Louis Raffetto

Louis Raffetto asked about the elevated stock compensation expense in Q1 2026, seeking clarification on whether this level would continue, step down, or ramp up throughout the year. He also posed a big-picture question regarding HEICO's business scale, the sheer number of underlying operating businesses, and whether the company foresees any potential portfolio actions, such as creating new segments, given its significant growth over 36 years.

Answer

Carlos Macau, Executive Vice President and CFO, explained that the elevated stock compensation expense is due to performance features attached to 2025 options, which accelerate amortization. He expects this elevated expense to be concentrated in the first half of fiscal 2026, tapering off towards the end of the year and into fiscal 2027. Victor Mendelson, Co-Chairman and Co-CEO, stated that HEICO has successfully adjusted its organization to grow with the business, transitioning to a 'working supervisor model' with talented individuals leading groups of companies. He emphasized that this group structure is 'very scalable' and that acquisitions are generally integrated into existing groups or under other subsidiaries, indicating no immediate plans for new segments but a continuous evolution of the organizational structure.

Louis Raffetto with Wolfe Research asked about the stock compensation expense, noting it was high in the quarter, and whether that level would continue, step down, or ramp up throughout the year. He also inquired about HEICO's management of its growing business scale, now in the $5 billion neighborhood, and the potential for future portfolio actions or new segments.

Answer

Executive Vice President and CFO Carlos Macau explained that the amortization of performance-based options from fiscal 2025 accelerates, leading to elevated expense in the front half of fiscal 2026, which will then taper off towards the end of the year and into fiscal 2027. Co-Chairman and Co-Chief Executive Officer Victor Mendelson described adapting the organization by morphing into a 'working supervisor model' with talented individuals leading groups of companies, which is scalable and supports acquisitions into existing groups or subsidiaries.

Louis Raffetto asked for a breakdown of end market growth within the Electronic Technologies Group (ETG) for the quarter, specifically between defense and electronics, and inquired about the reasons for increased CapEx in the fourth quarter and expectations for 2026.

Answer

Victor Mendelson stated that the ETG end market growth breakdown was not provided on the call and would be available in the 10-K. Carlos Macau explained that the increased CapEx in Q4 was 'business as usual,' possibly due to year-end deals, and projected CapEx for 2026 to remain in a similar range of 1.5%-1.6% of revenues.

Louis Raffetto asked Victor Mendelson for the end market growth breakdown within the Electronic Technologies Group (ETG) for the quarter (defense versus electronics). He also asked Carlos Macau about the increase in CapEx during the fourth quarter and what it was attributed to.

Answer

Victor Mendelson stated that the end market growth breakdown for ETG was not provided. Carlos Macau explained that the slightly higher CapEx in the fourth quarter was 'business as usual,' with projects sometimes accelerated towards year-end for deals. He noted that CapEx remains around 1.5%-1.6% of revenues historically and is expected to be in a similar range for 2026.

Louis Raffetto asked about the current competitive landscape for acquisitions.

Answer

Co-CEO Eric Mendelson described the M&A market as 'very competitive,' partly because HEICO's success has inspired emulation. He expressed confidence that HEICO's unique culture, speed, and decentralized model—which offers autonomy to sellers—provide a distinct advantage and make it the 'best home' for many target companies.

Louis Raffetto of Wolfe Research sought clarification on whether HEICO sells both PMA and OE parts for the same product, asked for the size of the distribution business, and requested an outlook for the combined impact of taxes and noncontrolling interests.

Answer

Eric Mendelson, Co-President, clarified that on the parts side, they typically don't offer both PMA and OE for the same product, but in the repair business, they stock both and use whichever the customer prefers. He did not size the distribution business but noted aftermarket replacement parts is a ~$1.8B annualized business. Carlos Macau, EVP and CFO, guided for a full-year effective tax rate of 18-19% and an NCI rate around 7-7.5% of pretax income.

Louis Raffetto of Wolfe Research sought clarification on the Q4 organic growth rates for FSG's MRO and specialty products segments and asked for details on a small impairment and contingency adjustment during the quarter.

Answer

Co-President Eric Mendelson confirmed that both the MRO and Specialty Products segments grew organically by about 11% in the fourth quarter. CFO Carlos Macau explained that the impairment and contingent earn-out adjustments were normal course of business items, not unusual for the quarter, and were split between the two operating segments.

Louis Raffetto asked for clarification on an unusual impairment charge and a change in contingent consideration, and also inquired about the cash usage for the Capewell acquisition.

