AAR Corp (AIR) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the AAR Corp. fourth-quarter fiscal 2006 earnings call. At this time, all participants are in a listen-only mode. Later there will be a question-and-answer session; however, instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded. I would like to turn the conference over to Mr. John Bowman, Director of Investor Relations. Please go ahead, sir.

Thank you, Kenneth. 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 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, 2005 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 Chairman, President and CEO, David Storch.

Thank you, John, and good morning to all today. Joining me on the call this morning is Tim Romenesko, our Chief Financial Officer as known to many of you.

Fiscal year 2006 was a pivotal year for AAR and I am very pleased with our results. We delivered a significant increase in earnings and earnings per share, we raised $150 million of fresh capital with attractive terms strengthening our balance sheet and providing liquidity for growth. We won several -- I should say we won and then launched several important new programs and we made several significant investments that positioned the Company to continue to grow. We then finished the year with an excellent fourth quarter reporting the highest quarterly net income in the Company's history.

For the fourth quarter, the Company reported sales of $253.5 million and income from continuing operations of $12.9 million or $0.31 per diluted share. Sales increased 21% during the fourth quarter from $209.9 million a year ago and income from continuing operations grew 121%. The Company also generated operating cash flow of $22 million in the fourth quarter.

For fiscal year 2006, sales were $897.3 million or just below $900 million, an increase of 20% over the prior year. I am quite pleased with the 20% sales growth as it was all achieved organically. Income from continuing operations for the full year increased 89% to $35.2 million or $0.94 per diluted share.

In the Aviation Supply Chain segment fourth-quarter sales were $128.9 million, an increase of 12% from the same quarter last year and the gross profit margin in this segment for the quarter was 22.6% compared to 18.6% a year ago. The sales and margin growth is attributable to higher volumes due to new commercial and defense programs as well as strong demand for parts supply products and repair services from nonprogram customers. New business wins with Mesa Air Group and the United Kingdom Ministry of Defense were significant contributors to improvement in results in this segment.

Sales in the Maintenance, Repair and Overhaul segment were $57.4 million in the fourth quarter, an increase of 57% over the same quarter last year and the gross profit margin in the MRO segment for the quarter was 16% versus 14.1% last year. The addition of sales from our new maintenance facility in Indianapolis continues to be the largest driver for growth in sales and margin in this segment; however, our Miami landing gear repair and overhaul operations also delivered a strong performance in terms of sales and margin improvement.

In the Structures and Systems segment fourth-quarter sales were $63.5 million, up 19% from the same quarter last year and the gross profit margin in this segment for the quarter was 12.1% versus 16% last year. The pallet contract with the U.S. Air Force announced early in fiscal 2006 was a key driver for the sales increase we experienced for the specialized mobility product and demand remains strong for the Company's products and services in this segment, particularly for our specialized mobility products.

The gross profit margin in this segment was adversely affected by approximately 110 basis points as we increased an environmental reserve during the fourth quarter by 700,000. We continue to invest in the development of the A400M cargo system and expect shipments for this program to commence in late fiscal year 2007.

Operating income in the Aircraft Sales and Leasing segment improved sequentially on a quarterly basis throughout the year and fiscal 2006 operating income was double that of fiscal 2005 albeit off of a small base. We are starting to see the benefit of the strategy undertaking this segment over the past few years. Our expectation is that Aircraft Sales and Leasing results will continue to improve going forward throughout this fiscal year as well.

During the fourth quarter we added one aircraft to our joint venture portfolio, bringing the total number of aircraft owned outright and in joint ventures to 23. We experienced solid growth with both defense and commercial customers as world air traffic and capacity continued to grow and the trends of MRO outsourcing and value-added supply chain management solutions gained momentum.

Sales to defense customers grew 25% for the fourth quarter and 24% for the year. Sales to our commercial customers grew 21% for the quarter and 19% for the year, both very robust sales growth numbers. We achieved a gross profit margin of 18.9% in the fourth quarter, up from 16.7% in the same quarter last year. Gross profit margin for the year was 18.3% versus 16.2% last year. The combination of higher volumes and cost efficiencies led to the improved margins.

