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AAR (AIR)

Participants
John Holmes President and CEO
Sean Gillen Chief Financial Officer
Mike Ciarmoli Truist
Josh Sullivan Benchmark Company
Steve Strackhouse RBC Capital Markets
Call transcript
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Operator

Good day. And welcome to AAR Corp.’s Q1 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. to remarks. conference like management to now opening for would turn over the AAR I ahead. go Please

Unidentified Company Representative

Good afternoon, welcome call. everyone. And quarter XXXX earnings first to AAR’s fiscal

are and Holmes, Sean We Chief by Officer; Gillen, Executive and President Officer. Financial today joined Chief John

the are from would include forward-looking uncertainties section no we release materially may Reform you statements. the that the statements differ Act Securities Accordingly, performance. statements Litigation as are and to results defined of to Risk of the Before actual like could remind These made involve comments earnings statements risks forward-looking that guarantee XX-K Form These these cause Factors company’s I during company’s the and Private risks XXXX. discussed future the of begin, forward-looking and uncertainties call in the in of for financial we anticipated May year the future assumes President XXXX. no reconciliation the turn to providing unanticipated is the to earnings or most company’s the the time, ended events. circumstances measures company In these John CEO, to At to measures information reflect this in forward-looking provide discuss forth over AAR’s call would non-GAAP release. updates on statements, obligation like set the call I comparable today. to and Holmes. or the GAAP non-GAAP A fiscal XX, Certain

John Holmes

from the share share share. and results. for were joining $XXX to discuss in to diluted to continuing today Sales us our adjusted per million prior were you, Thank per XX% you from year fiscal everyone. good quarter earnings $X.XX and year quarter appreciate Great. per up operations the down million $XXX XXXX $X.XX I afternoon, first from X% quarter

remain Defense sales XX% by to customers travel. encouraged Commercial customers we the Commercial business, Government and Our to and recovery continued air XX%. In our in decreased sales our increased to

are about been to recovery XX% last USMs that indicated we the behind, still leading Europe are for quarter, levels. most our most This global have is Asia while activities, lagged international. strongest relevant has our below which domestically, XXXX As and parts

to used as interest impacted high-demand of parts in our activities, as utilization but for time, material green the continues continue mediate we Regarding availability for parts lack assets. the see used of to well be by demand broadening the material, certain

parts However, our new growth. continued deliver distribution to activities meaningful

While contracts signed driven still being not of overall by distributorships years. is have prior that two the series to signed have recovered, fully COVID we the growth last in the

the growth parts We continue expect to and share market take distribution persist. new in that to

to driven remain the services the was strong Finally, by parts our to our and well programs. of activity as for hangers year-over-year, well programs, year. our In exit other full more in certain the the certain business, completion Sequentially, as decline of Afghanistan, the short-term Government from impact as expect reduced saw to level of the our QX. signal what as in of demand sales compared continue fiscal for Government we U.S. a customers on as the normal saw we to MRO, largely we full rest

up to ramped and other expect we our we contracts, contract resume later USAFE awarded this growth recently business. our As Government year in win

I another delivered report we Turning to quarter. pleased margins, am strong that to

was up X.X% adjusted margin on from last operating X.X% an Our basis, year.

demonstrate that improvement. margin to We in we have continue the sustained the resulted changes made during structural pandemic

of quarter ability activities market of use cash our continuing is parts our high-demand from growth take opportunities Regarding We acquire to drive $X assets example opportunities. that we generated quickly operating activities. to an strong balance to to we to this our operations. flow, saw sheet in This expect move million from advantage

well and quarter repurchase positioned we repurchase, to our X.X share under be our stock was net million $XX program. Even repurchased in EBITDA growth. also exceptionally leverage the of the fund after times share our continue future We to

wins, Airports generation $XXX.X U.S. the all-aluminum awarded U.S. support produce for from million Turning firm and continues pallets the cargo fixed next-generation the our XXXL to cargo the award contract was repair new produce to quarter, and existing to our this many business Systems Air pallets. of Mobility during come. Force We currently years

addition, Logistics successful a Norwegian contract government were strategic programs program by the Force for in P-XA expansion In fleet. the on Air we outside to the the awarded of parts our This U.S. provide Defence Norwegian Organisation Royal builds

tool on component orders. Airvolution and rely details solution our repairs modernize our digital its SaaS Textron will the Aviation a who Finally, the administration Airvolution CFO, of discuss we of will optimizing the Textron announced for management and aircraft workflows I’ll Defense. its Aviation with repair implementation turn supplement Gillen, customizable of it cycle for over to is evolution Defense results. repair to that, With Sean the

