Welcome to the HEICO Corporation Second Quarter 2024 Financial Results Call. My name is Samara, and I will be your operator for today's call. 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 duration, lower commercial air travel, 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 competitors, 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 electronics 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 statement whether as a result of new information, future events or otherwise, except to the extent required by applicable law. I now turn the call over to Laurans Mendelson, HEICO's Chairman and Chief Executive Officer.

Thank you very much, Samara, and good morning to everyone on the call. We thank you for joining us, and we welcome you to this HEICO second quarter fiscal '24 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation. And I'm joined here this morning by Eric Mendelson, HEICO's Co-President and the 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 to thank all of HEICO's talented team members for delivering another excellent quarter. Your focus on customers and operational excellence has provided record quarterly results for our shareholders, and I remain extremely optimistic about HEICO's future. I also want to thank everyone on the call, the HEICO team members and our customers and vendors who themselves or family members have served this great country. Some of whom made the ultimate sacrifice for our freedom. I hope you had these patriots in your thoughts on Memorial Day. HEICO is proud of the role we play in support of the armed forces of the United States and our allies. I will summarize the highlights of the second quarter fiscal '24 results. Consolidated operating income and net sales in the second quarter of fiscal '24 represent record results for HEICO, improving by 33% and 39%, respectively, as compared to the second quarter of fiscal '23. The results mainly reflect 21% organic net sales growth in the Flight Support aftermarket replacement parts and the impact from our profitable fiscal '23 and '24 acquisitions as well as improved results at ETG. Consolidated net income increased 17% to a record $123.1 million or $0.88 per diluted share in the second quarter of fiscal '24, and that was up from $105.1 million or $0.76 per diluted share in the second quarter of fiscal '23. Consolidated EBITDA increased 35% to $252.4 million in the second quarter of fiscal '24, and that was up from $187.2 million in the second quarter of fiscal '23. Our consolidated EBITDA margin was a very healthy 26.4% in the second quarter of fiscal '24. The Flight Support Group set all-time quarterly net sales and operating income records in the second quarter of fiscal '24, improving an enormous 65% and 49%, respectively, over the second quarter of fiscal '23. The increase principally reflects the impact from our profitable fiscal '23 and '24 acquisitions and strong 12% organic growth mainly attributable to increased demand for Flight Support Group aftermarket replacement parts and repair and overhaul parts services. Our net debt-to-EBITDA ratio was 2.45x as of April 30, '24, and that was down from 3.04x as of October 31, '23. We remain on track to lower our leverage to 2x within 12 to 18 months post the Wencor acquisition. Cash flow provided by operating activities increased 82% to $141.1 million in the second quarter of fiscal '24 and that was up from $77.8 million in the second quarter of fiscal '23. At this time, I would like to introduce Eric Mendelson, Co-President of HEICO and the President of HEICO's Flight Support Group, and he will discuss the second quarter results of the Flight Support Group.

Thank you very much. The Flight Support Group's net sales increased 65% to a record $647.2 million in the second quarter of fiscal '24, up from $392.2 million in the second quarter of fiscal '23. The net sales increase reflects the impact from our fiscal '23 and '24 acquisitions and strong 12% organic growth. The organic net sales growth mainly reflects 21% organic growth within our aftermarket replacement parts product line. Both the legacy hikes in Wencor operations continue to exceed our expectations, and the results prove that Wencor was an excellent investment for HEICO. Both HEICO's and Wencor's entrepreneurial culture and a record of producing high-quality products continue to produce wins in the marketplace. Our customers continue to find great value in our larger aftermarket product offerings for their aerospace parts and component repair and overhaul needs. Consistent with HEICO's time-tested and well-known operating philosophy, we continue to operate Wencor as a stand-alone business operation. However, we have made good progress working together and serving our customers. Some examples of how we are now working together include the utilization of all HEICO and Wencor PMAs and DERs at all repair stations, commercial and defense aftermarket sales cooperation where appropriate, Wencor e-commerce platform lists all HEICO noncompetitive PMAs. Wencor is utilizing HEICO's manufacturing base to quote new products, engineering and regulatory cooperation that we expect to yield tremendous benefits for our company and sharing best-in-class vendors. The Flight Support Group's operating income increased 49% to a record $148.9 million in the second quarter of fiscal '24, up from $99.9 million in the second quarter of fiscal '23. The operating income increase principally reflects the previously mentioned net sales growth, partially offset by higher than expected intangible asset amortization expense due to the Wencor acquisition, the prior year impact from the amendment and termination of a contingent consideration agreement, and increased inventory obsolescence expense. The Flight Support Group's operating margin was 23% in the second quarter of fiscal '24 as compared to 25.5% in the second quarter of fiscal '23. Given that acquisition-related intangibles amortization in the second quarter of 2024, consumed around 280 basis points of our operating margin. The FSG cash margin before that amortization, otherwise known as EBITDA, was around 25.8%, which is excellent in absolute terms, and we are extremely pleased with it. The decrease in operating income as a percentage of net sales principally reflects the prior year impact from the previously mentioned amendment and termination of a contingent consideration agreement and the previously mentioned higher intangible asset amortization expense, partially offset by lower performance-based compensation expense as a percentage of net sales. Now, I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the second quarter results of the Electronic Technologies Group.

