Heico Corporation

Welcome to the HICO Corporation fourth quarter year-end 2023 financial results call. My name is Samara and I'll be today's operator. Certain statements in this conference call will constitute forward-looking statements which are subject to risks, uncertainties, and contingencies. HICO's actual results may differ materially from those expressed in or implied by those forward-looking statements. Factors that could cause such differences include the severity, magnitude, and duration of public health threats, such as the COVID-19 pandemic or health emergencies, HICO's liquidity and the amount and timing of cash generation, lower commercial air travel caused by health emergencies and their aftermath, airline fleet changes or airline purchasing decisions, which could cause lower demand for goods and services, product specification costs and requirements, which could cause an increase to our costs to complete contracts, governmental and regulatory demands, export policies and restrictions, reductions in defense, space, or homeland security spending by U.S. and or foreign customers, or competition from existing and new competitors, which could reduce our sales. Our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth, product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales, our ability to make acquisitions, including obtaining any applicable domestic and or foreign governmental approvals, and achieve operating synergies from acquired businesses, customer credit risk, interest, foreign currency exchange, and income tax rates, and economic conditions, including the effects of inflation within and outside of the aviation, defense, space, medical, telecommunications, and electronics industries, which could negatively impact our costs and revenues. Parties listening to this call are encouraged to review all of HICO's filings with the Securities and Exchange Commission, including but not limited to filings on Form 10-K, Form 10-Q, and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except to the extent required by applicable law. I now turn the call over to Lawrence Mendelson, HICO's Chairman and Chief Executive Officer.

Thank you, Samara. Good morning to everyone on this call, and we thank you very much for joining us today. and we welcome you to the HICO fourth quarter fiscal 23 earnings announcement teleconference. I'm Larry Mendelsohn, chairman and CEO of HICO Corporation, and I am joined here this morning by Eric Mendelsohn, HICO's co-president and president of HICO's flight support group, Victor Mendelsohn, HICO's co-president and president of HICO's electronic technologies group, and Carlos Macau, our Executive Vice President and CFO. Before reviewing our operating results in detail, I would like to take a moment to thank all of HICO's talented team members for delivering another strong quarter and strong year. Your continued focus on exceeding customer expectations and operational excellence has translated into superb results for the shareholders. I would also like to congratulate and thank the WinCore team for a terrific quarter within the Heiko family. We could not be more pleased with their performance and their results. I personally continue to be very optimistic about the future for Heiko. And as a matter of fact, I have never been more optimistic about Heiko's future than I am today. I will now summarize the highlights of our fourth quarter fiscal 23 record results. Consolidated fourth quarter fiscal 23 operating income and net sales represent record results for HICO, driven principally by record net sales within the flight support group and electronic technologies group, mainly arising from continued strong demand for our commercial aerospace products and services and the contributions from our fiscal 23 and 22 acquisitions. Consolidated operating income and net sales in the fourth quarter of fiscal 23 improved by 29 and 54 percent, respectively, as compared to the fourth quarter of fiscal 22. These results mainly reflect 14 percent quarterly consolidated organic net sales growth, as well as the impact from the acquisitions. Consolidated net income increased 6 percent to $103.4 million, or 74 cents per diluted share, in the fourth quarter of fiscal 23. and that was up from 97.2 million or 70 cents per diluted share in the fourth quarter of fiscal 22. In connection with the WNCOR acquisition, HICO incurred acquisition costs during the fourth quarter of fiscal 23, and they decreased net income attributable to HICO by approximately $13.6 million or $0.10 per diluted share. Our consolidated operating margins before the wind core related non-recurring deal expenses remain strong and are consistent with the expectations we have previously communicated. These margins are extremely healthy, even though our product mix this year has meant lower overall margins than in prior year. In the fourth quarter of fiscal 23, excluding the Wencore acquisition cost, consolidated net income increased 20% to $117 million, or $0.84 per diluted share. Our net debt to EBITDA ratio was 3.04 times as of October 31, 23, and that compared to times as of October 31-22. The net debt to EBITDA ratio increase in the fiscal year ending October 31-23 principally reflects our successful offering of $1.2 billion in senior unsecured notes and increased borrowings on our revolving credit facilities. We used the net proceeds from the sale of the notes and additional borrowings on our revolving credit facility to fund the acquisition of Wencor. Cash flow provided by operating activities improved to $148.4 million in the fourth quarter of fiscal 23, and that was up from $143.9 million in the fourth quarter of fiscal 22. Cash flow provided by operating activities in the fourth quarter of fiscal 23 reflects an increase in working capital principally driven by an increase in inventories to support our increased consolidated backlog. The continued excellent cash flow generation by HICO permitted our board of directors to recently declare a $0.10 per share semiannual dividend, which represents our 91st consecutive dividend payment. At this time, I would like to introduce Eric Mendelson, co-president of HICO and president of HICO's Flight Support Group, and he will discuss the fourth quarter results of the Flight Support Group.

Thank you very much. I would like to take a moment to recognize and welcome the WENCOR team members to the HICO family. The WENCOR team is a perfect and highly complimentary fit with the HICO culture, and I'm extremely optimistic about the future of WENCOR's contributions to the flight support group's future. I must say that over the last number of months, I've gotten the chance to visit most of the WENCOR facilities. And I've been incredibly impressed with the caliber of team members that Wencor has. We had very high expectations for them prior to closing the acquisition, but they continue to amaze everyone and really perform outstandingly well. It really is a privilege and an honor to have gotten to know these people. And also, I'd like to thank the HICO team members for being so welcoming to their new Wencor brothers and sisters and bringing them into the fold. Because as a team, we can accomplish so much more than we can individually. The HICO team members have been phenomenally excited about the Wencor acquisitions. We've done about 100 acquisitions, but I can say that this one really has generated incredible enthusiasm and excitement. And I am just absolutely thrilled honored to work with both the HICO and the OneCorp team members. We've got a phenomenal group, and I think the results really speak for themselves with a lot more to come. So again, thank you very much to all of our HICO flight support team members for an incredible performance in the fourth quarter and full 2023. On to the results. The flight support group's net sales increased 74%. to a record $601.7 million in the fourth quarter of fiscal 23, up from $346 million in the fourth quarter of fiscal 22. The net sales increase in the fourth quarter of fiscal 23 reflects $185.7 million from Wincor and strong organic growth of 20%. The flight support group's operating income increased 47% to a record $114.6 million in the fourth quarter of fiscal 23, up from $77.8 million in the fourth quarter of fiscal 22. WENCOR's operating income in the fourth quarter of fiscal 23 was $29.3 million. The operating income increase principally reflects the previously mentioned net sales growth and improved gross profit margin, partially offset by $12.7 million of Wencore acquisition costs and $11.8 million of Wencore's intangible asset amortization expense and higher performance-based compensation expense. The improved gross profit margin principally reflects higher net sales within our aftermarket replacement parts and repair and overhaul parts and services product lines. The Flight Support Group's operating margin was 19% in the fourth quarter of fiscal 23, as compared to 22.5% in the fourth quarter of fiscal 22. The operating margin decrease in the fourth quarter of fiscal 23 principally reflects the previously mentioned Wincor acquisition costs and intangible asset amortization expense. Excluding the Wincor acquisition costs and intangible asset amortization expense, the Flight Support Group's operating income increased 79% to $139.1 million in the fourth quarter of fiscal 23, and the operating margin was 23.1 percent. Now, I would like to introduce Victor Mendelson, co-president of Heiko and president of Heiko's Electronic Technologies Group, to discuss the fourth quarter results of the Electronic Technologies Group.

