Q2 2020 Earnings Call
Good afternoon, everyone and welcome to the a ours fiscal 2022nd quarter earnings call.
We're joined today by John almost President and Chief Executive Officer, and Sean Yellens, Chief Financial Officer.
Well, we began I would like to remind you that the comments made during the call may include forward looking statements as a part in the private Securities Litigation Reform Act of 1995.
Our news release and the risk factor section of the company's Form 10-K for the fiscal year ended may 31st 2019.
Hey, providing the forward looking statements the company assumes no obligation to.
But updates to reflect future circumstances, or anticipate or and and anticipated events.
At this time I wanted to turn the call over to ERP is president CEO John Holmes.
Great. Thank you very much and good afternoon, everyone. We really appreciate you all being here to join US today to discuss our second quarter at war 20 results.
In the second quarter for 20 sales grew by 13.7%.
193.3 million to 560.9 million, our adjusted diluted earnings per share from continuing operations increased from 60 cents to share 64 cents for sure.
Had a great quarter and I'm really pleased with our raw results. Once again, we saw exceptionally strong performance from our trading activities as we continue to use our global network. That's worth the highest an immaterial to support our long term customer contracts. We saw strong results from a distribution activities as well having benefited from the maturation of contract.
Secured over the last several quarters.
We also continued to see solid growth from our government programs activities Awash Atlantic Your PBL contract in particular are performing very well operationally and are allowing us to build solid past performance.
As a foundation to capture more government opportunities.
The second quarter was also our fourth consecutive quarter of improved performance in our MRM business.
Actions taken to address the shortage of mechanics, such as enhancing our recruiting efforts partnering with various schools and repositioning elements of our workforce across our network paid off and we're seeing benefits of those actions now.
In addition to the strong financial performance, we also announced several new awards during the quarter.
Our airinmar subsidiary a provider of component repair cycle management solutions, an ounce two new contracts.
With the first with with Alaska Airlines for evolution, which is a software platform that enables the customer to increase efficiency and reduce costs by increasing visibility into their component repair cycle evolution is our first software as a service offering or hsas and I'm thrilled to have Alaskan using our platform. In addition to this.
We continue to see very significant revenue growth for our other businesses for the digital channels that we had built over the last two years.
[noise] Airinmar also sign a contract with Jetblue to provide component value engineering to help reduce repair costs.
Excited about these two awards as they represent new services to existing customers, which validates our integrated services model.
Finally, we expanded our component repair services agreement would be a systems to include a wider range of components for its regional jet support programs.
Yes, the added are consistent cost savings and high quality delivered by our Amsterdam facility as the basis for this expansion.
Before turning it over to Sean I would like to provide an update on the sale of our airlift cocoa business, which is in discontinued operations I'm pleased to share that we've completed the sale of all of our DRG contract and are awaiting regulatory approval for one remaining foreign contract, which we expect to receive soon once received the exit of our airlift cocoa business in this country.
Good operations will be complete.
That will turn it over to our CFO started going.
Thanks, John ourselves in the quarter of 560.9 million were up 13.7% for 67.6 million year over year.
This included a 69.1 million or 14.9% increase in aviation services revenues driven by execution on new contract awards and strong demand in our parts supply activities.
Gross profit increased 9.7% for 7.6 million to 85.9 million gross margin within aviation services remained relatively flat at 16.1% for the quarter, which was favorably impacted by improvement and MRO and offset by some mix and government services and increased costs and certain commercial PBH programs, while we.
We did see increased cost uncertain programs. Some of the increase can be attributed to improving the operational turnaround time by more quickly, causing repair orders. We are taking actions to address these increased costs, such as optimizing our vendor network and inventory pool as well in sourcing repair work.
Consolidated gross margin was 15.3% versus 15.9% in the prior year period, primarily due to expeditionary services, our mobility activities had a softer quarter due to a contract were not being finalized in the period and some operational challenges, including raw material inflation and warranty issues.
Deposit activities also had weaker performance due to mix labor inefficiency and higher freight costs overall performance should recover in the second half of the year, we're taking action to reduce overhead as well as evaluating opportunities to reduce fixed costs.
As DNA expenses were 10.2% of sales versus 10.0% in the prior period, which was largely driven by investigation and compliance related costs.
Including investigation, and severance costs, which totaled 3.3 million actually in a would've been 9.6% of sales in the quarter.
