Loar Holdings Inc.

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Greetings and welcome to Lower Holdings Third Quarter 2025 Results Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ian McKillop. Thank you. You may begin.

Thank you, Rob. Good morning, everyone. And as Rob said, welcome to the Lohr Holdings Q3 2025 earnings. Presenting on the call this morning are Lohr's Chief Executive Officer and Executive Co-Chairman Dirk, Executive Co-Chairman Brett Milgram, Treasurer and Chief Financial Officer Glenn D'Alessandro, as well as myself, Ian McKillop, Director of Investor Relations. Please visit our website at lohrgroup.com to obtain a slide deck and call replay information. Before we begin, we'd 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 on the forward-looking statements, please refer to our latest filings with the SEC available through the investor relations section of our website. Also, as a reminder, during the call, we will be referring to adjusted EBITDA, adjusted EBITDA margin, adjusted earnings per share, and free cash flow conversion, 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 the prepared remarks this morning, I'll pass it over to Dirksen.

Thanks, Ian. My mates at Law and I, we get up every day to create shareholder value over the long term. When we went public, we added a plethora of new partners to join our journey in building our aerospace and defense cash compounder. I got up this morning thinking about one such partner who we know is totally, totally aligned in our approach of building our business over years and decades as opposed to a quarter at a time. He was the one that told us we are boring. I did not name him on the call, so it was interesting when we spoke to him after the call. He said, Dirksen, Brad, was I not the one that called you boring first? Of course, the answer was yes. He then reminded us about the importance of intellectual property. How could we quote him without saying who he was? It is his IP after all. As you all know, we love IP. Here's the good news. We're going to be boring today. We're going to name the whole of the patent over the adjective that truly describes us. He has been with us since we went public, which is going on two years now. And along the way, he has continued to invest more in us. So before he named him, to respect his IP, let's remind everyone what it means to be boring. It means boring. We're about to tell you that we beat, we're raising up guidance, but more importantly, we generated strong cash flows. In addition to telling you, we continue to improve our margins while achieving record sales, adjusted EBITDA, and adjusted EBITDA margins during the quarter. We're then going to give you guidance in 2026 that we're doing with the Heather rule in mind, given that we do not want to sacrifice Ian. which means we're only going to tell you what we believe we can meet or beat. I'm going to get started with my remarks, but first, let me name the person that called us boring. His name is Steve. Good morning, Steve. Good morning, all. We're about to be super boring, so here goes. I'm Dirksen, founder, CEO, and co-chairman of Law. As always, We'll keep our remarks brief, so let's start by reminding you who we are. Lord's a family of companies with a very simple approach to creating shareholder value. First, we believe that providing our business units with an entrepreneurial and collaborative environment to advance their brands will generate above-market growth rates. Since our inception in 2012 through the end of calendar year 2024, We have grown sales and adjusted EBITDA at a compound annual growth rate of 37% and 45% respectively. Over the long term, we expect to increase sales organically a double-digit percentage with the last three years, 22, 23, and 24, achieving organic sales growth of 18, 14, and 15% respectively, with adjusted EBITDA growing at a faster rate. We execute along four value streams. First, 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. Over the next two years, we expect that new product growth will be closer to 3% and 1% as we qualify new parts, sell existing products to new customers, and just dive deeper into our mission of solving our customers' pain points. As you all know, we track this pipeline of opportunities monthly. It represents a list of opportunities across our portfolio that are derived from listening to our customers to identify their pain points to determine how we can help. It is created from sharing ideas, best practices, customer synergies across the group, to the high degree of collaboration that we foster across our business units. This list, as you can see, has grown by $100 million since our last call and represents over $600 million in sales over the next five years. As you can see, the beauty of the list is it is a living, breathing entity that continuously grows. We also focus on optimizing the way we manufacture, go to market, and manage to enhance productivity. Each year, we'll identify initiatives that will allow us to continually improve our performance with a focus on one or two major initiatives each year that will improve margins. Over the next couple of years, we are looking to enhance the way we mine, collect, gather, and utilize data. This means enhancing our management, ERP, and other systems and processes to improve our leverage of data to drive the improvement in our cash flows. In addition, across our portfolio of companies, we'll achieve more price than our cost of inflation. Each year, the result is a continuous improvement in margins year over year with, on occasion, a temporary dilution as a result of acquiring business with dilutive margins or incurring costs as a result of being a public company, all of which we have experienced over the years. But regardless of these temporary headwinds, we continue to improve our margins. Most importantly, we are committed to developing and improving the talent of all our mates because our success is solely a result of their dedication and commitment. To all our mates, thank you so much for your commitment and hard work. I will now turn it over to Brett to walk you through the key characteristics of our portfolio.

