Q2 2025 AAR Corp Earnings Call

January 7, 2025

Cloud.

After the speaker's presentation, there will be a question and answer session.

Speaker Change: I ask the question during the session you will need to press star one on your telephone you within her automated message advising your hand is raised.

Speaker Change: To withdraw your question. Please press star one again.

I would now like to hand, the conference over to Denise Patchy Oney you may begin.

Speaker Change: Thank you.

Speaker Change: Afternoon, everyone and welcome to Aar's fiscal year 2025 second 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.

Speaker Change: In the private Securities Litigation Reform Act of 1995.

Speaker Change: These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward looking statements.

Speaker Change: Accordingly. These statements are no guarantee of future performance.

These risks and uncertainties are discussed in the company's earnings release and the risk factors section of the company's annual report on Form 10-K for the fiscal year ended May 31 2024.

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

Speaker Change: Certain non-GAAP financial information will be discussed in the call today.

Speaker Change: Conciliation of these non-GAAP measures to the most comparable GAAP measures is that work in the Companys earnings release.

Speaker Change: At this time I would like to turn the call over to <unk>, Chairman, President and CEO John Holmes.

John Holmes: Thank you and welcome everyone to our second quarter fiscal year 2025 earnings call I'm pleased to report another strong quarter with record top line results for Q2, our second quarter sales of $686 million improved 26% from the same quarter last year. Our adjusted earnings of <unk> 90 per share were 11% higher than in the same period last year.

Speaker Change: We're also setting a second quarter record for adjusted EPS.

Speaker Change: These results, which included double digit sales growth for both our commercial and government businesses clearly demonstrate the strong demand for our aftermarket aircraft and engine services.

Speaker Change: We're very proud of the performance we delivered this past quarter and are even more excited for the remainder of fiscal year 2025 and beyond.

Speaker Change: <unk> continues to drive value throughout the company by focusing on growing our aftermarket services offering while diligently improving margins through portfolio optimization scaling efficiencies and realizing acquisition related synergies.

Speaker Change: In addition to these efforts we continue to benefit from a strong aviation aftermarket due to the elevated levels of consumer air travel and aging fleet and increasing demand from the government end market.

Speaker Change: This strong demand is not slowing down and we expect it to continue through calendar year 2025.

Speaker Change: As mentioned, we delivered quarterly sales of $686 million up 26% year over year. Moreover, we saw an increase in organic sales growth, which accelerated from 6% last quarter to 12% this quarter all.

Speaker Change: All three of our core business segments contributed to this growth part supply remains our largest segment by sales due to strong demand for both new and used parts sales grew 20% over the last year and it was entirely organic.

Speaker Change: Our repair and engineering segment grew 57% over the last quarter as a result.

Of the product support contribution and continued strong demand in our hangers.

Speaker Change: Integrated solutions also posted growth in the quarter.

Speaker Change: Overall consolidated sales to commercial customers increased 30% from the same quarter last year and sales to government customers increased 16%.

Speaker Change: <unk> growth accelerated from the same period last year. We also demonstrated improvement in our bottom line results adjusted EBITDA of $78 $3 million was higher by 42% from the same quarter last year EBITDA margin increased from 10, 1% in the second quarter of last year to 11, 4%. This year, our adjusted operating margin increased from eight.

Speaker Change: 1% last year to nine 2% this year.

Speaker Change: I will now discuss our three core segments in more detail.

Parts supply continues to be our largest business segment contributing nearly 40% of sales through our company.

Speaker Change: This segment has benefited greatly from a strong after market dimension aftermarket dynamic that I mentioned earlier, including strong demand for engine maintenance.

Speaker Change: 60% of our part sales in engine components are 60% of our parts sales our engine components or engine accessories.

Speaker Change: Our second quarter sales of $274 million or 20% higher compared to the same quarter last year and improved 10% sequentially.

Speaker Change: First quarter EBITDA for parts supply was $33 9 million, 13% higher than the same quarter last year, adjusted operating income of $31 6 million or 11% higher than the same period last year.

Speaker Change: Within parts supply and distribution continued its stellar performance as discussed previously our independent distribution model and our focus on exclusive contract allows us to win new business like the multi year agreement with Whippany transient company that we announced in the quarter. We are excited about this new win and have many more opportunities in the pipeline.

Speaker Change: Our USA business also returned to growth this quarter driven by piece of art in whole asset sales. We are seeing an increase in availability of whole assets in the market, which combined with continued strong demand will drive further growth in U S. M.

Quarter EBITDA for parts supply was $33 9 million, 13% higher than the same quarter last year, adjusted operating income of $31 6 million or 11% higher than the same period last year.

Speaker Change: As mentioned, 60% of our parts supply sales are engine related serving the engine aftermarket has always been quarter. Our business. An example of this is our partnership with <unk> to provide CFM 56 engine materials to the aftermarket. Additionally, we continue to see engine related growth opportunities such as the recently announced exclusive distribution.

Within parts supply and distribution continued its stellar performance as discussed previously our independent distribution model and our focus on exclusive contract allows us to win new business like the multi year agreement with Wes.

Speaker Change: Abuse in agreement with Chromalloy to sell their PMA parts for the CF six ADC to engine type.

Speaker Change: Securing this agreement further express sands, our engine part offerings and demonstrates the value we bring to both suppliers and customers.

Turning now to our repair and engineering segment second quarter sales of $229 million grew 57% from the same quarter last year.

Speaker Change: Adjusted EBITDA grew to $30 9 million up 132% from the same quarter last year, while adjusted operating income was $27 4 million higher by 143% from the same period last year.

Speaker Change: Product support acquisition continues to perform well and drive growth inside the repair and engineering segment. The integration is on schedule and we are on track to realize the $10 million of cost synergies as previously communicated.

Speaker Change: The integration is expected to be completed in our fiscal Q1, FY 'twenty six which is when we expect to be at run rate synergy realizations.

Speaker Change: While we are integrating the business. We are also growing it as evidenced by the recently announced joint venture with Air France for engineering and maintenance support on next generation aircraft and the Asia Pacific region.

Speaker Change: On the heavy maintenance side of repair and engineering, we continue to see strong underlying demand for our services and our focus on implementing process improvements that continue to increase efficiency and improved throughput at our existing facilities, our hangar capacity expansions in Miami in Oklahoma city or in process and once completed in FY 'twenty six.

Sort of last year, while adjusted operating income was $27 4 million higher by 143% from the same period last year. The product support acquisition continues to perform well and drive growth inside the repair and engineering segment. The integration is on schedule and we are on track to realize the $10 million of cost synergies as previously communicated.

Speaker Change: One or two more quarters to ramp up to achieve the $60 million of incremental annual revenue for the company.

Speaker Change: Turning now to integrated solutions sales for the quarter were $163 million up 4% from the same quarter last year, adjusted EBITDA and integrated solutions for the second quarter was $12 3 million slightly lower from the same quarter last year adjusted operating income of $8 $3 million was lower by 8% from the same quarter last year due to mix shift within certain.

Indicated the.

The integration is expected to be completed in our fiscal Q1, FY 'twenty six which is when we expect to be at run rate synergy realizations.

Speaker Change: Graham.

Speaker Change: Going forward, we expect growth to improve as our government program activity of convert their pipeline of opportunities to new business wins, and our recent contract wins mature.

While we are integrating the business. We are also growing it as evidenced by the recently announced joint venture with Air France Engineering and maintenance support on next generation aircraft and the Asia Pacific region.

Speaker Change: An example of a recent government new business win is the award from the USDA for engine overhaul work related to the Navy's fleet. While we are still working with the government to finalize the demand requirement. We do expect contributions to be in the low single digit millions per quarter initially ramp it to a more significant level later in our FY 'twenty six.

On the heavy maintenance side of repair and engineering, we continue to see strong underlying demand for our services and are focused on implementing process improvements that continue to increase efficiency and improved throughput at our existing facilities, our hangar capacity expansions in Miami in Oklahoma city or in process and once completed in FY 'twenty six.

Speaker Change: Additionally, we are incredibly well positioned to help the new administration realizes efficiency goals, whether that be through the dose commission or otherwise our offerings help our government customers reduce costs, while maintaining or improving performance. We look forward to continuing to demonstrate our capabilities to the U S Department of Defense State Department and other agencies.

One or two more quarters to ramp up to achieve the $60 million of incremental annual revenue for the company.

Turning now to integrated solutions sales for the quarter were $163 million up 4% from the same quarter last year, adjusted EBITDA and integrated solutions for the second quarter was $12 3 million slightly lower from the same quarter last year adjusted operating income of $8 $3 million was lower by 8% from the same quarter last year due to mix shift within certain pro.

Yes.

Speaker Change: Before turning the call over to John I'd like to briefly touch on two announcements that we made right before the holidays.

Speaker Change: On December 19th we announced that we have reached resolutions with the department of Justice and the Securities Exchange Commission to resolve a previously disclosed potential violations of the foreign corrupt practices Act. This relates to certain transaction signed in 2016 2017, and the fall in South Africa after self reporting to the government in 2019.

Graham's going forward, we expect growth to improve as our government program activity of convert their pipeline of opportunities to new business wins, and our recent contract wins mature.

An example of a recent government new business win is the award from the USDA for engine overhaul work related to the Navy's fleet. While we are still working with the government to finalize the demand requirement. We do expect contributions to be in the low single digit millions per quarter initially ramp it to a more significant level later in our FY 'twenty six.

Speaker Change: And cooperating with a multiyear investigation AAR has entered into a non prosecution agreement with the Doj and reached resolution with the SEC. The total amount associated with the settlement is $55 6 million.

Speaker Change: This has been a long process and we are pleased that this issue is now settled and I'm proud of the way our company dealt with this matter and we have made significant investments and improvements to our compliance program over the last several years.

Additionally, we are incredibly well positioned to help the new administration realize its efficiency goals, whether that be through the dose commission or otherwise our offerings help our government customers reduce costs, while maintaining or improving performance. We look forward to continuing to demonstrate our capabilities to the U S Department of Defense State Department and other agencies.

Speaker Change: Separately on December 20, we announced that we entered into a definitive agreement to sell our landing gear overhaul business <unk> for $51 million. This strategic decision was made so that we could put an even greater focus on our higher growth higher margin aftermarket activities. It also allows us to allocate even more resources to driving an integrated approach.

Before turning the call over to John I'd like to briefly touch on two announcements that we made right before the holidays.

First on December 19th we announced that we have reached resolutions with the department of Justice and the Securities Exchange Commission to resolve a previously disclosed potential violations of the foreign corrupt practices Act. This relates to certain transaction signed in 2016 2017 and to Paul in South Africa after self reporting to the government in 2009.

Speaker Change: <unk> integrated approach between product support heavy maintenance and parts supply, where we see significant opportunities for revenue synergies.

Speaker Change: We expect Atlantic year transaction to close in the first calendar quarter of 2025 and upon close that will be immediately accretive to margins and earnings.

<unk> and cooperating with a multiyear investigation.

We appreciate all the hard work and dedication from our land and your team and we wish them and <unk> much success in the future I'll now turn it over to Sean to discuss our Q2 results in more detail.

