Heico Corp Q1 FY2024 Earnings Call

Welcome to the HEICO Corporation First Quarter 2024 Financial Results Call. My name is Samara and I'll be today's operator. Certain statements in this conference call will constitute forward-looking statements which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements. Factors that could cause such differences include the severity, magnitude and duration of public health threats such as the COVID-19 pandemic, HEICO's liquidity and the amount and timing of cash generation; lower commercial air travels, airline fleet changes or airline purchasing decisions which could cause lower demand for our goods and services. Product specification costs and requirements which could cause an increase to our cost to complete contracts; governmental and regulatory demands, export policies and restrictions; reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new creditors which could reduce our sales. Our ability to introduce new products and services at profitable pricing levels which could reduce our sales or sales growth; product development or manufacturing difficulties which could increase our product development and manufacturing costs and delay sales; our ability to make acquisitions, including obtaining any applicable domestic and/or foreign governmental approvals and achieve operating synergies from acquired businesses; customer credit risk, interest, foreign currency exchange and income tax rates; and economic conditions, including the effects of inflation within and outside of the aviation, defense, space, medical, telecommunications and electronic industries which could negatively impact our costs and revenues. Parties listening to this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including but not limited to filings on Form 10-K, Form 10-Q and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by applicable law. Now, I'll turn the call over to Laurans Mendelson, HEICO's Chairman and Chief Executive Officer.

Thank you, Samara and welcome to everybody on this call. We thank you for joining us and we welcome you to the HEICO first quarter fiscal 2024 earnings announcement teleconference. I am Larry Mendelson and Chairman and CEO of HEICO Corporation. I am joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group, Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group; and Carlos Macau, our Executive Vice President and CFO. Before reviewing our operating results in detail, I would like to take a moment and thank all of HEICO's talented team members for delivering another very, very strong quarter. Your continued focus on exceeding customer expectations and operating at peak performance levels continued to fuel our excellent financial results. I personally have never been more optimistic about the future of HEICO. I would now like to summarize the highlights of our first quarter fiscal '24 record results. Consolidated operating income and net sales in the first quarter of fiscal '24 improved by 39% and 44%, respectively as compared to the first quarter of fiscal '23. These results reflect mainly a 12% organic net sales growth in Flight Support, commercial aerospace products and services as well as the impact from our profitable fiscal '23 and '24 acquisitions. Consolidated net income increased 23% to $114.7 million or $0.82 per diluted share in the first quarter of fiscal '24 and that was up from $93 million or $0.67 per diluted share in the first quarter of fiscal '23. Net income attributable to HEICO in the first quarter of fiscal '24 and '23 were both favorably impacted by a discrete income tax benefit from stock option exercises. The benefit in the first quarter of fiscal '24, net of controlling interest, was $13.3 million and that was up from $6.1 million in the first quarter of fiscal '23. Consolidated EBITDA increased 43% to $224.4 million in the first quarter of fiscal '24 and that was up from $157.1 million in the first quarter of fiscal '23. I mean that is an enormous increase, if I say so myself. The Flight Support Group set an all-time quarterly net sales and operating income record in the first quarter of fiscal '24, improving 67% and 63%, respectively, over the first quarter of fiscal '23. The increases principally reflect the impact from our fiscal '23 acquisition of Wencor and 12% organic growth mainly attributable to increased demand within our aftermarket replacement parts and repair and overhaul parts and services. Our net debt-to-EBITDA was 2.79x as of January 31, '24 and that was down from 3.0x as of August 31, '23. When we acquired Wencor, our pro forma leverage ratio was slightly above 3x. And we had projected pro forma leverage to be 2x within 12 to 18 months post-acquisition. At this time, I am pleased to report that we continue to remain on track to achieve this target. Cash flow provided by operating activities increased 46% to $111.7 million in the first quarter fiscal '24 and that was up from $76.7 million in the first quarter of fiscal '23. We continue to forecast strong cash flow from operations for fiscal '24. In January '24, we paid our regular semi-annual cash dividend of $0.10 per share and this represented our 91st consecutive semi-annual cash dividend since 1979. In January '24, we were honored to announce that I received the Kenn Ricci Lifetime Aviation Entrepreneur Award from the Living Legends of the Aviation Organization. The Living Legends of Aviation recognition is given to remarkable people of extraordinary accomplishment in aviation, including entrepreneurs, innovators, industry leaders, astronauts, record breakers, pilots who become celebrities and celebrities who have become pilots. I was profoundly humbled and honored that this storied and a unique organization would include me with such aviation and space pioneers for this special honor. However, in my opinion, the honor really belongs to HEICO's 10,000-plus team members who are the ones that make HEICO the great company that it is. Now let me discuss our recent acquisition activity. In December '23, we entered into an exclusive license and acquired certain assets for the capability to support Boeing 737NG/777 cockpit display and legacy display products line from Honeywell International. We do expect the exclusive license and asset acquisition to be accretive to our earnings in the year following closing. The acquisition broadens our avionics capability and it's another example of ways that HEICO has grown into adjacent markets to increase our overall value proposition to customers and the industry.

