Héroux-Devtek Inc.

Gilles Labbe - President and CEO Stephane Arsenault - EVP & CFO

Benoit Poirier - Valeurs Mobilières Desjardins Cameron Doerksen - National Bank Financial Ben Cherniavsky - Raymond James Limited

Good morning, and welcome to Heroux-Devtek conference call for the fiscal 2015 third quarter ended December 31, 2014. With me is Stephane Arsenault, our Chief Financial Officer.

Our Q3 press release was issued this morning together with another release providing an update on our capital investment plan. These can be found along with our interim condense consolidated financial statements and MD&A on our website at www.herouxdevtek.com.

Please know that all of our dollar amount will be expressing changing dollar unless otherwise indicated. Heroux-Devtek had a solid third quarter with sales and adjusted EBITDA up 44% and 29% respectively, mainly driven by the acquisition by APPH.

Adjusted Net income rose 18% to $4.4 million or $0.12 per share. Stephane will provide further details on our financial results in a few moments.

During the third quarter, we made further progress on our comprehensive capital investment plan in preparation for the long-term contract to supply Boeing, would complete the integrate system for the Boeing 777 and the Boeing 777X Aircraft. I’m pleased to report that all major elements are progressing according to plan, including the third of component machining at our Springfield, Ohio facility in December.

In Cambridge, Ontario, the construction of a new modern facility of 108,000 square feet has been completed and leading edge, highly-automated equipment are being installed. We are currently in the pre-production phase and the plan which will primarily manufacture large scale complex of component should be fully operational in June 2015.

We will proceed with the official inauguration of the Cambridge facility on February 26. In Ohio, we are expanding our Credit facility to approximately 100,000 quarter feet, nearly twice the current footprint.

This will provide additional capacity for component finishing and the state of the art subassembly center. Building expansion should be complete by the end of March 2015, while finishing capabilities should be in place six months later.

Also in Ohio, we are investing in machinery and equipment as well as building improvement of our Springfield facility. Similar projects are underway at our [indiscernible].

These two plants would mainly manufacture smaller, complex, critical landing gear components. Finally, we’ve leased a new 21,000 square foot facility in Washington to ensure final assembly of landing gear system, this building will be located in very close proximity to Boeing site.

We expect our facility to be operational near the end of calendar 2015. As of December 31, 2014, the Heroux-Devtek has invested about $48 million directly related to the Boeing contract and we anticipate additional investment of approximately $57 million before the end of fiscal 2016.

Total investments of $105 million are above our original guidance of $90 million. This is mainly due to a higher currency conversion rate applied to machinery and equipment purchase which are essentially done in U.S.

dollar. We have also committed supplementary funds to acquire more land and have additional finishing capacity available to support our growth beyond the time horizon as well as over and above the Boeing contract.

This network expansion leverage our strategy to operate dedicated center of excellence that procure, that requires flexibility and productivity to be competitive in the global aerospace market, while providing OEM with cost effective product of superior quality. Ladies and gentlemen, Stephane will now review our third quarter results and financial position.

Thank you, Gill. Before going to the financial data, please be reminded that as detailed in the press release issued last week, we recognize non-cash, a non-reoccurring charge of $7.9 million before taxes equivalent to $5.8 million or $0.16 per share after tax.

For the impairment of the capitalized development cost on the Learjet 85 Business Aircraft program, it would expect the developer and supplier of the complete landing gear for the aircraft and this charge follows the announcement in mid January to pause the program. Consequently, all references to adjusted data will exclude this charge along with restructuring charge incurred this year for the integration of APPH in capacity optimization measure at Longueuil.

It will also exclude acquisition related cost incurred last year for the APPH transaction. Consolidated sales reached $88.4 million up from $61.4 million last year.

This 43.8% increase reflects at $24.5 million contribution from APPH, while year-over-year fluctuation in the value of the Canadian currency increased sales by $3.2 million. Commercial sales rose 40.2 % to $39.9 million including $8.4 million from APPH.

On an internal basis commercial sales increased 10.9 % due to higher production rates for certain large commercial Aircraft mainly the B-777 and the B-787 programs, higher sales to the business jet market mostly due to the enter into production of the Embraer Legacy 450/500 program, as well as $1.8 million favorable currency effect. Military sales totaled $44.8 million up 46.9 % from last year driven by a $16.1 million contribution from APPH.

Excluding the latter, military sales decreased 1.9 % as lower spare parts requirement mainly with the U.S. Government more than offset sales on the F-35 and the CH-47 programs as well as $1.4 million favorable currency effect.