<unk> has entered into a non prosecution agreement with the Doj and reached resolution with the SEC. The total amount associated with the settlement is $55 $6 million.

Sean Gillen: Thanks, John total sales in the quarter grew 26% to $686 million setting a new company quarterly sales record.

This has been a long process and we are pleased that this issue is now settled and I'm proud of the way our company dealt with this matter and we have made significant investments and improvements to our compliance program over the last several years.

Sean Gillen: The impact from the recently acquired product support business organic sales growth for the quarter was 12%, which accelerated from last quarter's organic growth rate of 6%.

Separately on December 20, we announced that we entered into a definitive agreement to sell our landing gear overhaul business.

Sean Gillen: Promotional sales increased to 30% during the quarter compared to 20% from the prior quarter with.

<unk> for $51 million this.

The decision was made so that we could put an even greater focus on our higher growth higher margin aftermarket activities. It also allows us to allocate even more resources to driving an integrated approach integrated approach between product support heavy maintenance and parts supply, where we see significant opportunities for revenue synergies.

Sean Gillen: This additional increase in sales growth came from all three of our core business segments led by commercial distribution and product support sales.

Sean Gillen: <unk> also increased 16% for the quarter, primarily due to increased order volume and new parts distribution.

Sean Gillen: Total commercial sales for the quarter made up 73% of total sales while government sales made up the remaining 27%.

We expect our landed year transaction to close in the first calendar quarter of 2025 and upon close it will be immediately accretive to margins and earnings.

Sean Gillen: Compared to the same quarter last year adjusted EBITDA margin increased from 10, 1% to 11, 4%.

Sean Gillen: Adjusted operating profit margin improved from eight 1% to nine 2%.

Sean Gillen: Our focus on airframe maintenance efficiencies and contribution from our recently acquired product support business has helped us significantly improve margin performance.

Thanks, John total sales in the quarter grew 26% to $686 million setting a new company quarterly sales record.

Sean Gillen: Net interest expense for the quarter was $18 8 million, reflecting the financing of the product support acquisition.

Excluding the impact from the recently acquired product support business organic sales growth for the quarter was 12%, which accelerated from last quarter's organic growth rate of 6%.

Sean Gillen: We expect Q3 net interest expense to remain consistent with these levels.

Sean Gillen: We also expect our Q3 effective tax rate to be approximately 27%.

Promotional sales increased 30% during the quarter compared to 20% from the prior quarter.

Sean Gillen: Average diluted share count in the quarter was 30 $35 5 million shares.

This additional increase in sales growth came from all three of our core business segments led by commercial distribution and product support sales.

Sean Gillen: Adjusted diluted EPS increased from 81, or <unk> 90, reflecting the benefit of our growth and margin expansion.

Government sales also increased 16% for the quarter, primarily due to increased order volume and new parts distribution.

Sean Gillen: With that I'll turn to the detailed results by segment.

Sean Gillen: Supply sales grew 20% to $274 million driven by growth in both distribution and use them.

Total commercial sales for the quarter made up 73% of total sales while government sales made up the remaining 27%.

Sean Gillen: An increase in commercial volume drove growth in both businesses, along with an uptick in government demand for new parts distribution.

Compared to the same quarter last year adjusted EBITDA margin increased from 10, 1% to 11, 4% adjusted operating profit margin improved to eight 1% to nine 2%.

Sean Gillen: Our supply adjusted EBITDA margin decreased from 13, 2% to 12, 4% and adjusted operating margin decreased from 12, 5% to 11, 5% in the quarter, which was due to the whole asset sales at lower margins than the same period last year.

Our focus on airframe maintenance efficiencies and contribution from our recently acquired product support business has helped us significantly improve margin performance.

Sean Gillen: Repair and engineering sales increased 57% to $229 million on an organic basis sales increased 6%.

Net interest expense for the quarter was $18 8 million, reflecting the financing of the product support acquisition.

We expect Q3 net interest expense to remain consistent with these levels. We also expect our Q3 effective tax rate to be approximately 27%.

Sean Gillen: Demand remains strong for our heavy maintenance and component repair capabilities. When we look to continue to drive growth in these activities.

Sean Gillen: Repair and engineering adjusted EBITDA increased from nine 1% EBITDA margin increased from nine 1% to 13, 5% and adjusted operating margin increased from seven 8% to 12% in the quarter driven by the product support business and continued efficiency gains and behaviors.

Average diluted share count in the quarter was 30, $35 5 million shares adjusted diluted EPS increased from 81, or <unk> 90, reflecting the benefit of our growth and margin expansion.

With that I'll turn to the detailed results by segment.

Port supply sales grew 20% to $274 million driven by growth in both distribution and U S M and.

Sean Gillen: Going forward, we expect to drive further margin expansion in this segment from the realization of products or synergies continued rollout of our paper paperless hanger initiatives and the capacity expansion once they come online in FY 'twenty six.

An increase in commercial volume drove growth in both businesses, along with an uptick in government demand for new parts distribution.

Sean Gillen: Integrated solutions sales increased 4% to $163 million driven by growth in commercial activities integrated solutions adjusted operating margin and adjusted EBITDA margin slightly decreased to $5, 175%, respectively in the quarter.

Port supply adjusted EBITDA margin decreased from 13, 2% to 12, 4% and adjusted operating margin decreased from 12, 5% to 11, 5% in the quarter, which was due to whole asset sales at lower margins than the same period last year.

Sean Gillen: Turning to consolidated cash cash flow generated in operating activities was $22 million in the quarter.

Repair and engineering sales increased 57% to $229 million on an organic basis sales increased 6%.

Sean Gillen: This cash generation, along with EBITDA growth reduced our net debt leverage from three three times to three seven times during the quarter.

<unk> remained strong for our heavy maintenance and component repair capabilities. When we look to continue to drive growth in these activities.

When we closed the product support acquisition in March of last year net leverage at the time of three six times and we said we expect it to be back towards two times net leverage in two years. We are on track to achieve that target as we expect to continue to de lever for the balance of this year and into next.

Repair and engineering adjusted EBITDA increased from nine 1% EBITDA margin increased from nine 1% to 13, 5% and adjusted operating margin increased from seven 8% to 12% in the quarter driven by the product support business and continued efficiency gains and behaviors.

Sean Gillen: Next I'd like to address the financial impact of the two recent announcements.

Fourth we expect to drive further margin expansion in this segment from the realization of products or synergies continued rollout of our paper paperless hanger initiatives and the capacity expansion once they come online in FY 'twenty six.

Sean Gillen: First with the SEPA resolution the settlement amount of $55 6 million was recognized in the fiscal Q2 results. We are discussing today the payment of the settlement had been made and will be reflected in our third quarter cash flows.

Integrated solutions sales increased 4% to $163 million driven by growth in commercial activities integrated solutions adjusted operating margin and adjusted EBITDA margin slightly decreased to five 1% and seven 5% respectively in the quarter.

Sean Gillen: The combination of cash on hand, and funds from our revolving credit facility were used for ethane.

Sean Gillen: Second in regards to the landing gear overhaul business, we anticipate this transaction to close in the first quarter of calendar year 2025.

Turning to consolidated cash cash flow generated in operating activities was $22 million in the quarter.

Sean Gillen: Closing by the end of February we will receive a cash payment of $51 million less applicable fees and expenses in our Q3 results.

This cash generation, along with EBITDA growth reduced our net debt leverage from three three times to three seven times during the quarter.

As stated in the press release when this transaction closes the benefit will be immediately accretive to earnings and margins in conjunction with our decision to divest the business. We expect to recognize a noncash pre tax loss of approximately $60 million, which will be in our Q3 results.

When we closed the product support acquisition in March of last year net leverage at the time of three six times and we said we expect it to be back towards two times net leverage in two years.

We are on track to achieve that target as we expect to continue to de lever for the balance of this year and into next.

Going forward, we anticipate the magnitude of our adjustments between our GAAP results in our adjusted non-GAAP results to be significantly less.

Next I'd like to address the financial impact of the two recent announcements.

Sean Gillen: The next few quarters, our acquisition and integration related costs will wind down as the.

First with the SEPA resolution the settlement amount of $55 6 million was recognized in the fiscal Q2 results. We are discussing today the payment of the settlement had been made and will be reflected in our third quarter cash flows.

Sean Gillen: Finjan consideration retention and related integration costs are fully recognized for.

Sean Gillen: So our divestitures, we would anticipate that the exit costs associated with our land and your overhaul and composites businesses will also wind down by mid fiscal 2020.

The combination of cash on hand, and funds from our revolving credit facility were used for ethane.

At that time, we would expect our ongoing non-GAAP adjustments to be largely comprised of acquisition intangible asset amortization of approximately $4 million per quarter.

Second in regards to the landing gear overhaul business, we anticipate this transaction to close in the first quarter of calendar year 2025.

Closing by the end of February we will receive a cash payment of $51 million less applicable fees and expenses in our Q3 results.

Sean Gillen: With that I will turn the call back over to John.

John Holmes: Great. Thank you Sean I am very pleased with our second quarter results and the continued momentum since the beginning of this fiscal year regarding the balance of the fiscal year end for Q3, specifically, we expect year over year sales growth of 22% to 25% and adjusted operating margin in the range of nine 2% to nine 4% as.

John Holmes: As I look ahead into the balance of our fiscal year and into next fiscal year, we expect to continue to see strong demand for our services.

Going forward, we anticipate the magnitude of our adjustments between our GAAP results in our adjusted non-GAAP results to be significantly less.

John Holmes: Overall macro environment for commercial aviation remains very strong.

Over the next few quarters, our acquisition and integration related costs will wind down as the contingent consideration retention and related integration costs are fully recognized.

John Holmes: In addition, we have multiple levels to continue to drive significant growth, we had strong bookings of new contracts ramping up in distribution and we are seeing more assets come available to fuel growth in our U S M activity.

So our divestitures, we would anticipate that the exit costs associated with our land and your overhaul and composites businesses.

John Holmes: Bear in engineering to hanger expansions are expected to contribute to growth in the next fiscal year and our global sales team will drive incremental growth across the recently acquired product support business.

So wind down by mid fiscal 2026.

At that time, we would expect our ongoing non-GAAP adjustments to be largely comprised of acquisition intangible asset amortization of approximately $4 million per quarter.

John Holmes: Finally in integrated solutions, we have a strong pipeline of new opportunities across our government and commercial offerings, including tracks.

With that I will turn the call back over to John.

John Holmes: Turning to profitability, we continue to make tremendous progress towards executing on our long term objectives I'm incredibly proud of the progress we have made our adjusted operating margins are up from five 5% pre COVID-19 to nine 2% today and we expect continued improvement the margin expansion from here will come primary primarily from three areas first.

Great. Thank you Sean I am very pleased with our second quarter results and the continued momentum since the beginning of this fiscal year regarding the balance of the fiscal year end for Q3, specifically, we expect year over year sales growth of 22% to 25% and adjusted operating margin in the range of nine 2% to nine 4%.

As I look ahead into the balance of our fiscal year and into next fiscal year, we expect to continue to see strong demand for our services.

John Holmes: Is realizing the synergies from our recent product toward acquisition.

John Holmes: Mentioned earlier, we expect to achieve the run rate $10 million of synergy in Q1 of next fiscal year further as we drive more volume through the product support site, we anticipate additional margin expansion.

