AIR - Earnings call transcript Q3 2019

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Operator

Good afternoon, ladies and gentlemen and welcome to AAR's Fiscal Year 2019 Third Quarter Earnings Call.

We are joined today by John Holmes, President and CEO; and Sean Gillen, Vice President and CFO.

Before we begin, I would like to remind you that comments made during the call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as noted in our news release and the Risk Factors section of the company's Form 10-K, for the fiscal year ended May 31, 2018. In providing forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. At this time, I would like to turn the call over to AAR's President and Chief Executive Officer, John Holmes.

John Holmes

Great. and much very you good afternoon. Thank you quarter FYXX appreciate all joining third our discuss to results. us We

Before the we previously Sachs. X, to begin, our I USG at recently would like to Goldman Treasurer and years team. Sean AAR, was Sean of us have in Vice to banking President new and welcome pleased joined on XX prior We're January had very and Corporation, he on most spent CFO. Sean Gillen, investment

quarter, consolidated $XXX our the per the in grew a significantly, prior Now to XX% from to turning continuing in growth quarter. earnings sales up XX% stronger, of up $X.XX Adjusted from million period tax operations, back even share from diluted the $X.XX benefit in was inclusive this to $XXX million quarter. $X.XX,

also cash a million operating this cash we as from strong of quarter delivered continuing operations. $XX flow had We generation

our in multiple have contributing and to demand growth. continue that performance sustained supply continued robust the currently program to we investments won have we strategic distributorships parts to our parts are and from seeing, activities; enabled on supply, the and strong see new capitalize We are us parts

most WASS continued notably remain execution on solid our Our activities programs contract. strong, with

was systems grew and offset As XX% MRO segment performance in have awards. by a due contract our XX% also labor at mobility to services result, partially our our aviation strong segment This increased Sales shortages year-over-year. expeditionary services operations. other recent

actions ramped it saw that production while demand We've and is we impacted recent activities several tight struggled conversations quarters, having costs. perform with to labor qualified mobility, shortages to site new have labor taken in similar customers labor meet you in sequential been in happy this anticipated. fulfilled the level but sharing enough we labor increased MRO As and MRO to labor address these within the our during at not from MRO in been our challenges. continued we shortages several and productive This continues to we expect with very know, quarter and announced We've labor as also the customers. see expanded awards, a labor-intensive more met about contract We've these these sequential across scope. In we we the are the extremely by well to WASS Costa up was program improvement market find had with U.S. to we international last Subsequent the program. Rica the QX, improvement.

the fulfilled the for of which the our U.S. we Mobility We end company will of the for subsequent entered to Systems. to of into Force subject end also sell a award another it business. cargo The and pallets XXXX. the calendar announced quarter, Air production be contract regulatory by is AAR assets expect COCO to certain certain the contracts definitive approvals, agreement and of before close to Also sale

our non-cash entered we addition, In charge recognized of operations. in million after-tax separate of these have $XX.X with impairment we to agreements, sell assets. majority idle In the a discontinued agreements conjunction into

markets the and fixed-wing from coming of significant ongoing demand softness certain of and have decline U.S. the the and pressure rotary-wing the offshore in from supply market. aircraft remained well aware, as you're As excess an Defense oil under as Department from gas

to the business, of a the asset-light Sean from As like I'd growth COCO be going turn to our that, discuss a in financials With focus strategic to GOCO we asset-heavy call COCO shift will complete now bit over model the the exit our will more which the forward. this to detail. model

Sean Gillen

in company's the more I minutes Thanks, few a QX detail. take John. performance will discuss to financial

$XXX in year-over-year. sales said, the John quarter were XX% our million of As up

in of segment. support SG&A period, anticipate as the Gross will our year-over-year full expeditionary compared profit our of to Services sales the services. versus XX.X% mix indicated. last quarter, of by the X.X% the gross sales be was Aviation double-digit prior to million growth. as primarily expenses aforementioned improved shortages, to increased labor year in well driven consolidated were SG&A $XX.X during that due XX.X% Our to XX.X% the around year as XX.X% year We structure the XX% sales cost previously reflecting leverage margin

tax per the diluted adjusted share tax it is year EPS adjustments. the $XX.X this reduction diluted This is million or is the year with results to it practice. of share was of $X.XX In per quarter, Net Note the of benefit. adjusted Jobs rates. tax to income prior or quarter, related million in expense continuing in because operations from was in inclusive is to quarter reserved in EPS tax compared $X.XX annual to diluted was $XX.X from the share benefits. prior expense benefit course of that this due due $X.XX Cuts primarily year diluted per $X.X increase $X.XX million included quarter. Third normal a the This share. an due to previously interest compares of $X.X or consistent This $X.XX was prior underlying the per income per million $X.XX income income tax million recognition Tax because the Adjusted of interest share quarter diluted excluded for legislation. past Act included $X.X to & benefit in tax

