Q1 2024 AAR Corp Earnings Call

Speaker 1: Silence.

Yeah.

Yeah.

Speaker 2: Good afternoon, everyone, and welcome to AAR's fiscal 2024 first quarter earnings call. We're joined today by John Holmes, chairman, president, and chief executive officer, and John Gillum, chief financial officer.

Okay.

Good afternoon, everyone and welcome to Aar's fiscal 2024 first 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 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 like 95. These forward looking statements involve risk.

Speaker 2: 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.

Speaker 2: These forward-looking statements involve risks and uncertainty that could cause actual results of different material from forward-looking statements.

And uncertainty that could cause actual results to differ materially from forward looking statements. Accordingly. These statements are no guarantee of future performance.

Speaker 2: 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 section of the company's annual report on Form 10-K for the fiscal year ended May 31, 2023.

These risks and uncertainties are discussed in the company's earnings release and the risk factors section of the company's annual report on Form 10-K for the fiscal year ended May 31 2023.

Speaker 2: In providing the four different statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events.

In providing forward looking statements. The company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events.

Speaker 2: certain non-GAAP financial information we discussed on the call today. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is set forth in a company's earnings release.

Certain non-GAAP financial information discussed on the call today, a reconciliation of these non-GAAP measures. The most comparable GAAP measures is set forth in the company's earnings release.

Speaker 2: A replay of this conference call will be available for on-demand listening shortly after the completion of the call on AAR's website. At this time, I would like to turn the call over to AAR's Chairman, President, and CEO , John Holmes.

A replay of this conference call will be available for on demand listening shortly after the completion of the call on <unk> website.

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

Speaker 3: Thank you and good afternoon, everyone. I appreciate you joining us today to discuss our first quarter fiscal year 2024 results. This was a very strong start to the year, and I am both encouraged by our sustained momentum and proud of our team for continuing to deliver. Specifically, sales for the quarter were 23% year over year from $446 million to $550 million.

Thank you and good afternoon, everyone. I appreciate you joining us today to discuss our first quarter fiscal year 2024 results. This was a very strong start to the year and I am encouraged by our sustained momentum and proud of our team for continuing with the water specifically.

Specifically sales for the quarter were up 23% year over year from 446 million to 559 sales to commercial customers increased 34% and sales to government customers increased 3%.

Speaker 3: sales to commercial customers increased 34% and sales to government customers increased 3%.

Speaker 3: Within hard supply, sales were up 40% over the prior year quarter as we monetized USM investments that we made over the last year and as recent distribution winds continue to mature.

Within parts supply sales are up 40% over the prior year quarter as we monetize the U S and investments that we made over the last year.

As recent distribution wider continued to mature.

Speaker 3: Regarding USM, even though supply remains tight, our global sourcing team continues to secure high demand material. New parts distribution saw continued growth in our commercial product line, which more than offset slower part sales to the US government.

Even though supply remains tight our global sourcing team continues to secure high demand material new parts distribution saw continued growth in our commercial product line, which more than offset slower parts sales to the U S government.

Speaker 3: In repair and engineering, sales were up 8% over the prior year quarter, driven by continued strength in our hangers, partially offset by a slowdown in our landing gear operation due to the repair cycle timing of certain gear types.

And repair and engineering and sales were up 8% over the prior year quarter, driven by continued strength in our hangers, partially offset by a slowdown in our landing gear operation due to the repair cycle timing of certain year types in.

Speaker 3: In integrated solutions, sales were up 22% over the prior year quarter due to increased flight hours in our power by the hour program, the contribution from TRAC, and the strength in our government programs. Notably, our F-16 program in Europe is still in the process of ramping up and will become a more meaningful contributor of the year for RUP.

In integrated solutions sales were up 22% over the prior year quarter due to increased flight hours in our power by the hour programs the contribution from track and the strength in our government programs, notably our F 16 program in Europe , it's still in the process of ramping up it will become a more meaningful contributor as the year progresses.

Speaker 3: Turning to profitability, our adjusted operating margin was 7.3%, up from 6.9% in the prior year quarter. Adjusted operating margins expanded in all of our segments except expeditionary, and this represents our 10th consecutive quarter of year over year adjusted operating margin expand.

Turning to profitability, our adjusted operating margin was seven 3% up from six 9% in the prior year quarter.

Adjusted operating margins expanded in all of our segments, except Expeditionary and this represents our 10th consecutive quarter of year over year adjusted operating margin expansion.

Speaker 3: Our adjusted diluted earnings per share from continuing operations were up 28% from $0.61 per share to a first quarter record of $0.78 per share.

Our adjusted diluted earnings per share from continuing operations were up 28% or <unk> 51 per share to a first quarter record of 78 per share.

Speaker 3: With respect to cash, as we indicated in last quarter's call, we saw attractive opportunities to invest in our parts supply segment in the quarter, which drove a use of cash in operating activities from continuing operations of 18.5 million.

With respect to cash as we indicated in last quarter's call, we saw attractive opportunities to invest in our parts supply segment in the quarter, which drove a use of cash in operating activities from continuing operations of $18 5 million.

Speaker 3: Specifically, we made a net inventory investment of $38 million in our parts supply segment to support both US in demand and our recent distribution wins. It is worth noting that our prior parts supply investments are what drove the growth and profitability in this quarter, and we expect strong results from these most recent investments over time as well.

Specifically, we made a net inventory investment of $38 million in our parts supply segment to support both U S and demand and our recent distribution wins.

Worth, noting that our prior parts of by investors are what drove the growth and profitability in this quarter and we expect strong results from these most recent investments over time as well.

Speaker 3: Even after these growth investments, our net leverage at quarter end was only 1.18 times adjusted EBITDA, and as such, our balance sheet remains exceptionally strong.

Even after these growth investments our net leverage at quarter end was on a 11118 times adjusted EBITDA and as such our balance sheet remains exceptionally strong.

Speaker 3: Before I discuss new business, I would like to comment on the recent news regarding a parts supplier that allegedly provided uncertified parts using forged paperwork for use in CFM engine repair.

Before I discuss the business I would like to comment on the recent news regarding a parts supplier then allegedly provided uncertified parts using boards paperwork for use in CFM engine repairs.

Speaker 3: AAR neither purchased nor sold any parts from this supplier. Since our founding nearly 70 years ago, we have been exceptionally focused on quality and safety and conduct the highest level of diligence for resource parts.

AAR need are purchased or sold any parts from the supplier.

Since our founding nearly 70 years ago, we've been exceptionally focused on quality and safety and conduct the highest level of diligence that we source parts.

Speaker 3: This incident highlights the value of our quality system, and we believe it will result in customers placing even greater emphasis on AAR's reputation for doing it right.

That highlights the value of our quality system and we believe that will result in customers, placing even greater emphasis on aaas reputation for doing it Brian .

Speaker 3: Now turning to new business, during the quarter, we announced two multi-year commercial agreements with Moog, one for distribution and one for reciprocal component repair services. Importantly, these agreements are first steps in a new strategic relationship with Moog that we expect will lead to new opportunities.

Now turning to new business during the quarter, we announced two multiyear commercial agreements with no one for distribution and one for a reciprocal component repair services. Importantly, these agreements are first steps and a new strategic relationship with metal that we expect will lead to new opportunities.

