AAR Corp (AIR) 2002 Q4 法說會逐字稿

This is Premiere Conferencing. Please stand by, we're about to begin.

Good day, everyone, and welcome to the fourth quarter earnings release conference call. Just as a reminder, this conference is being recorded.

At this time, for opening remarks and introductions, I'd like to turn this conference over to Ms. Dawn Kaiser with Investor Relations.

Ms. Kaiser, please go ahead.

Thank you, .

Good morning, ladies and gentlemen, and thank you for taking the time to participate in this morning's conference call.

Before we begin, we would like to remind you that certain of the comments made today relate to future events, which are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Please also refer to the forward-looking statement disclaimer contained in the press release issued this morning, as well as factors which may affect future results discussed in our filings with the Securities and Exchange Commission.

By providing forward-looking statements, the company assumes no obligation to update the forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events.

At this time, I would like to turn the call over to our President and Ceo, David Storch.

Thank you, Dawn. And good morning.

With me today is Joe Gullion, our Chief Operating Officer, and Tim Romenesko, our Chief Financial Officer.

By now, you have all had an opportunity to review our results for the fourth quarter fiscal 2002, which reflect the challenging airline environment.

For the fourth quarter, the company reported a net loss of $2.7 million and diluted loss per share of eight cents. Net sales for the fourth quarter were $147.4 million, a slight increase from $143.5 in the third quarter of this year. The increase in sales over the third quarter reflects higher demand for engine and air parts and component repair services. These increases were partially offset by lower sales compared to the third quarter in our manufacturing and aircraft and engine sales in leasing segments.

We are pleased to say the month of May was the highest sales month and most profitable since September. And it was a profitable month.

Compared to a year ago, our fourth quarter sales declined 33 percent, as most of our airline customers dramatically reduced their buying activity from prior year levels. This was most evident in our aircraft and engine sales and leasing segment, which experienced an 87 percent drop in sales year over year, reflecting the lack of big ticket activity and new capital investments in the airline industry. Although net earnings are down dramatically year over year, the impact of lower sales has been mitigated by lower operating expenses and interest costs, as we have taken quick and aggressive actions to reduce our cost structure and maintain our financial position.

Compared to the third quarter of this year, sales in our inventory logistics services segment grew by 4.7 percent, driven by increased demand by commercial customers seeking to replenish stock, and higher sales and support of U.S. military logistics support contracts. Within this segment, we continued to experience an active deal flow for logistics support for the U.S. military. Also, since identifying the need to move to new technology support, 84 percent of our inventory has been acquired with in the last 24 months, reflecting our move to support newer generation aircraft.

In our maintenance repair and overhaul segments, sales increased over the third quarter by 8.1 percent, reflecting higher sales of component repair services. We continue to develop new repair capabilities for newer generation aircraft, as well as regional jets, and are focusing on operations efficiencies, such as plant consolidations to drive improved financial performance in this segment.

In the last report, you may recall we talked about consolidating our landing gear facilities. We successfully consolidated those two - the two facilities in the fourth quarter. We are in the process today of consolidating our two Long Island-based air component facilities, and that should be achieved by September of this year.

In our manufacturing segment, sales of tactical deployment products remain strong, although they did decline somewhat from the particularly robust third quarter. We expect strong sales of these products going forward.

Our consolidated gross profit margin during the fourth quarter was 14 percent, up slightly from the third quarter, but still well below historical levels. Our gross profit margins continue to be soft, mainly as a result of lower volumes flowing through many of our facilities. As we consolidate certain facilities, and as volume increases, we expect our gross profit margins to improve.

The outlook for military support, which benefits all of our segments, remains strong. Sales to the U.S. government and its contractors grew 15 percent during the fiscal year, as we were successful in landing several new logistics support contracts, which include parts supply and repair services. Government sales now represent 25 percent of our consolidated sales. We expect growth in this, in support of this market, as we move forward.

Improvement for the airlines is expected to be slow but steady, and we continue to operate in a challenging, yet opportunistic environment. We've reduced our cost structure, made strategic capital investments, purchased inventory at attractive prices, and have supported our key customers in every way possible. We expect our financial performance to improve as the environment for our airline customers gets better.

That concludes the formal remarks section of the call, and I'd like to thank you for your time and open up the lines for any questions you may have. Thank you.

Thank you. Our question and answer session will be conducted electronically today. If you do have a question or a comment for any of our speakers today, we'd like you to press star one on your touchtone phone at this time. Once again, if you do have a question or a comment, please press star one on your touchtone phone at this time. We'll take you questions in the order that we receive them, and we'll take as many questions as time permits. We'll now take a moment to assemble our roster.

We'll go to of CL King and Associates.

Yeah, good morning guys.

Good morning .

First off, can you shed a little light on this growth in the military business? You know, historically it's been very lumpy business, when I guess it was predominantly about the containers and such, but it looks like you're getting in to a lot of things that are more, can be counted on to be more consistent in nature. Is that so, and to what extent has that become a majority portion of what you do there, and how's that shaping up?