from turn cash million. quarter while activities quarter. $XX.X million During $X.X million resulting in of the the With million, our to the net year $XX accounts $XX in $XXX from operations now benefit to back flow receivable call X.XXx. prior net generation $XX.X a leverage compared benefit that, I year program operating quarter, the of prior a John. will included million our from The was quarter financing during The reduced debt included million, strong to quarter current continuing cash the flow of

John Holmes

Thanks, Sean.

labor market flying strong to As experienced in facilities. greater-than-expected we January recruiting customer labor experienced the holiday recruit meet in to enter the demand we the in after MRO our season, difficulty

the and the from it expected impact positive to issue, taken the that to our a an QX, actions QX have to we on this we like XXXX not Based guidance. address update impact seeing many to provide expected. impact is year I would full to the rate at we're While

of We the in million the of of the reflects operations continuing $X.XX of range income range of to range expect $X.XX. EBITDA of the negative adjusted updated ranges, the these guidance challenges, diluted this to benefit revenue billion of I annual original growth adjusted in impact, share $XXX At million, of XX.X%, billion, have well midpoint $X.XX assumes $XXX growth per from $X.XX in of to sales EPS almost $X.XX adjusted the Had earnings we Max not and within the inclusive range. grounding tax would adjusted want of updated guidance Boeing to XX.X%, the been these note positive and labor fleet. from do guidance the XX%. growth XXX meaningful or we EBITDA experienced no that

As we customers dynamic situation assess closely this you working to and with know, is any monitoring are our a actively changes. that we are

continue challenges we the overall in to intensive are businesses, these the experience While our growth exceptionally company. labor we of pleased with

the we growth, markets. parts for of and closely delivering margin and the both are to our and and the see focus on sustainable I'm we government improvement to that consistent excited and and pipeline are Sean opportunities outperform Our strategy at program working looking performance. team in have on continue we full our excited commercial by supply activities businesses

the well to are balance turn our a for will We can growth and AAR. strong operator I very questions. also capital strategy. deploy point, you positioned back interest it to we with this in sheet, Thank support time At for

Operator

[Operator Michael Instructions] question Ciarmoli from Our first SunTrust. comes with

Michael Ciarmoli

I so benefit am tax the already $X.XX So for to clear; just full just year? $X.XX was in on the contemplated guidance, the the

Sean Gillen

No.

of benefit tax $X.XX $X.XX that contemplated the to as guidance. So was original not part

Michael Ciarmoli

contract was from guys no and revenue government as you that just the it. that you how contract; shutdown. additional disruption that any seems guess, WASS And the then And first, and on I there color can the of Rica Okay, for site benefit be been has once potential get -- Costa It maybe income give running? what performing? at could us how that got operating up INL like

John Holmes

contact First performance. are very very the the Department, operationally. and is State contract We're The the happy. well of our at in customer with pleased they with all, is regular performing extremely counterparts

be the new ranges one it's on have certainly this last running like for -- will will sites first I and to quarter fully program. site we the up that's are think go -- impact be the but contemplated in the the but definitized. other as this a it the being of sites it's not is additional quarter, will site positive some it in and example, do there said in we this to is And first been Afghanistan what And large live as revenue, later as quarter So relates will for FYXX. it as

Michael Ciarmoli

where will last -- And Got jump where logistics are queue. can back in remind protest I it. just the Helpful. the us on support services; there John, program? you worldwide for now you was the of like just then a looked the and one, you team part started, contract. right are stand it you before things Leidos that awarded us, was call with do remind your the that Can or

John Holmes

point There bid, ended expect are, those few There task in the orders we orders on on believe, any over, I'll and is information more I are have and out up protest participants announcement. hear we they time. is -- this Leidos at to IDIQ. I'm to that seeing the that to multiple bids adding get award. task

Operator

Thank you.

with question next Canaccord Ken Our from comes Genuity. Herbert

Ken Herbert

that any how sort if then, is you specifically and maybe you just around issue? be the as what how maybe the quarter expect you the look waiver MRO did any through MRO of a provide wondered do 'XX of more I side of in the sequential -- quantification visibility flushed could improvement part on headwinds, to in fully or And or the on saw? fiscal much this that, John, of detail