Our income tax expense during the quarter was 6 million, resulting in an effective tax rate of 23% net interest expense was 1.8 million compared to 2.4 million last year due to lower borrowings and rates.
During the quarter, our cash flow provided from operating activities from continuing operations was 19.9 million, which improved 35.3 million from the prior year, excluding the impact of the accounts receivable financing program, which was relatively flat this quarter.
During the quarter, we returned 6.7 million to shareholders via dividends 2.075 cents per share were $2.6 million and repurchased 100000 shares for $4.1 billion. The balance sheet remains strong with net debt at a 160.1 million net leverage 0.9 times.
Before handing the call back to John I want to provide an update on the department of Justice investigation that airlift regarding potential violations of the false claims act, which we disclosed in 2018 and with which we have been cooperating.
We have recently entered into settlement discussions of the DLJ, you're happy to take a step towards resolving this matter. However, there is no assurance that any settlement will be achieved we will keep you updated as these discussions progress. Thank you for your attention and I'll now turn the call back over to John Great. Thanks, Sean.
Due to the strong performance in the first half of the year, we're updating our F. why 20 guidance and now expect sales to be between $2.15 billion and $2.2 billion to $5 billion. We now expect adjusted earnings per share from continuing operations to be in the range of $2.50 a share to $2.65 a share compared to our.
Prior financial guidance, the midpoint of our provide sales guidance increase from 2.15 billion to $2.18 billion.
And the midpoint of our revised adjusted diluted earnings per share from continuing operations increased from $2 at 55 cents a share to $2.58 a share.
We continue to expect SDMA in expenses to be approximately 10.5% of sales and anticipate an effective tax rate of 24% net fly 20, we will continue to reassess our guidance and modify it if necessary as the year progresses.
As it relates to the cadence of our earnings over the balance of the year, we would expect to have modest sequential growth in the third quarter and then more significant sequential growth in the fourth quarter.
In closing our parts supply activity has continued to deliver exceptional performance, we're executing well on our government programs wins and we're very pleased with recovery that we see in the MRO activities. We've got to strong balance sheet full pipeline of new business opportunities and we look forward to a very successful second half of that for 20.
And with that I'll turn it back over to the operator for questions.
Thank you if you like to ask a question. Please press Star then one when you touched on telephone.
One moment please.
Our first question comes from Robert Springer and Credit Suisse. Your line is open.
Hi, guys good afternoon.
Hey, Rob how are you doing.
Good thanks, and nice quarter.
Some nice cash flow here I wanted to go back you just talked about the midpoint of your revenue guidance to 218 A.
And.
That implies about 6.5% growth for the year, if I'm doing the math right, but you're about 15% so far this year so.
A couple of things here, what I'm thinking maybe the backend is a little conservative, though the moving parts I don't know if something's rolling off you've added a fair amount of work and then I wanted to talk about that in terms of the two segments.
Because.
Sort of no matter, what expeditionary does in the second half and is flattish for the year.
Now.
One would expect procedure it seems you're implying that the growth at aviation services softens a bit you did say the cadence into Q3 is is maybe softer than your strength and in Q4. So all that together how does the second half luck.
Yeah, well you know again, we're we're real proud of the first half thats been a great start for the year and as we think about the second half you do come up against tougher comps versus last year, because that was about when we started to see some recovery in the MRO business. So.
That drives a bit of that.
You did mention Expeditionary services, Sean mentioned, we are expecting a recovery.
The second half, although it will likely be below the plan that we originally developed.
We presented the guidance originally but but overall, we're happy that we're in a position to have raised the guidance overall for the year and this represents the best view of the opportunities that we see it at this time.
So.
Could you conceivably.
See does does expeditionary get better name point, what's the long term objective there.
So expeditionary.
Right now we're focused as a as we said on improving the performance of that business and part of what happened this quarter, what situational we had some operational issues that we've worked through and then we've also we've also seen a we've also seen some awards get delayed from the government and we expect to come those those come through during the second half of the year.
Depending on when those hit obviously will drive performance in the second half of the year, but you know as we've talked about drop for a long time, our focus is the company.
Generally speaking has been growing and building out the aviation services segment, and that's where the investment Thats, where the focus has been and that's where you've seen a that's where you're seeing the growth. So that's the long term future of the company.
