HEICO Corp (HEI.A) 2013 Q1 法說會逐字稿

Good morning. My name is Tamika and I will be you conference operator today. At this time I would like to welcome everyone to the HEICO, 2013 conference call. (Operator Instructions). 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 as a result of factors including but not limited to, lower demand for commercial air travel, or air fleet changes, which could cause a change for demand for all goods and services.

Products specifications which could cause an increase to our costs to compete contracts, governmental and regulatory demands, expert policies and restrictions, reductions and base or homeland security spending by US and/or foreign customers or competition from existing and new competitors which could reduce our sales. HEICO's ability to introduce new product, and products pricing levels, which could reduce our sales or sales growth. HEICO's ability to make acquisitions and achieve operating synergy's from acquired businesses customer credit risk, interest and income tax rates, and economic conditions within and outside of aviation, defense space, medical, telecommunication and electronic industries which could negatively impact our costs and revenues.

Those listening to this call are encouraged to review all of HEICO's filings with the SEC including but not limited to filings on 10-K, 10-Q and 8-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Thank you. I will now turn the call over to Laurence Mendelson.

Thank you and good morning to everyone on the call. As you probably can hear I have a terrible sore throat and cold and therefore I am going to turn the call over to our are very capable management team of Eric Mendelson, Victor Mendelson, Tom Irwin and Carlos McHale. And I am available. I will be listening on the call. If our team can't answer your questions I will try to do it but I thank you for understanding that I will not be actively participating in this call. So with that, I'm inviting Eric to step in and to start the call, please.

Thank you, good morning. This is Eric Mendelson the Co-President of HEICO corporation and I'm joined here this morning with Tom Irwin, HEICO's Senior EVP, and Carlos McHale, our EVP and CFO. Victor Mendelson is visiting our operations on the west coast and is also dialed in by telephone.

Before reviewing our first quarter operating results in detail, I would like to take a few minutes to summarize the highlights. Despite the challenging global business environment, our segments performed in line with budgeted expectations and are positioned to take advantage of the anticipated growth in the markets we serve during the second half of fiscal 2013.

Consistent with our philosophy of investing in future growth, we increased spending on new product development during the first quarter of fiscal 2013 by approximately 13% over the first quarter of fiscal 2012. Our consolidated first quarter 2013 net sales and net income represent record results for the first quarter. The aforementioned first quarter net sales record was driven principally by first quarter record net sales within both our Flight Support Group and Electronic Technologies Group.

Consolidated net sales increased 2% to $216.5 million in the first quarter of 2013, up from $212.7 million in the first quarter of 2012. Consolidated net income increased by 4% to $20.0 million for the first quarter of fiscal 2013, up from $19.2 million for the first quarter of fiscal 2012.

Consolidated net income per diluted share increased to $0.37 per diluted share for the first quarter of fiscal 2013, up from $0.36 per diluted share for the first quarter of fiscal 2012. Cash flow provided by operating activities increased $15.5 million, to $13.3 million for the first quarter of fiscal 2013.

As of January 31, the Company's net debt to shareholders' equity ratio was 37.3% with net debt, which is defined as total debt less cash, of $235.8 million. In December 2012 we paid our 69th consecutive cash dividend at a rate of $0.06 per share and the previously announced special and extraordinary cash dividend of $2.14 per share on both classes of our common stock. The dividends which aggregated $116.6 million were funded from borrowings under our revolving credit facility.

Now, I would like to go into the results of the Flight Support Group. The Flight Support Group's net sales improved slightly to a first quarter record of $139 million for the first quarter of fiscal 2013 compared to $138.9 million for the first quarter of fiscal 2012. This increase reflects additional net sales of $3.6 million from our fiscal 2012 acquisitions partially offset by an aggregate decrease of $1.9 million within our after market replacement parts and repair and overhaul services product lines and a decrease of $1.6 million within our specialty product lines.

Consistent with previous guidance, domestic economic uncertainty contributed to the the demand decline for certain products within our after market replacement parts and overhaul services product lines during the first quarter of fiscal 2013. Furthermore, the decrease in net sales within our specialty product lines primarily reflects the impact of production delays at certain customers.

Based on our current economic visibility, we anticipate improving demand and moderate organic growth within the Flight Support Group principally during the second half of fiscal 2013. The Flight Support Group's operating income was $24.2 million in the first quarter of fiscal 2013, compared to $25.5 million in the first quarter of fiscal 2012.