The Flight Support Group's net sales increased 67% to a record $618.7 million in the first quarter of fiscal '24, up from $371.3 million in the first quarter of fiscal '23. The net sales increase in the first quarter of fiscal '24 reflects the impact from our profitable fiscal '23 acquisition of Wencor which continues to perform above our expectations as well as strong 12% organic growth. The organic net sales growth mainly reflects high teens organic net sales growth from both our aftermarket replacement parts and repair and overhaul parts and services product lines. The Flight Support Group's operating income increased 63% to a record $136 million in the first quarter of fiscal '24, up from $83.6 million in the first quarter of fiscal '23. The operating income increase in the first quarter of fiscal '24 principally reflects the pre-mentioned net sales growth, partially offset by higher, as expected, intangible asset amortization expenses due to the Wencor acquisition well as increased inventory obsolescence expense. The Flight Support Group's operating margin was 22% in the first quarter of fiscal '24 as compared to 22.5% in the first quarter of fiscal '23. The Flight Support Group's operating margin before intangible amortization expense was 24.8% in the first quarter of fiscal '24 versus 24.3% in the first quarter of fiscal '23. The small decrease in operating margin principally reflects a slightly lower gross profit margin in the previously mentioned higher expected intangible asset amortization expense due to the Wencor acquisition partially offset by lower performance-based compensation expense. Now, I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the first quarter results of the Electronic Technologies Group.

Thank you, Eric. The Electronic Technologies Group's operating income was $55.3 million in the first quarter of fiscal '24. The Electronic Technologies Group's net sales increased 12% to $285.9 million in the first quarter of fiscal '24 up from $255.1 million in the first quarter of fiscal '23. The net sales increase is mainly attributable to the impact from our fiscal '23 acquisitions and a double-digit increase in organic net sales of our aerospace products, partially offset by lower organic net sales of our other electronics, medical and space products. We continue to forecast strong net sales and earnings growth for the remainder of fiscal '24. The Electronic Technologies Group's operating income was $55.3 million in the first quarter of fiscal '24 as compared to $56.5 million in the first quarter of fiscal '23. We expect higher net sales and profit margins in the quarters ahead and over the long term. This is due to our shipment schedule supported by our near-record backlog, combined with the revenues we expect because of our new product research and development activities. The slight operating income decrease principally resulted from our subsidiary shipment schedules of our record backlogs with fewer shipments in the first quarter than scheduled in future quarters, something that was scheduled prior to the quarter start and is in line with our internal plan. For those familiar with our last earnings call and our public interaction since then, you will remember that we said to expect high results variability quarter to quarter this year with the first quarter being our weakest quarter. So this preceded just as expected. Naturally, the less favorable product sales mix resulted in lower SG&A efficiencies. Also, recognizing our large record backlogs and our forward growth potential, we increased new product research and development investment which increased expenses in the quarter so that we can gain revenue in future quarters. As I sit here today, I'm very pleased that we made those investments and that we continue to fully fund these activities which provide the important forward growth.

