AAR (AIR) 20 Mar 222023 Q3 Earnings call transcript

Good afternoon, everyone, and welcome to AAR's Fiscal 2023 Third Quarter Earnings Call. We're 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. 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 XX, discussed the company's in release for XX-Q XXXX. These for XXXX fiscal XX, the company's

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

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

joining XXXX to fiscal Thank third quarter our results. us today good you, appreciate Great. and year discuss afternoon, everyone. you I

with comment we for I Trax of a we Before like would the the been carefully strategic years I with have combined the founders thinking for combination on to on This vision the acquisition highlight together the and we've announced Trax is that almost worked yesterday. organization. XX that results, about

task purchasing, over is scheduling, aircraft, customers activities. the one providers supports third-party MRO electronic and maintenance order fleet include many books spectrum cards, activities mobile Trax These log inventory management managing It and globally. engineering, approximately as leading and X,XXX the for planning providing software maintenance and software of personnel entire of XXX of processing, such management. things work

the other regulators. required serves a critical is system a it and of Trax record global by airlines MRO's piece for as of as software and Additionally, FAA

the established and the backing provider leading ERP independent The AAR's effectively. we of as their to successfully against more strength in For over XX the of Trax the years, compete and much even itself with believe given products speaks help success that larger will software. size maintenance them players market competed has has

for products offer platform creating tools analytical adding accelerates to digital and customers acquisition services. our this bringing AAR solutions AAR additional to and strategy, a channel For and unique our software a

squarely addition, and differentiated the leadership Trax aftermarket furthers add will to remain the identity brand business offerings. retain higher it solutions objective our and In the marketplace. margin our aviation The with Trax we team to stated will IP-based in

quarter. from million year Turning per to and share the million up -- share. operations from Sales million continuing $X.XX XX% were earnings to share $XXX diluted the to per $X.XX $XXX up adjusted from XX% in were $XXX quarter prior per

the last government of commercial Our X%, sales Sequentially increased reflecting X% to wind customers sales to and increased decreased government sales customers and to prior certain down sales XX%. customers our customers increased programs XX% fiscal year. to

last activities parts the that we quarter. continued commercial momentum Our described

parts the to remain were contract made USM in benefited contributing generated And already the parts distribution which quarter We recovery on expected, results. as focused have from to in support to as wins, opportunities well our New activities recent early as commercial the additional investments our flying continued returns. the deploy also activities. capital that we last

seen we've quarter. able sequential performance quarters, opportunities short-term identify the continued that to for government nearly pleased MRO, we drove capacity. our I'm in several were report we that at In on the growth business, that strong the remaining And past to

the X.X% leverage lower our to We This by driven the QX. consistent also an on delivered respect basis, structure we with was established another cost operating the adjusted and strong to that growth strong and X.X% last as margin in continue during year quarter performance to from our pandemic. profitability with our revenue up ability was

quarter. $XX.X from activities million the cash, flow to cash respect continuing during we generated of With operating from operations

to have EBITDA. QX at net times leverage fund At the for we sheet forma balance to acquisition, Trax times was leverage X.X was significant end continue net flexibility pro X.XX Our the our our of this further EBITDA, growth. level,

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

Thanks, John.

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

Our commercial sales activities. were up XX.X%, driven across our by growth commercial

completion to sales were were of XX.X%. government certain Sequentially, sales X% year. our the and up commercial previous government programs government fiscal Our our up in our were down due X.X% sales

and activities, in favorable Gross our the related the was margin to reflect on in continued our the adjustments supply government contract recovery XX.X% versus as quarter business quarter profit margin performance. in in MRO Gross performance was improved on as margins in prior parts in XX%. our commercial strong costs was The and business and contracts well profit government XX.X% year quarter. the margin profit overhead XX.X% gross

quarter in related results. are in earnings includes financial $XX.X that This to adjusted excluded release. certain the net These SG&A million. million items detailed our the are from items a figure press expenses were $X

Excluding items, in operating of adjusted our drove of decreased margin these quarter, which our to XX.X% SG&A sales the X.X%. performance

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

effective was rate in rate Our We tax be XX%. QX income our tax effective quarter would XX.X%. expect approximately the to

from in times at ended the was the end with net quarter is from $XX November. quarter. including fiscal million debt of the X.XX times of EBITDA, our EBITDA flow which a down net in $XX.X from reduction million of QX We Cash operations million, activities leverage $XXX.X continuing operating X.XX and in inventory

