then just the different parts of the business, right, aftermarket price is up 13%, slightly down from 17% last quarter. How do you think about the parts business trending into '25? Can it still grow double digits? And what is the -- what are you seeing with MROs versus airlines the demand there? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 18, 2024 / 2:00PM, HEI.N - Q4 2024 HEICO Corp Earnings Call Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Well, first of all, hi, and thank you for your questions. We are very optimistic on the continued growth, as I mentioned, in all of the segments. In breaking down our organic growth, the parts side definitely had the highest organic growth in 2024. And the area with the lowest organic growth was our specialty products. We think that in 2025, based on backlog that we already have in the specialty products area, that our organic growth is going to accelerate in that area. And it will remain a strong double digits within the parts side. Component repair is probably going to be somewhat in between those. But we also anticipate, I would say, strong -- I said double-digit growth, and I am expecting double-digit growth, frankly, in all three of our disaggregated areas.

Question: Sheila Kahyaoglu - Jefferies - Analyst : Eric, I'm sorry, I meant more on the commercial side. Do you think the administration makes it easier to PMA commercial parts as well? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Yes. I think -- I mean, with the administrations have always been supportive. The FAA has been, frankly, outstanding to work with over the last 35 years. I expect that to continue. I don't expect a change there. I mean, if you will, the civilian workforce has been great to work with. So I expect everything continuing and no change in our ability to get PMAs. So I mean we've gotten more PMAs than ever, and I expect that to continue.

Question: Scott Deuschle - Deutsche Bank - Analyst : Eric, can you give us any sense for what the growth acceleration of specialty products could look like next year? Because it sounds like you've got a lot of tailwinds there between the OE ramp and the missile defense growth. And I was just looking at my model, and there was a period of time in 2022 and 2023 where specialty products was growing over 50% pretty regularly. So I'm not trying to get too excited here but just trying to get a sense of whether something like that could perhaps repeat itself. Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Yes. I mean, the internal numbers I've got are really strong over in specialty products. As I mentioned, really, the key is being able to get products out of certain suppliers. But I think from what we're seeing and based on what the budgets are and everything, at least 10% organic growth seems to be very reasonable. And when you think of it, I know that on a spreadsheet, and I think everybody appreciates it's on a spreadsheet. It's easy. You put in point one, and it's easy to type that in. But when you think about this, when a business grows organically by 10% a year, it doubles in 7 years. quadruples in 14 years. And these businesses to accomplish a 10% growth rate. I mean, I think that's just tremendous and incredible in this market that we've got with constrained material and trained labor. So I'm very optimistic in those areas.

Question: Noah Poponak - Goldman Sachs - Analyst : I wanted to ask about the FSG margin, fielding some questions on that last night and this morning. I think the final full year is probably a decent amount higher than what you were projecting at the beginning of the year, but also kind of outperformed through the year. And then in the fourth quarter, it's down sequentially. So I guess, is the noncash piece higher? Or can you just give me those numbers 4Q versus 3Q? Or is there anything else abnormal whether it's a cost or mix in that fourth quarter margin? And then if you could speak to where you think those margins can go next year? That would be helpful.

Question: Noah Poponak - Goldman Sachs - Analyst : Yes. Carlos, I guess it makes sense in a way that you referenced that range over time, but there's no -- I guess that makes it sound like you expect it to be kind of flat over time. But I would think that you would have -- I mean, historically, you've had a pretty consistent 25%, 30% incremental margin in that business as you're able to -- when you're in an environment where you're growing revenue double digits or even mid- to high single you're probably not growing cost as quickly as you're growing revenue, right?

Question: Noah Poponak - Goldman Sachs - Analyst : Okay. Great. That makes a lot of sense. And then I wanted to ask about the other industries outside of the defense space are within ETG. I think that down in the quarter that being the fifth quarter in a row where it's down. So it was the first quarter where you were lapping the easier compare, but it's down again. So I guess, can you talk about what's behind that? And then what it would take to get that piece to stabilize and start to grow again? Victor Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Electronic Technologies Group Yes. This is Victor, Noah. So it's not necessarily a one-year event to wash out the overordering, which took place over, I think, a longer period of time. It probably took place over 2, 2.5 years. But as I said in the comments, my general sense is that we start -- that reverses starts to reverse sometime in the first half of our year. And we see signs of that in a number of businesses where basically, it looks like the order rate has started to turn up in some instances and others, it's kind of bouncing along the bottom. And sometimes we get an occasional positive surprise, we end the month doing better than we expected in both sales and orders in a couple of cases recently. And just our experience has been when this happens, that sometime in the neighborhood of half a year later, it could be a little more. It could be a little less, but somewhere in that neighborhood. It starts to show up with rising sales sequentially. And so I would expect that, that would play out like it typically does barring, of course, any unforeseen events, but that's what I would expect.

Question: Michael Ciarmoli - Truist Securities - Analyst : Happy holidays here. Eric, just -- I mean, we've talked a lot about FSG and the trajectory and -- but I guess, just looking at the sequential growth, one of the lowest sequential growth rates that we've seen in several quarters. Was there anything unusual in this quarter versus last quarter? I REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 18, 2024 / 2:00PM, HEI.N - Q4 2024 HEICO Corp Earnings Call mean, it sounds like all business lines, all capabilities are running up record levels, any notable changes or behavioral changes from customers that maybe pick that sequential FSG revenue down a bit? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Yes. I mean a couple of things. Number one, I should state that one of the metrics that we never look at HEICO in any of the businesses is sequential growth rate. Because things can move around, they can bounce around and that can exaggerate it. The number that we always look at is the annual growth rates are compared to what we've done in the prior year. And when I look at our FSG organic growth, I mean, basically, it was approximately in the first quarter, 12%. Second quarter, 12%. Third quarter, 15%. And fourth quarter, 12%. I mean, as far as I'm concerned, that's out of the park, that is phenomenal and is so far above what anybody else does in this industry with regard to organic growth. So I'm super happy with it. And we just don't look and compare one quarter to the next. I mean if we didn't get overly excited when between basically the second quarter to the third quarter, we had big sequential growth. I mean that can be due to various deals or all sorts of stuff. I mean, what's more important is the comparison to the annual. And we think that, that is incredibly strong. And sometimes these moves and the numbers move in various jumps. So it's really dangerous to look at it in a sequential basis like that.

