AIR - Earnings call 1 2024

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Operator

Good afternoon, everyone, and welcome to AAR's fiscal 2024 First Quarter Earnings Call.

We are joined today by John Holmes, Chairman, 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. fiscal are Factors the annual section Form for uncertainties and earnings report and XX, XX-K Risk May the of the risks discussed company's in release on XXXX. These ended year the company's

comparable reconciliation In to be obligation provide measures providing company's call discussed GAAP or or on updates no non-GAAP the Certain A circumstances to unanticipated future the the events. forth the of reflect financial set assumes measures in statements, release. anticipated earnings forward-looking most these company non-GAAP to information is today. will the

be A completion for replay of AAR's this conference call the listening call website. the will after available shortly on on-demand of

At to this the turn President would Holmes. call to AAR's time, over and I like Chairman, CEO, John

John Holmes

good today encouraged everyone. sustained joining very fiscal for afternoon, proud first quarter strong you appreciate and to of to deliver. both our by year, XXXX the our I and results. was us year I am start our Thank This a and continuing discuss you, momentum team to

for were prior quarter we we increased commercial continue million to USM XX% $XXX up distribution and mature. to over the XX% over Supply, made were year-over-year as last investments Sales wins $XXX to increased Parts sales to as Within the from government recent million. X%. XX% sales year customers quarter and up the customers that sales monetized Specifically, year

to secure material. Regarding USM, demand continues even though our high team supply remains sourcing tight, global

New our government. to the U.S. more parts product sales distribution parts continued lower than saw growth in offset which commercial line,

strength flight driven In by Integrated the repair in due XX% hangars, sales landing from hours our due in were of our increased to over government cycle the up certain Trax slowdown gear the up programs, and power-by-the-hour prior X% operation in contribution programs. year quarter the gear were types. In Solutions, the partially timing in Repair year a our over sales strength & quarter, our prior continued to offset by Engineering,

our ramping as still is become the in of meaningful program Notably, year contributor F-XX the will process and more up progresses. in Europe a

Turning profitability. to

X.X%, Our consecutive in segments, operating all margin the in of this prior tenth margin our year-over-year operating was our adjusted X.X% expansion. except operating adjusted up year Expeditionary, represents margins quarter Adjusted quarter. and expanded of from

Parts from adjusted earnings per quarter up operations indicated were diluted Our share. of per million. continuing a cash last With which quarter's share call, share from to as Supply $XX.X saw quarter, of we invest our operations in respect continuing cash, $X.XX in of use attractive a from $X.XX activities operating to XX% per drove the record opportunities first in segment to we in

a wins. distribution we to expect investments our our strong Parts results of net recent Specifically, It demand segment support well. in time Supply USM the as what this are these and growth in investments Supply $XX over from drove noting and made profitability in both prior is Parts million our most worth investment inventory quarter, that recent we

X.XXx as investments, growth EBITDA, balance sheet exceptionally strong. such, leverage our quarter remains our these adjusted only after was end Even and at net

like provided supplier. would purchased neither repairs. recent a that sold to using supplier comment parts uncertified parts or I news Before business, from any allegedly engine AAR on for I paperwork discuss the CFM in forged this the use parts regarding

incident diligence greater on we customers Since our and systems, emphasis of parts. our conduct and founding we highest reputation doing This and it nearly AAR's on the source XX even for it highlights will safety when exceptionally quality value placing right. we years the have of result been ago, focused believe level in quality

turning Now to new business.

X services. X for we for reciprocal component distribution the multiyear repair announced agreements commercial Moog, During X quarter, and with

steps that expect to we Moog new Importantly, with will relationship in lead these new opportunities. agreements first a are strategic

well military Pall that Corporation, partners reach This company, our our agreement provides capability with as quarter, the to filtration the to compliance to augment investments our to foreign sales multiyear extended military highly engineered we distribute we an a subsequent the AAR recent and have products customers. that addition, Danaher In programs. customer recognizes as announced agreement foreign years made to in exclusive

With that, over I'll discuss to our it more in CFO, Sean turn Gillen, detail. the to results

Sean Gillen

Thanks, John.

