Eric Mendelson: Yes. We, both HEICO and Wencor performed very well in terms of new PMA generation. We’re continuing to invest, continuing to find new opportunities. So I mean without doubt, this is going to be a record year in terms of PMA generation and the number of parts that we can come out with. I can tell you that I’ve met with a number of customers since Wencor has closed, and they are really excited and enthusiastic unlike I’ve ever seen, concerning our product line. They want us to do more Again, there is going to be plenty of business for the OEMs. There is more than enough business to go around. But they clearly have seen after going through a supply chain constraint like we’ve seen over the last couple of years, not only does HEICO bring cost savings, but we also bring availability.
And that is a very, very key part of our value proposition. So that is driving them to want to continue to develop more parts with us. And why I’m so bullish on it. I mean, obviously, we’re not going to HEICO-Wencor won’t develop the same parts and we can have each of the business units focused in areas where they have a competitive advantage, and that is our plan to be able to broaden the amount of product that we can bring to our customers.
Ken Herbert: Okay. That’s very helpful, thanks, Eric. And maybe, Carlos, if you look at the Wencor business, to the extent to which it’s still sort of stand-alone or independent somewhat. How is the cash generation profile of that business relative to legacy HEICO? And is there an opportunity to maybe see some better cash generation out of the Wencor business?
Carlos Macau: Ken, it was a little hard to hear that, but it sounds like you’re wondering how we might be able to squeeze more money out of Wencor? Is that essentially your question?
Ken Herbert: Exactly. Yes, sort of the cash profile and the outlook there. Thank you.
Carlos Macau: Sure. So I think that on a cash flow for basis from an EBITDA perspective, they are doing quite nicely. They are ahead of our expectations. I think that as we coordinate operations and coordinate our sort of consolidation of some back office things, there may be some savings there. As I mentioned to you before, we’re not going to, we’re not going to disrupt operations right now with any consolidation moves because our end markets are too hot and candidly, they are doing great. And I think that if they continue to do what they did this quarter, we will be very happy. They are not consuming a lot of working capital at the moment. So that’s all a positive going forward in ‘24.
Ken Herbert: Great. Thank you very much.
Operator: We will take our next question from Scott Deuschle with Deutsche Bank. Please go ahead.
Scott Deuschle: Hey, good morning.
Eric Mendelson: Good morning, Scott.
Scott Deuschle: Eric, can you talk a little bit about the munitions growth at FSG? Maybe kind of what the growth has looked like over the last year than what the outlook is going forward into 2024?
Eric Mendelson: I’m sorry, can you just – the growth of which product line?
Scott Deuschle: The munitions product line, I think, in Specialty Products, I think it was a big driver of growth in the first half of the year. I’m just curious a little more granularity there? Thank you.
Eric Mendelson: Got it. Yes. I think what you’re speaking about is the Missile Defense products that we’re doing. And there is a lot of, there is been a tremendous amount of growth as you can imagine in that area. Everybody has been significantly under-invested in it. And for that reason, we’re very optimistic on it. Within our Specialty Products business, we are adding capabilities and space and people to a number of those businesses. So there is a fair amount of, I would say, one-time costs that we’re anticipating in 2024, but we’re going to be able to cover it within our normal margins. But the business is very strong. And I think that we’ve really carved out a niche for ourselves in many areas in the defense products.
Scott Deuschle: Okay. And then Eric, you talked earlier about price and availability being two of the differentiators for what allows you to get the sale on a PMA part. But it seems like another one is that the PMA part is often just a better part. So I’m curious if you could talk a bit about that and how frequently the product itself and the capabilities of the product are what drives the sale? As opposed to just the price and availability piece that you mentioned earlier.
Eric Mendelson: Sure, Scott. I’d be happy to. So in order to get PMA, it’s got, the part has got to be the same in terms of form, fit and function. So therefore, yes, the way that we are able to differentiate ourselves with respect to quality, is we typically have tighter tolerances so we produce more consistent parts. And we also have an extremely robust quality inspection program. So when parts come in from vendors, whether they are HEICO vendors or outside vendors, there is a very robust material analysis, whether the part’s metal or not metal to confirm grain size, microstructure, hardness, coatings, all of those various constituents to ensure that the part that we ship out is exactly what was designed. Likewise, we have a very robust inspection process to review the dimensions.
So I would say that with regard to basically shipping the part according to the design intent, HEICO scores incredibly high in that area. So the parts are more consistent. Airlines are able to basically use them and install them right away and the fallout or rejection rate with HEICO parts, we believe, is significantly lower than with other companies’ parts. So they are improved in that regard. We do offer some parts that are improvements where material or dimensions can be changed. But that is a smaller part of our business, but that’s also an area of opportunity for us.
Scott Deuschle: Okay. Great. And then last question, Carlos. Can you give any kind of framework for how to best think about ETG margins for next year? Is something in the range of 24% to 25%, a good kind of base case framework to think about ‘24? Thank you.
Carlos Macau: Well, I can tell you this for the ETG. I think it’s going to be lumpy. I think the defense sales look like they have turned to our benefit. But we have, as Victor mentioned earlier, we have a lot of high-end reliable parts that are going to non-aerospace defense and space areas. That business, we believe, will calm down a little bit. So the margin is going to go all over the place. I would say if you’re at 24%, you’re probably in the right ballpark for the year. But I would let us get a couple of quarters underneath this before we before we commit to a margin. Because, again, I think based on backlog and what we see right now, it’s going to be a little lumpy going into next year.
