Q4 2021 AAR Corp Earnings Call
Okay.
Good afternoon, ladies and gentlemen, welcome to day, our fiscal 'twenty, 'twenty, 1 and fourth quarter earnings call.
We're joined today by John Holmes, President and Chief Executive Officer, and Sean Gillen, Chief Financial Officer.
Before we begin I would like to remind you that the comments made during the call may include forward looking statements as defined in the private Securities Litigation Reform Act of 1995 and <unk>.
And in the company's news release and the risk factors section of the company's form 10-K for the fiscal year ended May 31, 2020 and.
And providing forward looking statements. The company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events.
At this time I would like to turn the call over to <unk>, President and CEO John Holmes.
Great. Thank you and good afternoon, everyone. I appreciate you joining us today to discuss our fourth quarter and full year fiscal 2020.1 results.
Before I comment on the results I would like to take a moment to reflect on the last fiscal year.
The reduction of commercial passenger air travel to nearly zero shortly before our fiscal year began and a persistently depressed levels of commercial traffic throughout the year tested our industry and our company to agree that was previously hard to imagine and.
They are we have a strong set of values 1 of them is to every day find a way.
That has never been more important than it has been over the last 16 months and I am proud of the results we have delivered.
I want to thank our employees for their commitment and endurance and our customers for their continuing to support.
And I'm pleased to be able to say that we are now emerging from this crisis and even stronger more focused company.
Turning to our results sales for the year decreased 20% from 2 point out $7 billion to $1.65 billion and our adjusted diluted earnings per share from continuing operations decreased 39% from $2.15 per share to $1.31 per share.
These results reflect the impact of COVID-19 on the demand for commercial air travel, but also our team's ability to reduce costs and increase efficiency to mitigate that impact.
As you May recall, our Q4 of last year was only partially impacted by Covid as our hangers completed work on aircraft and we're already in the hangar when the pandemic began.
As such I am, particularly pleased to report that sales for the fourth quarter were up 5% $417 million to $438 million and I'm, even more pleased to report net adjusted diluted earnings per share from continuing operations were up 81% from 26 cents per share to <unk> 47 per share.
Our sales to commercial customers increased 3% and our sales to government and defense customers increased 7%.
Sequentially, our total sales growth was 7% and our adjusted diluted EPS growth was 27%.
The EPS growth was driven by our operating margin, which was 5.2% for the quarter on an adjusted basis up from 3.2% last year, and 5% and the third quarter.
We saw strong performance and our MRO operations as airlines perform maintenance in advance of the anticipated return to summer leisure travel as well as the strong performance and our government programs contracts.
Notably we have not seen much of a recovery and our commercial parts supply businesses as operators continued to consume their existing inventory.
Our supply is 1 of our higher margin activities and the performance and the quarter did not yet reflect a recovery of that business.
Turning to cash it was another strong quarter as we generated $23.5 million from operating activities from continuing operations. We also continue to reduce the usage of our accounts receivable financing program excluding the.
The impact of that AAR program, our cash flow from operating activities from continuing operations was $33.3 million.
The results for the year reflect our accomplishments and 3 key areas first we moved quickly at the outset of the pandemic to reduce costs and optimize our portfolio for efficiency.
We did this by consolidated multiple facilities.
And the permanent reductions to our fixed and variable costs exiting a restructuring several underperforming commercial programs contracts and completing the divestiture of our composites business, which had been unprofitable and recent quarters.
Second we continue to win important new business in particular, we created a partnership with fortress to supply used serviceable material on the CFM 56, <unk> <unk> and <unk> engine types. We were awarded a follow on contract from the Navy and extended and expanded our support of its <unk> 40.
We expanded our distribution relationship with GE subsidiary of Unison, we entered into a 10 year agreement with Honeywell to be and exclusive repair provider for certain 7 and 37 Max components and most recently, we signed a multiyear agreement with United to provide 737 heavy maintenance and our Rockford facility.
Finally, we focused on our balance sheet, and working capital management, which allowed us to generate over $100 million of cash from operating activities from continuing operations notwithstanding the investments that we've made to support new business growth we.
And we demonstrated that we can generate cash even in a down market and as a result, we are now well under 1 times levered and exceptionally well positioned to fund our growth going forward.
