Loar Holdings Inc.

Greetings, and welcome to the Lower Holdings Corporated Third Quarter 2024 Earnings Presentation. At this time, all participants are enlisted only in mode. The question and answer session will follow the formal presentation. If anyone today should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ian McKillop, Director of Investor Relations. Thank you. You may now begin.

Thank you, Rob. Good morning and welcome to the Lohr Holdings 2024 Third Quarter Earnings Conference Call. Presenting on the call this morning are Lohr's Chief Executive Officer and Executive Co-Chairman, Dirksen Charles, Executive Co-Chairman, Brett Milgram, Treasurer and Chief Financial Officer, Glenn D'Alessandro, as well as myself, Ian McKillop, the Director of Investor Relations. Please visit our website at lohrgroup.com to obtain a supplemental slide deck and call replay information. Before we begin, we at LOR 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 the 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. We'd like to also advise you that during the course of the call, we'll 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 GAAP measures and applicable reconciliations. To begin today, I will now turn the call over to Dirksen.

Thanks, Ian. Good morning. Good morning, everyone. Our partners, analysts, and, you know, Those of you who are on the call and hearing our story for the first time, I'm Dirksen Charles, founder, CEO, and co-chairman of Law. So look, I just want to remind everybody how we like to do these calls. We truly, truly, truly believe that your time is valuable. And as a result, we'll keep our remarks as brief as possible to allow the analysts the majority of the hour we've allocated to ask questions to ensure that we focus on the things that matter to you. So let's Let's start by reminding you who we are. Law is a family of companies with a very simple approach to creating shareholder value. First, we believe that by 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 through the end of calendar year 2023, 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. We focus on optimizing the way we manufacture, go to market, and manage our companies to enhance productivity. And each year we'll identify initiatives that will allow us to continually improve our performance with a focus on one or two major initiatives that will improve margins. We also each year across our portfolio of companies will achieve more price than inflation. Again, the sum total of all of these actions is margin improvement, as we'll walk you through in a moment here. Most importantly, we are committing to developing and improving the talent of all our employees. because our success is truly as a result of their dedication and commitment. So, best part of this, to all my mates, including our new brothers and sisters in Texas, a big thank you for your commitment and hard work. I'll now turn the call over to Brett.

Thanks, Dirksen. This is a chart everybody's seen in the past. It really shows how our portfolio of companies that we've acquired and grown are constructed across end markets, across aftermarket versus OE split, and of course the heavily weighted nature of it being proprietary products that we own. The key takeaway from this slide, I think, is that we want to have a very balanced portfolio, be it around end market, be it around customers, be it around products, or again, even the aftermarket and OEMs. However, and you've heard me say this in the past, while we are relatively agnostic and want to keep a balance across all those different categories, one thing that we are not agnostic about and we are incredibly disciplined about is our approach to acquisitions. As you see in these six or seven different boxes right here, one thing I want to highlight as we talk about our applied avionics acquisition that we did recently is that it checks all these boxes. First and foremost, it's an aerospace and defense-focused business. We are not going to open the aperture, as others have said, in so much as our acquisition focus. We want to maintain products in niche categories where we have a very strong market position and there's very high barriers to entry. Those barriers to entry are created because we have proprietary content where we are one of just a very, very few number of people on the planet who can make a particular product. We also want to have a balance between aftermarket and OEM, but every category that we're in and every product that we sell has to have some aftermarket exposure to it. And ultimately, we want to put this portfolio of companies together and these capabilities together so that we can create cross-selling opportunities across the group and maintain long-standing customer relationships where we can build and strong relationships with customers, drive revenue, and have outsized growth relative to the market.

Yeah, and as Brett mentioned, with the addition of applied avionics to the Lohr family, we have further enhanced and diversified the proprietary nature of our product offering. Applied avionics designs and manufactures ViviSun ruggedized mil-spec lighted push-button switches and indicators. as well as the Nexus line of avionics interface solutions, which integrate system-to-system functions like airing 429 converters and solid-state relays directly into the switch, enabling expanded solution capabilities behind the cockpit panel. Applied is an excellent complement to our existing portfolio of more than 15,000 products, whether it's sensors, water purification systems, de-icing systems, or human interface devices, or one of the many other products we continue to believe that we have capabilities that are unique to serving our customers for allure. I will now pass the call over to Glenn.

