- Earnings call transcript Q2 2023

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Operator

Good afternoon everyone and welcome to AAR's Fiscal 2023 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. 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 sections the year uncertainties and earnings XX-K ended and Form fiscal Risk and the of ended August risks XX, discussed the company's in release for XX-Q XXXX. These for XXXX fiscal XX, 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

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

the notwithstanding for both increased [ph] Our X% and our that USM to still sales levels. that In in improvement the increased demand sales customers I'm the to cards commercial increased government to sequential in our commercial particular, commercial activities, X%. XX% and from recovery XX%. see of parts volumes, global XX% are and in approximately flights fact customers customers continue decreased defense down pleased sales sales Sequentially, XXXX we to government and we to our progress distribution. customers saw new

facility recovery. increased from full adoption by our new provide sequential and market non-hanger of growth MRO the been portions expect still activities volume of were USM levels. of opportunities for operations. encouraging, growth MRO, the our improvement of While agreements down our growth the we as ramp-up opportunity able driven the the On 'XX is generate have optimization in beyond we we top by these encouraged FY and this, is to this over In XX% to distribution the more in further

prior Afghanistan to programs shift years commitment certain quarter. to towards be continue continue outperformance another sequential adjusted on but margin year and to set our pleased discipline, sales ago margins, including parts growth us of X.X% established our our wind-down that reflect margin is tightness the basis, pipelines appears market mix programs, experience to create reflects as highest up government X.X% quarter to respect operating I'm to a delivered we Our we With activity the certain labor an a from X.X% to was strong which well. cost we returned that quarter. programs. that We labor this to on serve proprietary and and last stabilizing do continue and This last of

for are our labor we are addition, higher In increases price customers experiencing. year engaging regarding we costs XXXX to calendar in order with the address

drove a As investments we USM cash indicated in the from $XX continuing quarter $XX business totaled activities operations use quarter's invest had operating to attractive of during approximately million quarter which the we in and compelling last long-term assets. opportunities during million. new in These and of call,

during net customers related business spare also worldwide. cover flydubai's distribution parts agreement include plugs, share and new aftermarket the This growing our our the harnesses after the under significant Unison. Even hour units which our of new and was in the now fleet announced the that We sheet of $XX balance strength expands quarter all to flexibility. flying with the we or long-term distribution EBITDA business we XXX -- new program. repurchase, ignition significant during long-term aircraft. our of the Among have flight with leads, Also agreement investments of addition igniter share support continue broadens in quarter, select investments and the multiyear million relationship to component expansion we to MAX repurchased announced new support repurchase flydubai stock of a our and new and was quarter leverage X.Xx

Finally, with a Philippines-based of to value a warranty low-cost aircraft, agreement covering provide signed Airinmar carrier, we Pacific management new services suite Cebu and engineering. both full

the implement Before that I Authorization to DoD's support position the acquiring comment to their procedures and used the Sean, turn National in new and and aircraft serviceable is aircraft the processes derivative and a Historically, market significant Navy institutionalizes has used over the in as I Defense whenever USM an it to mainly unlocking a government would offerings. for better DoD the use solution available legislation Force engines. parts. stating of step for the 'XX Air inclusion a Act on like initial will commercial aircraft material of untapped of and This acquired FY the process it's our parts for U.S. new value consider to

would in I turn and to the them Congress more in detail. to variety their discuss a opportunity partners value. I'll taxpayer on great important found that, of have With over results CFO, to we our for to years, on Gillen, the like this work drive it thank Over initiatives Sean

Sean Gillen

Thanks, John.

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

and gross XX% XX.X% XX.X% in gross in versus quarter profit our quarter business was XX%. government were certain year year commercial business our This Our for profit profit well Afghanistan $X our our was to million. contracts. $X.X as margin government prior by higher reflect of million the sales and government borrowings. as driven in was as and Net contracts remediation certain quarter initiatives in higher The in commercial digital million sales the X.X% margins versus related our on in interest profit up up the increased quarter and quarter. investigation and XX.X% programs, compared up commercial the margin in last sales cost period. were the adjusted strong contract were favorable our to in investments prior performance year, $X.X the Gross continuing government as were includes margin performance XX%, parts the were rates driving X.X%. SG&A government margin supply our down sales to completion due expenses in continued including was Gross well quarter XX.X% our in MRO activities figure Sequentially, million profitability interest and was the while expense business. XX.X% and $XX.X commercial