There are very few companies and commercial aviation that are emerging from the pandemic with a debt level that is actually lower than when they entered.
With that I'll turn it over to our CFO, Sean Gillen to discuss the results in more detail.
Thanks, John and our sales and the quarter of $437.6 million were up 5% or $21.1 million year over year sales and our aviation services segment were up 6.5% driven by continued strong performance and government as well as the recovery and commercial sales.
Sales and our Expeditionary services segment were down slightly reflecting the divestiture of our composites business.
Gross profit margin and the quarter was 16, 4% versus 8.7% and the prior year quarter and adjusted gross profit margin was 16, 5% versus 13, 6% and the prior year quarter.
Aviation services gross profit increased $32.9 million and Expeditionary services gross profit increased $2.5 million.
Gross profit margin and our commercial activities was 13, 4%. This reflects the relative strength and MRO, where we've been able to drive margin improvement through the efficiency actions we've taken.
As the commercial market continues to recover we would expect higher overall commercial gross margins.
Gross profit margin and our government activities was 19, 7%, which was driven by continued strong performance as well as certain events that occurred during the quarter.
The adjustments and the quarter include $2.1 million related to the closure of our Goldsborough facility, which had supported our mobility business within Expeditionary services.
We have completed our consolidation of those operations into mobility, Cadillac, Michigan facility and the adjustment reflects our current estimate of sale proceeds from the building.
Looking forward subsequent to the end of Q4, 1 of our commercial programs contracts was terminated.
And as a result, we expect to recognize impairment charges of between 5 and $10 million and the first quarter of fiscal 'twenty to.
And this contract had been underperforming for us in recent quarters and with this termination our restructuring actions and commercial programs are largely complete.
As John described we have taken steps over the last year to rationalize certain underperforming operations, including the divestiture of our composites business the closure of our Duluth heavy maintenance facility and the exit or restructuring of certain contracts.
These activities along with the terminated contracts I. Just described collectively contributed approximately $140 million of annualized pre COVID-19 sales, which will not return as commercial markets recover. However, the absence of these operations is now part of what's driving our increase and increasing profitability.
SG&A expenses and the quarter were $48.8 million.
And on an adjusted basis SG&A was $46.7 million up only <unk> 2 million from the prior year quarter. Despite the increase in sales.
As a reminder, SG&A and the prior year quarter already reflected our cost reduction actions.
For fiscal year 'twenty, 2 we would expect a modest increase in SG&A compared to FY 'twenty, 1 as we invest and certain initiatives such as digital that will drive improved performance in future years.
We continue to focus on driving SG&A as a percentage of sales to 10% or lower as our topline recovers.
And as John indicated we generated cash flow from our operating activities from continuing operations of $23.5 million as we continued to reduce our inventory balance.
In addition, we reduced our accounts receivable financing program by $9.8 million and the quarter from $48.4 million to $38.6 million.
As a result, our balance sheet remains exceptionally strong with net debt of $83.4 million versus $197.3 million at the end of last year.
And our net leverage as of year and was only <unk> 7 times.
Thank you for your attention and I'll now turn the call back over to John.
Great. Thanks, Sean.
Forward, we are optimistic that the significant recent increase in U S. Domestic leader flying as both enduring and a leading indicator of returned to business and international travel we've seen a nice recovery and heavy maintenance and expect that performance to continue on that note. While we are aware of the tight labor market. We believe that the labor related programs that we have established to recruit.
<unk> train and retain skilled technicians will continue to serve us well, particularly when those programs are coupled with our ongoing investment and innovation to drive efficiency and differentiation and side of our hangers.
Also although the commercial parts supply business has lagged behind the recovery. We have recently seen some early and modest signs of a rebound and that market as well both in our U S M and new parts activities.
And the government side, which has been very strong for us we do expect a moderation and the pace of growth is buying under previous administration normalizes and some of our programs come to a natural completion such as the C 40 aircraft procurement program for the Marine Corp.
But the valuable past performance that we have continued to build and the cost reduction actions that we've taken and put us in a strong position to continue to take market share and our government pipeline remains strong.
The path and pace of the commercial air travel recovery continued to remain uncertain, which is underscored by the emergence of the Delta variant as such we are not issuing full year guidance. However, and the immediate term we expect to see performance in Q1 that are similar to or modestly better than Q4 as you know.