Victor Mendelson, Co-President, Heiko's Electronic Technologies Group Thank you, Eric. The Electronic Technologies Group's net sales increased 28 percent to a record $342.5 million, in the fourth quarter fiscal 23, up from $268.5 million in the fourth quarter fiscal 22. The net sales increase principally reflects the impact from our fiscal 23 and 22 acquisitions, as well as 6% organic growth. The organic net sales increase in the fourth quarter fiscal 23 mainly resulted from increased net sales of defense, space, and commercial aviation products partially offset by lower net sales of other electronics products. We're pleased to see 26% sequential growth in defense product net sales in the fourth quarter of fiscal 23 over the prior quarter, which now marks our third consecutive quarter of defense-related net sales growth. The Electronic Technologies Group's operating income increased 8%, to a record $86.4 million in the fourth quarter fiscal 23, up from $79.9 million in the fourth quarter fiscal 22. The operating income increase in the fourth quarter of fiscal 23 principally reflects the previously mentioned higher net sales volume, partially offset by higher costs from the Accelia acquisition, higher performance-based compensation expense, and unfavorable changes in the estimated fair value of accrued contingent compensation. The electronic technologies group's operating margin was 25.2% in the fourth quarter fiscal 23, as compared to 29.7% in the fourth quarter of fiscal 22. As acquisitions and tangible amortization is equal to approximately 400 basis points from our sales, We view that our ETG businesses achieved a roughly 29% margin from what we consider to be their true operational activities, which is excellent by any measure, and we're very happy with it, even if it is not as high as it was before. I also note that in last year's fourth quarter, we recorded a $3 million gain from contingent consideration reversal. So last year's fourth quarter operating income included that gain, while this year we had the opposite effect, which reduced the operating margin in total between the two years by around 140 basis points from last year's fourth quarter. All of this is why I look at what we consider to be the business's actual performance before non-cash acquisition accounting, and that, as I said before, is excellent in absolute terms. The lower operating margin in the fourth quarter of fiscal 23, as we said, principally reflects that previously mentioned higher cost from the Excelli acquisition, the unfavorable changes in the estimated fair value of contingent compensation, and higher performance-based compensation. I turn the call back over to Larry Mendelson. Larry Mendelson Thank you, Victor.

Now for the outlook. As we look ahead to fiscal 24, we anticipate net sales growth in both the flight support group and the electronic technologies group. And that will be driven by contributions from our fiscal 23 acquisitions, as well as a demand for the majority of our products. Additionally, continued inflationary pressures may lead to higher material and labor costs. We plan to actively work on Wencor's ongoing integration into our business and operations, continue our commitment to developing new products and services, and further market penetration while maintaining our financial strength and flexibility. Our operating margins, especially before non-recurring acquisition expenses, remain extremely healthy and reflect our strong business operations. We believe that our ongoing conservative policies and strong cash flow enable us to continuously invest in new research and development and to take advantage of strategic acquisition opportunities which collectively position Heiko for success in the markets that we serve. In closing, I would like to again thank our incredible team members for their continued support and commitment to Heiko. Their persistent drive and determination to win in the marketplace has resulted in another quarter of outstanding results. Thank you, all team members, for everything you do to make Heiko a great company. And now, Samantha, I'd like to open the floor for questions.

Thank you. Thanks. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. And we'll take our first question from Robert Spengard with Mellius Research. Please go ahead.

Hi, good morning, everybody.

Good morning, Rob.

You know, you put up a terrific quarter. You're so far ahead of 2019 where everybody else is trying to get, even on an organic basis. I'd like to start there with Victor and just talk about this 26%. sequential growth, Victor, if you could, and characterize what's behind that. Is that across defense? Is it a few specific programs that have started to, you know, to move forward?

Yeah. Hey, Rob. It's good to talk with you. And it's a good question, as always. So, I think our strongest market right now and what's the biggest driver has been commercial aviation. And we have a few businesses in the ETG that have been particularly strong as a result of multiple factors. Some of it's the recovery in air travel. Some of it's new products that we've introduced. Some of it is also some efficiency initiatives. and some of it's acquisition related. So it's a broad mix there. Defense is definitely moving in the right direction for us as well. And commercial space is holding in pretty nicely overall for us. There are pockets of weakness here and there, but overall it's pretty good for us. I would say the headwind for us, and I mentioned this before, I think over the last year, I signaled this probably a year or more ago that I thought some of our high-end non-aerospace and defense markets would start to turn down this year, and those have been more difficult. So those markets that serve some high-end electronics, medical, and markets like those are definitely trending in the opposite direction, and I would expect That will continue for some time, and I think we'll see the effects of that over the next few quarters, actually, first quarter in particular, and as we go on into the year before that starts to reverse. And that's principally a result of probably overly aggressive ordering by customers during the supply chain crunch, dealing with the same kinds of things that we were dealing with. They wanted to get out ahead of it. And now the deliveries are coming in, and some of their orders may be slower, so they have to correct their inventory levels.

