AAR Corp (AIR) 2004 Q2 法說會逐字稿

Good day, everyone, and welcome to the second-quarter earnings release conference call. Just a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Greg Moore, with Investor Relations. Please go ahead, sir.

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 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 refer to the forward-looking statement disclaimer contained in the press release issued this morning, as well as those factors discussed under item 7, entitled "Factors Which May Affect Future Results," included in the Company's May 31, 2003 Form 10-K. 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, Greg. Good morning to all. With me today in Chicago is Tim Romenesko, our Chief Financial Officer. By now, I believe that you have had an opportunity to review our second-quarter 2004 results, which we released earlier today. I am very pleased to report that the earnings announced this morning represents our best quarterly earnings since the May 2001 quarter. For the second quarter, the Company reported net sales of just under 160 million, or 159.5, and net income of 900,000 or 3 cents per share. These results reflect a significant improvement compared to the first quarter of this fiscal year, when we reported sales of 152.1 million and a net loss of 6 cents per share, as well as compared to the second quarter of last fiscal year, when we reported net sales of 153 and a net loss of 2 cents per share. The increase in earnings were driven primarily by higher sales, improved margins and a continued focus on reducing our operating expenses. In the inventory and logistics services segment, net sales of 69.3 million, or 4.9 million higher than last year, driven by an improving airline environment and increased demand from our military customers. We did, however, experience lower sales in our new parts distribution business, although earnings improved as we shifted our focus to different markets; a little bit on that later. In the maintenance, repair and overhaul segment, net sales of 53 million were essentially flat compared to the prior year. Sales of the Company's airframe maintenance facility increased, and backlog doubled since the beginning of the fiscal year, as a result of booking long-term agreements with two U.S. domestic airlines. Furthermore, the environment for component repair services remains soft; however, we do expect the environment for these businesses to improve as our fiscal year progresses.

Also during the period, our manufacturing businesses achieved an 8.5 percent growth rate, as demand for the Company's products, which support the U.S. military's tactical deployment needs, remains strong. While we have seen meaningful results from these activities the first six months of our fiscal year, we are pleased to report our backlog has also more than doubled since the beginning of the fiscal year. Sales of our cargo systems also increased from the prior year, as we have been awarded several significant contracts. I would like to spend a few minutes discussing sales by customer type. As discussed, we continue to experience robust demand from our government customers, some of which is attributable to the war on terrorism. Second-quarter sales to U.S. and foreign governments grew 22 percent compared to last year, and now comprise 36 percent of our consolidated sales. Proposal activity from this customer segment is strong, and remains a growth engine for the Company. Sales to our commercial customers also increased from the prior year, albeit at a more modest pace of 3 percent, and sales to the general aviation market declined, which as mentioned before, was attributable to our shifting the focus of our distribution business to different markets, principally commercial and regional. We also experienced lower sales to the industrial market, mainly due to lower sales of composite structure products, which incidentally we expect improvement from over the next 12-month period.

Although still below historical levels, our gross profit margins did improve. For the second quarter, consolidated gross profit margin was 15.8 percent, compared to 15 percent a year ago and 3.9 percent in our first quarter. The margin improvement reflects higher margins in the inventory and logistics services and manufacturing segment, mainly due to increased volume, mix of inventories sold and cost control. During the second quarter, we did an excellent job strengthening our overall liquidity position. We generated 25.1 million of cash from operations, and for the first six months of the fiscal year, we have generated 34.2 million of cash flow from operations. In addition, our working capital turnover ratio improved to 3.2 times from 2.5 times in the prior year, and we do expect more work will make these numbers improve as the year progresses.

Overall, I am quite pleased with our results for the quarter, and as I take a longer view, I have several reasons to be optimistic. The commercial airline industry is slowly recovering, with a continuing shift in capacity to low-cost and regional airlines, most of which do not have significant repair and maintenance infrastructure. As this shift continues, AAR is in a position to benefit not only from additional demand from the low-cost and regional airlines, but also from increased demand from the big six airlines, who will find it necessary to transition to outsource value-added, low-cost solutions. Additionally, demand from our government customers continues to grow, as the U.S. military seeks a more rapidly deployable force, and looks to outsource more of its operating functions. As a result, AAR should experience increased and more consistent demand for our manufactured products and logistics services supporting the U.S. military.