The Trax upfront, on XXXX based $XXX acquisition, and transaction the multiple LTM performance. was year calendar the of to a purchase XX consideration This million we in up announced on plus to yesterday. earn-out revenue adjusted and the XXXX million closed million. times $XXX $XX represents respect cash EBITDA With

million revenue XXXX margins. year with approximately calendar generated XX% EBITDA $XX of Trax

it $X exclude XX%. to non-cash sales, will We the EBITDA contribute acquisition from where purchase consideration on contribute fiscal million SG&A immediately in Note the results. adjusted expect resulting in to be from retention than margins reflected accounting. there our closing earn-out million two-year to excluded will Trax are accretive conditions, our around the that as the would to will to $XX which EPS, more a amortization be period, the expect we Based months with over date, were adjusted $X little two QX. million We

million be of approximately will upfront the at by of rate $XXX Interest the impacted interest expense quarter X%. an in

As EBITDA a was accretive EPS pro On mentioned, net at $XXX be of under QX over and our times and leverage our X.XX expect Trax our liquidity forma basis, to on adjusted we end remaining availability revolver in to was million. the hand FY'XX. from cash

business, for return to As are previously, and inorganic you growth to priorities order, in investments deployment have our our add accretive in complementary investments capital indicated capabilities organic shareholders. value capital

had first the capital Over deploy attractive to the two of last quarters, in opportunities we've couple categories.

to We million remaining not that of $XXX on QX. in have repurchase currently As December a XXXX. million result, during stock we $XX the elected stock program announced repurchase we

this We authorization calendar based will capital evaluate deployment the opportunities. balance year over remaining usage of upon alternative of the

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

Sean. Great. Thank you,

item and about aerospace we about are macroeconomic resiliency banking flying of and all in watch for forward, Looking to global uncertainty continue aftermarket be generally. optimistic the the the concerns industry although companies, the recovery global

hangers The our continued confident in particularly This our strong strong demand travel for parts is international to remain for outlook our activities. demand and in translating bookings. commercial and is commercial their customers

recent recovering from up growth in benefiting parts contract of distribution, demand, wins. both new continued expect the and and is which We ramp

future. shop in strong associated quarter, should is engine drive continues demand. we and engine decreasing, near for are for supply the expect we capacity foreseeable green And demand last In remain of loosening which availability mentioned seeing to to in time more even visits and MRO, heavy a we be availability USM, maintenance USM the at as and

in evaluate opportunities to to and confidence We continue network have expand who we where have labor long-term customers availability. made commitments our

our best ability practices be to the that excited And With impact value, more the of our programmatic commercial new function best facilitates on business, well offerings. NDAA to we respect short-term continue remain our we long-term government the language to act and add of a as to offerings. about government's wins potential positioned of additional

Our were expect growth business. With in our we but by results performance commercial to QX, sequential decline expect respect government commercial, slight QX government strong a continued and markets. in both driven in

slightly in such, revenue performance better similar we what and total in adjusted As we delivered QX, relative EPS overall to to QX. just in expect

our our our resume begin commercial We to business in we as and business continue expect 'XX. in government growth FY growth to

plan FY on Investor an more information York the on our detail forthcoming Speaking as be July in and past. will 'XX, to hold City XX. we Day strategy to done providing in New we've More we of forward look

for Before could a emerged known express decade that opening acquisition. it team I again my and the want up to excitement to finally Trax I and questions, more management join the opportunity to its forces. pleased be not company the about We've

to achieve unique together support reiterate time. see was team opportunity be Trax a this I AAR's bring that and I extremely family. potential global Trax's hardware and the things software has the team yesterday a we to way look to over aftermarket forward Trax I can I said highly together the aerospace To great when with AAR to in successful in we the the a welcome Miami, to powerful what as that

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

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

Your line is open.

Hi. Thank you much. very

How are Rob. you? Hey,

to Good. if Thanks. I acquisition. start I on there, want your could. Congrats guys

Rob. Thanks,

a talk it's part whatever it's bit Trax doing past? that little AAR differently in now you of how the Can about versus grow been can

but market. most in the other market couple players smallest, in of thoughts the among about several A of of terms successful of last the there. penetration. the very been size, Trax just relative reach market have in they a broad and question. Great is terms Yeah. to the some in They're have years

the their winning. there, product. why main the they've just about reasons that's -- reason product successful been of the best of that been They've strength and why One is got they've out the