Okay, understood. Thank you for that, Culler. And then the next one moves over to FSG. So, Eric, this is either for you. It could be for Carlos. But if we look at the 8K that you filed back in mid-October, it looks like Wencore sales – outgrew overall organic sales for FSG. I mean, the numbers look like they could be 40% or more. It's not an exact comparison because it's an October quarter versus a December quarter, but I wanted to ask if that math is correct, and if so, what's driving that strong performance, and can it continue for Wencorf?

Hi. Good morning, Rob. This is Eric. So I'll start out answering that question, and then Carlos will fill in with some of the details. Wencor has performed exceptionally well, as have, frankly, all of the HICO flight support businesses. They're ahead of plan. They're doing very well, working incredibly hard, and very similar in culture to the HICO group in terms of being conservative in what they predict, and, frankly, outperforming. I'm not sure that the numbers that you state are – let's see what Carlos has to say about it. You know, my sense is their Wincor is growing at a similar rate to the HICO flight support aftermarket businesses, but I'll let Carlos fill in on that.

Yeah, I would, Rob, this is Carlos. I would say that you have to remember that when we put the 8K out, we had pro forma sales in there, which is, you know, when grants and acquisitions early in 23.

Okay.

So that's probably why you're seeing sort of exponential growth. I really, to be honest, I haven't gone back and calculated the organic because we just bought them. I will tell you that we were counting on about $724 million in pro forma sales. I mean, if you just divide that before, we would expect at $181 million. They delivered almost $186 million. So we're pleased with the sales growth. I would say that Q4 is typically a little bit richer than some of the other quarters when it comes to aerospace sales. So none of this is unexpected. But, no, they had a great year. And to Eric's point, they're performing at the same rate that the overall FSG is, particularly in the parts business.

Okay, that's super helpful. And just on all of this growth and on the complementary nature of the two groups, Eric, how are you doing with the cross-selling effort? Has that started to get traction and what might we expect from that?

Yeah, I would say that we have started the effort and it's borne fruit. There are a number of projects that the companies are cooperating on. The HICO style is very much to let our new acquisitions to continue to run as they have so we can really make sure that we fully understand. I can tell you that a lot of the businesses are cooperating, figuring out product rationalization, how to maximize sales opportunities. There are a number of projects that are moving forward, but I would say that that's something that we're going to be getting into more heavily in 2024.

Great. Thank you so much.

Thank you, Rob.

And our next question comes from Pete Skibitsky with Alembic Global. Please go ahead.

Hey, good morning, everyone. Happy holidays. Um, maybe another one for Eric or Carlos, but Eric, I think what you called out for the kind of the adjusted, uh, FSC margin was, was over 23%, which is really strong. And I, you know, I don't know how much seasonality factored in there, but I would also think you'd have some pricing power in 24 because some of the, some of the bigger suppliers, I think have called out high single digit pricing increases for, for 24. So it seems like you've got a, some wiggle room there, even though I know you guys don't like to be too aggressive. So is something approaching 23% reasonable all in for 2024 at FSG, or are there other factors that we should – I know Lawrence called out inflation and that sort of thing. So how do you think it nets out next year?

Let me take that one, Eric. So, hey, Pete, this is Carlos. You have to remember that we have a pretty big amortization slug coming in from the one core acquisition. So that's going to temper some of the, it's going to temper the gap margin a little bit. I think that it's going to be a little lumpy throughout the quarters, but I wouldn't get too far out over your skis. I've been talking about, you know, the segment doing around 21% margins when things settle, you know, when we sort of settle into our footprint. And I think as we're looking forward, that might be a good barometer. You know, we haven't given guidance, but that's kind of what I'm thinking that 24 is going to look like right now.

Okay.

Just curious.

Oh, go ahead. I'm sorry. And, Pete, this is Eric. To add, you know, you had asked about pricing. Yes, there's no question that we've got pricing upside potential. However, it's really been our philosophy to pass along our cost increases. And so that's what we've been focused on doing, to be able to maintain our margins and to continue to provide a lot of opportunities for our customers. So I think that there is a very large potential there. You know, one of the things is if someone's not buying a part and the OEM has raised the price on the part, then as new customers come in and start buying that part, they pay higher prices. So, in a sense, we do get some pricing that way, but we are being very good to our existing customers and we're looking very much at our cost increases. And cost increases have been significant. in a number of areas. You know, I don't need to tell you about labor and material. And we have been successful in passing along those cost increases because it's something that we've got to do in order to maintain our margins. As far as the overall operating margin, you know, before intangible amortization, I think that we'll continue to perform as we have in the past. You know, I'm quite pleased with our performance in the past. And, you know, we've got a lot of very, very good things in the hopper, a lot of projects where Heiko and Wincor can work together on a number of things. So I'm very optimistic about the future.

I appreciate it, guys. And just so we're all clear on the amortization, I think you called out 11.8 million in the fourth quarter. What's kind of the run rate you're expecting in 24 that flows through FSG?

That would be the quarterly run. Are you talking about for just Wencore or for the whole segment?

Well, I think the $11.8 million you referred to was Wencore purchase intangibles amortization. So I'm just wondering that number, how that runs through 24.

So it should be about that much each quarter. I will caution you that we're in the middle of purchase accounting and valuations and all that kind of stuff, so it could move. A few ticks to the right or left, but that's what I'm counting on for next year each quarter, about $11.8 million.

Okay. Appreciate it. Thanks, guys.

We'll take our next question from Bert Hoobin with Siebel. Please go ahead.

Hey, good morning, and thanks for the question.

Good morning.

Maybe just to follow up on that margin question, if we look at FSC, margins being dilutive to HICO, you know, just given where ETG margins are. And you noted last quarter when CORE was in line with FSG, excluding the amortization piece, which seems to be the case based on your prepared comments, Eric. When you put that together with the synergy opportunity and the broader parts pricing opportunity that we've seen on the OEM side, do you think there's a path to overall operating margins getting back to or above FY22 levels in the next, let's say, three years?

