Loar Holdings - Q1 2024

Executive Summary

• Record Q1 results: Net sales $91.84M (+23.7% y/y) and Adjusted EBITDA $33.03M (+23.0% y/y), with Adjusted EBITDA margin at 36.0% and net income of $2.25M vs a $(7.52)M loss in Q1’23.
• Capital structure significantly improved post-IPO: $330M net proceeds; $285M debt repaid; amended credit agreement cut rate to SOFR+4.75% (<5.5x leverage), added $50M revolver and $100M delayed-draw capacity. CFO also said pro forma annual interest expense would be ~$26M after the paydown and rate cut, while the Q1 press release outlook still assumed ~$42M for 2024 (management later revised guidance).
• Initial FY24 outlook introduced: revenue $370–$374M, Adjusted EBITDA $132–$134M (~36% margin), net income $25.7–$27.1M, Adjusted EPS $0.41–$0.43, interest expense ~$42M; management cited broad demand and strong aftermarket momentum.
• Demand setup strong: commercial aftermarket backlog up 25% y/y exiting Q1; management called it the strongest backlog in company history, supporting confidence in double-digit organic growth across end-markets in 2024.

What Went Well and What Went Wrong

What Went Well

• Record top-line and EBITDA: “quarterly record in net sales and Adjusted EBITDA... Adjusted EBITDA margins were strong at 36%,” despite temporary dilution from late-2023 acquisitions and public company infrastructure build-out.
• Broad-based demand/backlog: Commercial aftermarket backlog +25% y/y at March 31, 2024; “strongest backlog we have seen in our history,” underpinning confidence in FY24 outlook and double-digit growth across all end-markets.
• Balance sheet/interest burden improved: IPO proceeds reduced leverage to ~1.6x TTM EBITDA and cut borrowing costs; amended facility lowered rate by 250 bps and extended maturity to 2030, adding a $50M revolver and $100M delayed draw.

What Went Wrong

• Margins stable, not expanding: Adjusted EBITDA margin 36.0% vs 36.2% in Q1’23 as mix (lower-margin OEM) and integration/public company costs offset pricing/operating leverage.
• Gross margin flat y/y due to sales mix and facility move charges; “offset by pricing and operating leverage” (limits immediate drop-through of strong demand into margin expansion).
• Aftermarket destocking: Management cited destocking at a handful of distributors/end customers, partially offsetting travel recovery tailwinds (watch normalization timing).

Transcript

Operator (participant)

Please note this conference is being recorded. I will now turn the conference over to Ian McKillop, Director of Investor Relations. Thank you, you may begin.

Ian McKillop (Director of Investor Relations)

Thank you, and welcome to Loar's 2024 first quarter earnings conference call. Presenting on the call this morning Loar's founder, Chief Executive Officer, and Executive Co-Chairman Dirkson Charles, Executive Co-Chairman Brett Milgrim, Treasurer and Chief Financial Officer Glenn D'Alessandro, and myself. Please visit our website at loargroup.com to obtain a supplemental slide deck and call replay information. Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC, available through the Investor Relations section of our website or at sec.gov.

The company would also like to advise you that during the course of the call we will be referring to Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Earnings Per Share, each of which is a non-GAAP financial measure. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliations. Please also note, given that we have been a public company for two weeks, our analysts are in a quiet period, and we will not be taking questions after today's call. I'll now turn the call over to Dirkson.

Dirkson Charles (CEO and Executive Co-Chairman)

Thanks, Ian. I'm going to start on slide number 4. Let me make one brief remark here. As Ian mentioned, on today's call we'll do something a little bit differently than we'll be doing in the future, which is we're not going to take questions at the end because the analysts are really still in their quiet period, but just wanted people to know that. We'll do our best here to walk you through our story, our portfolio, etc., so, you can follow along with what we've been up to. Good morning, especially to our new partners, analysts, and those of you hearing our story for the first time. As Ian mentioned, I'm Dirkson Charles, I'm the founder, CEO, and co-chairman of Loar. Loar is a family of companies with a very simple approach to creating shareholder value.

First, we believe that by providing our business units an entrepreneurial and collaborative environment to advance their brands, we will generate above-market growth rates. Since our inception in 2012, we have grown sales and Adjusted EBITDA at a compound annual growth rate of 38% and 46% respectively. We collaborate across business units by sharing best practices and ideas while assisting each other when it comes to execution. We execute along four value streams. We identify pain points within the aerospace industry and look to solve those problems through organically launching new products, which we believe over the long term will create 1-3 percentage points of top-line growth annually. We focus on optimizing our productivity, which in simple terms is the ratio of output to input.

