AIR - Earnings call transcript Q2 2020

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Operator

Good afternoon everyone and welcome to the AAR's Fiscal 2020 Second Quarter Earnings Call. We're joined today by John Holmes, President and Chief Executive Officer; and Sean Gillen, Chief Financial Officer.

Before we begin, I would like to remind you that the comments made during the call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as in our news release and the Risk Factors section of the company's Form 10-K for the fiscal year ended May 31st, 2019. In providing the 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 CEO, John Holmes.

John Holmes

Great. and everyone. much, very you good afternoon, Thank We us quarter today you all FY to join being here to results. really appreciate XXXX discuss our second In by sales to FY million. the $XXX.X $XXX.X from million grew second quarter XX.X% XXXX,

continuing with Our $X.XX increased our share. had overall a share and quarter, per from a $X.XX results. operations great adjusted to I'm per diluted We earnings from share really pleased

to use strong source contracts. our we highest trading performance activities the our contracts over saw global as continue we We our maturation again, to network Once material secured from activities from the to the customer demand having support results exceptionally as long-term several benefited last well, of distribution strong our from saw quarters.

growth and opportunities. activities. solid as particular, past government We a are contract, operationally in solid to to from Landing government performing PBL us capture also WASS very well allowing performance foundation are and see programs Gear build our to continue more

also paid quarter such as The actions partnering the are our of mechanics, of quarter our MRO repositioning of shortage now. and benefits taken our actions we have to workforce fourth recruiting The those schools, our in was network with enhancing efforts, business. second off elements performance and address improved our various seeing across consecutive of

the financial quarter. to several the performance, strong during addition new In we also awards announced

by -- into repair component the and of component contracts. a was increasing costs solutions, first with enables platform management is provider Alaska cycle. was Airvolution, their increase that customer a cycle Airlines announced subsidiary, visibility efficiency repair Airinmar the software which Our reduce This with to new for two

thrilled or Alaska offering, Software-as-a-Service our have first to using our SaaS, and platform. is I'm Airvolution

built other revenue the see last years. have award, to addition for digital the two that channels our through we this In we very businesses over to significant continue growth

services to to as also excited existing model. We're services to new value our validates two they about reduce awards these with which a contract engineering component integrated Airinmar repair represent signed provide JetBlue help costs. customers,

to Finally, component jet wider for we consistent our range of as expanded our repair basis support Systems this delivered for cost sighted savings regional expansion. high-quality agreement components programs. facility BAE the Amsterdam our with include a BAE the and by services its

of in turning Sean, to sale to pleased that on business, of our our Once to I to completed for it I'm Before an operations. all which we've we discontinued contracts over update like Airlift foreign in business provide expect of one soon. would DoD the contract, our discontinued Airlift will the sale approval is COCO receive COCO operations be regulatory of exit the are which and complete. awaiting remaining received, share

it Gillen. turn to our I'll over that, CFO, With Sean

Sean Gillen

John. Thanks

were execution Our XX.X% demand by in Aviation our million sales the part in XX.X% supply or a $XX.X $XXX.X contract up and increase quarter in included or This new on $XX.X of year-over-year. driven revenues, Services awards million million activities. strong

some mix Services favorably X.X% in Gross programs. services commercial profit and million improvement offset which impacted costs in to Aviation $X.X increased for government XX.X% by in increased by certain quarter, the million. margin relatively remained within flat Gross was $XX.X at MRO and or PBH

closing While improving we to time the attributed operational in certain increased of the more can by increase programs, did see some costs quickly turnaround orders. be repair

well We network as vendor increased are inventory repair optimizing these and taking actions our to as such work. costs, address in-sourcing as pool,

primarily Expeditionary versus period, XX.X% Consolidated prior was XX.X% Services. the in due margin year gross to

period being including material had Our a operational a inflation and in warranty award raw challenges, mobility some contract the to and finalized due activities issues. quarter softer not

higher costs. freight performance Our labor composite mix, activities also had to due and weaker inefficiency,

year, the evaluating action well opportunities as to fixed half of as in While we overall reduce taking the performance costs. overhead are to second recover should reduce

was largely investigation which sales of XX.X% and prior costs. compliance-related versus in driven were expenses by SG&A XX.X% period, the

investigation of X.X% sales Excluding which the in severance million, costs, quarter. been $X.X have totaled would SG&A and

million, effective was expense $X.X tax $X.X quarter in million lower resulting income and due was an the compared to tax borrowings last rate Net during year million rates. Our to $X interest of expense XX%.