Yes, I was going to say, even with the tough comps if I just use your numbers you really implying no absolute increase in the back half of the year.
And again with these contracts that you've been feathering in all along I'm, just going to take that as conservatism.
And then so so that's a comment more than a question last question, though on the.
Software as a service contracts that you mentioned very interesting this evolution and so on who who you're competing with on these.
That is a great question, then I like our answer.
There's nothing like that in the market.
It's the only it's the only application that gives you the type of visibility that.
The type of visibility that we do into the component repair supply chain and it also allows customers to share data, we need more customers to get on the platform and and share their data with us but.
In an anonymized weigh on an individual component level customers can now compare the price that they're paying against against the community and that's a feature that we're seeing a a great deal of interest and Sony from a financial standpoint into that the very small contributor to the overall resorts results right now, but it's our first for what form.
Hey into an actual software program and we're really excited that Alaska is onboard.
And do you have any partners on this product is this developed in house are there any other folks that are.
Well, we technical side trio well, yeah, we definitely have about technical partners that helped us through the help us develop the platform, but those are more kind of on on a consulting basis as opposed to you know in any significant commercial relationship.
And we have we have a number of technical partners that are helping us build out the rest of the digital solutions and you know as I mentioned, we're seeing a really significant increase revenue for the digital channels, but we've developed.
For our traditional businesses over the last couple of years.
Okay. Thanks, very much I'll jump out come back later.
Thanks, Rob.
Thank you. Our next question comes from Ken Herbert of Canaccord. Your line is open.
Hi, Good afternoon, Sean John .
Hey, Ken.
Hey, I just wanted to first ask your gross margins within aviation services you called out.
Some headwinds from some of your government services contracts, but then also it sounds like on commercial programs you've seen some some higher than expected costs. There I wanted to see if you could if you could parse that out between those for US and then specifically on the commercial program side. It sounds like this is a business that's maybe not getting as much capital as it has.
In the past can you talk about some of the maybe the headwind you're seeing in that business, whether it be pricing or higher costs and maybe how we should think about that business for you.
Longer term.
Sure.
As we think about gross profit.
There were some they are the positives are continued exceptional performance out of the out of the parts businesses.
And the recovery and MRO.
The two areas that were that were offsetting to that as Sean mentioned.
One was a as you mentioned government programs now we don't see headwind government programs, we actually see a great deal of growth and very strong performance out of that area of the company.
But the way those work there dilute their dilutive to the gross profit number but accretive to our operating margin. So that that that mix. There is a pretty meaningful impact this quarter and we would expect it to be an impact going forward given given the growth for that business.
On commercial programs, we've talked the last several quarters about the market there and we have seen increased competition and the pricing has been driven down as a result for.
For that market, we continue to compete.
We but you know as we've talked about we have certain return requirements. If we can't meet those return requirements were not going to a you know we're not going to we're not going to take the deal.
On existing contracts, we have seen some cost headwind on certain of the contract as Sean mentioned, we're working to address those some of that though is the timing and situational that you saw in this quarter and that's because in certain of the contracts. We in order to improve operational performance We act.
Celebrated the the web and so that had the effect of falling costs forward, which we saw which we saw in this quarter and also because of the accounting changes that took place last.
Last year number these contracts are now on a cash basis as opposed to.
Managed over time, so you do see you do see fluctuations in income.
Any given quarter is the result of is off the cuff cost changes but.
As you pointed out we.
We had we Havent announced a new win in that area in a in a little while and so and it's still an important part of our portfolio, having said that we've been able to achieve what we believe very significant growth across the company double digit growth now for six quarters in a row.
And that's not that's being driven by other areas outside of commercial programs.
Okay. That's helpful. It makes a lot of sense it seems like a very competitive market and as we look at the as we look at the guidance increase again, just a question again within aviation services and the growth there. It's fair to assume then that the parts business trading distribution and maybe some of the government side with those contracts is obviously driving the IND.
Greece or is on the topline or is maybe better performance on the MRO material piece of that as well.
It's all of the above.
Very strong performance out of trading very healthy year over year growth. There continued strong performance from the new parts business.
Very nice growth out of the government programs areas those contracts have matured and and as you pointed out the recovery in the MRO business as meaningful as well.
Okay, and if I could just one final question on.
No I know Youve talked more recently about.
Government services and the opportunities and it sounds like was in the PBM contracts are going well.