Speaker 3: In addition, subsequent to the quarter, we announced an exclusive multi-year agreement with Paul Corporation, a day out of her company, to distribute highly engineered filtration products to foreign military customers.

In addition, subsequent to the quarter, we announced an exclusive multi year agreement with Pall Corporation Danaher company to distribute highly engineered filtration products to foreign military customers disagree.

Speaker 3: This agreement recognizes the extended customer reach that AAR provides to our partners, as well as the investments that we have made in recent years to augment our foreign military sales capability and our compliance program.

This agreement recognizes the extended customer reach the AAR provides to our partners as well as the investments that we've made in recent years to augment our core military sales capability and our compliance programs with that I'll turn it over to our CFO , Sean Gillen to discuss the results in more detail.

Speaker 3: With that, I'll turn it over to our CFO Sean Gillins to discuss the results in more detail.

Speaker 4: Thanks, John . Our sales in the corridor of 549.7 million were up 23.2% year over year. Our commercial sales were up 33.7% driven by growth across our commercial activities, particularly part supply. And our government sales were up 2.9% to primarily to integrated solutions, partially offset by declines for new parts distribution and part supply and expeditions.

Thanks, John our sales in the quarter of $549 $7 million were up 23, 2% year over year, our commercial sales were up 33, 7% driven by growth across our commercial activities, particularly part supply.

And our government sales were up two 9% due primarily to integrated solutions, partially offset by declines for new parts distribution and parts supplier in expeditionary.

Speaker 4: Gross profit margin in the quarter is 18.4% consistent with the prior year quarter on a reported basis and up from 18.1% in the prior year quarter on an adjusted basis.

Gross profit margin in the quarter was 18, 4% consistent with the prior year quarter on a reported basis and up from 18, 1% in the prior year quarter on an adjusted basis.

Speaker 4: Gross profit margin in our commercial business was 19.3% and gross profit margin in our government business was 16.3%.

Gross profit margin in our commercial business was 19, 3% and gross profit margin in our government business was 16, 3%.

Speaker 4: SG&A expenses in the quarter were $74.7 million, which included the $11.2 million charge we announced last week associated with the Russian court judgment and $2.8 million from TRAC's acquisition and amortization expenses as well as increased investments.

SG&A expenses in the quarter were $74 7 million, which included the $11 2 million dollar charge, we announced last week associated with the Russian Court judgment and $2 8 million from Trax acquisition amortization expenses as well as increased investments in the business.

Speaker 4: In the Russian judgment, a court directed us to make a payment equal to the alleged fair value of aircraft engines we purchased from a Russian airline in 2016 and 2017. We strongly disagree with the Russian court judgment and as noted in our September 22nd 8K, believe the judgment is the result of, among other things, a hostile business and legal environment for foreign companies in Russia.

In the Russian judgment, a court directed us to make a payment equal to the alleged fair value of aircraft engines, we purchased from a Russian airlines in 2016 and 2017.

We strongly disagree with the Russian court judgment and as noted in our September 20, 8-K believed the judgment is the result of among other things our hospital business and legal environment for foreign companies in Russia.

Speaker 4: Additionally, we believe we have strong defenses to any attempts that may be made to recognize and enforce the adverse judgment.

Additionally, we believe we have strong defenses to any attempt that may be made to recognize and enforce the adverse judgment.

Speaker 4: excluding discharge, the track expenses and $1.1 million of compliance costs. SG&A was $59.6 million or 10.8% of sales.

Excluding discharged the tracks expenses and $1 1 million of compliance cost.

SG&A was $59 6 million or 10, 8% of sales.

Speaker 4: As we announced last month, we entered into an agreement during the quarter to effectively transfer our pension obligations and assets to an insurer.

As we announced last month, we entered into an agreement during the quarter to effectively transfer our pension obligations and asset to an insurance company.

Speaker 4: This transaction allowed us to fully secure the funding for plan participants and eliminate our plan management activities and associated funding risk going forward.

This transaction allowed us to fully secure the funding for planned participants and eliminate our planned management activities and associated funding risk going forward.

Speaker 4: Due to the plan's funding status, no additional contributions were required as part of the transfer. And in fact, there was a surplus funding of $7.6 million, which we expect to use to fund certain 401k contributions.

Due to the planned funding status no additional contributions were required as part of the transfer and in fact, there was a surplus funding of $7 6 million, which we expect to use to fund certain 401K contributions.

Speaker 4: In conjunction with this transaction, we recognize a non-cash, pre-tax pension settlement charge of $27 million in the—

In conjunction with this transaction, we recognized a noncash pre tax pension settlement charge of $27 million in the quarter.

Speaker 4: We are very proud to be able to deliver on the commitments made to plan participants and have concluded our activities associated with a U.S. pension.

We are very proud to be able to deliver on the commitments made to plan participants and have concluded our activities associated with our U S pension plan.

Speaker 4: Net interest expense for the quarter was 5.4 million compared to 1 million last year, driven by higher interest rate and borrow.

Net interest expense for the quarter was $5 4 million compared to $1 million last year, driven by higher interest rates and borrowings.

Speaker 4: Regarding our effective tax rate, we expect it to be approximately 27% for the balance.

Regarding our effective tax rate, we expect it to be approximately 27% for the balance of the year.

Speaker 4: Cash flow use and operating activities for continuing operations with 18.5 million.

Cash flow used in operating activities from continuing operations was $18 5 million and <unk>.

Speaker 4: As John indicated, this usage was driven by net inventory investment of $37.9 million in our part supply segment to support both USM and new parts distribution.

John indicated as usage was driven by net inventory investment of $37 9 million in our parts supply segment to support both U S and new parts distribution demand.

Speaker 4: Specifically, these investments included a variety of engine platforms for USM material and inventory to support certain recently awarded distributions.

Specifically these investments included a variety of engine platforms for use on material and inventory to support certain recently awarded and distribution lines.

Speaker 4: We expect these investments to continue to generate a strong return on invested capital going forward. Even after the investments, our net leverage remains low at one point one eight times adjusted EBITDA. We are continuing to see both robust demand for aftermarket parts and attractive opportunities for further investment in part supply.

We expect these investments to continue to generate a strong return on invested capital going forward.

Even after the investments our net leverage remains low at 118 times adjusted EBITDA.

We are continuing to see both the robust demand for aftermarket parts and attractive opportunities for further investment in parts supplier.

Speaker 4: That said, we expect to generate slightly positive cash flow from operating activities in the second quarter.

That said, we expect to generate slightly positive cash flow from operating activities in the second quarter.

Speaker 4: Thank you for your attention and I'll now turn the call back over to John .

You for your attention and I will now turn the call back over to John .

Great. Thanks, John .

Speaker 3: Over the last few years, we've been proud of our ability to operate successfully in a particularly dynamic environment, and the environment certainly remains dynamic today.

Over the last few years, we have been proud of our ability to operate successfully in a particularly dynamic environment and the environment certainly remains dynamic today.

Speaker 3: While we expect the global aviation industry and our major customers to continue to grow, some low-cost and regional carriers have cited a slowing of demand, and fuel prices and inflation remain watch items for the industry.

While we expect the global aviation industry, and our major customers to continue to grow some low cost and regional carriers have cited a slowing of demand and fuel prices and inflation remains what guidance for the industry.