Miami. worked not AAR that proprietorship that been to they otherwise believe them And backer able a with a them, open. them much open as larger fact essentially in is, doors might they've the just well-financed What's sole we that can by combining been help have against

just around they customers able element. not the one been that presence in we AAR, So more reach the to Trax given our introduce have our we that's industry, already. think reach can otherwise that may also to globe, Furthermore,

what growth can what about talk a you can at, Is there we going growing do rate and been they've forward? that

we've Yeah. for have very nicely. about years get later that company a have time, their the specific more evolution platforms. and on at they following their XX We been growing been seen can Again, in but very,

to talking software started we For on not first desktops. largely them, example, surprisingly, and set mainframes when their

of offerings, offering. They was In they're next and SaaS-based generations new apps, cloud, you have it if in the users their whole will, They moving re-platform. and other a the words, a have localized. it's suite new to

new the will it expect last drive migrate current years. new platform few as hold takes the driven the that has growth and couple continued offering that as next we to years customers So and growth they of in

business Trax these sales the Okay. as And can an once words, question, more other it think distribution, your businesses? you then is core two combine what to more adjacent have it legacy you? drive things, can how parts John, In optimistic too or drive

at optimistic that's think all. don't I

purchase from of our availability. more bring In fact, closer to that of products And how world. customers the that's plan it. we thinking that the exactly services AAR at And planners our used parts and Trax access offer. give and used is system is the the actually world by around we're to system make basically buyers our to customers thousands this for broader around services a and and and to is airlines thousands Ultimately, the parts about is

out are you more quick MRO? how just With it body wide your seeing of markets to body in couple things. and get you other And into a this Okay. play does resurgence, that tempt wide

area see wide part an that passenger a the to though, the we we've predominantly From offering an opportunities and in steps core our narrow today, over aircraft focus great that in focused seeing are support the to the take take around as taken see cargo remain several the are body. around certainly play market. parts we it sky, our to standpoint, power out. particularly an that strength From years market MRO we -- -- on we standpoint really growth. engines, But bodies, that's we on more is. business . where That's last to From that's

been just have I whatever is, materials thing you talked on now. I parked that et about cetera., then cycle. I there the understand have investments. want are And you Okay. And only wanted to this to better USM the of would other aircraft by where out USM ask strength thought a lot just John recent in we might and depleted

on you if what's So us update could happening? just

beginning for aircraft, been of I the at in forecasted think levels of material you're many seen of that have correct the haven't terms of out retirements but particularly parked pandemic. years, the elevated we

long, As curve retirements next don't dramatic to that we time, OEM provide although aircraft, we that years, for material so as expect production rates come talked over airlines over reflect steepen more for about up But to jump business. many expect that their will do that and and see our that. do few expect more the USM we

much. Thanks so Okay.

Rob. Thanks, Great.

Please Thank our standby you. for question. next

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

is line Your open.

Good evening. Hey.

Josh. How doing? Hey, are you

the on outlook, months like next so? the recompete services the what Just XX does [indiscernible] or government side, over

on. programs on, that For of existing for recompetes don't my aware -- we that top I'm the of we're major are head, not off currently I programs any

for a in we're we right and bidder the AAR. that are a be not on, process work programs those now extent successful, However, of net that recompetes are we To there number would programs. new on a for are

allows comment to on expand just more that you can access language about the services? NDAA air And the

bit a language that DoD of that was parts last talked about buying to NDA the market. quarter ended to consider most the and requires branches they version ultimately passed was go We the little recent used in the Yeah. of up that anytime

used of required expect to educated offering, agencies now market market, commercial as buying as you more agencies that buy benefits as a we that so growth in are us. been very parts could look the be successful USM these they give And know, to look. the parts a become which, on for has as And over time our

there are Trax government the sector? for any then, opportunities And in

the little That's area They a a in Yes, work question. so. of already. we government great believe do bit

itself a agencies, because Trax to presence, can help actually again, FAA similar commercial but doors but are the fact, there is our Trax. customer, market, of believe, matter a we in As the government open we for of

you're [Technical getting on like supply distribution the side, what Just the availability on seeing comments chains commercial on any better? there? look Difficulty] from OEMs. then, the And coming Any

of it when quarters relates of in elements they supply supply the longer were have But still turnaround and of repair labor, times pre-pandemic. stable. stable and as part few for chain bucket. over say our It's put the think the to Lead most OEMs those been we we parts I'd for availability, it's quarters. the the from about chain last kind both times availability certainly business, last few are than stabilized in

the So material. longer turnaround we we out USM buying that. accounted our And buy that as account we send adjusted parts patterns to business repair, similarly, for for to as just look manage market we’ve for we in and times

you for Thank the time. Great.