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

growth offset for up Supply sales and XX.X%, parts were commercial activities, Expeditionary. X.X% distribution new sales Integrated our in were due up particularly partially Parts commercial primarily Our by government by driven declines across And Supply. to Parts our Solutions,

and the gross Gross profit profit basis. basis quarter in margin consistent year government on profit was margin in up was Gross the on in quarter a XX.X% business and year adjusted our margin quarter in our XX.X%. was prior business with reported XX.X% prior from commercial the XX.X%, an

well SG&A business. court quarter last amortization were which and the expenses the announced associated $XX.X the Russian judgment million million, as in in investments million with increased as we $XX.X included the week from Trax and charge expenses acquisition $X.X

in court equal us environment a judgment. the Russia. believe noted make judgment, X-K, foreign to in a as We Russian from September airline we our the XX judgment other companies the of, the a is aircraft in payment XXXX. and a business and disagree directed result strongly I hostile And of Russian things, value for among legal a court XXXX fair Russian alleged In purchased to engines with

may believe made strong that to recognize any be attempt the we defenses we Additionally, judgment. adverse and have to enforce

of Excluding or was costs, XX.X% $X.X the sales. million of expenses and $XX.X this SG&A million charge, compliance Trax

additional transfer. us This we funding the Due management our there insurance contributions. agreement contributions going quarter fund activities entered transaction As to of the plan's funding funding participants to as of forward. were we fact, no surplus which funding status, associated to expect planned a and to was $X.X to the in allowed month, last risk we certain effectively during the planned and million, required obligations secure part use And XXX(k) eliminate pension for into transfer fully our an announced assets to an company. and

pension a conjunction we million In in noncash pretax of $XX charge quarter. the with this transaction, settlement recognized

very U.S. activities the pension to to the have to are able proud We deliver with and concluded made associated plan. participants commitments be on plan our

the for interest Net rates compared by million higher last million to $X year, driven and quarter $X.X borrowings. interest expense was

effective in expect flow Regarding we the year. activities approximately Cash from continuing it operating used of for tax was be million. balance to rate, XX% the our operations $XX.X

and our As by usage $XX.X inventory in net John indicated, was parts demand. this to million support Supply driven distribution both new investment segment of Parts USM

engine of investments for included distribution to variety certain inventory USM these recently lines. Specifically, a support and material awarded platforms

capital return expect We these to invested on going investments generate a strong forward. to continue

X.XXx the adjusted our Even leverage net investments, low after remains at EBITDA.

parts in further investments see to opportunities robust That to for second Parts said, flow Supply. positive for expect aftermarket and continuing slightly attractive from demand both quarter. activities the generate are operating cash in We we

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

John Holmes

Great. Thank you, Sean.

in and ability Over the operate dynamic of remains proud successfully environment we've a last particularly environment, our to dynamic few certainly today. the years, been

expect mean parts strong benefits the While time, continue global new items the to constraints aviation major of At and continue grow, operate to a we demand we services. low-cost carriers for continued expect the our overall and same the cited fleet inflation and industry demand have on slowing customers the current fuel some and regional remain watch directly our balance, will aircraft industry. and to ongoing which that GTF for prices issues the and Therefore, longer, AAR. delivery

supply USM constrained USM still the to and mentioned, to delivered that just factors are aircraft For seeing will ultimately our improve. as new over opportunities parts due we of remains attractive availability activities, the while invest, I supply expect engines time we're and gradually

foreseeable In expected future. Repair our the to are for & Engineering, largely full hangars remain

expansion access hangar is governments, labor. and continue to overhead, hangars expansion can where at existing our customer expand evaluate with we local readily Miami and Our other we progressing, commitments partner leverage

our government we you of possibility previously contracts. under Integrated action impact to current would that shipments. know, we a situation some not may is impact. it the If any significantly as needed On to side, timing, Solutions expectation our given event, fluid, any government we business In have awarded shutdown. can take in that a operate occurs, It is payment so is our as there terms on the flexible and operations mitigate orders remain and that impact plan distribution of

see commercial government customers. said, best offering our in a we efficient as to budgetary environment All practices of supportive constrained our general, that

extended growth. respect Looking overall, we shutdown, QX sequential earnings with forward, no expect assuming government both to and year-over-year sales and

high to mid- delivered in anticipate with operating to or year. year-over-year we sales similar margins what than teens last Specifically, growth QX we better of

growth our customers by and More very to we generally, and this, are from we readiness, demand generation the environment. on continued the to business expect creates new fleet a as shift primary current we our with reliance government we combined our win In favorable industry's encouraged are operating accelerate aircraft receiving contracts focus the signals trajectory.

forward encouraged are invest strong our and start to very to the growth. people we further our in business year our and Again, continuing to to by drive look

turn operator I'll over it that, the With for to questions.

