Q4 2023 AAR Corp Earnings Call
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Good afternoon, everyone and welcome to Aar's fiscal 2023 fourth quarter earnings call. We're joined today by John Holmes, Chairman, President and Chief Executive Officer, and Sean Gillen, Chief Financial Officer.
Before we begin I'd like to remind you that the comments made during the call me include forward looking statements as defined in the private Securities Litigation Reform Act of 1995 esports looking statements involve risks and uncertainties that could cause actual results to differ materially from important 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, 2022 Form 10-Q for the fiscal quarter ended February 28 2023.
Any forward looking statements the company assumes no obligation to fund future circumstances or anticipated or unanticipated events.
Chairman, President and CEO John Holmes.
Thank you good afternoon, everyone. I appreciate you joining us today to discuss our fourth quarter and full year fiscal 2023 resolved.
Full year sales increased 9% from $1 8 billion to $2 billion, our adjusted diluted earnings per share from continuing operations increased 20%.
$2.38 per share to a record $2 86.
Which was driven by both sales growth and our increase in adjusted operating margin of six 3%.
This strong performance reflects continued execution on our strategy to leverage our improved cost structure and capture growth in higher margin activities.
For the fourth quarter sales were up 16% year over year from $476 million $553 million sales to commercial customers increased 31%, while as expected sales to government customers decreased 7% due primarily to the completion of certain government programs in the prior year quarter.
Operating margin was seven 8% up from 7% in the prior year quarter.
Adjusted diluted earnings per share from continuing operations were up 15% from 72 per share to a record 83 cents per share.
We saw further growth in our commercial partners activity Global Air travel continued to recover.
As described in previous quarters, we thought energy Green time availability continued to abate, which drove additional engine shop visits and associated demand for engine parts, which represent the majority of our U S him operator.
Further our recent new parts distribution contract awards continued to ramp up.
During the quarter would you experienced some delays from the Oems due to supply chain issues.
Working with our partners to receive the overdue material against our backlog.
MRO demand remains strong even though our hangers.
<unk> for for some time, we were able to drive some additional volume through our footprint in the quarter labor availability remains tight, but our attrition levels have stabilized and our many partnerships with schools and other sources of talent will continue to serve us well.
And integrated solutions, although our government work was down we saw better performance in our commercial power by the hour programs driven by increased flying internationally and the improvements that we've made to that operation over the last few years.
With respect to cash we generated cash flow from operating activities from continuing operations of $45 million. Our net leverage at quarter end was 1.0 to seven times EBITDA, which was down from 135 times at the end of Q3 on a pro forma basis for attractive acquisition.
As such our balance sheet remains strong and we have significant flexibility to fund our continued growth.
Regarding new business, we announced in March that we had agreed to acquire nine Boeing 770, <unk> hundred passenger aircrafts.
2018 Rolls Royce RV to 11 engines from American Airlines.
The investment provides us with feedstock to supply used serviceable material.
On the RV to 11 engine type to the 75 southern cargo market, which continues to be strong.
A good example of the type of asset acquisition that are part supply base to support the demand for Ya com.
In addition, I wanted to touch on the announcement that we made yesterday regarding the expansion of our Miami airframe maintenance facility.
That announcement, we have received final approval from the Miami Dade Board accounting Commissioners for the project.
Our agreement with both the Miami Dade Aviation Department, and United Airlines will increase our volume by 33% and Thats fine.
This project meets all of the criteria that we've previously outlined for MRO capacity growth, including expansion of an existing facility with government financial support favorable local market dynamics labor market dynamics, and a long term customer commitment we.
We expect to break ground in our fiscal Q2, and construction will take approximately 24 months.
Hey, Sarah will be reimbursed by the Miami Dade Aviation Department for the expected $50 million project costs I would like to thank United Airlines, Miami Dade County, Mayor than Yellow Levine Cotter, Miami Dade County Commissioners, Chairman, Oliver Gilbert and the Miami Dade Beacon Council for their partnership and making this important development.
Our reality.
Finally, I want to highlight that beginning with Q1 of fiscal 'twenty four we will be separating the reporting of what is currently our aviation services segment into three separate segments part supply prepared engineering and integrated solutions.
Separation better reflects the way, we manage the company and how we view the areas of growth.
To provide enhanced disclosure and insight to the investment community and other stakeholders.
That I will turn it over to our CFO , Sean Gillen to discuss the results in more detail.
