Héroux-Devtek Inc.
(TSX:HRX)
(OTCGrey: HERXF)
President and CEO: Gilles Labbé
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INTERVIEW TRANSCRIPTS:
WSA: Good day from Wall Street. This is Juan Costello, Senior Analyst with the Wall Street Analyzer. Joining us today is Gilles Labbé, the CEO and President of Héroux-Devtek Incorporated. The company trades on the Toronto Stock Exchange, ticker symbol HRX and over-the-counter, HERXF. Thanks for joining us today, Gilles.
Gilles Labbé: Well, thank you so much for having us.
WSA: Great. So starting off, please give us a history and overview of the company for some of our listeners that are new to the story.
Gilles Labbé: Well, yes, thank you. Basically, Héroux-Devtek is in the aerospace sector. We specialize in the design and manufacturing of aircraft landing gear for military products, but also for commercial products, of course. And so the company was founded 70 years ago and started to build at that time some products for the war effort, then moved into the aerospace sector by starting to design aircraft landing gear, for example for Canadair for the Water Bomber, the CL-215. Our team got fame in ’69, back then we were the first on the moon. We built for Grumman the landing gear for the lunar module back in ’69. And then we won our first major contract with the US military in the ’70s when we were chosen to repair and overhaul C-130 Hercules landing gear of the US Air Force fleet and also all the KC-135 of the US Air force fleet also. So this workload has been with us since 1970 and we still perform this workload for the US Air force.
And in ’85, myself and my partner at the time, we were employees of Héroux and we completed the management buyout with the support of some bankers at the time. The company was not very big, but in ’85 we were doing about 12 million to 13 million. And through a series of acquisitions and of course a lot of hard work from the old team at Héroux-Devtek, we have built, basically, a very strong company in the landing gear business. We were also involved in Dassault product and that structure doing from ’85 up to 2012. But in 2012, we have made a strategic decision to dispose of the asset that we had in the industrial sector and the aerostructural sector, and we sold this asset to Precision Castparts. Basically, we sold this asset for a value of $300 million, which was in excess of the total market cap of the company at the time.
So after that transaction, the company was very strong financially and we decided to return some capital to our shareholders. So we returned $5 per share to our shareholder, but even after doing that we were still in a very strong financial position. So we told our shareholders that we will build a landing gear company. So at that point, when we sold this asset, the company was doing around $250 million revenues. So at the end of 2012, basically we started a process to continue to build on our core asset of the landing gear business, and we announced, at the end of 2013, a large contract with Boeing to build that Boeing 777 landing gear and also the Boeing 777X landing gear. So that was a major announcement and we are presently doing this – performing this contract or getting ready to perform this contract.
And in early 2014, we acquired a company in United Kingdom that was a designer and manufacturer of aircraft landing gear. And today, when you look at Héroux, we have factory, of course, in Canada, in Quebec and Ontario; we have factory in the US mainly in Ohio, we have a factory in Cleveland, Ohio; Springfield, Ohio and also in Wichita, Kansas. And now following the acquisition, we have three factories in UK; in Runcorn, in Nottingham, and also in Bolton. And we have announced our most recent results last week.
We have a March 31st year end, so as of March 31st, 2015, our top line was $355 million, with an adjusted EBITDA of $48 million and adjusted net income $19.4 million. We have some one-time charges during the 2015 related to one, as you may know, Bombardier Learjet 85 has been postponed, for the present time, has been put on pause. So we have some capitalized costs in the balance sheet for all the development work we’ve done on that airplane. And we took the decision at that point, when Bombardier announced that, to write off this amount.
And the second large amount that we had as a one-time charge this year is the – we had a dispute with UTC regarding a non-compete agreement on the 777 contract and we’ve been able to have a settlement last week. So we have recorded a charge of $11.6 million and we finished with this one last year. So that’s now behind us and we are moving forward for the future.
WSA: Great. And so what are some of the other key trends that you are seeing and focused on right now in the aerospace sector, and how is the company positioned, with some of your recent deals, to capitalize?
Gilles Labbé: That’s a good question. As you may know, the commercial sector, the 100-seater-plus market, is excellent. Boeing and Airbus have a record backlog. If you look at the total fleet, this has to double basically over the next 20 years according to both Airbus and Boeing. So on average, commercial airliners, if you believe all the statistics over 20 years, we need to build around, on average, 1,800 aircraft a year. Last year, the best year ever, was a record in delivery from Boeing and Airbus. They delivered something like 1,350 airplanes, so that shows that there is quite a bit of runway for growth in the aerospace civil sector itself for years to come.
The second thing, the second market, that’s finally getting better, is the business aircraft market. Right after the crisis in 2008, of course this market collapsed somewhat, especially in the smaller aircraft. Since then I think we have hit pretty much the bottom in 2013 and we’ve seen, since then, an increase in delivery in this market in 2014 and 2015. On top of it, us, Héroux-Devtek, we have two new products that are pretty much done with the design. So we have designed and built the landing gear for the new Embraer 450/500, which is the new business aircraft from Embraer, the Legacy, and we started to deliver, at a low rate at this point, for the first unit of production, to Embraer.
This week, if you noticed, Dassault has rolled out their new Falcon 5X, which is a very large airplane. It’s an airplane that has basically the largest cabin in the industry now and is – the cabin is larger than the Global Express and larger than the Gulfstream 650. So this is an airplane that we have again designed and build the aircraft landing gear for them. And the production should start at the end of 2015 and of course more and more in ’16 and ’17.
