Heico Corporation

Welcome to the HICO Corporation fourth quarter 2024 financial results call. My name is Samara and I will be your operator for today's call. Certain statements in this conference call will constitute forward-looking statements which are subject to risks, uncertainties, and contingencies. 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, HICO's liquidity and the amount and timing of cash generation, lower commercial air travel, airline fleet changes or airline purchasing decisions, which could cause lower demand for 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. Cyber security events or other disruptions of our information technology systems could adversely affect our business. Our ability to make acquisitions, including obtaining any applicable domestic and or foreign governmental approvals, and achieve operating synergies from acquired businesses. Customer credit risk. interest, foreign currency exchange, and income tax rates, and economic conditions, including the effects of inflation within and outside of the aviation, defense, space, medical, telecommunications, and electronics industries, which could negatively impact our costs and revenues. Parties listening to this call are encouraged to review all of HICO's filings with the Securities and Exchange Commission and 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 and good morning to everyone on this call. We thank you for joining us and we welcome you to this HICO fourth quarter fiscal 24 earnings announcement teleconference. I'm Larry Mendelson, chairman and CEO of HICO Corporation. I am joined here this morning by Eric Mendelson. Eric is HICO's co-president and President of Heiko's Flight Support Group, Victor Mendelson, Heiko's Co-President and President of Heiko's Electronic Technologies Group, and Carlos Macau, our Executive Vice President and CFO. Now, before discussing our record operating results, I want to sincerely thank Heiko's talented team members for their exceptional contribution to our success. Your dedication to exceeding customer expectations and achieving operational excellence has driven outstanding results and reinforces my confidence in HICO's future. Over the past several years, we have achieved extraordinary growth in commercial aviation, emerging stronger than ever from a very challenging period in the aerospace industry. Our team members' resilience and adaptability during this time of rapid recovery and expansion have been remarkable. Equally commendable is the agility shown by our recent acquisitions which have seamlessly integrated into our operations and enhanced our collective success. I'm also encouraged by our progress in expanding our presence in key markets such as defense and space. These sectors are critical to long-term strategy and our team members' commitment to delivering innovative, reliable, and best-cost solutions has strengthened Heiko's reputation as a trusted partner. This focus for us for continued growth and success across diverse markets. I'll now summarize the highlights of our fourth quarter fiscal 24 record results. Consolidated operating income and net sales in the fourth quarter of fiscal 24 represent record results for HICO and improved by 15% and 8% respectively as compared to the fourth quarter of fiscal 23. Consolidated net income increased 35% to a record $139.7 million, or $0.99 per diluted share, in the fourth quarter of fiscal 24. And that was up from $103.4 million, or $0.74 per diluted share, in the fourth quarter of fiscal 23. The Flight Support Group set all-time quarterly net sales and operating income records in the fourth quarter of fiscal 24, improving 15% and 35% respectively over the fourth quarter of fiscal 23. The increases principally reflect strong 12% organic growth mainly attributable to increased demand for flight support groups, commercial aviation products and services, as well as the impact from our profitable fiscal 23 and 24 acquisitions. Consolidated EBITDA increased 13% to $264 million in the fourth quarter fiscal 24 And that was up from $234.2 million in the fourth quarter of fiscal 23. Our net debt to EBITDA ratio was 2.06 times as of October 31, 24. And that was down from 3.04 times as of October 31, 23. Our excellent operating results have allowed us to early achieve the forecast we made a year ago that our net debt to EBITDA ratio would return to a historical level of about two times within roughly one year to 18 months following the wind core acquisition. and that excluded the impact of any additional acquisitions. Our acquisition pipeline is extremely robust with opportunities in both light support and ETG, and we intend to follow our time-tested strategy of opportunistic acquisitions that continue to expand the cash-generating ability of HICO. Cash flow provided by operating activities increased 39% to $205.6 million in the fourth quarter of fiscal 24, and that was up from $148.4 million in the fourth quarter of fiscal 23. Yesterday, HICO's Board of Directors declared an $0.11 per share cash dividend payable in January 2025, and this represents our 93rd consecutive dividend, and this reflects their continued confidence in the strong cash flow generation of HICO. Now let me talk about acquisition activity. Over the past few months, our ETG group made several strategic acquisitions, acquiring 70% of SVM Private Limited in November 24th. They acquired 87.9% of Mid-Continent Controls in October 24th. And they acquired 92.5% of Marway Power Solutions in September 21st. In addition, in August 24, our flight support group acquired the Aerial Delivery and Descent Devices Division of Capewell Aerial Systems. All of these acquisitions were funded by using cash provided by operating activities, except for Capewell Aerial which was principally funded using proceeds from our revolving credit facility. We expect each of these acquisitions to be accretive to our earnings within the following year of acquisition. 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. Eric?

