AAR Corp. (NYSE:AIR) Q1 2023 Earnings Conference Call September 22, 2022 4:45 PM ET Company Participants John Holmes - President and CEO Sean Gillen - Chief Financial Officer Conference Call Participants Mike Ciarmoli - Truist Josh Sullivan - Benchmark Company Steve Strackhouse - RBC Capital Markets Operator Good day. And welcome to AAR Corp.’s Q1 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer sessi ...

AAR Corp (NYSE:AIR) Q4 2022 Earnings Conference Call July 21, 2022 8:30 AM ET Company Participants Sean Gillen - VP & CFO John Holmes - CEO, President & Director Conference Call Participants Kenneth Herbert - RBC Capital Markets Joshua Sullivan - The Benchmark Company Michael Ciarmoli - Truist Securities Operator Good Day, and thank you for standing by. Welcome to the AAR Corp. Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. ...

Financial Data and Key Metrics Changes - Sales increased by 10% year-over-year from $410 million to $452 million, with adjusted diluted earnings per share from continuing operations rising 70% from $0.37 to $0.63 [4][8] - Adjusted operating margin improved to 6.7%, up from 6.1% in the previous quarter, exceeding pre-COVID levels despite commercial sales being down more than 25% [5][12] - Generated $16 million in cash from operating activities, with a strong balance sheet showing net leverage of 0.4 times [6][11] Business Line Data and Key Metrics Changes - Aviation Services segment sales rose 12.4%, while Expeditionary Services segment sales decreased by $6.4 million due to a delayed pallet order [8] - Commercial sales increased by 28% year-over-year, while government sales declined by 8%, primarily due to the Afghanistan withdrawal [8][9] - Gross profit margin was 17.8%, down from 21% in the prior year, but adjusted gross profit margin improved to 17.3% from 16.1% [9][10] Market Data and Key Metrics Changes - Domestic commercial customers remain optimistic about recovery in business and leisure travel, leading to increased parts volume [12][13] - Government sales are expected to decline further in Q4, with Afghanistan sales dropping from $8 million to approximately $1 million [8][28] Company Strategy and Development Direction - The company is focusing on expanding its parts business and has secured a 10-year renewal of a component MRO contract for NATO's E-3A AWACS aircraft [6][12] - A new exclusive distribution agreement with Collins Aerospace aims to penetrate the business jet market, indicating a strategic move towards growth in adjacent markets [6][12] Management's Comments on Operating Environment and Future Outlook - The company is monitoring the impact of rising fuel prices on airline customers' operating costs, which could drive demand for lower-cost solutions [12][19] - Management expects modest sequential sales growth in Q4 and a more significant inflection in FY 2023, contingent on the recovery trajectory from COVID [13][29] Other Important Information - The company has taken proactive measures to address labor shortages, which have been higher than pre-pandemic levels, allowing it to manage through the current environment effectively [12][36] - The company has a strong focus on capital allocation, with plans for organic investments in the parts business and potential acquisitions [21][22] Q&A Session Summary Question: Performance of MRO vs. Parts Businesses - Management indicated that both MRO and parts businesses performed consistently, with parts volumes recovering as the impact of the Omicron variant subsided [15][16] Question: Impact of Higher Fuel Prices - Management noted that the ability of airlines to pass on fuel price increases to consumers will significantly influence their operating costs and demand for lower-cost solutions [18][19] Question: Capital Allocation Strategy - The company plans to invest organically in the parts business and explore inorganic opportunities through acquisitions while continuing share repurchases [20][21] Question: Customer Behavior Changes Due to Fuel Prices - Management reported no significant behavioral changes from customers regarding maintenance or upgrades, as they focus on preparing for a strong recovery in demand [24][25] Question: Government Opportunities Related to Ukraine - Management identified potential areas for increased demand due to the Ukraine situation, including sustainment dollars for the current fleet and elevated demand for mobility products [30][31][32] Question: Labor Market and Margin Impact - Management is in constructive dialogue with customers regarding potential wage adjustments, which could create margin headwinds, but they remain optimistic about overall margin performance [36][37] Question: New Distribution Agreement with Collins - Management highlighted a coordinated effort with Collins and other OEMs, emphasizing their unique value proposition as an independent distributor [39][40] Question: Expected Growth in 2023 - Management anticipates growth driven by parts recovery and new business wins, with a stable performance expected from MRO operations [42][43]

