Q1 2022 AAR Corp Earnings Call
Okay.
Good afternoon, ladies and gentlemen, and welcome to Aar's fiscal 2022 first 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 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. These risks and uncertainties are discussed in the company's earnings release and the risk factors section of the company's Form 10-K for the fiscal year ended May 31, 2021 and.
In providing forward looking statements. The company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events.
Certain non-GAAP financial information will be discussed on the call today, a reconciliation of these non-GAAP measures to the most comparable GAAP measures is set forth in the company's earnings release at this time I would like to turn the call over to AAR as President and CEO John Holmes.
Great. Thank you very much and good afternoon, everyone. I appreciate you joining us today to discuss our first quarter fiscal.
2020 to resolve our positive momentum continued with another quarter of solid results. Despite the continuing impact of the COVID-19 pandemic.
Impaired to the prior year period sales were up 14% from $401 million of $860.0 million and adjusted diluted earnings per share from continuing.
Full year were up 206% from 17 cents per share to <unk> 52 per share our sales to commercial customers increased 52% and our sales to government and defense customers decreased 17%.
We are particularly pleased that our sequential growth from Q4 to Q1 was 4% notwithstanding.
<unk> that our first quarter typically declines from our fourth quarter as a result of seasonality in our business.
Sequential growth in our commercial activities was 17%. This improvement was driven by our parts businesses, which is an encouraging indicator of returning demand. The strong performance in the quarter was also due to the robust demand for our airframe.
The <unk> services.
Notably the significant majority of our MRO volume has been on standard maintenance work as opposed to catch up work.
Our operating margin was five 5% for the quarter on an adjusted basis up from two 5% last year and five 2% in the fourth quarter for contact.
Our margin this quarter was actually higher than two years ago prior to the pandemic, even though our revenue was down $86 million or 16%.
This performance demonstrates the operating leverage that we've created over the last 18 months by optimizing our MRO operations exiting underperforming underperforming activities.
<unk> and reducing indirect and overhead costs.
Turning to cash it was another strong quarter as we generated $18 million from operating activities from continuing operations. We also continued to reduce the usage of our accounts receivable financing program, excluding the impact of that AAR program, our cash flow from operating activities from continuing operation.
Operations was $26 million.
Subsequent to the end of the quarter, we announced several new business wins first we announced an exclusive agreement with Ocwen, a trans time company to distribute engine actuation and other commercial aviation products. This award reflects the power of our independent distribution offerings.
That's a component Oems as well as the strength of our balance sheet SEC.
We announced the contract with the department of energy for the conversion and delivery of the 737.700 aircraft modified to allow the Dod quickly transition between passenger and cargo loads.
Like our prior C 40 aircraft delivery contracts with the U S Marine Corps.
This contract demonstrates the significant cost savings available to government customers.
Procuring in the aftermarket.
Finally, we announced an extension of our component support program a volatile are growing low cost Spanish carrier, which reflects the market's continued demand for this offering and our ability to drive lower.
Cost with superior operating performance.
Before turning it over to Sean I would like to comment on the critical role that AAR played in the U S withdrawal from Afghanistan we.
We had over 150 people station in country, primarily in support of our Wass program over a 36 hour period, our wass team transported approximately two.
Operating in the U S embassy personnel to Cobble International airport to support their evacuation from the country.
All of our employees subsequently departed the country's safely as well and I am exceptionally proud of our team's support of state department personnel under very difficult circumstances.
With that I'll turn it over to our CFO, Sean Gillen to discuss.
The quarter in more detail.
Thanks, John our sales in the quarter of $456.0 million were up 14% or $57.0 million year over year say.
Sales in our aviation services segment were up 19, 8% driven by recovery in our commercial markets.
Sales in our Expeditionary services segment were down <unk>.
2000, 7 million, reflecting the divestiture of our composites business and strong performance of the U S Air Force pallet contract in the prior year quarter.
Gross profit margin in the quarter was 14, 2% versus 12, 1% in the prior year quarter and adjusted gross profit margin was 16, 1% versus 13.
Percent in the prior year quarter.
This significant improvement reflects the cost takeout and efficiency initiatives, we have implemented.
And as the commercial market recovers, we would expect to continue to generate higher gross margins given the fixed nature of some of our cost of sales and the higher margin nature of our parts business, which is not yet participated in the market recovery.
To the same degree as our maintenance business.
