Q4 2022 AAR Corp Earnings Call

July 21, 2022

Good day, and thank you for standing by and welcome to the AAR Corp fourth quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

Speaker 2: Good day and thank you for standing by. Welcome to the AAR fourth quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to AAR. Please go ahead.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to AAR. Please go ahead.

Thank you good morning, ladies and gentlemen, and welcome to Aar's fiscal 2022 fourth quarter earnings call. We're joined today by John Holmes, President and Chief Executive Officer, and Sean Gillen, Chief Financial Officer.

Speaker 3: Thank you. Good morning, ladies and gentlemen. And welcome to AAR's fiscal 2022-20 quarter earnings call. We're joined today by John Holmes, President and Chief Executive Officer, and Sean Gillens, 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 90 95. 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.

Speaker 3: Before we begin, I would like to remind you that the comments made during the call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results that 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 factor sections of the company's Form 10-K for the fiscal year ended May 31, 2021 and Form 10-Q for the fiscal quarter ended February 28, 2022.

Please and the risk factors sections of the company's Form 10-K for the fiscal year ended May 31, 2021, and Form 10-Q for the fiscal quarter ended February 28, 2022, and providing the forward looking statements. The company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events.

Speaker 3: In providing the forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or un-induced sped-up events.

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.

Speaker 3: A certain non-GAAP financial information will be discussed on the call today. A reconciliation of these non-GAAP measures for the most comparable GAAP measures is set forth in the company's earnings release.

At this time I'd like to turn the call over to <unk>, President and CEO John Holmes.

Speaker 3: At this time, I'd like to turn the call over to AAR's President and CEO , John Holmes.

Thank you and good morning, everyone. I appreciate you joining us today to discuss our fourth quarter and full year fiscal 2022 results.

Speaker 3: Thank you and good morning everyone. I appreciate you joining us today to discuss our 4th quarter and 4 year fiscal 2022 results.

Before I comment on the results I would like to take a moment to reflect on the last fiscal year, we entered the year with optimism that the increasing demand for domestic leisure travel. We saw an early summer last year would be a leading indicator for business international travel. Shortly thereafter, the delta omicron various emerged in those markets did not rebound at nearly the same rate.

Speaker 4: Before I comment on the results, I would like to take a moment to reflect on the last fiscal year. We entered the year with optimism that the increasing demand for domestic leisure travel we saw in early summer last year would be a leading indicator for business and international travel. Shortly thereafter, the Delta and Omicron variants emerged and those markets did not rebound at nearly the same rate. In addition, the U.S. withdrawal from Afghanistan, as well as the natural conclusion of certain of other of our government programs, created headwinds in our government business.

In addition, U S withdrawal from Afghanistan, as well as the natural conclusion of certain of other of our government programs created headwinds in our government business, which had been an important source of strength during the pandemic. Finally in the macro environment labor has been in short supply inflation has been running high and there is uncertainty about economic growth.

Speaker 4: which had been an important source of strength during the pandemic. Finally, in the macro environment, labor has been in short supply, inflation has been running high, and there is uncertainty about economic growth.

In light of this backdrop I'm incredibly proud of the results that we delivered this year. It was not inevitable that AAR would be able to navigate the pandemic and the way that we have and that's a credit to our team for finding a way and to our customers for recognizing the value that we deliver and I want to thank them both.

Turning to the results for the full year sales increased 10% from $1 six 5 billion to $1 8 billion and $1 8 billion and adjusted diluted earnings per share from continuing operations increased 82% from $1 31 per share to $2 38 per share.

Speaker 4: Turning to the results for the full year, sales increased 10% from $1.65 billion to $1.8 billion and adjusted diluted earnings per share from continuing operations increased 82% from $1.31 per share to $2.38 per share. We were able to more than offset a 13% decline in sales to the government customers with a 34% increase in sales to commercial customers. For more information, visit www.fema.gov

We are able to more than offset a 13% decline in sales to the government customers for the 34% increase in sales to commercial customers.

More importantly, we were able to continue to drive efficiency improvement and cost discipline to deliver significant earnings growth.

Speaker 4: Even more importantly, we were able to continue to drive efficiency improvements and cost discipline to deliver significant earnings growth.

For the quarter sales were up 9% from 438 million to $476 million and adjusted diluted earnings per share from continuing operations were up 53% from <unk> 47 per share to <unk> 72 per share our sales to commercial customers increased 28% and our sales to convert to government and defense customers decreased 13.

Speaker 4: For the quarter, sales were up 9% from $438 million to $476 million, and adjusted delivered earnings per share from continuing operations were up 53% from $0.47 per share to $0.72 per share. Our sales to commercial customers increased 28%, and our sales to government and defense customers increased 13%.

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Sequentially, our total sales growth was 5% and our adjusted EPS growth of 14%.

Speaker 4: So, eventually, our total sales growth was 5% and our adjusted EPS growth was 14%.

Our operating margin was 7% for the quarter on an adjusted basis for five 2% last year and six 7% in the third quarter. We continued to see strong performance in our MRO operations as our hangers remained nearly full and we continue to benefit from the efficiency initiatives that we implemented across the company during the pandemic and our <unk>.

Speaker 4: Our operating margin was 7% for the quarter on an adjusted basis, and for 5.2% last year, and 6.7% in the third quarter. We continue to see strong performance in our MRO operations as our hangers remain nearly full, and we continue to benefit from the efficiency initiatives that we implemented across the company during the pandemic.

<unk> activities, we saw further recovery in the quarter, but demand remains inconsistent and the availability of used serviceable material to support our trading operations remains in short supply for certain platforms.

Speaker 4: In our parts activities, we saw further recovery in the quarter, but the man remains inconsistent and the availability of used serviceable material to support our training operations remains in short supply for certain platforms.

Turning to our government business, while we saw a decrease in revenue. It is important to note that despite this decline we were able to expand margins during the quarter.

Speaker 4: Turning to our government business, while we saw a decrease in revenue, it is important to know that despite this decline, we were able to expand Mars and stirring the quarter.

Just taking a step back I would like to highlight that in this quarter, we delivered adjusted operating margin and EPS that exceeded pre COVID-19 levels. Despite our sales being down 15% from their pre Covid Hi. This was the goal we established early in the pandemic and are proud of the work we have done to deliver against that commitment.

Speaker 4: To taking a step back, I would like to highlight that in this quarter, we delivered adjusted operating margin and EPS that exceeded pre-COVID levels despite our sales being down 15% from their pre-COVID high. This was a goal we established early in the pandemic and I'm proud of the work we have done with the liver against that commitment.

Regarding cash flow. It was another strong quarter as we generated $42 million from operating activities from continuing operations.

Speaker 4: Regarding cash flow with another strong quarter is regenerated $40.2 million from operating activities from continuing operations.

We also repurchased $22 million of stock in the quarter under our share repurchase program, even after the share repurchase we reduced our net debt leverage to 0.3 times EBITDA and we continue to be exceptionally well positioned to fund our growth.

Speaker 4: We also re-purchased $22 million of stock in the quarter under our share repurchase program. Even after the share repurchase, we reduced our net debt leverage to 0.3 times either done, and we continue to be exceptionally well-positioned with fund our growth.

Turning to new business during the quarter, we announced a marketing partnership with private Air technologies, which has developed a digital solution that uses proprietary algorithms to analyze and dynamically generate back to birthrates history for aircraft parts. This is a capability that we are using in our own operations and this partnership allows us to bring this emerging digital solution through our cut.

Speaker 4: Turning to new business, during the quarter we announced a marketing partnership with Provenir Technologies, which has developed a digital solution that uses proprietary algorithms to analyze and dynamically generate back-to-birth trace history for aircraft parts. This is the capability that we are using in our own operations, and this partnership allows us to bring this emerging digital solution to our customers as well.

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In addition, we announced our relationship with Arrow design Labs, which is a company that has developed an aerodynamic drag reduction system kit for the 787 LNG.

Speaker 4: In addition, we announced our relationship with Arrow Design Labs, which is a company that has developed an aerodynamic drag reduction system kit for the 737 NG.

This kit has the potential reduce fuel burn by one 5% for the 737 700, which equates to over 40 tons of Cotwo duction per aircraft per month, and the benefits are expected to be even larger, but the 737800 and dash 900.

Speaker 4: This kit has the potential to reduce fuel burn by 1.5% for the 737-700, which equates to over 40 tons of CO2 reduction per aircraft per month. And the benefits are expected to be even larger for the 737-800-900. The 737-800-900.

We will be providing distribution services to the company on an exclusive basis and have also invested in the company to help fund its growth.

Speaker 4: We will be providing distribution services to the company on an exclusive basis and have also invested in the company to help fund its growth.

Finally earlier this week, we announced that we became the first non OEM to be awarded the captains of industry contract by the defense Logistics agency.

Speaker 4: Finally earlier this week, we announced that we became the first non-OEM to be awarded a capins of industry contract by the defense logistics agency.

This is a distinction that establishes a long term strategic supply chain relationship with U S Department of defense and will provide us with access to unique opportunities to support the U S and its allies.

Speaker 4: This is a distinction that establishes a long-term strategic supply chain relationship with the U.S. Department of Defense and will provide us with access to unique opportunities to support the U.S. and its allies.

With that I'll turn the call over to our CFO , Sean Gillen to results as after a more results in more detail.

Speaker 4: With that, I'll turn the call over to our CSO, Sean Gillin, to result in more results in more detail. The result is after more results in more detail.

Thanks, John our sales in the quarter of $476 $1 million were up eight 8% or $38 $5 million year over year.