1 is typically our slowest quarter, whereas Q4 is typically our strongest quarter and so normally you would see a decline from Q4 to Q1. However, this year's expectation of similar performance reflects our belief that our commercial markets will continue their recovery.
Over the medium and longer term, we are exceptionally well positioned we are stronger today than where we were when we entered the pandemic.
And we are excited to leverage our efficiency gains and optimized portfolio and strong balance sheet to continue to drive growth and margin expansion going forward and with that.
I'll turn it over to the operator for questions.
Thank you at this time. This morning now open 2 quick questions. If you would like to ask a question you May press star 1 on your telephone keypad again Thats Star 1 on your telephone Keypad will force participants second to compile the Q&A roster.
Your first question comes from the line of Robert.
Your line is open.
Hi, Good afternoon, John and Sean Hey.
Hey, Rob.
Hey, there I wanted to see if we could expand a little on a couple of things you just talked about first just looking back at Q4 and.
And perhaps talking separately about MRO and parts, how that trended throughout the quarter and then into the first quarter.
Sure.
<unk> was relatively stable throughout the quarter.
And that continues to be the case as we go into the first quarter, which and I think we commented on this and the last earnings call and Thats a bit unusual usually you see a decline of activity and MRO.
Aircraft return to the Sky for summer flying and this case.
We are seeing a more steady performance there.
And <unk> businesses did continue to improve slightly throughout Q4, and we have seen a bit of improvement most notably on the parts trading side just at the very beginning of the courtesy of the current quarter.
And John is there anything obscure in the numbers, where we're maybe seeing strength from cargo.
And maybe obscuring some.
Deeper weakness and passenger.
No no. The cargo business has been has been again relatively stable throughout the entire pandemic and maybe you saw a bit of growth early on as we turned our attention to that market.
But I would say for the last several quarters now it's been relatively stable.
I think what Youre seeing is obviously air travel is pacing ahead here in the U S and so youre seeing some of our larger customers burn through inventory that they've had on the shelf as opposed to buying.
From suppliers and we.
We expect that to come through and and and.
To see more activity and the used parts and new parts business and the.
Coming quarters as they burn through that inventory, but then the rest of the world and our parts business is our most international activity you've got markets with 1 exception, China I'll come back to that and second you've got markets that.
Or just behind in terms of overall flying activity and that's certainly impacting the pace of the recovery and the parts business as well John Hey on the other hand as you know there are domestic flying has been.
You know as recovered largely and has been that way for several months and we actually had a a record year and the China market.
Yes, you sort of.
And <unk> pretty well and to what I wanted to ask you next which is 2 <unk>.
Look beyond the near term and think about the recovery with regard to the different pieces of aviation services largely overhaul and then parts when.
When you think about the recovery to pre COVID-19 levels.
What are the how do you frame it when you look at MRO, and then separately and parts what needs to happen.
For you to get to and aviation services number.
And in the mid 5 hundred's.
<unk> 500 billion.
And I'm sorry, yes.
Yes, sure exactly so and the MRO business.
And being much more disciplined about the work that we take on post pandemic and what we had before we're really matching.
The volume of work that we do.
To accept if you will.
With the availability of skilled labor and pre pandemic, we had a very heavy reliance on contract labor.
And to produce more labor hours, but that was at a much less profitable level than what we were able to achieve today.
And so.
Based on the current footprint.
And labor capacity.
It's possible that will be a bit smaller and the heavy maintenance business.
But a much more profitable business that we were pre pandemic, having said that we continue to look at our footprint in North America and look at ways to potentially.
Better align that footprint with labor availability.
And.
Based on where we see that.
Most of that is the most supply of labor.
And what we have today, so that's something we're continuing to monitor.
On the on the parts side of the business and the U S and market, we see the potential for that to actually even exceed pre COVID-19 levels based on early indications that we've talked about this and in prior quarters based on indications from the customer base that there would likely be and increased acceptance of used material and the aftermarket.
And we need to make sure we have material to supply.
But we see the potential for even greater growth out of that business over the next couple of years and then on the new parts business. We remain very very bullish on that business, we've announced a number of new distribution agreements over the last couple of years, there are more and the pipeline.