Thanks, John our sales in the quarter of $553 $3 million were up 16, 2% year over year.
Our commercial sales were up 37% driven by growth across our commercial activities and our government sales were down seven 1% due primarily to the completion of certain government programs and our previous fiscal year.
We also saw a decline in defense distribution sales due to the timing of shipments from certain Oems.
Gross profit margin in the quarter was 19, 5% versus 18, 9% in the prior year quarter.
Gross profit margin in our commercial business was 20% and gross profit margin in our government business was 18, 5% for <unk>.
Our commercial margin, reflecting improved performance of our commercial integrated solutions activity that John mentioned and the contribution contracts, which is a higher margin offerings.
SG&A expenses in the quarter was $70 8 million, excluding certain trax expenses and other items that are detailed in the earnings press release. This figure was $64 1 million or 11, 6% of sales.
This percentage is up sequentially, but down year over year in Q1, we expect these downward sequential cadence in SG&A similar to last year.
Net interest expense for the quarter was $4 7 million compared to zero point $6 million last year, driven by higher interest rates and borrowings.
Our effective tax rate in the quarter was 23, 2%, which was lower than we had anticipated due to certain state tax and other items in the quarter.
We expect our effective tax rate to be approximately 25% to 26% in Q1 of FY 'twenty four and approximately 27% for the full year FY 'twenty four.
Cash flow from operating activities from continuing operations was $45 3 million.
We ended the quarter with net debt of $203 6 million and net leverage of 1.07 times EBITDA.
In light of the Trax acquisition and other attractive opportunities to invest in our business, we elected not to repurchase stock during Q4.
We continue to have $58 million remaining on our stock repurchase program and we will evaluate both usage of the remaining authorization and expansion of the program over the course of the remainder.
Under this fiscal year based upon alternative capital deployment opportunities.
On that note, we are seeing attractive opportunities for investment in the U S market and may elect to deploy capital in Q1, which we expect will drive a use of operating cash in the quarter.
Regarding our re segmentation we plan to file an 8-K today that provide financial results for the new segments for FY 'twenty two on an annual basis and for FY2023 on a quarterly basis.
The new parts supply segment will consist of both our used serviceable material and distribution activities.
The repair and engineering segment will consist of an airframe MRO component and landing gear MRO and engineering.
And the integrated solution segment will consist of our government programs and commercial power by the hour component solutions, and our software solutions, such as Trax and Aramark.
Our Expeditionary services segment, consisting of mobility systems will remain unchanged.
In addition to the segment changes we are changing our measure of segment performance from gross profit to operating income.
We are frequently heard from investors and analysts on the desire for greater transparency and we hope these changes will be well received.
Thank you for your attention and I will now turn the call back over to Jonathan Great. Thanks, Sean looking.
Looking forward, we expect the commercial market recovery to continue commercial air travel remains below pre pandemic levels by most measures and in those markets and as you've heard from many major airlines recently their outlook for growth remains strong. This all means that we remain optimistic about the demand for our services specifically, we expect interim.
And U S has remained robust.
Although supply constraint has been improvement and we expect it to continue to improve as airlines take delivery of new aircrafts and retirements increase notably we do not expect additional U S. M supply negatively impacted profitability. Instead, we believe it will lead to more growth is the availability of U S and currently a growth constraint.
In distribution, we expect to win more new lines with more Oems, which will drive more growth.
Tissue market recovery and OEM supply chain improvement will also provide a tailwind.
And airframe MRO, we expect our bankers will remain largely full throughout the year.
Finally in our government business. Our F 16 program in Europe is not yet fully ramp it will be a more meaningful contributor in FY 'twenty four and beyond we're generally we remain confident that our value proposition in this market and our pipeline of opportunities will translate into additional growth over time.
On that note, we expect to see Q1 sales to be in line to be in the low teens year over year.
Driven by our commercial businesses and adjusted operating margins similar to what we just delivered in Q4 looking ahead, we expect another year of margin expansion, albeit at a slower rate than last two years.
Before taking questions I would like to take a moment to thank our team for delivering an outstanding year in our customers and other partners for supporting US we continue to make our we continue to make our MRO operations more efficient added several key distribution wins expanded support of our U S. M customers added an important new capability with the acquisition.
The result has been nine consecutive quarters of adjusted operating margin improvement and record adjusted earnings while maintaining superb financial flexibility.
Coming out of the pandemic the successful if not inevitable and once again I am exceptionally proud of our team with that I will turn it over to the operator for questions.