Speaker 3: At the same time, new aircraft delivery constraints and the ongoing GTF issues mean that the current fleet will continue to operate longer, which overall directly benefits AAR. Therefore, on balance, we expect continued strong demand for our parts and services.

At the same time, new aircraft delivery constraints and the ongoing GTS issues, namely that the current fleet will continue to operate longer which overall directly benefits AAR. Therefore on balance we expect continued strong demand for our parts and services for our parts activities, while U S and supply remains constrained due to the factors I just.

Speaker 3: For our parts activities, while USM supply remains constrained due to the factors I just mentioned, we're still seeing attractive opportunities to invest, and we expect that over time, as new aircraft and engines are ultimately delivered, the availability of USM supply will gradually improve.

Mentioned, we are still seeing attractive opportunities to invest and we expect that over time as new aircraft and engines are ultimately delivered the availability of USF supply will gradually improve.

Speaker 3: In repair and engineering, our hangers are expected to remain largely full for the foreseeable future. Our Miami hanger expansion is progressing, and we continue to evaluate expansion at other hangers where we can partner with local government, leverage existing overhead, expand our customer commitments, and readily access labor.

The repair and engineering, our hangers are expected to remain largely for the foreseeable future Alright, Ami hanger expansion is progressing and we continue to evaluate expansion at other hangars, where we can partner with local government leverage existing overhead expand our customer commitments and readily access labor.

Speaker 3: On the government side, as you know, there is a possibility of a shutdown. If that occurs, our current expectation is that it would not significantly impact our integrated solutions business, given we operate under previously awarded contracts. It may have some impact on our government distribution operations in terms of payment timing, orders, and shipments.

On the government side as you know there is a possibility of a shutdown at that occurs our current expectation is that it would not significantly impact our integrated solutions business given we operate under previously awarded contracts.

They have some impact on our government distribution operation in terms of payment timing orders and shipments and any of that the situation is fluid and we plan to remain flexible so that we can take action as needed to mitigate any impact.

Speaker 3: In any event, the situation is fluid and we plan to remain flexible so that we can take action as needed to mitigate any impact.

Speaker 3: All that said, in general, we see a constrained budgetary environment as supportive of our efficient commercial best practices offering to our government customers.

All that said in general we see a constrained budgetary environment is supportive of our efficient commercial best practices offerings through our government customers.

Speaker 3: Looking forward, with respect to Q2 overall, assuming no extended government shutdown, we expect both year over year and sequential sales and earnings growth. Specifically, we anticipate mid to high teens year over year sales growth with operating margins similar to or better than what we delivered in Q2 of last year.

Looking forward with respect to Q2 overall, assuming no extended government shutdown, we expect both year over year and sequential sales and earnings growth.

Specifically, we anticipate mid to high teens year over year sales growth with operating margins similar to or better than what we delivered in Q2 of last year.

Speaker 3: More generally, we are encouraged by the demand signals we are receiving from our primary customers, and this, combined with the industry's continued reliance on current generation aircraft, creates a very favorable operating environment. In our government business, as we win new contracts and the focus shifts to fleet readiness, we expect to accelerate our growth trajectory.

More generally we are encouraged by the demand signals, we're receiving from our primary customers and this combined with the industry's continued reliance on current generation aircraft creates a very favorable operating environment.

Government business that as we win new contracts and our focus shifts to fleet readiness, we expect to accelerate our growth trajectory.

Speaker 3: Again, we are encouraged by our very strong start to the year and look forward to continuing to invest in our business and our people to drive further growth. With that, I'll turn it over to the operator for questions.

Again, we are encouraged by our very strong start to the year and look forward to continuing to invest in our business and our people to drive further growth with that I'll turn it over to the operator for questions.

Speaker 5: Thank you. Ladies and gentlemen, to ask a question, please press star 11 on your telephone. You will then hear an automated message advising your hand is raised, and then wait to hear your name announced.

Thank you ladies.

Ladies and gentlemen to ask a question. Please press star one on your telephone.

Dan your automated message advising your hand is raised and then wait to hear your name announced.

Speaker 5: To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.

Withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.

Speaker 5: Our first question comes from the line of Robert Spengart with Nelius Research. Your line is open.

Our first question comes from the line of Robert Spingarn with Melius Research. Your line is open.

Hey, good afternoon.

Hey, Rob how are you.

Speaker 6: Good, thanks. I wanted to ask you about your, you know, very good sales growth in the quarter and what you just talked about for next quarter, and how we think about that against the five to 10% CAGR you're looking toward over the next few years. And maybe as a sub component to that, John , you know, does any of this GTF situation, how does that translate for you guys?

Good. Thanks, I wanted to ask you about your very.

Good sales growth in the quarter and what you just talked about for next quarter and how we think about that against the 5% to 10% CAGR youre looking toward over the next few years and maybe as a sub component to that John .

Does any of this.

GTS.

Situation, how does that translate for you guys.

Speaker 3: Sure, thanks, Rob. All good questions as usual.

Sure. Thanks, Rob all all good questions as usual.

Speaker 3: So as it relates to the quarter, obviously, as you can tell, we're really proud of what we delivered. It's really a really strong growth across the company, most notably in the parts business.

So as it relates to the quarter, obviously as you can tell we're really proud of what we deliver is really.

Really strong growth across the company, most notably in the parts business and how that relates to the 5% to 7% guidance that we put out obviously that that's a multiyear target and as we as we continue to ramp up.

Speaker 3: And how that relates to the 5% to 7% guidance that we put out, you know, obviously that's a multi-year target. And as we continue to ramp up, you know, the comps year over year will continue to increase. So we're thinking about years ahead. But in the immediate term, as we indicated for Q2 and the rest of this year in particular, we expect to be above that long-range target.

Our comps year over year will continue to increase so we're thinking about years ahead, but in the immediate term as we indicated four for Q2 and the rest of this year particular.

We expect to be.

Above that long range target.

Speaker 3: Okay. And on the GTF, I would say, you know, anything right now that takes next-gen aircraft out of service and places more emphasis on the current generation of aircraft is a positive for us. So if you've got 600 or more aircraft that are going to be coming out for these mods over the next couple of years, that's just going to put more pressure on the existing fleet, which is our bread and butter right now.

Okay and on the DTI.

That's why I was.

Yeah on the GTS I would say.

Anything right now that.

Nextgen aircraft out of service in places more emphasis on the current generation of aircraft.

Positive for us so if you've got 600 or more erk.

Aircraft that are going to be coming out for these bonds over the next couple of years, that's just going to put more pressure on the existing fleet, which is our bread and butter right now so.

Speaker 3: So net net, that will likely be a positive for us. The flip side is it's going to continue to constrain the supply for USM material. But as we've demonstrated, it's going to continue to constrain the supply for USM material.

Net net that will likely be a positive for us the flip side is going to continue to constrain supply or are you at that material but.

We've demonstrated.

Speaker 3: last year and this year with some of the investments we've been able to find and make, we're still, we believe, doing a good job of going out there and finding material to support this great growth even when the supply is tight.

Last year and this year with some of the investments we've been able to find and make.

Still we believe doing a good job of going out there and finding material to support this great growth, even when the supplier side.