Question: Peter Skibitski - Alembic Global Advisors - Analyst : Just a couple of quick ones maybe for Carlos. Carlos, just because DNA is a pretty big add-back for you guys in cash flow. Do you have an expectation for DNA for '25? And then also I was just wondering sort of post COVID, post-Wencor, the use of working capital, especially in inventory has been larger. I'm just wondering if that was kind of a short-term thing or if we should expect to a greater build in inventory going forward? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 18, 2024 / 2:00PM, HEI.N - Q4 2024 HEICO Corp Earnings Call

Question: David Strauss - Barclays - Analyst : Thanks. Good morning. I wanted to follow up, I think there was a NOS question. So the FSG margin, I guess, either for Carlos or Eric, in terms of -- I think, Eric, you gave some relative growth parameters around the individual kind of subsegments between parts, repair and especially in cost. How do you see that those relative growth rates within their influencing the margin for FSG in '25? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group I think it would help. So I think it will help. I think the FSG margin story has been, I think, one of the least reported and yet most important things that frankly happened to this company. I mean when we look at what our operating margin basically from roughly 2015 to 2019 was in the 18% to 19% area. Now the operating margin is up in the 22% to 23% area. So we've gone up about 500 basis points over that period of time after making a number of lower margin acquisitions and going through COVID and all the turmoil that happened there. So I think the HEICO businesses are exceptionally good at just continuing to wring efficiencies out of their operations year by year. We don't make a thing over it but they just increased the amount of volume. They focus on efficiency. They get the cost down. We don't have programs here at the corporate office like HEICO '25 or HEICO '26 or '27 or something like that. Instead, we just work with them and they do this as a matter, of course. And we just continually grind higher on the operating margin. So I think that, that there's no change from our perspective and what we want to continue to do. Obviously, it bounces around year-over-year, and it depends on various investments that we have to make. But I would anticipate the operating margins to continue heading north while still providing huge cost savings and benefits to our customers. and doing that not via price, but via cost and volume to what you were alluding to. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 18, 2024 / 2:00PM, HEI.N - Q4 2024 HEICO Corp Earnings Call

Question: Ronald Epstein - Bank of America - Analyst : Yes. A lot has been asked, but nobody really asked this one yet. So what's your expectation for maybe the change in the M&A environment with the new administration? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Well, as you know, we've been very strong in the acquisitions area, and we bought this fiscal year five different businesses. Our teams, by the way, are busier than they've ever been looking at a whole variety of deals in both segments, all sizes. So for HEICO, it's been a strong market. I would anticipate, obviously, people expect less scrutiny, more pro business evaluation going forward. But I think for HEICO, we're very much a preferred buyer because we don't have some of the complications that other folks have. So I think the regulatory environment improves, but it will still remain very good for HEICO.

Question: Ronald Epstein - Bank of America - Analyst : Got it. Got it. And then if I kind of keep pulling on the string a little bit, what's your appetite for doing another big one. You guys have gotten bigger. And then maybe two, if you can say, it's no secret that Boeing has been shopping some stuff around. Is there anything there that you guys would be interested in? Victor Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Electronic Technologies Group Yes. Our appetite for acquisitions of all sizes, including larger ones remains the same. And we do larger deals. We've done them when they make sense. We won't do them just for the sake of doing them or adding revenue. It's all to us about the bottom line. So that appetite is the same as well as for smaller acquisitions, as you've seen, including small bolt-ons or fold-in acquisitions for our companies. And the opportunities, by the way, are spread out across the board. Historically, we've been an opportunistic buying everything that makes sense to buy and nothing that doesn't make sense to buy. Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group And I think, Ron, if you look at Wencor, which was, of course, our largest acquisition to date, it's been an absolute home run. So I think we've proven to the market that we can execute and win and execute and assimilate these businesses and continue to generate the cash to basically get our leverage ratio back down so we can reload and do more. So I feel 100% confident in our ability to continue to do larger acquisitions.

Question: Louis Raffetto - Wolfe Research, LLC - Analyst : Eric, just to make sure I'm levels here. So 13% organic growth in aftermarket repair parts, do you have MRO and specialty products for the quarter? I know MRO had been a little bit lighter. It seemed like maybe that did accelerate in the fourth quarter? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Yes. So MRO looks -- is about 11% in the fourth quarter, and specialty products was 11% in the fourth quarter. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 18, 2024 / 2:00PM, HEI.N - Q4 2024 HEICO Corp Earnings Call

Question: Louis Raffetto - Wolfe Research, LLC - Analyst : Yes, look at there's $1 million. Again, both of those, I think, would be again a negative to the earnings. So I think margins would have been sort of better ex these, I'll call them sort of one-timers or you and I have talked about the contingencies. I know it's like if it's a negative, it's actually a positive long term. So just trying to square the where that may have been?

Question: Louis Raffetto - Wolfe Research, LLC - Analyst : Yes, no, makes sense. But again, I might explain some of the questioning or look at the sequential step down in the FSG margins, if you got even $0.5 million. I'm not sure what that works out to. But just was curious. All right, that wraps up for me.