AAR Corp (AIR) 2005 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the AAR quarter one earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. Greg Moore, Director of Investor Relations.

Thank you, Marianne (ph). Good morning, ladies and gentlemen and thanks 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 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, 2004 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, and good morning. With me today is Tim Romenesko, our Chief Financial Officer. By now, I believe that you have had the opportunity to review our first-quarter fiscal 2005 results, which we released earlier today. Overall, I am quite pleased with our results, as we increased sales 9.2 percent, significantly improved our earnings year-over-year and generated positive cash flow from operations.

For the first quarter, the Company reported consolidated sales of 166.1 million and net income of 2.3 million, or 7 cents per share. In the inventory logistics segment, net sales were 62.6 million, up slightly from a year ago. During the quarter, we experienced double-digit sales growth in our traditional engine and airframe parts businesses, reflecting strong demand from our airline customers around the world.

In our distribution business, sales declined year-over-year as we continue to execute our strategy of deemphasizing the lower-margin parts sales mainly to general aviation customers. We do expect favorable year-over-year comparisons beginning in the third quarter for the distribution business. For the first quarter, margins in our distribution business improved 300 basis points, contributing to increased operating income.

Sales in our manufacturing businesses were 43.8 million, representing a 74 percent increase on a year-over-year basis, as we experienced increases across all of our product lines. We experienced particular strength in sales to the U.S. military for products supporting their tactical deployment requirements. Backlog for these businesses increased during the quarter, and we expect strong results for the balance of the fiscal year.

In the Maintenance, Repair and Overhaul segment, net sales were 46.7 million, or a decrease of approximately 12.7 -- up (ph) 12.7 percent compared with last year. The sales decrease was primarily driven by lower sales in our industrial gas turbine services business and the timing of airframe maintenance at our Oklahoma City facility due to heavy summer utilization for a major customer.

In the Aircraft & Engine Sales and Leasing segment, sales increased 11 percent, and during the quarter, we added two aircraft to our portfolio through investments with two joint venture partners. In today's volatile aircraft market, we view this segment opportunistically and will invest accordingly.

We have been very focused on expanding sales internationally and have opened offices in Tokyo and Shanghai to better align the company to serve this growing region. We are also in talks with a number of companies to explore alliances that would continue to strengthen our presence in this important region. Our investments are paying off. Sales in Asia increased 35 percent over last year. In addition, sales were up 32 percent in Europe.

During the quarter, we saw our gross profit margins improve from 13.9 percent to 16 percent, which is below our target level, but improving nonetheless. Margins in our parts business increased and are moving closer to historical levels, and margins in our manufacturing businesses also increased from last year, reflecting more efficiencies. Margins at our service businesses will improve as volumes increase. Although SG&A expense increased 800,000 year-over-year due to higher selling expense, they declined as a percent of sales.

During the period, we generated 5.6 million of cash flow from operations and retired 14.9 million of long-term debt before maturity, contributing to the 1.4 million reduction in net interest expense. We expect quarterly net interest expense to be between 3.6 and 3.8 million for the balance of the fiscal year.

Overall, we had a very good showing for the Company for the first quarter. We achieved solid sales growth and significant earnings improvement, generated cash flow from operations, retired debt obligations, improved margins and SG&A efficiency, improved our sales spread in Europe and Asia, and backlog is at the highest level in a decade. We feel very good about our position as the leading low-cost MRO supplier, as our customers look to improve their competitiveness and sustain their viability.

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

(OPERATOR INSTRUCTIONS) Tom Lewis with Rockhouse Research (ph).

Good morning. Nice quarter. First question, just a little clarification. You were talking about an expectation for favorable comps on the new parts distribution business. Was that -- were you speaking for the balance of the year, the full year, or the quarter just ahead?

Third and fourth quarters.

So in the second half, that business should -- your downsizing should have run its course and there is a -- is that a business that once you reach -- once you get it where you want it, has any growth to it?

We expect that that business should start showing some growth in the third quarter, so yes. Keep in mind, Tom, from an income standpoint, it has been showing improved results now for quite some time. From a sales standpoint, we should start seeing year-over-year favorables by third quarter and we should start seeing some meaningful growth starting in the beginning of next fiscal year.

Okay. What is the outlook as far as your manufacturing business being able to maintain it's current volume levels over the balance of the year?

We're pretty encouraged by the backlog, so we believe that the environment is still friendly for those businesses. We have won some good competitions and we would be fairly optimistic for the results for at least the balance of this year and hopefully out into the out years as well.

Okay. And will supporting that UK AWACS program, will that be a revenue item this fiscal year at all?

That should start kicking in in the January/February time frame.

Okay. And last question. When you were speaking to the decline in gas turbine business, was that by way of comparison with a year ago or with the fourth quarter?

That's by way of comparison with a year ago. We have had an order pickup since September 1, although we are not overly bullish on the business. The business should do better in the balance of this fiscal year. We should have improved results in second, third and fourth quarter over first quarter.

Okay, great. Let's let somebody else ask questions. Keep up the good work.

Peter Arment with JSA Research.

Two questions, I guess. One question regarding the Indianapolis facility. Could you bring us up to speed a little bit on where that stands in terms of becoming operational and how you see it progressing throughout the year?

Okay, we have begun the hiring process. We have hired a few of the staff positions. We expect to be operational the second half of November, optimistically; realistically, the middle of December. We are in discussions with a few different potential startup customers, and we have a broad interest with customers from this market.

We will -- we are shooting for FAA certification by the end of October, early November, so I believe we are on schedule. We are on our schedule, and we are still very optimistic about the results from that business.