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 the first day of the earliest period presented. This market discussion includes the recent acquisition of Applied Avionics. We had record sales during the third quarter of 24. In total, our sales increased to 110 million, a 16% increase as compared to the prior year period. This increase was driven by strong performances in defense, commercial OEM, and commercial aftermarket. Commercial aftermarket sales increased 19% in Q3 as compared to the prior year period, and are up 16% sequentially from Q2 24. This is primarily driven by the continued strength and demand for commercial air travel. During Q3-24, our commercial aftermarket bookings remained strong. Our total commercial OEM sales increased by 21% in Q3-24 as compared to the prior year period. 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 improving 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. Our defense sales increased 25% as compared to the prior year period. This was primarily due to strong demand across multiple platforms and an increase in market share as a result of new product launches. Defense sales will continue to be lumpy given the nature of ordering patterns of our end customers for our products. Let me recap our financial highlights for the third quarter of 24. Our net organic sales increased 17% over the prior period. Our gross profit for Q3 24 increased 200 basis points as compared to the prior year period. This increase was primarily due to the execution of our strategic value drivers as well as operating leverage. This was partially offset by dilutive effects related to the move of one of our manufacturing facilities. Our increase in net income of $6 million in Q3-24 versus Q3-23 is primarily due to higher operating income and lower interest expense as a result of paying down $285 million of indebtedness with the proceeds from the IPO and the refinancing of our credit agreement in May of 24. This was partially offset by higher interest as a result of the $360 million incremental term loan for the acquisition of applied avionics as well as higher income taxes. Adjusted EBITDA was up $9 million in Q3 24 versus the prior year period. Adjusted EBITDA margins remain strong at 36.8 percent due to a favorable sales mix, execution of our strategic value drivers, and operating leverage. This was partially offset by the continued build-out of our infrastructure to support our reporting, governance, and control needs as a newly public company. Our adjusted EBITDA margins are expected to grow to 37.5 percent in calendar 25. This represents a 270 basis point margin growth since 2022. This chart shows we have been executing on our value drivers while acquiring two dilutive acquisitions and incurring infrastructure costs to support our needs as a public company. Our full-year market assumptions are as follows. Commercial OEM, up high double digits. Commercial aftermarket, up mid double digits. Defense, up high double digits. Our 24 outlook is as follows. Sales, 390 million to 394 million. Adjusted EBITDA, 141 million to 143 million. Adjusted EBITDA margin, approximately 36 percent. Net income, 19 million to 20 million. Adjusted EPS, 35 cents per share to 37 cents per share. Our 24 assumptions used in calculating the 24 revised forecasts are as follows. Capital expenditures, approximately 9 million down from 11 million. Four-year interest expense of approximately 54 million. This is up from our previous forecast of $42 million due to the borrowing of $360 million for the acquisition of applied avionics in Q3. Full year effective tax rate is approximately 30%. Depreciation amortization is $43 million. This is up from the previous forecast of $40 million as a result of higher depreciation and amortization from the purchase of applied avionics in Q3. Non-cash stock-based compensation is approximately $11 million, up from $10. And our fully diluted shares are approximately $91 million. Let me turn the call back over to Dirksen to share our 25 outlook.

Okay, this is the part of the call that I enjoy the most. Glenn just gave you our 13-week forecast, which I always struggle with, right, because we're building this business for the long term, long, long term. But I realize we have to, so we did. So let's talk about our initial guidance for 2025. And I'll repeat that, initial guidance. Now, we know most of our colleagues in the public environment will wait until they report earnings for the full year to share their outlook. But we felt we wanted to share how we are thinking about the business next year with you guys as soon as possible. So given the fact that we have such strong visibility in our business, as a result of the proprietary content of our portfolio and record backlogs at the end of the third quarter, these characteristics, combined with the high demand for aircraft by airlines, the challenges by the OEMs to produce new aircraft, and you can pick your favorite poison, whether that's a strike or supply chain challenges, we continue to drive increased aftermarket demand. So, for our part. Just given the geopolitical instability in the world, we see and we expect on a performer basis, assuming we own all of our businesses since the beginning of 2024, that our end markets will be up as follows. So let's go through it. Commercial OEM and aftermarket will be up high single digits versus 2024. Our defense end market sales will be up high double digits versus 2024. These market assumptions, along with our continued execution of our value drivers, will allow us to meet or exceed the following for calendar year 2025. Net sales between $470 to $480 million. Adjusted EBITDA between $176 and $180 million. While adjusted EBITDA margin will be approximately 37.5%. which I'd like to highlight is 150 basis point improvement over 2024, net income between $33 and $37 million, adjusted EPS between $0.45 and $0.50 per share. In addition, we expect capital expenditures of approximately $14 million, interest expense of approximately $60 million, while our effective tax rate will be approximately 30%. Depreciation and amortization, approximately $51 million. And our non-cash stock-based compensation will be approximately $15 million. All of this divided by a fully diluted share count of 93 million shares. So please note that all of the amounts I've just outlined for you relative to calendar 2025 performance assumes no additional acquisitions. However, As we have noted previously, our drumbeat is to complete one or two acquisitions each year, but we cannot predict the timing of such acquisition. One last metric, which is not on the slides that I want to share, for 2025. We expect operating cash flow minus capital expenditures to be greater than 125% of our net income, assuming no additional acquisitions. I'm going to say that one more time. We expect operating cash flow minus capital expenditures to be greater than 125% of our net income, assuming no additional acquisitions in calendar year 2025. So with that, Rob, let's turn it over for questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question at this time, please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions, and that's star 1. Thank you. Thank you. I do have a question from the line of Jason Gursky with Citigroup. Please receive your question.