Speaker 4: Thanks, John . Our sales in the quarter of 476.1 million, were up 8.8% or 38.5 million year over year. The sales in the quarter of 476.1 million, were up 8.8% or 38.5 million year over year. The sales in the quarter of 476.1 million, were up 8.8% or 38.5 million, were up 8.8% or 38.5 million, were up 8.8% or 38.5 million, were up 8.8% or 38.5 million,

Sales in our aviation services segment were up 9% driven by the recovery in our commercial business and sales in our Expeditionary services segment were up four 5%.

Speaker 4: Sales in our aviation services segment were up 9% driven by the recovery in our commercial business and sales in our expeditionary services segment were up 4.5% were up 4.5%

Overall, our commercial sales were up 28% year over year, while our government sales were down 13% driven by the wind down of our activity in Afghanistan and the natural completion of other government programs.

Speaker 4: Overall, our commercial sales were up 28% year over year, while our government sales were down 13%, driven by the wind down of our activity in Afghanistan and the natural completion of other government programs.

Sequentially, our commercial sales increased 11% and our government sales decreased 3%.

Speaker 4: Sequentially, our commercial sales increased 11% and our government sales decreased 3%. And our government sales decreased 3%.

Gross profit margin in the quarter was 18, 9% versus 16, 4% in the prior year quarter and adjusted gross profit margin was 18, 6% versus 16, 5% in the prior year quarter.

Speaker 4: Gross profit margin in the quarter was 18.9% vs. 16.4% in the prior year quarter. That adjusted gross profit margin was 18.6% vs. 16.5% in the prior year quarter.

Gross profit margin in our commercial business was 17, 7% and gross profit margin in our government business was 28%.

Speaker 4: Gross profit margin, our commercial business was 17.7%, and gross profit margin in our government business was 20.8%.

The government margin was driven by continued strong performance as well as certain contract modifications, which resulted in higher recovery on indirect cost.

Speaker 4: The government margin was driven by continued strong performance, as well as certain contract modifications, which resulted in higher recovery and indirect costs.

SG&A expenses in the quarter were $56 9 million. This figure includes increased investments in our digital initiatives as well as $2 9 million related to investigation and remediation matters and strategic project costs.

Speaker 5: SGNA expenses in the quarter were 56.9 million.

Speaker 5: This figure includes the increased investments in our digital initiatives, as well as $2.9 related to investigation and remediation matters and strategic project costs.

As a reminder, our fourth quarter has historically been our seasonally highest SG&A quarter, and we remain committed to driving SG&A down as a percentage of sales while continuing to invest in our growth.

Speaker 5: As a reminder, our fourth quarter has historically been our seasonally highest S-GNA quarter, and we remain committed to driving S-GNA down as a percentage of sales while continuing to invest in our growth.

Net interest expense for the quarter was <unk> 6 million compared to zero point $9 million last year, driven by lower borrowings. Despite the increase in interest rates.

Speaker 5: Net interest expense for the quarter was $0.6 million compared to $0.9 million last year, driven by lower borrowings despite the increase in interest rates.

As John indicated we generated cash flow from our operating activities from continuing operations of $40 2 million in.

Speaker 5: As John indicated, we generated cash flow from our operating activities from continuing operations to 40.2 million.

In addition, we funded $22 2 million of share repurchase and reduced our accounts receivable financing program by $3 million.

Speaker 5: In addition, we funded 22.2 million of share repurchased and reduced our accounts received both financing program by 3 million. Financing Program by 3 million.

Our balance sheet remains exceptionally strong with net debt of $46 5 million and net leverage is only 0.3 times <unk>.

Speaker 5: Our balance sheet remains exceptionally strong with net debt of $46.5 million and net leverage is only 0.3 times.

Consistent with the last two quarters, we expect to continue to execute on our plan to deploy the full $150 million share repurchase authorization over approximately two years from the time of announcements.

Speaker 5: Consistent with the last two quarters, we expect to continue to execute on our plan to deploy the full 150 million share repurchase authorization over approximately two years from the time of announcement.

Thank you for your attention I will now turn the call back over to John .

Great. Thank you Shawn.

Speaker 5: Thank you for your attention and we'll now turn the call back over to John .

Looking forward, while demand for domestic and European commercial travel continues to be very strong global traffic recovery in total continues to be slower and we're paying attention to the macroeconomic environment and its potential impact on the market for air travel.

Speaker 4: Great, thank you, Sean.

Speaker 4: Looking forward, while demand for domestic and European commercial travel continues to be very strong, global traffic recovery in total continues to be slower, and we are paying attention to the macroeconomic environment and its potential impact on the market for air travel.

Russ commercial parts demand should generally track the recovery in commercial flying.

With a commercial product activities the growth of our used parts sales will also be impacted by the availability of supply, which remain tight which remains tight for certain platforms. While the growth in our new part sales should continue to benefit from the new distributor shifts we have won.

Speaker 4: For us, commercial parts demand should generally track the recovery and commercial flying.

Speaker 4: When the commercial parts activities, the growth of our use parts sales will also be impacted by the availability of supply, which remains tight for certain platforms, while the growth in our new parts sales should continue to benefit from the newXrdiership we have won.

Recently and those that remain in our pipeline.

Demand for MRO remains strong and we expect the hangars to remain largely full throughout this fiscal year and our government business in the coming quarters, we expect growth to return as recent program wins ramp up and as we convert opportunities from our strong pipeline.

Speaker 4: recently and those that remain in our pipeline.

Speaker 4: Demand for MRO remains strong and we expect the hangers to remain largely full throughout this fiscal year.

Speaker 4: In our government business in the coming quarters, we expect growth to return as recent program winds ramp up and as we convert opportunities from our strong pipeline.

With respect to Q1, specifically as you know historically Q1 has been a down quarter sequentially from Q4, and we expect that to be the case. This year. We also expect to make investments in our business in the near term as we prepare for additional commercial parts demand as well as to potentially fund inorganic growth.

Speaker 4: With respect to Q1 specifically, as you know, historically Q1 has been a down quarter sequentially from Q4, and we expect that to be the case this year. We also expect to make investments in our business in the near term as we prepare for additional commercial parts demand as well as to potentially fund inorganic growth.

For full year FY 'twenty three given that the trajectory of the commercial aviation market recovery remains difficult to predict exacerbated by increasing macroeconomic uncertainty we're going to continue our recent practice of not providing formal guidance, having said that based on what we can see today, we expect sequential quarterly growth to return beginning in Q2.

Speaker 4: For full year FY23, given that the trajectory of the commercial aviation market recovery remains difficult to predict, exacerbated by increasing macroeconomic uncertainty, we are going to continue our recent practice of not providing formal guidance. Having said that, based on what we can see today, we expect sequential quarterly growth to return beginning in Q2, and we will continue to provide updates with we move through the year.

And we will continue to provide updates as we move through the year.

Over the longer term, we remain exceptionally well positioned our unique independent aviation services business model continues to resonate with both commercial and government customers or end markets are growing and we have the balance sheet strength to fund our continued expansion I am excited about all of the opportunities. We have ahead of us and the team and I remain committed to delivering value for our share.

Speaker 4: Over the longer term, we remain exceptionally well positioned. Our unique independent aviation services business model continues to resonate with both commercial and government customers, our end markets are growing, and we have the balance sheet strength to fund our continued expansion. I'm excited about all of the opportunities we have ahead of us, and the team and I remain committed to delivering value for our shareholders.

Holders.

Before we take questions I want to take a few moments to recognize our chairman David storage.

Speaker 4: Before we take questions, I want to take a few moments to recognize our Chairman, David Storch.

We announced yesterday that David has chosen to retire from the board effective in January David started at a $19 78 and served as its CEO from 1996 until 2018.

Speaker 4: We announced yesterday that David has chosen to retire from the board effective in January . David started at AR in 1978 and served as a CEO from 1996 until 2018. The board and C. Leibor helped with decisions of the formal operation. This estimate by Patrick. He has office data on these numbers, with the conditions for state notifications.???? you

During that time, he more than quadrupled the company sales, while navigating numerous peaks and valleys in the aviation industry, including both 911 and the great financial crisis, even more importantly, he established and modeled but doing it right approach, which is the culture. We continue to live by and set the foundation for the company to be the pillar of strength and opportunity that it is.

Speaker 4: During that time, he more than quadrupled the company's sales while navigating numerous peaks and valleys in the aviation industry, including both 9-11 and the great financial crisis. Even more importantly, he established and modeled the Doing It Right approach, which is the culture we continue to live by, and set the foundation for the company to be the pillar of strength and opportunity that it is today.

Today.

And I congratulate David on his retirement and thank him for his leadership counsel and friendship.

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

Speaker 4: I congratulate David on his retirement and thank him for his leadership, counsel, and friendship. And thank him for his leadership, counsel, and friendship.

Thank you as a reminder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.

Speaker 4: With that, I'll turn it over to the operator for questions.

Speaker 2: Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. Please stand by while we compile the Q&A roster.

Okay.

Our first question comes from Ken Herbert with RBC. Your line is open.

Speaker 2: Our first question comes from Ken Herbert with RBC. The line is open.

Hey, good morning, John and Sean.

Alright.

Speaker 4: Take good morning, John and Sean.

Hey, John I appreciate the commentary on sort of the full year 'twenty three outlook and I guess lack of visibility.

Speaker 5: Right then. Hey John , appreciate the commentary on sort of a full year, 23 outlook and I guess lack of visibility. But can you help at all or prevent any more granularity on the commercial business? You said MRO is largely full, so it sounds like that business is maybe flat up slightly, but what's the growth expectation specifically on the part side in fiscal 23 if you could prevent any more detail around that?

But can you help at all or provide any more granularity on the commercial business. You said MRO is largely full so it sounds like that business is maybe flat to up slightly but what's the growth expectation specifically on the parts side in fiscal 'twenty. Three if you could provide any more detail around that.

Yes, you've got it right on the on the MRO side from what we see today. The hangers are largely full and we expect continued strong demand throughout the year and heavy maintenance on.