As we indicated during last quarter's call one of our commercial programs contracts was terminated during the quarter, we recognized $10 million of charges, primarily related to this termination and an asset impairment.
SG&A expenses in the quarter were $52.0 million or 10, 8% of sale.
Sales, excluding severance of about $1 million. This would've been closer to 10, 6% of sales. This was down from 11, 3% in the year ago quarter and 11, 2% in Q4.
As a reminder, last year's results had some temporary cost savings due to salary and benefit reductions that were in place through Q2 of last year.
Net.
Net interest expense for the quarter was <unk> 7 million compared to $7.0 million last year driven by lower borrowings.
Average diluted share count for the quarter was $42.0 million versus $35 million for the prior year quarter.
With respect to Afghanistan as we discussed on last quarter's call. We had in country activity on two programs are.
Our Wass program supporting the state Department, and our SEC 130 program supporting for Afghan Air Force aircraft.
In conjunction with the state Department exit from Afghanistan, We are winding down related activities and expect that to be completed later this quarter.
The C 130 program is currently continuing with support of two of the four aircraft based in the UAE.
UAE.
In total our FY 'twenty, one sales in Afghanistan were $67 million the margins on these activities were consistent with the overall Wass program, which we have described in the past as being high single digit operating margin.
As John indicated we generated cash flow from our operating activities from continuing operations of.
<unk> $22.0 million as we continued to reduce our <unk> and inventory balances.
In addition, we reduced our accounts receivable financing program by $12.0 million in the quarter, our balance sheet remains exceptionally strong with net debt of $82.0 million and net leverage of only <unk> six times. Thank you for your attention and I will now turn.
Back over to John.
Great. Thank you Shaun.
Looking forward, we expect the demand for our MRO activities will remain strong as airlines continue to focus both on readiness to support the recovery in air travel and on preserving a healthy maintenance supply chain.
With respect to parts supply, while we saw increasing levels of activity during.
Call back quarter, we expect stable performance in the near term as a result of the uncertainty created by the Delta area.
On the government side, the exit from Afghanistan, as well as the programs nearing natural completion points will have a near term impact on our business. However, our department of energy contract as an offsetting award.
During that demonstrates the fundamental value proposition of our commercial best practices business model.
In addition, we continue to build a solid past performance history.
As such we believe that over time, we remain in an excellent position to grow our government business through additional program wins and expansions of our current positions.
Based on these.
<unk> dynamics, we currently expect.
Overall Q2 performance to be similar to Q1, while there remains uncertainty over the timing of the recovery. We are confident that a recovery will occur and we believe we are exceptionally well positioned we've emerged from the crisis with an even stronger balance sheet, our government and commercial pipelines are full.
Near term the operating leverage we have created positions us to continue to drive further margin expansion with that I'll turn it over to the operator for questions.
Thank you speakers participants we will now begin the question and answer session to ask a question over the phone you May press the star key followed by the number one.
Telephone keypad to withdraw your request you May press the pound key.
Again, Thats star one to ask a question or the pound key to withdraw your request.
Speakers first question is from the line of Marc Michael Charm.
On your tier two securities. Your line is now open.
Hey, good evening guys. Thanks for taking the questions here and nice results as well.
Maybe John just let the.
The last comments you just made there <unk> looking similar to <unk> are you talking both top and bottom line or is that.
Im only just the.
The revenue side you were referencing.
I think at this point we're thinking.
Up and down but I would highlight that again, we remain in an uncertain environment, but when we when we say similar we mean, we mean top down.
Okay, Okay and is that do you think I mean.
More just trying to get a sense and maybe I'll feather. This thing, but I mean, you had really strong I guess the implied sequential commercial growth in aviation services look really strong I mean was that from some of your additional maybe international customers and maybe I'm thinking air Canada, specifically coming online.
And as some of these other markets open up that does that continue to grow and are we just looking at the top line kind of headwind all stemming from the Wausau contract.
I think typically.
Yes. So so it was largely the demand we had a great quarter in the commercial business.
Across the board.
The majority of it was really driven by the trade.
Trading business, which is still considerably.
Considerably far off.
Pre pandemic levels, but they did have a nice sequential improvement.
What we are seeing is that while we had kind of increasing levels of activity throughout the quarter.
The crop seen more stability in the pace of that recovery moderate in the last few weeks.
And we attribute that to the pullback in the.