Thanks, Dirksen. Everybody, I think, has seen this slide. We've had it in all our presentations, so I don't want to belabor it. But the reason this slide is in there is really just to remind people that we have a very consistent and very attractive business model, as highlighted by all the boxes on the bottom of the page, that we apply all our parts to. And those parts cut across a very broad and very diverse set of end markets, customers, and virtually any platform that you can think of that flies. And the way that ultimately manifests itself is in the strong performance that we've had that is consistent, reliable, and dare I even say boring.

Excellent. Thank you, Brett. Over the last 13 years, we've brought together a unique set of capabilities and products that are highlighted here. We go to market with more than 20,000 unique products, none of which makes more than 3% of our annual revenue. Whether it's sensors or switches, water purification systems, de-icing technologies, human interface devices, auto throttle systems, or one of our many other products, we are an essential supplier across the aerospace and defense industries. Our customers have come to depend on our highly proprietary products, quality, on-time performance, and engineering capabilities to ensure they are able to maximize their production and aircraft operations. I'll now pass it over to Glenn to walk through the financials.

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. This market discussion includes the acquisition of Applied Avionics in Q3 2004 and Beadlight in Q3 2025. We achieved record sales during Q3 2025. In total, our sales increased to $127 million, which is a 15% increase as compared to the prior year. This increase was driven by strong performances in commercial aftermarket, commercial OEM, and defense. Our commercial aftermarket sales saw an increase of 19% in Q3 2025 versus Q3 2024. This is primarily driven by the continued strength in demand for commercial air travel and an aging commercial fleet. We continue to see strong commercial aftermarket bookings. Our total commercial OEN sales increased by 11% in Q3 2025 as compared to the prior year period. This increase was driven by higher sales across a significant portion of the platforms we supply along with an improvement production environment for commercial OEMs. The increase of 70% in our defense sales 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 the ordering pattern of our end customers for our products. Let me recap our financial highlights for the third quarter of 25. Our net organic sales increased 11.1% over the prior period. Our gross profit margin for Q3 25 increased by 380 basis points as compared to the prior year period. This increase was primarily due to our operating leverage, the execution of our strategic value drivers, as well as a favorable sales mix. Our increase in net income of $19 million in Q3 25 is primarily due to a tax benefit as a result of the enactment of the One Big Beautiful Bill Act, higher operating income, and lower interest. Adjusted EBITDA was up $11 million in Q3 2025 versus Q3 2024. Adjusted EBITDA margins were a record 38.7% due to our operating leverage, the execution of our strategic value drivers, and a favorable sales mix. This was partially offset by additional costs with being a public company including Sarbanes-Oxley compliance and additional organizational costs to support our reporting, governance, and control needs. We did not see a material increase in these types of costs going forward. We believe the run rate of these costs is fully reflected in our Q3 25 results. From 2020 through 2025, we will have increased our EBITDA margins by 710 basis points. We have achieved this growth through the following, operating leverage, winning new profitable business, executing on productivity initiatives, and from value-based pricing. In Q3 2025, our margins grew by 190 basis points from the prior year to a record 38.7%. This was achieved even with the negative impact of costs related to Sarbanes-Oxley from being a public company, as well as the dilution of margins from our most recent acquisition, Speed Life. We are excited to share our most recent view for calendar year 25. This view is in excess of what we told you 13 weeks ago. Our confidence rests in the great strides we've made executing on our value drivers, in the first nine months of 25 and the strength of our proprietary portfolio. Primarily, we are ahead of our plan on value pricing and productivity initiatives. In addition, we have seen material reduction. We have not seen any material reduction in demand on any of our end markets and expect no meaningful impact on our end markets as a result of the tariff environment. The one end market One end market to note is total commercial aftermarket. Given the strength we have seen in the first nine months of 25, we are increasing our outlook to low double-digit growth from high single-digit growth. Commercial OEM and defense are in line with our prior outlook. These market assumptions, along with our continued execs' execution of our value drivers will allow us to exceed the following metrics for calendar year 25 versus our previous outlook. Net sales are up 1 million. Adjusted EBITDA is up 1 million. Net income is up 5 million. Diluted earnings per share is up 5 cents. Adjusted earnings per share is up 10 cents. We see a further reduction in our interest expense of $1 million. All other assumptions are consistent with our previous outlook. Let me now turn the call back over to Dirksen to share our outlook for 26.