Thank you, Eric. The Electronic Technologies Group's net sales increased 6% to $319.3 million in the second quarter of fiscal '24, up from $301.8 million in the second quarter of fiscal '23. The net sales increase is attributable to 4% organic growth, mainly reflecting double-digit organic net sales growth of defense and aerospace products, partially offset by lower organic net sales of other electronic products. We were very pleased to see this core ETG end market gained traction in the past quarter even sooner than we had previously expected. As we previously thought it would more likely be an early third quarter event when we would see that turn up. While we continue to expect quarterly variation in lumpiness in our defense net sales, we believe the overall trend over the long term will remain positive. The Electronic Technologies Group's operating income was $75.3 million in the second quarter of fiscal '24, up from $68 million in the second quarter of fiscal '23. The operating income increase principally reflects an improved gross profit margin and the previously mentioned net sales growth. The improved gross profit margin principally reflects increased net sales of defense products, partially offset by our expected decreased other electronics products net sales. The Electronic Technologies Group's operating margin improved to 23.6% in the second quarter of fiscal '24, up from 22.5% in the second quarter of fiscal '23. Given that acquisition-related intangibles amortization consumes around 400 basis points of our operating margin, the ETG cash margin before that amortization was around 27.5%, which is excellent in absolute terms, and we are very pleased with it. The operating margin increase principally reflects the previously mentioned gross profit margin and net sales growth, partially offset by lower SG&A efficiencies. Growth in net sales of defense and commercial aerospace product sales contributed to a favorable product mix during the second quarter, and we note that we finished the quarter with a record order backlog. I'll turn the call back over to Larry Mendelson.

Thank you, Victor. Now for the outlook. As we look ahead to the remainder of fiscal '24, we continue to anticipate net sales growth in both FSG 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 remain optimistic on the ETG's opportunity to expand and grow its net sales of defense-related products over the next six months of fiscal '24, and that is supported by a strong backlog. Additionally, we plan to continue our commitment to developing new products and services, and further market penetration while maintaining our financial strength and flexibility. In closing, I would like to thank our dedicated and loyal team members for their continued support and commitment to HEICO. Our dedication to customers, team members, and the production of high-quality, highly engineered niche products continues to be a winning strategy in the marketplace. The end markets we serve remain very healthy, and I'm highly optimistic about HEICO's future. Thanks for all you do to make HEICO a great company. And now, I would like to open the floor for questions.

And we'll take our first question from Robert Spingarn with Melius Research. Please go ahead.

Good morning, everybody. Congrats on another excellent quarter. I wanted to dig into the businesses a little bit. So, Victor, I would start with you, and then Eric, I have something for you as well. But Victor, you just talked about your margins and the mix improvement, and it sounds like the second half should be better, especially based on your prior comments. I think you said something like 24% for the full year. So that implies a step-up here in the second half. And is that a good number for next year? In other words, are we starting to move back toward the margins of a couple of years ago? Or does that depreciation keep us from getting there?

Rob, I'm going to dive in here because I've had a bunch of conversations with analysts about this topic, maybe a little confusion. The 24% that's been battered around is what we aspire the segment's margin to elevate to. I don't know that we'll get there for the full year being an average of 24%. My comments last quarter were that, yes, my comments last quarter that as the defense came back, that would be accretive to our margin, which we expected to come in the second half. And I thought sometime during this fiscal year, we posted a quarter at 24% plus, and that's kind of where we're at.