Thank you, Victor. I think it should be clear to everyone on this call that Victor and we are expecting a quite different result from ETG from the second quarter through the end of the year. And in the first quarter, some people, I think, misunderstood and they said, 'Oh, ETG is not doing well.' And I think Victor explained it very well. So you understand that it is a lumpy business and the sales and earnings should come through from the second to the fourth quarter. As we look ahead to the remainder of fiscal '24, we continue to anticipate net sales growth in both the Flight Support and ETG principally driven by contributions from our fiscal '23 and '24 acquisitions as well as demand for the majority of our products. Notably, we fully expect future ETG quarters to be materially stronger than the first quarter. In addition, we plan to continue our commitment to developing new products and services with further market penetration as well as maintaining our financial strength and our flexibility. In closing, I would again like to thank our incredible team members for their continued support and commitment to HEICO. Our strategy of growing a highly diversified portfolio of excellent businesses continues to produce favorable results for all shareholders. Our end markets are very healthy and fiscal '24 is looking to be another great year. Thank you for your continued confidence. And as I said before, I have never been more bullish about HEICO's future. One other comment. We do not now give any guidance. Some analysts have asked us to give guidance. We prefer not to. However, I have said publicly that our goal is to grow net income 15% to 20% annually compounded. Over the last 30 to 33 years, I think we have done that and the actual growth has been somewhere around 18% or 19%. I can tell you that based on everything that I know at this moment and based upon our expectations for the future of this year. I clearly am highly confident that we will attain that 15% to 20% growth in the current year and that without any future acquisitions which we might make.

This is Scott Mikus on for Rob Spingarn. Eric, I wanted to ask you some of the U.S. airlines, they've readjusted their capacity growth plans for the year. Some of that's due to aircraft delivery delays or the GTF issues but some of it's just are concerns related to the U.S. domestic market being over-capacitated. So are you seeing any change in order patterns from customers where maybe the low-cost carriers are slowing down their orders but the large network carriers, like United and Delta are accelerating their orders?

Thank you for your question, Scott. In terms of the market, it remains exceptionally strong overall. The large commercial carriers are particularly robust, although there has been some slight weakness among the lower-cost carriers. However, this isn't very significant at this moment. There can be natural fluctuations in order patterns, so I don't want to make any predictions about potential weakness. Currently, there is still a shortage of parts, and airlines are actively looking to grow their inventory. Overall, we see the market as very strong.

Okay. Got it. And then I wanted to ask, you've owned Wencor for about a little more than half a year. So I was just wondering if you could share some of the best practices that Wencor has learned from HEICO? And what are some of the best practices that HEICO has learned from Wencor so far?

The Wencor acquisition has surpassed expectations across all areas, including the business, personnel, and strategy, demonstrating remarkable strength. We had high hopes for it, and it has exceeded those projections. In terms of best practices, HEICO excels in the technical field, and Wencor is also strong there. However, Wencor has gained advantages from us, while HEICO has also benefited from Wencor in some aspects, particularly in e-commerce. We are seeing ongoing synergies without the need for integration. Our intention is to keep Wencor operating independently for the foreseeable future, which is integral to our approach at HEICO. We want Wencor to maintain its own profit and loss structure, strategy, and team, as HEICO thrives when each business unit is self-sufficient yet coordinates with others. The collaboration between HEICO and Wencor is similar to the partnerships seen among various European airline groups, such as Lufthansa and Swiss or Air France and KLM. These groups retain their independence while managing some activities collaboratively to enhance their product offerings. Wencor will remain an autonomous entity with no plans to alter that. We're ensuring that we deliver significant value to our customers, particularly by avoiding overlapping product development and streamlining repair offerings through specialized centers of excellence. Our customers are pleased with the acquisition and are enthusiastic about our future, indicating they are eager to reward us with considerable new business. They perceive HEICO in a much more favorable light due to the Wencor merger.