Overall macro environment for commercial aviation remains very strong.

In addition, we have multiple levels to continue to drive significant growth, we had strong bookings of new contracts ramping up in distribution and we are seeing more assets come available to fuel growth in our U S. M activity in repair and engineering to hanger expansions are expected to contribute to growth in the next fiscal year and our global sales team will drive incremental growth.

John Holmes: Second is in our heavy maintenance hangar network, the new capacity coming online next fiscal year will not only drive growth, but also improve operating margins as we leverage the existing cost structure to meet the increased demand.

John Holmes: Really in the hangers, we expect improved efficiencies driven by several digital initiatives that we've invested in over the last several years.

Across the recently acquired product support business.

Finally in integrated solutions, we have a strong pipeline of new opportunities across our government and commercial offerings, including tracks.

John Holmes: Third will come from mix benefit as we drive growth in our parts supply segment.

We continue to see significant opportunity in distribution as evidenced by our strong pipeline of OEM contracts in recent wins.

Turning to profitability, we continue to make tremendous progress towards executing on our long term objectives I'm incredibly proud of the progress we have made our adjusted operating margins are up from five 5% pre COVID-19 to nine 2% today and we expect continued improvement the margin expansion from here will come primary primarily from three areas first.

These new distribution agreements mature, we expect additional margin expansion.

John Holmes: It is important to note that the exclusive contract focus for our distribution business allows us to earn higher margins than traditional distribution model due to the added value that we provide to both suppliers and customers.

Is realizing the synergies from our recent product Port acquisition as I mentioned earlier, we expect to achieve the run rate $10 million of synergy in Q1 of next fiscal year further as we drive more volume through the product support site, we anticipate additional margin expansion.

John Holmes: Finally, as Sean said, we remain focused on generating cash and continuing to reduce our leverage.

Speaker Change: Before turning it over to the operator for questions I would like to thank our team of dedicated employees, our customers and our shareholders for your continued interest and support of AAR.

Within our heavy maintenance hangar network, the new capacity coming online next fiscal year will not only drive growth, but also improve operating margins as we leverage the existing cost structure to meet the increased demand.

John Holmes: That will open it up for questions.

John Holmes: Thank you.

John Holmes: Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone.

John Holmes: And then wait for your name to be announced.

Currently in the hangers, we expect improved efficiencies driven by several digital initiatives that we've invested in over the last several years.

John Holmes: Your question. Please press star one again please.

John Holmes: Please standby, while we compile the Q&A roster.

<unk> will come from mix benefit as we drive growth in our parts supply segment.

We continue to see significant opportunity in distribution as evidenced by our strong pipeline of OEM contracts in recent wins.

Speaker Change: Our first question comes from the line of Scott <unk> with Melius Research. Your line is open.

Speaker Change: Good evening, John Sean You mentioned, the new the new distribution agreement with Chromalloy for PMA parts and the CF six engine criminalize also PMA in some parts and the CFM 56 in 2500.

These new distribution agreements mature, we expect additional margin expansion.

It is important to note that the exclusive contract focus for our distribution business allows us to earn higher margins than traditional distribution model due to the added value that we provide to both suppliers and customers. Finally, as Sean said, we remain focused on generating cash and continuing to reduce our leverage before turning it over to the operator for questions.

Speaker Change: For <unk>.

Speaker Change: Are there any restrictions that would prevent you from distributing those PMA parts for those engines and if so is there some sort of deal that can be worked out with S tie in Corona light to let you distribute those PMA is for the CFM 56 can be 2500.

I'd like to thank our team of dedicated employees, our customers and our shareholders for your continued interest and support and with that we'll open it up for questions.

Speaker Change: I appreciate the question.

Thank you ladies.

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

Speaker Change: What I would say there is we're very aware of the PMA portfolio that <unk> has.

And wait for your name to be announced so.

Speaker Change: And obviously, we've got a joint venture with ESI and now a long term relationship with Chromalloy.

So let's draw your question. Please press star one again, please standby, while we compile the Q&A roster.

Speaker Change: There are a number of other discussions that we're having with both of them as existing partners and the three of US are always looking for ways to grow the business together.

Our first question comes from the line of Scott <unk> with Melius Research. Your line is open.

Speaker Change: Okay and then another question on just the broader market in commercial aftermarket and Theres a lot of questions regarding the long term viability of some of the low cost carriers in the U S. So I'm just wondering if you could size your revenue exposure to some of the <unk>.

Good evening, John Sean You mentioned, the new the new distribution agreement with Chromalloy for the PMA parts on the <unk> six engine Criminalised also PMA in some parts and the CFM 56, and <unk> 2500.

Speaker Change: Yes, great question.

S tie.

Are there any restrictions that would prevent you from distributing those PMA parts for those engines and if so is there some sort of deal that can be worked out with S tie in criminal law.

Speaker Change: We are heavily skewed towards the larger carriers, our largest customers are United Airlines Delta Airlines American et cetera.

Speaker Change: So while we do do some business with.

Let you distribute those PMA is for the CFM 56 can be 2500.

Speaker Change: The lower cost carriers.

Speaker Change: It's a.

Speaker Change: A very small part of our business in North America.

I appreciate the question.

Speaker Change: Okay got it and then one quick question for Sean Sean If you happen to have it do you have the organic growth numbers for commercial and government.

What I would say there is we're very aware of the PMA portfolio that <unk> has and.

And obviously, we've got a joint venture with <unk> and now a long term relationship with Chromalloy.

Speaker Change: No I don't have that handy.

A number of other discussions that we're having with both of them as existing partners and the three of US are always looking for ways to grow the business together.

Speaker Change: You can back into it in terms of the inorganic growth came from TBS and most of that is commercial activity second help you get to something close to that but we don't disclose organic growth by by each of those activities.

Okay and then another question on just the broader market in commercial aftermarket and Theres a lot of questions regarding the long term viability of some of the low cost carriers in the U S. So I'm just wondering if you could size your revenue exposure to some of the <unk>.

Speaker Change: Okay got it thanks for taking my questions.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

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

Yes, great question.

We are heavily skewed towards the larger carriers, our largest customers are United Airlines Delta Airlines American et cetera.

Ken Herbert: Yeah, Hey, good afternoon, John and Sean.

Ken.

Speaker Change: Hey, John you mentioned.

Speaker Change: Rose in the second quarter and your U S portfolio.

And so while we do do some business with.

Speaker Change: Can you help quantify that and maybe talk a little bit about sort of where youre seeing that specifically on the whole asset side and how should we think about that into the second half of the fiscal year. In terms of is that accelerating is it is it sort of moving sideways, how much upside cannot provide into the back half.

The lower cost carriers.

Yes.

It's a very small part of our business in North America.

Okay got it and then one quick question for Sean Sean If you happen to have it do you have the organic growth numbers for commercial and government.

Speaker Change: Let's say, we're not breaking out growth specifically by by U S.

No I don't have that handy.

Back into it in terms of the inorganic growth came from TBS and most of that is commercial activity second help you get to something close to that but we don't disclose organic growth by basically liquidity.

Speaker Change: But what we can say is it absolutely accelerated from the first quarter to the second quarter and we are seeing growth in U S. We are seeing opportunities in U S.

Speaker Change: In terms of assets available for sale, we're seeing many more now than we did a quarter ago, it's hard to call that a trend.

Okay got it thanks for taking the questions.

Thank you.

Please standby for our next question.

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

Speaker Change: Because we're a quarter into it but generally speaking we are having more conversations.

Yeah, Hey, good afternoon, John and Sean.

Speaker Change: And again see more assets available.

Hey, Ken.

Speaker Change: Growth in this quarter and we would expect more growth through the balance of the fiscal year as long as we're able to capture those assets.

Hey, John you mentioned.

Growth in the second quarter in your U S portfolio.

Can you help quantify that and maybe talk a little bit about sort of where youre seeing that specifically on the whole asset side and <unk>.

Speaker Change: Oh, how is pricing on some of these assets like for instance, legacy engines like CFM 56, and <unk> 25. For example are you continuing to see.

How should we think about that into the second half of the fiscal year in terms of is that accelerating is it is it sort of moving sideways, how much upside cannot provide into the back half.

Speaker Change: Upward pressure on pricing or are you starting to get a sense that maybe that market's Pete how are you. What are you seeing in terms of pricing on some of the legacy engines.

Let's say, we're not breaking out growth specifically by by Us but.

Speaker Change: I'd say the pricing the values are still very very strong.

But what we can say is it absolutely accelerated from the first quarter to the second quarter and we are seeing growth in U S. We are seeing opportunities in U S.

Speaker Change: Say that they are accelerating.

Speaker Change: Right that we had seen but there is still very very strong and of course, the prices that we pay for assets.

Speaker Change: We're able to command equally strong pricing in.

In terms of assets available for sale, we're seeing many more now than we did a quarter ago.

Speaker Change: In the market to preserve our spreads.

Speaker Change: Okay great.

Hard to call that a trend.

Because we're a quarter into it but generally speaking we are having more conversations.

Speaker Change: Last year in fiscal 'twenty four you saw real sequential.

<unk> first half second half uptick in margins in the parts supply business.

And again see more assets available.

Speaker Change: As we think about sort of the cadence first half second half I know you don't give specific guidance, maybe by segment, but directionally, how do we think about margins in parts supply and is there.

Fuel growth in this quarter, and we would expect more growth through the balance of the fiscal year as long as we're able to capture those assets.

How is pricing on some of these assets like for instance, the legacy engines like CFM 56, and <unk> 25. For example are you continuing to see.

Speaker Change: Is there any reason, we wouldn't see sort of similar strengthening into the back half in that segment margins.

Speaker Change: I don't have the last year margins specifically.

Upward pressure on pricing or are you starting to get a sense that maybe that markets peaked how are you. What are you seeing in terms of pricing on some of the legacy engines.

Speaker Change: Specifically in front of me, but we do expect margin expansion in the second half of our year versus the first half of the year. So Q3 margins as we said wouldn't expand.

I'd say that I'd say the pricing the values are still very very strong.

Not to say that they are accelerating.

Speaker Change: Into Q3.

Speaker Change: And then also we would expect expansion on top of that in Q4, and Thats driven across the company, but related to parts supply specifically.

The rates that we had seen but there is still very very strong and of course, the prices that we pay for assets.

We're able to command equally strong pricing in.

Speaker Change: <unk> new distribution agreements that we signed ramp up we typically see margin expansion there and as you know we've been stacking win after win on top of each other so you've got a compounding effect in the distribution business and.

In the market to preserve our spreads.

Okay.

Great.

Last year in fiscal 'twenty four you saw real sequential first half second half uptick in margins in the parts supply business.

Speaker Change: And USA now that we're seeing more assets available to us we would expect.

As we think about sort of the cadence first half second half I know you don't give specific guidance, maybe by segment, but directionally, how do we think about margins in parts supply and is there.

Speaker Change: Further growth in USA and the margin profile of <unk> is more difficult to predict because it's such a transactional business and so youre dealing with assets as they become available, but generally speaking the part supply we would see we'd expect to see an upward trend largely driven by distribution.

