Heico Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Heichel Corporation Fiscal Year 2020 Second Quarter Earnings Results Conference Call. Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties, and contingencies. Heichel's actual results may differ materially from those expressed in or implied by those forward-looking statements. as a result of factors including the severity, magnitude, and duration of the COVID-19 outbreak, high cost liquidity, and the amount and timing of cash generation, the continued decline in commercial air travel caused by the COVID-19 outbreak, lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for air 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 U.S. and or foreign customers or competition from existing and new competitors, which could reduce our sales, our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth, product development, or manufacturing difficulties, which could increase our product development costs and delay sales, our ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest, foreign currency exchange, and income tax rates, economic conditions within and outside of the aviation, defense, space, medical, telecommunications, and electronic industries. which could negatively impact our costs and revenues, and defense spending or budget cuts, which could reduce our defense-related revenue. Parties listening to or reading a transcript of this call are encouraged to review all of High Court's filings with the Securities and Exchange Commission, including but not limited to filing 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, feature events, or otherwise, except to the extent required by applicable law. I would now like to hand the conference over to your speaker today, Mr. Lawrence Mendelson, High Court Chairman and Executive Officer. Please go ahead, sir.

Thank you, and good morning to everyone on the call, and we thank you for joining us. Welcome you to the HICO Second Quarter Fiscal 20 Earnings Announcement Teleconference. I'm Larry Mendelson, Chairman and CEO of HICO Corporation, and I'm joined here this morning by Eric Mendelson, HICO's Co-President and President of HICO's Flight Support Group, Victor Mendelson, HICO's Co-President and President of HICO's Electronic Technologies Group, excuse me, And Carlos Macau, our executive VP and CFO. Before reviewing our second quarter operating results in detail, I'd like to take a moment to thank all of HICO's talented team members. You have responded with distinction to the unprecedented challenge of serving our customers and your local communities during the onset of the COVID-19 global pandemic. I am humbled by your collective actions and unwavering commitment to HICO's success. I strongly believe your contributions to HICO's entrepreneurial values and ownership culture will continue to produce a winning formula in the marketplace, despite the near-term challenges that we face as a result of the COVID-19 outbreak. I'll now take a few moments to discuss our second quarter operating results. The results of operations for the six and three months ended April 30, 2020, have been affected by COVID-19. The effects of the outbreak and related actions by governments around the world to mitigate its spread have impacted our team members, customers, suppliers, and manufacturers. In response to the economic impact from the outbreak, we at HICO have implemented certain cost reductions, including layoffs, temporary reduced work hours, temporary pay reductions within various departments of our businesses, including our entire executive management team and our board of directors. Our response to the outbreak includes implementing varying health and safety measures at our facilities, including supplying and requiring the use of personal protective equipment, staggering work shifts, body temperature taking, increasing work from home capabilities, consistent and ongoing cleaning of workspaces, and high-touch areas, and establishing processes aligned with the Center for Disease and Control guidelines to work with any individual exposed to COVID-19 on their necessary quarantine period and the process for the individual to return to work. With respect to our results of operations, approximately half of our net sales are derived from defense, space, and other industrial markets, including electronics, medical, and communications. Demand for products in that half of our business has not been fundamentally impacted, and its operational results remain materially consistent with the financial expectations prior to the outbreak. However, we expect to continue experiencing periodic operational disruptions resulting from supply chain disturbances, staffing challenges, including in some of our customers, temporary facility closures, transportation interruptions, and other conditions which slow production or may increase cost. While these issues have not yet been material, it is possible to predict their future impact. It is impossible to predict their future impact. And our current experience indicates that the likely effect will be to delay orders and shipments measured in weeks and months. and to temporarily increase some costs, and this as opposed to profoundly changing our business overall. Fortunately, many of our defense and medical component design, manufacturing, and supply operations are believed to be crucial suppliers to markets with continuing strong needs. While it has not had a material impact on consolidated net sales, demand for our components used in medical equipment, such as ventilators, x-ray systems, sterilization equipment, personal protective equipment, all increased as a result of the outbreak. The remaining portion of our net sales is derived from commercial aviation products, and services. The outbreak has caused significant volatility and substantial decline in value across global economic markets. Most notably, the commercial aerospace industry has experienced an ongoing substantial decline in demand. As such, our businesses that operate within the commercial aerospace industry have been materially impacted by the significant decline in global commercial air travel that began in March 2020. Once commercial air travel resumes, cost savings will most likely be a priority for our commercial aviation customers, and we do anticipate recovery in demand for our commercial aviation products which frequently provide aircraft operators with significant cost savings. Furthermore, we believe that our cost-saving solutions and robust product development programs will enable us to potentially increase market share and emerge with a stronger presence within this market. Consolidated net income increased 22% to a record $197.3 million, or $1.44 per diluted share, in the first six months of fiscal 20. And that was up from $161.1 million, or $1.18 per diluted share, in the first six months of fiscal 19. Consolidated operating income increased 1% to $219.2 million in the first six months of fiscal 20, and that was up from $217.1 million in the first six months of fiscal 19. Our consolidated operating margin improved to 22.5% in the first six months of fiscal 20, and that was up from 22.1% in the first six months of fiscal 19. Cash flow provided by operating activities was strong, increasing 15% to $205.9 million in the first six months of fiscal 20, and that was up from 178.3% in the first six months of fiscal 19. we continue to forecast positive cash flow from operations for the remainder of fiscal 2020. Our net debt, which is total debt less cash and cash equivalents, of $393.4 million as of April 30, compared to shareholders' equity ratio, decreased to 20.8%. as of April 30th, 2020, and that was down from 29.8% as of October 31, 2019. Net debt to EBITDA ratio decreased to 0.72 times as of April 30, 20, and that was down from 0.93 times as of October 31, 19. During fiscal 20, we successfully completed two acquisitions, and we have completed five acquisitions over the past year. We have no significant debt maturities until fiscal 2023, and we pledge to utilize our financial strength and flexibility to aggressively pursue high-quality acquisitions to accelerate growth and maximize shareholder returns. At this time, I would like to introduce Ersk Mendelssohn, co-president of HEICO and president of HEICO's Flight Support Group, and he will discuss the results of this Flight Support Group. Thank you very much.

The Flight Support Group's net sales decreased 18% to $252 million in the second quarter of fiscal 20, as compared to $308 million in the second quarter of fiscal 19. The flight support group's net sales decreased 7% to $553.0 million in the first six months of fiscal 20, as compared to $595.5 million in the first six months of fiscal 19. The net sales decrease in the second quarter and first six months of fiscal 20 is principally organic and reflects lower demand across all of our product lines, resulting from the significant decline in global commercial air travel beginning in March 2020 due to the outbreak. The flight support group's operating income decreased 24% to $47.5 million in the second quarter of fiscal 20, as compared to $62.2 million in the second quarter of fiscal 19. The flight support group's operating income decreased 5% to $109.6 million in the first six months of fiscal 20, as compared to $115 million in the first six months of fiscal 19. The operating income decrease in the second quarter and first six months of fiscal 20 principally reflects the previously mentioned decrease in net sales and a lower gross profit margin mainly within our aftermarket replacement parts and repair and overhaul parts in service product lines, partially offset by a decrease in performance-based compensation expense. The flight support group's operating margin decreased to 18.9% in the second quarter of fiscal 20, as compared to 20.2% in the second quarter of fiscal 19. The decrease principally reflects the previously mentioned lower gross profit margin partially offset by a decrease in SG&A expenses as a percentage of net sales, mainly from the previously mentioned lower performance-based compensation expense. The flight support group's operating margin increased to 19.8% in the first six months of fiscal 2020, up from 19.3% in the first six months of fiscal 19. The increase principally reflects a decrease in SG&A expenses as a percentage of net sales, mainly from lower performance-based compensation expense, partially offset by the previously mentioned lower gross profit margin. Now I would like to introduce Victor Mendelson, co-president of HEICO and president of HEICO's Electronic Technologies Group to discuss the Electronic Technologies Group results. Thank you, Eric.

