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.