AAR Corp (AIR) 2004 Q4 法說會逐字稿

Good day everyone and welcome to the fourth quarter earnings release conference call. Just a reminder, today's conference is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to Greg Moore with Investor Relations. Please go ahead, sir.

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

Before we begin we'd 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 statements disclaimer contained in the press release issued this morning as well as those factors discussed under Item Seven 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'd like to turn the call over to our President and CEO, David Storch.

Thank you, Greg, and good morning. With me today is Tim Romenesko, our Chief Financial Officer.

By now, I would hope that you've had the opportunity to review our fourth quarter and fiscal year 2004 results which we released earlier today. As you can see from our results we continue to move in the right direction, evidenced by our fourth consecutive quarter of sequential sales growth and improved profitability.

For the fourth quarter of this fiscal year the company reported consolidated sales of 179.2 million, which represents a 23% increase over last year, and we experienced net income of 2.6 million, or 8 cents per share.

Please note that each of our four segments achieved higher sales compared with the prior year. For the fiscal year we reported sales of 652 million and a return to profitability with net income of 3.5 million, or 11 cents per share.

Overall the results we reported today reflect both improving airline environment and continued strong demand from our government customers and their contractors.

As mentioned in our press release airline passenger traffic statistics are showing steady improvement. Revenue passenger miles, available seat miles and passenger load factors have increased year-over-year for the past nine, five, and 13 months respectively.

Additionally, demand for AAR's products and services from the U.S. military and its allies remains strong in light of U.S. military activities and their overall strategy to reduce costs through the outsourcing of noncore functions. For the fiscal year just ended sales to this customer base accounted for 39% of our consolidated sales, up from 30% in fiscal 2003 and 24% in fiscal 2002.

Looking at results by segment fourth quarter sales in our Inventory and Logistics Services segment were 61.8 million, up 10% from the fourth quarter of 2003. The increase in sales was driven by stronger demand for spares and logistics support from both government and airline customers.

And although sales from our new parts distribution business were lower compared to last year, profitability improved dramatically as a result of our shift in focus to higher margin products and cost control.

Fourth quarter sales in our Maintenance, Repair and Overhaul segment increased 11.7% to 60.2 million from last year's 53.9 million. The increase in sales over last year was due to continued strong demand for airplane maintenance reflecting an increase in the number of long-term maintenance contracts with our customers.

Sales were also higher at certain of our component repair shops which is encouraging given recent softness in demand for component repair over the past several quarters. Within this segment we anticipate stronger results as operations at the Indianapolis maintenance facility commenced in mid-fiscal 2005.

We will initially occupy two hangar bays in Indianapolis and have control over eight additional hangar bays. The lease also includes all the tooling and equipment and significant financial incentives.

As a result of our commitment to the Indianapolis facility we are in an excellent position to capture market share and to meet increasing demands for outsourced high quality aircraft maintenance services.

In the Manufacturing segment fourth quarter sales of 50.1 million were 75% higher than a year ago. Demand for our product supporting U.S. military deployment activities remained exceptionally strong.

Additionally we achieved higher sales at our cargo systems business, where our backlog has more than tripled since May 31, 2003, reflecting recently awarded contracts from Boeing, Lockheed, Lufthansa, the Japanese Defense for their new CX military transport aircraft.

I am very pleased with the progress we made during fiscal 2004 with regard to liquidity and strengthening our balance sheet. In this area we had a number of accomplishments including, one, generating 13.2 million of cash from operations during the fourth quarter, and 41.4 million for the fiscal year which excludes the repurchase of $26.8 million of accounts receivable previously sold under our securitization facility.

Two, achieving working capital turnover of 2.9 times in the fourth quarter, up from 2.4 times in the year-ago period. Three, ending the year with cash and available lines of 91.1 million compared with 29.9 million at May 31, 2003.

Four, reducing our weighted average cost of debt by 600 basis points to 5.6% at May 31, 2004, as a result of paying down higher coupon debt. Five, going forward we remain committed to generating positive cash from operations, and buying in debt to improve our leverage ratios.

Subsequent to our fiscal year end we purchased in the open market 15 million of long-term debt.