our cash flow from quarter, continuing excluding quarter. was was the from the from $XX.X which activities operations improved flat million, the financing prior program, During provided which operating relatively year, impact of the million this receivable $XX.X accounts

shares $X.XXX quarter, returned balance remains million. The dividend a share at to X.X and net of During times. repurchased net million million we $X.X at debt per with shareholders sheet leverage via strong XXX,XXX the for million or $XXX.X and $X.X $X.X

John, to of call update in the of an disclosed back Act, we the XXXX which cooperating. and violations potential on provide we've at which Before Claims Airlift handing I regarding want Department been with to the Investigation Justice False

We discussions have take with the we to happy resolving recently DoJ, this into are settlement towards step a matter. entered

settlement assurance However, be any achieved. there that is will no

We will progress. keep you updated these as discussions

over back Thank your turn now and will to you for attention, the John. call I

John Holmes

the billion earnings share. Sean. in you, half billion. to operations be continuing share We we and are range from Thank XXXX per $X.XXX our to first share sales expect and $X.XX year, between performance $X.XX a the strong be the now to $X.XX Due expect updating to in Great. guidance a FY the of of now adjusted

share a our our increased our earnings $X.XXX revised $X.XX prior guidance, $X.XX of guidance of to diluted continuing revised a increased and to share. sales the billion midpoint from to financial from share from $X.XX per adjusted operations Compared billion midpoint the

effective expect approximately XX% an FY of of We XX.X% continue anticipate expenses be SG&A and XXXX. to sales in tax rate to

as the We will progresses. guidance and reassess continue our if to it, modify necessary, year

the growth we earnings third to year, quarter cadence more the have the in sequential to over in quarter. then the relates and sequential fourth significant it growth modest expect the would balance of our of As

of look to a pipeline new full half we pleased closing, the parts successful and of to In wins, that our got activity programs FY recovery our and we're opportunities, very activities. second XXXX. We're in business We've on we balance government very executing performance. continued has supply with deliver strong see MRO exceptional a well sheet, forward

I'll And questions. with over for to that, the it back operator turn

Operator

Thank you. [Operator Instructions]

Our of Robert from first Suisse. question comes Spingarn Credit

line open. Your is

Robert Spingarn

afternoon. guys. Hi Good

John Holmes

doing? you are how Rob, Hey

Robert Spingarn

here. Nice of nice I that for I'm some flow revenue back, talked X.X% math year. if go you just cash far quarter, so the about implies the to And year, your billion. Good the about doing thanks. $X.XXX right, this guidance, growth midpoint XX% the about you're wanted but

a here. So, couple of things

end don't parts. One, rolling I'm is little something back moving is know the thinking maybe though conservative, the I off. a if

matter work. flattish expect the I of amount second -- fair bit. would half the or one Expeditionary at does about in a talk segments, a no the the seems added terms year, implying two it Services that then wanted to of that And because what in sort it's for you're Aviation and growth of You've softens

soft is QX QX. did strengthen the You into and then say in cadence you maybe

together, So, does second that all half the look? how

John Holmes

think Yes. last Well, year. again, up year to we And some to as it. we're really we when start the see proud was that MRO been great first so about the the half, recovery half. bit of of comps come you drives a It's a because do second that started about the versus business, tougher against in

Services. mention did Expeditionary You

guidance raised But that guidance the the a and it the will we the recovery Sean we for the at although, originally. in we're in plan a of overall year, best be overall, we that half, time. second that this presented opportunities likely happy the this see below originally view As to are developed have represents we we're when the mentioned, expecting position

Robert Spingarn

So, does could there? objective mean, see What's conceivably any you I point? better at -- get Expeditionary long-term the

John Holmes

we performance half come -- improving focused, right during So, the come the through. those then awards year. we second we're now, expect happened the some drive half some on had that what the of And get part on hit, to was issues performance seen as obviously, the Expeditionary situational, we've delayed of government we've quarter said, we also operational through in business. those the And -- that of worked from the Depending and year. will when to those second of this

for the where where company, growing has But and that's where the our a focus generally time, Services building you've as segment, that's growth. a focus about, And Rob, we've that's the the been. as investment, Aviation out seen speaking, long has been and talked

future So, that's the long-term of company. the

Robert Spingarn

I the numbers more And along, absolute again, back feathering a implying if that in then with say, really no going year. the you've a with And contracts conservatism. comment so these all was of I'm use than take going the half comps, to -- I to your Yes, even in been that's question. increase tough just just that as

evolution that contracts Last mentioned, question, you this so are the you on these? Software-as-a-Service competing on. interesting with Who and on very though,