Thank you very much. The Flight Support Group's net sales increased 15% to a record $691.8 million in the fourth quarter of fiscal 24, up from $601.7 million in the fourth quarter of fiscal 23. The net sales increase reflects the impact from our fiscal 23 and 24 acquisitions and very strong 12% organic growth. The organic net sales growth mainly reflects increased demands across all of our product lines. The wind core operations continue to exceed our expectations, and we are convinced this was an excellent acquisition for Heiko. Our customers continue to find great value in our larger aftermarket product offerings for their aerospace parts and component repair and overhaul needs, which is translated into excellent growth opportunities and success for both our legacy businesses and Wencor. We continue to operate Wencor as a standalone business operation. I have defined our strategy as cooperation, cash, capabilities, and consistency without consolidation. The sales, earnings, and margins prove this was the perfect strategy. As I have mentioned before, we continue to make good progress working together in serving our customers in a combined, seamless fashion. Some examples of how we are working together include, one, utilization of all Hyco and WinCore PMAs and DERs at all repair stations, Two, commercial and defense aftermarket sales cooperation. Three, Wencor e-commerce platform lists all Heiko non-competitive PMAs. Four, Wencor is utilizing Heiko's manufacturing base to quote many new products. Five, engineering and regulatory cooperation. Six, sharing our best-in-class vendors. And seven, various back office synergies such as insurance, payroll, retirement benefits, and export compliance that will help offset additional regulatory compliance costs such as SOX and our FAA ODA. In addition, the FSG's defense sales continue to grow and offer an excellent opportunity. Many people have asked us what the U.S. presidential administration change will mean for HICO. In short, we are very excited about it. Whether it's the chance to sell more of our much lower cost alternative aircraft replacement parts to save the government and taxpayers significant money or other opportunities, the possibilities are many. HICO has always been about finding cost savings or best cost solutions for our customers, whether they're defense or commercial customers, and not about getting the highest price out of them. Another example of the opportunity set is the components we make for missile defense systems, which is a strong and growing business for us. Missile defenses are increasingly important to the United States and our allies, with sales of these products growing dramatically amidst what is effectively a shortage of defense missiles and a very large backlog stretching over years. We expect meaningful growth from this existing backlog alone. Moving on to operating income. The flight support groups operating income increased 35% to $154.5 million in the fourth quarter of fiscal 24, up from $114.6 million in the fourth quarter of fiscal 23. The operating income increase principally reflects the previously mentioned net sales growth, a decrease in acquisition costs, and an improved gross margin. The improved gross profit margin principally reflects higher net sales within our aftermarket parts and repair and overhaul parts and services product lines. The flight support group's operating margin improved to 22.3% in the fourth quarter of fiscal 24, up from 19% in the fourth quarter of fiscal 23. Given that acquisition-related intangible amortization expense consumed approximately 270 basis points of our operating margin in the fourth quarter of fiscal 24, the FSG's cash margin before amortization, or what we call EBITDA in the way we measure our businesses internally, was approximately 25.0%, which has been consistently excellent during 2024. It is 300 basis points higher than the comparable FSG cash margin of 22% in the fourth quarter of fiscal 23. I am extremely pleased with these results. The increased operating margin principally reflects the previously mentioned lower acquisition costs and improved gross profit margin, as well as the higher level of SG&A efficiencies resulting from the previously mentioned net sales growth. Now, I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the fourth quarter results of the Electronic Technologies Group.

Victor Mendelson Thank you, Eric. The Electronic Technologies Group's net sales were $336.2 million in the fourth quarter fiscal 24, as compared to $342.5 million in the fourth quarter fiscal 23. The net sales decrease in the fourth quarter principally reflects lower defense and other electronics net sales, partially offset by increased space products net sales, and the impact from our fiscal 24 acquisitions. This is in line with our expectations, as we've commented on earnings calls over the past few quarters, and is consistent with inventory destocking in some customers, particularly those in the non-aerospace and defense markets. Our defense sales growth was nicely healthy in the fiscal 24 year, though this growth varied highly by quarter, which, as you know, has historically been the case, and we anticipate the ETG's quarterly defense sales volatility will continue. But the overall trend remains positive. As expected, other electronic net sales were lower during the fourth quarter fiscal 24 compared to the fourth quarter fiscal 23 due to customer restocking. The low single-digit organic net sales decline was a much lower decline than in prior quarters, and I believe recent better order flow and backlog indicate the destocking trends are improving. I continue to expect a return to growth in these and other electronic end markets and businesses during the first half of fiscal 25. The ETG's fourth quarter record backlog and strong overall orders support our optimism and As the non-AND markets improve, we continue to anticipate growth into our next fiscal year. The Electronic Technologies Group's operating income was $81.8 million in the fourth quarter of fiscal 24, as compared to $86.4 million in the fourth quarter of fiscal 23. The operating income change principally reflects a less favorable gross profit margin mainly from the previously mentioned decreased defense and other electronics net sales, partially offset by the previously mentioned increased space products and net sales. The electronic technologies group's operating margin was 24.3% in the fourth quarter of fiscal 24, as compared to 25.2% in the fourth quarter of fiscal 23. Importantly, Before acquisition-related intangibles amortization expense, our operating margin was above 28%, as intangibles amortization consumes around 400 basis points of our margin. Now, that's how we judge our businesses, as that most closely correlates to cash. So on what we think of as a true operating basis, these are excellent margins, and we are very pleased with them. The operating margin change principally reflects the previously mentioned less favorable gross profit margin and the lower level of SG&A efficiencies. I turn the call back over to Larry Mendelson. Thank you. Larry Mendelson Victor, thank you.

Now, as for the outlook, as we look ahead to fiscal 25, we do anticipate net sales growth in both flight support and electronic technologies. driven primarily by organic growth supported by strong demand for the majority of our products. In addition, we plan to drive growth through our recently completed acquisitions while positioning ourselves to capitalize on potential opportunities from future acquisitions and to provide new cost savings and best cost opportunities to our government in the new administration's efficiency efforts. Our priorities include continued strong new products and services development, further expanding market penetration, and maintaining our financial strength and flexibility, all with a strong emphasis on delivering long-term value to our shareholders. In closing, I would like to reiterate my heartfelt appreciation to our exceptional team members for their steadfast support and commitment to HICO. Our strategy of cultivating a diverse portfolio of outstanding businesses continues to yield positive results for our shareholders. With strong key markets, Fiscal 25 is poised to be another successful year. We thank you for your continued confidence in HICO, and as I've shared before, I remain highly positive about HICO's future. Thank you all, and now I will turn the call over to the operator for questions.

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. And we'll take our first question from Larry Solo with CJS Securities.

