Q3 2024 AAR Corp Earnings Call

Unknown Executive: Thank you. Good afternoon, everyone.

Okay.

Unknown Executive: Welcome to AAR's fiscal 2024 third 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 may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.

Good afternoon, everyone welcome to our fiscal 2024 third 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 comments made during the call may 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 the forward looking statements. Accordingly. These statements are no guarantee of future performance. These risks and uncertainties are discussed in the company's earnings release and the risk factors.

Unknown Executive: 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 annual report on Form 10-K for the fiscal year ended May 31, 2023, and Form 10-Q for the fiscal quarter ended February 29, 2024, which we expect to be on file with the SEC shortly. In providing these forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events, and many more.

Sections of the company's annual report on Form 10-K for the fiscal year ended May 31, 2023, and Form 10-Q for the fiscal quarter ended February 29, 2024, which we began pilot shortly.

He provided the forward looking statements the company assumes no obligation to provide updates reflect future circumstances warranted.

It depends.

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

John McClain Holmes: 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. Thank you, and good afternoon, everyone.

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

Website.

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

John McClain Holmes: I appreciate you joining us today to discuss our third quarter fiscal year 2024 results. Before we discuss the results, I would like to take the opportunity here to, again, welcome the Triumph product support employees to the AAR family. We closed the acquisition and related financing transactions just subsequent to the end of our quarter.

John McClain Holmes: Thank you and good afternoon, everyone. I appreciate you joining us today to discuss our third quarter fiscal year 2024 results before.

John McClain Holmes: Before we discuss our results I would like to take the opportunity here to again welcome to try and product support employees.

John McClain Holmes: Family.

John McClain Holmes: The close of the acquisition and related financing transactions just subsequent to the end of our quarter. This business, which is now part of our repair and engineering segment meaningfully scaled our previous component repair operation and.

John McClain Holmes: This business, which is now part of our repair and engineering segment, meaningfully scales our previous component repair operation, adds differentiated repair capability on both current and next generation platforms, and expands our footprint into the higher growth Asian market. Integration is off to a great start, and I'm very, very excited about what we can do with this. Turning to the results, we delivered another strong quarter. Specifically, sales were up 9% year over year from $521 million to a third quarter record of $567 million. Sales to commercial customers increased 18% more than offsetting a 7% decrease in sales to government customers.

Differentiated prepare capability on both current and next generation platforms.

John McClain Holmes: Spans our footprint into the higher growth Asian market.

John McClain Holmes: <unk> is off to a great start and I'm very very excited about what we can do with this business.

John McClain Holmes: Turning to the results we delivered another strong quarter, specifically sales were up 9% year over year from $521 million to a third quarter record of $567 million.

John McClain Holmes: Sales to commercial customers increased 18% more than offsetting a 7% discrete decrease in sales to government customers.

John McClain Holmes: For part supply, total sales were up 6% year-over-year, driven by strong performance in our commercial distribution. In USM, demand remains exceptionally strong, which drove another quarter of growth. To break that down further, individual USM part sales were up significantly year over year, but large asset transactions such as whole aircraft and whole engine sales were down. This reflects even tighter supply in this market. For example, opportunities like the 757 acquisition that we made from American Airlines last year are even more difficult to find.

John McClain Holmes: For parts supply total sales were up 6% year over year, driven by strong performance at our commercial distribution business in.

John McClain Holmes: In U S demand remains exceptionally strong which drove another quarter of growth.

John McClain Holmes: That down further individual USA sales parts sales were up significantly year over year, but large asset transactions such as whole aircraft and whole engine sales were down.

John McClain Holmes: This reflects even tighter supply in this market for example opportunities like the 75% of an acquisition that we made from American Airlines last year are even more difficult to find having said that we have the best sourcing team in the world and continue to have the balance sheet flexibility to be able to act quickly when those opportunities do arise.

John McClain Holmes: Having said that, we have the best sourcing team in the world and continue to have the balance sheet flexibility to be able to act quickly when those opportunities do arise. I mentioned strong commercial distribution performance, and I would like to highlight that specifically. Commercial distribution had an exceptional quarter, posting 27% organic growth. This was driven by growth from existing product lines as well as the early ramp of recently announced wins. Government distribution had a lower quarter when compared to a very strong quarter a year ago.

John McClain Holmes: I mentioned strong commercial distribution performance and I would like to highlight that specifically commercial distribution had an exceptional quarter posting 27% organic growth.

John McClain Holmes: Driven by growth from existing product lines as well as the early ramp of recently announced wins.

John McClain Holmes: Government distribution had a lower quarter when compared to a very strong quarter a year ago. However, government bookings have been increasing and we expect growth to return to that business moving forward.

John McClain Holmes: However, government bookings have been increasing, and we expect growth to return to that business moving forward. In repair and engineering, sales were up 10% over the prior year quarter as we were able to drive greater volumes through our hangars. I'm proud of the efficiency gains we continue to make with our existing footprint. In integrated solutions, sales were up 15% over the prior year quarter due to increased flight hours in our commercial Power by the Hour programs and the contribution from TRAX. Finally, in Expeditionary Services, sales were down 15% over the prior year quarter due to a decline in shipments of pallets to the U.S. Air Force.

John McClain Holmes: In repair and engineering sales were up 10% over the prior year quarter, as we were able to drive greater volumes through our hangers I'm proud of the efficiency gains we continue to make with our existing footprint.

An integrated solution sales were up 15% over the prior year quarter due to increased flight hours in our commercial power. They are powered by the hour programs and the contribution from tracks.

John McClain Holmes: Finally in Expeditionary services sales were down 15% over the prior year quarter due to a decline in shipments of colleagues to the U S. Air Force as a reminder, we are a sole source provider of these pilots and we expect the dod's procurement volumes to return to more normalized levels in our FY 'twenty five.

John McClain Holmes: As a reminder, we have a sole source provider of these pallets, and we expect the DOD's procurement volumes to return to more normalized levels in our FY25. Turning to profitability, our adjusted operating margin was 8.3%, up from 7.6% in the prior year quarter, driven by margin expansion in parts supply and repair and engineering. This represents our 12th straight quarter of year-over-year adjusted operating margin expansion, and our margins are now approximately 50% higher than they were before COVID. We are especially proud to have made this progress in an inflationary environment in which labor costs, in particular, have been rising. Our adjusted diluted earnings per share from continuing operations were up 13% from $0.75 per share to a third quarter record of $0.85 per share. With respect to cash, we generated $20 million in cash flow from operating activities from continuing operations.

John McClain Holmes: Turning to profitability, our adjusted operating margin was eight 3%.

John McClain Holmes: Upfront seven 6% in the prior year quarter, driven by margin expansion in parts supply and repair and engineering. This represents our <unk> straight quarter of year over year adjusted operating margin expansion.

John McClain Holmes: Theyre now approximately 50% higher than they were before COVID-19.

John McClain Holmes: We are especially proud to have made this progress in an inflationary environment in which labor costs in particular have been rising.

John McClain Holmes: Our adjusted diluted earnings per share were from continuing operations were up 13% from 75 per share to a third quarter record of 85 cents per share.

John McClain Holmes: With respect to cash we generated $20 million in cash flow from operating activities from continuing operations, our cash flow and EBITDA growth resulted in net net leverage at quarter end of just under one times adjusted EBITDA.

John McClain Holmes: Our cash flow and EBITDA growth resulted in net leverage at quarter end of just under one times adjusted EBITDA. As you know, we elected to finance the product support acquisition entirely with new debt. Proforma for the acquisition net leverage at the end of Q3 was 3.6 times adjusted EBITDA. The decision to finance the acquisition entirely with debt reflects our confidence in the continued cash flow generation and EBITDA growth and our resulting ability to de-lever.

John McClain Holmes: As you know we elected to finance the product support acquisition entirely with new debt.

John McClain Holmes: No former for the acquisition net leverage at the end of Q3 was three six times adjusted EBITDA.

John McClain Holmes: The decision to finance entirely with debt reflects our confidence in the continued cash flow generation and EBITDA growth and our resulting ability to de lever.

John McClain Holmes: Turning to new business, during the quarter, we announced a new multi-year distribution agreement with ONTIC to supply certain military products to the U.S. government. We also announced a multi-year contract extension and expansion for flight hour component support services with ASL Airlines. We also announced TRAX agreements to provide eMRO services to Singapore Airlines, as well as eMRO and eMobility services to Archer Aviation.

John McClain Holmes: Turning to new business during the quarter, we announced a new multi year distribution agreement with <unk> to supply certain military products to the U S government.