Well, so when we look at this past year for the flight support group, in 23, our operating margin, even after the one-time expenses, was about roughly 22%. So we are going to have some additional headwinds as a result of the intangible amortization. But I think that when you add back the intangible amortization, you get into around the 23% area within the flight support group. So I do think that we, yeah, when you add back the intangible amortization and M&A expense, you get back to the 23%. So I do think that there is additional opportunity for us. But again, as I said, we want to be very protective and make sure we take care of our existing customers who have been buying the existing parts. But there is no question that there is pricing opportunity. I mean, if somebody has not purchased a part from us, our list price would escalate and they would not be able to pay the same price for that part as somebody who had been buying it for a long time. So, yes, I think that we do have pricing opportunity on the upside. I want to be careful not to get too far over my skis here because, again, we are very customer-friendly, but I do think there is pricing opportunity.

Okay, great. And then just as, I guess, a higher-level follow-up, You've called out commercial aviation in that end market as being strong. Boeing and Airbus clearly talking about driving toward target production rates, you know, that are much higher than today's rates over the next couple of years. You know, assuming that plays out based on sort of what you know today, how would you expect your commercial aero end markets to change? Do you think they remain fairly similar over that period?

Yeah, I think they remain fairly similar. One of the things that happened for us during the COVID crisis is we got rid of a lot of old aircraft at one time. So instead of having those headwinds, those headwinds as those older aircraft would have been retired over time, we got rid of them all. So if you look at our sales today, there's been a significant upgrade in the – improvement in our fleet age and distribution. So I think that the aircraft that we're servicing today are going to be out there for a long time. They continue to age one year per year, and their price points are, you know, very positive for HICO. So I think that we're going to have the wind to our backs for many years.

Thanks so much. Thank you.

We'll take our next question from Ken Herbert with RVC. Please go ahead.

Yes, hi. Good morning, everybody.

Good morning, Ken.

Hey, maybe a question, Eric, for you to start off. If you look at ICO now with Glencore and the combined business, can you talk organically perhaps how much you'd expect your PMA portfolio, for instance, to grow? into 24 or 25? I guess I'm just curious about what kind of share gain or opportunities you're seeing in PMA in particular and how you're investing to support that.

Yeah, we both, Heiko and Wincor, perform very well in terms of new PMA generation. We're continuing to invest, continuing to find new opportunities. So, I mean, without doubt, this is going to be a record year in terms of PMA generation and the number of parts that we can come out with. I can tell you that I've met with a number of customers since OneCore has closed, and they are really excited and enthusiastic, unlike I've ever seen, concerning our product lines. They want us to do more. You know, again, there's going to be plenty of business for the OEMs. You know, there's more than enough business to go around. But they clearly have seen, after going through a supply chain constraint like we've seen over the last couple of years, not only does HEICO bring cost savings, but we also bring availability. And that is a very, very key factor. part of our value proposition. So that is driving them to want to continue to develop more parts with us and why I'm so bullish on it. I mean, obviously, we're not going to, Heiko Winkler won't develop the same parts, and we can have each of the business units focused in areas where they have a competitive advantage, and that is our plan to be able to broaden the amount of product that we can bring to our customers.

Okay, that's very helpful. Thanks, Eric. And maybe, Carlos, if you look at the Wancor business, to the extent to which it's still sort of standalone or independent somewhat, how is the cash generation profile of that business relative to Legacy HICO, and is there an opportunity to maybe see some better cash generation out of the Wancor business? Sure.

Ken, it was a little hard to hear that, but it sounds like you're wondering how we might be able to squeeze more money out of one core. Is that essentially your question?

Exactly. Yeah, sort of the cash profile and the outlook there. Thank you.

Sure. So I think that on a cash flow process from an EBITDA perspective, you know, they're doing quite nicely. They're ahead of our expectations. I think that as we coordinate operations and coordinate are sort of consolidation, some back office things. There may be some savings there. You know, as I mentioned to you before, we're not going to disrupt operations right now with any consolidation moves because our end markets are too hot. And candidly, they're doing great. And I think that, you know, if they continue to do what they did this quarter, we'll be very happy. They're not consuming a lot of working capital at the moment. So that's, you know, that's all a positive going forward in 2024.

Great. Well, thank you very much. You're welcome.

We'll take our next question from Scott Duschel with Deutsche Bank. Please go ahead.

Hey, good morning. Good morning, Scott.

Eric, can you talk a little bit about the munitions growth at FSG, maybe kind of what the growth has looked like over the last year and then what the outlook is going forward into 2024?

Oh, I'm sorry. Can you just – the growth of which product line?

The munitions product line, I think, and specialty products. I think it was a big driver of growth in the first half of this year. I got it. I'm just curious to see a little more granularity there.

Thank you. Got it. Yeah, I think what you're speaking about is the missile defense products that we're doing. And there's a lot of – there's been a tremendous amount of growth. As you can imagine in that area, everybody's been significantly underinvested in it, and for that reason, we're very optimistic on it. Within our specialty products business, we are adding capabilities. and space and people to a number of those businesses. So there's a fair amount of, I would say, one-time costs that we're anticipating in 2024. But we're going to be able to cover it within our normal margins. But the business is very strong. And I think that we've really carved out a niche for ourselves in many areas in the

defense products. Okay. And then Eric, you know, you talked earlier about price and availability being two of the differentiators for what allows you to get the sale on a PMA part, but it seems like another one is that the PMA part is often just a better part. So I'm curious if you could talk a bit about that and how frequently the product itself and the capabilities of the product are what drives the sale as opposed to just the price and availability piece that you mentioned earlier.

Sure, Scott. I'd be happy to. So in order to get a PMA, the part has got to be the same in terms of form, fit, and function. So therefore, yes, the way that we are able to differentiate ourselves with respect to quality is we typically have tighter tolerances, so we produce more consistent parts. And we also have an extremely robust quality inspection programs. So when parts come in from vendors, whether they are hyco vendors or outside vendors, there's a very robust material analysis, whether the part's metal or not metal, to confirm grain size, microstructure, hardness, coatings, all of those various constituents to ensure that the part that we ship out is exactly what was designed. Likewise, we have a very robust inspection process to review the dimensions. So I would say that with regard to basically shipping the part according to the design intent, HICO scores incredibly high in that area. So the parts are more consistent. Airlines are able to basically use them and install them right away. And the fallout or rejection rate with Heiko parts, we believe, is significantly lower than with other companies' parts. So they are improved in that regard. We do offer some parts that are improvements where material or dimensions can be changed. But that is a smaller part of our business, but that's also an area of opportunity for us.

