AIR - Earnings call transcript Q3 2022

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Dylan Wolin

Good afternoon ladies and gentlemen and welcome to ARR's Fiscal 2022 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 the comments made during the call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. May are Factors the Form quarter section the year uncertainties and earnings XX-K ended and Form fiscal Risk and the of ended November risks XXth, discussed the company's in release for XX-Q XXXX. These of XXXX fiscal XXst, the company's obligation or providing unanticipated anticipated In no events. forward-looking to updates the statements, provide the or reflect assumes company to future circumstances on the non-GAAP call Certain be financial will discussed information today. is the reconciliation in set of measures these comparable A forth to company's most release. measures earnings the GAAP non-GAAP this to At CEO, turn call over time, Holmes. and President the I would like to John AAR's

John Holmes

that Thank to thoughts impacted those everyone. the discuss afternoon I are XXXX conflict and quarter by today in third saying us year fiscal joining to our Great. our want you results. with appreciate good Ukraine. I you by start

We and invasion Russia's are stand are angered with saddened both suffering. by who those unprovoked and all

$X.XX work all territories. with country, commercial increased $XXX share. grew strong earnings our do adjusted either we to $XXX very from we XX% said overall year-over-year and suspended share That sanctioned little the quarter, turning to operations from have our Although Sequentially to quarter XX% the business, business our we and sales in MRO. nations our from had per X.X%. in share per In increased sales $X.XX million continuing diluted million per of and another

gained quarter, declined. activity as parts Our but impact momentum of out the in Omicron slowly the the variant started

during gives continued eventual and of highest paced growth MRO. its ultimately, is that the have discussed behind quarter full margin is previously, us momentum activity parts more we parts and in recovery out our As supply activity. confidence The recovery the

growth the withdrawal. were able government despite of faced we side, sequential the as Afghanistan On a result the drive to headwinds we

continued quarter Regarding X.X% commercial down our we levels despite this the up second to operating our of particularly than as from is pleased delivered sales in X.X%. adjusted XX%. expansion I'm was exceed that and pre-COVID quarter margin another margin remaining Sequentially, earnings, more

quarter of had generated we operating cash, million we as activities another $XX to from Turning excellent from continuing operations. cash

consistent the remains repurchased repurchase announced after leverage our of the with balance share Even earlier our also to $XX at we fund repurchases the and in We X.X times quarter. growth. be sheet million well-positioned program continue strong we exceptionally net to stock share

distribution to we discuss NATO's during quarter jet renewal brings ability where see that the and Regarding the subsequent of to aftermarket. to our de-icers in offering agreement announced Aerospace market to commercial Gillen and contract an the the to our to first Also I'll activity. supply aircraft. it quarter quarter, business XX-year more this Sean exclusive CFO over the of in a that, MRO end new drive opportunities agreement it distribution most With because share move gains component important growth. both products it's into for represents Collins we announced our Collins to turn business a market with new detail. This E-XA our OEMs with and we to provide depot-level adjacent value recent our proposition demonstrates for component distribution exclusive supporting AWACS global a win also This is maintenance the the win

Sean Gillen

John. Thanks,

driven a driven commercial pallet our QX. receive down our XX.X% up Aviation by XX.X%, $XX.X Services by Our in in $X.X or recovery markets quarter and in to sales Expeditionary segment Services $XXX.X were million Sales that were sales we delayed expect the order million year-over-year. up segment now in million our of were in

programs. the decline in was the activity of were other natural X%. year-over-year, wind The our while Afghanistan primarily driven government sales down and in down XX% Our commercial sales were sales our completion by government of up government

increased quarter Our million we Sequentially, expect our in commercial Afghanistan $X fourth the X.X%. to approximately sales sales to sales and quarter. and $X our in were be in the X.X% down currently government million increased