We also announced a multiyear contract extension and expansion for flight hour component support services with Asl Airlines, We also announced tracks agreements to provide MRO services with Singapore Airlines as well as the MRO any mobility services to Archer aviation.

Sean M. Gillen: The Singapore Airlines Award in particular demonstrates the power of the AAR-TRAX combination as AAR was instrumental in securing that award. Finally, just yesterday morning, we announced an agreement to provide surplus CFM56-5B engine material to Cebu Pacific. This agreement leverages our long-term supply partnership with FTIA Aviation and drives further predictability into our USM operations. With that said, I'll turn it over to our CFO, Sean Gillen, to discuss the results and the acquisition in more detail. Thanks, John.

John McClain Holmes: Good for Airlines award in particular demonstrates the power of the AAR tracks combination as they are.

John McClain Holmes: He was instrumental in securing that award finally, just yesterday morning, we announced an agreement to provide surplus CFM 56 engine material to Cebu Pacific disagree.

John McClain Holmes: This agreement Leverages, our long term supply partnership with <unk> Aviation and drive further predictability into our U S operations with that ill turn it over to our CFO, Sean Gillen to discuss the results and the acquisition in more detail.

Sean M. Gillen: Our sales in the quarter of $557.3 million were up 8.9% year-over-year. Our commercial sales were up 17.6% year-over-year, driven by commercial growth in each of part supply, repair and engineering, and integrated supply. Our commercial distribution sales were a particular standout as we continued to drive sales growth on existing product lines and expanded newly won product lines as well. Our government sales were down 7.4% year-over-year.

Sean M. Gillen: Thanks, John our sales in the quarter of $567 $3 million were up eight 9% year over year. Our commercial sales were up 17, 6% year over year, driven by commercial growth in Egypt, part supply repair and engineering and integrated solutions are.

Sean M. Gillen: Our commercial distribution sales, where a particular standout as we continued to drive sales growth on existing product lines and expanded nearly one product lines as well.

Sean M. Gillen: Our government sales were down seven 4% year over year. However sequentially government sales were up 5% as we are starting to see a recovery in our government activities within distribution integrated solutions in Expeditionary services.

Sean M. Gillen: However, sequentially, government sales were up 5% as we have started to see a recovery in our government activities within distribution, integrated solutions, and expeditionary services. Gross profit margin in the quarter was 19.4%, up from 18.1% in the prior year quarter, driven by strong performance in parts supply, as well as integrated solutions, including the high-margin Tracksoft. Gross profit margin in our commercial business was 19.8%, and gross profit margin in our government business was 18.7%. SG&A expenses in the quarter were $77 million.

Sean M. Gillen: Gross profit margin in the quarter was 19, 4% up from 18, 1% in the prior year quarter, driven by strong performance in parts supply as well as integrated solutions, including the high margin tracks offering.

Sean M. Gillen: Gross profit margin in our commercial business was 19, 8% and gross profit margin in our government business was 18, 6%.

Sean M. Gillen: SG&A expenses in the quarter were $77 million. This included a $9 $4 million of trial product support transaction expenses $2 $8 million of Trax acquisition, and amortization expenses and $2 million of investigation costs. Excluding these items SG&A was $62 8 million or 11, 1% of sales.

Sean M. Gillen: This included $9.4 million in Triumph product support transaction expenses, $2.8 million in TRAX acquisition and amortization expenses, and $2 million in investigation costs. Excluding these items, SG&A was $62.8 million, or 11.1% of sales. Net interest expense for the quarter was $11.3 million, which included $6.1 million of costs related to the bridge financing commitment for the product support acquisition that will not recur going forward. Cash flow provided by operating activities from continuing operations was $20.4 million. This is net of inventory investments in parts supply, specifically in commercial distribution, which, as we've mentioned, had significant sales growth in the quarter. Our net leverage at the end of Q3 was 0.95 times. As John indicated, we financed the product support acquisition entirely with new debt consisting of $550 million of unsecured notes with an interest rate of 6.75% and an approximately $205 million incremental draw from our revolving credit facility, which we upsized by $205 million in conjunction with the acquisition. In Q4, we expect our net interest expense to be approximately $18.5 million, which consists of $9.3 million associated with the fixed rate notes and the balance from the floating rate revolver and the amortization of financing expenses.

Net interest expense for the quarter was $11 3 million, which included $6 1 million of costs related to the bridge financing commitment for the product support acquisition that will not recur going forward.

Sean M. Gillen: Cash flow provided by operating activities from continuing operations was $20 4 million. This is net of inventory investments in parts supply specifically in commercial distribution, which as we mentioned has significant sales growth in the quarter. Our net leverage at the end of Q3 were <unk> 95 times.

Sean M. Gillen: John indicated refinance the product support acquisition entirely with new debt consisting of $550 million of unsecured notes with an interest rate of 675% and an approximately $205 million incremental draw from our revolving credit facility, which we upsize by $205 million in conjunction with the acquisition.

Sean M. Gillen: In Q4, we expect our net interest expense to be approximately $18 5 million, which consisted of $9 3 million associated with the fixed rate note and the balance from the floating rate revolver and the amortization of financing expenses.

Sean M. Gillen: Going forward and consistent with our reporting for tracks, our adjusted operating income and adjusted EPS will exclude noncash amortization expense associated with purchase accounting.

Sean M. Gillen: Going forward, and consistent with our reporting for TRACS, our adjusted operating income and adjusted EPS will exclude non-cash amortization expense associated with purchase accounts. Our adjusted results will also exclude transaction expenses recognized in Q4, as well as integration costs that we expect to incur over the next 12 to 18 months. As a reminder, we indicated that we expect to generate $10 million of run-rate synergies from the product support acquisition and expect that it will be accretive in full year fiscal 2025. However, in Q4, we expect it to be slightly dilutive to earnings as the incremental interest expense associated with the acquisition will modestly exceed incremental operating costs. As we also indicated previously, we will step up the tax basis, which will generate approximately $9 million of annual cash tax savings for each of the next 15 years. This will not impact our GAAP tax rate or adjusted EPS, and we expect our adjusted effective tax rate to be approximately $27.5.

Adjusted results will also exclude transaction expenses recognized in Q4 as well as integration costs that we expect to incur over the next 12 to 18 months.

Sean M. Gillen: As a reminder, we indicated that we expect to generate $10 million of run rate synergies from the product support acquisition and expect that it will be accretive and full year fiscal 2025. However.

Sean M. Gillen: However in Q4, we expect it to be slightly dilutive to earnings as the incremental interest expense associated with the acquisition will modestly exceed incremental operating profit.

Sean M. Gillen: As we also indicated previously we will step up the tax basis, which will generate approximately $9 million of annual cash tax savings for each of the next 15 years. This will not impact our GAAP tax rate or adjusted EPS and we expect our adjusted effective tax rate to be approximately 27, 5%.

Speaker Change: Before turning the call back to John I would like to take this opportunity to thank our bank group for their support of the financing of the acquisition. There are additional $205 million commitment to a revolver reflects their confidence and AAR and the merits of the acquisition and allowed us to partially finance the acquisition with flexible pre payable debt that facilitates our de levering going forward.

John McClain Holmes: Before turning the call back to John, I would like to take this opportunity to thank our bank group for their support of the financing of the acquisition. Their additional $205 million commitment to our revolver reflects their confidence in AAR and the merits of the acquisition and allowed us to partially finance the acquisition with flexible prepayable debt that facilitates our de-levering going forward. Thank you for your attention, and I will now turn the call back over to you.

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

Great. Thank you Shawn.

Speaker Change: Regarding the market going forward the continued new aircraft delivery challenges as well as the GTS and other engine issues means the demand for current generation aircraft and associated maintenance and parts requirement will remain strong.

This is good news for AAR.

John McClain Holmes: This means that <unk> supply will remain tight we will continue to leverage our global sourcing network to secure material to meet this demand.

It also means sustained high demand for our commercial distribution activities, where we expect significant growth to continue coming from both existing lines as well as new contract awards.

John McClain Holmes: Great, thank you, Sean. Regarding the market going forward, the continued new aircraft delivery challenges, as well as the GTF and other engine issues, mean the demand for current generation aircraft and associated maintenance and parts requirements will remain strong. This is good news for AAR. While this means that USM supply will remain tight, we will continue to leverage our global sourcing network to secure material to meet this demand. This also means sustained high demand for our commercial distribution activities, where we expect significant growth to continue, coming from both existing lines as well as new contract awards. In repair and engineering, I am excited to announce that we expect to break ground on our airframe MRO facility expansions in both Miami and Oklahoma City this quarter.