The Electronic Technologies Group's net sales increased 2% to $219 million in the second quarter of fiscal 20, up from $214.5 million in the second quarter of fiscal 19. The increase is attributable to the favorable impact from our fiscal 19 and 20 acquisitions, partially offset by an organic net sales decrease of 2%. The organic net sales decrease is mainly attributable to lower space product shipments, partially offset by increased demand for our space products. The Electronic Technologies Group's net sales increased 7% to a record $427.4 million in the first six months of fiscal 20, up from $398.9 million in the first six months of fiscal 19. The increase is attributable to the favorable impact from our fiscal 19 and 20 acquisitions, as well as 2% organic growth, mainly due to increased demand for our defense products, partially offset by lower space product shipments. The electronic technologies group's operating income decreased 3% to $65.5 million in the second quarter of fiscal 20, as compared to $67.4 million in the second quarter of fiscal 19. This decrease principally reflects a lower gross profit margin, mainly due to a decrease in net sales of our space and commercial aerospace products, partially offset by increased net sales of our defense products, as well as the previously mentioned net sales growth and lower performance-based compensation expense. The electronic technologies group's operating income increased 3% to a record $123 million in the first six months of fiscal 20, up from $119 million in the first six months of fiscal 19. The increase principally reflects the previously mentioned net sales growth and lower performance-based compensation expense, partially offset by a lower gross profit margin, mainly due to a decrease in net sales of our space and commercial aerospace products, partially offset by increased net sales of our defense products. The electronic technology group's operating margin was 29.9% in the second quarter of fiscal 2020, as compared to 31.4% in the second quarter of fiscal 19. The electronic technologies group's operating margin was 28.8% in the first six months of fiscal 20, as compared to 29.8% in the first six months of fiscal 19. The decrease in the second quarter and first six months of fiscal 20 is mainly due to the previously mentioned lower gross profit margin, partially offset by a decrease in SG&A expenses as a percentage of net sales, mainly from lower performance-based compensation expense. Let me turn the call back over to Larry Mendelson.

Thank you, Victor. Moving on to diluted earnings per share, consolidated net income per diluted share decreased 8% to $0.55 in the second quarter of fiscal 20, and that compared with $0.60 in the second quarter of fiscal 19. the decrease principally reflects the previously mentioned lower operating income of the flight support group. Consolidated net income per diluted share increased 22% to $1.44 in the first six months of fiscal 20, and that was up from $1.18 in the first six months of fiscal 19. That increase has principally reflects an incremental discrete tax benefit from stock option exercises recognized in the first quarter of fiscal 20. Depreciation and amortization expense total 21.7 million in the second quarter of fiscal 20, up from 20.5 million in the second quarter of fiscal 19, and total 43.3 million in the first six months of fiscal 20, up slightly from $40.5 million in the first six months of fiscal 19. The increase in the second quarter and first six months of fiscal 20 principally reflects incremental impact from our fiscal 19 and 20 acquisitions. Research and development expense was $16.8 million in both the second quarter of fiscal 20 and 19 and increased 6% to 33.9 million in the first six months of fiscal 20 and that was up from 32 million in the first six months of fiscal 19. Significant ongoing new product development efforts are continuing at both flight support and electronic technologies as we continue to invest between of each sales dollar into new product development. Our consolidated SG&A expenses decreased by 22% to 70.2 million in the second quarter of fiscal 20, and that compared to 90.2 million second quarter of fiscal 19. Our consolidated SG&A expenses decreased by 10% to $157.8 million in the first six months of fiscal 20, and that compared to $174.5 million in the first six months of fiscal 19. The decrease in consolidated SG&A expense in the second quarter and the first six months of fiscal 20 principally reflects lower performance-based compensation expense and reductions in expenses, including outside sales, commissions, marketing, and travel, partially offset by the impact from the fiscal 19 and 20 acquisitions. Consolidated SG&A expense as a percentage of net sales decreased to 15.1% in the second quarter of fiscal 20. and that was down from 17.5% in the second quarter of fiscal 19. That decrease in consolidated SG&A expense as a percentage of net sales in the second quarter of fiscal 20 principally reflects lower performance-based compensation expense, partially offset by some inefficiencies resulting from the overall impact of the outbreak. Consolidated SG&A expense as a percentage of net sales decreased to 16.2% in the first six months of fiscal 20, and that was down from 17.8% in the first six months of fiscal 19. The decrease in consolidated SG&A expense as a percentage of net sales in the first six months of fiscal 20 principally reflects lower performance-based costs. Interest expense decreased to $3.8 million in the second quarter of fiscal 20, and that was down from $5.5 million in the second quarter of fiscal 19. And it decreased to $8 million in the first six months of fiscal 20, down from $11 million in the first six months of fiscal 19. The decrease in second quarter and first six months of fiscal 20 was principally due to a lower weighted interest rate on borrowings outstanding under our revolving credit facilities. Other income in the second quarter and first six months of fiscal 20 and 19 was not significant. Our effective tax rate in the second quarter of fiscal 20 was 22.6% as compared to 22.5 in the second quarter of fiscal 19. Our effective tax rate in the first six months of fiscal 20 was 0.3% compared to 14.5% in the first six months of fiscal 19. As previously mentioned, Heiko recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal 20 and 19, and this accounted for the majority of the decrease in our year-to-date effective rate. The larger benefit from stock option exercise recognized in the first quarter of fiscal 20 was the result of more stock options exercised as well as the strong appreciation in HICO stock price during the optionese holding period. The majority of options exercised, which generated this cash windfall for HICO, were approaching their 10-year expiration dates. Net incomes attributable to non-controlling interests were $5.5 million in the second quarter of fiscal 20, compared to 8.3 million the second quarter of fiscal 19. Net income, attributable to non-controlling interest, was 13.4 million in the first six months of fiscal 20, and that compared to 17 million in the first six months of fiscal 19. The decrease in the second quarter and first six months of fiscal 20 principally reflects the impact of a dividend paid by Heiko Aerospace in June 2019, which effectively results in the transfer of the 20% non-controlling interest held by Lufthansa Technik in eight of our existing subsidiaries back to Heiko's flight support group. Our financial position and forecasted cash flow remains very strong. As I previously discussed, cash flow provided by operating activities was very strong, increasing 15% to $205.9 million in the first six months of fiscal 20, and that's up from $178.3 million in the first six months of fiscal 19. We continued to forecast positive cash flow from operations for the remainder of fiscal 2020. Our working capital ratio improved to 4.4 times as of April 30, as compared to 2.8 as October 31, 2019. Our day sales outstanding of receivables improved to 44 days as of April 30, 2020, compared to 45 days compared to April 30, 2019. Of course, we continue to closely monitor all receivable collection efforts in order to limit our credit exposure. No one customer accounted for more than 10% of net sales, and our top five customers represented approximately 24 and 21% of consolidated net sales in the second quarter of fiscal 2019, respectively. Our inventory rate increased 239 days for the period ending April 30, 2020, and that compared to 126 days for the period ended April 30, 2019. The increase in the turnover rate reflects certain inventory purchase commitments based on pre-outbreak net sales expectations, and also to support the backlog of certain of our businesses. Now let's talk about the outlook. Our results of operation for the second quarter and first six months of fiscal 20 have been affected by the outbreak. In our quarterly report on Form 10-Q for the three-month period ending January 31, 2020, we provide financial guidance for fiscal 2020. but noted that it excluded any impact from the coronavirus outbreak because it was such an early stage. As noted within our form 8K filed on April 15, 2020, we withdrew our fiscal 20 financial guidance due to the recent developments pertaining to the impact from the outbreak. HICO entered the outbreak with a healthy balance sheet that included strong cash position and nominal debt. We cannot estimate the duration and magnitude of the outbreak and cannot confidently predict when demand for our commercial aerospace products will return to pre-outbreak levels. However, we believe that HICO is favorably positioned for long-term success despite the short-term challenges created by the outbreak in the global economy. Our time-tested strategy of maintaining low debt and acquiring and operating high cash-generating businesses across a diverse base of industries beyond commercial aerospace, such as defense, space, and other industrial markets, including electronics and medical, puts us in a good financial position to weather this period of economic uncertainty. Unfortunately, we continue to forecast positive cash flow from operations for the remainder of fiscal 2020. I would like to end by thanking our team members, for their continued support and commitment to HICO during these professionally and personally challenging times. Our executive team is focused on your safety and your professional success. We will exit this outbreak stronger than before. That strength will manifest from our culture of ownership, our mutual respect for each other, and the unwavering pursuit of exceeding our customers' expectations. And we thank all of our team members for all of the things you do to make Heiko an exceptional company. I would also like to point out that Heiko's executive team has gone through at least three, four, maybe five situations similar to this COVID-19 outbreak. We went through the 9-11. We went through SARS. We went through the 2008 financial collapse. And in every event, Heiko came back stronger and more profitable than before. I am completely confident and our management team is completely confident that we will again repeat this performance. So again, thank you all. And now we can open the floor for questions.

