Loar Holdings Inc.

Q1 2024 Earnings Conference Call

5/14/2024

spk03: Thank you for your patience. The conference will be beginning shortly. Again we want to thank you for your patience and the conference will be beginning shortly. Thank you. Thank you. Thank you. Greetings. Welcome to Lohr Holdings' first quarter 2024 results conference call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Ian McKillop, Director of Investor Relations. Thank you. You may begin.
spk04: Thank you, and welcome to Lohr's 2024 first quarter earnings conference call. Presenting on the call this morning are LOR's founder, chief executive officer, and executive co-chairman, Dirksen Charles, executive co-chairman, Brett Milgram, treasurer and chief financial officer, Glenn D'Alessandro, and myself. Please visit our website at lorgroup.com to obtain a supplemental slide deck and call replay information. Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements, please refer to the company's latest filings with the SEC, available through the Investor Relations section of our website or at sec.gov. The company would also like to advise you that during the course of the call, we will be referring to adjusted EBITDA, adjusted EBITDA margin, and adjusted earnings per share, each of which is a non-GAAP financial measure. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable gap measures and applicable reconciliations. Please also note, given that we have been a public company for two weeks, our analysts are in a quiet period and we will not be taking questions after today's call. I'll now turn the call over to Dirksen.
spk01: Thanks, Ian. I'm going to start on slide number four. And let me make one brief remark here. As Ian mentioned, on today's call, we'll do something a little bit different that we'll be doing in the future, which is we're not going to take questions at the end because the analysts are really still in their quiet period, but just wanted people to know that. But we'll do our best here to walk you through our story, our portfolio, et cetera, so you can follow along with what we've been up to. So, good morning, especially to our new partners, analysts, and those of you hearing our story for the first time. As Ian mentioned, I'm Dirksen Charles. I'm the founder, CEO, and co-chairman of Law. Law is a family of companies with a very simple approach to creating shareholder value. First, we believe that providing our business units an entrepreneurial and collaborative environment to advance their brands, we will generate above-market growth rates. Since our inception in 2012, we have grown sales and adjusted EBITDA at a compound annual growth rate of 38% and 46% respectively. We collaborate across business units by sharing best practices and ideas while assisting each other when it comes to execution. We execute along four value streams. We identify pain points within the aerospace industry and look to solve those problems through organically launching new products, which we believe over the long term will create one to three percentage points of top line growth annually. We focus on optimizing our productivity, which in simple terms is the ratio of output to input. Each year we'll identify initiatives that will allow us to continually improve with a focus on one or two major initiatives each year that will improve the ratio. In other words, think margin improvement and enhancing our competitive advantage. We also each year across our portfolio of companies will achieve more price than inflation. Again, margin improvement. Executing on these three simple value drivers, along with the secular growth rate of the aerospace and defense industry, we believe allows us to organically achieve 10% growth in sales and 15% growth in adjusted EBITDA over the long term. Most importantly, we are committed to developing and improving the talent of all of our employees because our success is solely a result of their dedication and commitment. That's why I'm proud to call them my mates. So our most important value driver is making sure we have the talent within our four walls and under our roof to support our customers and to continue to achieve above market growth. I will now turn the call over to Brett for walking through our portfolio.
spk00: Thanks, Dirksen. Good morning, everybody. This chart on page five represents the way we have constructed lore to date. It will probably look familiar to a lot of you, certainly those of you who we met on the roadshow, or even those of you who read the S1, so I don't want to belabor all the points and charts in here, but there are two things I do want to highlight. First and foremost, I want to highlight our extremely, extremely disciplined approach to how we construct the business and the business model. First and foremost, we are an aerospace and defense-focused company. Maybe most importantly, we like businesses where there's true proprietary content, where we own the intellectual property, the product is spec'd in, and or we have leading market positions in those categories with which we participate. And those categories are typically niche markets across the aircraft where there are true barriers to entry, particularly at the price points of the products that we sell, which Ian's going to talk about in a minute. Those barriers to entry are created in large part due to the fact that certification costs and recertifying or requalifying a product typically is diseconomic not only for the customer, but also for competitors who want to enter into our market space. Lastly, in every business that we acquire, we need to have businesses that have a balance between the OE and the aftermarket. If a business that we acquire doesn't currently sell into the aftermarket, it's something which we at a minimum need to see a path that we can enter so that we can capture the annuity, of the 50-year life of that aircraft and the cash flows that that product provides. The other thing I want to highlight is the diversity and broad scope of our platform, whether it's the end markets, which you see here, or the aircraft platforms that we're on, because we're on virtually any platform that you can think of, or all the customers we serve, which we have no significant concentration with. We want to have a broad and diverse platform not only because we want the opportunity to capture that 50-year annuity, but we also don't want to be exposed with any meaningful concentration to changing macroeconomic conditions that may affect any end market or platform or any one customer. I think everybody saw how we performed during COVID, and that was a testament to our diversity. And if we are diverse across all spectrums of the sector, then we can continue to generate the consistent financial performance that you've seen from us in the past.