<unk>.
And plan to announce and that business as we add more parks both on the government side as well as the commercial side, we definitely see that business growing beyond pandemic levels, and finally and commercial programs.
That's a business that we've done a lot of work to restructure its and a much better place than it was pre pandemic. It is smaller than it was pre pandemic, but we still intend to be a participant at that market.
But just more disciplined about the contracts that we go after.
And then just to finish this up is there a way to gauge your utilization and MRO in terms of your hangar capacity, where are you relative to the capacity that you have that's part 1 of the question part 2 of the question is we've heard anecdotally that some capacity globally has gone away during COVID-19.
And there could be a shortage of <unk>.
Heavy maintenance.
Capacity. So those are the 2 questions are your current utilization and whether theres a shortage and does that help you from a market share perspective at some point.
Sure sure in terms of capacity measured as looking at our footprint, we still have a lot of capacity left but again, we're really measuring capacity on our ability and our ability to attract and full time.
And skilled labor.
We are using contract labor.
But we don't want to rely on that as heavily as we did pre COVID-19. So based upon the labor capacity, where we are.
Pretty close to full at this point and having said that as I mentioned, we're looking at potential opportunities to realign our footprint, but where with where we see available labor, which would expand our capacity down the road.
And then and.
In terms of a shortage overall theres definitely an elevated amount of maintenance activity out there right now.
Theres a lot of deferred maintenance that had not been done there is and I think thats globally, and certainly seeing that here in North America, and I think youll see that elsewhere.
And the aircraft come back to the skies. So I agree with the comment that there is a shortage I think a lot of thats driven by return to service work, which obviously is a moment in time.
But.
Our goal is just to remain very disciplined as I mentioned and the beginning about the work that we take on because we want to hold onto these protection production efficiency gains that we've achieved and the last couple of quarters.
Okay. Thanks for the help John.
Thanks, Rob.
Your next question comes from Scott.
Sure.
Please go ahead.
Hey, good afternoon. This is Pete Austral and on for Mike.
Just wanted to get a little more color on your near term margin outlook are there any incremental operational efficiencies that you are still planning to implement that could help give you even more margin leverage and on the other hand are there any specific pressure points, you're experiencing in terms of cost inflation as you start fiscal 'twenty 2.
And so we've done a lot as we've mentioned in terms of structural changes to improve the margin.
Those are largely done and Sean mentioned this most recent contract that was terminated that.
And will contribute to that so a lot of that has been done the majority of the margin improvement that we expect to see in the medium term will come as the revenue recovers and are more profitable parts activities. So I would say the lion's share will come from that over the longer term.
And I should say medium to longer term, we would expect to see additional margin improvement coming from certain of our digital initiatives, we are making investments and that area that will start to come through in the coming quarters.
In terms of you'll see investments that we make but long term that should add efficiency, particularly inside our hangar operations.
Okay. Thanks, and then just wanted to ask on your Expeditionary business, just given the relatively small size of the business and.
Lower margins versus the company average.
Would you be open to considering strategic alternatives for that business.
That's not something we typically discuss publicly but we articulated several years ago our strategy is to.
B E.
Aviation services company and as we look at the portfolio anything that doesn't necessarily align with that strategy long term certainly we continue to evaluate.
Okay. Thank you very much.
Alright, thank you.
Thank you. Your next question comes from the line of Joseph de Nardi. Your line is open. Please go ahead.
Hi, Thanks, good afternoon.
John and Sean can you can you give us what commercial margins I guess adjusted commercial margins were in the quarter.
Yes, we don't break out the margins on an adjusted basis.
But you can kind of take a look at the adjustment and can allocate some of that but it is relatively close.
To the margin that I.
David in terms of GAAP.
Okay. Okay.
And then John just on the on the parts side of the business can you talk about whether youre seeing any difference there kind of geographically our U S Airlines kind of behaving differently from an inventory management standpoint, and how much longer do you foresee kind of inventories.
Being able to be burned down before they have to GAAP.
Come back to the market yes.
Yes, definitely the U S airlines outside of China, and U S. Airlines are certainly well ahead in terms of that inventory burn down and as I mentioned just in recent weeks, we've started to see some.
