AAR Corp (AIR) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the AAR CORP. fourth quarter fiscal 2009 earnings 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. (Operator Instructions). I'd now like to turn the conference over to Mr. Tom Udovich. Mr. Udovich, you may begin.

Thank you. Good morning, ladies and gentlemen. Thank you for joining our fourth quarter and fiscal year end 2009 earnings 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 statements disclaimer contained in the press release issued yesterday as well as those factors discussed on our Item 1A entitled Risk Factors included in the Company's May 31, 2008 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 statement or to reflect the occurrence of anticipated or unanticipated events. At this time I'd like to turn the call over to our Chairman and CEO, David Storch.

Thank you, Tom, and good morning, everyone. Joining me today in Chicago is Tim Romenesko, our President and Chief Operating Officer; and Rick Poulton, our Chief Financial Officer.

We reported our fiscal 2009 fourth quarter results last evening and I hope that you all have had a chance to review our press release. Our fiscal year 2009 coincided with global economic and business conditions. Beginning last summer, commercial airlines began reducing capacity principally in response to record fuel prices. Shortly after, several large financial institutions either failed, were acquired by other entities or taken over by the Federal Government. This led to an unprecedented freeze in our credit markets. The U.S. economy as well as other world markets spiraled towards recession characterized by steep declines in GDP and high unemployment. Both passenger and freight traffic have been negatively impacted by weak economic conditions and as a result, carriers have been forced to reduce costs and conserve cash.

Against this difficult operating environment, AAR delivered solid financial results. Fiscal 2009 results represented the highest sales, earnings, earnings per share, and cash flow from operations in the Company's 58-year history. In addition, we strengthened our balance sheet as net debt outstanding declined by $77 million from $421 million at May 31, 2008, to $344 million at May 31, 2009. We ended the year with no significant debt maturities until May 2011. We have an attractively priced credit facility and ample liquidity.

Our results for fiscal year 2009 reflect the execution of our strategy to transform the Company through diversification. Diversification through increasing business with defense and government customers, through expanding our geographic reach, through increasing our front end manufacturing content and increasing our program related business. Wrapped around this diversification strategy has been a drive toward moving up the value chain by providing more value-added services and increasing the engineering content of our products and services. Overall, I am very pleased with our results.

Now I would like to discuss some of the highlights of the fourth quarter. During the fourth quarter sales to defense and government customers increased 7% representing broad market acceptance of our products and services as we delivered on several large orders received earlier in the fiscal year in our structures and systems segment and experienced strength in our defense logistics business. We continue to see strong demand from government defense customers and the biz pipeline is robust. During the year we strengthened and expanded our leadership team in this area and look forward to the contributions.

In June, we formed AAR Global Solutions which is joint venture Company, capitalized on the markets for value-added solutions and support of the U.S. and other foreign government defense and nation building initiatives. We set out to create an organization with an inclusive and diverse base of capabilities, perspectives and ownership. Through this joint venture we're able to complement AAR's field proven MRO, logistics and mobility capabilities with individuals who have extensive experience winning and managing large scale government programs. The new business opens AAR up to new government and defense opportunities along with strengthening our ability to compete internationally for government programs as a prime contractor.

Turning to our commercial markets, sales during the fourth quarter declined 13% compared to a year ago. This reflects the impact of pressure from lower passenger and freight traffic causing airlines to reduce spending on part support and MRO related activities. The decline was particularly noticeable in our supply chain segment which was impacted by a reduction in sales of big ticket items and within our structures and system segment which experienced lower sales for precision machine parts for business jet production. Our MRO segment reported 25% increase in sales over the third quarter, on a sequential basis, which was attributable to improvement in our landing gear overhaul facility and our airframe maintenance business in Miami.

During the fourth quarter we entered a comprehensive supply chain program with a North American airline supporting their regional fleet. We expect annual revenues to exceed $20 million while only requiring a minimal investment. In addition, we recently entered a new supply chain program in the Gulf States region supporting Airbus aircraft. While this is a comparatively smaller program to the one mentioned previously, this program broadens our geographic reach.

During the fourth quarter, we reduced our aircraft portfolio by one aircraft. Our emphasis in this environment will continue to be to work down our investment in the aircraft portfolio and to make money by leveraging our intellectual capital. Today, all of our aircraft are on lease. We have seven aircraft scheduled for lease expiration this fiscal year and we are in discussions with interested parties including the current lessee for the lease of these aircraft.

With the backdrop of an uncertain economic environment affording us less visibility in our commercial aviation markets, our focus will remain on delivering high value-added products and services, capturing new business by paying close attention to our execution, maintaining our lean cost structure, making targeted investments, and to be all over our cash and liquidity position. Thank you, all, for joining the conference call today. We would now like to open the lines for any questions you might have.