The repair and engineering I am excited to announce that we expect to break ground on our airframe MRO facility expansions in both Miami and Oklahoma City. This quarter once complete in our FY 'twenty fix these will add approximately 15% capacity to our network in the meantime, we will look for ways to drive growth and higher throughput.

John McClain Holmes: Utilizing our existing footprint like we did this quarter.

John McClain Holmes: And integrated solutions, we have a strong pipeline of both government and commercial opportunities and we expect awards will be made this calendar year. We're also encouraged by the high level of customer interest and the tracks MRO suite of offerings.

John McClain Holmes: Regarding Q4, we expect revenue growth in the mid to high teens, including the contribution from the product support acquisition of approximately $65 million to $70 million in sales and we expect adjusted operating margins of approximately 9% overall, which reflect the accretive contribution from the product support acquisition.

John McClain Holmes: Once complete in FY26, these will add approximately 15% capacity to our network. In the meantime, we will look for ways to drive growth and higher throughput using our existing footprint, like we did this quarter. In integrated solutions, we have a strong pipeline of both government and commercial opportunities, and we expect awards to be made this calendar year. We are also encouraged by the high level of customer interest in the TRAX eMRO suite of offerings.

John McClain Holmes: More generally we are incredibly well positioned to continue our growth and margin expansion as we move into our FY 'twenty five and beyond attractive acquisition is working well and the thesis behind the combination is proving out as evidenced by the recently announced Singapore when we.

John McClain Holmes: We are incredibly excited about the differentiated high margin capability that the product support acquisition brings and our team is already pursuing numerous opportunities with our customers. Overall, our end markets are extremely strong and we remain focused on executing on our growth strategy with that I'll turn it over to the operator for questions.

John McClain Holmes: Regarding Q4, we expect revenue growth in the mid-to-high teens, including the contribution from the product support acquisition of approximately $65 to $70 million in sales, and we expect adjusted operating margins of approximately 9% overall, which reflects the accretive contribution from the product support acquisition. More generally, we are incredibly well positioned to continue our growth and margin expansion as we move into FY25 and beyond. The TRAX acquisition is working well, and the thesis behind the combination is proving out, as evidenced by the recently announced Singapore wind power project.

Operator: Thank you to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question Press Star one again.

Operator: While we compile the Q&A roster.

Operator: Okay.

Operator: And our first question will come from the line of Robert Spingarn with Melius Research. Your line is open.

Robert Michael Spingarn: Well good afternoon.

Robert Michael Spingarn: Hey, Rob how are you.

Robert Michael Spingarn: Good. Thanks, how are you guys are well I have a few different questions here John first I thought I'd go back to a couple of your comments on the business and this concept of a slower OE ramp.

Unknown Executive: We are incredibly excited about the differentiated, high-margin capability that the product support acquisition brings, and our team is already pursuing numerous opportunities with our customers. Overall, our end markets are extremely strong, and we remain focused on executing on our growth strategy. With that, I'll turn it over to the operator for questions. Thank you. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again.

Robert Michael Spingarn: Leaving more.

Robert Michael Spingarn: Other aircraft in service longer how is that effect clearly, it's driving the parts business how is that affecting MRO.

Robert Michael Spingarn: Because im curious if thats.

Robert Michael Spingarn: Increasing demand or lowering it because you just can't get airplanes out of an airline schedule long enough to work on them.

Robert Michael Spingarn: Yes, that's a really that's a really great question with respect to your first point on cards absolutely.

Robert Michael Spingarn: The longer the current generation aircraft.

Robert Michael Spingarn: We as an operation and obviously youre seeing very high utilization the more parts requirements, that's going to drive so it's good news for the parts business.

Unknown Executive: One moment while we compile the Q&A roster. And our first question will come from the line of Robert Spingarn with Mellius Research. Your line is open. Well, good afternoon. Hey, Rob, how are you?

Robert Michael Spingarn: The heavy maintenance.

Robert Michael Spingarn: Over the medium term it will be a positive it will drive.

Robert Michael Spingarn: More maintenance requirements <unk> got air aircraft that were expected to be retired that are now going to end up going in for another maintenance events. However.

Robert Michael Spingarn: Good, thanks. Hope you guys are well. I have a few different questions here. John, first, I thought I'd go back to a couple of your comments on the business and this concept of a slower OE ramp, and many more. Yeah, that's a really great question.

Robert Michael Spingarn: However in the immediate term is driving a lot of movement in the maintenance schedule that the airlines as airlines like United and southwest two of our big customers look to move things around to adjust to the new delivery schedules that they're getting out of the out of the OEM. So it's creating a little bit of churn for us in the medium term and the media.

John McClain Holmes: With respect to your first point on parts, absolutely. The longer the current generation aircraft fleet is in operation, and obviously you're seeing very high utilization, the more parts requirements it's going to drive. So it's good news for the parts business. For the heavy maintenance business, over the medium term, it will be positive. It will drive more maintenance requirements.

Term, but on the balance that it.

Robert Michael Spingarn: Will be a positive for us.

Robert Michael Spingarn: Okay, and then is focusing on parts supply.

Robert Michael Spingarn: Just wanted to think about sequentially through the quarter the year on year growth of six five.

John McClain Holmes: You've got aircraft that were expected to be retired that are now going to end up going in for another maintenance event. However, in the immediate term, it is driving a lot of movement in the maintenance schedules at the airlines. As airlines like United and Southwest, two of our big customers, look to move things around to adjust to the new delivery schedules that they're getting from the OEM, so it's creating a little bit of churn for us. In the immediate term, but on the balance, it will be positive.

Robert Michael Spingarn: Solid, but we might have expected.

A little bit higher exit margins, but just on the top line growth.

Robert Michael Spingarn: And then comparing to prior quarters how.

Robert Michael Spingarn: How do we think about that six 5% when we look through the various months of the quarter in terms of front a quarter back a quarter or is there a trend.

Robert Michael Spingarn: I wouldn't point too much of a trend throughout the quarter I mean, its fairly steady, but I would parse that fixed five right. You've got you've got really two kind of major buckets in there you've got new parts distribution and then you've got USF and within those two buckets I wanted to take care level further so and new parts distribution the.

John McClain Holmes: Okay, and then focusing on parts supply, just wanted to think about sequentially through the quarter, you know, the year on year growth at 6.5 was solid, but we might have expected, you know, a little bit higher, you had good margins, but just in terms of top line growth, you know, and then comparing to prior quarters, how do we think about that 6.5 when we look through the various months of the quarter in terms of front of I wouldn't point to much of a trend throughout the quarter. I mean, it's fairly steady, but I would parse that 6-5, right? You know, you've got really two kinds of major buckets in there. You've got New Parts Distribution, and then you've got USM. And within those two buckets, I want to take you a level further.

Robert Michael Spingarn: Commercial business as we mentioned just had an outstanding quarter were 27% organic growth year over year, and new parts commercial distribution and if you look at our peer set that's about the best that you see out there. So we're really happy with the way our commercial distribution is going.

Robert Michael Spingarn: Government distribution had a lower quarter than it did last year last year, we had a very strong quarter.

Robert Michael Spingarn: This year, we also had a good quarter it was lower than last quarter.

Robert Michael Spingarn: We had seen bookings and I believe we've talked about this in prior earnings calls we have seen government bookings decreased throughout last year. So we're feeling the effects of that now on the flip side, we are now seeing.

Government bookings increasing the last several months. So we expect that will drive return to growth in the government distribution as well so a.

John McClain Holmes: So, in New Parts Distribution, the commercial business, as we mentioned, just had an outstanding quarter. We're 27% organic growth year over year in New Parts Commercial Distribution. And if you look at, you know, our peer set, that's about the best that you see out there. So, we're really happy with the way commercial distribution is going. Government distribution had a lower quarter than it did last year.

Robert Michael Spingarn: A couple of moving parts on the commercial around the new parts distribution side and the Philippines over to.

Robert Michael Spingarn: Flipping over to USA.

Robert Michael Spingarn: We mentioned, we kind of break that down into two buckets large asset sales, which are whole aircraft and whole engines and then the day to day part sales the day to day part sales are at record levels, we saw double digit growth in day to day part sales in the U S M.

Robert Michael Spingarn: Packages of parts at this moment in time are easier to source. So we are getting their hands on those that are we're repairing them and refinance the whole assets. The larger dollar assets those are harder to come by.

John McClain Holmes: Last year, we had a very strong quarter. This year, we also had a good quarter. It was just lower than last quarter. So, we had seen bookings, and I believe we've talked about this in prior earnings calls. We had seen government bookings decrease throughout last year.