Sean Gillen

Thanks, John.

million Our sales of year-over-year. million in or the $X.X down quarter $XXX.X were X.X%

interest on driven expenses by lower $XX.X remediation recent Government, includes our recovery $X.X Government performance performance. versus sales borrowings. million X.X%, expense matters. Commercial XX.X%. up initiatives, investigation in XX.X% million the completion the SG&A prior quarter. for Gross Commercial year approximately flat Afghanistan in quarter adjusted higher XX.X% our quarter gross profit interest margin versus sales our and in higher In contract last gross contract sales profit well Sequentially, quarter the cost strong certain margin XX.X%. in a the sales Government margin $X.X down This were and our modifications the figure compared as business continuing prior investments were was profit our drove Our XX.X% quarter XX.X% in in that programs, in costs, as $X year, the our decreased including as to year XX.X% digital profit indirect margin well was million, related favorable Government in XX.X% was result and Commercial on was million. business margin while the rates, was Government notwithstanding of were Net due contracts. to to Gross were our and as

from million. $X of continuing operating generated we indicated, John from As cash operations flow our activities

funded we share of repurchase. $XX.X addition, million In

remains three to last share of time on Consistent repurchase quarters, sheet and strong deploy only net to to million expect execute debt the approximately balance of of X.X full over authorization million Our with our from years the announcement. two with $XXX we leverage the $XX.X exceptionally net plan times. continue

Finally, turn we inventory significantly in over John. more anticipate attention investing Thank to and call assets I growth. your now rotable to back for you our will support and the

John Holmes

Sean. you, Great. Thank

growth we As been and macro period are extremely uncertainty passenger That resilient cycles. you know, growth inflation. has regarding traffic a Commercial said, through economic in of historically

well new trading, benefit And all used recovery will inflection for trading and market though to indicated continue well from recovery we levels technical add the I should distribution, eventually as lead an hangers, tight, ultimately in to us volumes. For to green full the to remain partnerships deliveries with eventual lead positioned in in as dissipate remains engine Europe retirement other supply our labor serve lines to material. to our This our new and of labor AAR, to pipeline we of time expect largely will the source as schools, as In continue flying and more and earlier, even Asia. well. point are initiatives aircraft in a in

saw resilient macroeconomic during proven we to during Government weakness. has be the As business pandemic, also our

during resonate fundamental tightening. point our deliver loudly at Government even addition, customers of In value with periods to proposition commercial practices more best a our budget to lower price

confident which ability sequential in growth growth into respect transition QX. we remains near-term year-over-year in the result, full As a over both outlook, our With very our we are and meaningful to Government time. pipeline, to expect

remain be between to sales and growth we just in expect of throughout we Specifically, QX quarter sequential the finished of the fiscal for balance optimistic continued and last this year, we year.

comprehensive we solutions globally. provider as positioned long-term, leading uniquely the non-OEM are non-airline Over the aftermarket of

translate and for margin balance balanced into I’ll With shareholders. sheet for Commercial across have fuel Government We it questions. structurally Operator to to markets, share that strong a growth even are greater value profile over the that, improved and end our turn well market have the should

Operator

our with go Thank come Ciarmoli Truist. Mike will first from Instructions] And you. Please question ahead. [Operator

Mike Ciarmoli

what guys. some Maybe, expect color on afternoon, kind just for throughout. the Good growth for Hey. gave kind Thanks the the you with sequential John, question. of taking year you of

anticipate performance about be be aware quarter, of you you fiscal bit inflection inventory maybe are the half more I of this can are even, Sean, margins good to certainly, expect mean I issues in guess, second we growth. and you there hold start to expecting going that see the margins, growth, firm then in And of or to on Just talking should year? sort any the still mix of? little color investing give guys in should a we are us to