Great, good morning. Congratulations on another good quarter, good year. I guess the first question, maybe a couple for Eric. You gave us a lot of good detail on the LendCore acquisition. It sounds like things are really going well there. Just curious, you mentioned some of – obviously, this is one of the bigger acquisitions I think you've ever done, and you spoke about a lot of things there. Curious, as we look out going forward, are there still opportunities to gain even more revenue synergies? Are there things – now that you've had this under the hood for a little more than a year, under your umbrella, excuse me, things that maybe you didn't think were available or sort of positive surprises that you could work on going forward on that side of the business?

Good morning, Larry, and thanks for your question. First of all, as you pointed out, we're very happy with the WinCore acquisition. It has been immensely successful and exceeded all of our wildest expectations. Number one, starting with the people, they are outstanding. They really fit the Heichel culture. The companies are very similar, and the businesses are working extremely well together. We're in a unique situation that all of our aftermarket businesses are running, of course, at record numbers, performing exceptionally well. And they are so busy just trying to accomplish what they've each got in their backlog in terms of getting the parts out the door and developing all this new stuff that we've just left them alone right now. I do think that there is additional opportunity in further cooperation and going to the customers with a bigger basket. But as of now, I mean, you can see with these kinds of results, 12% organic growth, 13% in the aftermarket following a tremendous deal like that. Beats what anybody thought was possible. So we're very, very happy with that. But we do think that there are additional opportunities. Our teams are working very closely together in the parts and repair side to harvest those opportunities. We've already been very successful by putting all of the Heiko and the wind core as well as the Heiko and the Heiko and when core repairs together. So our repair stations can focus. on particular units and really drive costs down and service levels up to the customer. And we've been very successful in that, and we anticipate continued success in that area. So, yes, I think, you know, as I said internally, I think OneCorp is going to be the gift that keeps on giving, not only because of OneCorp, but because of the Heiko legacy businesses and really being the perfect fit there and just going so well. Got it.

And Eric, you mentioned that you touched on it briefly just on, you know, your opportunities may be increasing on the military side of the business under the new administration. Whether it be through Doge or whatever, it just does seem like there are a lot of, you know, opportunities solely on the military side rather than the government side. Just any more color there? Is that, you know, You know, something we should look forward to near term. Is that more of a mid to longer term opportunity? I know you've always been kind of focused on obviously getting more into the military aircraft side, I guess, right, where I think there's not much on the PMA side there. So any more color there would be great.

That's a great question, and we are extremely excited about this opportunity. I mean, this is real simple, low-hanging fruit. I mean, Doge is something I think everybody in the country realizes that we've got to spend our dollars more wisely, and Heiko offers various solutions without getting into the specifics because we have our competitors on the call, and I welcome them to it. But of course, we can't lay out a roadmap for them of what we're going to do. But needless to say, I think there is a tremendous amount of low-hanging fruit. Heiko was working on all of this before the election. And so we were very hopeful that there would be a number of breakthroughs. We are still hopeful of that. And Doge just... pours more fuel on the fire. When you look at the budget deficit and the amount of money that has to be cut, there are tremendous cost savings opportunities. And we think that it's not only cost, but there's also, and without, I have to be very careful because, of course, I don't want to provide a roadmap to our competitors, but there are a number of areas whereby, in particular in the development of new products, where HEICO can offer increased quality. And by the way, that's not just the tagline. That's proven through various rig tests. increased quality, better development timelines, and lower cost. So I think DOGE is going to be outstanding for us. Now, having said that, you asked, is this going to be short, medium, or long term? I think it's going to be more medium term. I mean, in the short term, the government has its money committed, so that's going to be what it is. But I do feel that this is just additional clarity and legs for HICO as we move forward. But I expect the opportunities to be very, very substantial because it's just not only about price.

Got it. Great. I appreciate all that, Carla. Maybe just lastly, a question for Carlos, just margins. I know you don't guide specifically, but just sort of the high-level outlook for the coming year. FSG was, you know, looking back, was pretty consistent in fiscal 24. And ETG, I know, is a little bit more mix-dependent. So just Any thoughts as we look into fiscal 25? Thanks.

I think, you know, as we look at the flight support group, it's performing as expected. You know, we're posting between 23 and 24% operating margins pretty consistently. I think our build on that will be, you know, slight improvements as we continue to grow the base of the business. We'll get SG&A leverage on some of our fixed costs, which should, you know, be added to the margin. very similar to what we did a decade prior to COVID. It'll be small steps, you know, it's not going to be a ratcheted moves. And, you know, look in the ETG, I've been saying for a while that, you know, when the mix settles out, I would expect that segment on a gap basis to, you know, come around the 24% margin range. And this quarter, I was very pleased to see them exceed that. So, uh, As I look into 25, I would expect the business to continue to be lumpy as it always has been. We'll have quarters that are higher and lower, but my baseline is around that 24% range.

Got it. Great. Thanks, Carl. Appreciate it. Thanks, Larry.

And we'll take our next question from Robert Spingarn with Mellius Research.

Good morning. This is Scott Madison for Rob Spingarn.

Good morning. Hi, Scott. Eric, you brought up DOGE and saving money across the federal government. So just wondering, can you quantify right now what percentage of FSG sales are directly to the DOD? And then for programs other than the commercial derivatives like the P8, have you already started the process of aggregating a list of potential parts that could be sold to the DOD?

Yes, so as far as what percentage goes to the DOD, I don't have that information in front of me, but I can tell you that defense is approximately a quarter of the FSG sales. So you get an idea there. In terms of the opportunity, we... the opportunities not only in the areas that you mentioned, but yes, we have come up with a list. We are aware of what the opportunities could be. Of course, I don't want to, I can't outline it on the call, but we are, it is quite substantial and the government really should be, should be saving these dollars.

Okay. And then also going back to when core, They used a lot of build to print shops in the past to manufacture parts. You talked about insourcing some of that manufacturing. Can you talk about where you are in that journey, and is there more cost savings to gain from insourcing even more of that work?