Noticeable pickup and activity on the parts businesses, both new and and use them and that's largely being driven by U S carriers, we expect that you'd see the same kind of curve.
Occur around the world as aircraft.
Get back and get back into service and we mentioned a couple of calls ago that we do a lot of business up in Canada. We've got 2 great facilities up there and Canada has been largely shut down.
Through this time and we were very encouraged yesterday to see the announcement come out that they've got a timeline to open the borders and Air Canada. For example, subsequently followed.
With the announcement that they're going to be putting more flight network as a result so.
Youll see that kind of thing we expect that the vaccines are deployed around the world and and.
And those are those airlines will go through the same I'm, assuming the same type of curve, where they'll burn through what they have on the shelf and then they'll turn to partners.
Purchasing from from Us Okay.
Okay. That's great and then on fortress, John You mentioned I think that that is starting to contribute could you characterize whether the contribution is at full run rate yet or how much that has left to go until it's fully up and running.
Yes.
And that's actually gone that program is going really well and fortress is a great partner. So far they are right on the money with the number of engines that are coming through to us.
So I would say the induction of engines is is right on pace.
Bookings that we are starting to see now that the engines are being processed and parts are being repaired and they're being marketed to customers. So the bookings are right on pace with our expectations, but you did not see.
Very significant shipments yet and this quarter and in Q4, you'll see a bit more in Q1 and we'd expect later this fiscal year in terms of actual shipments and the quarter, we would be at full run rate okay.
Okay. That's great and then just lastly, Sean the $140 million that you referenced does that capture the C 40, and the commercial programs headwind is that what that was.
So thats just taken a look at the call. It activities, we've either exited like closing Duluth, we're selling the composites business and then contracts that we restructured it or exited.
The revenue that those contributed pre COVID-19 was $140 million. So it's not kind of a forward looking for sea 40 or anything like that just.
Quantifying the sales of activities that we have exited over the last several quarters.
Got it Okay could you characterize what you expect from the defense business for the year. If the commercial side is a little bit too hard to call do you have more visibility on the defense side.
Yes.
We're not obviously defense you got a little bit better line of sight on but in terms of not giving guidance don't want to kind of go into specifics as John mentioned some of these contracts, maybe recompete and ultimately stay or and so to some uncertainty there and aren't going to quantify kind of the forward look for sales on that okay.
Okay. Thank you.
Thank you.
Your next question comes from the line of Ken Herbert Your line is open. Please go ahead.
Yeah, Hey, John and Sean and good afternoon.
Okay.
Hey, John as you look at and into fiscal 'twenty, 2 and you think about your parts business.
Is there any reason you would see demand.
Lower than aircraft utilization and I'm guessing as utilization continues to increase perhaps USF represent scenario, where you could see faster growth, but just a finer point just to put a finer point on it how are you viewing the pull on the parts side relative to utilization on the aircraft side as we head into fiscal 'twenty 2.
I mean, we.
And.
Thank you.
You have pent up demand there is no question out there and so we would expect to see once once.
That inventory is burned down thanks to elevated utilization that our recovery would I would say.
And kind of outpaced utilization and the early part is as you catch up if you will but then track with increased utilization once.
Once we hit steady state in terms of parts supply and consumption.
And do you think that catch up is there a quarter or 2 or could it be even longer.
We.
Thanks.
What I would say is that the U S and stuff.
And how are you going to be sooner than international because of the increase in utilization that you're seeing and the U S. It's difficult to predict right now and I go back to what I said earlier and as much as just and the last few weeks we've seen.
And some higher highs if you will and the.
Net parts activity.
So we're encouraged we're encouraged but at this point I wouldn't want to attempt to predict for.
Precisely when we would see that elevation.
Yes, Okay, and then as we look at the MRO business have you started to see get the industry pull any.
Wide body heavy work back to the United States.
Obviously, you're currently as John in Asia, and China in particular, and if we do start to see that trend is that and interesting markets. You would maybe look to capture some of that and add capacity to capture some of that or how do you think about that.
Yeah.
So off the top of my head I can't I can't think of a specific examples yet, but anecdotally absolutely. There is a lot of discussion about that.
And have had conversations with a couple of our customers and as much as to the extent that that occurs.
Would we be able to service it and it kind of all depends in terms of how we balance that versus other demand.