Overall AAR had a strong fourth quarter and a solid fiscal year. We entered a new fiscal year with the strength in balance sheet and with a strong order backlog which includes several long-term programs.

As the economic realities in the airline industry continue to shift and drive our airline customers to seek lower cost alternatives, we are confident that AAR is the company to provide those solutions.

In closing, I would like to thank our employees, customers and stockholders and all those who have supported us during the year. We look forward to a productive and improved fiscal 2005.

Thank you for your time this morning. I'd now like to open up the line for any questions you may have.

Thank you. The question-and-answer session will be held electronically today. If you'd like to ask a question please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speaker phone please make sure that your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and take as many questions as time permits. Once again, that is star one on your touch-tone telephone to ask a question. And we'll pause for just a moment to give everyone the opportunity to signal for questions. Our first question from Rockhouse Research will come from Tom Lewis.

Yeah, good morning, guys.

Good morning, Tom.

Yeah. Hey, clearly we've got this thing going in the right direction. It's great. But, you know, if I just looked at, you know, having followed you as many years as I have, you know, I'm comfortable with the idea that margins will bounce around a lot from quarter to quarter, and considering that this is typically your strongest quarter can you talk about, and you mentioned that you've, you got some profitability improvement on new parts. Can you talk about what the offsets were to, you know, the margin trend there in this quarter?

Well, I think the margin trend is positive. I mean, you're looking at margins going up to 15.9 for the quarter? 15.9 from 15.6. Where were they?

The margin's 15.6 in the quarter, up from 11.9.

Yeah, 15.6. So the margins, direction of the margins are going in the right direction. We believe that those margins will continue to increase particularly as we get more work through our facilities, although the component shops are doing better, they're still not back to where they've been historically. So we're running in many of these facilities single shifts.

As you know, Tom, we have the ability to run double shift very easily and even three shifts when times get very good. So when you look at the ability to consume, or, yeah, consume some of the overheads, we need more volumes, and, you know, that's where we're heading.

I think the sales increase to 23% sales increase is healthy. You know, it's coming off of a relatively low base last year. If you recall last year this period, March, April, May, was somewhat impacted by SARS. We hate to keep mentioning, you know, those events from the past, but nevertheless, you know, as we get more volume through the place you'll see our margins start to increase.

Part of what you're seeing also is in the new parts distribution as we segue into the more profitable segments there is still some stuff we're doing at lower margins than we would like, and that business will continue to diminish as well. So we are expecting the margins to continue to improve, particularly as we bring more volume through the facilities.

Okay. And --.

But overall the trend is going in that direction. Right now we would have experienced better margins in the period just ended.

Okay. And my other question would be with respect to your new opportunity in Indianapolis. Considering the prior occupant of that, I would think that would be a union work force there. Can you talk about that?

We are not expecting that. We do, as you know, we operate some businesses with unions. We have successful businesses. We've been very profitable with businesses with unions, and we've been profitable with units without unions.

So it's our intention to offer the employee base a very attractive work environment and we believe that we, and we've had very good feedback from folks in Indianapolis looking to get back into the aircraft maintenance business, and we believe we'll have wonderful relationships with those employees whether they be union or not.

Okay. Well, it seems like a splendid opportunity, and I'm really looking forward to hearing you guys talk about it in the quarters ahead.

We're excited. We should be up and running. Right now we're aggressively shooting for November 1. It may not happen until December 1, but right now we're shooting for November 1.

Okay. Great. Thanks.

And as a reminder to the audience that is star one on your touch-tone telephone if you'd like to ask a question. And we'll take our next question from Jim Brilliant with Century Management.

Good morning.

Good morning, Jim.

How are you guys?

Great.

With the new facility in Indianapolis do you expect any upfront costs before you start to see any revenue coming out of that?

We will have some upfront cost. The contract we negotiated provides for the airport authority to help fund some of those startup costs but we will have some startup costs over and above what's being financed by the authority.

And what's the magnitude of that?

There's a variable there. There is a payback when we actually start putting aircraft through the facility. We have an incentive that comes back to us with the first three aircraft that go through the facility. So in essence, we will be more than compensated for our startup expense.

There is some timing issues, and I'm not, you know, at liberty at this point in time to speak directly to what that impact will be between now and November. I will say this, that the plan right now calls for us to be accretive in the first 12 months of operation, and accretive actually even in this fiscal year.

