Heroux Devtek Inc
TSX:HRX
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
Abbvie Inc
NYSE:ABBV
|
Biotechnology
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Realty Income Corp
NYSE:O
|
Real Estate
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
| US |
|
Walt Disney Co
NYSE:DIS
|
Media
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
This note will be permanently deleted.
Heroux Devtek Inc
You don't have any saved screeners yet
Good morning. My name is [ Jowell ] and I will be your conference operator today. At this time, I would like to welcome everyone to a Heroux-Devtek's Fiscal 2024 Fourth Quarter and Fiscal Year Results Conference Call. [Operator Instructions] Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. We refer you to Slide 2 of the accompanying presentation available on the company's website for the complete forward-looking statement.I would like to remind everyone that this conference call is being recorded today, Wednesday, May 22, 2024 at 8:30 a.m. Eastern Time.I will now turn the conference over to Mr. Martin Brassard, President and Chief Executive Officer; and to Mr. Stephane Arsenault, Vice President and Chief Financial Officer of Heroux-Devtek.Mr. Brassard, please go ahead, sir.
Thank you very much, Jowell, and good morning, everyone. [Foreign Language] On behalf of all of us here in Longueuil, welcome to our fourth quarter and fiscal 2024 earnings conference call. As usual, I invite you to follow along by referring to the financial statements, MD&A, press release and presentation, which can be found in the Investors section of our website. We're pleased this morning to announce a very strong quarter of sales and profitability for Heroux-Devtek. Our fourth quarter of fiscal 2024 marks the fourth consecutive quarter of growth in both revenue and profitability, a sign that our focus on stabilizing our production system is paying off. The increase in volume, along with the effect of our pricing initiatives in response to inflationary pressure drove our Q4 EBITDA margin to 18%, marking a significant 540 basis point improvement over Q4 last year.These improvements clearly demonstrate the success of the strategy we've implemented over the past 2 years, restoring the health of our supply chain, stabilizing our production system, examining our production processes to identify efficiency gains, and reviewing our pricing and supply agreements to offset the effect of inflation. Beyond this, the broader aerospace and macroeconomic environment suggests more good news to come, but first, I would like to turn it to Stephane for a review of our fourth quarter financial performance in more details.
Thank you, Martin, and good morning, everyone. As usual, please be aware that we will be referring to certain non-IFRS measures during the call, including adjusted EBITDA, adjusted net income and adjusted EPS. Our non-IFRS measure are defined and reconciled in the MD&A issued earlier today. Before I begin, I would like to take a moment to congratulate our teams for their hard work on resetting the business over the past year. The results we are presenting are a clear measure of their success.In Q4, sales for the quarter rose 18% year-on-year to a record $184.1 million compared to $156 million last year. Civil sales rose 55% to $75.8 million from $48.9 million for the corresponding period last year, mainly driven by increased deliveries for the Boeing 777, Embraer Praetor and E2 programs, while defense sales rose 1.1% to $108.2 million from $107.1 million.For the full year, sales stood at $629.8 million, a 15.8% increase over fiscal 2023, exceeding pre-pandemic levels. Civil sales were up 42.6% to $243.4 million for the same reason at the fourth quarter, while the defense sales were up 3.6% to $386.4 million, mainly due to higher aftermarket business for legacy program as well as higher delivery for the Sikorsky CH-53K and Lockheed Martin F-35 programs. These positive elements were partly offset by lower demand for Boeing F-18 production.For the quarter, gross profit reached $39.4 million or 21.4% of sales compared to $22.7 million or 14.6% of sales last year, reflecting the impact of higher volume and pricing initiatives, partly offset by the effect of inflation on costs. For fiscal 2024, gross profit was up $111.1 million compared to $73.5 million last year or 17.6%, and 13.5% of sales respectively for the same reasons.Operating income for the quarter rose to $27.6 million compared to $9.9 million at this time last year, and to $59.8 million, up from $26.2 million for the fiscal year. In both cases, the stronger performance was due to higher throughput and profitability, while also reflecting a $4 million provision reversal related to a previous business acquisition, which the indemnification period has expired.Adjusted EBITDA in Q4 totaled $33.1 million, up 68.8% from $19.6 million in Q4 of 2023. For the year, adjusted EBITDA was $92.2 million versus $61.4 million in fiscal 2023, a 50% year-over-year improvement. Adjusted net income in the quarter stood at $16.7 million or $0.49 per share compared to $6.2 million or $0.18 per share in the same quarter last year. For the full year, adjusted net income was $34.3 million or $1.01 per share compared to $12.6 million or $0.37 per share in fiscal 2023.Cash flow related to operating activity improved substantially in Q4, reaching $19.7 million versus $4.5 million last year, mainly reflecting the improved financial performance. As a result, at the end of Q4, our net debt-to-EBITDA ratio improved to 2.3x from 2.7x at the same time last year and 2.8x last quarter.Back to you, Martin.