John Holmes

times go the after and come I’d certainly market in question. various during in the the of holiday those out aircraft go points, January season. you back we and one So of appreciate year, will, at out flying entry is We market and of the if the from and

the now in you aircraft market, visibility point work, because and market and FYXX rest have we're another entry feel good exit to the so the in why of if the the issuing go that we we And that's we comfortable have for are guidance. so, don't

we range would and just the you that to issued year. in try back significant, have terms of had we it's to it waiver headwind, As quantifying been original January for again, guidance had this in last we relates that of not that frame -- well impact, we in

been So, significant a impact company. to definitely the has it

Ken Herbert

organic the business? INL And can was you growth contribution quantify or quarter in maybe the the for what

John Holmes

first out the it's view everybody as basis, of organic, for a Yes, organic all win, to -- had couple that so this ramp out And not but sense INL, give quarters but growth going INL we we of of breaking be going quarter and it's a I broken part we the contributing up, again, forward expected. so view the as it's that as just we growth. mean, to we the an we're -- on company, of

Ken Herbert

you within business and it's your any any guide mobility programs the you side I on reflective to particular, are largely I mean, the initial business or of provide and particular, MRO, just in of you're I can you I'm and I flydubai know to have is customers exposure conversations in alluded yet issues the this adjustment early, certainly really not as but the side? you distribution. mean, and programs the in to disruption know there customers anything another the on with seeing well seeing know from labor yet MAX significant sure commentary to I on

John Holmes

number I a in customers Great -- Yes, world MAX. we you question have we're around Certainly, of know. as the on know. the MAX

couple program You company certainly how lasts customer. the which ways. could it mentioned, MAX depending a really is flydubai of a long The impact on grounding, in

to been operation have generation potential drive us, parts could XXXNGs downside, that been current that so that because more depending flown going XXXNGs, and that's those can to into mean into our MAX. goes their by be coming for that's maintenance might would operated AXXXs fleets those for hangars, it anticipate fulfill positive. likely going extended put generation are served this routes routes or fact drive the had the fly now that previously the to Conversely, on, the previously aircraft current to On we that service have how aircraft right those in that bread-and-butter to requirements make up be a increased on been for by MAX, the

something in very closely. customers, we're early, all it's active So our with dialogue of and MAX we're watching it’s

Operator

you. Thank

Spingarn Robert Suisse. from comes with question next Our Credit

Robert Spingarn

specifically just get In to in this able talked the labor? the to are the pricing past your shortages, labor -- a Just words, you've labor in customers, a it issue? shortage compensate looking order you level pricing at about need is this you the or to is other

John Holmes

it we've repricing had end. had activity cost has some this definitely The pricing our relates major in labor of improved issue the couple last recent of the over quarters customers agreements and significantly for potential the as higher -- in for to success on account of customers our have couple we to changes our

However, this this is bit moving a target. a timing is of issue, and a

One we is into labor felt back thought. were that actually we of went in good attractive that market certain we saw that sites as January about, the would not things when we rates in the attract as

technicians what what it's we from the experienced labor of a ran and the the customers; forth a just and experience not we also it's that's really bit get about an to too get ongoing we are dialogue. so discussion, between So force. it to takes it And rate -- what able of back -- and took

So had if we've as a to force bodies have year ago, been and operation the the would a plays profitability well. efficiency as as you the say as they will, are not just so people, that labor but experienced able efficient not and good we in role certainly inside attract

Robert Spingarn

you wanted I any it to -- ask I update you on then, don't recall but And there is because mentioning India?

John Holmes

issues were had still slowed is still Live customer bit of those, Go We -- this the we're various we an we launch the -- actually there we're project. quarter, active on an make progress view India did quite construction that some the dialogue down event. still a ongoing past got through on-track now, Yes. of that as back I with calendar facility, and XXXX the had

Robert Spingarn

kind you are opportunity? of some to able to going quantify give be when us that And -- to

John Holmes

over we so startup, an in Overall, will information customer, be launch as to charge but it the -- to will get operation we accretive we the relative the and right, startup some all it's cost view costs we a price going there we'll we we'll as as closer ultimately once be that there that. And get announce a the -- to be more can incur able given position portfolio the this as to announce of on labor. certainly we're provide that

Robert Spingarn

but to back there MRO, big growth so and parse much question differs INL clearly, this is you And some now, aviation another and a of can get forth? can between what because in level There parts, version of everything INL at an to -- doing? then give just services programs, apart this idea can going question; put the the idea here the an is so we is new; growth, us driver INL is it's how

