Loar Holdings Inc

NYSE:LOAR

Earnings Call Analysis

Loar Holdings Reports Strong Q3 Growth with Positive 2025 Outlook

In Q3 2024, Loar Holdings experienced a 16% revenue increase to $110 million, driven by a 25% surge in defense sales and 21% growth in commercial OEM sales. The commercial aftermarket rose 19%, spurred by robust air travel demand. For 2024, the company projects revenues of $390 million to $394 million and adjusted EBITDA of $141 million to $143 million, marking a 36% margin. Looking ahead to 2025, Loar anticipates net sales between $470 million and $480 million, with adjusted EBITDA rising to $176 million to $180 million and a margin of 37.5%.

Overview of Performance

In the third quarter of 2024, Loar Holdings reported record sales of $110 million, marking a 16% increase compared to the same period last year. This robust growth was attributed to strong performances across various sectors: defense sales rose by 25%, commercial OEM sales increased by 21%, and aftermarket sales surged by 19%. Notably, the company’s net organic sales for Q3 climbed 17% year-over-year, reflecting effective strategic initiatives and improved operational efficiencies.

Financial Highlights

The gross profit for Q3 2024 improved by 200 basis points, a result of executing strategic value drivers and benefiting from operating leverage despite some headwinds from moving manufacturing facilities. The company reported an increase in net income by $6 million from Q3 2023, reflecting higher operating income and a reduction in interest expense following debt repayment initiatives totaling $285 million from the IPO proceeds and a credit agreement refinancing.

Adjusted EBITDA and Margins

Adjusted EBITDA increased by $9 million compared to the prior year, reaching strong margins of 36.8%. The company anticipates adjusted EBITDA margins to rise to 37.5% in 2025, representing a 270 basis point improvement from 2022. However, in Q4 2024, margins are expected to slightly decelerate to about 36%, influenced by the product mix where commercial sales, which are typically higher margin, have been affected by some delays caused by OEM strikes.

2024 and 2025 Guidance

For full-year 2024, Loar Holdings is projecting total sales between $390 million and $394 million and adjusted EBITDA from $141 million to $143 million. They expect net income between $19 million and $20 million, translating into adjusted earnings per share in the range of $0.35 to $0.37. For 2025, initial guidance estimates net sales of $470 to $480 million and adjusted EBITDA between $176 million and $180 million, with a projected adjusted EBITDA margin of approximately 37.5%.

Market Assumptions and Expectations

The company expects its commercial OEM market to grow by high single digits, driven by strong demand despite operational challenges in the aerospace sector. The defense market is forecasted to expand by high double digits, backed by solid backlogs. The commercial aftermarket is anticipated to see growth in the mid- to high double digits, benefiting from increased air travel demand and robust booking trends.

Strategic Acquisitions and Operational Strength

Loar Holdings is committed to a disciplined approach to acquisitions, with expectations to complete one or two substantial acquisitions annually. The recent acquisition of Applied Avionics enhances its product offerings and reinforces its position in the aerospace and defense market. This strategy is expected to support continued growth and cross-selling opportunities within its diverse portfolio.

Cash Flow and Financial Health

The company maintains a strong outlook on cash flows, expecting that operating cash flow less capital expenditures will exceed 125% of net income for 2025, buoyed by an effective inventory management strategy and robust sales growth. Capital expenditures are projected at approximately $14 million, while interest expenses may rise to about $60 million due to recent borrowing for acquisitions.

Conclusion

In summary, Loar Holdings demonstrates a healthy growth trajectory, marked by strong sales in key segments, improving margins, and sound financial management. The proactive strategies in acquisitions, operational enhancements, and market positioning are likely to sustain this momentum into 2025 and beyond, making it a compelling consideration for investors looking for value in the aerospace and defense sector.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to the Loar Holdings Inc. Third Quarter 2024 Earnings Presentation. [Operator Instructions] 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.

[Ian McKillop, executive]

Thank you, Rob. Good morning, and welcome to the Loar Holdings 2024 Third Quarter Earnings Conference Call. Presenting on the call this morning are Loar's Chief Executive Officer and Executive Co-Chairman, Dirkson Charles; Executive Co-Chairman, Brett Milgrim; Treasurer and Chief Financial Officer, Glenn D'Alessandro; as was myself, Ian McKillop, the Director of Investor Relations.

Please visit our website at loargroup.com to obtain a supplemental slide deck and call replay information. Before we begin, we at Loar 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 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 GAAP measures and applicable reconciliations.

To begin today, I will now turn the call over to Dirkson.

[Dirkson Charles, executive]

Thanks, Ian. Good morning, everyone. Our partners, analysts and those of you who are on the call and hearing our story for the first time. I'm Dirkson Charles, Founder, CEO and Co-Chairman of Loar. 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 start by reminding you who we are. Loar 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 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 4 value streams. We identified 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 1 to 3 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 2 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 online 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.

[Brett Milgrim, executive]

Thanks, Dirkson. This is a chart everybody has 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, we are incredibly disciplined about is our approach to acquisitions.