Okay, thank you for clarifying that. Victor, I have a little bit more qualitative one then for you. And thinking about your data microwave division, you've got Connect Tech there, which is one of NVIDIA's largest global hardware partners, and I want to see if you're seeing an acceleration in orders or RFPs there and other businesses within ETG to support all of this demand for data centers?

Yes, Rob, good question. Connect Tech definitely is seeing increased demand for data centers and on NVIDIA products. And I would expect that to continue. Now, while Connect Tech is not a huge part of our company, it's important and it's a great business. In terms of the other companies, I don't think we're seeing a lot related to data centers. It's not a material part of our business in ETG.

Okay. And then, Eric, just quickly, in your business, just outstanding organic aftermarket parts growth at 21%. And I asked you this question in the past, but is there any way to parse that in terms of, for lack of a better expression, sort of same-store parts growth, same customers, same parts versus pricing, versus market share gains? In other words, what's driving the 21%?

Rob, this is Eric. As you know, we have a very decentralized business. It would be challenging to gather those numbers from all the business units. I don't have a precise answer, but I can say we've seen some pricing adjustments. Our customers understand our need to test increases in manufacturing and operational costs to maintain our margins, which requires us to raise prices accordingly. They are aware of this, and it has been manageable. Some of the price increases are driven by cost increases. Regarding the overall breakdown, while I don't have specific figures, I would estimate that it's roughly balanced between increased penetration of existing products and sales of new products that weren't available last year. I have a clearer view for certain companies, which allows me to share this insight, but I want to emphasize that this isn't just about price increases. The 21% growth isn't solely because of a 21% price hike; in fact, I would estimate that the price impact is probably less than a third of that figure, likely even below a quarter. Most of the growth stems from volume increases.

Okay. And then just as a final sort of follow-up to that. We know that turnaround times for LEAP and GTF engines are significantly longer than they are for the prior gen CFM56 and V2500; and part of this is the lack of approved DRs and PMAs for LEAP GTF. So, knowing that these programs are early in their life cycle, I wanted to see if you've started to work on those and what kind of ramp we might expect for HEICO's activity or FSG's activity on these two new engine types?

So, Rob, that's a great question. And as you know, we're very sensitive about giving specific information due to competitive reasons, as you can imagine, on any particular platform. But I can tell you that we have our eyes on new platform opportunities. Yes, we're willing to develop some products based on speculation that we'll be able to sell it. But we really need to make sure that the customers will be there and commit to us. You pointed out in your question, the basis and the reason why we exist and why our customers want us to exist. And I agree with you. I think that if there were alternative sources of supply, the situation wouldn't be as dire as it is. But at the moment, I'm going to have to pass on really where we are at that point. But needless to say, we've got people focused on all parts of the market.

And we'll take our next question from Sheila Kahyaoglu with Jefferies. Please go ahead.

Great quarter. Thank you so much. Eric, just on your prepared remarks, you made a few comments about Wencor and how you're working together, and you're starting to see those results. I was wondering if you could quantify that in any way or how you're tracking that internally. Are you looking into a part sold into a certain customer and the increase as you combine the sales force? Maybe if you could elaborate there.

Got it. So, the answer is we don't specifically capture what those numbers are. It's very hard to capture. And what we're just trying to do is get the businesses to do what's in their interest and to do what's in their customers' interest and the combined HEICO interest. So unfortunately, I don't have a number, but I can tell you that just breaking down, looking at the various areas, the use of the Wencor PMAs, Wencor and HEICO PMAs and DERs at the repair station is very significant. We always said that the product selections from both companies were extremely complementary. There was not a lot of overlap. So, you can just imagine when overhauling an LRU by being able to purchase each other's PMAs, which, to a certain extent, was done pre-acquisition but by being able to use each other's DERs and being able to rationalize where we overhaul these products. We've got multiple repair stations that are obviously strong in certain areas and weaker in other areas, and they've been able to buy themselves and without me orchestrating this, they've been able to share technology and figure out where it makes sense to swap product line, swap technologies. And as a result, it's really hard to measure this stuff. So, we really don't even try. As far as the aftermarket sales cooperation, I'd say that's been excellent in terms of opening doors for each other. We've had meetings with airlines who are so excited that we have the potential of putting all of these increased number of products together and really provide a very, very unique service. And I can tell you, the airline support has been extraordinary. We thought that it would be good, but it is really off the charts outstanding. In terms of the defense aftermarket, we've already — that there are all sorts of examples where in the international market, we were procuring parts from other sources. Now, we're buying the legacy HEICO companies are buying it from the Wencor companies and vice versa. So that's working extremely well. Having the — we are able to see when we list the HEICO parts on the Wencor platform, we are able to see what that is, and that's been excellent and very good. In terms of manufacturing new products down the road, Wencor has a very aggressive new product development program and having all of the 10 HEICO manufacturing businesses open to manufacturing products makes a lot of sense, and I think it's really going to benefit future of course, that hasn't benefited yet. It benefited the numbers. In terms of engineering and regulatory cooperation, that's substantial; by pooling the talents of both businesses, we're able to get a lot more done. And I can tell you in discussions also with the FAA, they're very excited about that as well. And then obviously, sharing best-in-class vendors. So, I'm sorry that I can't give you a specific number, but I think you see it in our organic growth and in our margin expansion, which is frankly beyond where I thought we would be. And I'm just so happy with the results that I'm letting them speak for themselves.