(Operator Instructions). Our first question comes from Larry Solow with CJS Securities. Your line is open.

Hi, good morning guys.

Hi, Larry.

Can you give us a little more color on some recent trends in aviation supply and do you see on the commercial side of things perhaps it was load factors stabilized and do you think the inventories are still declining or how do things sequentially move through the quarter?

Hi, Larry. I think there's certainly opportunities out there, but the airlines are still being very cautious on their buying, so our approach is to go out there and look for new opportunities, penetrate the customers that we're doing business with already and see if we can find additional opportunities within that customer and then obviously try and crack new customers. But no, I think the airlines are very cautious on their spending and very concerned about their traffic and still looking to take capacity out.

Larry, I would just add that load factors are hanging on but you follow the airlines, their yields are under a lot of pressure, particularly from their premium cabins and that is very clear evidence that they're very focused on liquidity, maintaining cash and minimizing spending. So there's a limit to how far they can mitigate spending obviously in this area but clearly they are going to look to stay in that mode, I think for a while.

Okay. Can you just remind us on the MRO, I guess you pretty much had a full quarter last year, right, except for maybe a week or it should be mostly pretty much flat organically?

That's correct.

Okay, and then landing gear, did you recover some of the lost revenue? I think you had cited 3 million, $3.5 million number last quarter when you had the shut down in the landing gear facility for a short while there?

Yes, landing gear had a strong Q4, yes.

And then Indy, I guess, I know Southwest had pretty much seven or eight hangers with Southwest and you were looking to fill up a couple others. Any progression there?

Indy has been steady, doing a good job with its customer there. We've got some things in the works to bring additional work in there later in the Summer or early in the Fall, but they're doing a good job, some of the investments in process improvement are starting to pay off, our performance with our customer there has been excellent. So we're optimistic that we're going to be able to continue to attract business into that center.

Okay and then just sort of a housekeeping question. You had mentioned maybe consolidating the Aircraft Sales and Leasing operations with aviation supply in your reporting stature, I guess is that not happening for fiscal '10 or still under consideration?

We're still going through that conversation with our auditors, Larry, but yes. We're still moving in that direction.

Got you. Okay, great. Thanks.

Our next question comes from Tyler Hojo with Sidoti & Company. Your line is open.

Hi, good morning, everybody. I was hoping that you could spend a little bit more time discussing some of the details on the supply chain contracts that you just spoke to and maybe to follow on to that just maybe talk about the pipeline there?

The significant agreement that we signed was with a North American carrier supporting their fleet of regional aircraft. It looks like it's going to be a nice deal for the Company. The customer was being under-supported by the previous contract holder, and we were able to come in and leverage our position that we already have in that equipment type and so far we're off to a good start. It was, as David said in his comments, a relatively modest up-front investment required and it looks like it's going to be a good program.

Is this a customer that you have a maintenance relationship with already?

No, it's not.

Okay, interesting. All right, and just on the composite business, I think last conference call you guys kind of spoke to a couple of contracts that were kind of out there and somewhat exciting just as it relates to kind of the growth prospects. Any updates on those?

We continue to work those possibilities.

Okay. All right and do you have a CapEx number for the quarter?

Yes, Tyler, it was $4.1 million, which then brought our annual total to 27.5.

Okay, and any expectations for CapEx and a tax rate for Fiscal 10?

I would expect CapEx to be in that same zip code. You may recall for '09 we previously thought we would be in a 30 million to $40 million range so obviously we came in just below the low end of that range and I would expect to target the low end of that range again for fiscal '10. For the tax rate, you should expect right around where you see the fourth quarter.

Okay, I'll jump out of the way. Thanks guys.

Our next question comes from J.B. Groh with D.A. Davidson. Your line is open.

Good morning, guys.

Good morning.

I had a question on the inventory adjustment. Does that all come out of inventory or does some of that come out of the PP&E line?

It's all inventory.

And last quarter you mentioned that it was something like 85% of your inventory was acquired in the last 18 months. Still probably in that same range?

Yes, those ratios have stayed pretty similar, J.B.

And then I was pleasantly surprised by the strength in MRO. Sequentially it's a pretty big increase there. Is that the kind of run rate we should think about or was there some seasonal strength in Q4?

There was seasonal strength there, but having said that, the activity there is steady, so I think while the fourth quarter is typically the strongest quarter in MRO, the activity level is decent.

Do you still own the storage business?

No, we don't.

Okay. Thanks for your time.

