AIR - Earnings call transcript Q3 2021

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Operator

Good afternoon, ladies and gentlemen, and welcome to AAR's Fiscal 2021 Third Quarter Earnings Call.

We are 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 comments made during the call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

As noted in the Company's news release and the Risk Factors section of the Company's Form 10-K for the fiscal year ended May 31st, 2020. In providing the forward-looking statements, the Company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. would and turn CEO, I to call time, President AAR's John this like the to over At Holmes.

John Holmes

and third today Great. good Thank to our discuss interruption begin us flexibility sacrifices again by would over employees. for afternoon, and year have continue our to recognizing customers everyone. AAR. to I and support for the all to results. their thank have you appreciate grateful you like very and I us quarter loyalty past fiscal them what much, the done without Their to allowed year. and once I'm commitment, XXXX professionalism call joining do our unwavering they continue for

Turning to the quarter.

million operations adjusted from per sales per share XX% earnings decreased share. and our share year-over-year decreased to Our XX% to continuing diluted $X.XX from from per $XXX $X.XX $XXX million

to Our increased decreased to customers our and defense sales and commercial government customers sales X%. XX%

defense and were For sales the sales. of our customers XX% quarter government total government to and

As In our with activity stable quarter what revenue, we increase see relatively saw hangar increased demand supporting to during quarter than we what parts a customers the sequential anticipated leisure but broader we expected sequentially. this activities, is in in last relatively the revenue across a we saw up to MRO, was mentioned we which X% in we orders commercial travel. In stable, did see encouraged were call, range due sales of earnings on QX.

year-over-year very the quarter strong well delivering past over year Our of their government performance businesses, have continued another performed which growth.

from our adjusted margin up to to per CARES XX.X% our X% excludes share benefit basis margin improvement our of improved XX% adjusted operating and progress. diluted sequentially continuing from profitability, sequentially from an margin earnings operations gross our Act, improved the X%. XX.X% the which On were continued reflecting Regarding

stable two We in quarters adjusted have past the margin operating a while revenue our now environment. doubled operating over more than

We we which beginning XXX(k) a reinstated quarter, retain to us fully Even and restoration, are adjusted able the we to improvement been gains cost over and a the with operating reductions, That margin salaries at the reflects have of priority full had look operating benefits for and also that improvement. third attract portfolio point leverage created we talent. were top the the a to proud of deliver last as compensation through still efficiency year. reshaping

cash from million quarter a Turning to business investments in to X.X continuing cash. net activities generated debt sheet we while We the position adjusted and EBITDA. from even were operating remain operations $XX times with flow Once making in again, balance in new positive wins. strong

a during new of distribution to Speaking years. S-XX Force program U.S. additional on quarter. an Seahawk we We our Air new GE for our five-year execute subsidiary the with Unison accessories continue secure repair the and and the from H-XX seven provide Navy's platform to business, of and also overhaul wins support of relationship expanded an extended

over to in began quarter's Honeywell previously Gillen CFO, I'll contract. this it our EBAS that announced also MAX We results With our turn Sean detail. on review to XXX operations more

Sean Gillen

John. Thanks,

to reduction increased to to sales sales up the defense U.S. the up profit Our program by passenger quarter driven reduction Marine driven in and million of million and $XXX.X the profit the year CARES ago quarter were support. were gross activity XX.X% excluding year-over-year actions consistent margin flying Act in sales with basis support indirect to other commercial in X.X% the driven the have primarily decline the the despite down deliver prior X.X% XX% our reflecting XX.X% for with efficiencies. CARES in XX.X% from by and in down payroll meaningfully by XX.X% or quarter items, due in adjusted taken and Act On commercial XX% Sequentially $XXX.X was up profit MRO our quarter volumes scheduled Corps. margin the year we the XX.X% in activity an from Sequentially to adjusted C-XX the gross X% aircraft two the driven COVID-XX. by reduce sales. was costs Gross significant and government drive sales

prior operation. prior specifically, driven quarter On the an and performance to were adjusted composites X.X% margin the business to our SG&A the we support, of $XX.X million the services of with SG&A income and CARES increased Act structure. deferred or expeditionary from for Act from Regarding the reduction our the million of XX.X% our we overhead will down recognize cost profit $XX.X sales for the QX fully million at year divestiture have gross XX% by accounting in mobility improved quarter. associated longer year basis, quarter, no credit reflecting was expenses CARES support. respect the the $X in With payroll

note our provided government the to million $X.X CARES expect governments. Consistent foreign quarter. promissory Act are eligible GAAP subsidies Act, certain foreign stimulus during fourth primarily a by in prior an have we which repay to the CARES cost our we income with that reflected are continue as for of Also, with the have reduction associated sales. including subsidiaries in We quarters,

included Other costs million $X of $X.X and commercial adjusted benefits these during reduced results. of for the exit from million contracts, programs loss provision exclude we quarter which However, adjustments our sales.