Thanks, Glenn. Look, we are extremely excited to share our initial, I'll say it again, initial view for calendar year 2026. But as a reminder, we can share such a detailed forecast so early in the year because of the substantial proprietary content of our product and service portfolio. combined with our record backlog as of the end of the third quarter of 2025, both of which allows for tremendous visibility into 2026. This view is on a performer basis, assuming we own all of our business units since the beginning of 2025. So with that said, we expect commercial OEM and aftermarket growth will be low double digits in 2026. With the strong backlogs as the commercial aircraft produces, including Boeing, Airbus, Embraer, Gulfstream, Cirrus, Diamond, just to name a few of the manufacturers that we have content on, we see another year of double digit growth. With regards to our assumptions about monthly production rates for the Boeing 737 MAX and A320 family of aircraft, we have assumed that monthly production will average 38 and 54 during 2026 respectively. This is between a 15 to 20% reduction from the OEM skyline projections that they all talk about. This is how we adjust for any supply chain challenges, destocking, that inevitable part of the complicated ecosystem of making parts for aircraft. So, let's meet and exceed. Commercial aftermarket growth, again, will be driven by the continuing secular growth rate of air travel combined with an older in-service fleet as OEM production continues to not meet demand for aircraft. It is noteworthy that the average age of the passenger fleet worldwide is a record 14 plus years currently. Given that airlines have learned to affordably maintain aircraft for longer combined years, We expect that, you know, that with the production of aircraft not covering retirements and plus a second of growth, that the aftermarket will stay strong for quite a period of time. We also see strength in general aviation, with Q3 2025 departures setting a record at over one million. How do we say it? We love the aftermarket. While our defense end markets will be up mid-single digits, as we come off a fantastic year of growth. As we have always said, growth in the defense end market will be choppy. So, up, down, up, down, over the long term, lots of cash. That's how we think about it. These market assumptions, along with our continued execution of our value drivers, will allow us to meet or exceed the following for calendar year 2026. Net sales between 540 to 550 million, Adjusted EBITDA between 209 and 214 million. Adjusted EBITDA margin of approximately 39%. Once again, demonstrating our ability to continually improve margins. Net income between 80 and 85 million. Adjusted EPS between 98 cents and $1.03 per share. In addition, we expect capital expenditures of approximately 17 million. Fully at interest expense, 25 million. Effective tax rate will be approximately 25%. Depreciation and amortization of 15 million. Non-cash stock base comp of 17 million. With the effect, fully diluted share count of 97 million shares. Please note that all of the amounts I've just outlined for you relating to calendar year 2026 performance assume no additional acquisition and does not include the previously announced pending acquisition of LMB Fans & Motors. However, as we have noted previously, our drumbeat is to complete one or two acquisitions each year, but we just cannot predict the timing of such acquisition. One last metric I will share related to calendar year 2026. We expect operating cash flow minus capital expenditures to be greater than 125% of our net income assuming no additional acquisition. With that, operator, let's open up the line for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Christine LeWag with Morgan Stanley. Please proceed with your question.