Speaker 6: Okay, super helpful. I wanted to ask you on distribution. When we think about you know, you're adding contracts, and you've been very clear that they take a couple years to ramp, so we should expect more sales contribution from these latest ones over time. How should we think about the margins in this business? KLX was in the mid teens before it was acquired by Boeing. On the other hand, other distributors have been a bit lower. I'm thinking of Aviol. What's the right way to think about margin?

Okay Super helpful.

I wanted to ask you on distribution, when we think about youre, adding contracts and <unk> been very clear that they take a couple of years to ramp. So we should expect more sales contribution from these latest ones over time.

Should we think about the margins in this business <unk> was in the mid teens before it was acquired by Boeing on the other hand other distributors have been a bit lower I'm thinking of AVR, what's the right way to think about margins in this business.

Speaker 3: Yeah, we'd be probably somewhere in the middle. The margins for that business are higher than the overall margin for the company right now. So as that business continues to grow, that mix shift will be favorable. That's part of the reason you've seen the continued improvement in operating margin over the last 10 consecutive quarters. And as we've talked about, we, because of our market position as the largest independent and our balance sheet to continue to go ahead and invest in these programs, whereas our larger competitors owned by Airbus and Boeing don't have any of the independence or the focus on this type of investment.

Yes.

Probably somewhere in the middle.

The margins for that business are higher than the overall margin for the company right now so as that business continues to grow that mix shift will be favorable.

That's part of the reason you've seen the continued improvement in operating margin over the last 10 consecutive quarters.

And as we've talked about we because of our market position as well.

As the largest independent and our balance sheet to continue to go ahead and invest in these programs, whereas our larger competitors on by Airbus and Boeing don't have haven't been independents or.

The focus on the type of investment, yes, we think it's a great opportunity for us to continue to take share and as that mix shift continues to head towards the parts in general, but most specifically in distribution that will be accretive to operating margins.

Speaker 3: Now we think it's a great opportunity for us to just continue to take share. And as that mix shift continues to head towards parts in general, but most specifically distribution, that'll be a creative operating model.

Speaker 6: Okay, fantastic. Just quick one. Maybe this, Sean, this is for you. But the margins in the quarter are a little bit softer than the prior quarter. And I think you've been calling for them to, you know, to be about the same. Is there anything behind that?

Okay Fantastic and just quick one and maybe this is Sean this is for you, but the margins in the quarter were a little bit softer than the prior quarter and I think <unk> been calling for them to be about the same is there anything behind that.

Speaker 4: Yeah, and then I think you should take a look at some of the segment detail that's in the release as well as the queue that'll come out. I think margin's still really strong performance, significant improvement from the prior year period, but as you mentioned sequentially a slight decline and a lot of that came in parts which was you know relatively consistent with the prior year quarter but just down slightly. That's just a mix of a really strong queue for the finish last fiscal year and then what we saw in this quarter. Okay, appreciate.

Yes.

I think if you take a look at some of the segment detail.

In the release as well as the queue that will come out.

Yes, I think margin is still really strong performance significant improvement from the prior year period, when as you mentioned sequentially a slight decline in a lot of that came.

In parts, which was relatively consistent with the prior year quarter, which is down slightly.

That's just the mix of a really strong Q4 that finished last fiscal year and then what we saw in this quarter.

Okay appreciate that thanks for the color.

Speaker 5: Great, thanks Rob. Thank you.

Okay. Thanks, Rob.

Thank you.

Please standby for our next question.

Okay.

Speaker 5: Our next question comes from the line of Michael Sarmoli with Truist. Your line is open.

Our next question comes from the line of Michael <unk> with choice Youre line is open.

Speaker 2: Hey, good evening guys. Nice results. Thanks for taking the questions.

Hey, good evening guys nice results. Thanks for taking the question.

Speaker 3: Maybe just back to Rob's question, just looking into second quarter guidance, I think you said mid to high teens year over year. I don't think you said anything sequentially. I know first quarter's usually seasonally weaker, but it kind of implies.

Maybe just back to Rob's question.

Looking into second quarter guidance, I think you said mid to high teens year over year I don't think you said anything sequentially I know first quarters, usually seasonally weaker but kind.

Implies maybe sequentially flattish or just up slightly I mean is it just can you can you give any more color on.

Speaker 2: maybe sequentially flattish or just up slightly? I mean, can you give any more color on a

Speaker 4: you know, maybe how we should think about 2Q and seasonal trends if they were at present this quarter as normally.

Maybe how we should think about <unk> and seasonal trends.

We're present this quarter is normally.

Speaker 3: Sure, great question. We would expect up slightly sequentially. And as it relates to seasonality, we've seen this now coming out of COVID where if we were called free COVID, we definitely would see a pretty meaningful drop from Q4 to Q1. We obviously did not see that this quarter and we're very proud of that. And it had been less severe last year than it had been in prior years. And the reason for that is we really.

Sure Great question, we would expect to up slightly sequentially.

And as it relates as it relates to seasonality.

You're seeing us now coming out of Covid, where if you recall free covenant, we definitely would see a pretty meaningful drop from Q4 to Q1.

Obviously not to do that this quarter and we're very proud of that.

It had been less severe last year than it had been in prior years.

And the reason for that is we really work with our customer base in the hangars to level load the operation.

Speaker 3: with our customer base in the hangers to level load the operation.

Speaker 3: And we've also continued to refine the number of customers that we work with in our hangers.

And we've also continued to refine the number of customers that we work within our hangers, but the airlines, even though they they want their aircraft as much as possible to be.

Speaker 3: But the airlines, even though they want their aircraft as much as possible to be in the air during the summer, they recognize that to keep work going, to keep the workforce around, given the labor supply constraints, it's best for everybody.

In the air during the summer they recognize that to keep work going to keep the workforce around given the labor supply constraints, it's best for everybody and so we do expect continued slight seasonality going forward, but not to the degree that we would've seen prior due to the changes I just mentioned.

Speaker 3: And so we do expect continued slight seasonality going forward, but not to the degree that we would have seen prior to the changes I just mentioned.

Speaker 2: Got it. Got it. That's helpful. And then maybe, John , just to I think you mentioned a slowdown in landing gear. Can you maybe elaborate on that comment a bit? I don't think I caught it all.

Got it got it that's helpful.

And then maybe John just.

You mentioned a slowdown in landing gear can you maybe elaborate on that.

That comment a bit I don't think I caught it all.

Speaker 3: Yeah, yeah, you know, gear are on a and obviously our MRO business is the hangers, which we pay a lot of attention to with component repair and its land gear. Those are the three main activities, obviously dominated by hanger, but those other two are meaningful as well. The land and gear business is on a roughly a 10-year cycle.

Yes, yes gear.

Gear are on and obviously, our MRO business hangers, which we pay a lot of attention to what the component repair and explain a year. Those are the three main activities, obviously dominated by hanger, but those other two are meaningful as well.

The landing gear business is on a roughly a 10 year cycle.

Speaker 3: and gear come off at intervals over their lifetime for overhaul. And we are coming, you know, kind of on the other end of what had been a pretty significant overhaul cycle for the customers that we serve.

And gear come off.

At intervals over their lifetime for overall and we are coming.

On the other end of what had been a pretty.

Significant overhaul cycle for the customers that we serve so that business is in <unk>.