of a for settlement, our reached the was a have of of under adjusted million Claims approximately legal during to there agreement the quarter, we which tentative XX.X the Act gain excluded million. to with Department a addition, In settle from we investigation $X.X airlift False Also the results. Justice related

operations. the charge $X.X in quarter we recognized million a such, and of As discontinued

on in focus the working to reduced in our second $XX.X from we $XX fourth reminder, the continuing of airlift operations. our of year. the cash exit activities capital generated by we completed We a our business as operating As we In million million of inventories quarter management. last quarter quarter, continue from

at was at $XXX.X from and million Our down $XXX.X QX of quarter the net end debt last of QX at end $XXX.X of end million the a from million year.

the addition, at $XX.X has financing year year In million $XX.X receivable the million. to $XX.X last the from over end by quarter ago of accounts million our program decreased

leverage overall unused net $XX.X of capacity debt EBITDA, liquidity Our cash over strong for $XXX our adjusted John. and times to call of and I under now Thank the of revolver turn over million back your X.X unrestricted and attention with remains million. you will

John Holmes

demand encouraged broader leisure we Great. Thank about by domestic commercial reported increases for are and you, recent we travel in remain Sean. the optimistic widely recovery. the market Overall,

are travel improvement lifted. QX international expect sequential some We in thereafter distributed restrictions vaccine our the are larger impacting of improvement which continued and is customers as and modest current

As and we current to remain revenue our that improvement. our cost structure margin occurs recovers, leveraging committed continued drive to

us very strong to growth. in be puts In addition our fund position balance able a to sheet

of to the expect give a to an to from continued even us make investments with invest confidence early will These our like initiatives. and our We company. over increasing operator more that it emerge business we USM to that strength our our the the distribution the continue I'd technology stronger digital and actions in for to profitable well With of turn market and questions. commercial recovery and pandemic as signs as in as activities along and government

Operator

Suisse. from Robert is question [Operator line Instructions] your Credit Spingarn first open. of Our comes Sir,

Robert Spingarn

know versus trends the to parts little the Nice in John businesses of don't but think business much, here quarter break bit commercial from performance we from sequentially. the to I like just you MRO. some QX if out talk about terms of too wanted maybe you a guys. about I And the to QX sequential

I think you a in said two - X% quarters? it growth overall was the between commercial

John Holmes

sequential. X% is That

Robert Spingarn

X%. do we in sorry, stronger? two businesses? different those about How I'm What's that think

John Holmes

sure. Yes,

requirement. So it QX. was do in elevated activity going see relatively we parts activity ahead repairing generates business aircraft parts In we MRO, did maintenance requirement stable, see typically elevated. QX the maintenance pace from to because of And saw you parts

primarily that's MRO sales not broader from the the surprising market though, we side but mentioned, us So in saw base are on we USM growth that and the customer to a part returning In side as parts the sales. cargo we part while necessarily, thought both the seen the look encouraged hadn't and come that part of from in the a new I there the segment. activity out market being quite quarters, driven prior If market a at of passenger of candidly quarter. the name we back and came bit freighter in we couple was the

of All of performance, some up to added relatively customers those but stable that to encouraging still it see back. come was

Robert Spingarn

based Yes, what USM, the on what say part can mean, there? and activity out seen you've trends we on about else I

John Holmes

Yes, that would so asset type. varies of kind by and

actually is generation an at interest all a at while from the increasing tight. I XXXNG, had current point are heard the we we the in as look come haven't well freighter support the got the we supply customers very current broader the that freighter we this game. as customers narrow-body that So airframe into USM from the back market, engines generation seeing of and we If because market, little not the going that mentioned strong conversions AXXXs, previously demand on and market, at look if relatively interest

in expect we and We do So narrow-body we the in cargo the we see supply but market. in increases differently more broader freight available USM than market. becoming what demand see there,

Robert Spingarn

some owners or going is They of the airlines well. is part NGs I imagine older as you, to are it on maybe was there COs making how I passenger side, or Yes, desert? the supply to the out there or or these ask in decisions sitting aircraft

John Holmes

part overall to so material thought line we longer over you're yes, retirement of from quarters from believe but that ago, a activity couple of still out grounding to that we I increased time. kind the see going think, has taken might to think, have the bit availability I a occur, Yes, -

support as pay agreements that access trends, the last example we we quarter an to focus give on and our certainly own is Fortress see to deal but to Our demand attention material focus to announced the that. our those to ourselves that is us we of want macro proprietary

Robert Spingarn

Okay. way in on fly Is aircraft those the the are more if And of international your routes? just that of United those you States versus to what any estimate business. to at domestically in commercial look you percentage cater this, that here flying fleet one there

John Holmes

We'd have to look at that.