Tim, the tax rate was a little lower this quarter than we had been anticipating. Is that the run rate you expect for the year?

It is, Peter. It is due to the foreign sales corporation, the benefit we received there, and the higher margins on business.

Okay, so that is 23 percent, roughly, sort of going to be the run rate.

Right.

Okay, and just one final. On the gross margin, you progressed nicely throughout '04 and starting off the year at 16 percent. Are you expecting a continual progression from here or it is it hard to say at this point, given the mix?

We are continuing to drive for margin improvement, Peter. We think that margin should improve as we progress throughout the fiscal year.

Okay, great. Thanks.

Brad Bryan (ph) with Jefferies & Company.

I had just a couple housekeeping questions. One, could you tell us what your capital expenditures were for the quarter and your outlook for the full year '05? And you give us a couple of the key working capital items, receivables, inventories and payables?

Yes, CapEx in the quarter was $3.6 million. For the year, we expect to be on approximately that run rate, in the $14 million range. Primarily the CapEx is primarily in areas of capability for the Company. In terms of working capital, inventory was up approximately $2 million in the quarter. Receivables were down approximately $7 million, and payables were down approximately $6 million.

Very good, thank you.

(OPERATOR INSTRUCTIONS) Jim Auschel (ph) with Avasion (ph) Advisory Service.

Couple of questions, please. You say you acquired two aircraft with joint venture partners?

That is correct.

Can you tell us what model aircraft they were?

One 737, one A310.

Okay. Next thing, for some time, one of the arguments in favor of investing in AAR has been that you would stand to benefit as airlines are under tremendous pressure to cut costs, they're likely to outsource to you. But the countervailing argument is that they have issues with their labor contracts. In the past six months, have you landed meaningful new business from either U.S. or foreign carriers looking to outsource?

As we have indicated, we have had good success in particularly the Asian and European markets, so yes, we have benefited from trends in outsourcing. We did not highlight the domestic market, but the domestic market is up slightly for the Company. And we -- although I don't think we won anything that would be other than we have communicated through press releases, we have some meaningful projects that we're working on right now, so we would anticipate some good stuff coming in this regard here shortly.

And I believe the Indianapolis facility will help us. Part of our problem on the MRO side, part of our problem on the air freight maintenance side is that we have been running fairly much at capacity in our Oklahoma City facility, so we have not unable to solicit any large-scale customers or business opportunities. We have not been able to compete. But now with the space coming on board there in Indianapolis, we should be in a very good position to compete for that business.

Excellent. You say you are the low-cost provider. Your principal areas of emphasis are on the MRO side. What companies in the U.S. and abroad are your principal competitors?

I think when we refer to it as a low-cost provider, what we are really referring to is in comparison with the airline shops. So we would be comparing ourselves basically with the broad market. We have very competitive labor rates in relationship to the airlines, very competitive benefit packages, and we have very favorable work rules. So those all work in our favor to make us a lower-cost provider. We can offer rates in Oklahoma, for instance, and we should be able to do the same in Indianapolis, that are really very competitive in the market.

In the third party maintenance field, what companies would you say are your principal competitors?

Singapore Technologies, Lufthansa Technik, TIMCO. Those would be three that come to mind.

Excellent, thank you very much.

Evan Dreyfuss (ph) with Talon Asset Management.

Just the question. On the 14.9 of long-term debt that was retired, can you give us which pieces of debt that was? Was that bank debt or converts or where was that?

It was a combination of the converts and the '07 public notes.

Okay, thank you very much then.

Brian Bies with Cortina Asset Management.

A couple questions here. One, could you just expand on the issue you mentioned on Oklahoma City and the MRO -- I think it is one specific customer?

One of our -- keep in mind that Oklahoma City, our Oklahoma City facility is somewhat impacted by the fact that it doesn't have that much hanger space. So we can only take so many commitments for work into that facility. So if you look at the quarter that just ended, one of our customers, which we were expecting to see work from, actually flew -- had a busier summer season than they expected so they kept the aircraft flying. So the impact on the business was somewhat meaningful and contributed to a decline on a year-over-year basis.

Okay, it was not a loss of a relationship, though?

Absolutely not. As a matter of fact, the shop today is full up again. Starting right around September 15, we were filled up again. And one of the drivers behind the Indianapolis strategy was that we really found ourselves in a position where we could not expand much in Oklahoma City. We could not take on new business; to build a new hanger would take us 1.5 years to two years. And the Indianapolis facility was available, so we're able to move on that opportunity.

All right. How has been the competitive threat in inventory and logistics? Have you seen people starting to come back?

Not noticeably. Our team has done a great job in this respect. First of all, I think we have the best team in the industry and our guys have put in -- I think have done a remarkable job in turning that business around since 9/11. And I think this quarter's results go ahead and signify the progress they have made. So I believe we have a very good position in that market.

Would you expect even lower quality people to return to the business that may have had problems post 9/11 anytime soon?

Well, I'm not sure that the market is necessarily the type of market that somebody would want to enter today. There are fewer players who can pay their bills. And the guys who can pay their bills have been forging closer relationships with suppliers they can depend upon. And I think we are in good position there to continue to build the relationships with the airlines that are viable airlines.

And one more quick one. Have you got the split on revenues between commercial and government yet or wait for the Q?

It is approximately 35 percent military in the quarter.

Thanks.

Al Ramirez (ph) with BlackRock.

Question has been answered, thanks.

(OPERATOR INSTRUCTIONS) At this time, there are no questions.

Thank you very much for your participation today and have a good day.

This concludes today's AAR quarter one earnings conference call. You may now disconnect.