Good morning, everyone.

Good morning.

You know, congratulations on your record margin in the quarter despite, you know, the two headwinds that you called out. including the dilution from the recent deal. I guess, you know, can you provide more color now with what the operating and integration playbook looks like 30, 60, 90 days after a deal? Are there some heuristics operationally that you could call out? And where do you usually find low-hanging fruits?

So, good morning, Christine. So it varies by the business that we acquire, right? Some businesses require, I'll put it this way, a lot of handholding. Others just require strategic direction. Specifically to Beadlight, our recent acquisition, great business, great team, great leader in Gina. It's more about, in this case, the first 30, 60 days. which is always the case, I should start there, is listen and observe first. We don't believe that we're smarter than the folks that have been running the business for years, right? So we listen and watch and learn first and help wherever they come to us initially. In Beadlight's case, it's more about top line synergies, right? We have embedded Beadlight with our short business So Gina actually reports to our president at Short to incorporate the outreach to customers in a synergistic way. At Short, as you know, we make seat belts and restraints for effectively the same customers that Beadlight is selling to. So in the case of Beadlight, it's more about the synergy with customers and focusing in that manner, which We have started but really have a tremendous runway ahead of us in terms of opportunity.

Great. That makes sense. And then with your commercial aerospace OE outlook for next year, Dirksen, can you provide some color regarding the underlying production rates that underpin those assumptions?

Yeah, I think what I outlined was the production numbers that we are doing. So 38 and 54, that's Boeing and Airbus respectively. That's what we're looking at. Now, I will tell you that varies tremendously by port. That's the net, net, net of everything that we have seen and touched across the group. So we can have a track liner at one number, and we can have a water purification system at another number, just driven by what's in the pipeline, what customers are expecting, those types of things. But on the average, we're looking at 38 for the max and 54 for the A320 family.

And for the wide bodies, too?

For the wide bodies, I would say it this way. The discount isn't as great. I think we discounted the 15% to 20%. on the narrow bodies, on the wide bodies versus skyline is about 10%. And just keep it in mind, the way we think about it is really going back to our rule of engagement when we give guidance, which is the heather. We want to make sure, especially at this early stage, I mean, we're in November predicting what's going to happen to the end of 2026, which is, you know, 13 plus months away. We just want to be conservative, so.

Thank you very much.

Our next question comes from Sheila Kayaglu with Jefferies. Please proceed with your question.

Good morning, guys, and congrats on a great quarter. Maybe if I could ask on the same light as Christine, but just focusing on defense, you know, your defense growth has been superb this year, and your guidance is for about 5%. Why the deceleration? And maybe can you talk about, yeah, what's driving the decel, whether domestic or international?

So first of all, I'll describe it this way. Lessons learned. Been doing this for three decades. And when you have a defense market that one year is up, you know, as we have seen this year, somewhere between 16% and 20%, it usually is time for it to be rationalized, right? It should be a mid-single digit-ish growth rate on the defense side. But I'll give you a little bit of specifics. Ground vehicles were strong in 2025. I will tell you, as we put together our budget, which is a month or so ago now, we looked at terms of our product on ground vehicles and we said to ourselves that that should slow down. We didn't have the backlog at the time to support it. But what I would tell you today, Sheila, is if we were building that forecast today, I'd probably come up with a different result. But since that time, we've seen improved bookings for ground vehicle products.

Okay, got it. So just normalization of the market and being conservative. Correct. Cool. And then, Darkson, at the beginning, you gave some introductory comments that said new product growth now could be 3% versus your, I think, 1 to 3 historically. Can you talk about some of the areas where you're making particular headway, whether it's an end market, a certain OEM, or is it a synergy with Speedlight, as you pointed to? Where are you seeing that new product growth coming from?