Is there any reason, we wouldn't see sort of similar strengthening into the back half in that segment margins.

Eric: Perfect. Thanks, John I'll pass it back to Eric.

I don't have the last year margins.

Specifically in front of me, but we do expect margin expansion in the second half of our year versus the first half of the year. So Q3 margins as we said wouldn't expand.

Ken Herbert: Thanks, Ken.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of Michael <unk> with <unk> Securities. Your line is open.

Speaker Change: Hey, good evening guys. Thanks for taking my question Nice nice results.

Into Q3.

And then also we would expect the expansion on top of that in Q4 and Thats driven.

Speaker Change: Thank you John and maybe just to stay on the margins I think I heard you in the port supply is EBITDA margins.

Across the company, but related to <unk> specifically.

Speaker Change: Down year over year, I think you called out maybe the mix for whole asset.

As new distribution agreements that we signed ramp up we typically see margin expansion there and as you know we've been stacking win after win on top of each other so you've got a compounding effect in the distribution business and.

Down sequentially is there any.

Speaker Change: Reason for concern any any change with underlying distribution margins there by customer either promotional or government or was everything truly just whole asset related.

And use them now that we're seeing more assets available to us we would expect.

We expect further growth in USA and the margin profile of <unk> is more difficult to predict because it's such a transactional business and so when youre dealing with assets as they become available, but generally speaking the parts supply we would see we'd expect to see an upward trend largely driven by distribution.

Speaker Change: Yes.

Speaker Change: No reason for concern.

Speaker Change: It's largely driven by the whole asset so last year, we had a whole asset sales that were at a higher margin. This year, we had whole asset sales that were lower margin and thats.

Speaker Change: That's simply the nature of that business.

Eric: Perfect. Thanks, John I'll pass it back to Eric.

Based on what whole assets become available to us in the cost to get into those assets. So I wouldn't.

Great. Thanks, Kevin.

Eric: Please standby for our next question.

Speaker Change: I wouldn't.

Speaker Change: Our next question comes from the line of Michael Mueller with choice Securities. Your line is open.

Speaker Change: Focus on that as any sort of trend I think the important thing to note is that whereas in the first quarter of this year, we have really struggled to find hold assets at all to sell.

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

Thanks, John maybe just to stay on the margins I think I heard you the part.

Speaker Change: We're pleased to see assets come available to us.

Speaker Change: <unk> EBITDA margins.

Speaker Change: And that we closed in the quarter.

Speaker Change: And we have a much stronger pipeline of assets available to us as we go throughout the balance of this fiscal year.

Speaker Change: Down year over year, I think you called out maybe the mix for whole asset.

Speaker Change: Down sequentially is there any.

Speaker Change: Yes, that's a great point on that topic, what do you think is driving that.

Speaker Change: Reason for concern any any change with underlying distribution margins there by customer either commercial or government or was everything truly just whole asset related.

Obviously, Boeing and Airbus are still struggling mightily to gift.

Speaker Change: Or I mean, whats driving that change yes.

Speaker Change: Yes, exactly I wouldn't I wouldn't say that this is related to increased production rates et cetera, I think again, its situational and we've got a very very talented sourcing team thats able to able to find assets out there in the market and.

Speaker Change: Yes.

Speaker Change: No reason for concern.

Speaker Change: It's largely driven by the whole asset so last year, we had a whole asset sales that were at a higher margin. This year, we had a whole asset sales that were a lower margin and thats.

Speaker Change: I believe we're doing a good job of Alpha Nuvaring the competition in getting our hands on on assets ahead of them.

Speaker Change: That's simply the nature of that business.

Speaker Change: Based on what whole assets become available to us in the cost to get into those assets. So I wouldn't.

Speaker Change: So I would not characterize this as a trend related to.

Speaker Change: Increased production out of the Oems I think that.

Speaker Change: I wouldn't.

Speaker Change: You are seeing you are seeing maybe a slight loosening due to some of the things going on with the lower cost carrier then and.

Speaker Change: The larger lessors.

I'm pleased to see assets come available to us.

Speaker Change: The re portfolio, but again I would characterize that as the situation right now.

Speaker Change: That were closed in the quarter.

Speaker Change: And we have a much stronger pipeline of assets available to us as we go throughout the balance of this fiscal year.

Speaker Change: Just playing a really good ground game to make sure that were thrown alignment those things become available.

Speaker Change: Yes, that's a great point on that topic, what do you think is driving that.

Speaker Change: Got it got it.

Speaker Change: Just last one as Sean could you maybe level set us.

Speaker Change: Obviously, Boeing and Airbus are still struggling mightily to get.

Speaker Change: R&D margins so you're.

Speaker Change: Or I mean, whats driving that change yes.

Speaker Change: Maybe by February or so you get rid of the money, losing landing gear can you calibrate us in terms of just for modeling revenue and then what.

Speaker Change: That actually does to margins and I don't know if its material enough that it moves the needle for kind of three to five year targets you put out there for margins, but presumably it's going to help.

Speaker Change: I believe we're doing a good job of Alpha Nuvaring the competition in getting our hands on on assets ahead of them.

Speaker Change: Yes, I would say, it's part of achieving the three to five year targets in terms of the margin expansion what will happen in R&D and as John mentioned, it's really going to come from two primary things.

Speaker Change: So I would not characterize this as a trend related to <unk>.

Speaker Change: Kris production out of the Oems I think that.

Speaker Change: You are seeing you are seeing maybe a slight loosening due to some of the things going on with the lower cost carrier then.

Speaker Change: Elevation of the synergies associated with the product support acquisition, which is the completion of that kind of getting to that $10 million number as John said will be in our Q1 of next fiscal year here, that's been that'll be complete and realize and then the other piece from that will come from the hangar expansion.

Speaker Change: The larger lessors.

As a REIT portfolios, but again I would characterize that as the situation right now.

Speaker Change: Just playing a really good ground game to make sure that we're at the front alignment those things become available.

And so both of those are kind of next fiscal year for that next bigger move in margin in the more near term here I think we would expect pretty consistent performance, maybe a slight improvement as you mentioned with landing gear coming out I would note the landing gear won't come out of the results until the deal closes so far fiscal Q3 and will likely be in the <unk>.

Speaker Change: Got it got it.

Sean: Just last one as Sean could you maybe level set us.

Speaker Change: <unk> margins so you're.

Sean: Maybe by February or so you get rid of the money, losing landing gear can you calibrate us in terms of just for modeling revenue and then what.

Speaker Change: Ultimate out of the cash flow.

Sean: That actually does to margins and I don't know if its material enough that it moves the needle for kind of three to five year targets you put out there for margins, but presumably it's going to help.

Speaker Change: Our results.

Speaker Change: Got it alright, thanks, guys I'll jump back in the queue.

Mike: Thank you Mike.

Speaker Change: Please standby for our next question.

Sean: Yes, I would say, it's part of achieving a three to five year targets in terms of the margin expansion what will happen in R&D and as John mentioned, it's really going to come from two primary things.

Speaker Change: Our next question comes from the line of Louis di Palma with William Blair. Your line is open.

John: John Sean and Denise happy new year and.

Sean: Elevation of the synergies associated with the product support acquisition, which is the completion of that kind of getting to that $10 million number as John said will be in our Q1 of the next fiscal year here, that's when that will be complete and realize and then the other piece from that will come from the hangar expansion.

Speaker Change: Good afternoon, and Denise congrats on joining the.

John: Our team.

Speaker Change: Thank you my question.

Speaker Change: <unk> seems to have hit an inflection with your commentary about the better supply and this quarters growth.

Sean: And so both of those are kind of next fiscal year for that next bigger move in margin in the more near term here I think we would expect pretty consistent performance, maybe a slight improvement as you mentioned with landing gear coming out I would note the landing gear won't come out of the results until the deal closes so far our fiscal Q3.

Speaker Change: After recent declines John would you say that the worst is behind us in terms of U S M and how we turned the corner there.

Speaker Change: Again, I think it's early so it's been a quarter.

Speaker Change: A quarter of loosening, if you will in terms of supply, but I would point back to what we've been talking about this for some time that we expect at some point, we will enter a period, where you still have extremely high demand for material and youll start to see more supply come on the market and that will provide a great.

Sean: We'll likely be in the results in that out of the platform results.

Speaker Change: Got it alright, thanks, guys I'll jump back in the queue.

Sean: Sure.

Sean: Please standby for our next question.

Sean: Our next question comes from the line of Louis di Palma with William Blair. Your line is open.

Speaker Change: Opportunity for us to accelerate the growth of U S M.

Speaker Change: John Sean and Denise happy New year, and good afternoon, Denise Congrats on joining the.

Speaker Change: We definitely saw that this quarter, we are seeing it through the balance of the for the balance of this fiscal year.

Speaker Change: <unk>.

Speaker Change: Beyond that it's tough to tell Thats, just the nature of that business, but certainly very very early signs are encouraging that we will be in an environment, where we have more supply to meet the very elevated demand.

Sean: AAR team.

Denise: Thank you my question.

Denise: <unk> seems to have hit an inflection with your commentary about the better supply and this quarters growth.

Speaker Change: And so along those lines you had forecast for there to be a period of time in which both <unk>.

Denise: After recent declines John would you say that the worst is behind us in terms of U S. M and have we turned the corner there.

Speaker Change: Distribution and <unk> are both clicking at the same time right.

Speaker Change: Again I think.

Speaker Change: Well they definitely are clicking at the same time this quarter.

Denise: Its early so its been a quarter.

Speaker Change: And distribution distribution, it's a very different business than <unk> right. Because you have assured supply out of your OEM partners and <unk>.

Denise: A quarter of loosening, if you will in terms of supply, but I would point back to what we've been talking about this for some time that we expect at some point, we will enter a period, where you still have extremely high demand for material and youll start to see more supply come on the market and that will provide a great.

Speaker Change: Many cases because of the nature of the product.

Speaker Change: It's much more forecastable and the backlog is much larger.

Speaker Change: I should say that the backlog for both commercial and government and distribution has been growing.

Denise: <unk> for us to accelerate the growth.

Denise: We definitely saw that this quarter, we are seeing it through the balance of the balance of this fiscal year.

Speaker Change: That's on existing lines as well as the new lines that we've been signing up so.

Speaker Change: Distributions then on just a tremendous run for the last several over the last couple of years and we absolutely expect that to continue thanks to the compounding of all the.

Denise: Beyond that it's tough to tell Thats, just the nature of that business.

Denise: Certainly very very early signs are encouraging that we will be in an environment, where we have more supply to meet the very elevated demand.

Speaker Change: The new contracts that we continue to sign and then again going back to use them.

Denise: And so along those lines you had forecast for there to be a period of time in which both distribution and <unk> are both clicking at at the same time right.

Speaker Change: Much much different business with different dynamics, but.

Speaker Change: This was a very good quarter, where we saw strong demand and strong asset availability and you can see it come through in the results.

Speaker Change: Great.

Speaker Change: You announced the new distribution agreements with chroma Elias as you discussed.

Denise: Well they definitely are clicking at the same time this quarter.

Denise: And distribution distribution, it's a very different business than <unk> right. Because you have assured supply out of your OEM partners.

Your response to the first question and.

Speaker Change: So with Fannie the Trans time company, but how long should it take.