Okay, great. And last question, Carlos, can you give any kind of framework for how to best think about ETG margins for next year? Is something in the range of 24 to 25%, you know, a good kind of base case framework to think about 24? Thank you.

Well, I can tell you this for the ETG. I think it's going to be lumpy. I think the defense sales look like they have turned to our benefit. But we have, as Victor mentioned earlier, we have a lot of high-end and liability parts that are going to non-aerospace defense and space areas. That business, we believe, will calm down a little bit. So the margin is going to go all over the place. You know, I would say if you're at 24%, you're probably in the right ballpark for the year. But I would let us get a couple quarters underneath this before we commit to a margin. Because, again, I think based on backlog and what we see right now, it's going to be a little lumpy going into next year.

Great. Thank you. You're welcome.

And we'll take our next question from Sheila Kayalu with Jefferies. Please go ahead.

Good morning, guys, and thank you. Maybe just continuing on that line of questioning with NTG profitability, Victor, can you talk about Excelia? Just provide us with an update there, the performance of what you're seeing in terms of the underlying profitability profile of the business and kind of how that tempers into your fiscal 24 expectations as what Carlos just said as well as beyond that period.

Sure, Sheila. Excelia has been doing pretty much exactly what we expected it to do, more or less right on plan. The business has been growing. And as we've said before, that it penalizes our operating margin by about 200 basis points. And I would expect that to probably continue to be the case. I would expect their margins will march up a bit over time, but not to the level of the rest of the ETG. So we're very happy to have the business. They have mined out a lot of new opportunities. They're working on other opportunities beyond that, continuing good product development, producing out their backlog, which has been very strong. So overall, very happy and very happy with the people there.

Okay, thanks for that color. And maybe, Eric, one for you. I know you got lots of questions on price. Any way you could quantify cumulative price over the last, since 2019 for us? And also, any thoughts on the GTF issues and how you think that'll potentially benefit HICO's PMA portfolio?

Hi, good morning, Shio. Great question. With regard to price, actually, I don't have that information in front of me. And due to HICO's decentralized nature, it would be very difficult to pull all of that together. But I would say that, in general, we have not, you know, as I said before, we have not pushed price beyond our cost increases. So, therefore, you know, customers who have been purchasing the parts for a long time have been treated very well, and it's our plan to continue doing that. But, of course, new people buy the parts, and they haven't purchased the parts in the past. They pay the newer price, and that would reflect increased prices as our labor and material costs have gone up. And then with regard to the GTF, I assume that will keep the existing fleet in great demand for a long time. You know, it's going to take a while to work through the GTF problems. And I have no question that they'll ultimately get through them. But in the meantime, that should be really a very strong indicator, I would say, for the aftermarket. And fortunately, these aircraft are able to pick up the slack. So I think that that's working out quite nicely. Originally, we always said that whenever you've got a recovery, there's always a little bit of an overshoot. Well, it looks like perhaps as a result of the GTF issue, that overshoot may either be delayed or won't happen. because there's just increased demand. Our backlogs are tremendous. Our suppliers are challenged to keep up. You know, I think we're doing better than most in that regard, but there's, you know, tremendous, there continues to be tremendous demand for our products and services.

Great. Thank you. Thank you. Thanks, Sheila.

We'll take our next question from Michael Termoli with Truist Securities. Please go ahead.

Hey, good morning, guys. Nice results, and thanks for taking the question here. Hey, Carlos, just can you give us any more maybe clarity or direction on the revenue growth outlook for 24? I mean, you know, I know you called out in the press release you expect growth in FSG and ETG. You know, FSG, you know, will be lapping a tough comp on the 20% organic. So, you know, maybe unlikely to see acceleration there. But I would think with ETG and defense kind of showing that sequential improvement, we get some acceleration off this 1%. Can you maybe give us a little bit more detail on kind of the top line growth expectations?

Well, I mean, as we're sitting here today, you know, our growth is, our growth is going to be solid next year from acquisition revenue. If you're referring to organic, you know, you are right. We're lapping 20 plus percent growth quarters for two years now. So I think what, in the FSG. So I think that that'll be, I don't think it'll continue at that rate, Michael. I mean, it could, but you know, I'm not anticipating that. I do think it peels back a little bit, not a ton, but it will peel back. I think the ETG's growth is going to be, quite lumpy based on what we see in backlog right now. I think with the ETG, if you're counting on the organic side, look to the low to mid single digits. FSG should be high single to double digits, something like that. It should continue a nice growth pattern next year.

Okay, that's helpful. And then just back to the FSG margins, I guess, you know, as you guys think about, you know, kind of the integration plans, when CORE had been running at 15.8%, give or take, where do you think you can take those margins? And I know, Carlos, you called out a couple times the amortization margin. From when court 11.8Million flowing through, but what was the other amortization as well that flows through there to kind of get you to that that 23% just just want to make sure we've got all the math. Correct.

Michael, are you talking about just one core of the segment?

The 1st question was just on when core the 2nd was was the segment in total at that 23%.

So I think that percent of sales you're going to run 2%, 2.5% I believe is the number for amortization in the segment. And one core is part of that. And like I said, you're close to $12 million a quarter for one core in amortization. So that's what we're looking at next year.

Okay. Got it. And then any thoughts on where you could take those one core margins, like just, you know, from that 15.8% level as you guys integrate and, you know, kind of go through the process?

So, Michael, this is Eric. Let me see if I can help you out with that a little bit. If you take the one core operating income for the quarter of $29.3 million and then you add back 11.8 million of intangible amortization, then you get to a number of about $41 million for the quarter. So when you divide that 41 million by the 186 million approximately of one core sales, you get to about a 22% margin adding back the intangible amortization. So if we're saying that HICO is, you know, fight support group is going to be in the 23% area, for this coming year, you know, one core based on the fourth quarter was just a tick below that. Okay. You know, to just, but so I would say it's very similar to, very similar to HICO.

Okay.

Okay. That's helpful.

Perfect. Thanks, guys. I'll jump back in the queue. Thank you.

And we'll take our next question from Gotham, Ghana. with TD Cowen. Please go ahead.

Hey, good morning, guys. Good morning. Good morning, guys. I had a couple questions. First, Eric, I was wondering if you've seen any differences in demand by channel. You know, Wencor, I think you guys said, sells more to the MROs, whereas Hyco on the PMA side, directly to the airlines. Was there any discernible differences or changes in customer behavior between the two channels?