Gross profit was $14.6 million or 16.5% of sales up from $10 million or 16.2% of sales last year. The increase in dollar and as a percentage of sales reflects the contribution of APPH including its more favorable product mix.

Excluding APPH, gross profit as a percentage of sales decreased by 2.3 % due to a less favorable year-over-year product mix caused by lower after-market sales in fiscal 2015 partially offset by favorable currency fluctuation of 0.9 % of sales. Adjusted EBITDA reached $11.5 million or 131 % of sales up from $8.3 million or 13.5% of sales a year ago.

The slight decrease of the percentage of sales reflects an increase in SG&A expense due to higher stock base compensation expense and professional fees. Adjusted net income which excludes the after tax effect of non-recurring item was $4.4 million or $0.12 per deluded share up 18% from $3.7 million or $0.12 per diluted share last year.

We have approximately 4.4 million more share of spending this year versus last year following an equity offering completed earlier in fiscal 2015. Our financial position remains healthy with cash and cash equivalent of $40.6 million or $1.13 per share as of the December 31, 2014.

The total long-term debt including the current portion but excluding net deferred financing cost was $107.5 million. Of this amount, an amount of $53.3 million was drawn from our authorized credit facility of $200 million.

As a result, our net debt position was $66.9 million, while the net debt to equity ratio was 0.23:1. With regards to foreign exchange, as at December 31, 2014; we had contract to sell at 113.8 million at an average rate of 1.0887.

This contract mainly pertain to our Canadian sales in U.S. dollar and mature at various dates between now and March 2018; but mostly this and next fiscal year.

Finally, we concluded the third quarter with a well-diversified funded backlog of $459 million up from $450 million three months earlier. I turn the call back to Gill.

Thank you, Stephane. Looking at the third quarter, this period historically been our strongest and we anticipate this trend to continue in fiscal 2015.

As a result, we expect to conclude the fiscal year with a solid contribution from APPH, while sales from existing operation should be relatively stable with an increase in commercial sales offset by a decrease in military sales. Our main priority for fiscal 2016 will be to continue executing on our capital investment plan for the Boeing777 and the Boeing 777X contract as we move progressively closer to begin production phase.

In a longer horizon, we are having focus on achieving annual sales of about 500 million by fiscal 2019 based on existing contract and assuming new order acquisition. Our leading position in growing markets should provide us with winning conditions to reach our objective.

In the large commercial Aircraft market, Boeing and Airbus are continuing to implement production rate increase on their leading programs for the next several years their respective order backlogs as of the end of December represent at least 8-year production at current rate. In the overall business Jet market, data release by the industrial association Gamma, confirms the recovery in the sector with six shipments increasing nearly 10% in the first nine months of calendar 2014.

A favorable outlook is also supported by the lowest percentage of business jets for sale in proportion of the fleet since the recession and the financial crisis at the end of the last decade according to a consultant firm JetNet. For these reasons, we are upbeat about our business Jet market niche, going forward driven by a better global economy and the ramp up of new programs including certain of which we have designed and developed a landing gear.

The military market is expected to remain soft with defense funding holdings steady with the U.S. Government 2015 fiscal year, however, the threat of the return of sequestration remains for the U.S.

2016 fiscal year as current funding request exceeding planned budget limits. Still our geographical diversification with APPH strong presence in Europe as well a good balance across our network between new component manufacturing and aftermarket product and services should mitigate the potential effort of any new further U.S.

spending restrictions. In summary, it would affect -- well position in this market and we are aggressively investing to further enhance our status as the cost competitor/integrated provider of complete landing gear systems.

With dedicated engineering team and manufacturing network spanning two continents we can confidently leverage our solid business relationship with our world leading OEM and even widen our customer base. Our focus is on providing customers with high value added products and services and in that way building further value for our shareholders.

Stephane and myself are now pleased to answer your question.

Hi good morning Gilles and Stéphane.

Good morning.

My first question is if you can provide any color on what the prospect pipeline looks like maybe any upcoming programs that it was bidding on and could expect to win?

Well it's - we are looking at different project these days. Exactly what they are you know it's a bit competitor sensitive what you are asking as a question.

But there is some military program that are available and we are looking also at not necessarily landing gear, there are also some acquisition business we are looking at with some commercial customers at this point. So that's what I can tell you at this point.

So, we certainly are trying to convince our customers to be with us as additional program and contract at this point in time.

Okay. Fair enough.

Thank you very much and in terms of the legacy 450/500 where are we in the ramp up, you started developing, producing landing gear for that and when can we see it ramp up to its run rate?

Well, right now it's - we are at two months as we see. And then we expect next year to probably to move up from 2 to a bit - 2 to more so maybe 3.

