Heroux Devtek Inc
TSX:HRX
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.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
14.75
32.17
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Heroux Devtek Inc
You don't have any saved screeners yet
Good morning. My name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to Héroux-Devtek's Fiscal 2024 First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [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 the press release available on the company's website for complete forward-looking statement.
I would now like to remind everyone that this conference call is being recorded today Tuesday, August 8th, 2023 at 11:00 A.M. Eastern Time.
I will now turn the conference over to Mr. Martin Brassard, President and Chief Executive Officer; and to Stéphane Arsenault, Vice President and Chief Financial Officer of Héroux-Devtek. Mr. Brassard, please go ahead.
Thank you very much Sylvie and good morning everyone. Welcome to our first quarter earnings conference call for fiscal 2024. I invite you to follow along by referring to the financial statements, MD&A, and press release, which can be found in the Investors section of our website.
We are pleased to report a strong start to fiscal year 2024 achieving first quarter sales of $141 million, up 23% versus last year. This performance is the direct result of the improvements we put in place to address the challenges of the current production environment and bring our trailing 12-month sales to $570 million.
We remain committed to maintaining this positive momentum that, along with our continued efforts and key initiatives, will allow us to return to historical levels of profitability in the coming quarters.
The aerospace demand environment is exceptionally strong and breathing with major aircraft manufacturers such as Boeing and Airbus reporting record backlogs. This surge in demand is a result of air travel rebounding nearly to pre-pandemic 2019 levels, reflecting the strong recovery of the industry.
Furthermore, the defense sector has also experienced significant growth, driven by increasing branches from the US and several nasal countries. Our strong reputation customer relationship experience and proven engineering know-how position us uniquely to capitalize on these opportunities.
At this time, I would like to turn it to Stéphane for a detailed review of our first quarter performance.
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 at that time and reconciled in the MD&A issued earlier today.
Our consolidated sales in Q1 increased by 23.2% to $140.7 million compared to $114.1 million last year. This improvement can be attributed to our ongoing effort to enhance our throughput.
Gross profit increased to $20.1 million or 14.3% of sales from $12.5 million or 11% of sales last year. This increase was largely the result of increased throughput, but was partly offset by the effect of inflation on labor costs and general production supplies.
Operating income increased to $7.5 million or 5.3% of sales from $2.6 million or 2.3% of sales last year due to higher throughput, partly offset by higher selling and administrative costs, resulting from higher employee-related costs, as well as the $1 million negative impact of exchange rate fluctuation representing 0.7% of sales.
Adjusted EBITDA reached $16.4 million, up 43.2% from 11.4 million year-over-year for the same reasons. Net income for the first quarter of fiscal 2024 stood at $4 million or $0.12 per diluted share from $1 million or $0.03 per diluted share in the corresponding period last year.
Cash flow related to operating activities stood at the usage of $12.2 million in the first quarter, down from a generation of $12 million last year, reflecting $25.8 million invested in inventory this quarter.
As of June 30th, 2023, our net debt stood at $187.5 million, showing an increase compared to $165 million at March 31st, 2023. This increase was primarily due to the cash flow usage described earlier.
However, this quarter improved profitability partially offset the impact of the increased net debt on the net debt to adjusted EBITDA ratio. Consequently, that ratio stand at 2.8 times, up from 2.7 times reported as of March 31 2023.
Back to you Martin.
Thank you, Stéphane. As you can see, our fiscal year has kicked off to a good start with the strong throughput in the first quarter, as a result of our efforts to stabilize our production system. Things are looking up from a staffing standpoint, while we were able to maintain 99% of our position filled last year, employee retention was an issue. I'm glad to say that our workforce has somewhat stabilized, as indicated by a 30% improvement in our turnover rate compared to last year from 13% to 9%.
Our investment in inventory is helping us to mitigate global supply chain issues, leading to an improvement in our throughput. While there is still work to be done to return to a higher level of profitability, our efforts have begun to bear fruit and the impact would be felt gradually over the next several quarters. We are well positioned for upcoming opportunities in both, the civil and defense market segment.
While our order book is already healthy, our customers have many projects and we will continue to support them as they pursue their growth. In the near term, we remain focused on three priorities, restoring supply chain health, optimizing production processes and reviewing pricing structure with customers and suppliers. We extend our hard sale gratitude to our employees for their unwavering support. We will continue to strive for excellence, capitalize on opportunities, and achieve sustainable growth.
Sylvie, we are now ready to answer questions.
Thank you. [Operator Instructions] And your first question will be from Cameron Doerksen at National Bank. Please go ahead.
Yes, good morning. Thanks, very much.
Good morning.
So question on inventory. Obviously, you've been investing a lot there over the last year to really stabilize the production system. We saw another big investment in the first quarter. Maybe you can just talk about, where inventory goes from here. When do you think we would start to see kind of a wind down in that inventory investment?
Well, first Cameron is our backlog is healthy. We have increased the backlog since March 31. So we're in a growing mode. We will stabilize our inventory. We are focused on stabilizing the inventory, mainly on purchase part, because raw material is a key to keep our manufacturing or machining plant busy. And so we are stabilizing the inventory as we speak. Stéphane, anything to complement there?