Denise: Many cases because of the nature of the product.

Denise: It's much more forecastable and the backlog is much larger.

Speaker Change: Those distribution agreements two to scale to a normalized rate as I think they were signed in November so will there be contributions in this fiscal year or is it more of like fiscal 'twenty six.

Denise: I should say that the backlog for both commercial and government and distribution has been growing.

Denise: That's on existing lines as well as the new lines that we've been signing up so.

Speaker Change: That's a great question.

Denise: Distributions then on just a tremendous run for the last several over the last couple of years and we absolutely expect that to continue thanks to the compounding of all the.

The answer is it varies by contract in the case of the Cromwell.

Speaker Change: Contract.

We would expect.

Speaker Change: An immediate contribution starting this quarter and ramping.

Denise: The new contracts that we continue to sign and then again going back to use them.

Speaker Change: Likely to close to full run rate by the end of this fiscal year. So that one is on a on a relatively nice path.

Denise: Much much different business with different dynamics, but.

Denise: This was a very good quarter, where we saw strong demand and strong asset availability and you can see it come through in the results.

Speaker Change: With Whitney along with other distribution agreements on the new parts distribution side.

Speaker Change: Those typically have a longer ramp and the reason is.

Great.

Denise: You announced the new distribution agreements with chrome Elias as you discussed.

Often you are taking that and we've been taking share in the distribution business. Often you are taking that business from another distributor and they may still or multiple distributors and those those prior distributors may have inventory sitting on the shelf and it just takes a while for the channel to drain out and then it.

Denise: Your response to the first question and the.

Denise: With Fannie the Trans time company, but how long should it take.

Denise: Distribution agreements two to scale to a normalized rate as I think they were signed in November so will there be contributions in this fiscal year or is it more of like fiscal 'twenty six.

Speaker Change: I am fully over to us so whippany I would expect to ramp.

Speaker Change: Over a multi quarter multi quarter period, it will be more of a contributor in our FY 'twenty six.

Speaker Change: So whippany was a takeaway.

Denise: That's a great question.

Denise: The answer is it varies by contract in the case of the Cromwell.

Speaker Change: Yes.

Speaker Change: <unk>.

Denise: Contract.

Speaker Change: I believe that one was.

Denise: We would expect.

Speaker Change: But let's let me confirm that okay.

An immediate contribution starting this quarter and ramping.

Speaker Change: Okay got you and for <unk>.

Denise: Likely to close to full run rate by the end of this fiscal year. So that one is on a on a relatively nice path.

Speaker Change: Sean.

Many different.

Speaker Change: Dax.

Speaker Change: And the stock market over the past month, or so they've been under pressure due to the the rise in interest rates with the 10 year yield.

Denise: With Whitney along with other distribution agreements on the new parts distribution side.

Denise: Those typically have a longer ramp and the reason is.

Speaker Change: Spiking and we were wondering what is your long term view of of net leverage and your appetite for M&A in regards to the recent increase in interest rates and the deleveraging plan.

Denise: Often you are taking that and we've been taking share in the distribution business. Often you are taking that business from another distributor and they may still multiple distributors and those those prior distributors may have inventory sitting on the shelf and it just takes a while for the channel to drain out and then it ran.

Speaker Change: So as you mentioned deleveraging is a focus of ours, we've seen pretty significant deleveraging from $3 six at deal close to $3. One seven today and we look to stay on track to get towards two times net leverage and two years.

Denise: I am fully over to us so whippany I would expect to ramp.

Denise: Over a multi quarter multi quarter period and be more of a contributor in our FY 'twenty six.

Alright, so whippany was a takeaway.

Close of the acquisition, which we're on track for <unk>.

Denise: Okay.

Speaker Change: And in terms of the rising interest rate environment.

Denise: Yeah.

Speaker Change: We have a combination of fixed and floating we have fixed rate debt on the $550 million bond, we put in as part of the acquisition to no exposure to rising interest rates, where the revolver is floating and so theres a little bit of exposure, there, but thats the instrument, we'd be using to pay down debt. So that portion of the capital stack would would come.

Denise: I believe that one was.

Denise: But let's let me confirm that yes.

Denise: Okay got you and for.

For Sean.

Denise: Many different.

Denise: Stocks and the stock market over the past month, or so they've been under pressure due to the the rise in interest rates with the 10 year yield.

Speaker Change: Down as we de lever as it relates to appetite for M&A in the near term here, we're clearly focused on integrating TPS, realizing the synergies and deleveraging, but we do continue to expect to play offense as it relates to acquisitions in the in the aftermarket.

Denise: Spiking and we were wondering what is your long term view of of net leverage and Apple.

Denise: Appetite for M&A in regards to the recent increase in interest rates.

Speaker Change: Awesome sounds good thanks, everyone.

Denise: And the deleveraging plan.

Speaker Change: Thank you.

Denise: So as you mentioned deleveraging is a focus of ours, we've seen pretty significant deleveraging from $3 six at deal close to $3 107 today and would look to stay on track to get towards two times net leverage and two years.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of Josh Sullivan.

With benchmark.

Speaker Change: Hey, good evening.

Speaker Change: Hey, Jeff.

Speaker Change: Can you just expand on the commentary you made around.

Denise: Close of the acquisition, which we're on track for <unk>.

Speaker Change: Potentially being.

Denise: And in terms of the rising interest rate environment.

Speaker Change: Part of the conversation.

Denise: We have a combination of fixed and floating we have fixed rate debt on the $550 million bond, we put in as part of the acquisitions and no exposure to rising interest rates, where the revolver is floating and so theres a little bit of exposure, there, but thats the instrument, we'd be using to pay down debt. So that portion of the capital stack would would come.

Speaker Change: Helping with any government efficiency efforts.

Speaker Change: I know this is probably a third rail conversation but.

Speaker Change: <unk> TMA.

Speaker Change: That composition as well.

Speaker Change: Yes, I would say.

The to answer the last part first certainly if you imagine would be part of that conversation, but for and we're in that business and it's still very small effort for us, but our focus.

Denise: Down as we de lever as it relates to appetite for M&A in the near term here, we're clearly focused on integrating TPS, realizing the synergies and deleveraging, but we do continue to expect to play offense as it relates to acquisitions in the in the aftermarket.

Speaker Change: I'd say more broadly in the areas, where we can have a much much greater impact would be.

Speaker Change: The utilization of used parts by the government I mean, we've said many times that if the U S. Air Force bought parts like Delta Airlines, there's billions of dollars.

Speaker Change: Awesome sounds good thanks, everyone.

Denise: Thank you.

Denise: Please standby for our next question.

Speaker Change: And potential savings there and one example, whatever related to everyone on the call is familiar with us when we sold to use C 40 aircraft to the.

Josh Sullivan: Our next question comes from the line of Josh Sullivan.

Denise: With benchmark.

Hey, good evening.

Denise: Hey, Jeff.

Speaker Change: The Marines and.

Speaker Change: Can you just expand on the commentary you made around.

Speaker Change: As you know at <unk> 40 is the 737, our commercial derivative aircraft converted for military use.

Dean.

Speaker Change: Part of the conversation.

Speaker Change: Government was going to buy two factory new <unk> from Boeing.

Speaker Change: With any government efficiency efforts.

Speaker Change: I know this is probably a third real conversation but.

Speaker Change: We convince the government that they can achieve the same objective the buying used aircraft.

Speaker Change: <unk> TMA.

Speaker Change: Does that composition as well.

Work with the government to source aircraft and ultimately convert used 737 two.

Speaker Change: Yes, I would say.

Speaker Change: The to answer the last part first certainly if you imagine would be part of that conversation, but for and we're in that business and it's still a very small effort for us, but our focus.

Speaker Change: <unk> and those aircraft has been delivered to the Navy Marines and are in operations today, and we were able to save the government approximately $60 million on two aircraft alone.

Speaker Change: I'd say more broadly in the areas, where we can have a much much greater impact would be.

Speaker Change: So when we think about those in the approach to looking at how can we never be more efficient.

Speaker Change: The utilization of used parts by the government I mean, we've said many times that if the U S. Air Force bought parts like Delta Airlines Theres billions of.

Speaker Change: We are hopeful that they will look through commercial solutions like what we offer and apply more of those commercial solutions to the government.

Speaker Change: We've got great examples like the C 40 to talk to them about.

Speaker Change: And potential savings there and one example, whatever related to everyone on the call is familiar with us when we sold to us.

Speaker Change: Great I'll keep it to one thank you.

Speaker Change: Okay, great. Thank you thank.

Speaker Change: 40 aircraft to the.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: The Marines and.

Speaker Change: As you know at <unk> 40 is the 737, our commercial derivative aircraft converted for military use.

Speaker Change: We have a follow up question from the line of Ken Herbert with RBC capital markets. Your line is open.

Speaker Change: Government was going to buy two factory new <unk> from Boeing.

Okay.

Ken Herbert: John I appreciate the follow up just two quick questions first as you start to maybe do more in PMA and it sounds like it's limited initially, but how are you managing any potential sort of conflict with some of your OEM partners and I'm just thinking specifically.

Speaker Change: We are convinced the government that they can achieve the same objective the buying used aircraft.

Speaker Change: Work with the government to source aircraft and ultimately convert used 737 two.

To see <unk> and those aircraft are since been delivered to the Navy Marines and are in operations today, and we were able to save the government approximately $60 million on two aircraft alone and so when we think about those in the approach to looking at how can we would ever be more efficient.

Speaker Change: <unk>, obviously been a great relationship and a great product line for you is that something thats at all a concern or how are you managing that as you're communicating to the marketplace. We are managing those those relationships very very carefully we would never do anything that would run afoul with our OEM partners and distribution or any other part of our business.

Speaker Change: We are hopeful that they will look through commercial solutions like what we offer and apply more of those commercial solutions to the government.

Speaker Change: The good news is as you know there are thousands and thousands of parts on the aircraft and there are lots of Oems out there.

Speaker Change: We've got great examples like the C 40 to talk to them about.

Speaker Change: Big ones small ones that we don't have any conflict.

Speaker Change: Great I'll keep it to one thank you.

Speaker Change: And those those are the type of parts that we are there.

Speaker Change: Okay, great. Thank you thank.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

We are targeting.

Okay, perfect and maybe just for Sean can you give any color on the free cash flow outlook for the year I mean nice quarter. This quarter typically you have a very strong quarter in your fiscal fourth quarter.

Speaker Change: We have a follow up question from the line of Ken Herbert with RBC capital markets. Your line is open.

Speaker Change: Okay.

Speaker Change: John I appreciate the follow up just two quick questions first as you start to maybe do more in PMA and it sounds like it's limited initially, but how are you managing any potential sort of conflict with some of your OEM partners and I'm just thinking specifically.

Speaker Change: How is thinking on full year free cash shaped up and should the trajectory look similar this year as it has in prior years with the fourth quarter.

Speaker Change: Yes, I think the trajectory should look pretty similar obviously.

Speaker Change: <unk>, obviously been a great relationship and a great product line for you is that something thats at all a concern or how you're managing that as you're communicating to the marketplace. We are managing those those relationships very very carefully we would never do anything that would run afoul with our OEM partners and distribution or any other part of our business.