Robert Spingarn

of you've just you How sustainable be that into of through amount some it the to ask recovery? delve of overhead. driven, reduction out much I could it's a overhead if Sean, the you the is improvement, just like sounds then, fair to going And on margins. taken wanted

Sean Gillen

majority the that cost recovery committed and of Yes, through of we is overhead would overhead reduced kind to that takeout sustainable anticipate the vast structure.

We also reduced as quarter the some in well. improvement indirect up the then the and SG&A, our the in then see gross profit. operations, efficiency that in in reduction seeing And shows can there's but are you

will do So think we recover, the come majority of stick. but volumes some that back will that vast as

Robert Spingarn

than margins when we are at recovery higher there? hit to volumes able be before some should into this you So get well point

Operator

Our from next of question Herbert comes Ken Canaccord.

Your line is open.

Ken Herbert

bit. just out a to wanted put start on you spot I little the

be to Our for fourth fourth mean up I quarter the obviously, quarter the anniversary, significant saw you, you're 'XX. going in going drop to fiscal you of revenues

how see the do and the sequential fourth quarter we first growth So about time? movement revenue for should into the think we positive

John Holmes

expect year-over-year necessarily call to we - it's modest from QX improvement to not close. we QX As mentioned, a to pretty from improvement, and but sequentially QX ready

Ken Herbert

quarter. booked And that's Okay, where how discussion. may in up in here how you're trending? of maybe your uptick think are you have mean you you sort that that - hangers about would MRO you how to with on or helpful. like - excess - I at do Are follow backlog. capacity any of seeing now are it fourth How think would you utilization just terms through an we is the or about sounds lines the

John Holmes

levels you the a as in we in fairly know in have been seeing mentioned international we're we're now. Europe. you're demand what seeing closed the is like Yes, encouraged of up couple pacing that what that of before that for that meaningful do space behind thing Canada U.S. activity have operations has so Canada overall we hangar we and by over right we're One some and seeing

level, pre-COVID So those ways to we're pacing to ahead. a go to U.S., operations in recovery get definitely the but seeing a still have back

and indicated, we before John operating higher our efficient as facilities our more focused very and than are, quarters in driven productive a over the MRO We what last operation efficiency. COVID. And what on saw quality several we've is much

work thoughtful we're back bring so very And and disciplined very network. we how about across the being

we the made preserve that gains quarters. the we've that in So few past

least that a starting be also have but now that you - MRO into maintenance you hangars And catch travel to seasonal think U.S. in you've see you deferred airlines on to right about point the of for deferred season, at work decline One is it's to to use done typical historically some most the on got that the we some QX, travel of because QX a have we time summer season, prepare that that the as likely what going going expect mix likely come busy leisure wouldn't maintenance. are the being in will through. up

Ken Herbert

the do there supply Is in helpful. pressure we you the see able how any that's demand Okay, to the John relief or and labor demand rates about were balance? think such

John Holmes

it's So relatively entire been far throughout pandemic. consistent the

Operator

[Operator Instructions] from Our of question next DeNardi Joseph comes Stifel.

open. line Your is

Joseph DeNardi

Sean, quick you. just a one for

it? give that. below gross of that is defense that to and that Is commercial little adjusted bit like mentioned a XX.X%. commercial kind You margins versus us right the think on Can about bit you were little way above is a defense

Sean Gillen

above. below. a That's little bit right. Commercial little Defense is a is bit

be detail here see some that of that the shortly. Q You'll will filed in

Joseph DeNardi

about you versus side. just but about of little And domestic John, international commercial you then, kind can spoke exposure on bit, the this talk your a

to it As and U.S. getting airlines relative commercial are on like pre-COVID like on at this you are point? where kind you relative are U.S. where pre-COVID you mentioned, to of capacity international to commercial international faster levels little seems a than pre-COVID back

John Holmes

relatively Sure. has the XX% and Historically, been business international. XX% mix domestic

domestic As ways pre-COVID where back we get and China back pre-COVID levels. almost The to are far a both of very mentioned, restrictions very, the and business pacing domestic, to Asia to International soft that China, parts in to very you it still to to the the to place. particular. the go relative very, levels, to levels were as across have is that's segment, but and Europe is is relative Rest MRO remains in due behind soft pre-COVID relates we