So this one's a little sensitive. because you're not the only one listening, and I don't want to share information that would make it harder to compete in the market, get people focused, but I know there's two things that we talk about quite a bit. Happy to share, because these are two of the reasons why it is improving, and we do see it. So one is on breaks. We are getting certification on PMA break applications. We've gotten five done this year, most of those within the last three, four months. And in the pipeline, but for the government shutting down, we're probably a little bit ahead, we have another four or so certifications to get. That's one of the reasons that we're going to see higher growth rates over the next couple of years because we're now getting into that business. So that I can talk to you. The other one I can speak to is as we think about – so that one's aftermarket. I'll give you one that's OE. As we think about the cockpit door barrier, I think we've told folks that we've got that certified this year, started producing in May on the ABLS platform. We're going to see more of that content growth next year and in the years to come because we're – exclusive and the majority of the Airbus narrowbody aircraft. Those two alone, those two alone would get us, as I said, I didn't say 3%, I said closer to three than one. Those two alone gets us closer to three than one.

Got it. Okay, great. Thank you so much. And also, as Steve said, I don't know why anybody would listen to a boring call like this. Exactly. You could share with us all you want. Thank you.

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

Morning, Ken.

Yeah, hi. Hey, Dirksen, Brett and Glenn, good morning, and Ian. Maybe just to start, you did nudge up slightly the aftermarket expectations for this year. I'm curious if you can talk about what's specifically driving that or how we think about sort of volume versus price in the aftermarket growth this year.

It's all across our products. I can't think of any one that stood out in terms of driving the aftermarket growth change. So it's really across all the products. And it's volume driven, not price. We're just seeing... I guess I'll put it this way. When we put together a guide, as we always do, we think of it in such a way to make sure we meet our exceed. I think you know that. So it's actually what's not surprising to us that it's low double-digit growth. Just like we're starting out this year thinking it's low double-digit growth. Commercial aftermarket, I got to tell you, is extremely, extremely strong. I know some folks we talked to worry about it slowing down, I got to tell you, Ken, don't see it. So going back to your question, volume-driven, not price, and it's across all of our product offerings.

That's great. Thanks, Dirksen. And as we think about the initial outlook for 26, again, up sort of a double, similar contributions as we think about the volume and price mix in 26 on the aftermarket and And then under that, I guess, as we think about 26, are you seeing any acceleration or deceleration underpinning that by end market from 25 to 26?

No, I don't see anything. So I guess I should say this way, right? So across all the end markets, I see this. I see over the last three years or so that as we think about the mix of what drove growth, that I would put it in this way, volume, price, and then new business, that's probably the last three years. The next two or three years, I would rank it this way, new business, volume, and then price. So to answer your question, don't see any slowdown on volume, Don't see any risk in terms of any long-term destocking. Now, with that said, I know we're talking about 26, but it does remind me, as we think about, I hate guiding for 13 weeks, which is what you guys force us to do when we get to this point in the year and we're talking about the end of 2025. I will tell you, Ken, I am seeing more noise from customers. By the way, we love them. from customers in terms of cosmetically managing their balance sheets and managing working capital. And there's a lot of push-pull within our system as to the timing of deliveries. It's all timing. It's all proprietary products, all those things. I would say that about 2025, but in terms of 2026, fairly strong across all the end markets. Talked about military. just trying to normalize what we think about what 2026 should look like.

Great. Thanks, Dirksen. Appreciate all the detail.

If that's the last question, operator.

Yes, it is. Would you like to do closing comments?

Yeah, I can close it up real quick. First of all, A big thank you to everyone that has taken the time to hear our story again today. Believe me, believe me when I say we continue to be excited about building our aerospace and cash compounder. We call it law. Looking forward to speaking to you all again in late February 2026, just to give you a date this time. Thank you. Thank you very much. And by the way, thank you everyone for calling in on time. Love you guys. Thank you.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.