AAR Corp (AIR) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AAR Corp third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. John Bowman, Director of Investor Relations. Mr. Bowman you may begin.

Thank you, Devon. 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 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 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, 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, John. And good morning. With me this morning in Chicago, is Tim Romenesko, our Chief Financial Officer. I'm very pleased with the third quarter fiscal 2005 results the company released this morning. The company achieved 24% sales growth, a significant increase in net income, and earnings per share, and substantial cash flow from operations. Sales results were particularly strong in Asia and Europe, with the increased 45%, and 35% respectively.

For the third quarter, the company reported consolidated sales of 197.7 million, and income of 5.2 million, or 15 cents per diluted share, from continuing operations. These results include the sale of the company's interest in certain aircraft or approximately 15 million at essentially book value. As well as a $500,000 or 1 cent per share -- per diluted share federal income tax benefit related to export activities which is similar to the $600,000 tax benefit we recorded in the third quarter of last year. The tax benefit results from the determination that the company qualified for additional export tax credits upon completion of its fiscal 2004 federal income tax return in February 2005.

As previously announced, we sold our engine component repair business during the quarter which had been losing money for quite some time. As a result of the sale of the business we incurred an after-tax loss of 2.6 million or 7 cents per diluted share, which is treated as a discontinued operation. We received 7.7 million in cash, approximately 1 million of inventory and we entered into a multi-year support agreement, with the buyer. Net sales for our inventory and logistics services segment were 72 million, an increase of 18% compared with a year ago and 9% over the second quarter of this fiscal year, driven by increased sales to commercial markets.

Sales in our manufacturing segment were 51.8 million, representing a 17% increase over the prior year, and 9% increase over the second quarter. Higher sales were fueled primarily by a continued strong demand, for our specialized mobility product to defense customers, and an uptick in demand for cargo systems and composite products.

In the maintenance repair and overhaul segment, net sales were 53.2 million on a continuing basis, up 11% from a year ago. And 3% compared with the second quarter of this fiscal year. The sales increase was across all product lines, and includes revenue from the recently opened Indianapolis maintenance facility.

Sales were 20.8 million in the aircraft and engine sales leasing segment, which includes the sale of the company's interest in certain aircraft, as previously mentioned. During the period, we added four aircraft to our joint ventures, two of the aircraft contributed to results in the quarter, and two of the aircraft were undergoing maintenance and are expected to contribute to results shortly.

We are off to a great start at our Indianapolis maintenance facility with our recently signed contract with United to provide maintenance for their 737 fleet. We are further encouraged with the level of interest shown by other air carriers. During the quarter, we also were awarded a contract by Link Simulation & Training as their partner to support the Navy's C40-A aircraft. AAR will provide inventory supply chain management and airframe maintenance services for the Navy's 8 C40-A aircraft which is the military version of the civilian 737-700 aircraft and this support will be at two locations for one year, with four one-year renewal options. We anticipate the number of aircraft and locations will grow over the life of the contract.

We continue to invest in Asia, first we formed a joint venture with AIROD to establish a landing gear overhaul facility in Malaysia. Second we established a parts exchange pool in Hong Kong with HAECO to support certain aircraft types. We are committed to expanding our presence in this very important region and are currently exploring additional opportunities.

We generated 19.5 million in cash flow from operations during the quarter and 28 million on a year to date basis. As we continued to generate cash and pay down debt, our net interest expense in the third quarter has declined 700,000, on a year-over-year basis.

In summary, we delivered strong sales, improved margins and operating efficiencies, lowered interest expense, improved earnings, and significant cash flow. We continue to invest in our businesses, including our MRO capabilities in Indianapolis and in Asia, parts support for commercial and government markets, and by acquiring commercial aircraft at advantageous prices with our joint venture partners.

I would like to thank you you all for joining the call this morning. And I would be happy to take your questions at this time.

Thank you. Ladies and gentlemen if you have a question or a comment, please press the one key on your touch-tone telephone. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. Our first question comes from Peter Arment of JSA Research.

Good morning, guys. Question on the inventory logistics segment. Growth there seemed to be quite strong, 72 million for the quarter was higher than we've seen in several quarters, I wonder if you could just give us a little more color exactly what went on in the quarter.

Well we saw strong activity across most of our product lines, particularly in our traditional after-market support with our after-market support products. We also had strength across different regions. North America, Europe, and Asia.