Speaker 4: Yeah, you've got it right on the on the MRO side. From what we see today, the hangers are largely full and we expect continued strong demand throughout the year in heavy maintenance. On the parts side, the distribution business, the commercial distribution business continues to grow. And that's largely driven by the new wins that we've announced in the last 18 months as they come online. So, so we expect growth in the new business in the new parts business as a result of those wins.

On the parts side the distribution business the commercial distribution business continues to grow and that's largely driven by the new wins that we've announced in the last 18 months as they come online.

So we expect growth in the new business and the new parts business as a result of those wins.

In the used parts business, it's more of an inconsistent story, we saw quite a bit of accelerated demand.

Speaker 4: In the youth parts business, it's more of an inconsistent story. We saw quite a bit of accelerated demand through Q3 as well as through most of Q4. That demand has moderated a bit as we're in the first quarter of this year. The other factor you've got going on there is we see very strong demand in certain platforms, but as a result, there's also a lot of demand for material on that's an entire supply.

Through Q3, as well as through most of Q4.

That demand has moderated a bit as were in the first quarter of this year. The other factor you got going on there as we.

We see very strong demand in certain platforms, but as a result.

So a lot of demand for material and thats in tight supply and so.

And platforms, where we see strong and consistent demand its a little bit more challenging to find.

Speaker 4: And so, you know, certain platforms where we see strong and consistent demand, it's a little bit more challenging to find the use material to service that demand.

The used material to service that demand.

In summary.

Very good about MRO are feeling good about the continued recovery in growth and commercial parts distribution, but a bit of an uneven story and trading based on the factors I just described.

Speaker 4: So, you know, in summary, feeling very good about MRO, feeling good about the continued recovery and growth in commercial parts distribution, but a bit of an uneven story in trading based on the factors I just described.

Okay, that's helpful and you've got a <unk>.

Obviously very low leverage it sounds like from your commentary that there might be some investment opportunities youre looking at you've talked in the past about about Unattractiveness of PMA is that something you are continuing to look at and organically are there.

Speaker 5: Okay, that's helpful. And you've got a obviously very low leverage. It sounds like from your commentary that there might be some investment opportunities you're looking at. You've talked in the past about an attractiveness of PMA. Is that something you're continuing to look at? And organically, is there an expectation that there's significant opportunities to invest in either engines or airframe or other feedstock as you think about the surplus marketplace here in the near term?

Is there an expectation that there is significant opportunities to invest in either engines or airframe or other.

Feedstock as you think about the surplus marketplace here in the near term.

Yes, great.

Great questions. So.

In terms of feedstock in the trading business. That's one of our greatest strengths right now is our balance sheet capacity and our ability to move very quickly and outmaneuver the competition with packages that material become available.

Speaker 4: Yeah, great questions. So in terms of feed stock and the training business, that's one of our greatest strengths right now is our balance sheet capacity and our ability to move very quickly and outmaneuver the competition with packages of material become available. And we are in the market all day, every day around the world looking for the right material. And when we find it, we're able to close very, very quickly. So that would definitely be a source of capital deployment for us throughout the year.

And we are in the market all day everyday around the world looking for the right material and when we find that we're able to close very very quickly. So that will definitely be a source of capital deployment for us throughout the year as it relates to PMA and other initiatives specifically, we do have organic PMA efforts underway and will incur.

Speaker 4: As a relief to PMA and other initiatives specifically, we do have organic PMA efforts underway and we're encouraged by the progress there. It's early and it's slow growing, but we do have a nice team focused on organic PMA efforts. And as we've indicated in the past, we will continue to look at inorganic opportunities to bolster that effort if assets become available and we can get...

<unk> by the progress there.

It's early and it's slow growing but we do have a nice team focused on organic.

Organic PMA efforts and as we've indicated in the past.

We'll continue to look at inorganic opportunities to bolster that effort if assets become available and we can.

That.

Valuation et cetera are aligned with expectations.

Okay, that's great and if I could just one final question as I look at the investments you had some nice growth in cash from obviously 'twenty one through 'twenty two how do we think about and you've got <unk>, you've got a lot of money tied up in working capital how do we think about free cash in 'twenty three.

Speaker 5: evaluation access or through a line with expectations. Okay, that's great. And if I could just one final question as I look at them, the investments, you have some nice growth and cash from, obviously, 21 through 22. How do we think about, and you've got a lot of money tied up and working capital still, how do we think about free cash in 23 on top of just the growth and income is working capital, maybe some opportunity to unlock some cash there, or do we see limited growth off 22?

On top of just the growth in income as working capital, maybe some opportunity to unlock some cash there or do we see limited growth off of 'twenty two.

Yes.

We're really proud of the consistent cash flow that we've been able to generate and that goes along with the consistent margin improvement et cetera that we'd be able to drive in the business overall.

Speaker 4: Yeah, we're really proud of the consistent cash flow that we've been able to generate and that goes along with the consistent margin improvement et cetera that we've been able to drive in the business overall. We certainly expect to be cash flow positive again this year and our goal is to remain consistent in terms of cash flow generation. Having said that though, just go back to your prior question. If we see an opportunity to make a great purchase of hot engine material or a feedstock to serve.

Certainly expect to be cash flow positive again this year.

Our goal is to remain consistent in terms of cash flow generation.

<unk> said that though just going back to your prior question. If we see an opportunity to make a great purchase of hot engine material or feedstock to serve other parts of the trading business, we're going to deploy that cash and deploy quickly, but again, that's an advantage of the market. So while the goal.

<unk> overall is to continue to generate cash and continue to be more efficient with our working capital we want to remain flexible so that we can react to market opportunities.

Great. Thanks, John .

Thank you Kent.

Our next question comes from Josh Sullivan with benchmark Your line is open.

Speaker 2: Our next question comes from Josh Sullivan with Benchmark. The line is open.

Hey, good morning.

Hey, good morning, Josh.

<unk>.

Speaker 6: Good morning.

On that comment there the uneven story in the parts business.

Speaker 7: Hey, good morning Josh. Just, you know, on that comment there, you know, the uneven story in the parts business, you know, I think you said you said acceleration Q3Q4 than a moderation here. Is there any dichotomy you can identify between narrow body and wide body just as, you know, some of those markets come back here? Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah.

Thank you said you saw an acceleration Q3 Q4, then a moderation here is there any dichotomy you can identify between narrow body and wide body.

Some of those markets come back here.

Yes.

I'd say the uneven if theres a bit from the is more from the narrow body or wide body business and trading is largely to support the cargo market and that's been consistent throughout the pandemic and very very strong and those are the areas, where we find the tighter the tightness in the supply of material.

Speaker 4: Yeah, I'd say the unevenness is more from the narrow body. Our wide body business in trading is largely to support the cargo market and that's been consistent throughout the pandemic and very, very strong. And those are the areas where we find the tightness in the supply of material.

Yes.

And then just as far as the CFM 56 relationship with fortress how is that performing.

Speaker 7: And then just, you know, as far as the CFM 56 relationship with Fortress, how is that performing? You know, is it, are you mentioning hot section opportunities there? You see volume sticking up there going forward. You see volume sticking up there going forward.

You mentioned in the Hot section opportunities there do you see volumes picking up there going forward.

Yes, that's a great question that partnership continues to go extremely well that has been a great source of material for us to serve that.

Speaker 4: That's a great question. That partnership continues to go extremely well. That has been a great source of material for us to serve that narrow body market. And Fortress is doing a really fine job on delivering the commitments of material to us that they made at the beginning of the agreement. At this point, it's fully ramped up. And we continue to work with Fortress as they expand their business and their engine portfolio. We could see growth in that platform.

That narrow body market and fortress is doing a really fine job on delivering the commitments are material to us if they made at the beginning of the agreement.

I mean at this point, it's fully ramped up.

And we continue to work with fortress as they expand their business and their engine portfolio. We could see we could see growth in that platform, but at this point its operating at full capacity and at the level we expected.

Speaker 4: But at this point, it's operating at full capacity and at the level we expected.

And then just on the investments you've made in your labor pool throughout Covid, how much runway do you think you had before you need to reinvest or what level of traffic would you need to see where you said capacity.

Speaker 7: Just on the investments you made in your labor pool throughout COVID, how much runway do you think you have before you need to reinvest? Or what level of traffic would you need to see where you fit capacity?

On the in the MRO business.

Yes, yes.

Great investments you guys made and keeping your.

Speaker 4: Any in the MRO business?

Around how much capacity is there.

Speaker 7: Yeah, yeah, I mean, just in the, you know, the great investments you guys may then keep in your your your account around, you know, how much capacity is there.

Yes so.

Again, thanks for highlighting that we're really proud of the way we held together the team through Covid and that has served us very very well and it wasn't just holding the existing team. It was maintaining the partnerships that we form with schools over time, we continue to fund those partnerships and we continue to get the results in terms of I would say proprietary source.

Speaker 4: Yeah, so we, again, thanks for highlighting that. I mean, we're really proud of the way we held together the team through COVID, and that has served us very, very well. And it wasn't just holding the existing team, it was maintaining the partnerships that we've formed with schools over time. We continue to fund those partnerships, and we continue to get sea results in terms of, I would say, for prior to resource talent with these relationships we have with schools to support the MRO business. In certain markets.

The talent with these relationships, we have the schools to support the MRO business.

In certain markets, our capacity is limited by our ability to hire and in other markets. Our capacity is as limited by floor space in the markets, where we're limited by floor space, we are considering opportunities to expand our footprint, where we know we've got a supply of labor and we know we're going to have <unk>.

Speaker 4: Our capacity is limited by our ability to hire and at other markets our capacity is limited by four space. In the markets where we're limited by four space we are considering opportunities to expand our footprint where we know we've got supply of labor and we know we're going to have one-term customer interest. So at this point you know when we say the hangars are full we mean full both in terms of footprint as well as labor availability but as we move forward

Since our customer interests. So at this point.