MRO volumes the slower growth by parts saw start overall parts near that John throughout Our And was limited capacity. increasing quarter although operations we referenced. the remained

margin government the Act XX.X% payroll our margin the in QX. XX.X% behalf XX.X% be Afghanistan. profit prior side, we government the profit and took to our work to business well year in reduction during gross was commercial activity included sequential profit This of benefit commercials improved actions portfolio procurement additional On margin quarter by quarter, more our margin in operations the parts in in SG&A expansion XX% the Gross that efficiency to ability quarter conditions on sales the as profit was support. pandemic up improvement secure in driven refinement government million XX.X% driven the commercial in activities. offset the margin our the of was our in year or margin continues and versus gross was were from of business which the XX.X% customers. growth Gross government as of Adjusted was intercompany prior and sufficient activity quarter program's CARES which XX.X%. XX.X% the was $XX.X in benefited from sales. by in expenses In than quarter

quarter. the during of related this lower quarter XX.X by expense million. to $X to XX.X% primarily borrowings. Average share of $X.X would sales. Excluding year the count interest $X.X was and to the This costs million investigation have driven been million was remediation diluted for quarter million for million Net repurchase closer compared reflects last the adjustments shares of X.X

execute our We years. expect $XXX two to full approximately over previously million deploy the authorization to to committed plan continue

turn activities indicated, This operations funded we strong cash our flow program X.X we and over $XX million $XX.X John back net for to times. and also share of and from the now in $X.X million repurchase remains million leverage your the quarter flow $XX.X of largely you generated with financing continuing call balance Thank the quarter. net John. our As in the operating attention our of strong receivable sheet exceptionally will reduced cash accounts I debt million from and by

John Holmes

Sean. Thank Great. you,

earlier sales indicated Ukraine we result not currently do and Russia in conflict. I as environment the are any of so a not as meaningful that have impact experiencing either or business notable Regarding

However, in been particularly aware than are levels in fuel the prices pandemic. potential are of increase airline the related continuing we were the before they the impact and are certainly our costs. hangars tightness our And monitoring we Domestically, operating market. to have customers' higher observe attrition the in labor to

in to leisure time. In need have of address manage allowed optimistic to in this we activities competition recovery demand fortunate business started labor into a immediate term, at over than respect parts translate had Having navigate the much developments current respect and about we in the several travel impact a through result, quarters. is the and environment quarter. European when QX to environment supply us those we However, see took action more that, customers in commercial our our This that to are to To-date and inflection this the to recovery tight to of beginning American as demand actions labor we COVID market our to we XXXX saw meaningful growth with we a continued our commercial this increasing And and our new labor we shortages the expect expect to of parts the market. FY accelerating that in dynamic customers we encouraging. aggressive to next moves that be effectively throughout more recognize With said supportive continue and demand largest remain our may continue XXXX. make we sales North in remain and sequentially trajectory. modest that volume experience

Regarding is a I'm we took plan. sheet actions and sales. higher series pandemic in margins, further proud of improvement goal and delivered the recovery. in extremely that margins expansion the we potential a a with the depend the the and representation have impact good during actions taste of the without efficiency on this took strength pandemic, full Early the will balance to quarter recovery achieving on operating drive margin of mix full towards a of for even that we

We have pandemic. we had commercial the companies balance we're sheet stronger for now few and a expanded in straight with operating six prior to the than very margins one of quarters aerospace

has will turn I business deliver and our organically both and to for continue to With inorganically over stakeholders. us positioned value to operator our that performance other it invest for in customers, Our the shareholders and questions.

Operator

the [Operator of Instructions] Your Ken question line Herbert comes first [ph]. from RCBC from

is open. line Your

Ken Herbert

and Hey, good afternoon, John Sean.

John Holmes

Hey, Ken.

Ken Herbert

in to the just Aviation just to parts of MRO start can you the relative relative businesses? talk up off. the in The I quarter, John performance XX% wanted about

John Holmes

QX. Sure. saw actually with Both consistent those of we what in were

which the QX. were MRO there was variant parts quarter, we from was sequentially start, with the off we in though recovery growth a to in saw came variant. to business. result commercial we're parts commercial programs in through today, – hangars saw bit quarter-over-quarter. largely related the down and And than we quarter full remain the quarter-over-quarter parts But Again, to there. other then of throughout The got business. of and We was business Omicron Omicron what business QX So in a we indicated, the variant early ultimately the even the performance our slower net-net we as happy from The that saw from volumes saw as really ultimately about subsided, volumes a assume that's pullback that we continued a higher as areas consistent QX. the accelerating the of impact

customers which other to of fly repair saw as revenue, PBH business nature out component well in So of given MRO more as to the landing performance that in operation. started area translated gear our then our other of hours, areas And we program. the strong more the