Thank you, sir. At this time, if anyone would like to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. For the first question, we have Robert Spinner from Credit Suisse. Your line is open. Thank you.

Good morning. Larry, thank you for all of that detail and color. I'm going to have a couple questions on FSG, so I guess these will go to Eric. Look, Eric, obviously this is an incredibly dynamic situation, and I think we can all appreciate the lack of visibility due to the virus, but how would you characterize the cadence of Q2 February through April, how do we think about it in components as this thing accelerated? And then how might we frame that in the context of when a bottom is? To be clear, you wouldn't have reached that in the quarter.

Thank you, Rob. That's a very good question, and we've spent a lot of time internally thinking about that and looking at what happened. Basically, February was an outstanding month. It was a short month, but had it been the length of the other months, it probably would have been a record month for us. And we entered March very strong. I would say that March overall was quite decent. It did start coming off in the second half of the month, but still, you know, we were able to hold our own in March. April was the point where we really started to get impacted. And, of course, we still had some backlog that was preordered before the month began. So April started coming down. And you can see the results where they are now. I think we are hopeful that May is probably the bottom of the crisis. You know, it's very hard to say that with all certainty. May is not concluded yet. We're starting to get June orders. Remember, we get most of our orders in the month of shipment, so it's very hard to have visibility. But as we can see, as enthusiasm in the country starts improving, as, you know, therapeutics or vaccines look like they're coming along and people are getting more comfortable with the idea of traveling, we think that it should be up from here. That would really be our internal guess. If you want to get into the numbers, you know, we've stress-tested our sales and earnings to make sure that we can withstand whatever may come our way. And we believe that within the FICE support group, based on the current expense levels that we can sustain a drop of sales in flight support in the 50% to 60% area and still break even. Now, that 50% to 60% drop in flight support sales would imply probably a 70% to 80% drop in the aftermarket. But, you know, with all of the business units, we've run those numbers. We understand what that is. And when I say break even at 50% to 60% down, that is after writing off all of the inefficiencies and the underabsorbed overheads that would end up getting incurred in a reduced volume environment.

Okay. And then just... I appreciate all that. That's very helpful. One other thing I wanted to ask you, and perhaps to just compare with what we've heard from some of your peers, and this has to do with used serviceable material in the parked fleet. Some of your peers have noted that it's not really an issue until price points get above about $5,000. Would you agree with that, and what is FSG's exposure to at those higher levels, if at all?

I would agree with that. And, you know, I've been on the calls where people have suggested those numbers. We think the $5,000 mark is probably a good number. I can tell you that less than, and we have not disclosed this in the past, due to competitive reasons, but based on where we are in the cycle and the crisis, I think it's something which is reasonable to speak about now, that only less than 10% of our PMA sales have, less than 10% of our PMA sales volume is driven by parts that cost over $5,000. So, therefore, we believe that, you know, our focus on the type of products that we've done would tend to not lend themselves to as much cannibalization as a result of used serviceable material.

Got it. Got it. Thank you very much. I'll jump back in. Thank you. Thank you.

Next question, sir, is from Peter from Baird. Line is open.

Thank you. Good morning, Larry, Victor, Eric, Carlos. Good morning. Good morning. Eric, I guess you're going to be popular today, so I'll continue to talk about FSG. I guess maybe you could just talk a little bit about when you said that stress test regarding FSG, how are you thinking about that in the context of all the retirements that we're hearing about, or when you think about the age of fleet, what that's going to look like? How do you think about that?

Yes, Peter, that's a great question. You know, what we... See, right now, the initial impact, of course, is if the airlines aren't flying the aircraft, they don't need the parts. And they need to burn off their inventories. And we've been through, you know, various examples of how destocking works. But basically, if an airline was using, let's just say, 100 units of a particular widget, you know, before the crisis, and they wanted to maintain, let's just say, three months of inventory on hand, that would be 300 units. If due to the demand hypothetically falls 50%, then they would only be using 50 units. And if they wanted to hold three months of inventory, and of course in some cases they want to hold less due to the financial impact that they are suffering right now, they would only need 150 pieces. So therefore, if they had 300 on the shelf, they only need 150. They're going to have to burn through 150 pieces before they place those orders. So I think that's the initial impact that everybody in the industry is seeing. Then you've got a further breakdown dichotomy between components and engines. So we believe that the sales of component overhaul, component parts, is going to be fairly linear to number of flights or available seat miles because airlines typically are not going to remove a serviceable component from a serviceable airplane and stick it on another aircraft and then end up with an unserviceable airplane that they just cannibalized. So we think that the sales of component overhaul and component parts will come back first. We believe that the engines will be more impacted and that airlines will figure out how to not induct engines and not either swap them off aircraft that have good engines as needed or just delay the engines going into the shop. And then, of course, heavy maintenance is the last part. So, you know, roughly two-thirds of our PMA sales are in the component area, and we expect that that is going to come back before the engines and the heavy maintenance. Now, how does, you know, your question was on retirements. So airlines are obviously faced with a dilemma. Do they continue to fly the existing equipment, or do they go ahead and take deliveries? You know, we could have a whole debate on this. Our belief is that in areas where airlines are going to lose significant deposits, they're going to take those deliveries. But by and large, they're going to defer the maintenance on the planes that require the most dollars to be able to fly, but that it will make sense to go ahead and make that equipment serviceable before they take deliveries of new aircraft. And, you know, I'm not saying that deliveries of new aircraft is going to shut off. It's not. But we think that that's going to be more seriously impacted. So that's sort of how we look at the market.