Speaker 3: So that business is in a forecast, is in a bit of a decline right now, just based on the natural cycle for these overhauls. That'll last for a period of time and then it'll pick back up. But that was obviously some slight softness inside of repair and engineering that we wanted to highlight.

But.

Forecasted.

It's been a bit of a decline right now just based on the natural cycle for these overall that last for a period of time and then.

It will pick back up but that was the.

Obviously, some slight softness inside of her Baron engineering that we wanted to highlight.

Speaker 2: Got it. Okay. And then last one for me and I'll jump off here. Just I guess if you go out there and look for some of that new material and the parts supplied the USM.

Got it Okay, and then last one for me and I'll jump off here, just I guess as you.

Go out there and look for for some of that new material on the parts supply the U S.

Speaker 2: What are you seeing in terms of profitability? And I guess maybe that kind of leads into what is the market looking like? I mean, is it pretty active to get your hands on that material? Are you having to pay higher prices than normal? Can you kind of protect your...

What are you seeing in terms of profitability I guess, maybe that kind of leads into what is the market looking like I mean is that is.

Is it pretty active to get your hands on that material is are you having to pay higher prices than normal can you kind of protect your.

Speaker 2: your kind of historical returns if you would or maybe just any any color there.

You're kind of.

Recall returns if you would or maybe just any any color there.

Speaker 3: Yeah, great question. So I would say yes, we absolutely for the asset types in which we're most active are paying higher prices, but we are also able to charge higher prices. So we are able to maintain our spread. You're going to see some fluctuation as you did in this quarter, in any one quarter just based on the mix of assets that we sell, whether they're whole engines or parts, et cetera, it'll move margins around a little bit. But generally speaking, the spread that we've had for years, we're able to maintain it, if not grow. And once again, I just want to highlight the efforts of the team there. It is a really tight, tight market. We're the largest in the world in terms of going out there and sourcing material. And that's one of the reasons that we're so focused on maintaining balance sheet flexibility to the extent that we have the opportunity to support the capital to get our hands on great material. As we did this quarter, for example, they weren't in a position to do that.

Yeah, Great question, So I would say.

Yes, we absolutely for the asset types of which were effective are paying higher prices, but we are also able to charge higher prices. So we are.

We're able to maintain our spreads youre going to see some fluctuation as you did in this quarter in any one quarter just based on the mix of assets that we sell whether they are whole legs and third parts et cetera.

<unk> margins around a little bit, but generally speaking the.

The spread that we've had for years, we're able to maintain if not grow.

And once again I just want to highlight the efforts of the team there. It is a really tight market.

We're the largest in the world in terms of going out there in sourcing material and Thats one of the reasons that we're still focused on maintaining balance sheet flexibility to the extent that we have.

The opportunity to deploy some capital to get our hands on great material as we did this quarter for example that we're in a position to do that.

Speaker 2: Got it. Helpful. Thanks, guys. I'll jump back into the queue. Thank you.

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

Thank you.

Thank you please standby for our next question.

Okay.

Speaker 5: Our next question comes from the line of Ken Herbert with RBC Capital Markets. Line is open.

Our next question comes from the line of Ken Herbert with RBC capital markets. Your line is open.

Speaker 4: Hey, John and so congrats on the nice sales group in the quarter. This is Steve's track house on for Ken.

Hey, Julien so and congrats on the nice quarter. This is Steve <unk> on for Ken Herbert.

Speaker 2: First wanted to just talk about the pricing in the aftermarket and what you guys are kind of seeing there I presume it's gonna be some some strong pricing. So maybe you could just kind of walk us through that

I first wanted to just talk about the pricing in the aftermarket in what you guys are kind of seeing there, presumably it's going to be some some strong pricing. So maybe if you could just kind of walk us through that.

Speaker 3: Yeah, I think similar to what I just mentioned, we are absolutely able to command strong pricing in the aftermarket, but also particularly in the used parts business where we're having to pay higher prices because material is in such demand. We haven't talked much about.

Yes, I think.

Similar to.

What I've just mentioned.

We are absolutely able to command strong pricing in.

In the aftermarket, but also particularly in the used parts business, where we're having to pay higher prices tariffs material.

First demand.

We haven't talked much about pricing.

Speaker 3: pricing in the hangers and as you know the last couple of years we've seen a pretty meaningful rise in our labor costs but we've received great support and cooperation from our MRO customer base about making pricing adjustments oftentimes off cycle from contract renewal periods in order to make sure that we can maintain our profitability to continue to provide them great support.

Pricing in the hangars and.

As you know the last couple of years, we've seen a pretty meaningful rise in our labor costs, but we've received great support and cooperation from our MRO customer base about making pricing adjustments oftentimes off cycle from contract renewal periods in order to make sure that we can we can.

Can maintain our profitability to continue to provide them great support.

Speaker 2: So maybe just just one more for me. I think it's the investor day. You had talked about the maturity cycle being very robust on something like a C.F. 1056, the B25 with the growth of those engines and the issues at Pratt for the turbofan. Just how do you think about shop visits and that going forward?

And maybe just one more from me I think at the Investor Day, you had talked about the maturity cycle will be very robust.

The CFM 56.

Two five with.

With regard to some of those engines and the issues.

Pratt geared turbofan, just how do you think about shop visits and that going forward.

Speaker 3: Yeah, we remain very bullish on that. The engine shops, and you're bringing up a great point, we sell parts to airlines, but some of our biggest parts, our biggest customers in the parts business are the engine shops themselves. And we receive forecasts based on their expected inputs over a year or longer, and they are all very full for those engine types that you mentioned. And so we expect a strong demand there for some time to come. All right, thanks so much.

Yes, we remain very bullish on that the engine shops, and you bring up a great point, we sell parts to airlines, but some of our biggest parts our biggest customers in the parts business or the engine shop themselves and we received forecast based on their expected inputs over a year or longer and they are all very full for those.

Operator: Good afternoon, everyone. Welcome to AR's fiscal 2024 first 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 would like to remind you that the comments made during the call may include forward-looking statements as to find the private security's litigation reform act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results different materially from forward-looking statements.

Operator: According to these statements, there are no guarantee of future performance. These risks and uncertainties that are discussed in the company's earnings release, and the risk factor section of the company's annual report on 1.10K for the fiscal year ended May 31, 2023. In providing the forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. Certain non-gap financial information we discussed in the call today. A reconciliation of the non-gap measures, the most comparable gap measures, is set forth in the company's earnings release.

<unk> types that you mentioned and so we expect a strong demand there for some time to come.

Alright, thanks, so much I'll jump back in queue.

Sure.

Great. Thank you.

Please standby for our next question.

Okay.

Speaker 5: Our next question comes from the line of Josh Sullivan with Benchmark. Your line is open.

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

Hey, good evening.

Speaker 6: Hey, Josh, how are you? I'm doing well. On the forged parts issue that's percolating through the industry here, can that be a driver for Trax? Is there a way to leverage the Trax franchise for that?

Hey, guys how are you.

John well.

The forged parts issue that's calculated into the industry here is that it can that be a driver for tracks or is there a way to leverage the franchise for that.

Speaker 3: Yeah, that's a great question and something we've been talking about even before this, that being able to track the provenance of parts digitally, and some people talk about blockchain or other elements to do that, is definitely something that we think the industry can benefit from. And unfortunately, this fraud that's out there is highlighting that.