Answer

CFO Carlos Macau explained that the impairment charge on a trade name and the reversal of a contingent earnout were unrelated events at two different ETG subsidiaries that largely offset each other in SG&A. He clarified that the Capewell acquisition was immaterial, funded by debt, and is not dilutive to segment margins, but did not provide a specific cash usage figure.

Louis Raffetto asked about the organic growth for MRO and distribution in Q4, specifically if they were both around 12%. He also inquired if the $20 million interest expense includes modest additional expense related to the Tangible Equity Units (TEUs) and if stock compensation will continue to be split between the 'aviation segment and the corporate' or fall under one.

Answer

CFO Adam Cohn stated that Q4 organic growth was a little more skewed towards distribution than MRO, but fairly balanced. He clarified that the $20 million interest expense does not include any interest income earned from cash on the balance sheet ahead of the PAG closing. He confirmed that the split of stock compensation between the aviation segment and corporate is a fair way to think about it.

Louis Raffetto asked for the organic growth rates for MRO and distribution in the fourth quarter. He also sought clarification on the $20 million interest expense, specifically if it includes expenses related to Tangible Equity Units (TEUs), and how stock-based compensation will be split between the aviation segment and corporate.

Answer

CFO Adam Cohn stated that Q4 organic growth was slightly more skewed towards distribution than MRO, but fairly balanced. He confirmed the $20 million interest expense is roughly in that range and includes interest expense, but not interest income from cash on the balance sheet. He also confirmed that stock-based compensation will continue to be split between the aviation segment and corporate.

Louis Raffetto questioned why Free Cash Flow guidance was not raised despite the earnings gain, asking for clarification on the factors influencing this decision. He also asked about the strategy for balancing the expansion of internal capacity with extending licenses to external MRO providers.

Answer

CFO Bill Lacey explained that while earnings implied a potential $40 million increase in free cash flow, the decision was made to maintain higher working capital levels, primarily inventory, to prioritize meeting customer demand, thus holding the free cash flow guide. Chairman and CEO Chip Blankenship discussed the strategy for LEAP GTF, noting that given the fleet size, Woodward aims to balance internal investment in brick and mortar with sharing investments by partnering with external MROs. This approach allows customers who prefer on-site work to utilize Woodward's materials and technical approach.

Louis Raffetto asked for clarification on why free cash flow guidance was not raised despite the earnings gain, implying that some factors might be worse than expected. He also inquired about the balance between expanding internal capacity and extending licenses to external MROs.

Answer

Bill Lacey (CFO, Woodward Inc) explained that while an earnings gain would typically imply higher free cash flow, the decision to maintain higher working capital levels, primarily inventory, to meet customer demand led to holding the free cash flow guidance. Chip Blankenship (Chairman and CEO, Woodward Inc) stated that the strategy for licensing to MROs balances internal investment with allowing others to bear some investment, especially for large fleets like LEAP GTF. It's a "win-win" where Woodward provides technical support and materials, and partners handle wrench-turning and customer support, allowing for efficient capacity expansion.

Louis Raffetto asked about Woodward's plan for returning capital to shareholders, specifically if it would be balanced across the year or skewed. He also inquired if Q1 aerospace margins are expected to be substantially below the rest of the year, consistent with past trends, and if the 22% tax rate assumes no benefit from option exercises, unlike previous years.

Answer

CFO Bill Lacey stated that the plan is to spread the return of capital evenly throughout the year. Mr. Lacey confirmed that Q1 is typically the lowest margin quarter for both aerospace and industrial, with margins growing sequentially thereafter. He also confirmed that the 22% effective tax rate assumes no outsized tax benefit from option exercises, based on current estimates.

Louis Raffetto asked about the company's plan for returning capital to shareholders, specifically if it would be balanced throughout the year or skewed. He also inquired if aerospace margins in Q1 2026 should be expected to be substantially below the rest of the year, consistent with past trends, and about the tax rate assumptions, particularly if the 22% rate excludes outsized benefits from option exercises.

Answer

CFO Bill Lacey stated that the plan is to spread capital returns evenly throughout the year. Mr. Lacey confirmed that Q1 is typically the lowest margin quarter for both aerospace and industrial, with margins growing sequentially. He also confirmed that the 22% effective tax rate does not foresee the outsized tax benefit from option exercises seen in previous years.

Louis Raffetto of Wolfe Research asked about the financial impact and cash usage for the recent Safran acquisition and requested an update on expectations for the China On-Highway business.

