Heico Corporation

Welcome to the HICO Corporation Second Quarter 2025 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 our 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 US 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. Cybersecurity 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, 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 Victor Mendelson, HICO's Co-Chief Executive Officer.

Thank you very much, Samara, and good morning, and thank you all for joining us on the call today. We welcome you to HICO's second quarter fiscal 2025 earnings announcement teleconference. As you heard, I am Victor Mendelson, HICO's co-chief executive officer, and I am joined here this morning by Eric Mendelson, HICO's co-chief executive officer, and Carlos Macau, our executive vice president and chief financial officer. Before we get into the details and the discussion on our call today, we thought we would take a moment to remember some people who we lost recently. One is Tom Irwin. Many of you know Tom Irwin. He was our senior executive vice president. He served as our CFO for about 30 years and was a very important part of our business for many years. Though he was mostly retired at this point, he was still a very good friend to us and an advisor and someone we will miss. Tom was, of course, a family man a wonderful husband, father, and grandfather. And he's somebody who was really very instrumental in the earlier years as we were building the company. The other person we remember, sadly, is Rob Spingarn. Rob was a securities analyst with a number of firms over the years. He covered Heiko. We know he was a believer, of course, in the Heiko story. Many of us knew him personally. He too was a family man, father, husband, and just a really wonderful person, and we all feel better for having known both of them. We can also comment, I think, that we are guessing that they would be smiling on us today, proud of the results we're about to discuss, and proud of the place to which Heiko has grown. So as we get into it, let's also think, from the bottom of our hearts, all of Heiko's outstanding team members for their devotion to our company and their continued focus on exceeding customer expectations. Your efforts contributed to another strong quarter, and we remain very optimistic about Heiko's future. We also thank the brave men and women who have served or are currently serving in the United States Armed Forces, as well as those who serve or have served in allied armed forces, including HICO team members, customers, vendors, and family members. With Memorial Day just behind us, we pause to honor those who made the ultimate sacrifice in service to our country and our allies. We're deeply grateful for their courage, commitment, and the freedom they protect. HICO is proud of the role we play in supporting the United States and our allies' defense needs. Needless to say, we are very pleased with our second quarter results, which continue to demonstrate our core business's strength and the positive impact of our recent acquisitions. As we look ahead to the remainder of fiscal 25, we are filled with deep optimism. The current administration's anticipated pro-business direction aligns well with our long-term goals, providing a fertile environment for innovation, investment, and expansion, with our key focus on markets like defense, space, and commercial aviation, and our team members' exceptional talent and drive, HEICO is uniquely positioned to capitalize on new opportunities and to sustain our momentum across diverse industries. In summarizing our second quarter fiscal 25 record results, we note that consolidated operating income and net sales in the second quarter fiscal 25 were record results for HICO, increasing by 19% and 15%, respectively, compared to the second quarter of fiscal 24. The flight support group set all-time quarterly operating income and net sales records in the second quarter of fiscal 25, improving 24% and 19%, respectively, over the second quarter of fiscal 24. The increases principally reflect strong 14% organic growth from increased demand across all of our product lines and the impact from our profitable fiscal 25 and 24 acquisitions. The electronic technologies group's strong second quarter results reflect an improved demand for the majority of its products, including double-digit organic net sales growth of space and aerospace products. Consolidated net income increased 27% to $156.8 million or $1.12 per diluted share in the second quarter of fiscal 25, up from $123.1 million or $0.88 per diluted share in the second quarter of fiscal 24. Cash flow provided by operating activities increased 45% to $204.7 million in the second quarter of fiscal 25, up from $141.1 million in the second quarter of fiscal 24. Consolidated EBITDA increased 18% to $297.7 million in the second quarter of fiscal 25, up from $252.4 million in the second quarter of fiscal 24. Notably, our net debt to EBITDA ratio improved to 1.86 times as of April 30th, 2025, down from 2.06 times as of October 31st, 2024. We continue to be very busy with acquisitions, and we completed our fourth acquisition of fiscal 25 in the second quarter. In April, our electronic technologies group acquired 100% of Rosen Aviation LLC, a designer and manufacturer of in-flight entertainment products, principally in cabin displays and control panels, for the business and aviation markets. The purchase price was paid in cash, using cash provided by operating activities. We expect the acquisition to be accretive to our earnings within the first year following the acquisition. I turn the call over to Eric Mendelson, HICO's Co-Chief Executive Officer, who will discuss the results of both our flight support and electronic technologies groups in greater detail.