John Holmes

for Yeah. Thanks Thanks, Mike. in. calling

number we in of expect if I think -- are the we contracts We’ve areas, signed Those year. a speaking, throughout generally two grow the distribution, to parts So, agreements. maturing. businesses about

and in throughout recovery that COVID continued agreements on the grow seeing we to expect were You’re before year. distribution place

the that would we need occur. trading I a things In to of say terms activities, of the that, inflection aftermarket, couple point,

time customers. continued are of seeing We our from utilization green

aircraft So and anticipated ground. certain There’s reasons. pilot we on to being other because due overhauls engine are ground that now on are would by the delayed aircraft have the shortages

year. the So to -- that’s us half the benefit that’s you’ve we’ve the operating margin, put the we occur changes And of that we then X% full it but made of out, operating it in structural as -- ballpark. margin the pushing that to second seen relates still adjusted inflection expect point and around

the distribution in both in margin further. that and we today area Those still should and and most are we where businesses that’s recover where so direction, growth. are as opportunity businesses trading, parts in the to improve ultimately, recovery see margins for that As the the and shift mix accretive

Mike Ciarmoli

the Got for primary guys And any of inventory parts or of of thinking sort labor? growth what’s in you guess, even maybe -- screen chain, repairs getting seeing to behind your for distribution, from is access then terms there guys is investing lower suppliers are OEM I what it. radar just or on in Got supply and about terms in it. that challenges on, you

John Holmes

Yeah. focusing managing say something definitely done for that. a would is Good has chain question. But the on. the we’re But are business, priority good supply challenges the definitely team distribution labor in job really us. I that

and job that. it’s overall, done quarters impact results somewhat I et over think few But, good in of times. we’ve -- deliveries, delayed the the but So repair pretty extended last had through cetera, managing a of an terms on

Mike Ciarmoli

one kind last I just should And Okay. we called that of me. is. Any then last you program? update there for expectations, the on ADL Got quarter drag Any out think know about it it. how update, or

John Holmes

I would say update… no meaningful

Mike Ciarmoli

Okay.

John Holmes

of to … I lot know continues was talking the to a customers. interested program go ADL well and

Mike Ciarmoli

enough. the queue I will Fair Okay. back Thanks. guys. jump in

John Holmes

Mike. Thanks,

Operator

from go ahead. Please that Company. with moment you. the for Benchmark line of our question Thank One and will next Josh Sullivan come

Josh Sullivan

Hey. Good evening.

John Holmes

Josh. Hi,

Josh Sullivan

color any there, you know changes type, I it to in there kind remain the Are mentioned narrow-body? any you the in expect reservations demand aircraft full. any a for the still or us there same changing hangers demand? you Can it of is hanger are relatively is dynamics still that give

John Holmes

same. you’ve the I customers largely some, past. that relationship flying, that in with have is with years pleased that less And significant year consistent what regard, and it’s we were the this around fall. The but But are change really that this force, vast drive in our we that, year, business aircraft of because earlier summer say will much, we pointed consistent to improved seasonality much lines maintain been to We our saw seen majority lot we keep it are efficiency workloads back had than that What during a throughout the we’re the so want also I’d we working us say seen. the aircraft and some less the and really so we’ve went customers labor that had maintenance. we was away our than able there maintenance the the before. activity come in they’ll drive of seen in to margins because in can to narrow-body is

Josh Sullivan

will for side, on or a Is on a continue one smaller that industry then to mom-and-pop distribution larger And are there you in players? Is who it from? the trend think it players you the consolidation taking share while? going

John Holmes

announced Many Yeah. players. in wins the couple last that have the we’ve from the years come of larger of

handful be of that a owned predominantly then by but Boeing, players. So would Satair the larger by ADL owned smaller, Airbus and

Josh Sullivan

dynamics then there, highlight one And us? any for relationship, any talk it. or can Southwest one you Got movement just on the about there last

John Holmes

The Southwest relationship.