This decrease principally reflects a combination of a less favorable product mix in the previously mentioned lower sales within our specialty product line. The Flight Support Group's operating margin was 17.4% for the first quarter of fiscal 2013 compared to 18.4% for the first quarter of fiscal 2012.

The decrease in operating margin principally reflects the previously mentioned less favorable product mix and lower sales within our specialty product lines. Based on our current economic visibility, we estimate the Flight Support Group's fiscal 2013 full year operating margin to approximate those in fiscal 2012.

Operating results for the first quarter of fiscal 2012 were a challenging comparable period to the first quarter of fiscal 2013 because the first quarter of fiscal 2012 was high highlighted by 10% organic sales growth, an increase of 25% in operating income and a 1.5% improvement in operating margins.

Now, I would like to introduce Victor Mendelson, Co-President of HEICO, and President of HEICO's Electronic Technologies Group, to discuss the results of the Electronic Technologies Group and the remainder of HEICO's performance.

Eric, thank you very much. The Electronic Technologies Group's net sales increased 6% to a first quarter record of $78.8 million for the first quarter of 2013 up from $74.5 million for the first quarter of 2012.

The increase in net sales for the first quarter of fiscal 2013 principally reflects additional net sales of $4.2 million contributed by the 2012 acquisitions. Further, the net sales increase reflects greater demand for certain space products resulting in a $4.4 million net sales increase from this product line partially offset by a $2.3 million and $1.7 million net sales decline from defense and industrial products respectively.

Ongoing economic uncertainty, coupled with weaker market conditions for defense related products, in part due to the threat of US defense spending reductions, contributed to lower sales of certain ETG products during the first quarter of fiscal 2013. Despite the uncertainty about government budget reductions we anticipate improving demand and moderate organic growth within the EPG principally during the second half of fiscal 2013. This is not unusual for the ETG sales progression in prior years.

The Electronic Technologies Group's operating income was $15.5 million for the first quarter of fiscal 2013 compared to $16.2 million for the first quarter of fiscal 2012. The decrease in operating income principally reflects a less favorable product mix of certain higher margin products in the first quarter of fiscal 2013, an increase in new product research and development expenses, and increased intangible asset amortization expense from our fiscal 2012 acquisitions.

The Electronic Technologies Group's operating margin was 19.7% for the first quarter of fiscal 2013 compared to 21.8% for the first quarter of fiscal 2012. The decrease in operating margin principally reflects the previously mentioned unfavorable product mix, increase in new product research and development expenses, and amortization expense.

Based on our current economic visibility, we estimate the ETG's fiscal 2013 full year operating margins to approximate those we experienced in fiscal 2012.

Turning to HEICO corporation, a consolidated level, our diluted EPS increased to $0.37 in the first quarter of 2013, up from $0.36 in the first quarter of 2012.

Additionally, diluted EPS for the first quarter of 2013 includes a $0.02 per diluted share benefit, net of expenses, attributed to a tax credit for qualified research and development activities for the last ten months of fiscal 2012 that was recognized in the first quarter of fiscal 2013. The aforementioned tax credit is the result of a retroactive extension in January of 2013, R&D tax credit to cover two year period from January 1, 2012 to December 31, 2013.

Of course, the fiscal 2012 diluted EPS amounts have been adjusted respectively for our five for four stock split distributed in April 2012. D&A expense increased $8.1 million for the first quarter of fiscal 2013, up from $7 million for the first quarter of 2012, and this increase is primarily a result of higher amortization expense of intangible assets that was principally the result of our acquisition's in fiscal 2012.

In research and development, consistent with our philosophy of investing in future growth, we increased spending on new product development during the first quarter of 2013 by 13% to $7.3 million, up from $6.5 million in the first quarter of fiscal 2012. Significant ongoing new product development efforts are continuing at both the flight support and electronic technologies groups as we reinvest approximately 3% to 4% of each sales dollar.

Our effective strategy for the last 22 years has been to reinvest a portion of our earning into the development of new products and services that we can offer at lower cost to our customers, which in turn facilitates market share growth sufficient to meet our growth goals.