Thank you, Victor, and good morning to everyone. Wow. Before I begin the FSG and ETG segment reviews, on behalf of all of our shareholders, I'd like to thank all of Heiko's incredible team members for achieving results that years ago we could have only dreamed of. Our results were absolutely phenomenal, and our team members literally hit the ball out of the park. Thank you for your well-known energy and passion, And thank you for your incredible effort, dedication, and friendship, which makes these results even more enjoyable. It's one thing for a small company to achieve numbers like this, but it's quite another to do it quarter after quarter, year after year, decade after decade at our scale. Congratulations to everyone. And now on to the Fight Support Group. The flight support group's net sales increased 19% to a record $767.1 million in the second quarter of fiscal 25, up from $647.2 million in the second quarter of fiscal 24. The net sales increase in the second quarter of fiscal 25 reflects strong organic growth of 14%, and the impact from our profitable fiscal 2025 and 2024 acquisitions. The organic net sales growth reflects increased demand across all of our product lines, including 16% organic growth in our aftermarket parts and distribution businesses. The Wincor and Legacy HICO operations continue to exceed our expectations, and obviously this was an excellent combination. Our customers continue to find great value in our larger aftermarket product offerings for their aerospace parts and component repair and overhaul needs, which has translated into excellent growth opportunities and success for both our Legacy businesses and Wencor. We continue to operate Wencor as a standalone business operation, and our strategy is cooperation, cash, capabilities, and consistency without consolidation. The sales, earnings, and margins prove this strategy to be optimal. As I've mentioned before, we continue to make good progress working together and serving our customers. Some examples of how we are working together include, one, utilization of all HICO and WinCore PMAs and DERs at all repair stations. Two, commercial and defense aftermarket sales cooperation. Three, WinCore e-commerce platform lists all HICO non-competitive PMAs. Four, WinCore utilizing HICO's manufacturing base to quote and build many new products. Five, engineering and regulatory cooperation. Six, sharing best-in-class vendors. Seven, back-office synergies such as payroll, insurance, retirement benefit plans, cybersecurity, and export compliance that will help offset additional regulatory compliance costs such as SOX and our FAA ODA. And finally, eight, sharing various IT applications and strategies. The Flight Support Group's organic defense net sales increased by 18% during the second quarter and continue to present an excellent opportunity, especially as the current US presidential administration prioritizes defense and cost efficiency. HICO is well positioned to support these efforts by providing lower-cost alternative aircraft replacement parts, helping the government and taxpayers save money while expanding our market reach. Our missile defense manufacturing business is experiencing significant growth, driven by increasing demand from the U.S. and its allies. With a substantial backlog of defense missile orders and ongoing shortages, we anticipate meaningful expansion from this firm pipeline, reinforcing our commitment to delivering cost-effective solutions with industry-best quality. The Flight Support Group's operating income increased 24 percent to a record $185 million in the second quarter of fiscal 25, up from $148.9 million in the second quarter of fiscal 24. The operating income increase principally reflects the previously mentioned net sales growth and an improved gross profit margin partially offset by the impact from changes in the estimated fair value of accrued contingent consideration. The improved gross profit margin principally reflects the previously mentioned higher net sales within our repair and overhaul parts and services product line, and higher net sales in a more favorable mix of defense products within our specialty products product line. The flight support group's operating margin improved to 24.1%. in the second quarter of fiscal 25, up from 23% in the second quarter of fiscal 24. The operating margin increase principally reflects the previously mentioned improved gross profit margin, partially offset by the impact from the previously mentioned changes in the estimated fair value of accrued contingent considerations. Given that acquisition-related intangible amortization expense consumed approximately 290 basis points of our operating margin in the second quarter fiscal 25, the FSG's cash margin before amortization, or EBIT-A as we call it, was approximately 27%, which has been consistently excellent and is 110 basis points higher than the comparable FSG cash margin, or EBITDA, of 25.9% in the second quarter of fiscal 24. I am very happy with the continued expansion of our cash margin and believe our efficient and decentralized operating structure has permitted us to expand these margins as we simultaneously delight our customers with cost savings and lightning-quick turnaround times. Now I will discuss the first quarter results of the Electronic Technologies Group. The Electronic Technologies Group's net sales increased 7% to $342.2 million in the second quarter of fiscal 25, up from $319.3 million in the second quarter of fiscal 24. The net sales increase reflects organic growth of 4%, and the impact from our fiscal 24 and 25 acquisitions. The organic net sales growth is mainly attributable to increased demand for our space, aerospace, and other electronics products, partially offset by decreased demand for our medical and defense products. The ETG's defense net sales are expected to be robust during the second half of the fiscal year, as we have significant backlogs in order volumes. The ETG's other electronics organic net sales increased mid-single digits during the quarter, following multiple quarters of lower demand due to inventory destocking at our customers for high-end industrial components. While one quarter of growth is not typically considered a trend, we are pleased with our order volumes and backlog in the business and are optimistic for the remainder of 2025. The Electronic Technologies Group's operating income increased 3% to $77.9 million in the second quarter of fiscal 25. up from $75.3 million in the second quarter of fiscal 24. The operating income increase principally reflects the previously mentioned net sales growth and SG&A expense efficiencies realized from the net sales growth partially offset by a lower gross profit margin. The lower gross profit margin principally reflects the decreased defense and medical products net sales partially offset by the increased space product net sales. The electronic technologies group operating margin was 22.8% in the second quarter of fiscal 25, as compared to 23.6% in the second quarter of fiscal 24. The lower operating margin principally reflects the previously mentioned lower gross profit margins, partially offset by a decrease in SG&A expenses as a percentage of net sales, mainly due to the previously mentioned efficiencies. Importantly, before acquisition-related intangibles amortization expense, our operating margin was 26.7%, as intangibles amortization consumed about 390 basis points of our operating margin. This is how we judge our businesses, as that most closely correlates to cash. On a true operating business basis, these are excellent margins, and we are very pleased with them. And now I will turn the call back to Victor Mendelson to discuss the outlook for 2025.