I would like to thank you for your time this morning, and for your ongoing support. I would like to now open up the lines for any questions you may have.

(OPERATOR INSTRUCTIONS). Peter Arment, JSA Research.

Good morning, Tim and David. Nice quarter.

Thank you. Good morning.

A question on the cash generated from operations in the quarter was quite strong, and maybe Tim, do you have a couple of balance sheet items that might give us a clue on where you are seeing the benefit from, maybe just receivables, inventories, payables?

We had a nice reduction in inventory of a $7 or $8 million reduction in the quarter. Receivables were essentially flat, but between the earnings plus depreciation, inventory reduction and some collections of some notes that we had outstanding, we were able to generate a significant number there. About 5 million of the 25 million did come from the sale of receivables, so if you adjust that out, it was $20 million of cash flow from operations. But we continue to make progress bringing our working capital in line with our revenue. And we think we are going to continue to be able to generate cash going forward.

Just to follow up, David, could you talk a little bit more about the focus that you are having within your general aviation area? Obviously, out of the -- I guess focusing on the business jet and smaller markets, and focusing more on the commercial and regional, what exactly you may be doing differently there?

As you may recall, our distribution business was largely geared to serving and servicing general aviation customers. We found the business to be very difficult for us, and we have shifted our focus into the commercial and regional markets. We have had some success in that regard, and we have also -- in the GA market, we are more focused on the business jet category. And we have been able to improve the operating performance of the distribution business dramatically as a result of those adjustments.

Okay, and also, regarding the manufacturing segment, this quarter it was up sequentially quite a bit. Is this sort of the level you expect to maintain throughout the year?

Yes, we are actually expecting continued growth in those markets. We have some exciting things going on at the composite business, exciting things going on at the cargo systems business, and of course, mobility continues to perform quite well. So we are anticipating continuing strong results coming from that group -- beyond this fiscal year, and into next year, as well.

Great, nice quarter. Thanks.

Thanks.

Tom Lewis, Risk Reward Advisors.

First of all, with respect to this increase in your backlog, can you shed a little light on the extent to which that is coming from capabilities that you might not have had a couple of years ago, as opposed to the stuff you have traditionally done?

Yes, I would say that you have -- in the mobility arena, you have a significant increase in capability. It would be hard for me to quantify that without that in front of me, but I would venture to say that that piece alone is probably 20 percent of the increased backlog, things we were not doing say a year or 18 months ago. Of course, in the services market, the capability -- we built the regional jet maintenance capability this year that we did not have last year, and we captured the Mesa contract, so that would be new capability developed this year that translates into results.

Okay, and I guess my other question would be with respect to MRO and why it remained as squishy as it has. Is that about loss of business, the customers taking it in-house and you just have to go and replace it, or are there capabilities in there that maybe you walked away? And as long as we are talking about capacity, can you give us a sense about how much you could grow that business as the industry recovers, without having to make significant capital type spending?

We have had very good success. We have had real success on the maintenance -- airframe maintenance part of our MRO business. We have seen some softness on the component repair side of our business. We believe that that is mostly tied to the industry conditions, fewer airplanes in the sky, a little bit more cannibalization still going on -- spare parts sales being at levels that make it more attractive than to do repairs. I believe that we will see some strengthening in the component repair businesses, moving forward, which will have an impact -- a very positive impact on the MRO overall results. We have developed some numerous new capabilities in this market. We're very focused on the 737 new generation, the Airbus fleet of aircraft as well as the CRJ and the ERJ aircraft types. So we -- as more of that capability comes online, we expect to see better results from those businesses.

And there is capacity to grow without having to spend -- other than maybe for real specific --?