So I think the program is moving in the right direction.

Okay. My last question is on the CapEx.

The revised CapEx does that include the land and the additional finishing capacity. And do you plan on spending all of that before fiscal 2015 is that correct?

Correct.

Okay. Thank you very much gentlemen.

Hi, good morning Gill, good morning Stephane. Just for the question about the CapEx you usually provide a lot of good color my understanding is that the bulk of the CapEx increase on the 777 is related to the FX, so could you provide more color, is there any reason why there was no hedge in place for that particular investment?

Well, I think essentially what you have to understand is contract was going is in the U.S. dollar first I would like to mention that.

Half of the investment we are making on this program are in the U.S. subsidiary so obviously new vest in that case and the other half is we have got to the million dollar in U.S.

and are working as in subsidiary, so we do have some cash flow from our sales and the cost that we have in U.S. So, we have an exact portion giving the situation at the exchange and also the fact that we have already some conversion in place with exchange contract for top line for the season cost so that's the reason behind, but again we have a contract in U.S.

with the Boeing.

So Stephane, is it fair to say that this higher CapEx will be offset by stronger margin if the Canadian dollar pay at this levels so when you look at the ROIC basis basically the number remains unchanged?

Good assumption.

Okay. Okay.

Very good on that front and excluding the 777 could you refresh a memory about the sensitivity how beneficial will be the weaker Canadian dollar on your total revenue base ex the 777?

You mean excluding 777?

Yes or everything but my understanding when we look at the last in years you have been typically big beneficial from weaker Canadian dollar given your huge footprint in Canada. So, if you could provide more color about what we should expect in terms of margin given where we are right now.

Yes. Well one we have some indications in that statement you know we do give some breakdown of the size by destination that are made to U.S.

customers. Obviously in U.S.

dollar and some of our sales that are made in Canada or in the U.K. is also a smaller portion in U.S.

dollar. But, there is a good indication as to the volume of U.S.

dollar that we have there. We have hedging policy in place to manage the fluctuation as you know, so we currently have foreign exchange contract in place as of December 31.

Most of the portion is for the first 18 months of this cover. So, we will gradually benefit from better exchange rate as we are currently doing now.

So yes, there will be benefit but gradual overtime so in-line with our policy we have to manage the situation from currencies.

Okay. And now for the Learjet 85, when we look at the amount of the depreciation should it change, taking your write-off, should we expect lower depreciation on the Learjet 85 going forward?

No, because -- Learjet 85 was not yet into production. So there was no authorization yet for the Learjet 85 as we amortize when the development cost, when we deliver units for production.

So that would have come overtime. So it won't change the current depreciation.

Okay. Stephane is it fair that you didn’t wrote up the full amount because it's a pause so my question, I am just wondering what is the amount left that could be written off in the long term assuming the total [indiscernible] the program?

Yes. Well essentially the answer is yes you are correct.

We have not written off the whole amount but we have taken the most conservative approach in establishing the write off so that that’s what we can say about this.

Okay and is it fair that the remainder is less than what you took?

Well again, yes.

Yes. Okay.

Thank you. It's very good quarter.

And last question how should we be thinking related to APPH seasonality in Q4 because we understand that AU there is typically a huge step up in Q4 so just wondering if APPH is kind of the same and we also recall that last Q4 was only two months of contribution?

Well, as we disclosed fourth quarter is always the strongest quarter of the year. So this year will be the same.

So that's what we disclosed. So in total we are expecting a big quarter from all of our operations.

Okay and even APPH is also the strongest quarter typically so mostly in-line with the effect?

Well, they have aligned fiscal year with us so they were at December 31 fiscal year, but again we are expecting good quarter from all of our operations and fourth quarter in total will be the best quarter of the year.

Okay. Thanks very much for the time.

Thank you.

Yes, thanks good morning.

Good morning.

Just to come back on the CapEx the foreign exchange I think this is obviously the biggest impact to the increase but as far as the additional land and finishing capacity is there anything specific that's driving that investment or is there specific opportunity out there is there more just say general belief that there will be more opportunities down the road?

Well Cameron, you know, this is the kind of facility right so we both understand the factory we build 1,008 square feet so there is enough land there to double the size operator that factory if we need so. So that's one.

And also in Springfield that’s Cleveland we are spending quite a bit of footprint over there to subassembly and finishing activity so of course when you do such an investment you have to look not only at two to three years you have to look for a longer period. So that's what we again we did that thinking eventually, you look at our operations over the last ten year I think you know how much we grow over the last ten years, I think in 2006 my memory is good revenues were $100 million, Stephane right?