No, I really appreciate that, Eric. And then maybe I wanted to ask another one on price. I know you said that top line contribution is about 1/3 or 1/4 of your growth. How do we think about that net price impact? And should we see that discount to the OEM narrow as it widened throughout the last four years? Do we see that narrow? And do we see the Wencor coming through in all your efforts coming through with new product development and higher net price even as inflation comes down? Does that make sense?

No, yes. I understand your question, and I can tell you that how the prices that we sell as a percentage of OEM, I would say, are unfortunately at an all-time low. So, the OEMs have raised prices faster than we have raised prices. We want to make sure that, as I said, we need to pass on — nobody wants a price increase. And while it appears easy, I must say that I understand, I know what it feels to walk in our sales to choose trying to get these price increases because even though costs are going up, nobody wants to take a price increase, especially when you're delivering so much value. So, while we have been successful in recapturing our increased costs and plus a little bit in some cases, at the percentage of OEM at which we sell our parts is, as I said, at an all-time low. And we're in the market capture space, and we think that we can continue to drive exceptional value for our customers by maintaining this philosophy.

And we'll take our next question from Scott Deuschle with Deutsche Bank. Please go ahead.

Carlos, can you give us an update on the operating margins you think FSG should be able to do this year? It looks like you're tracking a good bit higher than the 21% to 22% range you outlined previously?

The FSG is performing exceptionally well right now. And the caution I'll throw at you is, number one, obviously, we are a conservative bunch. And I'm not sure at this point once we get through this, what I'll call, exceptional growth period and the mix within the segment kind of flattens out or settles out. I'm still thinking that maybe it's towards the high end of '22 for sort of thinking out long term once we settle in. But I wouldn't — I don't want to guide or get you guys thinking about us having 23-plus percent margins. Now, I don't see impediments in front of us to continue to have these strong margins, but I do think that as the footprint settles down, we'll just see a natural tendency to — has the margin come down a little. And by the way, the reason for that is during the quarter, we had exceptional growth in our aftermarket parts business. Repair and overhaul were strong, not as strong as a parts business. And Specialty Products is a little flat on the commercial OEM product build side. So, I think as those segments, their growth patterns get back to normal, we might see a slight depression of that 23%, but not a ton. Does that answer your question, Sir?

Yes, it does. You achieved 22.5% in the first half, and typically the second half is stronger. I'm trying to understand what causes the decline in the second half compared to the first half. It seems like that's what you're indicating.

At some point, it's got me miss I'm not so sure that we are going to lose momentum in what I'll call exceptional growth this year. So, we probably will have margins that bounce around. But I can't predict the exceptionalism of our team members. I mean, the operations and the way they're running the business now to keep up with the demand that's out there to deal with this growth and employees and everything. They're just doing an exceptional job. So, I hope this margin would continue. I'm just cautioning you that my view is once the mix settles in, we're running 21 to 22, we're going to be very happy as a management team.

And Scott, this is Eric. Scott, this is Eric. And I can tell you, this is a shout-out to our many team members who I think are on this call. But HEICO has got the biggest bunch of sandbaggers that you've ever — that I've ever seen. And one, they're super talented. This is not meant to take away from their achievements because their achievements are nothing short of incredible and amazing. However, having said that, as Carlos said, they tend to be very conservative. We joke around internally. Carlos and I call them sandbaggers. They know who they are.