Robert Michael Spingarn: And so we saw a decline year over year and a.

Robert Michael Spingarn: Large asset sales.

Robert Michael Spingarn: And obviously the focus of that team is to continue to.

John McClain Holmes: So, we're feeling the effects of that now. On the flip side, we are now seeing government bookings increasing for the last several months. So, we expect that will drive a return to growth in the government distribution as well. So, you know, a couple moving parts on the commercial or on the New Parts Distribution side. And then flipping over to...

Robert Michael Spingarn: Leverage the global sourcing network to get our hands on the right assets to meet the demand so anyway.

Robert Michael Spingarn: I wanted to take you through and you've got a few different moving parts below that six 5% and hopefully that gives you a little more color.

Speaker Change: Yes, just on that.

Speaker Change: Comment you made a moment ago why is it that the smaller batches of components and parts are or have USA them are easier to come by than the.

John McClain Holmes: Okay....to USM. Flipping over to USM, as we mentioned, we kind of break that down into two buckets: large asset sales, which are whole aircraft and whole engines, and then the day-to-day parts sales. The day-to-day parts sales are at record levels.

Speaker Change: On the full aircraft et cetera, I guess the full aircraft. If you haven't a full aircraft somewhere in airline doesn't I'll, let that go they wanted to step back and serve that is.

John McClain Holmes: We saw double-digit growth in day-to-day parts sales in USM. Those packages of parts, at this moment in time, are easier to source. So, we're getting our hands on those, and we're repairing them and reselling them. But whole assets, the larger dollar assets, those are harder to come by.

Speaker Change: Is that the reason.

Speaker Change: Yes, that's exactly you want the aircraft in service and then in terms of whole Amgen. The engine shops are full right now the slots are full and so.

If you've got a spare engine, you're going to want an ongoing and an operator.

John McClain Holmes: And so, we saw a decline year over year in large asset sales. And obviously, the focus of that team is to continue to leverage the global sourcing network to get our hands on the right assets to meet the demand. So, anyway, I wanted to take you through it.

Speaker Change: Okay, and then just one more on engines, given Max and the geared turbofan situations.

Speaker Change: With the airlines extending the lives of all of the aircraft and engines, we see a build out still with Pratt and CFM on their maintenance networks for these engines GTS and leap do you have any interest in getting into the engine MRO market.

John McClain Holmes: You got a few different moving parts below that 6.5%, and hopefully, that gives you a little more color. Yeah, and on that comment you made a moment ago, why is it that the smaller batches of components and parts or of USM are easier to come by than the full aircraft, et cetera? I guess the full aircraft; if you have a full aircraft somewhere, an airline doesn't want to let that go. They want to put that back in service. Is that the reason?

Speaker Change: That question comes up.

Speaker Change: Relatively frequently at this time, our biggest customers in the trading business or the engine MRO themselves <unk> Delta Tech ops et cetera.

Speaker Change: So we're not in the business of competing with our customers our preferences to be the supplier to support that broadening demand across the MRI exit MRO network.

Speaker Change: Okay, and then just one quick one for Sean on margins just yet.

Robert Michael Spingarn: Yeah, exactly. You want the aircraft in service. And then, in terms of whole engines, the engine shops are full right now. The slots are full.

<unk> been doing well your parts business is strong.

Sean M. Gillen: Within repair and engineering strong demand for airframe MRO and then with the triumph asset in the tracks acquisitions being accretive to margins could you be close to double digit operating margins at some point in fiscal 'twenty five.

John McClain Holmes: And so if you've got a spare engine, you're going to want it on the wing and operating. And then just one more on the engines. Given MAX and the geared turbofan situations with the airlines extending the lives of old aircraft and engines, we see a build-out still with Pratt and CFM on their maintenance networks for these engines, GTF and LEAP. Do you have any interest in getting into the engine MRO market? You know, that question comes up, you know, and relatively frequently at this time. Our biggest customers in the trading business are the engine MROs themselves, MTUs, Delta Tech Ops, etc. And so we're not in the business of competing with our customers.

Sean M. Gillen: Yes.

Sean M. Gillen: That's certainly the focus as you heard John say Q4, we think will be around 9% and if you think about the continued mix shift the parts supply and the impact of the triad product support acquisition as well as tracks all of that is accretive to margins and getting towards that 10%.

Speaker Change: Great. Thanks, so much.

Speaker Change: Thank you Rob.

Speaker Change: Thank you one moment for our next question.

Speaker Change: And that will come from the line of Bert <unk> with Stifel. Your line is open.

Sean M. Gillen: Our preference is to be the supplier to support that broadening demand across the engine MRO network. Okay, and then just one quick one for Sean on margins. They've been doing well. Your parts business is strong. Within repair and engineering, there is strong demand for airframe MRO. And then, with the Triumph asset and the Trax acquisitions, these being accretive to margins, could you be close to double-digit operating margins at some point in fiscal 25? Yeah, I think that's certainly the focus.

Bert: Hey, good afternoon. Thanks for the question.

Bert: Thanks, Brett.

Bert: John maybe just a follow up to one of the questions. There. If we think about the guide for the fourth quarter mid to high teen sales growth would seem to imply a mid single digit organic growth versus the 9% you just did this past quarter.

Bert: It seems like you gave a pretty upbeat outlook, though on a lot of.

John McClain Holmes: The contributors there so what's driving the I guess slow down is it just comps do you think <unk> is going to decline sequentially.

Robert Michael Spingarn: As you heard John say, Q4 we think will be around 9%. And if you think about the continued mix shift of parts supply and the impact of the Triumph product support acquisition as well as the tracks, you know, all that's accretive to margins and getting towards that 10%. Great. Thanks so much, and many more.

John McClain Holmes: It sounds like governments, giving better parts distribution still strong maybe theres, a little bit of volatility in MRO, but if I put it all together it seems like it's maybe a little better. So can you just help me understand the question.

John McClain Holmes: Yes, I would say part of it is comps obviously had some strong performance.

Unknown Executive: Thank you. One moment for our next question, and that will come from the line of Bert Subin with Stiefel. Your line is open. Hey, good afternoon.

John McClain Holmes: Last year.

So thats, certainly driving driving a bit of it but.

John McClain Holmes: Your comment on government I would say that overall, we see things improving a government that we would not expect a meaningful improvement in this quarter. So we see a similar if we see a similar dynamic in Q4 and as much as youre going to have real strong commercial performance.

Bert William Subin: Thanks for the question. Thanks, Bert. John, maybe just to follow up on one of the questions there, if we think about the guide for the fourth quarter, mid to high teens, sales growth, what would seem to imply mid single digit organic growth versus the 9% you just did this past quarter? It seemed like you gave a pretty upbeat outlook, though, on a lot of things and the contributors there. So what's driving the, I guess, slowdown? Is it just comps?

John McClain Holmes: Trading and commercial distribution as well as in the hangers.

John McClain Holmes: But.

John McClain Holmes: That is offset by continued softness in the government market as we move through our FY 'twenty five we expect to return to growth in government.

John McClain Holmes: It would be a nice match to expected continued strength in the commercial market as well.

John McClain Holmes: Do you think USM is going to decline sequentially? Because it sounds like government's getting better, parts distribution's still strong, and maybe there's a little bit of volatility in MRO. But if I put it all together, it seems like it's maybe a little better. So can you just help me understand that equation?

John McClain Holmes: On the government point like if I look at the President's budget request for FY 'twenty, five and granted a lot of things can change.

John McClain Holmes: It seems to indicate a larger site of retirement cycle and so far not really any indication of increased sustainment spending are you seeing something different than that because it seems like there is optimism toward government that that's going to start to get better once we get into FY 'twenty five.

John McClain Holmes: Yeah, I'd say part of it is comps. Obviously, I had some strong performances last year, so that's certainly driving a bit of it. But your comment on government, I would say that overall, we see things improving in government, but we would not expect a meaningful improvement in this quarter. So we see a similar dynamic in Q4 in as much as you're going to have real strong commercial performance in trading, in commercial distribution, as well as in the hangars. But that is offset by continued softness in the government market.

Speaker Change: So I'm, just curious where that's coming from.

Speaker Change: Yes, we're hearing the same things that hasn't yet translated into orders. If you look at the stated levels inventory levels across the platforms that we support pretty much without exception they are below the <unk>.

John McClain Holmes: As we move through FY25, we expect a return to growth in government, which would be a nice match to the expected continued strength in the commercial markets as well. On the government point, like if I look at the President's budget request for FY25, and granted, a lot of things can change, it seems to indicate a large retirement cycle, and so far, not really any indication of increased sustainment spending. Are you seeing something different than that?