John Holmes

we that allows great -- supply into of a share market. It's gives you answer. chain is customers the the that nothing like in to type it There's our I also that only that component visibility the application of and data. the type like visibility the and That repair question, do

share platform compare price need We us. And an feature can a that's level, more and customers that deal But in now their we're component a on in. of that the an paying anonymized seeing to they're individual great way the the community. data customers get against on with interest

it's overall from a is right I but it's we're board. excited program, software our -- Alaska now, on a first into very So, contributor to small and foray mean, actual standpoint, an really results the financial that's that a

Robert Spingarn

you? other are or are have a -- product? that developed on side partners in-house for And do do this you technical any this any Is there folks

John Holmes

definitely build technical traditional developed as digital we of that are Well, the couple years. really that we're kind relationship. yes, over any the significant of -- platform. technical I of number us And more that revenue a help a for out those have partners partners consulting we've us the opposed And the on rest the channels mentioned, digital of through to we last the helping seeing do as are our increase us commercial significant help a businesses of But have develop basis solutions.

Robert Spingarn

Thanks jump and come out much. Okay. back later. very I'll

John Holmes

Thanks Rob.

Operator

you. Thank

Herbert from comes question next of Canaccord. Ken Our

is line open. Your

Ken Herbert

Hi, afternoon and good John. Sean

John Holmes

Ken. Hey

Ken Herbert

some wanted just wanted it to for some government Services, headwinds programs, first but there. out seen contracts, on you parse higher-than-expected Hey, your also within between your some out Aviation then could gross of see that I services commercial us? you've like if to costs from those I ask called you sounds margins

whether about business maybe sounds business costs -- that's maybe Can business, capital term? the you you're for we should higher not specifically program pricing commercial is past. seeing it a this think about the talk that you in and the maybe as side, getting then has it as in headwinds And how like be the of much it some or longer that on

John Holmes

Sure.

-- we profit, mentioned, as that, to positives Sean The about continued parts As performance were two as you out in there recovery one we're businesses and mentioned, of are offsetting programs. think the MRO. the the some that gross exceptional areas government was,

see actually accretive area the and great we our Now, programs, gross profit performance of out company. to deal the of strong a they're of growth dilutive to we work, operating but headwind margin. those number, that don't see in government very the But way

a is be there mix growth would pretty meaningful of that an given quarter. impact to business. So, forward, impact going it And this that the expect we

quarters we the market and we've a result talked the has for as increased down programs, seen there. commercial last driven On competition have several about been market. And the pricing that

-- as we requirements. we compete, we not going the have requirements, talked to but If continue return certain those return to can't about, take we're we've deal. meet We

seen cost some of existing certain headwinds the we contracts. have On on contracts,

working we're mentioned, Sean As those. address to

improve we though -- situational contracts, quarter this of in and performance, that in because in certain that the to that's of timing is you and we accelerated order web. the saw operational Some

forward, had we that effect so saw in costs this of quarter. which pulling And the

also to now of are opposed contracts managed a year, changes number cash on as accounting time. that place a last because the of these And over took basis

area little fluctuations see a portfolio. of as as and cost of in do in while so an our that a But win you any pointed we a quarter you new haven't -- and So, given changes. it's result still out, in part income those important announced in

being for driven across we've row company. been not in Having believe outside six that's achieve to a growth Double-digit growth significant by very commercial programs. now other -- said the of areas able and quarters is that, that's what we

Ken Herbert

a Or It to sense. then of within like just lot the there. at And that's a again It's competitive very and the that question look makes seems growth helpful. again, fair parts well? distribution Services the those government a guidance market. as obviously and some better assume the top performance Aviation No, we the with a side Okay. It piece trading line? increase, as on MRO, the is Or driving contracts material maybe on increase? and is maybe business, of the is that on

John Holmes

continued there, have in performance pointed is strong out above. out, you year-over-year performance parts strong business, out healthy Very business contracts of very government the nice the area, of the those of well. matured. meaningful And all trading, programs very from It's growth the MRO as new as the growth recovery

Ken Herbert

provide I PBL contract if And more government and just I talked question. the final sounds like one well bid services could, you flowing it the opportunities, your within Aviation about maybe and any the your pipeline and Can recently bids or know might opportunities, you're the be on Okay. terms are backlog? On of what in maybe -- data, Services. John, seeing, going WASS through you've

you maybe And activity focus and talked the now bit scenario as just just about mean, moving United in or States, continue base where for from about you I that on contracts see like there's high little Or business? are these your types of contracts forward a growth? it strong the your capturing a of a two we maybe sounds should underneath customer more particular, here obviously some to real wondering, in I'm expect