Operator

[Operator Our question first Melius Robert line comes from of Spingarn the with Research. Instructions]

Robert Spingarn

GTF John, very you're ask maybe any against your over that quarter this looking I just CAGR think situation? the wanted you to next we toward what How that about XX% subcomponent for good and you guys? next And sales quarter, to of a does the talked and growth for about you to about does translate as that, the in how years? X% few

John Holmes

Rob. Thanks, as Sure. questions usual. All good

growth proud obviously, tell, we quarter, of the the really it's can delivered, strong most business. to relates across the it company, as So as in notably you parts really what we're

the And increase. we guidance ramp we out, up, -- to a obviously, and will continue continue comps put how to that's the that relates to year-over-year as that target X% X% to multiyear

ahead. we're So years about thinking

the expect the year above immediate of particular, in term, QX rest indicated for long-range we be that target. this in But as we to and

Robert Spingarn

[indiscernible]

John Holmes

takes of say, for emphasis of Yes. current us. on is out now the places anything aircraft more I next-gen right GTF, on the generation that And aircraft service a and would positive

to bread is now. or going more you've the are these that years, that's aircraft be put next and of right XXX the couple if butter for mods which going So on pressure got out existing just over our coming fleet, more to

a supply for continue to But side with this investments USM we constrain is going good will year of for even finding material. when going of So job the the be net-net, a we're that it's year -- likely growth we've believe, make, been great The the this and there still flip out to positive material support demonstrated as us. to tight. supply last to doing is some we've able and and find

Robert Spingarn

you -- wanted ramp. that you're and adding -- Okay. about on Super to we couple distribution. helpful. clear take years very contracts a you've been When of think I to ask they

expect ones over So contribution sales we more these time. should from latest

KLX by the mid-teens before it in think Boeing. How was acquired in the business. should we about this margins was

business? this have other What's lower. way thinking a been hand, think distributors margins other right bit I'm Aviall. the the in to On about of

John Holmes

probably for the margins be now. higher than for margin the in We'd middle. company somewhere business Yes. overall The the are right that

So seen as that the over that margin business of you've favorable improvement in quarters. be part shift the continued continues mix that's operating to last will consecutive the XX grow, -- reason

largest owned we it's continue or to And think We competitors opportunity sheet on balance about, the our as of we've whereas the to by go to investment. these invest position us focus independence have -- our this independent in and talked Boeing, share. continue for programs, Airbus a and our to market larger and as don't because take the great just type ahead of

to head that accretive in specifically will but shift operating general, margins. parts continues be most as mix to that distribution, And towards

Robert Spingarn

Fantastic. Okay.

margins this -- there the is for Just anything you've the than same, little is the a the I about for be quarter in quarter, behind you. think were and Maybe quick Sean, that? prior them But one. calling been softer to a is bit this

Sean Gillen

segment come a as the Yes. in of And look that I at out. you take the Q as think detail will release as some well that's the

you margin slight I with relatively a the really prior and of that lot is consistent decline, slightly. prior year significant as period. mentioned, But came in a parts, improvement performance, think the strong still from which was down year which sequentially is quarter,

finished of this and last fiscal what strong in that we a a year saw quarter. really then mix QX just That's

Operator

of line Ciarmoli the with Truist. next Michael Our from question comes

Michael Ciarmoli

just Maybe to Nice back Rob's results. question.

weaker, think into as quarter any you said flattish kind you think present looking but sequentially said to mid- on more XQ it sequentially. about is just it anything slightly. guidance, maybe -- year-over-year. Just quarter know I they just don't seasonally think normally? first implies I mean color teens I usually of trends can quarter second you high if were we seasonal how and give up or should as this maybe is I

John Holmes

pre-COVID, out quarter, we've would now QX. coming a we COVID of that. proud relates did and we're you definitely We pretty very We question. sequentially. see Great expect not Sure. drop where, as obviously if slightly that up would And this of meaningful recall, QX to it seen this seasonality, to from see

prior And is reason the our with we've it hangars. worked severe base had hangars refine than years. had we we've level customers year our And the to last it operation. with really And in in also the been to in been of less customer that number the that work for load continued

even though as much workforce labor it's best the the as keep airlines, everybody. their possible work constraints, be keep to for to during the But to aircraft supply recognize they air summer, want the the they that going, around given in

the but due we going seen to seasonality so do degree mentioned. changes we just And prior not the forward, I to that have expect would continued slight

Michael Ciarmoli

in -- think gear. maybe, that all. it a comment John, then slowdown Got you I you on Can it. don't elaborate caught maybe Got think at a And it. bit? landing That's just mentioned helpful. I I

John Holmes

Gear business, are hangar, pay but Yes. obviously, is attention and our X hangars, main other dominated as Yes. component, the obviously landing which on it's are to well. lot those activities, it's a a -- of are gear. X repair Those meaningful by MRO and we

on business the we cycle over gear other a And a pretty kind of is cycle and The lifetime overhaul. overhaul serve. for intervals end come for the significant been coming we at that on landing of XX-year roughly gear had customers what are off their

overhauls. now a is the just a So cycle these forecasted decline in natural business for bit that on based is right of

for slight time, and some last wanted it Engineering of & the a then that that inside back but of period was softness up, pick will obviously Repair highlight. will That we