Last quarter, you had talked about the ETG margin for the full year being around 24%, that segment operating margin. Does that stand such that you'd have one or two quarters above that? And I know you don't give quarterly guidance but given the variability here, I don't know if it makes sense to just speak to the shape of that over the remaining three quarters of the year?

Sure. Noah, this is Victor. The answer to your question is yes. And as to the shape of it over the remaining quarters, I think that the year should build. I'm not sure yet that the fourth quarter is a little far out, whether the fourth quarter finishes above or a little less than the third quarter and the third is our high point or fourth is our high point, not sure about that. But at this point and based on the shipment schedules, that's how we think it will play out.

Okay. And Eric, on the FSG margin, the full year look was around 21% on the GAAP segment operating margin. And I think you guys had also said you expected the first quarter to be the low point of the year. So I don't know, maybe you could update us on how you see that playing out through the rest of the year or if there's a new number for the full year, given what you did in the first quarter?

Well, the first quarter was very strong at 22%. And when you add back the amortization, we get to about 24.8%, so extremely strong. We anticipate continued strength. I think I want to be a little bit conservative going forward. We often go ahead and we come out with our budgets and our numbers and our folks end up beating those numbers. But maybe Carlos wants to shed some light specifically on that.

Noah, it's Carlos. I don't think my view on the segment has changed. Can you hear me okay? I was going to say that I still believe the segment should produce between 21% and 22% operating income margin this year. That's what I anticipated back in December when I addressed the margin question. We could always exceed that, but that's what we planned. We also planned to have a strong first quarter in the segment, and I think that expectation still stands. However, as we approach the second quarter and the next call, I will try to provide a more precise range for you.

I appreciate that. One other thing I wanted to ask, which might be for everyone, is that you find yourselves in a unique position regarding PMA and pricing in the aftermarket, which is possibly more distinctive than we've seen in a long time. Your peers who produce and sell spare parts have enjoyed strong pricing for over two years now. We don't have exact details on how you price PMA, but presumably, that gap has increased, perhaps significantly. This gives you the opportunity to set higher prices or capture more market share than you typically would, or both. I’m interested to hear how you plan to strategically navigate these options and how you intend to balance them in the medium term.

Noah, that's a great and insightful question. The short answer is we need to do both. We need to adjust pricing to reflect our increased costs, and we also need to grow market share. That is the strategy. We have a number of customers who have been purchasing parts at fairly old prices before there was cost inflation, so we need to make sure we pass along our cost increases. I believe our customers are very understanding of that. Some customers recognize the need for new pricing and adapt immediately, while others prefer to discuss it further. Although we don't disclose our costs, we explain the situation regarding our cost increases, which seems reasonable. I think our pricing has been quite conservative compared to what it could be. Our competitors are raising prices significantly; for instance, one well-known OEM raised prices twice last year by 10% and then 18%. This isn't the case for TransDigm. This illustrates how widespread the price increases are, and I feel we've maintained a milder approach. Given the rising costs and the necessity to invest more in new product development, it would be reasonable to implement additional price increases. I believe we can capture market share while doing this, as the two objectives are not mutually exclusive. When talking to the airlines, it's clear that no one wants price increases, but they all acknowledge that HEICO has been very cautious with price adjustments. In fact, in areas where we've been more restrained on price increases, we expect to see significant share gains as well.

Eric, did Boeing's challenges in January have any impact on FSG Specialty Products growth in the quarter?

Yes, I would say they did. Boeing faced some challenges which led to impairments in the new bill, impacting specialty products. It's worth mentioning that while specialty product sales were somewhat soft, the reported organic growth rate appeared understated due to the high teens growth rate in the aftermarket. We're optimistic about the future, particularly since a significant portion of specialty products is defense-related. Many missile defense and space programs, along with rocket motor programs, have long lead times, so our order book is extremely strong. We remain very bullish about the future. We believe we are well-positioned with favorable long-term trends, being a low-cost, high-quality, sole-source producer for most of our offerings, and we expect good growth moving forward. I'm not concerned about the decline in specialty products, and I believe Boeing will ultimately resolve their issues. They face challenges that have been widely reported, but they are still a strong company, and I am confident they will navigate through it, allowing our specialty products to grow at more historical rates.