Speaker Change: Date of inventory levels to meet the.

Speaker Change: The expectations for Sustainment. So at some point, we absolutely do expect a replenishment in parts and pallets in particular.

Speaker Change: To meet those stated levels.

Speaker Change: We haven't seen the inflection point, yet as I mentioned in government distribution, we are seeing better months in better bookings.

Which could be a leading indicator that youre starting to see that inflection, but it's not translating yet into.

John McClain Holmes: Because it seems like there's optimism toward government that things are going to start to get better once we get into FY25. So I'm just curious where that's going. Yeah, we're hearing the same things that haven't yet translated into orders. If you look at the stated levels, inventory levels across the platforms that we support, pretty much without exception, they are below the stated inventory levels to meet the expectations for sustainment. So at some point, we absolutely do expect a replenishment of parts and pallets, in particular, to meet those stated levels. You know, we haven't seen the inflection point yet.

Speaker Change: Something we would call a significant trend.

Speaker Change: Just to clarify I guess, the differential is more sort of weakness in parts and government MRO is steadier and some parts of the opportunity.

Speaker Change: Government MRO has been steady.

Speaker Change: The government distribution business, yes.

Speaker Change: Is the opportunity again to parts business for government overall at AAR, we've got opportunities to grow in the government programs business. So the supply chain programs. We have a number of bids out there that have not yet been awarded we would expect to see awards come out of this calendar year.

John McClain Holmes: As I mentioned, in government distribution, we are seeing better months and better bookings, which could be a leading indicator that you're starting to see that inflection. But it's not translating yet into, you know, something we would call a significant trend. Just to clarify, I guess the differential is more sort of weakness in parts, and government MRO is steadier, and so parts is the opportunity. Government MRO has been steady.

Speaker Change: They take a while but when they happen they're big.

Speaker Change: And then again you've got the.

Speaker Change: The expeditionary business mobility business.

Speaker Change: You will see improvement there once the pallet awards start to come through so you got a few different buckets and the overall our government business.

Speaker Change: Got it Okay, just one last one for Sean.

Speaker Change: You gave some color on maybe getting closer to 10% as we think about next year can you just breakdown where parts supply falls into that it seems like this may be an opportunity U S. M. I assume the sort of flattish, but maybe it's parts distribution matures. There is an opportunity and then I guess as a follow on to that.

John McClain Holmes: The government distribution business, yes, is the opportunity in the parts business. For government overall at AAR, we've got opportunities to grow in the government programs business, so the supply chain programs. We have a number of bids out there that have not yet been awarded. We would expect to see awards come out this calendar year. They take a while, but when they happen, they're big.

Speaker Change: Can you give us any color on how to think about free cash does that start to moderate post some of the parts distribution or does that start to get better plus some of the parts distribution growth.

John McClain Holmes: And then again, you've got the expeditionary business, the mobility business, which will see improvement once the pallet awards start coming through. So you've got a few different buckets in the overall AAR government business. Okay.

Speaker Change: Yes.

Speaker Change: As you think about the margin.

Speaker Change: <unk> improvement for the company part supplies that a big part of that and if you think about next year. We do think it will continue to be.

Sean M. Gillen: You gave some color on maybe getting closer to 10% as we think about next year. Can you just break down where parts supply falls into that? It seems like there's maybe an opportunity. USM, I assume, is sort of flattish, but maybe as parts distribution matures, there's an opportunity. And then, I guess, as a follow-on to that, can you give us any color on how to think about free cash?

Speaker Change: The highest growing part and the highest growing segments.

Speaker Change: Specifically led by commercial distribution, but also continued growth in USA.

Speaker Change: And part supply operating margin is close to 13% so accretive to the overall company and will help drive that improved margin outlook next year.

And then in terms of free cash flow.

Good quarter $20 million of operating cash in this quarter. If you look earlier this fiscal year, a little bit heavier on the inventory investment to help drive some of that growth as we get into this next fiscal year, obviously, a big focus on generating cash and delevering as well as growing EBITDA. So I think youll see a little bit better.

Sean M. Gillen: Does that start to moderate after some of the parts distribution? Or does that start to get better after some of the parts distribution growth? Yeah, and I think, you know, as you think about the, you know, margin improvement for the company, parts supply has been a big part of that. And if you think about next year, we do think it'll continue to be the highest growing part and the highest growing segment, specifically led by commercial distribution, but also continued growth in USM. And parts supply operating margin is close to 13%. So it is very important to the overall company, and it will help drive that improved margin outlook next year. And then in terms of free cash flow, you know, a good quarter 20 million of operating cash in this quarter, if you look earlier this fiscal year, a little bit heavier on the inventory investment to help drive some of that growth.

Speaker Change: Free cash flow performance on that with the caveat that the USA market as John talked about remains dynamic and we continue to be in a good position to source new material to meet that demand is growing.

Speaker Change: Great. Thanks, so much.

Speaker Change: Thank you.

Speaker Change: Thank you one moment our next question.

Speaker Change: And that will come from the line of Josh Sullivan with the benchmark Company. Your line is open.

Joshua Ward Sullivan: Hey, good afternoon.

Joshua Ward Sullivan: Hey, Josh.

Joshua Ward Sullivan: John you called out the GTS issues just in your prepared remarks.

Joshua Ward Sullivan: What's your sense on how long the cycle looks like on the supplemental GTS worker when does it peak in your view at this point.

Sean M. Gillen: As we get into this next fiscal year, obviously, a big focus on generating cash and de-levering as well as growing EBITDA. So I think you'll see a little bit better free cash flow performance on that, with the caveat that the USM market, as John talked about, remains dynamic, and we continue to be in a good position to source new material to meet that demand that's growing. Great, thanks so much.

Speaker Change: I think that is a very popular question to ask in the industry right now.

Speaker Change: So I don't know that I could give you.

Speaker Change: Better insight than anyone else.

Speaker Change: But I would say, though is that generally speaking between that and the.

Speaker Change: The slower overall aircraft introductions, we expect.

Unknown Executive: One moment for our next question, and that will come from the line of Josh Sullivan with the Benchmark Company. Your line is open. Good afternoon. Hey Josh.

The elevated demand to be measured in years.

Speaker Change: Got it got it and then on the CFM CV relationship should we expect additional similar relationships followed down the pipe as the relationship with <unk> maturing to a point where you.

Joshua Ward Sullivan: John, you call out the GTF issues just in your prepared remarks. What's your sense of how long the cycle looks like for the supplemental GTF work? Or when does it peak in your view at this point? I think that is a very popular question to ask in the industry right now. So I don't know that I could give you better insight than anyone else. What I would say, though, is that, generally speaking, between that and the slower overall aircraft introductions, we expect the elevated demand to be measured in years. I got it.

Are you expecting an increase in volume of parts at this point.

Speaker Change: The relationship with <unk>.

Speaker Change: It is going very very well they are great partners.

Speaker Change: The relationship has grown beyond the initial expectations and both of US have expectations that it will continue to grow from here. So that is a meaningful contributor to the U S and as I said, we expect that to continue to grow.

John McClain Holmes: And then on the CFM-CV relationship, should we expect additional similar relationships to follow down the pipe? Is the relationship with FTI maturing to a point where you're expecting an increase in volume of parts at this point? The relationship with Apti is going very, very well. They're great partners.

Speaker Change: Got it and then and then just as far as expansion to Asian markets, particularly with the Chinese.

Speaker Change: What do you think the biggest opportunity is organic you're taking share from internal airline capabilities or third party suppliers.

John McClain Holmes: The relationship has grown beyond its initial expectations, and both of us have expectations that it will continue to grow from here. So that is a meaningful contributor to the USM business, and we expect that to continue to grow. And then, just as far as expansion to Asian markets, you know, particularly with the triumphant assets, where do you think that the biggest opportunity is? Is it organic?

Speaker Change: Yes, great question.

One of the most attractive things about the <unk> acquisition was the facility that they have in Asia that got very unique capability over there, particularly on the structure side.

Speaker Change: They are set up with next gen capability to move into platforms like the 770 <unk> hundred 50.

Speaker Change: And as and Thats, where the majority of those fleets in the world are going so as those leads mature we are only.

John McClain Holmes: You know, do you think it's taking share from internal airline capabilities or third party suppliers? Yeah, great question. You know, one of the most attractive things about the Triumph acquisition was the facility they have in Asia. They've got very unique capability over there, particularly on the structure side. They are set up with next-gen capability to move into platforms like the 787 and the A350, and that's where the majority of those fleets in the world are going.