I think Carlos is a sandbagger too.

I understand that we're just taking these numbers and rolling them up and when we go and talk to them about common, you're performing at this, why is the number going to go down? They've got 22 possible reasons, including a meteor strike and all sorts of crazy stuff that could cause it. And as a result, we really take up the numbers and we even had a positive contingency very often to it because we know that they're low. But it is very — it's very hard to quantify. And the reason I don't if you will, fight the sandbagging is because it encourages them to look at all of the areas of potential risk. There are all sorts of — there's — it's a Herculean effort to achieve these numbers. And there are all sorts of things that can go wrong in the supply chain and with technology and processes, all sorts of things. And they are very much focused on what can go wrong. And as a result, since they work so hard to mitigate those factors, they most of the time, almost always overperform. So that's sort of where we are in it. I mean we're hoping to do better. But based on the numbers that we've gotten, variations in the business cycle, this is what it rolls up to. So, we just sort of go with that.

Okay. Yes, I appreciate that. Eric, I guess, while I have you, if I go back to 2022 and the first half of '23, the Specialty Products was growing like crazy. And I guess a lot of that was driven by munitions, but the growth rate has slowed quite a bit since then. So, I guess my question is, do you have a sense for when we might expect to see Specialty Products return to a stronger growth profile and then what you need to see in order for that to happen?

Got it. So, the short answer to that is in fiscal '25, we think is when it's going to happen. I do want to mention that actually, we don't make — HEICO doesn't make any munitions; I think what you're referring to is missile defense. So, we are very active on missile defense interceptors, and we have a high content there on other missile platforms. But typically, it's more in the defense area, although I suppose there is some in the offensive. But we don't make the explosives themselves. When you look at the numbers, we're anticipating next year is going to be very strong. We've had significant ramp-ups in a number of businesses. And we have significant orders on the books. And now we've just got to produce.

Record backlog.

We're really very, very good in the Specialty Products area. So, I'm anticipating very good results in 2025 on that.

But by the way, Scott, one thing to point out with that Defense Business just like in the ETG, it can be incredibly lumpy. And I think that's what Eric is pointing out; you have to ramp to serve these big projects. And their backlog is at record high, and we do expect good things in '25. Not to say this year, I don't expect growth. I'm just '25 on seem to be big growth for us in that area.

I'll take our next question from Larry Solow with CJS Securities. Please go ahead.

Great. Thank you. Good morning, everybody. First question, just on the disparity between the really great growth on the parts business, 21%, and sort of the mid- to high single digits, it sounds like, on repair-service and overhaul. Is that different or part of that difference where you're capturing market share gains? Or is that too simplified a way to look at it?

Yes. I think there are some market share gains there. Larry, this is Eric. There are market share gains. I think that in the parts area. Remember, our business — we typically ship discrete parts. So, if we've got the part on the shelf, we're able to sell it, whereas in the component repair business, we're really beholden to the supply chain. We can have an LRU that's got a few hundred different part numbers in the bill of material, and one part is being held up, which actually is the case in many different businesses, and we can't ship it. And we've got this big backlog, and it's basically just sitting there. And so that's sort of, I think, what's also going on there.

Got you. And a question maybe for Carlos. Just I did notice there was a bit of a contingency reversal in the quarter. Was that in FSG?

Yes, it was. Yes, it was. So, this quarter, we had about — it was like a net $4 million. It was a $6 million reduction in the contingency, and then we had some inventory reserves we took for our product line. And so, we had about a $4 million net pickup in the margin related to contingent earnout reversal. And that was due to an acquired contingent earnout due to Wencor acquisition.

Now remember, Wencor itself, yes, go ahead please…

Remember, that's on our numbers right now. That's maybe 0.5 point to the margin. Last year, we had, if you recall, in the same quarter we had a $9 million reversal for the renegotiations of a contingent earnout. And that was a little bit more impactful to margins. That was maybe 1.5% or something like that of the margin. So net-net, it was actually a headwind for us this quarter.

Year-over-year, but maybe that gives us a little bit of a reason for a little bit of a sequential decline going to the back half of the year. It was a little bit of a benefit this quarter, I guess. And just in terms of Wencor…

I appreciate. I appreciate you supporting us on that.