spk04: Thank you, Brett. As Brett mentioned, diversity was a common focus in building LOR. Diversity across end markets, platforms, and notably for those viewing the presentation, our products. Across the 16 brands at LOR, we go to market with over 15,000 unique and proprietary parts. with no one part making up more than 3% of our overall annual net sales. And our parts have an average selling price of less than $1,000. Our products are found across the aircraft, embedded in engines, as part of the avionics, within hydraulic systems, as de-icing systems, restraint and safety systems, galleys, landing gear, actuation, and included in many other systems and subsystems that we will not be able to cover on today's calls. The proprietary nature of our products makes them mission critical for our end customer and ties us to the overall life of the aircraft. As many of you know, the life of an aircraft can exceed 50 years over multiple operators. The design and specced-in nature of our products allows us to serve not only the original aircraft manufacturer, but also the aftermarket through the many operators the aircraft sees over its lifetime. We believe that the diversity and proprietary nature of our product offering provides us the opportunity, and more importantly, the capabilities to serve our customers in a way that is unique to Lohr. Now I'll hand the call over to Glenn.
spk02: Thank you, Ian. Good morning, everyone. Let me start by discussing sales by our end markets. This comparison will be on a pro forma basis as if each of our businesses were owned as of the first day of the earliest period presented. We had record sales during the first quarter of 24, In total, our sales increased to 92 million, a 12.3% increase as compared to the prior year period. This increase was driven by strong performances in commercial OEM, commercial aftermarket, and defense sales. Our total commercial OEM sales increased by 29% in Q124 as compared to the prior year. This increase was driven primarily by higher sales across a significant portion of the platforms we supply, including general aviation, wide-body, and narrow-body aircraft, as an improvement supply chain has allowed us to deliver parts that were previously held because our customers were experiencing bottlenecks in other areas of their supply chain. The increase in total commercial aftermarket sales of 5% was primarily due to the continuing recovery in commercial air travel demand partially offset by destocking at a handful of our distributors and end customers. Our Q124 commercial aircraft bookings were strong, and our commercial aftermarket year-over-year backlog is up 25% at March of 24 versus 23. The strong bookings and backlog support our full-year 24 outlook for commercial aftermarket sales growth of low double digits. The increase of 8% in our defense sales was primarily due to strong aftermarket demand across multiple platforms and an increase in the market share as a result of our new product launches. So let me recap our financial highlights for the first quarter of 24. These are actuals. So our net organic sales increased 11.1% over the prior period. A gross profit margin for Q124 was flat with the prior year period. This was due to a sales mix with slightly lower margin OEM sales as well as charges related to the moving of one of our manufacturing facilities. These items were offset by pricing and operating leverage. Our increase in net income of $9.8 million in Q124 versus Q123 is primarily due to higher operating income as well as from the establishment of a valuation allowance during Q1 23 against the company's deferred tax asset related to our disallowed interest carry forward. Adjusted EBITDA margins remain strong at 36% despite the temporary delusion from two acquisitions completed in the second half of 23 and the continued build out of our infrastructure to support our reporting governance, and control needs as a newly public company. We expect to increase the EBITDA margins of our two newly acquired businesses as we continue to integrate them into LORE. So what have we been up to since March 31st? Well, we closed the IPO on April 29th, which raised $333 million with the exercise of the green shoe. We used $285 million of those proceeds to pay down borrowings. With both of these transactions, our pro forma net leverage to our trailing 12 months of EBITDA through March 24 was 1.6 times. We also amended and restated our credit agreement on May 10th of 24. This was done with no incremental fees. With this amendment, we extended the maturity of the term loans through May of 2030. Our interest rate was reduced by 250 basis points as long as we maintain a leverage ratio of less than 5.5 to 1. With the pay down of the $285 million of indebtedness and the reduction of the interest rate, our pro forma annual interest expense would be $26 million. We also increased our liquidity to support reinvestment and inorganic growth by increasing the unused commitment under our delayed draw term loan to $100 million and establishing a new $50 million revolving credit facility.
spk01: With that said, if you guys remember, the S-1, we gave a flash range of our expectation of the first quarter results. The quarter came in at record sales and adjusted EBITDA right on top of the high end of our range. This is a strong start to the year. This is why we feel very, very, very strongly and we have high confidence in achieving the outlook we put in front of you here. That plus the strength in available seat miles, which domestically are above 2019 levels, and globally, as projected by ADA, to be above 2019 levels in 2024. So strong, strong tailwinds. In addition, as Glenn mentioned, and I want to make sure everyone gets this, we have seen a 25% increase in our commercial aftermarket backlog at quarter end year over year. It's the strongest backlog we have seen in our history. And this strong backlog for our products and services, also we've seen it in our defense end markets. Add all that up, combined with our continued execution of our value drivers gives us a high degree of confidence that we will achieve organically double digit percentage improvement in sales across all our end markets in 2024 on a pro forma basis. So what do we expect? Sales between 370 to 374 million for calendar year 2024. Adjusted EBITDA between 132 and 134 million for the calendar year. Adjusted EBITDA margin of approximately 36%. And as we said, we continue to improve results of DAC and CAF, recent acquisitions, and we're developing our infrastructure to meet our public company needs. That's all baked into that 36%. Respect net income between 25.7 and 27.1 million. and adjusted EPS between 41 cents and 43 cents per share for the year. In addition, next slide, we expect capital expenditures to be approximately $11 million, full year interest expense of approximately $42 million, with effective tax rate of around 30%, B and A approximately $40 million, non-cash stock-based comp of $9 million, and our fully diluted share count will be approximately $91 million shares. Most importantly, if we do not acquire business this year, we will have approximately $100 million of cash on hand at the end of 2024. With that said, our drumbeat since our formation is to acquire one or two businesses each year, which is not included in our outlook for 2024 that you see here. As you guys know, the timing of such acquisitions, we cannot predict, but we are focused on that value driver also. So with that, as Ian stated at the beginning of the call, given that we have been a public company for only a little over two weeks, our analysts are in their version of a quiet period and cannot ask questions. We will not take questions today, but look forward to the future of quarterly calls when they can dig in. With that, thank you for joining Law's first quarterly earnings call, and hope to see you guys in 13 weeks. Thank you.
spk03: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Disclaimer

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