Ken Herbert

Can business fuel a a higher one for the could I of which support But sheet to crude on the prices feedstock. and hand the potential on there's dig sort the you assets, of newer on prices risk hand, your deeper into USM the and balance airline to might aerospace And other or if just obviously more obviously, the the operating helpful. customers? it usage That's the clearly Okay. create side. just little would risk recovery bit I model. know from

of So can that your expectations could through few over impact quarters? how talk you business the next your

John Holmes

are of our a airlines -- many a highlighted, there. we've situation function times decades on, on how consumer. We that seen much talk of dynamics much of And pass few fuel price increases will it's I able we're that this and been a to lots Sure. views say, different the be over customers meaningful of those varying the AAR got that competing ultimately that able industry. would how you be to you've in Certainly, to the is it's I on. think Yes. has monitoring. pretty And situation the the a passed a to

how drives about and expenses. But going ultimately that as drive solution. the extent operating -- factor, customers' are they think we are lower a and think to increases, see it's the about that that's they So them we lower-cost their solutions we costs to cost sustained a to

Ken Herbert

Okay. That's helpful.

could or now as bit Just could commercial I you the little a are thinking the finally, balance sheet we other about opportunities, maybe How as on put some sheet you capital feel do continue areas? allocation Sean. like argue underutilized if side. growth think recovery in I balance the more about you and any accelerating significantly onto you you should maybe see for is mean to

Sean Gillen

the question. Parts capital to priorities remain do Good the opportunity, Yes. see the invest in increasing I same. allocation We and organically business. And specifically think

over cash And that. So procurement in think, seeing past new we're as providing to that business invest inventory wins activity in as has on several used material well serviceable distribution been the opportunity I quarters. and

continues there to opportunity via inorganic be think acquisition. I

put money arguably to do that balance But to think as and in work. start could we And us for new area an $XX repurchase think So and think, opportunity money the you that I the to there. repurchase, -- quarter, put got but that sheet will to look underlevered is, we a capital. then say million work to to adequate so to be did we allocate be full continue the we good have we'll

Ken Herbert

you much. very Great. Well, All right. thank

John Holmes

Thank you, Ken.

Operator

of Truist. from Ciarmoli [Operator from Instructions] question the Your line Michael next comes

Your line is open.

Michael Ciarmoli

any discussions maintenance it they're doing of or on guys. that questioning this spending Hi, to point, are results. planning to heavy terms seeing of, indicate now on older nice upgrades, it's evening, of good better with in visits retire mean, at us for fuel. customers discretionary having go or behavioral are from on taking seeing any Maybe, with changes John Ken's they that? I line you can or whether the visits yet, yet might current planes? your back you this you Thanks be that thinking them those tell and on fuel questions just to planes Are specifically or environment around

John Holmes

no. everybody base answer America prepared the and with And I'm conversation our is question. It's Great North around the is the other customer very surprise for a see on be for spring of seems there mind travel overriding thing is certainly business but that, the we're a really, summer. focusing return. really strong of pace getting and happy customers as our now Europe, airline top again right being what And guess and I to around

the of so got what strong very ready on a enough focused and just available sure right they've airlines as And to now are equipment they couple support that making quarters. see

the that's So headline.

Michael Ciarmoli

is usually too to Okay. your Got because I that's the quarter fiscal mean strongest. a I segue, wanted fourth seasonally -- it. No good

you you growth I modest Parts expect quarter, to we you prepared that do you recover us sequential XQ fourth of next in year the time keeps said pretty in expect color some environment uneven just growth to were pullback in revenue kind given about that if think first Should sequentially? give comments, think of the entire with what this maybe think do think about talking some I building then, XQ? kind even about of normal -- steep quarter. But sort COVID, on the to And with in business? how expect the we you of can fiscal your continuing or just directional increase

John Holmes

Yeah, – again, good I question. think

QX. to overall improvement to increase sales QX from to be modest related was that to meant QX modest QX overall comment an the from So

Michael Ciarmoli

Okay.