That's a very helpful color. And if I could just ask one, Larry, just regarding, you know, thoughts on M&A. I know you had kind of an active pipeline before COVID-19. Maybe just give us your thoughts on, you know, deploying capital now during this environment.

Well, we're in a very, as you know, because you read our reports, we're in a very strong capital position. We have very low debt. very low leverage. We have great availability. We are actively in the market. We are doing due diligence on a number of projects. As you can imagine, with the travel restrictions and difficulty and COVID, the due diligence process is extended because we can't get out to the locations as often and as thoroughly as we might like. But I would say that we're ready to make the acquisitions if they make sense. We don't change our basic principles. We want an acquisition that's going to be accretive, that's going to have cash flow, that's going to earn its keep, so to speak. If we write a check, we expect to bring that acquisition in-house and have it accretive in the first year. In the aerospace group, there are companies which are suffering, so in order to pay the price that they may want, it doesn't really work for us. It doesn't work in our model, and we're not going to get ourselves in a cash crunch. We I have said for many years that Heiko is not an aerospace or electronics company. It is a vehicle that generates strong cash flow, and that's what we do. And we will make decisions based upon our cash flow profitability. But I can tell you that I wouldn't be surprised if we were to announce an acquisition. I can't. Definitely tell you because you never know until the deal closes if it will. But I can tell you we have an appetite, we have the financial capability, and we are active as we can possibly be. Thank you very much, Larry.

Next question is from Larry Follow from SJ Securities. Line is open.

Great. Thanks. Good morning, guys. Good to hear your voices, and I hope all your families are doing well. Thank you, Larry. Absolutely. Just a few follow-ups. I'm not just on the aircraft retirement question. Obviously, you know, a lot of talk about retirement of planes going forward. Can you sort of just speak to, you know, that drop-off versus, you know, I know there's been, you know, over the last 10 years or so, a big build-out of new aircraft and A lot of those probably have not been on warranty, so you guys haven't been benefiting from that. Will there be some offset there as you look at it? Obviously, we don't know exactly how many planes get retired, but I imagine there will be some offset as some of these newer aircraft go off warranty. Is that a fair statement?

Yeah. Hi, Larry. This is Eric. As you said, as the aircraft come out of warranty, they really come into our sweet spot. You know, there's all debate over what's going to be permanently retired and what's going to be temporarily retired. I think that there's a fair amount of optimism that a lot of equipment does go back into service. Of course, there's been a delay in the production of new equipment, and, of course, the build rates have been reduced. So, again, we're optimistic because even if you assume an aggressive retirement schedule, you've still got all of the other equipment aging one year per year. You know, the fleet is approximately 25,000 aircraft. So even if a chunk of aircraft come out, then, you know, so be it. They will. We don't think we're going to be hit as a result of cannibalization that badly. And yes, it would be a short-term impact, but we think that, you know, as the lion's share of the aircraft that remain in service age, that will provide plenty of opportunity for us in terms of our sales, whether it's parts or repairs.

Okay. And how about just in terms of, obviously, again, you know, hard to read, you know, in the future, but... entire downturns, although this could be a little bit more extraordinary, but entire downturns, obviously, the motivation and incentive and demand for PMA parts has spiked and could very well happen again this time around. Was that just in terms of the outlook for, you know, you guys have sort of maintained a level of new parts per year? Without getting into specifics, is there any thought of maybe, as we look out in the future maybe increasing the amount of PMA parts you introduce on an annual basis if demand does increase?

Yeah, it's something that we are capable of doing. You know, we've done a very thorough review of our new product development pipeline, wanting to make sure that everything that we're spending money on and that we're going to develop and source, that, in fact, there's going to be a need for it. So we've gone ahead and done that. At this moment, we haven't increased the amount of new product development, but we're basically holding it roughly steady and consistent with prior years because we want to make sure that we're able to support the airlines coming out of this crisis. And we think we're going to be in a very good position to be able to support the airlines. And I know that this is sort of my perspective and as a result of my involvement with Heiko. But I really do believe that it's important that people not conflate the growth of PMA with the growth of Heiko. In that I think airlines look at Heiko, Heiko is a $10 billion market cap company where a respected and serious industry participants All of the major companies are aware of us. And, you know, as I've said many times, the PMA industry is not an easy business to be in. You know, it's very difficult. We have to fight for every single piece of business that we have. So I'd be very careful about, you know, making a statement. And I don't mean you, but I mean people in general. Making a statement that PMA is going to do very well coming out of this crisis. I have a lot of confidence that Heiko... is going to be able to do very well coming out of this crisis because of the products that we offer and our financial stability. You know, looking at other companies, I'm not so sure. I think that they're going to have a lot of pressure. If you look at other companies, sort of how they've done over a longer period of time, the PMA space has not been very good for them. So I think our model of continuing to develop new parts and making sure that we take care of the customers and we're very fair on pricing, I think really wins us a lot of friends. And for that reason, I'm very optimistic on our future.

Right. So it sounds like an opportunity for you to hopefully take some market share. Yes.

I do feel that our market share is going to continue to go up. Our market share in PMA was already high, but it's even gone up. And I anticipate that that's going to continue.

Great. Okay. How about just switching gears and a question for Victor. I'll keep him on his toes. Thanks, Larry.

I'm starting to feel like chopped liver here. Never, never.

Just a quickie for you. Obviously, you know, some of your businesses are – somewhat more insulated, certainly against the consumer, the defense and the medical side. And I think you mentioned space. You expect a rebound in the back end. How about just on that, sort of on the general industrial piece of your business, which I think is, I don't know, 20, 15, 20% of the segment. Is that piece maybe more susceptible to a downturn?

Larry, I would say that is more susceptible. It's held up pretty well. It's been choppier, though, overall, and it's harder to predict. I think it will be softer than the rest of the business, certainly than space and defense, and we'll just have to see how it plays out. Fair enough.

Okay, just lastly, Carlos, just on the account receivable issue, Is there any way to sort of decipher or, you know, the aging of your receivables, has that gotten materially different over the last quarter? And then just last question, just you took a little bit of a drawdown on your revolver. What's the sort of thoughts on that?