When we say the hangers or full remain full both in terms of.

Footprint as well as the labor availability.

But as we move forward, we're going to again.

Focused on some targeted expansion too.

Look for ways to grow that business domestically.

Speaker 4: We're going to again, focused on some targeted expansion to look for ways to grow that business domestically.

Thank you for the time.

Alright, thank you.

Speaker 8: Take your time.

Thank you.

Speaker 9: Thank you.

Speaker 10: Thank you.

We have a follow up from Ken Herbert with RBC. Your line is open.

Speaker 2: We have a follow-up from Ken Herbert with RBC. The line is open. The line is open.

Hey, John .

What should we assume for any kind of labor rate relief you might be getting in the MRO business in fiscal 'twenty three considering.

Speaker 5: Hey, John , what should we assume for any kind of labor rate relief you might be getting in the MRO business in fiscal 23, considering the inflated labor costs?

The inflated labor costs.

Yes, our goal right now is to preserve the margin gains that we have made.

Speaker 4: Yeah, our goal right now is to preserve the margin gains that we have made. We've seen a lot of improvement in efficiency in that business over the last 18 months, and we want to hold on to that. So as we see increasing labor cost, that is driving any discussions we're having with the customer about price adjustments, but the goal there is to preserve the spot that we're in. That has been a very dynamic environment over the last three or four quarters.

We've seen a lot of improvement in efficiency in that business over the last 18 months and we want to hold on to that so as we see increasing labor cost that is driving any discussions we're having with the customer about price adjustments, but the goal there is to.

Preserve the spot that we're in.

That has been a very dynamic.

Environment over the last three or four quarters, I think we've mentioned that our customers as you've heard from them. They are seeing the exact same labor pressures, we are and so they recognize the value that we bring and the service that we provide to them and the need for us.

Speaker 4: I think we've mentioned that our customers, as you heard from them, they're seeing the exact same labor pressures we are. And so they recognize the value that we bring and the service that we provide to them and the need for us to be profitable and to be able to attract talent. So it's a challenging environment for everybody, but so far we've been very pleased with the support we've gotten from the customer and the need to change prices to address rising labor costs.

To be profitable and to be able to attract talent. So.

It's a challenging environment for everybody, but so far we've been we've been very pleased with the support we've gotten from the customer on the need to change prices to address rising labor costs.

Okay. That's helpful and in the past you've talked about the need to see a sort of more material inflection in demand for surplus material in the <unk>.

Speaker 5: Okay, that's helpful. In the past, you've talked about the need to see a sort of more material inflection in demand for surplus material in the revenues associated with the surplus parts market to really see a step change in the margin profile. It sounds like from your comments that were maybe not there, at least in the first half of fiscal 23.

Revenues associated with the surplus parts market to really see a step change in the margin profile. It sounds like from your comments that were or maybe not maybe.

Maybe not there at least in the first half of fiscal 'twenty three.

What should we be watching out for to maybe get a little better visibility on that margin step change in borrowing that how should we think about the margin progression for fiscal 'twenty three.

Speaker 5: What should we be watching out for to maybe get a little better visibility on that margin step change and barring that, how should we think about the margin progression for fiscal 23?

Sure.

So again very proud of the progress that we've made over the last seven quarters and operating margin improvement.

Speaker 4: Sure. So again, very proud of the progress that we made over the last seven quarters in operating margin improvement. And as you know, we're now well exceeding, particularly with this configuration of businesses, well exceeding the margins that we had pre-COVID. As we see the parts business recover, and you're right, we're not at that inflection point yet, where we'll see a meaningful step up from where we are. As we see that parts business recover and the overall revenue makes shift towards the parts businesses, we would see further margin expansion.

We're now well exceeding particularly with this configuration of businesses, while exceeding the margins that we had that we had pre COVID-19.

As we see the parts business recover and you're right. We're not about an inflection point, yet where we'll see a meaningful step up from where we are as we see that parts business recover and the overall revenue mix shift towards the parts businesses.

Would see further margin expansion.

At this point.

It's difficult to predict the trajectory of that as.

As you highlighted I don't think we will see that meaningful step change in the first half of the year, but as the supply chain issues or labor issues get worked out in the system and airlines can service the demand that they see in flying increases we would expect parts business to.

Speaker 4: You know, at this point, it's difficult to predict the trajectory of that. As you highlighted, I don't think we'll see that meaningful step change in the first half of the year. But as the supply chain issues or labor issues get worked out in the system, and airlines can service the demand that they see in flying increases, we would expect parts business to, you know, to pick up in the second half of the year. And to quantify that, you know, our our

To pick up in the second half of the year.

To quantify that.

R R.

Both on the trading and commercial parts distribution overall down.

Bill about 20% from where we were pre COVID-19.

Speaker 4: Both in the trading and commercial parts distribution, overall down still about 20% from where we were pre-COVID. That compares to roughly 25% from where we were in Q3. So you have seen a modest improvement there, which contributed partially to the sequential margin improvement that we saw this quarter. But given we're still 20% off of pre-COVID levels, we've got a ways to go in that business, and again, that would help margins throughout next year or this year.

That compares to roughly 25% from where we were in in Q3. So you have seen a modest improvement there, which contributed partially to the sequential margin improvement that we saw this quarter, but.

Given we still so 20% off of pre Covid levels, we've got a ways to go in that business and again that would help margins throughout next year or this year.

Great. Okay. Thanks, Sean.

Speaker 9: Great. Okay. Okay. Okay.

Our next question comes from Michael <unk> with <unk> Suisse. Your line is open.

Speaker 2: Our next question comes from Michael. Dr. Lei wheat Swiss to your line is open.

Hey, good morning, guys. Thanks for taking the questions here good results.

Hey, John just on 'twenty three.

Speaker 3: Hey, good morning guys. Thanks for taking the questions here. Good results. Hey, John , just on 23, I know you're not gonna give the guidance, but if we went back to last quarter, you talked about this inflection, more meaningful inflection in 23, should we still be thinking about that? And I guess if I look at, I mean, you just gave where we were on parts, but are we thinking that it returned?

I know youre not going to give the guidance, but if we went back to last quarter.

<unk> talked about this inflection.

More meaningful inflection in 'twenty three.

Should we still be thinking about that and I guess, if I look at I mean, you just.

Where we were on parts, but but are we thinking that a return to <unk>.

Peak commercial revenues occurs this year or.

I guess, how do you see 23 should we still think about that meaningful inflection or how should we calibrate our expectations here.

Yes, I think I think great question.

I'll go back to us.

Prior comments and as much as.

We still see the potential for that I think at this point, it's a second half discussion as opposed to a first half discussion and when we talk about getting back to pre Covid peak revenues keep in mind, we structurally took out.

Speaker 4: through a first-after discussion. And when we talk about getting back to pre-COVID peak revenues, keep in mind, we structurally took out revenue from the company, from activities that weren't profitable or were unprofitable. And so really in terms of getting back to pre-COVID levels, we're talking about parts businesses.

Revenue from the company from activities that weren't profitable or unprofitable.

And so really in terms of getting back to pre COVID-19 pre COVID-19 levels, we're talking about the parts businesses and thats that kind of 20% off that that I just described.

Hi.

Got it got it.

Speaker 4: And that's that kind of 20% off that I just described.

As we think you said more second half discussion I mean, obviously, we're seeing we're seeing the results from the airlines now and I think if we looked at outside repairs by Delta United These guys are all spending significantly.

Speaker 3: Got it, got it. What, as we think, you said more second half discussion, and I mean, obviously we're seeing the results from the airlines now, and I think if we looked at, outside repairs by Delta United, these guys are all spending significantly. What sort of the dialogue you mentioned that the hangers are gonna be full? I mean, I think we're all looking at potential, global economic slowdown. Are you seeing any, or hearing anything different from your...

What sort of the dialogue you mentioned that the hangers are going to be full I mean, I think we're all looking at potential global economic slowdown are you seeing any or hearing anything different from your customers about how they're thinking about their longer term planning for their fleets.

Certainly it doesn't seem like there is there is any potential pullback in maintenance at this point, but any kind of color you are getting from the airlines as they think about our longer term planning.

I think.

Overall, the airlines remain bullish on the return of demand and.

We believe that the current generation fleet based on what we're hearing which is the fleet that were predominantly involved that servicing is still going to be around for longer than people. Initially expected so that.

Speaker 4: face them a worth hearing, which is the fleet that we're predominantly involved in servicing, is still going to be around for longer than people initially expected. So that's both well for us. I think the challenge for the customers, our customers right now is really, as you've heard from them, it's driven by the staffing challenges that the airports themselves, pilot shortages, which have caused them to have to cancel flights in fly-less. That's really their focus. But...

That bodes well for us I think the challenge for the customers for our customers right now is as really as you've heard from them is driven by the staffing challenges at the airports themselves pilot shortages, which.

That caused them to have to cancel flights and fly less.

That's really their focus but overall demand for air travel that we're hearing from our customers still remains very very strong it's just about getting the system.

Speaker 4: Overall demand for air travel that we're here from our customers still remains very, very strong. It's just about getting the system back up fully running so that we can add so we support that demand. And so, again, while we're kind of in a bit of an uneven period here, we still feel really good about that return of the parts business and the fact that the platforms in which we operate and perform maintenance on, that they're going to be around for a long time.

Back up fully running so that we can adequately support that demand.

And so again, while we're kind of in a bit of an uneven.

<unk> here, we still feel really good about that return of the parts business and the fact that the platforms in which we operate and perform maintenance on that theyre going to be around for a long time.

Okay got it that's helpful. And then just one last one you mentioned.

You've had a press release I believe out on it that the era of design labs.