Good morning, everybody. Sirton, can you maybe walk us through what you view to be the risks and opportunities around your guidance in 2025? You kind of went out of your way to suggest that this is your initial guidance, and these are kind of the minimums that you expect to achieve. I'm just kind of curious what you think the risks and opportunities are.

Thanks for the question, Jason, and yeah, I think you picked up on that correctly. So, look, I know everyone is just getting to know us as a management team. This is just the third time we're reporting as a public company, but we don't like to share numbers with anyone, and we view all of the participants on the call as our partners that we believe we can't meet or exceed. I guess I'd say to you this way. I think our initial guidance that we came out with for EBITDA for the year was 132 to 134. We came back the next quarter and we said 134 to 136. This guidance for 2024, and we'll get to 2025 in a second, at 143 million includes applied avionics, which I'll do some homework for folks who haven't done it yet. If you look at the performer financials, you'll see the first six months, sales were 22 million. We told everyone for the year it would be 40, So therefore, the second half of the year is $18 million. So we've owned it for four months, which is about $12 million of revenues at the 50% EBITDA margins at six. You take 143 minus six, you're at 137. We have just guided higher than a high end of what we told you previously. So that's our history to date. And now let's talk about 2025. It is our initial guidance. And as I said on the call, most folks don't go this early. Right? Normally, folks, you only be hearing from us about 2025 until March of next year when we report earnings. We didn't think it was appropriate to wait that long to share with you guys. So what's in the guide? Everybody knows that the commercial OEM stock part of the business is challenged. Between Boeing strikes and challenges within their supply chain, Airbus challenges within the supply chain, et cetera, Textron striking, The way we think about the guide for 2025 is there is an impact to us, but as you guys know, Boeing sales to us, $12 million roughly a year, half of that OEM. So, you know, you're talking $6 million, small impact. So I don't see a lot of risk to our numbers and our guide for 2025 on the OE commercial side. On the aftermarket side, Given it's November and we're talking about the results through 2025, we are thinking about it cautiously. So I'd say this way, we're cautiously optimistic. So high single digits feels about right for us now, given, as you guys know, our pricing leverage, what we expect to happen with volumes given the OEM challenge of producing aircraft. We do see strong volume, strong backlog on that side of the business. So I'm comfortable, actually extremely comfortable on the commercial aftermarket. In terms of defense, which we share every time is choppy, the good news is we're starting the year with solid, solid backlog. Even though we see deliveries picking up more in the second quarter, into the last half of 2025, so a little bit more choppy in the first quarter of 2025, feel really, really good about that. So other than some black swan event, we feel really, really good about what we're sharing with folks. Hopefully I answered your question in there somewhere, Jason.

Yeah, no, I appreciate that. That's helpful. And then maybe just one quick follow-up. Glenn, for you on the cash flow guidance for 2025 and the 125% conversion pre-cash flow to net income, can you maybe just walk through some of the drivers of that and maybe talk a little bit about working capital and just kind of what the source of the high conversion relative to net income? Thanks.

Sure. Well, obviously, you know, start with EBITDA, right? We don't expect a significant use in working capital for 2025. We suspect inventory leveling out and receivables should be up because of the higher sales. We gave you the interest, so, and capital expenditures. So nothing significant. And as Dirksen said, we will be, we should be above 125%. Okay, great. Thanks.