John Holmes

And in you've a few got different parts there.

other the also, but to quarter programs. as of the we business. the then which of this lot yet, Afghanistan natural in full we well – have withdrawal talked government the in expect parts from in about MRO. you will impact the be of government another quarter haven't MRO, got You've strong some feeling another of completion government the continued But as a And other have momentum

the safety so but work will on we that programs contract other Afghanistan. make are And longer-term a government lot – there's while say won't like side do I that, revenue that replace kicking waiting, ultimately for to of focused the government of to on we the lost need up in

about at aircraft Afghanistan, a between the thinking again performance about of but while next improvement a we're the continue environment, our recovery in again mentioned more a from at in and – thinking to other demand. I our summer So of year, driver the we to And but moment, dynamic relates hopefully, another then airlines is expect typically the stronger strong and And year. bit out get ramp-up get quarter in as we're we're commercial, further we but first the that as of there transition is mirror. to And is next the is programs. mix further rearview point long-term a we inflection from COVID as it and seasonal all government think to expecting overall modest biggest ready QX specifically, subject this point, into this fiscal wind-down QX, we results expect to MRO meaningful And this at support business. of

Michael Ciarmoli

Okay.

Okay. Got it.

lot for a one a on those op scope indications result over there you quick WASS Russia contract call revenues Eastern European could seeing increase of given what's a increased opportunities covers government. countries. increased Just it of I there? there tempo a as know, that on mean, you Are are I with guys? are or the I'll see and – Ukraine, you any going there

John Holmes

again, question. say, I'd another good Yeah.

sustaining the right be sustaining now, the – Ukraine seem One our we three a development. spending it is, pretty fleet world would in the as given towards shifted priority. from a in positive to provide the having in decline priorities that better the the to directing administration I dollars ready shifted where parts with tailwind could a are would situation meaningful that – us. to fleet new that from think Biden be really business as position go, saw for could DOA on that day-to-day next-generation we areas that Obviously, there's the priorities current – current

And being demand parts dollars more into spent, could so translate for see would more us. you sustainment which

We anticipate. haven't could we yet, something seen that it's but

mobility is The in area our other business.

around be extent to You that, world, demand and moving you elevated containers there's could see the going the troops that manufacture. could to we see the shelters for

the That we situations We expect decades, have what like you seen is is diplomatic we're And of on – look that one again, touched -- area is program missions. more. over there we big in on follows the a that this flying the as seen we yet. this, -- a Democratic part But you've WASS. would final such it the see to depending how Historically, some unfolds. in activity thing if diplomacy typically third haven't that utilize administration

increased And see early. positive of time. area activity. very we over diplomatic program out Again, And see may another increased result it's benefit where tempo a could of so you that's that as still

seen We the prolonged a think haven't be any those movement of a these key are in areas areas. I any -- But three that conflict. impacted meaningful sustained by could

Michael Ciarmoli

in helpful. jump very guys. the it, Got queue Thanks. back I’ll

Operator

have we question Michael from And Ciarmoli a Truist. Instructions] [Operator follow-up from

open. Your line is

Michael Ciarmoli

figured jumping get follow-ups, other Two else on, back I'd on here. John. Nobody I

wages in mentioned mean on I the something impact confident thoughts the tight story. that and to how your passing margin could Is and You labor operating those sounded headwind? that margins. could create about Any that market. you color customers maybe along some pretty

John Holmes

Yeah.

to contracts tight Yes, A labor. good to a market. couple definitely customers we to thoughts It's there. to-date in where of support we've around increases adjustments constructive very think our dialogue with had I a again, need potential question.

flip Parts recovered. signed Collins side, distribution new were we've and we we And mentioned fully higher down the it's exceed on and two paying managing parts where it's of in new market another far, been higher-margin a in think continued the it it in to we those you XX% labor extent which decisions could fully commercial yet over turn get agreement, about industry, are talk to attention recover. to number conversations that just recovery them businesses, some pace supportive. than to. distribution about something see and And than they wages the the MRO will and in to we're in pass And varies -- expect has we We're fully not we're the But distribution is depending business because not a the more XX% as the our said, one anticipated to well. need the so reflected by lot raising with we've in given particularly ultimately I they've still one mean very see going. the to as increase still cost cannot that parts recruiting are and years very I parts margin there. we yes, market. and or I of on As in our we as And overall dynamic, customers. on MRO agreements But of margin, relates businesses, headwind in might customer, business. the signed growth drives we fully business, back past If levels, tightness pre-pandemic how results. the But mentioned, those the to think to lead the therefore, area pre-pandemic businesses margin businesses, that we as ultimately

but margin. in higher then and there some between business, labor with recovery So, is costs, parts potential got headwinds competing again, growth the you've with tailwinds potential dynamics which