Absolutely. We've got very broad manufacturing capabilities at Heiko, and we are focusing on Windcor's robust new product development. in terms of manufacturing that stuff within various HICO businesses. There is an opportunity to resource some of the existing businesses. As long as our vendors treat us right and are fair with us, we're very loyal to them. So there's, you know, they have nothing to worry about. And frankly, the new pipeline is so robust that it will really keep our shops very busy. But again, we think the opportunity is really very, very strong in that area.

Thanks for taking the questions, and happy holidays. Thank you, and happy holidays to you too, Scott.

Our next question comes from Ken Herbert with RBC Capital Markets.

Yeah, hi, good morning. Thanks for taking the question. Maybe, Eric, just to start, as you look at FSG organic growth within the fiscal 25, I know you're Probably not going to get too specific, but is there any reason we shouldn't see double-digit organic growth again across FSG in fiscal 25?

Yeah, no, I don't think there's any reason you shouldn't see it. We're very optimistic on our three disaggregated revenue buckets of parts, repair, and specialty products. They are all very strong. And so I think that that is, you know, a double-digit expectation is reasonable. I mean, of course, we're only 45 days into the year. So, you know, we always want to be a little circumspect and always at the end of the year between Thanksgiving and the New Year, you know, volumes can be skewed one way or the other depending on shipments from our vendors to us and then what the customers want and the way they manage their inventory. So I don't like to take the months of November and December in order to prognosticate the rest of the year. But, yeah, our internal numbers are for double-digit organic growth within the flight support. And, again, very strong in all three of our segments. Okay, that's very helpful.

This is Carlos. Just keep in mind, you know, While we don't really have seasonality to our business, one thing Eric just pointed out is very important. Our first quarter, typically with the holidays, tends to be a little lighter than the second, third, and fourth quarters. So just keep that in mind when you're thinking about what he just said.

Yeah, and always November and December, I mean, for the 35 years I've been at the company, November and December are historically lower types of months. And January is always the month that drives the first quarter. So, of course, we're not yet in January, so it's hard to say. But our internal numbers are very optimistic, and our business heads are extremely optimistic and, frankly, more optimistic than I've ever seen them.

Okay, that's very helpful. Just one more, if I could. There's obviously been a lot of commentary recently around, greater confidence in execution in terms of new aircraft deliveries and new engine deliveries out of the OEMs. What's your view on if things do start to perform better there? How quickly can fleets really start to turn around to become younger? How quickly do you think spending on some of the legacy assets would actually start to slow and the legacy aircraft would start to slow as that tie does ideally get better in 2025 and 26 in terms of just sort of the execution on the airframe and the engine OEM side, if that makes sense.

Yeah. So, number one, I have tremendous respect for the airframe and the engine OEMs. They're phenomenal companies. They build incredible products. But unfortunately, they are dependent on their supply chains. And those supply chains, as we know, got terribly beat up through COVID, as many companies slashed their orders, and the people are not at the suppliers. So they talk about increasing the production rates, and I think that's the intent, and marginally they have in some areas. But I think they've had a lot of challenges. And I can tell you, I go around to our businesses, and I see the supply chain challenges that exist, and they are still tremendous. So I personally am not putting any money down that the supply from the OEM suppliers is going to turn around substantially. I have not seen evidence of that. So I expect the aftermarket to continue to remain very strong. And I think airlines have been bitten so badly by the deferrals that they don't want to get into a situation where they don't have the legacy assets to be able to complete their routes and their schedules. I expect them to continue to spend money. Not foolishly, but they've got to always have a backup plan. That's why I think the aftermarket is going to be strong. In addition, if you look, even with the OEM deliveries increasing. If you look at the available seat miles and what IATA predicted, I mean, 8% available seat miles increasing in 2025, this is a huge number. And frankly, it would be very easy to absorb the additional seats and keep the older aircraft in service. So we, based on the order trends that we see, it remains very, very strong. for the legacy aircraft. So I, at this moment, don't see a change there.

Great. Thanks, Eric. Thank you.

Next question comes from Gautam Khanna with TD Cowen.

Yeah, thanks. Good morning, guys. Good morning.

Hey, I was wondering, COD and PMA parts, what historically has been the disconnect there on their ability, on their willingness to entertain buying those. Is it, I'm just curious, like, do they require OEM parts or is it just culture? I'm just curious, like, what actually has prevented?

Yeah. First of all, they don't have a process. You know, as Carlos says, they don't have a box to check. And what the airlines had to have, and this is what we worked on 35 years ago. When I first went into the airlines and showed them what we could do and said we could develop all this additional stuff, they said to me, that's a great idea, but we can't buy PMA parts. And I said, well... What do you mean? You're already buying our combustion chambers where the fuel and air is mixed and burned, and we've supplied those parts to you for 20 years with a flawless service record. You should be able to buy these additional parts, and this is the process that we're going to use with the FAA. And frankly, this is the box that you have to check, and that's been immensely successful. So I think the government must change. This cannot be business as usual. The United States cannot continue to irresponsibly run at these budget deficits. And there is no reason if a part is good enough for the president or the vice president or senators or representatives or the secretary of defense to fly on when they fly commercially. Maybe the president doesn't, but everybody else certainly does. when they fly commercially, but it can't be used for the DoD. That is nonsense. It's a relic of the past. And I think the government recognizes this is low-hanging fruit. This must change. And frankly, HICO is the one to do it. And we've got a lot of opportunities. I need to be very careful. And obviously, you know us well, and I don't want to get into details on specifically what, but you don't have to be a rocket scientist to figure out the opportunity here. And we think it's very substantial. And I just want to add, that we still think that the current providers are going to continue to do very well. And HICO provides a product to the DoD, and there's still a tremendous number of products out there, and not everything lends itself to what we can provide, but I think what we can provide is very significant for HICO.