Yes, yes, absolutely. Just on one Wencor, Eric, you mentioned sort of this still operating as a standalone. And I think that as the beauty of HEICO and most of your subsidiaries kind of run autonomously. Being that Wencor is so large and somewhat has a lot of similarities in your core PMA parts business and distribution and whatnot. Are there opportunities to sort of merge — blend those two companies more together than the normal HEICO where you operate?

Larry, so that's a great question. A lot of people have wondered about that. And as you know, HEICO has the unique ability, which you don't typically find in a company of our size to operate businesses in the similar same spaces and to sort of direct traffic so they don't hurt each other and make sure that we maintain the entrepreneurial spirit. And I think that is the single most important thing that we can do. Just last week, I was at the Aerospace Industries Association Board of Governors meeting. And actually, PwC did a wonderful presentation speaking about what's going on in terms of the employment trends in the aerospace market. And what was interesting is that the lack of interest from people with regard to aerospace is not due to the mission of aerospace or even the defense part because some people are sensitive about that. And it's not due to the earnings level. It's due to the fact that when people join large companies, they feel pigeonholed, and they don't feel like they're able to get a good experience. And I think that that’s the unique thing about HEICO. We recognize that there's no question there are synergies. If we can functionally put things together, we can drive certain processes, eliminate costs, and do all that. But what it does in the process is it kills the entrepreneurial nature, the enthusiasm, the desire to stay up late, to work late to make sure that you accomplish what your customer needs where you have full responsibility for the product from selecting it, designing it, manufacturing it, procuring and inspecting it, selling it, accounting for it. And this is what is very, very motivational to our team. So, to answer your question, no, there's no plan to put this together. However, there is the opportunity to cooperate. And frankly, with the organic growth that we've got, if we could just have these businesses work together and become more efficient but still retain their entrepreneurial spirit and their individual focus. There are tremendous cost benefits by just giving our internal people the internal promotional opportunities and not having to go outside and hire more people. So, I don't see, if you will, cost synergies in terms of job reductions. But I do see the opportunity for our people to put their heads together and figure out — we've already gotten to the point where one plus one equals two-and-half, but I think we're going to continue to focus to plus one plus one can equal three or four or five. And that's really the focus. And it's not going to be through job cuts, the way some other companies handle this kind of thing.

Got it. I appreciate that color. If I could just slip one in to Victor, if you guys don't mind, just 4% organic growth, double digits dispense on the defense side. What was sort of standout on the offsets on the negative side that kind of offset some of that growth on the other products? Anything extraordinary there?

Larry, thank you for the question. It's a good question, and I was feeling neglected. So glad to answer a question. But all kidding aside, the weakest part was the other markets, the non-aerospace and defense markets, which you may recall in the last couple or several calls. I said to anticipate that being lower, and I would expect order rates to start to tick up in the back half of the year. I'm not sure whether it's the third or fourth quarter, but we're certainly seeing some green shoots here and there, though not across the board. But that is the case. And it's really a result of customer inventory channels. They had stocked up, and much the same way a lot of companies in our industry have done and our industries have done, and I think they're working off those inventories at this point, and that will continue for a little bit longer, then you have a lead timing after the orders start to turn. So, we had a little lead time. So, I'm optimistic about those businesses, but I think we have probably, I don't know, a couple of quarters or so left to go on negative comparisons.

Our next question comes from Peter Arment with Baird. Please go ahead.

Thanks for all the details and great quarter. So, Eric, I wondered — you made in your prepared remarks, you made some comments about kind of the partnership that you — with Wencor and your traditional PMA business. You mentioned Wencor is utilizing HEICO's manufacturing-based new products. Curious to get more color on that, what kind of opportunity that is for Wencor.

We think it's pretty substantial. Wencor has an excellent vendor base, and they remain loyal to that vendor base. They're not, in general, moving product from established vendors who are making it. However, as you know, the industry supply is very tight right now, even in the HEICO businesses. And we have the opportunity to redirect capacity, frankly, in our Specialty Products more towards the HEICO businesses. And I've been out there working with the Head of our Specialty Products Group and I are working with our individual businesses to explain the virtue of manufacturing for HEICO and Wencor as opposed to only third-party customers because when third-party customers, they're great, and we want to stay focused on them as well. But when it's an internal customer, you know very clearly what's going on competitively, and we're able to move priorities for them. So and also able to really focus on the quality. I mean, that's been a key focus for HEICO and for Wencor in terms of making sure that the products that we supply are the absolute best in the industry. So, I think this is something that will start to pay dividends in 2025 and after, both in terms of more timely deliveries to our internal customers as well as, frankly, a profit margin that our specialty products companies can make by supplying these high-quality parts to the HEICO companies. There's a lot of stuff that we can do. There are 10 different businesses in our specialty products group, and they all have unique capability. And we think there is opportunity in the vast majority of them.