I think you know that we've been largely a narrow body operation and.
And North America, both in Canada, and the U S and so that's been our primary focus but to the extent that and existing customer wants to repatriate work and.
And we can make room for it and find the technical labor to support it we'd certainly be open.
Okay.
And pre Covid, you had talked about perhaps pursuing PMA on the part side as a growth opportunity is that still something you're looking at or how do you view that opportunity now.
Yes, we continue to believe that that should be a part of our portfolio and we continue to look at internal initiatives.
And as well as partnership opportunities with other PMA houses out there.
Okay, Great and then just finally on the on the government side.
And we're hearing about some pressure from the DLA and I know you've got a number of contracts on the distribution side for military and government parts are you seeing any of that pressure yet on the DLA or how does that look from fiscal 'twenty 1 to 'twenty 2 in terms of their purchasing.
Yes. Good question and we are we've definitely seen a moderation in the <unk>.
Weekly order volume out of the DLA and we attribute that to the new administration's kind of focused on spending money on the next generation platforms as opposed to the prior administrations focus on Sustainment.
And readiness.
So we do expect.
Moderated growth in that regard, having said that even though same store sales on military product lines may actually come at or a little bit of pressure.
Got a number of new distribution agreements that we've signed or have in the queue that ultimately we believe would still provide growth over time and that market as we sign up new distributor shifts.
Okay, great. Thanks, a lot and really nice job managing the business through the downturn. Thank.
Thank you Ken really appreciate that.
Your next question comes from the line of Josh Sullivan. Your line is open. Please go ahead.
Hey, good afternoon.
Hey, Josh how are you.
And doing well.
Can you just kind of outlined some of your.
Afghanistan exposure is at and opportunity is there.
Pull out on some of your support services or is it more of a headwind at this point.
It's a great question.
1 program, we have a couple of different operations that.
Our evolved and Afghanistan 1 program.
And as is actually being restructured.
The operation will change but.
The kind of financial impact to AAR.
<unk>.
It will be neutral to positive.
Based on that based on that restructuring the other significant operation we have over there and support the walk contract and at this point, it's unclear what if any impact.
The withdrawal will have to that operation.
We do.
And your point and the opportunity is exactly correct I mean, there will be a number of ways that.
And that country will be supported differently going forward and we.
We are focused on participating in that to the extent that we can.
And then just on that <unk> contract I mean globally outside of Afghanistan, or there are they're growing opportunities or is it really in Afghanistan kind of opportunity for you.
So what I would say philosophically.
A democratic administration tends to rely more on diplomacy than a Republican administration. So what's at its best years under Obama for example, prior to the Trump and.
So we believe that to the extent that the current administration looks to.
Increase.
Increase the level of diplomatic activity around the world that what could be a beneficiary of that none of that has occurred yet, but certainly it's something that's on our minds.
And then just following up on the on the PMA question do you see yourself more as a distributor of the PMA or do you think you'll be investing and engineering resources and pursuing PMA.
Your own making.
Both.
Alright. Thank.
Thank you for the time.
Great. Thank you.
Again, if you would like to ask a question you May press star 1 on your telephone keypad.
Next question comes from the line of Robert Spingarn. Your line is open. Please go ahead.
Hi, I'm back just with a couple more questions Greg.
And MRO, what does smaller but more profitable look like in the future maybe 1 way to think about this is pre COVID-19, we thought of it as about a third of aviation services.
Yes.
And 1.
Quantify that.
At this point.
And that's not something that we.
And historically broken out.
But.
We.
We tend to think of it in terms of.
Labor hour production and for competitive reasons wouldn't necessarily want to get into that but.
We would expect fewer hours, but a higher yield on those hours.
This fiscal year, and then I would also point to that.
And that's where we are today, but to the extent that we can stay true to the model of servicing the demand with full time employees as opposed to relying on contractors.
And adjust our footprint. So that we can continue to attract more full time employees and go where the skilled labor is that would allow us to expand our capacity and potentially get back to the hour production that we saw pre COVID-19.
But again on AR and AR with much better yield so thats how.
How we're thinking about it.
Okay and then.
These all of these questions are and a similar vein and looking to the future you've announced a lot of different deals.
<unk> ventures and relationships with customers during Covid, when we think about all of that business, how do we size that relative to.