That makes sense. Just to follow up on that, is the opportunity biggest on the commercial derivatives like tanker and P-8, where you may have comparable products on the commercial aircraft that they're built on, or is there a big opportunity beyond that?

I think that there is a very large opportunity in both. On the commercial derivatives, this is a no-brainer. I mean, this is just, it's a no-brainer. And again, they already use some of the parts. So, it's not that they're fundamentally opposed, it's just they need that box to check. And then when you go outside of the commercial derivatives, there are also significant savings opportunities that can occur. And, you know, we think that there are very large opportunities there as well. But again, I don't want to over commit on this because these are not short term. This is not a fiscal 2025 impact. You know, this obviously comes later, but I think it's a very nice add on to all of the good stuff that we're currently doing.

That makes sense. And last one, Carlos, I was wondering if you could give us some framework for the inorganic contribution in the upcoming fiscal year based on what you've already acquired.

Yeah, sure. So, you know, I don't want to give subsidiary outlooks. I think that the contributions will be, they're not going to be material if that's helpful. I'll be careful because we've not, you know, we've done some recent acquisitions and I don't want to get into the subsidiary details, but on the FSG side, you know, when core laps this quarter and we'll have capable next year in the organic, in the inorganic bucket for the first three quarters, it won't be material to the segment. And of course, in the ETG, we had the three recent acquisitions that, again, I don't think it's going to be material to the quarter. So It's pretty much mostly organic next year.

Great. Thanks. Happy holidays, guys.

Same to you.

Our next question comes from Sheila Kayalu with Jefferies.

Good morning, guys. Thank you for the time. Eric, if I could start with you, if that's okay, please. If we could just talk about the organic growth within FSG up 12, and then just the different parts of the business, right? Aftermarket parts was up 13%, slightly down from 17 last quarter. How do you think about the parts business trending into 25? Can it still grow double digits? And what are you seeing with MROs versus airlines, the demand there?

Well, first of all, good morning, Sheila, and thank you for your questions. We are very optimistic on the continued growth, as I mentioned in all of the segments. In breaking down our organic growth, the parts side definitely had the highest organic growth in 2024. And the area with the lowest organic growth was our specialty products. We think that in 2025, based on backlogs that we already have in the specialty products area, that our organic growth is going to accelerate in that area. And it will remain a strong double digits within the part side. Component repair is probably going to be somewhat in between those But we also anticipate I would say strong You know, I said double-digit growth and I am expecting double-digit growth frankly in all three of our disaggregated areas The parts and then parents specialty products sure um

Maybe if we could talk about one core for a minute, you know, any way to quantify the revenue synergies, how you think about their 6,000 skews relative to your 15,000 or so, how many have penetrated into your customer base? And then maybe, you know, a PMA question unrelated to the defense side of the business, but do you see PMA becoming easier under the new administration?

Yeah. So specifically with regard to wind core, If you take a look at our organic growth within parts and component repair, you'll see that there's over $60 million approximately $62 million of organic growth in the fourth quarter in just parts and repair. That's all organic. And remember, we owned Wencor basically for pretty much the entire fourth quarter of last year. For Heiko and Wencor to grow $60 million organically, no acquisitions, I mean, that's huge. And frankly, far beyond anything that I thought was ever possible. We've got incredible teams, incredible leaders in these businesses. I think Heiko's competitive advantage is the way that we have these businesses structured, where we have them as individual business units, each with its own business head and its own leadership team. combined with central sales forces to be able to help them get out there. There is a tremendous amount of unsold potential. There is so much more help that we can give our customers, and it's just a matter of getting out there, getting in front of them, and making sure that they switch from their old legacy solution into a new HICO solution. So I expect the future to be very strong. And I'm very encouraged. And when I go out and talk to our folks, so are they. When I look also into the specialty products, when we look at what our backlogs are in these areas, they're tremendous. And now really the challenge is executing and getting product from the vendors out there in the field and subcontractors because the market is incredibly tight. I don't go to any businesses where they say, oh, you know, yeah, we're all caught up. Everything is back to 2019. Not a prayer. I mean, the labor force has changed. It's very difficult to be able to ramp. And so that's why I'm very bullish in all of our areas. You had asked about the military side. I think that's just added opportunity. You know, because we've spoken about it, that for years, HICO has operated in that area and we've had limited success. But as a result of the comments that I made in the prior couple of questions, I think this is really low-hanging fruit for HICO. and the government got to make cost savings an imperative, and the new administration certainly is doing that to a degree that we've never seen before in the history of this country, and it's wise that they do so, because as a country, we're running out of money, and HICO can provide, again, not only the cost savings as a result of using our parts or using our technology, But also, when these systems are developed by the government, there's a tremendous approach which slows things down. And I'm really very excited for Doge because I think they can accelerate a lot of these processes. And Heiko is going to be, I think, a tremendous beneficiary across our flight support as well as our electronic technologies business. Because we are smaller businesses that are competitively focused in various areas, lower cost, higher quality. We can get it done quickly. And if the government wants it fast, I believe it's a huge opportunity for us.

Eric, I'm sorry. I meant more on the commercial side. Do you think the administration makes it easier to PMA commercial parts as well? Sure.

Yeah, I think, I mean, look, the administrations have always been supportive. The FAA has been frankly outstanding to work with over the last 35 years. I expect that to continue. I don't expect a change there. I mean, if you will, the civilian workforce has been great to work with. So I expect everything continuing and no change in our ability to get PMAs. I mean, we've gotten more PMAs than ever, and I expect that to continue.

Thank you.

Thanks, Sheila.

And our next question comes from Scott Duschel with Deutsche Bank.