Our SG&A expenses were $42.7 million, and $40.6 million first quarter fiscal 2013 and fiscal 2012 respectively. The increase in SG&A expenses principally reflects an increase of $2.5 million attributed to the fiscal 2012 acquired businesses.

SG&A expenses, as a percentage of net sales, increased from 19.1% in the first quarter fiscal 2012 to 19.7% in the first quarter of 2013 principally reflecting the impact of higher SG&A expenses as a percentage of net sales at the acquired businesses of which 4 tenths of a percent of the increases attributed to amortization expense of intangible assets recognized in conjunction with the acquisitions. Interest expense approximated $600,000 in both the first quarter of fiscal 2013 and fiscal 2012, and our outstanding debt balance was $255 million as of January 31, 2013 at a weighted average interest rate of approximately 2%.

Other income in the first quarter of fiscal 2013 and fiscal 2012 was not significant. Our effective tax rate was 27.8% in the first quarter of 2013 compared to 34.2% in the first quarter of 2012. The decrease in this tax rate is principally due to the previously mentioned income tax credit for qualified research and development activities that was recognized in the first quarter of fiscal 2013.

The decrease in the effective tax rate was also attributed to an income tax reduction for the special and extraordinary cash dividend paid in December of 2012 to participants of the HEICO 401K plan holding HEICO common stock. For the full fiscal 2013 year we are now estimating an effective tax rate of approximately 33%. Net income attributable to non-controlling interests was $5 million in the first quarter of 2013 compared to $5.3 million in the first quarter of 2012.

The decrease in the first quarter of fiscal 2013 principally reflects our purchase of certain interests during fiscal 2012 and 2013 resulting in more allocations of net income of non-controlling interest partially offset by higher earnings of certain ETG and FSG subsidiaries during the first quarter of 2013.

Turning to the balance sheet, as I mentioned earlier our financial position and forecasted cash flow [inaudible]. Cash flow provided by operating activities increases $15.5 million to $13.3 million for the first quarter of fiscal 2013.

We continue to expect strong cash flow provided by operating activities, approximately a total of $140 million for fiscal 2013. Our working capital ratio, current assets divided by current liabilities, is a strong 3.5 as of January 31, 2013 up from 2.8 as of October 31, 2012.

Days sales outstanding of accounts receivable was 47 days as of January 31, 2013 compared to 46 days as of October 31, 2012. We continue to closely monitor all receivable collection efforts in order to limit our credit exposure.

No one customer accounted for more than 10% of our net sales and our top five customers represented approximately 15% of consolidated net sales for the first quarters of both fiscal 2013 and fiscal 2012. Our inventory turnover rate was 129 days as of January 31, 2013 compared to 114 days as of October 31, 2012. Decrease in our turnover rate principally reflects an increase in inventory levels to what the end of the first quarter of 2013 due to anticipated sales growth in the second half of the fiscal year.

Capital expenditures were $4.5 million in the first quarter of 2013 compared to $3.8 million in the first quarter of 2012. We continue to plan for approximately $18 million to $20 million in capital expenditures during the current fiscal year.

We continue to anticipate depreciation and amortization expenses in this fiscal year to approximately $35 million. Our net debt to shareholders equity ratio is 37.3% as of January 31, 2013 with net debt, which is total debt less cash and cash equivalents, of $235.8 million.

As of January 31, 2013 we had a total of $250 million of outstanding borrowings under our revolving credit facility with a maturity in fiscal 2018. The $123 million increase over the $127 million outstanding as of October 31, 2012, principally relates to borrowings made to fund the previously mentioning aggregate $2.20 of cash dividends paid in December of 2012, and to purchase the remaining 13.3% interest in one of our subsidiaries.

Turning to our outlook. As expected, global economic uncertainty, and domestic governmental spending reductions, were principal contributing factors to the nominal sales growth and lower operating income reported in the first quarter of fiscal 2013. As we look ahead for the remainder of 2013 we remain optimistic in the consensus outlook for the commercial airline industry and expect to see growth in airline capacity and maintenance spending in the back half of 2013.

Additionally, we expect improving demand for certain products of our electronic technologies group in the space, aerospace and medical industries. Based on current economic visibility we are increasing our estimates of full year fiscal 2013 year-over-year growth in net sales to 6% to 8% and growth in net income to 9% to 11%, up from our prior growth estimates of 5% to 7% in both net sales and net income.