Joseph DeNardi

on quantify all as deal, And view to clear that just some it's that opportunity exactly. investors kind struggling Fortress of important. that I suspect then the are pretty you

agreement So what can if helped like you you just that pre-COVID, the maybe? would of of for that your meant how like have had that business would give Thanks. kind best the shot place in much

John Holmes

and be I Yes. have to don't into that to that. to say, a meaningful trading suffice appreciate contributor results for deal, result. contributor want us, you we meaningful the been it specifically the get but expect to to asking a I would USM quantifying it

are them have set relationship the was years a Fortress supporting that has material of venture them. been - step for partner nice we joint first received from a next many great really in with the and we

say, So be going expect fiscal it will growth small a, I we year. would a contributor this quarter next and into

Operator

Michael from comes from Truist question next Securities. Our Ciarmoli

is Your line open.

Michael Ciarmoli

and you're a a gross taking Thanks I the look for lower what XX.X% nice strong you mean, any more number if Rob mean about back some the and if $XXX structurally but doing were pressured I little were that like of headwind million stronger at were MRO. got mean you labor driving it the bit with a sounds plus talked you margins challenge, is I I us give back think here. sounds benefit adjusted John results question the to I ago, a asking year more my Can margins. there mix was I you've and rates. now specifically margin obviously it getting mean we and sense, really mean on it efficiencies. gross like look there I in a not just labor maybe just what Maybe revenue from

you exactly bit kicks the shed but So more here how presumably in, and tell more these line, the that dig parts, parts with volumes getting you in topline with maybe it of up a with runway market deeper us putting with you're one efficiencies volume give some pressures? margins seems us little maybe can like

John Holmes

kicking a And and and the the in of Absolutely, a We areas. margin pre-COVID pleased very, ISG&A drive across we're areas deployed that amount just technology in facilities out. These of that made number progress a different taking also includes consolidated very that been underperforming underperforming you with efficiencies. contract. in are we again short we've We've helping Sure. lines, company time. underway number then as this number we've now of initiatives product a in know were and and that headcount to driving improvement were exiting actions certain taken of

So see for recovery. as more the you relates definitely mentioned the margin as MRO In we see runway example, not rate improvement to we it the yes, definitely labor business, revenue through labor, relief. coming

on experienced labor of We amount and care on have limiting in really our we the to focused labor as and on the contract that we got making hung most that of operation. focus to sure the mechanics we've we took retool use force now

able most a product the employee and do than what So efficiently have that we are before. quality experience it turn higher saw more who base to we

historically so nice MRO income which as then And business, had been revenue performance terms in, for that see operating our the business to us. through lower starts to margin the as of received you'll that in a the starts right business of And our well. there the for once margin line, in gains And one historically return, been absolutely at performance. kick parts margin that you're flow higher has

Michael Ciarmoli

Got on USM. helpful. those about parts it. What That's on just

a all available. You it on mentioned coming detail or still we on the good potentially challenge is the material could pricing say price current flooding give of out are there can you fairly it's some more on talking market supplies Anything I your there or hands generations. at narrow-body supply more mean you to the competitive whether Any legacy get and pricing?

John Holmes

moment. the for that, but a would reasons, type to between of Yes, really see get I just just you that lot say at want competitive I wouldn't asset into variation

Michael Ciarmoli

Okay.

other subsidies. going planning other international on any subsidies forward? have and some government potential Are in you locations taking facilities mentioned You you

John Holmes

of additional the receive the to well taken. the the program. We money under we eligible as U.S. were in CARES as new majority and subsidies original program Here that represents under the

we performance whether U.S. Given in or participate in programs forward. the continue those company options. not two avail going and evaluate of we there available the the Canada not strong our Netherlands, cash generation are those to example, to our there ourselves still facility for and elected and we'll for

Michael Ciarmoli

one Last me. for

are there. of capacity some be a the million. looking $XXX at sort think you you've is you are consolidator there looking assets you said how here of Are unused potential in think you Just out marketplace? opportunities? What seeing the marketplace lot Do good a you for got to I or

John Holmes

very we're to to to available, what available, in execute. coming would we available the close what's be a position we and strong to like attention we extent opportunity, Yes, paying find about what right being feel good be would that the

Operator

next Sullivan Benchmark Our from of comes The question Josh Company.