The bookings that you've seen from our commercial customers.
Your comments on Canada are right on we're really happy that the.
Canada has opened up in that.
We have to move their notably Air Canada are seeing more activity that was not considerable.
Contributor to this quarter, but we do expect it to contribute to the results going forward.
Okay got it got it.
On the gross margin I know you obviously had on the adjusted.
Our <unk> margin good.
Good year over year growth, but sequentially.
It dipped down a bit and you just said parts was was actually strengthening a little bit of recovering a little bit what else went into the gross margin sequentially declining given the.
<unk> strong topline was it just more MRO general mix or anything any more color you can add there.
Yeah, Hey, it's Sean it was a little mixed on the government side that was down a touch sequentially as we've talked on our Q4 call. There is a few events in Q4 that drove outsized profitability.
<unk> signed some government activity. So you saw a little bit of a decrease on that which is what drove the sequential decrease from 16, 5% to 16, one but still feel very good about the overall profitability.
And as we've talked about is parts continues to grow that will be accretive to the margin.
Got it.
<unk> just on the parts.
I'll take a stab here I'm not sure. If you guys don't give much color, but any any thoughts or anything you could provide on how the.
Relationship with fortress is trending and sort of expectations there.
Yes.
Yes.
The relationship is going very well that program is performing.
Exactly how we expected fortresses a great partner in <unk>.
On everything they said they were going to do.
That program at this point is as a full contributor I would say is that basically at full run rate.
In the quarter and we expect those levels to be consistent throughout the rest of the year.
Got it helpful.
Alright, I'll jump back in the queue. Thanks, guys.
Thanks.
Okay.
Next.
<unk> is from the line of Ken Herbert from RBC. Your line is now open.
Hey, John Hey, Sean how are you.
Hey, Greg Ken How're you doing.
Pretty good.
John I wanted.
To first see if I could ask you about retirements and has your view changed on when we might see or start to see a more meaningful uptick in retirements and subsequently sort of U S. M availability or what are you. What are you currently seeing in that marketplace.
We have seen board.
Assets become available to us in the last in the last few weeks.
And there are some.
Again for competitive reasons, I don't want to get into too much detail, but we have seen more things come available that are interesting to us I would not characterize that as you know.
The two anecdotal and too soon to call it any sort.
That would suggest a meaningful uptick in our retirement flash or teardowns.
But.
Anecdotally, we have seen a few more come out recently.
The <unk>.
The activity that we saw this past quarter.
Was largely due to material in stock.
Okay. Okay. That's helpful.
And as you as you talk about your MRO business. It sounds like it's seeing some nice uptick is that all volume or are you starting to see some some better pricing reflected in labor rates in that business.
The pricing that we've seen has actually been consistent over the last few quarters we've worked.
<unk> over the last few years to get.
Our customer base down two eight.
A more focused long term contracted customers. So we're operating under long term contracts.
All of that business. So the pricing has been relatively stable.
We have been able to do and this was by design based on the changes.
<unk> made during the pandemic.
Really improve our efficiency inside the hangers and by optimizing our footprint and aligning our our hangar space with where we see the most labor availability and that full time labor availability as opposed to a contract labor.
We've been able to.
Achieve superior performance inside the hangers.
Okay, that's great and just bouncing around I know you had a program of contracts that you exited.
In the quarter can you just comment on sort of incremental risk you see in what's left of your programs business and how we should think about any of that risk moving forward.
But we had good question, we feel good about the remaining.
Remaining portfolio that was something that happened right after the.
The end of the fourth quarter.
We characterize that when we announced the end of year results and so in terms of anything new happening in this quarter.
And anything but.
That program contract that was situational.
And I.
I would say kind of a one off and we feel good about the remaining the remaining portfolio and very excited that we extended with volatile they've been a long term customer of that airline is a great success story and the volume of work.
There was we've done with them has grown as they've grown and we're excited to be on that contract for another few years.
Great well, thank you very much.
Thanks, Kent.
As a reminder, its star one to ask a question.
Florida power <unk> to withdraw your request.
Okay.
Thank you participants I'll now turn the call back over to management for final.
All remarks.
Listen our we really appreciate I appreciate everyone's interest and support and look forward back to look forward to being back here in 90 days to talk about our second quarter. Thank you.
And that concludes today's.
Conference. Thank you all for joining you may now disconnect.
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