Well, thank you, Stephane. I am very proud of our teams who have worked relentlessly this year. Their ability to deliver our throughput commitments in a still challenging production environment is remarkable. Thanks to their support and dedication, we were able to deliver excellence to our clients. Thanks to our customers for their continued support and confidence. And finally, to our supplier, many thanks for helping us maneuvering in this challenging production environment. These results represent a sustainable trend of performance, surpassing our historical levels, supported by lasting improvements and a record backlog of $951 million. The aerospace industry outlook remains very strong. Global passenger traffic is back to pre-pandemic levels and the IATA is forecasting continued growth.On the defense side, geopolitical tension has added urgency to the defense industry's effort to maintain, develop and launch new aircraft programs, and we are very active on a number of defense platforms. The high demand we are seeing from prime contractors worldwide attest to the trust and recognition our customers have in the quality, safety and excellence of our products. This recognition has further echoed in Boeing's $35 million commitment to partnering with us on the development of advanced landing gear technologies via the new aerospace innovation zone in Longueuil.Jowell, we are now ready to answer questions.
[Operator Instructions] Your first question comes from Konark Gupta with Scotiabank.
Great results there, absolutely. If I can like dig into the margin performance, which was pretty strong, and I don't think we have seen something like that in a long time on a normalized basis. The volumes was great, pricing you said, obviously, it's offsetting inflation, it's not finally catching up, probably that supports the margin expansion and based on operating leverage as well, maybe right, and you probably obviously restructured the business over the pandemic to support higher margins in the future. Do you think the 18% margin is a more sort of normalized reflection of your business today? Like in fourth quarter, obviously, it's a stronger quarter normally, but is 18% reflection of what your business is capable of today, or was there something one-off in the quarter that drove that or helped that or was there something that pushed the margin down like could you have done more than 18%?
You want to go --
You said a lot of things, Konark, so essentially, we were at the same question in Q2, right? Is this a one-off? I think the team is delivering, right, on the order we have. So what you said, the operating leverage, right, on the initiative we took in the past 18 months or 2 years, right, is paying us. And I think you highlighted what was done during pre-pandemic as well. So addressing right, the cost structure during that period of time. I think everything when you sum it up, we are in a very good position, right, and we are delivering on those results.
And just to add there, Stephane, every business unit contributed to the bottom line. So everybody delivered on their plan, that's what's happening.
No, that's great. Now in terms of the growth profile, the civil is still doing pretty well, obviously, this is coming off a low base as that of 777, it's rebounding and you have the Embraer platform also performing well. When you look at the backlog, and I know you pointed out in your prepared remarks about the geopolitical tensions and all that, plus maybe some of the aftermarket pricing is getting a lot of traction these days. Volumes are going up as well because of all the supply chain issues. I'm wondering if the backlog, which went up by 10%, was it all driven by defense? Or would there be any contribution from civil? And I'm asking this because we are seeing obviously a lot of issues in the commercial aviation supply chain, including Boeing, of course, so can you help us split out what the backlog drivers were this quarter?
Well, the backlog increased in both segments, Konark. So we're very fortunate to be present in all of the segments of the aerospace, mainly civil and defense, and in all the subsegments, as you know, we're present in everything. So we see demand in the backlog. It's always important to remind that this is only from POs. It's not the committed order. So there's a time also -- a time zone because if we had to include all the contracts that we signed over and above the PO, we would be well above the $1 billion mark. So we saw -- so like I said in my remarks, we see strong demand in both segments. And the platform, the driving platform in the civils are 777, Praetor, the Falcon 6X will go up in revenue, right? E2 is also, the E2 jets. And in the main defense platform, we see growth in the CH-53K, we see growth in the CH-47, we see growth in many defense platforms. And also, the F-18 program will phase out, as you know, production, but we're entering in the phase that we had strategically thought back when we won that contracts, in the aftermarket revenue and the MRO revenue. So we're well positioned to continue our trend.
That's great. And if I can follow-up on that upmarket comment before I turn it over. Have you seen any substantial or significant interest from customers in aftermarket? And I know you are more aftermarket in defense as compared to civil. But given the supply chain mess up right now, we are seeing globally, are you seeing a lot of demand for aftermarket products? And did you see that in the quarter as well?
Not in our actual results yet, but we see that there's going to be some opportunity there, right, especially in the defense, you know that we still got to produce or to manufacture landing gear for all the USAF platform. So that could be a good opportunity for us, but also, it's active. But the growth is going the same rhythm as the OE business for us.
The next question comes from Benoit Poirier with Desjardins.