Speaker 3: Okay, got it, that's helpful. And then just one last one, you mentioned, and you've had a press release, heavily about on it, the arrow of design labs. I mean, you actually said you made some investment there. And if I go back, man, I don't know, it's maybe 15 years or so, they're kind of comparing this to Winglitz, and the opportunity that that presented, which was really significant for a lot of the aftermarket players. So,

You said you made some investment there.

And if I go back Matt I don't know, maybe 15 years or so they're kind of comparing this to help winglets and.

The opportunity that presented which was really significant for a lot of the aftermarket players. So I mean do you see the same potential in the 737 drag kit I mean, it's that and maybe if you could just elaborate on the investment you made and sort of how you guys are thinking about the model for revenues and sort of the opportunity there for.

<unk>.

Kind of retrofits, if you would.

Yes, I think you've hit it on the head I would definitely say that this is analogous to winglets.

Speaker 4: Yeah, I think you've, you've hit it on the head. I would definitely say that this is analogous. So, WINGLESS, we're excited that they announced the FTC on the death 700 and we know they're working on the same for the 8900, which obviously is a very large fleet. And given the price of fuel today, we expect that the airline community interest will be extremely strong in this solution. We were really happy to get to start this partnership, so we're trying to get a feedback from a very perpetual

We're excited that they announced the FTC on the Dash 700, and we know they are working on the same for the 8900, which obviously is a very.

Very large fleet and given the price of fuel today, we expect that the.

Airline community interest will be extremely strong.

And this solution.

We were really happy to get to start this partnership very early with ADL, we've actually been working with them for some time.

And we have.

Creased, our investment in the company over that period of time. So we're very bullish both from an investment standpoint, but also as it relates to the exclusive agreement that we've got in place to distribute the kit as they are developed and produced.

Sure.

Got it helpful. Alright, Thanks, guys I'll jump back in the queue.

Thank you Mike.

Thank you and I'm showing no other questions in the queue I would like to turn the call back to AAR for closing remarks.

Speaker 9: Thank you very.

Speaker 2: Thank you. And I'm sure no other questions in the queue. I'd like to turn the call back to AAR for closing remarks.

Great. Once again really appreciate everybody's time and interest and the support.

And we look forward to reporting on our first quarter. Thank you very much.

Speaker 4: Once again, I really appreciate everybody's time and interest and support. We look forward to reporting on our first quarter. Thank you very much.

Okay.

This concludes today's conference call. Thank you for participating you may now disconnect.

Speaker 2: This concludes today's conference call. Thank you for participating. You may now disconnect.

We will begin.

To raise Johan during Q&A, you can dial stolen.

Speaker 1: Once we'll begin shortly. Raise your hand during Q&A.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Okay.

Sure.

Yes.

Okay.

Yes.

Speaker 1: I have.

Speaker 2: Good day and thank you for standing by. Welcome to the AAR Corp. 4th quarter, 2022 earnings conference call. At this time, I'll participate in a listen only mode. After the speaker's presentation, there'll be a question and an after session. To ask a question during the session, you'll need to press star one on your telephone.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to a a R. Please go ahead.

Speaker 2: Please be advised that today's conference is being recorded. I would now like to hand the conference over to AAR. Please go ahead.

Speaker 3: Thank you. Good morning, ladies and gentlemen, and welcome to AAR's fiscal 2022 fourth-quarter earnings call. We're joined today by John Holmes, President and Chief Executive Officer, and Sean Gillen, Chief Financial Officer.

Speaker 3: 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 Security Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results that differ materially from the forward-looking statements.

And the risk factors sections of the company's Form 10-K for the fiscal year ended May 31, 2021, and Form 10-Q for the fiscal quarter ended February 28, 2022, and providing the forward looking statements. The company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events.

Speaker 3: Accordingly, these statements are no guarantee a future performance. These risks and uncertainties are discussed in the company's earnings release, and the risk factor sections of the company's form 10K for the fiscal year ended May 31, 2021, and form 10K for the fiscal quarter ended February 28, 2022.

Speaker 3: In providing the forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events.

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.

Speaker 11: A certain non-GAAP financial information will be discussed on the call today. A reconciliation of these non-GAAP measures for the most comparable GAAP measures is set forth in the company's earnings release.

At this time I'd like to turn the call over to Aar's, President and CEO John Holmes.

Speaker 11: At this time, I'd like to turn the call over to AAR's President and CEO , John Holmes.

Thank you and good morning, everyone. I appreciate you joining us today to discuss our fourth quarter and full year fiscal 2020 results.

Speaker 4: Thank you and good morning everyone. I appreciate you joining us today to discuss our fourth quarter and four year fiscal 2020 to results.

Sure I comment on the results I would like to take a moment to reflect on the last fiscal year, we entered the year with optimism that the increasing demand for domestic leisure travel. We saw for an early summer last year will be a leading indicator for business and international travel shortly thereafter that delta and omicron various emerged in those markets did not rebound at nearly the same rate.

Speaker 4: Shortly thereafter, the Delta and Omicron variants emerged and those markets did not rebound at nearly the same rate. In addition, the U.S. withdrawal from Afghanistan, as well as the natural conclusion of certain of other of our government programs, created headwinds in our government's business, which had been an important source of strength during the pandemic.

Speaker 4: Finally, in the macro environment, labor has been in short supply, inflation has been running high, and there is uncertainty about economic growth.

Speaker 4: In light of this backdrop, I'm incredibly proud of the results that we deliver this year. It was not inevitable that AAR would be able to navigate the pandemic in the way that we have. And that's a credit to our team for finding a way and to our customers for recognizing the value that we deliver and I want to thank them both. I'm very proud of the results that we deliver and I want to thank them both. I'm very proud of the results that we deliver this year. I'm very proud of the results that we deliver this year. I'm very proud of the results that we deliver this year.

Turning to the results for the full year sales increased 10% from $1 65 billion to $1 8 billion and $1 8 billion and.

Speaker 4: Turning to the results for the full year, sales increased 10% from $1.65 billion to $1.8 billion, and adjusted diluted earnings per share from continuing operations increased 82% from $1.31 per share to $2.38 per share.

And adjusted diluted earnings per share from continuing operations increased 82% from $1 31 per share to $2 38 per share.

We were able to more than offset a 13% decline in sales to the government customers for the 34% increase in sales to commercial customers.

Speaker 4: We were able to more than offset a 13% decline in sales to the government customers with a 34% increase in sales to commercial customers.

Even more importantly, we were able to continue to drive efficiency improvements and cost discipline to deliver significant earnings growth.

Speaker 4: Even more importantly, we were able to continue to drive efficiency improvement and cost discipline to deliver significant earnings growth.

For the quarter sales were up 9% from $438 million to $476 million and adjusted diluted earnings per share from continuing operations were up 53% from <unk> 47 per share to <unk> 72 per share our sales to commercial customers increased 28% and our sales to convert to government and defense customers decreased 13%.

Speaker 4: For the quarter, sales rub 9% from $438 million to $476 million, and adjusted to limited earnings per share from continuing operations, or up 53% from $0.47 per share to $0.72 per share. Our sales to commercial customers increase 28%, and our sales to government and defense customers increase 13%.

<unk> <unk>.

Sequentially, our total sales growth was 5% and our adjusted EPS growth was 14%.

Speaker 4: sequentially our total sales growth was 5% and our adjusted EPS growth was 14%. Our operating margin was 7% for the quarter on an adjusted basis, I'm from 5.2% last year and 6.7% in the third quarter. We continue to see strong performance in our MRO operations as our hangers remain nearly full, and we continue to benefit from the efficiency initiatives that we implemented across the company during the pandemic.

Its activities, we saw further recovery in the quarter, but demand remains inconsistent and the availability of used serviceable material to support our trading operations remains in short supply for certain platforms.

Speaker 4: In our parts activities, we sought further recovery in the quarter, but the man remains inconsistent and the availability of used serviceable material support and our training operations remains in short supply of certain platforms.

Turning to our government business, while we saw a decrease in revenue. It is important to note that despite this decline we were able to expand margins during the quarter.

Speaker 4: Turning to our government business, while we saw a decrease in revenue, it is important to note that despite this decline, we were able to expand margins during the quarter. Just taking a step back, I would like to highlight that in this quarter, we delivered adjusted operating margin and EPS that exceeded pre-COVID levels despite our sales being down 15% from their pre-COVID high. This was a goal we established early in the pandemic and I'm proud of the work we have done to deliver against that commitment.

Regarding cash flow. It was another strong quarter as we generated $42 million from cash from operating activities from continuing operations.

Speaker 4: Regarding cash flow with another strong quarter is regenerated $40.2 million from operating activities and continuing operations.

Speaker 4: We also re-purchased $22 million of stock in the quarter under our share repurchase program. Even after the share repurchase, we reduced our net debt leverage to 0.3 times EBITDA, and we continue to be exceptionally well positioned in fund our growth. We have a fund our growth. We have a fund our growth.

Speaker 4: Turning to new business, during the quarter we announced a marketing partnership with Provenare Technologies, which has developed a digital solution that uses proprietary algorithms to analyze and dynamically generate back-to-birth trace history for aircraft parts. This is the capability that we are using in our own operations, and this partnership allows us to bring this emerging digital solution to our customers as well.

<unk> as well.

In addition, we announced our relationship with Arrow design Labs, which is a company that has developed an aerodynamic drag reduction system kit for the 737 LNG.

Speaker 4: In addition, we announced our relationship with Aero Design Labs, which is a company that has developed an aerodynamic drag reduction system kit for the 737-NG. The company has developed an aerodynamic drag reduction system kit for the 737-NG.

This kit has the potential reduce fuel burn by one 5% for the 787 700, which equates to over 40 tons of Cotwo duction per aircraft per month, and the benefits are expected to be even larger, but the 737800 and dash 900.