Although SG&A costs were up $1.6 million in the fourth quarter as the Company added resources to support growth, we saw a meaningful improvement in SG&A costs as a percentage of sales which declined to 11% from 12.6% in the fourth quarter last year leaning us closer to our goal of getting to 10% and below. For the year, operating margin increased to 7.2% from 4.5% last year.

I was very pleased that our operating margin hit 8% in the fourth quarter as we progressed to our objective of 10%. As we execute against our business plan, not withstanding startup costs associated with new programs that we may be engaging in, we believe we are on track to achieve 10% operating margin by the fourth quarter of fiscal 2007.

During fiscal 2006 we significantly strengthened our balance sheet. During the third quarter we raised $150 million of capital through a 1.75% convertible Senior Note offering. Also during the third quarter we acquired 50.6 million principal amount of our 2.875 convertible notes in exchange for 2.72 million newly issued shares of common stock. And throughout fiscal 2006 we retired 7.2 million of our 6.875 Senior Notes which come due in December 2007. Net interest expense decreased by 500,000 in the fourth quarter. We also saw improvement in our return on invested capital and working capital turnover and finished the year with nearly $122 million in cash and $83 million available on our credit line.

Our key performance indicators continue to move in the right direction. Growth in sales, margins, income and earnings per share was strong and we believe that our strong balance sheet will allow us to execute our business plan. I believe we have exited the recovery phase we have been in for the last few years. AAR is healthy and strong. The Company is in a great position to continue to execute its growth strategy and meet customer needs with new and innovative solutions. We appreciate your participation on our call today. And if we may, if we can now open the line for calls -- I should say Q&A -- we're ready.

(OPERATOR INSTRUCTIONS). Peter Arment, JSA Research.

Good morning, guys. Congratulations on the year. A question on just the MRO segment in particular because growth was tremendously strong this quarter. But I know there's a seasonality effect going into the next quarter. Could you maybe just give us a little color on that, David, on how you see the MRO going throughout the year?

Yes, Peter, I think you're absolutely correct. There is seasonality to our business. You would expect the summer months when airplanes are flying in greater numbers, the airlines are less inclined to put aircraft through maintenance during this period, so you have a little bit of strain on the numbers in the first quarter. It also is true to some extent in the December period where the airplanes -- where the airlines prefer to operate the airplanes as opposed to putting them through maintenance.

So there is some seasonality, but we expect -- on a year-over-year basis we expect each quarter to be -- to see improvement over prior year. And from a sequential standpoint, I think you're correct, there is some seasonality. The strongest quarters historically have been the second and fourth quarters.

Okay, okay. Great. And then just touching on the Structures and Systems in particular, you know, it's been a phenomenon that's gone on for the last several quarters in terms of the margin pressure and regarding your mix there. Is this sort of now you think a stabilized run rate wherein the 13 to 14% gross margin area, or do you still expect further pressures there?

There's some pressure, but we're expecting to maintain margins. There could be some more mix pressure, but there should be some other things that offset that mix pressure. So by plan, at least, we should be -- we're expecting margins to improve.

And then maybe you could just give us some further additional information on how the Mesa deal has been working out now that you've had that under your belt for a little while?

Yes, I believe they're very pleased with the service we're providing, and we continue to execute well against that plan. And we think we have a model that is transportable to other customers, and that's the direction we're heading.

Okay, and regarding that in terms of other customers, is there -- how would you view the current marketplace right now in terms of opportunities I guess for '07?

Opportunistically?

Okay.

We feel good about the opportunity pool. Yes, we're in good shape.

Great, thanks.

Arnie Ursaner, CSJ (sic) Securities.