Hey, good morning. Hey, Scott.

Good morning. Eric, can you give us any sense for what the growth acceleration at specialty products could look like next year? Because it sounds like you've got a lot of tailwinds there between the OE ramp and the missile defense growth. And I was just looking at my model, and there was a period of time in 2022 and 2023 where specialty products was growing over 50% pretty regularly. So I'm not trying to get too excited here, but just trying to get a sense for whether something like that could perhaps repeat itself. Thank you.

Yeah. I mean, we've The internal numbers I've got are really strong over in specialty products. As I mentioned, really the key is being able to get products out of certain suppliers. But I think from what we're seeing and based on what the budgets are and everything, at least 10 percent organic growth seems to be very reasonable. And, you know, when you think of it, I know that on a spreadsheet, and I think everybody appreciates this, on a spreadsheet it's easy, you know, you put in .1 and it's easy to type that in. But when you think about this, when a business grows organically by 10% a year, it doubles in seven years, quadruples in 14 years. And these businesses to accomplish a 10% growth rate, I mean, I think that's just tremendous and incredible in this market that we've got with constrained material and constrained labor. So I'm very optimistic in those areas.

Okay, great. And then just one follow-up, Eric. I think it seems like there's a number of airlines that have built up some inventory of spare aftermarket parts. I think United is one of them. Have you seen any evidence of customer inventory build for your specific parts, or are airlines generally pretty hand-to-mouth for HICO parts?

Yeah, I think on HICO parts, they're pretty hand-to-mouth. I mean, they certainly don't tell us when they have a surplus. I'm not aware of any material oversupplies at the airlines. I mean, they're all wanting these parts very badly. There are always puts and takes with that, but I think it's all very strong. Also, since HICO's got a really good delivery program and we're able to supply so many of these parts in the month of order, You know, airlines are – they don't typically have to overstock our parts because they can rely on us pretty well.

Right. Okay. Thank you. Happy holidays. Thanks, and happy holidays to you too.

Our next question comes from Noah Popanak with Goldman Sachs.

Hey, good morning, everyone. Good morning, Noah. How's it going? Good morning.

Good. Happy holidays.

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

No, this is Carlos. Let me take a stab at that. So you're digging deep in my brain here. So we're down about 20 bips. Q3 to Q4, I'd almost consider that a little noise. There is a little bit more amortization in the fourth quarter this year than last year, which probably contributed to that blip. There isn't a lot of noise in either quarter for unusual things like that. I will tell you that I've been pretty open and vocal that my expectation on the FSG is that the margin's go between 22 and 23%. And that's what we've done. And, you know, we're basically at 22 and a half for the year. So pretty much did what I thought it would do. And I think that as we move forward, the things that I can count on other than, you know, mixed shifts or something like that would be some incremental gains in that margin due to leverage on our costs. The one thing the FSG has done very well is that as the revenue base has grown, They've done that in a very efficient manner. The SG&A spend has been down as a percent of revenue consistently all year. I expect that trend to continue, and that's really where we're going to eke out these little incremental margin gains. Again, absent any big shift in mix, that's what my expectations are going into next year.

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

That's absolutely correct. And I know I don't think they're going to be flat. No, I hope I didn't. I didn't mean to insinuate that. What I what I what I am insinuating is that I expect margin improvement. It's going to be, you know, if you look back historically pre-COVID over the decade prior to that, our margins were growing 20, 30 bps a year. And it was based on volume growth in the business as we grew it. To your point, we're not the cost base isn't growing as fast as revenues. I expect that to continue. and absent any big swings and mix, then that should be the cadence that we see moving forward.

Okay, great. That makes a lot of sense. And then I wanted to ask about the other industries outside of the defense space era within ETG. I think that down in the quarter, that being the fifth quarter in a row where it's down, so it was the first quarter where you were lapping. the easier compare, but it's down again. So I guess, can you talk about what's behind that and then what it would take to get that piece to stabilize and start to grow again?

Yeah, this is Victor Noah. So, you know, it's not necessarily a one-year event to wash out the overordering, which took place over, I think, a longer period of time. It probably took place over two, two and a half years. But, you know, as I said in the comments, my general sense is that we start, that reverses, starts to reverse sometime in the first half of our year. And, you know, we see signs of that in a number of businesses where basically it looks like the order rate has started to turn up in some instances. In others, it's kind of bouncing along the bottom. And sometimes we get an occasional positive surprise. We end the month doing better than we expected in both sales and orders in a couple of cases recently. And just our experience has been when this happens that sometime in the neighborhood of half a year later, it could be a little more, it could be a little less, but somewhere in that neighborhood, it starts to show up with rising sales sequentially. And, you know, so I would expect that that would play out like it typically does, barring, of course, any unforeseen events. But that's what I would expect.

Okay. That's helpful, Victor. Appreciate it. Just one last quick one. The corporate in the quarter is fairly high compared to where it had been running. You guys don't strike me as big corporate expense guys. Is there something abnormal in that, or how should we think about the run rate moving forward?

No, I think, you know, we typically run about one and a half percent of sales or something like that in corporate expenses. I mean, as you can imagine, over the last four years, we've had tremendous inflation, things like insurance and benefits and all those things rise. We also have a little noise with FX, you know, as the As the dollar weakened, we had some FX challenges, but nothing no extraordinary. I mean, I think the trend going forward, we should continue to be 1.4%, 1.5% of sales in that. You know, as the company grows, we don't have lavish expenditures, but we do need arms and legs to keep track of everything. So that's principally the zip code we'll run in.

Got it. Great. Thank you so much. You're welcome.

We'll take our next question from Michael Jarmoli with Truist Securities.