Additionally we continue to estimate consolidated operating margins to approximate 18% for the full fiscal 2013 year. Roughly 75% of this growth is expected to be organic and represent organic growth of approximately 7% for the balance of fiscal 2013. These estimates do not include the impact of any potential 2013 acquisitions.

In closing, we will continue to focus on intermediate and long-term growth strategies with an emphasis on acquiring profitable businesses at fair prices and we are currently actively pursuing [inaudible] within both of our segment that compliment our existing operations. With that I'm going ask the Operator to please open the floor for questions. Thank you.

(Operator Instructions). Your first question comes from the line of Tyler Hojo with Sidoti & Company.

Good morning, everyone. First question, if we look at your organic growth within the Flight Support Group, this is now the fifth consecutive quarter where we have seen decelerating growth rates on an organic basis. I'm wondering if you could talk a little bit about what gives you confidence that you will see a rebound as we move through the remainder of fiscal 2013.

Tyler, good morning, this is Eric. I will go ahead and answer that. If you look at our sales in fiscal 2011, we were up about 23%. We had about 23% organic growth which obviously was a huge number and I think we out performed a number of our peers in the industry in turning out those numbers. And even in the first quarter of fiscal 2012, we were up about 10%.

And I think in hindsight when we look back the airlines were a little over optimistic perhaps for the ultimate results that fiscal 2012 would generate. And ended up, in hindsight, probably over ordering a little bit in fiscal 2011, not because they were worried about shortages or not because they were trying to restock, but when the economy started stalling and all of the political issues came to light in the beginning of 2012, things softened up.

So I think that we are just really seeing a continuation of that and really a continuing burn off of the inventory. I can tell you that I met recently with our sales folks and I've asked them exactly that question, why are they optimistic, and I can tell you that we have gone through on a customer by customer basis and our normally extremely conservative, and I would say sand bagging, sales folks had very concrete answers as to why they thought the results would be better.

We are aware of certain airlines who kept inventory levels down for their 12/31 fiscal year end and there were some other issues going on. So our folks really, when you dive into the details, they are pretty optimistic on a rebound in the second half. So I would say that is why we feel good.

In addition, normally November and December are slower months for us just due to the number of working days and people trying to conserve working capital but in January of 2013 our sales were up and that trend continues into February of 2013. So we do have some tangible results. Now, I don't want to mischaracterize and say that we are going to go back anywhere near the 2011 numbers but we do see a firming which leads us to be able to increase our estimates for the back half of the year.

Okay. Got it. And the kind of inventory stocking and de-stocking seems to be kind of a theme your competitors have talked about. Is it possible perhaps you are being a little overly conservative in regards to the growth expectation in FSG if you do see some sort of restock occur in the back half of your fiscal year?

I mean I would say normally we err to the side of being conservative because that is just in our DNA and how we are wired. But, yeah, I suppose there is a possibility that things will be even better. But I can tell you when we look customer by customer we do expect the rebound but we are not anticipating any sort of restocking levels or huge movements that would be beyond our guidance. Yeah, it is possible, but we are really not anticipating that.

Got it. Okay. Thanks so much for that color. And just one more from me, maybe for Victor. Just curious, what is baked into the full year outlook in regards to this overhang in regards to sequestration?

Tyler, hi, it's Victor. By the way, I apologize for what sound like a Marco Rubio moment where the phone went quiet but some I have some loud fans in my hotel room and I had to turn it off. I don't know what it was about. Anyway, the answer is, at this point on sequestration it is really very murky. And I'm not sure what we attribute to sequestration at this point in the first quarter and even beyond, versus what I would say would have been some of the normal defense cuts that we have talked about in the past, just because of operations levels.

And right now we are seeing I think a little evidence of it possibly in a couple of our businesses where DOD is reticent to place orders, and we are waiting on orders and we just aren't certain, though, whether that is in fact a result of the sequester. Obama's sequester or something else. We are just sort of staying flexible at this point and we will see what happens.

Okay. Great.

I wish I had a better answer but everyone I talk with, by the way, pretty much in our level within the industry seems to be feeling the same thing.

Yeah, no, I definitely get that. All right. Thanks so much, guys.

You're welcome.

Thank you.

Your next question comes from the line of Arnold Ursaner, with CJS Securities.

Hello?

Arnie?