Congrats for the strong finish. Yes, just in terms of organic growth, obviously, there is some organic growth, especially on the civil side with 55% of fees in this quarter. So could you maybe provide more granularity about the contribution from pricing actions taken --
I'm sorry to interrupt, we have very, very difficult to hear you, very bad -- I'm sorry.
Okay, sorry guys. Let me see here. Okay. It should be better now -- just in terms of the organic growth, you achieved 55% for civil in the quarter, so very strong performance. Could you maybe talk about the impact from pricing actions taken? And should we expect further pricing benefits going through fiscal year '25?
Well, essentially, we have growth in the platform. We listed right in our MD&A. So this is a continuous initiative, right? You cannot in our business, have a repricing or adjusted pricing in the same fiscal year. So this will be over a couple of fiscal year, that we will see the pricing effect from contract expiring and also the full benefit from the one implemented this fiscal year. So this is where we stand. But the demand is strong, right? As Martin said earlier, the order book for the backlog, we see growth in both civil and defense.
And it's a combination -- margin improvement is a combination of several factors, Benoit.
Okay. That's great. And this week earlier, we saw a nice announcement with Boeing. They are going to invest here in Quebec, but also in Longueuil and Heroux-Devtek will benefit as well. So could you talk about the positive implication? And what is your expectation in terms of the benefits with Boeing going forward?
Well, it's always a good news and a good opportunity for us to have leaders such as the largest OEM in the world to come here and express their desire to work with us in developing new landing gear technology. So it could be technology breakthrough, it could be new platforms, it could be everything. So it's always refreshing, it is always good opportunity when we have leaders in the aerospace industry that clearly expressed their desire to work with us. So we'll see where the future is going to lead us, Benoit, but we're enjoying strong relationship with many customers and Boeing is one of them.
Okay. And in terms of free cash flow, very good performance. Looking at your leverage, it went down. You haven't been active in terms of buyback in the quarter. Was there any reason why? And given your leverage ratio significantly improve, is M&A now back on the table?
So, you see, Benoit, as you said, free cash flow was -- a good free cash flow quarter. We need some stabilization in generation of free cash flow before going as aggressive as we have been in the past for the NCIB. So we just want to be prudent because it's still a challenging environment. And our strategy is paying off, but let us deleverage a little bit, and then we'll be back.
Your next question comes from Cameron Doerksen with National Bank Financial.
So I wanted to ask you about the bidding activity. I mean, you cited you're very active, especially on the defense side. Obviously, you're not going to go into specific things that you're bidding on here, but just wondering if there's business out there that you're bidding on now that would contribute to revenue growth over the next couple of years or is it more things that you're looking at that are kind of longer-term programs? Just any color there would be helpful.
It's both, its both depending of the system we're working on. It is both. But we're also working on that actively on long, longer platform. You know what's happening in the U.S., you know what's happening in Europe, you know what's happening in South Korea. So of course, there's not many landing gear people, electromechanical actuation and actuation and defense, specialized defense product, we have all that in our portfolio. So yes, all the business units are very active in defense progress right now.
Okay. And I just wonder if you can provide some, I guess, some sort of estimate around what you think the CapEx will be in fiscal 2025. And just thinking kind of longer term, I mean you've had a significant rebound here in the revenue above the pre-pandemic levels. How much more can you grow without having to, I guess, invest more in plant and equipment? I mean I guess the question is, where are you as far as capacity utilization?
It's always a difficult question to answer, but we do are forecasting over 5 years. But the things like I explained in the past calls, we're trying hard, the automation, reducing the machining hours is reducing the need of the CapEx. So we've started that initiative 2 years ago. And again, we always told you that -- it's between 4% to 5% of sales that you should really consider it, and we continue like that.
Cameron, we had mentioned in the previous quarter that pre-pandemic, right, we were growing at that time, and we have guidance in place at that time anywhere between $650 million and $680 million. This is where we were going at a time. But these were with 2020 pricing, right? So, inflation has come. And obviously, contracts are reflecting more and more the new pricing. So we have capacity ahead of us to continue to grow. And CapEx-wise, it's the same answer we're giving typically, right? It's around the 5% mark. So in terms of CapEx that we're spending annually typically. So that will continue to be our plan.
Your next question comes from Tim James with TD Cowen.
Great quarter. Just wondering, Stephane, could you comment on or provide any thoughts around sort of remaining working capital investments that are required for the balance of the year? How should we think about the need for cash to go into working capital -- sorry, for the balance -- for fiscal '25 at this point?
Yes, sure. So as you have seen, we are in a growth mode, right? Everything is pointing out in that direction. The order book, which is 40% higher than 2 years ago. We have inventory to support growth, especially our work-in-process position, we're very well positioned to start the year of fiscal 2025. So as this year is completing, I think we'll see more stabilization of our inventory over the year. So I think we pointed out at that time 18 months. I think it's going to be around that period in the next fiscal year. I think things will be stabilized in fiscal 2025. And essentially, the investment, as you see that we've done in inventory is in support of the growth we are entertaining in our business.