Josh Sullivan

With the now. party aircraft

John Holmes

partner. great new They large there. Nothing remain a of very a customer No. and ours

Josh Sullivan

it. Got the Thank you time. for

John Holmes

you. Thank Great.

Operator

that Thank you. for RBC Herbert moment and question One Capital Please the come go from will of our with Markets. line ahead. next Ken

Steve Strackhouse

Herbert. actually for Ken John Hi, Steve Sean. and Strackhouse This on is

John Holmes

you? are How Hi.

Steve Strackhouse

Good.

any was I retirement further bit wanting touch of the building talked I engines, you the just for just parts the tick-up to Are on see build of are of kind you I little starting You’ve your green starting about expectations business, for year. the inventory, extended inventory, a of expectations believe. about you if for this but the kind year? time or your talked rest rest you could know to on about

John Holmes

access Generally that’s I as with the on definitely have at have is lasting engines moment off with I anticipated. Yeah. screen they one shortage the have green to and think, you’ve don’t was larger got of around contributing shortages. the speaking, to burn pilots. they as as customers much result we Well, our that green is me that that pilot longer shared would are ground a a of to, now number earlier than is and the -- that of airlines time, this aircraft in And the XX got time. swap on aircraft ground, week XXX the they’ve pilot because time

So would we longer persisting that’s have definitely than imagined.

in out As opportunities supply. And very to quickly able to wouldn’t supply, out of unique it the terms but putting in it’s we this and anything that, an structural were you material on some found as material. say market. have, indicator quarter, there mentioned we capture used move we that’s I of relates and saw of going But of us, some changed. There’s for it, larger plenty good I would cash still we in has have demand say, tightness plenty and and overall of nothing terms

Steve Strackhouse

color quarter, like might cash and you if flow I contract for for in to when about looks just year there. and Thank then going about you great the $XX may, patients QX, for this you in million it on normalize then USAFE then that. one And That’s year $XX cash for the of just of talk well. well? an more, that just as it kind inventories back assets million Can and additional the was there as kind think free about

Sean Gillen

Yeah.

in don’t talked think I material I get to parts contract some programs USM our that inventory on an new we on weren’t are supply, expect with show you’d that and continue. programs inventory see some And we to On inventory would longer would up support assets, see with assets, invoiced the win globe. as of the business those will about, miles opportunities, and specifically would invoiced then activity in buy. that upfront come trend had procure term which distribution flown near-term, that I it think continue the we yet. to rotable just or across on recover to rotables PBH generally, our recovering because

Steve Strackhouse

much. so I back Thanks the hop in will queue.

Operator

with have will a line and that you. ahead. Thank we do go the follow-up And Mike come of Ciarmoli question from Please Truist.

Mike Ciarmoli

decline but guess, programs? sequential Did in I think significantly, you that some know just I year-over-year the was also I had Thanks. the XX% I obviously, missed that. went make Defense, it Sean, say through Government mentioned down I so. just you guys. I I was sure or Hey, wanted it, think to you this, U.S. Afghanistan,

there was then you… what the Just I driver and know

Sean Gillen

Two-fold [ph].

Mike Ciarmoli

for some programs new as in. … strengthening kick

Sean Gillen

parts a activity Sequentially as quarters, the the the sales was pretty shorter that We activity QX of we’ve lighter as lower term couple U.S. two-fold, reduced and of just which some over Government. last was won well some programs to QX. a had on strong

Mike Ciarmoli

Okay.

that ebbs is parts or mean, color there’s on Perfect. that of in the usually going the just way flows? you related Okay. something tempo sales? op reduced Presumably, is mean not to and there, that have any anything I I on -- U.S. much activity

Sean Gillen

flows, finish ebbs our… strong a to just Mostly and

Mike Ciarmoli

Okay.

Sean Gillen

… fiscal QX.

Mike Ciarmoli

Okay.

guys. Got Okay. Yeah. Perfect. it. Thanks

Operator

you. the over Thank showing questions any like back for no I’m And would closing management in I at to remarks. now further turn queue this call time. to the

John Holmes

quarter. being We everybody back your I your forward interest, to next we thank time to appreciate that. want for look and and

Operator

conference for today’s concludes This participating. Thank call. you

now disconnect. may You