And if you look at the compound growth since then it’s more than 10% a year, so I guess if we continue to grow at that pace I mean we will need some additional capacity. So, when you build for these types of facility you have to look a bit longer than short, right.

Right. That will make sense.

I guess on the bidding of new opportunities that are out there I mean historically you have always I think bid on contracts at an exchange rate of par obviously you have got a different situation today with the exchange rate. Have you changed the way that you are bidding on program giving that the Canadian dollars weakened a lot, I mean is there, are you able to be more competitive or more aggressive against some of your - some of the other competitors out there?

Sure we are. We are using just of course, but at the end of the day we cannot - we work competitive at par so yes we will use this to a point to be more competitive and depending on who we are against and that's the decision of pricing that we judge on many factors and if needed we will use this factor, yes.

Okay. Stephane just a question on the SG&A I think you are incurring decent amount of professional fees and other costs in the SG&A related to the preparations for the 777 contract.

When do we will see that sort of drop off, will that be kind of at the same period when the CapEx starts to drop off?

Yes I think that’s the good assumption.

Okay and maybe just the final question from me, you have got a contract with [indiscernible] aerospace now and I am just wondering what the status is there I mean - I think that your expectations was even to lose probably at least some of that work that's non 777 related have you had any further discussion with them on the business that you are doing as a subcontract [indiscernible]?

Well, I was referring to discuss this subject, yes we have discussion but I think at this point we want to keep them confidential.

Okay. Fair enough.

That's all the questions I had. Thanks very much.

Good morning guys.

Hi Ben. How is the weather in Vancouver?

It's wet. We had a really nice dry January but it's miserable typical raining Vancouver right now.

Okay. Well pretty cold.

I know. We never get any sympathy from these but I was just wondering looking back at your commentary about the Learjet 85 right now and that you didn’t make any revision to your $500 million long term target and I mean I recognized that's just sort of a long term aspiration figure, but I am wondering why the Learjet would be immaterial to a number that was based several years out because I am assuming that was going to be, I imagine initially that was party or your target to get there, you assume that program would be running or did you assume it wouldn't be ago when you came up with that number or have other opportunities transpired I am just?

But no, no, we assume this program was in the ramp up moved down, but we have - we had enough revenues planned and we still are maintaining our $500 million with all the Learjet 85 and as I said program is on pause so we may just may come back to be a year or two from here with nobody knows at this point. So -

Let's say it doesn’t ramp up like what the time line that you have set for that $500 million are you - can you still do it like is it --

Yes.

So it was conservative number in the first place. You sort of --

Yes.

Yes okay. That's all.

That’s what I thought but I just wanted to hear from your guys on that.

And just to maybe to finalize on [indiscernible] for example in the last nine months and our revenue represented to 2% or 3% of our total revenue.

Right.

Okay. That's good to know.

Thanks very much.

I never thought I would be on a conference call with two Sammy asking questions.

The other Sammy, I think, he is like, I think he is a comedian, right.

I’ll try not to be funny then. With respect to the defense budget where that we have heard of earlier this week it looks like it passed the bottom, modernization expenses are expected to be up and so on, are you marginally more encouraged by this or is it the programs that you are on specially on the MRO side, that keeps your view relatively limited for now?

Well, as we have said before I think the aftermarket military sales that we do that's somewhat difficult, still difficult. We’re tried to appoint the MRO, somewhat come back but it's kind of still at the same type of level right Stephane?

Exactly.

On OEM side that’s a bit brighter due to the F-35start to really ramp up and that we still have some share increase to come and so the OEM side is a bit better than the aftermarket sales. But it's going to be - continue to be somewhat challenging in inventory sale.

So that's what we see.

Okay and the last question could you remind us of the time line on the Dassault program development and when that switches to production?

I think the first slide, Dassault in Q2 of our calendar year 2015, that's what the Dassault was published. And entering to service normally, normally it's 9 to 12 months after I guess so we should see entering to service in 2016 and I think it's - I think we really believe that this is going to be a very good program.

Dassault was famous for designing very good airplane so I think it will good program for us.

Okay and it show up in your numbers in your Q2, Q3 of F-16in terms of feeding that start up of the line?

Before that because you know one of the longest lead time item on an airplane is the landing gear. So we should start to see some revenues in 2015 calendar year.

Yes. Okay.

Alright. Thank you very much gentlemen.

Thank you.

Okay. Thank you all for listening to us today.

We are looking forward to reporting our progress in our next quarter. This will be our year end as Stephane said earlier we expect the last quarter of the year to be our best in fiscal year of 2015, so we will keep you up-to-date at our next conference.

So, thank you for listening to us today and have a good day. Thank you so much.