Thank you. Our next question comes from Eric Hugel with Stephens Incorporated. Your line is open.

Good morning, guys.

Hi, Eric.

Can you talk about one of the trends you talked about in the commercial side of the business is inventory destocking. Can you talk about sort of as we've gone through the quarter and as we're looking at now sort of the trend of the pressure? Is it stable? Is it getting worse? Is it getting better?

I think it's fairly stable. We don't see it getting any worse. We don't see any real uptick if you will, so it feels like it's at a stable level. Go back to what Rick said. At some point in time, whether they're selling seats in the front cabin or not they have to start putting engines through overhaul and spending money more on maintenance. So my sense is they have a little bit more to work off yet, but I think when you get out of this Summer, I think you'll start seeing an uptick in demand.

And typically after you go through a period of inventory destocking, is there a catch up?

Typically, yes.

Okay.

It's usually a function, Eric, of how interested the airlines are in capacity. When they're interested in reliability and capacity they are going to have a lot more safety stock around.

Great. I was particularly impressed on the SG&A line. You were able to keep costs pretty flat with where you were last quarter. Can you talk about how we should be thinking about that, maybe that 36 million, $37 million range on a quarterly basis going forward or is there any reason why that should fluctuate materially?

We've talked about our spending across the Company for several quarters here, it's something that we've been focused on internally and we don't see any significant changes to that going forward.

We'll be spending a little bit of money on AAR Global Solutions and it's going to take a gestation period for A) for us to bid on the contracts, and B) to win the contracts, so there will be a period of time here over the next nine months or so where there will be a little bit of a drag on SG&A.

Right and that was leading into my next question. Is there an order of magnitude that we can think of in terms of your portion of the costs in terms of bid and proposal? How should we be thinking about it when we're building our model?

Relatively modest.

Couple million bucks?

Yes.

Okay, and lastly and then I'll get back into line, you took another writedown on the inventory, the pre-9/11 inventory. How much of that is left?

Less than $8 million. Less than $8 million.

Great. Thanks a lot guys.

Eric, I just want to remind you on SG&A, there was nothing unusual in the fourth quarter so there is a little seasonality on that line so just remember that.

Usually your fourth quarter is a big step up.

Right. That's correct.

Okay, so we should expect as we go into next year that number is going to come down a bit?

Yes, you've got a lot of moving pieces but just remember that you can't just straight line the number, or you won't just see a straight line number there is all I'm seeing.

Thanks a lot guys.

Thank you. Our next question comes from Tom Lewis with Highroad Value Research.

Thank you. Good morning.

Hi, Tom.

In the past, one of the factors that's been a big driver for you guys seems to have been when aircraft changed owners and can you talk some to, I'm assuming that's probably been in the below normal rate of late. Can you talk a bit about how that's figured into the mix of the revenue opportunities out there and how you see that unfolding just ahead?

Yes, well I think you're correct. Historically this has been a major driver for our supply chain businesses and it will continue to be so as time marches on. Right now, there's not a lot of movement in this regard. I think you're correct. We would anticipate, we have had some benefit on our MRO business of aircraft being repositioned but mostly repositioned out of fleets as opposed to into new fleets. We've had some pick up in activity in support of aircraft that are moving but as it relates to our spare parts business at this stage I would say that again, I think as Rick said, I think it's going to be based on demand. There is some movement of aircraft so it's not like it's come to a halt. It's just not as robust as we may have seen in the past, but I would anticipate that again, once you come into the September time period, my sense is that you probably get a little pick up in aircraft movement.

Okay. Second of all, big merger of a couple of big customers out there. Is there anything at all you can share about how that's affecting you near term or how opportunities might be evolving out of that going forward or is it still too early to talk about that?

I think our relationships are very solid with the folks who have merged and we continue to book a fair amount of business with those customers.

Okay. And last question, the A400 contract, is that an ongoing expense at all for you at this time?

It's an ongoing investment. Our net investment didn't really change much, it actually went down a little bit during the year because we were able to get some of our investment covered by the manufacturer. We intend to make a little more investment in that in fiscal '10.

Okay. Fair enough. Thanks.

Thanks.

Your next question comes from Jon Braatz with Kansas City Capital. Your line is open.

Good morning. A couple questions. Rick you were talking a little bit about the A400. I assume there's no expectation of revenue this year from this fiscal year?

That's correct, Jon.

Secondly regarding the leases, you renegotiated a lease this quarter, you have seven coming up. The renegotiation this quarter, did you do it at a similar rate and when you look forward to the seven renegotiations this year, are any of them on older, less efficient aircraft that is sort of questionable there?