Can you hear me?

We can hear you.

This is Lee Jagoda for Arnie.

Good morning.

Good morning. Since Q1 one was flat organically and you did see a pickup in January, how far down were November and December?

This is Tom Irwin. We report on a quarterly basis the consolidated numbers. Again, our commentary back in our fourth quarter conference call was that the November/December were down. But again we don't really subscribe to monthly or weekly sales forecast or sales reporting. But again as Eric said we did see recovery in actually both of our segments in the month of January and again based on our updated second quarter forecast from our business units that is what is baked into our updated estimate growth.

You highlighted R&D spending by segment which you rarely, if ever, do. Was the increased ETG R&D spending more broad based or more project specific? As a follow-up to that, did it have any impact on the spending you did related to the FSG segment?

Again, this is Tom Irwin. The answer was really R&D spending principally in the ETG group. We actually spoke about it last year we began ramping up ETG in fiscal 2012. The first quarter of this year versus the first quarter of last year kind of reflects that growth as an example, R&D spend in the first quarter was about 3.4% of sales. That is pretty close to where it ran for the full year of last year was about 3.3%. We saw some ramping up after the first and second quarters of last year. The net/net gross increase is principally in ETG and I would say it is broad based and I would say broadly reflective of our targeted areas of growth such as space, aerospace, and industrial given the uncertainty of near term defense spending.

Okay. And one more question and I will hop back in queue. Corporate expense was higher as a percent of sales in the quarter. Can you give us more color on what caused that jump and the outlook for corporate expense for the remainder of the year?

Inherent again in our guidance is, round numbers, just about 2% of sales. It is about what it has been running, just to 1.8% and 2% of sales is what is baked into our guidance. I don't recall, if could add any other detail on any changes in the first quarter.

The only incremental increase, if you would, to overhead and corporate expenses would be from the new acquisitions and that was not a needle mover.

Okay. Thanks very much.

Thank you.

Your next question comes from the line of Michael Ciarmoli, with KeyBanc Capital Markets.

Good morning, Michael.

On for Mike. Real quick first Tom just kind of a house keeping question but I know you mentioned that the tax rate for the full year is expected to be I think you said 33%. Does that bake in additional impact from the R&D tax credit? How are you guys dealing with that?

The answer is yes, our updated tax rate for the full year reflects the additional R&D credit which we will be eligible for the full year which wasn't eligible and, of course, we he mentioned earlier the retro impact of the first quarter as well as the other things that impacted the first quarter effective tax rate, the deductibility of a portion of our special dividend payable to our 401(k). On the other hand we have some things going the other way such as acquisition of non-controlling interests that are basically entities of LLC, Linden Liability Corporation, that are taxed as partnership. So that kind of goes the other way. Inherent in our updated full year tax effective rate of 33% are all of the above.

Okay. Okay. Great. That's helpful. And then just one other one. Are you guys expecting to see any material impact or potential opportunities from the US Airways/American merger should it go through?

We normally don't comment on specific customers or products due to competitive reasons. You know, we have our competitors on this call and you know listening actively to what we say. I can say that in general bigger airlines are good for what we do, are good for HEICO because when they've got more aircraft, or more aircraft of a particular type, we are able to develop more products and be a more meaningful savings target for them on all of the different stuff that we do for them. I would say in general that is good for us. And, of course, both of the other major US combinations I think helped HEICO. And, of course, both American and US Airways are currently our customers and have been for a very long time. So I would say that we are optimistic on that.

Okay. Great. Thanks. That's all I had.

Your next question comes from the line of Steve Levenson, of Stifel Nicolaus.

Good morning, Steve.

Larry, hope you feel better soon. Just going back to the R&D spending increases. Are these line extensions or are you expanding to new aircraft and engine families?

This is Tom Irwin. Again, it is mostly in the electronic technologies group that increase and so it wouldn't be specific.

Not at airline then.

Exactly. [ OVERLAPPING SPEAKERS ]

Steve, I can tell you as a matter of course we do continue to develop products for new aircraft that are developed and being used by the airlines. So there is a natural evolution towards developing parts for newer aircraft.

And our spend was.

And our spend was consistent with that.

Okay, thanks. As leasing becomes a bigger part of acquisition, are you seeing any change in attitude from the leasing companies to some of your products? Or your acceptance for example?

