Héroux-Devtek Inc.

Gilles Labbé – President and CEO Stéphane Arsenault – EVP & CFO

Benoit Poirier -Valeurs Mobilières Desjardins Cameron Doerksen - National Bank Financial Ben Cherniavsky -Raymond James Ltd. Tim James - TD Securities

Good morning, and welcome to Heroux-Devtek conference call for the fiscal 2015 second quarter ended September 30, 2014. With me is Stéphane Arsenault, our Chief Financial Officer.

[Foreign language] Our press release was issued this morning and can be found along with our interim condense consolidated financial statement and MD&A on our website at www.herouxdevtek.com. Heroux-Devtek had a strong second quarter with 49.1% sales growth and 53.1% increase in adjusted EBITDA.

Adjusted EPS reached $0.11, up from $0.09 last year where this performance achieved in a seasonal weaker period due to summer vacations and plant shutdown. Our UK operation had another solid quarter with a revenue contribution of $23.5 million and a solid gross profit reflecting a small favorable product mix, we remain on track with the integration as our European and North American teams are working hand in hand and sharing best practice across the Heroux-Devtek network to achieve efficiency gains and synergies.

We are also pleased with the internal growth of nearly 5% after adjusting foreign exchange rate fluctuations. As anticipated, sales of commercial products were driven by the strength of the large commercial aircraft markets and higher sales to the business jet market mainly reflecting the ramp up of the Embraer 450/500 program.

In the military market, we also generated modest internal sales growth as we benefited from higher sales on CH-47 and the F-35 JSF programs. We concluded the second quarter with a well diversified funded backlog of $450 million, up from $447 million three months earlier.

I'll now provide you with a brief overview of our main operating markets. First, in the large commercial aircraft market Boeing and Airbus are continuing to implement production rate increases on their leading programs.

Their respective order backlogs as of the end of October sale represented approximately eight year of production at current rate. In the business jet market, data released by industry association GAMA confirmed the recovery in this sector with shipments increasing nearly 10% in the first nine months of calendar 2014.

The next few years are promising for this sector with industry forecast calling for sustained growth over a several years, driven by a better global economy and the ramp up of new programs, including those for which we have designed and developed a landing gear namely the Legacy 450/500, Learjet 85 and Dassault 5X. The military market is expected to remain soft with defense funding holding steady through the US government 2015 fiscal year.

However, on uncertainty remains beyond a time horizon with current funding request exceeding plan budget limits. As evidenced by a strong second quarter, our UK operation reduce our exposure to the US military market and provide us with better jurisdiction in terms of geography, customers and programs.

We also maintain a good balance across our network between new component manufacturing and after market products and services. Ladies and gentlemen, Stéphane Arsenault will review our second quarter result and financial position.

Thank you, Gilles. Before begin let me remind you that all amount are expressed in Canadian Dollar unless otherwise indicated.

Consolidated sales reached $84.1 million, up from $56.4 million last year. This 49.1% increase reflects a $23.5 million contribution from APPH while year-over-year fluctuation in the value of Canadian currency increases sales by $1.5 million.

Excluding these elements, comparable sales increased $2.7 million or 4.8%. Sales of commercial product rose 38.8% to $37.5 million including $7.9 million from APPH.

On an internal basis commercial sales increased 9.4% due to higher production rates for certain large commercial aircraft mainly the B-777 and B-787 program as well as higher sales to the business jet market mostly resulting from entry into production of the Embraer Legacy 450/500 program. Military aerospace totaled $46.6 million, up 58.6% from last year driven by a solid $15.5 million contribution from APPH.

Excluding the latter, military sales grew 5.7% as higher sales on the F-35 and CH-47 program were partially offset by a slowdown in the repair and overhaul activities and lower electronic enclosures and cabinet sales due to lower customer demand. Gross profit was $13.1 million, or 15.6% of sales up from $7.9 million, or 14.0% of sales last year.

The increase in dollars and as a percentage of sales reflects the contribution of APPH, including its more favorable product mix during the period. Excluding APPH, gross profit as a percentage of sales improved by 0.8%, driven by greater efficiency and a better product mix in our military aftermarket business.

Adjusted EBITDA reached $10 million, or 11.9% of sales, up from $6.5 million, or 11.6% of sales a year ago. We use the term adjusted to exclude items that are not related to our normal course of business.

Consequently adjusted EBITDA for the second quarter of fiscal 2015 exclude restructuring charge of $0.8 million before taxes related to the initiative to optimize and consolidate manufacturing capacity announced in January as well as certain charge in connection with the integration APPH operation. The comparable figure for the second quarter of fiscal 2014 exclude acquisition related cost of $0.3 before taxes.