Each year we'll identify initiatives that will allow us to continually improve with a focus on one or two major initiatives each year that will improve the ratio. In other words, think margin improvement and enhancing our competitive advantage. We also, each year across our portfolio of companies, will achieve more price than inflation. Again, margin improvement. Executing on these three simple value drivers, along with the secular growth rate of the aerospace and defense industry, we believe allows us to organically achieve 10% growth in sales and 15% growth in Adjusted EBITDA over the long term. Most importantly, we are committed to developing and improving the talent of all of our employees because our success is solely a result of their dedication and commitment. That's why I'm proud to call them my mates.

Our most important value driver is making sure we have the talent within our four walls and under our roof to support our customers and to continue to achieve above-market growth. I will now turn the call over to Brett to walk you through our portfolio.

Brett Milgrim (Executive Co-Chairman)

Thanks, Dirkson. Good morning, everybody. This chart on page 5 represents the way we have constructed Loar today. It will probably look familiar to a lot of you, certainly those of you who we met on the road show, or even those of you who read the S-1. So, I don't want to belabor all the points and charts in here, but there are two things I do want to highlight. First and foremost, I want to highlight our extremely, extremely disciplined approach to how we construct the business and the business model. First and foremost, we are an aerospace and defense-focused company. Maybe most importantly, we like businesses where there's true proprietary content, where we own the intellectual property, the product is specced in, and/or we have leading market positions in those categories which we participate.

Those categories are typically niche markets across the aircraft where there are true barriers to entry, particularly at the price points of the products that we sell, which Ian's going to talk about in a minute. Those barriers to entry are created in large part due to the fact that certification costs and recertifying or requalifying a product typically is diseconomic not only for the customer but also for competitors who want to enter into our market space. Lastly, in every business that we acquire, we need to have businesses that have a balance between the OE and the aftermarket.

If a business that we acquire doesn't currently sell into the aftermarket, it's something which we at a minimum need to see a path that we can enter so that we can capture the annuity of the 50-year life of that aircraft and the cash flows that that product provides. The other thing I want to highlight is the diversity and broad scope of our platform.

Whether it's the end markets, which you see here, or the aircraft platforms that we're on, because we're on virtually any platform that you can think of, or all the customers we serve, which we have no significant concentration with, we want to have a broad and diverse platform not only because we want the opportunity to capture that 50-year annuity, but we also don't want to be exposed with any meaningful concentration to changing macroeconomic conditions that may affect any end market or platform or any one customer. I think everybody saw how we performed during COVID, and that was a testament to our diversity. And if we are diverse across all spectrums of the sector, then we can continue to generate the consistent financial performance that you have seen from us in the past.

Ian McKillop (Director of Investor Relations)

Thank you, Brett. As Brett mentioned, diversity was a common focus in building Loar. Diversity across end markets, platforms, and notably for those viewing the presentation, our products. Across the 16 brands at Loar, we go to market with over 15,000 unique and proprietary parts, with no one part making up more than 3% of our overall annual net sales. Our parts have an average selling price of less than $1,000. Our products are found across the aircraft, embedded in engines, as part of the avionics, within hydraulic systems, as de-icing systems, restraint and safety systems, galleys, landing gear, actuation, and included in many other systems and subsystems that we will not be able to cover on today's call. The proprietary nature of our products makes them mission-critical for our end customer and ties us to the overall life of the aircraft.

As many of you know, the life of an aircraft can exceed 50 years over multiple operators. The design and specced-in nature of our products allow us to serve not only the original aircraft manufacturer but also the aftermarket through the many operators the aircraft sees over its lifetime. We believe that the diversity and proprietary nature of our product offering provide us the opportunity and, more importantly, the capabilities to serve our customers in a way that is unique to Loar. Now I'll hand the call over to Glenn.

Glenn D'Alessandro (Treasurer and CFO)

Thank you, Ian. Good morning, everyone. Let me start by discussing sales by our end markets. This comparison will be on a pro forma basis as if each of our businesses were owned as of the first day of the earliest period presented. We had record sales during the first quarter of 2024. In total, our sales increased to $92 million, a 12.3% increase as compared to the prior year period. This increase was driven by strong performances in commercial OEM, commercial aftermarket, and defense sales. Our total commercial OEM sales increased by 29% in Q1 2024 as compared to the prior year.