Michael Ciarmoli

you with point that another Got side. there good And finally edge said created What one or Was anything you I win that your kind then, over segue you anything had, to? or break caused to first through I was the Collins? you last you there the puts could on mentioned. of is think, it. distribution which

John Holmes

that. We've for -- asking thanks

we independent now. with OEM not and some distributor focuses had some market a the the we've effort basis wins time I the exclusive last over like I'd starting have independent, proficient team the on in is in parts. on noticed. value And there of partner that, Airbus, part drumbeat technically largest gaining and thing get competitive go the would an OEM steady And of becoming Boeing sales had that's to And coordinated as we and several And as represent a our meaningful say to and We that product. an our OEMs displace we're help other say our force, large years traction. because other that's Collins proposition you've for partners' with or that the is goal our seen, really out OEMs

call. And We're extension industry. there that's model not our we we're traction the it's a waiting for again, We're some think a players holding just Collins. center. true as And So with inventory in not call out like getting the a partners. unique a larger of

Michael Ciarmoli

Helpful. it. right. All Got Thanks guys.

John Holmes

Thanks, Mike.

Operator

And RBC we have [ph]. question Herbert line from another of the Ken from follow-up

Your open. line is

Ken Herbert

to what's inflection you as you're can positive quick and the heard just and correctly. John, a step-up about, surplus commentary Hey, I provide expected an material see that sort optimistic particular, Aerospace in XXXX? in inflection pretty like behind It you're parts with that Is correlated or a of you more in if to side commentary any on maybe question. sales, expecting sounds the XXXX confident

John Holmes

got run business to recover of And on distribution, the just of lines parts kind the up. fact XX% there's by won what lines some Yes. we've based around COVID. those We We've other get largely older And, new going then, recovery. that, that curveball been signed the as like so, given the we parts. as and earlier, late, at an out our driven in seen that, fact lines going demand XX% industry we've is recovery given we've -- to provided And back I the trend it's still that said by by in Collins are mature expectation down, to to growth there again don't us thrown encouraged yes, continue. we've room think that built-in of businesses there

hangars that's MRO So, would that to the so We're on performance stable well. just where commercial given a was spot I where would are there. And a side, look in side we're out expect capacity. full. then, we And MRO good. I of we relatively feel are come -- for expecting the good the performing to, back from. in But the I growth would on go we

Ken Herbert

Okay. potentially And the to of then given incrementals sounds on XXXX? cost how we story volume course. has parts in growth the margins. its drive side margins? like benefit about clearly see XXXX near-term it kind to in mix run with should what incremental think really It see sounds we greater shift mix to we relative think the models, MRO, sort like And that need as for But should of about your you

John Holmes

Yeah.

that We see about position feel the pre-pandemic in feel progress I really plays to that the out. we need We margins. this full of think good made impact. about ahead to good how we've be

very we're not made of proud the that we've have there. sales progress recovered While

labor competing think forward, to Going margins we've the to recovery potential to mix we than we're specific to the plays of the would progress continue get But, it's as the overtime dynamics our terms made. expand proud dynamics we unfolds and headwind And difficult the that expect that combined more out. the how right pace now. say we very see in of that as but that, I with address we I how to need parts see play how cost those need of out,

Ken Herbert

lot. Thanks Fair Okay. a enough.

John Holmes

Okay.

Operator

[Operator Instructions]

John Holmes

the you And time we in back July, we look forward all Okay. and results. the interest. the appreciate to discuss year with to full fiscal really Well being

Operator

call. conference for today's you Thank concludes this And participating.

may now disconnect. You

AAR (AIR) 23 Mar 222022 Q3 Earnings call transcript