Okay. So it would be fair to think that maybe some of that Boeing-related weakness is probably lingered in the February but the growth in the space and defense side allows you to return to growth overall in specialty products next quarter?

I need to look at specifically with regard to next quarter but what you're saying sounds logical.

It was quite widespread. There were areas where we invested more than before. Overall, it was a good scenario because I prefer to see all of our companies increasing their investment in R&D. R&D was up by about 25% in the quarter, which was a significant increase for us.

Okay. And then last question. Victor, were there any changes in your F-35 content with the shift to TR3?

I don't think it's material to us. We do have in a fuel business as F-35 content. But overall, it's not a material change.

Okay, got it. And just switching gears to question, Victor. Just on the quarter and the outlook, it sounds like aerospace had some good follow-through and it was a little slow last year, at least on deliveries but that just sounds like that's continuing to return to growth mode. Just in terms of the other categories, I know it sounds like you mentioned a few there was just slower due time in electronic medical consumer space and those sound like they're all higher margin categories. I think on the last call, you guys had mentioned that there would be some of those, I think maybe the electronics piece would be slower. Is that still the case? Has anything changed in terms of your sort of full year outlook for ETG in terms of revenue composition and growth?

So overall, for the year right now, our expectations are largely in line with what they were during our last call. The general markets gave up ground in the quarter as we anticipated. We are starting to see some early signs of improvement in a few businesses, but we are still not operating at order levels higher than last year. As I mentioned before, I expect that in the next couple of quarters, orders will begin to reverse. I also believe that if we consider lead times with our backlog and orders, as we progress later in the year, we should start to see a positive shift in revenue.

Yes, I mean, right now, if everything plays out, I'm expecting our interest expense quarterly to run between $35 million and $37 million. We booked about $38 million this quarter. As we pay down some debt and if we get some relief from potential rate cuts, I anticipate a decrease. This depends on how quickly I can reduce the debt, which will be influenced by the number of businesses Eric, Victor, and Larry want to acquire throughout the year.

Just to further expand on what Victor said, it's completely correct. It's a balancing act. We are in the business of expanding, creating cash flow and bottom line income. And if we see an outstanding acquisition, we will make it. At the same time, we have to watch our debt level and we're trying to reduce it. So as you saw, we made a Honeywell acquisition recently because we believe it will be very accretive and very positive cash flow. So we made the decision to acquire it by using debt which reduced our ability to reduce our debt overall. But on the bottom line, it was helpful to HEICO and actually where you get more income and debt. So the balance actually benefits the ratio of debt to EBITDA. But anyway, this is all a balancing act and we watch it very, very carefully because, as you know, we are focused on bottom line cash flow. So we will make these acquisitions when they are very, very desirable and we might have to use some debt but we'll take each one as it comes. We are here to grow HEICO bottom line cash flow. Again, it's a balancing act and we're very careful with it.

Victor, I'm going to start with you if it's okay, given the ETG margins spotlight. You gave us some color on R&D up 20%, so it implies about 100 basis points of margin pressure. Can you maybe talk about the less favorable sales mix, how much it was maybe even pricing into the mix as well just on the bridge and how we think about that improvement, as you said, Q3 and Q4 are headed to be better and should we expect a similar sub-20% rate in Q2?

Sure. Sheila, there are a couple of points to address. First, I would be surprised to see a sub-20% rate in Q2. Secondly, the difference in sales was not due to pricing but rather the shipment schedule. I would describe the pricing environment as fairly normal, where in some cases customers accept prices that may acknowledge our higher costs, while in other situations we have longer-term contracts where pricing is less favorable. It’s a typical scenario on the pricing side. Regarding revenue, it primarily revolved around the shipment schedule and when items were slated to ship. This does not necessarily relate to our production rate. We aim to maintain level loading in our facilities and production. However, it largely depends on when the order is scheduled for delivery or customer acceptance and testing, which influences our operations. To reiterate, I would expect our GAAP operating margin to be above 20% for the quarter, and the true margin, excluding intangibles amortization, should exceed 24%.