Speaker Change: The only thing different D&B.

Speaker Change: SEPA payment and the timing of the close of landing gear for those who have been either all in Q3 or certainly in this second half of the fiscal year as it relates to the balance of the free cash flow I think you should look pretty similar to last year in terms of positive cash in Q3, and a stronger Q4 to close out the year and that will help as we think.

Speaker Change: The good news is as you know there are thousands and thousands of parts on the aircraft and there are lots of Oems out there.

Speaker Change: About the deleveraging that's a piece of it and the EBITDA growth will be another piece.

Speaker Change: Big ones small ones that we don't have any conflict.

And those those are the type of parts that we are there.

Speaker Change: Perfect. Thanks, Sean.

Speaker Change: Thank you. Thank you.

Speaker Change: We are targeting.

Speaker Change: Ladies and gentlemen at this time I would like to turn the call back over to management for closing remarks.

Speaker Change: Okay, perfect and maybe just for Sean can you give any color on the free cash flow outlook for the year I mean nice quarter. This quarter typically you have a very strong quarter in your fiscal fourth quarter.

Great well. Thank you very much we really appreciate you all joining us today and we look forward to being back next quarter to talk about our Q3 results. Thank you.

Speaker Change: How is thinking on full year free cash shaped up and should the trajectory look similar this year as it has in prior years with the fourth quarter.

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

Speaker Change: Yes, I think the trajectory should look pretty similar obviously.

Speaker Change: The only thing different D&B.

Speaker Change: Cta payment and the timing of the close of landing gear for those who have been either all in Q3 or certainly in this second half of the fiscal year as it relates to the balance of the free cash flow I think you should look pretty similar to last year in terms of positive cash in Q3, and a stronger Q4 to close out the year and that will help as we think.

Speaker Change: About the deleveraging that's a piece of it and the EBITDA growth will be another piece.

Speaker Change: Perfect. Thanks, Sean.

Speaker Change: Thank you. Thank you.

Speaker Change: Ladies and gentlemen at this time I would like to turn the call back over to management for closing remarks.

Speaker Change: Great well. Thank you very much we really appreciate you all joining us today and we look forward to being back next quarter to talk about our Q3 results. Thank you.

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

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Yeah.

Speaker Change: [music].

Speaker Change: Yes.

Speaker Change: Sure.

Speaker Change: Yeah.

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Yes.

Speaker Change: Yeah.

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Thanks.

[music].

Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Sure.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: [music].

Yes.

Speaker Change: [music].

Speaker Change: Hello, and thank you for standing by.

Speaker Change: Welcome to AAR Corp, Q2, 2025 earnings conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question during the session you will need.

Speaker Change: Press Star one on your telephone.

Speaker Change: You will then hear automated message advising your hand is raised.

Speaker Change: Withdraw your question. Please press star one again.

I would now like to hand, the conference over to Denise you.

Denise: You may begin.

Denise: Thank you.

Denise: Good afternoon, everyone and welcome to Aar's fiscal year 2025 second quarter earnings call. We're joined today by John Holmes, Chairman, President and Chief Executive Officer, and Sean Gillen, Chief Financial Officer.

Denise: 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 1095.

Denise: These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward looking statements.

Denise: Accordingly. These statements are no guarantee of future performance.

Denise: 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 2024.

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

Denise: Certain non-GAAP financial information will be discussed in the call today.

Denise: Information on these non-GAAP measures to the most comparable GAAP measures is set forth in the company's earnings release.

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

Denise: Thank you and welcome everyone to our second quarter fiscal year 2025 earnings call I'm pleased to report another strong quarter with record top line results for Q2, our second quarter sales of $686 million improved 26% from the same quarter last year. Our adjusted earnings of <unk> 90 per share were 11% higher than in the same period.

Denise: Last year also setting a second quarter record for adjusted EPS.

Denise: These results, which included double digit sales growth for both our commercial and government businesses clearly demonstrate the strong demand for our aftermarket aircraft and engine services. We're very proud of the performance. We delivered this past quarter and are even more excited for the remainder of fiscal year 2025 and beyond.

Denise: To drive value throughout the company by focusing on growing our aftermarket services offering while diligently improving margins through portfolio optimization scaling efficiency and realizing acquisition related synergies and.

Denise: In addition to these efforts we continue to benefit from a strong aviation aftermarket due to the elevated levels of consumer air travel and aging fleet and increasing demand from the government end market.

Denise: This strong demand is not slowing down and we expect it to continue through calendar year 2025.

Denise: As mentioned, we delivered quarterly sales of $686 million up 26% year over year. Moreover, we saw an increase in organic sales growth, which accelerated from 6% last quarter to 12% this quarter all.

Denise: All three of our core business segments contributed to this growth part supply remains our largest segment by sales due to strong demand for both new and used parts sales grew 20% over the last year and it was entirely organic.

Denise: Our repair and engineering segment grew 57% over the last quarter as a result.

Denise: Of the product support contribution and continued strong demand in our hangers.

Denise: Integrated solutions also posted growth in the quarter.

Denise: Overall consolidated sales to commercial customers increased 30% from the same quarter last year and sales to government customers increased 16%.

Denise: Top line growth accelerated from the same period last year. We also demonstrated improvement in our bottom line results adjusted EBITDA of $78 $3 million was higher by 42% from the same quarter last year EBITDA margin increased from 10, 1% in the second quarter of last year to 11, 4%. This year, our adjusted operating margin increased from eight.

Denise: 1% last year to nine 2% this year.

Denise: I will now discuss our three core segments in more detail.

Denise: Parts supply continues to be our largest business segment contributing nearly 40% of sales through our company.

Denise: This segment has benefited greatly from a strong after market dimension aftermarket dynamic that I mentioned earlier, including strong demand for engine maintenance.

Denise: 60% of our part sales in engine components are 60% of our parts sales our engine components or engine accessories.

Denise: Our second quarter sales of $274 million or 20% higher compared to the same quarter last year and improved 10% sequentially.

Denise: First quarter EBITDA for parts supply was $33 9 million, 13% higher than the same quarter last year, adjusted operating income of $31 6 million or 11% higher than the same period last year within.

Denise: Within parts supply and distribution continued its stellar performance as discussed previously our independent distribution model and our focus on exclusive contract allows us to win new business like the multi year agreement with Whippany Transcon company that we announced in the quarter. We are excited about this new win and have many more opportunities in the pipeline.

Denise: Our USA business also returned to growth this quarter, driven by <unk> and whole asset sales. We are seeing an increase in availability of whole assets in the market, which combined with continued strong demand will drive further growth in U S. M.

Denise: As mentioned, 60% of our parts supply sales are engine related serving the engine aftermarket has always been quarter. Our business. An example of this is our partnership with <unk> to provide CFM 56 engine materials to the aftermarket.

Denise: Additionally, we continue to see Andrew related growth opportunities such as the recently announced exclusive distribution agreement with Chromalloy to sell their PMA parts for the <unk> ADP to engine type.

Denise: Securing this agreement further expands our engine part of offering and demonstrates the value we bring to both suppliers and customers.

Denise: Turning now to our repair and engineering segment second quarter sales of $229 million grew 57% from the same quarter last year.

Denise: Adjusted EBITDA grew to $30 9 million up 132% from the same quarter last year, while adjusted operating income was $27 4 million higher by 143% from the same period last year.

Denise: Product support acquisition continues to perform well and drive growth inside the repair and engineering segment. The integration is on schedule and we are on track to realize the $10 million of cost synergies as previously communicated.

The integration is expected to be completed in our fiscal Q1, FY 'twenty six which is when we expect to be at run rate synergy realizations.

Denise: While we are integrating the business. We are also growing it as evidenced by the recently announced joint venture with Air France for engineering and maintenance support on next generation aircraft and the Asia Pacific region.

Denise: On the heavy maintenance side of repair and engineering, we continued to see strong underlying demand for our services and our focus on implementing process improvements that continue to increase efficiency and improved throughput at our existing facilities, our hangar capacity expansions in Miami in Oklahoma city or in process and once completed in FY 'twenty six.

Denise: One or two more quarters to ramp up to achieve the $60 million of incremental annual revenue for the company.

Denise: Turning now to integrated solutions sales for the quarter were $163 million up 4% from the same quarter last year, adjusted EBITDA and integrated solutions for the second quarter was $12 3 million slightly lower from the same quarter last year adjusted operating income of $8 $3 million was lower by 8% from the same quarter last year due to mix shift within certain pre.

Graham's going forward, we expect growth to improve as our government program activity of convert their pipeline of opportunities to new business wins, and our recent contract wins mature.

Denise: An example of a recent government new business win is the award from the U S. Vod for engine overhaul work related to the Navy's fleet, while we are still working with the government to finalize the demand requirement. We do expect contributions to be in the low single digit millions per quarter initially ramp it to a more significant level later in our FY 'twenty six.

Denise: Additionally, we are incredibly well positioned to help the new administration realizes efficiency goals, whether that would be for the dose commissioner otherwise our offerings help our government customers reduce costs, while maintaining or improving performance. We look forward to continuing to demonstrate our capabilities to the U S Department of Defense State Department and other agencies.

Denise: Yeah.

Denise: Before turning the call over to John I'd like to briefly touch on two announcements that we made right before the holidays.

Denise: First on December 19th we announced that we have reached resolutions with the department of Justice and the Securities Exchange Commission to resolve a previously disclosed potential violations of the foreign corrupt practices Act.

Denise: As it relates to certain transaction signed in 2016 2017 and to follow in South Africa. After self reporting to the government in 2019 and cooperating with a multiyear investigation.

Denise: <unk> has entered into a non prosecution agreement with the Doj and reached resolution with the SEC.

Denise: Little amount associated with the settlement is $55 6 million.

Denise: This has been a long process and we are pleased that this issue is now settled and I'm proud of the way our company dealt with this matter and we have made significant investments and improvements to our compliance program over the last several years.

Denise: Separately on December 20, we announced that we entered into a definitive agreement to sell our landing gear overhaul business <unk> for $51 million. This strategic decision was made so that we could put an even greater focus on our higher growth higher margin aftermarket activities. It also allows us to allocate even more resources to driving an integrated.

Denise: <unk> integrated approach between product support heavy maintenance and parts supply, where we see significant opportunities for revenue synergies.

We expect the landing gear transaction to close in the first calendar quarter of 2025 and upon close that will be immediately accretive to margins and earnings.

Sean Gillen: We appreciate all the hard work and dedication from our Atlanta team and we wish them and <unk> much success in the future I'll now turn it over to Sean to discuss our Q2 results in more detail.

Sean Gillen: Thanks, John total sales in the quarter grew 26% to $686 million setting a new company quarterly sales record extra.

Sean Gillen: Excluding the impact from the recently acquired product support business organic sales growth for the quarter was 12%, which accelerated from last quarter's organic growth rate of 6%.

Sean Gillen: Promotional sales increased to 30% during the quarter compared to 20% from the prior quarter.

Sean Gillen: This additional increase in sales growth came from all three of our core business segments led by commercial distribution and product support sales.

Sean Gillen: Government sales also increased 16% for the quarter, primarily due to increased order volume and new parts distribution.