Actually, CJS Securities and good morning. First question I have, going back to the margin issue, you gave us some additional color in your comments. You had a 110 basis point environmental reserve hit in the Structures and Systems. And again, following up on Peter's question, given the visibility -- can you give us a little more sense of the visibility in the Structures and Systems side and, again, how this mix issue should play out over the next year? If you could give us a little more feel for where margins ought to come in -- a little bit more color on the mix of pallets and shelters versus containers?

I'll ask our colorful CFO to --

Arnie, we have good visibility into the mobility business. The backlog there is strong. We do see an increase in the backlog for pallets and containers, which is -- pallets and shelters which is what's driving this change in the margins. So going forward we expect margins, as David said, at this level or slightly better.

Okay. And David, you had mentioned in your prepared remarks you have a goal of a 10% operating margin by Q4 '07. Most investors are beginning to look towards calendarized '07. Is there any reason structurally as we look out to fiscal '08 for you that if you can achieve your 10% operating margin by Q4 of '07, is there any structural reason that shouldn't be a reasonably good level to build for for '08?

Yes, I believe that would be a good level to build for, yes. I think you're correct.

Okay. Tim, we look forward to seeing you at our conference. Thank you.

Tyler Hojo, Sidoti & Co.

Hi, good morning guys. I was wondering, maybe if you could provide a little bit of commentary on what's going on with the Malaysian joint venture?

Yes, it's progressing well. We have a five year in shop today, so we're very pleased. Still relatively small numbers, but at least the competitive -- it seems like we're -- we still feel very good about the growth market as the aspect of the market, which tends to be towards growth. And we have a good position. We probably need to build more in-country capability. We're still depending very heavily on our Miami operation. So gear coming through, they get stripped, but then they get sent to Miami for the heavy operations. We'll probably -- with the workload that we're now experiencing, with the interest level that we're experiencing, we probably will have to make more in-country investments in Malaysia. But right now we're very pleased.

Okay. Do you guys have a rough expectation as far as a level of sales volumes that you hope to see out of that facility once it's fully operational?

I think, yes, we do. I think for competitive purposes we'd prefer not to disclose that.

Okay, that's fair. Maybe moving over to Indianapolis, are you guys still utilizing six bays here?

Yes.

Okay, and any change in kind of the improvement there as far as --?

Well, you have the summer months' challenges. So you know, it might be a little bit softer in the summer than we had before. But -- than we have say in the spring, I should say. But we feel very confident with the buildup in workload projected for that operation.

Okay. And just one more for you. Maybe it would be helpful for some of the people listening on the call if you could just give us some color here on what your expectation is for the 2007 sales growth rate? I know you guys have mentioned in the past you could do hopefully 20% over the next couple of years. Are you still sticking with that? And if so, how much of that is already booked?

Our preference, Tyler, is not to really comment in this context other than give directional guidance, and we feel that we have -- we're in a good position. We feel, in answering the comments from Arnie before, the opportunities are there. The Company, we believe, is well-positioned. We have a good team in place. We have a good track record. There's some momentum, but we prefer not to forecast, but we feel we're in a good place.

Thanks a lot.

Tom Wyman, San Francisco Capital.

Good morning, and congratulations on the results. My question relates to that last subject. So without getting specific about numbers, could you identify the nature of your key segments, some of the primary growth drivers? That I think would be helpful from our standpoint as investors. Thank you.

Sure, sure. If you look at the supply chain and you look at the MRO operations, they both are geared towards the trend towards outsourcing by major carriers, not just in North America but outside of North America. And this would cover carriers who are operating, let's say, wide body aircraft, narrow body aircraft and regional aircraft. So as the tendency and trend here has been to work with third party maintenance and supply operators such as ourselves. We believe that those drivers are still in place.

As you look at the Structures and Systems piece of our business, a major portion of that business is tied to the deployment requirements, principally the U.S. Armed Forces, but also foreign governments as well. We have unique products in this market, and as the need to move troops or supplies into various theaters of operation continues to proliferate, our products are there to assist. And so the major drivers there have been largely around the geopolitical environment that we're faced with on a worldwide situation.