Thanks. Thanks for the question, Larry. So the receivables are actually very high quality right now. We did a good job on collections during the quarter. And as you can see from the press release, you know, receivables are down as a source of cash for us. So that was very good. The aging is not deteriorated. I mean, candidly, I am worried about airline bankruptcies and that impact on our receivables. We don't tend to have high concentrations with any one airline or any what I'll call significant exposures. But for the health of the industry, I do worry about that. We'll see how that plays out over the next three to six months. As far as the draw, you're correct. We took a draw in March, and I did that preemptively to make sure that if the banks, for whatever reason, seized up, as we saw back in the financial crisis, that Heiko wasn't at the mercy of the banks in the case where we needed to draw a line for an acquisition or for whatever capital needs we had. And so I took the draw in a proactive state. You can see we didn't use it. We have about close to $350 million sitting on the balance sheet right now. And, you know, my carrying cost for that is so low that I'm going to let it sit there for a while. And if we use it for acquisitions, great. If not, we'll just repay the line with it.

Great. All right. Excellent, guys. Thanks so much. Appreciate it. You're welcome.

Next question is from Gautam Khanna from Cohen. Your line is open.

Hey, thanks. Good morning, guys.

Good morning.

Good morning. I had a couple follow-up questions. I guess the first, I don't know, Eric, if you could characterize this, but in terms of kind of what you're seeing in current orders and demand on the PMA side, should we just assume it's sort of down in line with available seat miles, or is there any discernible difference at this point? I'm just curious, you know, we all assume that you're going to pick up share, you know, relative to just general aftermarket parts suppliers. But I wonder, like, in this, in the current environment, is it just kind of Armageddon, everything's down at or around the same rate as ASMs or worse or anything you can say about kind of May trends?

Yeah, that's a great question. You know, in the past, in order to sort of keep things simple, we used to say that the greatest proxy for the aftermarket was really available seat miles. You know, ultimately passenger seat miles would impact available seat miles, but available seat miles were really the driver. And as we got into this crisis, we realized, yes, I mean, obviously that's important, but just the number of flights is also very important. Most of our sales have always been on the narrow body product. So wide body is what's obviously most impacted right now or even more impacted than narrow body. And most of our sales are over on the narrow body. So I would say number of fights is probably the highest correlated to the aftermarket right now and the thing that we're really looking at. But remember, the other issue that you've got, as I mentioned earlier, was the destocking phenomenon. And that is extremely sharp and extremely painful in the beginning because everybody's got to burn off their inventory. And until that happens, it's very hard to see a rebound. But I would say that's probably the big driver for us, number of flights.

To follow up on that, is there any way you can give us some rule of thumb on the mix of PMA that you guys have? What percentage is narrow body versus wide body so that we're tracking the right data points?

I don't have that with me, but I'm guessing that the 75-25 is probably a good guess on what it is. It sometimes can get a little complicated because some of the components can go on narrow-body aircraft as well as wide-body aircraft, so you have to make all sorts of assumptions. But I would say, yeah, the 75% narrow-body is probably a good, you know, rough approximation of it.

Okay, that's really helpful. Hey, Victor, I was also wondering, in your business – You know, what are sort of bookings trends looking like? Obviously, we have very difficult comparisons this year because of the great growth last year. But I just want to see, like, how much do we have left, you know, in terms of organic growth? What's your visibility at this point, if you could speak to that?

Bookings in the ETG are – they tend to get batched. in the business, particularly on the defense side and the space side. They tend to come in in large amounts. Recently, within the last couple of months, we've had some very large orders that have come in. Order flow on defense and space has been pretty strong for us. And, you know, that's why we made the comment in the release that we had softer shipments in space. We didn't say softer demand. We referred to softer shipment because demand in space for us remains strong. Okay.

And those convert in the second half, would you expect, or –

Yeah, you know, that would be – that will start to materialize in the second half of the year as well as in 2021, fiscal 2021 for us.

Okay. Larry, one last one for you, if you don't mind. You talked a little bit about the acquisition pipeline and certainly the interest in doing acquisition.

The acquisition – we are looking – we're doing due diligence on a number of companies. Again, earlier I commented on acquisitions. And, you know, it's more difficult because of logistics issues, getting out, doing the due diligence. You know, we do a very thorough due diligence. We go out to factories. We look at how they're manufacturing, what their manufacturing processes are. In addition to financial, we study the markets. And so we do a very thorough process. due diligence process. It's more difficult because we can't get out to the sites as easily because of the COVID. But again, we have a great appetite. Our appetite for acquisition has not changed at all. And as a matter of fact, we're cautiously optimistic that we will see some opportunities. Maybe people will be willing to sell at prices that match our strategy because you know we don't pay 14 or 12 times EBITDA and we're hoping that some of the competition that we used to get from private equity might be less because of their private equity's less ability to to raise funds in this environment. We have plenty of availability, capital. We're not capital constrained. We have very low debt level. So we are, you know, aggressively looking for acquisitions. Now saying that, many companies have seen, particularly in the aerospace side, have seen their revenues drop, and we normally do not pay prices based upon future promises. We want companies that will carry their way, generate cash flow, generate the margins that we demand at Heiko. So our discipline has not changed, and we will never want to grow just to be bigger. We only will grow to be more cash flow positive. So I think the opportunities are out there. I think over the next six months or a year, I would think we will see more opportunities. And, you know, we're open for business. We'd like to make as many good transactions as we can.

Would you say that there's larger acquisition opportunities that have showed up in the pipeline that have shown up?

No, I think it's all, it's pretty much the same. You know, the mix is pretty much the same. We look at large ones. We look at smaller ones. Again, the key for us is not big. You know, investment bankers come to us and they bring us deals where there's 7% or 11% operating margins. They're big. But We're not interested in big. We want cash flow. So we want 20%, 30% operating margins that really earn their keep with great entrepreneurial management. Just to be big, Heiko is not a company that wants to grow to just be big. We will always grow to be cash flow big. That's where we want to be big. And so the size of the company is not nearly as important as the profitability and the cash flow.

Thank you very much, guys.

Next question, sir, we have Ken Herbert from Tenaccord. Line is open.

Hi, good morning, everybody. Really nice quarter. Thank you, Ken. Hey, Eric, I just wanted to start with you. I wanted to follow up on a comment you made earlier regarding your expectations maybe for the recovery as you look at the aspects of the aftermarket component versus engine versus heavy maybe. And as you think about for your business, maybe a delay or a lag in the engine recovery relative to component, is that maybe a matter of months, maybe a matter of quarters, any sort of quantification or how you're sort of expecting the recovery to play out on engine versus component and timing would be very interesting.

Yeah, Ken, that's a very good question. I know you've been writing about this topic and very much focused on it, which I think is very good. My personal belief is that airlines are not going to induct engines until they absolutely have to. So I think that that is, you know, again, the last thing to come back, I think, will be heavy maintenance. I don't think they're going to induct heavy maintenance until they absolutely have to. And with engines, I think they're going to wait. So, you know, how much longer that is from components, I think it's really on, you know, very much a case-by-case basis. But, you know, I'm guessing that it could be six months delayed. from when the components come in. But it's something that we're going to have to look at depending on the particular engine type and the airline that is operating it. But I definitely expect them to really want to conserve cash. And of course, engines that need A lot of life-limited parts, those, you know, goes without saying, are really going to be at the end of the line. And I think those are the part of the aftermarket that's really going to experience the most short-term and perhaps intermediate-term pain. And, you know, those will end up getting overhauled, but I think that's just, you know, further down the line.

Yeah, that's very helpful. Do you get a sense that, you know, as you look out over the next six to 12 months or so, as things do come back, that relative to prior downturns, there will be more sort of green time availability on the engine fleet today, which certainly could further sort of depress the timing of the engine recovery?