inventory As long-term operations in John our acquisition indicated, continuing operating support and activities. by driven to the cash business activities from $XX.X investment used in was of new USM million, wins

as addition, market window. $XX.X million XXX,XXX took advantage or which prior higher back In dynamics favorable bought approximately than we our open quarters we of shares is in

to to invest our We execute to on the of we business sheet with our program strength net of We X.Xx. of as to remaining. ended as in which on well $XX.X balance authorization continue have debt million $XXX the repurchase only and continue quarter million net share have leverage

another turn we the the increased million will facility revolving liquidity. our group I gives back We and over us our years million for X week, extended now call extension the size last of the that continued and from support to $XXX of attention your appreciate Thank you significant credit for upsizing. bank maturity addition, In and to John. $XXX which and executing

John Holmes

Great. Sean. you, Thank

resiliency North largest demand our and Looking continue about expansion. be American airline to confident forward, customers

activity easing by XX% from improvement China, that flight is restrictions signs of were an of flying pre-COVID and to still already encouraged from XXXX are is in hours. indications We also demand lockdown in leading increase Europe recent down the in levels early are

to contract in expect to continue government to year, continued USM shop increased Overall, and short-term to In addition, engine We've long-term expect time for which for parts. be business, may are green lead of engine to sales sequential to this our increase With in for some beginning and our we contribute balance will be to signs that anticipating are we with availability procurement an growth of now early further growth we in time source are inflection growth. leading we this and see visits QX. we occurring. is consistent dwindling the signs respect important carriers seeing the QX for been certain demand expect that QX fiscal point wins which

We longer positioned reasons. that we growth in for we well line seen levels to last In few have with quarters. be expect term, several QX the the exceptionally are believe the over and for margins in we medium

that fully believe USM well business restrictions and travel market existing favorable every although fleet; to and volumes extending strong also only the we with initiatives investments the parts these to recover continue commercial over on to shift maturation are grow conditions not government of it programs we the new With and following are the the digital turn awarded best production acceptance operating government in that of consistent new recovering support including value based ability practices and that, parts operator and increasingly is demand, reopening I'll our travel of efficiency challenges of the leisure on margin offerings. First, they reason OEM are recently Further, are along pre-COVID seeking several towards relaxation third, the that and contracts; is act international distribution second, of parts the of drive life which, improved language best supplementing and our will markets to still government's the with growth U.S. with a below to mix the increased levels facilitates for leverage have our commercial offering expansion. but more NDAA questions.

Operator

line of Our [indiscernible]. Instructions] question [Operator the comes from first

Unidentified Analyst

open your extended years. and But ramp John, Airbus couple wanted on for level question. at to a of from thoughts with will maybe this, the drive there's Boeing aftermarket ask cycle some John. to slower-than-expected industry next the higher wanted OE I discussion an

John Holmes

the with the Yes, agree trends think platforms in as core we the are gives going be to much one confidence that as growth about that butter we flying us for talking would we're are us in favorable people originally. anticipated of that. and than longer that's bread And

Unidentified Analyst

is into have segue the little I a and reach you about for USM. military talked going more on today? bit you your a bit on clearly your color then the comment commercial where a versus market track and could NDAA perhaps strong record. then -- And where ask USM maybe little to that talk into USM you And was about

John Holmes

demand Sure. back. a out general, an anticipated we supply. well has at and a recovery we that related The a were what to aircraft factors pilot parked, from words, of time number in there recently, shortages the point had towards couple as of have they the utilizing been engines. come market The And anticipating defer taken business the we that that ago is that but talked than maintenance. driving as bit and quarters longer to heard were customers still in around of a in inflection U.S. green to of other and both demand was lot due have moving engines that In then cases, seen they most customers that on of many time our we're about

customers For dwindling key that time coming that engines due. we maintenance and green those that is is support, now deferred and

support engine their are so example, as And seeing we shops, input the signs that at of XXXX. schedule for look for increased they we demand

we Coupling in a of beginning availability, terms very at the market. that it been surplus So point has of with material believe demand we're inflection that. that tight