Ladies and gentlemen to ask a question. Please press star one on your telephone.
Within your automated message advising yohanan right, Dan wait to hear your name announce.
To withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Hey, good evening I'm on for much moly, thanks for taking our questions.
Miami facility expansion once construction is complete what's the timeframe for ramping up operations fully and how many new hires will you need to add in order to support that additional capacity.
Yes, great question and thanks for being on the call.
Given the fact that we're expanding at an existing site, where we've been operating for for quite some time.
Once construction is complete we expect to ramp up to actually go very quickly.
We anticipate hiring about 250 new people.
For this expansion and again one of the criteria for expanding in a site that we feel we've got.
Access to a very strong supply of labor, which is certainly what we have in Miami. So.
We will be recruiting that talent well in advance of going live.
All right very helpful. Thanks, and then I just had a follow up on the margin outlook for the coming year.
SG&A expenses improve and start to trend closer to the target you've mentioned in the past of around 10% of sales is that still a viable target or are there any dynamics going on with <unk>.
Wage inflation or anything else.
It's kind of.
Yes, I would say extraordinary target to be at 10% of sales and I think to get there what we'll need to see is just continued leverage on the top line on both commercial and government sales as I mentioned Trax is slightly higher than SG&A, but it.
Doesn't move the needle massively for the whole company.
EBIT in this inflationary environment, we do still think that we can get to 10% of sales as we see more leverage on the top line.
Alright, great. Thanks for taking the questions.
Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Ken Herbert with RBC capital markets. Your line is open.
Hey, Jonathan and Sean Nice way to end the year.
I wanted to.
First.
Follow up Jon on some of your comments on the U S M marketplace. It sounds like Youre seeing.
Seeing more feedstock and it clearly sounds like you've got some opportunities very near term in the first fiscal quarter can you provide any more granularity on.
Or are you seeing the opportunities and maybe how we should think about investments either in the first quarter or cross fiscal 'twenty four specifically in the U S M area.
Yes.
Great question.
Kate you made on the call, Yes, I would say generally speaking we are seeing.
Loosening in the U S and supply and we have enabled the quarter, we were able to deploy capital throughout our FY 'twenty, three here's where starting off FY 'twenty four presented some unique opportunities and again as you know thats one of our big advantages in the market is when these things come up and there are still few and far between we're able to do.
Quickly.
With respect to commenting on specific asset types et cetera, I would prefer to stay away from that given competitive dynamics, but.
Sure.
We have a significant focus on engines and we are talking to all areas of market, whether that's by stores that are going through portfolio changes.
Airlines that are going through.
For some of this feedstock into USAF, youre, not expecting or fiscal 'twenty for the guidance doesn't imply any sort of significant step down in pricing you get youre getting in the marketplace, where the material correct I mean, it sounds like there's still enough of an imbalance that you should be able to get price on the U S at least through the fiscal year.
Yes.
Definitely feel confident in maintaining our spreads throughout the year.
A number of maybe large captive airline operations may be getting out sort of.
Getting out of the heavy MRO business to some extent so I think your capacity additions make a lot of sense in your it sounds like theres other opportunities there to maybe look to add capacity.
How far out are you sold within warehouse the backlog look maybe within the heavy MRO segment and I guess more importantly, it seems like if there was ever an environment for you to get better labor rates. It would be right. Now. So can you comment on sort of what youre seeing from that standpoint.
Yes.
The commitment that we have for the United that drove in Miami expansion in any of the other customers that we're talking to you about potential other expansions those are multiyear commitments, we're building permanent new capacity and so we want to make sure that realign with that so we're absolutely seeing.
Airline because they anticipate capacity shortages for some time being willing to sign multi year agreements with us so that's.
That's encouraging.
As it relates to the labor rates I think we touched on this over the last couple of calls, but generally speaking we have had very productive dialogue with our airline customers about about labor rates and we have.
Contract by contract work.
Worked with the customers to adjust labor rates are priced to them to reflect the cost of labor that we've seen in the market and we've been able to achieve inflationary environment drive.
Margin expansion in that business sort of internal efficiencies, but also.
We should see some of that drop to your bottom line in terms of there is an area for margin expansion within that business in particular.
Yes, I mean, we can talk more about that on Thursday, but work together, but Broadway and you'll have visibility into the margins of that.