John Holmes

bid of that sure. we expect should is the because we very pipeline. past to we're to have there. the Sure, Yes, a A point build more business, experience, And full see work. services out win, on couple of that our on made continued allows to and government the thoughts of you performance growth we more we which types win more more able us

pursue. that the So, widening that of types is we aperture of the things can

is On just example bid subcontractor and is of ago, the over helping two that the really won, made sell four top advantage you government successfully of these again, And the we contract C-XX five aftermarket. of aircraft a a to the fact two as that us last a also government. migration the larger know, years, prime quarters to accessing that, contractor aftermarket And great from that, we're programs. or to the taking we've the

successful we out those to but on two of and aircraft, sales DC solicitation we're aircraft. originally to used to aircraft the that not allow we sourcing winning part doors new two for coming that, we worked And came that of original was used open written us, aircraft more And only of for in there. going up just for That purchase ultimately, solicitation lot see the and the also allow for in to that. use believe opportunity is for sales, a two

more a DoD a and of there, readiness a I the a fleet, gave use I DoD aftermarket a that as way. the and speech gave was -- lot making sustainment keynote application of interest the ahead but week of to doing the government commercial to about their was it just solutions examples well-established better at of Symposium, and there in Maintenance we the environment. these lot last go we And talked cost-effective as looks increase and

excited about us for So, growth services. government very remain we the prospects in

Ken Herbert

much. Great. Nice Thank very you quarter.

John Holmes

Thanks Ken.

Operator

Thank you.

Our comes Ciarmoli SunTrust. Michael of next question from

open. is Your line

Michael Ciarmoli

evening Thanks good Hey, Nice the guys. taking quarter. for questions.

John Holmes

Mike. Thanks

Michael Ciarmoli

loop on, Honeywell's at you difference? just to solution? what's entice How you to about the digital John, yes, to I close a just sell solutions. maybe your the think compete mean, trading solution? their there? got, the on guys versus what's to we GoDirect are you I Do their just seems but different I -- all? Rob little be was radically differentiating -- talking between that are guess, back a the more you doing difference bit solution know -- part think, Can can guys maybe go I just anything store, to customers I articulate there what

John Holmes

got. initiatives digital handful a of that There's Sure. we've

part lot our in and maintenance heavy power-by-the-hour and we've our we more and capture and Quickly, put external activities more and of get use data internal, to to sales our advantage can from activities that real-time we information sales information that are in some a data work front our that collect of of activities employees quickly. so are the take Some internal. done more

in that of digitally broader very, store. store. From a through a business have increases we've traffic an small traffic phones and terms lot that acceptance to a of seen very our of through of large healthy And and do opposed external standpoint, parts as transacting seeing store. customers We're emails. month-over-month We've seen we

about that. we're So, excited

people compare to [ph], wouldn't the there's all mentioned, there's you I as to of Honeywell different of there. there's AeroBuy, -- there, want necessarily ePlane GoDirect, us a platforms there's lot kinds out

very, is applying are One do reasons this successful channel. a do. is digital it taking we of what us, what This to for very because and business and core the do is we're we we and we a well what

So, I excited what remain very we're seeing about there.

Michael Ciarmoli

see looks parts to continues. in strength overhauls, Got like then more the and strength upside that pricing any parts activity It on on next that's the helpful. if into robust I little continue just power? And grounding from we shop mean, everything trading, the I it. is That's color giving this the at year, MAX? maybe seeing tightness in visits, clearly, that schedule into more factoring mean, XX the performance the trading, just Are all? availability like incremental you looks on of how a the give around creating of of Can you aftermarket. you

John Holmes

Yes. No, positive it's neutral us. definitely the I a the the life it positive now, extends of for net-net, that said mean, it's we've over slightly positive before platforms. but because to current long-term the generation And right is MAX

the question, the of best XXX As it we material right sourcing in price. relates to and But material that material availability, at very world is the tight. sourcing there's no very, are it

in closed on buying and because we we're second the to aircraft able great our on a two hands recently, actually that and us that matter we're get that's that As we will that fact, made of just happy help material half. really

and are world, and we've we're giving this, got we've flexibility the for got sourcing largest than team compete fact best around we world buyers the balance we've an in that in and edge that close -- -- the got market. that's network of sheet us capacity the the the the anybody to with, faster we So,