Financial Data and Key Metrics Changes - Sales increased by 8% year-over-year from $404 million to $437 million, and adjusted diluted earnings per share from continuing operations rose by 71% from $0.31 to $0.53 [6][12] - Adjusted operating margin was 6.1% for the quarter, up from 5.5% in the first quarter, and exceeded pre-COVID levels despite a decline in sales [7][17] - Generated $16 million from operating activities from continuing operations, with total cash flow from operating activities reaching $142 million over the last six quarters [8][15] Business Line Data and Key Metrics Changes - Aviation Services segment sales increased by 8.9%, while Expeditionary Services segment sales decreased by $1.3 million [12] - Commercial sales rose by 33%, while government sales fell by 15%, primarily due to reduced activity on specific programs [12] - Gross profit margin improved to 18% from 17.2% year-over-year, with adjusted gross profit margin rising to 16.7% from 13.9% [13] Market Data and Key Metrics Changes - Commercial sales were up 33%, while government sales were down 15%, indicating a recovery in commercial markets but challenges in government contracts [12] - The company noted that parts supply, its highest margin activity, remained stable despite some delays caused by subcontractors and freight issues [6][10] Company Strategy and Development Direction - The company is focused on organic investments, acquisitions, and returning capital to shareholders, with a $150 million share repurchase program announced [11][15] - AAR aims to grow its business beyond recovery, particularly in the USM market, and is pursuing new long-term exclusive distribution agreements [17] - The recent $365 million contract with the U.S. Air Force for F-16 maintenance is expected to enhance the company's government program portfolio [10][34] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the impact of the Omicron variant on commercial passenger traffic but expressed confidence in margin expansion and cash flow generation [5][17] - The company expects MRO activities to remain at current levels, with parts demand anticipated to recover as global travel restrictions ease [16][17] - Management is optimistic about the backlog and parts supply, expecting sequential growth in Q3 [17] Other Important Information - The company has seen a tight labor market, but initiatives taken during and before COVID-19 have positioned it well to manage labor needs [43][44] - The company is monitoring the impact of new COVID-19 variants on its operations and customer maintenance plans [5][28] Q&A Session Summary Question: Growth in the commercial business - Management indicated that growth was spread evenly across MRO and parts businesses, with most growth coming from parts [20] Question: Timing of recovery in parts trading - Management noted that recovery in international markets is crucial for parts demand, with clarity on travel restrictions needed for consistent demand [22][23] Question: Impact of Omicron variant - Management stated that the response to Omicron has been more rapid than Delta, but they expect sequential growth based on current backlog [28] Question: F-16 contract ramp-up - Management expects the F-16 contract to contribute meaningfully in FY '23, with a relatively compressed ramp-up time [34] Question: Labor market conditions - Management acknowledged the tight labor market but expressed confidence in their ability to meet schedules due to customer collaboration [43][44]

Financial Data and Key Metrics Changes - Sales increased by 14% from $401 million to $455 million year-over-year, with adjusted diluted earnings per share rising 206% from $0.17 to $0.52 [5][10] - Operating margin improved to 5.5% on an adjusted basis, up from 2.5% last year and 5.2% in the previous quarter [6][10] - Generated $18 million from operating activities, with cash flow from continuing operations at $26 million excluding accounts receivable financing [7][13] Business Line Data and Key Metrics Changes - Sales to commercial customers rose by 52%, while sales to government and defense customers decreased by 17% [5] - Aviation Services segment sales increased by 19.8%, driven by recovery in commercial markets, while Expeditionary Services segment sales decreased by $17.7 million due to divestiture [10] - Gross profit margin improved to 14.2% from 12.1% year-over-year, with adjusted gross profit margin at 16.1% compared to 13% last year [10] Market Data and Key Metrics Changes - Strong demand for airframe MRO services was noted, with the majority of MRO volume being standard maintenance work rather than catch-up work [6] - The company experienced sequential growth of 4% from Q4 to Q1, with a 17% increase in commercial activities [5] Company Strategy and Development Direction - The company aims to maintain strong demand for MRO activities as airlines focus on readiness for air travel recovery and preserving maintenance supply chains [14] - The exit from Afghanistan and nearing completion of certain government programs may impact near-term business, but new contracts like the one with the Department of Energy are expected to offset this [14][15] - The company is positioned to grow its government business through additional program wins and expansions of current positions [15] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in a recovery occurring despite uncertainties, highlighting a strong balance sheet and full pipelines in both government and commercial sectors [15] - The company expects Q2 performance to be similar to Q1, indicating stability in both top and bottom lines [18] Other Important Information - The company announced several new business wins, including an exclusive agreement with Arkwin and a contract with the Department of Energy [8] - The company played a critical role in the U.S. withdrawal from Afghanistan, successfully transporting U.S. embassy personnel [9] Q&A Session Summary Question: Will Q2 performance be similar to Q1? - Management indicated that they expect both top and bottom line performance to be similar to Q1, but noted the uncertain environment [18] Question: What drove the strong sequential growth in Aviation Services? - The growth was largely driven by demand in the trading business, with international customers like Air Canada contributing positively [20] Question: What factors contributed to the sequential decline in gross margin? - A slight mix change on the government side contributed to the decline, with previous quarter events driving outsized profitability [22] Question: How is the relationship with Fortress trending? - The relationship is performing well, with expectations that it will continue to contribute positively throughout the year [24] Question: What is the outlook on retirements and USM availability? - There has been an increase in available assets recently, but it is too early to call it a trend [27] Question: Is the MRO business seeing better pricing? - Pricing has remained stable due to long-term contracts, with improved efficiency in operations contributing to performance [29] Question: What is the risk associated with the remaining programs? - Management feels confident about the remaining portfolio and highlighted the successful extension of contracts with long-term customers [31]