Yes, that's a great question.

Operator: A replay of this conference call will be available for on-demand listening shortly after the completion of the call on AAR's website.

But talk about even before this.

Being able to track the provenance of parts digitally and some people have talked about blockchain or other elements to do that.

John Holmes: At this time, I would like to turn the call over to AAR's Chairman, President and CEO John Holmes. Thank you and good afternoon, everyone. I appreciate you joining us today to discuss our first quarter of fiscal year 2024 results.

It's something that we think the industry can benefit from and unfortunately this fraud. That's out there is highlighting that.

John Holmes: This was a very strong start to the year, and I am both encouraged by our sustained momentum and pride of our team for continuing to deliver. Specifically, sales for the quarter of 23% year-over-year, from $4.46 million to $559. Sales to commercial customers increased 34% and sales to government customers increased 3%. With this part supply, sales rock 40% over the prior year quarter, as we monetized U.S.M, investments that we made over the last year, and as recent distribution winds continued to mature.

Speaker 3: You know, to do those things takes some time, and I would say it's currently not part of the TRAC platform, but given the technological capability that we acquired with that company, this is definitely something that we could pursue. So the short answer to your question is yes, I think that could be part of the longer-term solution here, and if we think there's a market for TRAC, we've got the capability to make investments and go in that direction.

To do those things take some time and I would say, it's currently not part of the track platform, but given the technological capability that we acquired with that company. This is definitely something that we could that we could pursue so starting with your question is yes, but I think that could be part of the longer term solution here.

If we think there's a market for track we've got the capability to make investments in going that direction.

Speaker 7: Got it. And then a question on labor, given the demand that's going to be out there for you know, wrench turners and to address some of the RTX issues, are you seeing any pressure on labor rates at this point?

Got it and then.

John Holmes: Regarding U.S.M., even though supply remains tight, our global sourcing team continues to secure high demand material. New parts of distribution saw continued growth in our commercial product line, which more than offset slower parts sales to the U.S, government. In repair and engineering, sales work 8% over the prior year quarter driven by continued strength in our hangars, partially offset by a slowdown in our landing year operation due to the repair cycle timing of certain year types.

Question on labor given the demand that's going to be out there for <unk>.

To address some of the jacks issues are you seeing any pressure on labor rates at this point.

Speaker 3: It's been stable. We've seen it, as I mentioned, for the last couple of years, but it's not at the accelerating rate that it had been before. Now, we're certainly aware that as the airlines look to continue to negotiate their contracts with unions, et cetera, obviously, they're going to focus on pilots to the extent that they move on to mechanics and other constituencies, but I think that's important, that that couldmobile those operations

It's been stable we've seen it.

As I mentioned for the last couple of years, but it's not at the accelerating rate that it had been before now we're certainly aware that as the airlines look to continue to negotiate their contract with unions et cetera, obviously, we've been focused on pilots to the extent that they move on some mechanics that other.

John Holmes: In integrated solutions, sales were up 22% over the prior year quarter due to increased flight hours in our power by the hour program, the contribution from track, and the strength in our government programs. Notably, our F-16 program in Europe is still in the process of ramping up and will become a more meaningful contributor as the year progresses.

Our constituency.

But that could.

Speaker 3: create a downstream effect to our non-union team. But it would be the same dynamic that we've been dealing with for the last two years, which is to the extent that we see an increase in our costs, we need to seek relief from our customers so that we can continue to provide the service that they've come to rely on.

Create a downstream effect.

Two our nonunion team, but it would be the same dynamic that we've been dealing with for the last few years, which is to the extent that we see an increase in our cost we need to seek relief from our customers. So that we can continue to provide the service that they've come to rely on.

John Holmes: Turning to profitability, our adjusted operating margin was 7.3% up from 6.9% in the prior year quarter. Adjusted operating margin expanded in all of our segments except F-peditionary, and this represents our 10th consecutive quarter of year over year adjusted operating margin expansion. Our adjusted deluded earnings per share from continuing operations were up 28% from 61 cents per share to a first quarter record of 78 cents per share.

Got it thank you for the time.

Great. Thanks, guys.

Speaker 5: I'm sure no further questions in the queue. I will now like to turn the call back over to management for closing remarks.

I'm showing no further questions in the queue I would now like to turn the call back over to management for closing remarks.

Speaker 3: Well, we really appreciate everybody's time and interest, and we look forward to being back here for the Q2 earnings call. Thank you.

Okay, great well, we really appreciate everybody's time and interest and we look forward to being back year for the Q2 earnings call. Thank you.

John Holmes: With respect to cash, as we indicated in last quarter's call, we saw attractive opportunities to invest in our parts of flight segment in the quarter, which drove a use of cash in operating activities from continuing operations of 18.5 million, specifically, we made a net inventory investment of $38 million in our part supply segment to support both USM demand and our recent distribution wins. It is worth noting that our prior part supply investments are which drove the growth and profitability in this quarter and we expect strong results from these most recent investments over time as well.

Speaker 5: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Goodbye.

Speaker 8: Music

Okay.

[music].

Okay.

[music].

John Holmes: And as such, our balance sheet remains exceptionally strong.

Okay.

Okay.

John Holmes: Before I discuss due business, I would like to comment on the recent news regarding a parts supplier that allegedly provided unsertified parts using forged paperwork for use and CFM engine repairs. AAR need to purchase or sold any parts from this supplier. Since our founding nearly 70 years ago, we have been exceptionally focused on quality and safety and conduct the highest level of diligence when we source parts. This incident highlights the value of our quality systems and we believe that will result in customers placing even greater emphasis on AAR's reputation for doing it right.

John Holmes: Now, starting to do business, during the quarter we announced two multi-year commercial agreements with MOG, one for distribution and one for reciprocal component repair services.

John Holmes: Importantly, these agreements are first steps in a new strategic relationship with MOG that we expect will lead to new opportunities.

John Holmes: In addition, subsequent to the quarter we announced an exclusive multi-year agreement with Paul Corporation, a danifer company to distribute highly engineered filtration products to four military customers.

Sean Gillen: This agreement recognizes the extended customer reach that AAR provides to our partners as well as the investments that we have made in recent years to augment our four military sales capability and our compliance programs. With that, I'll turn it over to our CSO, Sean Gillen, to discuss the results in more detail. Thanks, John. Our sales in the quarter of 549.7 million were up 23.2% year over year. Our commercial sales were up 33.7% driven by growth across our commercial activities, particularly part supply.

Sean Gillen: And our government sales were up 2.9% to primarily to integrate solutions, partially offset by declines for new parts distribution and parts supply and expeditionary. Close profit margin, the quarter was 18.4%, consisting with the prior year quarter on a reported basis, and up from 18.1% in the prior year quarter on an adjusted basis. Close profit margin in our commercial business was 19.3%, and gross profit margin in our government business was 16.3%. As DNA expenses in the quarter were 74.7 million, which included the 11.2 million dollar charge we announced last week associated with the Russian court judgment, and 2.8 million from track acquisition and arbitration expenses, as well as increased investments in the business.