We that acquire that to to support more increased look we opportunities have that And support. And for of things even to available anticipated demand we into seeing, as year, material. to we reasons asset acquire started to come work see quickly to recently next materials certain this move are out early quarter to for capital the was the put just was USM. we capital one put types that

other with services So whole we we've compels success parts couple language and some selling had In years change haven't a like on The Air a to terms used NDAA here basis to in government a and there what's of C-XXs. of aircraft had the which cases, cases, did commercial small is in government. the in in reflected Force basis the in law we ever the like a the that's Navy the market but ago market. structural But USM. consider that material

the the for we think much aircraft are is opportunities the the part that the AAR. which derivative could is question language the of point that, is be the now really NDAA. we're How like commercial by how meaningful but the of starting long, this for XXX, C-XX which PA and C-XX I encouraged fact of So think, XXX,and

Unidentified Analyst

to, the parse the if in growth Okay. And out XX% can Sean, able commercial sub the you lines? aero quarter business across you're then,

Sean Gillen

Yes.

is saw last some we XX% think reflects I then that in of distribution of business commercial some is commercial all a activity And hour new our also across flight really say two which saw outperformance. a more international activity outsized drove several hour that wins our all than business line. flight of PVH years. the within over which commercial performance bit strength the other driving top across that highlight our little some improved But commercial driven those activities, the we which

Unidentified Analyst

just then we expect second continued distribution, of half think how with cash fiscal flow And investment Okay. about maybe in the you how do year? the in should

John Holmes

Yes.

at would positions cash source obviously, quarter. in way by I in we’re last had And of ratio to that look think this or you year we The sheet. the X a the our be balance over of as forward, were inventory we more half the expect leverage cash investing in have we been reflected if quarters, second But the the the of that’s cash. on really we the proud mode look back generated. X low we’ve performance

Operator

from comes question next Ken of RBC. line Herbert with the Our

Ken Herbert

more to wanted out supply? acquire versus about was agreements seeing the parse how much you Are a USM systems. What maybe to significant assets having we on on just tight it’s versus maybe this of side, of pay seeing in assets engines what the quarter. terms think in the John, distribution guessing maybe you to And I are you’re of considering that on usage pricing? USM start to that? Can other the you uptake the capital How out just support should working for side. maybe

John Holmes

Yes.

positions USM -- fairly and on inventory then them -- obviously, parts it the the and first these And is distribution provisioning the then If the those part distribution new areas, skewed the worked think As down, new contracts those we between I buys go on And the as side. on when slightly parts initial two. mean more time we the with but capital agreements, about down are agreements, that more equal on. the contracts USM our towards breaks X slightly over mature. we're we was USM towards so take

pricing at relates a remains pay get it for USM, and which the between competitive to it but tight and material that As want market to the to the spreads wouldn't material. in we for that, particular, I prices prices able achieve in into we're right we reasons sell

of kind out in, as relates USM buys. we're So these market it to market

Ken Herbert

some cash incremental seems agreements landscape OEM the agreements. think OEM you’re of bringing customers. distribution been helpful. like sounds out half That’s moving we as in Okay. And as in for It with about partners your Unison. It there’s the forward, new comments the additional think like more obviously about fiscal you’ve considering like like you there extending some usage regarding sort year? second of What’s

John Holmes

of a are out in and agreements a opportunity see got to we're expand COVID. and to We us that them. their Leach for things new that a with we more with We we Yes. our rethink have same areas. of of -- for XX-year-old approach distribution. and And a of in an opportunity expanded. Unison that's market coming as do they still that number we distribution. then like opportunities to OEM The finding to the see expand there's proud It's one That's new real there's lot with other aftermarket agreement relationships expansion. announced relationship big us. partners That's electronics we're we've long-term And a category where that

into production parts piece selling we're So line.

deal participate market strong COVID distribution. coming that's BA in out in market. So a general there market we think Obviously, is also interest more for and we way BAGA very in the through market in Leach that that which in of that's opportunities and the opportunity to us see been is a new There's extended launch we've market. and lot that of our a

of would so but have focus that, network. And us to new again, a a leveraging interest for in that be number OEMs distribution talking we're our

Ken Herbert

And helpful. past the in change very margins. of a talked Okay, in step seeing about often ideally you've aviation sort

some surplus business, this that and how margin in to the How I and as the do material we acceleration of should of we you segment specifically, business. obviously As the parts in second availability see starting agreements increasing margins you're half the think start the guess, see one of demand? about of being recovery pieces in USM to -- the in higher here