Answer

CEO Chip Blankenship and CFO Bill Lacey declined to disclose specific financials for the Safran deal, emphasizing its strategic nature and minimal macro impact on segment reporting. For China On-Highway, CFO Bill Lacey updated the full-year sales expectation to be around $60 million, with approximately $10 million expected in Q4.

Louis Raffetto sought to understand the drivers of the high non-segment expenses and asked for the precise Q2 sales figure for the China on-highway business.

Answer

CFO William Lacey clarified that there were no gains affecting segment results; a facility sale gain was adjusted out at the non-segment level. He attributed the higher non-segment costs partly to the timing of long-term incentive compensation and specified that China on-highway sales were $20 million in the quarter.

Louis Raffetto asked for the specific pricing contribution in the quarter, clarification on the recurring exclusion of business development expenses, and whether the recent acquisition and divestiture were cash-flow neutral.

Answer

CFO William Lacey stated that price realization was approximately 6% at the total Woodward level in Q1. He explained that the adjusted business development expenses were related to recent M&A activity and were excluded to provide a clearer view of operational performance. He declined to comment on the financial specifics of the transactions until they close.

Louis Raffetto sought to reconcile the accretive China On-Highway results with the overall negative mix in the Industrial segment, asked about decelerating trends in Power Gen, and inquired about the accounting for a recent divestiture.

Answer

CFO William Lacey explained a rebate reversal made the China On-Highway business accretive in Q4, confirming the core industrial margin decline was due to an unfavorable mix shift. CEO Charles Blankenship advised against over-reading quarterly trends in Power Gen, noting strong full-year growth and a positive outlook. Lacey also confirmed the divestiture is factored into guidance.

Louis Raffetto inquired about the drivers behind the significant increase in spare parts sales, trends in the used serviceable material (USM) market, and the company's process for deciding whether to repair or part out an engine. He also asked for clarification on the difference between equipment sales and sales from the leased portfolio.

Answer

President Austin Willis attributed the sales increase partly to a large back-to-back parts transaction but also noted strong underlying demand for USM. He explained their decision-making involves a present-value analysis comparing part-out revenue, repair costs, and third-party cash offers. CFO Scott Flaherty clarified that 'equipment sales' are trading activities for assets never on lease, distinct from sales of previously leased assets.

Louis Raffetto inquired about the current state of the engine market, asking if asset values are continuing to rise or have stabilized, and noted the strong gain on sale margins. He also asked if Willis operates its own engine test cells for its MROs and about the availability of test slots.

Answer

President Austin Willis confirmed the engine market remains strong for both whole engines and parts, contributing to healthy gain on sale margins. He acknowledged scarcity in originating typical lease transactions but highlighted Willis's success through value-added solutions like its 'Constant Thrust' program. Willis confirmed they do not currently have a test cell but are exploring it, and noted that slot availability varies.

Louis Raffetto of Wolfe Research, on behalf of Myles Walton, asked for clarification on the A350 production slowdown, questioning if it was due to a flattening of build rates or customer destocking. He also inquired about the reason for the unusually low corporate expense in the first quarter.

Answer

Chairman, CEO and President Tom Gentile clarified that the A350 issue was a direct reduction in demand, with expected 2025 shipsets falling from 84 to 68, accounting for $76 million of the $85 million revenue guidance reduction. VP of Investor Relations Patrick Winterlich explained that the lower corporate expense was due to a few credits and differences in stock compensation related to the new CEO's tenure.

Louis Raffetto, on for Myles Walton from Wolfe Research, asked about the average green time of acquired engines, the division of labor with Pratt & Whitney on the V2500 MRE program, and the outlook for PMA contribution.

Answer

COO David Moreno explained that FTAI now focuses on acquiring run-out engines that require shop visits, as this is where they can add the most value, a shift from prior years. CEO Joe Adams clarified that in the Pratt partnership, FTAI acquires the engine and markets it, while Pratt performs the performance restoration. He added that FTAI may have missed its 2024 PMA target due to approval delays and did not provide 2025 guidance.

Louis Raffetto asked about the sustainability of the Services & Support segment's performance, questioning if the Q2 revenue and margin levels represent a new run rate for the remainder of the year.

Answer

CFO Antonio Carlos Garcia indicated that while performance is strong, the margin should be viewed in the mid-teens range for the full year. He explained that ongoing investments in service expansion, such as in Portugal, have initial ramp-up costs that will temper the margin slightly from the high level seen in Q2. He also noted one-time benefits were not a major factor.