Sean Gillen: Total commercial sales for the quarter made up 73% of total sales while government sales made up the remaining 27%.

Sean Gillen: Compared to the same quarter last year adjusted EBITDA margin increased from 10, 1% to 11, 4% adjusted operating profit margin improved from eight 1% to nine 2%.

Sean Gillen: Our focus on airframe maintenance efficiencies and contribution from our recently acquired product support business has helped us significantly improve margin performance.

Sean Gillen: Net interest expense for the quarter was $18 8 million, reflecting the financing of the product support acquisition.

Sean Gillen: We expect Q3 net interest expense to remain consistent with the levels. We also expect our Q3 effective tax rate to be approximately 27%.

Sean Gillen: Average diluted share count in the quarter was 30 $35 5 million shares.

Sean Gillen: Adjusted diluted EPS increased from 81, or <unk> 90, reflecting the benefit of our growth and margin expansion.

Sean Gillen: With that I'll turn to the detailed results by segment.

Sean Gillen: Part supply sales grew 20% to $274 million driven by growth in both distribution and U S M and.

Sean Gillen: An increase in commercial volume drove growth in both businesses, along with an uptick in government demand for new parts distribution.

Sean Gillen: Part supply adjusted EBITDA margin decreased from 13, 2% to 12, 4% and adjusted operating margin decreased from 12, 5% to 11, 5% in the quarter, which was due to whole asset sales at lower margins than the same period last year.

Sean Gillen: Repair and engineering sales increased 57% to $229 million on an organic basis sales increased 6%.

Sean Gillen: <unk> remained strong for our heavy maintenance and component repair capabilities. When we look to continue to drive growth in these activities.

Sean Gillen: Repair and engineering adjusted EBITDA increased from nine 1% EBITDA margin increased from nine 1%, a 13, 5% and adjusted operating margins increased from seven 8% to 12% in the quarter driven by the product support business and continued efficiency gains and behaviors.

Sean Gillen: Fourth we expect to drive further margin expansion in this segment from the realization of product support synergies continued rollout of our paper paperless hanger initiatives and the capacity expansion once they come online in FY 'twenty six.

Sean Gillen: Turning to consolidated cash cash flow generated in operating activities was $22 million in the quarter.

Sean Gillen: This cash generation, along with EBITDA growth reduced our net debt leverage from three three times to three seven times during the quarter.

Sean Gillen: When we closed the product support acquisition in March of last year net leverage at the time of three six times and we said we expect it to be back towards two times net leverage in two years.

Sean Gillen: We are on track to achieve that target as we expect to continue to de lever for the balance of this year and into next.

Sean Gillen: Next I'd like to address the financial impact of the two recent announcements.

Sean Gillen: First with the CPA resolution the settlement amount of $55 6 million was recognized in the fiscal Q2 results. We are discussing today the payment of the settlement had been made and will be reflected in our third quarter cash flows.

Sean Gillen: The combination of cash on hand, and funds from our revolving credit facility were used for ethane.

Sean Gillen: Second in regards to the landing gear overhaul business, we anticipate this transaction to close in the first quarter of calendar year 2025.

Sean Gillen: Closing by the end of February we will receive a cash payment of $51 million less applicable fees and expenses in our Q3 results.

Sean Gillen: As stated in the press release when this transaction closes the benefit will be immediately accretive to earnings and margins in conjunction with our decision to divest the business. We expect to recognize a noncash pre tax loss of approximately $60 million, which will be in our Q3 results.

Sean Gillen: Going forward, we anticipate the magnitude of our adjustments between our GAAP results in our adjusted non-GAAP results to be significantly less.

Sean Gillen: Over the next few quarters, our acquisition and integration related costs will wind down as the contingent consideration retention and related integration costs are fully recognized.

Sean Gillen: So our divestitures, we would anticipate that the exit costs associated with our land and your overhaul and composites businesses.

Sean Gillen: So wind down by mid fiscal 2026.

Sean Gillen: At that time, we would expect our ongoing non-GAAP adjustments to be largely comprised of acquisition intangible asset amortization of approximately $4 million per quarter.

John Holmes: With that I will turn the call back over to John.

Speaker Change: Great. Thank you Sean I am very pleased with our second quarter results and the continued momentum since the beginning of this fiscal year regarding the balance of the fiscal year end for Q3, specifically, we expect year over year sales growth of 22% to 25% and adjusted operating margin in the range of nine 2% to nine 4%.

Speaker Change: As I look ahead into the balance of our fiscal year and into next fiscal year, we expect to continue to see strong demand for our services.

Speaker Change: Overall macro environment for commercial aviation remains very strong.

Speaker Change: In addition, we have multiple levels to continue to drive significant growth, we had strong bookings and new contracts ramping up in distribution and we are seeing more assets come available to fuel growth in our U S M activity.

Speaker Change: Bear in engineering to hanger expansions are expected to contribute to growth in the next fiscal year and our global sales team will drive incremental growth across the recently acquired product support business.

Speaker Change: Finally in integrated solutions, we have a strong pipeline of new opportunities across our government and commercial offerings, including track.

Speaker Change: Turning to profitability, we continue to make tremendous progress towards executing on our long term objectives I'm incredibly proud of the progress we have made our adjusted operating margins are up from five 5% pre COVID-19 to nine 2% today and we expect continued improvement the margin expansion from here will come primary primarily from three areas first.

Speaker Change: Is realizing the synergies from our recent product toward acquisition as I mentioned earlier, we expect to achieve the run rate $10 million of synergy in Q1 of next fiscal year further as we drive more volume through the product support site, we anticipate additional margin expansion.

Speaker Change: As in our heavy maintenance hangar network, the new capacity coming online next fiscal year will not only drive growth, but also improve operating margins as we leverage the existing cost structure to meet the increased demand.

Speaker Change: Additionally, in the hangers, we expect improved efficiencies driven by several digital initiatives that we've invested in over the last several years.

Speaker Change: The third will come from mix benefit as we drive growth in our parts supply segment we.

Speaker Change: We continue to see significant opportunity in distribution as evidenced by our strong pipeline of OEM contracts in recent wins.

Speaker Change: These new distribution agreements mature, we expect additional margin expansion.

Speaker Change: It is important to note that the exclusive contract focus for our distribution business allows us to earn higher margins than traditional distribution model due to the added value that we provide to both suppliers and customers.

Finally, as Sean said, we remain focused on generating cash and continuing to reduce our leverage before turning it over to the operator for questions I would like to thank our team of dedicated employees, our customers and our shareholders for your continued interest and support of AAR and with that we'll open it up for questions.

Speaker Change: Thank you.

Speaker Change: Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and then wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

Speaker Change: Okay.

Speaker Change: Our first question comes from the line of Scott <unk> with Melius Research. Your line is open.

Speaker Change: Good evening, John Sean You mentioned, the new the new distribution agreement with Chromalloy for the PMA parts on the <unk> six engine criminalize also PMA in some parts and the CFM 56, and <unk> 2500.

Speaker Change: Hi.

Are there any restrictions that would prevent you from distributing those PMA parts for those engines and if so is there some sort of deal that can be worked out with <unk>.

Speaker Change: Let you distribute those PMA is for the CFM 56 can be 2500.

Speaker Change: I appreciate the question.

Speaker Change: What I would say there is we're very aware of the PMA portfolio that <unk> had.

Speaker Change: And obviously, we've got a joint venture with <unk> now a long term relationship with Chromalloy.

Speaker Change: There are a number of other discussions that we're having with both of them as existing partners and the three of US are always looking for ways to grow the business together.

Speaker Change: Yes, great question.

Speaker Change: We are heavily skewed towards the larger carriers, our largest customers are United Airlines Delta Airlines American et cetera.

So while we do do some business with.

Speaker Change: The lower comp carriers.

Speaker Change: It's a <unk>.

Speaker Change: Very small part of our business in North America.

Speaker Change: Okay got it and then one quick question for Sean Sean If you happen to have it do you have the organic growth numbers for commercial and government.

Speaker Change: No I don't have that handy you can back into it in terms of the inorganic growth came from TBS and most of that is commercial activity second help you get to something close to that but we don't disclose organic growth by by each of those activities.

Speaker Change: Okay got it thanks for taking the questions.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

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

Ken Herbert: Yeah, Hey, good afternoon, John and Sean Hi.

Speaker Change: Hey, Ken.

Speaker Change: Hey, John you mentioned.

Speaker Change: Growth in the second quarter in your U S portfolio.

Speaker Change: Can you help quantify that and maybe talk a little bit about sort of where youre seeing that specifically on the whole asset side and <unk>.

Speaker Change: How should we think about that into the second half of the fiscal year in terms of is that accelerating is it is it sort of moving sideways, how much upside cannot provide into the back half.

Speaker Change: Let's say, we're not breaking out growth specifically by by U S.

Speaker Change: But what we can say is it absolutely accelerated from the first quarter to the second quarter and we are seeing growth in U S. We are seeing opportunities in U S.

In terms of assets available for sale, we're seeing many more now than we did a quarter ago, it's hard to call that a trend.

Speaker Change: We're a quarter into it but generally speaking we are.

Speaker Change: Having more conversations.

Speaker Change: And again see more assets available.

Speaker Change: Fueled growth in this quarter and we would expect more growth through the balance of the fiscal year as long as we're able to capture those assets.

Speaker Change: Oh hi.

Speaker Change: Was pricing on some of these assets like for instance, legacy engines like CFM 56, and <unk> 25. For example are you continuing to see.

Speaker Change: Upward pressure on pricing or are you starting to get a sense that maybe that markets peaked how are you. What are you seeing in terms of pricing on some of the legacy engines.

Speaker Change: I'd say that I'd say the pricing the values are still very very strong I would not say that they are accelerating.

Speaker Change: That we had seen but there is still very very strong and of course, the prices that we pay for assets.

Speaker Change: We're able to command equally strong pricing in.

Speaker Change: And the market to preserve our spreads.

Speaker Change: Okay great.

Last year in fiscal 'twenty four you saw real sequential first half second half uptick in margins in the parts supply business.

Speaker Change: Is there any reason, we wouldn't see sort of similar strengthening into the back half in that segment margins.

Speaker Change: I don't have the last year margins specifically.

Speaker Change: Specifically in front of me, but we do expect margin expansion in the second half of our year versus the first half of the year. So Q3 margins as we said wouldn't expand.

Speaker Change: Into Q3.

Speaker Change: And then also we would expect the expansion on top of that in Q4 and Thats driven.

Speaker Change: Across the company, but related to <unk> specifically.

Speaker Change: As new distribution agreements that we signed ramp up we typically see margin expansion there and as you know we've been stacking win after win on top of each other so you've got a compounding effect in the distribution business and.

Speaker Change: And USA now that we're seeing more assets available to us we would expect.

Speaker Change: We expect further growth in USA and the margin profile of <unk> is more difficult to predict because it's such a transactional business and so on youre dealing with assets as they become available, but generally speaking the part supply we would see we would expect to see an upward trend largely driven by distribution.

Speaker Change: Perfect. Thanks, John I'll pass it back to her alright.

Speaker Change: Great. Thanks, Kevin.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of Michael <unk> with <unk> Securities. Your line is open.