And then is that evenly distributed amongst, I guess your -- is it majority North America or is it exposure there, I guess, within the different end markets with --

We saw good growth in Europe and we saw good growth in Asia for this business. And we also had good performance in North America.

Okay.

But the business itself, you know is, recovering from, you know, the traumas of 9/11, and we anticipate Peter, that that business will continue to grow and get back to, you know, more historical levels.

Okay. And what do you view as -- what's historical levels I guess for that business. Well, you know, you would be looking at -- you know, let me get back to you with those numbers specifically. Okay.

But you would be looking at still considerable improvement.

Right. Okay. Fine. Tim, do you have the gross margins by segment at all?

Sure. The -- I will give you the gross profit and the gross profit percentage.

Okay.

In the inventory and logistics, the gross profit was 14 million 250, or 19.8%. MRO was 6 million 961 or 13.1%. Manufacturing was 9 million 591, 18.5. And aircraft [INAUDIBLE] and leasing was 130,000 or break-even for a total of 15.6. And if you adjust for the aircraft sale, Peter, the $15 million aircraft sale, the growth margin -- the adjusted gross margin would be 16.9% for the quarter. For that transaction.

Great. That's great. Thank you. And David, just one follow-up, just on regarding Indianapolis, if you could maybe -- what is the time line, I guess when they -- when the United planes start to -- the first planes start to show up?

The first plane is in the barn now. And is undergoing maintenance.

And is that you know, the one hangar? And when will all four be --

I believe that all four by the summer.

By the summer?

I think we add a second line next month, a third line the following month, and the fourth line by the summer.

Okay. Great. And you mentioned that there is quite a bit of other interests out there and is this still very broad based amongst the majors and other low cost carriers?

Very interesting group of customers interested in putting interest through Indianapolis. We've had quite a few customer visits. Everybody is fairly impressed with the facility and the team that we've put together. So we would anticipate other wins, you know, relatively shortly for that facility.

Great. Thanks very much, guys.

Thank you. Our next question comes from Jay -- excuse me if I pronounce this wrong -- Jay Khetani of SG Cowen.

Good morning. Just a follow-up on Indy, do they have a certificate on the A-320 and kind of the follow-up to that is has United placed the A-320 and 757 heavy maintenance yet?

First part of the question is I believe we do have a certificate for the A-320. The second part of the equation I don't have -- the question I don't have the answer.

Okay. The 19.5 cash in the quarter was particularly strong. Was -- what was the source of strength there? If the is the cash received on the aircraft sale included in that figure?

Yes, it is.

So that's -- okay.

And we also had a reduction in our overall inventory position, you know, in addition to the sale of the aircraft. If we did have -- we did have an increase in receivables in the quarter, Jay. Driven by the increased sales but also driven by, you know, a fewer collection days in the month of February.

So was working capital a net source of cash?

Yes.

Okay. And just on, that do you also have a D&A cap-ex figure for the quarter?

Yes, D&A was 7 million 4 and cap-ex was 2.7 million.

Okay. The cargo wins that you've talked about recently, this 8 million that hits, I think, through kind of mid 2006, how should we think about that with regards to the growth rate in the cargo segment? Is this replacing business that's otherwise burning off or is this substantially stepping up a growth rate in cargo?

Well, I think, you know, we're benefiting from the demand for conversions, and we think that there's a lot of opportunity for us to grow our cargo business. I think there's going to be more, you know, more announcements coming.

Okay. All right. And just one last one, on Indy, are you now saying you've got four bays fully loaded by the summer? Because I guess on the last quarter it was kind of the fourth one was up and down, but is it a fully-loaded position now?

We should have four bays, possibly five bays running by the summer.

Okay. And so it is four fully-loaded and five maybe something less than 100%. Is that the right way to think about it?

I think that's the way to look at it, yes.

Okay, great. Thanks very much.

Thank you. Our next question comes from Tom Lewis of Rockhouse Research.

Yes, good morning.

Good morning, Tom.

Can you kind of give us a sense, I mean in your manufacturing business, in a rough sense, how much of that now should we be understand as being related to the specialized cargo for the military, as opposed to other aviation-related end markets as opposed to nonaviation related markets.

Well, the specialized cargo product that you're referring to are significant part of the manufacturing business, and that business in the quarter had growth, albeit somewhat modest but still experienced sales growth. We had particularly strong growth in the cargo, the commercial cargo products, and we had good growth in the specialized composite products.