Speaker 4: This kit has the potential of reduced fuel burn by 1.5% for the 737-700, which equates to over 40 tons of CO2 reduction per aircraft per month. And the benefits are expected to be even larger for the 737-800-900. The 737-800-900.

We will be providing distribution services to the company on an exclusive basis and have also invested in the company to help fund its growth.

Speaker 4: We will be providing distributed services to the company on an exclusive basis and have also invested in the company to help fund its growth.

Finally earlier this week, we announced that we became the first non OEM to be awarded the captains of industry contract by the defense Logistics agency.

Speaker 4: Finally earlier this week, we announced that we became the first non-OEM to be awarded a captain's of industry contract by the defense-placific agency.

This is a distinction that establishes a long term strategic supply chain relationship with the U S Department of defense and will provide us with access to unique opportunities to support the U S and its allies.

Speaker 4: This is a distinction that establishes a long-term strategic supply chain relationship with the U.S. Department of Defense, and will provide us with access to unique opportunities to support the U.S. Senate's allies.

With that I'll turn the call over to our CFO , Sean Gillen to result is up to a more results in more detail.

Speaker 4: With that, I'll turn the call over to our CFO Sean Gillen to discuss more results in more detail.

Thanks, John our sales in the quarter of $476 1 million were up eight 8% or $38 $5 million year over year.

Speaker 12: Thanks, John . Our sales in the corridor of $476.1 million were up 8.8% or $38.5 million year over year.

Sales in our aviation services segment were up 9% driven by the recovery in our commercial business and sales in our Expeditionary services segment were up four 5%.

Speaker 12: Sales in our aviation services segment were up 9% driven by the recovery in our commercial business, and sales in our expeditionary services segment were up 4.5%

Speaker 12: Overall, our commercial sales were up 28% year over year, while our government sales were down 13%, driven by the wind down of our activity in Afghanistan and the natural completion of other government programs. Our commercial sales were up 28% year over year, but the wind down of our activity in Afghanistan you

Sequentially, our commercial sales increased 11% and our government sales decreased 3%.

Speaker 12: Sequentially, our commercial sales increased 11% and our government sales decreased 3%.

Gross profit margin in the quarter was 18, 9% versus 16, 4% in the prior year quarter and adjusted gross profit margin was 18, 6% versus 16, 5% in the prior year quarter.

Speaker 12: Gross profit margin in the quarter was 18.9% versus 16.4% in the prior year quarter and adjusted gross profit margin with 18.6% versus 16.5% in the prior year quarter.

Gross profit margin in our commercial business was 17, 7% and gross profit margin in our government business was 28%.

Speaker 12: Gross profit margin in our commercial business was 17.7% and gross profit margin in our government business was 20.8%.

The government margin was driven by continued strong performance as well as certain contract modifications, which resulted in higher recovery on indirect costs.

Speaker 12: The government margin was driven by continued strong performance, as well as certain contract modifications which resulted in higher recovery on indirect costs.

SG&A expenses in the quarter were $56 9 million. This figure includes increased investments in our digital initiatives as well as $2 $9 million related to investigation and remediation matters and strategic project costs.

Speaker 12: SG&A expenses in the quarter were $56.9 million.

Speaker 12: This figure includes increased investment in our digital initiatives, as well as 2.9 million related to investigation and remediation matters and strategic project costs. Just a moment,? time through that.

Speaker 12: As a reminder, our fourth quarter has historically been our seasonally highest S-GNA quarter, and we remain committed to driving S-GNA down as a percentage of sales while continuing to invest in our growth.

Net interest expense for the quarter was <unk> 6 million compared to <unk> $9 million last year, driven by lower borrowings. Despite the increase in interest rates.

Speaker 12: Net interest expense for the quarter was $0.6 million compared to $0.9 million last year, driven by lower borrowings despite the increase in interest rates.

As John indicated we generated cash flow from operating activities from continuing operations of $40 2 million in.

Speaker 12: As John indicated, we generated cash flow from our operating activities from continuing operations of $40.2 million.

In addition, we funded $22 2 million of share repurchase and reduced our accounts receivable financing program by $3 million.

Speaker 12: In addition, we funded 22.2 million of share repurchase and reduced our accounts received both financing program by 3 million. count toward the growth fund.

Our balance sheet remains exceptionally strong with net debt of $46 5 million and net Leverages. All these 0.3 times <unk>.

Speaker 12: Our balance sheet remains exceptionally strong with net debt of $46.5 million and net leverage is only 0.3 times.

Speaker 12: Consistent with the last decorders, we expect to continue to execute on our plan to deploy the full 150 million Sherry purchased authorization over approximately two years from the time of announcement.

Thank you for your attention I will now turn the call back over to John .

Great. Thank you Shawn.

Speaker 12: Thank you for your attention and I'll turn the call back over to John .

Looking forward, while demand for domestic and European commercial travel is continues to be very strong global traffic recovery in total continues to be slower and we're paying attention to the macroeconomic environment and its potential impact on the market for air travel.

Speaker 4: Great, thank you, Sean.

Russ commercial parts demand should generally track the recovery in commercial flying.

Within commercial parts activities the growth of our used parts sales will also be impacted by the availability of supply, which remain tight which remains tight for certain platforms. While the growth in our new part sales should continue to benefit from the new distributor shifts we have won.

Speaker 4: For us, commercial parts demand should generally track the recovery and commercial flying.

Recently and those that remain in our pipeline.

Demand for MRO remains strong and we expect the hangars to remain largely full throughout this fiscal year.

Speaker 4: recently and those that remain in our pipeline.

Speaker 4: Demand for MRO remains strong, and we expect the hangars to remain largely full throughout this 50th year. Demand for MRO remains strong, and we expect the hangars to remain fully of the year.

And our government business in the coming quarters, we expect growth to return as recent program wins ramp up and as we convert opportunities from our strong pipeline.

Speaker 4: In our government business in the coming quarters, we expect growth to return as recent program winds ramp up and as we convert opportunities from our strong pipeline. And as we convert opportunities from our strong pipeline.

For full year FY 'twenty three given that the trajectory of the commercial aviation market recovery remains difficult to predict exacerbated by decreasing macroeconomic uncertainty we're going to continue our recent practice of not providing formal guidance, having said that based on what we can see today, we expect sequential quarterly growth to return beginning in Q2.

And we will continue to provide updates as we move through the year.

Speaker 4: Over the longer term, we remain exceptionally well positioned. Our unique independent aviation services business model continues to resonate with both commercial and government customers. Our end markets are growing, and we have the balance sheet strength to fund our continued expansion. I'm excited about all of the opportunities we have ahead of us, and the team and I remain committed delivering value for our shareholders.

Shareholders.

Before we take questions I want to take a few moments to recognize our chairman David Storch.

Speaker 4: Before we take questions, I want to take a few moments to recognize our Chairman, David Storch.

We announced yesterday that David has chosen to retire from the board effective in January David started at a 1978 and served as its CEO from 1996 until 2018.

Speaker 4: We announced yesterday that David has chosen to retire from the board effective in January . David started at AR in 1978 and served as a CEO from 1996 until 2018. From 1996 until 2018.

Speaker 4: During that time, he more than quantrupled the company sales while navigating numerous peaks and valleys in the aviation industry, including both 9-11 and the great financial crisis. Even more importantly, he established and modeled the doing it right approach, which is the culture we continue to live by and set the foundation for the company to be the pillar of strength and opportunity that it is today.

They.

I congratulate David on his retirement and thank him for his leadership counsel and friendship.

Speaker 4: I congratulate David on his retirement and thank him for his leadership, counsel, and friendship.

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

Thank you as a reminder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.

Speaker 4: With that, I'll turn it over to the operator for questions.

Speaker 2: Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. Please stand by while we compile the Q&A roster.

Okay.

Our first question comes from Ken Herbert with RBC. Your line is open.

Speaker 2: Our first question comes from Kim Herbert with RBC. The line is open.

Hey, good morning, John and Sean.

Alright.

Hey, John I appreciate the commentary on sort of the full year 'twenty three outlook and I guess lack of visibility.

Speaker 5: Take good morning, John and Sean.

Speaker 5: Hey, John , appreciate the commentary on sort of the full year 23 outlook and I guess lack of visibility. But can you help at all or provide any more granularity on the commercial business? You said MRO is largely full, so it sounds like that business is maybe flat to up slightly, but what's the growth expectation specifically on the part side in fiscal 23 if you can provide any more detail around that?

But can you help at all or prevent any more granularity on the commercial business. You said MRO is largely full so it sounds like that business is maybe flat to up slightly but what's the growth expectation specifically on the parts side in fiscal 'twenty. Three if you could provide any more detail around that.

Yes, you've got it right on the on the MRO side from what we see today. The hangers are largely full and we expect continued strong demand throughout the year and heavy maintenance on.

Speaker 4: Yeah, you've got it right on the MRO side. From what we see today, the hangers are largely full and we expect continued to draw on the man throughout the year in heavy maintenance. On the part side, the distribution business, the commercial distribution business, continues to grow and that's largely driven by the new wins that we've announced in the last 18 months as they come online. So we expect growth in the new business, as a result of those wins.

So we expect growth in the new business and the new parts business as a result of those wins.

In the used parts business, it's more of an inconsistent story, we saw quite a bit of accelerated demand.

Through Q3, as well as through most of Q4.

That demand has moderated a bit as were in the first quarter of this year. The other factor you've got going on there as we.

We see very strong demand in certain platforms, but as a result.

So a lot of demand for material and that is in tight supply and so.

Certain platforms, where we see strong and consistent demand its a little bit more challenging to find.

Speaker 4: And so, you know, with certain platforms where we see strong and consistent demand, it's a little bit more challenging to find the used material to service that demand.