Perfect. That's great color. And then just, Eric, just staying with you on just what you're seeing from an international travel perspective, are you seeing any pockets of strength or weakness or anything to call out on a regional basis? Just curious on that.

It's — so I spoke with all of our sales heads last week and on overall the details, and we're seeing tremendous strength around the world. The Americas remains strong as well as Europe and Asia, Middle East, China. So, we're seeing very good strength across the board. The market seems extremely strong. People want to travel, both for business as well as leisure, so things look good. I wouldn't say there's one or two areas of particular strength. I'd say it's very broad-based.

Great. And then just quickly on Victor on you had some, I guess, some timing delays in Q1. Just how is the supply chain looking for your ETG when you think about, obviously, kind of the back half of the year?

Yes, this is Victor. So, I think our supply chain has pretty much returned mostly to normal. I don't think companies talk too much about and focus too much about supply chain issues, small supply chain issues that were in the noise level then. But certainly, people are no longer afraid to do that. But it seems to me as though things are maybe not quite entirely back to normal, but fairly close. There are still some pockets here and there where some lead times are extended or deliveries are delayed but again, I — my sense of it is that wasn't unheard of before the pandemic either. We just didn't really hear much about it.

Okay. And your R&D efforts, Victor, I know you guys called that out in Q1, just — is that for existing orders? Or is there new opportunities that really you're pursuing?

It's a combination. I mean, our R&D activities in ETG remain very strong. It's a key part of what we do. And that's for some of customer funded, it shows up as revenue, NRE and things like that. But a lot of it is related to product development for future products. And in the aerospace industry, generally speaking, R&D expenses to start something today, it takes time years before it turns into revenue or meaningful revenue. So, we have to keep that constant investment going. I think it's something we've been very successful with in our subsidiaries have been very successful with over a long period of time.

Yes, Peter, we spend roughly 3%, sometimes 4% of sales on R&D. That's pretty consistent. That's what we saw this quarter, company-wide, I should.

And ETG is probably higher than that for a variety of reasons because we have some businesses, ETG is probably above 5% on R&D.

And we'll take our next question from Bert Subin with Stifel. Please go ahead.

Thank you for the question. Victor, maybe just to start with you. You get some good color on ETG, what's in there. You've seen a little bit of volatility in our organic growth over the last several quarters as we think forward, do you expect that to stabilize? And do you still see that group in track for the mid-single-digit growth you thought you would see in '24?

Yes. Historically, this has been the case for ETG that it's volatile growth quarter-by-quarter. And I would expect that to continue to be the case. I don't think we've suddenly reached a different run rate. But I think the overall trend is a positive and upward trend, that's supported by the backlog, it's supported by quote activity and other things.

Got it. Okay. And then, Eric, one for you.

I just want to add, Bert, we still expect low to mid-single-digit growth in ETG for the year, which that statement implies volatility if you think about what we've done to date versus the next two quarters. So, I think Bert is right, it’s going to be up and down, but we do expect the low to mid-single-digit growth for the year organically.

Got it. Okay. Thank you for your question, and we'll take our next question from Gautam Khanna with TD Cowen. Please go ahead.

Thanks for staying on and talk to Eric. So, I was curious, how far along are you guys on kind of introducing Wencor's product suite to your — to HEICO's legacy airline customers and vice versa? I know there was a whole comment when the deal was announced that Wencor was bigger with the MRO facilities than with HEICO, and you guys were stronger at the airlines. I'm just curious like how much time does it take to kind of make those introductions and have those — the product catalog added to the contracts that you guys already have each of those companies already have.

Yes. So, Gautam, I think what you're referring to is we said that historically, Wencor originally got its focus was more in the repair stations. They still dealt with the airlines, but more of their focus originally was in the repair stations, and it was sort of vice versa with HEICO. But I can tell you that the cooperation is going extremely well. We are — both companies are helping each other. And there are airline customers where Wencor had more of a presence in their airline customers where HEICO had more of a presence. And we are introducing the folks on both sides so they can go ahead and take advantage of those relationships in that history and be able to sell the products. So, I think that that is happening as we speak. And I anticipate that that's going to continue to occur in 2025. I think we will continue to see the very good results in that area.