Great. Thanks, Josh.

standby you. our question. Thank Please next for

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

Your line is open.

conditions as with kind recovery for flying pre-COVID COVID just or of there? we into for Thanks going coming prepping -- mean called the any of this still on I on is but kind revenues. wouldn't dynamic questions. you the off think guys. or evening, airlines Good why taking the flattish I there Hey. the should what's John, just mean the just fourth is quarter, think reason summer the be as season seasonally of quarter, for the kind strong usually I it's strongest the of dynamic your

contracts, of in government with government successful saw able that the this long-term that for elements we mentioned in In we commercial all expect MRO we in fair the which certain just We Really for of government. Commercial, The QX, both government shorter-term doing partially the a side. government strong. that parts two down quarters continued we in few the in program QX. businesses we growth We've expect as QX. is to growth mentioned, and remains wind and ago, offset accounted you strong, performance continued activities. offsetting a bit do What’s commercial. reasons in down sequentially remain strong been have were wind Yeah.

expect side than don't the us that government revenue activity in QX which in we say, level in we to a, same QX, delivered I of EPS would leads overall better on similar net-net slightly However, what QX. and to

maybe repair elaborate Can short-term work is on is? ad-hoc, that logistics, or picking what that I elaborate Okay. what you're you doing activity of up mean, kind there? just

the individual activity more it and the of other and is with programs transactional we of tempo of it that parts government. Some is see

Got it.

having I type terms advantage Trax, of you it give material Does you're buying a might intelligence to this just in back just demand? of mean be in higher bit (ph) asset then that aircraft, better the gives all mentioning there? what little in-house, of all you feedstock And does the customers, USM or Okay. out on an that's

want parts owned Trax manages work data many Trax with to able parts data base. customers. base. Ultimately, the see and we availability that customer tremendous and are whom Over by a Trax time, for amount use how and offer solutions, to might their Trax of be and we is its that everybody, more with customers customer to in partnership more to Trax to of customers, our

over be yes, to our So an businesses. traditional accelerant will that we time, believe

it. Got

And one. just Okay. last then the

kind mean pretty good be dynamic story. they're the the trying JV guess I going guys to Fortress, I'm going On are to about XX with of a there CFM I I they is. they're you obviously out But the to. trying after mean they're of think telling

on or just to after going kind out little material, the access but in is their contract similar in terms or sort of dynamics of USM. JV of are that like of maybe competitive have ramping any workings material that bit that up expected sounds that as of there engine focused they it also I a more some on there color relationship? You playing are mean,

question. Good Yeah.

it. overall we have we if outlined relationship JV is going than when the not and the originally that as So well, expected with we them better

I just think on different platforms. there is you’re different possibly activity hearing what

respect good of again, lot Fortress relationship. covering and platforms of the So around that lot a momentum in we’re which with there’s a

we’re areas, with portfolio, them. about got talking they’re has in where the other areas and partnership port Fortress not broad a engine

Got it.

queue. back the jump I’ll in Perfect. Okay.

you. Thank

Please standby Thank question. our for you. next

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

Your line is open.

on and strong John actually is Steve on Herbert. Hey, Sean. Ken This the for Strackhouse quarter. Congrats

quick Trax. with further for 'XX? are with now you synergy M&A that How that you've might starting cost couple on view looking thinking a of acquired is FY Just that questions maybe Trax, what your capture be opportunity? at And about the then you

Great. Appreciate question. the Thanks.

respect cost not this play. focused This we synergy really growth a really at to is with on Trax, First, point. are

doors believe further for services As customer revenues world Trax's the by earlier, and around government that opening and we can funding base, mentioned their help them we included. by a development with of larger grow products

synergy around revenues growing So Trax. this we a from perspective view of really

similarly then and and work develop And in time, turn again, could we revenue. customers, think be cooperation side, as on market Trax products this services, would which their our AAR for traditional our over grow with we channel a to unique in own

with to it's think So and track. third, about heard And about revenue synergy thinking first returning as Sean, capital from shareholders. M&A, deployment you second, really, a capital inorganically we organically; play M&A then then

the see. We right we are very M&A encouraged pipeline now that by opportunities of

great with it to in that that fits and there portfolio sheet strength we're the act. value is many been many We in in companies many, and outstanding expect years, to We've them it's have it following the term. medium been And There provided thinking position line. next example deal -- here have, come the for that and with we we XX sense, to about working get of a about really for assets makes years. the the out that. great market this the other an finish balance Trax to are over

you available of But maybe then in a and the how at look that where is asset are you follow-up few little from it with Awesome. spoke airframes engines, bit maybe pricing some just there. Is prepared We buying remarks seeing and the touched of trending as And feedstock? one the the of questions. for some acquisitions, the you a opportunity? on

own would their say are part, categories, in it seeing I both as as airframes first well we whole engines. individuals come with on that

just a material have in the the to expect last for of to to position we assets available. pricing, so in And come I we respect quarters. we very on that packages see come wouldn't available we to are again, on coming market. more seen couple And competitive the we're strong And With that concerns, that. encouraged but see by element act comment on want more

Awesome. Thanks Thank guys. you.

very Great. you Thank much.

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

forward you. great. you time that’s your Well, Thank quarter. to for everyone and Thank talking you to much, and very attention, next look we

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

You disconnect. may now