Yes, I think what you are going to see, Tom, is modest CAPEX. CAPEX will be for capability expansion. We don't see much in the way of CAPEX necessarily in the airframe maintenance piece of that business, but there will be continuing CAPEX on capability development, but fairly modest. Most of the equipment machinery is in place, so now you're talking about minor tooling, some training, etc. But I think you'll see, from a capacity standpoint, we have plenty of room for growth. We are still nowhere near historical levels that we have achieved in the component shops, so we believe that with very little investment, we can get back some meaningful growth and results.

John Sienkowicz (ph), Sienkowicz & Associates (ph).

David, one of the things in the past that always added a nice little increment was the engine trading business. Any thoughts on getting back into that in a big way, and what it looks like now, and when you might want to try to do that, if you do it?

Yes, first of all, we will do it, and we have not seen much activity in that arena of late. We have done fairly well on the leasing side in that market, less so on the trading side. But I would anticipate as aircraft changed hands, and as aircraft come back out of the desert and go back into the sky, I would anticipate that there will be certain opportunities there. So we are geared for it, John. We have not lost the skill set. As that market recovers, I think you'll see us as a player.

Are you having any thoughts about -- what can I call it -- sort of pooling engine portfolios, and having a pool for a couple of different airlines to lease into?

Yes, I think we have seen certain opportunities in that regard, but I think for the most part, our business historically has been providing engines on kind of an emergency need basis, or a maintenance replacement basis, and I think that market will recover, as I indicated, as the aircraft come back to the sky, and I think that is more of an opportunity for us than the pooling might present.

The reason I asked that is I saw an announcement recently where Willis is going to do something like that for a bunch of Chinese airlines.

Good, good.

(OPERATOR INSTRUCTIONS). Jim Altschul (ph), Aviation Advisory.

A couple of questions, please. First of all, what has CAPEX been for the first six months, and do you have a CAPEX forecast for the whole year?

CAPEX was 2.7 million in the quarter, approximately 4.7 for the six months. And we would expect it to be -- continue in that $2 to $3 million a quarter range, going forward.

Jim Altschul Okay. Next thing -- can you talk a little bit about trends in the market for aircraft parts? I guess the values of certain -- some types of parts were hit pretty hard. Is it stable, has it gotten softer or is it firming up a little? Do you see opportunities to make some advantageous buys, and conversely, do you feel comfortable with the valuations you have on the balance sheet for all that inventory?

We feel very good about our parts business. As you know, we are leaders in this market, and we are seeing a recovery in demand. And we feel we have a very good position in that market, and we expect good things from that business.

(OPERATOR INSTRUCTIONS). Brad Bryan (ph), Jefferies & Co.

Question one, first if you could please tell us what your depreciation and amortization was in the quarter? And second, if you might, comment on what your plans are, as your cash position here, about $39 million?

Depreciation and amortization was 6.4 million in the quarter. And our plan is to continue to generate cash.

Okay, but any comments on future uses of that cash?

We think as our business grows, we will have cash requirements to fund that growth, and retire debt from time to time.

Let me help a little there, if I may. If you look at our businesses, if you look at the markets that we are serving, as we see demand come back into the picture, we will look to develop more capability, either through acquisition, partnership, joint venture, having capital available, function as opportunities present themselves, is a good thing. At the right time, we will put that capital to good use.

Matol Shaw (ph), Goldman Sachs.

Two quick questions. At quarter end, your total debt seems a little light. Am I right? Is it $214 million, including the non-recourse? I am sorry -- the nonrecourse debt?

Hold on a second. Long-term debt, including the nonrecourse debt as of November 30, is 214 million.

Okay. Then I should add that 5 on top for the current maturities to get total debt?

You should add the 5.9 million for current maturities. Yes.

My next question is, the nonrecourse piece comes due in January '04. What steps is the company taking now? Are you trying to re-negotiate that piece of debt and maturity, or are you planning to just give up the assets?

We are working with two parties on that transaction, to go ahead and refinance that debt.

There are no further questions at this time. I will now turn the conference back cover to you, Mr. Storch, for any additional or closing remarks.

I would like to thank everyone for their support. The Company feels good about the progress we have made. We believe we are in the first stage of our recovery. And we are looking for some good things ahead, and I would like to wish those still on the line happy holidays and a safe new year. And see you in 90 days.

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