So these are, as I say, two programs that will generate revenues in the future. Right now, the revenues are very limited. But as these two programs ramp up, then this would create a lot of revenues. So that’s basically on the commercial side, that’s what we see on them. On the military side, as where we have about 52% of our total revenues, that market is more difficult because of budgetary restrictions, but still we see some single-digit growth in this sector for us this year, especially due to the F-35 programs starting to ramp up.
Second, we see more activity on the MRO side with the US Air Force. We have two years of lower requirement, but right now this requirement is going to the right direction. We will guide the street in term of revenues for this year and last year with 365 million as I explained earlier. Now we guide the street globally both on the military and commercial business and in total we see a top line growth of around 10% for the year we are in.
WSA: Right. And what makes Héroux-Devtek unique from some of the other players in the sector?
Gilles Labbé: Well, I think as I said earlier, we won a very large contract with Boeing on 777. This is a game changer for us. This is our largest landing gear on a commercial airplane. We are presently investing $105 million in capital expenditures to be ready for this contract. We will start to deliver this program starting early in 2017. And then, of course, this program is running at a rate of 100 chipsets a year, as we speak. So as this program ramps up within our company, this would create a lot of additional revenues. So we guide the street, so that in FY19, which is the calendar ‘18, when this program has ramped up, the 777 and the other business aircraft program that I mentioned.
We have also new programs that don’t generate much revenue as we speak, such as the Sikorsky new CH-53K, we have designed that product with Sikorsky. We designed also a new product for Airbus helicopter, the EC-175 and we are presently designing a new aircraft landing gear for the Gripen in Sweden for Saab. So all these new programs will start to generate revenues in the years to come and we are confident at this point, without any acquisition, that we can reach revenues of $500 million. So when we said in early 2013 to our shareholders that we will build a strong company in the landing gear business, we basically are executing on that promise and basically if you look in that timeframe from 2013 to 2018, we will basically double the revenues and, of course, the bottom line will follow.
WSA: Right. And what goals and milestones are you hoping to accomplish over the next six to twelve months?
Gilles Labbé: Well, I think in six to twelve months, as I said earlier, I think this year is a year we need to continue to grow our top line by 10% and, of course, we just realized an EBITDA of $48 million, so I guess if you do the math, we did a 13% EBITDA for the year, we did 15% EBITDA for the last quarter. So you know, smart analysts will figure out pretty much where this EBITDA number should be at the end of this year. So, of course, we would be more than 48 million, but I will let the analysts and investors make their calculation.
So I think the point here is we will continue to execute on our large program that we have already won and as we execute, for example, Boeing 777 on schedule, on budget, same thing on the Dassault, same thing on the Embraer, same thing on the Gripen, same thing on the Sikorsky 53K, as we meet all these milestones on schedule, on budget, we are building a very strong company in our expertise.
We are also looking at an acquisition. We have a strong balance sheet. At this point, we don’t have much debt on the balance sheet. If you look at our financial situation, our total debt was $112 million at year-end and we have cash in the bank of $35 million. So if you netted out, so we have net debt of around $80 million or so. We have some room to realize an acquisition the size of anywhere between $50 million to $150 million. And what we are looking for is a company that is quite complementary to what we have, whether an aircraft landing gear company or, you know, something that is complementary, such as actuation business or uplift system or hydraulic system business. We are looking for a company that has quite a bit of IP, engineered products that would create aftermarket business in the future and so that’s the type of company we are looking at as we speak.
WSA: Great. And as far as investors and the financial community are concerned, Gilles, do you believe that the Héroux-Devtek story and your message and upside are completely understood and appreciated by them and if not, what do you wish investors better understood about the company?
Gilles Labbé: Well I think look, there are certain investors that are quite aware, but, of course, we need to make this story more known. And I think to understand the potential of the company well, you know, I think the potential is there, the backlog is there, it’s a matter of execution. And if you do the math, this company will be worth a lot more than what it’s worth today. The stock is trading, as we speak, around $10.50 and that turns to be a multiple of EBITDA of around eight to nine. And I think with the prospect of growth that I just explained, I think the investors, if they look at closely at our potential, they probably will realize that our value is more than what it is today.
WSA: Certainly. And so once again joining us today is Gilles Labbé, the CEO and President of Héroux-Devtek Incorporated. The company trades on the Toronto Stock Exchange, ticker symbol HRX as well as over-the-counter HERXF. Currently trading at $10.53 a share, market cap is about $378 million. And before we conclude here, Gilles, to recap some of your key points, why do you believe investors should consider the company as a good investment opportunity today?
Gilles Labbé: Well, I think it’s a matter of execution more than a matter of going out and getting some of the [new] business. We have business on the books, as I explained, we have many new programs that will start to generate revenues in the years to come, in the next two or three years. New airplane programs such as the Dassault Falcon 5X, the Embraer, the Sikorsky 53K and, more importantly, the new Boeing 777 for us and also 777X after. So these programs will create additional revenues that will permit us to basically double our business from 2013 to 2018 and generate quite a bit of cash flow for our shareholders.
WSA: Well, we currently look forward to continuing to track the company’s growth and report on your upcoming progress. We would like to thank you for taking the time to join us today and update our investor audience on HRX. It was great to have you on.
Gilles Labbé: Thank you, Mr. Costello, and have a good day.