Has there already been traction like commercial traction you guys are already getting sales from some of that cross-selling opportunity? Or is it still on the comp?

No, no. We have received sales on it. And I think that's one of the reasons you see the organic growth rate, and you see the margins that we have because we've already realized the benefits. I think there's a lot more to come. And — but we recognize them thus far.

Got you. That's helpful. And then, Carlos, I know you addressed this earlier in the call, but just do you have a better sense of the long-term FSG margin framework? At one point, it was 22% long term. I know there are reasons you guys are over that now. But is that still kind of the right bogey longer-term with Wencor? Or do you think it could be structurally higher than?

I think the long-term margin probably is around that 22% rate. And I do think that if you look back over the — if you sort of ignore the COVID period and look back over the decade prior to that, you will see that our margin is pretty consistent and that every year, we get a little improvement in it. I think we're going to be — we're heading towards that pace to where we get back, as I mentioned earlier, to a normal footprint within the segment when the mix is kind of what it used to look like, and then we move forward from there and he got those little efficiencies. That's my expectation long time.

And of course, Gautam, this is Eric. We've got, as I mentioned, in the quarter, we had 280 basis points from intangible amortization. So, you add that and we're really approaching 25% on an EBITDA basis, which is outstanding.

Yes, absolutely. And then last one, Eric, just in terms of product introductions, I know in the past, you talked about 300 to 500 PMA parts developed each year. What's the right number now that you own Wencor have some experience with them? Is it higher than that? Or is it a number, 300 to 500?

Yes. I would think it's closer to the 500 area. Wencor continues to focus and develop a very aggressive number of products. HEICO, obviously, the same. The key is getting all those parts manufactured and getting the airlines to buy them. So, we've got the capability, and we continue to — we're not going to cut back in any of that area.

And we'll take our next question from Louie DiPalma with William Blair. Please go ahead.

Eric, Victor and Carlos, good morning. One of the recurring themes on both the ETG side of the business is your ability to consistently introduce new products to the market. You just mentioned the target of 500 new PMA parts per year. Similarly, I was wondering what is ETG doing in terms of new products per year? And is there still a long runway? And is the Ukraine more inspiring new ideas and demand for new types of products?

Louie, this is Victor. Thank you. It's a very good question. I don't know the number of new products and new part numbers we actually introduced in the ETG each year because it's a very large number, and we have so many subsidiaries. But one of the things that we do look at when we meet with the company is each year, we do an annual meeting and do a budget review and a bottoms-up budget. We do look at with each one their new product introduction. And it is a very active and regular rate. And I think it's — my sense of it is it's probably higher than most people I see in the industry. So very, very happy with that. And that will continue, and that was my lesion earlier to the R&D spending and why it's so critical for us to do in good times or in bad, we don't cut R&D spending if the business is weaker in a particular moment because ultimately, that's our salvation, right? And that's how we grow the business over time. And we look at it on a very long-term basis. In terms of Ukraine, yes, Ukraine has meant more new product introduction in some of our businesses and has stimulated sales in a number of our businesses as well. And it's — Ukraine's had an interesting effect because I think it is reminded our allies in Europe, our friends of the need to expand their defense spending sustainably in the long term. And that's happened, right? And that's happening, and we're seeing more investment there. The company we acquired, we completed the acquisition in January 23 of Exxelia, which is a company headquartered in France with significant operations and sales in Europe. And that was one of the things that attracted us to that business was the opportunity to offer products to our friends and allies as well as, by the way, here in the U.S. and the Ukraine war does have an impact on U.S. companies. And obviously, as we know, what the U.S. supplies. So, I would expect that to continue. And then when that conflict ends, and I hope it is soon, of course, but when it ends, I think it will have an enduring effect on how people look at defending themselves and what they spend to do it.

And that concludes today's question-and-answer session. At this time, I'll turn the conference back to you for any additional or closing remarks.

So, this is Larry Mendelson. I want to thank everybody on this call for their interest in HEICO. We look forward to speaking with you when we report third quarter results, and that will be some time about three months from now. So meanwhile, have a very good summer, enjoy summer, be safe. And HEICO will, I believe, do extremely well. Thank you, and that's the end of this call.

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