I think yes. I think definitely the airlines are going to manage the green time. you know, very effectively. There are also lessors out there who are being very creative and very innovative on buying up engines with green time, buying up aircraft, taking off the engines, you know, to the point where the engines don't have to be overhauled as much. And there are lessors out there who recognize that what airlines care about is thrust. They want safe thrust. And I think a number of OEMs have gotten away with conflating their sales of spare parts with the quality or the aftermarket demand for the remarketability of those engines. And we've seen lessors go out there and recognize that airlines are just as happy to operate engines which have alternative material in them, and the airlines are able to achieve the savings, the lessors are able to make money. So I do think that engines that have more OEM material and require more of the life-limited parts are going to be delayed, and definitely the green time engines are going to be used first.

Great. And if I could, Eric, just one more, appreciate all the extra detail you're giving today. As you think about the cash preservation or conservation approach from the airlines, which I completely agree with, do you think that presents any incremental opportunities for you with emerging market airlines or airlines that historically have not been where you've maybe had a less representation relative to more established airlines? Does this current environment maybe provide the opportunity for you to accelerate the work with some customers that you've historically not done as much work with?

Absolutely, Ken. We believe that there is a lot of opportunity for us in those markets. Those discussions were actually occurring before the COVID crisis. They had really picked up in the months before COVID. And now with the airlines being really behind the eight ball, we anticipate that I think really for Heiko, and that goes to my earlier comment in that Heiko is recognized as a serious industry player with a, you know, $10-plus billion market cap, and we're able to stand behind these products. So I think that we are going to disproportionately benefit on the rebound, and I think these airlines are going to see the opportunity, you know, that a Heiko solution can give them. So, yes, I do anticipate us being able to sort of mitigate the downturn and pick up market share as a result of picking up some of these customers where we didn't do as much with them in the past. Great. Thank you very much. Thank you.

Next question, sir. We have Josh Sullivan from the Benchmark Company. Line is open.

Okay. Good morning. Thank you for taking the questions. Good morning, Josh. You guys have had more of an entrepreneurial acquisition model with your portfolio companies. Can you talk about, you know, the relationship in this environment? You know, how much are you directing to those portfolio companies to implement, you know, disciplined cost reductions, you know, versus what they're doing organically?

You know, we – Josh, we – for the business. That doesn't mean we don't have this about it, but ultimately, we expect them to be the same companies they were pre-acquisition. And you've heard us say that the key is buying right, that if you buy the right business and you buy the right kind of company that does the right things, then you don't have to direct them post-acquisition. So our companies took it upon themselves to take the actions that they've taken individually and they've done what's right at the local level. And they're the right ones to make those judgments because they need to make sure they save where they can save. But at the same time, we know that we'll come out of this and we need to grow. And Heiko is a growth company and will continue growing. So we have to take the right actions across the board. The other part is, want a motivation. We don't want to demotivate our managers by ruling from on high, so to speak, and ruling from on top. So it's a combination of those things. And what we have noticed, and again, over a period of decades dealing with downturns and crises, is that it works. It actually is very effective that we get to the levels we need to get to and we get the reductions that we need to get. but we do it in a much more humane way and a much less disruptive way than the companies that come out and say, that's it, we're getting rid of 20% of our people, and then people are quaking in their boots as to who's next. And we find better, I think, better and creative ways to keep our folks motivated and happy.

Larry, just to add to what Victor said, I agree completely. To simplify it, you think of the carrot and the stick. So in a decentralized company, as Heiko is, we would much prefer the carrot than the stick. And all of the business unit managers and presidents of the companies are incentivized to a very high degree to produce good results. They are also basically entrepreneurial when we acquire the company, as Victor told you. So, by incentivizing them to do the right thing, we don't have to hit them with a stick. These guys are really, really smart operators. They are terrific. So, that's the benefit that we get running a highly decentralized company. Now, they report to us, we know what they're doing, we get financial reports weekly, but these people are known entities and they know exactly what to do. We have a group, I would say what doesn't show up in the financial statement is the brilliance of the managers that we have running these companies. So I think that's at the heart of it.

I appreciate that. And then just kind of relatedly, as far as the free cash flow outlook, if May isn't the trough for commercial aerospace, how sensitive is that guidance or any thoughts around that?

Apologies everyone. We will resume the conference in a moment. Please stand by. Ladies and gentlemen, apologies again for the interruption. Please stand by. The conference will resume shortly. Again, ladies and gentlemen, please stand by, and we will resume shortly. Thank you.

5381666.

Ladies and gentlemen, the speakers are now back.

Okay.

So, Josh, are you still there? Yes, yeah, I'm here. I'm sorry. We must have had a power failure here, and the system went down and just disconnected. Were you satisfied? Did you get the whole answer? We did. I was actually just beginning the next one. Okay. Thank you.

And just as far as the free cash flow outlook,

you know, if May isn't the trough for commercial aerospace, you know, how sensitive, you know, is that free cash flow guidance, essentially?

Josh, this is Carlos. I just want to reiterate, we haven't given free cash flow guidance. The guidance we've given is that, you know, we will remain cash flow positive. We have measures of a very variable cost structure, which allows us to flex the business and maintain cash flow positives. So, I want to be very careful that we're not putting numbers to that because as a management team, you know, we're dealing with this without the luxury of having a survey in the future here.

Got it. Okay, thank you.

For the next question, we have from . Your line is open.

Good morning, everyone, and thank you for the time. Eric, you're popular today, so I apologize, and I know you've talked about this a bunch, but I want to delve in more into the PMA market, and I know you guys have the best share because of your product offering and your rigorous process behind it. I wanted to see how you're thinking about balancing airlines choosing lower-cost products and also the aircraft ages, aircraft being retired at, say, 18 years old versus 24 years old. how those two things balance each other as you think about gaining share in this market?

Sure, Sheila. That's a good question. And I've been reading your material throughout the whole crisis. I found it very interesting with a lot of the data that you've had in there. I think the big driver is going to be the aircraft that need first heavy maintenance and then engine maintenance. and I think that's going to be the driver before the age. In other words, you could have, hypothetically, an 18-year-old aircraft that needs a lot of money to be put in it in order to fly, whereas you just overhauled a 24-year-old aircraft, and you're going to end up deciding to fly the 24-year-old aircraft because, from a cash perspective, you don't need to put money in it. So I think it's going to be very much based on a... an airline by airline, fleet by fleet, aircraft serial number by serial number as they figure out which aircraft they're going to use. We are in the process, we're part of a study whereby we've got somebody looking into this for us to be able to determine what areas are going to be impacted the most and, you know, basically come back online. So, I think that's really how we look at it, more on a cashing basis as opposed to a straight age basis. Now, having said that, if you've got two aircrafts, hypothetically, and they both need the same number of dollars to be made viable, then obviously, to these things, own both of them, then you would pick, obviously, the younger one because you would have a longer life than that. However, I think a lot of this gets very complicated because it depends what's leased, what airlines are able to give back, what's owned, what's fully depreciated, and it's a fairly complicated calculation. So I don't think it's going to be a one-size-fits-all approach.