We use material to service that demand.

In summary.

Very good about MRO are feeling good about the continued recovery in growth and commercial parts distribution, but a bit of an uneven story and trading based on the factors I just described.

Speaker 4: So, you know, in summary, feeling very good about MRO, feeling good about the continued recovery and growth and commercial parts distribution, but a bit of an uneven story in trading, based on the factors I just described.

Okay, that's helpful and you've got a.

Obviously very low leverage it sounds like from your commentary that there might be some investment opportunities youre looking at you've talked in the past about about an attractiveness of PMA is that something you are continuing to look at and organically are there.

Is there an expectation that there is significant opportunities to invest in either engines or airframe or other.

Seedstock as you think about the surplus marketplace here in the near term.

Yes, Greg.

Questions. So.

Speaker 4: feedstock as you think about the surplus marketplace here in the near term? Yeah, great question. So, in terms of feedstock in the trading business, that's one of our greatest strengths right now is our balance sheet capacity and our ability to move very quickly and outmaneuver the competition when packages of material become available. And we are in the market all day every day around the world looking for the right material and when we find it we're able to close very very quickly. So that will definitely be a source of capital deployment.

As a feedstock in the training business. That's one of our greatest strengths right now is our balance sheet capacity and our ability to move very quickly and outmaneuver the competition with packages of material become available.

We are in the market all day everyday around the world looking for the right material and when we find that we're able to close very very quickly. So that will definitely be a source of capital deployment for us throughout the year as it relates to PMA and other initiatives specifically, we do have organic PMA efforts underway and we're encouraged.

Speaker 4: for us throughout the year. As early as the PMA and other initiatives specifically, we do have organic PMA efforts underway and we're encouraged by the progress there. It's early and it's slow growing, but we do have a nice team focused on organic PMA efforts. As we've indicated in the past, we will continue to look at inorganic opportunities to bolster that effort if assets become available and we can get.

By the progress there, it's early and it's slow growing but we do have a.

<unk> focused on.

Organic PMA efforts and as we've indicated in the past.

We will continue to look at inorganic opportunities to bolster that effort if assets become available and we can.

Get valley.

Evaluation et cetera that are aligned with expectations.

Okay, that's great and if I could just one final question if I look at the investments you had some nice growth in cash from obviously 'twenty one through 'twenty two how do we think about and you've got <unk>, you've got a lot of money tied up in working capital. So how do we think about free cash in 'twenty three.

Speaker 5: evaluation access or to align with expectations. Okay, that's great. And if I could just one final question as I look at them, the investments, you have some nice growth and cash from obviously 21 through 22. How do we think about, and you've got a lot of money tied up and working capital still, how do we think about free cash in 23 on top of just the growth and income is working capital, maybe some opportunity to unlock some cash there, or do we see limited growth off 22?

On top of just the growth in income as working capital, maybe some opportunity to unlock some cash there or do we see limited growth off of 'twenty two.

Yes.

We're really proud of the consistent cash flow that we've been able to generate and that goes along with the consistent margin improvement et cetera that we've been able to drive in the business overall.

Certainly expect to be cash flow positive again this year.

And our goal is to remain consistent in terms of cash flow generation, having said that though just going back to your prior question. If we see an opportunity to make a great purchase of hot engine material or feedstock to serve other parts of the trading business, we're going to deploy that cash and deploy it quickly and again, that's an advantage of the market.

So while the goal.

Overall is to continue to generate cash and continue to be more efficient with our working capital we want to remain flexible so that we can react to market opportunities.

Great. Thanks, John .

Thank you Kent.

Our next question comes from Josh Sullivan with benchmark Your line is open.

Hey, good morning.

Speaker 2: This question comes from Josh Sullivan with Benchmark. Your line is open.

Hey, good morning, Josh.

Just on that comment there the uneven story in the parts business.

Speaker 6: Good morning.

Speaker 7: Hey, good morning, Josh. Just on that comment there, the uneven story in the parts business, I think you said you saw an acceleration Q3, Q4, then a moderation here. Is there any dichotomy you can identify between narrow body and wide body just as some of those markets come back here?

You said you saw an acceleration Q3 Q4, then a moderation here is there any dichotomy you can identify between narrow body and wide body just as well.

Those markets come back here.

Yes.

Say the unevenness is a bit from the is more from the narrow body or wide body business and trading is largely to support the cargo market and that's been consistent throughout the pandemic and very very strong and those are the areas, where we find the tighter the tightness in the supply of material.

Speaker 4: Yeah, I'd say the unevenness is a bit from the, is more from the narrow body. Our wide body business in trading is largely to support the cargo market. And that's been consistent throughout the pandemic and very, very strong. And those are the areas where we find the tightness of supply of material.

And then just as far as the CFM 56 relationship with fortress.

Speaker 7: And then just, you know, as far as the CFM56 relationship with Fortress, how is that performing? You know, is it, you mentioned hot section opportunities there. You see volumes sticking up there going forward.

Is that performing.

You mentioned in the Hot section opportunities there do you see volumes picking up there going forward.

Yes, that's a great question that partnership continues to go extremely well that has been a great source of material for us to serve that.

Speaker 4: Yeah, that's a great question. That partnership continues to go extremely well. That has been a great source of material for us to serve that narrow body market. And Fortress is doing a really fine job on delivering the commitment to material to us that they made at the beginning of the agreement. I mean, at this point, it's fully ramped up. And we continue to work with Fortress that they expand their business and their engine portfolio. We could see growth in that platform.

Narrow body market and fortress is doing a really fine job on delivering the commitments are material to us if they made at the beginning of the agreement.

I mean at this point, it's fully ramped up.

Speaker 7: But at this point, it's operating at full capacity and at the level we expected. And then just on the investments you made in your labor pool throughout COVID, how much runway do you think you have before you need to reinvest? Or what level of traffic would you need to see where you set capacity?

And then just on the investments you made in your labor pool throughout Covid, how much runway do you think you had before you need to reinvest or what level of traffic would you need to see where you said capacity.

On the MRO business.

Yes, yes, I mean, just.

Speaker 4: Any in the MRO business?

Great investments you guys made in keeping your.

Talent around how much capacity is there.

Speaker 7: Yeah, yeah, I mean, just in the great investments you guys made in keeping your talent around, you know, how much capacity there is there.

Yes, so we.

Again, thanks for highlighting that.

We're really proud of the way we held together the team through Covid and that has served us very very well and it wasn't just holding the existing team. It was maintaining the partnerships that we form with schools over time, we can.

Speaker 4: Yeah, so we, again, thanks for highlighting that. I mean, we're really proud of the way we held together the team through COVID, and that has served us very, very well. And it wasn't just holding the existing team, it was maintaining the partnerships that we formed with schools over time. We continue to fund those partnerships, so we continue to get sea results in terms of, I would say, a proprietary source of talent with these relationships we have with the schools to support the MRO business. You know, in certain markets.

Continue to fund those partnerships and we continue to get the results in terms of.

I'd say proprietary source of talent with these relationships, we have the schools to support the MRO business.

In certain markets, our capacity is limited by our ability to hire and in other markets. Our capacity is as limited by for space in the markets, where we're limited by four space, we are considering opportunities to expand our footprint, where we know we've got a supply of labor and we know we're going to have.

Speaker 4: Our capacity is limited by our ability to hire, and in other markets, our capacity is limited by forespace. In the markets where we're limited by forespace, we are considering opportunities to expand our footprint where we know we've got a supply of labor, and we know we're gonna have long-term customer interest. So at this point, when we say the hangers are full, we mean full, both in terms of footprint as well as labor availability. But as we move forward...

Long term customer interest so at this point.

When we say the hangers or full remained full both in terms of.

<unk> footprint as well as the labor availability.

But as we move forward, we're going to again.

Focused on some targeted expansion too.

To look for ways to grow that business domestically.

Speaker 4: We're going to again, you know, focus on some targeted expansion to, to look for ways to grow that business domestically.

Okay.

At this time.

Alright, thank you.

Speaker 8: Take good time.

Thank you.

Speaker 9: Take good time. Thank you.

We have a follow up from Ken Herbert with RBC. Your line is open.

Speaker 10: Thank you.

Speaker 2: We have a follow up from Ken Herbert with RBC. Your line is open.

Hey, John .

What should we assume for any kind of labor rate relief you might be getting in the MRO business in fiscal 'twenty three considering.

Speaker 5: Hey, John . What should we assume for any kind of labor rate relief you might be getting in the MRO business in fiscal 23 considering the inflated labor costs?

Inflated labor costs.

Yes, our goal right now is to preserve the margin gains that we have made.

Reserve the spot that we're in.

That has been a very dynamic.

Environment over the last three or four quarters, I think we've mentioned that our customers as you've heard from them. They are seeing the exact same labor pressures, we are and so.

Speaker 4: I think we've mentioned that our customers, as you heard from them, they're seeing the exact same labor pressures we are. And so they recognize the value that we bring in the service that we provide to them and the need for us to be profitable and to be able to attract talent. So it's a challenging environment for everybody. But so far we've been very pleased with the support we've gotten from the customer on the need to change prices to address rising labor costs.

They recognize the value that we bring and the service that we provide to them and the need for us to.

And be profitable and to be able to attract talent. So.

Sure.

It's a challenging environment for everybody, but so far we've been we've been very pleased with the support we've gotten from the customer on the need to change prices to address rising labor costs.

Okay. That's helpful and in the past you've talked about the need to see sort of more material inflection in demand for surplus material or in the in the <unk>.

Speaker 5: Okay, that's helpful. And in the past, you've talked about the need to see a sort of more material inflection in demand for surplus material in the revenues associated with the surplus parts market to really see a step change in the margin profile. It sounds like from your comments that were maybe not there, at least in the first half of fiscal 23.