John Holmes

that. away in QX overall, we -- But more businesses to and If we broken part to very of we the we performance a go QX, bit the and back the down similar performance, from did want the year. strong fly in within saw half get first similarly, had segment, as saw the overall, because we that we we're and we

distribution at go go you to had in and both that range, we well and we're is prior, -- I kind we're the those this back could we of market. new moment back So businesses doing see and -- of the at the what that you encouraged we're seeing, all by mean, if demand continuing, and disclosed market parts look extremely that the are aftermarket parts in

Robert Spingarn

labor how MRO; do about this it then about put we do shortage think stock how all so growing? is to and And on we just think

John Holmes

year. declined from has last MRO

Robert Spingarn

point what expect so inflect do to on; you the and you on up? situation hiring based it said, And what at everything

John Holmes

that we're and of a know, to you about so successful plan those we'll as the FYXX supply our having offering, working as our provide are view our guidance we're at at It and this solution And year. is related customer. the just we'll view we several on aviation that an related the program offer has Investor over We're MRO, all a have point point be about working plan, bundled starting together for growth been full aviation we Day; services, we the last will FYXX. you Rob, parts to growth think a quite services as just one you in value bundled look to and is of write And talk our years. when this we writing is beginning market. and more model the the -- for at that part and to And services to proposition Day of our Investor driving if part we in the big this how the

Robert Spingarn

this like you've hiccup trend Sure. labor continues. the But been something thing with sounds that, but guess be labor hallmark we side the third-party? that of it of isn't just third-party was would the growing And about it's all whole structural to make course, it that I you're sure on and outsourcing the is wanted idea that sticking also with got a this

John Holmes

I structural. No, as see it don't

I in feel the the in customers equilibrium new order and to this we're that is rates think time a process team we in the a have pay think of the rates we charge to I that right, qualified the moment the you're market between finding exactly in mechanics. of and

Robert Spingarn

a put on contracted; MRO has finer quarters now that you've case? many to been the told that just then And how that point it us

John Holmes

the year. been That's case this fiscal

Robert Spingarn

quarters? -- all fiscal X so, The whole

John Holmes

Yes.

Operator

from Larry with Thank Solow CJS. you. And question next our comes

Larry Solow

couple ask certain actually different of have been my questions ways. Most I'll but in answered a

it's like from a Is mobility and or reduction exclusively expectations? so maybe that the else $XX million in really, of a I of -- guidance reducing tiny that. business the to you're else, it EBITDA [indiscernible] million, looks for sounds $XX It that guess everything everything questions the of well, all shortage, is on couple [ph]. solely so and -- So, like doing I labor us bit is sorts the MRO think the

John Holmes

right. you've what's the Larry, mean, are hangars, that the Yes, the which is manufacturing, and that's the I -- driving businesses coming got from labor it's mobility it.

Larry Solow

mobility is And pretty doing still well…

John Holmes

growth Yes, to about is got exactly. parts businesses again, had. growth we that well I mean, and expectations still the of mid-teens the businesses the we've continue the the programs perform still -- and company overall

Larry Solow

great sort new And is assuming the so a them aviation just outlook these obviously visibility like ramped, they for not fully -- of programs adding should us, still of it is the seems them are environment businesses, of programs a lot wins lot program remind on ramp further? some but [indiscernible], the there environments

John Holmes

That's various that we also the a the stages long-term on -- we that won. locked and company, other the with the number of parts of and grow serve. customers serve have area long-term up which other new customers businesses all contracts already will contracts contractual with the are fleets quarters correct. And that or couple words, over another their supply ramp of so Several of have we company words, distribution supply in but programs up in is agreements lot the additional area on airline a different In contractual it's to government continue customers the sign sell; cases, of buy. business the contracts also parts we've we we'll businesses, the last ramping see that's of OEMs well, with we on have we've our that's with, and that in as new of OEMs distribution with those the

And sustainable that's growth so forecast. to business that's nice more easy a

Larry Solow

quantify that to annualized in you know the guys contract, million or sort then Is fair I running $XXX it's INL minus not plus it I on -- and say revenue And number? rather understand. you of

John Holmes

year. a this be below will It that little

in look high we last we're quarters XXs. if at the you of couple did So that the disclose,

$XXX So it this will below the million fiscal be for year.

Larry Solow

You I already, And know sites correct Rica, then is this right? think again, [ph]? on I Costa -- sixth is five site, that your had

John Holmes

site. It's the operating fifth

Larry Solow

sites. were four there So

half or at four plus look way So average the size a -- they that to is or… of it the are we're minus, out it, good is other

John Holmes

that but prefer not the get it be to into not largest we site. will Yes,

Larry Solow

rounding, a or But it's millions double-digit I annual more it sounds like least it's sales in at mean contribution. than

John Holmes

Fair.