Okay. When you look at the opportunities, the bidding that you're doing, the opportunities that you see ahead, whether it's over the next couple of years with a very, very long-term opportunities. Are those -- can those be achieved? If you have success on those, can those be achieved and delivered while keeping CapEx in that kind of 5% plus or minus range? Or could there be opportunities where you have a CapEx commitment that more closely resembles going back to -- say, the 777 investment that you made many years ago, I believe that was a bit unique and one-off. Could you just talk about what CapEx might be required if you are successful in winning some significant work packages?
Yes. So to give you the perspective, Tim, it's -- we've been introducing many platforms over the years. If you look at where we were in 2008 and where we are today, if you exclude the 777, each CapEx, it's easy to get in the program where you're at the beginning of our program. So your CapEx profile will go with well better match with our risk with the revenue. When you have -- obviously, when you have a 777, right, and you're at 0 and you need to produce capacity to get to 100 shipset a year. I haven't seen many landing gear company doing that in the industry. So those are big challenges, and we demonstrate that we could do it. So if we don't have things like that, the 777 CapEx profile, normally follows the revenue generation in a more steady year flow than what we had when we did the 777.
So, we have many platforms in, that we have embedded growth because of this reason that Martin explained, right, it's investment we've done in the past -- in the past years that production rates, right, are increasing. The 53Ks example, right, the investment we've done in our program, either Praetor 6x, 10x, right? These are all programs that will have increased rate or entry in service in the next couple of years, the KF-X is also another example.
and 225 -- and I can go on and on and on --
So, to your question, I mean, those platforms, right, will enter into service or grow in rate in the next couple of years, which will accelerate our growth.
Yes. I'm thinking primarily as you've addressed, Martin, sort of future opportunities that you might win as opposed to those new ones that you've got that are ramping up? And just if there's any way any of them could sort of require CapEx measured in the tens of millions --
And other 777.
For a particular win, another 777.
Win another 777. it's again, it's that when you're entering in a new program, so your customer going from 1 to 5 to 10 shipset up and it takes 4 years, 5 years to get the rate, right? So, you're developing these platforms over and then you build up pre-capacity slowly, gradually, and you don't even see it, right, in the numbers. But if you have a big one where you're at 0, and you need to meet rate within a specific period of time, let's say, 2, 3, 4, 5 years. This is really where depending on the rate that will generate the CapEx above the 5% threshold guidance.
Yes. When you reflect back on 777 and the CapEx that was required for that, would you do anything differently? I mean, my view is you just -- you got caught the market took an unexpected turn shortly after that investment. But, and it's tough to fault you for that. But would the 777 experience and the timing of the CapEx or the amount, or the sort of terms of it, would you do anything different or again in the future if something similar were to come along?
Always, with experience, we can always improve, but to get that contract put us on the map, right?
Yes.
It propelled us to a leader in the -- in our field. So financially, like you said, 777, we built up capacity for 100 shipsets and now we went as little as 2 shipsets a year, right. But of course, we would have done something differently. We're less naive than we were in 2013, right, obviously. So I will not share that with you on the -- but of course, we have experience now. And that makes us better, and we grew through this experience. So -- and again, like I said, I want my shareholder to understand that is, that many team would have done what we've done.
Okay. That's how -- Yes. If I could just squeeze one more in, just turning back to this quarter, specifically the fourth quarter. Was or is there anything that surprised you internally or positively in the quarter or was this really all kind of running according to plan?
Of course, because we are always maneuvering. We're in a decentralized environment, right, there's always hiccups that we need to watch out. But this one, all the stars aligned properly. So yes, we were surprised about these things, but our plans supported that. It seems that the strategy and all the strategy working with the suppliers, inventory, specifically stabilizing the production system, et cetera, et cetera, drove those results. But I'm not saying that we aren't going to have bumps in the road yet. We always need to be cautious because it's still a difficult environment. It's still production. The orders are there, but it's a challenging and that's why I thank the customers, the suppliers and the employees because it's really a team effort to overcome all of these challenges.
Our business unit performed to the plan, Tim. So just at the end, the level of contingency, right? By managing the other and then, right? It looks like these are stabilizing a bit, but inventory investment that we did is paying up as well.
[Operator Instructions] There are no further questions at this time. I will now turn the call back to Martin for closing remarks.
Yes. Thank you, so well, and I could not excuse myself before closing the call to not thank our shareholders for their continued trust and confidence in our company, in our team and in our business. So thanks again for your interest level and interest and continued support in us. Thank you, and have a good day.
Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.