That business, but I would say that our focus on margin expansion is not going to come through price increases to the customer that's really just to keep us even with the increasing labor costs. The margin expansion that we expect to gain over time is through investments in the facilities. So Miami leveraging the fixed cost structure there at <unk>.
33% more volume.
Or deploying technology throughout our hangers, whether it's paperless drilling inspections things like that to get ourselves more efficient inside of the operation.
Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Josh Sullivan with the Benchmark Company. Your line is open.
Hey, good afternoon.
Hey, Josh.
Just to kind of follow up on Ken's question there.
I'll start with a turnaround times that are in our own CAGR that we've been running a pretty steady operation from last the last several quarters. So we feel that we're actually operating quite efficiently and hangers.
To say that.
To try to predict when that's going to peak and come down is difficult, but I think what we're hearing and im sure Youre hearing the same thing from prepare providers many of them are Oems.
We we feel overall that the supply chain environment is improving and so this should be a better year than last year for turnaround times.
Got it.
And then maybe as far as Trax any any kpis you can share that you've completed or you are looking to complete.
Nothing specific at this point, what I would say more generally is that.
We're roughly a quarter into the acquisition is going very well.
Gration is on track or ahead of our plan. The team there remains extremely excited about the possibilities between our two companies on Thursday, we will provide more detail.
Elements of the vision that we have for the track today are a combination.
I feel really good about it.
Great. Thank you for the time.
Our next question comes from the line of Robert Spingarn with Melius Research. Your line is open.
Hey, guys.
Hey, Rob how are you.
Pretty good thanks, Jon I wanted to ask you just all this talk about heavy maintenance and maybe just to simplify it would you say with the unionization, we've seen and all of the traction that labor is getting in this constrained environment would you say that the wage spreads between captive.
Airline labor and your labor is widening.
We just announced an expansion there or other expansions that we're considering and we're already doing that where we're getting long term commitments from customers.
Right right and then in terms of increased rates coming out of the Oems Boeing and Airbus starting to get those ramps have you seen any impact from that in your business as more aircraft come through I understand there are nowhere near where theyre going to be I'm, just curious the extent to which you might be seeing it.
Yes.
Nothing broad or a trend at this point.
The closest thing, let's just we are seeing a loosening.
A slight loosening of supply in the U S market, we are seeing more opportunities come up but again those are coming from.
From all quarters again, whether it's a lesser order the airlines et cetera, So we assume that the.
The slight increase in production that youre seeing out of the Oems.
It's driving some of its fleet movement, thats, providing opportunities for us to acquire assets.
Okay, and then Sean for you just with the parts distribution business.
Impacting cash flows if we would exclude that or maybe look long term is there a free cash flow conversion target that we should think about.
Thought about that over time as well.
Got it stayed away from giving specific guidance on that which is in terms of net working capital as you mentioned, what you will see volatility from time to time, we will be around new distribution agreements, which generally come with an upfront capital outlay or use some opportunities as we kind of I think I saw back in our Q2 times.
Period.
The big opportunity that we move to more aggressively on.
But outside of that obviously very focused on overall net working capital efficiency.
AP as well.
Thank you.
Try to improve the cash flow profile of the company, which I think as part of the margin improvement that we've shown pre call. It today I think youre seeing some of that improvement on the cash flow as well.
Okay. Thanks, so much I'll save the rest for Thursday, great. Thanks, Rob.
Thank you.
Please standby for our next question.
We have a follow up question from the line of Ken Ken Herbert Your line is open.
Yes.
Sean or John can you comment on maybe what percentage of the growth in the quarter was trax or what that contribution was.
It was very modest.
Very modest this quarter.
On track with expectations, but very modest.
Reiterate that that we expect trax to be accretive to our FY 'twenty four numbers.
Okay, Okay, Great and then I'm sure we'll get into more of this on Thursday, but as you look for fiscal 'twenty. Four can you can you comment at least at a high level one on.
Sort of expectations for revenues are sort of low double digits.
A fair starting point as we think about the full year.
Yes, as we mentioned we expect.
Q1 to be kind of mid teens growth over over Q1, I'm, sorry, low teens growth over Q1 last year and.
And we will talk a little bit more about long range growth targets when we're together on Thursday.
Okay, great. Thanks, Ron.
Thank you.
Thank you.
I'm showing no further questions in the queue.
I would now like to turn the call back to management for closing remarks.
Great well. Thank you very much we appreciate the time and interest everyone and we look forward to seeing many of you on Thursday.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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