Speaker Change: Hey, good evening guys. Thanks for taking my question Nice nice results.

Speaker Change: Thanks, John maybe just to stay on the margins I think I heard you the parts.

Speaker Change: <unk> EBITDA margins.

Speaker Change: Down year over year, I think you called out maybe the mix for whole asset.

Speaker Change: Down sequentially is there any.

Speaker Change: Reason for concern any any change with underlying distribution margins there by customer either commercial or government or was everything truly just whole asset related.

Speaker Change: Yes.

Speaker Change: No reason for concern.

Speaker Change: That's simply the nature of that business.

Speaker Change: Just on what whole assets become available to us in the cost to get into those assets. So I wouldn't.

Speaker Change: I wouldn't.

Focus on that as any sort of trend I think the important thing to note is that whereas in the first quarter of this year, we had really struggled to find hold assets at all to sell.

Speaker Change: Pleased to see assets come available to us.

Speaker Change: That were closed in the quarter.

We have a much stronger pipeline of assets available to us as we go throughout the balance of this fiscal year.

Speaker Change: That's a great point on that topic, what do you think is driving that I mean, it's obvious.

Speaker Change: Boeing and Airbus are still struggling mightily to get or.

Speaker Change: Or I mean, whats driving that change yes.

Yes, exactly I wouldn't I wouldn't say that this is related to increased production rates et cetera, I think again, its situational and we've got a very very talented sourcing team thats able to able to find assets out there in the market and.

Speaker Change: I believe we're doing a good job of Alpha Nuvaring the competition in getting our hands on on assets ahead of them.

Speaker Change: So I would not characterize this as a trend related to <unk>.

Speaker Change: Increased production out of the Oems I think that.

Speaker Change: You are seeing you are seeing maybe.

Speaker Change: A slight loosening due to some of the things going on with the lower cost carrier, then and the larger lessors.

Speaker Change: As a REIT portfolios, but again I would characterize that as the situation right now and we're just playing a really good ground game to make sure that worth run align with those things become available.

Speaker Change: Got it got it and maybe just last one as Sean can you maybe level set us.

Speaker Change: R&D margins so you're.

Speaker Change: Maybe by February or so you get rid of the money, losing landing gear can you calibrate us on in terms of just for modeling revenue and then what that actually does to margins and I don't know if its material enough that it moves the needle for kind of three to five year targets you put out there for margins but.

Speaker Change: Presumably that's going to help.

John Holmes: Yes, I would say, it's part of achieving a three to five year targets in terms of the margin expansion what will happen in R&D and as John mentioned, it's really going to come from two primary things.

John Holmes: Realization of the synergies associated with the product support acquisition, which the completion of that kind of getting to that $10 million number as John said will be in our Q1 of the next fiscal year here, that's when that will be complete and realize and then the other piece from that will come from the hangar expansion.

John Holmes: And so both of those are kind of next fiscal year for that next bigger move in margin in the more near term here I think we would expect pretty consistent performance, maybe a slight improvement as you mentioned with landing gear coming out I would note the landing gear won't come out of the results until the deal closes so far our fiscal Q3 and will likely be in the <unk>.

John Holmes: <unk> net out of the Q4 results.

John Holmes: Got it alright, thanks, guys I'll turn it back thank you.

Mike: Thank you Mike.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of Louie Dipalma with William Blair. Your line is open.

Speaker Change: John Sean and Denise happy new year and.

Speaker Change: Good afternoon, Denise congrats on joining the <unk>.

Speaker Change: Our team.

Speaker Change: Thank you my question.

Speaker Change: U S M seems to have hit an inflection with your commentary about the better supply and this quarter's growth. After recent declines John would you say that the worst is behind us in terms of U S M and how we turned the corner.

Speaker Change: Sir.

Speaker Change: Again, I think it's early so it's been a quarter.

Speaker Change: A quarter of loosening, if you will in terms of supply, but I would I would point back to you. We've been talking about this for some time that we expect at some point, we will enter a period, where you still have extremely high demand for material and youll start to see more supply come on the market and that will provide a.

Speaker Change: Right opportunity for us to accelerate the growth of U S M.

Speaker Change: We saw that this quarter, we are seeing it through the balance of the.

Speaker Change: The balance of this fiscal year.

Beyond that it's tough to tell Thats, just the nature of that business.

Speaker Change: Certainly very very early signs are encouraging that we will be in an environment, where we have more supply to meet the very elevated demand.

Speaker Change: And so along those lines you had forecast for there to be a period of time in which both distribution and U S. M are both clicking at at the same time right.

Well they definitely are clicking at the same time this quarter.

Speaker Change: And distribution distribution, it's a very different business than <unk> right. Because you have assured supply out of your OEM partners.

Speaker Change: Many cases because of the nature of the product.

It's much more forecastable and the backlog is much larger.

Speaker Change: I should say that the backlog for both commercial and government and distribution has been growing.

Speaker Change: And that's on existing lines as well as the new lines that we've been signing up so.

Speaker Change: Distributions then on just a tremendous run for the last several over the last couple of years and we absolutely expect that to continue thanks to the compounding of all the.

Speaker Change: The new contracts that we continue to sign and then again going back to use them.

Speaker Change: Much much different business with different dynamics, but.

Speaker Change: This was a very good quarter, where we saw strong demand and strong asset availability and you can see it come through in the results.

Great.

Speaker Change: You announced the new distribution agreements with chroma Elias as you discussed.

Your response to the first question and the.

Speaker Change: We're pany the trans time company, but how long should it take.

Speaker Change: Distribution agreements two to scale to a normalized rate as I think they were signed in November so will there be contributions in this fiscal year or is it more of like fiscal 'twenty six.

Speaker Change: That's a great question.

Speaker Change: The answer is it varies by contract in the case of the criminal.

Speaker Change: Contract.

Speaker Change: We would expect.

Speaker Change: An immediate contribution starting this quarter and ramping.

Speaker Change: Way to close to full run rate by the end of this fiscal year. So that one is on a on a relatively nice path.

Speaker Change: With Whitney along with other distribution agreements on the new parts distribution side, those typically have a longer ramp and the reason is.

Speaker Change: Often you are taking that and we've been taking share in the distribution business. Often you are taking that business from another distributor and they may still multiple distributors and those those prior distributors may have inventory sitting on the shelf and it just takes a while for the channel to drain out and then it ramped fully over to us so.

Speaker Change: If any I would expect to ramp.

Speaker Change: Over a multi quarter or multi quarter period and be more of a contributor in our FY 'twenty six.

Speaker Change: So whippany was a takeaway.

Speaker Change: Okay.

Speaker Change: Yeah.

Speaker Change: I believe that one was.

Speaker Change: But let's let me confirm that okay.

Speaker Change: Okay got you and for.

Sean Gillen: For Sean.

Speaker Change: Many different.

Stocks and the stock market over the past month, or so they've been under pressure due to the the rise in interest rates with the 10 year yield spiky.

Speaker Change: Spiking and we were wondering what is your long term view of of net leverage and.

Speaker Change: Our appetite for M&A in regards to the recent increase in interest rates and the deleveraging plan.

Speaker Change: So yes as you mentioned in your deleveraging is a focus of ours, we've seen pretty significant deleveraging from $3 six at deal close to $3. One seven today and would look to stay on track to get towards two times net leverage and two years.

Speaker Change: The close of the acquisition, which are on track for <unk>.

And in terms of the rising interest rate environment.

We have a combination of fixed and floating we have fixed rate debt on the $550 million bond, who put in as part of the acquisitions and no exposure to rising interest rates, where the revolver is floating and so there's a little bit of exposure there, but thats the instrument, we'd be using to pay down debt. So that portion of the capital stack would would come.

Speaker Change: Awesome sounds good thanks, everyone.

Thank you.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of Josh Sullivan.

Speaker Change: With benchmark.

Speaker Change: Hey, good evening.

Hey, Jeff.

Speaker Change: Can you just expand on the commentary you made around.

Speaker Change: Dean.

Speaker Change: Part of those conversations.

Speaker Change: With any government efficiency efforts.

Speaker Change: I know this is probably a third rail conversation but.

Speaker Change: Hence TMA.

Speaker Change: Does that conversation as well.

Speaker Change: Yes, I would say.

Speaker Change: The to answer the last part first certainly if you imagine would be part of that conversation, but for and we're in that business and it's still very small effort for us, but our focus.

Speaker Change: I'd say more broadly in the areas, where we have a much much greater impact would be.

Speaker Change: The utilization of used parts by the government and we've said many times that if the U S Air Force ballpark like Delta Airlines, there's billions of dollars.

Speaker Change: And potential savings there and one example that I've alluded to everyone on the call is familiar with us when we sold to use C 40 aircraft to the.

Speaker Change: The Marines and.

Speaker Change: As you know at <unk> 40 is the 737, our commercial derivative aircraft converted for military use.

Speaker Change: Government was going to buy two factory new <unk> from Boeing.

Speaker Change: We convince the government that they can achieve the same objective the buying used aircraft.

Speaker Change: Work with the government to source aircraft and ultimately convert used 737 two.

<unk> and those aircraft has been delivered to the Navy Marine and are in operations today, and we were able to save the government approximately $60 million on two aircraft alone.

Speaker Change: So when we think about those in the approach to looking at how can we would ever be more efficient we are.

Speaker Change: We are hopeful that they will look through commercial solutions like what we offer and apply more of those commercial solutions to the government.

We've got Great example, I'd like to see for it and talk to them about.

Speaker Change: Okay.

Speaker Change: Great I'll keep it to one thank you.

Speaker Change: Okay, great. Thank you thank.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: We have a follow up question from the line of Ken Herbert with RBC capital markets. Your line is open.

Speaker Change: Okay.

John I appreciate the follow up just two quick questions first as you start to maybe do more in PMA and it sounds like it's limited initially, but how are you managing any potential sort of conflict with some of your OEM partners and I'm just thinking specifically.

Speaker Change: The good news is as you know there are thousands and thousands of parts on the aircraft and there are lots of Oems out there.

Speaker Change: Big ones small ones that don't.

Speaker Change: Have any conflict with and those those are the type of parts that we are.

Speaker Change: We are targeting.

Speaker Change: How sinking on full year free cash shaped up and should the trajectory look similar this year as it has in prior years with the fourth quarter.

Speaker Change: Yes, I think the trajectory should look pretty similar honestly.

Speaker Change: The only thing different D&B.

Speaker Change: SEPA payments and the timing of the close of landing gear or those who both have been either all in Q3 or certainly in this second half of the fiscal year as it relates to the balance of the free cash flow I think you should look pretty similar to last year in terms of positive cash in Q3, and a stronger Q4 to close out the year and that will help as we think.

Speaker Change: About the deleveraging that's a piece of it and the EBITDA growth will be another piece.

Speaker Change: Perfect. Thanks, Sean.

Speaker Change: Thank you. Thank you.

Speaker Change: Ladies and gentlemen at this time I would like to turn the call back over to management for closing remarks.

Speaker Change: Okay, great well. Thank you very much we really appreciate you all joining us today and we look forward to being back next quarter to talk about our Q3 results. Thank you.

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

Q2 2025 AAR Corp Earnings Call

Request a DemoDemo

AIR

AAR

Earnings