No, I would say that there really hasn't been thus far. I think that that is an opportunity for us to mine as we go forward. And I think that that will be very much an opportunity again. WENCOR has operated basically as a standalone business. Yes, we're coordinating some activities, but it continues to operate with its own leadership and its own P&L. But I think there will be opportunities such as the ones you're alluding to. Okay.

You know, airlines appear to be in some financial distress incrementally. I'm just curious, have you seen any increase in the number of inquiries from non-PMA buying customers that are now looking to switch over or just you're seeing more volume among certain customers than you would expect at the airlines given some of the challenges?

Yeah, it's a great question. And there are, I mean, pretty much everybody uses PMAs, but there has been an increase in using parts that, you know, using hygo parts that they haven't purchased in the past. And, you know, what is it, you know, the old saying, necessity is the motherhood of invention. And sometimes if people can't get a part from the OEM, then they'll go ahead and, you and then they'll buy it from HICO. And we certainly have seen that happen. And as a matter of fact, it's particularly gratifying when you see OEMs do that. So, and that's been, you know, I'm not going to get into specifics, obviously, but it's very nice when we see OEMs purchasing you know, the HICO and the one core alternative parts in order to meet their demand, because we know the quality is outstanding.

Appreciate it. And then Victor, just quickly on some of the earlier questions related to the defense improvement that you saw sequentially, what is this a letup of past due backlog or is there, is that not really a driver? And, you know, what can you say about maybe book to bill or, any sort of discernible change in order trends among those customers?

Yeah, on defense, I think our book to bill is positive on defense and moving in the right direction. For our defense businesses, I would say very little of it, if any, would be supply chain catch-up. In fact, in the whole quarter, our companies estimate that maybe approximately $10 million worth of shipments moved to the right, right? So compare that to where we were, I don't know, roughly a year ago, I think we'd reached up in the $40 million range or even higher. So that's definitely trended in the right direction for us and I'm overall optimistic on our defense business. throughout the year. Again, as Carlos emphasized, it will be lumpy, and the mixed sensitivity is important because we have some products, some subsidiaries, which have a much higher margin than others, and how that backlog falls out is very important. So I would expect, for example, the first quarter on margin side to be tougher for us than the following quarters.

And last one, if I may, just back to Eric. On the number of TMA parts you expect to introduce between the two entities, Legacy HICO and WEMCOR, if you could just update us on that over the next year.

Yeah, I think, you know, HICO has been running in that 300 to 500 area, you know, roughly 400 parts a year. And Wincor has been running in about the 150 area. So I would anticipate those numbers continuing that way.

Great.

Thanks a lot, guys. Happy holidays. Thank you very much. Happy holidays to you too. Thank you.

And we'll take our next question from Louie DeBalma with William Blair. Please go ahead.

Larry, Eric, Victor, and Carlos, good morning.

Good morning.

Good morning, Louis. When discussing the Wencore deal, Wencore's e-commerce platform was touted as one of the unique assets with potential synergies. Has Heiko started the process of selling any of the Heiko parts on the Wencore online marketplace? And Are there many revenue and cost synergy projects planned for 2024 or is that more of a 2025 event? Thanks.

Yeah, this is Eric. I'd be happy, Louie, to answer that. You know, as I mentioned, the HICO philosophy when we acquire a business is just to leave it alone and observe what's going on. We've got our initial view, and then we want to make sure we confirm that first before making substantial changes. So, yes, the ownership period at Wencor has gone extremely well, and we are working on a number of projects in terms of product rationalization, you know, sharing resources between the businesses, sending business to, you know, Heiko Wenkor, which used to go outside. So all of that is going well. Specifically with regard to the e-commerce platform, we think that that's going to be an opportunity for 2024. It's something that we're looking at right now. We continue to believe very much that's going to be a huge asset. They are studying the best way to go ahead and do that. But no, we have not done it to date, not because we don't want to do it, but because, frankly, both businesses are running at such a high percentage of utilization that we don't have People to be able to focus on all of the projects that we're just sort of taking them as we can handle them. But we believe that that's going to be a tremendous benefit for us in 2024.

Great and following up on that in terms of. The cost synergies, then you said that you. plan to let Wencore operate in a standalone mode, should we think of synergies more as a 2025 event then? Like how long would you generally plan to let it operate in a standalone mode?

Well, I think the revenue synergies are going to start accruing quickly. And then as far as some of the cost synergies, the business units are taking it upon themselves to work together and to find areas where they can rationalize product lines. You know, if one business does more of a particular product than another, they're looking at swapping. So this way, you know, we can maintain the workforces. We've got, you know, tremendous volumes and all the businesses are running at a high rate. utilization factor, but if we can redirect people to more efficient activities, we want to do that. So we are taking advantage of the revenue synergies and of some of the cost synergies, but I would say that that's going to be something that benefits us in both 24 and 25. Excellent.

Thanks, Eric, and thanks, everyone.

Thank you.

And we'll take our next question from Larry Zallo with CJS Securities. Please go ahead.

Great, thanks. Good morning, guys. Happy holidays to everybody. Most of my questions have been answered. Just one, I guess, just on free cash flow, a couple there, sort of your, without getting into specific guidance, sort of your general outlook on free cash flow in terms of, you know, working capital needs. You expect maybe to have to build a little more inventory there. How do you think that's going to shake out? And then part two of that question would be kind of priorities for free cash flow. A little more leverage than you guys are used to. So I'm just curious, would that number one priority be sort of debt pay down, maybe in front of even strategic acquisitions? Thanks.

So let me take a stab at that, Larry. It's Carlos. I think that on the, as you mentioned, the inventory side, we did have a significant investment, 23 in inventory. And I suspect that for a few quarters into 24, we might have a little bit more inventory bill. Part of that is due to firm commitment orders we placed sometimes as much as two years ago to deal with the supply chain challenges to make sure we had product on the shelf for our customers. But I do think that carrying costs and inventory isn't free anymore, right? Rates are up. So we're very cognizant of that. And I do think as we get into 24, my hope is Is that towards the back half of the year we get a little bit more rationalization on the working capital usage? That's my expectation. As far as free cash flow, I expect the company to continue to have strong free cash flows. And I do think you've hit the nail on the head. Once the working capital investment to support the growth and some of these firm commitment orders has tempered, I think our conversion will be slightly better.