Larry Solow

you assets? on can How enough. -- to guess, Fair just maybe proceeds your figure that what and before in you off? had sheet about share color material you -- the proceeds of a share balance you number is that from valued of expect expect or -- could wrote in But that terms you out a not? we what what I COCO from anything

John Holmes

still sell. we looking we're Not assets yet, -- have that we're some to

that's all up, disclose So those once amounts. we'll wrapped

Larry Solow

of math -- is the little a it top And like in least performance, for my on from the similar sort then line like QX that seems better do gotten plus you've the range -- and bottom-line, at looks maybe correct?

John Holmes

right. Yes, that's

Larry Solow

And then like surely we rate tax mid-XXs? normalized assumes a is XX%

John Holmes

what XX% to we think is on XX% the rate. Yes, tax

Larry Solow

question; you X us, last say think Asia. longer is this could you actually what some that got market Could similarly, be or term in had guys Just X sure for guys to I'm the help [indiscernible] I you but you something? you a years announced, -- opportunity just of more

John Holmes

Japan growing a On got of going government we And quite there. having a that have of ability got the various Japanese of issue to distribution Japan, commercial things parts, the side of is on office Defense. we Japanese do that because tags we've good in year, And to positive. an JMOD, a of terms parts of lot we've footprint contracts we Japan Ministry some a in the we customers have have attendance on to with actually of in the other repair -- had the new opportunities over these in lot

away ran step us JCAD a is the direction. us, a [ph] had been market but store target we've in really and push recent get for right AAR. from has We [ph] a renewed market years a it kind in good the some it's for good saw -- approval in So of the

Operator

we with our Thank do you. follow-up Herbert question, next Canaccord. have And a Ken from

Ken Herbert

do or in on of and you've the again, some had winning going share to of business somewhere -- a of a and sort permanent I disruption, prices this work issue airlines how we on sort mean but sort do to but think this of not follow-up these bit sort bring we how to to keep as representing any back guess, wanted harping of about I as just this we're people MRO; talent you are I at expect issues higher presumably, don't of ideally these as on? think bring customers section taking about that the of you're Or sort competitive the timing back on? able do that able any dynamic or

John Holmes

It's important to through over single note last have a lost that going as we've the not customer. been we quarters, this few

have but us, we very aftermarket system. we the work had didn't we're our part quality have We America product, lines had turn to of as we aviation us; only sticking customers, deliver vital the of the this sticking you of to or them supportive of are in certain just work they part that are with support are a labor have at because overall, and away largest the facilities AAR, handle not and they North we with a know, are of

you we've that teams received to in dialogue regard. from in of keep the having that you", think a we've so And can support need and you is us with been "what lot do the around, work order one we so feel that the

had important smaller is but do note on area MRO the long-term MROs down of -- contracts And also are customers depending we so have of to that In kind to our retention on based work. work we've and it's with to that terms in is North supportive. of larger mechanisms we've number we customers got we've that of place keep larger been in the most work labor the where got turn there things a were has and in moved America, going, where the around

Ken Herbert

And been I'm you or most jet lines narrow-body or support the regional of haven't either aircraft, that have correct? assuming the work to able been

John Holmes

That's correct.

Ken Herbert

the provide in you but about expectations full very quarter on of of be mean, sort talk or question; quarter million of year $XX-ish EBITDA terms you beginning did of just update pushed typically if maybe around any is that, generation; sort Thank conversion I of you. sort in year the the cash what it take year? for cash would you the for clearly think the that fourth on about of quarter a great. fiscal conversion the fourth update the -- these final should to how XX% for or issues used one think Just we right to ever full roughly have can the you terms can strong that at

Sean Gillen

we you in is I growth strong flow to think continued a strong I we'd expect pretty it but kind as mentioned QX usually as cash in think relates QX so flow, cash for expect quarter the of the full going year for we'd XX% in flow and cash that's as year think be but we're that that we to we've EBITDA mentioned think target, not positive be something we previously.

Operator

to questions turn the I'll in call you. Thank you. the over back further I'm showing no queue. Speakers,

John Holmes

we and Thank to wrapping look our year. time and fiscal interest, very you much. up we Well, everybody's appreciate Okay. again, forward

Operator

in Ladies concludes and conference. gentlemen, thank you today's the for This program. participating

You wonderful a may have all day. and disconnect

AAR (AIR) 19 Mar 192019 Q3 Earnings call transcript