As you see in these 6 or 7 different boxes right here. One thing I want to highlight, as we talked about our Applied Avionics acquisition that we did recently is that it checks all these boxes. First and foremost, it's in 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 strong relationships with customers, drive revenue and have outsized growth relative to the market.

[Ian McKillop, executive]

Yes. And as Brett mentioned, with the addition of Applied Avionics to the Loar family, we have further enhanced and diversified the proprietary nature of our product offering, Applied Avionics designs and manufactures Vivisun-ruggedized MIL-SPEC lighted pushbutton switches and indicators as well as the NEXSYS line of Avionics interface solutions, which integrate system-to-system functions like ARINC-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, deicing 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 Loar.

I will now pass the call over to Glenn.

[Glenn D'Alessandro, executive]

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 in 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 remained strong at 36.8% 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% 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 2 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%, net income, $19 million to $20 million; adjusted EPS, $0.35 per share to $0.37 per share.

Our '24 assumptions used in calculating the '24 revised forecast are as follows: capital expenditures, approximately $9 million, down from $11 million. Full 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 and amortization is $43 million. This is up from the previous forecast of $40 million as a result of higher depreciation and amortization for the -- from the purchase of Applied Avionics in Q3. Noncash stock-based compensation is approximately $11 million, up from $10 million, and our fully diluted shares are approximately $91 million.

Let me turn the call back over to Dirkson to share our '25 outlook.

[Dirkson Charles, executive]

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. I realize we have to, so we did.

So let's talk about our initial guidance for 2025 and I'll repeat that, the initial guidance. Now we know most of our colleagues in the public environment will wait until we 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 and whether that's a strike or supply chain challenges. We continue to drive increased aftermarket demand. So for our part.

So just given the geopolitical visibility in the world, we see and we expect, on a pro forma 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. 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 million to $480 million; adjusted EBITDA between $176 million and $180 million, while adjusted EBITDA margin will be approximately 37.5%, which I'd like to highlight is a 150 basis point improvement over 2024. Net income between $33 million 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 noncash 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 1 or 2 acquisitions each year, but we cannot predict the timing of such acquisition.

One last metric, which is not on the slide 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.

[Operator]

[Operator Instructions] I do have a question from the line of Jason Gursky with Citigroup.

[Jason Gursky, analyst]

Dirkson, 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. So I'm just kind of curious what you think the risks and opportunities are.

[Dirkson Charles, executive]

Thanks for the question, Jason. And yes, I could pick 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.

And 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 million to $134 million. It came back the next quarter, and we said $134 million to $136 million. 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 pro forma financials, you'll see the first 6 months, sales were $22 million. We told everyone for the year, it would be $40 million. So therefore, the second half of the year is $18 million. So we've owned it for 4 months which is about $12 million of revenues and the 50% EBITDA margins at $6 million. If you take $143 million minus $6 million you had $137 million, we have just guided higher than the 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 their 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'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 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 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.

[Jason Gursky, analyst]

Yes. 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 free 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?

[Glenn D'Alessandro, executive]

Sure, sure. Well, obviously, let's start with EBITDA right? We don't expect a significant use in working capital for 2025. And we expect 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 Dirkson said, we will be -- we should be above 125%.

[Operator]

[Operator Instructions] At this time, there are no further questions. I'd like to turn the floor back to Dirkson Charles for closing remarks.

[Dirkson Charles, executive]

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

[Operator]

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

[Dirkson Charles, executive]

And I guess, it's not that easy.

[Operator]

Our next question will be from Sheila Kahyaoglu with Jefferies.

[Sheila Kahyaoglu, analyst]

Sorry about that, guys. Yes, it might have been my mistake but congratulations on a good quarter in providing the '25 guide. 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 bps below that? And how much did Applied contribute?

[Dirkson Charles, executive]

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 pro forma basis. So -- but it's really Sheila, it's across all the platforms. It's actually one of the first things we look at. And there isn't a platform that wasn't up quarter-over-quarter, year-over-year because even quarter-over-quarter, we were up 16% in commercial aftermarket.

So first, its market share. It's new product introduction and it's just good performance, executing on a value driver. So that's what's driving it. We really feel good about it, which is going back to Jason's question about the 9% into 2025. We -- 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.

[Sheila Kahyaoglu, analyst]

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 commercial OEM aftermarket guided to grow high single digits and then military which is 15%, let's say, growing high teens. How do you think about that total mid-teens organic growth essentially that you have for '25? What are we missing?

[Dirkson Charles, executive]

What are you missing?

[Sheila Kahyaoglu, analyst]

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

[Dirkson Charles, executive]

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 pro forma basis, but we feel really good about it. So -- your math is right. Oh, by the way, the non-aviation is actually down year-over-year. So that could be a piece of the missing math for you.

[Sheila Kahyaoglu, analyst]

Yes, that makes sense. That makes sense. Okay. Great. And then maybe just 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-o-Q deceleration?

[Dirkson Charles, executive]

I hate using this word because I think it's a 4-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 happens with a lot. So we have factored some of that into how we think about the fourth quarter.

[Operator]

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

[Dirkson Charles, executive]

Okay. I was going to say it's going to be an easy call until Sheila dialed in. But no, 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.

[Operator]

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