We also manufacture cargo systems in that market for commercial applications as well as for military applications in the Structures and Systems group I should say, and the drivers there are around changes in demand for freighter lift, as the world demand for freight traffic increases, and as the opportunity to convert say commercial aircraft to freighter aircraft proliferates. We have products to fill that niche as well.

We last year announced a very major win to build cargo systems for a new military transport being developed and built by Airbus. And the driver there, of course, is for the European manufacturer to produce an aircraft that competes with what historically have been U.S.-based types of aircraft. Our Aircraft Sales and Leasing business, the major drivers there are opportunistic buys where we see, let's say, discrepancies in market values and imbalances in terms of aircraft operations, where you may have more aircraft supporting the North American marketplace than are necessary. As those aircraft exit that market there are opportunities to place those aircraft into other markets, and we've built a pretty good presence in that market as well.

So basically, those are the fundamental drivers, and if you look at the results in the last couple years at least, the demand in each one of those segments of our business have been fairly strong.

If you could maybe just help us to understand, where are we in -- to use a baseball analogy, in the game of outsourcing? Is it early innings or mid game in terms of the transformation of the industry in this regard?

It's really hard to say because you have -- I think in each carrier you have a different dynamic. So it would be very difficult for me to pinpoint where we are. Also keep in mind it's a worldwide market. I would say you're probably still in the first third of the game.

Right. Thank you very much.

Andy [Kuntz], WestPoint Asset Management.

Andy, how are you?

David, I'm doing great. Actually, I don't know how I got in that line, but I did not have a question.

Okay.

Take care.

Mike [Marinachi], [Raganot] Capital.

Yes, hi, Tim. I didn't see it in the release, but do you happen to have the Accounts Receivable and inventory balances at year-end?

I do. Accounts receivable at year-end was $136 million, and inventory was $259 million.

Okay, that's all I needed. Thanks very much.

Bob [Signal], [Singlink] Investments.

Good afternoon. I'd like to know if you could please comment, since you have a lot of exposure globally, to give us some color on the strength that you see in Asia versus some renewed strength possibly in GDP in Europe. And specifically in Asia, I mean, we all read about the growth of China and Japan, and what are you all doing specifically in those regions that we may not know about that could be helpful for us to understand what direction you're moving in that area of Asia? I would appreciate that.

Right, so we're very excited about the Company's prospects in Asia. Earlier I answered a question about the Company's joint venture in Malaysia, which has gotten off to a pretty good start. In the last couple years we've opened up offices in not just Kuala Lumpur in Malaysia, but we've also opened up an office in Shanghai in China. We've had some good progress in getting the Company positioned in that market.

The results on a year-over-year basis might be relatively modest, but there were some special situations prior year which we benefited from, but we expect double-digit growth coming out of that region for the Company. So yes, we're pretty bullish. We also happen to be doing quite well in Europe for that matter, and probably benefiting from some of the outsourcing trends both in the commercial markets as well as defense markets.

Thank you.

John Rolfe, Argand.

Hi, guys, just a few housekeeping questions and I apologize if you've covered any of this. But did you give any guidance on what to expect for tax rate going forward in the current fiscal year?

We expect the tax rate to be in the 30% range going forward. We are -- some of the tax law changes are impacting us in fiscal '07.

Okay, great. Second question for you, did you give any guidance on CapEx for the coming year?

CapEx we expect to be in the 20 to $25 million range for fiscal '07.

And any kind of detail on what comprises that? I guess I'm kind of trying to get a sense for what you guys view as maintenance versus growth CapEx?

In that number is approximately $10 million of facility expansion, that really would be growth CapEx. In addition to the range I gave you, we are still investing in non-recurrent engineering on the A400M. And we expect on top of the CapEx number that I gave you an additional approximately $13 million for A400M.

And so how will that be accounted for?