That is one way to think about it. I'm also considering how the product sets are very complementary. Without going into specific customers, I can say there are several strong sales relationships on both the Wencor side and the HEICO side. I believe we can support each other by sharing these relationships and essentially helping one another. Historically, we've significantly improved our margins over the last decade, exceeding even my expectations, and I see more potential in that area. There is ample sharing that can take place on the repair side regarding DER repairs, and they are already utilizing the PMA parts, which is advantageous. In the defense sector, we are already collaborating effectively, as orders that previously went to third-party companies are now being placed internally, which is strong, and the same goes for our specialty manufacturing. Our specialty manufacturing group can produce a lot of products for our other businesses, including Wencor, and we are actively pursuing that. Overall, there is a broad level of cooperation, without integration. With talented individuals leading these businesses who have truly mastered their areas, providing them autonomy is a strong motivational factor. This is not something found in many companies. Across all of HEICO, we have about 100 business leaders, and for a company of our size to have 100 highly skilled individuals performing well and enjoying their work due to the way they are treated highlights the real synergy here. It won't come from making small cost cuts; while there is some opportunity for that, we plan to share booths at various trade shows like Paris and Farnborough, where HEICO and Wencor will exhibit together. In some other trade shows, they may operate separately. We encourage each business to have its own strategy and take responsibility for its results, which is why we are realizing these benefits.

First of all, congratulations, Larry, on the award. My first question is about R&D, specifically regarding ETG R&D. What are the main trends driving the increase in R&D? You mentioned a broad increase, but could you elaborate on the opportunities that are leading to this growth? Is it related to specific technology, market trends, or particular end markets? Please discuss that.

Sure, this is Victor. That's a great question. When I mention across the board, I'm referring to the majority of our businesses rather than every single one. Essentially, there is a significant opportunity for our businesses or newer and evolved products. This isn't necessarily about revolutionary changes or entirely new developments. In our case, it's more about evolutionary improvements on previous versions or iterations of products. We're observing a high demand among our customers for what you would consider to be next-generation products. This isn't solely technology-driven; it isn't akin to the introduction of something like Bluetooth years ago, which everyone adopted. Instead, it's more about responding to the specific needs of our customers.

So HEICO has done a number of licensing deals over the last decade. So we're very well experienced on doing those licensing deals. And in particular, when you look at the component repair footprint, HEICO has got 19 individual MRO businesses just within Flight Support. And then over in ETG, there are another number of them there as well. So we've been able to buy these licenses and basically take the technology and put it into a business that's already incredibly experienced in that market niche and really understands the technology. So when we buy a license, we're able then to go out to the customer with people who can hit the ground running in many cases, are already working with the customer on other items and it's really a seamless experience. So I think that there is plenty of opportunity for HEICO in this area to continue to grow in adjacent white spaces. I can tell you that our reception at the customers for the Honeywell product has been extremely strong. They've been very happy about that. They're used to our experience with regard to quality, turn time and price. So the reception has been very strong. So I think that it was a great move for both Honeywell as well as for HEICO as well as for our customers. There's just a net benefit increase to the industry here. So I think that there is additional opportunity for us.

Congratulations on the award. Many questions have been raised and addressed. I'm curious if you've noticed any differences in activity levels between the direct and indirect channels. Could you also discuss the variations by market, such as aftermarket and OE, and whether you're observing anything noticeably different, like restocking or destocking in the distributor channel?

Our distribution businesses are performing exceptionally well and continue to gain market share. They have appropriate inventories, and our customers are very satisfied with their services. Similarly, in the PMA and repair areas where we sell directly, the situation is quite similar with strong performance in both sectors. However, on the flight support side, product availability is challenging as our vendors are significantly behind schedule. Our results could improve further if they could address the overdue backlog, which affects both PMA and distribution. There have been some raw material issues due to sanctions, and labor challenges persist as mentioned by Victor. Overall, the supply chain remains tight with no excess capacity. We hope for normalization by the end of 2024, though I initially expected improvements by now. Unfortunately, our vendors are struggling, but we anticipate a better situation after November.