So I would anticipate that the specialized products you are referring to, Tom, will continue to be a significant part of the manufacturing group, the backlog is still very strong in that business, and you know, I see no reason why that won't continue to be a significant piece of the manufacturing business.

Okay.

And but by the same time I think you can expect to see growth coming out of the other products in that group as well.

Okay. My other question would be, you know, with respect to what -- understanding what you're doing at Indianapolis, can you give us an approximate number on how many people you have working to support current level, what that number would be like when you get up around four or five bays and how high that might ultimately go?

You would probably be looking at somewhere in the vicinity of 400 people, at that point, and how much higher it can go will obviously depend on how successful we are, in deploying the balance of the bays. But you know, we have our plan, calls for us to have as many as 1100, 1200 people there, once we are fully occupying the facility.

So 400 would be the number where you would be at the -- at the end of the summer.

Correct.

All right, then. When you get to four or so -- okay. Okay great, thanks.

Thank you. Our next question comes from Lionel -- forgive me if I pronounce this incorrectly -- Joelvot (ph) of Goldman Sachs.

Good morning. Just a quick question regarding the debt. I mean the resource -- $8 million during the quarter, and I believe you did not have anything outstanding in a revolver at the end of last quarter, so which debt did you pay down and more specifically, did you buy back any of your bonds in the open market or do you have any plans to do so in the future?

The debt that we paid down was specifically related to an aircraft joint venture that we had, as well as a small IRB. And we did not repurchase any bonds during the quarter.

Okay. And do you have any plans going forward to -- I mean basically, what are your plans in terms of the capital structure going forward as you continue to generate some free cash flow?

We are, you know, monitoring our capital structure, we're -- we are tuned into what's available in the market, and it is something that we -- you know, that we are looking at on a regular basis.

Okay. And then just a quick follow-up regarding Indy, what were the revenues during the quarter from this activity? And did you incur any start-up costs or do you expect any start-up costs in the fourth fiscal quarter?

The revenues in the quarter were, you know, very modest, because you know, we only had a, you know, a one or two aircraft in there, they were joint venture aircraft, and we don't really expect any start-up costs in the fourth quarter of any significance.

Okay. Great, thank you very much.

Thank you. Our next question comes from John Roll of Argon (ph).

Hi, guys. Most of the questions have been answered. Just wanted to confirm a few things here. In terms of the airplane sale, I guess there was 15 million of cash proceeds and that also implies I guess that there was actually 15 million of revenue booked in that segment for the quarter. Is that correct?

That is correct.

Okay. And in terms of the balance sheet, would that -- I guess you said that was roughly equal to book value, would that come out of a long-term lease item or would that be in PP & A.

No, equipment on long-term lease.

Okay. Good. Last couple of questions. Actually, last question. What should we be using going forward, you know, if we look out to next fiscal year, in terms of a normalized GAAP tax rate?

Well, the -- we expect that the effective tax rate for the remainder of this fiscal year will be in this 20% range. Going forward, because of the impact of the changes in the tax law, we expect that our tax rate will increase. We haven't pegged it for next fiscal year yet, and I expect that will be in a position to, you know, to do that in the next -- on the next call.

Okay. Great, thanks very much, guys.

Thank you. Ladies and gentlemen, if you have a question or a comment, please press the one key on your touch-tone telephone. Once again, if you have a question, comment, or concern, please press the one key on your touch-tone telephone. Our next question comes from Gregory Macosko (ph) of Lord Abbot.

Yes, thank you. Hello, David.

Hi, Greg. How are you?

Fine. Could you talk a little bit about the sale of the aircraft and just your expectations in the aircraft and engine sales and leasing, what do you see that the structure of that business going forward, and does the sale of the aircraft suggest anything different going forward versus where we were in the past?

I think what you're seeing going forward, Greg, is the company is more interested in investing alongside of other investors, so that you will see that, for instance, in the quarter, we invested in four aircraft together with a joint venture partner. We will continue to look to monetize the fleet that we've -- that we had pre-9/11, let's say, and at the same token, continue to look for advantageous buys going forward, with partners.

Would it be fair to say then that you would -- that the aircraft that you have currently or engines, et cetera, you would look for a partner say to take a portion of your equity out as well?