That actually goes through the cash flow from operations, it's not in the CapEx number, but it is a commitment that we expect.

Okay. And the last question for you, if you could just help me on the share count. I guess quarter end you guys had 35.9 basic shares. Obviously I guess most of the dilution is associated with the convertible instruments. What should I kind of assume in terms of stock option -- I mean dilution? If I'm going from that 35.9 to the 43.1 fully diluted how much would be options versus converts?

I think using the 43 to 44 million share count is the right share count to use. The vast majority of the dilution is due to the convert.

Okay, I guess -- okay. So on a reported basis, 43 to 44, but sort of the way I account for it depends on whether that converts into money or not. So I should just assume that most of that is the convert?

Right.

Okay, thanks very much.

Stan [Mann], [Mann] Family Investments.

Good job, gentlemen. A couple of questions. One, what do you see as depreciation for 2007?

I expect depreciation to be in the same $30 million range for 2007.

Okay, and what about EBITDA? Can you give us your EBITDA in the fourth quarter and a little look see year 2007?

Tell you what I'll do, I'll give you EBIT and I'll give you depreciation and amortization, okay? EBIT was 20,283,000.

In the fourth quarter?

Right, and depreciation was $7.6 million.

Okay, any view of '07 on depreciation?

Yes, depreciation should be that $30 million number.

Going forward?

Yes.

Okay, good job. Thank you.

Peter Arment.

Yes, one follow-up on the MRO gross margin number, David, that you mentioned. It was 16%, correct, for this quarter?

Yes.

And that seems to be one of the I guess higher performers you've had over the last several quarters in that particular segment. Is it all due to volume or are you actually -- now that you've had Indianapolis under your belt for a while where we're seeing a lot of the learning curve issues worked out and --?

It's a little bit of everything, Peter. A little bit of Oklahoma, it's a little bit of landing gear as well. So it's across the board improvement. You've got volume and you've got efficiencies. So Indianapolis is better today than it was before. And so that's a -- in terms of operating efficiencies. So that's a piece of it as well.

Okay, so for the year you ended I guess it was something slightly over 14% for gross margin?

Right.

And you would expect -- I guess going forward that we'll see further improvements from that level?

Yes.

Okay, great. Thanks, David.

(OPERATOR INSTRUCTIONS). Arnie Ursaner.

I want to try to the back to the idea that you hit a new plateau of margin. Can you attempt to quantify what you spent in '05 for investment spending to build out the four key new programs you announced over the last year or so?

You mean fiscal '06?

Well, you announced four different key programs that evolved -- yes, in fiscal '06, I'm sorry, yes.

Well, probably in the $30 million range -- 35 to $40 million range for the year that just ended.

Okay, and if we were to think in the same vein on current programs you have, obviously it will change to the extent you win new programs and you mentioned a very robust pipeline. Sitting here today, approximately what sort of spending level do you think you have in fiscal '07?

I don't think we have that information right in front of us here. Obviously we have a detailed assessment of that is it relates to breakout between new programs and continuing to fund existing programs. But you know, that's going to be really pegged, Arnie, to how successful we are in capturing business.

Okay, and sitting here again today -- I know you don't give specific guidance, but sitting here today barring some unforeseen world events, what sort of -- in your view, what percent of the revenue you expect in the upcoming year would you view as either contractually obligated or kind of in hand at this stage?

I don't have that information right now. But if you call Tim back, I'm sure he has something along those lines.

Okay, thank you very much.

Dan Baker.

Did you guys buy any converts back in Q4? And I wondered if you could comment generally on use of the cash on hand and free cash flow?

We didn't buy any of the converts back in Q4. And we expect to continue to invest our cash that we have on hand and our cash that we generate into growing the business.

Okay, thank you.

Thank you. I am not showing any further questions at this time.

Great, everybody have a nice day.

Ladies and gentlemen, we thank you all for your participation in today's conference. This concludes the program. You may now disconnect your lines. Have a wonderful day.