I think this allows us in the past year right, to increase the throughput and we want to maintain that. It's still a challenging environment, but we'll see eventually as the stabilized and the throughput increased then we'll adjust the inventory accordingly.
Okay. Maybe just for my second question, maybe you can talk a little bit about, what progress you're making on repricing some of the contracts to offset the inflation. Are you having some success there?
We have -- like I said, we have constructive discussions with customers. Yes, we have good results. We're working with our customers in full transparent matters and we see collaboration from customers.
Okay. That’s great. I’ll pass it along. Thanks very much.
Thank you.
Thank you. Next question will be from Konark Gupta at Scotiabank. Please go ahead.
Thanks, operator. Good morning, gents. I just wanted to understand the margin progression a little bit. Obviously, you guys are still kind of looking at some upside or rebound in margins, right from where you were, maybe a few years ago 15% plus call it. So, the three pillars that you mentioned Martin, the production processes, supply chain health and pricing, which of the three buckets you think are most important to get back to 15%.
They're all important, Cameron -- Konark. They're all important. So, we faced a lot of inflation. So we need to look at the expenses, mainly in the shop supplies energy cost is going down now in Europe. Transportation is somewhat going down to with the stabilization of the production system that would help also to reduce the cost into our manufacturing processes increase efficiencies and also the pricing structure revision with our supply chain and customers. So, I would not name -- so we're working on the three fronts. They're all important to us to get back to the historical level of profitability.
Okay. That's a great answer. Thank you. And then the supply chain aspects like Airbus and Boeing, they both came out recently and they kind of maybe affirmed most of their production rate goals for the medium-term and the long-term, which means that they are asking the supply chains to increase production rate, as we thought before.
Does that make things continuously difficult for you guys given there will be a constant pressure on supply chain for many more years, or do you think the supply chain is kind of creating capacity to absorb that increase in production rate, so that there's no more supply chain disruptions. Like is the supply chain getting better? Is it getting worse? It's steady for the next few years?
The rebound is a challenge that we're all facing, right. The demand rebounded sharply since last year. So, of course, right now, the demand is higher than the capacity. So we will adapt. So, the supply chain will adapt. So raw material is one of our concerns in the industry throughout the industry. And it's all -- and there's another comment denominator is the scale labor workforce.
So there was a lot of people that has restructured. Now we need especially the raw material that we need to get back this capacity build up. So -- but the industry will adapt. I'm confident that we will all at that.
So, we saw somewhat in the quarter some stabilization, but there's going to be some again bump in the road. So, right now, the industry is adapting, and skilled labor workforce and raw material are the main constraints to get up to full capacity.
Okay. That makes sense. Thanks. And last one for me before I turn it over. In the MD&A, there is some discussion about a new restricted share unit plan that was introduced during the quarter. Can you talk about what the plan is? And how does that impact the compensation structure?
Well, the RSUs are in view of a stock option. So, there is no more stock options. So, it's going to be the RSU to replace the stock option-based compensation.
I see. Okay. Thanks for the answers.
Thank you.
The next question will be from Benoit Poirier at Desjardins Bank. Please go ahead.
Yes. Thank you very much. Good morning everyone. Just with respect to your backlog, it remains at a healthy level. Could you provide maybe more granularity around your backlog? You been disclosing that amount every quarter? And also if you could provide more color about the bidding pipeline, especially after your visit at the Paris Air Show?
Great question, Benoit. Good morning. So the backlog increased compared to March. We don't disclose for a year or two now the quarterly impact on because of the timing of the orders. So, I think, we wanted to give you some color about the attendance, or where the backlog could be growing. So it grew. It grew. It grew.
Second is after our show at Le Bourget, this is the busiest show that we have attended since 2005 my personnel. We were booked -- fully booked all to one, from eight in the morning to 11 at night, customers are great opportunities. So, many growth experience. And again, like I said in my remarks, we are well positioned to benefit from these opportunities.
In the defense and in the civil side, and the strength of improved tech is also the diversification of our revenue. We're not only in the civil and defense, but we are also present in all some sub-segment of the market. So, obviously there's a lot of interest from the OEMs to do business with us.
Okay. That's great color, Martin. And on the recent acquisition of Raytheon actuation business, Safran management stated that they are prepared to make small divestments if needed for antitrust reasons. I was curious whether you see some opportunities on the actuation side with Héroux following the comments made by the management.
Yes, Benoit. So we will continue to have our disciplined M&A strategy there. But you saw the multiples, right. So there is a lot -- the market is bullish about the aerospace and defense company. So we are looking at some acquisitions, but right now we have so many opportunities that is in front of us that we believe investing in our company will give a better return to the shareholders.
That's great. And last one for me. We saw that…
I'm sorry, Benoit. And Benoit, again, our focus -- we're very focused on our three main actions there that we need to get back to historical level of performance.