On top of contracts, set particularly with for supply that, of we also engine the have long-term the agreements. shops best

capital deploy sold we right out we quickly, we've when we've contract. the find to and we we the go got it the So, got because material, and know got

Michael Ciarmoli

bit business. helpful. assuming Aviation in is to mean, to revenue-generating down this then margins. been of of services just flattish, all trading activity parts activities That's on little accretive margin other maybe the some nitpick, year-over-year. it. have slightly Aviation I'm I a Got and And the The margins the

did think some at turn the looking times there talk of and in-sourcing. about I you cost and

But operating potential or do about I how mean, think margins would think Should once can't any we imagine sustain about upside the this to parts I some levers sort some to continue normalizes? of active. in parts you guys having leverage Services? either pull the we to trading stay Aviation trading drive

John Holmes

Well, for that would heightened to the I maintenance on mean, say, the level long I the of from we occur well continue MAX happened grounding couple wave contract activity a just business expected bow expect parts see that forecast of that's shop before the we time. have, of of because we to this trading, and And was the years. the next over

very and the business that we come. good for to strength many So, quarters about feel continued

focus overall it's of In terms a of margin, big ours.

MRO own very got because to a are couple make working number. pressures of a cost is level but quarter, with we cost increased where we being at on passed We and years that on that our some labor it we not customer. have do that are still The have yet was customers of improvement, to not they're their focused back little ago cost the work depressed ago. They've but that bit the and us, way. We're supportive. still yet there. entire two Each that years headed was it improving is from

floor. On of efficient a we we in and takes happens, did they improvement more bring and and get continued that top while MRO. become in of what expect to new lot And ultimately trained as good a on talent, margin at that, to see talent that the get do

seen actions then recently some And to we work program, margin there we taking the address are those. commercial to too. a expect challenges as see there, on that and mentioned that, number we're And through of we've improvement as would cost Sean there, definitely

Michael Ciarmoli

queue. I'll Helpful. back in the it. Got guys. Thanks jump

John Holmes

Mike. Thanks

Operator

Instructions] [Operator you. Thank

Josh Our from next question Seaport Sullivan comes of Global.

line Your open. is

Josh Sullivan

afternoon. good Hey,

John Holmes

Josh. Hey

Josh Sullivan

can still trading that's your that feel How do about coming to inventory spot inventory wave You a it that trade have network? Or that you maintenance that is need in basis Do you your the feel talked build confidence? in giving you the network bow business? that on feel you up. you you about like

John Holmes

the so and But last also have have few and investment so the it, move over can actually making get quickly. is so candidly, go able has We to that material, we quarters. that in inventory, material in improved, demand wherever been investments very continued we're out. the The seeing often, grown we're come it turns we find significant

be investment stuff. but we So, hands our cetera, we come when across flexible have those the investment plans plans, on et to get to have right opportunities

Josh Sullivan

Got or on Are another then still at just trials this point? and How these follow-up And the firmed margin up pricing it. discovery is you price strategy. have SaaS going?

John Holmes

what sorry, on exactly? the was I'm what --

Josh Sullivan

initiative, On strategy the with the yes. SaaS digital

John Holmes

Okay. -- very that would early, Yes. It's very as early. characterize very, I

a launch customer. got we've So,

talking the phase say, your And we discovery. would in We are price have that now. other to words, multiple of customers right use about we're I

Josh Sullivan

just is And last it. then shop utilization on year-over-year Got at visits this point? MRO market, the where one one MRO on

John Holmes

move We are And a around, of customers the -- at from standpoint, well, the very up year-over-year. changes to we utilization. are have through result largely sold We're But as we're we work -- we us, year. high seen the out a for due MAX. of our scheduled rest

Sean Gillen

I And say last pure year by constrained rather would labor, utilization our capacity. was than

better. is our so And position labor

But labor in higher that be continues a to market. at overall utilization. the we're constraint So,

John Holmes

us position to a that taken The for labor It's the allowed macro Thanks within has that environment. I our actions improved year-over-year. environment recovery. think good have point. that's not make to we've this

Josh Sullivan

Thank you.

John Holmes

Josh. Thanks great. All

Operator

showing I'm no Thank this you. at questions Instructions] time. [Operator

John Holmes

we and everyone. company appreciate wish holidays. and Well, your happy in interest our everybody We time great, your really

Operator

does this you participating. today's gentlemen, conclude Thank conference. for and Ladies

disconnect. all may You

AAR (AIR) 19 Dec 192020 Q2 Earnings call transcript