Yes, we have had is success with certain lessors permitting the lessees to use our parts and we think that we have got to continue to educate and make sure that the operators understand the benefit and the lessors understand this is not detrimental to the value you of their aircraft or engines. Yes, I would say we made continued progress on that front.

Okay. And last one, in terms of acquisition opportunities, are they skewed more towards one side of the business or the other?

No. Right now we are looking at a number of opportunities in each of our business segments. Of course, we never know what we are going to end up being able to close on. But I would say there are plenty of opportunities in each business segment and I think that, one of the things which is sort of interesting as we go out on the road and we meet new leadership teams and talk to them about their businesses, I think what is becoming more and more consistent to us is that HEICO seems to be an acquirer of choice for these folks because of our operating style, because we treat people fairly, both customers and team members, shareholders, that's all part of our DNA.

And when they have the opportunity to select with whom they are going to work, whether it is an entrepreneur who has built up a business, or a management team, or even a private equity firm, I feel that HEICO can write a check and close. We continue to be favored in that area. And we just got to make sure that we find businesses that match with our DNA and that can be acquired at fair prices where it is fair for the seller, fair for the seller's leadership team and employees and also it is fair for HEICO. But there are plenty of opportunities, many opportunities in both businesses, in both business segments that we are working on right now.

Okay. Thanks very much for the additional detail.

Thank you.

Your next question comes from the line of Chris Quilty of Raymond James & Associates.

Good morning, Chris.

Good morning. I know you don't provide quarterly guidance but the guidance seems to imply that most of the growth is in the second half of the year and I'm assuming that Q2 in terms of both growth rate and margins might be more similar to Q1, or is there a different progression that we should expect throughout the year?

Chris, this is Tom Irwin. And as you pointed out we don't give quarterly earnings guidance or revenue guidance. I think as we reported in our press release and in the commentary from Eric and Victor earlier, I think we see the strengthening, more push, towards the back half of the year based on what we see today, and other than that we won't be more specific. But some what back ended if you will.

And that would be for the margins also as you get volume?

You know, typically historically we get a bump in margins with increased volumes, yeah. Obviously a piece of our cost structure is either fully variable, or semi variable. Volume definitely does help and tends to move the margins. That being said, as we've commented in the past, in the ETG group sometimes you will get some abnormality based on mix and lumpiness. Generally, yes, we do have historically seen and would expect to see margin improvement with volume increases.

Great. Thanks a lot.

Thank you.

(Operator Instructions). Your next question comes from the line of Jim Foung, with Gabelli & Co.

Good morning, Jim.

I guess just circling back on the R&D. Spending primarily in the ETG segment, are you expecting a fast pay back on that? Is it on new products that can be developed relatively sooner than you normally spend on the Flight Support Group?

Jim, this is Victor. I would say it is our typical pay back. There is nothing here that is going to be accelerated by the higher spending. We'll see special results in the next quarter or two quarters out or something like that, it is in the normal flow of the business.

So it is kind of our normal time frame but you are stepping up because you need to continue to maintain your edge in the marketplace?

Yes. And I think there are a lot of opportunities out there, particularly in the space side for us, that we are working on and spending on at the moment. And actually as well as in some defense related areas as well that offer opportunities even in a shrinking budgetary environment.

Okay.

Jim, let me just clarify. The commentary was that the growth in the spend first quarter to first quarter was [inaudible] but I don't want to you know that to be misconstrued. We again to spend, again typically spend 3% to 4% of each sales dollar towards new product development in both of our segments and as Eric said earlier we continued at that targeted level in FSG as well. As you look quarter over quarter the dollar increase was principally in ETG's but again, for the full year, pretty close to what we ran last year, about 3.3% of sales.

It is pretty much in line then with your typical spending.

Yes.

Yes.

And could you give me color on just what you have seen in Europe overall from a corporation? Are you seeing activity improving or still seeing pretty sluggish in terms of the environment out there?

Jim, this is Eric. I mean a year ago everybody thought Europe was going to collapse and sentiment got very bad. I'm not sure sales ever got down to that level but certainly emotion was very raw back then. I would say Europe is still very slow. There are a lot of issues over there. I don't think the fundamental issues have been corrected even though the markets seem to be rallying a little bit. But we are doing fine over there but I would say there is not really any pockets of tremendous strength over there. A number of the airlines have got labor issues, have got cost issues and they have got to work through those. I think that they will and since we provide cost saving alternatives whether they are in parts or repair, I think that we continue to grow our share. But Europe is still a pretty tough place right now.