Okay. So --

We may have some expenses that we will incur here.

In the first two quarters, but after that you make it up?

Yes.

Okay.

And it won't be dramatic.

Okay. And what is the capacity in terms of revenues? Revenue potential that you get out of the Indianapolis facility?

When we get to the full eight bays, you're looking at in excess of 100 million. And actually comes, you can get in excess of 100 before that if we, in fact, get to that point. I'm sorry, I said eight, I meant ten bays.

We start with two bays, we then control another eight, so it's as many as ten bays. And the revenues get very appealing once you get to, you know, say the fourth, fifth and sixth bay.

And would you expect any consolidation of other facilities into this at the time?

Not at this point. It's something that we can explore at the right time but at this point that would not be in our plan.

Okay. Good enough. Thanks a lot.

Thank you.

Up next from Putnam Investments we'll hear from Michael Petro.

Yes. Could you explain the circumstances and the reasoning behind the repurchase of the 26.8 million in accounts receivable?

We did that just to, we really looked at the accounts receivable securitization as a form of financing after we raised the convertible notes it was no longer necessary to have the draw-downs on the accounts receivable securitization program. The program is available, though, for us to draw as a source of liquidity in the future.

Okay. And then also, what's the loan for the aircraft that you have classified as a long-term debt now? What was that for?

That is a nonrecourse debt on a 767-300 aircraft.

Okay. Thank you.

And as a reminder that is star one on your touch-tone telephone to ask a question. Up next we'll hear from Brian Bees with Cortina Asset Management.

Thank you. Good morning. I was wondering if could you just give us an update with regards to where the commercial airline industry is with regards to their attitude in taking planes out of the desert and putting more capacity on, whether it's across the industry or if you needed to segment it between the regionals and the mainline carriers?

I believe what you're seeing is you're seeing both, requirement of both to increase capacity, so you've seen aircraft come out of the desert not just for the commercial airlines, airliners, but also for the freight carriers. You know, I think we indicated in our opening comments that we're seeing available seat miles increase. Some of that's coming from the factories but a good portion of that is also coming from aircraft coming out of the desert.

So I think you're seeing it not just, and you're seeing it not just in North America but you're also seeing it elsewhere around the world. And the numbers we cited are international numbers. So we're seeing demand for lift coming out of Central America. We're seeing demand for lift coming out of Asia and we're seeing demand for lift coming out of southern Europe.

We are, you know, do believe in that North America we still have a shift, if you will in terms of capacity, and some of that shift is going to the lower cost operators at the expense, if you will, of the, let's call them the legacy carriers. So I think even some of the legacy carriers have been pulling recently some aircraft out of the dessert.

With regards to the net business and the competitive nature of the business is it helping to soak up what I assume is excess capacity amongst the MRO business out there, and what's the impact on sort of pricing?

Well, first of all, obviously more aircraft come into the system, more opportunities for the MRO industry. And as folks like United shedding their Indianapolis maintenance facility that creates opportunities for outsourcing that didn't exist previously.

You may have seen that we recently signed some contracts with Alaska Airlines, for instance, where they were performing certain maintenance inside, in-house that they have outsourced to us. So as more aircraft come into the system, that's a good thing for the MROs, and as more aircraft come into the system and as the capacity gets chewed up, if you will, or eaten up, then that's good for, to help strengthen pricing.

And do you work under, I assume you work under longer term contracts or intermediate-term contracts with the carriers, correct?

Yeah, I would say the contracts are medium to long-term, and then you have, we do have some drop-in work that you know, somebody may call us tomorrow asking us if we have space available. If we do, they may send us an aircraft in five days.

Thank you.

Yep.

And as a final reminder to the audience that is star one on your touch-tone telephone if you'd like to ask a question. Please make sure that your mute function is turned off to allow your signal to reach our equipment. And we'll pause for just a moment. At this time there appear to be no further questions. I'll turn the conference back over to you, Mr. Storch, for any closing remarks.

I'd like to thank those who did participate today, and I appreciate your support, and we have some exciting things going on at the company. Have a great day.

And that does conclude our teleconference for today. We'd like to thank you all for your participation. You may now all disconnect.