The aircraft in question that we put on a lease is a 1997 aircraft and we leased it at a lower rate than the prior lease but still at a acceptable return. On the seven aircraft that come off lease, those are 737-400's. I can't speak to the exact date, but all of those aircrafts are 1992 to 1997 aircraft. They're all in pretty decent demand today and we anticipate that those aircraft will probably go back on lease with the current leaseholder and probably at a very similar rate to the rate that we've experienced before. We also have one MD80 lease in Europe that comes off lease and we are talking with a lessee there as well to potentially acquire that aircraft from us. That's one of our pre-9/11 aircraft and it's been written down fairly low and we'll convert that to cash, most likely one way or the other this fiscal year.

Was that part of the seven?

That's part of the seven. Six are the 737-400's and one is the MD80.

Okay, and then one last question. Rick, I know you're going to be faced with some new accounting provisions this year for your convertible debt.

Right.

I think in the last 10-Q, you said the impact would be around $0.10 to $0.12. I know you repurchased a little bit more debt. Two things, number one, any characterization of what that amount might be now and secondly, will you have to go back and restate prior years numbers so we get sort of an apples-to-apples comparison?

Yes, the accounting standard is going to require a restatement of all prior periods, Jon, so you'll always get all apples and apples as we begin reporting that standard with first quarter of '10. Our projection is, because of some of the repurchases, that the impact is continuing to come down a little bit. Currently we're projecting it at approximately $0.09.

And that's basically when we do our modeling that's higher interest expense; correct?

That's correct.

Now, will we have those restatements before the first quarter ends?

We're working on that activity right now, Jon, and depending on timeliness, we'll take that under advisement. And see if it makes sense to do that.

Okay, thank you, Rick.

Thanks, Jon.

Thank you. Our next question comes from Stan Mann with Mann Family Investment. Your line is open.

Good morning, gentlemen. A couple of questions. One, you've got a tremendous free cash flow coming up in the year, assumingly. Is the plan still to pay down debt primarily?

Yes Stan, at this stage, based on all the uncertainty in the capital markets, I think that that it would probably be to watch our cash position and pay down our debt and particularly if we can buy our debt at an advantageous basis.

Is there still opportunity advantageously that you see untaken?

Yes. The accounting treatment may change but yes, it's still is from a balance sheet perspective and overall perspective the answer is yes.

So we shouldn't expect any large acquisitions this year just thinking about it?

I think in terms of large acquisitions, nothing necessarily on the radar screen in terms of acquisitions that we cannot clearly fund out of our working capital position. We are more inclined to look at it that way.

Are you seeing anything in that category?

I think there is in a general sense, in the first category with a larger deal it's kind of like the house market, you got buyers that want to pay a price and sellers want a different price. In the lower end market, there are a couple of situations that we might -- that look interesting to us.

Last question. What do we look for for D&A in fiscal '10?

Well, let me start by fiscal '09, Stan. Fourth quarter we did $9.4 million which brought the total for the year up to 40.6. I would expect the fourth quarter to be pretty representative of what we would anticipate seeing next year.

So in the same range?

Yes. fourth quarter is a little lower than you'd see in the first three quarters, but if you take the fourth quarter and annualize that, that's what I would anticipate.

Good job. Thank you, gentlemen.

Thanks.

(Operator Instructions). We do have a follow-up question from Eric Hugel with Stephens Inc. Your line is open.

Hi, guys. Anything as we're sort of thinking about 2010, other than sort of your normal seasonality, is there anything that you guys can see right now that we should be expecting in terms of big expenses coming into the mix or benefits?

Nothing unusual. I mean, I think we've made comments, Eric, up front about the macro environment that puts visibility on the commercial markets at close to an all-time low. It's difficult to predict exactly what the carriers are going to do and what the flow down from that will be, but I think we feel very good about our defense segments as we talked about. I think we feel good about the customer relationships we have. Nothing unusual in terms of SG&A or other types of controllable type of cost changes.

Okay.

I guess that's a long way of saying no.

On the supply -- on the logistics contracts, I mean I guess Mesa didn't sort of at the end of the day, I mean it was kind of a topsy turvy kind of deal here but you made a pretty sizeable up front investment and I guess it looks like not as much of an investment with this deal but in your learning period with Mesa, do you have better contract protection, sort of versus Mesa in this new deal?

A significant difference in investment level. So this is less than a tenth of what we have, 10% of what we have invested in the Mesa deal.

Okay.

So the answer is yes, because we are utilizing other people's inventory. We have a lease in-lease out construct with the person who owns the inventory and we have an "out" in that contract, if the carrier were to struggle.