Adjusted net income which exclude after tax effect of these time was $3.8 million or $0.11 per diluted share in the second quarter of fiscal 2015 versus $2.8 million, or $0.09 per diluted share last year. I remind you that last year we recorded favorable adjustments of deferred income tax liability of $0.9 million equivalent to $0.3 per share.

Factoring out these elements, adjusted net income roughly doubled from last year. Looking at our financial position, Heroux-Devtek concluded the second quarter with cash and cash equivalent of $50.9 million, or $1.42 per share.

Total long-term debt including the current portion but excluding net deferred financing costs was $103.7 million. Of this total an amount of $52 million was drawn from our authorized Credit Facility of $200 million.

As a result, our net debt position was $52.8 million while the net-debt-to equity ratio was 0.18:1 down from 0.19:1 at the end of the first quarter. This healthy financial position allows Heroux-Devtek to carry out its $90 million capital investment plan in preparation for our multi-year contract with Boeing to supply complete landing gear systems for the B-777 and B-777X aircraft.

During the first half of fiscal 2015, we invested $14.3 million in capital expenditure of which $10 million were related to the Boeing contract, and amount of $5.2 million was also disbursed for deposits on machine and equipment. The pace of investment will accelerate in the second half of the fiscal year and we should conclude fiscal 2015 with total investment of approximately $75 million of which $58 million will related to the Boeing contract.

I turn the call back to Gilles.

Thank you, Stéphane. Looking ahead our main priorities for the remainder of fiscal 2015 is to continue the integration of APPH and to execute on our capital investment plan for the B-777 and B- 777X contract.

As Stéphane just said, our pace of investment is accelerating. Construction of a new state of the art facility in Cambridge is progressing on schedule, and we anticipate the plan to be operational by the end of fiscal 2015.

Other project for leading as machinery and equipment across our existing network are also on schedule and within budget. We are pleased with how the plan is progressing and remain eager to demonstrate our ability, to demonstrate our world class capabilities introducing large scale value added mandate.

With the expanded side and scope provided by APPH including access to more generating resources, we can confidently pursuit other opportunities to supply complete landing gear system to the world largest aerospace OEM. As I mentioned earlier, most segments of the global aerospace market are growing.

Given these trends and their potential outcome on our existing contract, we believe Heroux-Devtek can achieve say over $500 million within five years. This objective can be achieved without further acquisition and assume stable currency.

It also reflects the contribution and subsequent growth of our European operations. The successful start up of the Boeing 777 and 777X contract.

And the main platform [ph] of North American landing and design program. For the remainder of fiscal 2015, we continue to anticipate a solid contribution from our UK operation, while internal phase are expected to remain productively stable with higher sales to the commercial aerospace market, offset by lower sales to the military aerospace market.

In conclusion, Heroux-Devtek ability to be cost competitively is driven by the talent of our team, our people. Our know how and our use of leading edge technology.

We remain focus on execution in order to provide customers with high value as a product and services and create further value for our shareholders. Stéphane and I are now pleased to answer your questions.

Hey, good morning, Gilles. Good morning, Stéphane.

Congratulations for the good quarter. If you could provide a little bit more detail around the military organic growth 6%, once you strip out APPH obviously a very good performance, just wondering how sustainable is the 6% organic growth going forward?

Look what happen is I think as Stéphane explained on CH-47, as you know; we have more of new this quarter than prior quarter so I think it is ramp up of this program to a certain level. The F-35 also we have ramp up coming from the F-35 so it is gradual, so it is going to the right direction.

On the repair overhaul contract where we repair for United States air force, we've seen an improvement and we expect some more improvement in the next two quarter. But the market of spare part though, spares -- you know why we built the lot of spares for the US air force and the navy.

And that market is still very difficult. So that one we don't expect any growth, we expect it's go down.

Okay. Just for the CH-47, Gilles, I assume that it's mostly the US portion right now that is kicking in, it is the CH-47 contribution at full speed now?

Yes. We have reached that level now with CH-47.

When you compare it with last year, our last year we are not -- still at the full rate now, we are pretty much where we should be.

Okay. And just on JSF 35, obviously you are not involved in the ballcades [ph] any more, so if you could provide more color about your contribution right now in the JSF35?

And also what's your view about the upcoming potential in Canada? We've seen some news that said that the Canadian could buy about four planes in the coming year, so I am just trying to know -- it seem that the JSF 35 will be the one that will be chosen by the government.

Well, I am not -- I don't make the decision for Canadian government. So I guess I'll let the Canadian government make their own decision.

Of course, as the Canadian government goes there with this purchase I think it would be good for us that we will sell more and more product on F-35, as you know I have been while, I am believer that they will sell at least 3000 aero plane over time on this program. So I think it is a great opportunity for us and we believe that eventually we could may be build more products on that aero plane if our government decides to buy it.