Within aviation services can you provide any data John on maybe.
The the bids you're seeing the opportunities maybe what might be flowing through in terms of your bid pipeline or your backlog or I mean, it sounds like now there's obviously a real high focus on these types of contracts from your customer base here in United States in particular and Im just wondering maybe are you are you capturing more as a scenario where we should.
Continue to see or expect strong growth and maybe just a little bit about some of your activity underneath.
The two contract you talk about moving forward for that business.
Sure sure.
A couple of thoughts there, yes, you should Ah you should expect to see continued growth out of that that our government services business and we havent very full pipeline and the point that we made on a path performances. The more we win the more we're able to win.
Because we rebuild more experience of which allows us to bid on more types of work. So that as you are widening the aperture of the types of things that we can pursue on top of that we are we really successfully made the migration from the subcontractor through a prime contractor over the last four or five years.
And that again is helping us a bid these larger programs.
And we're also taking advantage of the fact that we just one as you know two quarters ago. The fee 40 contract to sell to aftermarket aircraft to the government.
That is a great example of the government accessing the the aftermarket and on that the original solicitation that came out for those two aircraft was originally written Rowley the purchase purchase of two new aircraft and we worked.
When do you see to allow that solicitation to to allow.
The sourcing a few used aircraft and ultimately were successful in winning that that we believe is going to open up more doors for us not just for used aircraft sales, but for also use part sales and we see a lot of opportunity coming there I was just did a deal the maintenance symposia and I gave a keynote speech last week there.
And.
We talked a lot about the DRD, making better use of well established aftermarket solutions as it looks to go ahead and increase the sustainment.
And the readiness of the fleet, but doing that in a more cost effective way and there was a lot of interest as we we gave these commercial examples of the and their application to the government environment. So we we remain very excited about the growth prospects for us and government services.
Great. Thank you very much nice quarter.
Thanks.
Thank you. Our next question comes from Mike assume Molly.
Yes. Your line is open.
Hey, good evening guys. Thanks for taking the questions nice quarter.
Thanks.
John just kept can we go back to maybe just to close the loop on I think what what Rob was talking about on the digital solutions do you compete at all I know Honeywell's, Scott I think there go direct trading gag direct difference between yeah. What's the difference how are you guys differentiating your solution first their solution I mean, there's just seems to be upon.
Store I guess, but are you guys doing anything radically different to entice more customers to sell that solution can you just maybe articulate a little bit there.
Sure there's a there's a handful of.
Digital initiatives that we've we've got some are external and some are internal I quickly in the internal we've done a lot of work to to put more information and take advantage of data that we collect from our heavy maintenance activities in our power by the hour activities in our parts sales activity and use that data to get more information from.
Of our employee is real time for that we can capture sales more quickly.
From an external standpoint, we do have our parts store, we're seeing a lot of of traffic through that store, we've seen a very very healthy month over month increases of traffic through that store and we've seen a broader acceptance of of small and large customers in terms of transacting bill.
Digitally as opposed to phones and emails. So we're excited about that you know I wouldn't want to necessarily compare us to there's a lot of people out there as you mentioned Honeywell go direct their deep Blaine, there's the arrow Aero bye.
There's all kinds of different platforms out there one of the reasons. We are successfully because this is what we do you know this is a core business for us and we're taking what we do and what we do very very well and applying it to a digital channel. So I remain very excited about what we're seeing there.
Got it that's helpful. And then just on the strength in the parts trading I mean.
Clearly we continue see this robust activity in the aftermarket it looks like shop visits overhauls everything on the schedule into next year looks like that strength continues or are you seeing any incremental upside from the grounding of the Max I mean does that creating more tightness around three seven parts of available.
Realty and giving you more pricing power can you just maybe give a little color on on how that's factoring into the performance of trading if at all.
Yes, I mean net net the Max is a positive for us.
You know and we've said before that it its a.
Neutral to slightly positive right now, but it's definitely positive over the long term because it extends.
Extends the life of the current generation platforms.
As it relates to material availability. There's no question 737 material is very very tight.
But we are the best in the world of sourcing that materials and sourcing at at the right price as a matter of fact, we just closed on too.
Two aircraft actually recently.
And we're really happy that we made that vine rabble to get our hands on that because that's great material that old that'll help us in the second half.
So the fact that we are we've got we're the largest in the world for that we've got the best.