I'll pass the line.

As a reminder, if you'd like to ask a question today, you may press star 1 from your telephone keypad. We'll pause a moment to assemble a queue. Thank you. Once again, I start one to ask a question. Thank you. At this time, there are no further questions. I'd like to turn the floor back to Dirks and Charles for closing remarks.

You guys are easy today. No, thanks for taking the time, hearing our story. Actually, Rob, I think I need to hold off

Yes, I was just going to say we just have some more analysts that just came into queue.

I guess, you guys, it's not that easy.

Our next questions will be from Sheila Kayaglu with Jefferies.

Sorry about that, guys. That might have been my mistake. But congratulations on a good quarter in providing the 25 guides. So maybe let's start off on the quarter, if that's okay. Just commercial aftermarket pro forma up 19, sequentially up 16. What drove that versus peers maybe 1,000 BIPs below that, and how much did Applied contribute?

So we don't talk specifically about one business unit over another in terms of contribution because the numbers we're sharing is on a performer basis. But it's really, Sheila, it's across all the platforms. It's actually one of the first things we look at. There isn't a platform that wasn't up, you know, quarter over quarter, year over year. Because even quarter over quarter, we were up 16% in commercial aftermarket. So for us, it's market share. It's new product introduction. And it's just good performance, you know, executing on our value drives. That's what's driving it. We're really feeling good about it. which is going back to Jason's question about the 9% into 2025. I think on the last call I said it looks like blue skies, and my teammates in the room here looked at me like, wow. But the commercial aftermarket really, really feels good to us, Sheila.

Understood. That makes sense. And then maybe just on the 25 guide, I just want to make sure we have it correctly here because 70% of your business is guided, you know, commercial OE and aftermarket guided to grow high single digits and then military, you know, which is 15%, let's say, growing high teens. How do you think about that total, you know, mid-teens organic growth essentially that you have for 25? What are we missing?

What are you missing?

Just a calculation. It just seems like most of your business is growing high single digits.

That's correct. So high single digits, I'll say this way, 9%, 10%, high single, low double. And on the military side, it's really, really strong, if I could say it that way. So you're not missing anything other than the fact that – We want to make sure, as we've learned from speaking to a number of our partners in this call, that we don't push the envelope hard in terms of giving guidance. So we're going to be up 14% in total year over year on a performer basis, but we feel really good about it. So your math is right. Oh, and by the way, the non-aviation is actually down year over year. So that could be a piece of the missing math for you.

Yeah, that makes sense. That makes sense. Okay, great. And then maybe just, you know, while I have you guys for the quarter, as we think about the Q4 exit rate, the guidance implies 2024 exits with 36% margins in Q4 versus even about 30 bps above that year to date. What drives that Q over Q deceleration?

I hate using this word because I think it's a four-letter word, but there's some mix in there because defense is going to be a greater, you see it's growing faster. While we make good money, the margins on the commercial side of the business is higher, so that's a piece of it. We also, as we discussed, we do have a small impact on the commercial OE side of the business. We got the same love letters that everybody got across the industry from Boeing and Textron when they were on strike. stop shipment, hold, all that stuff, moving to the right. And again, commercial is higher margin than defense. So we have, I'll give you a number, approximately $3-ish million of revenues that has moved to the right because of those love letters we got from the OEMs. That's part of it. Plus, the fourth quarter for us, I think it's a little bit different than most public companies in that Like I said earlier, 13 weeks is 13 weeks, and it really doesn't matter in the long term. So we'll get the phone calls from our customers saying, can you move it into January because we want to manage our balance sheet and that. And it's usually commercial aftermarket parts that that happens with a lot. So, you know, we have factored some of that into how we think about the fourth quarter.

Understood. That makes sense. Thank you so much.

Thanks, Sheila.

Thank you. Mr. Charles, I'll turn the floor back over to you for any further remarks.

Okay. I was going to say it was going to be an easy call until Sheila got in. No, thanks. Thanks, everyone, for taking the time to join us on the call. Look forward to speaking again, I guess, in late March. You have our guide for 2025. It's our initial guide, as we said. And most importantly, I truly, truly want to thank all of my mates, all 1,500 now of them across the group, because without you guys, none of this happens. So thanks to everyone participating, and thank you to our colleagues.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.