Speaker Change: We'll be one of the four <unk>.

Speaker Change: Providers of structure prepare capability in the region to support those large fleets and.

Speaker Change: Thats organic that's organic growth as the new aircraft mature. Furthermore, we see opportunities to expand the capability on the component and accessory side as well in that facility. We're looking at investment opportunities that we can make there to broaden the capability in the region.

John McClain Holmes: So as those fleets mature, we will be one of the four providers of structure repair capability in the region to support those large fleets. And, you know, that's organic growth as the new aircraft mature. Furthermore, we see opportunities to expand the capability on the component and accessory side as well in that facility. We're looking at investment opportunities that we can make there. We're looking at investment opportunities that we can make there to broaden the capability in the region because, you know, the competitive set there is somewhat limited, and a lot of that work comes back to the west. So we see a lot of opportunity now to have a very solid footprint in Asia. Thank you for your time.

Speaker Change: The competitive set there is somewhat limited a lot of that work comes back to the west.

Speaker Change: No.

A lot of opportunity now, having a very solid footprint in Asia.

Speaker Change: Got it thank you for your time.

Speaker Change: Great. Thank you.

Speaker Change: Thank you one moment our next question.

And that will come from the line of Sam <unk> with <unk> Securities. Your line is open.

Sam: Hey, guys on for Mike Smiley This evening.

Sam: Okay.

Sam: Hey, guys doing.

Sam: I was curious if you guys maybe talk a little more detail about.

Unknown Executive: Great, thank you. Thank you. One moment for our next question, and that will come from the line of Sam Strusaker with Truist Securities. Your line is open. Hey guys, this is Mike Ciamoli on behalf of Mike Ciamoli this evening.

Sam: Kind of a trajectory of integration costs for the acquisition moving forward and then in addition to that maybe cover a little bit more how you are thinking about.

Unknown Executive: How are you guys doing? I was just curious if you could maybe talk in a little more detail about kind of the trajectory of the integration costs for the acquisition moving forward. And then, in addition to that, maybe cover a little bit more how you're thinking about the free cash flow profile in that business as well, or kind of the new combined. Sure, I can talk about integration, and you want to take a look at Sean here. You'll take the second one.

Sam: Free cash flow profile in the business as well are kind of the new combined.

Sure I can talk about integration.

Speaker Change: John here I'll take the second okay. So with.

Speaker Change: With integration.

John McClain Holmes: We expect the overall integration to take.

John McClain Holmes: 12 to 12 to 18 months.

More of the cost will be in the back half of that period of time.

John McClain Holmes: Because.

Sean M. Gillen: Okay, so with integration, you know, we expect the overall integration to take 12 to 18 months. But more of the costs will be in the back half of that period of time because the real work that's got to get done is setting up a couple of Triumph facilities to take government work that we'll be transferring from some of our other sites. And that requires physical investment and reconfiguration of the Triumph site, which obviously translates to cost.

John McClain Holmes: The real work that's got to get done is setting up a couple of the <unk> facilities to take government work that we will be transferring from some of our other sites.

John McClain Holmes: That requires physical investment and reconfiguration of the <unk> site, which obviously translates to cost.

John McClain Holmes: We're a few quarters away from that set of cash outlay in advance of that though there is work that.

John McClain Holmes: Triumph today has near identical capability to us in certain areas.

John McClain Holmes: So we're a few quarters away from that cash outlay. In advance of that, though, there is work that, you know, Triumph. Today, it has near identical capability to us in certain areas, and we believe the Triumph will be able to perform the work that we do today more profitably than we do. And so we will start to realize synergy benefits by transferring volume from existing AAR sites to a higher profit environment at the Triumph site. And to transfer that volume where capability already exists requires little to no investment.

We believe the trial will be able to perform the work that we do today more profitably than we do.

John McClain Holmes: So we will start to realize synergy benefit by transferring volume from existing AAR sites to a higher profit environment at the at the trial sites and to transfer that volume or capability already exists requires little to no.

Investment so it's a long way to say that at the beginning not a lot of cash and then it'll ramp throughout the 12 to 18 month integration period.

John McClain Holmes: Yep.

And I'd just add in terms of kind of the integration cost you expect we've said $10 million of run rate synergies I would expect the onetime integration costs to be a little in excess of that over the time period that John talked about in terms of free cash flow.

Sean M. Gillen: So it's a long way to say that at the beginning, not a lot of cash in it. It'll. It'll ramp up throughout the 12 to 18 month integration period. Yep. And I just add, you know, in terms of kind of the integration cost to expect, you know, we've said 10 million in run rate synergies. I expect, you know, the one-time integration cost to be a little in excess of that over the time period that John talked about. In terms of free cash flow, you know, trajectory, I think nothing really notable there. You know, there's a little bit of seasonality to our free cash flow. Q4 tends to be a stronger quarter than Q1.

John McClain Holmes: Trajectory.

John McClain Holmes: Think nothing.

John McClain Holmes: Nothing really notable there there's a little bit of seasonality to our free cash flow Q4 tends to be a stronger quarter than Q1.

John McClain Holmes: Other than that I think the only real nuances around the net working capital changes specifically to inventory to support parts supply and I think what you've seen over the past year and a half I've spent a lot of opportunity to put money to work, we'll continue to do so.

Sean M. Gillen: Other than that, I think the only real nuance is around the network and capital changes, specifically to inventory to support parts supply. And I think what you've seen over the past, you know, year and a half, obviously, there's been a lot of opportunity to put money to work. We'll continue to do so, but we're also focused on making sure we're disciplined and generating cash to de-lever over the next couple years. Thanks very much.

John McClain Holmes: But also focused on making sure we're disciplined on generating cash to delever over the next.

A couple of years there.

Speaker Change: Got it thank you very much hopeful dose.

Speaker Change: Great. Thank you.

And one moment our next question.

Speaker Change: And that will come from the line of Ken Herbert with RBC capital markets. Your line is open.

Speaker Change: Hey, good afternoon, John Sean and John This is Steve strike us on for Ken.

Speaker Change: Okay.

Steve: Hey, guys. So I just wanted to double click on margins one more time really to be kind of asked about it a couple of times, but ex trials. It looks like margins were doing pretty well because in the quarter.

Unknown Executive: Helpful guys. Thank you. And one moment for our next question, which will come from the line of Ken Herbert with RBC Capital Markets. Your line is open. Hey, good afternoon, John, Sean, and Dylan. This is Steve Strackhouse on behalf of Ken.

Steve: Just even thinking back to your Investor Day, you would take nine months ago. It sounds like you guys are on kind of a better run rate than you might have anticipated is there maybe just a couple of things within the parts supply or repair and engineering is kind of driving those margins higher.

Kenneth George Herbert: Hey guys, so I just wanted to double-click on margins one more time. I realize we kind of asked about it a couple of times, but kind of X triumph, it looks like margins were doing really well in the quarter. And just even thinking back to your investor day, give or take nine months ago, it sounds like you guys are on kind of a better run rate than you might have anticipated. Is there maybe just a couple of things within the parts supply or repair and engineering that's kind of driving those margins higher?

Speaker Change: Yes, I would say that overall the team is executing ahead of the plan that we that we originally envisioned.

Speaker Change: We're seeing nice growth out of part supply, which by definition is higher and really really strong execution in the repair and engineering group. So I'd like to add that once those again were a little ways away, but once the facility expansions come online.

John McClain Holmes: Yeah, I would say that, you know, overall, the team is executing ahead of the plan that we originally envisioned. You're seeing, you know, nice growth out of parts supply, which by definition is higher, and really, really strong execution in the repair and engineering group. So I'd like to add that, you know, once those facility expansions come online in the repair and engineering group, the expansions in Oklahoma City and Miami, we're going to take advantage of the fixed cost basis that's already existing, leverage that fixed cost base, and so those expansions should drive further margin improvement in R&E as well. And then maybe just one more on the Triumph update.

In the repair and engineering groups the expansion in Oklahoma City, and Miami, we're going to take advantage of the fixed cost base, that's already existing leverage that fixed cost base and so those expansion should drive further margin improvement in an already as well.

Speaker Change: Great and then just maybe on the triumph update I realize that you guys are maybe Doug you can head.

Speaker Change: For a full month in house, but is there any change in how youre thinking about the growth in terms of high single digits, there or is there any change in kind of the margin profile.

Speaker Change: Youre now thinking about internally.

Speaker Change: No I would say, it's consistent with what we described when we announced the acquisition.

Speaker Change: The color I would give there is that as we've gotten to know the team as we've gotten to know the business even more since closing we're really really excited about where we can take this business theres a lot of opportunity and a lot of.