So have your results been hurt by the weaker Europe in the last 12 months?

I'm sorry have they been hurt by what?

By the weaker economies in Europe in the last 12 months?

Yes, I would say so. I would say so. Yes. They have been hurt.

Are you able to kind of quantify that a bit?

I really don't have the data in front of me right now. But I can tell you definitely that customers over there are struggling, unit volumes are down, while we may be winning share unit volumes challenged because they are trying to save as much money as possible and cut back on maintenance spending. They are not going to be able to do that indefinitely and there will be a rebound. But it still continues to be a tough region and other corporate executives with whom we speak are basically saying the same thing.

Okay. Great. Thank you. Larry, I hope you feel better.

Jim, thank you.

(Operator Instructions). Your next question comes from the line of Ken Herbert, with Imperial Capital.

Good morning, Ken.

Actually for Ken this morning. I had a question about FSG specifically I mean it seems like the number of aircraft getting torn down is going up and I was wondering if you felt like the amount of used parts within the channel was hurting maybe sales within FSG at all?

That is a very good question and we are asked that quite a bit at the conferences that we attend. And again, it is important to remember that most of what we sell on the parts side are expendable parts and those are typically not recovered in these tear down operations. So we have not seen any meaningful impactas a result of the tear downs nor really do we anticipate a big impact there.

The other thing which I think is also very important to point out is that HEICO is not a trading operation in that we don't take inventory positions in various inventories where if suddenly the price goes down due to tear downs that we will be impacted. And like wise, if the price goes up due to lack of tear downs, we will benefit. We tend to be more focused on the expendable area and in our asset management business more on serving the customers and acquiring in pretty short-term what they need and not buying out big inventories. So no, I don't think we are impacted significantly there.

Okay. Okay. That's helpful. And then can we still sort of look at FSG as creating 500 new PMA parts a year? Is that still sort of the run rate that you guys are going at?

A couple of years ago we started talking about parts and DER repairs because the two were interchangeable depending on what the customer wants but I mean we are running at the same rate that we have been running now for the last couple of years. So there is no meaningful change there.

Okay. And then my last question was just on your OEM counter parts and I was just wondering if they were at all maybe getting more creative as far as service packages that they are offering or are if you just were finding it maybe more difficult to maybe get maybe deeper penetration within airlines? Are you finding it more difficult at all to move PMA or products now than maybe one or two years ago?

No, no. We are not. We have a tremendous amount of respect for our OEM competition and they are always doing the same stuff that they have always done. We typically say that the card they like to play is the FUD card, fear, uncertainty and doubt, and they are very effective in doing that and they are also very focused on maintaining their margins. So no, we haven't seen any special activities. The other thing which I think is important to point out is that we are not greedy and that we only go for up to a one third market share on each of the parts we he provide. We intentionally leave them with two thirds.

So if you look at the economics of that, they can get two thirds at an aggressive price and if they want to try to squeeze us on the one third that we are going to take and compete on price we are just going to have to go after some of the other piece that they have got in order to capture our target market share. They don't like us and they wish that we didn't exist, nobody likes competition but I think if we didn't exist somebody else would do it ultimately and we are probably the best type of competition to have. So no, I don't think there is anything, there are no material changes in those areas.

Okay. Okay. Great. Thank you very much.

Thank you.

Appreciate it.

And there are no further questions at this time. I would now like to turn the call back to management for any closing remarks.

Thank you very much. We appreciate everybody attending our are first quarter earnings call and we will be having our second quarter earnings call towards the end of May. And perhaps our Chairman, Larry Mendelson, would like to say a few parting comments.

Or maybe not. Anyway, he is recovering very well from his cold. Nothing serious. And all of us will be here for our second quarter conference call.

Eric, I will. I just wanted to say goodbye to everyone and I look forward to speaking to them this time for real at the second quarter meeting and I'm going to get off and rest my voice and you can all hear the problem. So thanks very much for your interest in HEICO and let us know if we can answer any questions you may have. Thanks.

Thank you. And that is the end of the call.

Thank you all for participating in today's conference call. You may now disconnect.