Does that answer your question, Larry?

Yeah, no, absolutely. And I guess just priority. Is that pay down? Is that probably your priority?

Yeah, look, I mean, our objective right now, as we stated before, is to try and delever as quick as possible. You know, our plan after completing the one and four acquisition, you know, within 12 to 18 months, we set out on a plan to get our debt leverage ratio something close to normal. around the two range, roughly. That's the goal of the 12 to 18 months. I would say that that is not a goal that prohibits us from doing acquisitions. I would say that for smaller acquisitions, we will draw on our line to do what we need to do to complete those if they're good for our shareholders. I think if they're larger deals, we might have to get creative, but I don't expect that over the next 12 to 18 months, something as large as Wencore probably would be very unique. I don't know that we've got something on the horizon right now. And I do think, to your point, that deleveraging is sort of our highest and best use of free cash right now.

Okay, great. Thanks, guys. I appreciate it. Yep.

We'll take our next question from Ron Epstein with Bank of America. Please go ahead.

Good morning, everyone. This is Mariana Perez-Moran for RON today.

Hello.

I'm going to ask a big picture question. Larry, in your prepared remarks, you highlighted you have never been more optimistic about high-cost future than you are today. When you think about the year ahead, what are you most excited about? Is the industry? Is a particular end market? Is high-cost competitive position?

I think all of the above and other areas, too. I think that the Wencor acquisition puts us in a very unique spot. As we've told you today, it's actually working out better than we anticipated. You know, to Heiko, the culture of a company is critical. And I can tell you, as a large acquisition like Wencor, having that excellent culture is really a wonderful thing. We have learned, I'm a financial person originally, started as a CPA long ago, and finance is very important and we key on that of course in cash. But when I look at our cash flow and I look at our culture, the culture is what ultimately drives the bottom line. So this is very, very good. On the other hand, The Accelia acquisition has come off almost exactly what we expected, and we expected it to be good, and it is good. So when I look at all these things and the size of the company, I also believe that, as a matter of fact, I've said many times that we have a goal of growing 15% to 20% bottom line. And in 23, if you add back non-recurring expenses that we incurred, the legal investment banking and so forth for the acquisition, we grew about 20% over the prior year, 22. I feel very confident that in the current year, we will be able to grow 15 or 20%. We don't give guidance, but Clearly, we focus on our budgets and where we think we will wind up. But I feel, knowing everything I know now, that we will be able to repeat a 15%, 20% growth. And then that's after making these sizable acquisitions and digesting them. So Heiko is a much stronger, bigger company than it has ever been. I mean, it's a major factor today in the industries we operate. So for all those reasons, I would say Heiko has become a powerhouse. And for those reasons, I feel extremely confident of the future for Heiko. Does that answer your question?

Yes, thanks so much. And then when you think about potential challenges, what keeps you up at night? What are you paying close attention attention to?

Well, the only thing that I worry about is exogenous events, which we can't control. War, strange things like this. But as far as the operation of Heiko, I am highly confident because we have great depth in management. In other words, since we're a company that's not consolidated, we're diversified and and we leave the decision-making down at the level where we believe it belongs. The corporate doesn't tell the operating entities what they have to do. We say to them, what do you think we should do, and how will you accomplish it in your budget? And to that extent, I have great confidence. These are people who have been running these businesses for many years. Nobody, in my opinion, nobody knows their market, their labor market, their customer market, better than the people operating the businesses. And they've done it over and over and over again. So it's not as though, well, this is something new. Can they do it? Can they accomplish it? No. They've been doing this for many years. I mean, Heiko has a record of growing over 30-some years, the bottom line close to 20% compounded growth. So because of that, I have great, great confidence in what they're doing. I mean, Eric and Victor run those companies, and they go out and they meet with the business unit leaders constantly. They speak to them by phone. Carlos has an extremely detailed financial report weekly, so we keep track of the receivables, the growth, the backlog, cash flows, everything. So for all those reasons, I really don't worry about the operation of our company. I just worry about, well, I don't worry about it because I can't control it, but things like COVID, wars, and things like that, which might impact us, but I can't change that. I think we've done as well, Eric Victor and our team members have done as well as can be done with the company in terms of operations and control. So none of those things worry me.

Perfect. Thanks so much. And then if I may, one last question for Carlos. Could we please dig deeper on M&A? I'm curious if you could discuss the two sides of it, like number one, like pipeline of opportunities and like how any color and pricing there, but also how You mentioned the leveraging. What is the targeted leverage? And I'm curious how and if an easing interest rate environment influences that target.

Well, clearly, higher interest rates causes me to want to pay down debt quicker, right? I mean, that's kind of our mode of operation here. You know, within the next 12 to 18 months, I'm targeting somewhere in the low two times. And that gets us, you know, close to historic norms, which have been somewhere slightly lower than two. You know, that was the goal when we set out, and that's what our objectives are. As far as our M&A backlog goes, we have a very active process. Both segments have teams that are focused on markets and opportunities. It's very opportunistic. And as I mentioned earlier, you know, there'll be those handful of deals that we see every year, which I would probably categorize as smaller deals. you know, $100 million spend and less and things like that, we'll find deals like that all day long. And if it makes sense for our shareholders, we'll pull the trigger. That won't damage our plan to de-lever. But as far as larger deals, such as a wine core where we spent over $2 billion, you know, I would think over the next 12 to 18 months that that would be unlikely that we would pursue something like that until we've de-levered a bit.

Does that answer your question? Yeah, that's perfect. Thanks so much, and happy holidays to everyone.

Thank you. Thank you, you too.

And we'll take our next question from Ian Franz Engelbrecht with Baird. Please go ahead.

Good morning, Larry, Eric, Victor, and Carlos. Thanks for taking the question. Good morning. Eric, if I can just sort of a high-level question. Just over the next 12 months, in terms of flight activity across narrow-body, wide-body, and then sort of North America, Europe, and China, if you can just let us know how you're thinking about sort of potential areas of strength and potential regions where there's probably a watch item for your business for the aftermarket.

Yeah, we're seeing strength, frankly, across the board. So... You know, we dive down into the part number level. So it's just very, very broad base strength straight across the board. So I wouldn't want to call out one area or another. It's really just very strong across the board.