Okay. No, that makes sense. Thanks. I appreciate the extra color, and I think you guys will always prove the market wrong in some ways and myself wrong. In terms of 10% of your business is actually OE, I believe, within FSG. Can you talk about, you know, your expectations for that part of the business? And then on your break-even forecast of 50% to 60% decline, you know, does that assume any sort of cost-cutting, or is that just the current, you know, SG&A compression we've seen thus far?

Yeah, that's a good question, Sheila. Let me start with the second part of the question. We have done layoffs. You know, our number one asset is our people. So we've been very careful to try to impact our people the least as possible. Having said that, with the current reality and the reduced level of business, we've had to make some adjustments. So we have done layoffs. We have done furloughs. We have done voluntary programs where people are not working one or two days a week. And then we've also done wage, you know, temporary wage reductions, which we've all taken, in order to be able to pitch it. When you put all of that together, we've calculated that our break-even on FSG is we can withstand a drop of 50 to 60% in total sales. And if you assume roughly that FSG is approximately 80% aftermarket, and let's just say the aftermarket is down, pick a number, 70%, then that implies basically a 70% to 80% drop in the aftermarket. We think that initially the drop in the OEM sales initially coming out of the chute wasn't So we anticipate, again, aftermarket down sharply, OEM not down as much, but that reduction is going to last longer than the aftermarket because we anticipate the aftermarket is going to come back first. So I would say that's sort of how we look at it.

That makes sense. Thank you so much for all the color, everyone.

Thank you, Sheila. Thanks, Sheila.

Next question, we have Michael from . Your line is open.

Hey, good morning, guys. Thanks for sticking around here to take the questions. Maybe Eric and Carlos on this to kind of stay on Sheila's question. You know, if we look at, you know, the second quarter here, the fall off that you saw in April, you know, probably assumes, you know, maybe revenues were down 50% or so. I mean, should we think about SSG being down in that 50 to 60% range for the next two quarters or so? And I just wanted to tie in, you know, the SG&A, you know, down at, you know, 15% or so of revenues for the quarter? You know, I think you guys usually run at, you know, kind of 17 and a half. I mean, are you resizing the business? You know, that low level of SG&A, you know, sort of implies that, you know, the full year revenue run rate, you know, maybe it comes in below 1.7 billion or so. Is that the right way we should be thinking about this? You know, the current SG&A in the quarter and then You know, I guess the kind of what you just said, Eric, with the aftermarket down sharply in terms of, you know, tying together a growth rate for the next quarter or two?

Yeah. So, Mike, this is Eric, and that's a great question. We, you know, we have to be careful because we have withdrawn guidance because we truly don't know what the numbers are going to be. You know, we've seen the impact thus far. We see that airlines are not flying. We care about our people. You know, as I said, number one is about our people. And so, we obviously had to reduce our cost structure to be able to live with this new reality. but we want to make sure that we're able, in terms of new product development, developing new stuff, as well as maintaining our sales force and maintaining the leadership in our businesses, that we are able to respond. So that's why we're providing this, if you will, framework that FSG can be down 50% to 60% in revenue and still break even. You know, it does as that revenue falls, we do approach, you know, more of the break-even area. And the reason we give the range of 50% to 60% is it depends very much on mix. But the other thing which is very important to note is that we've always had, and this is going back 30 years, we've always had an extremely conservative accounting model and accounting standard. You know, one of the old tricks in manufacturing is that when volume falls, One of the ways that companies can delay taking the pain is basically by increasing costs in tooling, in the block costs that ends up getting amortized, or increasing the standard costing of products going forward. We're very careful to not do that. So we write off, when we have excess manufacturing costs and underutilized overhead, We're very careful to write that off so we don't have future pain. So when I say that our numbers are down, we can withstand a drop of 50, 60% and still break even. That's after taking all of the inventory reserves and writing off all of the excess manufacturing costs and not putting them into inventory, not putting them into fixed assets and not doing things that we think are really penalize the long haul. We want our businesses to understand very clearly how they're doing in the short term. And if companies play around and they play games and they end up reporting higher short-term profits in order to delay the pain, then that just confuses the team members on really where you stand. So I hope that gives you a little bit of idea or color into how we're thinking about it.

Yeah, no, that's extremely helpful. And then just another one, Eric, on your customers, you know, and looking at the fragility of the airlines here, have you, you know, done an analysis of your airline customer base from, you know, the big majors down to the ultra low cost carriers to maybe as you're stress testing the model to get a sense of, which one of your customers might really be at risk of bankruptcy or failure here as, you know, this kind of pandemic carries on. And, you know, certainly there's going to be some failures out there, I'd imagine. But have you kind of looked at the customer list from that regard?

We have, but it becomes, honestly, very complicated to build the revenue model based on that. We do look at it. But, you know, Carlos, let him comment on our accounts receivable process. But we are careful with regard to companies that are at risk of filing for insolvency or bankruptcy. And, yes, we do get stung, and we like to make sure that we're supporting our customers, but we want to do so in an intelligent way, and Carlos can expand on that.

Mike, this is Carlos. So... Big concern on your part. I mean, we're all reading the papers and seeing the industry email. You know, there will be some – there probably will be some bankruptcies in the airline space, and I don't know if it's going to be domestic, foreign. I don't know what geography. We're going to see it. And, you know, the one thing we've done to try and limit that exposure is we sat down with all of our folks at the business unit level – Start over their credit limits they give to customers, make sure that they're mindful about on the collection side, and they're not overextending HICO. We don't want to be anybody's bank. By the same token, we still have to conduct business in a relatively normal fashion with these customers because we don't want to burn any customer goodwill by acting too unusual during this time period. So it's a fine line we've got to balance. I would say at the end of the quarter, our receivables were in very good shape. The age of the receivables was very new. There wasn't a lot of any stuff overextended. But going into Q3 and Q4, we'll just have to be mindful. And if there are bankruptcies, we'll deal with it. But because of our diversified platform and the fact that we are dealing with multiple airlines across the globe, we don't have a ton of exposure or concentration in any one airline that could cause us major issues.

I hope that answers it. It does. It does. And then just a point of clarification on Josh's question. You guys mentioned, or even in the press release, that you could maintain positive cash from operations. So not necessarily free cash flow, but clearly you guys are comfortable in, you know, looking at maybe working capital, managing inventory, some of those variable costs. So clearly cash from ops is going to be positive for the remainder of the year.

Yeah, that's – This scenario there, Eric described a little while ago, if we stress test the business at extreme levels, we still wind up with positive cash flow.

Got it. All right, guys. Thanks a lot. Appreciate it. Thank you.

Next question, three, is from Colin Dutron from Serling Capital. Your line is open.

Hi, good morning. Thanks for taking the question. I hope the Heiko family is all healthy and safe. I had a quick clarification for Carlos regarding the expense rationalization kind of framework. You've talked about the playbook a bit. Bottom-up, very entrepreneurial, which is consistent with prior messaging at the subsidiary level. But clarifying, so substantially all of that expense reduction, has that been bottom-up? you know, in coming from the constituent businesses versus being framed top-down?