Network of buyers.
Sourcing team around the world and we've got the balance sheet capacity and flexibility to close faster than anybody we compete with that's giving US an engine that in that market on top of that we also have the best set of contracts, particularly with the engine shops for long term supply agreements. So when we go out and we find the right material we've got the capital.
To deploy quickly and we've done we've got to total because we've got contract.
Got it that's helpful now.
And then just to nitpick, maybe a little bit on the that aviation margins I mean, I'm, assuming all of this parts trading activity is margin accretive to some of the other services and.
Revenue generating activities and in the aviation business the margins have been.
Flattish down slightly year over year, I think you did talk about.
Some of the turn times in looking at cost there in sourcing.
But how do we think about any any potential operating leverage in aviation services I mean, I would imagine the porch trading can't continue to stay this active.
Should we think about you guys haven't some levers to pull to either sustain the margins or drive some upside.
Once porch trading sort of normalizes.
Well I would say just on parts or anything I mean, we expect this heightened level of activity to continue for a long time.
And that was that well before the Max.
Rounding happened because.
Of the contract that we have to forecast received from the shop and the bow wave of maintenance visits that that's expected to occur over the next couple of years. So.
We.
We feel very good about that that business.
Indeed strength for many quarters to come.
In terms of overall margin you know, it's a big focus of ours. We we we are focused on improving that number.
MRO is not yet at back at the level that it was two years ago.
We're headed that way each quarter, we make a little bit of improvement, but that is still.
The press from where it was a couple of years ago, because our labor costs increased and we have not yet path that entire cost onto the customer of the customers being very supportive they've got their own cost pressures and theyre, they're working with us.
But we still have some work to do there on top of that we did bring in a lot of new talent and that talent takes a while to get trained and get good at what they do and ultimately become more efficient on the floor and as that happens we expect to see continued margin improvement and MRO and then as Sean mentioned on commercial program and then as Sean mentioned on the commercial programs, but you know there.
They are definitely some some cost challenges that we have seen recently, there and we're taking a number of action to address though than if we work through that we would expect to see margin improvement there too.
Got it helpful I'll jump up back in the queue. Thanks, guys.
Thanks, Mike.
Thank you again, if you like to ask the question. Please press Star then one our next question comes from Josh Sullivan.
Global your line is open.
Hi, good afternoon.
How do you feel about the inventory in your trading business you talk about that bow wave maintenance coming out do you still feel the need to build that inventory in your network or is it that network that you have that you feel like he can trade on a spot basis, that's giving you confidence.
You know that we have been making continued investments in a in the inventory so that that investment has actually grown over the last few quarters. The turns have also improved so we're seeing material come in and go out but candidly the demand is so significant.
That you know wherever we can find material we get it.
And often we were able to move it very quickly so.
You know, we we have investment plans et cetera, but those investment plans have to be a flexible when we come across opportunities to get our hands on the right stuff.
Got it.
And then just another follow up on on the SaaS strategy. How is price discovery going are these these trials still or have you firmed up pricing and margin at this point.
Im sorry, which what was the on what exactly.
On the assess strategy with initial okay.
Yes.
I would characterize that is very very early.
Very early.
So we we've got to launch customer we have.
Multiple other customers that were talking about right now and I would say two years. Your words, we are in the freight in the phase of a price discovery.
Got it.
Then just one last one on the MRO market.
Whereas utilization MRO shop visits year over year at this point.
We are.
Well for US we are up year over year, we're sold out through the rest of the year.
And.
You know we have seen customers move work around largely the result of schedule changes due to the Max.
But we from our standpoint were it we're at a very high utilization and I would say our utilization last year was constrained by labor rather than pure capacity and so our labor physician is better. So we're at a higher utilization, but the constraint continues to be late labor overall net Mark I think that's a good point the math.
Grow environment for labor has not improved year over year, it's our position within that environment. Thanks to the actions that we've taken have allowed us to make this recovery.
Yes.
Thank you.
Great. Thanks, guys.
Thank you again, ladies and gentlemen, I'd like to ask a question. Please press Star then one.
One moment please.
I'm showing no questions at this time.
Well great everyone. We really appreciate your time and your interest in our company and we wish everybody happy holidays.
Ladies and gentlemen, this does conclude today's conference. Thank you for participating you may all disconnect.
Okay.