John Holmes

Yes.

margins this think quarter I general, strong a very quarter. had we in

QX the few in the margins again, last the pretty think with term consistent term. I consistent That's quarters be general we've from immediate there. in performance delivered. And seen some immediate would in that you've

and a would result we've mix the as that the that and Beyond towards in as parts your these to business beyond as we been we level MRO long that, continues things in point, the we that over in, some X% continued of investing those of initiatives, to recover to particular, take start as medium get some grow efficiencies in term. expansion hold of expect kind digital and shift

Ken Herbert

one just got going to it’s on. past, effort know past, talked final or you’ve about opportunities and to of next you’ve Is think about sales. under the line? few SG&A of question. down think I look target moving And In recently. reduction Helpful. a for parts XX% In getting of Okay. I of on forward? the something ‘XX? the the I Where know you sort of Is had you the sort a over have into how we not And cost quarters do it should opportunity fiscal the other cost more But you business? cost it SG&A

John Holmes

that in that Yes, still of We below reaching the percent towards We contributor of recovery will significant -- there we as as is of Great in our in sales believe a changes focus preserving or more is see COVID that lot be We to the structural the a question. now made first of lot staying XX% changes those so goal you right getting to a took great. all, grow. as terms SG&A goal. And just a of disciplined out top know, business. costs line. a

we to down. So as to top that recover, come line continues percentage expect

beginning to would kick end. as are is start thing very They’ve particularly much in we the expect I so through projects of digital that investments to up area those – the And out efficiency making Those those they those the expenses right projects, would flow the middle expense other of we point but investments, and those we and as projects. we’re result of those an got they’re now come a in. down a The do we are in wrap thick lines. to in

Operator

Our from comes next Ciarmoli. of question the line

Mike Ciarmoli

Maybe just on about the up maybe almost sequentially. of some you kind and I were talking the SG&A, just of $X million investment that there anything items or that you that Or quarter? think X% drove that Was of those so, all part about? specifically were was expensing digital in

John Holmes

that. we have, predominantly predominantly well. certain we've areas, costs I people that. as go mean, It's in It's up seen

of some to And contributing that relief projects in adjustments it. that are so costs labor it's to we to that offset certain line. ultimately, get that's that the flowing through then those And but price some investments through hope and those

Mike Ciarmoli

it. maybe you the could when to back out? just in to aftermarket. assembly line, shop kind obviously something period, and XXXX the on you plays off there planes activity we be we look looking visits. question dynamic first-time of kind to warranty? I we where into 'XX? coming back fewer more have in -- 'XX the those see broader is maybe validity off mean, are as the out a Is at if first going claims There's period coming coming planes that How off. Rob's get low we go mean, that Got at this to just aftermarket guys then trends that I it. thought any Got And maybe the the of new

John Holmes

dynamic definitely that's pay to. to think I attention a

powerful of the result sit, we of fleet delays. is the those as current production where from dynamic the However, extension more a

Mike Ciarmoli

Yes.

Okay.

up XX%, of Okay, right the things in looks guess got that will there Last for a down. revenue any XX% create ramping an that might here? one it. I I new the of wins government be the trending of terms are Sean, had, kind it or be expectation? Is inflection year. bit maybe just Or little to

Sean Gillen

Yes.

longer-term we as the QX. of little some from to we’d his bit expect that see in growth saw sequential modest mentioned continue modest think to balance QX over I I a of growth show ended had And short-term the John the year cost, half. for think the in that government second things that as more are the will as some results as contracts activity procurement of the replenishing up over well some

Operator

Sullivan with comes question from Benchmark. next Josh Our the line of

Josh Sullivan

that? hitting On you you the time comment, what that measuring much give maybe this how you critical so availability crossover? confidence are tracking green metrics we’re to are Or

John Holmes

key look It's they really that support their X months. over we driven next input customers by XX as to shop the and the schedule

them based the on we you engine haven't a customers. now hearing based in what we're -- our or we're seen through to that what So overhauls talking from come on way expect see

So shop be inputs the would key metric.