John McClain Holmes: I realize that you guys have maybe not even had it for a full month in-house, but is there any change in how you're thinking about the growth in terms of high single digits there? Or is there any change in the kind of margin profile that you're now thinking about internally? Now, I would say it's consistent with what we described when we announced the acquisition. The only other color I would give there is that as we've gotten to know the team, as we've gotten to know the business even more since closing, we're really, really excited about where we can take this business. There's a lot of opportunity and a lot of areas where we can cross what AR offers with what Triumph offers. So they've got a great set of capabilities and a great team, and we're excited that we're now together. Alright, I'll leave it there. Thanks guys.

Speaker Change: A lot of areas, where we can cross sell where they are.

Offers with what <unk> offers so they've got a great set of capability and a great team.

We're excited that we're now together.

Speaker Change: All right I'll leave it to take us.

Speaker Change: Thank you.

Speaker Change: And one moment, Sir our next question.

Speaker Change: And that will come from the line of Louis Dipalma with William Blair. Your line is open.

Salvatore J. Marino: John Shawn and Donna and good afternoon.

Salvatore J. Marino: Louis.

Salvatore J. Marino: John You mentioned this a little bit in the answer to your last question about how should we think about revenue synergies for the deal when the deal was originally announced.

Salvatore J. Marino: Our focus on on the cost aspect, but what are the opportunities with the tramp deal too.

Unknown Executive: Thank you. And one moment for our next question, which will come from the line of Louis DiPalma with William Blair.

Michael Louie D DiPalma: Your line is open. John, Sean, and Dylan, good afternoon, and Lloyd. John, you mentioned this a little bit in the answer to your last question, but how should we think about revenue synergies for the Triumph deal? When the deal was originally announced, there was a focus on the cost aspect. But what are the opportunities with the Triumph deal to make the sum of the parts a lot better than each of the individual components? Sure. I would just talk about synergies in general. The $10 million that we've described, those are hard-cost synergies that come from footprint rationalization, and we feel very, very good about that number, at a minimum. Over and above that, you have a couple of buckets.

Salvatore J. Marino: Meg.

Salvatore J. Marino: Some of the parts.

Salvatore J. Marino: Better than each of the individual components.

Salvatore J. Marino: Sure.

Just to talk about synergies in general the $10 million that we've described those are hard cost synergies that come from footprint rationalization and we feel very very good about that number at a minimum over and above that you would have a couple of buckets. The first before I get to revenue. The first is the opportunity to in source repair.

Salvatore J. Marino: We spend a lot of money with other repair vendors today to support our commercial power by the hour programs. We send out a lot of work that we are in charge of managing and we also spend a lot of money millions and repair of two.

John McClain Holmes: The first, before I get to revenue, is the opportunity to in-source repair. AAR; we spend a lot of money with other repair vendors today to support our commercial Power by the Hour programs. We send out a lot of work that we're in charge of managing, and we also spend a lot of money, millions, to repair assets that we acquire through our trading business. And most of that repair goes to repair parties that are not Triumph.

To prepare assets that we acquire through our trading business.

Salvatore J. Marino: And most of that repair goes to prepare parties that are not triumph.

Salvatore J. Marino: So there is a synergy opportunity to in source those repairs, both our commercial programs as well as as well as trading that would be over and above the $10 million and then to your point on revenues in general I really believe that we've got the best aftermarket commercial sales team in the world and spending time in Singapore in February.

John McClain Holmes: So there's a synergy opportunity to in-source those repairs, both for commercial programs as well as trading, that would be over and above the $10 million. And then, to your point on revenues in general, I really believe that we've got the best application. We have the best market commercial sales team in the world.

Salvatore J. Marino: <unk> in Europe.

Salvatore J. Marino: Earlier this month.

Salvatore J. Marino: As well as having a number of meetings here in North America. Our sales team is extremely excited to sell the higher margin higher.

John McClain Holmes: Spending time in Singapore in February, in Europe earlier this month, as well as having a number of meetings here in North America, our sales team is extremely excited to sell the higher margin, higher engineered capability that we get with Triumph to our existing customer base. And so while we haven't quantified it yet, the early returns from our internal sales, as well as the initial conversations that we've had with some of AAR's largest customers, would suggest that there'll be a lot of opportunity to pass Triumph volume through our sales channel. Great And yesterday, I believe, was the one year anniversary of when you acquired Trax. It was.

Salvatore J. Marino: Engineered capability that we get with drive through our existing customer base and so.

Salvatore J. Marino: We haven't quantified it yet the early returns from our internal sales team as well as the initial conversations that we've had with some of our largest customers would suggest that there'll be a lot of opportunity to put try and volume through our sales channels.

Salvatore J. Marino: Great.

Salvatore J. Marino: And.

Salvatore J. Marino: Yesterday, I believe was the one year anniversary of when.

John McClain Holmes: Yes. Yes, we had a little celebration in the morning. Yeah, I was wondering if the debt, has the deal met your expectations? If you had to, you know, grade the deal on a report card, would it be an A plus? And how are the track bookings and what does the pipeline look like? I would say overall it's definitely meeting or exceeding expectations as we think about the deal. The only mistake we made yesterday was not celebrating in Miami versus Chicago, where it's 28 degrees.

Salvatore J. Marino: Tracks It was yes.

Speaker Change: Yes, we had a little calibration and good morning.

Speaker Change: I was wondering has the debt has the deal.

Speaker Change: Met your expectations, if you had to grain.

Speaker Change: <unk> the deal on a report card would it be would it be an a plus and and how where and how are the tracks bookings and what does the pipeline look like.

Speaker Change: I would say overall definitely definitely meeting or exceeding expectations as we think about the deal youre willing to take we made yesterday with not celebrating in Miami for the Chicago, where it's 28 degrees but.

John McClain Holmes: But the TRAX deal has gone very, very well, and I'll highlight a couple of things. First, the deal that we announced in Singapore with SIA, that's a big airline with a big, complicated fleet and, ultimately, will be a very large customer for TRAX. That deal would not have happened at the speed at which it happened if it weren't for the AAR relationships that we had with SIA. So the thesis of putting a smaller enterprise, TRAX, with a great product together with a bigger company, AAR, with great relationships certainly played out there. Related to that, there are a number of competitions that TRAX is in right now with other very large carriers where I don't believe that they will be able to do that.

Speaker Change: The track deal has gone very very well and I'll highlight a couple of things.

Speaker Change: The deal that we announced in Singapore with FAA, that's a big airline with a big complicated fleet and ultimately will be a very large customer for track that deal would not have happened in.

Speaker Change: And the speed at which would happen if it werent for the AAR relationships that we had with <unk>. So the thesis of putting a smaller enterprise tracks with a great product together with a bigger company AAR with great relationships.

Speaker Change: We played out there.

Speaker Change: Related to that there are a number of competitions attractive and right now with other very large carriers where.

John McClain Holmes: And so I think that's something that we need to be thinking about. So our first priority was to open doors for TRAX. And in the first year since owning it, that's absolutely proven to be true.

Speaker Change: I don't believe that they would be considered in the way that they are today if it weren't for the backing of AAR. So our first priority was to open doors for tracks.

Speaker Change: And in the first year since owning it thats absolutely proving out.

Michael Louie D DiPalma: The second priority was to ultimately leverage the TRAX platform as a sales channel for AAR parts. That is something that is absolutely still a focus of ours. We've been focused more on the former and probably spending a little bit more time on the former than we might have anticipated in the first year. But the opportunity to ultimately sell parts through the TRAX network is still very much an element of the strategy that we intend to pursue. Great, that's it for me.

Speaker Change: The second.

Speaker Change: Priority was to ultimately leverage the <unk> platform as a sales channel for our parts.

Speaker Change: That is something that is absolutely still a focus of ours, we've been focused more on the former and probably spending a little bit more time on the former than we might have anticipated in the first year, but the opportunity to ultimately sell sell parts through the tracks network is still very much an element of the strategy that we intend to pursue.

Unknown Executive: Thanks, everyone. Great. Thanks, Luke.

Speaker Change: Great. That's it for me thanks, everyone.

Great. Thanks Lee.

Unknown Executive: Thank you. One moment for our next question, and we do have a follow-up question from Robert Spingarn with Mellius Research. Your line is open.

Speaker Change: Thank you one moment our next question.

Speaker Change: Okay.

Speaker Change: And we do have a follow up question from Robert Spingarn with Melius Research. Your line is open.

Robert Michael Spingarn: Thank you. I actually have one for each of you, and they both touch on things you've already talked about. Sean, we'll start with you just quickly.