Okay. That's great color, Martin. And last one for me. Northrop Grumman announced that they won't be bidding on the NGAD fighter, so -- which seems to be adopt fit between Lockheed and Boeing. So given you have good relationships with both OEMs, is it fair to assume that this should be a positive that is for you at the end of the day, Martin?
Yes. We have relationships with all three OEMs. But if I'm not mistaken Benoit, Northrop had said that the Air Force and they're not bidding really well if I'm correct. They're interested into the navy gas. So right now that -- so that's a good potential project for us. And we're working well with all three of them meaning Northrop, Lockheed, and Boeing. So those are great opportunities that are ahead of us or ahead of the industry.
Thank you very much for the thought.
Yeah. Thank you.
Next question will be from Jonathan Lamers at Laurentian Bank Securities. Please go ahead.
Good morning.
Good morning, Jonathan.
Martin your comments on returning to historical levels of profitability seem to be increasingly confident. Is there any reason the adjusted EBITDA margin cannot get back to the pre-pandemic range of around 15% to 16% over the coming year?
No, there's no reason preventing us to get back there. As soon as we first stabilize our production system, we get our throughput between 140 to 160, stabilize the production system work more efficiently and reviewing the pricing structure, I see no reason why we cannot get back to this level.
And could you just update us on production initiatives that you've completed since the last quarter, and which ones are still in the pipeline? I know you have some investments in automation around deeper in and parts of the production line?
So, yes. So it's a journey to optimize and max and optimize our production our programs our methodology. So we did very good progress during the quarter. We have better hours further throughput coming from our machining side, less human intervention. So we continue that journey. And it going to be -- so it's a journey. It's a one, two, three years journey, it's a constant improvement but the ball is rolling.
Great. And I'm just curious there was a strong acceleration in revenue growth in Q1 in both the defense and the civil sales on an organic basis. Can you tell how much of that was from improving the production throughput and whether some of it was from stronger demand whether on the aftermarket side, or anything related to the step-up in customer delivery rates?
So right now the demand is there Jonathan. The demand is increasingly there. So why we have more throughput and we are between the -- north of the 140 is better execution. So we need to continue to better execution because like I said, it's not the problem of having the order. It's the problem of delivering them in an efficient manner.
I leave it there. Thanks for the comments.
Thank you, Jonathan.
Thank you.
[Operator Instructions] And your next question will be from Tim James at TD Cowen. Please go ahead.
Thank you. Good morning, everyone. My first question just looking at revenue in the quarter. I'm just wondering if given all the moving parts and the supply chain challenges et cetera, were there any deliveries or revenue that came through in the first quarter that was a catch-up from previous quarters that maybe couldn't get shipsets out the door because of supplier issues, or was this -- was the quarter and the revenue fairly representative of what the plan was for deliveries?
It is representative of the plan we have to answer your question. So it's a mixed bag. So catching up delivering order, I think overall it's really what we had as a plan for this quarter.
Okay. Thank you. Then I'm just wondering if there -- as you look at the world today, the demand that you're seeing, the supply chain challenges, you've had labor turnover slowdown, which is great. Do you think -- are there any cost saving initiatives that you think are required at this point, or is it really -- you've kind of -- you've got the footprint you need. You've got the labor force you need for the most part and it's just a matter of kind of executing on what's in front of you?
It's a matter of executing in front of us in a more efficient manner. So as soon as we stabilize the labor, we stabilize the supply chain, we'll get back to cost cutting, Tim. We'll get back to operate more and more efficiently. Because people and the resource will be used to really define to really chase these cost reduction and not change parts, right, to make the delivery.
Right. Could you comment at all on -- and forgive me on most of this earlier, but your CapEx plans for fiscal 2024. Is there any update there, or what do you expect to spend in terms of capital expenditures on both PP&E and intangibles?
On the fixed asset front, right, it remained about the same goal about 4% of our top line. So -- in reference to your question for the intangible is mainly on the development program that we have. So, we have the 10x, right, being develop and the cargo actuators and setback [ph], so these are the two main programs. So we have invested about $3 million, $3.5 million this quarter. So, it's really timing of the payment we received on different milestones with those customers. So, it will remain about the magnitude that we had in the first quarter.
Okay. And then my last question, I guess going back to Ken's question earlier about inventories and you mentioned that you'll stabilize and the plan is to stabilize them here for the balance of the year. When we get through this period of supply chain challenges and uncertainty, is there an opportunity do you think for inventories relative to backlog or relative to revenue to go lower again, or do you think when conditions normalize, this level of inventories again adjusting for growth in the business is the right place to keep inventory?
Yes. Adjusting inventory product growth, we have so many projects terms, right, like I said in defense and civil program. Benoit a touch point on the India and then the collaborative combat aircraft program, all of these programs are very strategic for us and important for us. But, all being equal, for the same amount of revenue yes, the inventories would go down.
Thank you very much for your time. Thank you.
Thank you, Tim.
And at this time, Mr. Brassard, we have no further questions registered. Please proceed with closing remarks.
Thank you very much. Thank you everybody. We are very proud of our performance and we're committed to improve our company and make our company stronger. So thank you very much and have a great day.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.