Yeah, if you look at our military business, you really need to think of it in three different categories. One is manufacturing, which as you say has historically been characterized by certain lumpiness in container orders. Today that business is a little bit more consistent than it's been in the past. It does have some movement based on certain contracts, and timing of those contracts.

The second area is our component maintenance business, and airframe maintenance business. That business has been certain, fairly steady, it is somewhat subject to U.S. government budgeting. We have, for instance, we are sitting on $3 million of a F-16 component in our New York facility that is awaiting government funding. We know the funding will be coming, these are the auxiliary drive gearboxes for the F-16 aircraft.

The aircraft are being operated, the fleet is, well the parts will need to be put back on the aircraft, so that funding should come momentarily, but yet, we are waiting for the funding.

The third category, which is more of a support area, which is the logistic support which has been growing in excess of 50 percent a year for the last three years, that business is fairly predictable, somewhat based on the government looking to transition away from managing these activities on their own to having third parties manage that activity on their behalf. In this regard we are principally serving as a subcontractor to the major systems providers such as Lockheed Martin, UTC, and Northrop Grummen and people of that nature.

So that business we believe is definitely more predictable and we expect that business to continue to grow, not just this year but the next three or four years. That business today is about 35 million in total volume. This is a logistics piece. We expect that business to be twice its size in the next three fiscal years.

OK. Could you comment briefly on - one of your items here is your cargo landing systems agreement that you signed. Is that - and I can - with the surplus aircraft and everything I can - I can - I could see that either a good thing or a bad thing. Is that business on hold temporarily or is there more activity because there's more old aircraft around to convert?

The cargo system business we signed a contract during the year with FedEx to convert - to provide the cargo systems for the MD-11s. The post September 11th the major freight carriers put that activity on hold. They slowed down the conversion process. As the time has elapsed since September 11th we're seeing those aircraft now go back into the conversion process. We anticipate deliveries on these systems throughout this next fiscal year.

OK. So we could anticipate that particular activity being more robust over the next six to nine months as opposed to the last six to nine months?

Yes, that's correct.

OK. I guess my only other question would be for Tim the - could we shed a little light on the bump up in current liabilities? Is that mainly about short-term debt or is it something else?

No, it's short-term debt. We ended the quarter with $34 million of cash in the bank and $40 million drawn on our lines. At the end of third quarter we had drawn $20 million on our lines.

OK. Thanks a lot.

And our next question will come from with .

Hi. It's actually . Congratulations on the good earnings report in this difficult environment.

I have two questions. My first was regarding the regional jet market. Could you give us a better understanding of that market and in terms of how much revenues you currently derive from serving it?

Yeah. The - currently the market represents about six percent of our total revenues. And we believe that as the jets enter the market, which has been a phenomenon that's been going on for the last few years but continues to increase in terms of its relationship to the total world fleet. We believe that that business for us will become as much as 15 percent of our total revenues.

The industry is fairly well characterized by operators who do not have huge infrastructure. They do not have their own maintenance and spare part support capabilities. We believe that as this segment grows, as more of these jets come into service, the operators will be calling upon us for additional support.

We are seeing that today. You'll see in our highlights for the year, you'll see we've signed a couple of meaningful contracts with and Lufthansa CityLine, both to support their regional jets. We also have an agreement with a operator in Italy, , to support their regional jets.

And if I were to look at deal , I'd see that more of these opportunities are hitting our desks than have in the past.

So six - I'm sorry, six percent going to 15? Could we see 15 percent next year? Or is that a longer-term goal?

I think you're looking at about two years.

OK, in two years. That's great.

And my second question is a clarification of an earlier question regarding the liabilities. And if I look at the - I guess the debt, the short-term debt and long-term debt, I guess it's $259 million. Does that include trade notes payable?

Yes, it does.

So the trade notes are...

Yeah, the trade notes payable are...

Are in the $259 million of debt at the end of the year?

It includes all of our notes payable, yes.

So I'm a little bit confused by the figure then. Did you retire that $65 million that was due November of '01?

Yes, we did. We refinanced it with a $75 million private placement.

Right. And you also - you also raised $36 million of stock, so I don't understand why the liabilities, why they're there then.

The short-term liabilities went up because we drew down on our revolvers, the $40 million that I explained earlier.

Right.

The long-term debt went up $30 million because we converted some leases for aircraft and engines to long-term debt of $30 million.

I'm sorry, so you converted - could you say that again? The leases...

We converted some leases of airplanes and engines from operating leases to notes payable, long-term notes payable. And that caused the long-term debt to go up by $30 million.

And you drew on the revolver?

And we drew - well we increased our on the revolver from $20 million in the third quarter to $40 million in the fourth quarter.

Oh, so you're just - you're just better positioned now from a liquidity point of view. You have more cash...

Right, we have...

... and you have more debt. But I guess the thing that I didn't know was the conversion of these leases into debt.

Right.

Could more of the leases convert to debt?

I think right now we're situated where we want to be. There's about $30 million of additional leases out there. But for the time being, we plan to have them stay out there as leases.