Sean Gillen: In the Russian judgment, a court directed us to make a payment equal to the alleged fair value of aircraft engines we purchased from a Russian airline in 2016 and 2017. We strongly disagree with the Russian court judgment, and as noted in our September 22nd 8K, believe the judgment is the result of, among other things, a hostile business and legal environment for foreign companies in Russia. Editionally, we believe we have strong defenses to any attempt that may be made to recognize and enforce the adverse judgment, excluding this charge to track expenses in 1.1 million of compliance costs, S-GNA was 59.6 million or 10.8% of sales.

Sean Gillen: As we announced last month, we entered into an agreement during the quarter to effectively transfer our pension obligations and assets to an insurance company. This transaction allowed us to fully secure the funding for planned participants and eliminate our plan management activities and associated funding risk going forward. Due to the plan's funding status, no additional contributions were required as part of the transfer and in fact there was a surplus funding of 7.6 million which we expect to use to fund certain 401K contributions.

Sean Gillen: In conjunction with this transaction, we recognized a non-cash pretax pension settlement charge of 27 million dollars in the quarter. We are very proud to be able to deliver on the commitments made to plan participants and have concluded our activities associated with a U.S, pension plan. Net interest expense for the quarter was 5.4 million compared to 1 million last year, driven by higher interest rates and borrowers. Regarding our effective tax rate, we expected to be approximately 27% for the balance of the air.

Sean Gillen: Cash will use and operating activities from continuing operations with 18.5 million. As John indicated, this usage was driven by net inventory investment of 37.9 million in our part supply segment to support both U.S.M, and new parts distribution demand. Specifically, these investments include a variety of engine platforms for U.S.M, material and inventory to support certain recently awarded distribution lines. We expect these investments to continue to generate a strong return on investing capital going forward.

Sean Gillen: Even after the investments, our net leverage remains low at 1.18 times adjusted at the top. We are continuing to see both robust demand for aftermarket parts and attractive opportunities for further investment in parts supply. That said, we expect to generate slightly positive cash flow from operating activities in the second quarter.

John Holmes: Thank you for your attention and I'll now turn the call back over to John. Great. Thank you, John.

John Holmes: From the last few years, we've been proud of our abilities to operate successfully in a particularly dynamic environment. The environment certainly remains dynamic today. While we expect the global aviation industry and our major customers to continue to grow, some low costs and regional carriers aside as slowing of demand and fuel prices and inflation remain watch items for the industry. At the same time, new aircraft delivery constraints and the ongoing GTF issues mean that the current fleet will continue to operate longer, which overall directly benefits AAR.

John Holmes: Therefore, on balance, we expect continued strong demand for our parts and services. For our parts activities, while USM supply remains constrained due to the factors I just mentioned, we're still seeing attractive opportunities to invest and we expect it over time as new aircraft and engines are ultimately delivered. The availability of USM supply will gradually improve. In repair and engineering, our hangers are expected to be largely full for the foreseeable future. Our Miami hangar expansion is progressing and we continue to evaluate expansion at other hangers where we can partner with local government, leverage existing overhead, expand our customer commitment, and readily access Herbert.

John Holmes: On the government side, as you know, there is a possibility of a shutdown. If that occurs, our current expectation is that it would not significantly impact our integrated solutions business, given we operate under previously awarded contracts. It may have some impact on our government distribution operations in terms of payment timing, orders and shipments. And any event the situation is fluid and we plan to remain flexible so that we can take action as needed to mitigate any impact. All that said, in general, we see a constrained budgetary environment as supportive of our efficient commercial best practices offering to our government customers.

John Holmes: Looking forward with respect to Q2 overall, assuming no extended government shutdown, we expect both year over year and sequential sales and earnings growth. Specifically, we anticipate mid to high team year over year sales growth with operation margins similar to or better than what we delivered in Q2 last year. More generally, we are encouraged by the demand signals we are receiving from our primary customers and this, combined with the industry's continued reliance on current generation aircraft creates a very favorable operating environment.

John Holmes: In our government business, as we win new contract and the focus shifts of wheat readiness, we expect to accelerate our growth trajectory. Again, we are encouraged by our very strong start to the year and look forward to continuing to invest in our business and our people to drive further growth with that.

Operator: I'll turn it over to the operator for questions. Thank you. Ladies and gentlemen to ask the question, please first start one one on your telephone. You would then hear automated message advising your hand is raised and then wait to hear your name announced to withdraw your question. Please first start one one again.

Operator: Please stand by while we compile the Q&A roster.

Robert Spingarn: Our first question comes from the line of Robert Spengar with Melius research, Yalan is open. Hey, good afternoon. Hey, Rob, how are you? Good thing. So I wanted to ask you about your, you know, very good sales growth in the quarter and what you just talked about for next quarter and how we think about that against the 5 to 10% keger. You're looking toward over the next few years and maybe as a sub component to that, John, you know, does, does any of this GTF situation, how does that translate for you guys?

Robert Spingarn: Sure. Thanks, Rob. All, all good questions as usual. So as it relates to the quarter, obviously, as you can tell, we're really proud of what we delivered. It's really really strong growth across the company most notably in the parks. And how that relates to the, you know, the 5 to 7% guidance that we put out, you know, obviously that's a, that's a multi year target. And as we continue to ramp up, you know, the cops year over year will continue to increase.

Robert Spingarn: So we're thinking about years ahead, but in the immediate term, as we indicated for Q2 and the rest of this year, in particular, we expect to be above that long range target, on the GTF. On the GTF, I would say, you know, anything right now that takes next-gen aircraft out of service and places more emphasis on the current generation of aircraft is a positive for us. So if you've got 600 or more aircraft that are going to be coming out for these mods over the next couple of years, that's just going to put more pressure on the existing fleet, which is our bread and butter right now.

Robert Spingarn: So, you know, net net that will likely be a positive for us. The flip side is it's going to continue to constrain to supply for USM material, but as we've demonstrated, you know, last year and this year with some of the investments we've been able to find and make, we're still, we believe, doing a good job of going out there and finding material to support this great growth even when it's a wide type.

John Holmes: Okay, super helpful. I wanted to ask you on distribution. When we think about, you know, you're adding contracts and you've been very clear that they take a couple years to ramp, so we should expect more sales contribution from these latest ones over time. Now, how should we think about the margins in this business? KLX was in the mid teens before it was acquired by Boeing. On the other hand, other distributors have been a bit lower.

John Holmes: I'm thinking of maybe all what's the right way to think about margins in this business? Yeah, we'd be probably somewhere in the middle. The margins for that business are higher than the overall margins for the company right now. So, as that business continues to grow, that mixtures will be favorable. That's part of the reason you've seen the continued improvement in operating margin over the last 10 consecutive quarters. And as we've talked about, we, because of our market position as the largest independent and our balance sheet to continue to go ahead and invest in these programs, whereas our larger competitors, owned by Airbus and Boeing, don't have any of the independence or the focus on the type of investment.

John Holmes: Now, we think it's a great opportunity for us to just continue to take share. And as that mixtures continues to head towards parts in general, but most specifically, distribution, that'll be accrued at the operating margins. Okay, fantastic.

Sean Gillen: Just a quick one. Maybe this is Sean. This is for you. But the margins in the quarter are a little bit softer than the prior quarter. And I think you've been calling for them to be about the same. Is there anything behind that? Yeah, and then I think you should take a look at some of the second detail that's in the release as well. The queue that'll come out. I think margins still really strong performance, significant improvement from the prior year period.