Robert Michael Spingarn: Thank you I actually I have one for each of you and they both touch on things you already talked about Sean just we'll start with you just quickly you mentioned delevering the balance sheet and I just wondered if you could give us some color on the pace of that process as we go here and maybe how sale.

Sean M. Gillen: You mentioned delivering the balance sheet, and I just wondered if you could give us some color on the pace of that process as we go here, and maybe how the sale of expeditionary services would factor in and what the timing on that might be. Is that something that might be sooner rather than later? Yeah, maybe first, we have a target net leverage of, you know, one to two times, obviously, on the back of this acquisition at 3.6 pro forma. So the focus is to get, you know, back down to the high end of that range. So two times, and I think that'd be, you know, 18 to 24 months would be the timeline we'd be looking at for there.

Robert Michael Spingarn: Expeditionary services would factor in and what the timing on that might be is that something that might be sooner rather than later.

Yeah, maybe first.

Robert Michael Spingarn: Target net leverage of 1% to two times, obviously on the back of this acquisition and at three <unk> pro forma so the focus is to get back down to the high end of that range. So two times and I think that'd be 18 to 24 months would be the timeline, we would be looking at for there and I'd say, that's just an organic.

Sean M. Gillen: And I'd say that's just an organic growth, no divestiture associated with that. That'd just be, you know, EBITDA growth and cash flow generation across the combined business. Obviously, any divestiture would get you there a bit quicker. Okay, is that all you want to say on divestiture? I mean, is there any other color we can put around that?

No divestiture associated with that that just EBIT.

Robert Michael Spingarn: EBITDA growth and cash flow generation across the combined business.

Robert Michael Spingarn: Obviously any divestiture would get you there a bit quicker.

Robert Michael Spingarn: Okay.

Robert Michael Spingarn: Al you want to say on divesting I mean is there anything any other color we can put around that.

John McClain Holmes: I would just say that, obviously, deleveraging is a focus of ours, and we have highlighted that expertise share services is not core to the future going forward. However, where the balance sheet was a quarter ago, it wouldn't necessarily have made sense to pursue that in earnest. Obviously, our balance sheet looks a little bit differently, so we're paying a lot more attention to a potential process there. Okay, okay. That's good. And then, John, just, you know, we just talked about triumph and some of what it brings to the table. I wanted to go back to something you said last quarter about their position in PMA relative to yours could accelerate your push a little bit. I know it's early.

al: I would just say that.

al: Obviously <unk>.

al: Deleveraging is a.

al: As a focus of ours and we have highlighted that extra care services is not core to the future going forward, However, where the balance sheet was a <unk>.

<unk> ago, it wouldn't necessarily have made sense to pursue that in earnest, obviously, our balance sheet looks a little bit differently. So we're.

al: We're paying a lot more attention through a potential process there.

Speaker Change: Okay. Okay. That's good.

Speaker Change: So John just.

Speaker Change: We just talked about triumph.

Speaker Change: And some of what it brings to the table I wanted to go back to something you said last quarter about their position in PMA relative to yours could you push a little bit I know, it's early I imagine this is not going to happen that quickly, but I'm wondering where you are in the process are you starting to aggregate a list of parts to PMA.

Robert Michael Spingarn: I imagine this is, you know, it's not going to happen that quickly. But I wondered where you are in the process. Are you starting to aggregate a list of parts to PMA that might not run afoul of any parts distribution agreements you have in the other parts of your business, like with the OEM parts suppliers? And, you know, first, is there a cost associated with putting this together?

Speaker Change: That might not.

Speaker Change: Run afoul of any parts distribution agreements you have in the other parts of your business like with the OEM parts suppliers.

Speaker Change: And.

Speaker Change: First is there a cost associated with putting this together and then the last part of this somewhat lengthy question on PMA is is the grid lock at FAA on the airplane programs impacting the PMA approval process from what you can see.

John McClain Holmes: And then the last part of this somewhat lengthy question on PMA is, is the gridlock at FAA on the airplane programs impacting the PMA approval process from what you can see? Yeah, great set of questions. And I'm actually very happy you asked about PMA because that is a focus of ours and an early focus of ours. So just a couple of thoughts. First of all, for AAR's own internal PMA effort, it continues to move along well. We have several parts right now out for approval related to the last part of your question. At this point, based on the offices that we deal with, we have not seen any sort of slowdown, so things are moving along.

Speaker Change: Yes.

Set of questions.

Speaker Change: Actually I'm very happy you asked about PMA, because that is a focus of ours and an early focus of ours.

Just a couple of thoughts first of all for our own internal PMA effort continues to move along well we have several ports right now out for approval.

Speaker Change: Weighted to the last part of your question at.

Speaker Change: At this point based on the office that we deal with we have not seen any sort of slowed us. So things are moving along again inside of AAR, that's a very small effort.

John McClain Holmes: Again, inside of AAR, that's a very small effort, but we're excited about the potential there. As it relates to Triumph, I would say that, on balance, we're more excited about the potential for PMA than we were even before it closed. They've got a nice portfolio, again, a small portfolio, but generating healthy revenue and healthy margins. So that's encouraging. The other thing that's encouraging there is that they really aren't engaged in any meaningful marketing activities for this PMA portfolio. So the sales that they have, which are impressive given the small number of parts that they have PMAs on, we think that we can do a lot of good work on that. Just by putting their PMAs through our distribution channels to market, they can grow their existing portfolio of PMAs.

Speaker Change: But we're excited about the potential there as.

Speaker Change: As it relates to try if I would say that on the balance we're more excited about the potential for PMA than we were even before we closed.

Speaker Change: They've got a nice portfolio I get a small portfolio, but generating healthy revenue and healthy margin.

Speaker Change: <unk> that is not in any way in conflict with any of our distribution agreements. So largely interior parts. So a totally different part of the aircrafts.

Speaker Change: Where we play in distribution so.

Speaker Change: So that's encouraging the other thing thats encouraging there is.

Speaker Change: They really are not engaged in any meaningful marketing activities for this PMA portfolio. So.

The sales that they have which again are impressive given the small number of parts of the <unk>.

We think that we can just by putting their PMA through our distribution channels to market grow their existing portfolio of PMA third thing I mentioned is that they've got a engineering process and PMA design and approval.

John McClain Holmes: The third thing I mentioned is that they have an engineering process and PMA design and approval set of procedures that are further advanced than what we have. We have a lot more data than they do, and as much as we're working on 1,000 aircraft a year in our hangars, and we are able to collect data in terms of what parts might make good PMA Canada, we're able to collect data in terms of what parts might make good PMA Canada because of the volume of aircraft that we see. So if you combine our access to data plus their, I would say, more advanced engineering and approval procedures, that's a good combination. So again, a long answer to, I guess, a long set of questions, but we're very encouraged by the PMA growth. Having said all of that, these are relatively small revenue dollars today.

Speaker Change: Procedures that is further advanced than what we have.

Speaker Change: We have a lot more data than they have and as much as we're working on a thousand aircrafts the year on our in our hangers and we're able to collect data in terms of what parts might make good PMA candidates because of the volume of aircraft that received so if you combine our access to data plus there.

Speaker Change: They are more advanced.

Speaker Change: Engineering and maybe.

Speaker Change: An approval.

Approval.

Speaker Change: <unk> procedures.

Speaker Change: That's a good combination so again, a long answer to it I guess, a long set of questions, but we're.

Speaker Change: We're very encouraged by the PMA growth, having said all of that.

Speaker Change: These are relatively small revenue dollars today inside the overall AAR portfolio, but as you know it comes with high margin and now that we're together likely high growth.

John McClain Holmes: Inside the overall AR portfolio. But as you know, it comes with high margins and, now that we're together, likely high growth. Great. Thank you. That was super helpful. Thanks, Ron. Thank you. I'm showing no further questions at this time. I would now like to turn the call back over to management for any closing remarks. We really appreciate the time and the interest and the very thoughtful questions, everybody, and we look forward to being back here with you next quarter. Thank you. This concludes today's program. Thank you all for participating. You may now disconnect. Thank you for watching!

Speaker Change: Great. Thank you that was super helpful.

Speaker Change: Great. Thanks, Rob.

Speaker Change: Thank you I'm showing no further questions at this time I would now like to turn the call back over to management for any closing remarks.

Speaker Change: Well listen we really appreciate the time and the interest in a very thoughtful questions everybody and we look forward to being back here with you next quarter. Thank you.

Speaker Change: This concludes today's program. Thank you for all thank you all for participating you may now disconnect.

Speaker Change: Right.

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Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Thanks.