We have been approached by a party in that expect respect? We have not been able to consummate any transactions if the right opportunity came along, Greg, in that respect, we would explore it?

Okay. And then as the idea that it's all the partners responsibility to see that the aircraft is leased and utilized, et cetera, is that the idea?

Yeah, the idea is that together, we will fund advantageous purchases, and then we will go ahead and either purchase aircraft that are either in place, or that -- you know, which case we might have a slightly lower return, or we will purchase aircraft on a, let's call it, more of a speculative basis, and which case we would be looking for a higher returns, and you know, we are looking at a wide array of aircraft types in this regard, and we believe we have made some very prudent investments the last six months in this area, and we -- based on where the markets set today, we think there are some additional opportunities in this market.

So we're actually quite encouraged and we like -- we like the idea we're able to attract partners who have deeper pockets than we do, and are eager to play in this market and have chosen AAR, you know, to go ahead and go into the market with.

Good. Well, that's good to hear. With regard to the -- just generally speaking, the four businesses, and I realize the aircraft and engines are a little bit more volatile, but could you talk about perhaps the other three, and your expectations with regard to top line growth, kind of looking out say over the next year or so?

Well, as you can see in the period, just ended, we had a fairly broad success across the different product areas, the ILS, the inventory logistic service segment, has nice growth, double digit growth,. The MRO business experienced double digit growth. And the manufacturing business experienced double digit growth.

As I look out into the future, obviously the MRO business will -- should be very positively impacted by the moving into the Indianapolis maintenance facility, so I would anticipate very clearly that we would experience double digit growth in MRO. I believe the same dynamics exist in the inventory business, so I would anticipate moving forward that we will continue to experience double digit growth out of that group as well, and then manufacturing is I believe we're in a very solid position, across the different product lines that we have, and I would think that that business also should grow in a double digit fashion.

On the aircraft engine sales and leasing business, I believe that as a result of these joint venture investments we've made, that at least the earnings flow from that business will be more predictable, and I also would expect a meaningful improvement, particularly on the earnings side, coming from that business, going forward.

Now, you know, because of joint venture accounting, we may not be recording as much sales growth, because the sales will not come through the sales line, but that aside, the activity in that market should be a lot stronger for the company, and the earnings contribution from that business, I think you may have heard Tim say earlier for the third quarter, business did not contribute, to the profitability of the company, but we would expect that, you know, as we look out next year, and beyond, as we continue to build a very attractive portfolio of aircraft together with partners, that we would expect this business to contribute very nicely to the profitability of the company.

And so I mean what I'm hearing is, you know, we're kind of, as you've said it, a little bit coming out of a trough, or from a low point, so we would expect kind of some kind of a sort of higher than normal long-term growth as things kind of turn around, and which, you know, on a longer term basis might moderate a little bit.

I think that is a good way to put it. I think if you look at the quarter's result, 24% sales growth is I think a fairly healthy sales growth number. And even if you were to back out the aircraft transaction you still have 15% sales growth, and that takes into consideration also that we disposed -- or, you know, sold an operation that took sales from a comparative standpoint, take sales out of the equation, so yeah, I believe that you're seeing, you know, to some degree, you know, there has been a coming out of the trough, if you will, and you know, I don't think it is too dissimilar to what we experienced in the early '90s, only we're 10 years smarter.

That's good to hear. And then finally just from my own understanding, the large increase in the chilling nine months in the manufacturing business, the 40-plus% there, is that -- what is that? Was there an acquisition there? I'm sorry, I don't --

No, that is all of the -- it is primarily the increase in our mobility business.

And that was in the second quarter, I guess?

It started -- the increase started in the third quarter a year ago.

Okay. Okay. But clearly, now, it is -- you kind catching up with itself in terms of growth rate.

Exactly.

Okay. Thank you very much.

Thank you. We have a follow-up question from Mr. Jay Khetani of SG Cowen.

I had just one quick follow-up, you sighted 41% growth in commercial aviation. Does that include the revenues from the aircraft sale? And if it does, could you tell us what that growth rate was excluding that sale?

It does, and we can't.

Okay.

Bear with us for a second. You want me to -- Jay, you want me to call you back with it.

That would be fine. That was all I had. Thanks.

Thank you. I'm showing no further questions, sir.

Okay, well, thank you for your participation. I hope today's call was useful.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Thank you and have a nice day.