Sean Gillen: But as you mentioned, sequentially a slight decline. And a lot of that came in in parts, which was relatively consistent with the prior year quarter, but just down slightly. And that's just the mix of a really strong cheap four that finished last fiscal year. And then what we saw in this quarter. Okay, appreciate that. Thanks for the color. Great. Thank you.

Operator: Please stand by for our next question.

Michael Ciarmoli: Our next question comes from the line of my core. So, Sir Moly with Truist. The line is open. Hey, good evening, guys. Nice results. Thanks for taking the questions. Maybe just back to Rob's question. Just looking into second quarter guidance, I think he said mid to high teen zero over a year. I don't think he said anything sequentially. I know first quarters usually seasonally weaker, but it kind of implies maybe sequentially flatish or just up slightly.

John Holmes: I mean, can you give any more color on how we should think about 2Q and seasonal trends if they were at our present this quarter as normally? Sure. Great question. We would expect a up slightly sequentially. As it relates to seasonality, we've seen this now coming out of COVID where we're called free COVID. We definitely would see a pretty meaningful drop from Q4 to Q1. We obviously did not see that this quarter or we're very proud of that.

John Holmes: And it had been less severe last year than it had been in prior years. And the reason for that is we've really worked with our customer base in the hangers to level low of the operation. And we've also continued to refine the number of customers that we work with in our hangers. But the airlines, even though they want their aircraft as much as possible to be in the air during the summer, they recognize that to keep work going, to keep the workforce around, given the labor supply constraints, it's best for everybody. And so we do expect, you know, continued slight seasonality going forward, but not to the degree that we would have seen prior to the change as I just mentioned. Got it. That's helpful.

John Holmes: And then maybe, John, just to, I think you mentioned the slowdown in landing gear. Can you maybe elaborate on that common a bit? I don't think I called it all. Yeah. Gear are on a, and obviously our MRO business is the hangers, which we pay a lot of attention to with component repair and it's landed here. Those are the three main activities, obviously dominated by hangers, but those are the two are meaningful as well.

John Holmes: The landed gear business is on a roughly a 10 year cycle. And gear come off at intervals over their lifetime for overhaul. And we are coming, you know, kind of on the other end of what had been a pretty significant overhaul cycle for the customers that we serve. So that business is in a, is in a forecasted, is in a bit of a decline right now just based on the natural cycle for these overhaul. That lasts for a period of time, and then it'll pick back up. But that was obviously some slight softness inside of our Garen engineering that we wanted to highlight. Got it. Okay.

Operator: And then last one for me, and I'll jump off here.

John Holmes: Just, I guess as you go out there and look for for some of that new material in the parts supply, the USM, what do you see in terms of profitability? And I guess maybe that kind of, you know, leads into what is the market looking like? I mean, is it is it pretty active to get your hands on that material? Are you having to pay higher prices than normal? Can you kind of protect your your kind of historical returns if you would or maybe just any any color there?

John Holmes: Yeah, great question. So I would say, yes, we absolutely, for the asset types in which growth act is our paying higher prices, but we are also able to charge higher prices. So we are able to to maintain our spread. You're going to see some fluctuation as you did in this quarter, in any one quarter, just based on the mix of assets that we sell, whether their whole engines or parts, etc. It'll move margins around a little bit.

John Holmes: But generally speaking, the spread that we've had for years, we're able to maintain it if not, bro. And once again, I just want to highlight the efforts of the team there. It is a really tight market. We're the largest in the world in terms of going out there and sourcing a cereal. And that's one of the reasons that we're still focused on maintaining balance sheet flexibility. To the extent that we have the opportunity to force the capital to get our hands on some great material, as we did this quarter, for example, there weren't a position to do that. Got it. Now helpful. Thanks, guys. I'll jump back into you. Thank you.

Ken Herbert: Please stand by for our next question. Our next question comes from the line of Ken Herbert with RBC Capital Markets. You're on the floor, Ken Herbert. Chris, we're going to just talk about the pricing in the aftermarket and what you guys are kind of seeing there. There's going to be some strong pricing, so maybe you could just kind of walk us through that. Yeah, I think similar to what I just mentioned, we are absolutely able to command strong pricing in the aftermarket, but also particularly in the youth starts business, we're having to pay higher prices because material is in best demand.

Ken Herbert: We haven't talked much about pricing in the hangers, and as you know, the last couple of years, we've seen a pretty meaningful rise in our labor costs, but we've received great support and cooperation from our MRO customer base about making pricing adjustments oftentimes off-cycle from contract or new periods in order to make sure that we can maintain our profitability to continue to provide them great support. So it's good, and maybe just one more for me.

Ken Herbert: I think at the investor day, you've talked about the maturity cycle being very robust on something like the CFN 56, the V25. With the brothers and those engines and the issues at Pratt for their turbofan, just how do you think about shop visits and that going forward? Yeah, we remain very bullish on that. The engines shops and you're bringing up a great point. We sell parts to airlines, but some of our biggest parts, our biggest customers in the parts business are the engine shops themselves, and we received forecast based on their expected inputs over a year or a longer, and they are all very full for those engine types that you mentioned, and so we expect a strong demand there for some time to come. Thanks so much. Let's go pick them. Thank you.

Operator: Great, thank you.

Operator: Please stand by for our next question.

Joshua Sullivan: Our next question comes from the line of Josh Sullivan with Benchmark. Your line is open. Thank you, David. Hey, Josh, how are you? I'm doing well. I'm the forage parts issue that's percolating through the industry here. Is that a, can that be a driver for tracks? Is there a way to leverage the tracks franchise for that? Yeah, that's a great question and something we've been talking about even before this, that you know, being able to track the provenance of parts digitally.

Joshua Sullivan: And some people talk about blockchain or other elements to do that. It's definitely something that we think the industry can benefit from. And unfortunately, this, this fraud that's out there is highlighting that need, you know, to do those things take some time. And I would say it's currently not part of the track platform, but given the technological capability that we acquired with that company, this is definitely something that we could, that we could pursue.

Joshua Sullivan: So the short answer question is yes, I think that could be part of the longer term solution here. And if we think there's a market for tracks, we've got the capabilities to make investments and go in that direction. Got it. And then question on labor, you know, given, you know, the demand that's going to be out there for, you know, renchterners and to address some of the BRTX issues. Are you seeing any pressure on labor rates at this point?

Joshua Sullivan: It's been stable. We've seen it, as I mentioned for the last couple of years, but it's not at the accelerating rate that it had been before. Now, we're certainly aware that as the airlines work to continue to negotiate their contracts with unions, et cetera. Obviously, we've been focused on pilots to the extent that they move on to mechanics and other conditions that that could create a downstream effect to our non-union team.

Joshua Sullivan: But it would be the same dynamic that we've been dealing with for the last two years, which is to the extent that we've seen increase in our costs, we need to seek relief from our customers so that we can continue to provide the service that they've come to rely on. Got it. Thank you for the time. Great. Thanks, Josh.

Operator: I'm sure no further questions than the Q.

John Holmes: I will now like to turn the call back over to management for closing remarks. Great. Well, we really appreciate everybody's time and interest and we look forward to being back here for the Q2 earnings call. Thank you.

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator: Good bye.