No, that makes sense. Thank you. And if I could just have a quick follow-up. Victor, I think you may have answered this with ETG. But if you could just talk about sort of the supply chain outlook in 2024 and beyond. So there's less of an impact. I think you guys mentioned $10 billion. Does that keep on improving for the remainder of 2024?

I would expect that to be the case. I think it's improved dramatically, but there's still room to go. Lead times have improved. Of course, there are some products, there are some components, particularly in the realm one would think of as, quote, chips. That's still elevated and a little complicated. And I would say even in ordinary times, As I reflect on it, I would expect that there will always be products and vendors that are delayed, but we wouldn't categorize it as a supply chain crunch like the world experienced before. And so I think it will return to normal sometime, I would expect, within calendar 2024. Perfect.

Thank you. Thanks and happy holidays and congrats and a good quarter. I'll jump back in there. Thank you. Thank you. Thank you.

and we'll take our next question from Louis Raffetto with Wolf Research. Please go ahead.

Thank you. Good morning, guys.

Good morning. Victor, so it's great to see defense up again. I guess have we lapped year-over-year growth yet? I know it was down high single digits last year or last quarter for defense. I guess was it up this quarter?

Yes, it was up this quarter. Okay, great.

Thank you. Eric, just can you help baseline the $186 million of sales for one core between sort of the sub-segments within FSG? Any way you could help us out there?

I can't. I don't have that actually in front of me right now. But it would fall, you know, broadly into parts and into MRO in terms of the disaggregation of revenue. but I don't have that information in front of me at the moment. But I would say that we're doing very well in both of those areas.

All right, great. Appreciate it. And then, Carlos, just to make sure we're all based on, I guess, on the interest costs in the quarter, was there anything one time, or should we think of this $40 million level as sort of going into fiscal year 24 as the right level?

Hey, Louis, that's a good question. So within the interest line this quarter, we had $3.8 million worth of one-time costs in there related to the commitment letter to fund the one-court deal. So going into there, we basically had to pay about $3.8 million to get a bank to write a letter to say that we were good for the purchase price. That's the one-timer. That won't repeat. So as you're looking forward next year, if you pull that out, you're looking at roughly $38 million and then decreasing as we deliver.

Okay. And then I guess just taxes. Any way to think about taxes for next year?

Yeah, I hope they remain. I'm planning on them to remain similar to what they were this year. You know, I always kind of count on a 20% to 21% rate. This year we did a little better. It's because, frankly, the – We have that leadership compensation plan where we have some tax-deferred earnings that has a positive impact on our rate. And because the market was generally up through 23 for our fiscal year, that did help us as opposed to hurting us last year. So I think if you're in the 20% to 21% range, you're going to be in good shape.

Okay. And then just last cleanup on the intangible amortization. There's no sort of one-time step-ups or anything like that. That $11.8 million was – to your point, sort of the go-forward rate?

Yeah, it was. The one thing about, you know, one court doesn't have what I'll call a manufacturing base like we do. They outsource a lot of their manufacturing. So there wasn't any manufacturing profit to pull out of the purchase accounting to pull out of the numbers. I mean, maybe a little bit in the repair side, but it wasn't anything notable, Louis. So I would say that 11.8 is a pretty good run rate number.

All right, thank you very much. You bet.

We'll take our next question from Colin Newsharm with Sterling Capital. Please go ahead.

Hi, good morning, and thanks for taking my question. I had actually one clarification for Eric and then one question for Carlos, if I may. Eric, on the GTF question earlier, could you just please clarify your impression of the materiality of that potential demand driver for 2024? Do you view that as... an incremental needle mover for you all? And then do you have any additional certifications, et cetera, that your subsidiaries perhaps need to attain to win that work? And then do you have the capacity to kind of take that on? And then for Carlos, just stepping back and thinking of the post-WENCOR and Exalia balance sheet that you're sitting on now, you're facing one of the most significant delivering processes in recent memory for Heiko. And we've just witnessed a significant and favorable change to financial market conditions in the last month or so. And while I'm no macro economist, things could continue to favorably develop here in 2024. So I just wanted to ask about your thinking and has it changed at all regarding the cost or pace of this delivering journey that you're on? any change to your thinking and or steps as you kind of prosecute that playbook. Thanks again.

Colin, so I'll start out. What I was referring to in response to the prior question concerning the GTF was that as a result of the GTF-powered aircraft being taken out of service in order to have their engines overhauled, that would create additional demand for legacy aircraft. So I don't want to call that out as, you know, anything more than a tailwind, but, you know, clearly is going to be good for the use of the utilization of non-GTF-powered aircraft. With regard to HICO's involvement in the GTF fleet campaign, I would say that it is not material. We are not supplying PMAs on the GTF in any material quantity. And frankly, the service that's being done now is being paid by the manufacturer. So that would not be a revenue opportunity for us. If we've got businesses that are supplying parts into the OEM, then there could be a little bit of increased demand for that. But no, I would not call it out as a special one-time item.

Colin, this is Carlos. I don't know that anything on the horizon is going to change my view on the de-levering. In my mind, we've got almost 10,000 team members and, you know, an uncountly number of family members that are attached to those people. And we want to make sure we have a battle-hardened company that has a lot of staying power. And so my objective with that in mind is to try and de-lever as quick as possible so we can de-risk the balance sheet. I will tell you this. I mean, at net leverage of three times, it's not like we're highly levered. But for me, I'd prefer to be back down to historical norms. So that's kind of the marching orders in the next couple years, and we'll see how it plays out. I can tell you we will not miss opportunities that are good for our shareholders as a result of that plan, but the stated goals right now are to continue the thoughts of de-levering. Does that answer your question?

Yes, thank you. You're welcome.

We'll take our next question from Jordan Liones with Bank of America. Please go ahead.

Hello? Hello?

It appears they disconnected, and we have no additional questions at this time.

Okay. Well, thank you very much. I want to thank everybody who has been listening to this call. I hope we've satisfied you and give you information that you would like. If not, we are available, as you know. Give us a call. Eric, Victor, Carlos, myself. And we look forward to speaking to you in the first quarter call, which will be in a few months from now. And we wish all of you a very happy and healthy holiday season and new year. And that's the end of this call.

Thank you. And this concludes today's call. Thank you for your participation. You may now disconnect.