But that as for the government to decide. So that's pretty much cover your question I think.

Okay. And could you talk a little bit about the development of Boeing 777 program?

How smoothly is going the program? And also from a CapEx standpoint should we take into account the deposit as part of CapEx number?

Well, yes. I mean the deposit will turn into CapEx, of course as a point so when we say we will invest $90 million for the project that includes a deposit of course.

And as we said during the conference program is on schedule, as with on budget, things are moving in the right direction. So we of course it's -- we have to watch it very carefully.

We have people assigned full time on this, is watched also by myself and a whole group of people -- a large group of people to make sure that we have to perform, execute, very important.

Okay. And is the fact that CapEx on this program will ramp up more significantly in the coming quarters, will put some pressure on the margins, Gilles?

Well, so we have -- we execute that project and at the same time, we have to continue to deliver profitability to the shareholders. So as you can see we are doing both and we intent to continue doing that.

So it is managing -- we are managing the business, we continue to make profit.

Okay. And maybe last question just on the military side.

Could you provide some color about the bidding pipeline right now? The opportunities you see on the military side.

Well, not at this point. Of course there is a bid on a commercial side but it is -- as I said the spare market is very low.

We are looking at other opportunity at this point but I would reserve my comments because some of these projects are -- they are somewhat confidential.

Thank you, good morning. I guess just a follow up on Benoit question on the bidding activity.

Can you comment on what you are seeing in the commercial side? You mentioned that it seems like it's fairly active but, has it changed at all since the last quarter and are you seeing any opportunities for some new complete landing gear bids?

Yes.

Okay, don't need to elaborate.

Well, I will not elaborate on the military side. But there is project on the civil side and I think it is -- will not be appropriate to talk too much for them because as we are in bidding stage at this point and not-- actually it is not in the 100 C [ph] plus market that's we all know that this is pretty much, there is lot of up and down that side and this -- the business has been already decided on this.

So these are for helicopter market and other smaller type aero plane, at this point, I would reserve my comment because we are in a competition, we will speak.

Yes, understood. What about on built different type work, is there more activity there on a commercial side?

We have a large group of friends to take care of, it is all eligible, Boeing 777

Right. Okay, maybe just shifting gears on the Embraer Legacy 450/500 program?

Sound like it was a decent contribution in the quarter from that? How does that ramp up?

I mean I think that Embraer is part of relatively few new aircraft delivery in calendar 2014 but how does it looking for next year? Is it going continue to ramp to the next 12 months?

What we see we got visibility from a customer, I think we've reached certain level now phase which I believe we should be pretty much at one among so for now I think that's what we see as a visibility, small increase next year.

No, actually we will sell Europe, we expect gradual ramp up, and so we are now we at where we are, we are confident we will ramp up gradually.

Okay. And maybe just a couple of questions some of the restructuring and then I guess in duration activities.

Maybe first on APPH, have you had any benefit yet from integration and synergies and how do you think that will roll off over the next 12 months or so?

We have some benefit at this point in terms of synergy but I don't think we could see as material at this point. But we are expecting really more synergy to come next year in FY16.

For there is certain initiative that I think takes more time, for example installation of our ERP system launch where we believe that this would create some important saving. And we have other initiative on the go that are in the making and we believe that next year we will see more and more of this saving being achieved.

But in terms of the team over there, the team is in place. As you may know Cameron, we have some people that are working in Canada and US now are based in UK.

That change in the management over there has been done. So we have a strong team in UK as we speak made of mainly of UK people and assisted by also some of our older executive so they are working well together.

I am very proud of what they have achieved in the first six months. We can see the results so far so I think we are moving in the right direction over there.

Okay, good. And just finally just on the restructuring I guess in the Longueuil facilities.

When do you expect that to be completed and when should we searching more the savings?

Essentially this is pretty much on line on track. We should be complete it by the end of this fiscal year.

So little bit longer than what we had anticipated but as we are proceeding with this, we already see some more efficiency at this point.

At the end of March we should be done.

Hi, good morning, Gilles. This is [indiscernible] just filling in for Anthony Zicha.

My first question would you -- how comfortable are you in pursuing acquisition while ramping up for the Boeing 777 and Boeing 777X program?

So good question. First of all on that side while we are still looking as we speak.

There is nothing eminent let's put this way. We just be care about it nothing eminent.

Our priority is really to 777 then the integration of APPH, but yes if we would find something that is really fits all our criteria and will not impact our execution on 777, we will take a look at it. So our execution is very important now and the integration and the Boeing contract

Okay. And I understand that why you wouldn't talk much about the pipeline opportunities in civil and military but can you maybe provide maybe some color on if any announcement could be expected this fiscal year?

Is there anything that you could see materializing?