No. I think for the full year, I continue to think we'll run between 20% and 21%, Larry. I think the effective tax rate we have in the first quarter here is about what I expected. I thought we'd catch about half our effective rate for the year this quarter and then we make it up more normalized rate in Qs 2, 3 and 4 but no real surprises. It played out the way I thought it would slightly better than last year's benefit but still in line with history and what we've seen in the past.

Victor, maybe just a quick one on if you're still seeing lingering impacts from the supply chain and that's also a factor that's kind of impacting you on the top line.

Thanks for your question. We're not experiencing significant issues at this point. There has been notable improvement, although I can't confirm if everything has returned to normal since I'm unsure what the new normal will look like. I would say the supply chain is nearly where it was before. However, the labor market has been tough for some time and continues to be a challenge. I believe this affects us just as much, if not more, than the supply chain, particularly in terms of recruiting good, qualified personnel for our operations.

Could you provide an update on how your business is performing after nearly a year of ownership?

Yes, we're very happy we own it. It's doing essentially as we expected and a lot of good potential ahead. Also, they're looking at a number of acquisitions we've been able to bring to them, they bring up some. We'll see whether they transpire. But a lot of good things happening there and so far, so good.

And Carlos, you mentioned that the 21% to 22% Flight Support margins are about right, and I believe you previously indicated that the cycle would be in that range as well. I'm curious about your long-term confidence in potentially exceeding those margins, not just for fiscal '24 but beyond, especially since it seems like Wencor is performing well and there are some pricing opportunities, as you noted in response to Noah's question.

Highly confident. I mean I think if you look back over the last decade, just if you want to do a history lesson, go back from pre-COVID and just look back 10 years and you'll see a pattern of where the FSG continually ekes out 20, 30, 40 basis points a year. I mean, sometimes it's a little flatter. But if you look at that trend, I think we're returning to that. I think we're at a pretty high growth level right now. And at some point, we get back to what I'll call a normal business cycle and that's when you'll see our margin take those nice incremental jumps up. Until then, with our end markets being as hard as they are, the margin could fluctuate a little bit based on volumes, what we're selling. But I do think at some point when this hyper-growth scenario we're in softens and gets back to, I don't want to say business as usual but a more customary demand in the market, I would say that, that incremental eke out of growth north, small increments is what we would expect to see. By the way, as far as the 21% to 22% I mean I feel very confident that we're going to wind up in there. We always could do better. But for modeling and thinking about the business, that's why I keep your focus in that area.

The answer is that if an opportunity is truly exceptional and significantly improves our financial standing, and if the payback would bring us below a 3x ratio back to the 2x range, we might contemplate it. We are cautious about taking on debt, especially since interest rates are quite high. Making acquisitions under these current interest conditions is challenging. To exceed a 3x ratio, the acquisition would need to be extraordinarily compelling, and so far, I have not encountered anything that meets that criterion, making it highly unlikely. However, as we plan to decrease from just under 3x toward 2x, which we project will happen in 12 to 18 months following our debt incurrence, that could change if we find a very profitable acquisition that enhances cash flow and earnings per share, thus lowering the debt-to-EBITDA ratio through its generated earnings. We are very deliberate in our acquisition strategy; we do not make hasty decisions. Furthermore, as the Mendelson family and as stewards of our 401(k), we aim to protect our investments. We will remain cautious in assuming any additional debt to avoid financial issues. Our business enjoys strong cash flow and is growing well, so we will be prudent with our leverage. I'm not sure if that fully addresses your question. Well, I would like to again thank everyone on this call for their interest in HEICO. We are available; if you have other questions, you can contact Carlos, Eric, Victor, myself. And if you don't, we look forward to speaking to you on the second quarter earnings teleconference. That's the end of this teleconference. And again, thank you. Have a wonderful day.

And this concludes today's call. Thank you for your participation. You may now disconnect.