This increase was driven primarily by higher sales across a significant portion of the platforms we supply, including general aviation, widebody, and narrowbody aircraft, as an improving supply chain has allowed us to deliver parts that were previously held because our customers were experiencing bottlenecks in other areas of their supply chain. The increase in total commercial aftermarket sales of 5% was primarily due to the continuum recovery in commercial air travel demand, partially offset by destocking at a handful of our distributors and end customers. Our Q1 2024 commercial aircraft bookings were strong, and our commercial aftermarket year-over-year backlog is up 25% at March of 2024 versus 2023. The strong bookings and backlog support our full-year 2024 outlook for commercial aftermarket sales growth of low double digits.

The increase of 8% in our defense sales was primarily due to strong aftermarket demand across multiple platforms and an increase in the market share as a result of our new product launches. Let me recap our financial highlights for the first quarter of 2024. These are actuals. Our net organic sales increased 11.1% over the prior period. Our gross profit margin for Q1 2024 was flat with the prior year period. This was due to sales mix with slightly lower margin OEM sales as well as charges related to the moving of one of our manufacturing facilities. These items were offset by pricing and operating leverage.

Our increase in net income of $9.8 million in Q1 versus Q1 2024 versus Q1 2023 is primarily due to higher operating income as well as from the establishment of a valuation allowance during Q1 2023 against the company's deferred tax asset related to our disallowed interest carry forward. Adjusted EBITDA margins remained strong at 36% despite the temporary dilution from two acquisitions completed in the second half of 2023 and the continued buildout of our infrastructure to support our reporting, governance, and control needs as a newly public company. We expect to increase the EBITDA margins of our two newly acquired businesses as we continue to integrate them into Loar. So, what have we been up to since March 31st? Well, we closed the IPO on April 29th, which raised $333 million with the exercise of the greenshoe.

We used $285 million of those proceeds to pay down borrowings. With both of these transactions, our pro forma net leverage to our trailing 12 months of EBITDA through March 2024 was 1.6x. We also amended and restated our credit agreement on May 10th of 2024. This was done with no incremental fees. With this amendment, we extended the maturity of the term loans through May of 2030. Our interest rate was reduced by 250 basis points as long as we maintain a leverage ratio of less than 5.5 to 1. With the paydown of the $285 million of indebtedness and the reduction of the interest rate, our pro forma annual interest expense would be $26 million.

We also increased our liquidity to support reinvestment and inorganic growth by increasing the unused commitment under our Delayed Draw Term Loan to $100 million and establishing a new $50 million revolving credit facility.

Dirkson Charles (CEO and Executive Co-Chairman)

With that said, if you guys remember, in the S-1, we gave a flash range of our expectation of the first quarter results. The quarter came in at record sales and Adjusted EBITDA right on top of the high end of our range. This is a strong start to the year. This is why we feel very, very, very strongly, and we have high confidence in achieving the outlook we've put in front of you here. That plus the strength in available seat miles, which domestically are above 2019 levels, and globally, as projected by IATA, to be above 2019 levels in 2024. So, strong, strong tailwinds. In addition, as Glenn mentioned, and I want to make sure everyone gets this, that we have seen a 25% increase in our commercial aftermarket backlog at quarter end year-over-year. It's the strongest backlog we have seen in our history.

This strong backlog for our products and services, also, we've seen it in our defense end market. Add all that up, combined with our continued execution of our value drivers, gives us a high degree of confidence that we will achieve organically double-digit percentage improvement in sales across all our end markets in 2024 on a pro forma basis. So, what do we expect? Sales between $370-$374 million for calendar year 2024, Adjusted EBITDA between $132 million and $134 million for the calendar year, Adjusted EBITDA margin of approximately 36%. And as we've said, we continue to improve results at DAC and CAV, recent acquisitions, and we're developing our infrastructure to meet our public company needs. That's all baked into that 36%. We expect net income between $25.7 million and $27.1 million and Adjusted EPS between $0.41 and $0.43 per share for the year.

In addition, next slide. We expect capital expenditures to be approximately $11 million, full-year interest expense of approximately $42 million with an effective tax rate of around 30%, D&A approximately $40 million, non-cash stock-based comp of $9 million, and our fully diluted share count will be approximately 91 million shares. Sorry. Most importantly, if we do not acquire a business this year, we will have approximately $100 million of cash on hand at the end of 2024. With that said, our drumbeat since our formation is to acquire one or two businesses each year, which is not included in our outlook for 2024 that you see here. As you guys know, the timing of such acquisitions, we cannot predict, but we are focused on that value driver also.

So, with that, as Ian stated at the beginning of the call, given that we have been a public company for only a little over 2 weeks, our analysts are in their version of a quiet period and cannot ask questions. So, we will not take questions today but look forward to the future quarterly calls when they can dig in. With that, thank you for joining Loar's first quarterly earnings call and hope to see you guys in 13 weeks. Thank you.

Operator (participant)

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.