All right I mean, you didn't note any sort of receivable writedowns this quarter, maybe they were just too small to note or whatever but it looks like you've had receivable writedowns over the last several quarters. Should we expect that trend to be getting better or is that just sort of, it just didn't happen this quarter but we would expect that kind of pressure going forward still?

Well, our bad debt provisioning that we took in Q4 would have been more in line with what we would consider to be normal and therefore that's why it wasn't called out as opposed to some of the earlier quarters this year. I think the environment as we've talked about with respect to receivables, we have very little concentration with respect to our receivables and we think that's fundamentally a very good thing. The dark side of that is you have a lot of small exposures and occasionally those flame out on you, so I think we'll have some of that to deal with but we're not forecasting any kind of big hits right now.

And are you as comfortable with, I guess last quarter you made some commentary about being very comfortable with the marks on your aircraft portfolio. Has there been any sort of change in that that you're sort of less comfortable or are you still very comfortable that over the next quarter or two we're not going to see any substantial writedowns?

Yes, I think we feel comfortable. The assets are all working. We're getting a decent return, and we don't have any reason to expect anything otherwise at this stage.

Okay, fair enough. Thanks a lot.

Recognize Eric as well we're down to six aircraft in our owned portfolio, and those would be the only six that we directly hold on our balance sheet and have a disproportionate amount of capital tied up relative to the JV aircraft.

Thanks a lot guys.

Thank you. Our next question comes from [Kevin Clarinet] with Palisade Capital.

I was wondering if you could qualify in your defense related business any impact of the wind down in Iraq?

I don't know if we necessarily feel the effect of that. There's two sides to that for our Company. One is it should create some reset opportunities for the Company and on the other hand, there won't be as much requirement to bring things into that theatre, but it seems to be at least for now that we're moving things into other theatres which creates opportunities for this Company.

Okay, thank you.

Thank you. We have a follow-up question from Tyler Hojo with Sidoti & Company. Your line is open.

Yes. On the MD80 you mentioned that potentially could be sold, would that potentially happen in the first quarter or are you planning any or do you think there could be any aircraft sales in the first quarter?

We actually are expecting an aircraft sale in the first quarter, not that particular aircraft, but we are expecting an aircraft sale in the first quarter. That aircraft, the MD80, if we sell it would be later in the fiscal year.

Okay, and obviously there's some seasonality in the first quarter, but I mean, given that basically we're halfway through Q1 at this point, I mean is there any way to maybe talk about how business has been tracking at least relative to the fourth quarter?

I would say steady is probably the best description.

Okay. Great. And then just one last one. In terms of Indianapolis, last quarter I think it was at seven to eight bays utilized with some Winglet work in there. I guess it certainly seems like from what I've been hearing that Winglets has been down a little bit. Care to characterize the utilization in Indianapolis and if that's indeed what you're seeing on the Winglet side?

We're wrapping up the Winglet program but we're expecting a new Winglet program to come in on its heals. we have been keeping seven or eight aircraft at Indianapolis and we see that continuing for the near future at least.

Great. Thanks a lot guys.

Thank you. (Operator Instructions). We have a follow-up question from Tom Lewis with Highroad Value Research. Your line is open.

Yes, David. It seems that this downturn and what the industry has faced in the last couple of years in many senses is worse than what we all went through like eight years ago and yet you and your customers seem to be managing through it better. Is there anything you can put your finger on besides having your balance sheet in a better place to account for this or does it just kind of seem that way and I'm missing the mark?

No, I think the Company, Tom is a very different Company than we were coming into that last period. Last period, 72% of our business was after-market, today 47%, and today the supply chain is 47% or in the 40 percentage of our business. before that time period, we had 1% of our revenue in Asia and today I don't know if it's 5 or 7% but somewhere in that vicinity. We also have more front end business, so I think we've successfully diversified the mix of our business. If you take a look at the decline in the commercial arena, other than the quarters immediately post-9/11, having a 13% decline in our commercial markets is fairly meaningful and yet I think the Company is able to weather that by virtue of our diversification strategy, so it's a very different, Tom, I think it's a very different Company. It's good that you raise this question because I think many people still view us from around the 9/11 time period but I think you can see from these results how much different the Company is.

Yes. Okay, and just kind of one last related little thing. Part of that whole mess that time around, a lot of the difficulty in air travel was around the SARS epidemic and here we are again with the same story, different virus. Has that registered at all do you think in terms of protracting the downturn in traffic?

Not really.

You don't see that as a--?

No.

All right, fair enough.

Thank you. (Operator Instructions). I'm showing no further questions.

Thank you, very much, for your time this morning and everybody have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.