Revenues associated with the surplus parts market to really see a step change in the margin profile. It sounds like from your comments that were or maybe not maybe.

Maybe not there at least in the first half of fiscal 'twenty three.

What should we be watching out for to maybe get a little better visibility on that margin step change and barring that how should we think about the margin progression for fiscal 'twenty three.

Speaker 5: What should we be watching out for to maybe get a little better visibility on that margin step change and barring that, how should we think about the margin progression for fiscal 23?

Sure.

So again very proud of the progress that we've made over the last seven quarters and operating margin improvement.

Speaker 4: Sure, so again, very proud of the progress that we made over the last seven quarters and operating margin improvement. And, you know, as you know, we're now well exceeding, particularly with this configuration of businesses, well exceeding the margins that we had that we had pre COVID. As we see the parts business recover, and you're right, we're not at that inflection point yet where we'll see a meaningful step up from where we are. As we see that parts business recover and the overall revenue mix shift towards the parts businesses, we would see further margin expansion. You know, at this point, it's

We're now well exceeding now, particularly with this configuration of businesses well exceeding the margins that we had that we had pre COVID-19.

As we see the parts business recover and Youre right were not at that inflection point, yet, where we'll see a meaningful step up from where we are as we see that parts business recover and the overall revenue mix shift towards the parts businesses.

Would see further margin expansion.

At this point.

It's difficult to predict the trajectory of that.

As you highlighted I don't think we'll see that meaningful step change in the first half of the year, but as the supply chain issues or labor issues get worked out in the system and airlines can service the demand that they see in flying increases we would expect parts business to.

Speaker 4: It's difficult to predict the trajectory of that. As you highlighted, I don't think we'll see that meaningful step change in the first half of the year. But as the supply chain issues or labor issues get worked out in the system, and airlines can service the demand that they see and flying increases, we would expect parts of business to pick up in the second half of the year. Just to quantify that, you know, our, both in the trading and commercial parts distribution, in, in your budget, over a dozen passenger vehicles are taking off with everybody's memory and a not new number from all over the world and you

Pick up in the second half of the year.

To quantify that.

R R.

Both in the trading and commercial parts distribution overall down.

Phil about 20% from where we were pre COVID-19.

Speaker 4: Overall down still about 20% from where we were pre-COVID. That compares to roughly 25% from where we were in Q3. So, we have seen a modest improvement there, which contributed partially to the sequential margin improvement that we saw this quarter. But, you know, given we still 20% off of pre-COVID levels, we've got a ways to go in that business and again, that would help margins throughout next year or this year. Thank you.

That compares to roughly 25% from where we were in in Q3. So we have seen a modest improvement there, which contributed partially to the sequential margin improvement that we saw this quarter, but.

Given we still still 20% off of pre Covid levels, we've got a ways to go in that business and again that would help margins throughout next year or this year.

Great. Okay. Thanks, Sean.

Our next question comes from Michael <unk> with <unk>. Your line is open.

Speaker 3: Great. Okay, thanks, Sean. Our next question comes from Michael. Tomolee with Twist. Your line is open. Hey, good morning guys. Thanks for taking the question to your results. John , just on 23, I know you're not gonna give the guidance, but if we went back to last quarter, you talked about this inflection, you know, a more meaningful inflection in 23.

Hey, good morning, guys. Thanks for taking the questions here good results.

Hey, John just on 23.

I know youre not going to give the guidance, but if we went back to last quarter you talked about this this inflection.

More meaningful inflection in 'twenty three.

Should we still be thinking about that and I guess, if I look at I mean, you just.

Speaker 3: Should we still be thinking about that? And I guess, you know, if I look at, I mean, you just gave where we were on parts, but are we thinking that a return to peak commercial revenues, you know, occurs this year or, you know, I guess, how do you see 23? Should we still think about that meaningful inflection or how should we calibrate our expectations here?

Just gave where we were on parts, but but are we thinking that a return to peak commercial revenues occurs this year or.

I guess, how do you see 23 should we still think about that meaningful inflection or how should we calibrate our expectations here.

Yes, I think I think great question.

Back to us.

Prior comments and as much as.

Speaker 4: Yeah, I think great question. I go back to prior comments in as much as we still see the potential for that. I think at this point, it's a second half discussion as opposed to a first half discussion. And when we talk about getting back to pre-COVID peak revenues, keep in mind, we structurally took out revenue from the company from activities that weren't profitable or were unprofitable. And so really, in terms of getting back to pre-COVID levels, we're talking about parts of our businesses.

Revenue from the company from activities that weren't profitable or were unprofitable.

And so really in terms of getting back to pre COVID-19 levels, we're talking about the parts businesses and thats that kind of 20% off that I just described.

Yes.

Got it got it.

Speaker 3: potential global economic slowdown. Are you seeing any or hearing anything different from your customers about how they're thinking about their longer term planning for their fleets? Certainly, it doesn't seem like there's any potential pullback in maintenance at this point, but any kind of color you're getting from the airlines as they think about their longer term planning.

Speaker 3: you know, global economic slowdown. You know, are you seeing any, or hearing anything different from your customers about how they're thinking about their longer term planning for their fleets? You know, certainly it doesn't seem like there's any, you know, potential pullback in maintenance at this point, but any kind of color you're getting from the airlines as they think about their longer term planning? I think, uh, uh.

I think.

Overall, the airlines remain bullish on the return of demand and.

We believe that the current generation fleet based on what we're hearing which is the fleet that were predominantly involved at servicing is still going to be around for longer than people. Initially expected. So that bodes well for us I think the challenge for the customers for our customers right. Now is really as you've heard from them is driven by the staffing.

Speaker 4: Overall, the airlines remain bullish on the return of demand. And we believe that the current generation is to lead based on what we're hearing, which is the fleet that we're predominantly involved in servicing is still gonna be around for longer than people initially expected. So that's both well for us. I think the challenge for the customers, our customers right now is really, as you've heard from them, it's driven by the staffing challenges at the airports themselves, pilot shortages, which have caused them to happen.

<unk> at the airports themselves pilot.

Pilot shortages, which have had.

Cause them to have to cancel flights and fly less.

That's that's really their focus but overall demand for air travel that we're hearing from our customers still remains very very strong it's just about getting the system.

Speaker 4: canceled flights in fly-left. You know, that's really their focus. But overall demand for air travel that we're hearing from our customers still remains very, very strong. It's just about getting the system back up fully running so that we can add so we support that demand. And so, again, while we're kind of in a bit of an uneven period here, we still feel really good about that return of the parts business and the fact that the platforms in which we operate and perform maintenance on.

Backup fully running so that we can adequately support that demand.

So again, while we're kind of in a bit of an uneven.

Period here, we still feel really good about that return of the parts business and the fact that the platforms in which we operate and perform maintenance on that theyre going to be around for a long time.

Okay got it that's helpful. And then just just one last one you mentioned.

Speaker 3: that they're going to be around for a long time. Okay, got it. That's helpful. And then just just one last one, you mentioned, um, and, you know, you've had a press release, I believe, out on it, the arrow of design labs. I mean, you actually said you made some investment there. And if I go back, man, I don't know, it's maybe 15 years or so, you know, they're kind of comparing this to winglets and, you know, the opportunity that that presented, which was really significant for a lot of the aftermarket players.

You've had a press release I believe out on it that the arrow with design labs.

You said you made some investment there and if I go back Matt I don't know, maybe 15 years or so.

Comparing this to help winglets and the opportunity that presented which was really significant for a lot of the aftermarket players. So I mean do you see the same potential in the 737 drag kit I mean, its that maybe if you could just elaborate on the investment you made and sort of how you guys are thinking about the model.

Speaker 3: I mean, do you see the same potential in this 737 drag kit? I mean, is that and maybe you could just elaborate on the investment you made and sort of how you guys are thinking about the model for revenues and sort of the opportunity there for these kind of retrofits, if you would. Yeah, I think you've you've hit it on the head. I would definitely say that this is analogous to wingless. We're excited that they announced the on the dash 700 and we know they're working on the same for the 8 and 900, which obviously is.

For revenues and sort of the opportunity there for <unk>.

Retrofits, if you would.

Yes, I think you hit it on the head.

Would definitely say that this is analogous to winglets.

We're excited that they announced the FTC on the Dash 700, and we know they are working on the same for the 8900, which obviously the.

A very large fleet and given the price of fuel today, we expect that the.

Airline community interest will be extremely strong.

Speaker 4: very largely and given the price of fuel today we expect that the airline community interest will be extremely strong in this in this solution. We were really happy to get to start this partnership very early with ADL. We've actually been working with them for some time and we have increased our investment in the company over that period of time. So we're very bullish both from an investment standpoint but also as a relate to the exclusive agreement that we've got.

And this solution.

We were really happy to get to start this partnership very early with ADL, we've actually been working with them for some time.

And we have.

Got it helpful. Alright, Thanks, guys I'll jump back in the queue.

Speaker 3: in place to distribute the kits as their developed and produced. I'm sorry, I just got it helpful. All right, thanks guys, I'll jump back in here. you.

Speaker 3: as they're developed and produced. God, it's helpful. All right, thanks guys. I'll jump back in the queue. Thank you very much. Thank you very much.

Thank you Mike.

Thank you and I'm showing no other questions in the queue I would like to turn the call back to AAR for closing remarks.

Speaker 2: Thank you, and I'm showing no other questions in the queue. I'd like to turn the call back to AAR for closing remarks.

Great. Once again really appreciate everybody's time and interest and the support.

And we look forward to reporting on our first quarter. Thank you very much.

Speaker 4: Once again, I really appreciate everybody's time and interest and support. We look forward to reporting on our first quarter. Thank you very much. This concludes today's conference call. Thank you for participating. You may now disconnect.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q4 2022 AAR Corp Earnings Call

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