Josh Sullivan

labor outsourcing then And at their outsourcing air? the help the just or for on question, kind excuse availability tight you? it. Got looking does – it me, market cost labor the versus of internal take airlines labor Does option the how dynamic are to

John Holmes

a it's think everybody. I for challenge

think field. it's level a I really So playing

of I know changes that calculus outsource necessarily to or at So the terms the whether airlines in don't bring work in it work.

a relatively that's stable think I relationship.

amount work ours. to would like of companies positive are discussions they So to in of like continue -- our that the terms all outsource to

Josh Sullivan

Got last then one. it. one And just

It’s the is in into think Investor strategic changing here fly-to-buy making of you’re relationships vision on COVID we exit do re-establishing see longer-term markets, kind But the Or or that positioning of with digital had the and for Do a investments, we long-term outlook. As positioning? while others. some curious you you just you’re change since Day. Air? been an any kind what

John Holmes

next all, now Day Investor we cadence getting this regular year. we a of do all at that anticipate first be we again, back anticipate can Well, together I think, with

to out want But looking forward relates opportunity. it fully. we our a side. on having discuss the parts to as mean, to distribution that strategy, both you an certainly, the on wait and USM new opportunity until have But of building that parts we're I success tell, as overall So lot capability. very focused to we the on we can more there We're remain

Our operating and customer hadn’t that that grow areas in we at and MRO COVID, access interest to expect we to a we where MRO do efficiency in that business. to can prior portfolio where long-term labor, that expand want and for to make we of preserve long-term so level that we is we to ways have experienced sure look

as You remain we with on finally, that elements portfolio revenue very And as with And continue offerings government. that digital, We’ve us really mentioned performance into there’s like drive the to also We’ve then look the that PMA very a benefit variety of continued efficiency got us. digital, strong that work areas a but of and at whether now. from improvement. AIRVOLUTION DER portfolio Airinmar we are to bids digital internally well strong of it’s government contracts. us the and bring drive new of allows past of for built U.S. ways meaningful pipeline sources a to parts bids repairs there bid position to IP, then or right margin in a through

good And there. successful a so prime continue to we very to contractor as be feel position

Operator

of follow-up a from the with Ken have Herbert RBC. question line We

Ken Herbert

is other about significant the off through. how USM, investment in sounds think of you've you terms we we it meaningful Should pretty opportunities M&A think what allocation? of went and that you distribution John, table? just set assume a capital should and that M&A Or like about got as or areas organic

John Holmes

that And great I table. certainly not to no, the question. is off would M&A suggest want No,

M&A than the for remains allocation then very Our organic capital capital investment first, inorganic still balance second Xx sheet strong. and framework shareholders. We're returning investment And less is levered. to

the got for of in companies we to area, investment could first there options out capital also that but we've are the very open So keep believe there us. then number a be interesting organic And to deploy opportunity M&A.

Some some an to that align, the pursue years. evaluation been find we are And M&A. absolutely would we where we've and extent our new, opportunity strategy for following

Ken Herbert

just PMA just call And you out again. did Okay. finally,

You everything haven’t a in I about It recently through more we terms opportunity a agreements were OEM of you little past. Or as seems been the strategy. bit PMA and had been and with becoming about know talking for mix? do think aligned the much think, of as seriously like you? distribution Is it identified in sort growth priorities still your the PMA something, maybe that’s how I that business in else,

John Holmes

much it's in mix. I think we partners PMA. big selective any would Yes, we be there on our to And it's and conflict basis do pursue see not, out a world in opportunities the OEM in with very where a way,

visiting very We relative a internal of initiatives to third PMAs us -- are I only It's the things we could underway. that and really to just to small. take have a with But it's that we AAR, effort well up of they're around available it's parties. are an total in some to that our use the team was own a But for actually offer coming exciting over It's while. PMAs as as to small time. scale it going couple repairs ago weeks there are on. the working it's But operation. expect do

Operator

I'm to in would to over questions queue. I any the for management the closing turn further remarks. now like not back showing call

John Holmes

Great. interest really Well, being we want everybody’s and forward a discussing and and appreciate wish to and time happy you. holiday Thank QX. I to back look everyone

Operator

today's conference for this Thank your gentlemen, concludes call. Ladies you and participation.

now You disconnect. may

AAR (AIR) 21 Dec 222023 Q2 Earnings call transcript