I think if something happen it will be probably in next fiscal year.

Okay. And my last question would be on the ramp up of Dassault 5X and the Learjet 85 maybe an update any changes in timeline, how is the ramp up going?

Well, this one is -- will go as just -- that's all, entering to service first; no first flight is schedule now for the first half of 2015. And entering to service I think therefore 2016, so again we see a gradual ramp up 2015 and 2016 on this one.

On Learjet 85, my memory is not perfect, first flight-- they are flying that right now, entering to service, I don't know if Bombardier have update their schedule at this point, so again here it would be a gradual ramp up, we have no timing at this point so it's -- that is where we are.

Good morning, guys.

How is the weather in Vancouver?

Probably I won't get lot of sympathies from you guys but it is really cold out here. So it's about plus five.

But it is one of those cold Vancouver days, it is beautiful but crest. We are not complaining, no rain.

Pretty nice in Montreal today.

Do you have any snow yet?

All right, it is coming.

Yes, it is coming. I just have -- I have couple questions maybe just trying to understand the financials a little better and pardon me if sounds like a bit of naïve question but when I recall back in the day when the Canadian Dollar was appreciating you had pressure on your gross margins at that time and that sort of montoward [ph] to me that when the dollar gets stronger and your margins get squeeze at a lot of Canadian dollar cost and exporting the product.

So can you just maybe elaborate on why the depreciation in the dollar hurt your margin this quarter, I would have thought it would help.

Yes, so I essentially as you may know we had some coverage on the exchange so from year-over-year we do some hedging as we have a policy internally to cover that risk over time. So it minimizes the fluctuation from year-over-year.

So when you take into consideration the exchange variation you have also take into consideration you know the variation of the portfolio that we have in terms of foreign exchange contract. So that's why from year-over-year it can have a negative impact like this quarter, essentially with exchange contract at the lower rate compared to previous year.

So it is a hedging impact

But Ben over time I think that's -- it is a phenomenon of this quarter, but if you look at through the years especially further in time let say in six months, nine months and 12 months from now then we will see a improvement, if the dollar stays at say pre type level or even go either, so that's going to probably show up as -- so which going to help us have a better margin, yes.

Yes. That's what I was trying to understand, it is just -- it is hedging impact which rolls off in time and --

That's correct.

It is here one for you, okay. I know I think a guy or someone on the call asked just about every quarter about the tax rate but moves around a lot for the next few quarters, do we just plug in the statutory rate?

Typically I have indicated in the past that our tax rate, combined tax rate should be more around 20%-22% depending of certain timing difference. So that's rate to use but if the terms of the level of income before tax as well, so 20% would be more in the right way.

And I just put that into the next few quarters and then use the year-to-date the average like just average year-to-date but not 20% for the year.

Talking about the tax, remember last year in a quarter we had quite an adjustment, favorable adjustment on the tax side that was like Stéphane said $900,000 or $0.03 per share, if you remove this, if you compare then net income let see on an adjusted basis, this will give you $1.9 million last year versus $3.8 million this year, so it is quite an improvement in net income versus last year when you try to compare apple-to-apple type.

Right, yes, and your margins are better too. So that was good to see, thanks, good quarter, guys.

Thanks very much, good morning. In terms of the APPH business in the quarter, I was wondering if you can comment if there were any particular areas platform of strength in the quarter relative to previous quarters for that business.

Yes, there are two of them. The Oaken and 1:1 [ph] we had a good delivery on these two products during the quarter.

Both for essentially there is a lot of MRO in there spare parts so that is a good product mix from the APPH transition at year-to-date.

Okay, thank you. My next question is just the Boeing 777 contract and the investment.

Can you just provide a bit of an update on what the funds in the CapEx, it has been put into that program so far? Kind of what its development are?

Where is that impacting facilities on the ground etcetera?

Well, in terms of number maybe let me summarize, so we disclosed that with-- we have maintained $10 million of capital expenditure on this program but we also have $18 million in deposits of machinery and equipments including those made last year. So we still remain with the same CapEx for this program at $90 million over this fiscal year and next fiscal year.

And we've got at the end of September total commitment of $52 million. So you see that like I have indicated in the call that the investment and the payment will accelerate in the last semester.

So it is $10 million plus $52 million committed

That's correct.

And I am just wondering then whether the $10 million that's been used so far I mean just what types of -- where those expenditures being put towards?

We are building average as we speak, right. So that's a big amount right there and some machines have already arrived.

Okay. So it's primarily going into the building and the machinery that's going into Cambridge.

And some machines are in Laval, machines are received Springfield, Ohio also.

Okay, thank you, operator. And thank you for listening all to the call today.

We are certainly looking forward to report on our progress during our next quarterly conference call. And have a good day and talked to you soon.

That's it. Thank you.