Hey, good morning, guys. Thanks for taking the questions and happy holidays here. Eric, we've talked a lot about FSG and the trajectory, but I guess just looking at the sequential growth, one of the lowest sequential growth rates that we've seen in several quarters. Was there anything unusual in this quarter versus last quarter? I mean, it sounds like all business lines, all capabilities are running at record levels. Any notable changes or behavioral changes from customers that maybe kicked that sequential FST revenue down a bit?

Yeah, I mean, a couple of things. Number one, I should state that one of the metrics that we never look at at HICO in any of the businesses is sequential growth rate because things can move around, they can bounce around, and that can exaggerate it. The number that we always look at is, you know, the annual growth rate compared to what we've done in the prior year. And when I look at our FSG organic growth, I mean, basically, it was approximately in the first quarter, 12%, second quarter, 12%, third quarter, 15%, and fourth quarter, 12%. I mean, as far as I'm concerned, that's out of the park. That is phenomenal and is so far above what anybody else does in this industry with regard to organic growth. So I'm super happy with it. And We just don't look. I mean, compared one quarter to the next. I mean, we didn't get overly excited when between basically the second quarter to the third quarter, we had, you know, a big sequential growth. I mean, that can be due to various deals or all sorts of things. I mean, what's more important is the comparison to the annual. And we think that that is incredibly strong. And sometimes these moves, the numbers move in various jumps, so it's really dangerous to look at it in a sequential basis like that.

Got it. No, that's helpful. And then just one other housekeeping one for Victor. Victor, did you give the ETG organic growth rate for the quarter at the consolidated level?

uh, did we provide that?

Uh, I mean, the ATG, I can do it. I mean, the ATG was, uh, down low single digits is like, uh, approximately 4% down for the quarter organically. Okay. And, um, contributing to that was what we talked about earlier. The other electronics in defense offset by space. That's, that's pretty much what happened. I think, um, In total for the quarter, we were up 3%, which is acquired growth in there, but the organic side was down roughly 4%.

Got it. Perfect. Thanks, guys. I'll check back. Thank you. Thanks, guys.

We'll take our next question from Pete Skibitsky with Alembic Global.

Hey, good morning, guys. Good morning, Pete. Just a couple of quick ones, maybe for Carlos. Carlos, just because DNA is a pretty big add back for you guys in cash flow. Do you have an expectation for DNA for 25? And then also was just wondering, sort of post-COVID, post-WENCOR, the use of working capital, especially in inventories, has been larger. I'm just wondering if that was kind of a short-term thing or if we should expect a greater build in inventory going forward. Thanks.

Sure. So actually, I think our DNA, I expect it to be very similar next year to this year. You know, depending on how many acquisitions we do next year, it could flux up on the A side. But as a percentage, I expect it to be roughly the same as it was this year. As far as working capital use, you know, it's interesting. We came into this year with a lot of commitments. on products that our guys purchased multiple years ago because of some of the supply chain challenges we had. And we took delivery on that stuff towards the end of last year and the beginning of this year, and we talked a little bit about how that would probably skew our annual inventory, being a little higher than what we would normally expect as far as spend-wise goes. I do expect that to moderate a tad as we get into 25, because a lot of those firm commitments we had made on inventory coming out of COVID where some of these deals had two-year lead times and we had to commit two years in advance. A lot of that stuff we sort of took our last deliveries on as we got into the beginning of this fiscal year. So we should see a little bit of a calm down in inventory. As we grow the business organically, we've got to support it with more inventory spend. But I don't know that the slope of that spend will be as high as it had been the prior few years. Our receivable management is impeccable. We have very little consumption of working capital for receivables, which, given our growth, is amazing to me. So I think our guys and we as a management team are highly focused on working capital. You know, going forward, I expect we're going to probably return to more consumption of working capital like you've seen historically versus over the last two or three years.

Right. Thanks for the call.

Our next question comes from David Strauss with Barclays.

Thanks. Good morning. Good morning, David. Hi.

One to follow up, I think it was on Noah's question. So the FSG margin, I guess either for Carlos or Eric, in terms of, you know, I think, Eric, you gave some relative growth parameters around the individual kind of subsegments between parts repair and specialty products. How do you see, you know, that those relative growth rates within there influencing the margin for FSG in 25?

I think it would help it. I think it'll help it. You know, I think the FSG margin story has been, I think, one of the least reported and yet most important things that's frankly happened to this company. I mean, when we look at what our operating margin basically from roughly 2015 to 2019, you know, was in the 18 to 19% area. Now the operating margin is up in the 22% to 23% area. So we've gone up about 500 basis points over that period of time after making a number of lower margin acquisitions and going through COVID and all the turmoil that happened there. So I think the HICO and the HICO businesses are exceptionally good at just continuing to ring efficiencies out of their operations year by year. We don't make a thing over it, but they just increase the amount of volume. They focus on efficiency. They get the cost down. We don't have programs here at the corporate office like HICO 25 or HICO 26 or 27 or something like that, but instead we just work with them and they do this as a matter of course, and we just continually grind higher on the operating margin. So I think that there's no change from our perspective and what we want to continue to do. Obviously, it bounces around year over year, and it depends on various investments that we have to make. But I would anticipate the operating margins to continue heading north while still providing huge cost savings and benefits to our customers. And doing that not via price, but...

via cost and volume and you know to what you were alluding to okay terrific and um i don't think i don't think you you specifically said on on etg but would would you expect etg to grow revenue organically next year in 25 and is it if so is it more low single digit or single digit thanks

Sure. This is Victor. So we expect in our budgeting for growth in the ETG next year, organically, I think we're being careful and putting it in the lower single digits range organically with acquisitions, hopefully more than that. And we've got some great acquisitions in the pipeline as well. And, you know, look, I don't know where we'll wind up, to be clear. I mean, we've only finished one month of the new fiscal year. But it's my belief based on talking to our companies and hearing from them that the ones who felt that they came up a little short this year are being very conservative in their projection for next year. Some people call that sandbagging. I'm not going to say that or accuse them because I think it's good that our companies are conservative and they plan to spend money according to what they think they're going to see on the revenue side. But as I sit here at this moment I'm hopeful that we'll do better than our internal budgets. But we'll see, and I don't want to commit to that at this point. And of course, just to point out, that as it always has been throughout our existence in the ETG, it will be lumpy throughout the year. We're going to have bigger quarters than others. Some may be up. And in fact, the budgets have that, some up much more than others. And that is based upon what their expected production rates are as a result of many factors, including when the customer wants the product shipped and a variety of other factors. But I would expect that to continue in multiple ways, by the way, not just in sales and income, but as well as by end market, which we've seen historically.