I guess aviation services.
Before in other words, how do we think about the new business in terms of how additive it is yes.
And I think a lot of those.
Okay.
And that goes back to my earlier comments around the parts businesses in particular, we.
We believe that U S.
Thanks to likely increased user adoption of aftermarket material as well as programs like fortress and then on the new parts distribution business. Our the lines that we've announced over the last year and a half as those grow back to pre COVID-19 levels, we see both of those businesses.
They have the opportunity and the foundation to ultimately exceed the volume that we saw pre COVID-19 just on deals that we've already done and that's not counting on new business that we have and the pipeline.
At this point again, I would say, it's just difficult to sketch out the pace and size of that but we have a broader foundation to build from them. We did pre COVID-19 for those businesses in particular.
And is there anything we should take from the fortress or other deals about your.
Activity on the engine side as in contrast to the airframes and we think about MRO, we think about airframe, but clearly youre doing engine work, but what's the trend and their engine versus airframe and terms are.
Yes.
Airframe has always been the focus of where the primary focus of the MRO businesses and don't forget and you've got landing gear components, there as well, but our aircraft maintenance business.
Primary focus of the MRO business.
Our parts business the primary focus and the aftermarket has historically been the engine and we expect that to continue and we see the most opportunity for US there supplying engine parts not overhauling engines, but supplying engine parts in most cases, 2 shops that perform the overhauls and <unk>.
And as fortresses detail there is a tremendous amount of cost savings opportunity for customers as they look to overhaul agenda by using aftermarket engine part material as opposed to buying new from the Oems.
Okay, and then and then just on distribution.
These distribution deals that we've seen some investment and in the past.
What are you what are you expecting going forward there does any structural change to the desire to do that more opportunity post COVID-19.
To put your balance sheet to work.
Yes.
Absolutely, we see a lot of opportunity for organic investment and that market you recall a year ago, we announced the units and deal that was a meaningful investment that's tracking right, where we expected.
And there are there are other programs that we've announced since then and other things that are and the pipeline some of them require capital some of them do not.
But we are very excited about the position, we occupy and the distribution space.
Unlike a couple of our larger competitors at this point.
We've got a balance sheet that we can put to work and it's our core focus.
Right and then and my last 1 also.
Also on investment and maybe Sean you have this is what do you expect or how much do you expect to invest and digitization in fiscal 'twenty 2.
Yes, I think there'll be some modest investment and some of that will be and SG&A as I mentioned to see a bit of and increase there and then in terms of capital Capex, Obviously last year was a lean year for Capex.
And so youll see some of that digital investment come through Capex, which will be higher than this past year, a little bit more in line with historical years before that in terms of total capex.
Okay. Thank you both.
Thanks Robert.
Your next question comes from the line of Ken Herbert Your line is open.
Please go ahead.
Yes, hi, Thanks, Sean I, just wanted to follow up on that.
Generally it really strong cash and fiscal 'twenty, 1 and it sounds like Capex heads up and 22 can you walk through a couple of sort of accumulating pieces as we think about free cash flow and 22, and maybe if you're comfortable how we should start to think about sort of a framework around cash conversion or where you think the business should be on a more normal basis.
Yes, I think we've made a lot of improvements in terms of the cost of the company, which shows up and our cash flow efficiency and working capital management as you think about what occurred in FY 'twenty, 1 and tried it and <unk>.
<unk> to FY 'twenty, 2 obviously inventory was a significant provider of cash in the fiscal year.
As we focused on that and managed our position there I don't think Youll see the same performance in FY 'twenty, 1 because as John mentioned there'll be opportunities both on new materials as well as use material, which will show up and inventory largely to put capital to work.
But we kind of havent sketched out a specific conversion target and we'll continue to focus on managing working capital and driving free cash flow, but with a little bit more of an eye towards putting money to work on new investments.
Okay. That's helpful. Thank you.
Okay.
Okay, and then if you would like to ask a question you May press star 1 on your telephone keypad.
There are no further questions.
And Chris Please go ahead.
Great well. Thank you very much we really appreciate the time and the interest and we look forward to being back here, let's talk about our first quarter results. Thank you.
This concludes today's conference call. Thank you all for joining you may now disconnect.
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