That's correct, Colin. So I think as Victor mentioned earlier, we're very – first of all, our guys that manage these businesses are incredibly entrepreneurial, and the one thing we have noticed about them is they don't change much. When they own the business and they ran it, They ran it using their checkbook. And just because HICO is either co-invested with them or acquired the business doesn't seem to change the way that they manage or the frame of references they have on how to deal with both good and challenging times. And so what we've noticed is that these folks at these subsidiaries, because we allow them to operate in a decentralized fashion, they do make good decisions. And they do tighten their belts when they need to. They're very aware of and conscientious of working capital management. of listening to their customers, understanding demand as best that they can during this time period. And so we haven't – we don't have a need or we haven't felt the – we haven't felt it necessary that we be heavy-handed in these circumstances. They have done the right things. It just so happens that with them doing what they need to do to manage their businesses, we have also contributed at the corporate level. by taking some pay reductions by the executives and the corporate staff and also board of directors. So we've sort of all contributed, if you would, to the collective misery of challenging times. And, of course, we hope that this is short-term and that we can all get back to normal as soon as possible.

Okay, thanks for that. And I wanted to get, you know, take a look at the M&A results. kind of outlook and perhaps view it in a different lens. Larry was very clear in that, you know, a nice frame for HICO is a vehicle for free cash flow and you're looking for, you know, solid cash flow from your targets over time. Recognizing that that frame has been consistent over time, You know, one could also equally recognize the unique nature of this crisis. You guys have been through several, but none as far as I know have seen seat miles collapse 95-ish percent. And so I guess my question is, maintaining that free cash frame, you know, are you willing to consider targets that are long-term quality assets with a quality longer-term outlook, which are distressed in nature today and facing liquidity pinches? where you could foresee them becoming part of the Heiko family and expanding your aperture given the unique complexion of this crisis?

Thanks. Let me answer. This is Larry. We will look at those kinds of companies depending upon what we think their ultimate profitability will be. So the answer is yes. We are inclined not to pay up for pie in the sky in the future, but there are some companies that we know of now that we're looking at that meet those kind of qualifications that you just mentioned. We'll have to see, you know, how they work out, what the price is, if they're for sale. So, yeah, but we would consider. So the answer to your question is yes.

And this is Victor. I'll just add to that. We cast a very broad net in the acquisitions we look at and look for. So we consider many different transactions and different styles, and that's very important to what we do. So we understand we've got to look at a lot of things and consider many things in order to find the right one. So we are willing to look and consider all style of deals, even ones that may not be performing well, that may be distressed at this point. Thanks.

Next question, we have Luis Rafael from UBS. Your line is open.

Hey, good morning, guys. Good morning. So, sorry, Eric, to pick on you here, but going to go. So, I know in the past you said that you traditionally didn't get onto an airplane until it was about 10 years old. So, is that still the case? Is that primarily just for the PMA business, or do you think that applies for sort of MRO as well.

No, I think to clarify, Lewis, what I meant or what I said or what I meant to say was that we typically don't get on a new airplane until, you know, it doesn't have meaningful revenue to us until 10 years after the first delivery. But not 10 years after, you know, each aircraft is delivered. And it's probably shorter than that, you know, maybe it's seven years or, you know, something like that. I would say that's the case more on the PMA and the repair side. On the distribution side, we would be on it right away. We'd be on it immediately. And, of course, in the specialty products, we would achieve revenue even before it's delivered. So, you know, to put a little bit of color into that thought.

That's great. Thank you. And so, I know if we go back to kind of like 2014, 15, 16 area when, you know, flight support didn't have as strong a growth, one of the things you guys talked about back then, and, you know, you heard from other people in the industry, was that the age of the fleet was kind of younger given the dynamics of increasing retirements and, you know, newer planes coming in. So I guess do you, you know, I don't know if anyone can argue with the fact that the age of the fleet is likely to get quite a bit younger in the coming year or two. Do you think you'd be able to offset that with share gains?

Yeah, so I think what you're referring to in the 2014-15 time was the reason our sales were lower then was because we had something like, I don't have the numbers in front of me, but something like 22% organic growth in the year or two before that. So I think what happened was a lot of equipment got deferred. There was a lot of deferred maintenance. There was massive sales. We way outperformed in the period before. So then it slowed down a little bit in that period. I think that's probably the thing that drove the lower sales growth in the 14, 15 timeframe.

Okay, great. And then just one follow up on the M&A. maybe Larry, maybe best for you. You've traditionally talked about wanting deals, I think you said earlier, you know, 20% type of margins. I guess, how do we circle that with the fact that FSG has, you know, call it roughly 20% margins? And I, you know, you correct me if I'm wrong, but I'm guessing that the PMA aftermarket, you know, has higher margins and especially products has lower margins. So is there a lot of opportunity there?

We think that, I mean, look, there's no question that it is hard to find those types of businesses. Over on the FSG side, I would say more often than not, we're probably lower than that in terms of margins. And then through our ability to increase the sales and to increase the profitability of the business going forward, we get it closer up to our area. But I would say, you know, that 20% is something that we like to be. Sometimes we're able to find a business that's over 20%. But I wouldn't say that that is a walkaway point. You know, if we see a very realistic path, then we could start with something that's below that number.

Thank you.

Just to clarify. I will not go for a company that has a very low margin unless it's a bolt-on acquisition where we know. So if we buy a company, we bought lost companies. Within FSG, we have purchased lost companies, and within three months, they have become big profit makers. Why? because we strip it, we move the location, we close the factory, and we merge it into one of our other operations. And then all of a sudden it goes from, it could be a loss, to over 20%. Great, thank you. Keep in mind, we're looking for, remember this, because I don't know if you keep this in mind when you write your reports. We are looking for constant cash flow and growth. That's what HICO is all about. Forget aerospace, electronic technologies, whatever. HICO is a vehicle to generate cash flow. And we do it through those two divisions, which normally has high margins. And I think if you understand that, you'll understand HICO better.

All right. Percentage, last question. We have Mr. Barry Haynes from Sage Asset Management. Your line is open.

Thanks very much. I had two questions, I think both quick. One, can you, for FSG, just give us what the revenue decline was in the month of April, just so we have a marker on sort of where things were? And then the second question was, do you have any idea roughly the number of planes in the narrowbody fleet globally, and then how many MAXs are built and sitting on the sidelines waiting to come into that fleet when we get approval, if and when we get approval?

Thank you. Yes. The first question, Barry, with regard to APRA, we don't break out the specific numbers, you know, within the quarter, but I think you can do some, you know, back-to-the-envelope math and sort of get an idea of where that is. The reason that we're not getting that out is because it's not necessarily representative of, if you will, the bottom or, you know, how the entire corridor operated. With regard to the number of narrow-body aircraft, I don't have that in front of me, but I think it's somewhere in the 20,000 aircraft area. And with regard to the MAX, I think there are approximately 400 that were delivered that have been parked. And then Boeing has got approximately another 400, you know, in various stages of production. that will need to get delivered. Great. Thanks very much. Appreciate it. You're welcome.

Thank you.

I am showing no further questions at this time. I would now like to turn the conference back to your presenters. Thank you.

Well, the management team at HICO wants to thank everybody on this call for their interest in HICO. We are available at any time. If you have other questions, you're welcome to call me, Carlos, Eric, Victor, and if we can clarify anything, and we're happy to discuss it. And otherwise, we look forward to speaking to you after the third quarter announcement, and that call will be sometime, I guess, in the middle of August, the end of August. So thank you all, and please stay safe and healthy during this COVID epidemic. This concludes the call.

Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.