Your is open. line

Josh Sullivan

Can bit change seen seen I new the you just just of customers recovery. in you Have old mix. mean customer about talk some little any a as you've or customers.

curious like this look what might point? Just that at

John Holmes

the market And some inquiries. we majority been business, Sure. while the quarter going really some in don't of in saw In to be a historical meaningful the this see cargo last over first but passenger. changing orders driven a by for activity that couple time, time that's because in our out of for the parts strong of has the cases quarters We actual the market. larger

business. the the here activity you U.S. fray quieter than MRO increasing support of we domestic we as in the U.S. leisure travel in mentioned, if see the MRO are that business, So the operations, Canadian seeing the them but In have you market. been will operations to the parts the kind re-entering domestic in

Josh Sullivan

on the just one And defense.

go Sorry, ahead.

John Holmes

has the and quarters strong that a government from put the of up pipeline the the growth the seen remain encouraged we numbers, three year-on-year we we very this government there. very by - time opportunities see as government entire of you've in business in row business remained And

Josh Sullivan

if you government centers that new the on the territories open the is performing? forward? got INLA got. helicopter business, new How you going do just then operation that you you the expect opened And acronym business, to or contract Have

John Holmes

of is program that's performance. State is way our with the contract, contract also the happy last much with years That thought has have you Department when the performing really that a over INLA be We're customer several actually Yes, the more might do locations we have turned very might regularity. open to that our the of out on very WASS with and gone well. happy as and and thought a much close have dynamic as fair we took you amount than it

into early So go a disclosing a the publicly was been thought back of we location, we the of be program that going to has contribution and locations, moved there more from a operational down stable but to time the it, event if revenue every we every and opening base, went time where away that contribution several were and we days program realized closing new but frequent very quarters. for up tempo has the income been that between we overall last we

Josh Sullivan

their one department last I have into visibility as here. Do that? just additional you then to just you mean are vehicle any funding expecting And state contract into any together one flow come budgets

John Holmes

right at now, or no moment. Unclear, this the expected way unclear but change one meaningful other

Operator

from Joseph comes of Stifel. Our next question DeNardi

Your is open. line

Joseph DeNardi

think, Sean, guys a Is maybe XX% you talking of have been at Thanks. to forward? XX% the of as that looking kind business about you're percent how I going still SG&A sales. pre-COVID

Sean Gillen

on we will see topline and this think, that the once you occurs I on cost keeping recover. as that's structure start right improvement obviously see my the Yes, recovery comments to

Joseph DeNardi

the considerations Sean point this to of maybe just any keep Is that And Okay. other settlement. contingencies mind going then at there John forward? on are done or of or gone that or and kind with in kind DOJ any

John Holmes

to be the gone, agreement will do Once bit we to work and settlement. the a reach of but with little felt we done finalize final government, it

Operator

next of from question The Herbert comes Canaccord. Ken

open. your is Your line is line Herbert, Mr. open.

Ken Herbert

expect of around more similar be, sort MRO I implying playbook about crisis and in you of about advantage coming that topline right selective the much my taking out you growth not by you maybe for opportunities Are now maybe Is the as this. a like talked on around of the on you now a sort a it's of MRO you airlines do expecting sort of quarters would especially and question the prior work In outsourcing air it's the take follow-up. making side to it wanted just comments side. to I if those expansion? is margin as guess being airlines in outsourcing sure more your of more by opportunity

John Holmes

latter. work things necessarily result the the true. as to those definitely relate is wouldn't more of hitting the two I It's latter market a but outsourcing,

We are a very being really and a gains the the that focused increasing leads focusing we pre-COVID. quarters on expanding just throughput seen last maintaining take over than on on few to that work And margin and we the we've the bit smaller more selective about footprint on. had

As us you our allowed achieve decision that a across efficiency do, network. the did sites of to remember, we remaining but more has difficult close unfortunately to one

Ken Herbert

And the it increased on maybe mean how the about and business talked a in investment mix benefits ever as I you've worthy Does terms maybe think point significant longer margins. of you're we the maybe focus moving of you and for about a customer do no business the think MRO synergies the quite face other potential reach shift the where of forward? time about more

John Holmes

very in that as MRO MRO the we even a dynamic That's of to the market. our believe the feel better still margin of and between performance We continue the the and business businesses. to improve certainly businesses look rest about connection

connection but and of of were so toes what fans from goes there we on in a to always we And be the terms still perform between win MRO competitive programs going of standpoint, how we on the business. there we and parts the our and how

Operator

showing turn any further Thank at you. call back the Holmes no this closing remarks. over time. for I will to I'm questions Mr.

John Holmes

look the time And you, interest. you talking the quarter. everybody. to next really appreciate safe again thank and Well, Great. to I and stay forward

Operator

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

great may disconnect. all You day. Have a

AAR (AIR) 24 Mar 212021 Q3 Earnings call transcript