Terrific. Thanks very much, and happy holidays. Thank you. Thank you.

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

Hey, good morning, guys. Good morning, Ron. Yeah, a lot's been asked, but nobody really asked this one yet. So what's your expectation for maybe the change in the M&A environment with the new administration?

Well, as you know, we've been very strong in the acquisitions area. And we bought this fiscal year five different businesses. Our teams, by the way, are busier than they've ever been looking at a whole variety of deals in both segments, all sizes. So for Heiko, it's been a strong market. I would anticipate, you know, obviously people expect less scrutiny, you know, more pro-business evaluation going forward. But I think for HICO, we're very much a preferred buyer because we don't have some of the complications that other folks have. So I think the regulatory environment improves, but it will still remain very good for HICO.

One of the things to point out, of course, is that we have always been, as we said earlier in the call, a a price and value preferred supplier to our customers. We've never pushed on the pricing button. We've never pushed on the monopoly buttons and things of that sort. And as a consequence, we've never had any issues to begin with in regulatory approvals. And of course, I think people generally expect, as Eric said, the regulatory environment to be more favorable to business and to companies like ours.

Got it, got it. And then if I kind of keep pulling on the string a little bit, what's your appetite for doing another big one? You guys have gotten bigger. And then maybe two, if you can say, it's no secret that Boeing's been shopping some stuff around. Is there anything there that you guys would be interested in?

Yeah, our appetite for acquisitions of all sizes, including larger ones, remains the same and you know we we do larger deals we've done them when they make sense we won't do them just for the sake of doing them or adding revenue it's all to us about the bottom line so that appetite is the same as well as for smaller acquisitions as you've seen including small bolt-ons or fold-in acquisitions for for our companies and the opportunities by the way are spread out across the board. Historically, we've been an opportunistic buyer, buying everything that makes sense to buy and nothing that doesn't make sense to buy.

And I think, Ron, if you look at Wencor, which was, of course, our largest acquisition to date, it's been an absolute home run. So I think we've proven to the market that we can execute and win and execute and assimilate these businesses and continue to generate the cash to basically get our leverage ratio back down so we can reload and do more. So I feel 100% confident in our ability to continue to do larger acquisitions.

Got it. Got it. Great. Thanks, guys. Happy holidays. Thank you. Happy holidays. You too. Thank you.

And the next question comes from Louis Raffetto with Pulse Research.

Hey, good morning, guys. Good morning. Good morning, Louis. Eric, just to make sure I'm level-set here, so 13% organic growth in aftermarket repair parts. Do you have MRO and specialty products for the quarter? I know MRO had been a little bit lighter. It seemed like maybe that did accelerate in the fourth quarter.

Yes, so MRO is about 11% in the fourth quarter, and specialty products was 11% in the fourth quarter.

Okay, perfect. Thank you for that.

You're welcome.

And then maybe, Carlos, for you, it looks like there was another small impairment and a contingency adjustment in the quarter. It just didn't know. It looks like that actually may have negatively weighed. I don't know if that was in either or both segments or ran through corporate. Just any color there?

Yeah, we had a small impairment to a trade name in the fourth quarter. It was about $1.5 million. It's just normal course of business stuff, you know, wrapping up the year, not a big deal there. And any, I guess you're talking about, what, contingency adjustments, contingent earn-out adjustments, Lewis?

Yeah, look, if there's a million-dollar, again, both of those, I think, would be, you know, again, a negative to the earnings. So I think, you know, margins would have been sort of better XDs. You know, I'll call them sort of one-timers. You and I have talked about the contingencies. I know it's like if it's a negative, it's actually a positive long-term. So just trying to get squared on where that may have been.

Okay, so the trade name was in the ETG. And the roughly net $1 million increase in the contingent earn-out liability was split pretty much evenly between the two segments. And it's just relating to accreting that liability to terminal value. It's just the normal noise that we have every quarter for the discounted liability getting accreted to payout value. Nothing unusual there.

Yeah, no, it makes sense. But again, it might explain some of the questioning or look at the sequential step down in the FSG margins. If you got, you know, even a half million dollars, I'm not sure what that works out to, but just was curious. All right, that wraps up for me. Thank you very much.

Yeah, just as a reminder, Lewis, we have those adjustments every quarter because you can't, you know, I wish I could put the full earner value on the balance sheet on day one, but you have to fair value it and then accrete it up to payout value. So, In every quarter, we're going to have a little noise like that. And the fourth quarter was just normal. There was nothing unusual about those adjustments.

Thank you. You're welcome. Thank you.

At this time, I will turn the conference back to Lawrence Mendelson for any additional or closing remarks.

I would like to thank everybody on this call for their interest in HICO. And we look forward to our next earnings call, which would be for the first quarter of 25. Personally, I'm very optimistic about the outlook for Heiko. I see opportunity in acquisition and internal growth. And I feel that the company is doing extremely well, and it will continue to do so. So let us know if you have any other questions that we haven't answered during this call, and otherwise we stand ready to speak to you at the end of the first quarter 25. Thank you very much.

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