What drives a decision to convert leases to debt? How does that happen?

It was just based on our interest in getting our - the amount of off-balance sheet leases that we have out there down. We began the year with $86 million of these leases, and we're ending the year at $30 million.

OK. Thank you for the clarification.

And our next question will come from with .

Good morning, guys.

Hi, .

A question. When you did some consolidation of the - you know, the branches on your distribution system, what impact did that have on your airline sales and your general aviation sales?

OK, the impact on the commercial sales has been negligible. The branches were not handling commercial sales. It has had an impact on the GA sales. But, you know, the impact there has been pretty much what we had anticipated. The impact has been, on the sales has been less than the benefit from the cost reduction. So the business is in better financial shape today than it was before the consolidation of the GA branches.

So any impact on your overall distribution business sounds like it was pretty minimal.

Yes. And, well actually positive.

Yeah, but does ...

And going forward, we believe more positive.

OK. And at, you know, you sound like, it sounds like that business is starting to pick up a little bit maybe? Because I'm hearing, you know, a lot of people are getting inquiries now.

Yeah, well definitely, if you take a look at American Airlines for instance, where we have a three year contract, our business had been running at about $500,000 a month through April, from September through April, they've been running at about 200,000 a month. The month of May it got back up to just short of the $500,000 level. So that's anecdotal for that business. We are contemplating and expecting an improvement in the commercial side of that business, the airline side of that business, going forward.

On the, turning to your airframe MRO operations, do you right now have any, you know, the repair certificates for like the, you know, the ERJ or the CRJ out at Oklahoma or anything?

We're in the process of getting the tooling that we need for the CRJ, we're about two pieces of tooling away from having that capability. The certificate, we already, you know, the certificate allows us to do repairs on the aircraft, we just need, we've been sending people to training now for the last six months.

Yep.

So our technicians are trained, our managers are trained. We're now looking for a couple of pieces of tooling that are on order, and we expect to have that tooling, and to be in a position to service those aircraft within the next three to six month period.

And then you're going to go after the ERJs as well?

Right now in North America we see more of an opportunity today on the CRJs. We are doing ERJ maintenance, component maintenance in Europe, and doing that quite well. But at this moment we're more focused on the CRJ. We may move to the ERJ but that will be customer driven.

And no I, are you going to get involved on, you know, doing any of the, you know, the engine part for the, you know, for the engines, for the, either of those two aircraft, and maybe doing any engine leasing or pooling or anything?

You know , that's not really contemplated at this time. GE has a very strong position, particularly around the CRJs.

Right.

The CF-34, so we are not being overly aggressive in that, in that area at this time. Now we are, we are being aggressive on the parts side, on the airframe parts side, and we're building a nice little business around supporting those aircraft.

Thank you.

Thank you.

And just as a reminder, if you do have a question or a comment today, please press star, followed by the digit one on your touchtone phone at this time. Once again, that is star, followed by the digit one on your touchtone phone. We'll now take a question from with High Rock Capital.

Yeah, if you went over this I missed it, but could you just break out the details on working capital inventories and receivables?

Yeah, receivables were 77 million five, up from 71 million in February. The increase is due to higher sales in May as well as lower use of our securitization program about $4 million.

Inventory went from 235 to 238 and cash was flat at 34 million. Payables did come down as we paid off some extended-terms notes that we had received from some of our suppliers. So that caused a reduction in accounts payable of about $10 million.

OK. And could you just characterize kind of the trend of business through the quarter? You talked a little bit about American Airlines specifically, but, just, you know, overall.

March and April were somewhat disappointing. Month of May was best month we've had since September - you know, since I guess August. It was profitable and, you know, we're somewhat optimistic as a result of May's results.

So you're starting to show some signs of life here as we ...

Yes.

... as we move further into the year?

Yes.

Good. Thanks very much, that's it for me.

We'll take our next question from with Century Management.

Yeah, just a couple maintenance questions here. What was cap ex for the year and depreciation/amortization and what do you expect it to be for this current year?

It was 12-million-one for the year and ...

For cap ex?

For cap ex, yeah. And D&A was 17.8. And we expect approximately the same in the upcoming fiscal year.

OK. And then in terms of trends of business I take it June was continuing along at the pace that May was?

Of course, we're in to the first - well, I guess we're coming down towards closing in June. June should be on plan to where we expect it to be.

OK. That'll do. Thank you.

And once again, we'll now take a follow-up question from .

Yes, this is again. Given the sharp rebound we're seeing in May in terms of the business, are you guys comfortable with the current consensus for '03?

Hold on one second.

It's 38 cents.

It's in the ballpark.

OK, so you guys feel good about it. Thank you.

OK.

And there are no further questions at this time, Mr. Storch. So I'll turn the call over to you for any additional or closing comments.

OK. Well, I appreciate your attention today and look forward to the next conference call 90 days from now. Thank you for your support.

And that does conclude today's conference call. We'd like to thank everyone for their participation and wish everyone a good day.