Michael Ciarmoli

it. Got

here. last Okay. And off jump and then X for me, I'll

in there if some Just Parts out look of seeing you and profitability? Supply, terms are new for you what the of I USM, guess the material that go in

material? maybe is to historical that kind just having prices Or looking on of your kind you kind than your there? protect market higher pay you if I of mean I the Are what get is hands into pretty And color that to guess, any it leads would? like? active Can normal? maybe you of returns,

John Holmes

question. Great Yes.

we active we which for are able So but mostly types the higher I would say, higher yes, also asset we're paying to in were prices. absolutely charge prices,

our So are maintain to we able spread.

they're this or it we that just you on in going to You're will move see in around of whole quarter some the bit. engines any parts, cetera, a quarter margins as mix fluctuation did based assets X et sell, whether little

we're did And some going the just But that great quarter, that spread grow. generally this to we're the speaking, out sourcing the a that on reasons flexibility that. so not focused to the we've And in we a had opportunity market. if material. get X the of the maintain terms sheet again, I We're do to is that example, as that's of on largest there. It deploy world the tight maintaining want to highlight extent we're balance really years, some hands able position of the in there materials team once capital have we for to our and it, to efforts in for

Operator

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

Stephen Strackhouse

Sean, and for the Ken sales is congrats on Herbert. John growth nice the Steve on Strackhouse quarter. in This

I the guys be talk you pricing First assume strong are kind in of some there? just wanted about to aftermarket to going seeing and what the it's pricing.

kind just walk of could you if maybe So that. through us

John Holmes

Yes.

parts demand. in because able pricing having to similar is command in particularly think pay the the I but higher in we're just prices mentioned, strong I material such are we what to aftermarket absolutely business, used also to

couple in our but about support from provide pricing that off-cycle profitability periods talked continue cooperation order as you making we MRO from oftentimes sure maintain can meaningful in rise of And haven't we've pretty the years, great know, labor last a to customer great received them adjustments base our support. contract make the hangars. our in renewal to to about we've seen costs, pricing much We and

Stephen Strackhouse

Sounds for good. me. more And X just maybe

regard and of very some you at the about to something Investor at the maturity for talked engines I think your those VXX. Day, robust Pratt CFMXX, cycle With the turbofan. like issues had the on being

you think in going forward? about how shop Just visits that do

John Holmes

The our Yes. but of We to the in sell bringing parts you're and point. airlines, shop parts our engine remain up very customers We the bullish a themselves. biggest on -- biggest business are shop that. great some parts, engine

received mentioned. types or forecast full we for that inputs And and on expected based very engine year their they are you over all a those longer,

And strong so a for to come. expect demand some there we time

Operator

with Next of question line the comes Sullivan Josh from Benchmark.

Joshua Sullivan

driver there -- percolating leverage that issue the through a Trax for industry that? that the can here, way the is that's Trax? parts On be for to forged franchise Or a is

John Holmes

that's this, think parts digitally the is great to and about talking been question. that providence people talk before can being industry or we a definitely some Yes, elements the about It's from. even benefit track we've blockchain that to that of something able something other do

things is would To And that definitely is But capability the -- of could say fraud platform. part technological this Trax take that's with company, some out the not I we unfortunately, highlighting that need. do that currently there given something we time that those and pursue. this acquired it's

got your is, here. solution that think there's part to And the if make that the for investments I direction. and be of short in we So the yes, market a longer-term go capability could Trax, think we've to answer question

Joshua Sullivan

labor, then labor Are the rates on there for of the any going And turners that's issues. pressure Got this demand out at some question address be it. a wrench given RTX on to point? to seeing you

John Holmes

rate accelerating that It's been it's last it at I of for had couple it, We've as the mentioned the before. been seen not but stable. years,

with to cetera. as that look airlines aware to certainly unions, negotiate et we're contracts continue the their Now

they could that to extent we extent service same that, few is mechanics team from our that nonunion with to that need move focused our last dynamic customers to be which and to in provide we've we've constituencies the on. to on the been the so years, effect pilots can they've other for the cost, create we it continue our we've that to rely seek seen Obviously, to on been a increase relief downstream that would but the dealing that come

Operator

turn further the management over like would I'm to to call remarks. for back no now questions seeing queue. I in the closing

John Holmes

to forward the we you. Well, and for really back time earnings interest, we Great. everybody's call. appreciate here look and Thank being QX

Operator

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

disconnect. may now You

AAR (AIR) 26 Sep 232024 Q1 Earnings call transcript